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

Saturday, October 20, 2012

week ending Oct 20

Fed balance sheet grows in latest week - (Reuters) - The Federal Reserve's balance sheet grew in the latest week with a jump in the holdings of agency mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.829 trillion on October 17, up from $2.794 trillion on October 10. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $862.30 billion, up from $835.01 billion the previous week. Under the Fed's latest stimulus program, announced last month and dubbed QE3, the central bank has pledged to buy $40 billion per month of agency mortgage-backed securities. The Fed's holdings of Treasuries totaled $1.659 trillion as of Wednesday versus $1.654 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $82.75 billion, which was unchanged on the week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $12 million a day during the week compared with a $17 million a day average rate the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 17, 2012 

 Fed Official Says Monetary Steps Were Too Timid - The Federal Reserve’s recent expansion of its economic stimulus campaign was announced as a course correction. It wasn’t that economic circumstances had changed, officials said. They simply had concluded that they needed to do more. The implication, of course, was that the Fed had failed to do enough. William C. Dudley, president of the Federal Reserve Bank of New York, made that point explicit in a Monday speech. “Monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances,” Mr. Dudley said. He underscored the point later, saying, “With the benefit of hindsight, monetary policy needed to be still more aggressive.”  Mr. Dudley said that the shortcomings of monetary policy were one of five reasons, in his judgment, that the recovery continues to disappoint expectations. The others he listed include the overhang of mortgage debt, economic problems in Europe and other parts of the world, the aging of the American population and the shortcomings of fiscal policy makers.

Bernanke's faith in QE on shaky ground - Since the end of the International Monetary Fund meetings in Tokyo less than a week ago, there have been a series of defensive statements from Federal Reserve officials trumpeting the success of their actions. Ben Bernanke, head of the US central bank, said Fed policy “helps strengthen the US economic recovery” and “by boosting US spending and growth it has the effect of helping support the global economy as well”. But there is little hard evidence of either a recovery in the broad economy or a connection between “quantitative easing” and any hopeful signs of improvement in the economy. The economic activity that was supposed to be sparked by the third round of quantitative easing has yet to materialise. Indeed, the impact of this latest round of unconventional monetary policy is already fading. Analysts at Morgan Stanley this week decided that returns in the high-yield market were no longer attractive in the face of deteriorating fundamentals. The stock market is struggling to make further headway, while yields on mortgage-backed securities have started to turn up after an initial drop. A drop in third-quarter capital expenditure suggests the Fed policy hasn’t been a catalyst for corporate investment at all. One major reason for the lack of effectiveness of this latest round of quantitative easing may well be a growing concern with the “fiscal cliff”, automatic US tax rises and spending cuts due to kick in on January 1. Uncertainty over “cliff risk” – and the prospects of a deal in Congress on deficit reduction – seems to be offsetting any positive impact of Fed policies. Goldman Sachs this week sent its clients its fiscal risk scenarios. What it refers to as its base case (the “not so good scenario”), in which the cliff is barely resolved by year end, results in a 1.5 percentage point deduction from real GDP growth in early 2013. Under its bad scenario, in which jobless benefits and upper income tax cuts expire, that drag rises to almost 2 percentage points. Finally, under its ugly scenario, where there is no agreement on a path to more fiscal prudence for an extended period, the GDP growth hit amounts to about 4 percentage points and plunges the economy back into recession.

Fed's Williams: Fed Actions Will Improve Growth - The "strong measures" taken by the Federal Reserve at its September meeting should spur better levels of growth in the U.S. economy, a key central bank official said Monday. John Williams, president of the Federal Reserve Bank of San Francisco, also said the open-ended buying of mortgage bonds the Fed launched last month will be adjusted as necessary. "We will continue buying mortgage-backed securities until the job market looks substantially healthier," he said, adding "we might even expand our purchases to include other assets" if that seems like an effective way to spur better activity levels. Mr. Williams, a voting member of the policy-making Federal Open Market Committee, spoke at a meeting of the Financial Women's Association of San Francisco. A vocal supporter of the Fed's efforts to get the economy back on track, he said Fed policy "cannot solve all our economic problems," but it can help speed the pace of recovery and get our economy back on track sooner." He forecast that real gross domestic product to expand at a "modest" 1.75% or so this year, but improve to 2.5% next year and 3.25% in 2014. Unemployment he sees falling by the end of 2014 to 7.25%, from the current 7.8%, with inflation staying "slightly below" 2% for the next several years, in an absence of labor-cost pressure. Even with the aggressive action taken by the Fed, which includes a conditional pledge to keep rates very low until the middle of 2015, Mr. Williams said "in no way has our commitment to price stability wavered." He added "if we find that our policies aren't doing what we want or are causing significant economic problems, we will adjust or end them as appropriate."

Fed’s Dudley: Policy Will Stay Aggressive Even When Growth Picks Up - The Federal Reserve will keep policy aggressively easy even when the pace of the recovery accelerates, a key central bank official said Monday, given that evidence now suggests past policy actions weren’t aggressive enough in responding to the financial crisis. “If we were to see some good news on growth I would not expect us to respond in a hasty manner” and begin tightening monetary policy, Federal Reserve Bank of New York President William Dudley said in a speech Monday. “Only as we became confident that the recovery was securely established, would I expect our monetary policy stance to evolve to ensure that it remained appropriate to achievement of our objective: maximum sustainable employment in the context of price stability,” the official said.

Fed’s Dudley and Plosser Spar Over Unwinding Risks - The Federal Reserve may be in the stimulus game for several years to come, but that doesn’t mean officials are done talking about how they are going to unwind all the liquidity they have provided to the economy. Over recent days, two key Fed regional bank leaders, New York’s William Dudley and Philadelphia’s Charles Plosser, have spoken in detail about the eventual policy rollback. Just as the two have very different outlooks on the need for continued monetary policy stimulus, their views on the ease of the unwind are somewhat at odds. It may seem jarring to hear the officials talk about tightening policy when the central bank’s easy stance is likely to prevail for years to come. The Fed decided only last month to launch an open-ended mortgage bond buying program that will surely push its balance sheet well beyond the current nearly $3 trillion mark, versus around $800 billion in late 2007. What’s more, the central bank has said it expects short-term rates to remain near zero until the middle of 2015.

Why Unwinding QE Won't Matter - Ashwin Parameswaran nails it once again. If you want to understand how the modern financial/monetary system actually works, run don’t walk to read this post.  His key insight: Just as the East India Company could access cash on the back of their government bond holdings in the 18th century, any pension fund, insurer or bank can do the same today. Let me translate that into my words: If the CB unwinds QE by trading bonds for “money,” “sopping up” “cash” (those are all “so-called” quotes) from the private sector, the private bond-holders can just use those bonds as collateral to get (new) cash loans. Commercial and shadow banks will create (“counterfeit”) the new money under (explicit or implicit) license from the central bank, and deposit the money into the bondholders’ accounts. Result: roughly the same amount of “cash” in the system. In other words: …the private sector can monetize the deficit as effectively as the central bank can. Hence:…the reversal of QE, if and when it happens, will have no impact on economy-wide access to cash/purchasing power. This also serves to explain why QE may not have had as much effect as one might hope. The Fed gave bondholders cash in return for their bonds, so bondholders ended up with more cash but less collaterizable/monetizable/convertible-to-cash bonds. A wash?

Should Central Banks Burn All Their Government Bonds? - In June of 2008, Ron Paul made a radical proposal: the Fed should simply burn all the U.S. Treasuries it’s currently holding, reducing the government (U.S. Treasury) debt by $1.6 trillion, or about 10%. (Yes: bonds held by the Fed are counted as part of “Debt Held by the Public,” even though the government basically “owns” the Fed.) Paul called this “bankruptcy,” but it’s actually pure MMT thinking, acknowledging that 1. the Fed and the Treasury are most reasonably viewed as a single consolidated entity (“the government”), and 2. that government debt is something of a side issue in the big monetary picture (bonds are a vehicle for interest-rate management by the Fed), compared to the matter of central importance: how much newly created money the government puts into the economy by deficit spending, or takes out with a surplus (destroying more money by taxing than it creates by spending). This is pretty radical talk, for sure. (I wonder if Paul and Kucinich ever eat lunch together.) But now Gavyn Davies tells us in the Financial Times that such notions are at least floating about in some decidedly traditional circles (emphasis mine): Two separate journalists (Robert Peston of the BBC and Simon Jenkins of The Guardian) said that Lord Turner’s “private view” is that some part of the Bank’s gilts holdings might be cancelled in order to boost the economy. Lord Turner distanced himself in public from this suggestion on Saturday. However, the notion will now be widely discussed. It is easy to see how the idea could appeal to a finance minister facing the need to tighten fiscal policy during a recession in order to bring down the public debt ratio. [that's "Adair Turner, the Chairman of the UK Financial Services Agency, and reportedly a candidate to become the next Governor of the Bank of England."]

Guest Post: Should Central Banks Cancel Government Debt? - Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed. Of course the proposal was not really meant to be taken serious: rather, it was meant to highlight the absurdities of the modern-day monetary system. In a way, we would actually not necessarily be entirely inimical to the idea, for similar reasons Ron Paul had in mind:  it would no doubt speed up the inevitable demise of the fiat money system. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially: “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon."

Helicopter Money Drop -A helicopter money drop is a form of monetary policy in which a Central Bank prints money and distributes it directly to households / consumers. The aim of helicopter money is to boost nominal GDP, overcome deflation and help reduce unemployment. In normal circumstances printing money will be inflationary. Economists usually suggest helicopter money in a liquidity trap and period of deflation. The idea of a ‘helicopter money has been referred to by Milton Friedman and picked up by the Chairman of the Federal Reserve, Ben Bernanke. One image of ‘helicopter money is a  helicopter dropping cash from the sky, which presumably would be picked up and spent pretty quick. On a more practical vein, it could involve the Central Bank sending a cheque in the post to people across the country. In a period of severe deflation, the cash sent could even have an expiry date. Meaning you have to spend it in 6 months or lose it. This expiry date will prevent people just saving it.

The Only Game in Town - What should central banks do when politicians seem incapable of acting? Thus far, central banks have been willing to step into the breach, finding new and increasingly unconventional ways to try to influence the direction of troubled economies. But how can we judge when central banks overstep their limits? When does boldness turn to foolhardiness?Central banks can play an important role in a cyclical downturn. Interest-rate cuts can boost borrowing – and thus spending on investment and consumption. Central banks can also play a role when financial markets freeze up. By offering to lend freely against collateral, they “liquify” assets and prevent banks from being forced to unload loans or securities at fire-sale prices. Anticipating such liquidity insurance, banks can make illiquid long-term loans or hold other illiquid financial assets. To the extent that unconventional monetary policy – including various forms of quantitative easing, as well as pronouncements about keeping interest rates low for a long time – serves these roles, it might be justified. Other unconventional policies, however, have been undertaken to stimulate the economy, rather than to deal with broken markets. The benefits have been commensurately smaller. QE2, in which the Fed bought long-term government bonds, did not have a discernible effect on long-term government interest rates. Indeed, with its recent decision to pursue QE3, the Fed is focusing once again on the mortgage-backed securities market; but, given that the market is much healthier now, it is unclear how much good this will do.

Housing Recovery May Validate Fed’s QE3 - Legitimate signs of life in the housing market suggest the Federal Reserve may have chosen the right lever to stimulate the economy when it launched its latest stimulus bid last month. In September, officials on the monetary policy-setting Federal Open Market Committee decided to embark on an open-ended program of mortgage bond buying, in an effort that will increase what is now a nearly $3 trillion central bank balance sheet. The purchases follow in the tracks carved out by past asset-buying efforts, which had relied more heavily on the purchase of Treasurys. Many Fed officials reckon that as the housing market’s problems have been a big reason why the recovery has been so tepid, targeting the sector with direct aid can make a big difference for the broader economy. Policymakers hope positive housing momentum will help overall activity rise, which in turn should help boost job growth and lower unemployment. An increasing amount of data suggests the Fed may indeed have targeted the right part of the economy for assistance. On Wednesday, the government reported that new home-building levels surged to a four-year high last month, amid a nearly 12% rise in new building permits. While the rise in activity is not attributable to the new Fed stimulus, it owes in part to past stimulus by the central bank. The central bank “does deserve a lot of the credit” for creating the conditions that are allowing the housing market to get itself back on track.

Fed Watch: Buyer's Remorse? - In the near-term, the upbeat news will have limited impact on monetary policy. The Fed will remain committed to the path laid out at the last FOMC meeting. That said, I have to imagine some of the moderates on the FOMC - those pulled into Federal Reserve Chairman Ben Bernanke's gravity with the softening of data this summer - will be starting to feel a little bit of buyer's remorse, thinking that maybe, just maybe, they pulled the trigger a little too soon. The doves, of course, should be ecstatic that the FOMC locked in an easier policy at beginning of an upswing. Rather than threatening to withdraw stimulus at the slightest sign of recovery, now we have a commitment to keep monetary momentum until the economy is clearly on firmer ground. This will be supportive of the upswing in activity. The death of the consumer continues to be more myth than reality. The retail sales report revealed that households have shaken off the summer doldrums: While the year over year trend is not particularly strong: the last three months have packed a bit of a punch: While industrial production was up somewhat, the trend over the past year is basically flat: The underlying story, I think, remains two-fold. First, some investment was likely pulled forward into 2011 by now-expired tax credits. Second, the global slowdown is also weighing on manufacturing growth. That said, note that the current scenario continues to look more like 1998 than 2008: To be sure, core new orders have been a little unnerving of late, and certainly something to watch. But this would not be the first time that an external shock failed to deliver a US recession. For now, I expect that to continue to be the case. And one reason to believe that the US will escape recession is the obviously improving housing market. Starts exceeded expectations in September:

Romney is shocked to learn how the Fed creates money - By William K. Black - The following passage from the transcript of Governor Romney’s secretly videotaped May 17, 2012 fundraiser has not received any attention in the media.  It is a fascinating passage, however, from the perspective of Modern Monetary Theory (MMT).  Here is the full context of the passage: ROMNEY: Yeah. Yeah. It’s– it’s interesting. There’s– the former head of– Goldman Sachs, John Whitehead– was also the former head of the New York Federal Reserve and– and I met with him and he said, “As soon as the Fed stops buying all the debt that we’re issuing–” which they’ve been doing. The Feds buy like 3/4 of the debt that America issues.He said, “Once– once that over– that’s over,” he said, “we’re gonna have a failed Treasury option. Interest rates are gonna have to go up. You know, we’re– we’re– we’re living in this borrowed– fantasy world where– where the government keeps on borrowing money.” You know, we– we borrow this extra trillion a year. We wonder, “Well, who’s– who’s loaning against the Treasury? The Chinese aren’t loaning to us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us a trillion?” And the answer is we’re just making it up. The Federal Reserve is– is just taking it and saying, “Here, we’re– we’re giving–” it’s just made up money. And– and this– this does not augur well– for– for our economic future. No. I mean I– you know, some of these things are– are complex enough it’s not easy for people to understand, but your– your point of saying bankruptcy usually concentrates the money. Yeah, George?

How Romney could end quantitative easing - To belabour the obvious, the Federal Reserve and monetary policy are critical to any president’s success; presidential elections are usually determined by the state of the economy and the Fed has a great deal to do with that, arguably never more so than today. Many observers believe that President Obama hurt himself by taking a somewhat lackadaisical attitude toward the Fed – leaving positions on the Fed board vacant for long periods, not moving quickly to appoint replacements and failing to back away from appointees that ran into Senate confirmation difficulties. Were he elected it is unlikely that Mitt Romney will make the same mistakes. I expect that he will move quickly to put his stamp on the Fed. So what can we expect? Republicans in Congress have been highly critical of Fed policy, especially the episodes of “quantitative easing” that took place in 2009, 2010 and again this year. Despite the continuing lack of inflation in the price data, Republicans believe that quantitative easing is highly inflationary and should be reversed as soon as possible. Mr Romney will have an immediate opportunity to encourage a move in that direction. Among the many responsibilities of the president is making appointments to the seven member Federal Reserve Board, which must also be confirmed by the US Senate. Members seldom complete their entire 14-year terms creating opportunities for additional appointments to fill unexpired terms. The critical position of chairman of the Fed is one to which an existing member must be separately appointed and confirmed to a 4-year term.

Monetary Policy under Obama and Romney – Macroadvisers - The outcome of this election will almost certainly affect the conduct of monetary policy.

  • We assume that, if President Obama is re-elected and Ben Bernanke does not seek or is not offered another term, Janet Yellen will be nominated to be Chair of the Federal Reserve Board (and thus also of the FOMC).
  • If Governor Romney is elected, he will most likely nominate one of his two principal economic advisers: Glenn Hubbard or Greg Mankiw. John Taylor, another adviser, would surely also be on the short list.
In three of the four cases, the prospective Chairs have written down a simple policy rule that would inform their policy decisions.
  • We have previously distinguished between dovish and hawkish rules. 
  • Dovish rules portray recent and current policy as restrictive, notwithstanding the prevailing near-zero funds rate. Hawkish rules portray policy today as too stimulative.
  • Dovish rules embed a much more aggressive response to departures from full employment than do hawkish rules.
  • Dovish rules prescribe a later first rate hike than do hawkish rules.
Using these rules as proxies for policy preferences, we can place three of the prospective Chairs along the dove-hawk continuum.
  • Taylor is unquestionably the most hawkish. His rule embeds a modest response to departures from full employment. The FOMC would already have raised rates under his rule.
  • Yellen is the most dovish. Based on her rule, policy should respond aggressively to departures from full employment, and the first rate hike would still be two years away.
  • Mankiw is somewhere in between. While his rule, like Taylor's, allows for only a modest response to departures from full employment, it nevertheless prescribes a later first rate hike that is still one year away.
  • While Glenn Hubbard has not written down a rule, his recent comments reveal that he is not as hawkish as Taylor, not as dovish as Yellen, but likely somewhat more hawkish than Mankiw.

Why US Monetary Policy is Too Tight -- An excellent op-ed by Doug Irwin on why US monetary policy is too tight: The Divisia M3 and M4 figures for the US money supply, calculated by the Center for Financial Stability, show that the money supply is no higher today than in early 2008. For all the fretting about the Fed’s accommodative policy, the money supply has barely increased and is way off its previous trend. This represents a very tight policy compared to Friedman’s rule that growth in the money supply should be limited to a constant percentage. The lack of growth in the money supply is an important reason why US inflation and inflationary expectations remain under control. The Federal Reserve Bank of Cleveland’s latest market-based estimate of the 10-year expected inflation rate is 1.32 per cent.

Key Measures show low inflation in September - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in September. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.6% (7.1% annualized rate) in September. The CPI less food and energy increased 0.1% (1.8% annualized rate) on a seasonally adjusted basis.Note: The Cleveland Fed has the median CPI details for September here.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, and core CPI rose 2.0%. Core PCE is for August and increased 1.6% year-over-year. On a monthly basis, two of these measure were above the Fed's target; trimmed-mean CPI was at 2.6% annualized, median CPI was at 2.6% annualized. However core CPI increased 1.8% annualized, and core PCE for August increased 1.3% annualized. These measures suggest inflation is close to the Fed's target of 2% on a year-over-year basis.

Two Measures of Inflation: New Update - The BLS's Consumer Price Index for September, released today, shows core inflation fractionally at teh Federal Reserve's 2% target at 1.98%. Core PCE, at the end of last month, is further below the target at 1.58%. The Fed is on record as preferring Core PCE as its inflation gauge:  This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice.The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000. For some technical data explaining the differences between the calculation of PCE and CPI, see this comparison article from the BEA.  In the real world we can't exclude food and energy from our monthly expenses. But the extreme volatility of these two expense categories, especially energy, often obscures the underlying trend, which is the focus of the chart above. For evidence of the volatility, see this overlay of headline and core CPI and this one of headline and core PCE.

High Unemployment Points to Below-Target (But Still Stable) Inflation - Dallas Fed: The Federal Reserve has a mandate to promote price stability and full employment. Generally, “price stability” is given a forward-looking interpretation. Policy should be conducted so that expected medium-term (two- to five-year) inflation is low and stable or, less strictly, so that expected inflation beyond the next few years is low and stable.[1] Households and businesses, too, are generally more interested in where prices are headed than in where they have been. How best to forecast inflation is controversial. Many analysts have assumed that changes in inflation depend on the amount of labor market slack: Inflation tends to rise when the unemployment rate is low and to fall when it is high. It follows that you cannot reduce inflation without going through a period of higher-than-normal unemployment. Others, however, believe that slack—at least as we usually measure it—doesn’t matter: The best predictor of future inflation is current inflation. It appears that both of these views oversimplify. Neither is a good approximation over the past 15 years—a period that has been characterized by remarkable stability in long-term inflation expectations. Our research carries the implication that should this stability be maintained, the current high unemployment rate means that inflation is likely to run somewhat below 2 percent in the coming year. It does not mean, however, that we can expect ongoing declines in inflation.

Poll: Economists Foresee Weak but Improving Growth — Economists foresee only tepid growth for the coming year, with unemployment back above 8 percent for the first half of 2013. The good news: The housing market is recovering faster than expected and the economy likely won’t fall off a “fiscal cliff.” The quarterly survey by the National Association for Business Economists released Monday predicts growth will be weak overall but should slowly accelerate through 2013. The 44 economists surveyed now see gross domestic product – the value of all goods and services produced in the United States – rising just 1.9 percent in 2012 before reaching a 3 percent pace by the fourth quarter of next year. Employment growth is forecast to weaken. The panel predicts that the unemployment rate will rise to 8.1 percent by the end of the year. The economy should add an average of 125,000 jobs per month during the fourth quarter, down from the economists’ May forecast of 190,000 jobs.

Economists Polled on the Pre-Election Economy -   A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FP conducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)    My fellow economists choose defense and agricultural subsidies as the two categories of US federal spending that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.    For a slideshow presentation of the results, see “The FP Survey: The Economy.”   Or in a magazine format:  “If we’re ever going to get out of this slump, what will it take?  We asked more than 60 leading economists to tell us.”    Also, here is a recent poll from The Economist, asking similar questions of NBER and NABE economists:   “Asking the Experts,” Oct. 6.

Recession Trends – Stanford -The sixteen selected domains cover the most important economic and social institutions in the U.S. In choosing them, our goal was simply to cover the major institutions of interest, not necessarily to single out those especially affected by the downturn. We rehearse below some of the core questions underlying the Recession Briefs within each domain.

GDP, Prosperity, The Wealth Effect, and Marginal Propensity to Consume - It comes to mind as I ponder the rather grudging and tepid suggestions that you hear here and there these days — that excessive inequality might actually be a drag on economic growth and prosperity. There are some full-throated assertions of this belief out there, but in the mainstream economics community they are rare and in general quite decidedly mealy-mouthed. The general failure to question the “more inequality is good for growth” mantra has deep roots, even among progressive economists. Viz, this from Paul Krugman back in December, 2008, when the highest inequality since The Great Depression was was in the process of delivering the first (at least potential) depression since…The Great Depression (bold mine):There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people. This seems to completely ignore marginal propensity to consume (MPC) — that poorer people spend a larger percentage of their income than rich people, so a more equal income distribution would result in higher money velocity, hence higher GDP. But I’d like to suggest that the problem runs deeper. Almost all the thinking about MPC seems to obsess about income, and greatly downplay the role of wealth, or net worth. This failure to consider wealth is important because wealth inequality in this country (and worldwide) utterly dwarfs income inequality.

Conference Board LEI: ''Fluctuating Around a Slow-Growth Trend'' - The Conference Board Leading Economic Index (LEI) for August was released this morning. The index increased 0.6 percent in September to 95.9 (2004 = 100), following a 0.4 percent decline in August, and a 0.4 percent increase in July. The consensus had been for 0.2 percent. "Fluctuating around a slow-growth trend" is the summary phrase from today's press release, an upgrade from last month's "fluctuating around a flat trend." Here is the overview of today's release from the LEI technical notes: The Conference Board LEI for the U.S. increased in September after declining in the previous month. Large positive contributions from building permits and the financial components offset the negative contributions from ISM® new orders index, consumer expectations for business conditions and weekly initial claims for unemployment insurance (inverted). In the six-month period ending September 2012, the leading economic index increased 0.3 percent (about a 0.6 percent annual rate), much slower than the growth of 2.6 percent (about a 5.2 percent annual rate) during the previous six months. In addition, the strengths and weaknesses among the leading indicators have become balanced in recent months.  [Full notes in PDF format]  Here is a chart of the LEI series with documented recessions as identified by the NBER. And here is a closer look at this indicator since 2000. We can more readily see that the recovery from the 2000 trough has been more or less flatlining in recent months.

Downside Risks - Occasionally, over the last several years, I've posted a list of downside risks to economic growth - and here is another one. Currently my forecast is still for sluggish and choppy growth, but I think there are reasons to expect US economic growth to pickup in the next year or two, perhaps to trend growth. As I noted last month in Two Reasons to expect Economic Growth to Increase, residential investment is now a tailwind for the economy, and the drag from state and local government cutbacks is mostly behind us. There are always many downside risks (meteor strikes, major terrorist attack, war somewhere - possibly with Iran), but I think these are the most probable downside risks:
• The European financial crisis. The European crisis has been threatening to spill over into the US for several years. Looking back, I was writing about Greece, Ireland and Spain sovereign debt issues in 2009. This year the recession in Europe is hitting US exports, but so far there is little financial contagion..
• The economic slowdown in China. The recession in Europe has spilled over into China, and has led to fears of a sharp slowdown. From the WSJ: China's Growth Continues to Slow Growth in China's gross domestic product fell to 7.4% in the third quarter compared with a year earlier, China's National Bureau of Statistics said Thursday, down from 7.6% in the second quarter and the weakest since the beginning of 2009.
• The Fiscal Slope. This is commonly called the "fiscal cliff", but it is more of a slope. This refers to several federal tax increases and spending cuts that are scheduled to happen at the beginning of 2013. This includes ending the Bush-era tax cuts, ending the temporary payroll tax reduction, ending extended unemployment benefits, and some large budget cuts mostly for defense spending. No one expect this to be resolved before the election, but after the election this could become a significant issue.

Debate Rages Over Recoveries From Financial Crises - While the presidential candidates battle over the Obama administration’s handling of the U.S. economy, some prominent economists are going to war over a related subject. At issue: Should the economy be expected to bounce back quickly or slowly after a financial crisis? Economists Carmen Reinhart and Kenneth Rogoff of Harvard University have been saying for several years that the answer is ‘Slowly.’ The Obama administration has leaned on their book, “This Time Is Different,” to argue that it isn’t to blame for the dismal economic recovery. The book was in the works before Mr. Obama took office. In it, the economists studied 224 banking crises spread out over several centuries and across different countries and found that recoveries after a financial shock tend to be tepid, with financial institutions and government budget emerging from the crisis strained. Rutgers University economic historian Michael Bordo and Cleveland Fed economist Joseph Haubrich studied just U.S. recessions going back to 1882 and found that U.S. recoveries following financial shocks tend to be rapid. Top economic advisers to Republican Mitt Romney have leaned on this research to argue that the culprit in the current slow recovery is Mr. Obama himself, not the financial crisis that preceded him. This line of research has taken issue with the Reinhart and Rogoff studies, arguing, among other things, that U.S. crises can’t be likened to financial crises that have happened elsewhere in the world — such as small developing markets – because their economic institutions are so different.

Sorry, U.S. Recoveries Really Aren’t Different - Carmen M. Reinhart and Kenneth S. Rogoff -  Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 percent. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth. This disappointing performance shouldn’t be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries. Subsequent academic research using different approaches and samples has found similar results. Recently, however, a few op-ed writers have argued that, in fact, the U.S. is “different” and that international comparisons aren’t relevant because of profound institutional differences from one country to another. Some of these authors, including Kevin Hassett, Glenn Hubbard and John Taylor -- who are advisers to the Republican presidential nominee, Mitt Romney, have stressed that the U.S. is also “different” in that its recoveries from recessions associated with financial crises have been rapid and strong. We have not publicly supported or privately advised either campaign. We well appreciate that during elections, academic economists sometimes become advocates. It is entirely reasonable for a scholar, in that role, to try to argue that a candidate has a better economic program that will benefit the country in the future. But when it comes to assessing U.S. financial history, the license for advocacy becomes more limited, and we have to take issue with gross misinterpretations of the facts.

Bubble, Bubble, Conceptual Trouble -- Krugman - We’re living in the aftermath of a major financial crisis. Reinhart-Rogoff warned in advance that recovery was likely to be slow; so, with less historical detail, did I. And so it has proved. But based on the discussion I’ve heard, both on the blogs and in forums like that House of Commons debate Monday, there’s a lot of confusion even among economists about what the pattern of slow recovery from financial crisis is really telling us. Basically, there seems to be a confusion between saying that something is usual and saying that it is necessary. Those aren’t the same thing. Here’s how I interpret what we see in the historical data: financial crises leave an overhang of private-sector problems, principally excessive debt on the part of some subset of economic agents — households, in the case of the United States. Because these agents are either forced or strongly induced to slash spending, the “natural” rate of interest, the interest rate consistent with full employment, falls sharply — and in the case of a severe crisis, falls well below zero. What this means in turn is that conventional monetary policy, which normally bears most of the burden of economic stabilization, is no longer up to the job.

Is overregulation contributing to slow recovery in the US? - John Taylor makes an interesting point on his blog (here) with respect to the bloated government regulation in the US. Here are two charts that compare the recovery from the recession in the early 80s (during the Reagan administration) with the current economic recovery. One trend that really stands out is the number of federal workers employed in regulatory activities (excluding transportation security). The two trends are drastically different. It shows how the US regulatory framework is becoming in many ways similar to the European governments' tactics. Regulate it all, ask questions later. Below is a comparison of the quarterly GDP during the two recoveries. Of course this could simply be a coincidence, but is it?

Weak Recovery Denial -  Paul Krugman disagrees with my recent post that the recovery is weak compared to recoveries from past serious U.S. recessions including those associated with financial crises. In making his critique, Krugman appeals to a recent oped in Bloomberg View by Carmen Reinhart and Ken Rogoff who criticize the research of economic historian Michael Bordo and his coauthor Joseph Haubrich of the Cleveland Fed, which I have referred to. Bordo and Haubrich demonstrate that the recovery from the recent recession and financial crisis has been unusually weak compared to recoveries from past recessions with financial crises in the United States. In separate research, Jerry Dwyer and Jim Lothian report the same finding. Neither Reinhart-Rogoff nor Krugman disprove this finding. First, they argue for a narrower definition of a financial crisis. Reinhart and Rogoff say that one should “distinguish systemic financial crises from more minor ones and from regular business cycles.” Thus they exclude some cases studied by Bordo and Haubrich. But narrowing the focus to systemic crises in this way does not change the Bordo-Haubrich findings because the recovery from the recent recession is weaker than the average of past recessions cum financial crises even with these exclusions. Second, Reinhart and Rogoff argue that one should look at recessions together with recoveries when looking at severity. In fact, in their work they explicitly “don’t delineate between the ‘recession’ period and the ‘recovery’ period.”

Income Inequality May Take Toll on Growth - Income inequality has soared to the highest levels since the Great Depression, and the recession has done little to reverse the trend, with the top 1 percent of earners taking 93 percent of the income gains in the first full year of the recovery. The yawning gap between the haves and the have-nots — and the political questions that gap has raised about the plight of the middle class — has given rise to anti-Wall Street sentiment and animated the presidential campaign. Now, a growing body of economic research suggests that it might mean lower levels of economic growth and slower job creation in the years ahead, as well. “Growth becomes more fragile” in countries with high levels of inequality like the United States, said Jonathan D. Ostry of the International Monetary Fund, whose research suggests that the widening disparity since the 1980s might shorten the nation’s economic expansions by as much as a third. Reducing inequality and bolstering growth, in the long run, might be “two sides of the same coin,”  research published last year by the I.M.F. concluded. Since the 1980s, rich households in the United States have earned a larger and larger share of overall income. The 1 percent earns about one-sixth of all income and the top 10 percent about half, according to statistics compiled by the respected economists Emmanuel Saez and Thomas Piketty.

Shrink Inequality to Grow the Economy? - Room for Debate - The International Monetary Fund and others say that income inequality represses economic growth, and is not simply a byproduct of growth. To expand the economy, should the United States enact policies to address inequality? And if so, what initiatives would promote growth and reduce the income gap?

US runs a 4th straight $1 trillion-plus budget gap - The United States has now spent $1 trillion more than it's taken in for four straight years. The Treasury Department confirmed Friday what was widely expected: The deficit for the just-ended 2012 budget year — the gap between the government's tax revenue and its spending — totaled $1.1 trillion. Put simply, that's how much the government had to borrow. It wasn't quite as ugly as last year. Tax revenue rose 6.4 percent from 2011 to $2.45 trillion. And spending fell 1.7 percent to $3.5 trillion. As a result, the deficit shrank 16 percent, or $207 billion.  Debt piles up, year after year. It's reached $11.3 trillion — $16.2 trillion if you include money the government has borrowed from itself, mostly revenue from Social Security. Unless something changes, the Congressional Budget Office warns, the federal debt would reach a level that is "unsustainable from both a budgetary and an economic perspective." Over time, big government debts can damage the economy. The economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics have found that growth tends to slow sharply once national government debt reaches 90 percent of GDP.

Treasury Yields/Mortgage Update: Yields Rise, 30-Year Mortgage Falls - I've updated the charts through today's close.  Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing. The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy continues to be a solution to a non-problem.  The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Foreign holdings of US debt hit record $5.43T — Foreign demand for U.S. Treasury securities rose to a record level in August, further evidence that most nations see U.S. debt as a safe investment. The Treasury Department says total foreign holdings rose to a record $5.43 trillion in August. That's up 1.5 percent from the July level. China, the largest foreign holder of U.S. debt, increased its holdings 0.4 percent to $1.15 trillion. And Japan increased its holdings 0.5 percent to $1.12 billion. Japan now trails China's holdings by just $32.1 billion. Demand for U.S. debt has remained high even though the United States has run budget deficits in excess of $1 trillion for the past four years. Many foreign investors see U.S. debt as a safe investment with Europe in crisis and global growth slowing.

China Continues To Boycott Treasurys As Japan Prepares To Become Largest Foreign Holder Of US Paper - Where there were notable developments in today's TIC report, was in the composition of buyers of US paper, which showed that for yet another month, there has been virtually no buying interest in US paper by the biggest non-Fed holder: China, whose total TSY holdings were $1,154 billion, down $12 billion since the beginning of the year, and down a whopping $125 billion from a year ago. Ironically that other massively indebted country, Japan, which has Y1 quadrillion in its own public debt to deal with, for a debt/GDP ratio will above 200%, continues to load up on US paper, as the biggest paper ponzi scheme continues going ever higher and nothing possibly can get in the way. In fact, as the chart below shows, the difference between total Chinese and Japanese holdings has declined to a record low $32 billion, and will likely see Japan surpass China as the biggest holder of US paper very soon.

Debt and the burden on future generations - I don't want to bore people, but once again this question has come up (see here, here, here, here, here, here, and here for the whole battle royale) , and I thought I'd blog about it, because hey, every econ blog should occasionally do some little "thought experiment" type stuff, even if it doesn't quite as much traffic as does making fun of commenters. The question, once again, is: "Does government debt impose a burden on future generations?" I took a crack at this question back in January, and my answer is still the same, but I'd like to phrase it more concretely. Here's how I like to think about this question. In my mind, to "impose a burden on future generations" means  "to decrease the consumption possibilities of future generations". So the question is really whether or not the size of today's stock of government debt reduces the total consumption possibilities of people not currently born. In other words, if government debt is $1,000,000,000 today, does that mean that the consumption of future people must be lower than if government debt were $1 today?

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate - Dean Baker - After having provoked a debate that subsequently involved Nick Rowe, Brad DeLong and Paul Krugman, I will assert blogowners’ privilege and throw out some summary thoughts. First, we all seem to agree that in a situation where the economy is clearly operating well below its potential, governments can run deficits to boost employment and output. I believe we all agree that in principle the government can also use these deficits to increase future output through productive investment in either physical or human capital. This would make future generations better off on net as a result of deficits today, since the economy will be larger than it would be without the deficits. I would also add, without necessarily implicating anyone else, that simply by increasing output and employment the government is likely to make society better off in the future for two reasons. First, by keeping people employed we will keep them attached to the labor force and reduce the number of hard core unemployed who would be difficult to re-employ in subsequent years, possibly leaving us with a higher rate of unemployment (and lower output) long into the future. The other reason that short-term increases in employment can have long-term effects is that by keeping families intact, children are likely to have better upbringings and do better in school. This means that the next generation will on average will have happier more productive lives because we used deficits to keep their parents employed today.

Foreigners and the Burden of Debt - Paul Krugman - A number of comments on my non-burden of the debt post were along the lines of “But what if the debt is owed to foreigners?” OK, this takes a bit more thinking. Another thought experiment: suppose that for some reason the Chinese and a bunch of domestic investors do an asset swap: the Chinese sell off $500 billion of Treasuries and buy an equal amount of, say, corporate bonds, while the domestic investors do the reverse. Has America become any richer (or any poorer)? Obviously not — as a nation we still owe the same amount to the rest of the world. What this tells us is that when we’re trying to assess the burden or lack thereof of debt, foreign ownership of government debt doesn’t really matter. What does matter is our net international investment position, the value of the overseas assets owned by all domestic residents minus the value of all domestic assets owned by foreign residents.. Now, this ties right in with what Brad said about the burden of the debt: we’d all agree that deficits make us poorer if they crowd out investment spending — which they would if the economy were near full employment, but won’t if we’re deeply depressed. All we have to do is realize that net foreign investment — purchases minus sales of assets from and to foreigners — is also a form of investment. Or to put it a bit more simply, sure, budget deficits can make us poorer as a nation if they lead to bigger trade deficits. So far, nothing like this has happened. Here’s the U.S. budget deficit (all levels of government) and the current account deficit, both as a percentage of GDP:

The Burden of Government Debt - The recent ‘exchange’ on this topic (see Nick Rowe here, here, here and here, and apparently on the other side Dean Baker, Brad DeLong, Paul Krugman and Noah Smith) may just have confused many, so here is my attempt to unconfuse. I’m doing this because (a) the issue is tricky (as I know from my own experience) (b) I’ve written about this before (c) I happen to be teaching this stuff right now (d) Nick Rowe needs some support (although no help). Bottom line: government debt can be a burden on future generations (the current generation can use it to take resources from future generations) even if there is no impact on future output, but it is also likely to reduce future output, so we really should worry about the size of government debt in the longer term. But none of these worries applies when the economy is demand constrained, as it is right now

  Government Debt and Intergenerational Distribution - After reading Nick Rowe, Brad DeLong, and Paul Krugman, I now understand who bears the burden of the government debt. Any member of the younger generation who reads the stuff that these old guys have written on government debt will be hopelessly confused. And that will be a burden on us all. The idea that a larger government debt is a burden for future generations is so strongly intuitive as to be part of the standard narrative for anyone who wants to tell you that more government debt is a bad idea. But is that correct? When I teach undergraduates about government finance, I find it instructive to start with the Ricardian equivalence theorem. In a frictionless world, government debt is irrelevant. A tax cut that increases the government debt today has no effect because everyone understands that government debt is just deferred taxation. Lifetime wealth does not change, and everyone saves their tax cut today so as to pay the higher future taxes that are required to pay off the government debt in the future. Ricardian equivalence is a useful starting point, as it makes clear what frictions might cause Ricardian equivalence to break down - and that's a route for thinking about how policy might work to improve matters. Distorting taxes, intragenerational distribution effects from tax policy, and credit market frictions all potentially make a difference. But that doesn't make Ricardian equivalence "wrong" or useless. Indeed, it is an important organizing principle, and needs to be taken seriously.

Dean Baker: The National Debt and Our Children: How Dumb Does Washington Think We Are?: While much of the country is focused on the presidential race, the Wall Street gang is waging a different battle; they are preparing an assault on Social Security and Medicare. This attack is not exactly secret. There have been a number of pieces on this corporate-backed campaign in the media over the last few months, but the drive is nonetheless taking place behind closed doors. The corporate honchos are not expecting to convince the public that we should support cuts to Social Security and Medicare. They know this is a hopeless task. Huge majorities of people across the political spectrum strongly support these programs. Instead they hope that they can use their power of persuasion, coupled with the power of campaign contributions and the power of high-paying jobs for defeated members of Congress, to get Congress to approve large cuts in Social Security, Medicare, Medicaid and other key programs. This is the plan for a grand bargain that the corporate chieftains hope can be struck in the lame duck Congress. Most of the media have been happy to cooperate with the corporate chieftains in this plan. There are two main ways in which they have abandoned objectivity to support the plan for cutting Social Security and Medicare.

Semantics and the Debt Burden - Does government debt impose a burden on future generations? A relevant question given the high current government debt levels to which most people will answer with a clear "yes": we are spending today and passing the bill to the next generation. But this answer is incorrect (or to be more precise it might be incorrect).  The link between debt and burden on future generations is much more complex than what many think. Recently, a debate has populated the economics blogosphere as some argue that that debt only imposes a burden when it is held externally, others coming up with counterexamples where this is not true (borrowing from Noah Smith a list of links to the debate: here, here, here, here, here or here.) The debate becomes even more complex as the issue of desirability of another round of fiscal stimulus is mixed with the notion of intergeneration transfers associated to increasing government debt. Unfortunately, economists tend to go in circles and debate the same subjects over and over again without reaching consensus, so when I went back a few months (January this year) I found a very similar debate with practically identical arguments being put forward by both sides. The lack of consensus in this particular debate is much more about semantics that about disagreements on how the economy works. My reading of the debate is summarized well by Noah Smith long list of updates to his blog entry. In particular the following question: is government debt an indicator of the (fiscal) burden we are imposing on the next generations? And the answer is a clear no. Debt does not matter. Debt is not a burden per se but it can be the outcome of tax and spending decisions that lead to redistribution of resources.

One More Rumination on the Burden of Fiscal Deficits - You would think that everything that needs to be said about this topic has been put on the table in the past few weeks. And you might be right, but I’ll offer a different take anyway. The debate has been cast in an aggregative framework in which the set of welfare-relevant individuals includes both those who pay taxes tomorrow to repay today’s deficits and those who hold the bonds and receive payments.  Fine, but let’s consider a narrower question, one that most economists apparently think is beneath discussion: what it is the purely fiscal burden of public debt? Well it’s obvious, isn’t it?  Either you pay off the debt in the future or you roll it over and pay more interest.  Either way you bear a fiscal burden, and they are the same in present value terms. Well, try this.  In thinking about the fiscal burden, it may help to imagine a country with two types of citizens.  One type pays taxes but owns no financial assets; the other owns financial assets but pays no taxes.  (We’re getting there....)  The government runs a fiscal deficit in period 1.  In subsequent periods will there have to be offsetting transfers from the taxpayers to the bondholders?

Myth Drives the Budget Fuss - Nearly everyone believes that Uncle Sam is like a family that must get money before it can spend. But that is not true. A basic function of any sovereign government is to create and run the country’s money system. Unlike a family, the US government is sovereign. It creates money and can never run out. All the words about America’s financial limits mean nothing. Years ago, our money was based on silver and gold. But that did become a limitation when economies around the world needed money to grow faster than metal was dug out of the ground. The US went off the gold standard in 1971, but we still act as if its limitations remain. The economy is often shown as a circular flow of goods and services moving in one direction from producers to consumers, and money to pay for them flowing in the opposite direction. Like a juggling act, the flow keeps running until something interferes. Families that save interfere by removing some of the money. They also remove money when they buy more things from other countries than the US exports. The flow of goods and services slows down when money is removed unless some other party replaces it. The sovereign federal government is the other party. It creates new dollars by spending more into the flow than it removes with taxes. The big bad deficits that haunt so many people are just new dollars that the government crates to replace dollars that savers and importers remove. Moreover, the federal debt that causes so much heartburn is just the sum of all new dollars created since the country began. Truth in labeling would have deficits called something like “new dollars created” or “new savings” and the debt would become “total dollars created” or “total savings”. This is shown every week when savers bid to buy Treasury securities as safe places to put their dollars. The debt is not a liability that will burden future generations, it is an asset that present and future generations of savers will depend on.

Modern Money and Public Purpose 2: Governments Are Not Households - Presentation by Warren Mosler and Stephanie Kelton. Presented at Columbia Law School on September 25, 2012 as part of the Modern Money and Public Purpose series.

Bond Market Vigilantes Are The U.S. Economy's Big Foot - I first used the phrase “deficit cheerleaders” in a column more than two years ago to describe what Wall Street bond traders were really telling Washington, D.C., about the budget. It was August 2010, and contrary to what some in Washington were saying, the supposedly all-knowing and all-seeing traders formerly known as “bond market vigilantes” absolutely were not insisting that the federal government reduce its red ink and we had to stop saying that they were. I also wrote that those who were using the bond market as an excuse for spending cuts and tax increases were misreading or — far more likely — misrepresenting the messages actually being sent by the bond traders. Based on both the low interest rates of the time and the direct statements they were making, it was clear two years ago that the vigilantes had turned into an increase-the-deficit cheering section. They were letting it be known that they not only wouldn’t criticize those who helped produce deficits but would be rooting for those who helped make them happen. In other words, no matter what they might have been saying to the Clinton administration and Congress in the 1990s, the bond market of 2010 actually wanted higher deficits, and the vigilantes had become deficit cheerleaders.

‘Crowding Out’ is Coming to Get You - The principle of 'crowding out' is ubiquitous in economics.  It is a standard statement in many basic economics textbooks.  A couple of definitions of crowding out are found at Wikipedia: public debt crowds out private investment and increases in government spending crowds out investment spending. The definition from Investopedia is  public spending reduces private spending.  These arguments are logically based on theories that private spending will be reduced by anticipation of higher future tax rates and higher interest rates resulting from eventual shortages of capital because the government is "hogging the money resource" so to speak. I have engaged in a number of informal discussions about the crowding out concept in which I have questioned it and have been questioned (critically by some) in return.  My bottom line from these exchanges is that the topic needs more thorough analysis than many have given it.  This is not the start of my attempt to contribute to that analysis (in which I hope to be engaged in the coming weeks), but is simply to throw some cards on the table to explain why the subject so intrigues me.

Six (maybe) good arguments for deficits (and one bad). - Are deficits good or bad? That depends. Sometimes they are good, and sometimes they are bad. But even when deficits are good, don't use bad arguments to defend them. It really annoys me. Here's a list of arguments for deficits:

  • 0. "There is no burden on future generations because the extra taxes to service the debt will be paid to those same future generations that inherit (sic) the bonds." That is a really bad argument. It's just plain wrong
  • 1. "Yes, future taxes will be a burden on future generations, but monetary policy won't work at the zero lower bound, and we need fiscal deficits to increase demand now, and the benefits exceed the costs." I happen to disagree with the assumption that monetary policy can't work at the ZLB. But I might be wrong.
  • 2. "Yes, future taxes will be a burden on future generations, but the roads and schools etc. we are borrowing to build will be an even bigger benefit to those future generations".  Good argument.
  • 3. "Yes, future taxes would be a burden to future generations, but all we are doing is building the same roads and schools a couple of years earlier than we would have done, and doing it when roads and schools are cheap to build, and real interest rates are very low or even negative, so there's a chance that future taxes might even go down if we run a deficit today and pay it all back by building fewer roads and schools in a couple of years." Another good argument.
  • 4. "Yes, future taxes would be a burden to future generations, but the rate of interest on government bonds will on average remain below the growth rate of the economy forever, so we can increase the debt, rollover the debt plus interest forever, without ever having to increase taxes on future generations, who will actually be better off because they will get a higher rate of return on their savings." This argument is valid. But I admit it does scare me, because we don't know for sure what future interest rates and growth rates will be.
  • 5. "Yes, future taxes will be a burden on future generations, but future generations will be richer than we are, and it's OK to transfer wealth from richer to poorer". OK. Maybe.
  • 6. "Running deficits in bad times and surpluses in good times but balanced budgets on average doesn't mean higher taxes on future generations, and it's better than having government spending procylical and tax rates countercyclical".

Should we be grateful for the Bush deficits? - IN THE recent debate between America's vice-presidential candidates, current Vice President Joe Biden criticised opponent Paul Ryan for "voting to put two wars on a credit card". Matt Yglesias chides Mr Biden for this, noting that borrowing at the time was quite sensible: [D]uring the Bush years, we had low inflation, low interest rates, and plenty of private investment. What would higher taxes have accomplished? There are lots of valid criticisms to be made of Bush-era fiscal policy. Low taxes could have gone to bolstering working class incomes, for example, rather than those at the high end. We could have made potentially useful domestic public investments rather than spending all that money in Iraq...But the idea that we should have relied more on taxes and less on borrowing doesn't hold much water. That's an interesting take. Orthodoxy would suggest that during a typical economic expansion a normal economy shouldn't be running large government deficits (unless the public sector is borrowing to fund positive return public investments that are likely to pay for themselves). Government borrowing competes with private borrowing, crowding out potential private investment (perhaps there was "plenty" but there might otherwise have been more). Sustainable budgeting should aim for balance over the cycle: with surpluses in good times to offset deficits in bad times. Alternatively: if the ratio of net public debt to GDP had been 35% in early 2009 (as it was in 2000) rather than 66%, then America's government might have worried less about the possible fiscal costs of a truly massive fiscal stimulus.

Ryan and Romney’s Secret Plan to Cut the Deficit – and why Romney opposes it - Bill Black - At Thursday’s VP debate, Representative Ryan renewed his claim that he has a secret plan to cut the deficit while cutting all tax rates by 20 percent and not eliminating any tax deductions for which the middle class are large recipients.  Oh, and Romney has also promised to increase military spending. Romney is reprising the three contradictory budgetary promises that President Reagan made during the 1980 campaign.   Reagan’s OMB Director David Stockman admitted no plan could produce the three promises.  Stockman’s job was to lie in order to cover up the fact that the administration had no plan that could simultaneously (1) cut taxes, (2) end the budget deficit, and (3) increase military spending.  Stockman invented the “magic asterisk” to hide the truth from the public.There is, of course, no Ryan plan.  There cannot be a Ryan plan because mathematicians are not like historians.  The cruel joke about historians is that while God himself cannot change history; historians can.  It is perhaps because they can be useful to God in this regard that he tolerates their continued existence and frequent errors.  Mathematicians are useless to God, at least in the non-exotic realms of mathematics relevant to budgets, because they are so good at exposing errors and when they do so the error is beyond dispute.  (Econometricians are God’s favorites among the quants.)    No budget plan could meet all (or even most) of the policy constraints Ryan and Romney have promised they would obey.  It is mathematically impossible.  Romney and Ryan’s primary lie is that they have a secret plan to cut taxes, cut the deficit, and increase military spending.

Moody’s Zandi Warns of Need to Deal With Fiscal Woes - Mark Zandi, the chief economist of Moody’s Corp.’s research arm, believes the U.S.’s fiscal woes will take a turn for the better — but not just yet. “I am meaningfully optimistic about the economy in the second half of the decade,” said Mr. Zandi, of Moody’s Analytics, at the Association for Corporate Growth’s M&A East conference in Philadelphia. “[But] we need to solve a number of fiscal issues pretty quickly after the election.” Mr. Zandi pointed to the fact that the U.S. government needs to tackle the so-called fiscal cliff looming on Jan. 1. Besides that, Congress will be faced with whether to raise the debt ceiling again by the end of February or early March.

A Reminder Of Why A Fiscal-Cliff Compromise Is Not Coming Any Time Soon - CEOs suggest a major reason they are not spending is 'policy uncertainty', politicians blame the other side for stifling growth because of 'policy uncertainty', and brokers, bankers, & economists whine that the only reason the Dow is not at Bernanke's goal-seek'd 36,000 is the 'policy uncertainty'. If only the 'fiscal cliff' issue would go away - we'd all have a pony and life could go on. Sorry to burst that bubble; as we noted here, the market is priced for a total compromise and earnings expectations appear to imply a full fiscal cliff resolution in Q4. The hope remains that 'even if we were to go off the fiscal cliff, the political reaction will be swift and vengeful and we will see a 'V'-shaped recovery - so do not worry'. There are two small (ok, very large) problems with that thesis: 1) the self-reinforcing shadow-banking collateral squeeze that would occur as asset values dump again and liabilities remain; and 2) the record-high polarization among our political class. Something to ponder as earnings outlooks continue to drop...

Chances of Going Over Fiscal Cliff May Be Higher Than Experts Think- What are the odds of the U.S. running off the so-called fiscal cliff — the mix of spending cuts and tax increases that would likely tip the U.S. into recession? On average, economists in the latest Wall Street Journal economic forecasting survey put the probability at just 17%, but some economists and analysts say that may be too low. “Our view remains that the debate in D.C. following the election will be contentious beyond precedent and that this difficulty in finding common ground suggests the odds of going over the cliff are higher than people seem to appreciate,” RBC Capital Markets chief U.S. economist Tom Porcelli said Tuesday in a note to clients. Unless the White House reaches a deal with Congress, the Bush-era tax cuts are scheduled to expire at year-end, raising tax rates on more than 100 million Americans. Another $100 billion in spending cuts on military and other government programs are set to kick in. Other smaller tax policy changes also are looming.

Officials: Obama ready to veto a bill blocking 'fiscal cliff' without tax hike for rich - President Obama is prepared to veto legislation to block year-end tax hikes and spending cuts, collectively known as the “fiscal cliff,” unless Republicans bow to his demand to raise tax rates for the wealthy, administration officials said. Freed from the political and economic constraints that have tied his hands in the past, Obama is ready to play hardball with Republicans, who have so far successfully resisted a deal to tame the debt that includes higher taxes, Obama’s allies say. In the days after the November election, the tables will be turned: Taxes are scheduled to rise dramatically in January for people at all income levels, and Republicans will be unable to stop those automatic increases alone. If he wins reelection, Obama may finally be able to dictate the terms of a bipartisan debt-reduction deal. And if he loses to Republican Mitt Romney, Obama could make sure that tax rates rise before he hands over the keys to the White House on Inauguration Day in late January. Administration officials declined to say whether the veto threat will stand if Obama loses the election.

Obama's plan: Push Republicans off the fiscal cliff -- I’ve criticized the Obama campaign for failing to detail much of a vision for a second term. But that’s not to say they don’t have one. They do. It’s just a hard one to campaign on.  After promising in 2008 to bring about a new era of cooperation in Washington, they’re campaigning in 2012 knowing that, if reelected, they will start their second term with a brutal, economy-shaking showdown with Republicans over spending and taxes. If the Obama administration were to really lay out their plans, they would go something like this. In November, President Obama will reiterate, clearly and firmly, that he will veto any attempts to extend the high-income tax cuts or lift the big, dumb spending cuts without finding equivalent savings elsewhere. In fact, as my colleague Lori Montgomery reports, they’re already reiterating that promise. That veto threat is the center of the Obama administration’s second-term strategizing. The Obama administration believes – and, just as importantly, they believe Republicans believe — that they’ve got the leverage here. The Republican position on taxes is less popular than the Democratic position. The outcome of gridlock is much higher taxes, which is more anathema to Republicans and arguably cheering to Democrats. The big, dumb spending cuts, despite being poorly timed and inanely constructed, are very progressive in their effect, falling heavily on military spending while exempting Medicaid, Social Security, and Medicare beneficiaries.

Brookings Institute On Looming Fiscal Cliff: Little Room for Optimism -  Brookings Institute Senior Fellow Ron Haskins discusses the Looming Fiscal Cliff in the following video. About 30 seconds in, Haskins' stated "the fiscal cliff is kind of the opposite of Keynesian economics". I was thinking here we go again, another person thinks we cannot do anything about this "now".  Having played it entirely, it is clear Haskins is not supportive of the Keynesian view, rather, he is disgusted as to why we are where we are, blaming Congress, the president, an partisan politics. He failed to address the role of the Fed or fractional reserve lending, but he is against can-kicking exercises.

Fiscal Cliff Could Play Scrooge This Holiday Season - If workers start paying attention, the fiscal cliff could play Scrooge this holiday season. Economists have been warning for a while about the overall drag coming from the fiscal cliff–the coming combination of government spending cuts and tax increases. Company executives already are reacting to the situation. Business surveys suggest policy uncertainty is holding back hiring and capital spending in the second half of 2012. Consumers, however, aren’t bothered by the potential impact on their wallets. Polls show a jump in economic optimism even as the U.S. approaches the cliff.

GDP Growth Caused By Tax Cuts Has Never Happened - Mike's post here got me thinking. I'll telegraph my conclusion. He dramatically understated his case. You can see the long range view of nominal and inflation adjusted GPD growth in Graph 1 of FRED quarterly YoY percent change data. Graph 1 YoY growth Nominal and Inflation Adjusted GDP Nominal GDP Growth was in a secular up-trend from 1960 through 1980. However, inflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of '65 and Q1 of '66. It then dropped dramatically for the next four years. This peak value has been matched only once since: in 1984, during a sharp rebound from the double dip recession of 1980-82. Since then, in the wake of numerous tax cuts, the rate of GDP growth has been anemic. To get a look at the rate of growth, I took an 8 year average of the annual percent change data presented above, and then plotted a 5 year rate of change for that data. This is essentially the 2nd derivative of GDP, or GDP acceleration, as shown in Graph 2.Inflation Adjusted GDP acceleration peaked in Q3, 1966.   Fueled by the inflation of the 70's, NGDP acceleration stayed high until Q1, 1980, then plummeted for 9 years.  It has been relentlessly negative since. Inflation adjusted GDP acceleration has not done quite as badly in this disinflationary era, but has been below zero more than half the time since 1970.  This is a little bit worse than coasting. This all might seem a bit abstract, but the message is clear.  If tax cuts were good for the economy, then GDP growth would be increasing.  In other words, acceleration would be positive and most especially so after a tax cut.  The data is not consistent with this notion.

Wall Street CEOs Up Pressure for Grand Bargain in the Lame Duck Session - As soon as the election is over expect a powerful renewed push for a “grand bargain” that cuts entitlements. Already Erskine Bowles and Al Simpson have raised $25 million for the Fix the Debt campaign to push for a deal in the lame duck session, and we now have the top Wall Street executives laying the groundwork to really put pressure on Congress after the election. Today, CEOs of 16 of the largest financial companies sent a letter to Congress urging them to reach a bipartisan debt deal. From the letter:We write today to you to work together to reach a bipartisan agreement to avoid the approaching “fiscal cliff,” and take concrete steps to restore the United States’ long-term fiscal footing. The consequences of inaction – for stability in the global financial markets, economic growth, for millions of Americans still without work, and for the finical circumstances of American businesses and households – wold be very grave. [...]But merely avoiding the fiscal cliff is not enough. We further urge you and your colleagues to enact legislation that truly restores the nation’s long-term fiscal soundness. This is not CEOs merely pointing out that the fiscal cliff would be bad and should be eliminated. They want dealing with the fiscal cliff to be used as an excuse for pushing through a very unpopular “bipartisan” deficit deal.

Public Briefing: Erskine Bowles Determined to Reduce Private Sector Income, Stifle US Economy – Pt. 1 - One of the chief agitators and supporters of austerity in the US is Erskine Bowles, a Democrat with intimate ties to Wall Street, who serves on a number of corporate boards.  Bowles is one of chief Democratic allies of Republican Pete Peterson, the Wall Street billionaire who has taken it upon himself to change the accounting rules of government and scare legislators and politicians into submission to the boogieman of the “bond markets”.  Together they both sit as directors at the Committee for a Responsible Federal Budget, a front-group/think tank housed at the ostensibly liberal New America Foundation.  Many of Washington’s key deficit hawks have thus lodged themselves at one of DC’s supposedly left-leaning brain trust, cleverly providing themselves cover for their essentially right-wing agenda.  Ari Berman of the Nation has called them Washington’s “austerity class”.  The CRFB’s webpage declares with agit-prop style graphics that we must “Fix the Debt” as if public indebtedness were the core problem our generation faces and should inspire demonstrations on the street and at the US Capitol.  Bowles is thought to be a likely candidate for Secretary of the Treasury to replace Timothy Geithner for Obama’s second term.

Public Briefing: Erskine Bowles Determined to Reduce Private Sector Income, Stifle US Economy – Pt. 2 -- Bowles Would Have Us Repeat the Errors of the Euro-Zone. That Bowles is currently lionized in Washington policy circles is particularly striking given the slow-motion economic catastrophe occurring within the Euro-Zone.  Bowles’s ignorance or willful disregard of macroeconomic accounting processes and insistence that the US government institute laws that reflect that ignorance, repeats the errors made by the Euro-Zone countries when they signed the Maastricht Treaty in 1992.  With a more than adequate understanding of macroeconomic accounting, Wynne Godley predicted in 1992 that the Euro Zone would not withstand a substantial financial crisis because of the budgetary restrictions required by the Treaty.  The 3% limits in budget deficits to GDP mandated by the treaty indicated to Godley already at the formation of the Euro-Zone that its founders were woefully ignorant of the stabilizing, supporting and leadership role of government in the economy, especially during times of crisis.

New lie: The government spends more on welfare than everything else! - This is the apparently conclusion of a new report from the nonpartisan Congressional Research Service (the same organization that recently said that Obama’s supposed “welfare reform gutting” was totally legal!), though in fact it is a claim made by Senate Republicans who are abusing the nonpartisan research of the CRS. Here’s the story in the Weekly Standard, complete with charts from the Republicans on the Senate Budget Committee. Here’s the story in the Daily Caller, which is more upfront about all the material coming from Senate Republicans and not from the CRS. And here’s a Weekly Standard follow-up with some new charts. They claim that “welfare spending” is the “largest budget item” for the federal government, with the fed spending $745.84 billion, more than is spent on Social Security, Medicare and “non-war defense.” (Hah.) Plus: “In all, the U.S. government, including federal and state governments, spends in excess of $1 trillion on welfare.” That is a lot of welfare spending! Those poor people must be rolling in dough, right? In the context of political discussions, “welfare” traditionally (as in pretty much always) refers specifically to Temporary Assistance for Needy Families, or TANF, The federal government spends $16.5 billion a year on TANF and, combined, the states spend another $10 billion. Most of the federal budget is “defense” and war spending and Medicare, which should be common knowledge but that fact is regularly obscured by right-wingers who claim to be deficit hawks but refuse to cut defense spending and are scared of proposing real reductions to our programs for old people. So this is obviously just an attempt to rebrand “everything else” as “welfare.”

That Blurry Line Between Makers and Takers, by Tyler Cowen, Commentary, NY Times: Mitt Romney has apologized for his depiction of 47 percent of America as wealth takers rather than wealth makers. But his blunder touched inadvertently on some discomforting truths about the importance of politics in income distribution in the United States.  The correct distinction is not “makers versus takers.” The problem is that taking, rather than making wealth, appears to be growing in relative influence.  Most of us are actually both makers and takers. Consider farmers who produce food and favor agricultural subsidies. The question is whether the role of wealth maker has more influence over our politics, at any given time, than does the taker role. Is public policy being adjudicated on grounds of ethics and efficiency, or is the real story about lobbying and the relative power of different interest groups?  It isn’t easy to measure whether politics is less public-spirited these days, and we should resist the tendency to idealize the past. Still, job creation, median income and other measures of economic well-being have done poorly since the late 1990s. That suggests that America isn’t paying enough attention to creating wealth and increasing general prosperity.

How to think about makers and takers - Here is my latest NYT column, on how we ought to be thinking about the issue of makers vs. takers.  Excerpt: EVERYONE FEELS ENTITLED People tend to think that they have justice on their side, whether it comes to making or taking. For example, millions of homeowners have spent hundreds of thousands of dollars on the premise that the tax deduction for mortgages will be continued. If they support a continuation of that deduction they hardly feel like brigands, even though a bipartisan consensus of economists doubts the efficiency of this tax break. As years and decades pass, recipients of this deduction and other benefits start to see them as deeply and richly deserved. Furthermore, almost all of us reap one or more of these benefits, so few individuals are consistently opposed to all government transfers. It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings.

Matt Taibbi: The Romney-Ryan tax plan should be laughed at - Rolling Stone contributing editor Matt Taibbi said Monday on Current TV that it was appropriate for Vice President Joe Biden to laugh at his Republican challenger Paul Ryan during last week’s debate. “I think what he did — and he got heavily criticized for laughing and bringing this mocking tone to Ryan’s whole presentation — but I think that is what has been missing all along from the coverage of this campaign,” he explained. “You should bring contemptuous laughter to this whole thing because it is not serious. That is the real problem with it. It is not even that it is cynical and it is nefarious, it is just not serious.” Romney and Ryan have said they plan to cut tax rates for every American by 20 percent. They have insisted the tax cut would be “revenue neutral” because they also plan to eliminate deductions. But they have refused to explain which deductions they would eliminate and how their massive tax cut would help decrease the federal deficit.How Much More Will Your Payroll Tax Be in 2013? - The Social Security tax withholding rate is expected to return to 6.2% after two years at 4.2%. So far neither party has expressed much interest in another extension. For someone earning the 2011 median income of $50,054 that translates into $1,001.08 a year or about $40 less in a biweekly paycheck. Economists expect the increase will trim about 0.6 percentage point from growth in the first quarter of 2013. To see how much more you will pay next year, input your annual pretax salary into the calculator below and click “calculate.”

New JCT Study Shows Futility of Base-Broadening to Pay for Massive Tax Rate Cuts - As long as the only thing we’re going to talk about for the next few weeks in the election is taxes, I might as well provide the update. The Joint Committee on Taxation, the “CBO for taxes” as it were, the nonpartisan scorekeeper on tax policy, just released a report that should end all discussion about the Romney campaign’s plans for a deficit-neutral 20% across-the-board rate cut. Repealing all itemized deductions in the U.S. tax code would pay for only a 4 percent cut in income tax rates,... an estimate ... that casts doubt on Republicans’ ability to finance lower income-tax rates with base broadening.......[T]his is not a perfect indicator of the Romney plan. But the basic principle applies, and it’s so far from the reality of what Romney wants to achieve – a 20% rate cut without adding to the deficit, and without an increase on the middle class – that I think it serves as more evidence of the futility of the exercise. ... Mark Zandi, the Moody’ economist always trotted out to bless this or that plan, admitted today that the Romney plan is mathematically impossible....

What the Joint Tax Committee Really Said About Tax Reform - On Friday, congressional Democrats released the results of a new analysis of base-broadening, rate-cutting tax reform by the Joint Committee on Taxation. For reformers everywhere the results seemed exceedingly grim: By eliminating all deductions, Congress could reduce tax rates by only a puny 4 percent without adding to the deficit. The top tax rate, for instance, would drop from 39.6 percent to just 38.2 percent. In other words, if JCT is right, lawmakers would have to take the political heat for going after popular deductions such as those for mortgage interest or charitable giving and they best they’d have to show for their pain would be a tiny reduction in rates. These estimates of what would happen under one theoretical tax rewrite sent reformers, not to mention the Romney campaign, into a frenzy. How could Romney pay for his 20 percent across-the-board rate cut if JCT could only get rates down by 4 percent?  How could the bipartisan fiscal plans we’ve seen over the past couple of years both lower rates and cut the deficit if eliminating tax expenditures generates so little money? Even my colleagues at the Tax Policy Center, who have estimated much larger effects of broadening the tax base, would be very wrong. The JCT estimates matter because, unlike all those other groups, including TPC, the Joint Committee is the official congressional arbiter of tax proposals. If JCT says your tax plan doesn’t generate enough money to pay for the rate cuts you want, it doesn’t. End of story.

Five Points Worth Remembering About Taxes and the Poor - At a recent Tax Analysts panel discussion, I provided some background on the taxes that low-income people pay and what they have at stake as we approach an intense period of decision-making on federal tax and budget issues.  Below are five of my main points:

  • 1. Most of the people who don’t owe federal income tax are workers, elderly, disabled, or students.
  • 2. Low-income households pay significant federal taxes.For low- and moderate-income people, payroll taxes are much more significant than income taxes.  These people also pay a much larger share of their incomes in payroll taxes than high-income people do. The same goes for excise taxes.
  • 3. Low-income households also pay significant state and local taxes. Unlike federal taxes, which are progressive overall, state and local taxes fall much harder on low-income people.
  • 4. Income growth has been weak at the bottom of the scale.
  • 5.Tax credits make a big difference for low-income working families. Historically, both parties have supported a robust Earned Income Tax Credit (EITC) for low-income workers, which is the best kind of welfare reform because it encourages and rewards work. Along with the Child Tax Credit, the EITC lifted 9 million working people out of poverty in 2010.

Anatomy Of The 47 Percent - Chuck Marr of the Center on Budget and Policy Priorities has posted on his Web site a pie chart that everybody should see, but most especially Mitt Romney. It's a breakdown of the "47 percent" of Americans (actually, 46 percent) who don't pay federal income taxes. This group was famously labelled, by the Wall Street Journal editorial page, "lucky duckies." Here's how Romney, in his demented talk (since disavowed) to rich donors in Boca Raton, broke the duckies down (I will never get tired of this quote):All right, there are 47 percent who ... are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what…. These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn’t connect. ... And so my job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.  And here is how Marr breaks them down:

Romney's Tax (Mis)Calculations: if your two and two don't add to four, pretend the laffer curve gives you more – Linda Beale - Anybody watching last night's presidential debate surely became aware at some point that Romney's so-called "plan" for economic growth is an empty shell based on the idea that he's made money for himself so he knows how to run a country.   Romney's plan is pure market fundamentalism--a mistaken view that the "market" will take care of all problems and vigorously grow to elevate everyone's livelihood just so long as government regulators stay out of the business of regulating and allow business owners and managers (particularly huge multinational corporate owners and managers) to do whatever they want, including fire workers, outsource business assets, and engage in complex schemes to turn tax laws into tax avoidance bonanzas.  Oh, and the government should provide all kinds of subsidies to aid those businesses at minimal or no (tax) cost--from interstate roadways to easy rights to exploit national lands owned by the public; from localo fire protection to federally funded international security; from state-based contract protection to federal courts that provide handy forum choices to the wealthy and big corporations; from state and local property tax exemptions and waivers to federal intellectual property rights that provide monopoly power and stifle innovation (exactly the opposite of the Founders' dream). And when Romney claims that he can "simplify" the tax system and lower everyone's rates without increasing the deficit, reducing the taxes paid by the upper crust, or increasing the taxes paid by the middle class, while at the same time increasing the military budget and striking more threatening poses a la the Bush neo-cons on Iran?  That's gibberish, as many respected studies have shown.

Repealing Deductions Pays for 4% Tax Cuts, Study Says - Immediate repeal of some of the most popular tax benefits would pay for only a 4 percent cut in U.S. income tax rates, according to an estimate by Congress’s nonpartisan scorekeeper that illustrates the mathematical and political challenges of financing rate cuts by limiting tax breaks. The analysis by the Joint Committee on Taxation emphasizes the difficult choices facing lawmakers as they balance the benefits of rate cuts against the consequences of changing or ending deductions, such as for mortgage interest and charitable contributions. Republican presidential nominee Mitt Romney proposes a 20 percent income-tax rate cut and says he would pay for it by limiting deductions, credits and exemptions.While there are major differences between the assumptions underlying Romney’s plan and the JCT study, the findings emphasize shortcomings in Romney’s approach, said Daniel Shaviro, a tax law professor at New York University. “There really is no serious dispute that the parameters of their plan can’t be met,” Shaviro said. “It’s like saying you’re going to drive from Boston to Los Angeles in 10 hours without speeding. There’s just no way to make the numbers add up.”

How Much Revenue Would a Cap on Itemized Deductions Raise? - In last night’s debate, Mitt Romney repeated the idea that he could pay for much or all of the 20 percent rate reduction and other tax cuts in his tax plan by capping itemized deductions at $25,000. He had previously suggested a $17,000 cap in an interview and, in the first debate, $25,000 or $50,000 caps—and possibly phasing deductions out entirely for high-income taxpayers. Capping deductions would raise revenue in a highly progressive way but how much revenue and how progressive depend on the cap. Itemized deductions disproportionately benefit high-income taxpayers for three reasons:

  1. High-income taxpayers are more likely to itemize deductions. Less than 10 percent of those in the bottom two income quintiles (fifths) itemized in 2011, compared with about 80 percent of those in the top quintile and more than 95 percent of those in the top 1 percent.
  2. High-income taxpayers claim more itemized deductions. Itemizers in the bottom two quintiles averaged less than $14,000 in 2011, compared with nearly $38,000 for those in the top quintile and more than $170,000 for the top 1 percent. A higher cap on deductions would therefore affect fewer taxpayers and a larger share of affected taxpayers would have very high incomes.
  3. A dollar’s worth of deductions reduces taxes more for high-income taxpayers. That dollar saves 35 cents for someone in the top 35 percent tax bracket but only 15 cents for a person in the 15 percent bracket.

As a result, more than 80 percent of the tax savings from itemized deductions in 2011 went to those in the top quintile and more than a quarter to the top 1 percent. Paring back those deductions would hit high-income taxpayers hardest.

The Real Lesson About Capping Itemized Deductions - The Tax Policy Center is back in the political cauldron, this time in the wake of its new research that looks at the revenue and distributional effects of caps on itemized deductions. TPC’s aim was to analyze an interesting idea that could find its way into future tax reform plans. Its conclusion was a mix of good and bad news. The good: Such a cap is a highly progressive way to raise substantial revenues. The bad: Even eliminating all itemized deductions cannot raise enough money to pay for a tax reform that significantly cuts rates without adding to the budget deficit.   But, alas, we are in the midst of a contentious political season. And because Mitt Romney has at least three times in the past few weeks raised the possibility of such a deduction cap, his campaign has gotten defensive about TPC’s results, accusing the center of, among other things, being “misleading and deceitful.” This is, to say the least, odd, since TPC’s findings provide evidence that a deduction cap is a pretty good, though insufficient, idea.  

Understanding TPC’s Analysis of Limiting Deductions - The Tax Policy Center’s new tables showing the revenue and distributional effects of capping itemized deductions have received a great deal of attention since we released them on Tuesday. Our results show that capping deductions can raise a large amount of revenue in a quite progressive manner. Capping deductions could thus be an important component of any tax reform proposal that also wants to reduce tax rates.However, specific aspects of our analysis have confused people. To reduce that confusion, let me make five points.

  1. The new tables do not analyze Mitt Romney’s tax plan. Governor Romney has not released a detailed tax plan, so it is not possible to analyze it fully.
  2. The new revenue table shows the gross revenue gains from eliminating or capping deductions, not the net effect of limiting deductions and making the tax cuts proposed by Romney.
  3. The same is true of the new distribution tables: they show the gross effect of limiting deductions, not the net effect of limiting deductions and making other changes.
  4. The third tax baseline— current policy with 20 percent rate cuts and no AMT—represents part but not all of Mitt Romney’s known tax plan.
  5. Elsewhere, TPC has analyzed the known elements of the Romney plan. In March, TPC estimated the distributional effects of the parts of the Romney plan that the campaign defined in detail.

Tax Cuts for Job Creators - Laura D’Andrea Tyson - The centerpiece of Mitt Romney’s tax plan is an across-the-board 20 percent cut in marginal tax rates. This cut, along with a few other tax changes Mr. Romney has endorsed – such as repeal of the estate tax and the alternative minimum tax – would reduce federal tax revenue from personal income and payroll taxes by an estimated $3.6 trillion to $3.8 trillion over 10 years. The total is closer to $5 trillion when Mr. Romney’s proposed cut in the corporate income tax rate to 25 percent is included. About two-thirds of this amount would go to taxpayers making $200,000 a year or more – about 5 percent of all taxpayers. Extending the Bush tax cuts for high-income earners, as Mr. Romney proposes, adds another trillion in lost revenue and increases the share of the benefits going to the top 5 percent. Even if the cost of the Romney tax cuts for the top 5 percent is covered by base-broadening measures, as Mr. Romney promises – but as President Obama and many others assert is mathematically impossible – does it make sense to devote trillions of dollars to lowering income taxes for the top 5 percent? Is this an effective way to create jobs? Mr. Romney appears to think so. His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment – that lower taxes for job creators create jobs and will do so quickly. This assertion, while superficially convincing and ideologically compelling, is not supported by the evidence.

"If you tax investment income what will people do? Stuff their money in the mattress?" - Richard Thaler asks exactly the right question. This from the latest IGM Forum poll of big-name economists, on the effects of taxing income from “capital.” I’ve been over this multiple times before, but it’s nice to see the thinking validated by a real economist. If you’ve got money, there is no (practicable) alternative to “investing” it. (Those are irony quotes: referring to “buying financial assets,” as opposed to “buying/creating real [fixed] assets,” which is the technical meaning of “investing” in national-account-speak.) Or actually — there is one alternative to “investing” your money: spending it. Are the neoclassicals really going to argue that if we tax returns on financial assets at a higher rate — so “investors” have less after-tax income — they’re going to spend more? I don’t think I have to cite sources to prove that they consistently argue exactly the opposite.But just for grins, let’s say they will spend more. That would be great! They’d increase the volume of private money circulation (P*T, or M*V, your choice) — boosting demand for real goods and services, stimulating production, and goosing GDP. And if we’re lucky, they’ll use it for investment spending instead of consumption spending. They get to write off those real investment expenditures against their taxes, after all. Not true with consumption expenditures, much less purchases of financial assets. In which case — this seems kind of obvious when you think about it — taxing “investment” income will increase investment (while reducing the federal deficit). What’s not to like?

A look at tax havens by the Fortune 500 - According to a new report today from Citizens for Tax Justice, the 285 members of the Fortune 500 that have parked money overseas would owe an estimated $433 billion in taxes if and when it is repatriated. No wonder these companies are working so hard to get a "repatriation holiday" even though the one given in 2004 did not yield any significant new investment, but lots of dividends and stock buybacks.  The new report list 10 companies with $209 billion parked overseas that report the taxes they would owe on these profits (only 47 do so). These companies all report that they would owe 32-35% on their money, which indicates they have not paid any taxes abroad on it; in other words, the money is in tax havens. Note that some estimates place these figures even higher; in March, I reported that Apple's overseas stash was estimated at $64 billion.  Based on the entire 47 companies that report their estimated tax bill, CTJ came up with an average tax rate of just over 27%.Multiplied by the $1.584 trillion in overseas cash held by the 285 corporations (up from about $1 trillion estimated in March) yields the figure of $433 billion in taxes that would be due if the income were repatriated or the deferral provision for overseas income ended.

Bill Moyers: Plutocracy Rising - via Yves Smith - Bill Moyer’s latest show, with Matt Taibbi and and Chrystia Freeland, focuses on how the super rich have established a yawning chasm between themselves and ordinary Americans, both in financial and physical terms. One major focus is view the rich are where they are by virtue of their talents and efforts, not (say) by regulatory and tax arbitrage, and how they’ve convinced themselves and a large swathe of society of this myth. One place where I quibble is where and Freeland argues that “progressives” have dropped the ball by focusing on manufacturing jobs as a solution to the woes of the fallen middle class. That’s hardly the first or best remedy; more progressive taxation (on the order, say, of what we had in Reagan’s day) and getting rid of the favorable treatment of “carried interest” would have far more short term impact. And if I’ve heard the weak tea lefties correctly, the preferred fix for creating more manly jobs (remember Obama’s fixation with that?) is infrastructure spending, where the US has fallen way behind its advanced economy peers, and lousy infrastructure is an impediment to commerce. Freeland has spent too much time in Davos and is unduly enamored of the big multinational corporation business models of extended supply chains. But that aside, there is a lot of good stuff in this show. Enjoy!

Ben Stein Tells Incredulous Fox & Friends Hosts Taxes Are Too Damn Low - Former Republican speechwriter and game show host Ben Stein likely won't be invited back on Fox & Friends any time soon after the conservative economist dropped a megaton truth bomb in the studio earlier this morning. Asked by Gretchen Carlson what needs to be done in order to fix the economy, Stein said unequivocally that taxes need to be increased for upper-echelon earners. "I hate to say this on Fox, and I hope I'll be allowed to leave here alive, but I don't think there is anyway we can cut spending enough to make a meaningful difference," Stein said. "We going to have to raise taxes on very rich people, people with incomes of like say, 2, 3 million a year and up, and then slowly move it down." Thinking he may have misheard the Ferris Bueller star, Steve Doocy asked Stein if he doesn't think "Washington just has a spending problem.""I do not think they just have a spending problem," Stein replied. "I think they also have a too-low taxes problem. And while all due respect to Fox, whom I love like brothers and sisters, the taxes are too low."

If Europe Adds a Financial Transactions Tax, Will We Follow? - Linda Beale - Has the time come for the US to impose a financial transactions tax?  It would have several positive features.  First, it would raise revenues, which are sorely needed for everything from climate change action to infrastructure improvements to aid for needy families.  Second, it would raise revenues from those who are most responsible for the financialization of the economy--investment bankers, fund managers, and high speed traders interested in bigger and bigger profits no matter the result for ordinary folks.  Third, it would act in some small way to discourage excessive trading that contributes to the volatility of the stock market.  Of course, such a tax (frequently called a "Tobin Tax" after the Nobel economist who recommended it) would be best if applied by all sophisticated nations.  It appears that the European Union is getting closer to making a financial transactions tax a reality in at least some of the participating countries.  See James Kanter, Tax on Financial Trades Gains Support in Europe, New York Times (Oct. 10, 2012).  Britain will remain exempt so the City of London (Europe's parallel to Wall Street) would continue on its merry way (or even increase the financialization of the UK economy as trades moved from participating countries to London).  Wall Street has lobbied heavily against any tax on its activities, and would fight bitterly if the US were to impose such a tax while London remained exempt.

It’s time to levy the risk takers - Since the Lehman bankruptcy and AIG bailout, there has been increased momentum to move “over-the-counter” financial derivatives from the books of large banks to clearing houses – or central counterparties (CCPs) – in effect moving the risk off large banks’ balance sheets. But moving counterparty risk from banks to CCPs does not eliminate it. It means risk will instead be shifted from individual banks to new institutions similar to concentrated “risk nodes” in the financial system. This may work in normal times. But what happens during the next crisis? Little progress has been made on crisis resolution frameworks for unwinding large banks, let alone huge new institutions called CCPs that would house trillions of dollars in financial derivatives. Thus, the underlying economics of having more “too-big-to-fail” entities needs to be justified. Financial statements show that each of the large banks active in the OTC derivatives market in recent years carries an average of $100bn of derivative-related tail risk; that is, the potential cost to the financial system from its collapse after all possible allowable “netting” has been done within the bank’s derivatives book and after subtracting any collateral posted on the contracts. Past research finds that the 10-15 largest players in the OTC derivatives market may have about $1.5tn in under-collateralised derivatives liabilities, a cost taxpayers may have to bear unless some solution to the “too-big-to-fail” question can be proffered. Housing derivatives in one single global CCP backstopped and regulated by the leading central banks would have been an ideal “first-best” solution as it would enhance netting, reduce collateral cost and “house” overall risk in one place. A “second best” solution would have involved a few linked CCPs scattered around the globe. However, local politics has resulted in the least-best outcome. A plethora of CCPs are being created because countries such as Australia and Singapore do not want to lose oversight to an overseas entity incorporated in a foreign country.

It’s Time for a Tax to Kill High Frequency Trading -  Yves Smith - It’s frustrating to know that there’s a simple solution to a serious problem but no one seems willing to do the obvious. Tax maven Lee Sheppard in an article at Forbes describes how transaction taxes could very quickly put a brake on numerous undesirable activities: high frequency trading, the explosion in derivatives, and overuse of repo financing. You might collectively think of these things as “junk liquidity” or “junk trading”. HFT has proven to be singularly destructive. Despite the claims of it defenders, it does not increase market liquidity; it merely increases trading volumes without improving ease of execution. 60% of US stock market trading volume comes from HFT. HFT has undermined how markets operate. Institutional investors have diverted some of their trades to “dark pools” to escape the pred. Retail traders have become increasingly distrustful of equity markets, thanks to HFT-related debacles like the flash crash and Kraft’s first trading day at NASDAQ, when its initial trades had to be cancelled. CFTC commissioner Bart Chilton pointed out some other casualties of “cheetah trading” in a speech on Tuesday: A few weeks ago, the Tokyo Stock Exchange closed due to technology problems. We’ve seen a few contracts shut down for different periods in Chicago and New York last month. We’ve seen market volatility increase wildly: natural gas plummeting eight percent in 15 seconds last year. One day silver plunged 12 percent in about as many minutes. One energy trader lost $1 million in one second—in a second! We saw crude tumble $3 in a minute last month.  The primary objective of a transaction tax is like a vice tax: its primary objective is to discourage activity, not make money, although a transaction tax would generate a decent level of revenues at low cost. It’s no where near as radical as the banksters would have you believe: the United Kingdom, Hong Kong, Singapore, and (gasp) the US have forms of transaction taxes.

Mitt Romney: The Great Deformer - David Stockman -- Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise. The fact that Bain’s returns reputedly averaged more than 50 percent annually during this period is purportedly proof of the case—real-world validation that Romney not only was a striking business success but also has been uniquely trained and seasoned for the task of restarting the nation’s sputtering engines of capitalism. Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better. That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

Small-Time Mitt - Krugman - I was amazed to hear Mitt Romney describing himself as having “come through small business”, as if his private equity firm were just like a mom-and-pop store or something. But Digby informs us that he made similar claims in his convention speech, making Bain sound like a scrappy little start-up. And it’s true it had only 10 people at first — that, and $37 million, yes, $37 million, in seed money.  Where did that $37 million come from? A large part from foreigners, in many cases investing via Panama-based shell companies. Also, funds from families of Central American oligarchs, who were sitting things out in Miami while death squads sponsored by their class, and in some cases by their relatives, were roaming their home countries. Hey, doesn’t this sound like just your usual small-business success story?

Private Equity Exposed: A Lawsuit Blows The Lid Off Shady Deals - Yves Smith - One of the salutary side effects of the Mitt Romney presidential bid is that it has shed light on one of the most secretive yet influential parts of the financial services industry: the major buyout firms. Thanks to motions filed by the New York Times, a federal judge in Boston released court filings this week that had previously been under seal in a class action, anti-trust lawsuit -- Dahl v. Bain Capital Partners -- against the eleven biggest and most blue-chip names in the private-equity industry, including Blackstone, Carlyle, Goldman, and TPG. The plaintiffs contend that they lost billions as shareholders in companies that were sold at lower prices than they would have otherwise fetched in the 2003 to 2007 period due to buyer collusion through a system they called “club deals.” No wonder the defendants had been keen to keep the case under wraps. The 221-page complaint goes through 27 transactions, and with each, presents not only persuasive economic analysis, but more important, damning e-mails showing how the heads of each of the firms were involved in submitting sham bids, sharing information about their offers, working with management of the target companies to restrict the sales process, enforcing elaborate systems of quid pro quos (for instance, not submitting a bid with the expectation of being cut in on that deal or future deals), and other forms of market manipulation. The messages make clear that the intent was to reduce competition and buy the companies on the cheap. For instance, on the sale of Toys R’ Us,

Why is a Price-Fixing/Collusion Lawsuit Against the Biggest Names in Private Equity Getting Only Cursory Notice? - Yves Smith - It’s troubling that some stinging charges against the very biggest names in private equity are getting only passing attention in the financial media. The New York Times last week managed to get some court filings unsealed last wee09k in a class action lawsuit, Dahl v. Bain Capital Partners. This revelation came after the parties tried to satisfy the NY’s motion with a heavily redacted filing, which the judge nixed. This short post by yours truly in the New Republic gives an overview; due to space constraints, I had to stay pretty high level: I wish there had been more space in the TNR post to provide extracts from e-mails, which are typically among either the heads of the mega buyout firms, or other managing directors. They show a clear understanding of what they were up to. These players were engaged in an effort to collude, by submitting sham bids, not bidding in the auction but being invited in as a co-investor on that deal later or getting a slice of a future deal, all clearly intended to buy the target companies at more favorable prices. You really need to skim the filing. If you thought the quotes from the Libor traders in the FSA’s letter to Barclays were damning, they pale in comparison to this (the juicy stuff starts on page 26 of the pdf, which is numbered page 22): A Lawsuit Against Private Equity

Is the Financial Sector Worth What We Pay It? - A basic capitalist tenet is that the market represents the most efficient way to allocate capital. How well is it working? We are rapidly evolving a fast-moving, increasingly cybernetically interlinked capital marketplace that, as Lord May observes in the Santa Fe Institute Journal, has become intertwined in ever-more complex interdependent patterns. He goes on to ask how much are we, societally, paying the financial sector to allocate capital? More importantly, is the sector allocating capital to further societal goals, or merely enriching itself and a narrow segment of the world’s population? Human nature is powerful. John Stuart Mills said, in Social Freedom: “Men do not merely desire to be rich, but richer than other men”. Benjamin Friedman holds, in The Moral Consequences of Economic Growth, that “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy” derive directly from economic growth. He shows that even during stagnation–let alone recession and depression–those values can vanish easily. Brad Delong observes, in reviewing Friedman, that if the majority of the people do not see an improving future, these values are at risk even in countries where absolute material prosperity remains high. Given rising political intransigence and loss of common social purpose in the U.S., and the rise of nationalistic political sentiments in Europe, the effects of increasing stagnation and inequality are becoming more evident, despite the financial sector’s phenomenal growth.

5 Steps Obama or Romney Must Take to Fix Wall Street: The former head of the FDIC warns that the financial system remains far from stable – and that regulations like the Volcker Rule may be too complex to be effective. These five steps, she suggests, could lead to more sensible reforms. Bair has had a lot of time to think about what went wrong in the time leading up to the financial crisis and in the years we have spent struggling to emerge from its shadow. The long story can be found in her newly published book, Bull By the Horns. You’ll want to read this – or at least, even if you don’t want to, you probably should. But in the meantime, it’s worth pondering the reforms that she feels President Barack Obama and his Republican opponent, former Massachusetts Gov. Mitt Romney, are overlooking or oversimplifying. Too many regulators fall victim to one of several fatal flaws, Bair suggested in a speech to the National Association for Business Economics yesterday. Some of them over or under-regulate (usually at the wrong point in the cycle); they devise impossibly complex rules; they are “closet free-marketeers” proposing convoluted rules to prove it’s impossible to regulate financial institutions, or they are “captive” regulators who, without any corruption or malfeasance involved, have simply subordinated their judgment to those of the organizations they are charged with overseeing.

Marcy Wheeler: Eric Holder Rewards the Teams that Gave Torturers and Mortgage Fraudsters Immunity - As TPM’s Ryan Reilly noted yesterday, among the awards Attorney General Eric Holder gave out at yesterday’s Attorney General’s Award Ceremony was a Distinguished Service Award to John Durham’s investigative team that chose not to prosecute Jose Rodriguez or the torturers who killed their victims.The 13th Distinguished Service Award is presented to team members for their involvement in two sensitive investigations ordered by two different Attorneys General. In January 2007, Attorney General Michael Mukasey asked Assistant U.S. Attorney John Durham to lead a team that would investigate the destruction of interrogation videotapes by the CIA. Assistant U.S. Attorney Durham assembled the team and began the investigation. Then, in August 2009, Attorney General Holder expanded Assistant U.S. Attorney Durham’s mandate to include a preliminary review of the treatment of detainees held at overseas locations.  The timing on this award–coming even as DOJ aggressively prosecutes John Kiriakou for talking about this torture–is particularly cynical. Holder also presented a Distinguished Service Award to the team that crafted a $25 billion settlement effectively immunizing the banksters for engaging in systemic mortgage fraud. As DDay has documented relentlessly, the settlement is little more than kabuki, with most of the “consumer relief” consisting of actions the banks were already taking.To get an idea of how outrageous it is to give an award to the torture non-prosecution team and the kabuki settlement team, compare what those teams did with the rest of the Distinguished Service recipients.

Why It is Essential That Criminal Bankers are Prosecuted - There is a growing groundswell of informed opinion among modern commentators and even some politicians that financial regulators should be far more willing to bring criminal charges against those financial practitioners whose actions should be construed as more than just negligent or incompetent. I have never understood why ‘white collar’ criminals should be treated any differently from any other criminals, but the fact remains that they are treated differently, and it has been so for many years. The phenomenon was first recorded in a book entitled White Collar Crime by the American criminologist Edwin Sutherland, published in 1949. He pointed out that “There is a consistent bias involved in the administration of criminal justice under laws which apply to business and the professions and which therefore involve only the upper socio-economic group…” In White Collar Crime, Sutherland argued that the behaviour of ‘respectable’ people, from the upper socio-economic class, frequently exhibits all the essential attributes of crime, but that it is rarely dealt with as such. This situation had arisen, he said, from the tendency for systems of criminal justice in Western societies to favour certain economically and politically powerful groups and to disfavour others — notably the poor and unskilled who comprise the bulk of the visibly criminal population.

How Botched Derivatives Risk Taming Regulations are Again Going to Leave Taxpayers Holding the Bag -  Yves Smith - An important piece in the Financial Times by Manmohan Singh, a senior economist at the International Monetary Fund, describes persuasively how one of the central vehicles for reducing derivatives risk, that of having a central counterparty (CCP) and requiring dealers to trade with it rather than have a web of bi-lateral exposures, or rely on banks to act as clearers (making them too big to fail) has gone pear shaped. While the immediate reason for this outcome is the unwillingness of national banking regulators to cede powers to an international clearinghouse, Singh fingers an equally important cause: the reluctance to recognize that the underlying problem was and remains undercollateralized derivatives positions. His introduction to the mess: Little progress has been made on crisis resolution frameworks for unwinding large banks, let alone huge new institutions called CCPs that would house trillions of dollars in financial derivatives. Thus, the underlying economics of having more “too-big-to-fail” entities needs to be justified. Financial statements show that each of the large banks active in the OTC derivatives market in recent years carries an average of $100bn of derivative-related tail risk; that is, the potential cost to the financial system from its collapse after all possible allowable “netting” has been done within the bank’s derivatives book and after subtracting any collateral posted on the contracts. Past research finds that the 10-15 largest players in the OTC derivatives market may have about $1.5tn in under-collateralised derivatives liabilities, a cost taxpayers may have to bear unless some solution to the “too-big-to-fail” question can be proffered.

Despite Its Problems, Dodd-Frank Is Better Than the Alternatives - Repeal Dodd-Frank? It sounds so simple. But repealing the Dodd-Frank Act won’t end “too big to fail” banks, and it may even make things worse. Mitt Romney raised the issue at the first presidential debate, contending that Dodd-Frank should be repealed and replaced because “it designates a number of banks as too big to fail, and they’re effectively guaranteed by the federal government. This is the biggest kiss that’s been given to — to New York banks I’ve ever seen.” It’s a seductive idea. Dodd-Frank contains provisions that go much further than regulating banks in order to prevent another financial crisis. In Section 1,502, to take one example, is a provision requiring public companies to disclose whether they use conflict minerals. What this has to do with the financial crisis is beyond me. So, some parts of Dodd-Frank may already need renovation or even repeal.But the core of the law dealing with the big banks is another story. Simply repealing Dodd-Frank wholesale will turn back the financial clock to 2006 for these banks. That doesn’t seem very smart given what happened, something that Mr. Romney recognizes when he talks of replacing the act rather than repealing it. The problem is that possible replacements are unlikely to work or would be politically feasible.

Why there’s less high-frequency trading - Nathaniel Popper arrives today with something that looks like good news on the high-frequency trading front: there’s less of it! Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities… The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm. This is all true, and in fact it probably is good news, at the margin. But it’s not very good news, and it’s not as good news as it might look at first glance. Because while the number of trades is indeed going down, the number of orders is going through the roof. Here’s how I put it in my Radio 3 essay: One reason that volumes are dropping is that the algobots are getting so sophisticated at sparring with each other that they’re not even trading with each other any more. They’re called high-frequency traders, but maybe that’s a misnomer: a better name might be high-frequency spambots. Because what they’re doing, most of the time, is putting buy or sell orders out there on the stock market, only to take those orders back a fraction of a second later, and replace them with new ones. The result is millions of orders, but almost no trades. Call it the Stalemate of the Spambots: the HFT algos are all so sophisticated, now, that they just ping each other with order spam, rather than actually trading shares. Naturally, if you don’t trade shares, you can’t make money. But at the same time, anybody who does trade shares risks getting picked off by the very algorithms which are increasingly circling each other like prizefighters who never land a punch.

The Minimum Balance at Risk: A Proposal to Stabilize Money Market Funds - NY Fed - In a June post, we explained why the design of money market funds (MMFs) makes them prone to runs and thereby contributes to financial instability. Today, we outline a proposal for strengthening MMFs that we’ve put forward in a recent New York Fed staff report. The proposal aims to reduce, and possibly eliminate, the incentive for investors to run from a troubled fund, while retaining the defining features of money market funds that make them popular financial products. U.S. Treasury Secretary Timothy Geithner, in a recent letter to the Financial Stability Oversight Council, requested that it consider an idea similar to what we described in our staff report as one of several potential options for reforming MMFs to address their structural vulnerabilities.

Quelle Surprise! Sorkin Tells Remarkable Whoppers to Defend His Wall Street Sources - Yves Smith - Andrew Ross Sorkin has a remarkable piece of hogwash masquerading as a story today. His new piece, “Nowadays, Wall Street Saviors May Wish They Weren’t,” blatantly rewrites crisis history claiming that buyers of failed firms were “pressured” by the government do transactions during the crisis and the Big Bad Government got the better of them. His article starts with PR from Jamie Dimon on the JP Morgan acquisition of Bear Stearns. Now that JP Morgan is facing a milquetoast suit from the New York attorney general over some particularly heinous conduct by Bear (we’ve argued this suit is sure to be settled for very little down the road), Jamie is shamelessly using the bit of negative media coverage to whine that next time, maybe you won’t have Dick Nixon to kick around he won’t be there to rescue failed banks.  Dimon is far and away the most experienced dealmaker of any Wall Street CEO. Acting along side Sandy Weill, he built a financial conglomerate based on a series of acquisitions, over 1100. They were such successful buyers that their integration program was envied throughout the industry. Jamie’s little problem is that he did a sloppy acquisition, period. If you don’t get a waiver of liability that you should have, shame on you. There was already evidence of questionable dealmaking on Bear by JP Morgan. The deal was retraded due to a major error in the contract, leading JP Morgan to have to increase its price for Bear. This isn’t the first time that Sorkin has run the JP Morgan flattering line that it was abused by the Fed; we shredded Sorkin’s claims in March 2008, but he’s back at it again.

Of Bulls and Bair - Sheila Bair’s new book, Bull by the Horns, is both a crisis narrative and a thoughtful reflection on economic institutions and policy. The crisis narrative, with its revealing first-hand accounts of high-level meetings, high-stakes negotiations, behind-the-scenes jockeying, and clashing personalities will attract the most immediate attention. Among the many highlights are the following: a discussion of the linkages between securitization, credit derivatives and loan modifications, an exploration of the trade-off between regulatory capture and regulatory arbitrage, an intriguing question about the optimal timing of auctions for failing banks, a proposal for ending too big to fail that relies on simplification and asset segregation rather than balance sheet contraction, a full-throated defense of sensible financial regulation, and a passionate critique of bailouts for the powerful and politically connected even when such transactions appear to generate an accounting profit.Under the traditional model of mortgage lending, there are strong incentives for creditors to modify delinquent loans if the costs of doing so are lower than the very substantial deadweight losses that result from foreclosure. But pooling and tranching of mortgage loans creates a conflict of interest within the group of investors. As long as foreclosures are not widespread enough to affect holders of the overcollateralized senior tranches, all losses are inflicted upon those with junior claims. In contrast, loan modifications lower payments to all tranches, and will thus be resisted by holders of senior claims unless they truly see disaster looming. One consequence of this “tranche warfare” is that servicers, fearing lawsuits, will be inclined to favor foreclosure over modification.

The Vampire Squid Morphs into Jilted Valley Girl - Bill Black: - Matt Taibbi famously dubbed Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Taibbi knew his metaphor worked a deep injustice on Vampyroteuthis infernalis, a small animal that feeds on carrion and excrement (I will let the reader explore the metaphorical possibilities).    Goldman Sachs’ leaders were always secretly flattered by Taibbi’s metaphor.  They like being thought of as hyper-aggressive and intimidating.  Saying that an investment banker’s goal is to make money is to state the obvious and causes no embarrassment. The news flash is that Goldman Sachs has revealed her new, softer side.  She has become Ms. Good in the Sack and she wants us all to know that she has feelings and she is terribly hurt by the way she is being taken for granted, treated coldly, and made fun of as a “fat” feline.  The cruelest blow is that Ms. Good in the Sack suffered these indignities at the hands of the handsome new guy who escorted her to the presidential ball.  Her BFF, the tall, dark and handsome guy who was exotic without seeming too dangerous – the kind of guy her dad always warned her never to date – has betrayed her.  No sooner had she gotten in a serious relationship with Obama that helped him climb to the top of the social order than she saw him flirting with that skank – Ms. Liberal. Ms. Liberal is notoriously easy.  She is always eager to jump in the sack with any Democratic President who pretends to care about her mind and ideas.  Democratic Presidents always take her for granted the next morning and even mock her, but Ms. Liberal stands by her man. As soon as Ms. Good in the Sack let Obama have his way with her he stopped calling her.  Democrats!  They’re all alike.  Ms. Good in the Sack has learned her lesson and is in a deeply committed relationship with the safe guy who is a member of Daddy’s club.  Republicans may not be exciting, but they know enough to date the rich guy’s daughter and to “dance with them that brought them.”

Running Citigroup Without Subsidies - Simon Johnson  - According to American Banker, a trade publication:In recent months, Pandit faced mounting questions about Citigroup’s capital levels, share price and his compensation as chief executive. On Monday evening, hours after Citigroup reported a third-quarter profit, Pandit clashed with the board over his pay and the company’s strategic direction, according to industry sources. By the next morning, he and his longtime aide, chief operating officer John Havens, were gone.This is an unexpected exit, almost as dramatic as the resignation of the top two executives at Barclays this summer. It is also long overdue; I called for Mr. Pandit to resign in March 2010. Others were far ahead of me. For example, Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, concluded in 2008 of Mr. Pandit, “I doubted that he was up to the job”; According to Bloomberg News, Citigroup paid Mr. Pandit $261 million over the last five years, including the $165 million paid to acquire his hedge fund, Old Lane (which was quickly shut down). In a speech last week, the Fed governor Daniel Tarullo made clear – for the first time – that he thought very large banks received cheaper funding because their creditors believed they receive downside protection in the form of implicit government guarantees. Mr. Tarullo, the lead Fed governor for many regulatory issues, also made it plain that too-big-to-fail banks should face a size cap. He did not mention Citigroup by name, but Citi’s experience leading up to the crisis of 2008 and more recently are likely to have been on his mind. (Mr. Tarullo spoke specifically about capping “nondeposit liabilities” of financial institutions as a percentage of gross domestic product, meaning their debts other than insured deposits. Citigroup is the fourth-largest bank in the country, according to this metric. Its wings would definitely be clipped.)

BlackRock CEO Laurence D. Fink Redefines Financial Education: Convincing Young People to Ignore Inconvenient Truths About Markets - Laurence D. Fink’s October 8 editorial in WSJ is entitled How to Restore Confidence in Financial Markets. A more appropriate title would be How to Restore Confidence in Financial Markets Without Making Financial Markets More Worthy of Confidence. Mr. Fink’s idea of “education” entails convincing young people to invest in “the markets” which, he asserts, will deliver 8% annualized returns and a secure retirement.  I too advocate educating young people about finance and economics. But my conception of “education” involves teaching people about those markets so that they are empowered to make appropriate investment decisions. One thing we have all learned from the crisis is that it is imperative that individuals living in a capitalist economy learn how markets function. This includes understanding risk and return, conflicts of interest, and how warped incentive systems can cause bad behavior. It also includes understanding how rent-seeking industries use the lobby system to write legislation that benefits themselves at the expense of everyone else in the marketplace. That is education – actually informing people of facts, and then arming them with analytical tools that enable them to make reasoned decisions about their own risk and return options.

Questions From a Bailout Eyewitness - IT has become almost unpatriotic to question the many and munificent bank rescues of 2008 and beyond. If you have the temerity to do so, you’re likely to hear that the bailouts were the only thing standing between us and financial obliteration. You will also be told that, four years on, many of the bailouts have made money.  It’s hard to argue against this narrative, not knowing what would have happened had cooler heads prevailed. But Sheila C. Bair, former chairwoman of the Federal Deposit Insurance Corporation, is well positioned to question the dogma of the bailout brigade. And she does so repeatedly in “Bull by the Horns,” her new book about the crisis. As one of the main participants in the battles surrounding the rescues, and perhaps the coolest head in attendance, Ms. Bair provides some straight talk that represents an important piece of history and a rebuttal to the conventional wisdom.  As described by Ms. Bair, the events of the fall of 2008 showed that many financial regulators were desperate to make anyone but those who created the crisis pay for its devastation.

Fed’s Raskin Cites Need for Blend of Self, Government Regulation -- Correct financial oversight requires a blend of regulation both at financial-services firms and at the government level, but institutions have the main responsibility, Federal Reserve Board governor Sarah Bloom Raskin said Tuesday. “In order to do financial regulation correctly you need both elements,” she said, speaking at a conference on regulation in Boston, hosted by Suffolk University. She said she doesn’t put her faith in institutions or regulations alone, and said regulation is best done in a “coupled” manner. But it has to start within the institutions, she said.

Forcing frequent failures - It’s not enough for the legal system to “permit” infrequent, hypothetical failures. Economic behavior is conditioned by people’s experience and expectations of actual events, not by notional legal regimes. As a matter of law, no bank has ever been “too big to fail” in the United States. In practice, risk-intolerant creditors have observed that some banks are not permitted to fail and invest accordingly. This behavior renders the political cost of tolerating creditor losses ever greater and helps these banks expand, which contributes to expectations of future bailouts, which further entices risk-intolerant creditors. [1] In order to change this dynamic, even big banks must actually fail. And they must fail with some frequency. Chalk it up to agency problems (“you’ll be gone, i’ll be gone“) or to human fallibility (“recency bias”), but market participants discount crises of the distant past or the indeterminate future. That might be an error, but as Minsky points out, the mistake becomes compulsory as more and more people make it. Cautious finance cannot survive competition with go-go finance over long “periods of tranquility”. So we need a regime where banks of every stripe actually fail, even during periods when the economy is humming. If we want financial stability, we have to force frequent failures. An oft-cited analogy is the practice of setting occasional forest fires rather than trying to suppress burns. Over the short term, suppressing fires seems attractive. But this “stability” allows tinder to build on the forest floor at the same time as it engenders a fire-intolerant mix wildlife, creating a situation where the slightest spark would be catastrophic. Stability breeds instability. (See e.g. Parameswaran here and here. Also, David Merkel.) We must deliberately set financial forest fires to prevent accumulations of leverage and interconnectedness that, if unchecked, will eventually provoke either catastrophic crisis or socially costly transfers to creditors and financial insiders. Squirrels don’t lobby Congress, when the ranger decides to burn down the bit of the forest where their acorns are buried. Banks and their creditors are unlikely to take “controlled burns” of their institutions so stoically. If we are going to periodically burn down banks, we need some sort of fair procedure for deciding who gets burned, when, and how badly. Let’s think about how we might do that.

U.S. Postal Service Hits $15 Billion Borrowing Limit For First Time (Reuters) - The financially struggling United States Postal Service has hit its $15 billion borrowing limit for the first time ever, meaning it will have to rely on revenues from stamps and other products to fund operations. The postal service, which as independent agency of government relies on its own revenue from the sale of stamps and other products rather than taxpayer funds, has lost billions of dollars each quarter as Americans move online to pay bills and communicate. It hit the limit in September, according to USPS spokesman David Partenheimer. "We need passage of comprehensive legislation as part of our business plan to return to long-term financial stability," the spokesman said. Congress left Washington without acting on legislation that might help the agency attain some financial stability. Nearly all legislation is on hold until after the U.S. presidential elections on Nov. 6. The agency still had enough cash to make a $1.4 billion payment for workers compensation claims due on Monday, Partenheimer added.

Throwing Out Insiders Won't Fix Corporate Boards - Enron had quite an impressive board of directors. The 17-member group was almost certainly too big, but beyond that it met or exceeded most modern criteria for good corporate governance: company insiders were a tiny minority; the jobs of chairman and CEO were separated; the key role of audit committee chairman was held by a respected outsider who presumably understood accounting (at least, he taught it at Stanford). What could possibly go wrong? There's little or no evidence that the modern criteria for good corporate governance actually lead to better-governed corporations. What's generally seen as the most important good-governance move of them all, pushing insiders off boards in favor of independent directors, may actually hurt performance. At least, that's my reading of the voluminous academic research on the topic. Yet the anti-insider movement rolls on unchecked. The Wall Street Journal reported this week that chief financial officers are getting chucked off their companies' boards right and left as part of the push for more independent directors. And now my friend Felix Salmon has let loose with a video rant about the Goldman Sachs board that lambastes it for being populated by too many insiders and long-timers.

Are Businesses Quietly Preparing for a Financial Apocalypse? - US corporations are sitting on more cash than at any point since World War II. 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. If these businesses could conjure up even the most marginal of projects to earn a meager 1% return, they would generate $14 billion profit. Instead, they're sitting on the cash and earning near zero for a guaranteed after-inflation loss.

Unofficial Problem Bank list declines to 872 Institutions - Here is the unofficial problem bank list for Oct 13, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  As anticipated, minor changes were made to the Unofficial Problem Bank List this week. The First National Bank of Southern Kansas, Mount Hope, KS ($67 million) merged on an unassisted basis causing its removal. The other change was the Federal Reserve terminating the Prompt Corrective Action order against Sunrise Bank, Cocoa Beach, FL ($100 million). The list holds 872 institutions with assets of $334.9 billion. A year ago, the list had 979 institutions with assets of $403.8 billion. Next week we anticipate the OCC will release its actions through mid-September 2012. Also, the FDIC will likely be back in the closure business before the month is over.

US Woman Takes on Banks Over Libor - A pensioner whose home was repossessed is taking on some of the world’s leading banks in the first known class-action lawsuit claiming that alleged Libor manipulation made mortgage repayments for thousands of Americans more expensive than they should have been. The subprime mortgages of Annie Bell Adams and her four co-lead plaintiffs were securitised into Libor-based collateralised debt obligations and sold by banks to investors. The class action, filed in New York, alleges that traders at 12 of the biggest banks in Europe and North America – including Barclays, Bank of America and UBS – were incentivised to manipulate the London interbank offered rate to a higher rate on certain dates on which adjustable mortgage interest rates were reset. This resulted in homeowners paying more between 2000 and 2009, according to the complaint. The plaintiffs, who could number 100,000, have lost thousands of dollars each, says their Alabama-based attorney, John Sharbrough. He declined to give a figure on the total damages his clients are seeking. A series of class actions have been filed in New York since banks disclosed they were being probed. Until now plaintiffs have been investors and municipalities, not homeowners. The banks are contesting the lawsuits and declined to comment. A New York judge will have to decide whether to allow any or all of these suits to go ahead as group actions.

Guest Post: The Latest Bubble? | ZeroHedge: Subsidies encourage the type of behaviour they are subsidising. And the Federal Reserve’s QE Infinity is subsidising the market for mortgage backed securities by taking them out of the market at a price floor. Unsurprisingly, the market for mortgage-backed securities is near all-time highs: And Wall Street is doing some wild and wacky things. UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities. The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing. Of course, back in the real world, there is no such thing as a sure thing. As Pedro Da Costa recently noted, banks are sitting on the proceeds of MBS purchases, rather than passing on the money to customers in the form of lower interest rates.

Morgan Stanley Facing Discrimination Lawsuit - Morgan Stanley is being accused of discriminating against black homeowners and violating federal civil rights laws by providing strong incentives to a subprime lender to originate mortgages that were likely to go unrepaid. The lawsuit, which seeks class-action status, was filed Monday by the American Civil Liberties Union and others on behalf of five Detroit residents and Michigan Legal Services. It was filed in U.S. District Court in New York. “We believe these allegations are completely without merit and plan to defend ourselves vigorously,” Morgan Stanley said in a statement. The five homeowners in the lawsuit received their loans from subprime lender New Century Mortgage Corp., which has since collapsed. (MORE: Atlas Shrugonomics) The lawsuit claims Morgan Stanley pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset when the investment bank bundled the loans into securities and sold them.

A.C.L.U. to Sue Morgan Stanley Over Mortgage Loans - The American Civil Liberties Union is accusing Morgan Stanley of fueling the production of risky, expensive loans that targeted African-American borrowers.In the lawsuit, expected to be filed on Monday, the A.C.L.U. claims that Morgan Stanley is culpable for predatory loans made through the New Century Financial Corporation because the investment bank lent billions of dollars to New Century, a now-defunct subprime lender, and pressured it to make troublesome loans to African-American borrowers who could not afford them. Morgan Stanley packaged the loans made by New Century and sold them to pension funds and other large investors. But, the lawsuit claims, the bank went beyond the traditional role of an investment bank by requiring that the mortgage company churn out the wildly profitable loans that came with “dangerous” characteristics. For example, the lawsuit says, many of the loans ultimately sold to investors were “stated income” loans, in which borrowers could estimate their incomes without having to provide supporting documentation. The action against Morgan Stanley follows a series of lawsuits brought by investors and federal and state officials against some of the nation’s largest banks. The A.C.L.U. suit, which is to be filed in federal court in New York and will seek class-action certification, claims that Morgan Stanley violated the Fair Housing Act and the Equal Credit Opportunity Act.

Foreclosure-Suit Funds Shifted -  When states received $2.5 billion from big banks in a mortgage-foreclosure settlement earlier this year, the expectation was that most of it would be used to aid distressed homeowners. But so far, less than half of the money has been designated for that cause—with much of the rest going to help close state budget gaps, says a report scheduled for release Thursday. In March, 49 states reached a $25 billion settlement with five of the nation's largest mortgage lenders over charges that they had improperly processed foreclosures.  The agreement allowed the banks—Ally Financial Inc., Bank of America Corp., Citibank Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co.—to pay $20 billion of the settlement in the form of relief to distressed homeowners. The states received $2.5 billion of the total. The agreement said the state money should be used "to the extent practicable…for purposes intended to avoid foreclosures," among other purposes. But so far, only about $1 billion of the state funds have been designated for some type of homeowner aid while $1 billion will go toward state general funds. States haven't decided how to spend the remaining $500 million, according to the report by Enterprise Community Partners, a housing nonprofit. Only 14 states plan to spend their entire allotment on housing relief, while an nine states are spending most of their funds for housing, according to the report.

Half of Foreclosure Fraud Settlement Hard Dollars Diverted Away From Housing Programs By States - We’ve been following this issue of states using the hard dollars in the foreclosure fraud settlement – which is only about $2.5 billion, 10% of the total amount – as free money they can use to fill their budget gaps, rather than the notional goal of the settlement, to help homeowners. Some state leaders have had the audacity to claim that plugging the budget does help homeowners, in a roundabout way. Whatever works, I guess. Now McClatchy catches us up on the issue, based on a new report put out yesterday by Enterprise Community Partners, a housing advocacy group. While states have announced plans to use $977 million of their direct payments for housing and foreclosure-related assistance, $989 million will go to fill budget shortfalls or for non-housing purposes, according to a report released Thursday The report, which updated an earlier analysis, found that six states – Missouri, California, South Carolina, Georgia, Alabama and New Jersey – ignored the agreed-upon uses for the money entirely by directing nothing for housing-related activities.It said that 23 states are using all, or nearly all, of their settlement money for housing, while five others – New York, North Carolina, Washington, Massachusetts and Kentucky – have dedicated between 70 percent and 89 percent for housing purposes. Fourteen others, including Idaho and Illinois, are using less than half of their funds for the intended purposes.

So Where is Schneiderman? Computerized Robosigning Has Made Its Debut - Yves Smith - The lawyers and writers that have gotten into the weeds of bad practices in mortgage servicing land (the folks at Foreclosure Fraud, Lynn Syzmoniak, Dave Dayen, and Abigail Field, to name a few) all deplored the mortgage settlement. One of the many complaints about it was that it gave a broad release on chain of title issues, in return for supposedly improved mortgage servicing. That was to be achieved through new servicing standards required of the big servicers (the five involved in the settlement of this year, and the 14 national banks who were party to bank friendly consent orders by the OCC in April of last year). It seems now that the officialdom in DC has taken the position that foreclosure fraud is a thing of the past. By contrast, a number of states, most notably California, have made it clear they aren’t going to rely on these new servicing standards. These states are implementing various forms of “homeowners bills of rights” which among other things, typically create tougher punishments for foreclosure abuses. In case you had any doubts about the wisdom of state-level actions, the discovery of a new type of abuse, computerized robosigning, should put them to rest. One of the servicers that was not party to either settlement is apparently so confident that no one will go after them that it is engaging in what looks to be a new level of systematized foreclosure fraud. From Deadly Clear: It appears Green Tree Servicing has been flying under the radar and was hardly noticed until a recordation research team began uncovering similarly signed documents – yup, the old robo-signed Assignment of Mortgage trickery again… but this time new and improved via computer, maybe for speed and precision, ya think? It appears the signatures are in the computer – no dummies needed to sign – just fill in the blanks and push the buttons (as if that wasn’t committing an unlawful act)… “Who, me? I just filled in the information and pressed print…” Why bother to use humans when computers will do just the same… and what are they going to do – arrest or sue the computer?” How about the programmer or the button pusher or the boss?!

Mortgage Industrial Complex Continues Its Push Against Rule of Law - The meaning of the word “chutzpah” varies by context. In criminal court, it might refer to murdering one’s parents then asking for leniency because the perpetrator is an orphan. We now have a property court usage: perpetrating a massive, well documented fraud then complaining that court bottlenecks – which exist solely because of fraud perpetrated by bank lawyers – cause expensive delays. An Oct. 9 article published by Lord, Whalen, LLC “Tail Risk: Kamala Harris Declares War on Lenders, Loan Servicers in CA,” sets forth this nervy argument. Bank maven Chris Whalen’s analyses are normally top notch but he seems to have fallen under a Svengali spell of the parasitic foreclosure support industry – particularly foreclosure mill lawyers. Like fingernails drawn against a blackboard, foreclosure attorneys, analysts, and even the FHFA relentlessly rant that judicial foreclosure must be eliminated, and that recent legislation expands judicial foreclosures. Due solely to gross abuses of process by foreclosure lawyers, California – a state that all but outlawed foreclosure defense lawyers – has passed legislation to ensure foreclosure lawyers follow the law. The California Homeowner Bill of Rights, which is effectively a pro-borrower escalation in the bank-led war against the rule of law, is causing the parasites to fume:

Lawler: Table of Short Sales and Foreclosures for Selected Cities in September -  On Monday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). Economist Tom Lawler has been digging up similar data, and he sent me the following table yesterday for several more distressed areas. 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 in most areas. For two cities, Las Vegas and Reno, short sales are now three times foreclosures, although that is related to the new foreclosure rules in Nevada. Both Phoenix and Sacramento had over twice as many short sales as foreclosures. A year ago, there were many more foreclosures than short sales in most areas. Minneapolis is an exception with more foreclosures than short sales.
2) The overall percent of distressed sales (combined foreclosures and short sales) are down year-over-year almost everywhere. Chicago is essentially unchanged from a year ago.

Previous comments from Lawler: Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales

California Foreclosure Activity Lowest Since Early 2007 - Three and a half years after peaking, the number of California homes entering the foreclosure process fell last quarter to the lowest level since the early stages of the housing bust. Mortgage default filings hit their lowest point since first-quarter 2007, due in large part to a stronger economy and housing market and more short sales, a real estate information service reported. A total of 49,026 Notices of Default (NoD) were recorded on residential properties during the third quarter. That was down 10.2 percent from 54,615 for the prior three months, and down 31.2 percent from 71,275 in third-quarter 2011, according to San Diego-based DataQuick. Last quarter's number was the lowest since 46,760 NoDs were recorded in first-quarter 2007. NoDs peaked in first-quarter 2009 at 135,431. DataQuick's NoD statistics go back to 1992.  ...Short sales - transactions where the sale price fell short of what was owed on the property - made up an estimated 26.0 percent of statewide resale activity last quarter. That was up from an estimated 24.0 percent the prior quarter and up from 22.9 percent of all resales a year earlier. The estimated number of short sales last quarter rose 19.0 percent from a year earlier. Foreclosure resales accounted for 20.0 percent of all California resale activity last quarter, down from a revised 27.8 percent the prior quarter and 34.2 percent a year ago. The figure peaked at 57.8 percent in the first quarter of 2009.

9 million mortgages still underwater - As we finally begin to see improvements in the US housing market (see discussion), it is important to note that we still have roughly 9 million mortgages that are "underwater" (the mortgage balance is higher than the value of the home). That's almost one fifth of the overall market. Furthermore if home prices for some reason begin to decline again, that number of underwater mortgages increases quickly. The chart below from JPMorgan shows the impact of increases or declines (in 5% increments) in home prices ("house price appreciation" or HPA). The housing recovery has a long way to go and substantial downside risks remain.

Reverse Mortgages Costing Some Seniors Their Homes - The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out.Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates. Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died. Now, as the vast baby boomer generation heads for retirement and more seniors grapple with dwindling savings, the newly minted Consumer Financial Protection Bureau is working on new rules that could mean better disclosure for consumers and stricter supervision of lenders. More than 775,000 of such loans are outstanding, according to the federal government. Concerns about the multibillion-dollar reverse mortgage market echo those raised in the lead-up to the financial crisis when consumers were marketed loans — often carrying hidden risks — that they could not afford.

The HARP Refinance Boom Continued in August - From the FHFAThe Federal Housing Finance Agency (FHFA) today released its August Refinance Report, which shows that Fannie Mae and Freddie Mac loans refinanced through the Home Affordable Refinance Program (HARP) accounted for nearly one-quarter of all refinances in August. Nearly 99,000 homeowners refinanced their mortgage in August through the HARP program with more than 618,000 loans refinanced since the beginning of this year. This continues the strong pace of HARP refinancing with the program on target to reach a million borrowers in 2012.In August, borrowers with loan-to-value (LTV) ratios greater than 105 percent continued to account for more than half the volume of HARP loans as HARP enhancements were fully implemented in the second quarter of 2012. In August, nearly 18 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, which help build equity faster.
Note: the automated system wasn't released until the end of March - and there were some issues with that system - so HARP refinances didn't really pickup until sometime in Q2. Now they are on pace for 1 million refinances this year. These "underwater" borrowers are current (most took out loans 5 to 7 years ago), and they will probably stay current with the lower interest rate. This table shows the number of HARP refinances by LTV through August of this year compared to all of 2011. Clearly there has been a sharp increase in activity.

US housing update: shrinking inventories - US residential housing supplies remain at multi-year low levels. The inventories of unsold homes as measured in months (time to clear the inventory) are at the lowest level since 2006. To put things in perspective, here is what the situation looks like compared to the previous 3 years. This supply of homes is constrained by weak residential construction. The chart below compares residential construction growth in the US to previous recoveries. This is starting to stabilize prices even in areas that have witnessed relentless house price declines, such as Southern California. What's interesting is that we are seeing a shift from the heavily discounted or distressed sales to the more normal "move-up properties". DQ News: - La Jolla, CA---The median price paid for a Southern California home rose again in September to a more-than-four-year high, the result of affordability-driven demand meeting a modest supply of homes for sale, and a big change in market mix. For the first time in nine months sales declined compared with a year earlier as low-end deals fell and foreclosure resales hit a nearly five-year low, a real estate information service reported.    The median price paid for a home in the six-county Southland climbed to $315,000 last month. That was up 1.9 percent from $309,000 in August and up 12.5 percent from $280,000 in September 2011, according to San Diego-based DataQuick.

Report: Housing Inventory declines 17.8% year-over-year in September - From September 2012 Real Estate Data The total US for-sale inventory of single family homes, condos, townhomes and co-ops remained at historic lows, with 1.8 million units for sale in September 2012, down -17.77% compared to a year ago.  The median age of inventory was down -11.21% compared to one year ago. For sale inventories declined on a year-over-year basis in 143 of the 146 markets tracked by Fifty two cities saw year-over-year declines greater than 20%. On a month-over-month basis, inventory declined in 126 of 146 markets.

Foreclosures may ease shortage of homes for sale - Florida may have the nation's highest foreclosure rate, but that's not necessarily a scourge on the local housing market. An increase in foreclosed properties would alleviate a severe shortage of homes for sale in South Florida, potentially giving first-time buyers and others more choices in a market dominated by investors. We certainly don't like the idea of people losing their homes," "But if they're going to be foreclosed on anyway, I'm hoping we could absorb all those homes very quickly because we desperately need more properties." The number of South Florida homes for sale on has fallen by 34 percent in the past year, the real estate website said this week. Local Realtor boards have reported even steeper drops.

Some Smart Money is Already Exiting the Single Family Rental Landgrab -  Yves Smith - Reuters describes how one of the funds that was first to get on the “buy single family homes out of foreclosure and rent them” bandwagon has decided to exit. Ochs Ziff is selling its comparatively small (300 home) Northern California portfolio at a profit. This is an intriguing development given the widespread bullish beliefs about this opportunity (it was deemed to be the best opportunity over the next year at a mortgage/real estate conference I attended a few weeks ago) versus the fact that Ochs-Ziff is generally seen as a savvy operator. The talk has been that there are operators (and I saw one present) who can offer maintenance services on a regional basis to absentee landlords. So why did they exit? It appears the returns weren’t as juicy as they imagined. From Reuters Och-Ziff Capital Management recently told its investment partner, 643 Capital Management, that it wants to exit from the foreclosed homes business.. Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out. But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California,  Other participants pooh-poohed the Ochs-Ziff exit as a sign of a someone lacking experience overestimating the potential returns and part of a natural weeding-out process. But the part I question (and so did some other seasoned investors I met at the conference) was not just the expense side, as in the cost and difficulty of managing dispersed homes, the exposure to property tax increases, but also the revenue side. Gary Shilling is admittedly a famed bear; his housing price forecast is the most dire I’ve run across. But his argument about hidden housing inventories is directionally correct: (video)

FNC: Residential Property Values increased 0.3% in August - FNC released their August index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.3% in August compared to July (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.5% and 0.8% in August. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). Since this index is NSA, the month-to-month changes will probably turn negative in September or October. The key then will be to watch the year-over-year change and also to compare the month-to-month change to previous years. This was the first month-to-month increase for the month of August since 2005. The year-over-year trends continued to show improvement in August, with the 100-MSA composite up 1.5% compared to August 2011. The FNC index turned positive on a year-over-year basis last month - that was the first year-over-year increase in the FNC index since year-over-year prices started declining in early 2007 (over five years ago). This graph is based on the FNC index (four composites) through August 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Housing Recovery in Perspective – Chart showing the fledgling housing recovery in the short-term (since January 2010) and in the longer perspective (since 1959), via Cullen Roche. “I am substantially more bullish on housing than I was several years ago, but I am trying to keep things in perspective also. The housing ‘recovery’ is pathetic. This chart summarizes the recency effect that has a lot of people saying we’re off to the races here.”

Home Appraisers: A Market Failure? - Yves Smith - There’s an interesting sign of homebuyer champing at the bit to lever up again with all the “housing has bottomed” talk in a New York Times article last week, “Scrutiny for Home Appraisers as the Market Struggles.” The headline signals the new complaint about appraisers: they aren’t rubber stamping deals entered into by willing buyers and sellers! They are therefore holding back the housing market! While this frustration among housing enthusiasts is a squeaky wheel in the housing market that probably does warrant comment by the Grey Lady, there are more serious market failures in appraisal land that also deserve attention. In fairness, the Times tries to play this story straight, patiently pointing out that appraisers work for banks,and their job is not to act as a dealmaker but to protect lenders. What is shocking is perspective of homeowners and brokers, that a mortgage is a right and the appraiser is an obstacle. But there is a legitimate question about how appraisers do their work, as in how they look at comparables. The problem is that any form of collateralized lending has a strong propensity to generate boom-bust cycles. If the price of a widely held asset rises, everyone looks richer and banks are willing to lend more against it. And as more people look richer and banks are willing to hand out more dough in the form of secured loans, they can bid up all sorts of asset prices. And as we’ve seen, in frothy markets, the conservative, careful operators will tend to lose out to the more cooperative ones.

MBA: Mortgage Purchase activity highest since June - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey  - The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. This is the highest Purchase Index observed in the survey since early June 2012.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.57 percent from 3.56 percent, with points increasing to 0.44 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week.  This graph shows the MBA mortgage purchase index. The purchase index is up about 8 over the last four weeks and is at the highest level since June. But even with the recent increase, the purchase index has mostly moved sideways for the last 2 1/2 years.

Low Mortgage Rates and Refinance Activity - Freddie Mac reported earlier today: Mortgage Rates Near Record Lows As Home Construction Builds Up Steam Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates edging slightly lower with the 30-year fixed averaging 3.37 percent, just above its all-time record low of 3.36 percent, and the average 15-year fixed dipping to a new all-time record low at 2.66 percent. And the MBA reported yesterday that refinance activity decreased last week, but is still near the highest level since early 2009.  Here is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA).It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and that is what we are seeing!  There has also been an increase in refinance activity from borrowers with negative equity and loans owned or guaranteed by Fannie or Freddie (see The HARP Refinance Boom Continued in August) . The second graph shows the 15 and 30 year fixed rates from the Freddie Mac survey.

U.S. Home Sales Dip 1.7 Percent on Tight Inventory - U.S. sales of previously occupied homes fell in September after hitting a two-year high in August, in part because there were fewer homes available for sale. The National Association of Realtors says sales dipped 1.7 percent to a seasonally adjusted annual rate of 4.75 million. That’s down from a rate of 4.83 million in August, which was the highest in more than two years. Sales are still up 11 percent from a year earlier, further evidence that the housing market is slowly recovering. But sales remain below the more than 5.5 million that economists consider consistent with a healthy market. The inventory of homes for sale fell in September to 2.32 million. It would take 5.9 months to exhaust the supply at the current sales pace, the lowest sales-to-inventory ratio since March 2006.

Existing Home Sales in September: 4.75 million SAAR, 5.9 months - The NAR reports: September Existing-Home Sales Down but Prices Continue to Improve Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 1.7 percent to a seasonally adjusted annual rate of 4.75 million in September from an upwardly revised 4.83 million in August, but are 11.0 percent above the 4.28 million-unit pace in September 2011. Total housing inventory at the end September fell 3.3 percent to 2.32 million existing homes available for sale, which represents a 5.9-month supply at the current sales pace, down from a 6.0-month supply in August. Listed inventory is 20.0 percent below a year ago when there was an 8.1-month supply. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in September 2012 (4.75 million SAAR) were 1.7% lower than last month, and were 11.0% above the September 2011 rate.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory declined to 2.32 million in September down from 2.40 million in August. Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales Decline by -1.7% for September 2012 - NAR reported their September 2012 Existing Home Sales. Existing home sales decreased -1.7% from last month and inventories are down to a now tight 5.9 months of supply. Existing homes sales have increased 11.0% from a year ago. Volume was 4.75 million, annualized against August's revised up, from 4.82 to 4.83 million, annualized existing home sales.  Inventory decreased 3.3% or 2.32 million existing homes for sale. This is a 5.9 months supply and down 20.0% from a year ago.  The national median existing home sales price, all types, is up, now at $183,900, a 11.3% increase from a year ago. This is the 7th month in a row for price increases and hasn't happened since at the cusp of the housing bubble, 2005-2006. It's clear foreclosures, REOs are being held off of the market as well as down. Below is the breakdown by types of sales: Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 24 percent of September sales (13 percent were foreclosures and 11 percent were short sales), up from 22 percent in August; they were 30 percent in September 2011. Foreclosures sold for an average discount of 21 percent below market value in August, while short sales were discounted 13 percent. According to NAR 30.7% of existing homes were on the market less than a month.  The median time on market was 70 days in September, unchanged from August, but down 30.7 percent from 101 days in September 2011. Thirty-two percent of homes sold in September were on the market for less than a month, while 19 percent were on the market for six months or longer. Yet all cash sales, implying investors are still snatching up homes, are still high. All-cash sales were at 28 percent of transactions in September, up from 27 percent in August; they were 30 percent in September 2011. Investors, who account for most cash sales, purchased 18 percent of homes in September, unchanged from August; they were 19 percent in September 2011

Existing Home Sales: A few comments and NSA Sales Graph - This was a solid report, not because of sales, but because of the level of inventory. Based on historical turnover rates, I think "normal" sales would be in the 4.5 to 5.0 million range. So, existing home sales at 4.75 million are in the normal range. Of course a "normal" market would have very few distressed sales, so there is still a long ways to go, From the NAR this morningDistressed homes - foreclosures and short sales sold at deep discounts - accounted for 24 percent of September sales (13 percent were foreclosures and 11 percent were short sales), up from 22 percent in August; they were 30 percent in September 2011. According to the NAR, existing home sales in September were at a 4.75 million annual rate with 24% distressed sales. That would suggest conventional sales at a 3.61 million annual rate. In September 2011, sales were at a 4.28 million annual rate with 30% distressed. That would suggest conventional sales were at a 3.0 million annual rate in September 2011. So conventional sales in September 2012 were up about 20% from a year ago. Also, according to the NAR, the percent of distressed sales peaked in March 2009 at just under 50% when total sales were at a 3.94 million sales rate. That would suggest conventional sales were at a 2.0 million sales rate in March 2009, and that conventional sales are up about 80% from the bottom! If we were confident in the NAR data, this would be the number to watch. This graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of September since 2002, and inventory is below the level in September 2005 (not counting contingent sales). All year I've been arguing months-of-supply would be below 6 towards the end of the year, and months-of-supply fell to 5.9 months in September (a normal range). The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA in September (red column) are only slightly above last year (there were 2 fewer selling days). Sales are well below the bubble years of 2005 and 2006, and also below 2007.

Lawler: Comments on the Existing Home Sales Report - The National Association of Realtors estimated that US existing home sales ran at a seasonally adjusted annual rate of 4.75 million in September, down 1.7% from August’s slightly upwardly revised (to 4.83 million from 4.82 million) pace. The upward revision to August’s seasonally-adjusted pace was puzzling/mildly amusing, as unadjusted sales were revised downward to 476,000 from 477,000! The NAR’s September seasonally-adjusted sales estimate was close to consensus and just a tad higher than my estimate based on regional tracking, though all of my “miss” was in the seasonal factor for September – my unadjusted sales estimate was “right on.” While seasonally adjusted sales in September were up 11.0% from last September’s pace, unadjusted sales showed a YOY gain of just 2.2% (mainly but not totally reflecting the lower business day count).The NAR’s estimate of the inventory of existing homes for sale at the end of September was 2.32 million, down 3.3% from August’s downwardly revised (by a hefty 2.8% to 2.40 million from 2.47 million) level and down 20.0% from last September. According to the NAR, the median existing US home sales price last month was $183,900, up 11.3% from last September, and the median existing SF home sales price was $184,300, up 11.4% from a year ago. August’s median home sales price was revised down by 1.3%, and August’s median SF home sales price was revised down by 1.7% -- resulting in a revised YOY increase of 8.4%, vs. last month’s estimate of 10.2%. The NAR’s median sales price numbers continued to come in higher than what state and local realtor reports would suggest, for unknown reasons. In its press release the NAR misleading said that “(d)istressed homes3 - foreclosures and short sales sold at deep discounts - accounted for 24 percent of September sales (13 percent were foreclosures and 11 percent were short sales), up from 22 percent in August; they were 30 percent in September 2011.” A footnote in the press release notes that the distressed sales shares are from a monthly survey of realtors (for the Realtor Confidence Index), generally taken from the last week of a given report month through the first week of the subsequent month. The sample size is small and varies over time; is voluntary; and the results often do not represent trends in the market as a whole. 

This Is The Housing Bubble Beneath The "Recovery" - We want to 'believe', we really do; but anyone with any sense (and no skin in the game) can see through the data; the eon-like periods of foreclosure and the drastically reduced supply. No matter how 'bullish' homebuilders are, or how much they dream of a future pickup, calling the recovery (as Bob Shiller recently noted) is just a fool's errand. The truth is, for the average citizen, housing is not recovering - the wealth effect is not creating animal spirits - and we do indeed have more to fear than fear itself. The following 79 second clip from Bloomberg TV should perhaps clarify the 'difference' in demand for housing. Primary residence 'buyers' are down remarkably, while 'investors' are up dramatically - now at pre-crisis bubble levels! Perhaps, as we noted here, Och-Ziff's stepping away from the 'flip-that-house' or 'REO-to-Rental' game is as good an indicator of exuberance as any.

Investor Participation in the Home-Buying Market - Atlanta Fed's macroblog - What is the investor share of the home-buying market, and in what direction is the trend moving? We have been asking ourselves this question for the past few months, because the answer can help to inform what type of housing recovery we are seeing. Is it being driven by owner occupants or investors? If it is being driven by investors, does this signal an emerging aversion to homeownership? Or, instead, does this simply signal that owner occupants are unable access mortgage finance and that, for now, owner occupants will be unable to maintain the share of market they once held? If we see that the owner occupant share is increasing, this observation could offer some support that the housing recovery has legs. The conclusion that the investor share is increasing, then, may suggest that we will see home sales activity fall off once prices rise to the point that it no longer makes sense for investors to continue buying. To help us pinpoint the share and trend in the investor participation in the home-buying market, we polled our real estate business contacts to get a better sense for our regional portrait of investor market share. When asked to describe the distribution of home buyers in their market, our business contacts from the Southeast (excluding Florida) noted that one-fifth of home sales, on average, were to investors. Once we added Florida into our tally of Southeast contacts, just over one-fourth of sales, on average, were to investors.

Housing Starts Jump 15% to Four-Year U.S. High: Economy - Housing starts in the U.S. surged 15 percent in September to the highest level in four years, adding to signs of a revival in the industry at the heart of the financial crisis. Beginning home construction jumped last month to an 872,000 annual rate, the fastest since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. An increase in building permits may mean the gains will be sustained. “It’s no longer a question of whether the industry is rebounding,” “There is clear evidence that we have bounced off the bottom and are in the midst of a recovery.” A pickup in sales stoked by record-low mortgage rates and population growth combined with dwindling supply indicates construction can continue strengthening, contributing more to economic growth. Improving demand may also help revive a part of the job market that’s seen construction employment fall by almost 2 million since the end of 2007.

U.S. Housing Construction Up 15 Percent in September - U.S. builders started construction on single-family homes and apartments in September at the fastest pace since July 2008, a further indication that the housing recovery is strengthening. The Commerce Department says builders broke ground at a seasonally adjusted annual rate of 872,000 in September. That’s an increase of 15 percent from the August level. Applications for building permits, a good sign of future construction, jumped nearly 12 percent to an annual rate of 894,000, also the highest since July 2008. The strength in September came from both single-family construction, which rose 11 percent, and apartments, which increased 25.1 percent. Construction activity is now 82.5 percent higher than the recession low hit in April 2009, although activity is still below healthy levels.

Housing Starts increased sharply to 872 thousand SAAR in September - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in September were at a seasonally adjusted annual rate of 872,000. This is 15.0 percent above the revised August estimate of 758,000 and is 34.8 percent above the September 2011 rate of 647,000. Single-family housing starts in September were at a rate of 603,000; this is 11.0 percent above the revised August figure of 543,000. Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 894,000. This is 11.6 percent above the revised August rate of 801,000 and is 45.1 percent above the September 2011 estimate of 616,000. Single-family authorizations in September were at a rate of 545,000; this is 6.7 percent above the revised August figure of 511,000. The first graph shows single and multi-family housing starts for the last several years. Starts are slowing increasing. Total housing starts were at 872 thousand (SAAR) in September, up 15.0% from the revised August rate of 758 thousand (SAAR). Note that August was revised up from 750 thousand.  The second graph shows total and single unit starts since 1968.

Housing Starts Surge 15% To 872,000, Highest Since July 2008 - The pre-election barrage of "six-sigma" economic beats continues, with today the trophy going to Housing Starts, which soared by a whopping 15% from a revised 758K to 872K. The highest forecast called for a 800,000 print with consensus expecting an increase to 770,000K. Did we say 6 sigma? We meant a 9 sigma beat to consensus. The numbers being thrown about are so ridiculous they are almost credible in their political talking point ridiculousness. Expect this outlier printing to continue at least until the election. In the meantime, prepare for a barrage that housing start soared to the highest since July 2008. Looking inside the numbers, the print for single family rose to 603K from a revised 543K, while multi-family houses increased to 260K from 208K. The geographical breakdown is as follows Northeast down 4K to 75K, Midwest modestly higher to 143K from 134K, West a little more higher from 169K to 203K, and the biggest surge was in the South from 376K to 451K. At this point the best one can hope for is for a return to some normal data reporting after the election, because it is now obvious that every data series will be skewed and 'seasonally adjusted' substantially higher. Curious why BofA charge-offs are already soaring thanks to the Housing Bubble 2.0? That's why.

New Residential Construction Housing Starts Soared Up By 15.0% in September 2012 -- The September 2012 Residential construction report showed Housing starts increased 15.0%, and from a year ago have soared 34.8%. September's housing start annualized levels were 872 thousand, whereas August's housing starts tallied to 758,000. In August, housing starts increased by a revised 4.1%.  For the month, single family housing starts increased 11.0% and apartments, 5 units or more in one building structure, jumped by 25.0%. Since September 2011, single family housing starts have increased 42.9% whereas apartments have increased less, 18.7%. These figures are outside the margin of error and show a genuine improvement in new construction. Housing starts had a statistical error margin of ±12.1% for the month and ±18.2% from a year ago, although single family housing starts gains are inside the ±11.1% margin of error for the month as are apartments, ±38.9%. That said, single family new housing construction for the year is outside the ±14.7% margin of error. We mention the margin of error for almost always new residential construction are revised extensively and there is wide variance. This month's figures look solid to believe we do have significant new residential housing construction going on.  Housing starts are defined as when construction has broke ground, or started the excavation. One can see how badly the bubble burst on residential real estate in the below housing start graph going back all the way to 1960.

Housing Starts & New Permits Rise Sharply In September - The housing market reached what might be thought of as a new post-recession milestone last month, and for all the right reasons, the Census Bureau reports. The takeaway here: The idea that the economy is caught in a fatal swoon just took another blow with today’s numbers. What’s more, there’s reason to wonder if growth is set to pick up a bit for the economy overall, an outlook that’s supported by my latest nowcasts of Q3:2012 GDP (I’ll have an update later today). That's also the message in the September profile for economic and financial data, as summarized by The Capital Spectator Economic Trend Index (I’ll update CS-ETI today as well). Today’s housing numbers certainly don’t offer any reason to think otherwise.  Housing starts rose to an annualized rate of 872,000 last month, up a strong 15% from August. More of the same appears to be on tap, based on the nearly 12% gain in newly issued building permits for private housing in September. More importantly, the year-over-year percentage change in starts and permits continues to rise at a healthy pace. Permits are up a sizzling 45% from a year ago (a new post-recession high for the annual rate of change) and the trend in starts is almost as strong, posting a 35% increase in September vs. a year earlier.

Starts and Completions: Multi-family and Single Family -- Three-fourths of the way through 2012, single family starts are on pace for about 520 thousand this year, and total starts are on pace for about 750 thousand. That is an increase of about 20% from 2011. The following table shows annual starts (total and single family) since 2005 and an estimate for 2012. And the growth in housing starts should continue. My estimate is the US will probably add around 12 million households this decade, and assuming no excess supply, total housing starts would be 1.2 million per year, plus demolitions and 2nd home purchases. So housing starts could come close to doubling the 2012 level over the next several years - and that is one of the key reasons I think the US economy will continue to grow. Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). These graphs use a 12 month rolling total for NSA starts and completions.The blue line is for multifamily starts and the red line is for multifamily completions.  The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up over the course of the year (completions lag starts by about 12 months).  This means there will be an increase in multi-family deliveries next year, but still well below the 1997 through 2007 level of multi-family completions. The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Housing Starts and Permits: Euphoria May Be Premature - However, the reports for September showed that on a seasonally adjusted basis new home starts surged to 872,000, a 15% gain for the month, and a rise of 34.8% from a year-ago. While it was once again the multifamily component which jumped 25.1%, the single-family component also improved, gaining 11.0%. Housing permits also jumped 11.6% in September to an annualized pace of 894,000 which was up 45.1% from a year-ago. This is good news, however, it is not quite worth the euphoria that Mr. Weisenthal attributes to the report. However, let's analyze the data beyond the headline to determine what is really occurring. As we have discussed so many times in the past, it is not the monthly data point that matters but rather the trend of the data that is much more important. The chart below shows new housing starts and permits. Clearly, while the data has ticked up in recent months, we are still a very long way from calling it a recovery.Secondly, the seasonal adjustments, as we saw with the retail sales, were exceptionally large in September. The series is highly volatile to begin with so seasonal adjustments are used to smooth the data. However, in the most recent month, the seasonal adjustment was larger than normal and the entire trend has been diverging from historical norms. The chart below shows the Seasonal versus Non-Seasonal Housing Starts data going back to the peak of 2006. Just for the record the number of new home starts in September, on a non-seasonally adjusted basis, was 79,000 up from 70,100 in August. Housing starts tend to peak around June of each year and then trail lower through the end of the year. More importantly, the seasonal adjustment in September is normally lower than, or roughly equal to, the June adjustment. That is until the last two years of the "housing recovery" where the seasonal adjustments have been pushing the data higher. The seasonal adjustment for September, on a percentage change basis from August, was the largest on record at 15.28% going back to 1959.

Construction Surge Is for Real, but Don’t Expect a Boom - The surge in housing starts for September was real, but it doesn’t necessarily mean that boom times are here for the sector or the broader economy. U.S. home building jumped 15% in September to the highest level since 2008 amid gains in both multi- and single-family construction. In a positive sign of future activity, new building permits also increased, climbing 12%. The jump continues a trend of increases and points to a clear rebound for the housing sector. The gain in the third quarter of 2012 represented the sixth consecutive quarterly improvement.

Housing starts boosted by FHA loans - As discussed earlier (see post) a visible increase in US housing starts we saw in September (post-recession high) should not be a surprise. It is important to keep in mind that in spite of slow household formation, households have formed at a significantly faster rate than new homes have been built since 2008. One factor that is also at play here is the FHA provisions regarding foreclosure. The FHA guidelines require a period of 2 years from Chapter 7 filing or 3 years from foreclosure or short sale, whichever comes later. Many of those who defaulted on their mortgages after the housing crash - amazingly enough - now qualify for FHA loans. This doesn't mean FHA loans are used entirely for new homes - it simply indicates that an increased pool of qualified buyers is creating incremental demand for single family homes. And that translates into more new homes being built.

Puncturing the Housing Optimism Bubble - The housing bulls have really started to run wild now. One of them planted this rose-colored story in Bloomberg arguing that consumer deleveraging points to happy times ahead for the economy. The only problem is that the deleveraging comes from defaults rather than any paying down of debts. And these defaults are destructive for an economy, not a sign of hope.  It’s a similar story with some of the other housing fundamentals. Cullen Roche rightly points out that the housing recovery, when viewed over a longer time horizon, looks completely pathetic, and the bulls are being overcome with recency bias. There’s upward movement over the past two years off an incredibly low bottom, and viewed against the historical average it barely looks like movement at all. What’s happened in housing, as I’ve said repeatedly, is that banks have figured out how to make the system work for them, making the most of their ability to structure the market and maximize opportunities for federal cash. The best example of this is that this housing “boom” is occurring in an environment where home sale listings have dropped significantly: You can call this a “recovery” if you want, but if there are 400,000 less homes for sale, it follows that, amid constrained supply, any increase in demand will cause prices to rise. The demand increase is coming from institutional investors scooping up homes to rent out. Low mortgage rates haven’t hurt, assuredly, but most of the mortgage activity is coming from refinancing. The investors pay cash for their homes

NAHB Builder Confidence increases in October, Highest since June 2006 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 1 point in October to 41. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Edges Higher in October Builder confidence in the market for newly built, single-family homes edged slightly higher for a sixth consecutive month in October, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The latest, one-point gain brings the index to 41, its strongest level since June of 2006. Following substantial increases in the previous month, the HMI components measuring current sales conditions and sales prospects for the next six months each remained unchanged in October at 42 and 51, respectively. Meanwhile, the component measuring traffic of prospective buyers increased 5 points to 35, its highest level since April of 2006.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts (September housing starts will be released tomorrow). This was at the consensus estimate of a reading of 41.

U.S. Homebuilder Confidence at 6-Year High - Confidence among U.S. homebuilders remains at its highest level in six years, reflecting improved optimism over the strengthening housing market this year and a pickup in visits by prospective buyers to builders’ communities. The National Association of Home Builders/Wells Fargo builder sentiment index released Tuesday rose to 41 this month, up from 40 in September. That’s the highest reading since June 2006, just before the housing bubble burst.Any reading below 50 indicates negative sentiment about the housing market. The index hasn’t been above 50 since April 2006, the peak of the housing boom. The gauge of current sales and builders’ outlook on sales over the next six months remained unchanged from September’s reading. But a measure of traffic by prospective buyers rose 5 points to 35, the highest level since April 2006.

The Housing Bottom and the Unemployment Rate -  Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices. For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. When I posted that graph, the bottom wasn't obvious to everyone. Now it is, and here is another update to that graph (and a repeat of some analysis). The arrows point to some of the earlier peaks and troughs for these three measures. The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly. For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units. Housing plays a key role for employment too. Here is an update to a graph I've been posting for a few years. This graph shows single family housing starts (through August) and the unemployment rate (inverted) also through September. Note: there are many other factors impacting unemployment, but housing is a key sector.

Household Debt Has Fallen to 2006 Levels, But Not Because We’ve Grown More Frugal -U.S. household debt has finally fallen back to pre-recession levels.  The real reason our debt has dipped is that so many Americans defaulted on bills they couldn’t pay. Moody’s Analytics and the Federal Reserve released a batch of figures last week showing a significant dip in U.S. household debt. According to Moody’s, the combined amount owed on our home mortgages, credit cards, and other outstanding liabilities have gotten down to about $11 trillion, which is about what it was in 2006. Federal Reserve numbers show that household debt as a share of disposable income dipped to 113% in the second quarter of 2012. It hit 134% in 2007, right before the recession. So how exactly did we finally got our debt under control? A growing sense of fiscal responsibility has certainly played a role. This, after all, is the era of extreme couponing; and after years of out-of-control spending on bigger and bigger houses, we’ve become a nation of renters. A number of polls also show that we believe we are more frugal and cost-conscious than before the recession. The decline in household debt, however, doesn’t necessarily mean we’ve changed our ways. In fact, says Mustafa Akcay, an economist at Moody’s, “nearly 80% of deleveraging is caused by defaults.” Only 20% of the decrease comes as a result of what he calls “voluntary deleveraging,” i.e. the hard work of paying down our debts faster than we borrow. “Most of the decline in outstanding aggregate debt has been defaults,” agrees Brookings Institution economist Karen Dynan, who last year analyzed financial institution charge-offs of loans that have gone bad and found that the value of defaults was about two-thirds as large as the total decline in household debt.

US Households Are Not "Deleveraging" - They Are Simply Defaulting In Bulk - Lately there has been an amusing and very spurious, not to mention wrong, argument among both the "serious media" and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will. This couldn't be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed's own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).

U.S. Retail Sales Jumped 1.1 Percent in September — U.S. retail sales rose sharply in September, reflecting higher consumer confidence and improvement in the job market. Consumers bought more cars, gasoline and electronics. The Commerce Department says retail sales rose 1.1 percent in September after a 1.2 percent in August, which was revised higher. Both increases were the largest since October 2010. Electronics and appliance store sales rose 4.5 percent, in part because Apple released its latest iPhone last month. Sales increased 1.3 percent at auto dealers and 2.5 percent at gas stations, reflecting higher prices. Excluding autos and gas, sales were still up a solid 0.9 percent in September. There were gains in most areas although department stores saw a 0.2 percent drop following no change in August.

Retail Sales increased 1.1% in September - On a monthly basis, retail sales were up 1.1% from August to September (seasonally adjusted), and sales were up 5.4% from September 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $412.9 billion, an increase of 1.1 percent from the previous month and 5.4 percent above September 2011.. ... The July to August 2012 percent change was revised from 0.9 percent to 1.2 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 24.6% from the bottom, and now 9.0% above the pre-recession peak (not inflation adjusted) The second graph shows the same data, but just since 2006 (to show the recent changes). This shows that retail sales ex-gasoline are increasing, but that gasoline prices have boosted retails sales over the last two months. Excluding gasoline, retail sales are up 20.9% from the bottom, and now 8.6% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.3% on a YoY basis (5.4% for all retail sales). Retail sales ex-autos increased 1.1% in September.

September Retail Sales: Another Solid Increase - Retail sales posted another respectable advance in September, the Census Bureau reports. The 1.1% rise last month matches the previous gain, which was revised up. It's been a number of years, in fact, since we've seen back-to-back 1%-plus gains in retail sales on a monthly basis. Today’s retail sales update is just one data point, of course, but it echoes the narrative that I've been discussing on these pages for some time: the economy continues to chug along, expanding modestly. That implies that recession risk remains low. (For a broad review of the data behind this view, see last week’s updates of The Capital Spectator Economic Trend Index and the Q3 GDP nowcast.) Even after stripping out the volatile auto sector, or the potentially distorting data from gasoline sales, consumption still rose handsomely last month. Retail sales ex-autos jumped 1.3% in September and retail sales ex-gasoline advanced 1.0%.

Retail Sales: Getting Stronger, Even with Real Per-Capita Adjustments - The Advance Retail Sales Report released this morning shows that sales in September came in at 1.1% month-over-month with an upward revision to 1.2% for August (originally 0.9%) and 0.7% for July (previously 0.6%). Today's number is above the consensus forecast of 0.7%. The year-over-year change is 5.4%. Today's report is the third consecutive monthly gain after three months of decline. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function. The green trendline is a regression through the entire data series. The latest sales figure is 4.8% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 16.6% below the blue line end point. We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy.

Consumers Holding Up Better Than Other Parts of Economy -- Today’s retail sales report continues a recent theme: Consumer spending is holding up better than other pieces of the economy. That’s a reversal from earlier in the recovery, when manufacturing and exports drove the economy and consumers — saddled by debt and facing high unemployment — held back. Now steadying house prices and falling unemployment are boosting consumers’ outlook just as the manufacturing sector is cooling off amid weak demand from overseas. The consumer economy likely isn’t quite as strong as September’s 1.1% rise in retail sales suggests. Much of the boost came from electronics stores, likely due to blockbuster sales of the iPhone 5. Higher gas prices also played a role.

Can Consumers Keep Up Spending? - The latest sign of life in the consumer sector is a larger-than-expected advance in retail sales. Total sales jumped 1.1% in September and August’s gain was revised up to 1.2% from 0.9%. A chunk of the September increase was due to the introduction of Apple Inc.’s iPhone5. Sales at electronics stores jumped 4.5% last month. But other shopping categories posted good gains as well. As a result, core retail sales–which exclude sales of vehicles, building materials and gasoline, and are part of the gross-domestic-product tally–increased 0.9% in September, on top of a small upward revision to the August figure. The pop in core sales caused many forecasters to push up their tracking of third-quarter GDP growth. Economists at Goldman Sachs, for instance, now think the economy expanded at a 2.2% annual rate last quarter, up from 2.0%. Macroeconomic Advisers lifted its growth estimate to 1.9% from 1.6%. Consumer behavior is following the consumer’s mood. Friday, data showed the consumer-sentiment index for early October was at its highest reading since before the Great Recession. The increases in consumers’ mood and spending are unusual because they aren’t being supported so far by upbeat news in jobs and wages.

Where Are Consumers Getting Income to Spend? - Some economists are looking for more cash. In some ways, consumer behavior is back to where it was before the Great Recession. Buyer traffic through model homes is at its busiest since April 2006. Robust retail gains were posted in both August and September, even when excluding the impact of higher prices at gasoline stations. Household sentiment is back to where it was in September 2007. Consumers’ behavior seems irrational given sluggish income growth. Personal income increased just 3.5% in the year ended in August, and wages and salaries alone were up 3.7%, according to data collected by the Bureau of Economic Analysis. The average weekly paycheck isn’t even keeping up with inflation. Real weekly pay is down 1.3% since it peaked in October 2010, according to the Labor Department.To explain the disconnect, some economists are wondering whether government measures of total income may be undercounting how much money consumers have to spend on cars, homes and iPhones. That idea shows up in the examination of tax-witholding data done by two separate economists: Jim O’Sullivan, chief U.S. economist at High Frequency Economics, and Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research. After adjusting for tax-law changes, Mr. O’Sullivan found the 13-week average of withholdings for employment-based income is rising 4.5% over the past year. That is almost one percentage point higher than the BEA’s tally of the increase in wages and salaries over an equivalent time period.

No, Virginia, Consumers Delevering via Default is Not a Reason for Economic Cheerleading - Yves Smith - The economy bulls are back at it again, claiming that all is well. The most recent edition of this story is, “Consumers Paying Down Debt Helps Boost U.S. Expansion”, in a Bloomberg piece. It’s a well-reported piece, replete with Mark Zandi quotes, that mixes financial analysts sounding the all clear with anecdotes of people who have paid back their overwhelming debts, and are now shopping again.This is the thesis. Three-plus years into a recovery from the worst financial crisis since the Great Depression, Americans finally are getting their finances back into shape, Federal Reserve figures show. Household debt as a share of disposable income sank to 113 percent in the second quarter from a record high of 134 percent in 2007 before the recession hit. Debt payments on that basis are the smallest in almost 18 years, while the delinquency rate for credit cards is the lowest since the end of 2008…Unfortunately, the economy bulls are leaving something very significant out: defaults. The data is pretty clear. In the latest quarter, first and second lien charge-offs were $303.7 billion (with Home Equity Lines of Credit defaults high and continuing to rise). Meanwhile, aggregate consumer debt dropped by $53 billion. That’s better than 2012 Q1, but the drop in debt from defaults is six times larger than the total drop in debt. Consumers aren’t paying down their debts, they are simply defaulting.

LA area Port Traffic: Moving Sideways - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for September. LA area ports handle about 40% of the nation's container port traffic.To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic is up slightly, and outbound traffic is down slightly compared to the 12 months ending in August.  In general, inbound and outbound traffic has been moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of September, loaded outbound traffic was down 2% compared to September 2011, and loaded inbound traffic was up 3% compared to September 2011.  Usually imports peak in the July to October period as retailers import goods for the Christmas holiday - so imports might increase next month, but probably not by much.

More Expensive Gas Pushes US Consumer Prices Up - Higher gas costs drove up U.S. consumer prices in September for the second straight month. Outside energy, there was little sign of inflation. The Labor Department said Tuesday that the consumer price index rose a seasonally adjusted 0.6 percent last month, matching the August increase. In the past 12 months, prices have increased 2 percent. That’s in line with the Federal Reserve‘s inflation target. Excluding volatile food and energy costs, prices rose just 0.1 percent. In the past year, so-called core prices have increased 2 percent. “Pump prices are fueling headline inflation, but underlying … trends remain benign,” Robert Kavcic, an economist at BMO Capital Markets, said in a note to clients. (MORE: Who Should Pay More in Taxes?) Modest inflation leaves consumers with more money to spend, which can boost growth. Low inflation also allows the Federal Reserve to continue with its efforts to rekindle the economy. If the Fed were worried that prices are rising too fast, it might have to raise interest rates. Food prices rose only 0.1 percent. The cost of meat, chicken and eggs fell. Dairy prices rose. Gas prices rose sharply over the summer and into September, but have since come down. The average price for a gallon of gas nationwide was $3.77 on Tuesday, about 9 cents below last month’s level.

BLS: CPI increases 0.6% in September, Core CPI 0.1%, Cost-Of-Living Adjustment about 1.66% --From the BLSThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment. For the second month in a row, the substantial increase in the all items index was mostly the result of an increase in the gasoline index, which rose 7.0 percent in September after increasing 9.0 percent in August... The index for all items less food and energy rose 0.1 percent for the third month in a row. This was above the consensus forecast of a 0.5% increase for CPI, and below the consensus for a 0.2% increase in core CPI.The increase in CPI was mostly due to the sharp increase in gasoline prices.Cost-Of-Living Adjustment (COLA): The BLS reported CPI-W increased to 2281.84 in September, for a Q3 average of 226.936. In Q3 2011, CPI-W average 223.33. The annual Social Security Cost-Of-Living Adjustment will be 1.66% (will be rounded).

CPI increased 0.6% for September 2012 - The September Consumer Price Index increased 0.6% from August. The CPI measures inflation. This is the second month in a row for CPI to increase 0.6% and these jumps are the largest since June 2009. The reason again is gas with a 7.0% increase in the gasoline index for September and August's CPI jump was also caused by gas at the pump with a 9.0% increase in gasoline prices. When removing food and energy inflation, of which gasoline is a part, core inflation increased 0.1% for September, the same as August. Below is CPI's monthly percentage change. CPI is up 2.0% from a year ago and the highest increase since April 2012, as shown in the below graph.  Energy overall jumped 4.5% for September, but is now up 2.3% for the last 12 months. Don't expect that yearly change to last. The BLS separates out all energy costs and puts them together into one index. Energy costs are also mixed in with other indexes, such as heating oil for the housing index and gas for the transportation index. Fuel oil for the month increased 4.1% and natural gas also increased 2.0% for September. Below is the overall CPI energy index, or all things energy.

Annualized Headline and Core Inflation Both at 2% - The Bureau of Labor Statistics released the CPI data for September this morning. Year-over-year unadjusted Headline CPI came in at 1.99%, which the BLS rounds to 2.0%, up from 1.69% last month (1.7% in the BLS record). Year-over year-Core CPI (ex Food and Energy) came in at 1.98% (rounded to 2.0%), up from 1.91% last month. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data:The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.  For the second month in a row, the substantial increase in the all items index was mostly the result of an increase in the gasoline index, which rose 7.0 percent in September after increasing 9.0 percent in August. The other major energy indexes increased in September as well.  The food index increased 0.1 percent in September; the index for food at home was unchanged as major grocery store food indexes continue to be mixed. The index for all items less food and energy rose 0.1 percent for the third month in a row. Indexes for shelter, medical care, apparel, and airline fares were among those that increased, while the indexes for used cars and trucks, new vehicles, personal care, and household furnishings and operations all declined.  The 12-month change in the index for all items was 2.0 percent in September, an increase from the August figure of 1.7 percent and the highest since April. The index for all items less food and energy also rose 2.0 percent for the 12 months ending September; the food index has increased 1.6 percent and the energy index has risen 2.3 percent over that span.  More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

Except For Food And Gas, September Inflation Barely Higher - September core CPI, ex such trivial, hedonically displacable items as food and energy (remember: when in doubt, just nibble on your obsolete first generation iPad, for which you waited hours in line - cause Bill Dudley said so) rose a tiny 0.1%, on expectations of a 0.2% pick up. Of course, for those lucky few who still get to eat and/or have a job to drive to, inflation rose by 0.6% in September from August, higher than expectations of a 0.5% increase. Luckily, in America the intersection of the Venn Diagrams for those who i) eat and ii) drive is so small it is barely worth mentioning...

Inside the Consumer Price Index: The charts in this commentary have been updated to include the October Consumer Price Index news release for the September data. The Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link. The chart below shows the cumulative percent change in price for each of the eight categories since 2000.Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. The latest Apparel number is the first fractional nudge above zero in about nine years. Another unique feature of Apparel is the obvious seasonal volatility of the contour.  Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For example, the spike in gasoline above $4-a-gallon in 2008 is readily apparent in the chart, and, according to my weekly gasoline updates, we're once again approaching that territory.

Weekly Gasoline Update: Prices Drop Slightly - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump eased a bit last week. Rounded to the penny, the average for Regular dropped three cents and Premium two. Regular is up 59 and Premium 6 cents from their interim weekly lows in the December 19, 2011 EIA report. As I write this, shows seven states (California, Hawaii, Alaska, Washington, Connecticut, New York, and Oregon) with the average price of gasoline above $4. That's unchanged from last week. Another 4 states plus DC have prices above $3.90, down from seven last week.

Rising US crude oil production is not translating into more gasoline and heating oil for US consumers - US domestic crude oil production is continuing to rise. After a slowdown in September it hit a new record according to latest data from EIA. That is keeping the US crude oil inventory above the 5-year range for this time of year. Crude market in the US is well-supplied.But those who expect these strong supply fundamentals for crude oil in the US to translate into lower fuel costs for consumers will have to wait. Gasoline stocks are at the low end of the range, keeping gas prices at the pump elevated. Distillates stocks (jet fuel, heating oil, etc.) are in even worse shape - below the 5-year range.This imbalance of crude vs. refined products supplies keeps crack spreads wide, making US refineries (such as Tesoro for example - see this story from Reuters) a great deal of money. But it is not good news for the cash-strapped US consumer. In fact in some areas of the country fuel shortages have been downright painful. We've discussed the elevated gasoline prices on the West Coast (see post). Now tight heating oil supplies in the North East could pose serious problems if we return to a more seasonal NE winter weather.

The recovery in U.S. Heavy Truck Sales - Neil Irwin wrote in the WaPo on Friday: What cars and big rigs say about the economy: Less trucking activity, of course, means less demand for trucks. That is ... evident from this week’s earnings. Cummins, an Indiana company that makes truck engines, said it will cut up to 1,500 jobs by the end of the year amid weakening demand. “As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products,” Cummins chief executive Tom Linebarger said. And Alcoa, the giant aluminum company, cited less demand from the trucking industry as it downgraded its forecasts. “Heavy trucks and trailer,” Alcoa chief executive Klaus Kleinfeld said in a conference call with analysts Tuesday, is “down compared to the view that we had in the first quarter. North America is really driving it.  I think the key quote is truck sales are "down compared to the view that we had in the first quarter" - actually heavy truck sales are up, and at the highest level since April 2007. This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is current estimated sales rate.  Heavy truck sales really collapsed during the recession, falling to a low of 181 thousand in April 2009 on a seasonally adjusted annual rate (SAAR). Since then sales have doubled and hit 376 thousand SAAR in September 2012. This is up 12% from September 2011, and the highest level since April 2007 (over 5 years ago).

Vital Signs Chart: Easing Capital-Equipment Prices - Gains in prices for capital equipment, such as industrial machines, are easing as companies invest at a slower pace. The producer-price index for capital equipment was up 1.7% in September from a year earlier, compared with a 2% gain in August. A sluggish economy and uncertainty about federal spending cuts and tax increases set to take effect in January have made companies cautious.

Industrial Production Rebounds In September - Industrial production rebounded in September after a steep decline in August. As the Federal Reserve noted when the August numbers were released, the sharp drop that month was probably due to the temporary effects of Hurricane Isaac. Today’s update appears to offer confirmation that the August retreat was a one-time problem rather than the start of a cyclical downturn. Indeed, industrial production continues to rise at a modest pace, advancing 2.8% on a year-over-year basis through last month. Today’s news brings one more positive contribution to the September economic profile, and one more reason for thinking that recession risk remains low. Yes, September’s 0.4% rise in industrial production is relatively modest compared with recent history, but it’s enough of a gain to provide strong evidence for seeing August’s deep slide as a one-time anomaly.

Industrial Production increased 0.4% in September, Capacity Utilization increased - From the Fed: Industrial production and Capacity Utilization Industrial production rose 0.4 percent in September after having fallen 1.4 percent in August. For the third quarter as a whole, industrial production declined at an annual rate of 0.4 percent. Manufacturing output increased 0.2 percent in September but moved down at an annual rate of 0.9 percent in the third quarter. Production at mines advanced 0.9 percent in September, and the output of utilities moved up 1.5 percent. Roughly 0.3 percentage point of the decline in overall industrial production in August reflected the effect of precautionary idling of production in late August along the Gulf of Mexico in anticipation of Hurricane Isaac, and part of the rise in September is a result of the subsequent resumption of activity at idled facilities. At 97.0 percent of its 2007 average, total industrial production in September was 2.8 percent above its year-earlier level. Capacity utilization for total industry moved up 0.3 percentage point to 78.3 percent, a rate 2.0 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 11.5 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.3% is still 2.0 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.  The second graph shows industrial production since 1967.

Industrial Production Increased 0.4% for September 2012 = The Federal Reserve's Industrial Production & Capacity Utilization report, G.17, shows a increase of 0.4% in industrial production for September 2012. This report is also known as output for factories and mines. Manufacturing increased 0.2%, mining 0.9% and utilities increased 1.5%. Oil and gas Gulf of Mexico rigs resuming are mentioned in the 0.9% output of mines increase. Some had temporarily shut down for Hurricane Issac in August.  Roughly 0.3 percentage point of the decline in overall industrial production in August reflected the effect of precautionary idling of production in late August along the Gulf of Mexico in anticipation of Hurricane Isaac, and part of the rise in September is a result of the subsequent resumption of activity at idled facilities. For the quarter industrial production has declined -0.4%, annualized. This is the first quarterly drop since Q2 2009, when the country was still mired in recession and industrial production declined -11.4%. Below is a quarterly annualized percentage change of industrial production and we can see a decline matches with recessionary periods. Total industrial production has increased 2.8% from August 2011 and is still down -3.0% from 2007 levels, that's right, five years. Here are the major industry groups yearly industrial production percentage changes from a year ago. Utilities are fairly surprising, considering the drought and heat domes of this year, although there was also an unusually warm winter.

  • Manufacturing: +3.2%
  • Mining: +3.8%
  • Utilities: -1.4%

Vital Signs Chart: Slowing Factory Activity - Factory activity is slowing. Manufacturing output grew 3.2% in September from a year earlier, its slowest pace of growth since July 2011, when the global industrial sector was reeling from supply-chain disruptions tied to the Japanese earthquake and tsunami. U.S. manufacturers rebounded strongly from the recession, but are now struggling amid slowing global demand.

Empire Manufacturing and Retails Sales Show Mixed Report - 24/7 Wall St.: Monday morning brought on two different economic reports, each with different aspects of the economy. The New York Fed released the Empire Manufacturing Index for October and the Commerce Department released the September retail sales data. The Empire Manufacturing index fell to -6.16 in October. This was worse than expected as Dow Jones was calling for -4.0. While it was the third negative report in a row, it is an improvement from the -10.4 report from the prior month’s reading. Today’s report from the Commerce Department is from September and we have already seen enough guidance from retailers on same-store sales that the number here should not be a major surprise. That being said, the headline retail sales were up by 1.1%, and even the ex-autos report was up by 1.1%. Dow Jones was looking for gains of 0.7% on the headline number. The seasonally adjusted figure came to $412.94 billion.

NY Fed Manufacturing Index Rises to -6.16 in Oct. Vs -10.41 in Sept.: An index covering New York manufacturing activity shows continued contracting activity this month as shipments fall to the lowest reading in more than a year, according to the Federal Reserve Bank of New York'sEmpire State Manufacturing Survey released Monday. The Empire State's business conditions index stood at -6.16 in October. While that is an improvement from -10.41 in September, it marks the third consecutive month in contractionary territory, which is any reading below 0. Economists surveyed by Dow Jones Newswires had expected the index to come in at -4.0. The New York Fed survey is the first of several regional Fed factory reports due in the next few weeks. Monday's report will raise worries that the sector's weak showing in the third quarter is carrying over into the fourth. The Empire subindexes were almost all in negative territory this month. The new orders index improved slightly to -8.97 from -14.03 in September. The shipments index plunged to -6.40 from 2.75. The October reading was the weakest in more than a year, the report said. Labor conditions deteriorated further. The employment index dropped to -1.08 this month from 4.26 in September, and the workweek index worsened to -4.30 from -1.06. Optimism about the future also deteriorated this month. The general business conditions expectations index for the next six months fell to 19.42 from 27.22 in September. The employee expectations index dropped sharply to 0.00 from 8.51.

Philly Fed: "modest improvement" in Region’s manufacturing sector - The Philly Fed manufacturing index showed expansion in October after five consecutive months of contraction. From the Philly Fed: October Manufacturing Survey The survey’s indicators for general activity returned to positive territory, while new orders and shipments recorded levels near zero. But firms reported continuing declines in employment and hours worked. Indicators for the firms’ expectations over the next six months remained positive. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 8 points, to 5.7, marking the first positive reading since April. Labor market conditions at the reporting firms remained weak this month. The current employment index dipped 3 points, to ‐10.7, its lowest reading since September 2009. Earlier in the week, the NY Fed reportedThe October Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline for a third consecutive month. The general business conditions index increased four points but remained negative at -6.2. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through October. The ISM and total Fed surveys are through September. The average of the Empire State and Philly Fed surveys increased in October but was still slightly negative.  This suggests another weak reading for the ISM manufacturing index.

Philly Fed Report Shows Improving Mid-Atlantic Manufacturing - Business conditions improved for mid-Atlantic manufacturers this month after five consecutive months of contraction, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. However, except for shipments, the details of the report were disappointing. The Philadelphia Fed said its index of general business activity within the factory sector rose to 5.7 from -1.9 in September. Economists surveyed by Dow Jones Newswires expected the latest index to rise to 1.0. Readings under zero denote contraction, and above-zero readings denote expansion.

Philly Fed Business Outlook: Modest Expansion after Five Months of Contraction - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows the first expansion after five consecutive negative reading in General Activity. Since this is a diffusion index, negative readings indicate contraction, positive indicate expansion. Today's positive number follows a trend of lesser contractions since the recent trough of -16.6 in June. Here is the introduction from the Business Outlook Survey released today: Firms responding to the October Business Outlook Survey reported a modest improvement in business activity this month. The survey’s indicators for general activity returned to positive territory, while new orders and shipments recorded levels near zero. But firms reported continuing declines in employment and hours worked. Indicators for the firms' expectations over the next six months remained positive. (Full PDF ReportThe first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.In the next chart we see the complete series, which dates from May 1960.

Philly Fed Beats Even As Core Components Deteriorate - The ridiculous economic data continues. Those looking at the headline Philly Fed, which jumped from -1.9 to 5.7, trouncing expectations of 1.0, such as the NY Fed's Simon Potter are pushing buy buttons left and right. And yet anyone who takes the 2 minutes to look at the internals, such as the collapse in the Number of Employees Sub-Index, which tumbled from -7.3 to -10.7 (the lowest since September 2009), the decline in the Average Employee Workweek, or the surge in Prices Paid from 8 to 19, double the change in Prices Received which means plunging corporate profits, or the ever critical New Orders which declined from 1.0 to -0.6, and one can see why this is a report only an Econ Ph.D-cum-Central Planner can love. Finally adding insult to injury, is the 6 month forecast, which unlike all other regional Fed diffusion indices, collapsed by half, from 41.2 to 21.6, as the Hopium at least in the city of brotherly mugging appears to be running out. Stocks kneejerk in every possible direction hoping the Fed will provide a direction.

Philly Fed Rises But Details Very Weak; Future Expectations Plunge - Inquiring minds digging into the latest Philly Fed Manufacturing Report will quickly discover the rise from last month is really a mirage. The previous overall diffusion index rose from -1.9 to +5.7. However ...

  • New orders fell into from +1 to -.6
  • The number of employees sunk further into contraction
  • The average work week fell further into contraction
  • Prices paid rose substantially vs. prices received. This shows inability to pass on costs, thus reflects a squeeze on profit margins
  • Inventories are up, but shipments are still in contraction following an enormous plunge in shipments last month

Measuring Employer Confidence - The labor market effects of employer confidence are probably real but have been exaggerated. American employers have hired more than 230 million times since the recession began, but need to hire even more for employment per person to return to what it was five years ago.One explanation for this state of affairs, according to the Mitt Romney campaign, has been a supposed lack of confidence among employers who are worried about taxes and new regulations, especially those associated with the Affordable Care Act (often referred to as Obamacare) as it is fully put in effect. It is easy to find a businessman worried about government intervention, but the prevalence of such worries does not by itself tell us whether a lack of employer confidence depresses employment 10 percent, 1 percent or 0.1 percent. Presumably if we have two employers who can hire workers at $20 an hour for the same task, the more confident of the two will hire more people than the less confident one, all else being the same.  To the degree that an erosion of employer confidence has depressed the entire labor market, we should see the immediate profit from employees grow over time, as employers perceive more tax and regulatory costs on top of the cash and fringes they already owe their employees.

The labor market is not self-regulating; governments must support worker’s fight for higher wages Real News - interview with Heiner Flassbeck

Closing America’s Jobs Deficit - Laura Tyson -  The latest data on employment in the United States confirm that the American economy continues to recover from the Great Recession of 2008-2009, despite the slowdown engulfing the other G-20 nations. Indeed, the pace of private-sector job growth has actually been much stronger during this recovery than during the recovery from the 2001 recession, and is comparable to the recovery from the 1990-1991 recession. During the last 31 months, private-sector employment has increased by 5.2 million and the unemployment rate has now fallen below 8% for the first time in nearly four years. But the unemployment rate is still more than two percentage points above the long-run value that most economists view as normal when the economy is operating near its potential. Moreover, the number of long-term unemployed (27 weeks or longer) is about 40% of the total – thelowest share since 2009, but still far higher than in the previous recessions since the Great Depression, and about double what it would be in a normal labor market. So the US labor market, while healing, is still far from where it should be. That is partly because the job losses during the Great Recessionwere so large – twice as large as those of previous recessions since the Great Depression. In terms of US economic history, what is abnormal is not the pace of private-sector job growth since the 2008-2009 recession ended, but rather the length and depth of the recession itself.

Lies, Damned Lies, and Jobs - Paul Krugman -- Aha. Via Greg Sargent, the Romney campaign is lying about its jobs plan. What I mean is that the campaign is claiming that Romney’s assertion that his plan would create 12 million jobs is backed by three economic studies — and none of the studies actually says what the campaign says it does. The (implausible) claim that tax cuts would add 7 million jobs was a 10-year estimate, not a 4-year estimate; the 3 million jobs figure for energy was a prediction of what would happen under current policy, not what Romney would add; the 2 million “get tough with China” estimate had nothing to do with what Romney is proposing. So they’re just faking it — the same way they have with the “six studies” supposedly validating the tax plan, four of which aren’t studies and one of which actually validates the critics. What’s amazing here is the contempt the campaign is showing for the voters and the media. Unfortunately, that contempt may be justified

Snow Job on Jobs, by Paul Krugman - Mr. Romney, it turns out, doesn’t have a plan; he’s just faking it. In saying that, I don’t mean that I disagree with his economic philosophy; I do, but that’s a separate point. I mean, instead, that Mr. Romney’s campaign is telling lies: claiming that its numbers add up when they don’t, claiming that independent studies support its position when those studies do no such thing. As many people have noted, the plan has five points but contains no specifics. Loosely speaking, however, it calls for a return to Bushonomics: tax cuts for the wealthy plus weaker environmental protection. And Mr. Romney says that the plan would create 12 million jobs over the next four years.  Where does that number come from? When pressed, the campaign cited three studies that it claimed supported its assertions. In fact, however, those studies did no such thing.  Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property; this would be nice, but Mr. Romney hasn’t proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs in the next few years — but these were predicted gains under current policy, that is, they would happen no matter who wins the election, not as a consequence of the Romney plan.  Finally, a third study examined the effects of the Romney tax plan and argued (implausibly, but that’s another issue) that it would lead to a large increase in the number of Americans who want to work. But how does that help cure a situation in which there are already millions more Americans seeking work than there are jobs available? It’s irrelevant to Mr. Romney’s claims.

Immigration and American Jobs - Of all the economic dynamics buffeting the American middle class, immigration might seem the easiest to explain: as millions of poor immigrants from Latin America poured illegally into the country seeking work, the conventional wisdom goes, they competed with more expensive American workers, displacing them from their jobs and undercutting their wages. This understanding of immigration helped propel a vast increase in the Border Patrol’s budget over the last two decades to stop immigrants on their way in. It was the rationale for proposals to build a long, tall fence along the southern border. President Obama, who in 2008 said he would push for a law that would grant many of these immigrants legal access to jobs in the United States, instead deported a record number of immigrants working here illegally. But this explanation of the impact of immigration is mostly wrong.  For years, economists have been poring through job market statistics looking for evidence that immigrants undercut less-educated Americans in the labor market. The most recent empirical studies conclude that the impact is slight: they confirm earlier findings that immigration on the whole has not led to fewer jobs for American workers. More significantly, they suggest that immigrants have had, at most, a small negative impact on the wages of Americans who compete with them most directly, those with a high school degree or less. Meanwhile, the research has found that immigrants – including the poor, uneducated ones coming from south of the border — have a big positive impact on the economy over the long run, bolstering the profitability of American firms, reducing the prices of some products and services by providing employers with a new labor source and creating more opportunities for investment and jobs.

The Unemployment Report Wasn’t Rigged — But It’s Not Accurate, Either. On October 5th, the Bureau of Labor Statistics announced that the official unemployment rate had dropped from 8.1% to 7.8% — a surprisingly sharp decline given the slow pace of growth in the U.S. economy. The reaction from many on the right was incredulity, with some even suggesting that political appointees in the Obama administration had tampered with the Labor Department’s report to give the President a political boost in the final weeks of the election. Though these conspiracy theorists were dismissed by pundits on both the left and the right, that’s where agreement on the report ended. Conservatives have long argued that the official unemployment rate is understating the sluggishness of the economy, and that much of the decline in that rate is actually a result of people giving up their job search and dropping out of the labor force entirely. Supporters of the President say that this decline in the number of workers in the labor force is caused by the aging of the workforce — as our nation gets older, there will naturally be a larger portion of the population that is retired. All of this back and forth has underscored the fact that the unemployment rate is not the cut-and-dry, authoritative statistic that the media often portrays it to be. The so-called discouraged worker is one factor that muddies the data, for example. The Labor Department determines the unemployment rate by surveying 60,000 households and asking respondents a series of questions to determine their employment status. If a citizen is out of work, but hasn’t looked for a job in the past four weeks, he’s not considered employed or unemployed; he isn’t counted as part of the labor force at all.

Seasonal Adjustments Can’t Smooth Out Everything - Thursday’s jobless claims were distorted by so-called seasonal factors–technical adjustments to data that account for events that follow a regular pattern, such as layoffs around school holidays or a surge in retail hiring ahead of Christmas. Almost all major economic indicators are reported with seasonal adjustments, which can help eliminate the impact of, for example, the normal cycle of a winter slowdown in the construction industry. The idea is to make it easier to discern broad economic trends. But those factors, based on historical patterns, are set months in advance, so they don’t take into account one-off quirks in data. That means that week-to-week or month-to-month economic reports all have to be weighed against possible outside influences–everything from an out-of-the ordinary spring break schedule in one state to a hurricane hitting the coast to the auto industry canceling its usual summer layoffs in light of strong demand.

Still Don't Trust the Jobs Report? Here's How to Build a Better One - Justin Wolfers, a professor at the University of Michigan and Betsey Stevenson's husband, points out that the establishment data actually comes from two sources. There's the monthly poll, and the annual benchmark revision -- the latter of which looks at so-called "universe counts" of who has paid into unemployment insurance over the previous quarter. In other words, it's a very precise measurement of employment rather than a very precise poll of employment. What kind of difference are we talking about here? Well, in the year ending in March 2012, the benchmark revision found 386,000 more jobs than the establishment poll had found. That's not nothing. Obvious question time: If the benchmark data is better than the establishment survey data, why don't we just use the benchmark data? The answer is one part infrastructure and another part convenience. The crazy thing is every state has a record of how many jobs there are, but we can't get to the records fast enough. The data are stuck on different, sometimes antiquated, computer systems, and only come in every three months. We could revolutionize how we calculate the jobs number if we harmonized these computer systems across all 50 states and required businesses to file unemployment insurance payments every month instead of every quarter. It would become an administrative, rather than a statistical, task, as Justin Wolfers put it to me.

Charting Errors in BLS Participation Rate Projections - The following graph plots labor force participation rates by BLS economist Mitra Toossi in November 2006 with new projections for the participation rate as of January 2012:
Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
Mitra Toossi in January 2012: Labor force projections to 2020: a more slowly growing workforce
I asked Doug Short at Advisor Perspectives to plot the difference as a follow-up to my post About That "Expected" Drop In Participation Rate. As you can see, the participation rate is plunging even faster than the recent January 2012 projections.The current participation rate is 63.7. In 2006, Toossi estimated the participation rate would be 65.6, a drop of .6 percentage points from 66.2. Instead, the participation rate fell by 2.5 percentage points. Mathematically, 76% of the decline since 2006 was "unexpected" (1.9 of 2.5). In 2000 the participation rate was 67.1. Using that favorable starting point, Toossi expected  a total drop of 1.5 percentage points. The actual drop was 3.4 percentage points. Even by the most favorable method, only 44% of the total decline in the participation rate was expected by the BLS.

Number of the Week: Accounting for Dropouts in Unemployment Rate - 9.3%: The unemployment rate in September 2012, if the labor force were following historical patterns. The unexpected drop in the official unemployment rate to 7.8% in September has given rise to conspiracy theories about politically motivated data-doctoring. Most economists find the notion laughable. But behind the conspiracy talk lays real frustration: The unemployment rate is falling, but by most other measures, the job market is improving only slowly. Those who pay close attention to economic issues know that the Labor Department uses a relatively narrow definition of “unemployment,” counting only those who are actively looking for work. As a result, economists often look at another measure, the labor force participation rate, which is the share of the population that’s either working (employed) or looking for work (unemployed). Long before the recession, the participation rate was declining due to factors unrelated to the business cycle. People are entering the labor force later as more people go to college. The Baby Boom generation is starting to retire. And the flood of women into the workforce, which drove a long rise in labor force participation in the second half of the 20th century, has slowed. Any serious effort to assess the job market has to take such trends into account.

Weekly Initial Unemployment Claims increase sharply to 388,000 -- The DOL reports: In the week ending October 13, the advance figure for seasonally adjusted initial claims was 388,000, an increase of 46,000 from the previous week's revised figure of 342,000. The 4-week moving average was 365,500, an increase of 750 from the previous week's revised average of 364,750. The previous week was revised up from 339,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 365,500. This is just above the cycle low for the 4-week average of 363,000 in March. Weekly claims were higher than the consensus forecast of 365,000. And here is a long term graph of weekly claims: Mostly moving sideways this year, but near the cycle bottom. The large swings over the last two weeks were related to timing and technical factors, and is a reason to use the 4-week average.

Weekly Jobless Claims: A Sharp Turn For The Worse - If you needed another reason to treat weekly jobless claims data with caution in the short term,  today’s update aims to please. The unusually large drop reported previously (for the week through October 6) evaporated in today's release, and then some. As I noted last week, any big change in the number du jour for this volatile series requires several weeks of corroborating data before it's safe to make hard and fast conclusions. If that wasn't obvious before, it is now. Jobless claims surged higher last week to a seasonally adjusted 388,000. That more than reverses the previous decline that looked so enticing for the cause of optimism. As a result, claims have jumped to the highest level since mid-July. Suddenly the case for thinking that this leading indicator is treading water is plausible once more.

Weekly Unemployment Claims at 388K, Correcting Last Week's Anomaly - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 388,000 new claims number was a 46,000 increase from the previous week's upward revision of 3,000. Today's number suggests that last week's originally reported 30K decline (now revised to 27K) was an anomaly. The less volatile and closely watched four-week moving average, which is a better indicator of the recent trend, is at 365,500, up 750 from the last week's 364,750. Here is the official statement from the Department of Labor:  In the week ending October 13, the advance figure for seasonally adjusted initial claims was 388,000, an increase of 46,000 from the previous week's revised figure of 342,000. The 4-week moving average was 365,500, an increase of 750 from the previous week's revised average of 364,750.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending October 6, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 6 was 3,252,000, a decrease of 29,000 from the preceding week's revised level of 3,281,000. The 4-week moving average was 3,275,500, a decrease of 5,750 from the preceding week's revised average of 3,281,250.  Today's seasonally adjusted number was well above the consensus estimate of 360K.'s own forecast was for 370K. Here is a close look at the data over the past few years (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks. In the callout, note the red dots for the past three weeks. These clearly illustrate the high degree of data anomaly in the past few weeks.

Reality Storms Back As Initial Claims Explode Higher By 46K From Last Week's Upward Revised Aberration - So much for last week's aberration initial claims print of 339K (revised higher of course to 342K). With expectations of an increase to 365K, the DOL just came out with a whopper of a miss, the largest in three months, at 388K, an increase of 46K in one week, which was also the highest print in three months. Remember: this number will be revised to 391K next week. So much for single print indicative of a recovery. As the chart below shows, the rate of change was a 13.45% from last week: the highest in five years! So far, there has been no explanation from the BLS or DOL for last week's outlier print. And no, last week's print was not due to  California, which the DOL reported just decreased by 4,979 in the week ended Oct 6, not the required 49K. What is however worse, is that it is becoming increasingly clear that nobody at the DOL knows what is actually going on following a statement by the Labor Dept that "it appeared that state-level administrative issues were distorting the data", and numbers are simply picked out of thin air. Finally, in truly amusing news, those on Extended Benefits have once again started to rise, after dropping to virtually 0 following expiration of state benefits.

Graphical Look at Trends in Weekly Unemployment Claims - As expected, weekly unemployment claims bounced sharply higher this week, up a whopping 46,000 from last week's revised figure of 342,000. Last week, recall that the Labor Department reported a four-year low of 339,000 first-time claims. It was not a real number. As I noted a week ago in So Much For Today's Surprising "Drop" In Weekly Jobless Claims; California Forgot to Report 30,000 Claims ...  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). Actually, the report isn't worthless, it's simply erroneous. Add back in 30,000 claims and the number is 369,000 right about where it has been for some time. Economists were thus expecting about 370,000 claims this week, but amusingly claims shot all the way back to 388,000. So much for conspiracy theories regarding unemployment claim numbers. To better understand real trends we need to look at the 4-week moving averages of claims to help smooth out things like weather-related incidents (and California ineptitude).

Report: Seasonal Retail Hiring to be about the same as in 2011 - Each year I track seasonal retail hiring during October, November and December. This usually provides an early clue on holiday retail sales. Currently the NRF is forecasting about the same level of seasonal hiring as last year. From the National Retail Federation: Expect Solid Growth This Holiday Season Tempered by political and fiscal uncertainties but supported by signs of improvement in consumer confidence, holiday sales this year will increase 4.1 percent to $586.1 billion. NRF’s 2012 holiday forecast is higher than the 10-year average holiday sales increase of 3.5 percent. According to NRF, retailers are expected to hire between 585,000 and 625,000 seasonal workers this holiday season, which is comparable to the 607,500 seasonal employees they hired last year. Last year was the highest level of seasonal hiring since 2007 (seasonal hiring was especially weak in 2008, and then improved some in 2009). There is also a shift towards online buying that is keeping down seasonal hiring.

Unemployment Tumbles in Most States - Joblessness fell in 41 states and the nation’s capital in September, as employers added jobs in most of those states, the Labor Department said Friday. The national unemployment rate fell to a seasonally adjusted 7.8% from 8.1% in September from August, and Friday’s data showed that most states followed the national trend. South Carolina, California, Hawaii, Louisiana and Utah posted the biggest drops in unemployment. In California, the rate fell to 10.2% from 10.6%. Several states that are being fiercely contested in the presidential campaign also saw declines. Nevada’s rate fell to 11.8% from 12.1%, though it still led the nation in joblessness. Colorado’s ticked down to 8.0% from 8.2%. Florida’s rate fell to 8.7% from 8.8%. Iowa’s dropped to 5.2% from 5.5%.

Unemployment falls in 41 states in September - Unemployment rates fell in 41 states and the District of Columbia last month, reflecting a sharp drop in the nation's jobless rate just weeks before the presidential election. Unemployment increased in six states, and three states showed no change. Among key swing states in the presidential race, the jobless rate declined in nine, was unchanged in two and increased in one. INTERACTIVE: Where the jobs are.  The national unemployment rate was 7.8% in September. That was down from 8.1% in August and 9% in September 2011. The 12 presidential battleground states are Colorado, Florida, Iowa, Michigan, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin. Nevada and Iowa posted the largest declines, with the jobless rate falling to 11.8% from 12.1% in Nevada, and to 5.2% from 5.5% in Iowa.

State Unemployment Rates decreased in 41 States in September - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally lower in September. Forty-one states and the District of Columbia recorded unemployment rate decreases, six states posted rate increases, and three states had no change, the U.S. Bureau of Labor Statistics reported today.  Nevada continued to record the highest unemployment rate among the states, 11.8 percent in September. Rhode Island and California posted the next highest rates, 10.5 and 10.2 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - obviously Michigan and Ohio have seen the most improvement - New Jersey and New York are the laggards. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. In early 2010, 18 states and D.C. had double digit unemployment rates.

The Mysterious Economic Collapse in the Northeast - Looking at the state-level unemployment numbers yields a significant and under-reported story. We’ve known for some time that innovations in reaching shale oil deposits in the Plains states – places like the Dakotas, Nebraska, Oklahoma and Iowa – have kept their unemployment rates low, even throughout the Great Recession. On the other end of the scale, we’ve seen a recent trend of rising unemployment in the Northeast. Look at this chart. This includes the current unemployment rate in red, and the peak unemployment rate during the recession in blue. The state closest to its recession peak? New Jersey (Christie 2016!). Followed by New York (Cuomo 2016!). Followed by Pennsylvania and Connecticut. And Maine, Vermont and New Hampshire have seen their unemployment rates rise in recent months. Rhode Island hasn’t eroded, but they basically never had a recovery. Massachusetts, incidentally, is a major outlier here. The St. Louis Fed finds the same uptick, reflected in the chart above. Look at that back end.

Unemployment Doesn’t Just Hurt the Unemployed - Every once and a while I hear someone say, “wait a sec, if the unemployment rate is 7.8% then 92.2% of labor force is working…that doesn’t sound so bad at all.” That’s wrong simply in the sense that 7.8% is still an elevated unemployment rate (suppose the rate were 15%–would you feel better if someone pointed out the 85% are still at work? 100%-unemp is just not an elucidating metric). But it’s more wrong in the sense that high unemployment has negative spillovers for most of those still at work.  In a labor market like ours, with low unionization rates, bargaining clout for many in the workforce is very much a function of the unemployment rate.  Excess labor supply over labor demand typically puts downward pressure on both nominal and real wages. The figure below plots real hourly wages for non-supervisory workers—blue collar workers in manufacturing and non-managers in services (about 80% of the workforce).  It also plots yearly nominal growth rates of that same hourly wage (before accounting for inflation). As you can see, the latter series just keeps trending down, and that’s what I mean by a weak labor market hurting workers and their paychecks. 

Mish Obamacare Mailbag: Expect More Part-Time Jobs - I received a number of interesting emails from readers in response to Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?.  Here is a sampling of emails.
Reader John, Owner of 37 Restaurants Chimes In Hello Mish,  I own a chain of 37 fast food restaurants. I am doing the same thing as Olive Garden  [going to part-time workers] as are many of my small (50 to 1000 employees) competitors. This ObamaCare tax will continue to cause a large shift in employment figures starting now and continuing for the next several years, decreasing the unemployment rate as each full time employee gets replaced with more than one part time employee.
Reader Kris writes About Whole Foods  Hello Mish, Thanks for your wonderful data analysis on all my favorite B(L)S topics... As an anecdotal note to Prepping for Obummer care... Whole Foods also limits their non-management hourly workers to 20 to 29 hours per week. Says so right on any of their existing location employment openings via their online application process.

Walmart Warehouse Workers Forced To Sleep In Foreclosed Houses, Tents In The Woods - New details emerged Thursday about the living conditions endured by workers at a Walmart support warehouse in Elwood, Ill. who went on strike last month to protest their poor working conditions and alleged retaliation by management. In a new piece by The Guardian, warehouse worker Phillip Bailey explains how he sleeps in a Catholic hostel in Joliet, Ill., after a long day of loading and unloading hundreds of boxes bound for Walmart stores. Another worker, Mike Compton, says he regularly sleeps in foreclosed homes, explaining, "I found one abandoned house that had working electricity still. And a fridge." A third warehouse worker, Bailey said, was forced to live in the woods. "He just set up a tent in there for a few weeks." Temperatures in Northern Illinois during the winter average 22 degrees Farenheidt, making situations like these potentially deadly. The dire conditions in which the workers live are compounded by the fact that their jobs working for the logistics company Roadlink Workforce Solutions, moving goods on their way to Walmarts nationwide, are physically taxing, perpetually part-time, and often pay near minimum wage. Compton told the Guardian that if he were to work every single week of the year, he might expect to make about $15,000. "It is not easy to get by," he added.

Where’s the IMF on inequality and growth? - Oxfam America - Today’s New York Times picked up on an important research paper by two IMF economists. The Fund’s Andrew Berg and Jonathan Ostry argue chronic income inequality is detrimental to economic growth. In contrast, more equal countries are likely to experience durable and sustainable growth spells. This research couldn’t be more timely, as inequality across the globe continues to grow worse. In the US, the top 1%  captured roughly 8% of GDP in the late 1970s. Today, they command more than 23%; a figure not seen since the eve of the Great Depression. Among OECD nations, the U.S. has one of the highest rates of inequality. The only countries with higher rates are Portugal, Turkey, and Mexico. As the US tries to recover from the financial crisis, the link between inequality and growth should be instructive to lawmakers. Among developing countries, the Fund’s research is especially important. Economic growth has long been hailed as the silver bullet to poverty reduction. Yet, the economic and social benefits of growth accrue to countries that can sustain it over many years (decades, really). Developing countries have demonstrated that igniting growth spells—even robust ones—is not impossible.  Unfortunately, they typically run dry after only a couple of years. The difficulty is generating growth that remains strong over a long horizon. As the Fund’s research makes clear, investments that reduce inequality hold the payoff of stronger and longer growth.

Political Causes, Political Solutions - Room for Debate - NYTimes- Joseph E. Stiglitz The International Monetary Fund is absolutely right that inequality is bad for stability. But even before the I.M.F. documented this relationship, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System identified increasing inequality as one of the most important factors contributing to the Great Recession of 2008. In “The Price of Inequality,” I explain the channels through which inequality commonly leads to instability. Both were in evidence in our recent crisis.One is that inequality leads to weak aggregate demand — or demand that would be weak in the absence of countervailing actions, say by the Federal Reserve. The reason is simple: Those at the bottom and middle consume essentially all of their income; those at the top save 15 percent, 20 percent, or more. When money shifts from the bottom to the top — as has occurred in recent decades in the United States — this low demand would lead to unemployment and an anemic economy. The Fed, though, stepped in, with low interest rates and lax regulation. It worked, creating a bubble, which supported a consumption boom. But it was clear that it was only a temporary palliative. Another channel is the link between economic inequality (at least in the extreme form that it has reached in the United States) and political inequality, imbalances in politics that have allowed corporations undue influence in shaping our laws and regulations, especially those pertaining to financial markets.

Housing Prices and Income Inequality - Why is the gap between rich and poor in America yawning ever wider? The issue is urgent. As my colleague Annie Lowrey writes, there is growing evidence that income inequality impedes economic growth. And one interesting explanation boils down to the high price of housing. A recent paper by researchers at Harvard University argues that the prohibitive cost of living in the areas with the greatest economic opportunities has forced low-wage workers to migrate instead to areas with inferior opportunities. “The best places for low- and high-skilled workers used to be the same places: California, Maryland, New York,”  “Now low-skilled workers can no longer afford to move to the high-wage places.”  In this account, people aren’t moving to the Sun Belt because they want to live there. They are moving because they can’t afford to live in Boston. And the result isn’t just second-best for them; it also slows the pace of economic growth.The trends are beautifully illustrated by three time-lapse graphics.

Don't Pity the Rich: The Great Recession Was Worst on the Poor - The Great Recession hit all of us, but it didn't hit all of us equally. It turns out the more you had to lose, the less you lost. The chart below from Amir Sufi, a professor of finance at the University of Chicago Booth School of Business, shows us this depressing story in three graphs. And like that, two decades of gains for the bottom half of households were gone. Not that it's exactly been a banner decade for the top 10 percent of households either -- but at least they're still 80 percent wealthier than they were 20 years ago. This shouldn't surprise us. As Ryan Avent of The Economist pointed out, three words -- cash, houses, stocks -- explain these three charts. The 25th percentile get their wealth from jobs, but not from housing or stocks; the 50th percentile get their wealth from jobs and housing, but not from stocks; and the 90th percentile get their wealth from all of the above, but particularly from stocks. That's exactly the story we see above. The 25th percentile barely saw their wealth increase during the housing bubble years because they weren't buying houses, and wages barely kept up with inflation. But then wealth evaporated as jobs did after panic hit in 2008. Meanwhile, median households did see their wealth shoot up sharply during the housing bubble, as their homes rapidly appreciated in value. But then wealth evaporated as housing equity did after the boom turned to bust. And then there's the 90th percentile -- their wealth barely budged since less of it was in housing equity, and more of it was in equities that quickly rebounded in 2009.

John Kenneth Galbraith on the Moral Justifications for Wealth and Inequality - Mark Ames (via Joe Costello) recommended a 1977 documentary series written and hosted by John Kenneth Galbraith. This segment, “The Manners and Morals of High Capitalism,” discusses how the rising bourgeoisie and the new rich justified their lofty status. Kings could rely on God and the Great Chain of Being for their authority, but what about mere capitalists? Galbraith reviews the views of some of the leading defenders of this new order, and shows how their ideas have influenced our views. Galbraith makes quite a few deadpan observations.

Record Number Seeks Food Aid in the U.S. - As delegates and activists are addressing the lingering issues of world hunger, malnutrition and poverty on the occasion of World Food Day Tuesday, homelessness and hunger are spreading fast and affecting millions of people across the globe, with far reaching implications in the United States. In the world’s wealthiest nation, rising unemployment compounded by unprecedented high food prices are contributing to worsening living conditions. Persistent poverty and growing inequalities rather than scarcity of food is the main cause of hunger in the U.S., many analysts say. According to the United States Census Bureau, since the global economic recession, the number of U.S. citizens who suffer from food insecurity nearly reached a staggering 50 million as of 2010, which represents the highest level ever recorded since the office began monitoring poverty rates more than 50 years ago. In states such as Texas, Oklahoma, Arkansas, Missouri, North Carolina, New Mexico and South Carolina, food insecurity rates are far above the national average. Moreover, according to the latest figures, 20.5 million U.S. citizens live in extreme poverty. This means their family’s cash income is less than half of the federal poverty line, which corresponds to about 10,000 dollars a year for a family of four.

U.S. Jails More People Than Any Other Country: Chart of the Day - The U.S. has the world’s highest incarceration rate, with Department of Justice data showing more than 2.2 million people are behind bars, equal to a city the size of Houston. The CHART OF THE DAY shows that, with a rate of 730 people per 100,000, the U.S. jails a higher proportion of its citizens than any other country, according to data from the International Centre for Prison Studies, an independent research center associated with England’s University of Essex. .“The model is, if you build it they will come,” said Daniel D’Amico, a professor of economics at Loyola University New Orleans. “Because we have all these prisons and all of these other resources funneled into our criminal justice system, we have this ability to enforce things that would otherwise be unenforceable.” “That includes the drug war, but it’s also including everything from the Martha Stewart types to immigration policies,” D’Amico said. “The scope of things that are now criminal in corporate law is exponentially higher than it was merely twenty years ago.”

WATER PAINS: City needs to spend millions to fix aging transmission pipes - While water main eruptions have made the headlines in recent months, city officials say the number of main breaks is not on the rise. Still, experts said that a city like Philadelphia with an aging water system is under a lot of pressure that will only get worse with time. "This is a national problem, and in every older city in America, particularly in the East and Midwest, we have water mains, many of which were laid in the 19th century," said ex-Gov. Ed Rendell, an advocate for infrastructure repair. "It's inevitable that these breaks will occur and the frequency of the occurrences will only increase." A report last year from the American Society of Civil Engineers said an additional $84 billion was needed to shore up the nation's water infrastructure. Rendell said Philly would need outside help. "This will take a significant combined effort of city, state and federal dollars," Rendell said. Philadelphia's water system has 3,100 miles of pipe, with an average age of about 70 years.

The Unemployment Tax Dilemma - When the economy is doing well employers pay both state and federal (backup system) unemployment taxes. The rates tend to be reasonable and are levied only on a portion of wages. During recessions the employers who keep workers on are in effect penalized because all rates will likely go up somewhat. Many states also use an experience rate, so the businesses shedding jobs will be paying a higher rate in the future. In the "great recession," now dragging into a fifth year, the employers still in business are seeing accelerating rates, thus creating a penalty on employment (varies by state).  The system is designed for a "regular recession" and not for a "great recession." How do we do this so we don't penalize hiring? Ideas welcome. FYI:

California May Sell $7.5 Billion in Debt, Lockyer Says - California, the most indebted U.S. state, may sell $7.5 billion of bonds in the next fiscal year, Treasurer Bill Lockyer said, 42 percent more than the current year. About $5.27 billion of the securities would be general- obligation bonds and the rest lease-revenue debt, Lockyer said today at a Bond Buyer conference in San Francisco. For the present fiscal year that began July 1, Lockyer has said he expects to offer $5.25 billion. He’s already sold $1.174 billion of that total. The amount of debt sold in the next fiscal year must still be approved in the budget that Governor Jerry Brown will propose in January. A California bond maturing in 10 years traded yesterday at an average yield of 2.289 percent, or 64 basis points more than top rated bonds, according to Bloomberg data. That’s down from 68 basis points when the bonds were sold in September.

Conservation Crossroads from C-FARE - The Massachusetts Budget and Policy Center this week released new resources about breakfast and lunch participation in Massachusetts schools.  A chart pack (.pdf) illustrates data describing the extent of take-up of nutrition benefits, and a summary graphic (.pdf) traces a wide variety of nutrition assistance programs from the federal funding sources to the state and local implementation level. More generally, the Kids Count data center from the Annie E. Casey Foundation has a wide variety of state-level data resources for all states.  For example, here is an interactive map showing children's poverty levels by regions within Massachusetts (you can mouse over selected counties to see specific statistics).

Texas schools punish students who refuse to be tracked with microchips - A school district in Texas came under fire earlier this year when it announced that it would require students to wear microchip-embedded ID cards at all times. Now, students who refuse to be monitored say they are feeling the repercussions. Since October 1, students at John Jay High School and Anson Jones Middle School in San Antonio, Texas, have been asked to attend class with photo ID cards equipped with radio-frequency identification (RFID) chips to track every pupil’s location. Educators insist that the endeavor is being rolled out in Texas to stem the rampant truancy devastating the school's funding. If the program is judged successful, the RFID chips could soon come to 112 schools in all and affect nearly 100,000 students. Students who refuse to walk the school halls with the card in their pocket or around their neck claim they are being tormented by instructors, and are barred from participating in certain school functions. Some also said they were turned away from common areas like cafeterias and libraries.

Race-based academic goals approved by Florida Board of Education | Watch the video - The Florida Board of Education's decision to approve new race-based academic goals has set off a firestorm of controversy. The plan calls for different levels of academic achievement with 90% of Asian students, 88% of Caucasians, 81% of Hispanics and 74% of African-Americans to be at or above grade reading level by the year 2018. Math standards have been set at 92% of Asian students, 86% of Caucasians, 80% of Hispanics and 74% of African-Americans to be at or above their math grade level. Many parents and community leaders have voiced sharp criticism of the new race-based benchmarks calling them discriminatory and shocking. But those who support the plan say that the goals set a higher standard than previous plans. Spokesperson for the Florida Department of Education, Cheryl Etters said, "Of course we want every student to be successful. But we do have to take into account their starting point." Etters also said that the various percentages were not meant to lower expectations but rather to set "realistic and attainable" goals.

How a single DMCA notice took down 1.45 million education blogs - Web hosting firm ServerBeach recently received a Digital Millennium Copyright Act (DMCA) violation notice from Pearson, the well-known educational publishing company. The notice pertained to Edublogs, which hosts 1.45 million education-related blogs with ServerBeach, and it focused on a single Edublogs page from 2007 that contained a questionnaire copyrighted by Pearson. ServerBeach informed Edublogs about the alleged violation, and Edublogs says it quickly took down the allegedly infringing content. Instead of calling the matter settled, though, ServerBeach took Edublogs' servers offline last Wednesday, temporarily shutting off all 1.45 million blogs, according to Edublogs. ServerBeach confirms taking all of the Edublogs offline, telling Ars that the outage lasted for "roughly 60 minutes before we brought them back online and confirmed their compliance with the DMCA takedown request." As you might expect, ServerBeach and Edublogs have slightly different accounts of how it all happened.

The price of admission - - This autumn, the children of several American friends entered a clutch of elite US colleges, such as Brown, Harvard and Princeton. Most of these kids have earned their places, in the sense of having high-performing SAT tests and a curriculum vitae packed with accolades. And yet these intelligent teenagers had another advantage: connections. More specifically, their parents and relatives are usually alumni of those elite universities, visibly involved in the alumni network and have often made philanthropic donations. To be sure, those parents usually do not want to stress this aspect of their kids’ lives: it would be rude to ever discuss the “price” of securing a spot (ie, how much philanthropy or alumni involvement is required). But there is no shame incurred by the practice either. On the contrary, when I relate my Cambridge tale it provokes astonishment. This is little wonder, perhaps, when educational researchers estimate that at 15 per cent or more of students at some top Ivy League universities are “legacy” kids – and having a family link increases a mid-level student’s chance of entry by about 60 per cent. “It is just how the system works,” says a friend in Washington, a prominent Harvard alumnus who proudly helped get his nephew to Harvard this year. “My nephew is incredibly bright – he deserves to be there. But the problem is that there are lots of other bright kids, so I did everything I could.” Or as Lawrence Summers, former Harvard University president, has observed, “legacy admissions are integral to the kind of community that any private educational institution is” – or they are in the eyes of Ivy League leaders and some private liberal arts colleges.

Average debt up again for new college grads - It's the latest snapshot of the growing burden of student debt and it's another discouraging one: Two-thirds of the national college class of 2011 finished school with loan debt, and those who borrowed walked off the graduation stage owing on average $26,600 — up about 5 percent from the class before. The latest figures are calculated in a report out Thursday by the California-based Institute for College Access and Success (TICAS) and likely underestimate the problem in some ways because they don't include most graduates of for-profit colleges, who typically borrow more than their counterparts elsewhere. Still, while 2011 college graduates faced an unemployment rate of 8.8 percent in 2011, even those with debt remained generally better off than those without a degree. The report emphasized research showing that the economic returns on college degrees remain, in general, strong. It noted the unemployment rate for those with only a high school credential last year was 19.1 percent.

The Aging Demographic for College Education - I was recently hired by a business to do research on the demographics of the modern college student. One of the most surprising results in my study has been the increasing representation of people over the age of 30. In fact, my study so far (admittedly in the early stages) indicates that the fastest growing population of college students is women between the ages of 35 and 45.  What might explain this? More likely than not, it is the advent of distance education and the increased flexibility of schooling options. People in their mid-30s to early 40s are increasingly choosing to give college a 2nd or 3rd chance, and see it as an opportunity to further improve their lives and pursue their dreams. Given that most people change careers about 7 times throughout their lifetime, modern technologies make it easier than ever to change direction, and people are choosing to seize the opportunity. Here is graphic put out by that explores the aging demographic of those pursuing college degrees from a variety of angles.

JPMorgan Chase’s Debt Collection Agency’s Sleazy Tactics to Squeeze Student Loans Debtors of Their Last Cash - JPMorgan Chase may have cut back on its private student lending, but the megabank is still making plenty of money on student debt. In addition to some  $9 billion [PDF] in taxpayer-subsidized Federal Family Education Loans and untold millions in private student loans, JPMorgan, the country's biggest bank by assets, has a private equity arm, One Equity Partners. In turn, One Equity Partners owns NCO Group, a debt collector that makes millions of dollars a year from the federal government to collect on students who've defaulted on their loans. And that taxpayer money is paying for some pretty abusive practices. In 2009, Jason Fagone at Philadelphia Magazine reported on one woman's experience with NCO as it tried to collect the $9,000 that her husband, at the time on active duty in Iraq, owed for school. At the time, Tara Burkholder told Fagone, she was working for free as a student teacher and had $92 in her checking account and a daughter to care for. “The NCO lady told Tara it was time for her to give up on her dream of being a teacher, and get a paying job immediately: 'Honey, sometimes we have to do things that we need to do.' The lady also told Tara that NCO had contacted her husband’s commanding officer in Iraq, and that if she didn’t pay back the loan, her husband would be dishonorably discharged from the Army.”

Consumer Financial Protection Bureau Finds Student, Mortgage Lenders Have 'Uncanny Resemblance': The private student loan industry smells a lot like the subprime mortgage industry: Dead ends, runarounds and few live customer service representatives to speak with. The same tactics that mortgage borrowers have faced are now happening for student loan borrowers, according to a new report from the Consumer Financial Protection Bureau. The government watchdog on Tuesday released its annual report on student loans, including details from a database of complaints that opened to student loan borrowers in March. “Student loan borrower stories of detours and dead ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business,” CFPB student loan ombudsman Rohit Chopra said in a statement. Nearly two-thirds of the 2,857 complaints filed in the database had to do with repayment issues, including complaints about fees, billing, deferment, forbearance and fraud. Thirty percent of the complaints were about problems facing borrowers unable to pay. Few were related to getting a loan.

‘You should’ve served US better and died!’ Debt collector berates disabled veteran — RT - A debt collector, angered that a disabled US Army veteran was living off of disability payments, told him he “should have died” in war instead of "taking advantage of" other Americans. ­Minnesota-based debt collection agency Gurstel Chargo is now facing a lawsuit for verbally abusing the Army vet over a $6,000 defaulted student loan, Courthouse News reports. “If you would have served our country better you would not be a disabled veteran living off Social Security while the rest of us honest Americans work our asses off,” one of the agency’s debt collectors allegedly told the vet. “Too bad, you should have died.” Michael Collier was declared 100 per cent disabled after suffering permanent spine and head injuries while in the Army. As a result, both Collier and his wife receive disability payments from the federal Social Security Administration, which are exempt from seizure by debt collectors. But in an attempt to collect on the defaulted student loan, the collector seized the money from Collier's wife’s savings account. The credit union then proceeded to freeze her account.

Bankrupt San Bernardino Skips $1 Million Bond Payment - San Bernardino, the second-largest U.S. city to enter Chapter 9 bankruptcy, failed to make a $1 million payment due Oct. 1 on pension bonds, according to a Municipal Securities Rulemaking Board filing dated today. The missed payment is for a 2005 taxable issue, according to the regulatory filing by Wells Fargo Bank, trustee for the debt. The city of 209,000, about 60 miles (100 kilometers) east of Los Angeles, voted in July to skip payments of $3.4 million to bondholders of its pension debt and $2.2 million for retiree health care before it sought bankruptcy protection on Aug. 1. “An installment of interest in the amount of $1,014,447 was due from the city on Oct. 1, 2012,” the bank said. “The city did not transfer any funds to the trustee for payment of the interest.” San Bernardino, the third California municipality to enter bankruptcy since June, has about $90 million of outstanding bond debts, according to budget documents, and another $200 million owed to holders of securities issued by the city’s now-dissolved redevelopment agency. The largest U.S. city in bankruptcy is Stockton, California.

Bankrupt San Bernardino halts payments to Calpers - San Bernardino, California, has failed to make more than $6 million in payments to the state's powerful public employee pension fund, heightening speculation of a high-stakes showdown between the fund and other creditors as the city seeks eligibility for bankruptcy protection. Since July 31, the day before San Bernardino declared bankruptcy, the city has failed to make six biweekly employer contribution payments of more than $1 million to the California Public Employees' Retirement System (Calpers), a city spokesperson said. The action taken by San Bernardino is in stark contrast with two other California cities - Vallejo, which emerged from bankruptcy in 2011, and Stockton, which is seeking bankruptcy protection. Both cities decided to keep current on all payments to the pension fund. How San Bernardino deals with its future obligations to Calpers remains to be decided, but even opening the door to negotiating payments to Calpers is significant, said Karol Denniston, a San Francisco lawyer who helped draft California's bankruptcy process law. Calpers is the largest pension system in the United States and serves many Californian cities and counties. It has long argued that pension contributions cannot be touched, even in bankruptcy.

U.S. public pensions have $1.2-trillion gap, study shows - The largest 100 U.S. public pension funds have around $1.2 trillion of unfunded liabilities, about $300 billion above the nearly $900 billion they reported themselves, according to a new actuarial study to be published on Monday. The pension systems reported a median funding level of 75.1 per cent. The study by the actuarial firm Milliman, which used different ways to value assets and measure liabilities, finds an aggregate level of funding of 67.8 per cent. But Milliman, one of the world largest actuarial firms took a close look at U.S. public pension funding for the first time, and said the multibillion-dollar difference was good news. Rebecca Sielman, the report’s author, said results should reassure the public that America’s public pensions in general are accurately reporting their funding shortfalls. The difference between what public pensions across the United States have reported and what Milliman found wasn’t significant, Sielman said. She noted that a relatively small change in the way the figures are calculated could lead to seemingly outsized results because the funds are so large.

Social Security Benefits to Go Up by 1.7 Percent — More than 56 million Social Security recipients will see their monthly payments go up by 1.7 percent next year. The increase, which starts in January, is tied to a measure of inflation released Tuesday. It shows that inflation has been relatively low over the past year, despite the recent surge in gas prices, resulting in one of the smallest increases in Social Security payments since automatic adjustments were adopted in 1975. Social Security payments for retired workers average $1,237 a month, or about $14,800 a year. A 1.7 percent increase will amount to about $21 a month, or $252 a year, on average. Social Security recipients received a 3.6 percent increase in benefits this year after getting none the previous two years. About 8 million people who receive Supplemental Security Income will also receive the cost-of-living adjustment, or COLA, meaning the announcement will affect about 1 in 5 U.S. residents.

Social Security receivers get a 1.7% raise - People collecting Social Security checks got some tough news to swallow Tuesday morning: Their annual cost of living raises for 2013 will be among the smallest ever. The Social Security Administration announced today that the annual cost-of-living adjustment (or COLA) for next year will be 1.7%. For the average Social Security beneficiary, who gets about $1,130 per month, a 1.7% raise would increase the monthly check by $19.21. Seniors got a 3.6% raise for calendar 2012, but for 2010 and 2011 they saw no increase . Since 1975, the annual Social Security cost of living adjustments have been below 2% a total of only five times. The relatively low 2013 increase “could erode buying power for millions of beneficiaries,” says Mary Johnson, a senior policy analyst at The Senior Citizens League, an advocacy group. Plus, a large part of the 2013 adjustment may get eaten up by increases in Medicare Part B premiums (earlier this year, the Medicare Trustees predicted that the standard Part B premium would increase by more than $9 per month in 2013, to $109.10).

There’s nothing ‘courageous’ about raising the Social Security retirement age: In an interview with Dylan Matthews, Nobel laureate economist and Social Security expert Peter Diamond unloads on those who think the simplest and fairest way to “fix” Social Security is to raise the retirement age, which would particularly hurt seniors who retire early at age 62. (Source: AFP)What do we know about the people who retire at 62? On average, they have a shorter life expectancy and lower earnings than people retiring at later ages. If anyone stood up and said, ‘Instead of doing uniform across the board cuts, let’s make them a little worse for people who have shorter life expectancies and lower earnings,’ they’d be laughed at. Of course, those who say we should raise the Social Security retirement age — either the age of eligibility or the age for full benefits — don’t get laughed at. It’s considered a very thoughtful, courageous effort to deal with our entitlement programs. People who mention it often make a joke of how brave they’re being. For instance, here’s New Jersey Gov. Chris Christie (R) at an American Enterprise Institute event: You are going to have to raise the retirement age for Social Security! Whoa! I just said it and I am still standing here. I did not vaporize into the carpeting. Big applause, of course.

Progressive Groups Oppose Potential Social Security Benefit Cut From Move to Chained CPI - I mentioned earlier today that Social Security recipients will see a 1.7% cost of living increase in 2013, one of the smallest in the history of the program, which amounts to around $21 a month for the average recipient. This is likely to get eaten up by Medicare premium increases and drug costs. In two of the last four years there has been no adjustment, so the Social Security benefit has really decreased on a real basis over those four years, given the population served by it. And yet, there are still plenty of people in Washington who look at the COLA calculation and say that it’s too generous, that a “better” calculation like chained CPI, one which results in a cut in benefits from current law, would be more appropriate. By “appropriate” they mean “save money for the government” rather than actual adequacy for senior citizens. Switching to chained CPI would save $112 billion over 10 years, and all of that money would come out of the hands of senior citizens, many of whom can ill afford it. The release of the 2013 COLA offers a teachable moment on Social Security, and 96 progressive organizations are making the most of the opportunity: A coalition of 96 organizations representing veterans, the elderly, minorities and labor unions on Tuesday used the occasion of the annual Social Security cost of living adjustment to plead with Congress not to manipulate the measurement as a way to reduce the deficit in coming negotiations over tax and spending policy [...]

Seniors on Social Security squeezed by rising prices - Janis Mason is 94 and has been receiving Social Security benefits for nearly 30 years. Because she has outlived her savings, the monthly checks are her only source of income. To keep pace with the rising cost of living, the Social Security Administration announced a 1.7% benefits increase for 2013. This will give a $19 boost to the average benefit of $1,130 a month. For some of the 56.3 million people who get Social Security -- either because they are retired or disabled -- the increase may not be enough to keep up with rising expenses. "We're grateful for any small increase [in Social Security benefits], but believe me, any small increase doesn't begin to cover the major increases we're seeing in things like vegetables, fruits, bread and milk," said Mason. Part of the problem is a disconnect between the official inflation figure and what seniors actually pay, experts and seniors say.

Social Security Keeps 21 Million Americans Out of Poverty: A State-by-State Analysis — Social Security benefits play a vital role in reducing poverty. Without Social Security, 21.4 million more Americans would be poor, according to the latest available Census data (for 2011). Although most of those whom Social Security keeps out of poverty are elderly, nearly a third are under age 65, including 1.1 million children. (See Table 1.) Depending on their design, reductions in Social Security benefits could significantly increase poverty, particularly among the elderly. Almost 90 percent of people aged 65 and older receive some of their family income from Social Security.[2]   Without Social Security benefits, 43.6 percent of elderly Americans would have incomes below the official poverty line, all else being equal; with Social Security benefits, only 8.7 percent do.  These benefits lift some 14.5 million elderly Americans — including 8.7 million women — above the poverty line. Social Security is important for children and their families as well as for the elderly.  About 6 million children under age 18 (8 percent of all U.S. children) lived in families that received income from Social Security in 2011, according to Census data.  This figure includes children who received their own benefits as dependents of retired, disabled, or deceased workers, as well as those who lived with parents or relatives who received Social Security benefits.  In all, Social Security lifts 1.1 million children out of poverty.

CalPERS approves 85% rate hike to long-term care insurance --About 114,000 people with long-term care insurance through the California Public Employees' Retirement System will face a whopping 85 percent rate hike over two years if they choose to keep their current benefits. The CalPERS Board of Administration approved the hike Wednesday by a vote of 12-0. They also approved plans to create less-extensive coverage that will be cheaper — and an option for affected beneficiaries to take a 79 percent rate hike in one fell swoop. The rate hikes take effect in 2015. They were approved by the board over complaints by members and amid debate about a long-term care insurance market hit by higher-than-expected claims and poor investment returns in an economy where interest rates hover at historic lows. It’s unclear how many beneficiaries will go for the pay hike — or take lesser coverage. Letters will be sent in the spring, advising members of their options, CalPERS spokesman Bill Madison said.

Contraceptive Economics - Americans passionately disagree about both the biology and the morality of contraception. Even many who skillfully practice what Thomas Robert Malthus termed the “improper arts” consider it a personal and, ideally, completely private choice. But private choices are constrained by public policies. Both behavioral economics and recent empirical research help explain why access to long-acting, reliable, safe and reversible methods of contraception should be considered a public health priority.Recent news coverage shows a pathological level of misinformation in some quarters, embodied in the assertion by Representative Todd Akin, the Republican Senate nominee in Missouri, that “legitimate” rape victims could never become pregnant against their will. On a more amusing note, a group of Catholic nuns in Ohio released a video contending that women who use contraceptives are less sexually attractive to men (feminist bloggers at Jezebel had a good time with this one). Conservatives with an accurate grasp of biology are more likely to use a strategy of trivialization. The Republican speechwriter Peggy Noonan labels Sandra Fluke, Georgetown law student, as a “ninny” for suggesting that insurance coverage of contraception is a serious issue. Carrie Lukas, writing for National Review Online, derides the Democrats’ “cartoonish appeal to women to vote based on their ‘lady parts.’” A more polite and perhaps more effective approach is simple avoidance. Ann Romney, asked whether she believed that employer-provided health insurance should be required to cover birth control, replied: “You’re asking me questions that are not about what this election is going to be about. This election is going to be about the economy and jobs.”

United States Only First-World Country Without Mandatory Paid Medical Leave: 'A Human Rights Issue' (VIDEO): The United States has no mandatory paid family leave policy, making it one of just three countries in the world and the only country in the first-world to not mandate paid maternity leave for new mothers (Swaziland and Papua New Guinea are the others). "What does this mean?" HuffPost Live host Nancy Redd asked Friday. "It means that new working mothers are almost always without pay for the first few months of their child's life and are frequently left without a job to come back to." Redd was joined by several working mothers -- including Best For Babes Foundation co-founder Danielle Rigg, National Partnership for Women & Families Director of Work and Family Programs Vicki Shabo and HuffPost Parents Editor Farah Miller -- for a panel discussion about America's "barbaric" practice. "It puts us all in a very cranky place," Miller said. "What you're left with when you don't have support in terms of leave is women who are going back to work because they have to in order to support their family....I hear from mothers all the time who say, 'I was not ready to go back after twelve weeks.'"

Study suggests privatized Medicare would raise rates - A study out Monday says most Medicare recipients — 59 percent — would pay higher premiums under a hypothetical privatized system, with wide regional differences leading to big hikes in some states. In the senior-rich political swing state of Florida, the study says premiums for traditional Medicare would jump more than $200 a month. The report by the nonpartisan Kaiser Family Foundation carries a prominent disclaimer that it should not be taken as an analysis of the proposal by Republican presidential candidate Mitt Romney and running mate Paul Ryan, partly because their plan lacks specifics. However, Kaiser says it is modeled a similar approach to Romney-Ryan. The Obama campaign pounced on the findings, while the Romney camp pointed to the disclaimer, saying the report doesn't reflect the candidate's own plan

Why Private Medicare Plans Don't Cost Less - Medicare Advantage has historically cost 7 to 12 percent more than traditional Medicare, according to the Medicare Payment Advisory Commission. But to conclude that this cost difference proves that private health plans have no place in Medicare misreads the Medicare Advantage experience in an important way: It ignores the decisive role that government has played in driving up the program’s costs. Medicare Advantage is only partly about reducing costs. It is also designed to increase choice for beneficiaries. And the incentives that government gives private health plans to expand choice end up undercutting efforts to save money. Under Medicare Advantage, private plans deliver Medicare services directly to patients. Insurance companies bid to provide Medicare beneficiaries with a different package of services than traditional Medicare, but their coverage must be at least as generous. The government then reimburses the insurers to cover about 13 million enrollees, or about 27 percent of the Medicare population. Both insurers and consumers are making choices. Beneficiaries opt out of traditional Medicare if they think a private plan offers them a better deal, and insurers enter the Medicare Advantage market if they believe it will be profitable. The crucial point is that both consumers and insurers need an incentive to take part in the market. That costs money — and it is the government that has chosen to pay the price to give beneficiaries more choices. The result is that insurers compete by covering more services rather than by reducing premiums and improving efficiency to remain profitable at lower premiums.

The problem for premium support: Seniors don’t always choose the best plan: Joe Antos argues there’s a problem with a study released this week by Kaiser, which looked at what seniors would pay for Medicare benefits under a Romney-like plan. It found that, if seniors wanted to keep the benefits they have right now, 59 percent would end up paying more. Antos says the Kaiser analysts don’t give seniors enough credit here: They’re smart enough to switch to the plan that is a better deal. “The Kaiser study does not show what sensible seniors could save if they simply followed their supermarket instincts and select the best deal,” he writes. “The study shows how much seniors would lose if they keep their old plan in the face of much better options. My mom isn’t that dumb.” The Kaiser study does run through an option that is similar to what Antos describes, although with less detail than other options. It shows that if 25 percent of seniors switched to the second-cheapest Medicare option — the one that their voucher would cover completely — the number who would see costs increase drops fro 59 to 34 percent. A handful, about 1 percent, would even see a rebate as their plan costs less than the voucher.

NYT Decides to Start Blaming Medicare and Social Security for Bad Weather - There is a serious effort by corporate honchos to cut Social Security and Medicare in the lame duck session of Congress. As has been reporting in several major media outlets, this campaign has raised tens of millions of dollars for this purpose. Readers of a NYT "fact-check" on the presidential debate were no doubt wondering whether the paper had sold space to this campaign. The fact-check was addressing the question of whether Governor Romney wanted to increase military spending by $2.3 trillion over the course of the decade. At one point the piece told readers: "The drop in military budgets as a share of G.D.P. is due less to any reductions for the Pentagon and more to the fact that a growing piece of the federal budget pie is being consumed by spending for entitlement programs like Medicare, Medicaid and Social Security as more baby boomers reach retirement age." Of course that one makes no sense. Increased spending on Medicare, Medicaid and Social Security will raise their percentage of the budget and therefore could explain a decline in military spending as a share of the budget. It can only explain a decline in military spending as a share of GDP if spending on these programs raises GDP. While that is possible in a depressed economy, like the one we have seen the last 5 years, that is not the argument that we usually hear about these programs. Furthermore, the Congressional Budget Office and other agencies do not project that the economy will remain depressed throughout the decade. Therefore this is assertion is not true in the context of the generally used budget projections.

The Business of Health Insurance and “Obamacare”: What Can We Expect? - Over the past couple of years there has been considerable back-and-forth over what has been accomplished by the Patient Protection and Affordable Care Act of 2010 (PPACA). While a short post cannot survey the entirety of this multifaceted law, several elementary confusions have been repeated in public discussions and should be addressed in the interest of clarification. The most urgent of these is to point out that, despite the Act’s (deliberately misleading?) title, it addresses neither the practice of medicine nor its cost. At most a government-sponsored institute has been authorized to find and make suggestions. The Act, then, is not about making health care affordable, but an effort to make health-care insurance affordable – a related but separate topic. To understand the implications of this, we must consider the business of health insurance. The health insurance business is–it cannot be overemphasized–a business. While its advertising may suggest otherwise, we would do well to remember that business differs from charity in ways that matter. Being private for-profit businesses, health insurance companies are engaged in the pursuit of profit. If the health insurer is a corporation, and many of them are, their profits are expected to show steady growth over time so as to satisfy “Wall Street expectations.” This is not always easy, and firms must be vigilant if they are to achieve these targets. As is the case for any and all businesses, revenues must be greater than expenses if health insurance companies are to show a profit. Without profits they will soon cease to exist. But before this occurs, senior management will be fired. As they understand this, we should expect these managers to make every effort to avoid this outcome. None of this, it should be noted, implies that health insurers are more or less moral than other firms. Business is business. With that point cleared up, let us turn to specifics.

ObamaCare's Heavy Toll on Middle Class Americans -  ObamaCare will pile thousands of dollars in new taxes and higher health costs on top of America’s middle class. How so? Through redistribution, of course. The president has made no secret of his fondness for using the government’s tax and spending powers to spread our diminished wealth around from one group of Americans to another. And ObamaCare is nothing if not a massive redistribution machine. It places huge new financial burdens on some Americans — primarily those who already have health insurance, including the vast majority of middle-class families — in order to extend new federal entitlement commitments to other households, primarily the uninsured. In broad terms, the amount of redistribution is easily ascertained form the aggregate expenditures and taxes contained in ObamaCare. According to the Congressional Budget Office (CBO), in 2020, ObamaCare will spend $229 billion on a Medicaid expansion and a new subsidy program for health insurance. These expenditures will primarily benefit 29 million people newly enrolled in Medicaid and the insurance subsidy program. That works out to nearly $8,000 for every newly insured American, or about $21,000 per newly insured household. Much of the rest of the legislation is devoted to extracting these resources from everyone else in the country — about 290 million people — who won’t benefit from the new spending programs, and doing so in way that obscures what’s taking place. For these Americans who already have insurance, the law contains nothing but new financial burdens, in the form of higher taxes, higher premiums for their existing plans, and lower benefits, particularly for those on Medicare.

Why Romney and Ryan’s 'Reforms' of Medicaid Would Likely Destroy It - Not only did we get sparks at the vice-presidential debate last week, we got a good deal of substance. The social safety net inevitably came up, and Biden and Ryan sparred over Social Security (the one drawing a hard line on making changes to benefits, the other refloating the idea of privatization) and how to reform Medicare, with the word “voucher” tossed back and forth. One major program that didn’t get much airtime, though, was Medicaid. Perhaps it gets less play because it’s targeted at those living in poverty, not necessarily the middle class politicians so love to love. The program provides healthcare for low-income people through both federal and state financing. Currently, the federal government gives states money with requirements attached for maintaining a certain level of benefits and eligibility. While Social Security and Medicare get the spotlight, this program is in serious danger, as past experience with Romney and Ryan’s preferred “reforms” shows. Both Ryan and Romney are in favor of changes to Medicaid that would do it real damage. First, they would spend a lot less money on it. Romney and Obama basically agree on how much to spend on Medicare, but they differ sharply in the case of Medicaid. Obama’s healthcare law will expand the program. Romney, on the other hand, has said he’d support the spending levels in Ryan’s budget plan, which would eventually cut spending on the program in half.

Emergency Room Free for All: Why America’s Emergency Rooms Are Not the Key to Improved Health Care Access or Lowered Cost - Mitt Romney has been going around telling newspaper editorial boards that the Affordable Care Act is redundant, that – to quote him in the Central Ohio Dispatch – “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.”   (10/11/12 Ohio Dispatch)  Over the last few days, Paul Krugman and Nick Kristof have pointed out that limiting health care to emergency room visits already means that people die unnecessarily.   If it were as simple as showing up at emergency rooms designed to treat the indigent, Romney would be correct that we don’t need the Affordable Care Act to improve health care access.  But it isn’t as simple as that. Our multi-layered health care system is rarely as simple as that.  Claims of simplicity underestimate the intelligence of listeners and display a striking lack of familiarity with emergency medicine, as most Americans know it.What really happens in the hospital emergency room is a triage procedure – as anyone who has sat waiting for five or six hours for a few stiches will tell you. America earns an “F” grade on urgent care provided after hours in non-hospital settings even for those with full insurance coverage.  So the single biggest users of emergency rooms are the insured who really could wait a few hours for care but really can’t wait until the next morning at 9:00 AM. And so the urgent but not emergent insured clog the emergency room. This is, of course, an amazingly expensive and inefficient way to treat this group.

Death By Ideology, by Paul Krugman -  Mitt Romney doesn’t see dead people. But that’s only because he doesn’t want to see them; if he did, he’d have to acknowledge the ugly reality of what will happen if he and Paul Ryan get their way on health care.  Mr. Romney declared that nobody in America dies because he or she is uninsured: “We don’t have people that become ill, who die in their apartment because they don’t have insurance.” This followed on an earlier remark by Mr. Romney — echoing an infamous statement by none other than George W. Bush — in which he insisted that emergency rooms provide essential health care to the uninsured. These are remarkable statements. They clearly demonstrate that Mr. Romney has no idea what life (and death) are like for those less fortunate than himself.  Even the idea that everyone gets urgent care when needed from emergency rooms is false. Yes, hospitals are required by law to treat people in dire need, whether or not they can pay. But that care isn’t free — on the contrary, if you go to an emergency room you will be billed, and the size of that bill can be shockingly high. Some people can’t or won’t pay, but fear of huge bills can deter the uninsured from visiting the emergency room even when they should. And sometimes they die as a result.  More important, going to the emergency room when you’re very sick is no substitute for regular care, especially if you have chronic health problems. When such problems are left untreated — as they often are among uninsured Americans — a trip to the emergency room can all too easily come too late to save a life.  So the reality, to which Mr. Romney is somehow blind, is that many people in America really do die every year because they don’t have health insurance.

Ways the Uninsured Die --  Krugman - A physician writes: It’s true that EMTALA [the 1986 law requiring that emergency rooms treat you regardless of insurance status] requires a medical screening exam and stabilization of any emergency medical conditions. It does not, however, mandate admission to the hospital for treatment of conditions that are not currently emergent (e.g. cancer, kidney disease, and other more chronic conditions except related to certain complications). For example, if someone were to present to one of our emergency departments with some mild bloating and be found to have an abdominal mass, they may very well be discharged home for outpatient follow-up and treatment. If that person doesn’t have insurance, they will likely have difficulty obtaining that care. I agree with your example of someone delaying care because they are uninsured (it happens with regularity), but thought another avenue to describe how uninsured people could die despite emergency care being mandated by EMTALA would be informative.

Lawsuit: Aspen Dental clinics operating illegally-- Aspen Dental Management and the private equity firm that controls it illegally operate dental clinics across the country and engage in aggressive, misleading profit-driven practices that cause patients economic harm, claims a federal lawsuit filed Thursday in New York. East Syracuse-based Aspen and Leonard Green and Partners are violating laws that require clinics to be owned by dentists actively performing procedures onsite to prevent business interests from trumping those of patients, according to court papers filed at U.S. District Court in Albany. The suit is on behalf of 11 people in 11 states, but their lawyers are seeking class action status that could cover tens of thousands of current and former patients and untold monetary damages.  They argue that the structure of Aspen Dental puts a premium on getting patients to consent to expensive treatment plans through aggressive sales pitches after they've been attracted to the clinics by free exam and X-ray promotions.

More drugs implicated in fungal meningitis outbreak - Two more drugs have been implicated in the ongoing outbreak of fungal meningitis linked to contaminated pain injections, federal health officials said Monday. Both come from the same pharmacy, New England Compounding Center, that distributed the steroids suspected of sickening at least 214 people and killing 15 of them, the Food and Drug Administration said in a statement. One is a steroid called triamcinolone acetonide and another is a product used during heart surgery. While the FDA hasn’t confirmed that the two products are to blame, it’s issued a warning. “A patient with possible meningitis potentially associated with epidural injection of an additional NECC product, triamcinolone acetonide, has been identified through active surveillance and reported to FDA,” the agency said in a statement. “Triamcinolone acetonide is a type of steroid injectable product made by NECC. The cases of meningitis identified to date have been associated with methylprednisolone acetate, another similar steroid injectable product.” Both can be injected into the spine. The FDA didn't specify what the triamcinolone was being used for in this case. Methylprednisolone was being used to treat pain. Until now, just three lots of methylprednisolone made by NECC had been suspected – but as many as 14,000 patients were treated with steroid from those three batches.

Corn Belt Shifts North With Climate as Kansas Crop Dies - Joe Waldman is saying goodbye to corn after yet another hot and dry summer convinced the Kansas farmer that rainfall won’t be there when he needs it anymore. “I finally just said uncle,” said Waldman, 52, surveying his stunted crop about 100 miles north of Dodge City. Instead, he will expand sorghum, which requires less rain, let some fields remain fallow and restrict corn to irrigated fields. While farmers nationwide planted the most corn this year since 1937, growers in Kansas sowed the fewest acres in three years, instead turning to less-thirsty crops such as wheat, sorghum and even triticale, a wheat-rye mix popular in Poland. Meanwhile, corn acreage in Manitoba, a Canadian province about 700 miles north of Kansas, has nearly doubled over the past decade due to weather changes and higher prices. Shifts such as these reflect a view among food producers that this summer’s drought in the U.S. -- the worst in half a century -- isn’t a random disaster. It’s a glimpse of a future altered by climate change that will affect worldwide production.

Water Economics - The next set of lessons in MRUniversity’s development economics course is on water economics. Water is one of the most important issues in developing countries for many reasons, including agriculture, health, and wealth. Every year, millions of people die because of lack of access to clean and safe water. It is estimated that over 1 billion people in the world don’t have adequate access to such an essential resource, and the poor pay the biggest price. In this section, we cover:

  • The effects water monopolies can have on consumers
  • The pros and cons of water privatization in developing nations, including major examples from Buenos Aires, Bolivia, Saudi Arabia and Yemen
  • Why it’s so hard to regulate private water companies effectively
  • What can happen to the price of water when it is interfered with through subsidies and price controls
  • The tragedy of the commons in water economics
  • How water ethics influences the actual supply of water
  • And finally, what happens when countries engage in trading water commodities

Wine experts: worst grape harvest in half century - Drought, frost and hail have combined to ravage Europe’s wine grape harvest, which in key regions this year will be the smallest in half a century, vintners say. “Two big producing nations, France and Italy, have not known a harvest so weak in 40 to 50 years,” Mr. Coste said. `’All the major producing nations have been hurt.” France’s Champagne and Burgundy regions were hard hit by weather conditions that particularly affected the prevalent Chardonnay grape, used to make the world’s most famous sparkling wine and the luxurious whites from those regions. In places where vintners were already facing a small margin of profit, many could be facing survival problems, said Mr. Coste of the Copa-Cogeca union. “In certain regions, there will be many vintners in big difficulties because of the collapse of the harvest,” he said. The European wine harvest automatically has a global impact since it accounts for some 62 per cent of the worldwide wine production. In Europe, about 2.5 million families live off the wine sector. It makes the dependency on the vagaries of weather a sometimes cruel business.

Giant Walmart vs the small farmer - India is a land of small farmers. According to the United Nations, the smaller the farm, the higher the productivity. Small farms grow biodiversity. They are falsely described as unproductive because productivity in agriculture has been manipulated to exclude diversity and exclude costs of high chemical and capital inputs in chemical industrial agriculture. When biodiversity is taken into account, small farms produce more food and higher incomes. In the heated debate on FDI in retail, those promoting it repeatedly claim that the entry of corporations like Walmart will benefit the Indian farmer. Reference is made to getting rid of the middleman. Any trader who mediates in the distribution of goods between producers and consumers is a middleman. Walmart is neither a producer nor a consumer. Therefore, it is also a middleman; it is a giant middleman with global muscle. That is how it has become the world’s biggest retailer, carrying out business of nearly $480 billion. So the issue is not getting rid of the middleman but replacing the small arthi with a giant one. The Walton Family is the global arthi located in the US, not in the local community. And this new kind of arthi combines the functions of all small traders everywhere from wholesale to retail. Instead of millions of small traders taking a two per cent commission at different levels, Walmart gets all profits. If three small traders mediate at two per cent between the producer and consumer, the difference between the farm price and consumer price is just six per cent. When Walmart enters the picture, the difference jumps with the farmer getting only two per cent of the consumer price and Walmart and its supply chain harvesting the 98 per cent. So the issue is not the number of middlemen but their size and their share of profits.

Doctors and nurses forced to pick cotton - After some international clothing firms boycotted cotton from Uzbekistan in protest at the use of child labour, this year most Uzbek children are able to get on with their schoolwork. But office workers, nurses and even surgeons are being forced into the fields instead. Malvina, a nurse at a clinic in Tashkent, is angry. "I am almost 50 years old and I've got asthma. We had to pick a lot of cotton, all by hand - and we were not paid anything!" She has just returned from a 15-day stint picking cotton with other health professionals in rural Uzbekistan. It was hard toil and no-one was spared, whatever their seniority. Uzbekistan is one of the world's main producers of cotton and the crop is a mainstay of its economy. The government controls production and enforces Soviet-style quotas to get the harvest off the fields as quickly as possible. A history of using child and forced labour at harvest time has led to a number of retailers - including H&M, Marks and Spencer and Tesco - to pledge to source their cotton from elsewhere. In response, earlier this year Uzbekistan's Prime Minister Shavkat Mirziyayev issued a decree banning children from working in the cotton fields. Yet many adults, including teachers, cleaners and office workers, are still forced to return to the land during October and November.

Signs of the U.S. Drought Are Underground : Image of the Day - A deep and persistent drought struck vast portions of the continental United States in 2012. Though there has been some relief in the late summer, a pair of satellites operated by NASA shows that the drought lingers in the underground water supplies that are often tapped for drinking water and farming. The maps above combine data from the twin satellites of the Gravity Recovery and Climate Experiment (GRACE) with other satellite and ground-based measurements to model the relative amount of water stored near the surface and underground as of September 17, 2012. The top map shows moisture content in the top 2 centimeters (0.8 inches) of surface soil; the middle map depicts moisture in the “root zone,” or the top meter (39 inches) of soil; and the third map shows groundwater in aquifers. The wetness, or water content, of each layer is compared to the average for mid-September between 1948 and 2009. The darkest red regions represent dry conditions that should occur only 2 percent of the time (about once every 50 years). For a long-term view, download the animation below the third image, which shows the storage of groundwater from August 2002 through August 2012. (The animation is also available on YouTube.)

Portrait Of A Drought: Finding Water Where It Ain’t - I’m on a bus driving across West Texas and all appears well. Miles and miles of white-speckled cotton fields line both sides of the road. Splotches of green grassland are a welcome sign from last year’s devastating drought. Dozens of giant wind turbines churn away far off in the distance. But appearances are deceiving. West Texas is on the front lines of a changing climate, and scarce water is the most obvious symptom. Everyone – ranchers, farmers, water engineers – is talking about it. A cyclone of hotter temperatures, more people, water-sapping cotton farming and a devastating 2011 drought have crippled groundwater supplies. And, though the drought has lifted, West Texans are being forced to change their ways like never before. “It’s quite emotional today,” said Jim Conkwright, general manager of the High Plains Underground Conservation Water District #1, headquartered in Lubbock. Conkwright is referring to parched conditions across much of the vast Ogallala Aquifer, which have forced first-ever limits on how much water farmers can pump from their wells. This year’s limit is 21 inches per acre per year; in 2014, it drops to 18 inches. The City of Lubbock saw one of its key water reservoirs dry up. “Lake Meredith is dead,”

UN Warns Of Food Crisis In 2013 If Extreme Weather Persists… Widespread drought and record-breaking heat waves across the U.S. caused mass soybean and corn crop failures this summer, leading to the worst harvest in more than 50 years.  Similar weather is expected to cut grain harvests in Russia, Ukraine and Kazakhstan – which together supply a quarter of world’s wheat exports – by 27 percent. These production shortages have led to the U.S. consuming more grain than it produces, running grain stocks down to historically low levels. And the U.S. isn’t alone: worldwide food consumption has surpassed production for the sixth time in 11 years, and countries have reduced reserves from an average 107 days of consumption 10 years ago to less than 74 days in recent years. This drop in food reserves leaves “no room for unexpected events next year,” Abdolreza Abbassian, a senior economist with the UN Food and Agriculture Organization, told the Guardian. The low crop yields have caused a spike in food prices around the world, with the UN FAO reporting a Food Price Index rise of 1.4 percent in September, following an increase of 6 percent in July. This price increase hurts the world’s poorest countries, where as much as 60 to 80 percent of household budgets are spent on food. Families in these countries eat less often, buy cheaper, less nutritious and less varied food, and must make cuts in other areas in order to feed themselves. Rising food prices are expected to increase the grain import bill for poor countries to $36.5 billion in 2012-2013 – a 3.7 percent jump from last year’s bill.

UN warns of looming worldwide food crisis in 2013- World grain reserves are so dangerously low that severe weather in the United States or other food-exporting countries could trigger a major hunger crisis next year, the United Nations has warned. Failing harvests in the US, Ukraine and other countries this year have eroded reserves to their lowest level since 1974. The US, which has experienced record heatwaves and droughts in 2012, now holds in reserve a historically low 6.5% of the maize that it expects to consume in the next year, says the UN. "We've not been producing as much as we are consuming. That is why stocks are being run down. Supplies are now very tight across the world and reserves are at a very low level, leaving no room for unexpected events next year," said Abdolreza Abbassian, a senior economist with the UN Food and Agriculture Organisation (FAO). With food consumption exceeding the amount grown for six of the past 11 years, countries have run down reserves from an average of 107 days of consumption 10 years ago to under 74 days recently. Prices of main food crops such as wheat and maize are now close to those that sparked riots in 25 countries in 2008. FAO figures released this week suggest that 870 million people are malnourished and the food crisis is growing in the Middle East and Africa. Wheat production this year is expected to be 5.2% below 2011, with yields of most other crops, except rice, also falling, says the UN.The figures come as one of the world's leading environmentalists issued a warning that the global food supply system could collapse at any point, leaving hundreds of millions more people hungry, sparking widespread riots and bringing down governments. In a shocking new assessment of the prospects of meeting food needs, Lester Brown, president of the Earth policy research centre in Washington, says that the climate is no longer reliable and the demands for food are growing so fast that a breakdown is inevitable, unless urgent action is taken.

Developing nations' food costs soar - High and volatile food prices are pushing the cost of a basic food shop, including products worth £7 in the UK, up to nearly four times the average salary in some developing nations, Save The Children has said. The charity asked its staff in nine countries to buy a selection of food from local markets, including meat, bread, oil, milk, fruit and vegetables. Shopping online at Tesco in the UK, the basket of food would cost £7, the charity said. But in South Sudan, the basket cost nearly four times the average salary, and was the equivalent of paying £1,838 for the food in this country. In Somaliland, it cost twice the local average weekly salary, the equivalent of £1,034 in the UK. In India the basket cost half of the average weekly salary, equivalent to £270, while in Mozambique the equivalent of £490 pounds, the Ivory Coast £200, Egypt it was £167, Bangladesh £161 and Spain £20.

Can Agricultural Productivity Keep Growing? - As the world population continues to climb toward a projected population of 9 billion or so by mid-century, can agricultural productivity keep up? Keith Fuglie and Sun Ling Wang offer some thoughts in "New Evidence Points to Robust But Uneven Productivity Growth in Global Agriculture," which appears in the September issue of Amber Waves, published by the Economic Research Service at the U.S. Department of Agriculture.  Food prices have been rising for the last decade or so. Fuglie and Wang offer a figure that offers some perspective. The population data is from the U.N, showing the rise in world population from about 1.7 billion in 1900 to almost 7 billion in 2010. The food price data is a a weighted average of 18 crop and livestock prices, where the prices are weighted by the share of agricultural trade for each product. Despite the sharp rise in demand for agricultural products from population growth and higher incomes, the rise in productivity of the farming sector has been sufficient so that the price of farm products fell by 1% per year from 1900 to 2010 (as shown by the dashed line).

Everyone Eats There - Something like 50 industrial trucks were filled to the top with carrots, all ready for processing. Bolthouse, along with another large producer, supplies an estimated 85 percent of the carrots eaten by Americans. There are many ways to put this in perspective, and they’re all pretty mind-blowing: Bolthouse processes six million pounds of carrots a day. If you took its yield from one week and stacked each carrot from end to end, you could circle the earth. If you took all the carrots the company grows in a year, they would double the weight of the Empire State Building. Bolthouse is just one of the many massive operations of California’s expansive Central Valley, which is really two valleys: the San Joaquin to the south and Sacramento to the north. All told, the Central Valley is about 450 miles long, from Bakersfield up to Redding, and is 60 miles at its widest, between the Sierra Nevada to the east and the Coast Ranges to the west. It’s larger than nine different states, but size is only one of its defining characteristics: the valley is the world’s largest patch of Class 1 soil, the best there is. The 25-degree (or so) temperature swing from day to night is an ideal growing range for plants. The sun shines nearly 300 days a year. The eastern half of the valley (and the western, to some extent) uses ice melt from the Sierra as its water source, which means it doesn’t have the same drought and flood problems as the Midwest. The winters are cool, which offers a whole different growing season for plants that cannot take the summer heat. There’s no snow.

California Copper Thieves Have Dire Consequences For Farmers: California farmers are facing a calamity. Petty metal thefts, which law enforcement officials believe are driven by Central California's high rate of methamphetamine addiction, are creating damages 10 times higher than the value of the metal crooks rip out to recycle. In the nation's No. 1 agriculture county, thieves are on track this year to steal more than $1 million worth of metal they'll sell for pennies on the dollar. The theft of pump wiring, irrigation pipes, equipment bearings and even tractor weights account for 85 percent of Fresno County's rural crime, the district attorney said. "That's just in metal loss," said Sgt. Mike Chapman of the Fresno County Sheriff's Office Agriculture Task Force. "That's not what it's going to cost to replace or repair the equipment, which can be 10 times more." That's what makes metal thefts worse for farmers than thefts of crops or, five years ago when prices skyrocketed, diesel fuel.

Scientists: New GMO wheat may 'silence' vital human genes (Includes interview): Australian scientists are expressing grave concerns over a new type of genetically engineered wheat that may cause major health problems for people that consume it. University of Canterbury Professor Jack Heinemann announced the results of his genetic research into the wheat, a type developed by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO), at a press conference last month. "What we found is that the molecules created in this wheat, intended to silence wheat genes, can match human genes, and through ingestion, these molecules can enter human beings and potentially silence our genes," Heinemann stated. "The findings are absolutely assured. There is no doubt that these matches exist." Flinders University Professor Judy Carman and Safe Food Foundation Director Scott Kinnear concurred with Heinemann's analysis. "If this silences the same gene in us that it silences in the wheat -- well, children who are born with this enzyme not working tend to die by the age of about five," Carman said.  

NGO urges government to facilitate poultry farmers - An NGO urged the government Monday to provide greater financing, research and extension services to small and medium poultry farmers. "The government must also invest more in the rural supply chain -- allowing poor farmers practising more humane and sustainable free-range egg and chicken production to capture a greater share of the market for eggs and meat," said the NGO Humane Society, in its letter to union Agriculture Minister Sharad Pawar on the occasion of World Food Day. The NGO also urged the government to implement stronger environmental and farm animal welfare regulations which would discourage further industrialisation of the farm animal sector, and help reduce the harmful impacts of current animal factories on the environment, animals, and human communities. "It would be pertinent to critically look at the impact of industrial farm animal production on food security and to develop a road map for sustainable farm animal production through cooperatives," said the NGO. According to the NGO, in India, over the past 50 years, egg and chicken meat production has been radically transformed from a largely backyard activity to a massive agro-industry. But around 140 to 200 million egg-laying hens suffer extreme confinement in barren, wire battery cages so restrictive they cannot even spread their wings.

Global Feed Production to Contract in 2013 - Next year for the first time ever, global feed production is expected to contract. Vice President Aidan Connolly of Alltech, an international animal health and nutrition company, presented the prediction to the Food and Agriculture Organization of the United Nations in mid-October. Last year, the Lexington, Ky.-based company's feed production survey showed China surpassed the United States as the world’s largest producer of feed. This year’s survey, which be released in late 2012 or early 2013, covers 130 countries and will show that global feed production grew this year. For 2013, though, Connolly predicts a contraction of 3-5 percent. "FAO’s concern is feeding the 1 billion people who don’t have enough food to eat," Connolly said this week in an interview. "Our offices expect an overall reduction in consumption of food next year, which will have a direct impact on production of feed." A weak global economy is depressing protein consumption. "It’s a function of meat, milk and egg consumption," Connolly said. The continued use of feedstocks and materials for biofuels will also cut into feed production next year. The European Union, United States and Brazil will continue to use a large portion of their feed crops for biofuels, and China and Russia are also considering converting feed into biofuels. The renewable fuel standard in the United States, which mandates that gasoline be blended with ethanol, is an ongoing concern to the feed industry.

US corn ethanol fuels food crisis in developing countries (AlJazeera) Record drought in the US farm belt this summer withered corn fields and parched hopes for a record US corn harvest, but US farmers may not be the ones most severely affected by the disaster. Most have insurance against crop failure. Not so the world's import-dependent developing countries, nor their poorest consumers. They are hurting. This is the third food price spike in the last five years, and this time the finger is being pointed squarely at biofuels. More specifically, the loss of a quarter or more of the projected US corn harvest has prompted urgent calls for reform in that country's corn ethanol programme. Domestically, livestock producers dependent on corn for feed have led demands for change in the US Renewable Fuel Standard (RFS), which mandates that a rising volume of fuel come from renewable sources. Up to now that has been overwhelmingly corn-based ethanol. In November, the US Environmental Protection Agency (EPA) will rule on a request for a waiver of the RFS mandate to reduce pressures on US corn supplies.But US livestock producers aren't the only ones affected by shortages and high prices. The most devastating impact is on the poor in developing countries, who often use more than half their incomes to buy food. It also hurts low-income developing countries dependent on corn imports.

 Biofuels Benefit Billionaires — Biofuels will serve the interests of large industrial groups rather than helping to cut carbon emissions and ward off climate change, according to research to be published in the International Journal of Environment and Health this month. Vieri suggests that, "In 2020 the EU won't be able to keep to its 10% biofuels goal using only European agricultural production, but will have to continue importing the greatest part of raw materials, or biofuels." In this frame, Vieri explains that, "The EU's decision to focus on the first-generation biofuels, raises many doubts." In particular, the approach seems to favour several issues. For instance, it favours production systems that are in competition with traditional agriculture for use of resources and production factors, he says. Additionally, to encourage agro-industrials models, such as those on which the production of first generation biofuels is based, might compromise the possibility of developing models based on multifunctional agriculture and, then, on the production of energy from agriculture waste and by-products rather than from dedicated products. The adoption of first-generation biofuels sometimes leads to exploitation of human and environmental resources of poorer countries, adds Vieri, as they are commonly the source of many of the agricultural raw materials used for production of biofuels. Moreover, agricultural production processes that change land use can lead to zero net benefit in terms of emissions reduction.

EU considers limiting percentage of biofuels made from food that count toward renewable target - The Washington Post: — Europe is considering limiting the amount of food-based biofuels that can count toward its renewable fuel targets while a drought in the U.S. has pushed up food prices worldwide and millions around the world go hungry. As part of an effort to reduce greenhouse gas emissions, the European Union had previously decided that 10 percent of the fuel used for transport in the 27-country bloc must come from renewable sources by 2020.But environmentalists argue that biofuels made from food, like corn and soybeans, may add as much or even more to greenhouse gas emissions as fossil fuels they replace because trees are often felled to grow them. Others have criticized the burning of food while there are still millions who can’t afford to eat. In response, the European Commission, the EU’s executive arm, proposed Wednesday that food-based fuels only be allowed to contribute to half of the 10 percent target. The rest should come from more advanced biofuels that don’t take up valuable farming land — like algae or waste.

September 2012 Tied For The Warmest Ever Recorded -- September was tied for the warmest month ever recorded globally, according to new data from the National Climatic Data Center. The average combined land and ocean surface temperature last month was 1.21 degrees F above the 20th century average — rivaling September of 2005 as the warmest on record. In August, the National Climatic Data Center reported that June through August of 2012 was the warmest ever recorded for global land surface temperatures. When factored with ocean surface temperature, the average global temperature between June and August was the third warmest in recorded history. The summer of 2012 was also the third warmest ever recorded for the U.S. — only .2 degrees F lower than the summer of 1936, during the height of the Dust Bowl. In early September, the climate center reported that January through August of this year was the most extreme for weather ever recorded for the U.S.

NOAA winter outlook: Big uncertainty due to fickle El Nino -  Since the summer, forecasters have called for El Nino to develop this fall, but so far, it has defied such predictions. El Nino’s baffling behavior has left NOAA forecasters scratching their heads and unable to make a solid call about what kind of winter to expect over large parts of the United States. El Nino, the episodic warming of ocean temperatures in the tropical Pacific, is often linked to certain weather patterns over the U.S. Generally, during El Nino winters, it is cool and wet across the southern U.S. and warm and dry across the northern tier. But such signals are much less prominent, if present at all, when El Nino is weak or non-existent (neutral) - the case so far this year. Mike Halpert, deputy director of NOAA’s Climate Prediction Center, said El Nino development “abruptly halted” last month. “This is one of the most challenging outlooks we’ve produced in recent years because El Niño decided not to show up as expected,” Halpert said. NOAA still sees signs a weak El Nino will develop and its outlook, released today is based on that tentative assumption.

Extreme Weather: A Mixed Bag For Dead Zones - This year’s extreme weather events—a warm winter, even warmer summer, and a drought that covered nearly two-thirds of the continental United States—has certainly caused its fair share of damages. But despite the crop failures, water shortages, and heat waves, extreme weather created at least one benefit: smaller dead zones in the Chesapeake Bay and Gulf of Mexico. On a normal year, rain washes pollutants like nitrogen and phosphorous from farms and urban areas into the two bodies of water, fueling algae growth. When this algae dies, it consumes oxygen and creates hypoxic areas, or “dead zones,” which can kill fish and other marine life. Less rain this year meant fewer pollutants making their way into the Chesapeake Bay and Gulf of Mexico. The Chesapeake Bay’s summer dead zone was the smallest since record-keeping began in 1985, and the Gulf of Mexico’s covered one of the smallest areas on record. Which isn’t to say that extreme weather and climatic events decrease the incidence of dead zones overall. In fact, in some cases, extreme weather and climatic events can actually exacerbate dead zones in lakes and oceanic ecosystems.

How to Catch Fish and Save Fisheries - TOP environmental ministers from scores of countries all over the world are meeting this week in Hyderabad, India. Their goal: to reach agreement on how to protect 10 percent of the world’s ocean. Actually, they had set that goal two years ago under the Convention on Biological Diversity. . You might be thinking, here we go again — easy to agree on goals; hard to agree on how to meet them. But it matters. The U.S. Commerce Department just declared major fisheries in New England, Alaska and Mississippi a “disaster.” Another new study found that Australia’s Great Barrier Reef has lost half its coral since 1985. British and French fishermen have clashed as boats from Britain sailed into French waters on the hunt for scallops. But that bell tolls not just for the fishermen — it tolls for us as well. Fish are the primary source of protein for an estimated one billion people around the world. The journal Science recently published the first comprehensive analysis of more than 10,000 fisheries — roughly 80 percent of our global fish catch. The conclusion: fish populations worldwide are swiftly declining. This global analysis paints a stark new picture of a global ocean fished to exhaustion in an increasingly hungry world.

Over Half of All Wetlands on Earth 'Destroyed' in Last 100 Years- Over half of all wetlands in the world have been destroyed in the last 100 years due to residential and industrial development, water waste, over-consumption, and pollution says a new report released by the United Nations Environment Program. According to the report, the "startling figure"—a 50 percent loss of wetlands on earth—signals years of neglect of our world's ecosystems, as industrialization and development have trumped concerns of biodiversity and water scarcity. As a result, coastal wetland losses in many regions have occurred at a rate of 1.6 percent per year. "Water security is widely regarded as one of the key natural resource challenges currently facing the world," the authors of the report state. "Human drivers of ecosystem change, including destructive extractive industries, unsustainable agriculture and poorly managed urban expansion, are posing a threat to global freshwater biodiversity and water security for 80 per cent of the world’s population." The report was compiled through The Economics of Ecosystems and Biodiversity project and presented at this year's UN Convention on Biodiversity.

Scientists have 'limited knowledge' of how climate change causes extinction - A major review into the impact of climate change on plants and animals has found that scientists have almost no idea how it drives various species to extinction. Though some organisms struggle to cope physiologically with rising temperatures – a simple and direct result of climate change – there was scarce evidence this was the main climate-related threat to many species whose numbers were already falling. More often, climate change took its toll on life through more complex and indirect routes, such as reducing the abundance of food, making diseases more rife, and disturbing natural encounters between species, the review concludes. The report warns that scientists have "disturbingly limited knowledge" on the crucial issue, and that many species may become extinct long before their inability to cope physically with warmer conditions becomes a danger. "This is arguably the most important topic in biology and the simple question of what actually causes a population to go extinct through climate change is completely understudied,"

Climate change research gets petascale supercomputer - Scientists studying Earth system processes, including climate change, are now working with one of the largest supercomputers on the planet.  The National Center for Atmospheric Research (NCAR) has begun using a 1.5 petaflop IBM system, called Yellowstone, that is among the top 20 supercomputers in the world, at least until the global rankings are updated next month. For NCAR researchers it is an enormous leap in compute capability -- a roughly 30 times improvement over its existing 77 teraflop supercomputer. Yellowstone is a 1,500 teraflops system capable of 1.5 quadrillion calculations per second.  The NCAR-Wyoming Supercomputing Center in Cheyenne, where this system is housed, says that with Yellowstone, it now has "the world's most powerful supercomputer dedicated to geosciences." Along with climate change, this supercomputer will be used on a number of geoscience research issues, including the study of severe weather, oceanography, air quality, geomagnetic storms, earthquakes and tsunamis, wildfires, subsurface water and energy resources.

Did Global Warming "Stop" Sixteen Years Ago? - An acquaintance of mine who’s very statistically savvy (and quite conservative) posted the following link on Facebook today. Global warming stopped 16 years ago, reveals Met Office report quietly released... and here is the chart to prove itI replied as follows (I’ve replaced a link here with a clickable image): As a statistics guy, you know way better than most how important sample size is. There was a 30-year plateau in the HADCRUT data, mid-40s to mid-70s. But the longer-term trend is obvious and apparent: (This is one just data set, but you can view and compare many others at this link. They’re remarkably similar. Try the rolling-average smoothing to get a less noisy picture.) For me the really big sample relates to arctic ice. We don’t really know when the summer arctic ice cap was last as small as it is now, but we do know that the last time it melted completely was approximately three million years ago. To me, if that’s just sort of happening due to random climate variation, over mere decades, it’s looking like a quite spectacular statistical anomaly.

Ten Charts That Make Clear The Planet Just Keeps Warming - Perhaps you thought that the whole “planet isn’t warming” meme was killed by this summer’s bombshell Koch-funded study. After all, it found ”global warming is real,” “on the high end” and “essentially all” due to carbon pollution.Sadly, denial springs eternal. Long-debunked denier David Rose has an article in the Daily Mail, “Global warming stopped 16 years ago, reveals Met Office report quietly released … and here is the chart to prove it.” The piece is so misleading, even the UK Met Office felt a need to instantly debunk it with a blog post that included this chart.

Sea Level Rising Faster Than Average In Northeastern U.S. | Climate Central: Sea level is rising all over the world thanks to the heat-trapping effect of greenhouse-gas emissions, but according to a new study published in the Journal of Coastal Research, the northeastern U.S. and eastern Canada have seen the ocean rise at an accelerating rate in recent decades. Based on readings at 23 tidal gauges stretching along the entire East Coast, John Boon of the Virginia Institute of Marine Science has determined that the rate of sea level rise began to accelerate in 1987 at points north of Norfolk, Va. Boone concluded that if the acceleration continues at this rate — something that is not certain at this point — Boston will see 27 inches of sea-level rise by 2050, New York will see 20 inches and Norfolk will see 24 inches. By contrast, Charleston, S.C., whose rate of sea level rise is closer to the worldwide average, will see less than 6 inches. (In all locations, the bulk of sea level rise will happen in the second half of the century, as warming temperatures continue to transfer more and more freshwater from the ice sheets in Greenland and Antarctica into the sea).

"Spring snow cover extent reductions in the 2008–2012 period exceeding climate model projections," - Analysis of Northern Hemisphere spring terrestrial snow cover extent (SCE) from the NOAA snow chart Climate Data Record (CDR) for the April to June period (when snow cover is mainly located over the Arctic) has revealed statistically significant reductions in May and June SCE. Successive records for the lowest June SCE have been set each year for Eurasia since 2008, and in 3 of the past 5 years for North America. The rate of loss of June snow cover extent between 1979 and 2011 (−17.8% decade−1) is greater than the loss of September sea ice extent (−10.6% decade−1) over the same period. Analysis of Coupled Model Intercomparison Project Phase 5 (CMIP5) model output shows the marked reductions in June SCE observed since 2005 fall below the zone of model consensus defined by +/−1 standard deviation from the multi-model ensemble mean.

Bill McKibbon on Bill Maher -  Frank Luntz and Ex-Republican Rep Mark Foley try to put forth some sort of logical sounding arguments to McKibben, but look like children when Maher and McKibben put them squarely in their place. Children vs Adults here. Global Warming is a crisis unequaled in human history. A new report by the  Organization DARA says 100 Million deaths could be caused by Global Warming by 2030.

Hot Air from David Brooks on Clean Energy and Global Warming - David Brooks is trying to do his best to help the Romney campaign, but apparently he hasn't been getting the memos. Brooks' column today is a diatribe against measures to promote clean energy. (That would be socialist items like tax credits for retrofitting buildings, solar panels, or fuel efficient cars. The same sorts of policies that were promoted under President Bush, albeit on a smaller scale.) There are a number of things that are not quite right in Brooks' piece, but my favorite is Brooks' assertion: "The biggest blow to green tech has come from the marketplace itself. Fossil fuel technology has advanced more quickly than renewables technology. People used to worry that the world would soon run out of oil, but few worry about that now. Shale gas, meanwhile, has become the current hot, revolutionary fuel of the future.... the oil and gas sector is investing a whopping $490 billion a year in exploration." Oh no, Governor Romney has been running around the country trying to tell people how President Obama's horrible energy policy has blocked drilling for fossil fuels and sent gas prices soaring and now David Brooks is telling us that the great breakthroughs in fossil fuels and massive amounts of drilling has caused energy prices to plummet. Okay, but there's much more fun in this Brooks column. His big gotcha indictment of Obama's clean energy program as a failure is: "The U.S. government wasn’t the only one investing in renewables. Governments around the world were also doing it, and the result has been gigantic oversupply, a green tech bubble. Keith Bradsher of The Times reported earlier this month that China’s biggest solar panel makers are suffering losses of up to $1 for every $3 in sales. Panel prices have fallen by three-fourths since 2008. ... The U.S. share of the global market, meanwhile, has fallen from 7 percent to 3 percent since 2008." Wow, what a disaster! Prices of solar panels have fallen by three quarters in 4 years. Those people in the Obama administration must feel really stupid. They thought their clean energy program would make alternative energy competitive, but look now, prices of solar panels fell by 75 percent in four years.

US Distillate Situation and Arctic Sea Ice - The graph above of distillate stocks from the EIA's This Week in Petroleum has been occasioning some interested comment.  It shows that stocks of distillates (ie diesel and heating oil taken together) are low in the US northeast relative to recent history for this time of year.  I was curious to know if this was explained by dropping consumption of heating oil in the US generally, but there isn't a sharp sign of a drop off in the last year or two: This is an interesting situation in light of the record lows in Arctic sea ice this fall.  Specifically the US northeast is going into the beginning of winter with unusually small stocks of heating oil and yet all that uncovered Arctic ocean is going to give rise to more than the historical amount of atmospheric moisture in northern climates.  That pretty much has to show up in December as a lot of snow somewhere. Presumably, we are hoping that "somewhere" won't be the northeastern US.  Otherwise heating oil prices could spike dramatically.

Rising sea levels threaten US coastline - Aljazeera (video) - The sea level on the east coast of the US is rising five times faster than the global average. The prospect of flooding is a major threat to millions of people who live in the region. Scott Heidler reports from a small community in the state of Delaware, which has found itself on the front line of the problem

Too late to stop global warming by cutting emissions, say experts - Governments and institutions should focus on developing adaption policies to address and mitigate against the negative impact of global warming rather than putting emphasis on carbon trading and capping greenhouse-gas emissions, researchers say. "At present, governments' attempts to limit greenhouse-gas emissions through carbon cap-and-trade schemes and to promote renewable and sustainable energy sources are probably too late to arrest the inevitable trend of global warming," Johannesburg-based Wits University geoscientist Dr Jasper Knight and Dr Stephan Harrison from the University of Exeter in the United Kingdom wrote. The paper argues that much less attention is paid by policymakers to monitor, model and manage the impacts of climate change on the dynamics of Earth surface systems, including glaciers, rivers, mountains and coasts. "This is a critical omission, as Earth surface systems provide water and soil resources, sustain ecosystem services and strongly influence biogeochemical climate feedbacks in ways that are as yet uncertain," they wrote. Knight and Harrison want governments to focus more on adaption policies because future impacts of global warming on land-surface stability and the sediment fluxes associated with soil erosion, river down-cutting and coastal erosion are relevant to sustainability, biodiversity and food security.

Climate engineering to reverse global warming may impact biodiversity: Experts - Can the impact of global warming be lessened by deploying sun-shields in space and by injecting sulphates in the upper atmosphere to reduce the amount of solar energy reaching the earth?  Environmental scientists and other experts are currently grappling with the proposed geoengineering technologies and are studying the impact they could have on biodiversity.  Geoengineering is the deliberate intervention in the earth's climate system to moderate global warming.  The experts believe Sunlight Reflection Methods (SRMs) and Carbon Dioxide Removal (CDR) techniques could reduce the magnitude of climate change but are likely to have unintended impacts on biodiversity with significant risks and uncertainties.  The experts' report on geoengineering in relation to biodiversity is being discussed at the ongoing 11th meeting of Conference of Parties (COP11) to the Convention of Biodiversity (CBD) here.  Over 170 countries are attending the meet, discussing various issues related to biodiversity.

Illegal Scheme Exemplifies Threat of Geoengineering - A California businessman duped an indigenous village into spending $1 million on a geoengineering project that was "a blatant violation of international resolutions"—and that scientists say could exacerbate global warming and ocean acidification. Russ George dumped 100 tons of iron sulphate into the Pacific ocean about 200 nautical miles west of the islands of Haida Gwaii, "one of the world's most celebrated, diverse ecosystems," Martin Lukacs of the Guardian reported Monday. The iron spawned an artificial plankton bloom as large as 10,000 square meters, which Kristina M. Gjerde, a  senior high seas advisor for the International Union for Conservation of Nature, said "appears to be a blatant violation of two international resolutions … and does not appear to even have had the guise of legitimate scientific research." "It is difficult if not impossible to detect and describe important effects that we know might occur months or years later," said John Cullen, an oceanographer at Dalhousie University. "Some possible effects, such as deep-water oxygen depletion and alteration of distant food webs, should rule out ocean manipulation. History is full of examples of ecological manipulations that backfired."

World's biggest geoengineering experiment 'violates' UN rules - A controversial American businessman dumped around 100 tonnes of iron sulphate into the Pacific Ocean as part of a geoengineering scheme off the west coast of Canada in July, a Guardian investigation can reveal. Lawyers, environmentalists and civil society groups are calling it a "blatant violation" of two international moratoria and the news is likely to spark outrage at a United Nations environmental summit taking place in India this week. Satellite images appear to confirm the claim by Californian Russ George that the iron has spawned an artificial plankton bloom as large as 10,000 square kilometres. The intention is for the plankton to absorb carbon dioxide and then sink to the ocean bed – a geoengineering technique known as ocean fertilisation that he hopes will net lucrative carbon credits. George is the former chief executive of Planktos Inc, whose previous failed efforts to conduct large-scale commercial dumps near the Galapagos and Canary Islands led to his vessels being barred from ports by the Spanish and Ecuadorean governments. The US Environmental Protection Agency warned him that flying a US flag for his Galapagos project would violate US laws, and his activities are credited in part to the passing of international moratoria at the United Nations limiting ocean fertilisation experiments Scientists are debating whether iron fertilisation can lock carbon into the deep ocean over the long term, and have raised concerns that it can irreparably harm ocean ecosystems, produce toxic tides and lifeless waters, and worsen ocean acidification and global warming.

Will a Fishy Geoengineering Experiment Raise the Stakes of Global Environmental Law?  -On Monday, the Guardian reported that “the world’s largest geoengineering experiment” to date took place in July when entrepreneur Russ George, former president of the defunct “ocean seeding” company Planktos Corp., dumped 100 tons of iron in international waters near the Haida Gwaii islands of British Columbia. The Haida First Nations community of Old Massett backed him with $2.5 million in the hopes of saving the area’s floundering fishing industry. Facts are still emerging, and the Canadian government is investigating the project. But much about the affair smells fishy. It probably won’t result in any usable scientific evidence, and it may have violated the incredibly vague international law governing the still-developing field of geoengineering.Still, if George’s iron dump didn’t harm the local environment, why not call it a case of no harm, no foul? Because much more is at stake than the “rogue field experiments” fretted over by the New York Times. Critics of experiments like George’s are not just concerned with the environmental impact of field studies. Many are worried that the mere promise of a technological fix—however speculative—will create a false sense of reassurance and give us more excuses not to clean up our carbon mess. Committed research could have an inertial effect, making deployment of geoengineering technology more likely even if those who might be most affected by it haven’t consented to—or been properly made aware of—the risk.

California’s Doomed-to-Fail Experiment in Carbon Regulation - The New York Times has a piece this morning on California’s new law to regulate carbon emissions, the corporately named Global Warming Solutions Act.  It is utterly uninformative about what is at stake in this new program and the damage it is likely to cause. There are two huge issues, either one sufficient to sink the entire experiment.  The first is that carbon permits are given away to businesses based on historic emissions.  The second is the gaping loophole of offsets.Giving away permits is very attractive to politicians.  Overnight they are in a position to grant or withhold vast sums of monetary equivalents, and this is sure to induce correspondingly large campaign contributions.  In other words, the logic of carbon giveaways is the same as the logic of our tax laws: they are convoluted and larded with special exemptions because otherwise there would be nothing to sell. But worse, giving away carbon permits creates an unsolvable contradiction for policy.  On the one hand, freebie permits transfer money from consumers to businesses to the extent that the permits are scarce.  Issue fewer permits and prices go up, but costs to producers stay the same because the permits are free.  From an economic point of view it is a lot like the supply restriction enforced by cartels, except that here the government is in charge of squeezing the market.

Poor Market Conditions will See 180 Solar Manufacturers Fail by 2015 - A recent report by GTM Research suggests that due to the oversupply of the solar industry at least 180 solar panel makers will go out of business or be bought out by 2015. Shyam Mehta, one of the analysts who composed the report, said that they expected nearly 60 percent of existing solar suppliers to leave the market by 2014. GTM estimates that on average supply will exceed demand in the solar industry by 35 gigawatts each year for the next three years, with the largest number of casualties coming from the high cost US, European, and Canadian markets. GTM analysed more than 300 panel makers when compiling their report and identified Solarworld,a and Conergy of Germany, Isofoton, and Solaria Energia y Medio Ambiente of Spain as potential buyout targets.

Encouraging Solar Energy to Stand on its Own two Feet - The search for market equilibrium is an elusive quest in the solar energy industry. But the addiction to subsidies, carve-outs and other political favours has done little to improve the success potential for solar. Quite the reverse, by creating the conditions that made possible and induced China to expand its aggressive export strategy of market dominance and deploy its zero sum game of taking market share from regional players the solar industry and its political patrons has effectively slit their own throats. The question is how do we pull the solar energy future out of the ditch and get it back on the road re-positioned to be competitive on its own merits and strengths while changing the counterproductive business model, tax policies, market conditions, regulatory requirements and political meddling that now stand in its way? The solar power industry continues to struggle to find market equilibrium amidst the chaos and volatility it finds itself. The news is regularly full of near death experiences which have unfortunately come true for many solar market participants or fears of loom disaster on the horizon including:

Iraq plans to invest up to $1.6 bln in solar and wind energy (Reuters) - Iraq plans to spend up to $1.6 billion on solar and wind power stations over the next three years to add 400 megawatts to the national grid to help curb daily blackouts, an official from the ministry of electricity said on Monday. Nine years after the U.S.-led invasion that toppled Saddam Hussein, investment is needed in most of Iraq's industries, not least power generation, which produces just 8,800 MW of the 14,000 MW needed. The dilapidated national grid supplies only a few hours of power a day, leaving Iraqis to swelter in the summer months, when temperatures can top 50 degrees Celsius. Invitations have been sent to about 25 leading companies to manufacture and install solar and wind power plants, said Laith al-Mamury, the head of the planning and studies department at the ministry of electricity.

Middle East Pursues 150 Renewable Projects, Saves Oil for Export -  The Middle East and North Africa, home to about half the world’s oil reserves, has more than 150 renewable-energy projects under way, a map from the Abu Dhabi- based Clean Energy Business Council shows. The interactive map, based on Google Inc. technology, plots solar, wind, geothermal and biomass plants in the region, the council’s website shows. It will be updated regularly to track the industry’s progress, the CEBC said today in a statement. “By making this data available to the public, we hope to push further the development of the renewable-energy industry,” said Aaron Bielenberg, chief executive officer of the council. “The previous general lack of awareness made policy makers and capital providers feel the industry was smaller and hence riskier than it actually is.” Countries in the Middle East and North Africa were responsible for 36 percent of global oil production and held 52 percent of proved reserves last year, according to BP Plc data. The region is now developing alternative sources of energy to meet rising domestic demand and save more crude for export.

Why TEPCO Failed to Prevent the Fukushima Disaster - TEPCO, the Japanese utility in charge of the Fukushima Daiichi power plant that melted down last year, admitted on Friday that the disaster could have been averted. So why did it fail to act accordingly? Fear. The utility said it could have done more to prevent the earthquake and tsunami-triggered disaster that became the world’s most severe nuclear accident since the 1986 Chernobyl meltdown. TEPCO said it knew that it had to improve safety procedures at Fukushima before the 9.0-magnitude earthquake sent walls of water slamming into the facility on March 11, 2011. The reasons TEPCO gives for not implementing certain safety procedures at the plant before the disaster include a list of fears of what would happen if they admitted such measures were needed. The report mentions the potential negative political and legal ramifications if the utility had admitted there were problems at the Fukushima plant that needed correcting. “There was concern that if new severe accident measures were implemented, it could spread concern in the siting community that there is a problem with the safety of current plants,” the utility said in a report

Ground under Fukushima Unit 4 sinking, structure on verge of complete collapse (japanese video)

Germany's Merkel defends switching from nuclear to renewable power despite rising costs - German Chancellor Angela Merkel on Tuesday defended her government's decision to phase out nuclear power and switch to renewable energies within a decade, but acknowledged the need to overhaul and speed up the transition plan. Business leaders have criticized the way the switchover has been managed, saying the costs are spiraling and hurting some companies. "We have achieved a lot but we are far from being where we should stand," Merkel told a gathering of the German Employers Association. The country's grid operators this week said a surcharge on households' electricity prices financing the expansion of renewable energies will increase by 47 percent on the year in January. A typical family of four will have to pay about €250 ($324) per year on top of their bill, but many large companies are exempt from the surcharge to safeguard their competitiveness. The surcharge is used to guarantee producers of wind, solar or biomass power a long-term above-market rate for their electricity output, making sure their investments are profitable.

NRC Whistleblowers: Risk of Nuclear Melt-Down In U.S. Is Even HIGHER Than It Was at Fukushima - Numerous American nuclear reactors are built within flood zones: As one example, on the following map (showing U.S. nuclear power plants built within earthquake zones), the the Mississippi and Missouri rivers: Numerous dam failures have occurred within the U.S.: Reactors in Nebraska and elsewhere were flooded by swollen rivers and almost melted down.  See this, this, this and this. The Huntsville Times wrote in an editorial last year: A tornado or a ravaging flood could just as easily be like the tsunami that unleashed the final blow [at Fukushima as an earthquake].An engineer with the NRC says that a reactor meltdown is an “absolute certainty” if a dam upstream of a nuclear plant fails … and that such a scenario is hundreds of times more likely than the tsunami that hit Fukushima : An engineer with the Nuclear Regulatory Commission (NRC) … Richard Perkins, an NRC reliability and risk engineer, was the lead author on a July 2011 NRC report detailing flood preparedness. He said the NRC blocked information from the public regarding the potential for upstream dam failures to damage nuclear sites.

Fracking Your Future: Shale Gas Industry Targets College Campuses, K-12 Schools -In Pennsylvania - a state that sits in the heart of the Marcellus Shale basin - the concept of "frackademia" and "frackademics" has taken on an entirely new meaning. On Sept. 27, the PA House of Representatives - in a 136-62 vote - passed a bill that allows hydraulic fracturing, or "fracking" to take place on the campuses of public universities. Its Senate copycat version passed in June in a 46-3 vote and Republican Gov. Tom Corbett signed it into law as Act 147 on Oct. 8. The bill is colloquially referred to as the Indigenous Mineral Resources Development Act. It was sponsored by Republican Sen. Don White, one of the state's top recipients of oil and gas industry funding between 2000-April 2012, pulling in $94,150 during that time frame, according to a recent report published by Common Cause PA and Conservation Voters of Pennsylvania. Corbett has taken over $1.8 million from the oil and gas industry since his time serving as the state's Attorney General in 2004.  The Corbett Administration has made higher education budget cuts totaling over $460 million in the past two consecutive PA state budgets. The oil and gas industry has offered fracking as a new fundraising stream at universities starved for cash and looking to fill that massive cash void, as explained by The Philadelphia Inquirer:

FAQs: Hydro-fracking -- What is it? Hydraulic fracturing, or "hydro-fracking," is a form of natural gas extraction in which a pressurized mix of water and other substances is injected into shale rock formations or coal beds to release trapped natural gas. A fluid mixture of water and chemicals is injected under high pressure deep underground, creating or widening fissures in the rock. Then, sand or another solid, often ceramic beads, is pumped in to keep the fissures propped open so that methane gas can escape from pores and fractures in the rock. The technique can also be used to extract oil and geothermal energy. How deep are the wells? Hydro-fracking wells can be drilled vertically, vertically and horizontally or directionally, i.e. on a slant. According to the U.S. Environmental Protection Agency (EPA), wells can be anywhere from 300 metres to 2.5 kilometres deep and extend for hundreds of metres horizontally from the well site. How much water is used? The EPA estimates one well in a coal bed can require anywhere from 200,000 litres to more than 1 million litres while a horizontal well in a shale formation can use between 7.5 million to 19 million litres of water

Factors that Could Threaten the Oil & Gas Industry in the Future - This year, the oil & gas industry see environmental accountability as a top priority, underlined by the intersection between public concern and industry efforts among the U.S. shale boom. This year's annual report conducted by BDO USA, LLP, a leading accounting and consulting organization, found a striking increase in environmentally-focused risks cited by the industry's top 100 players. One of the hottest topics, of course, surrounds concerns of hydraulic fracturing practices or “fracking.” Many companies are facing the challenge of developing technologies that reduce water usage and earthquake risks. “Fracking is under a microscope this year—more so than ever in the past,” says Charles Dewhurst, partner and leader of the Natural Resources Practice at BDO USA, LLP. “That continuing trend is probably a good thing. The industry is taking those concerns seriously, so it can react to them.” Even with the low prices of natural gas, the industry remains bullish. Reserves found in shale formations in areas that weren't traditionally big oil and gas producing areas (particularly in the Northeast), are now oversupplied with extractable gas near major population centers.

The Myth of Affordable Energy — Interview with Ed Dolan - Yves here. Some readers may be concerned that economist Ed Dolan has recently published a book on the “libertarian perspective” on environmentalism. I’m frankly a bit confused, since he very clearly advocates what he calls “full cost pricing” for energy, which means pricing in externalities. You’ll see below that he has an expansive view of what should be included. But that sort of pricing could be achieved only via government intervention, such as fees or fines imposed on producers, or end user taxes (he admittedly has more conventional views when the conversation moves away from energy to macroeconomics). Cross posted from We were fortunate enough to speak with the well known economist Ed Dolan on various energy and economic issues. In the interview Ed talks about the following:

• Why cheap energy is not vital to economic growth
• Why high oil prices aren’t necessarily a bad thing
• Why the U.S. Oil and gas boom is hurting Russia’s global influence
• Why Obama’s desire to cut oil industry tax breaks could be a great idea
• Why energy policy needs to be completely reformed
• Why Russia’s Arctic Exploration could cause the worst environmental disaster to date
• Why renewable energy investors should be very worried about the Natural gas boom
• Why the EU was flawed from the start
• Why subsidies for renewables are just plain wrong.
• Why we should give QE3 a chance
• Why abundant natural resources can bring a curse of riches

Why do we Need Government to Tell Business to be Energy Efficient? -  In response to my interview "The Myth of Affordable Energy," my friend and fellow blogger Gary Alexander asks a question that is so good that I would like to take a separate post to answer it. Gary asks: Ed, I need your clarification on a comment you made in the opening section, in which you said that the increase in energy efficiency in the U.S. is "pretty remarkable, considering that we haven’t really had a policy environment that is supportive of efficiency. Think what we could do if we did."  My question: Isn't efficiency (getting more done with the same or less) a constant goal of most businesses? Why would these businesses need an official federal government policy to direct this efficiency from afar? Nearly every technology has increased efficiency and/or lowered cost over time, in the natural course of conducting business in a cost-conscious manner. Or am I missing something? Excellent question. The goal of businesses is to make a profit. Part of their strategy for doing that is to adjust their input mix to minimize the total cost of producing their product. I that sense, yes, they are constantly pursuing the goal of efficiency and the government does not need to nudge them to do so. However, businesses have no inherent goal to economize on any one input. For example, if market prices signal that plastic is cheap and steel is expensive, an automaker will substitute plastic bumpers, door handles, and so on for steel. Vice-versa if plastic is expensive. An automaker has no inherent goal of reducing its use of steel, just reducing costs.

Coast Guard: Gulf oil slick comes from device used in 2010 spill: An undersea camera confirms that an oil slick discovered in the Gulf of Mexico came from a 100-ton device on the seafloor that BP had used several weeks after the 2010 oil spill in a failed attempt to cap its runaway Macondo well, the U.S. Coast Guard said Thursday. The oil is not coming from the Macondo itself, which was sealed in a relief well operation months after the 2010 blowout. Less than 100 gallons of oil per day is leaking from the containment device, the Coast Guard said. The oil will continue to dribble out slowly for the time being. Officials are trying to figure out the best course forward. BP said the Coast Guard has determined the sheen is not feasible to recover and does not pose a risk to the shoreline, but the Coast Guard said it is still considering what should be done.

TransCanada temporarily shuts Keystone pipeline: — TransCanada Corp. has temporarily shut down its existing 2,100-mile Keystone pipeline after tests showed possible safety issues, a federal agency said Thursday. Jeannie Layson, spokeswoman for the Pipeline and Hazardous Materials Safety Administration, which oversees pipelines in the U.S., said no leaks were detected on the line, which moves on average about 500,000 barrels of crude a day from Alberta, Canada, down through several states to facilities Illinois and Oklahoma. "TransCanada reported to the Pipeline and Hazardous Materials Safety Administration that they have shut down their existing Keystone system pipeline to make repairs in areas where required integrity tests identified possible safety issues," Layson said in an email. She said the possible problems were located on the stretch of pipeline that extends between Missouri and Illinois.

Potential for a Heating Oil Crisis - The Energy Information Administration (EIA) last week reported on a potential crisis for heating oil customers in the Northeast part of the United States. In This Week in Petroleum (TWIP), the EIA reported: For the week ending October 5, distillate inventories in the U.S. Northeast (PADDs 1A and 1B) were 28.3 million barrels, about 21.5 million barrels (43 percent) below their five-year average level (Figure 1). Distillate inventories have historically been used to meet normal winter heating demand but are also an important source of supply when demand surges as a result of unexpected or extreme cold spells. The low distillate inventories could contribute to heating oil price volatility this winter. In addition, outages at several major refineries, notably Petroleos de Venezuela’s Amuay Refinery, Shell Oil’s Pernis Refinery in the Netherlands, and Irving Oil’s Saint John Refinery in Canada, have added to the fundamental market pressures in the Atlantic Basin. The figure below indicates a potential for very high heating oil prices if this winter is particularly cold

Oil and gas industry uses deceptive energy independence message to push U.S. exports - With gasoline scaling $4 a gallon recently, plans announced last week by international oil giant BP to export U.S.-produced crude oil ought to have Americans howling. For such a plan to be good energy policy--rather than merely profitable for the oil industry--the United States would have to be producing more than enough oil to meet its own needs. But the country produces nowhere near that amount. Nevertheless, the industry's deceptive campaign to make the public and policymakers believe that the United States is on the verge of energy independence seems to be succeeding--a push that is really just a smokescreen for selling the country's oil and natural gas to the highest bidder.  So far this year the United States has produced 6.2 million barrels per day (mbpd) of crude oil plus lease condensate (which is the definition of oil) versus daily net consumption of 13.6 mbpd of finished petroleum products. The country is a long way from being free of oil imports, and as I'll discuss below, there is no realistic prospect that we'll ever produce enough oil domestically to satisfy our needs at the current level of consumption.

Delta Airlines Buys its Own Refinery to Cut Fuel Costs - In a move from somewhere out in left field, Delta Air Lines decided in late April to tackle energy risk management head-on by taking a rather unorthodox step of managing their fuel cost exposure by…purchasing a refinery. $150 million later (after a $30 million subsidy from the Commonwealth of Pennsylvania), Delta bought the Trainer refinery just south of Philadelphia, which produces 185,000 barrels a day. In addition to the purchase, they are now retrofitting the refinery (to the tune of $100 million) to maximize its jet fuel output. Although a seemingly peculiar purchase, jet fuel accounts for 37% of the company’s costs – ringing in at a whopping $12 billion for 2011 (up a third on the previous year) – making this less perplexing than it may first appear. The refinery is tweaking jet fuel to become 32% of its output, up from the usual 14%, while gasoline output will drop from 52% to 43%. Further, the company has entered into a three-year deal with BP to swap out the volumes of these other products for jet fuel. The two deals combined mean that Delta will cover 80% of its jet fuel needs: out-of-the-box risk management, but it may prove to be astute. On the flipside, it could prove to be a very costly mistake should it go wrong.

US to sell Arctic land leases in November for oil, gas production (Reuters) - The Interior Department said Thursday it plans to offer up 4.5 million acres of Arctic land for oil and gas production next month, as the Obama administration's energy policies face more scrutiny ahead of the November elections. The Nov. 7 lease sale, a day after the presidential election, will include 400 tracts in the National Petroleum Reserve-Alaska, an area set aside by the government for oil and gas development. U.S. President Barack Obama is locked in a tight election battle against Republican challenger, Mitt Romney, who has accused Obama of stifling domestic oil output.

Letting sleeping oil deposits lie - Much public land exploration is on hold.  More than half the federally owned land approved for oil exploration and leased to energy firms for that purpose is going unexploited – because the companies holding the rights say it would be economically infeasible. Continued... 1234See Full Story 175 million barrels of oil lie under federally owned land. 70 percent of that land has been approved for exploration and drilling. But 56 percent of it goes untapped. Offshore exploration is even more modest, with 72 percent of the area leased to energy interests not producing oil. The Congressional Budget Office says the leaseholders are waiting until oil production becomes more profitable. In the meantime, the government makes a profit on the leases whether or not the energy companies act. Today’s slideshow reveals how much – and more.

US Oil Rig Boom Leveling Off? - I just thought to check this following the Presidential debate last night.  The above shows the weekly Baker Hughes count of oil rigs drilling in the United States.  This number has been in a near-vertical climb ever since the beginning of the economic recovery in 2009.  However, in the last few months there are signs of it leveling off - whether temporarily or permanently I don't know.  It has certainly been an incredible boom.  The sevenfold increase in rigs since the mid 2000s has so far produced about a 20% increase in oil production: There also seems to be some sign of leveling off in that series.  It will be interesting to see if the production continues to rise if we hold drilling at the current very high level.

U.S. Oil Boom Falls Short of Pump - Surging U.S. oil production is driving down domestic benchmark crude prices and delivering a windfall to some refiners and their investors. But the oil boom is providing little relief for consumers at the pump. U.S. crude production is expected to rise 12% this year and 8% in 2013, when it will hit the highest level since 1993, according to government figures. The price of West Texas crude, the U.S. benchmark, has fallen 7% this year, held down by rising supplies from new drilling methods. Yet gasoline prices currently average nearly $4 per gallon nationwide. Rising U.S. crude production may seem like an attractive antidote, but it is proving ineffective on its own at a time when the world's appetite for energy remains voracious and Middle East tension is a reminder that supplies could be disrupted. "Even the significant increase in U.S. production is a small part of the world oil market," said Severin Borenstein, co-director of the Energy Institute. Refiners that process the cheaper crude are selling gasoline and diesel into a global market driven more by higher international prices for crude, which are up around 7% in 2012.

ASPO-USA Urges Energy Department to Confront Risks of Oil Crisis - Representatives of the Association for the Study of Peak Oil & Gas USA (ASPO-USA) are urging the U.S. Department of Energy (DOE)—including its data and analysis branch, the Energy Information Administration (EIA)—to fully recognize the risks facing U.S. oil supply and the threat of a near-term oil crisis.  ASPO-USA is calling for DOE and EIA to critically examine these risks and properly inform decision-makers and the public about the consequences for the economy, national security, and the environment. In a letter to Energy Secretary Steven Chu and EIA Administrator Adam Sieminski, ASPO-USA said that DOE and EIA must maintain an independent, unbiased, and prudent perspective amidst a barrage of industry and media hype about a new era of oil abundance.  The letter points to overly optimistic forecasts from industry and media sources for increased oil production in North America and cites evidence that such claims are overstated and based on misrepresentation of the data.  “They confuse oil in the ground with actual supply delivered to the market, they overstate the potential of technology, and understate the increasing cost and difficulty of extracting new oil,” said Jim Baldauf, ASPO-USA president and co-founder.

Update on Iran sanctions -- The boycott of Iran has been more successful than I had anticipated, with Iranian oil production and exports down significantly from a year ago. And even stronger additional sanctions may soon be agreed upon. The measures appear to be having a significant effect on the Iranian economy, with the IMF reporting an inflation rate of 20-25% and some observers claiming the true figure could be as high as 70%. There are some signs of growing political opposition to the regime. The goal of the sanctions is to try to pressure Iran to abandon its nuclear enrichment program. There was at least one indicator last week of some progress toward that goal, as statements from Foreign Ministry spokesman Ramin Mehmanparast seemed to signal a modest move forward in negotiations. Of course, lower oil production from Iran has not been without cost for the oil-consuming countries. The combined effects of the loss in Iranian production and modest gains elsewhere have left total world oil production essentially flat since the start of the year.

EU Ministers Tighten Sanctions on Iran -- Yesterday in Luxembourg, EU foreign ministers approved the improvements to the sanctions which close existing loopholes, and will focus on the finance, energy, and transport industries. They also took action to freeze the assets of 34 Iranian corporations in an attempt to restrict the ability of Ahmadinejad’s government to raise funds for further nuclear research and development. The UK Foreign Secretary William Hague said of the new sanctions that “the EU’s message today is clear: Iran should not underestimate our resolve. We will continue to do all we can to increase the peaceful pressure on Iran to change course and to return to talks ready to reach a negotiated solution by addressing the world’s concerns.” German Foreign Minister Guido Westerwelle stated that “we want a political and diplomatic solution. Sanctions are beginning to work. That sanctions are beginning to work shows that a political and diplomatic solution is possible. So far, we haven’t seen sufficient readiness for substantial talks on the atomic program.”

Humanitarian Aid Blocked As UN Imposes New Iran Sanctions -Food and medical exports to Iran are being blocked from that country even though they are exempt from new sanctions instituted Monday by the European Union.New EU sanctions, including an embargo on Iranian natural gas, are a response to Iran's refusal to address concerns about its nuclear programme, says British Foreign Secretary William Hague.The new sanctions, ostensibly in the financial, trade, energy and transport sectors, are "the strongest, most comprehensive sanctions ever put in place on a country," National Iranian American Council Policy Director Jamil Abdi said, according to a release from the NIAC.

Iranians Planning to Create Environmental Catastrophe in Hormuz Strait -- Iran could be planning to create a vast oil spill in the Strait of Hormuz, according to a top secret report obtained by Western intelligence officials. The aim of the operation is to both temporarily block the vital shipping channel and to force a suspension of Western sanctions. If there is a man who brings together all the fears of the West, it is General Mohammed Ali Jafari, commander of the Iranian Revolutionary Guards. Hardened by torture in the prisons of the former Shah, Jafari was among the students who stormed the US Embassy in Tehran on Nov. 4, 1979. He later fought in the Iran-Iraq War, and in 2007 Jafari, who has a degree in architecture, assumed command of the Revolutionary Guards, also known as the Pasdaran. The group, founded by revolutionary leader Ayatollah Ruhollah Khamenei to defend the Islamic regime, has since developed into a state within the state. Today the Pasdaran control several companies and are likely a more effective military force than the regular army. Of the 21 ministers in the Iranian cabinet, 13 have completed Pasdaran training. Within this group of hardliners, Jafari, 55, is seen being particularly unyielding. In 2009, for example, he declared that Iran would fire missiles at Israel's nuclear research center in Dimona if the Israelis attacked Iran's nuclear facilities -- knowing full well that such an attack would result in several thousand deaths on both sides.

Early Warning: Iranian Latest - The above shows the available public data on Iranian oil production as of this moment.  The slide continues.  You may wonder if there's a little sign of stabilization in the OPEC secondary numbers in the last month, but the previous month also showed that sign but then it got revised away.  So I think for now we should hold judgement on that.  Meanwhile the EU continues to tighten sanctionsYesterday in Luxembourg, EU foreign ministers approved the improvements to the sanctions which close existing loopholes, and will focus on the finance, energy, and transport industries. They also took action to freeze the assets of 34 Iranian corporations in an attempt to restrict the ability of Ahmadinejad’s government to raise funds for further nuclear research and development.  Besides some rather amateurish terrorist attacks. it's beginning to appear that Iran's main response is cyber-attacks.  This includes a very large internal worm attack on Saudi Aramco: (IPS) - Last weekend’s disclosure that Iranian cyber warriors had disabled some 30,000 computers owned by the Saudi oil giant Aramco is attracting considerable attention here, particularly in light of a warning last week by Pentagon chief Leon Panetta that Washington could face a “cyber-Pearl Harbor”.and distributed denial-of-service attacks on US banks: Cyber attacks on U.S. banks continued this week from suspected hackers believed to be supported by the Iranian government, according to U.S. officials. There was little damage and no accounts were compromised, the officials said. But the banks were still not able to fully stop the attacks even though it appeared they were pre-announced by at least one group. So far, these attacks have not had a major impact on bank operations and Saudi oil production was not affected in September.  However, I think it's a somewhat dangerous development.  The vulnerability of the US economy to cyber-attacks is still a lot greater than has yet been capitalized on, in my opinion.  Since we are placing the Iranians under very severe pressure with sanctions, they have the motivation to learn quickly and cyberattacks are very cheap.  So there is some risk of them getting good enough to inflict real pain.  I was always concerned that Stuxnet would be a case of us throwing the first stone while living in a glass house.

Popping the rare earths bubble -  From the US housing to the global uranium markets, bubbles seem to be simply inevitable (and generally can not be prevented by regulation or other government interference). In fact bubbles occur even in simulated (experimental) markets (see this paper). Most major asset classes experience a bubble periodically. The tech bubble of the late 90s for example has been one of the better known ones in the equity markets.Very few have been as spectacular as the one in the so-called rare earth metals that are used to manufacture all sorts of equipment, including LEDs, smartphones, and motors. The rise in prices was triggered by China's policy of limiting exports, creating a perceived shortage. From there hoarding and speculation took hold. And as often happens in commodity markets, the bubble burst almost as violently as it inflated. Reuters - As prices soared, new mining projects made it on to the front burner, and some of these are likely to come onstream before the end of the year, including an expansion to Molycorp’s (MCP.N) California operations. China remains by far the world’s largest producer of these materials, but as new supplies elsewhere hit the market while demand remains little changed, China itself also is changing its tune and has announced a higher export quota.  To put the magnitude of this bubble in perspective, the chart below compares the price action of 3 rare earths with gold and silver, which have also appreciated materially over over the same period.

China’s September electricity production weak - China’s State Electricity Regulatory Commission has published September data for electricity production.. Total electricity output for September was 394.488 billion kwh, which is a 2.2% increase compared to the same month a year ago according to our own calculation, down from +2.7% yoy in August. Growth of electricity output remained at low level in September without any noticeable pick-up seen throughout the third quarter. The chart below shows the total electrical power output growth as GDP growth. The data suggest that economic activity has remained relatively weak throughout the third quarter:

China Power Output Falls to Four-Month Low Amid Slowing Economy - China’s power output in September fell to the lowest level in four months as economic growth slowed for a seventh quarter. Electricity production was 391 billion kilowatt-hours, the least since 390 billion in May, data from the National Bureau of Statistics showed today in Beijing. The figure was down 11 percent from August and up 1.5 percent from a year ago, according to the data. The world’s second-biggest economy expanded 7.4 percent from a year earlier in the three months ended September, the statistics bureau also said today.

Chinese Electricity Consumption And Production Both Point To Sub 7% GDP Reality - Whereas yesterday we learned that Chinese September electricity consumption had dropped to a multi-year low of 2.9% Y/Y (ignoring the Chinese New year data aberration of -7.5% from January which should be a blended reading with the February surge of +22.9%), down from 3.6% in August, and the lowest since August 2010, today in turn we find that the flip side to the this number, electricity production, was an even bleaker +1.5%, and the lowest in three months. And while it has been rumored that China has an incentive to manipulate the former down, this has been offset by manipulating the latter - output - up. Which is why whereas the consumption data implies a modestly weaker GDP, which declined and missed the official target (if ended precisely as the goalseek-o-tron expected), it is the electricity production data that is the outlier, and which indicates that in reality the GDP is now trendlining well below the official 7%.

Boss Rail -- Beijing South Station is shaped like a flying saucer, its silvery vaulted ceiling illuminated by skylights. It contains as much steel as the Empire State Building and can handle two hundred and forty million people a year, thirty per cent more than New York’s Penn Station, the busiest stop in America. When Beijing South opened, in 2008, it was the largest station in Asia; then Shanghai stole the crown. In all, some three hundred new stations have been built or revitalized by China’s Railway Ministry, which has nearly as many employees as the civilian workforce of the United States government. That autumn, to help ward off the global recession, Chinese leaders more than doubled spending on high-speed rail and upped the target to ten thousand miles of track by 2020, the equivalent of building America’s first transcontinental route five times over. China prepared to export its railway technology to Iran, Venezuela, and Turkey. It charted a freight line through the mountains of Colombia that would challenge the Panama Canal, and it signed on to build the “pilgrim express,” carrying the faithful between Medina and Mecca. In January, 2011, President Obama cited China’s railway boom in his State of the Union address as evidence that “our infrastructure used to be the best, but our lead has slipped.” The next month, the governor of Florida, Rick Scott, blocked construction of America’s first high-speed train, by rejecting federal funds. Amtrak had unveiled a plan to reach speeds comparable to China’s by 2040.

China evictions increase, leading to more unrest - China says it has worked hard to overhaul its judicial system in ways that better protect human rights, but one of the country's most widespread abuses is increasing and is a leading cause of unrest. The forced eviction of residents from their homes and farmland has quickened over the past three years, human rights group Amnesty International said in a report issued Thursday. Evictions make up the leading cause of protests here, especially in the countryside. Homeowners have been risking violence and jail to prevent their ouster and protest the often inadequate compensation offered by developers and officials. "Millions of people" have been evicted "without appropriate legal protection and safeguards," and often with violence, Amnesty said.

The voices of China’s workers - This video is a presentation by Leslie T. Chang via TEDTalks, so granted it’s full of TEDitude,* but it’s definitely worth a listen, especially in the context of “supply chain justice,” the issue raised by OUR Walmart. Here is the section at the beginning that I took notice of. [CHANG:] … All of these speakers, by the way, are young women 18 or 19 years old. So I spent two years getting to know assembly line workers like these in the South China factory city called Dong Wan [phonetic]. Certain subjects came up over and over: How much money they made; what kind of husband they hoped to marry; whether they should jump to another factory, or stay where they were. Other subjects came up almost never, including living conditions that to me looked close to prison life. Ten or fifteen workers in one room, 50 people sharing a single bathroom, days and nights ruled by the factory clock. Everyone they knew lived in similar circumstances, and it was still better than the dormitories and homes of rural China.

Guys and Sex Dolls – Scenes from the Guanzghou Sexpo - Danwei - The Sexpo’s remit is to “Promote sexual science, advocate sexual civilization, set up sexual ethics, spread sex education and improve sexual health” (以弘扬性科学、倡导性文明、普及性教育、树立性道德、促进性健康为宗旨) and features a forum of experts each year tackling a different theme. This year, it was sperm – or rather, lack of it.  China’s sperm difficulties are perhaps unique. For example: Last year, Huazhong University of Science and Technology medical student Zheng Gang (35) walked into a university-affiliated sperm bank and opened an account. What happened afterwards is now the subject of a 4 million yuan lawsuit in the Wuhan city. Zheng passed a medical check-up and made four donations; the legal limit is five. But after making the last donation in October, Zheng Gang collapsed and died. The actual cause of his death is in dispute but for Zheng’s family, it was clearly the act of donation; the university, meanwhile, is evoking unspecified “foreign forces” in its defense. Further murky details can be found in this Global Times report. Bizarre as it is, the case sheds some rare light on one of the odder superstitions in China, the idea that masturbation can be a life-threatening habit for the unwary male. The theory is a very old one – some Daoist beliefs dictates that all sex should be geared towards gathering energy from heterosexual congress; solo sex is therefore a waste of good qi – muddled in with some good old-fashioned, down-on-sex Communist moralizing (of which more later). But the belief that onanism can be harmful to a man’s health has certainly taken a hold.

Vital Signs Chart: Easing Inflation in China - Inflation is running lower in China as economic growth cools. Consumer prices in September climbed just 1.9% from a year earlier, down from January’s 4.5% pace. Continued low inflation—the consumer-price index has been at 3% or below since May—gives policy makers room to boost the world’s second-largest economy without fear of setting off surges in prices.

China Exports Rise, Hinting at a Glimmer of a Revival -China’s exports to the United States and Southeast Asia rose last month while the country’s money supply expanded faster than expected, Chinese government agencies said on Saturday, in the first signs that the Chinese economy might be starting to bottom out. But strengthening exports to the United States — up 5.5 percent in September compared with the same month a year ago — could also increase trade frictions at a politically touchy time for both countries. Mitt Romney, the Republican presidential nominee, and President Obama have competed this autumn to present themselves as more willing to confront China on trade issues. China’s own Communist Party leadership has been wary of appearing too conciliatory toward the United States ahead of their Party Congress, which starts two days after the presidential election in the United States on Nov. 6 and is expected to produce a new slate of members of the ruling Standing Committee of the Politburo. After months of gloom, Chinese exporters are starting to voice hope about demand in the United States. “We are beginning to see some improvement in the U.S. market — the second half of this year is looking better than the first half, with our U.S. orders up by roughly 8 to 10 percent,”

China's trade surplus up on iPhones and Christmas presents - China's trade surplus increased in September - the first positive surprise in months. It seems those new iPhones as well as Christmas-related products were responsible for the increase. Credit Suisse: - Wireless handset and components saw an acceleration in its growth pace to 20.2% YoY, up from 8.4% in August. We think this can be attributed to the release of a new generation of smartphones and suspect the momentum may sustain through the coming few months as distributors worldwide stock up. The growth of Christmas-related items, such as toys, clothing and shoes, all picked up on a YoY basis. The fact that there could be over-capacity in the manufacturing lines for clothing and toys could have allowed the exporters to make rush shipments.

The East grows only because the West consumes. Bitch please. - An abiding belief in the global economy is that the East is one gigantic Foxconn-shaped, steroid-boosted manufacturing facility, pumping out iPhones, shoes, clothing, refrigerators, air-conditioners, and defective toys that its own people could never afford. In this narrative, the only reason that measured Eastern GDP shows any kind of life is because the Western consumer steps into the breach to buy up these manufactures. The confirming natural experiment would then be what was sure to occur post-2008, when Western imports collapsed. Here is what actually happened: (Source: IMF World Economic Outlook, April 2012) China became the single largest contributor to world economic growth, adding to the global economy 3 times what the US did. Since this chart shows GDP at market exchange rates, those who have long argued China’s RMB is undervalued must be standing up now to say that China’s real contribution is likely even larger. Sure, China undertook a massive fiscal expansion beginning November 2008. But, hey, everyone fiscal-expanded. In number two position among the contributors to global growth is Japan. Yes, “Lost Decades” Japan helped stabilize the global economy more than did the US. Among the other top 10 contributors are the other BRIC economies, and Indonesia. How is East Asian or emerging economy growth merely derivative when they had nothing among Western economies from which to derive?

China central bank sees room for easing: report --China has the policy room to support economic growth by adopting both fiscal and monetary measures, the People's Bank of China Vice Governor Yi Gang said in an interview with the state-run Financial News. Unlike other countries that are burdened with high fiscal deficits or have already implemented a zero interest rate policy, China is well positioned to adopt both fiscal and monetary policies to support economic growth, Mr. Yi said, according to the newspaper on Monday. The vice governor also said monetary policymakers continue to use preemptive macroeconomic measures to ensure stable and sustainable economic growth in the world's second-largest economy. China posted 7.6% economic growth in the second quarter of the year, the slowest pace in more than three years. The National Bureau of Statistics is scheduled to release third-quarter gross domestic product data on Thursday. Mr. Yi also told the newspaper that the latest round of quantitative easing by the U.S. and a bond purchase plan by the European Union could have a mixed impact on the Chinese economy. Quantitative easing helps boost demand in major market economies and thus benefits Chinese exports, but it might also raise new risks of imported inflation, he said.

Charting China’s Economy: Has It Stabilized? - Thursday morning, all eyes turned to China for the latest read out on the state of the world’s second-largest economy. The key question, going into a into the once-in-a-decade Chinese leadership transition that begins in earnest next month: Has the country’s economy stabilized or will growth continue to slow? China Real Time charts it out. Growth in gross domestic product slowed to 7.4% year-on-year, down from 7.6% in the second quarter and the lowest since the financial crisis. On a quarter-over-quarter annualized basis (the way in which growth is measured in the United States and Europe), things looked considerably better. Growth accelerated to 9.1% in the third quarter, from 8.2% in the second. Economists continued to raise doubts about the official QoQ growth rate. Wang Tao, China economist at UBS, estimated it to be about 7.6% in the third quarter, accelerating from below 7% in the second – considerably below the numbers published by the National Bureau of Statistics.

Has China’s realty bounce peaked (already?) New home prices in China rose in 31 out of 70 cities according to the National Bureau of Statistics yesterday, down from 35 out of 70 cities in August. Of 70 cities, 17 of them saw new home prices flat, up from 16 cities in August, while 22 of cities saw new home prices falling, up from 19 cities in August. Although not very reliable, the data suggest that although the real estate market continues to “recover”, the “recovery” is probably moderating. Also out yesterday, China’s real estate investment increased by 15.4% for January-September, slightly down from 15.6% year on year for January-August. Residential new housing start in terms of floor area were –12.9% yoy for January-September, down from –11.1% yoy for January-August. For September alone, residential housing start decreased by 28.07% yoy, down from +4.96% yoy in August. Meanwhile, residential housing sales in terms of floor area was –4.3% yoy for January-September, up from –4.8% yoy for January-August. However, for September alone, sales in terms of area were –1.6% yoy, down from +13.3% yoy in August, reflecting the weak start of the peak season of September and October after some strong pick-up during the summer:

Is China Due for a Slowdown? - SF Fed Economic Letter -- Many analysts have predicted that a Chinese economic slowdown is inevitable because the country is approaching the per capita income at which growth in other countries began to decelerate. However, China may escape such a slowdown because of its uneven development. An analysis based on episodes of rapid expansion in four other Asian countries suggests that growth in China’s more developed provinces may slow to 5.5% by the close of the decade. But growth in the country’s less-developed provinces is expected to run at a robust 7.5% pace.

The "two Chinas" will have materially different growth trajectories - A recent economic letter from the San Francisco Fed (Israel Malkin and Mark Spiegel) discusses a model used to project China's economic growth. In their analysis the researchers separate China into two economies: "Advanced" and "Emerging". They point out that historically (across Asian nations), as economies move from Emerging to Advanced, their growth slows. China's provinces should follow the same trend of rising per capita income levels and declining growth rates.The model projects that the recent slowdown is a structural one and growth will indeed continue to moderate. However the "two Chinas" (Advanced and Emerging) will have very different growth paths going forward. SF Fed: - China’s relatively undeveloped areas may be able to grow at high rates for some time before reaching income levels associated with slowdown. This could delay a middle-income trap growth slowdown for the nation as a whole. Emerging Chinese provinces are likely to maintain their high growth rates for some time after their wealthier counterparts have slowed

China’s Advantage of Backwardness - With Beijing scheduled to report new GDP numbers on Thursday, analysts are pretty uniformly predicting the data will show China’s growth continued to swoon in the third quarter, but two San Francisco Federal Reserve economists are bullish on the Chinese economy for an unusual reason: its continued backwardness. China will slow over the coming years, but not as much as many predict, write Israel Malkin and Mark Spiegel, because of much of the country is so lightly developed that growth there will continue to speed along. “There is an advantage to backwardness, in the sense that a poorer region or nation has a lot of catching up to do before it prices itself out of certain activities,” said Mr. Spiegel, explaining his paper. According to the two economists, growth in China’s more developed provinces may slow to 5.5% by 2020, as places like Beijing and Shanghai reach the income levels of wealthy countries. But the interior of China is far poorer than China’s showcase cities, so wages are far cheaper there, making it suitable for labor-intensive work. Those places will have an easier time continuing to register faster growth. The two expect those provinces to grow at a 7.5% pace by 2020.

China’s economic growth slows to 7.4% in Q3 -- China’s economic growth slowed in the third quarter ended in September, missing the government’s target. Data showed that China’s economy fell to the lowest level in over three years, yet retail sales and other activity accelerated and it is viewed as the sign of recovery. According to data released by the National Bureau of Statistics, China’s economy grew as much as 7.4 percent in the third quarter compared to the last year, but it slowed down from 7.6 percent in the previous quarter. China’s economic growth in the third quarter missed the Communist Party’s target of 7.5 percent for the full year.  China’s economic growth in the period was the lowest since the first quarter of 2009. However data showed that industrial production, retail sales and investment were all slightly ahead of estimates. As it was stated by analysts, this might suggest that the worst was behind the world’s second largest economy and that China’s economy would pick up in the fourth quarter of the year. Kevin Lai, an economist at Daiwa, is convinced that the growth in the final quarter should be above 8 percent. Economic activity in the third quarter was up by approximately 2.2 percent from the previous period and it was the biggest quarter-on-quarter gain. : ‘‘This confirms that the economy is rebounding from the trough in the first quarter of this year,’’ adding that there was no need for further stimulus.

China Economic Watch: GDP Growth Slows to 7.4% in Q3; Industrial Output Rebounds from 40-Month Low: China's economic growth cooled to 7.4% in Q3 2012 from Q3 2011, the slowest pace in 14 quarters, the National Bureau of Statistics said. For the first three quarters, the nation's gross output grew 7.7% year on year to ¥35.35 trillion; the rate was above the government's annualized 7.5% target. In Q1-Q3, output by the primary sector grew 4.2% to ¥3.31 trillion, output by the secondary sector grew 8.1% to ¥16.54 trillion and output by the tertiary sector was up 7.9% to ¥15.5 trillion. Industrial Output Rebounds from 40-Month Low: China's value added industrial output expanded 9.2% year on year in September, 0.3 percentage points faster than in the month before, which hit a 40-month low, National Bureau of Statistics said. The growth of light industries was 9% and the growth of the heavy industries was 9.3%; output from state-owned industrials was up 6.3% and output from non mainland-funded industrials was up 5.3%. Fixed Asset Investment Up 20.5% Jan-Sep: Fixed asset investment in China rose 20.5% year on year to ¥25.69 trillion in the first nine months of 2012; the rate was 0.3 percentage points faster than in the month before, which was the second lowest since December 2002, the National Bureau of Statistics said. Fixed asset investment in the primary sector was up 32.2% to ¥654.5 billion; fixed asset investment in the secondary sector was up 22.4% to ¥11.37 trillion; fixed asset investment in the tertiary sector was up 19.4% to ¥13.67 trillion.

China's consumer-led growth - CHINA, you may have heard, announced its latest growth figures on Thursday. The speed of growth attracted most of the attention, but the source of growth is perhaps more striking. At a press conference (in Chinese; see an FT report here), the National Bureau of Statistics pointed out that in the first three quarters of this year consumption* contributed over half (55%) of China's growth, exceeding the contribution from investment. If that pattern holds, China's growth this year will not be investment-led (let alone export-led), but consumption-led.** That hasn't happened for over a decade. Or so I thought. Until recently, the official statistics showed that investment made the biggest contribution to China's growth in every year since 2001. But earlier this week the new edition of the China Statistical Yearbook arrived on my desk with a thud. Its revised figures show that consumption contributed 55.5% of China's growth in 2011; investment contributed only 48.8%. (Net exports subtracted 4.3%.) In other words, China's growth was consumption-led last year as well.

Wen upbeat on China’s economy - Wen Jiabao, China’s premier, has given his most optimistic assessment of the Chinese economy since the start of the year, saying that it had stabilised and that the government’s target of 7.5 per cent annual growth was well within reach. Mr Wen’s comments, published in a statement on the government’s main website on Wednesday, came a day before China releases its third-quarter GDP data. The data are widely expected to show growth slowing from the 7.6 per cent recorded in the second quarter and marking the country’s seventh straight quarterly slowdown. Before previous data releases this year Mr Wen warned that the Chinese economy faced “downward pressure” because of the lingering impact of the global financial crisis. But in the comments released on Wednesday he struck a more upbeat tone: “The economy in the third quarter was quite good. We can now say with confidence that the growth of the Chinese economy is basically stabilising . . . As policies are implemented and hit their mark, the Chinese economy will stabilise further.” He added that he was sure the economy would achieve the government’s full-year target of 7.5 per cent growth.

In China, a Power Struggle of a Different Order - As the Communist Party in China prepares for a once-in-a-decade leadership transition next month, it is also planning to take a giant step — to break up the monopolies enjoyed by its gargantuan state-owned enterprises. Prime Minister Wen Jiabao vowed in a speech this year that Beijing would pursue breaking up state monopolies. “We must move ahead with reform of the railway, power and other industries,” Mr. Wen said, “complete and implement policies and measures aimed at promoting the development of the nonstate economy, break monopolies and lower industry thresholds for new entrants.” All signs indicate that the next leaders of China — Xi Jinping is widely expected to replace Hu Jintao as president and Li Keqiang is poised to succeed Mr. Wen as prime minister — will stick to that script. Critics say that the sheer size and market dominance of state-owned enterprises creates a drag on the Chinese economy, with vast opportunities for corruption and waste and higher costs for consumers.  Once the new party leadership is in place, it will be under enormous pressure to break the grip of inefficient state companies and to reinvigorate China’s three-decade economic miracle. But there is a deep division within the party on such economic policies.The increasingly powerful state-owned companies are a monster of the party’s own creation.

Against a Sea of Enemies: China as Currency Manipulator - One of the interesting things about the presidential debate tonight was the prominence of China. Governor Romney repeated his insistence that he would declare China a currency manipulator "on day one". (I am surprised he didn't mention the "yellow peril".) If his criterion is forex intervention, he should be prepared to declare many other countries manipulators as well. Readers of this weblog will know that I have been a consistent critic of Chinese exchange rate policy: [1] [2] [3]. However, now (or in January 2013) seems an odd time to strike at China. That's because the Chinese currency has been appreciating, and the degree of estimated undervaluation has decreased over time. Even the Peterson Institute for International Economics, which has been adamant historically, recently estimated a 3% undervaluation. [4] And if it's forex intervention, it's many other countries. [5] According to Joseph Gagnon, we should include Switzerland and Israel... [6]

El-Erian Cautions Romney on China Stance - Bloomberg video - Labeling China a currency manipulator, as Republican Mitt Romney has pledged to do if elected president, “may have a disruptive impact” on global markets, according to Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian.

Beijing decapitates Romney's tough anti-China rhetoric by strengtheneing the yuan - Below are some campaign quotes from Mitt Romney on China. He has labeled China an oppressor of human rights, a flagrant violator of intellectual property rights, an aggressive promoter of cyber espionage, and worst of all for China, a currency manipulator.

    • 1. "We face another continuing challenge in a rising China. China is attentive to the interests of its government – but it too often disregards the rights of its people. It is selective in the freedoms it allows; and, as with its one-child policy, it can be ruthless in crushing the freedoms it denies. In conducting trade with America, it permits flagrant patent and copyright violations … forestalls American businesses from competing in its market … and manipulates its currency to obtain unfair advantage.
    • 2. “My own view on the relationship with China is this, which is that China is stealing our intellectual property, our patents, our designs, our know-how, our brand names. They’re hacking into our computers, stealing information from not only corporate computers but from government computers. And they’re manipulating their currency.

Beijing clearly understands that at least some of this language is just campaign rhetoric. But the nation simply can not afford to take a chance. The formal label of  "currency manipulator" carries with it the imposition of tariffs. And tariffs on Chinese goods, unlikely even under Romney as president, would launch an unprecedented trade war that could devastate China's already slowing economy. Beijing has to nip this in the bud and to lessen one of Romney's key campaign issues - in some ways weakening the candidacy. The best way of avoiding being called a currency manipulator of course is to strengthen the yuan. And that's exactly what China has been doing in the last couple of months.

China’s Yuan Internationalization: Made In Africa, Not Hong Kong - China-Africa trade is nearing $200 billion annually, with China now the continent’s biggest trading partner.  Secondly, African central bankers like Nigeria’s Sanusi Lamido Sanusi have pledged to convert as much as 10% (which would be approximately $3.8 billion as of September) of their nation’s foreign exchange reserves, from dollars to yuan.  Thirdly, China is currently the biggest lender to Africa’s Small and Medium-sized (SMEs) – pledging up to $10 billion in loans.  Lastly, China’s overpopulation, environmental degradation and unintended consequences of the One-Child policy (i..e. a gender crisis that finds 35 million more men than women) are driving millions of Chinese into Africa seeking entrepreneurial opportunities.  I believe that projections that 300 million Chinese will eventually have to move into Africa to alleviate the demographic nightmare to be accurate.  That so few are picking up on this, not realizing that China’s objective in Africa is self-preservation and not European-style colonization is alarming. Western media and activist reactions and explanations regarding the emergence of massive ‘Ghost-Cities’ in Africa are stunning for their clue-lessness.  The best case is the recent BBC coverage of a mixed residential complex near Luanda, Angola described as being built for 500,000 people; holding 750 apartment buildings, 12 schools and 100 retail units.  Built by the China International Trust and Development Corporation (CITIC), the purpose, motive and function for the 5,000 hectare state-sponsored undertaking is obvious to us – it is part of the grand realization and strategy on the part of the Chinese to relocate millions to Africa this century.

Japan Plans to Tap Discretionary Budget for Stimulus Money - Japan’s government plans to tap discretionary budget funds to counter an economic slowdown as a legislative stalemate threatens to leave the Noda administration without cash as soon as next month. Prime Minister Yoshihiko Noda yesterday ordered his Cabinet to draw up economic stimulus measures by November, Chief Cabinet Secretary Osamu Fujimura said. With Finance Minister Koriki Jojima telling reporters that the idea of a supplementary budget would be considered later, the government can use around 1.3 trillion yen ($17 billion) in reserves from this year’s budget. Noda’s room for fiscal maneuver is limited by the political opposition’s refusal to give the government authority to borrow to pay for this year’s deficit. Politicians instead may focus on applying pressure on the Bank of Japan, and banks including JPMorgan and UBS AG are among those predicting the BOJ will boost asset purchases this month.

Japan And The Exhaustion Of Consumerism - What few seem willing to acknowledge is the solipsistic, narcissistic nature of this reliance on public display of consumerist fantasy for self-identity. All consumerist fashion is based on superficiality and self-indulgence, of course; but if we look at the energy, money and attention "invested" in fashion lifestyles in Japan, we might conclude it is strong evidence that there is plenty of "money and time to burn" in Japan. While that is certainly true, this reliance on consumerist excess for self-identity and pastime is also evidence of a deeply troubled economy and society. Young people have money and time to burn on outlandish costumes because few earn enough to have their own families or flats. They work part-time for low wages and live at home or in tiny one-room apartments. Few own cars because they 1) don't earn enough to support a car and 2) they're uninterested in acquiring status symbols or prestige signifiers. This is not just a generational shift: it reflects a realistic understanding that opportunities for secure, high-paying employment have diminished over the past 20 years. There are plenty of low-level jobs, but few with the guarantees that their parents took for granted.

India's stubborn inflation trend puts RBI in a bind - rate likely on hold - India continues to struggle with stubbornly high inflation levels. In spite of slower economic growth, the Wholesale Price Index (WPI) clocked at 7.81% in September, putting the RBI in a real bind. The central bank needs to cut rates as growth has moderated, but it is difficult to do with inflationary pressures unresolved. The Times of India: - The Wholesale Price Index (WPI) inflation figures are out but those looking for repo rate reductions in the forthcoming October 30 monetary policy announcements by the RBI may be in for some disappointment. According to economists, the WPI figure, though certainly better than the 10%-odd inflation numbers that the economy was totting up till recently, is still not good enough for the RBI to cut rates. In other words, things aren t as bad as before but they are not good enough to merit a growth-inducing repo rate reduction by the RBI. Part of the issue with India's stubbornly high inflation is that it has been elevated for an unusually prolonged period .GS: - India has experienced a sustained period of high headline inflation since late 2009. In this period, inflation, as measured by the Wholesale Price Index (WPI), has averaged 9% and has not fallen below 7%. Indeed, the high inflation period can be seen from 2007, with a blip due to the GFC between February and November in 2009. This prolonged period of high inflation has not been witnessed since the early-1990s.The problem that often accompanies long periods of inflation is the establishment of deeply rooted inflation expectations. Households now fully expect double digit near-term and longer term inflation. The recent rise in food prices is only going to exacerbate these expectations. And as central banks learned from past experiences, inflation expectations create a feedback loop with the actual inflation that is extremely difficult to break. That's why RBI is likely to be on hold for some time.

Untenable critiques sowing confusion on supposed ill-effects of retail FDI -- Retail sector liberalisation has been revived and included in Prime Minister Manmohan Singh’s package of big-bang reforms announced recently. This was to be expected as an element of the package since the influential minister Jairam Ramesh, who has access to Sonia Gandhi and is identified with her NGO-dominated set of advisers whose knowledge of economics is outweighed by their enthusiasm, had already announced his conversion to retail sector liberalisation.As expected, Mamta Banerjee has withdrawn her support to the UPA government over the issue. Equally, opposition parties, chiefly the BJP, have opposed the move.  Their argument is that this is a high-risk strategy and that the Prime Minister could have chosen other ‘surer’ reforms, with a higher payoff-to-risks ratio, as part of his package: e.g., further trade liberalisation as we still have ways to go in that regard, and trade liberalisation since the early 1990s has been a great success.We would argue that this argument is implausible. The economic gains from retail sector liberalisation are considerable indeed, as has been argued in many studies. Also, as we argue below, the liberalisation of the retail sector offers little risk: the risk to the small shopkeepers – the so-called mom-and-pop shops, a cultural misnomer since, in India, the old moms and pops are not seen in these small shops as much as middle-aged and younger family members – is limited.

Argentina slams credit agencies for "terrorist" reports (Reuters) - Argentina's economy minister accused credit ratings agencies on Tuesday of releasing "terrorist" reports and acting like "pirates" after Moody's Investors Service said Chaco province defaulted last week when it paid dollar debts in pesos. The central bank refused to let Chaco buy dollars on the local foreign exchange market due to currency controls, so the province repaid creditors about $260,000 in pesos on dollar-denominated bonds issued under local legislation. Leftist President Cristina Fernandez has limited access to dollars in the last year to stem capital flight but this was the first time a province was unable to buy greenbacks due to the restrictions. In a report titled "Province's Default Is Credit Negative for All Foreign Currency Debt from Argentina", Moody's said Chaco's move reflected "a broader foreign exchange shortage within the country and an increasingly interventionist government".

Inequality and top income shares in Canada: Recent trends and policy implications - Inequality has increased in the majority of rich countries, but the share of income and earnings going to the top has increased most in the anglophone countries. McMaster University economist Mike Veall says Canada has not escaped this trend, and argues that a public policy response is needed. The underlying causes of, in his words, “the surge” in the shares of the top 1%, one-tenth of 1% and even the top one-hundredth of 1% in Canada remain elusive. Even so these changes should motivate at least three policy responses that could be supported across the political spectrum. The soon-to-be published version, called  Top income shares in Canada: Recent trends and policy implications, in part updates his earlier work with Emmanuel Saez originally published in 2005: The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence. The research points out that top income shares fell during the recent recession, the top 1% making about 12% of all income in 2009 down from about 14% in 2007. It is unlikely that this signals a change in the upward trend since the early 1980s.

A Question for Olivier Blanchard... - Brad DeLong - I will not ask you to agree with Lawrence Summers and myself, and to distinguish sharply between the fiscal policies appropriate for typical countries and the policies appropriate for those countries that can borrow on a large scale at negative real interest rates…But I will question your claim that U.S. financial markets appear relatively healthy on an interest rate-spread metric. When I look at the U.S. housing market, I find myself thinking about those overcomplicated Stiglitzian credit-rationing models that you annoyed me by making me learn, that I thought were too clever to be true, and thinking they might be true after all--and that housing finance might somehow be experiencing market failure on a large scale without it showing up as large interest rate spreads…

Times Like This Are Different - Paul Krugman -- Jonathan Portes and Simon Wren-Lewis have further thoughts on the new IMF report, with its concession that the adverse effect of austerity has been much worse than expected; both make points I should have stressed. As Portes emphasizes, back in 2010, as advanced economies “pivoted” to austerity despite protests from yours truly and others, there were really not two but three positions about the relevant macroeconomics. It wasn’t just a contrast between the wishful thinking of the expansionary austerity types and those who didn’t buy it. There was also a distinction between those who looked at the historical record and concluded that fiscal contraction would have only modest contractionary effects, and those — including Martin Wolf, Wren-Lewis, Brad DeLong, and me — who argued that historical experience from countries that were not up against the zero lower bound, had flexible exchange rates, and were pursuing austerity amidst a strong global economy was likely to greatly understate the effects of austerity in the current environment. Our position was, if you like, that times like this are different.

The world is stuck in a vicious cycle - If the global economy was in trouble before the annual World Bank and IMF meetings in Tokyo last week, it is hard to believe that it is now smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors and the wealthy financial sector hangers on, it is difficult to see what of immediate value was accomplished. The US still peers over a fiscal cliff, Europe staggers forward trying to prevent crises King Canute-style with no compelling growth strategy, and Japan remains stagnant and content if it can grow at all. The Bric countries, meanwhile, are each unhappy stories in their own way. On the one hand, they are constrained by deep problems of corruption and financial imbalances that are impeding growth, while at the same time demographic trends cast doubt on their long-term prospects. In much of the industrial world, what started as a financial problem is becoming a structural one. If growth in the US and Europe had been maintained at its average rate from 1990 to 2007, gross domestic product would have been between 10 and 15 per cent higher today and more than 15 per cent higher by 2015 on credible projections. Of course, this calculation may be misleading because global GDP in 2007 was inflated by the same factors that created financial bubbles. However, even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1tn short of what could have been expected in the US and EU. This works out to more than $12,000 for the average family.

Washing Up - and Saving Lives by the Millions - Jeffrey Sachs - Today, around 2.6 billion people still lack access to decent sanitation (aka toilets). One billion people defecate in the open, if that can be imagined in the 21st century. As a result, kids by the millions die each year of water-borne diseases causing diarrhea as human waste commingles with the water supply. Similarly, lack of decent hygiene causes pneumonia, another major killer of children under five. At the start of the new millennium, world leaders promised to cut by half the proportion of people without decent sanitation, and to reduce child mortality by two thirds, all by 2015. We're determined to help the world keep its promises. Ho-hum, will say the cynics. More empty promises. In discouraging moments, we sometimes feel the same way. But the evidence is actually to the contrary: promises and goals can make a difference. The numbers of young children dying each year is actually falling, and falling fast, because the world is stepping up the fight for good health. In 1990, 12.5 million kids under five died, almost all of preventable or treatable diseases -- in other words for stupid and unnecessary reasons. By 2010, the number of deaths had declined to 7.6 million. Yes, we agree, 7.6 million is still far too many. Nonetheless there is progress, and realistic hope for much more!

Bernanke: Accommodative Policies Do Not Impose (Net) Costs on Developing Countries - Ben Bernanke responds to foreigners complaining about US monetary policy (including saying that if some countries want to enjoy the benefits of an undervalued currency, then they must also pay the costs, "including reduced monetary independence and the consequent susceptibility to imported inflation": U.S. Monetary Policy and International Implications, Speech by Ben Bernanke: This morning I will first briefly review the U.S. and global economic outlook. I will then discuss the basic rationale underlying the Federal Reserve's recent policy decisions and place these actions in an international context. ...All of the Federal Reserve's monetary policy decisions are guided by our dual mandate to promote maximum employment and stable prices. With the disappointing progress in job markets and with inflation pressures remaining subdued, the FOMC has taken several important steps this year to provide additional policy accommodation. ... As I have said many times, however, monetary policy is not a panacea. Although we expect our policies to provide meaningful help to the economy, the most effective approach would combine a range of economic policies and tackle longer-term fiscal and structural issues as well as the near-term shortfall in aggregate demand. Moreover, we recognize that unconventional monetary policies come with possible risks and costs; accordingly, the Federal Reserve has generally employed a high hurdle for using these tools and carefully weighs the costs and benefits of any proposed policy action.

IMF: Austerity is much worse for the economy than we thought: Earlier this week, the International Monetary Fund made a striking admission in its new World Economic Outlook. The IMF’s chief economist, Olivier Blanchard, explained that recent efforts among wealthy countries to shrink their deficits — through tax hikes and spending cuts — have been causing far more economic damage than experts had assumed.How did the IMF figure this? That was the tricky part. Blanchard could have just plotted a simple graph showing that countries undertaking heavy austerity measures, such as Greece and Portugal, are faring more poorly than their peers. But that doesn’t actually prove anything—perhaps those countries are undertaking austerity because they’d run into economic trouble. So, instead, Blanchard did something more subtle. He studied the IMF’s previous economic forecasts. If a country is already struggling for other reasons, the forecasters are likely to have taken that into account. And what Blanchard found was surprising: IMF forecasts have been consistently too optimistic for countries that pursued large austerity programs. This suggests that tax hikes and spending cuts have been doing more damage to those economies than policymakers expected. (Conversely, countries that engaged in stimulus, such as Germany and Austria, did better than expected.)

Heed siren voices to end fixation with austerity - It was disguised as a technical appendix, but it turned out to be an act of insurrection. The International Monetary Fund has published results from a study, which show that the impact of fiscal policy on growth is higher than previously estimated. The policy conclusion of a large fiscal multiplier is obvious: excessive austerity defeats itself. It must end. One has to be clear about what this statement says, and what it does not say. The IMF does not say that austerity is too hard, too unfair, causes too much pain in the short term or hits the poor more than the rich. It says simply that austerity may not achieve its goal of reducing debt within a reasonable amount of time. The technical article makes two observations. The first is that most standard fiscal multipliers used in ordinary forecasting models, including the IMF’s own, is roughly 0.5. That means for each additional dollar or euro in reduced public spending, the economy contracts by 50 cents. This is not a realistic assumption for a time like this. Even intuition tells us that the multiplier must be at least one – simply because the fiscal tightening is not compensated for by lower interest rates. Nobody takes up the slack caused by austerity. The second claim is that most forecasting models underestimate the multiplier by 0.4 to 1.2. This implies that it must be in a range between 0.9 and 1.7. The estimate for the eurozone periphery is nearer the higher end of this range. So, let us assume that it is 1.5. That means a fiscal adjustment of 3 per cent of gross domestic product would translate into a GDP contraction of 4.5 per cent. This is roughly what Spain needs to do to reach its fiscal target for next year. The multiplier thus tells you what kind of recession Spain can expect. And it tells us that the Spanish government’s forecast of a 0.5 per cent fall in GDP in 2013 is delusional.

IMF jumps ship on Europe - So you take a 2 week holiday, and when you return you find the IMF have switched sides!“Fiscal policy should be appropriately calibrated to be as growth-friendly as possible,” the International Monetary and Financial Committee said in a communique. The statement came after days of back and forth between those — led by Germany — urging no let-up from belt-tightening and those arguing for a loosening of the grip of austerity. International Monetary Fund Managing Director Christine Lagarde said on Thursday she was happy for Greece — struggling under the weight of cuts demanded by international creditors — to have two more years to meet its deficit reduction targets. So has the IMF suddenly woken up the fact that demanding every government slash spending and raise taxes is, in many cases, counter productive because they have underestimated the fiscal multiplier in government spending ?  No this isn’t new. As I noted back in August 2011, the IMF along with its new President have been well aware for some time that their theories on expansionary fiscal contraction have underestimated the negative effects of attempting government sector austerity at a time of private sector de-leveraging, specifically in a fixed currency environment.

Sweden: The new model - The most equal country in the world is becoming less so. Sweden’s Gini coefficient for disposable income is now 0.24, still a lot lower than the rich-world average of 0.31 but around 25% higher than it was a generation ago. That rise is causing considerable angst in a nation whose self-image is staunchly egalitarian. A leftist group caused a media hubbub earlier this year by organising a “class safari” bus tour of Saltsjöbaden and Fisksätra. Opposition leaders insist that the ruling centre-right party is turning Sweden into America. Anders Borg, the finance minister, vehemently disagrees. Sweden, he argues, has gone from being a stagnant benefit-based society to a vibrant modern economy with a remarkably small rise in inequality. Its experience, he says, shows that dynamism and egalitarianism do not need to be at odds. The facts bear him out. Thanks to deregulation, budget discipline and an extensive overhaul of the welfare state, Sweden’s economy has been transformed in the two decades since its banking crisis. The new Swedish model is quite different from the leftist stereotype.

In Spain’s Housing Bust, Sell-Off Brings Bargains - For years, the Mar de Canet apartment complex in this beach town south of Barcelona stood empty, another casualty of a real estate crash that left this country littered with ghost towns and half-finished developments no one would buy. Mar de Canet’s 308 units were sold in less than 30 days last spring, mostly gobbled up by eager Spaniards finally getting a deal they could not resist: choice holiday homes for less than half the price of similar properties on the market. Banks, which have been sitting on a pile of real estate assets or listing them at only slight discounts, are beginning to slash prices, eager to get out of the business of being landlords. Some experts worry that they are simply repeating mistakes of the past by handing out 100 percent mortgages again. But giddy Spaniards — those who still have jobs — are lining up to get in on the bargains. No one expects Spain’s housing backlog to disappear soon. The country has more than 1.2 million unsold new homes. And Spain is still far from getting its financial house in order. But to the surprise of many, Spaniards have not lost their passion for buying property, at the right price, and some prefer to put their savings in bricks and mortar rather than one of the country’s shaky banks.

Bailout for Spain would cost Italy 1.5% of GDP: minister - Italy's contribution to a hypothetical bailout for Spain would cost 1.5 percent of its gross domestic product (GDP), Finance Minister Vittorio Grilli said in an interview in La Repubblica on Friday. "The past two years, our public debt has been increased by four percentage points because of loans to Greece, Ireland and Portugal," the minister said. "If there is a package for Spain of no less than 100 billion euros ($130 billion), Italy's share would be the equivalent of 1.5 percent of GDP." "We have to be generous but we also have to evaluate with prudence the impact on public finances. Especially since we are going through a phase that is still very, very difficult," he added. The minister however repeated that Italy did not need a bailout.

Portugal to unveil more austerity in budget - Portugal's government is taking the bailed-out country deeper into austerity, announcing Monday sharp tax increases next year that risk worsening a recession and stoking public discontent. The draft budget for 2013 is one of the harshest in the country's recent history and will take away the equivalent of a month's wages from many workers. The government says the measures are needed to cut the national debt as Portugal strives to restore its financial health. More than a decade of meager growth compelled Portugal to ask for a €78 billion ($101 billion) rescue last year to avert bankruptcy. But critics say the latest batch of austerity measures will choke the economy, which is forecast to contract for a third straight year in 2013, and push higher the unemployment rate which already stands at a record 15.9 percent. As in other heavily indebted European countries, public hostility to cutbacks is running high as hard-hit workers balk at falling living standards. The coalition government, too, is showing signs of strain amid mounting criticism as leading figures in the governing parties have expressed deep reservations about the strategy. Announcing "very significant" tax hikes, Finance Minister Vitor Gaspar said Portugal had no choice because it is locked into a three-year debt reduction program by its international creditors in return for the bailout.

Austerity Protests Are Rude Awakening in Portugal - Portugal has long been regarded a role model in the grinding euro zone crisis. In return for an international bailout, its government cut services and raised taxes while its citizens patiently endured with little of the popular outcry seen elsewhere in southern Europe. That is, until now. Suddenly, the Portuguese, too, have joined the swelling ranks of Europe’s discontented, following Greece and Spain, after the government tried to take another step up the austerity path last month. For many here, it was one step too far, driving tens of thousands into the streets in the largest protest of Portugal’s crisis. As Pedro Passos Coelho, Portugal’s center-right prime minister, prepares to announce a new budget on Monday — filled with still more steep tax increases and public sector job cuts — he faces the kind of popular backlash that was, until recently, absent from the political and social landscape here. Taking a page from the playbook of their Spanish neighbors, Portuguese protesters are planning to encircle the Parliament building here in the capital for the budget announcement. For their part, Portugal’s powerful trade unions are preparing a general strike for Nov. 14. Arménio Carlos, the leader of the CGTP union, compared Mr. Passos Coelho to Pinocchio, accusing him of constantly changing his austerity message.

Troika Out of Control: Suggests Greeks Living on Small Islands Be …Relocated - This morning I wrote about Troikans being paranoid with a disease developing at full speed. Just hours later, my prediction came true. It’s all over the Greek press, that the Troika suggested that Greeks residing on islands with less than 150 inhabitants should be relocated somewhere else! This insane demand was allegedly revealed by Minister of Maritime Affairs Kostas Mousouroulis while he was attending a meeting with representatives of the maritime sector. ”At a meeting I had with the troika representatives they asked me to evacuate Greek islands with up to 150 inhabitants, because they are a burden to the state budget,” the minister said. “I immediately told them, you are crazy. We do not negotiate on this.”

Greece Will Probably Leave Euro Within Six Months, Borg Says - As European Union leaders prepare for a summit next week devoted to saving the euro, Swedish Finance Minister Anders Borg said Greece may quit the common currency within the next six months. “It’s most probable that they will leave,” Borg said today on a conference call from Tokyo, where global finance officials have gathered for the annual meetings of the International Monetary Fund. “We shouldn’t rule out this happening in the next half-year.” The so-called troika that oversees euro-area bailouts, comprised of officials from the European Commission, European Central Bank and IMF, has resumed talks with Greek officials after a pause that provided Prime Minister Antonis Samaras’s three-party coalition with backing to continue efforts to carve out 13.5 billion euros ($17.5 billion) of new budget cuts needed to unlock aid payments.

Swedish Finance Minister Expects Greece to Exit Euro Within Six Months; Comments From Saxo Bank -Anders Borg, Sweden's finance minister, has warned it is 'probable' that Greece will leave the common currency. As European Union leaders prepare for a summit next week devoted to saving the euro, Swedish Finance Minister Anders Borg said Greece may quit the common currency within the next six months. “It’s most probable that they will leave,” Borg said today on a conference call from Tokyo, where global finance officials have gathered for the annual meetings of the International Monetary Fund. “We shouldn’t rule out this happening in the next half-year.” Given Greece’s lack of competitive industry and inability to implement necessary reforms, “it’s a little bit hard to see how they’ll resolve this situation without stimulating competitiveness through a significantly lower exchange rate,” Borg said. Borg has long been pessimistic about Greece’s future. In July, he said “some sort of default” was the most likely scenario for Greece. Last month, he said he couldn’t rule out a Greek euro exit within a year and that European banks were prepared for such an outcome.

Secessionist Wave Sweeps Belgium Ending 90 Years of Socialist Rule in Antwerp - In a vote on Sunday that is likely to have serious repercussion down the road for the eurozone, a Secessionist wave sweeps Belgium Flemish nationalists made sweeping gains across northern Belgium in local elections on Sunday, a success that will bolster separatists’ hopes for a break-up of the country. Bart De Wever, leader of the New Flemish Alliance (NVA), is set to become mayor of the northern city of Antwerp, Belgium’s economic heartland, after his party emerged as the largest one ending about 90 years of socialist rule. Soon after the ballot results emerged, Mr De Wever, who had turned the tough mayoral race into a referendum on Flander’s independence for Belgium, demanded that the country’s prime minister give greater independence to the Dutch-speaking north. Flanders, which is the most economically prosperous region of Belgium, has long resented financing the ailing economy of French-speaking Wallonia, and Sunday’s victory will strengthen their demand for self-rule.

Lithuanians vote out austerity government - Opposition populists and leftists in crisis-worn Lithuania have hinted they are prepared to form a government coalition after an exit poll late on Sunday indicated their parties would take first and second place in the country's parliamentary elections. The exit poll conducted by RAIT/BNS gave the biggest share of the vote, 19.8 per cent, to the Labour Party. And Labour’s most likely coalition partner, the centre-left Social Democrats, were second with 17.8 per cent with the prime minister's Homeland Union in third place on 16.7 per cent. The ex-Soviet state, with a population of nealy three million, drastically suffered when the crisis hit four years ago. It was swift to slash spending in response and is now on course to return to economic health - but the belt-tightening failed to win over dispirited voters. Lithuanian voters threw out centre-right Prime Minister Andrius Kubilius, in favour of a coalition of left-leaning opposition parties who promise to alleviate austerity measures, according to the exit poll following Sunday’s parliamentary election.

Merkel Sees No Alternative to ‘Arduous’ Euro-Area Overhaul -  German Chancellor Angela Merkel said there’s no way around economic overhauls for euro-area countries struggling in the debt crisis and pledged to help them defend the joint currency. Merkel said she will hold countries to commitments to make their economies more competitive and attract investors. “It’s arduous, but I see no other option that leads to a decent outcome,” she said in a speech to a regional convention of her Christian Democratic Union party today. “It isn’t some kind of pressure that were creating to make you suffer.” While the euro area needs to regain the confidence of financial markets, Germany would bring on “the risk of a recession” if it refused financial aid to stem the crisis, she told delegates at Celle in the northern state of Lower Saxony.

After Starting Riots In Greece, Merkel Booed In Germany Next - What does an iron chancellor have to do to be loved these days? After scrambling 7,000 members of the Greek police force out of an early prepaid retirement for her brief, still inexplicable 6 hour visit to Athens last Tuesday, which caused the now usual Syntagma square rioting, Merkel next took the stage in a rainy Stuttgart, in a show of support for the local mayor candidate Sebastian Turner, which promptly devolved into 14 minutes of continuous booing. Watch below.

Merkel’s Government Rejects Second Greek Debt Cut to Ease Crisis - Bloomberg: Germany rejected a second debt writedown for Greece, digging in against suggestions for European governments to accept losses on Greek holdings. “A new haircut is out of the question as far as the German government is concerned,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, said at a regular news briefing in Berlin today. “We are working on sensible solutions with the Greeks and our European partners.”Seibert was responding to a reporter’s question about comments by Rainer Bruederle, the parliamentary leader of Merkel’s Free Democratic coalition ally, in which he floated the idea of losses for Greece’s public creditors. Finance Minister Wolfgang Schaeuble said Oct. 11 that European governments can’t accept losses on Greek debt holdings.

To Fight Hyperstagflation, Greece Will Allow Sale Of Expired Food Products - Against a deflationary environment of austerity-driven wage and pension cuts combined with rising unemployment; food, commodity, and fuel prices continue to surge in Greece. The government has taken an unusual step - allowing the sale of expired food at lower prices. As Voz Populi reports, this act means the government has 'virtually admitted their inability to control prices" as the worst aspects of stagflation crush the Hellenic Republic. The regulation (allowing from one-week to one-month extensions of foods for sale post their eat-before-this-day-or-you'll-get-Salmonella date) has existed for many years, according to a ministerial decree and this action merely states that these foods must be sold at a lower price. Meat and dairy is excluded but this move is described as "an immoral act" as few believe prices will actually be reduced - since that is at the discretion of the merchant. As the National Food Agency notes: "This is also a moral dilemma, to divide consumers into two groups: those who can afford basic food and those who, because of poverty, are forced to resort to dubious quality food." We presume this will also reduce the drag on pension and healthcare costs as death rates will rise?

S&P cuts ratings on 15 Spanish banks after sovereign downgrade - (Reuters) - Ratings agency Standard & Poor's cut the rating of 15 of Spain's banks on Tuesday after downgrading the sovereign to one notch above junk with a negative outlook on Friday as investors await a decision from Madrid on a request for aid. S&P cut the long-term rating on 11 banks and the short-term rating on four other lenders. The agency assigned negative outlooks on the long-term ratings of Spain's largest bank Santander and second largest BBVA. The agency said it expected to conclude its review of the wider implications of the sovereign downgrade on the banks' ratings in November. Spain's banks, hit by a prolonged recession and burst property bubble, face a capital shortfall of 59.3 billion euros ($76.7 billion), according an independent audit published end-September. Madrid has been offered a credit line of up to 100 billion euros to help recapitalise its banks, though has said it will only need around 40 billion euros of that.

Spain Plays Cat-And-Mouse Over Bailout - Over the past month, financial market pressure on Spain and Italy has eased following approval of a €700 billion euro zone bailout fund, the European Stability Mechanism, and the declaration by the European Central Bank that it will ride to the rescue of countries that apply for a bailout by buying unlimited amounts of their sovereign bonds on the secondary market, if necessary, to counter market speculation. Yet Spain’s public finances, in particular, are in poor shape. Its banks urgently need recapitalizing and it needs to repay more than €200 billion in sovereign borrowing next year. Many savvy investors believe Spain should ask its European partners for a bailout while the pressure is off. “He who hesitates is lost. Pride goeth before a fall,” Bill Gross, a well-known U.S. fund manager and investment guru, tweeted on Oct 11. “Spain should swallow its pride and ask for help now!” But here’s the catch: to be eligible for a bailout under the newly agreed rules, a nation would have to implement a range of tough conditions set by E.U. officials and the International Monetary fund. Financially, it would be a boon; politically, it could be a humiliation. At the very least, it would be a loss of sovereignty — and face.

Spain's exposure to the rating agencies - The recent downgrade of Spanish debt by the S&P is not going to have a significant effect on the bonds' eligibility as collateral at the ECB. The ECB takes the best of the four ratings of Moody’s, S&P, Fitch, and DBRS to determine the eligibility for repo collateral. DBRS currently has Spain as A−, making downgrades by other rating agencies irrelevant - for now. Private sector collateral requirements are based on different criteria (h/t Kostas Kalevras), but the impact of the private sector changing collateral requirements will be minimal. That's because Span's banking system is entirely dependent on the ECB for funding (€378 bn borrowed) - and the ECB criteria is what ultimately matters. Even if all the rating agencies (including DBRS) assign junk ratings to Spanish bonds, the ECB would make them eligible automatically as soon as Spain officially requests the bailout - which should be coming soon.  A DBRS downgrade, even by one notch, would however have an impact on haircuts. In the AAA to A- range the haircut is 1.5% for the shorter maturity bonds and 4% for the longer ones. In the BBB+ to BBB- range (DBRS is one notch above that, while the other rating agencies are already there), the equivalent haircuts go up to 6.5% and 9%. It's quite amazing how one relatively small rating agency in Canada has the power to increase the ECB repo haircut requirements by 5% for the whole Spanish banking system. These relatively loose inclusion criteria by the ECB are only available for central government bonds. Local and regional bonds (the equivalent to municipal bonds in the US) do not qualify for such eligibility framework. The ECB will simply not accept junk-rated regional bonds. Moreover DBRS does not rate many regional bonds in Europe, leaving them exposed to the big three rating agencies

Iberian Pain Only Getting Worse as Spanish Population Falls, Portugal Goes All in For More Failed Austerity - Yves Smith -  Wolf Richter’s latest post may seem a bit breathless, but my assumption is that this rhetorical choice is an effort to try to penetrate Eurocrisis fatigue. The continuing decay, the ongoing last minute patch-ups, the Punch and Judy show between Germany and anyone who dares say anything bad about its perverse creditor moralism, is feeling so stale that it’s easy to tune out. Yet even though the headlines all seem to be of a muchness, they mask an ongoing deterioration that at some point will produce a state change. For instance, the data Wolf cites points to an acceleration of a bad trajectory in Spain, both on the political and economic front. And even though Spain mavens may discount the number of people who demonstrated in favor of independence for Catalonia (it’s a perennially popular cause), what I found more disturbing was the thuggish threat by Supreme Court Justice Ruiz-Gallardón recounted in Wolf’s piece. While Spain implodes, things are not looking much better in its neighbor Portugal. As Delusional Economics recounts in a quietly grim post, “IMF ambulance too late for Portugese suicide.” Even though Christine Lagarde last week said it would be better to give countries who had made “reforms” more time if they were missing their austerity targets, Portugal apparently did not get the memo on time and instead is doubling down.

Portugal likely will require second bailout – Capital Economics - According to Jennifer McKeown, a Senior European Economist at Capital Economics, "Assuming that the Government is able to press ahead with its plans, a sharp economic downturn is likely to mean that borrowing does not fall as quickly as it expects." The Budget is based on a 1% fall in GDP next year, which measures of economic sentiment. With unemployment already at 15.9% and surveys of hiring pointing to worse to come, revenues will almost certainly continue to disappoint. The Troika might be willing to relax the deficit targets again. After all, there has been a slight shift in general opinion recently towards the idea that too much austerity is counter-productive. Portugal has already received about 80% of its €78.0B bailout package, leaving just €18.0B to be disbursed between now and July 2014. It has taken small steps in this direction by organizing a debt exchange to lengthen the maturity of some of its debt and issuing 18-month Treasury Bills. However, it is still a very long way off functioning normally and potential private buyers of Portuguese debt will become even scarcer as the recession deepens and fiscal targets are endangered. As such, "we still think that Portugal is likely to need another bailout if it is to avoid a disorderly default and euro-zone exit; and if the Troika insists on yet more austerity first, this will be extremely difficult to implement. If Greece leaves the euro-zone, Portugal remains the most likely candidate to follow." McKeown warns.

Portugal reveals tough 2013 budget: The Portuguese government has revealed details of its draft budget for 2013, one of the harshest in the country's recent history. Finance Minister Vitor Gaspar confirmed the average income tax rise would increase from 9.8% in 2012 to 13.2% next year. Portugal was granted a 78bn-euro ($100bn; £63bn) bailout last year. Mr Gaspar said the budget was the only way for the country to meet its targets under the bailout. "We have no room for manoeuvre," he said. "Asking for more time [under the bailout] would lead us to a dictatorship of debt and to failure." He also announced spending cuts worth 2.7bn euros next year, which would include laying off 2% of the country's 600,000 public sector employees. About 2,000 protesters gathered outside parliament on Monday to demand the resignation of the government, chanting: "The people united will never be defeated."

Thousands protest in Portugal over 2013 budget - There seems to be a protest almost every day somewhere in Europe, and last night it was the turn of the people of Portugal again. Under the watchful eye of hundreds of police in riot gear thousands of people took to the streets of the capital, Lisbon, to voice their anger of the passing of the country’s budget for next year. 2,000 or so protestors surrounded the Parliament building, where the budget was being formalised, in disgust over the fact that 2013 is most definitely going to be an extraordinarily tough time for the Portuguese people. Prime Minister Pedro Passos rubber-stamped yet more tax rises and harsh spending cuts, which will see the country spiral into a recession for the third year running. The cuts are needed to stay in line with the conditions of the 78 billion Euro (almost £63 billion) bailout, the government received last year to stop the country going bankrupt. The angry protestors cried out for the resignation of the PM and his government: "It’s time for you to leave" and "Passos, go, you’re a son of a gun." Finance Minister Vitor Gaspar said if the country doesn’t stick on the current path of austerity, it could be catastrophic for its people. Opposition Socialists called the tax hike 'a fiscal atomic bomb,' saying it denied the country growth and jobs creation.

French president pushing homework ban as part of ed reforms - How do you think this would go over in the United States? French President François Hollande has said he will end homework as part of a series of reforms to overhaul the country’s education system. And the reason he wants to ban homework? He doesn’t think it is fair that some kids get help from their parents at home while children who come from disadvantaged families don’t. It’s an issue that goes well beyond France, and has been part of the reason that some Americans oppose homework too. Hollande’s reform plans include increasing the number of teachers, moving the school week from four days to 4 1/2 days, overhauling the curriculum and taking steps to cut down on absenteeism. “Education is priority,” Hollande was quoted as saying by at Paris’s Sorbonne University last week. “An education program is, by definition, a societal program. Work should be done at school, rather than at home,” as a way to ensure that students who have no help at home are not disadvantaged.

Retirement No Option for Older Workers in Europe’s Crisis - Jean-Luc Guillaume always presumed he’d retire at about 60, just like his civil-servant father. Cutbacks to France’s retirement benefits, the European financial crisis and the cost of a recent separation have stretched out his horizons. “Financially, retirement just isn’t an option,” “I’m looking at 66 at the earliest.” Guillaume is part of a generation of European workers retiring later as the worst economic downturn in 70 years and higher retirement ages induce workers to stay longer. The proportion of over-55s in jobs has climbed even as unemployment rates have soared across the European Union. While many economists say increased work for elders doesn’t reduce job opportunities for the young, deferred retirement has become a political issue for those who say otherwise, especially as youth unemployment in the EU exceeds 20 percent.

Irish State Pushes Banks to Forgive Home Debt as Arrears Mount --- Ireland’s banks need to forgive some unsustainable housing debt, John Moran, the most senior official in the Finance Ministry said, as the nation’s central bank pressured lenders to act as arrears spiral. Ireland needs “to see solutions that involve much more dramatic write-off of debt in respect of households that are really in non-sustainable situations and have an inability to pay,” Moran said in a speech to bankers in Dublin today. Some 30 percent of Irish home loans by value are in arrears or have been modified, the central bank said today. The government has pledged or injected 64 billion euros ($83 billion) into its banking system and nationalized five of its six biggest domestic lenders. “The economic milk spilt in poor lending, the losses already incurred, have not even begun to be cleaned up,” Fiona Muldoon, the central bank’s head of supervision, said in a speech at the same event. “This is the stuff of denial.”

European Car Sales Crash Most In 2 Years But Q4 Earnings Hope Remains - Just when the channel-stuffed world was hoping for some good news, European car registrations pop up to smack the dream back to reality. A 10.8% YoY decline, the biggest drop in two years, makes it 11 months-in-a-row of dropping YoY comps. Before the crisis began, car registrations had risen on average 1.7% YoY each month; in the 4.5 years since they have dropped on average 4.7% YoY each month. The Eurozone year-to-date is -10.5% with Cyprus (-19.4%), Greece (-42.5%), Italy (-20.5%), Portugal (-39.7%), and Spain -11.0%. However, Spain's very recent past has been extreme to say the least with a 36.8% YoY drop from last September. Interestingly, Land Rovers are up 42.3% YTD while Alfa Romeos are down 31.6% YTD (and Mercedes and BMW down around 1% YTD). But apart from that, Europe is doing great - just look at earnings expectations for Q4.

Europe Auto Market Headed for Biggest Plunge in 19 Years - European car deliveries headed for their biggest annual plunge in 19 years after the region’s deliveries tumbled 11 percent in September. Registrations last month dropped to 1.13 million vehicles from 1.27 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today. Nine-month sales fell 7.2 percent.The market is now on track to decrease as much as 10 percent in 2012, the worst sales slump since the aftermath in 1993 of the region’s currency crisis, the ACEA said. Renault SA (RNO) posted a European sales drop in September of 29 percent, while Fiat SpA (F) decreased 19 percent. Tiremaker Nokian Renkaat Oyj (NRE1V) forecast second-half operating profit will fall on weak demand. “We have seen the European market deteriorate, from an already weak level, rather than recover,” said Marc-Rene Tonn, a Hamburg-based Warburg Research analyst. “That is something that is weighing on the shares.”

Debt in a Time of Protests - iMFdirect - As the world economy continues to struggle, people are taking to the streets by the thousands to protest painful cuts in public spending designed to reduce government debt and deficits. This fiscal fury is understandable.  But with a sluggish recovery, efforts at controlling debt stocks are taking longer to yield results, particularly in advanced economies. Gross public debt is nearing 80 percent of GDP on average for advanced economies—over 100 percent in several of them—and we do not expect it to stabilize before 2014-15.  So what can governments do to ease the pain and pave the way for successful debt reduction?  I would highlight two key premises that governments must meet for fiscal consolidation to succeed. Let me elaborate on both.

  1. First, governments need to put together a credible medium-term plan and stick to it. This plan should be based on structural (not nominal) targets to allow flexibility in response to the economic cycle. Such plans are a vital ingredient when it comes to restoring confidence. For most countries, this means tackling the thorny issue of entitlement reform.
  2. Second, governments need to ensure that fiscal adjustment is fair and carried out in a transparent manner. Spending cuts and tax raises that people perceive as unfair are unlikely to be sustainable.

Largest Spain union calls national strike Nov. 14 - Spain's largest union federation said Friday it would organize a nationwide strike Nov. 14, in a new sign of how economic reforms the new conservative government is undertaking are raising social tension even as the country considers an international bailout. The strike announced by Comisiones Obreras would be the second since Spanish Prime Minister Mariano Rajoy took power in December. The second-largest union group, Union General de Trabajadores, also will likely approve a strike for the same day later Friday. In calling the concerted union action, Spain's largest unions would join those in Portugal that have planned work stoppages for the same day. They are protesting severe budget cuts their governments are enacting in order to meet strict budget-deficit targets. In Spain, the government has reduced unemployment benefits, government-workers' pay and some money for health and education.

Spain: Decision on Bailout Within Weeks - The Spanish government said Wednesday it will decide within the next few weeks whether to ask for outside financial help, noting it might opt for a precautionary line of credit instead of bailout cash. Spain is under pressure to tap a eurozone financial aid system that would give the European Central Bank the green light to buy the country’s government bonds. That would lower Spain’s borrowing rates in bond markets, relieving its financial burden. A spokeswoman for the Spanish economy ministry, said the government was also still considering not asking for any aid at all, not even a credit line. She was speaking on condition of anonymity in keeping with ministry policy. The issue is likely to dominate a summit of the 27 leaders of the European Union on Thursday and Friday. Germany has said Spain does not need a bailout and Prime Minister Mariano Rajoy may be reluctant to accept a rescue ahead of regional elections this Sunday. But analysts say that if Spain delays the request too long, investors may grow jaded and sell off its bonds again.

Moody’s Keeps Spain Rating Above Junk on Bailout Prospects -- Spain kept its investment grade credit rating from Moody’s Investors Service, which said the European Central Bank’s willingness to buy the nation’s debt reduces the risk of the country losing market access. Moody’s assigned a negative outlook on its Baa3 rating, one step above junk, as it concluded a review for a possible further downgrade of Spain initiated in June, the New York-based company said in a statement yesterday. The willingness of the ECB to purchase Spain’s government bonds on the secondary market “is an important step” for Spain to maintain access to credit markets, Kathrin Muehlbronner, a Moody’s analyst in London, said in a telephone interview. Creditworthiness concerns have grown since Prime Minister Mariano Rajoy requested as much as 100 billion euros ($131 billion) in European Union aid to shore up Spanish lenders amid signals the nation may miss its budget-deficit goals. Standard & Poor’s downgraded Spain on Oct. 10, saying it doubted the loans will be mutualized among euro-region nations.

Quelle Surprise! Spain Shows Bank Stress Tests Living Up to Their Bad Name, Dud Loans Rise 0.6% in One Month - Yves Smith - Bank stress tests have become a contemporary exercise in “the emperor has no clothes”. Everyone by now (or at least everyone who pays attention) knows that the stress tests are an exercise in confidence building, with emphasis on the “con”. And even when they sorta work, they don’t work. The latest stress tests, those on Spanish banks, are hewing to the well established pattern. As Eurocrisis junkies may recall, Spain initially asked for “up to” €100 billion. After considerable theatrics, handwaving, and a rumor that the number would be €60 billion, the Spanish government announced that a study conducted by Oliver Wyman ascertained that in a worse case scenario, Spanish banks would need €59.3 billion. Awfully precise, that number. Everyone was relieved that the number was so much lower than the €100 billion that had been bandied about before that Spain’s banking problems were treated as if they were well nigh resolved.  In keeping with the usual half life for Eurorescues, here we are, a few months later, and confidence is evaporating. From Bloomberg, “Spain Banks Face More Losses as Worst-Case Scenario Turns Real.” Spanish bank stress tests by management consultants Oliver Wyman have factored in an economic contraction totaling 6.5 percent between 2012 and 2014 in an adverse scenario that the government and Bank of Spain said has a probability of about 1 percent.

Chart Of The Day: Spanish Bad Loans Hit New Parabolic Record - It just refuses to get any better in Spain, whose banks are now aggressively marking down real estate to something resembling fair value. Last month we reported that Spanish bad loans jumped by the most ever, rising by over 1% to just under 10%. Today, last month's number was revised even higher to 10.1%. But the worst news is that the August bad loan total just hit a fresh record of €178.6 billion, or 10.5% of the total €1,698.7 billion in bank loans. Making things worse is that the primary bank funding lifeline - deposits - continues to flow out. That both Spain, and its banking sector are utterly insolvent, is clear to anyone but Oliver Wyman and those who have bought SPGBs (although granted the latter are merely hoping for a quick flip). And the ECB of course. Indicatively, as a % of GDP, this would be equivalent to roughly $2.7 trillion in US bank loans going sour (for more on the collapse of Spanish banking, and the laughable stress test whose worst case has already become the baseline, read here). The chart summarizing this staggering statistic is below.

IMF urges aid for Italy, Spain but Rome baulking (Reuters) - The International Monetary Fund called on the eve of a European Union summit for both Spain and Italy to seek euro zone assistance to draw a line under the bloc's debt crisis, but Rome has rebuffed the idea and Madrid seems likely to apply alone. The two-day Brussels summit will debate steps towards a single banking supervisor and proposals for closer euro zone integration, including German Finance Minister Wolfgang Schaeuble's idea of a super-commissioner with veto powers over national budgets. No decisions are expected this week and there is no certainty as to when Spain will come off the fence. Spain dodged a bullet on Tuesday when Moody's maintained its credit rating at investment grade, with a negative outlook, on the assumption that Madrid will trigger European Central Bank intervention soon to lower its borrowing costs.

Suspicious Italian transactions rise sharply - Suspicious bank transactions jumped by a third in Italy last year, the central bank said on Wednesday, a sign that tax evaders, swindlers and mobsters are cashing in during the worst economic crisis since the Second World War. The number of dubious money exchanges rose to almost 49,000 in 2011, a 31.5-per-cent increase from a year earlier and seven times the number reported in 2009, according to an annual document compiled by Bank of Italy’s financial information unit.talian anti-mafia prosecutors say crime syndicates have tightened their grip on the euro zone’s third-biggest economy during the slump as banks have cut lending and mafia groups, flush with cash, increase investments in the legitimate economy. “It’s clear that the crime groups involved in drug trafficking have enormous sums of money to invest and that during an economic downturn the cash is needed by many businesses, including honest ones,” Vittorio Mete, a mafia researcher at the University of Catanzaro, told Reuters. Many of the suspicious transactions turn out to be red herrings, but about a third of those investigated last year proved to be illegal, the report said.

If Italian corruption were its own country, it would be the world’s 76th largest economy - Official corruption siphons 60 billion euros out of government finances every year, according to a new report by the Italian audit court. That’s about $78.8 billion. Here are a few stats to put that into context:

  • • According to the IMF’s economic data, Italian corruption losses are larger than the national economy of Serbia, which it ranks 76th in the world at $78.7 billion.
  • • This new economy would be roughly equivalent to the GDP of Italy’s eastern neighbor, Croatia.
  • • In 2011, the Italian government spent $1.112 trillion and brought in $1.025 trillion, a gap it could close almost entirely by recovering estimated corruption losses for that year.
  • • Italian public debt is 120% of GDP, the eighth-highest in the world. It’s worth over $2.5 trillion.
  • • It could be even worse than that: In his excellent article on Italy’s culture of tax evasion, Anthony Faiola reported last year that “evaded taxes on legal commerce coupled with lost taxes from illicit or under-the- table deals are costing the national treasury about $340 billion a year.” This would rank the Italian “shadow economy” between the national GDPs of Austria and Ukraine.

S&P downgrades Cyprus deeper into junk — International ratings agency Standard & Poor's has cut Cyprus' credit rating to B, three notches deeper into junk because of the government's delay in swiftly negotiating a bailout with potential creditors in order to support its ailing banks. The agency also warned in a statement Wednesday that another downgrade could follow. It said bad domestic loans held by Cypriot banks have increased faster than expected, possibly raising the amount of money they would need to recapitalize. That would, in turn, push the country's debt to 130 percent of gross domestic product, making it difficult to service and increasing the risk that the debt may need to be restructured. Cyprus asked for international financial aid in June to support its Greece-exposed banks.

Germany trims 2013 growth forecast to 1% on EU debt crisis - Two years after expanding at its fastest rate since reunification, Germany’s economic growth is seen at just 1 per cent next year, finally hit by the euro zone crisis that has hammered most of its partners. The government chopped its 2013 growth forecast on Wednesday to 1 per cent, down from a 1.6 per cent forecast in April. For this year, the economy ministry expects growth of 0.8 per cent, up from 0.7 per cent in April. Germany’s economy powered through the first two years of the euro zone’s sovereign debt crisis, posting 4.2 per cent growth in 2010 and 3 per cent last year at a time when some peers were seeking bailouts and others were grinding to a halt. Its export strength saved the currency bloc from falling into recession up until the second half of this year. But uncertainty about policymakers’ ability to curtail the crisis has resulted in companies postponing investment, and turmoil in Germany’s main trading partners could weigh on exports in the second half of the year, the ministry said.

Euro Exit by Southern Nations Could Cost 17 Trillion Euros - A new study by a German think tank warns that a euro exit by Greece, Spain, Portugal and Italy would cut global GDP by 17 trillion euros and plunge the world into recession, with France suffering the biggest loss. A Greek exit alone would be manageable, but must be avoided to forestall a domino effect, it says. A Greek euro exit on its own would have a relatively minor impact on the world economy, but if it causes a chain reaction leading to the departure of other southern European nations from the single currency, the economic impact on the world would be devastating, a German study warned on Wednesday. Economic research group Prognos, in a study commissioned by the Bertelsmann Stiftung, estimated that euro exits by Greece, Portugal, Spain and Italy would wipe a total of €17.2 trillion ($22.3 trillion) off worldwide growth by 2020. The researchers arrived at a particularly bleak assessment because they didn't just calculate the losses of creditors who had lent money to the crisis-hit nations. They also analyzed the possible impact of a euro collapse on economic growth in the 42 most important industrial and emerging economies that make up more than 90 percent of the world economy. Using an econometric model, Prognos first calculated the effect of a Greek euro exit, and then simulated the step-by-step fallout from Portugal, Spain and Italy abandoning the currency as well.

Merkel pushes EU veto over national budgets - German Chancellor Angela Merkel said Thursday the European Union’s top financial official should have the power to veto the national budgets of member states. Merkel, addressing the Bundestag lower house of parliament ahead of an EU summit beginning later in Brussels, said the EU’s economics commissioner should have the authority to declare a budget “invalid”. “We believe, and I say that for the whole government, we could go further by granting the European level real rights to intervene in national budgets” that breach the limits of the EU’s growth and stability pact, Merkel told lawmakers.

Germany Seeks to Strip National Sovereignty from Eurozone Members - The EU will hold one of its regular summits, and the participants are all patting themselves on the back because they don’t believe they have an immediate near-term crisis to deal with. Except they do. That crisis isn’t about whether or not Spain will accept a bailout (the Spanish government is reluctant, because they would be forced from the outside to impose conditions they have largely pre-emptively proposed from the inside, so who cares?), or whether or not Greece will exit the euro. The crisis concerns the prospect of diminished economic capacity for a prolonged period, ruining the lives of tens of millions of Europeans for decades to come, for no legitimate reason. French President Francois Hollande actually touched on this prior to the summit. François Hollande, the French president, has warned for the first time that the Paris-Berlin motor driving Europe could stall over deep differences on how to resolve the euro crisis, insisting on a climbdown by Angela Merkel in her emphasis on austerity and the surrender of national powers to tighten fiscal discipline. While the Franco-German relationship was the driving and “accelerating” force of the EU, Hollande said, “it can also be the brake if it’s not in step. Hence the need for Franco-German coherence.” [...]

EU mulls junior debt haircuts in case of recapitalizing banks (Reuters) - The euro zone might impose losses on holders of junior debt of banks that would be directly recapitalized with euro zone funds as one of the conditions for such aid, but is reluctant to impose such losses on senior bondholders, an EU document said. The confidential document for the Task Force for Coordinated Action (TFCA) - a working group of the Economic and Financial Committee preparing EU finance ministers' meetings - describes the implications of the European Commission's bank resolution directive from June for direct bank recapitalization by the European Stability Mechanism (ESM). The ESM, a 500 billion euro permanent bailout fund of the 17 countries sharing the euro, will be able to directly recapitalize euro zone financial institutions, without the involvement of governments, once the European Central Bank takes effective control of euro zone bank supervision. ECB President Mario Draghi said last Saturday such supervision could be operational from January 1, 2014. "On the one hand it would seem excessively rigid to make the use of a full bail-in tool (i.e. including holders of senior debt) a compulsory prerequisite for ESM intervention, especially in circumstances where it could exacerbate financial turmoil and impair financial stability," . "On the other hand, it could be possible to conduct some form of bail-in as part of the conditionality of a financial assistance programme to occur prior to the effective capital injection by the ESM," the document said

EU Summiteers Feast While Eurozone Smolders - So it’s yet another two days where the leaders of the EU get together for a dinner (this time it’s tarte, fine eggs/mushrooms, braised veal on bed of fresh spinach followed by a chocolate trio) and attempt to thrash out greater economic integration. Up for discussion is Greece and Spain, what to do with the funds from the financial transaction tax and most importantly the plan for a banking union. Given previous results the expectations are running fairly low and Reuters reported that Hollande and Merkel are already at odds over some key points: Germany and France, Europe’s two central powers, clashed over greater European Union control of national budgets and moves towards a single banking supervisor before a summit of the bloc’s leaders began on Thursday. German Chancellor Angela Merkel demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules, but French President Francois Hollande said the issue was not on the summit agenda and the priority was to get moving on a European banking union. The two leaders met privately for 30 minutes just before the start of the 22nd EU summit since the euro zone’s debt crisis erupted nearly three years ago.  In the lead up to the summit Angela Merkel had stated that Germany wouldn’t be rushed on the banking union and reports in the last hour look as if she has got her way:

Debt crisis: EU summit - live - - Too many Greek reforms are being implemented at a "snail's pace", Angela Merkel has said, as the German Chancellor prepared to join leaders at an EU summit where a banking union and Spanish bail-out will be high on the agenda. In case you missed it last night, Newsnight's Paul Mason reported that some members of the police were "colluding" with the far-right party Golden Dawn. Anthee reports that the first stun grenades have been fired by police. "We could be kicking off," she adds. While our correspondent Anthee Carassava, writes: Thursday's protest has drawn one of the biggest attendance yet of an anti-austerity demonstration in recent months. Thousands of workers have flooded the city centre, a stark contrast to previous marches with dwindling crowds. Streets in Athens were packed as flows of workers waving banners and chanting "don't bow down, revolt!" marched in front of parliament to voice their opposition to continued austerity. The peaceful march captured an almost carnival atmosphere as street hawkers rolled out carts and mobile grills selling water, soda and kebabs -- even nuts. Watching waves of workers plough through the capital, Anna Tricha, a first-comer to Athenian demonstrations said the action "was too little, too late." We "should have been more forceful from the start; it's like we resigned to austerity out of guilt." Angela Merkel spoke this morning of creating a new fund - financed by the proceeds of a financial transactions tax - that would create "a new element of solidarity" for troubled states. The fund would be used to finance individual projects and be limited in time, she added.

EU leaders agree on bank supervisor Aljazeera (video) European Union leaders have agreed to create a single supervisor for banks in countries that use the euro, and said it would "probably"' become operational sometime next year. The deal, reached at a summit of EU leaders in Brussels on Friday, represents a shaky compromise between the Germans and French, who had been tussling over how to shore up the eurozone's banking system. France has been pushing to get all 6,000 banks in the 17 countries under the supervision of one European body by the end of this year. Leaders agreed in June that, once a supervisor is in place, struggling financial institutions would be able to tap Europe's emergency bailout fund, the European Stability Mechanism, directly. At the moment, money to help banks has to go through the country's government - placing more strain on state finances

Europe mistakes market lull for vote of confidence -- Sorry to quibble, but there was no EU banking union deal last night. It was a step backwards from agreements already made in June. Germany has succeeded in kicking the issue into touch until after the Bundestag elections late next year. There will be no decision until deep into 2013 on whether to recapitalise the banks (ie crippled Spanish banks) directly through the European Stability Mechanism.The crucial issue of whether this can be applied "retroactively" to legacy assets remaining from the Spanish burbuja will be discussed later by finance ministers. ie, by the same AAA bloc that has already said it won't underwrite this mess.The final text repeats verbatim the loose commitment from the June summit to break the vicious circle between banks and sovereign states, but Europe is not in fact any closer to doing so. The timetable has slipped further.As our Brussels correspondent Bruno Waterfield reports, the EU has wasted the window of opportunity offered by the ECB's Draghi Plan to restore market trust.

Crisis strains Hollande and Merkel’s unity - When François Hollande and Angela Merkel marched shoulder to shoulder into the EU summit on Thursday night, their public show of unity was undermined by the German chancellor, with a stern look on her face, vigorously shaking her head. The joke quickly flashed around the Brussels press corps, alert to every nuance of body language between the two, that Ms Merkel was saying “nein, nein, nein!” to the French president. In fact, they had just stitched together one of the many compromises – this time on the timetable for a eurozone banking union – that Paris and Berlin have been forced to make repeatedly as they battle to overcome the single currency crisis. Nevertheless, the past week has marked a testing time for the EU’s most important bilateral relationship, with the Socialist Mr Hollande letting fly with some pointed barbs at Ms Merkel – and receiving return fire across the Rhine. Mr Hollande was especially riled that just when he thought the eurozone should be concentrating on short-term moves to cement recent relative calm in the markets, Germany was dragging its feet on banking union and instead making politically contentious proposals on deepening political union. “It has not escaped my notice that those who are most eager to talk about political union are sometimes those who are most reticent about taking urgent decisions that would make it inevitable,” Mr Hollande said in an interview with six European newspapers. His denial that he was “not targeting anyone in particular” was less than convincing.

IMF Rejects Own Research, Backs Austerity in Portugal - The EU wrapped up its summit, and the major policy announcement was an agreement for a single Eurozone bank regulator, a step on the road to common depository insurance. This is a couple years off, and leaders announced that no country would be able to get bailout funds for its banks until the regulator was in place, which could pressure Spain into tapping that bailout fund for its government operations, if they’re on the hook for rescuing their own banks in the near term. In addition, Germany and France appear divided over the next steps on fiscal integration, with Germany emphasizing budget discipline and France warning against recession. But I want to focus on this remarkable statement from the IMF, a complete rebuke of the analysis of their own organization from just a week ago. At that time, the IMF released analyses showing that the fiscal multiplier for austerity was bigger than they thought, meaning it was more damaging to economies that engaged in it, especially in the midst of a recession. Presumably they would associate this new data to assessing Portugal’s austerity plans, which include a large tax increase. In fact, just a couple weeks ago, the IMF warned against austerity in Portugal as potentially counter-productive, citing the risk of recession as higher than the risk of more debt. But I guess that didn’t hold, because now the IMF describes the Portuguese austerity program as “imperative"

REPORT: Greek Bailout Negotiations With The Troika Have Broken Down - Per Bloomberg, the Athens News Agency is reporting that talks between Greece and its troika of international lenders – the EU, ECB, and IMF – have broken down. The state-run news agency's story, via Bloomberg: A second meeting between the heads of the EU-IMF troika mission in Athens and Greek Labour Minister Yiannis Vroutsis on Tuesday afternoon ended abruptly a few minutes ago, after the two sides hit deadlock for the second time in the same day. Sources in the labour ministry cited "complete disagreement" between the two sides on the issue of three-year wage maturation periods. They said that the labour ministry had been prepared to continue the talks but the representatives of Greece's creditors had departed. Perhaps the bullish sentiment toward Greece is a bit early.

Yanis Varoufakis: The Euro Crisis as a Spectacular Political Failure - Yves here. This post is the text of a speech Yanis delivered in Melbourne at the CPA annual conference, as part of a debate with Norman Lamont, the UK’s former Chancellor of the Exchequer under John Major.

Greece Prepares Second Wave of Privatizations - Greece plans to launch tenders to sell or lease a string of state assets, including its biggest refiner and two largest ports, as it battles to pay down debt and meet the terms of an international bailout. The deals will be a second round of long-delayed privatizations after six projects which are expected to be done in early 2013. “We have some very significant assets and tenders to launch in the next few months,” Yannis Emiris, head of Greece΄s HRADF privatization agency told a conference on Oct. 16. Athens plans to launch tenders to sell stakes in refiner Hellenic Petroleum, the country΄s two biggest ports in Piraeus and Thessaloniki, its second-biggest water company, Thessaloniki Water, and Larco, one of the world΄s biggest nickel producers. The country also plans to seek investors for the country΄s biggest airport in Athens, the Egnatia motorway as well as small regional airports and marinas. Privatizations are a key part of Greek efforts to pay down debt and return from the verge of bankruptcy. Under the terms of its EU-IMF-ECB Troika bailout plan, Athens is supposed to raise 19 billion euros ($25 billion) by the end of 2015 and about 50 billion euros ($65.1 billion) by 2020 under its asset sale programme.

Greeks launch two days of protest against new austerity cuts - Lawyers, notaries, pharmacists and doctors were told by their respective associations to walk off the job ahead of a full-blown general strike on Thursday called by the country's main unions. Journalists also staged a one-day walkout. After similar demonstrations in Spain, Portugal and France in recent days, Greek protesters want to send a message to the European Union that societies facing successive austerity waves to meet fiscal goals have reached their limit. "Wage-earners and pensioners have exclusively borne the weight of the economic crisis while the tax cheats who created it are in the clear," said leading union GSEE, which represents hundreds of thousands of private sector employees. GSEE has called its members to protest on Thursday to block "measures that wipe out both society and the economy". Civil servants are joining the mobilisation and the association of Greek traders has also called for a general store shutdown on Thursday.

Athens erupts into violence as workers strike against cuts - Tens of thousands of Greeks joined the second nationwide strike in three weeks, moving to bring the country to a near-standstill in a bid to show European Union leaders meeting in Brussels that fresh austerity cuts being demanded by Greece's lenders would cripple society and further depress an already battered economy. Protest rallies began peacefully but were disrupted when demonstrators broke away from the crowd near Syntagma Square outside parliament and threw rocks, bottles and firebombs at police, who responded with tear gas. A crowd, estimated by police at 15,000, thinned out, some with tears streaming from their eyes. A rally by the Communist Party drew another 7000 people, a police spokeswoman said. Unions said the turnout was about 40,000 people, double the official estimate.

BBC Newsnight Report On Golden Dawn Violence - Société Générale's Dylan Grice recently described the way Greek police were turning a blind eye to the Golden Dawn political party's harassment of immigrants as "chilling." But judging by a report from BBC's Paul Mason on the situation on Newsnight last night, "chilling" may not be a strong enough word to describe what's going on in the streets of Greece right now. It's evolving into an incredibly scary scenario for immigrants who live in Greece. And Mason reports that Greek politicians, the media, and the police are all a part of it. Meet Ilias Panagiotaros, a Greek MP and "the de facto commander of the Golden Dawn attack squads," as Mason describes him. BBC Newsnight Panagiotaros allegedly led an attack on a Greek theater where an Albanian was directing a play last week. Golden Dawn supporters clashed with riot police and hurled bricks while the actors and guests were trapped inside – unsure of whether help was on the way.

World Food Day: Rising food prices hit Greece (BBC Video) - In Greece, which is in its fifth year of recession, the cost of dairy products are the highest in the EU. Many are relying on food handouts from charities and others are returning to villages to survive on what they grow.

UNICEF: Over 439,000 Children in Poverty in Greece - More than 439,000 underage children are living below poverty level in Greece due to the ongoing crisis, according to a UNICEF report released on Oct. 16 on the occasion of the World Feed Day 2012 and the International Day for the Eradication of Poverty. According to the report, 37,1 percent and 18,4 percent of all poor children in Greece live in families that have shortage in meeting their daily needs including heating. In most European countries child poverty percentages have increased. In particular, France and Germany have recorded the biggest increase in numbers of children suffering from poverty. Single parent families are worst affected by the crisis. Child poverty in Greece has reached 23 percent, while the respective percentage for Europe is 20.5 percent.

One in 10 live in food poverty - Some 10% of people in Ireland cannot afford or have no access to nutritious food, a new report on food poverty has shown. Food Poverty refers to a person's inability to have an adequate and nutritious diet due to issues of affordability and accessibility. This new report, ‘Measuring Food Poverty in Ireland', was launched by Safefood. It reveals that those most at risk include people on low incomes, lone parents, those with an illness or disability, the unemployed, those with poor education and families with three or more children under the age of 18. The report also notes that between 2009 and 2010, 7% of people were living in food poverty, so these latest figures show a 3% increase in the problem. According to Dr Cliodhna Foley-Nolan of Safefood, the ‘immediate effects' of food poverty include poor energy levels and difficulties in concentration. "The longer-term public health consequences for those households living in food poverty are ill health and higher rates of diet-related chronic diseases, such as osteoporosis, type 2 diabetes, obesity and certain cancers," she added.

Increase in pupils going to school hungry - Around 40% of breakfast clubs have recently closed in schools across England due to budget cuts. Now, cash-strapped schools across Yorkshire are increasingly having to rely on food banks to keep their daily breakfast clubs going. That's according to a survey of UK teachers which also reveals one in ten schools are now relying on food recycling charities to feed pupils, while a third of teachers admit to taking food into schools to give to the hungriest children. The average breakfast club costs just £4,000 to run per year, however cuts to school budgets are leaving a financial gap which many are struggling to fill.

UK Austerity Push May Have Hurt Growth More Than Thought -OBR - The U.K. government's budget watchdog Tuesday joined the International Monetary Fund in warning that austerity measures may be exerting more of drag on the country's economic growth than previously thought. The independent Office for Budget Responsibility said the coalition government's program of spending cuts and tax increases could partly explain why the U.K. economy only grew 0.9% between the first quarter of 2010 and the second quarter of 2012--significantly lower than its forecast ...

Thousands expected at UK anti-austerity protest - Tens of thousands are expected to march through London on Saturday in what is likely to be the largest demonstration in Britain this year against government austerity measures. Prime Minister David Cameron's push to reduce one of Europe's biggest deficits has drawn howls of protest, with critics arguing that austerity is not working and calling for urgent measures to stimulate growth. The Trades Union Congress (TUC), Britain's umbrella union body, said people from across the country would join Saturday's “A Future That Works” march through central London, and there will be similar demonstrations in Glasgow and Belfast. “The evidence is mounting that austerity is failing,” said TUC General Secretary Brendan Barber. “More than 2.5 million people are out of work, a further three million are not working enough hours to make ends meet and wages have been falling every month for the last three years.” In March last year at least 250,000 people joined a TUC-organised protest in London, the largest since a mass rally against war in Iraq in 2003. It turned violent after radical splinter groups broke away from the main march.

Britain facing new £1.5 billion bill to pay for Brussels pay and perks - British taxpayers face an extra £1.5 billion bill to pay for the increased costs of Brussels bureaucracy, as governments warn that the cost of pensions for EU officials is set to double.The Daily Telegraph has seen a confidential letter, signed by Britain and seven other governments, which reveals that they are "very concerned" because the cost of EU pensions is forecast to double to more than £2 billion a year by 2045. Eurocrats already retire on a gold-plated 60 per cent of final salary scheme – on average £57,000 each – which costs the cash-strapped national governments almost £1 billion a year. But it is growing fast because of the increased number of staff employed as the EU expanded from 15 to 27 countries since 2004. The letter, from the eight countries who pay more into the EU budget than they get out of it in benefits, also reveals that the European Commission is demanding a 26 per cent increase to pay for the costs of its civil service for the next seven year budget period. The proposed 2014 to 2020 budget would take the cost of the European civil service from £45 billion to £57bn, an increase that countries say is wrong at a time when national public sector workers are facing job losses and pay freezes or cuts.

UK mugged by eurozone banking union? -Whether we like it or not (some don't) the City of London and financial services is important to the UK economy. Depending on what you include in that industry, it represents between 8% and 14% of national output or GDP - and banks and banking are (again for better or worse) the core of the City. When the entire banking system went to the brink of collapse, and in the process hobbled our economy for years to come, we learned the hard way that proper regulation and supervision of our banks (which was so singularly absent for years) is of the greatest national importance. Which is why there are mixed feeling in the government and among our regulators at this morning's agreement by eurozone leaders to centralise supervision of eurozone banks: during the course of next year, the European Central Bank will acquire responsibility and the tools for trying to prevent banks going bust and winding up those that get into irredeemable trouble. In one sense, this will be seen as very good news for the UK - because it is an important step on the way to preventing a disorderly fracture of the currency union, which could muller our economy. The reason this kind of so-called "banking union" matters is that in time (though we don't quite know when, but probably next year) it will be the trigger for transferring the financial burden of bailing out and strengthening Spain's chronically weak banks from the beleaguered and over-stretched Spanish state to all eurozone members, via the European Stability Mechanism or ESM (the currency union's new bailout fund).

Misusing cyclically adjusted budget deficits - Chris Dillow alerts us to new claims that the UK government’s finances were in a terrible state before the financial crisis. Latest estimates from the IMF and OECD put the UK’s cyclically adjusted budget deficit in 2007 at around 5% of GDP, and the usual suspects have used these numbers to justify the theme that the Labour government was grossly irresponsible in fiscal terms before the recession. Chris explains why this might be quite acceptable to offset surpluses being run in the private sector. However as these figures appear to contradict what I argued about the Labour government’s fiscal record in this post, I want to explore a little bit where this number comes from.

BoE's Tucker: Worst may still be ahead for banking - The "worst may still be ahead" for the banking system, the Bank of England's deputy governor has told a gathering of leading bankers. Paul Tucker said reserves held by banks were still not calibrated for the "end-of-the-world risks" that remained a possibility. He added that bank bosses should be paid in debt, so they had a stake in the survival of their institutions. Mr Tucker is a leading contender to be the Bank of England's next governor. Speaking at the British Bankers' Association's (BBA's) annual conference in London, Mr Tucker said that the most important issue ahead was ensuring that banks could be allowed to fail in an orderly way. This should be done without taxpayer support, he said. This would also make it easier for new, smaller entrants to the banking sector and encourage competition in a UK market dominated by a small number of institutions.

Bank of England Divided on Continuing Stimulus Measures - Policy makers at the Bank of England are divided over the future of their multibillion-pound program of bond purchases to stimulate the economy, according to minutes of their discussions released on Wednesday, suggesting that prospects for an expansion of the program in the near term may be fading. With the British economy likely to emerge from recession in the third quarter but still facing extremely weak growth, many analysts expect more stimulus in November. But there is also a growing sense that, with interest rates already at a record low and the economic effects of the central bank’s asset purchases unclear, monetary policy is becoming less effective as a means of stimulus. Instead of central bank stimulus measures, some economists favor a slowdown in the pace of large government spending cuts intended to reduce the country’s budget deficit. The bank’s policy makers also said that consumer price inflation was still above the bank’s 2 percent annual target and probably would not decline this year, as had been hoped, because of rising energy and food costs. Economists note that inflation argues against an increase in stimulus, for fear of overheating the economy.

Will central banks cancel government debt? - As the IMF meetings close in Tokyo this weekend, it is obvious that governments are struggling to find the correct balance between controlling public debt, which now exceeds 110 per cent of GDP for the advanced economies, and boosting the rate of economic growth. The former objective requires more budgetary tightening, while the latter requires the opposite. Is there any way around this? One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE). After all, the government and the central bank are both firmly within the public sector, so a consolidated public sector balance sheet would net this debt out entirely. This option has always been viewed as extremely dangerous on inflationary grounds, and has never been publicly discussed by senior central bankers, as far as I am aware However, Adair Turner, the Chairman of the UK Financial Services Agency, and reportedly a candidate to become the next Governor of the Bank of England, made a speech last week that said more unorthodox options, including “further integration of different aspects of policy”, might need to be considered in the UK. Two separate journalists (Robert Peston of the BBC and Simon Jenkins of The Guardian) said that Lord Turner’s “private view” is that some part of the Bank’s gilts holdings might be cancelled in order to boost the economy. Lord Turner distanced himself in public from this suggestion on Saturday. However, the notion will now be widely discussed. It is easy to see how the idea could appeal to a finance minister facing the need to tighten fiscal policy during a recession in order to bring down the public debt ratio. Why is this such a radical idea? No one in the private sector would lose out from the cancellation of these bonds, which have already been purchased at market prices by the central bank in exchange for cash. The loser, however, would be the central bank itself, which would instantly wipe out its capital base if such a course were followed. The crucial question is whether this matters and, if so, how.

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