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

Saturday, October 6, 2012

week ending Oct 6

Fed's Balance Sheet Grows Modestly In Latest Week - The Fed's asset holdings in the week ended Oct. 3 climbed to $2.810 trillion, from $2.806 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.653 trillion on Wednesday from $1.648 trillion. The central bank's holdings of mortgage-backed securities edged up to $834.99 billion from $834.98 billion a week ago. The Fed's portfolio has tripled since the financial crisis of 2008 and 2009 as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy. Thursday's report showed total borrowing from the Fed's discount lending window was $1.57 billion Wednesday, down from $1.73 billion a week earlier. Borrowing by commercial banks fell to $17 million from $95 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.585 trillion, down from $3.594 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts declined to $2.880 trillion from $2.890 trillion in the previous week. Holdings of agency securities grew to $705.00 billion from the prior week's $703.65 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - October 4, 2012

FOMC Minutes: "Most participants agreed numerical thresholds could be useful" - From the Fed: Minutes of the Federal Open Market Committee, September 12-13, 2012 . Excerpt:  Many participants anticipated that such a program would provide support to the economic recovery by putting downward pressure on longer-term interest rates and promoting more accommodative financial conditions. A number of participants also indicated that it could lift consumer and business confidence by emphasizing the Committee's commitment to continued progress toward its dual mandate. In addition, it was noted that additional purchases could reinforce the Committee's forward guidance regarding the federal funds rate. Participants discussed the effectiveness of purchases of Treasury securities relative to purchases of agency MBS in easing financial conditions. Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement of late.  A few expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues. In discussing the costs and risks that such a program might entail, several participants reiterated their concern that additional purchases might complicate the Committee's efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future and potentially unmooring inflation expectations.  However, most participants thought these risks could be managed since the Committee could make adjustments to its purchases, as needed, in response to economic developments or to changes in its assessment of their efficacy and costs.

Fed members disagree over when to reverse policy - The Federal Reserve's minutes from its September policy board meeting show general consensus over the need to provide more economic stimulus. By contrast, members show significant disagreement about the finer details, particularly regarding what economic conditions will trigger a reversal of the policy. Yet that disagreement could turn out to be helpful if it effectively cements current monetary policy in place. The minutes released today have been anxiously awaited because they may provide insight into the Fed's decision to implement another round of quantitative easing, or QE, to keep interest rates low through mid-2015 and to keep the policy in place until unemployment improves. The QE component is open-ended, and the forward guidance offered by the Fed is a bit vague. The key question is what, in particular, will trigger the Fed to begin reversing policy. Fed Chairman Ben Bernanke has said that the current policy will remain in place until well after recovery begins. But it is unclear how widely shared this view is among committee members.

Macro Malpractice - Stephen S. Roach – The wrong medicine is being applied to America’s economy. Having misdiagnosed the ailment, policymakers have prescribed untested experimental medicine with potentially grave side effects. The patient is the American consumer – the world’s biggest by far, but now in the throes of the worst funk since the Great Depression. Recent data on consumer spending in the United States have been terrible. Growth in inflation-adjusted US personal consumption expenditures has just been revised down to 1.5% in the second quarter of 2012, and appears to be on track for a similarly anemic increase in the third quarter. Worse, these numbers are just the latest in what has now been a four-and-a-half-year-old trend. From the first quarter of 2008 through the second quarter of 2012, annualized growth in real consumption spending has averaged a mere 0.7% – all the more extraordinary when compared with the pre-crisis trend of 3.6% in the decade ending in 2007. The disease is a protracted balance-sheet recession that has turned a generation of America’s consumers into zombies – the economic walking dead. Think Japan, and its corporate zombies of the 1990’s. Just as they wrote the script for the first of Japan’s lost decades, their counterparts are now doing the same for the US economy. Yet the treatment prescribed for this malady has compounded the problem. Steeped in denial, the Federal Reserve is treating the disease as a cyclical problem – deploying the full force of monetary accommodation to compensate for what it believes to be a temporary shortfall in aggregate demand.

The Fed is cutting a tree with a hammer: Goldman projects $2trn of additional asset purchases through 2015 - Given that the Fed's current expansionary policy is expected to have only a limited effect on US labor markets, the program may end up being in place for years. That's because slow growth will be met with additional asset purchases that become increasingly less effective over time. Here are some reasons for the program's ineffectiveness as applied to the current environment:
1. It is not clear what impact asset purchases will have on consumer confidence.
2. We've had extraordinarily low interest rates for quite some time now, yet improvements in job growth have been limited.
3. Lowering mortgage rates from 3.5% to 3% is not going to have a significant impact on home affordability or materially reduce consumers' interest expense (see this discussion).
4. Raising bank excess reserves is not going to accelerate credit expansion.
5. Fed's unemployment targets are unrealistic - it's going to be an exercise in "squeezing blood from a stone" (see discussion).
6. US real median household income has basically been unchanged since 1994. The Fed' program is unlikely to improve this metric and could actually impair incomes further by elevating inflation levels.
7. The market "euphoria" effect is fleeting.
Central bank balance sheet expansion is a blunt instrument that is simply inappropriate for addressing economic issues the US currently faces. QE is good for dealing with frozen credit markets (such as in 2008) or lowering interest rates. In the current environment however it's the equivalent of using a hammer to chop down a tree - one would need a very large hammer and a great deal of time (to drive this point we include a video of someone actually attempting to do such a thing.) The hammer here is the $2trn increase in Fed's balance sheet and the timeline extends into 2015. In the mean time one can do some "unintended" damage.

Is U.S. Monetary Policy Seasonal? - New York Fed - Many economic time series display periodic and predictable patterns within each calendar year, generally referred to as seasonal effects. For example, retail sales tend to be higher in December than in other months. These patterns are well-known to economists, who apply statistical filters to remove seasonal effects so that the resulting series are more easily comparable across months. Because policy decisions are based on seasonally adjusted series, we wouldn’t expect the decisions to exhibit any seasonal behavior. Yet, in this post we find that the Federal Reserve has been much more likely to lower interest rates in the first month of each quarter over the past twenty-five years. While some of this seasonality is a result of meeting scheduling, a large seasonal component remains unexplained.

FAQ: Bernanke Answers 5 Common Questions From Critics - In a speech today, Federal Reserve Chairman Ben Bernanke answered five common questions about monetary policy. This is the text of his answers.

  • 1. What are the Fed’s objectives, and how is it trying to meet them?
    2. What’s the relationship between the Fed’s monetary policy and the fiscal decisions of the Administration and the Congress?
    3. What is the risk that the Fed’s accommodative monetary policy will lead to inflation?
    4. How does the Fed’s monetary policy affect savers and investors?
    5. How is the Federal Reserve held accountable in our democratic society?

One question for Ben Bernanke - I would have asked only one question, similar to his first, albeit with a bit of prefacing. This is what I'd love to ask Bernanke. he Fed has a very close relationship with the financial sector. Simple examples of this include:
. Of the three advisory committees that advise the Board of Governors of the Federal Reserve directly, even in theory only one, the Consumer Advisory Council, has a non-zero number of members who don't directly work for the financial sector. Regional Federal Reserve Banks are also, ahem, advised by similar committees made up entirely or almost entirely by financial institutions and/or their representatives.
b. By design, every one of the Fed's methods for raising and lowering the money supply require direct interactions between the Fed and financial institutions. None of these methods even allow for any direct interactions between the Fed and members of the public. (Note that raising and lowering the money supply does not in any way constitute "regulating the banks.")
c. Federally chartered banks and some state chartered banks are designated "members" of the Federal Reserve system - no similar appellation or roles apply to the public at large.
d. Federal Reserve banks serve as repository institutions for member banks, but none of the services performed by the Fed for banks are
available to the public at large.
e. And of course, there is something of a revolving door between the Fed and the financial sector.
Given all of this, what would the Fed's objectives be, and how would it be trying to meet those objectives, if the interests of the public were given equal weight to the interests of the financial sector?

Republicans Not Buying Bernanke’s QE3 Defense - Federal Reserve Chairman Ben Bernanke Monday explained and defended the central bank’s extraordinary policy actions since the onset of the financial crisis. Republican critics aren’t buying it. Mr. Bernanke’s remarks follow last month’s decision to launch a third round of asset purchases, a policy tool known as quantitative easing, or QE. On Monday, Mr. Bernanke sought to debunk two charges: that low interest rates enable bad fiscal policy by making it cheap for the federal government to borrow, and that the Fed has “monetized the debt” by engaging in securities purchases and will eventually cause higher inflation. Responding to Mr. Bernanke’s speech, Sen. Bob Corker (R., Tenn.) said: “While I understand the Fed’s reasoning behind QE1 and QE2, I strongly believe we’ve reached a point of diminishing returns. In the meantime, the Fed’s easy money policies are taking pressure off Congress to address our fiscal problems, something that Chairman Bernanke and every economist agrees must happen to prevent a crisis.” And here’s Sen Pat Toomey’s (R., Penn.) reaction to the speech: “The principle policies holding back our economy and employment are government overspending, excessive regulation and the threat of debilitating tax increases. Creating ever more money might reflate certain assets, but it cannot correct these real underlying problems. Indefinite quantitative easing greatly risks rising inflation; robs savers of interest earnings; facilitates excessive government borrowing; and does little or nothing to create sustainable economic growth.”

What Definition of Meaningful Is Fed Using? -- The word meaningful is vague and subjective, but how “meaningful” is ultimately measured will determine the debate about the Federal Reserve‘s recently announced foray into open-ended quantitative easing of monetary policy. To hear Federal Reserve Chairman Ben Bernanke tell it, as he did again today, the Fed can still “provide meaningful help” to the high-unemployment U.S. economy and so was justified in setting off on mortgage-bond buying to lower long-term interest rates, bestirring the housing and stock markets, among other things. The critics, of course, say there is little the Fed will accomplish, since even before this third round of extraordinary measures the economy was awash in inexpensive capital. People just don’t broadly enough see the profitable opportunities to employ it. And furthermore, they say, such Fed action puts the economy at risk for inflation, dollar depreciation and the cosseting of fiscal over spenders through low deficit-financing costs. Here is Mr. Bernanke’s full quote on the meaningful issue. “Although monetary policy cannot cure the economy’s ills, particularly in today’s challenging circumstances, we do think it can provide meaningful help.” The Bernanke quote is from the text of remarks he delivered today to the Economic Club of Indiana in Indianapolis. It is part of his effort to rebut the Fed’s critics. Mr. Bernanke did so, offering his own version of events and risks. He gave reasons why inflation won’t go up, why the Fed isn’t encouraging profligate spending in Washington and said even hard-pressed savers facing minuscule returns are eventually better off in a robust economy helped by current Fed action.

Fed's expansionary policy is not going achieve projected unemployment levels - CS put together an updated chart of the Fed's unemployment projections (discussed here). The expectations for the "longer run" unemployment rate continue to be unrealistic and are based on credit driven excesses of the pre-crisis era. Someone needs to explain to the FOMC forecasters that a structural change in US employment (discussed here) had raised the level of "natural" unemployment rate. Expansionary policy, no matter how aggressive, is simply not going to produce the desired results.

Monetary policy: The broken transmission mechanism - SINCE the crisis hit in 2008, there has been a sharp divide between those who believe that the monetary authorities have been insufficiently aggressive and those who believe that central banks have done everything possible given that households and businesses have no interest in taking on new debts. For what it’s worth, a poll of more than 300 research associates at America’s National Bureau of Economic Research conducted for an article in the print edition reveals that the overwhelming majority (76%) believe that monetary policy has not been too tight. Nearly half believe that fiscal rectitude has been a principal cause of the slow recovery. This should not be surprising. To see why, let’s take a step back for a minute and review some important accounting identities. Economic output is measured as total spending on goods and services produced minus total spending on goods and services imported from abroad. All of this spending has to be funded either out of income or by issuing financial assets (usually debt, which is of course a liability from the perspective of the person issuing it). Anyone who spends less than his or her income on goods and services becomes a net accumulator of financial assets, which includes debt repayment. (People who generate surpluses can also convert financial assets into physical fiat money but the volume of currency is insignificant compared to the stock of financial assets). While there is no theoretical limit to the gross quantity of financial assets and liabilities in the world, the net value has to equal zero because every asset is someone else’s liability.

Monetary policy: Not so broken | The Economist -- YESTERDAY, my colleague set out a fairly straightfoward balance-sheet-recession critique of the effectiveness of monetary policy. It's an interesting and useful perspective to consider but not one that ought to be interpreted as reflecting actual constraints on policy. In the balance sheet view, a boom occurs in which economic actors borrow against rising asset prices. When those asset prices then fall, those actors are forced into deleveraging. And the necessity of deleveraging makes them relatively insensitive to interest rate changes: the central banks normal method for stabilising economic activity. We can posit additional complications by breaking the credit market associated with more cyclical, interest-rate-sensitive sectors like housing, and by reducing rates to very low levels beyond which further nominal reductions are difficult or impossible. In this case, then, you have households that don't want to borrow, that can't be incented to borrow because rates can't be pushed much lower, and that wouldn't be able to obtain mortgage credit in any case. How could we reasonably expect a central bank to boost an economy in that situation? This analysis neglects several critical points, however. The first is that it is not literally true that all economic actors are now pressed into deleveraging. Some subset of the population is highly indebted and facing credit constraints that compel steady deleveraging. But lots of others aren't. Or to quote Paul Krugman and Gauti Eggertsson:  [T]he level of debt matters only if the distribution of that debt matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn't created equal -- which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.

Cyclical Zombies: Stephen Roach argues in this article that the "current medicine being applied to America's economy" is wrong. The real disease is a "protracted balance-sheet recession that has turned a generation of America’s consumers into zombies – the economic walking dead. Think Japan, and its corporate zombies of the 1990’s. Just as they wrote the script for the first of Japan’s lost decades, their counterparts are now doing the same for the US economy". This is an argument that has been used before during the current crisis: we are trying to fix a structural problem with medicine that can only deal with cyclical misalignments. Using Roach's words: "Steeped in denial, the Federal Reserve is treating the disease as a cyclical problem – deploying the full force of monetary accommodation to compensate for what it believes to be a temporary shortfall in aggregate demand." There is no doubt that asset bubbles and excessive optimism during the pre-crisis years are now reflected in weak balance sheets that will take time to fix and will represent a drag on growth. And this clearly is not a mere cyclical issue. But there is something else that is going on: advanced economies have gone through a deep recession and are still producing below potential. This is not structural, this is cyclical. And finding a solution to the structural problem in the middle of a recession is not easy. While households have to reduce spending to repair their balance sheets, doing so at the same time that income is below potential just becomes more painful. Monetary and fiscal policy cannot eliminate the effort that is associated with deleveraging but they need to ensure that this happens in the least painful way.

Markets' addiction to central bank stimulus dominates financial headlines -  Financial markets' addiction to central bank stimulus is out of control (see previous post). Below are some financial media headlines from the last few days discussing market moves - in no particular order. The news driving markets now constantly originates from central banks (or related government entities) - with earnings mixed in here and there. Central banks' actions (or inaction) are often the major factors in securities valuation. What is not clear however is if market participants and the public understand that this is not how financial markets have typically operated in the past (even though central bank actions were always a component of valuations) and is not how free markets should operate. We go from this one day: Reuters: - U.S. stocks rose modestly on Tuesday on investor confidence that Federal Reserve stimulus would underpin equities and purchases by money managers wanting to touch up portfolios before the quarter's end. ... to this the following day: WSJ: - The Standard & Poor's 500-stock index dropped nine points, or 0.6%, to 1447. The Nasdaq Composite fell 29 points, or 0.9%, to 3131.  Federal Reserve Bank of Philadelphia President Charles Plosser said the U.S. central bank's new mortgage bond-buying program is unlikely to boost growth, and that the effort could harm the Fed's credibility.  "There are many investors who think the Federal Reserve was the catalyst for this latest move," "If you have another Fed governor dissenting with what the Fed's doing, you're going to spook some people." And it just keeps going.

Bernanke Seeks Gains for Equities in Push for Jobs: Economy-- Chairman Ben S. Bernanke is increasingly aiming for gains in stock prices as the Federal Reserve reaches for new tools to spur the three-year recovery and reduce unemployment stuck above 8 percent. Bernanke, setting the stage for a third round of quantitative easing in an Aug. 31 speech in Jackson Hole, Wyoming, said the strategy works in part by boosting the prices of assets such as equities. In a speech yesterday in Indianapolis he said higher stock and home prices would provide further impetus to spending by businesses and households. “It’s pretty clear that the stock market is the most important transmission mechanism of monetary policy right now,” said Peter Hooper, chief economist at Deutsche Bank AG in New York. “That’s where you’re getting most of the action in terms of lift to the economy. It’s the stock market that’s going to have to be carrying the load.”

Fed Watch: Data Update - (w/ 8 charts) For now, US monetary policy has faded into the background. For the foreseeable future - until labor markets make substantial and sustainable improvements in the context of price stability - we can assume the Fed is on hold. If we do not see measurable improvement within six to nine months, I suspect Bernanke & Co. will turn their attention to increasing the pace of balance sheet expansion.  It would be unlikely, however, to see any impact from QE3 in the near term. Instead of looking for the positive impact of QE, I am looking for signs that the underlying path of activity is set to deviate from the slow and steady trend of the past two years: The current fear is that the path will deviate to the downside, putting the US economy precariously close to recession. And no, I don't think the economy is near recession just yet - see Menzie Chinn and Bill McBride for more. That said, a few warning signs are flashing. In particular, core manufacturing orders (nondefense, non aircraft capital goods), while up slightly in August, were revised down sharply for July. The picture isn't exactly pretty:  Year-over-year declines are clearly consistent with the past two recessions, but note that this has not yet translated into a substantially weaker ISM survey as might have been expected: My working hypothesis is that the core manufacturing orders are being negatively impact by overseas events, and that these external shocks have not propagated sufficiently within the domestic economy to tip aggregate manufacturing into a tailspin. In other words this If that story holds, we will not see the core orders weakness translate into overall industrial production declines - similar to the experience of the Asian Financial Crisis:

The Federal Reserve and the Currency Wars - The United States Federal Reserve’s recent decision to launch a third round of “quantitative easing” has revived accusations by Brazil’s finance minister, Guido Mantega, that the US has unleashed a “currency war.” In emerging-market countries that are already struggling with the impact of rapid currency appreciation on their competitiveness, expansionary measures announced in recent weeks by the European Central Bank and the Bank of Japan have heightened the sense of alarm at the Fed’s decision. My sense is that both sides are right. The Fed was right to adopt new expansionary monetary measures in the face of a weak US recovery. Of course, monetary expansion should be accompanied by a less contractionary fiscal stance in industrial countries. But the advanced economies’ room for fiscal maneuver is more limited than it was in 2007-2008, and America’s political gridlock has deepened, all but ruling out further stimulus through budgetary channels. Although the effectiveness of a new round of quantitative easing will be limited, as Mantega argues, the Fed had no choice but to act. But Mantega is also right. Given the role of the US dollar as the dominant global currency, the Fed’s expansionary monetary policy generates significant externalities for the rest of the world – effects that the Fed is certainly not taking into account. The basic problem is that there are essential imperfections in an international monetary system that is based on the use of a national currency as the world’s main reserve currency.

Professor Woodford and the Fed - Professor Michael Woodford of Columbia University is an extremely renowned macro-economist, and rightly so, but only recently has he occupied a central place in market thinking. Since his paper on US monetary policy at Jackson Hole, and the favourable remarks which Ben Bernanke made about him, everyone is trying to understand what his influence on the Fed might eventually mean. His writing can be complex and intricate, which is in the nature of the subject, but his current policy recommendation is quite clear: the Fed should adopt a target for the level of nominal GDP which would have the effect of increasing price inflation, and inflation expectations in the period ahead, and thus reduce the real rate of interest. If the controlling majority which surrounds the chairman on the FOMC has fundamentally accepted the thinking which backs these recommendations, as many investors believe, then there has been a profound change in Fed strategy. However, I am not convinced that this is the case. Mr Bernanke has not yet crossed the inflation Rubicon.

Fed Watch: If QE Causes Commodity Price Inflation... It never ceases to amaze me that critics of quantitative easing fail to remember that commodity prices were rising well before the Federal Reserve engaged in quantitative easing: If anything, commodity prices have been moving generally sideways since the Fed began expanding its balance sheet: And please don't say "commodity prices have surged since the beginning of 2009." I think it is pretty obvious that virtually everyone would not want to return to the economic conditions of 2009 to achieve lower commodity prices. The rebound of commodity prices was a natural consequence of expanding global activity; if QE is to blame, it must also be blamed for the economic rebound. Also, why have headline consumer prices grown more slowly since the Fed initiated quantitative easing? What about the surging inflation expectations in the TIPS markets (not necessarily the best measures of inflation expectations, and the ones already falling anyway)? At best, quantitative easing is keeping inflation expectations propped up, barely. And once again, does anyone really want to return to the collapsing inflation expectations at the height of the recession? And are expectations any higher than before quantitative easing? No. Bottom Line: If anything, inflation is lower, both for commodity prices and headline PCE, after quantitative easing. So isn't it finally time to put to rest the myth that quantitative easing is causing runaway inflation? Nothing to see here folks, move along.

 Fed Watch: Is Low Inflation Always Good? -- I was intrigued by something Scott Sumner wrote last week: I’d also point out that the US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81). The 1987 stock market bubble was an intermediate case (which did zero harm, as NGDP continued growing after the bubble.) I was further intrigued when I saw this chart from the IMF (h/t FT Alphaville): This was from a chapter covering the history of all situation in which public debt rose above 100 percent of GDP. See the gap in the timeline? The relatively high inflation late 1960's and 1970's. Another reason to at least think about the possibility that while high and variable inflation is not ideal, perhaps neither is very low inflation.

Fed's Bullard warns inflation won't ease US debt burden - The United States faces a debt problem, but any suggestion that the burden can be eased by allowing inflation to rise will just result in higher borrowing costs in the future, a senior Federal Reserve official said on Thursday. James Bullard, president of the Federal Reserve Bank of St. Louis, said that inflation was sometimes seen as a way to "partially default" on existing debts, because it lowers the amount the borrower repays in real, inflation-adjusted terms. "A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing. Creditors would want to protect themselves against an unpredictable central bank," he told the Economic Club of Memphis. "Alas, in economics there is no free lunch," he said, quoting Nobel Prize-winning economist Milton Friedman.

The Disingenuous James Bullard - St. Louis Federal Reserve President James Bullard is making some headlines today. He fears that inflation expectations are becoming unglued:Is this happening? Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target.  He seeks to prove this claim with this chart: I just can't let this one go. I honestly don't know if I should laugh or cry. I have a whole new respect for Federal Reserve Chairman Ben Bernanke if this is any indication of the kind of grief he needs to deal with on a regular basis. This is disingenuous on two levels. The first is that TIPS returns are based on CPI inflation, not the Fed's PCE inflation target. I find it hard to believe that Bullard does not understand the distinction. Putting the Fed's inflation target on this chart is comparing apples to oranges. Bullard should know this. If he does, he is deliberately misleading his audience. If he doesn't...well, I don't really know what to say about a top monetary policymaker that can't identify the proper inflation target.  To understand why the TIPS breakeven rate will be above the Fed's PCE inflation target, simply note that CPI inflation tends to run above PCE inflation, on the average of about 44bp since 1990: The second reason this is disingenuous is the length of the time series. Bullard begins his chart at the beginning of this year, leaving the audience to believe that these high inflation expectations are a new phenomenon. Again, deliberating misleading the audience. Let's go to the tape: Nothing to see here, folks. Move along.

Three Reasons Why Endogenous Money Matters - There’s been a bit of confusion of late in blogland about whether endogenous money really matters all that much. Endogenous money is, of course, the theory that, contrary to what mainstream economics would have you believe, private banks in modern capitalist economies actually create money out of thin air. In my experience, theoretical economists grasp very quickly how much of an impact such a theory would have if it were accepted as true. Less theoretically inclined commentators who are generally more interested in policy and practical matters, however, often express confusion over what exactly all the fuss is about. “Does endogenous money really matter?” they ask. In what follows I will lay out the three leading reasons why endogenous money does, in fact, matter. While I will try not to go too much into theory I will briefly mention the ISLM, but as we move from point three to point one our discussion will become less and less abstract. Hopefully such an endeavour will play a part in lifting the fog surrounding the relevancy of endogenous money. Then it will simply be up to commentators themselves to decide what approach they want to accept.

Cost of Decisionmaking Influences Individual Selections - Dallas Fed - Market prices are often driven by choices later viewed as mistakes. Waves of optimism or pessimism sometimes dramatically move prices; a burst bubble of euphoria can bring significant macroeconomic consequences. A sudden change of sentiment may occur when a large number of stock market professionals consistently err by holding on to stocks for too long when they should sell, or by selling equities too quickly when they should be holding on to them. Yet, these individuals are specialists with every incentive to evaluate stocks correctly. Behavioral experiments show that in laboratory conditions, people behave like market participants.[1] When faced with the same question repeatedly within any single experiment, they frequently change their minds. Why are people so inconsistent? Do rational people blunder? Theories on how individuals and groups reach decisions don’t provide a satisfactory answer. By and large, the mystery of costly human errors remains unsolved. Understanding why such mistakes occur can help researchers interpret change in observed behavior and carries implications for the behavior of financial markets.

The Economic Outlook and Federal Reserve Policy - SF Fed - Progress reducing unemployment has nearly stalled, while annual inflation has fallen below the Federal Reserve’s 2% target. To move toward maximum employment and price stability, the Fed recently announced plans to purchase more mortgage-backed securities and extend its commitment to keep its benchmark interest rate exceptionally low through mid-2015. Thanks partly to these actions, the recovery should gain momentum. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the City Club of San Francisco on September 24, 2012.

Why do top economists think the recovery has been so slow? - EVERY four years, we poll the top American economists to get their views on the presidential election. This week’s print edition explains many of the results from our 2012 survey, which was conducted between September 18 and September 28. One particularly interesting set of results was generated when we asked economists why they thought the recovery had been so slow. This chart shows how various subpopulations rated the importance of six factors we chose: Averages can tell you a lot but sometimes it is even more interesting to look at the distribution of all the responses, which you can see in this chart: As you can see, there was a broad consensus on the relative importance of most issues. The two exceptions were fiscal austerity and policy uncertainty. Both factors got a grade of 4 or 5 from around 40% of the sample but also got grades of 1 and 2 from another 40% of the sample. There was some overlap—about one-fourth of people who thought fiscal austerity was important also thought uncertainty was holding back the recovery, and vice versa. Nevertheless, the economists’ political preferences can generally be predicted by their beliefs about why the recovery has been so anemic. In particular, those who think that fiscal policy is too tight believe that Mr Obama has a superior grasp of economics than Mr Romney. Similarly, economists who think that policy uncertainty is hobbling the recovery generally believe that Mr Romney has a firmer command of the discipline:

'Economists Played a Special Role in Contributing to the Problem' -- This is from Andrew Haldane, Executive Director, Financial Stability, Bank of England: What have the economists ever done for us?, by Andrew G Haldane, Vox EU: There is a long list of culprits when it comes to assigning blame for the financial crisis. At least in this instance, failure has just as many parents as success. But among the guilty parties, economists played a special role in contributing to the problem. We are duty bound to be part of the solution.  Our role in the crisis was, in a nutshell, the result of succumbing to an intellectual virus which took hold of the body financial from the 1990s onwards. One strain of this virus is an old one. Cycles in money and bank credit are familiar from centuries past. And yet, for perhaps a generation, the symptoms of this old virus were left untreated. That neglect allowed the infection to spread from the financial system to the real economy, with near-fatal consequences for both.  The interplay of bank money and credit and the wider economy has been pivotal to the mandate of central banks for centuries. For at least a century, that was recognized in the design of public policy frameworks. The management of bank money and credit was a clear public policy prerequisite for maintaining broader macroeconomic and social stability.

If You Prop Up An Artificial Economy Long Enough, Does It Become Real? - The policy of the Status Quo since 2008 boils down to this assumption: if we prop up an artificial economy long enough, it will magically become real. This is an extraordinary assumption: that the process of artifice will result in artifice becoming real. This is the equivalent of a dysfunctional family presenting an artificial facade of happiness to the external world and expecting that fraud to conjure up real happiness. We all know it doesn't work that way; rather, the dysfunctional family that expends its resources supporting a phony facade is living a lie that only increases its instability. The U.S. economy is riddled with artifice: millions of people who recently generated income from their labor have gamed the system and are now "disabled for life." Millions more are living in a bank-enabled fantasy of free housing. Millions more are living off borrowed money: student loans, money the government has borrowed and dispensed as transfer payments, etc. Assets are artificially propped up lest a banking sector with insufficient collateral be revealed as structurally insolvent. It's not difficult to predict an eventual spike of instability in such a system; the only difficulty is predicting the date of the instability. Hiding a broken, dysfunctional economy behind a facade of artifice and illusion can't fix what's broken, it only adds to the system's systemic instability as resources that could have gone to actually fix things are squandered on propping up phony facades of "growth" and "health."

U.S. Economy Prints 32-month Low: Recession Risks Escalate: It's been 4 months since the 3rd "Summer Swoon" in this expansion – when many commentators were trotting out recession scares and imminent collapses in the stock market. Since then the SP-500 has risen over 9%, peaking at 12% gains some weeks back. There is now an interesting divergence developing between the leading data (stock market, money supply, credit spreads etc.) that is implying positive expansion ahead and the co-incident data that is implying a drift toward possible recession. In our  "NBER Recession Model – Confirmation of last resort" research note we constructed a co-incident U.S economic composite based on the 4 indicators watched by the NBER, namely Industrial production, Personal Incomes, Retail sales and Payroll employment. With the nosedives for the August prints for Industrial Production and Personal Incomes, this model is now showing triple the recession probability in August over the prior month, namely 6.8%.The low prints for Industrial Production and Personal Incomes brought the NBER composite coincident index down to a new 32-month low watermark: Let's examine the main culprits for this month's decline starting with Personal Incomes. You will note we deploy a rather fast-moving short-term 3-month smoothed growth rate (which examines the behaviour of the last 7-month data in the formula) so this model captures trend changes very quickly (and is less susceptible to seasonal anomalies) The other culprit in August was Industrial Production. Again we deploy a 6-month smoothed growth rate as opposed to the traditional 12-month straight growth to allow for faster response to directional changes and less exposure to structural seasonal changes:

Latest GDP Revision Carries a Mixed Message: Economy Weak, but Corporate Profits Strong -The revised third estimate of GDP for Q2 2012, released Thursday by the Bureau of Economic Analysis, carries a mixed message for the election campaign. The revised data show real GDP growing at an annual rate of just 1.3 percent in Q2, down from the already weak 1.7 percent of the previous estimate. The slowdown supports the GOP contention that the economy as a whole remains weak despite the Obama team’s efforts. At the same time, corporate profits after taxes grew faster than previously estimated. They continued to grow faster than the economy as a whole and remain near the all-time highs reached later last year. Taxes paid by corporations actually fell in the second quarter while total profits grew. All of those data bolster the Democratic narrative that corporate managers and shareholders are doing quite nicely, thank you, while the rest struggle. True, economic policy needs a tune-up, but are tax cuts for wealthy “job creators” really what we need most?

Q3:2012 U.S. GDP Forecast Update | 9.30.2012 - Starting with today’s update of looking ahead to the next quarter’s GDP, I’ll present several forecasts drawn from different methodologies for contrast and comparison on a regular basis. With that in mind, let’s consider how several forecasts for third-quarter U.S. GDP stack up. The first chart compares four in-house forecasts that will be updated as new data arrives. I’ll briefly explain below how each of The Capital Spectator’s GDP forecasts are calculated. But first, take note that the first chart also includes two widely cited surveys of economists. The average guesstimate for each survey is presented for additional perspective. One source is the Survey of Professional Forecasters (SPF) via the Philadelphia Fed. It’s updated relatively infrequently, however. The current average forecast of real GDP growth of 1.6% for Q3 was published on August 10. The other survey is the September outlook via The Wall Street Journal, which asks several dozen economists for their outlook each month. The Journal's current forecast from dismal scientists reveals an average forecast of 1.9% for Q3 GDP, based on September 7-11 polling. One rationale for keeping on eye on multiple forecasts and tracking how they change through time is that it gives us an additional layer of intelligence to consider. Point forecasts at one moment in time are fine, of course, but as conditions change, so too should the predictions. How they change can sometimes tell us as much, maybe more, as a specific forecast at one specific moment.

Durable Orders Potential Recession Warning -- If you’re a subscriber to David Rosenberg’s Breakfast With Dave, you might have seen the chart below, which I posted Thursday on Twitter, in Friday’s note:   A break of this magnitude in Durables – that’s ex-aircraft – has in the past been a harbinger of of recession and a downturn in payrolls (I’ve used private payrolls, excluding government). BR laid out a similar warning on decaying economic conditions yesterday, offset only by the strength of monetary policies. Two caveats on this:

  1. Durable Goods has a history (at least on FRED) limited to about 20 years, so we don’t have a lot of data.
  2. We did see a false positive in the period around 1999 or so.

On a related note, business activity fell into contractionary territory (ISM-Chicago, grey bars) for the first time in three years: Another revision to GDP (down to 1.3 percent) was released on Thursday, and I note the following: Government spending has been a drag on GDP for what I believe is a record eight consecutive quarters:

The High Cost of Energy is Leading the Economy into Recession - Energy is everything. Without energy literally nothing happens. It's easy to overlook the role of energy in the economy because we often just look at it as how much we spend on energy as a fraction of total GDP. But that really is misleading. Because if you take away energy, the GDP doesn't just contract by that percentage, the GDP disappears. If suddenly there was no petrol at the pump; if suddenly the lights went out and did not come back on, the economy would go away. Energy is central to all economic activity. Up until the last couple of hundred years, the energy that we used was from renewable sources - it was almost entirely from the sun. But something changed with the Industrial Revolution. We developed the tools, the gears, the metallurgy, the simple heat engine, so that we could access and use the fuels that had been created by nature over tens of millions of years. Think of it this way. You have run out of petrol and have to push your car a couple of metres off to the side of the road. It's a lot of work, especially if it's a heavy car. Think about having to push the car for kilometre after kilometre - that would really be a lot of work. If you do the math, a single litre of fuel is doing the work that's the equivalent to, maybe, six weeks of hard labour. You can't get labour anywhere as cheap as the petrol we buy.

Are We Already in A Recession? - Most of the time and for most people, the difference between no growth and contraction probably doesn’t mean that much. However, we are in a much different situation now than we were in 2007. The Federal Reserve has more or less gone all in with its open-ended quantitative easing. The government’s fiscal mechanism is paralyzed and a large portion of the electorate has no appetite for further fiscal stimulus. If the American economy were to go into a so-called “double-dip” recession the government would be especially hard-pressed to drag us out. It would be a huge blow to the nation’s confidence and would lead to shrinking government revenues and further net job loss in both the public and private sectors. For those reasons, it’s more than a little frightening that we’re seeing a spate of depressing numbers that could signal a recession on the horizon — or that one is already here. On Thursday the Commerce Department revised down its estimate of second-quarter GDP growth to 1.3% from an already sluggish 1.7%. If that weren’t bad enough, the Department also reported that orders of durable goods – long-lasting pieces of equipment like airplanes or heavy machinery – fell 13.2% in August. And Friday, the Project Management Institute was out with a survey which showed that manufacturing activity in the Chicago region was contracting, surprising many analysts. While it’s unwise to read too much into any one of these data, the three in succession are unsettling. These data also give ammo to bearish commentators who have long been predicting a recession in either late 2012 or early 2013. John Hussman wrote:“We continue to infer that the economy has already entered a recession – something that will probably take several more months to be broadly recognized. "

Imminent Recession? - So says David Malpass in the WSJData released this week by the Commerce Department waved bright red recession flags—orders for durable goods fell 13.2% in August and inflation-adjusted personal income fell 0.3%. ... the new Commerce Department numbers, combined with his stay-the-course approach, point to recession in 2013.And James Pethokoukis writes “GDP collapse puts U.S. economy into recession red zone.”Even if the sources of these worries are less than fully credible, I will not “pull a Lazear” (or a Don Luskin, for that matter), and rule out a priori the possibility of recession. Rather, it seems appropriate to examine the indicators the NBER Business Cycle Dating Committee (BCDC) uses to determine peaks and troughs. As the NBER BCDC notes, the key indicators are GDP, nonfarm payroll employment, industrial production, personal income ex.-transfers, and manufacturing and trade sales. Figure 1 depicts official GDP from the BEA (3rd release for 2012Q2), and from Macroeconomic Advisers (the e-forecasting series is added for reference, since I have a longer series for that).

The Big Four Economic Indicators: Updated Nonfarm Employment = Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method. There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

  • Industrial Production
  • Real Income   (excluding transfer payments)
  • Employment
  • Real Retail Sales

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee."

The FRED charts are excellent. They show us the behavior of the big four indicators currently (the green line) as compared to their best, worst and average behavior across all the recessions in history for the four indicators (which have start dates). The latest updates to the Big Four was today's release of the September Total Nonfarm Employees (the blue line in the chart below), which rose 0.1 percent over the previous month. As the average of the Big Four indicates (the gray line), economic expansion since the last recession was flat or contracted during three of the eight months in 2012. The average for August, down 0.3 percent, is the sharpest month-over-month decline of the 2012.

Bill Gross: The US Is A Debt Meth Addict - Unless The Fiscal Gap Is Closed Soon "The Damage Will Be Beyond Repair" - The highlights from Bill Gross' latest monthly piece:

  • Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them.
  • Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the “Ring of Fire.”
  • If the fiscal gap isn’t closed even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears. The damage would likely be beyond repair.
  • The U.S. and its fellow serial abusers have been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult.

Who has the most debt in the US? - Rebecca Wilder - This was the question posed to a group of my colleagues as regards the merits of US fiscal and monetary policy: guess who has the most debt in the US economy? Everyone at the table said ‘the government’. When most pundits talk of ‘government debt’ they are inherently referring to federal debt, who is not the highest explicit debtor in the non-financial US economy (total nominal debt outstanding excluding financial and foreign financial domestic debt outstanding). Coming to the answer of this question can be rather complicated. According to the Federal Reserve’s latest flow of funds accounts (see Table D.3 in the following .pdf link), federal debt outstanding was $11.11 trillion. US household debt and US non-financial business debt outstanding were each greater: $12.95 and $12.01 trillion, respectively. Here, the US federal government does not have the largest stock of debt outstanding. Well, you may then say the following: look at the general government, or the public sector which includes the US federal government plus state and local governments. The public sector (general government) does have the largest stock of debt outstanding, $ 14.11 trillion. But for a comparable analysis, then one needs to consider the ‘private sector’, which includes household plus non-financial business debt outstanding. Private debt outstanding dwarfs that of the public sector debt outstanding: $24.95 trillion vs. $14.11 trillion, respectively. While the US federal government is popularized as being the largest debtor in the US economy, it’s not. Look at the time series in natural logs – by taking the natural logarithm of the public and private debt outstanding series, the slope of the line is a growth rate. I’ve put the two on different axis, so this chart is not precisely correct; but the trajectory of government debt took another leg upward on Q1 2008 at the outset of private sector deleveraging, or the government is ‘financing’ the private sector’s desire to save. So outside of default or inflation, the government does bear the ultimate burden of private sector debt.

Follow-Up: Who Has the Most Debt in the US? - Rebecca Wilder - Yesterday’s post on US debt by sector brought up some interesting comments. Specifically, that there’s a stark difference between federal debt and private-sector debt (households and/or non-financial businesses). Household and non-financial business obligations are true liabilities in the sense that there’s a party on the other side that requires payment in a currency which must be earned. The federal government faces no such constraint, since it ‘borrows’ and promises to pay in a currency over which it has full printing capabilities. Government debt is better thought of as an asset to the private sector that prefers to save, rather than a true liability to the private sector. This discussion reminded me of an article that Randy Wray (Professor of Economics at UMKC, blogger here at Economonitor  and New Economic Perspectives) wrote two years ago: The Federal Budget Is Not Like a Household Budget: Here’s Why. The following is an excerpt from the article but the whole thing is worth a read: The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. .

Sober Look: US repo rates spike - The US repo rates have risen to a 3-year high this week. The chart below shows the so-called General Collateral (GC) treasury repo rate. GC simply means that the borrower under the repo loan can post any treasury securities as collateral - as opposed to specific bonds.JPMorgan attributes this increase to several factors.
1. Banks' total reserve balances at the Fed has declined recently. Empirically it can be shown that declines in reserves corresponds to rising repo rates. Reserves will begin rising again as the Fed commences balance sheet expansion.
2. Dealer holdings of treasuries (which are not prohibited under the Volcker Rule) have risen recently, increasing demand for treasury financing.
3. US money market funds, tired of extraordinarily low rates in secured lending (repo), have rolled some of their assets into unsecured US bank paper (commercial paper and CDs). This reduction in repo lending contributed to rising rates. Note that US money funds still prefer secured lending in Europe (discussed here).
4. Quarter-end generally corresponds to higher rates, as banks try to reduce balance sheets ("window dressing") for reporting purposes.

Monetary Mystification, by Joseph Stiglitz -  Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3”..., and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically... Others, especially on the political right, worried that the latest monetary measures would fuel future inflation... In fact, both the critics’ fears and the optimists’ euphoria are unwarranted..., the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth. ...Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well. ... For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending.

Treasury Yields/Mortgage Update: 30-year Fixed Mortgage at Historic Low - I've updated the charts through today's close.  But the big news today is that the latest Freddie Mac update shows the 30-year fixed has dropped four basis points to 3.36%, a new historic low. Presumably this rate was facilitated by the new round of Fed easing focused on mortgaged-backed securities. Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing. The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy appears to be a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report:Seven (7) percent of the owners reported that all their credit needs were not met (unchanged), 31% reported all credit needs met, and 53% explicitly said they did not want a loan  .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.

U.S. Interest Cost Falls to Lowest Since 2005 as Debt Soars - The U.S. government’s interest expense fell to the lowest in seven years as yields on Treasury debt dropped to records even as debt soared beyond $16 trillion for the first time, aided by a one-time accounting change. The U.S. paid $359.8 billion in interest on $16.1 trillion of debt in the 12 months ended Sept. 30, according to the Treasury Department’s TreasuryDirect website. That’s down from $454.4 billion for the 2011 fiscal year and the least since $352.4 billion in fiscal 2005. The fiscal 2012 interest bill was reduced by a change in Department of Defense accounting methods for market-based securities, a one-time adjustment of $75 billion for the month of July. Without the adjustment, the interest bill would have been the lowest since $414 billion in fiscal 2010. Borrowing costs for the U.S. declined as investors sought the safety and liquidity of U.S. government securities as the European sovereign-debt crisis worsened, employment growth stalled and Federal Reserve policy makers sought to bolster the economy by extending the average maturity of the central bank’s Treasury holdings. The lower borrowing costs have helped the administration of President Barack Obama as the U.S. has run the only four budget deficits exceeding $1 trillion in the country’s history as it has struggled to recover from the worst financial crisis since the Great Depression.

Is the Fed Buying Up All the Treasury Debt? - No, according to the data provided by SIFMA.  The Fed actually holds a relatively small share of total marketable treasury securities: The other big holders include foreigners, households, mutual funds, banks, and pensions.  So don't blame the Fed for the low yields on Treasuries.

Reaching the $16.4 trillion debt ceiling carries significant downside risks - The topic of the US debt ceiling is covered widely in the media and the blogosphere. It is often accompanied by a great deal of finger pointing. Let's try to take an unbiased look for a second. The map below shows how total government debt level increased under either the Democrats' or the Republicans' controlled White House, the Senate, or the House.Both parties had a hand in this nightmare - potentially for different reasons. The long-term risks to the US prosperity from these debt levels are enormous, particularly given slow economic growth possibly for years to come. But there are also short-term risks. None of this is news to most people, but it is still important to point out the following facts:  (Bloomberg): - A rapidly increasing U.S. debt load, approaching the $16.4 trillion ceiling, amplifies downside risk. In 2011, failure to raise the debt ceiling led to the first-ever downgrade of the U.S. by Standard & Poor’s. This year, U.S. debt has increased by an average 0.6 percent a month. At that rate, the current ceiling may be breached by January, risking further downgrades and substantial volatility in financial markets.  The U.S debt ceiling has been raised 17 times since 1993 by an average of 8.5 percent. Four of those increments came during Bill Clinton’s presidency. Seven were during President George W. Bush’s time in office. Since President Obama took office, the debt ceiling has been increased six times.

Bernanke: No Deficit Reduction Now, Economy Still Needs Support -  There are serious questions about the beneficiaries of QE3 – banks look to be one winner – and I don’t think they are being terribly imaginative in their effort. But this speech by Ben Bernanke in Indianapolis yesterday did make a couple salient points that show that he understands the nature of the problem to some degree. He’s saying that interest rates will be low enough for a certain period, even if the economy improves, so people can make their purchasing decisions accordingly, without having to wait to figure out when the Fed will take away the punch bowl. That could definitely have economic implications, especially with interest rates this low. And, it implicitly acknowledges, as he says later, that the economy “the economy is not making full use of its resources” and that monetary policy can alleviate that. Next, Bernanke dispelled a number of myths about fiscal and monetary policy. He said that he does not keep interest rates low to induce Congressional borrowing, nor does he keep those rates higher to induce austerity budgeting. “Using monetary policy to try to influence the political debate on the budget would be highly inappropriate,” he said specifically, which is the exact opposite of what, say, the European Central Bank is doing, resisting a purchase of sovereign debt until the affected countries submit to “conditions.” In fact, Bernanke said that the deficit, the main preoccupation in Washington, is a long-term issue and not one we face immediately. In particular, Bernanke said, “They (Congress) must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term.”

Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 1 - Most of the US political class has been infected with the “mind virus” of austerity that suggests to them that either virtue or necessity consists of cutting government spending and government programs.  Under the influence of this “folk economics” with no evidentiary support, the equivalent of economic superstition, politicians seem prepared to slash vital supports to the economy despite the ability of monetarily sovereign governments, like the US federal government, to afford continued spending on current and even expanded government programs.  Whatever one’s personal tastes and predilections are in government programs and the role of government overall, the net effect in dollar terms of reducing the spending of government, in the context of the current Lesser Depression is to stall and eventually shrink the economy. Because of a mountain of private sector debt and overvalued assets like real estate in which people are now under water, the only source of renewed spending on goods and services, the engine of economic growth, is government spending.  Alternatively, the restructuring of private debts, using for instance the policy format of Steve Keen’s modern debt jubilee, also most likely legislated and funded by a fiat-currency issuing government, would ease private debt loads for the public, and this would then release funds to purchase new goods and services. The concept that best describes the common dynamics of the current Depression, the Great Depression and Japan’s Lost Decade is “debt-deflation” but Richard Koo, economist at Nomura Bank. has also called this period, in milder terms, a “balance-sheet recession”.

Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 2 - Everybody has a household economy that looks slightly different from that of their neighbors.  However, because of the nature of a monetary economy, household economies are linked quite tightly together and trends that effect one household start to have effects in other households soon or over the longer term.  While within the same economy some households can prosper while others do not, generally there is a movement in tandem for some obvious reasons related to how society and the monetary system work. Very obviously, when more people have surplus income, they are more inclined to spend it on more goods and services which in turn brings in income (profits or wages) for other people.  When there is a decrease in the surplus of income, this has a knock-on effect of reducing the incomes of others.  As well, on a social level, people influence each other creating trends that sweep through society, having both cultural and economic effects. Over the longer term, as well as movements in tandem there are movements in the differential between households that create large-scale systemic effects.  Over a period of decades, imbalances in savings, i.e. growing wealth inequality, can start to undermine the ability of goods and services in the economy to find buyers.  For a time, the ability to borrow money, if available, enables those with lesser incomes to buy enough or more than enough to live on, including larger asset purchases, but this too collapses when incomes do not rise enough to cover both daily needs and servicing increasing amounts of debt.   Unemployment rises as effective demand for goods and services goes down.

Robert J. Samuelson tries to create a moral panic about deficits - William K. Black - The Washington Post leads the pack when it comes to generating what scientists term a “moral panic” about budget deficits.  As part of that effort they generated the series of myths that Paul Ryan was “serious,” “courageous,” and “expert” about “solving” the “deficit crisis.”  The newspaper’s theme is that anyone who doesn’t fall for their effort to create a moral panic is not “serious” and should be ignored.  The paper runs a column by Robert J. Samuelson that is devoted to generating a moral panic about the deficit.  Like Ryan, his central targets are imposing austerity and cutting Social Security, Medicare, and Medicaid.  Samuelson’s latest column claims that President Obama and Governor Romney are lying to the nation because they have not sufficiently embraced the moral panic as the transcendent campaign issue that will determine America’s future.  Samuelson demands the candidates implore the American people to urgently adopt austerity and attack Social Security, Medicare, and Medicaid. We have known for over 75 years that the key to recovering from a recession is to follow a counter-cyclical fiscal policy that will reduce unemployment. We have long exhibited the wisdom to adopt automatic stabilizers that increase government services and decrease taxes when a recession strikes.

Fixing America’s Fiscal Problem - Americans are rightly focused on the “fiscal cliff” looming at the start of 2013, when, under current legislation, virtually all tax rates will rise, sucking more than 3% of GDP out of households and businesses. In addition, automatic cuts in government spending on defense and non-defense programs will subtract nearly another 1% of GDP in 2013 and similar amounts in future years. The Congressional Budget Office warns that falling off the fiscal cliff would push America’s economy into a serious recession next year. And the fiscal cliff is only part of the problem that must be solved. The bigger problem is that the United States has an enormous fiscal deficit – now about 7% of GDP and predicted to grow rapidly in future decades as an aging population and rising health-care costs increase government outlays for the “entitlement programs” that benefit middle-class seniors. Although politicians on both the left and the right recognize that these programs’ growth must be slowed to avoid massive deficits or very large tax increases, their growth is unlikely to slow enough to prevent the national debt/GDP ratio from rising. Fiscal consolidation therefore requires additional revenue as well as slower growth in entitlement spending. The challenge facing US politicians after the election will be to find a politically acceptable way to raise that revenue without undermining incentives and economic growth. The task is made more complex by the large number of legislators who insist that the deficit should be reduced by spending cuts alone.

Fiscal Policy for Shared Prosperity - Let's put forward a threefold rationale for public action through fiscal policy. Firstly, there is macroeconomic stabilization. Given that often monetary policy cannot get it done alone, governments should maneuver taxation and/or spending levels in a countercyclical manner. Before the crisis, many economists had discarded the effectiveness of proactive fiscal policy as a stabilization tool, but its widespread use in the early stages of the global economic crisis rescued it from the limbo to which it had been relegated.  Secondly, there is a resource allocation rationale, i.e., improving economic performance via expenditure and tax policies that raise efficiency and tackle relevant market failures. The existence of public goods, externalities and increasing scale returns, as well as information failures and missing markets, are recognized as factors frequently undermining the operation of pure markets. Therefore, taxes and government expenditures addressing those factors might fit in well, boosting economic growth and thereby prosperity.Thirdly, there is the distribution rationale underpinning policies that are designed to mitigate inequalities of income, opportunities, assets, or risks that result from private-market activities. We can't forget to include a dimension of intergenerational distribution, since fairness toward future generations may demand taxes and expenditures that guarantee some carry-over of the value of natural assets.

Paul Krugman Reminds Us That Bowles-Simpson Was Terrible - Over at his own blog, Paul Krugman says something that can't be said enough: The plan Bowles and Simpson proposed would have been terrible fiscal policy had it been adopted. Krugman doesn't include one other thing that also needs to be repeated again and again and again: The plan announced by Bowles and Simpson was not adopted by the Bowles-Simpson commission. It was just something proposed by the two co-chairs that didn't have enough support to move forward. In fact, there wasn't even a formal vote. Bowles and Simpson decided not to take a formal vote when it became clear that their plan was only supported by 11 of the 14 members of the commission that were needed to move it forward. What makes this more infuriating is how Bowles and Simpson have been hawking their plan as the official final report of the B-S commission. Again, for the record, there was no report and Bowles and Simpson are lying when they refer to it that way.

Senate Leaders at Work on Plan to Avert Mandatory Cuts - Senate leaders are closing in on a path for dealing with the “fiscal cliff” facing the country in January, opting to try to use a postelection session of Congress to reach agreement on a comprehensive deficit reduction deal rather than a short-term solution. Democrats and Republicans remain far apart on the details, and House Republicans continue to resist any discussion of tax increases. But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts. First, senators would come to an agreement on a deficit reduction target — likely to be around $4 trillion over 10 years — to be reached through revenue raised by an overhaul of the tax code, savings from changes to social programs like Medicare and Social Security, and cuts to federal programs. Once the framework is approved, lawmakers would vote on expedited instructions to relevant Congressional committees to draft the details over six months to a year. If those efforts failed, another plan would take effect, probably a close derivative of the proposal by President Obama’s fiscal commission led by Erskine B. Bowles, the Clinton White House chief of staff, and former Senator Alan K. Simpson of Wyoming, a Republican. Those recommendations included changes to Social Security, broad cuts in federal programs and actions that would lower tax rates over all but eliminate or pare enough deductions and credits to yield as much as $2 trillion in additional revenue.

Bowlesing Toward Betrayal -- Krugman - So, is my timing good or not? Right after I warn about the risk that Democrats, including the president, might betray the mandate they seem likely to get for preserving the safety net, we learn that Senate leaders are at work on a plan based around, well, you guessed it: If those efforts failed, another plan would take effect, probably a close derivative of the proposal by President Obama’s fiscal commission led by Erskine B. Bowles, the Clinton White House chief of staff, and former Senator Alan K. Simpson of Wyoming, a Republican. Those recommendations included changes to Social Security, broad cuts in federal programs and actions that would lower tax rates over all but eliminate or pare enough deductions and credits to yield as much as $2 trillion in additional revenue. Just to say, this would be politically stupid as well as a betrayal of the electorate. If you don’t think Republicans would turn around and accuse Democrats of cutting Social Security — probably even before the ink was dry — you’ve been living under a rock.

Payroll Tax Cut Unlikely to Survive Into Next Year - Regardless of who wins the presidential election in November or what compromises Congress strikes in the lame-duck session to keep the economy from automatic tax increases and spending cuts, 160 million American wage earners will probably see their tax bills jump after Jan. 1. That is when the temporary payroll tax holiday ends. Its expiration means less income in families’ pocketbooks — the tax increase would be about $95 billion in 2013 alone — at a time when the economy is little better than it was when the White House reached a deal on the tax break last year.  Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.  But there is still little desire to make an extension part of the negotiations that are under way to avert the huge tax increases and across-the-board spending cuts, known as the fiscal cliff, that will start in January without a deal. For example, without any action, the Bush-era tax cuts will expire and the military and other domestic spending programs will be reduced.

Washington to the unemployed: Eh, we’re over this: In December 2010, when the payroll tax cut was first signed into law, the unemployment rate was 9.4 percent. In February 2012, when the payroll tax cut was extended through 2012, the unemployment rate was 8.3 percent. Today, the unemployment rate is virtually unchanged, at 8.1 percent. And yet, both parties agree that the payroll tax cut should be permitted to lapse — meaning that both agree this is a good time for a $920 tax hike on the average family. The weirdness — and, some would say, cruelty — of the political system’s thinking is thrown into sharp relief by the recent actions of the Federal Reserve. After reviewing the last year of economic data, Ben Bernanke and Co. chose to increase the level of monetary stimulus and promised to sustain that stimulus beyond the initial signs of the recovery — no more being fooled by false dawns or forcing the market to worry about whether the Fed would yank its support. Conversely, the Congress and the White House aren’t simply resisting the calls to increase the amount of fiscal stimulus in the economy. They’re literally taking stimulus away. I don’t think there’s any evidence that this move is the result of a thoughtful process based on economic forecasting. Rather, the various players seem tired of fighting over the payroll tax cut and antsy to move onto deficit reduction. It’s not “mission accomplished” so much as “mission too hard, let’s try something easier.”

Never Underestimate Wall Street's Ability To Overestimate Washington -- Completely contrary to the opinions expressed by the Wall Street analysts quoted in the AP story, and as I've been saying for a while, we're more likely to hit the fiscal cliff (I put the odds at greater than 50-50) than is being generally assumed for five reasons:

  • 1. It's becoming increasing understood inside the beltway that the fiscal cliff is really more of a fiscal slope and the U.S. economy won't actually come to an end on January 1, 2013.
  • 2. Assuming the GOP retains control of the House, John Boehner may have to let the fiscal cliff occur to stay as speaker.
  • 3. Lame duck sessions are just about the hardest time to make major policy decisions and this one may well be worse than most.
  • 4. If Obama is reelected, the Republican party is likely to move further to the right rather than to the middle and the fiscal cliff will be its first test after the election.
  • 5. If Obama is elected, the White House is far more likely to press the political advantages the fiscal cliff gives it on taxes and spending to get concessions from the GOP because this may be the only time it has this magnitude of leverage.

Economists: Fiscal cliff a serious threat, but unlikely - 1 Of 17 top economists surveyed, 14 believe the end of tax breaks and the steep federal spending cuts set to take effect at the start of next year would cause the economy to tumble into a new recession. Twelve of them believe the fiscal cliff is the most serious risk facing the economy, more serious than the European sovereign debt crisis, business uncertainty about various government regulations or the continued weakness in the job and housing markets.... But all 17 agree on one thing -- the economy won't plunge over the fiscal cliff. Despite partisan bickering ahead of the election, all the economists said they believe Democrats and Republicans will come together to extend the tax breaks and prevent the spending cuts either during the lame duck session of Congress or early in the new year.

Gaming US Fiscal Reform - Mohamed A. El-Erian - Hobbled by the self-inflicted wounds of the debt-ceiling debacle in the summer of 2011 – which undermined economic growth and job creation, and further damaged Americans’ confidence in their political system – the US Congress and President Barack Obama’s administration recognized the need for a measured and rational approach to fiscal reform. To increase the likelihood of this, they agreed on immediate spending cuts and tax increases that would automatically kick in (the “fiscal cliff”) if agreement on a comprehensive set of fiscal reforms eluded them.  On paper, at least, this sizeable threat – involving blunt fiscal contraction amounting to some 4% of GDP – should have properly aligned incentives in Washington, DC. After all, no politician would wish to go down in history as being responsible for pushing the country back into recession at a time when unemployment is already too high, income and wealth inequalities are increasing, and a record number of Americans live in relative poverty. Yet, so far, the threat has not worked. To understand why, we can appeal to game theory, which provides economists and others a powerful framework with which to explain the dynamics of both simple and complex interactions.The objective of threatening a fiscal cliff was to force a “cooperative outcome” on an increasingly “non-cooperative game.” But, in the absence of a credible enforcer (and lacking sufficient mutual assurances), participants felt that they had more to gain from continuing their non-cooperative behavior.

The 'Fiscal Cliff' Opportunity - There is evidence that the fiscal cliff is already affecting business investment spending, slowing economic growth. Dealing with the fiscal cliff will undoubtedly be the principal item of business when Congress returns for a lame-duck session. Talks between the administration and Congressional leaders have already begun but have been hampered by questions about who will be president in January, as well as which party will control the House and Senate. The budget analyst Stan Collender speculates that Mr. Boehner will be on a short leash during the lame-duck session as the Tea Party tries to maintain influence after a disappointing election. This means that Mr. Boehner will have little scope to negotiate with Democrats on a compromise that would forestall the fiscal cliff, making it likely that the fiscal cliff measures will begin as scheduled. The two primary sticking points are taxes and military spending. President Obama is insisting that the Bush tax cuts not be extended for those with incomes over $250,000. For them, the top tax rate would rise to 39.6 percent — what it was during the Clinton administration — from 35 percent. The administration would also like to raise the maximum tax rate on dividends and capital gains to 20 percent for upper-income taxpayers, from 15 percent currently. Republicans are adamantly opposed to any increase in taxes for anyone, but especially the wealthy, whom they universally view as “job creators,” even if all they do is cash dividend checks on inherited stocks. But Republicans are even more concerned about impending cuts to military spending, which they agreed to last summer as part of the deal to raise the debt ceiling.

The Tax Side of the Fiscal Cliff - Come January, if Congress fails to act, sweeping federal tax increases will hit in what is not at all affectionately nicknamed in Washington “taxmageddon.” How big are those federal tax increases? The respected Tax Policy Center is out with a full analysis of the math, and estimates the impact at more than half a trillion dollars next year alone. In the words of Eric Toder, one of the report’s authors, “It’s just a huge, huge number.” The paper is full of such numbers. About 9 in 10 Americans would see their tax bills go up. The average household would pay $3,500 more. The typical middle-income household would pay $2,000 more. An average household in the top 1 percent would pay $120,000 more. The average federal tax rate would climb a whopping 5 percentage points. Americans would have 6.2 percent less after-tax income. The analysis walks through the pending tax increases. The payroll tax holiday goes away, raising taxes on America’s 160 million wage earners. New provisions from the Affordable Care Act bump up taxes on the investment income of high-income households, and the Bush tax cuts for capital gains and dividends expire. The Bush-era income tax cuts end as well, with the top rate climbing to 39.6 percent from 35 percent. Without adjustment, the alternative minimum tax affects millions more taxpayers. Tax credits enacted in the stimulus go away. The estate tax jumps. It goes on and on. The Tax Policy Center’s analysis shows that the tax increases would be painful for everyone, rich and poor.  The very wealthy would have the biggest hit, with the top 1 percent of earners seeing their average federal tax rate climb by seven percentage points. The single biggest tax increase would be on dividend earnings, with the tax rate increasing by 20 percentage points. But the poor would not go unscathed, either. For households in the lowest income quintile, earning less than $20,113 a year, the average federal tax rate would climb 3.7 percentage points, with taxes increasing $412 on average. That works out to about $8 a week.

If Congress Goes Over the Fiscal Cliff Your Taxes Will Likely Go Up -- If Congressional gridlock sends the U.S. government tumbling over the fiscal cliff later this year, Americans could face an average tax hike of almost $3,500 in 2013. Nearly 9 of every 10 households would pay higher taxes. Every income group would see their taxes rise by at least 3.5 percent, but high-income households would suffer the biggest hit by far, according to a new Tax Policy Center analysis. TPC found that if the tax hikes last the entire year—a big ”if”–those in the top 0.1 percent would pay an average $633,000 more than if today’s tax rules were extended. However, even middle income households would take a hit: they’d pay an average of almost $2,000 more, and see their after-tax income fall by more than 4 percent. Such tax hikes would be “unprecedented,” What’s scary, of course, is that all this would happen automatically. It would merely require Congress to default to its normal state of partisan gridlock in the face of a remarkable confluence of circumstances. They include the reversion of nearly the entire tax code to what it was at the end of the Clinton Administration, new taxes to pay for the 2010 health reform law, and automatic across-the-board spending cuts that would trim just about every government program except for Medicaid and Social Security. Looming in the background: The Treasury will hit its borrowing limit sometime in the first quarter of next year and temporary funding to keep the government operating will end in March.

Huge tax increase looms at year-end 'fiscal cliff' -- A typical middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year if lawmakers fail to renew a lengthy roster of tax cuts set to expire at the end of the year, according to a new report Monday. Taxpayers across the income spectrum would be hit with large tax hikes, the Tax Policy Center said in its study, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range. Taxpayers will get slammed with increases totaling more than $500 billion -- a more than 20 percent increase -- with nine out of 10 households being affected by the expiration of tax cuts enacted under both President Barack Obama and his predecessor, George W. Bush. The expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children, among others. Also expiring is a 2 percentage point temporary payroll tax cut championed by Obama.

How Much Would the Fiscal Cliff Raise Taxes? - Roberton William, Eric Toder, Hang Nguyen, and I are out with Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?, a detailed look at all the tax increases in the looming fiscal cliff. We have two basic messages. First, the cliff is big, amounting to more than $500 billion in 2013, a 20+ percent increase. Second, you can’t tell the players without a scorecard. Over the past dozen years, the snowball of temporary tax cuts (and, for 2013, the introduction of some new taxes) has grown to epic proportions. As a result, the cliff isn’t just about the 2001-03 tax cuts that grab most of the headlines. There are also the temporary cut in payroll taxes, the “extenders”, the expanded credits enacted in 2009, the current version of the estate tax, the AMT patch, and the start of new health reform taxes. To make sense of it all, we had to divvy the pending tax increases up into nine categories. This chart shows how they would affect tax rates for households at different income levels: Bottom line: People of all incomes will see their tax go up if we go completely over the fiscal cliff. But there are significant differences in which provisions matter most. Of course, the full paper includes much more. Here’s the abstract:

Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much? - The looming fiscal cliff threatens to boost taxes by more than $500 billion in 2013 when many temporary tax provisions are scheduled to expire. Nearly 90 percent of Americans would pay more tax, primarily because the temporary cut in Social Security taxes and many of the 2001/2003 tax cuts would expire. Low-income households would pay more due to expiration of tax credits in the 2009 stimulus. High-income households would be hit hard by higher tax rates on ordinary income, capital gains, and dividends and by the new health reform taxes. And marginal tax rates would rise, potentially affecting economic decisions.

IRS Could Buy Time on Fiscal Cliff - The prospect of the U.S. falling off the “fiscal cliff” is an ominous one for many economists, who warn that the U.S. could plunge into another recession. But exactly how painful a fiscal cliff-dive would be is a matter of debate, and some politicians and economists aren’t that troubled by it. One possible reason: the U.S. Treasury Department and the Internal Revenue Service have broad latitude to adjust withholding rates for Americans – or not adjust them. If the current tax breaks expire on Dec. 31, but tax administrators decided to leave withholding at current levels, some tax experts say that could cushion the economic blow considerably at the beginning of next year, and give Congress more time to reach a compromise. “What happens with the Bush tax cuts depends on what the Treasury does with withholding tables [and] they have a significant amount of discretion,” said Eric Toder, an expert with the nonpartisan Tax Policy Center, at a briefing on Monday on the fiscal cliff’s potential impacts. For example, “if they anticipate that Congress is going to pass something in early January they may delay increased withholding….That is certainly one of the imponderables.”

More Cliff Notes - Let’s start off the week with a few interesting pictures re the impact of the fiscal cliff. The Tax Policy Center has a new paper out showing the impact of the many tax increases that comprise by far the lion’s share of the fiscal contraction from the cliff—over $500 billion in higher taxes would kick in next year, according to the TPC. Changes in the tax code have very different impacts across the income scale, depending on who’s targeted, e.g., the EITC vs. the preferential tax treatment for capital gains.   So the TPC usefully breaks out the important changes and who, by income class, gets dinged. For the lowest income households, the loss of tax credits expanded by the 2009 Recovery Act (and since extended) like the EITC and the Child Tax Credit, are most important.  But the expiration of the payroll tax cut—a cut of over $100 billion next year and a loss of $720 to the average household next year (and $940 for working households)—hits everyone.  For families in the middle three fifths, you can see the dominant impact of both the end of the payroll tax break and the return to pre-Bush tax rates.  Conversely, for the top 1%—average income, a cool $2 mil—the high-income tax rate increases and the increases in cap gains and dividend rates are the big ticket items.

Counterparties: How to build a safety net for the fiscal cliff - We’re entering a strange time in the politics of the American economy. If Congress doesn’t act by January 1, a series of expiring tax cuts and automatic spending cuts will kick in. This “fiscal cliff” or “taxmageddon”, the CBO says, will send us back into recession and slash GDP.More specifically, almost 90% of Americans would see their taxes rise by an average of roughly $3,500 per household, according to a report released yesterday by the Tax Policy Center: “Average marginal tax rates would increase by 5 percentage points on labor income, 7 points on capital gains and 20 points on dividends.” Households in the top quintile of income would see their after-tax income fall 7.7%; those in the lowest quintile would see this income would fall 3.7%. But the NYT reports today that top senators have something resembling a plan. With the threat of a recession looming, the Senate has decided to revisit policies it couldn’t pass last year. First, there are hints of a possible agreement on a deficit reduction target that seems somewhere near the $4 trillion over a decade that a bipartisan group of lawmakers called for last fall. If that doesn’t work, a second plan would kick in, possibly including Social Security cuts or something like the Simpson-Bowles proposal that was obliterated in the House in May. Paul Krugman is not pleased, calling the possible safety-net cuts “politically stupid as well as a betrayal of the electorate”. And, finally, senators have also come up with a way to delay automatic spending cuts – sequestration, in budget-speak. Which isn’t to say this will happen before the election: “negotiators will not even try to determine how much money would come from the three components until after the voting"

Fiscal Cliff, the Video -- Here’s something new: a video version of TPC’s report on the fiscal cliff: Thanks to the Urban Institute’s crack communications team for pulling this together on short notice.

Will Going Over the Fiscal Cliff Make a Budget Deal Possible? - This afternoon, I moderated an Urban Institute panel on taxes and the fiscal cliff. The fundamental question on the table:  Will Congress have to tumble over the precipice in order to build the political consensus it needs to do a budget deal? To put it another way, will it take the fear of a financial market collapse and a cliff-driven recession to change the karma on Capitol Hill? Or, can Congress find an easier route to fiscal sanity by ducking the coming showdown? There are huge dangers to both options, and no clear answer. But in the current political climate, it is hard to see a road to a long-term budget agreement, whether or not Congress falls over the edge.

Game-Planning the Proper Economic Response in the Lame Duck Session - On taxes, I think Travis Waldron has it mostly right. With unemployment at 8.1%, I would like to see the payroll tax cut extended another year as a wage subsidy, but because it implicates the Social Security trust fund, it’s not going to happen. So let’s look at the above chart from the Tax Policy Center. The taxes set to expire are fairly progressive; the Bush tax cuts on the wealthy, increases in capital gains taxes, the estate tax, the increased Medicare tax on the rich snuck into the Affordable Care Act, even the AMT patch, all hit the upper income distributions. For those on the low end of the scale, the biggest measures are the series of stimulus-era tax breaks (expanded Earned Income Tax Credit, tuition tax credit and the child tax credit) and the Bush-era tax cuts on the first $250,000 of income. Therefore, this is correct: The top-line tax number news outlets are taking from the TPC report is certainly ugly: raising taxes on the middle-class would have a negative economic impact at a time when the country is still recovering from the Great Recession. But that calamity should be easily avoidable, given that both sides agree that those cuts should be preserved. The vast majority of the tax increases that would result from going over the “cliff” would have little economic impact since they primarily affect the wealthy, and, as a Congressional Budget Office report made clear earlier this year, the biggest economic threat posed by the fiscal cliff comes not from the tax side, but from its massive spending cuts. These are the battle lines, then, for those who want to see the poor and middle class protected: let the tax cuts expire above $250,000. The economic value of those tax cuts is extremely limited. Furthermore, it represents a pot of money that can be applied to cancel the sequester. Between that and savings from the war in Afghanistan’s end (especially if you end it early), you can pay for the sequester, AND an extension of the stimulus tax cuts for the poor and middle class, and even probably some of the “tax extenders” for businesses...

Goldman: "Neither Democrats Nor Republicans Look Inclined To Budge On The Fiscal Cliff" - The market appears convinced that it now has nothing to worry about when it comes to the fiscal cliff. After all, if all fails, Bernanke can just step in and fix it again. Oh wait, this is fiscal policy, and the impact of QE3 according to some is 0.75% of GDP. So to offset the 4% drop in GDP as a result of the Fiscal Cliff Bernanke would have to do over 5 more QEs just to kick the can that much longer. Turns out the market has quite a bit to worry about as Goldman's Jan Hatzius explains (and as we showed most recently here). To wit: "our worry about the size of the fiscal cliff has grown, as neither Democrats nor Republicans look inclined to budge on the issue of the expiring upper-income Bush tax cuts. This has increased the risk of at least a short-term hit from a temporary expiration of all of the fiscal cliff provisions, as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits." This does not even touch on the just as sensitive topic of the debt ceiling, where if history is any precedent, Boehner will be expected to fold once more, only this time this is very much unlikely to happen. In other words, we are once again on the August 2011 precipice, where everything is priced in, and where politicians will do nothing until the market wakes them from their stupor by doing the only thing it knows how to do when it has to show who is in charge: plunge.

Did Obama Blame the Financial Crisis on Budget Deficits? This was a very strange part of the debate last night. I would just say this to the American people. If you believe that we can cut taxes by $5 trillion and add $2 trillion in additional spending that the military is not asking for, $7 trillion — just to give you a sense, over 10 years, that’s more than our entire defense budget — and you think that by closing loopholes and deductions for the well-to-do, somehow you will not end up picking up the tab, then Governor Romney’s plan may work for you. But I think math, common sense, and our history shows us that’s not a recipe for job growth. Look, we’ve tried this. We’ve tried both approaches. The approach that Governor Romney’s talking about is the same sales pitch that was made in 2001 and 2003, and we ended up with the slowest job growth in 50 years, we ended up moving from surplus to deficits, and it all culminated in the worst financial crisis since the Great Depression. The Bush tax cuts were very bad fiscal policy, and shifted wealth upwards. But budget deficits create public debt, and the 2007-2009 financial crisis was fundamentally a problem of excessive private debt. Conflating the two is an intentional strategy to impose austerity on a population. White House Fiscal Commission co-Chair Alan Simpson has pointed to Greece as a possible future for the US, if the US doesn’t begin reducing its deficit.  In fact, the budget deficit basically exploded because of reduced output due to the financial crisis, and the transfer of private debt to the public balance sheet.

We’ve Already Cut Spending By Almost All of the Bowles-Simpson Targets - Jared Bernstein of the Center on Budget and Policy Priorities has an important piece that reinforces something I’ve been saying for a long time. Contrary to the opinion of Michael Grunwald that there has been no austerity in Obama’s first term, Bernstein lays out the numbers that actually shows the austerity, in both the short- and long-term, that actually encompasses most of what deficit scolds seek in their grand bargain. And this is actually a bad idea, as Bernstein illustrates. These developments are poorly understood by those—most vocally, SB advocates—who continuously inveigh that we’re not “serious” about cutting spending. In fact, that’s the only thing we’ve been “serious” about so far, such that we’ve actually achieved 70% of the discretionary spending cuts called for in the SB budget plan. This does not count war savings, nor does it include savings on interest payments, which would add another $250 billion to the savings. Bernstein references this paper by Richard Kogan of CBPP, which lays out the deficit reduction deals already put in place by Congress and the President, both from the 2012 budget deal and the Budget Control Act (i.e. the debt limit deal). This generated $1.5 trillion in discretionary spending cuts between 2013-2022, as part of a spending cap that President Obama is unlikely to violate as long as he’s President. And Kogan writes that, while 2/5 of these cuts come from defense, “These reductions will shrink non-defense discretionary spending to its lowest level on record as a share of GDP, with data going back to 1962.” The chart at the top reflects that

What happens if there is no Farm Bill? - Many farm programs and policies have never been permanently authorized, so, if there is no Farm Bill, policy reverts to a messy jumble of past authorities from more than 60 years ago. The National Sustainable Agriculture Coalition (NSAC) has clear and detailed answers to 15 questions about Congress' failure this year to pass a Farm Bill.  Here is an example. If a new farm bill is not enacted or the current farm bill is not extended for a period of time, the farm bill commodity programs revert to permanent law contained in the 1938 and 1949 farm bills. Each successive farm bill since that time has suspended permanent law for the period of time provided for the newly enacted farm bill. But the permanent law provision is scheduled to pop back up and become the law of the land again if Congress does not enact a new bill or extend current law.

Congress just let the farm bill expire. It’s not the end of the world … yet. -  Back in 2008, Congress passed a five-year bill that funded a whole array of agricultural programs, from food stamps to farm subsidies to conservation programs. This year was the year to renew and the Senate passed its own 10-year, $969 billion farm bill in June (here’s our breakdown). The House, however, hasn’t yet cobbled together its version yet. There were too many disagreements among Republicans over whether and how to cut $16 billion in food-stamp and nutrition funding over the next five years. So, John Boehner explained, they’ll have to finish work in the lame-duck period after the elections. But what about the interim period? Is it a disaster that the country now has no farm bill? Not necessarily. Or at least not yet. The folks at the National Sustainable Agriculture Coalition (NSAC) have written up a handy primer on what happens next. Here’s our even shorter summary:

Milk and Dairy Prices Set to Rise as Farm Bill Expires - The farm bill expired today, reverting some programs back to a 1949 level and totally eliminating others. The other day I looked at the consequences of expiration, and while many elements didn’t have much of an impact until the end of the year, in particular milk and dairy farmers were likely to feel the pinch right away. And Democrats, in blaming the House GOP for not taking up their version of the farm bill, have wasted no time highlighting that. Sen. Charles Schumer says milk prices in stores across New York could double if the Farm Bill isn’t renewed. Schumer says the nation will start to revert to 1940s era agriculture policy if a new Farm Bill isn’t passed soon. The National Milk Producers Federation says government purchases of dairy products under the outdated law could cause milk prices to rise above $6 per gallon. My understanding is that the farm bill that expires in 2012 still covers all crops or commodities planted and harvested in 2012. But dairy farmers have other issues, in particular the loss of the Milk Income Loss Contract Program, which supports them. That will hit farmers in November in their checks from the government. And dairy and livestock farmers already felt the worst effects of the drought, as the price of their feed skyrocketed. Dairy farms are going broke, particularly in California, due to a separate milk pricing issue. So while I don’t know whether prices would double right away, milk prices are almost certain to rise immediately.

Feldstein and Summers on Tax Reform: A Lot of Common Ground–but Still Some Stumbling Blocks - Last week as part of the “Strengthening of America-Our Children’s Future” project that the Concord Coalition is a co-sponsor of, a forum was held in New York on the topic of “pro-growth tax reform.” Harvard economics professor and Romney adviser, Martin Feldstein, joined former Treasury secretary and Obama adviser, Lawrence Summers, to discuss what they consider “pro-growth” tax policy.  A preview of their discussion was provided by former Senator Sam Nunn’s co-anchoring of the CNBC “Squawk Box” show earlier that morning; in this segment Feldstein and Nunn discuss the potential for bipartisanship in tax reform, but Feldstein is also asked to react to comments that Summers had made on the show just before.  (This latter issue will be most appreciated by those who have been following the Tax Policy Center’s analysis of the Romney plan and Feldstein’s subsequent critique of the TPC analysis and defense of the Romney tax reform plan.)  At the event, Feldstein and Summers made it clear that when it comes to the notion of what is “pro-growth tax reform,” there is a lot of common ground between economists who favor the Rs and economists who favor the Ds.  Here are what I heard as some of the main points of agreement between Feldstein and Summers (what Summers referred to as the “structure that Marty and I have converged on”):

The Math on the Romney-Ryan Tax Plan --Mr. Ryan and Mitt Romney have proposed a tax plan that would lower everyone’s tax rates by 20 percent. On Fox News Sunday, Mr. Ryan was asked to explain how the proposal can be revenue neutral — that is, not reduce the total amount of tax revenues collected — given this condition of substantially lower tax rates. He mentioned ending tax deductions starting with “people at the higher end” and broadening the tax base, and finally declared:… it would take me too long to go through all of the math, but let me say it this way. You can lower tax rates by 20 percent across the board by closing loopholes and still have preferences for the middle class for things like charitable deductions, for home purchases, for health care. You cannot lower tax rates as much as Mr. Romney and Mr. Ryan propose to do and keep all the existing tax expenditures for middle class Americans and still end up with the same total amount of tax revenue. As the Tax Policy Center demonstrated, cutting individual income tax rates by 20 percent from today’s levels would reduce tax burdens by $251 billion per year (in 2015) among households with income above $200,000. If you leave preferential tax rates for savings and investing (e.g., long-term capital gains and dividends) untouched, as Mr. Romney has said he would do, that leaves only $165 billion of available tax expenditures that can be eliminated from this same group of high-income earners once their marginal tax rates fall. That means there’s an $86 billion shortfall that somewhere come from the rest of the population, the 95 percent of households earning less than about $200,000 annually.

Distributional Impacts of Tax Cuts and Spending Cuts - Gov Romney’s tax plan is consistently criticized as being mathematically impossible in the following cents sense: He wants to a) cuts federal income tax rates by 20% across the board—so the top rate, e.g., goes from 35% to 28%, b) protect the “middle class” from any tax increases, and c) maintain revenue neutrality so as not to increase the deficit.  As the Tax Policy Center work has shown, that math doesn’t work out because even if you closed every loophole enjoyed by upper-income families, there’s still not enough revenue up there to offset the rate cuts (see the last three bars in their figure 2, noting that the blue bars—revenue losses from rate cuts—are higher than the red ones—revenue gains for base broadening). The TPC—and logic—suggests that this means that in order to maintain revenue neutrality and not add to the budget deficit, taxes would have to go up on other income groups, which they labeled “…a necessary but perhaps unintended consequence.” But what if they decided to make up the revenue losses with spending cuts?  Clearly, this would admit that their tax plan was not revenue neutral, but it is, at least in theory, a way to avoid a larger budget deficit.  Remember, it is the deficit which has been the victim of supply-side tax cuts like this in recent years. The problem here, as shown in some of our recent work at CBPP, is that the non-defense spending cuts implied by the Romney proposals would have further negative impacts on " programs such as veterans’ disability compensation, Supplemental Security Income (SSI) for poor elderly and disabled individuals, the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), school lunches and other child nutrition programs, and unemployment compensation would cause the incomes of large numbers of households to fall below the poverty line. Many who already are poor would become poorer.”

Romney’s Tax Plan: What We Learned (or Not) from the Debate -- From last night’s debate (NPR transcript, video above from Wall Street Journal): MR. ROMNEY: Well, sure. I’d like to clear up the record and go through it piece by piece. First of all, I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high- income people...…look, I’m not looking to cut massive taxes and to reduce the — the revenues going to the government. My — my number one principle is there’ll be no tax cut that adds to the deficit.I want to underline that — no tax cut that adds to the deficit. But I do want to reduce the burden being paid by middle-income Americans. And I — and to do that that also means that I cannot reduce the burden paid by high-income Americans. First, Romney says he will have “no tax cut that adds to the deficit.” How to reconcile this with not raising burdens on “middle-income” Americans and not reducing burdens on “high-income” Americans–given the Tax Policy Center’s analysis of the kind of base broadening needed to support a 20% across the board reduction in marginal income tax rates (in addition to the proposed extension of the full complement of Bush tax cuts) and no increase in effective tax rates on capital income?A few possibilities I see: (i) Romney is willing to back off the 20% figure for the marginal tax rate cuts; (ii) Romney is implicitly fiddling around with his definition of “middle income” vs. “high income”; and/or (iii) Romney is using “dynamic scoring” assumptions that assume growth effects offset any “static” revenue loss.  Some combination of those three tradeoffs is being exploited here. Second, Romney says he is “not going to reduce the share of taxes paid by high- income people.” How to reconcile this with reducing marginal tax rates and keeping capital income tax expenditures out of the tax base?

Even more mathematically impossible tax promises - In making up policy on the fly, Romney promised that his tax cuts would be entirely revenue-neutral, that he would cut taxes on the middle class, and that he would not cut taxes on high-income earners. Taken together with his specific tax cutting plans, these pledges violate basic rules of arithmetic. Early on in the debate, Romney disputed President Obama’s claim that the former governor’s central economic plan was a $5 trillion tax cut on top of extending the Bush-era tax cuts: I’ve gone over these numbers before, but it’s worth a quick refresher about the broad thrust of what’s wrong with this claim: Romney is hugely specific about just how he’ll cut taxes (mostly for high-income earners) but refuses to specify any real-world offset though the “base-broadening” that he’s promising.  Romney initially proposed repealing the estate tax; eliminating capital gains, dividends, and interest taxation for households with adjusted gross income under $100,000 ($200,000 for married taxpayers filing jointly); cutting the corporate income tax rate from 35 percent to 25 percent; eliminating the corporate alternative minimum tax (AMT); and repealing new taxes from the Affordable Care Act. This $2.7 trillion package of tax cuts would be entirely deficit-financed—indeed repealing business tax loopholes would only be used to offset further corporate income tax rate reductions below 25 percent. Romney subsequently proposed reducing all individual income marginal tax rates by 20 percent and fully eliminating the AMT, claiming that this round of tax cuts would be both revenue-neutral (i.e., financed with “base-broadening”) and distributionally neutral. If this second round were fully deficit-financed, the cost of Romney’s tax plan would increase by $3.4 trillion, rising to $6.1 trillion.

For the Wealthy, a 28 Percent Solution - Everyone knows that America’s tax code is a mess... But there is a possible solution. I can state my idea in just one sentence: All income above $1 million a year for a household will be taxed at 28 percent. There are no deductions, and all income, including capital gains and dividends, is included. President Reagan favored something like this...  While we’re at it, let’s make the corporate tax rate 28 percent, too, because our current rate is high by international standards. Oh, and the estate tax exemption? On amounts above $3.5 million for individuals, the rate would be, of course, 28 percent. ... But what about the argument that taxing capital gains and dividends at the same rate as ordinary income will discourage investment? I don’t find this claim convincing. Of course, I haven’t said what would happen to the households in the middle, or what the taxes would be on the first $1 million for the rich... One possibility is to scale back deductions smoothly, starting at household incomes above $250,000, and completely eliminate them for incomes above $1 million. ... A more radical plan, curtailing deductions for this large group, is probably politically infeasible

I am a job creator: A manifesto for the entitled - (excerpt)  I am the misunderstood superhero of American capitalism, single-handedly creating wealth and prosperity despite all the obstacles put in my way by employees, government and the media.

  • I am a job creator and I am entitled.
  • I am entitled to complain about the economy even when my stock price, my portfolio and my profits are at record levels.
  • I am entitled to a healthy and well-educated workforce, a modern and efficient transportation system and protection for my person and property, just as I am entitled to demonize the government workers who provide them.
  • I am entitled to complain bitterly about taxes that are always too high, even when they are at record lows.
  • I am entitled to a judicial system that efficiently enforces contracts and legal obligations on customers, suppliers and employees but does not afford them the same right in return.
  • I am entitled to a compensation package that is above average for my company’s size and industry, reflecting the company’s aspirations if not its performance.
  • I am entitled to have my earned income taxed as capital gains and my investment income taxed at the lowest rate anywhere in the world — or not at all.
  • I am entitled to pass on my accumulated wealth tax-free to heirs, who in turn, are entitled to claim that they earned everything they have.
  • I am entitled to everything I have and more that I still deserve.

Why Do America’s Super-Rich Feel Victimized by Obama? -  One night last May, some twenty financiers and politicians met for dinner in the Tuscany private dining room at the Bellagio hotel in Las Vegas. The eight-course meal included blinis with caviar; a fennel, grapefruit, and pomegranate salad; cocoa-encrusted beef tenderloin; and blue-cheese panna cotta. The richest man in the room was Leon Cooperman, a Bronx-born, sixty-nine-year-old billionaire. Cooperman is the founder of a hedge fund called Omega Advisors, but he has gained notice beyond Wall Street over the past year for his outspoken criticism of President Obama. Cooperman formalized his critique in a letter to the President late last year which was widely circulated in the business community; in an interview and in a speech, he has gone so far as to draw a parallel between Obama’s election and the rise of the Third Reich. In the letter, Cooperman argued that Obama has needlessly antagonized the rich by making comments that are hostile to economic success. The prose, rife with compound metaphors and righteous indignation, is a good reflection of Cooperman’s table talk. “The divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them,” Cooperman wrote. “It is a gulf that is at once counterproductive and freighted with dangerous historical precedents.”

'I Am a Job Creator': This Is the Country I Want - James Kwak -  I am a "job creator." I co-founded a software company eleven years ago and worked there for seven years. It now employs over eight hundred people, most of them in the United States and most in high-paying jobs. Hundreds of other people have jobs installing and configuring our software for our customers. I realize that my company probably caused other people to lose their jobs--most obviously at our competitors. I believe that, in the long run, products that increase productivity and that provide benefits exceeding their costs do improve overall welfare. I pay tax at historically low rates. Most of my income from my former company technically counts as investment income, and taxes on investment income were lowered by both President Clinton and President Bush. I had no idea, when we started the company, what the capital gains tax rate was. I would be a major beneficiary of the proposal by Mitt Romney and Paul Ryan to maintain low capital gains tax rates (or eliminate them altogether).

The Peril of Obama's "Man Crush" on Geithner Is Exposed by the Debate -  Bill Black - FDR transformed the nation when he was confronted with the Great Depression and World War II. He famously welcomed the hate of the banksters. President Obama wanted the love (and the contributions) of the banksters. He chose Timothy Geithner to be his pipeline to the banksters because Geithner shared Obama's lack of passion for holding the banksters accountable for their frauds that drove the ongoing crisis. We have known the core of these sad facts for years, for they were revealed (irony of ironies) in a May 22, 2010 article whose theme was that we had all done Geithner and Obama a terrible injustice by criticizing them for their servile approach to the banks. The key facts that the article disclosed can be summarized in a sentence: Obama developed a "man crush" on Geithner and decided to follow Geithner's policies to bail out the banksters rather than hold them accountable for the frauds that made them wealthy and caused the Great Recession. Obama's "man crush" is particularly odd given the fact that Geithner is a Republican who, as a fig leaf, became an independent.

Mitt Romney's Unintentionally Hilarious Tax Return FAQ - Unless you've been in a coma, you have certainly heard about Mitt Romney's release of his 2011 tax returns last Friday. You no doubt know that he and his wife did not claim all the charitable tax deductions they were due, so their tax rate would not go below 13% of adjusted gross income. If you read Bloomberg or a newspaper that picked up the Bloomberg story, you know that Rafalca, the Romneys' dressage horse, has disappeared from their 2011 tax deductions. This, of course, raises the question of whether it was a legitimate deduction in 2010 (or earlier?).  But have you read the Frequently Asked Questions page the Romney campaign put up about the 2011 returns and the PricewaterhouseCoopers (PwC) summary of the Romneys' 1990-2009 taxes? You should, for the humor value, if nothing else.

Romneys likely gained from complex offshore deals, tax experts say - Mitt Romney’s former private equity firm used a half-dozen companies and partnerships in the tax havens of Luxembourg, Ireland and the Grand Caymans four years ago to channel $689 million in loans to a U.S. company that it co-owned. Tax experts say that the circuitous paper chain likely was structured to avoid certain taxes for passive investors, including blind trusts for the Republican presidential candidate and his wife. It’s just one of a maze of transactions involving the Romney family portfolio that were engineered in tax-neutral nations. The gradual emergence of outlines of these deals in recent weeks is prompting some experts to challenge Romney’s pronouncement that his scores of offshore investments haven’t lowered his federal taxes by so much as a dollar. “It appears likely that offshore entities helped his investments avoid taxes or adverse tax consequences,” The New York Times reported Tuesday that it obtained documents showing that an offshore fund in which Romney’s investment retirement account held an interest probably used a “blocker” — an intermediary company that legally insulated the White House hopeful from paying 35 percent in taxes.

Mitt Romney’s Leniency Toward Corporate Welfare Queens -  From the days of high tariffs and giant land grants to the railroads, business and government have always been tightly intertwined in this country. But, in recent decades, what you could call the corporate welfare state has become bigger. Energy companies lease almost forty million acres of onshore land in the U.S. and more than forty million offshore, and keep the lion’s share of the profits from the oil and natural gas that they pump out. In 1996 the government temporarily lowered royalties on oil pumped in the Gulf of Mexico as a way of encouraging more drilling at a time of low oil prices. But this royalty relief wasn’t rescinded when oil prices started to rise, which gave the oil companies a windfall of billions of dollars. Something similar happened in the telecom industry in the late nineties, when the government, in order to encourage the transition to high-def TV, simply gave local broadcasters swathes of the digital spectrum worth tens of billions of dollars. In the mining industry, meanwhile, thanks to a law that was passed in 1872 and never rewritten, companies can lease federal land for a mere five dollars an acre, and then keep all the gold, silver, or uranium they find; we, the people, get no royalty payments at all.  Farmers, despite food prices at record highs, still get almost five billion dollars annually in direct payments, along with billions more in crop insurance and drought aid. U.S. sugar companies benefit from the sweetest boondoggle in business: an import quota keeps American sugar prices roughly twice as high as they otherwise would be, handing the industry guaranteed profits. Domestic manufacturers collectively get a tax break of around twenty billion dollars a year.

Paul Ryan: Socialism Must Be Destroyed, and by "Socialism" I Mean Things Like Social Security, Medicare, Food Stamps, and Unemployment Insurance -- The Paul Ryan audiotape did not get the same attention as the Romney videotape. Yet I find it as damning: Paul Ryan: Social Security right now is a collectivist system. It is a welfare transfer system…. And so what we have coming now at the beginning of this century is a fight…. [A]ll they have to do is to stop us from succeeding. Autopilot will get them to where they want to go. It will bring more government, more collectivism, more centralized government if we do not succeed in switching these programs and reforming these programs from what some people call a defined-benefit system to a defined-contribution system--and I am talking about health-care programs as well--from a third-party socialist-based system to an individually-prefunded individually-directed system. We can do this. We are on offense on a lot of these issues… In Paul Ryan's eyes, Social Security, Medicare, Medicaid, Unemployment Insurance, SNAP, etc. are all socialist, collectivist systems that must cease to exist in anything like their present form.And let me stress that shifting health care to an "individually-prefunded individually-directed system" means that poor people die in the gutter outside the hospital when they get sick: if you are unlucky and get seriously ill, then unless you are rich there is no way that you can have individually-prefunded enough to pay for your treatment.

Will everyone be worse off if the United States turns social democratic? - Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper that asks “Can’t We All Be More Like Scandinavians?” Their answer is no. The answer follows from a model they develop in which

  1. Countries choose between two types of capitalism. “Cutthroat” capitalism provides large financial rewards to successful entrepreneurship. This yields high income inequality, but it stimulates lots of entrepreneurial effort and hence is conducive to innovation. “Cuddly” capitalism features less financial payoff to entrepreneurs and more generous cushions against risk. This yields modest income inequality but less innovation.
  2. Because of the difference in innovation, economic growth initially is faster in cutthroat-capitalism nations. But technological advance spills over from cutthroat nations to cuddly ones, so growth rates then equalize. Over the long run, GDP per capita is higher in cutthroat-capitalism nations (due to the initial burst) while economic growth rates are similar across the two types.
  3. Average well-being may be higher in cuddly countries because the more egalitarian distribution of economic output more than compensates for the lower level of output.
  4. Nevertheless, it would be bad for all countries if cutthroat-capitalism nations switched to cuddly capitalism. That would reduce innovation in the (formerly) cutthroat nations, which would reduce economic growth in all nations.

Cutthroat capitalism and the 52/20 club - Lane Kenworthy has a long but pithy post questioning the claim that "cutthroat" capitalism spurs innovation. The whole thing is worth reading but this passage in particular got me thinking: The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and others.  I think we can take this even further. The entire quarter century following the WWII was marked exceptional innovation and growth and yet there were a number of factors (taxes, unions, large government payrolls, etc.) that reduced pay-outs for economic winners and risks for losers. Many of these factors involved programs for veterans (a huge group at the time). Of these, the most relevant might be one known, disapprovingly, as the 52/20 ClubAnother provision was known as the 52–20 clause. This enabled all former servicemen to receive $20 once a week for 52 weeks a year while they were looking for work. Less than 20 percent of the money set aside for the 52–20 Club was distributed. Rather, most returning servicemen quickly found jobs or pursued higher education.

Everything You Wanted To Know About Tri-Party Repo Markets But Were Afraid To Ask - The U.S. tri-party repo market is one of the most important components of the financial system - that noone has ever heard of (though not ZH readers: Tri-party repo has been a core topic of several of our 2009 posts exploring the nuances of the Lehman collapse - initially here and here and then multiple times as we discuss the backbone of the shadow banking system). The 2007-09 financial crisis exposed weaknesses in the design of the U.S. tri-party repo market that could rapidly elevate and propagate systemic risk. We have long-discussed the importance of the collateral and hypothecation markets and a recent study of the market identifies the collateral allocation and unwind processes as two key mechanics contributing to the market’s fragility. While the topic is relatively specialized, it is critical to understanding the reality behind the curtain and the paper below provides clarification of the bilateral and tri-party repo markets (The Fed, Bank of NY, and JPM - who in effect have first refusal on any collateral in the system), dealers' intervention, and its potential as a source of financial systemic risk.

US judge strikes down CFTC commodity limits - The recent ISDA challenge to CFTC on commodity limits (discussed here) finally paid off. The nonsense about limits on futures holdings preventing "excessive speculation" that causes outsize swings in commodity prices was struck down in court. Politicians blaming the investment community for problems created by fiscal or monetary policy in the US or abroad never made sense. Grandma's multi-billion dollar state pension fund should not be prohibited from buying a basket of commodities (or investing in a fund that does) to protect against inflation risk. It's just silly. Academic literature clearly points out that price fluctuations in commodities that had no futures contracts have been just as extreme as those traded on futures exchanges. And funds that take concentrated positions in commodities (such as commodity index funds and ETFs) are not the problem. In fact an OECD paper recently pointed out (see bottom of post) that the participation of index and swap funds in commodity markets may actually reduce volatility - possibly because of added liquidity. OECD: - An unexpected finding was a negative relationship between index and swap fund positions and market volatility. That is, there is some evidence that increases in index trader positions are followed by lower market volatility. The possibility still exists that trader positions are correlated with some third variable that is actually causing market volatility to decline. Nonetheless, this finding is contrary to popular notions about the market impact of index funds, but is not so surprising in light of the traditional problem in commodity futures markets of the lack of sufficient liquidity to meet hedging needs and to transfer risk.

Obama-Appointed Judge Strikes Down CFTC Commodity Speculation Limits - Everybody get on the commodity speculation train. A federal judge today threw out the Dodd-Frank provision that empowered the Commodity Futures Trading Commission to set position limits on commodity trading. Judge Robert Wilkins said in his ruling that the CFTC did not prove the necessity of position limits to curb runaway speculation, and that the law itself did not “constitute a clear and unambiguous mandate to set position limits, as the Commission argues.” Here’s the punchline: Judge Wilkins was appointed by President Obama in 2010. CFTC already set the position limits, and they were weeks from going into effect in the oil, grain, coffee, gold and other markets, 28 in all. At the time, Sens. Bernie Sanders, Maria Cantwell and others called it weak. Under CFTC’s rule, a single speculator could still hold as much as 25% of all deliverable oil supply in any given month. But now there will be no rule at all, unless CFTC can come up with a better rationale. Judge Wilkins sent the rule back to the CFTC for “further consideration.” But this, of course, is how Wall Street rules get watered down. The initial rule wasn’t all that effective, and yet the industry managed to litigate that away. Any substitute would have to be even more compromised to avoid the ire of the judge. And at that point it becomes close to meaningless.

Putting the Brakes on High-Frequency Trading - IMAGINE if the stock market were hijacked by computers that executed trades in a fraction of the time that it takes to blink. Since no mere mortal could understand the “thinking” behind such nanosecond trading, ordinary investors — even longtime institutional traders — would have little clue as to why any company’s share price was moving up or down in any moment. The values of well-established corporations would sometimes swing wildly from one second to the next and we slow-reacting, human investors wouldn’t know why.  You don’t really have to imagine this. This is how our stock markets function today. Some 50 percent to 70 percent of all trading is done by “traders” who live in server parks, are nourished by direct current and speak only in binary pulses.  Several other countries are starting to regulate this high-frequency trading, or H.F.T. But in the United States, the deep-seated bias toward “liquidity” — the notion that more volume will always make it easier for investors to buy and sell shares — has discouraged regulators from taking action.  Lately, though, after several well-publicized market blowups traced to H.F.T., officials are having second thoughts. In late September, the Senate banking committee held a hearing on the issue, and the Securities and Exchange Commission is getting into the act with a panel discussion today. Even Wall Street veterans have begun to question whether a market flooded with speed demons is good for society.

High frequency trading: how it happened, what’s wrong with it, and what we should do - In some ways HFT is the inevitable consequence of market forces – one has an advantage when one makes a good decision more quickly, so there was always going to be some pressure to speed up trading, to get that technological edge on the competition. But there was something more at work here too. The NYSE exchange used to be a non-profit mutual, co-owned by every broker who worked there. When it transformed to a profit-seeking enterprise, and when other exchanges popped up in competition with it was the beginning of the age of HFT. All of a sudden, to make an extra buck, it made sense to allow someone to be closer and have better access, for a hefty fee. And there was competition among the various exchanges for that excellent access. Eventually this market for exchange access culminated in the concept of co-location, whereby trading firms were allowed to put their trading algorithms on servers in the same room as the servers that executed the trades. This avoids those pesky speed-of-light issues when sitting across the street from the executing servers.

The New Bank Resolution Regimes and “Too-Big-to-Fail” - NY Fed - During the recent financial crisis, the absence of an orderly resolution regime forced governments of several countries to provide extraordinary support to a number of systemically important financial institutions (SIFIs) that were considered “too-big-to-fail.” Since then, new laws such as the Dodd-Frank Act have established a framework to resolve SIFIs without the need for government “bail-outs.” These types of laws have important implications for senior bondholders of SIFIs, as the use of the new regimes would likely expose creditors to losses. Given this change, this post investigates whether markets are adjusting their perceptions of the risk associated with global SIFIs. We find that in response to shifting regulatory regimes, investors are beginning to price in a higher risk of default on senior bonds issued by the institutions.

A Very Strange Way to Assess the Safety of Banks - Simon Johnson - Global regulators have a peculiar way of assessing the soundness of big banks: Ask bankers how risky their investments are, then figure out if they have enough capital to absorb the potential losses. This method, known as risk weighting, has failed repeatedly -- most spectacularly during the 2008 financial crisis. The good news is that some smart regulators understand and are articulating the problem. Like most firms, banks finance themselves with a combination of debt, which they get by taking deposits and issuing bonds, and equity, which they get from their shareholders. The latter, also known as capital, is crucial to the bank’s survival. If bad investments cause the value of a bank’s assets to fall, its equity decreases by an equivalent amount. If equity is depleted, the bank is insolvent. There will be either bankruptcy or some form of government bailout. Hence the need for capital requirements. In thinking about whether a financial institution has enough equity, current practice -- for example, as seen in the international banking regulations called Basel II and Basel III -- is to compare it with a measure that places weights on the bank’s assets according to their riskiness. A bond with a rating of AAA and a face value of $1 million, for example, might not be counted at all, based on the (often erroneous) assumption that it would always pay out in full. So a bank with total assets of $2 trillion might have risk-weighted assets of only $1 trillion. With just $100 billion in equity, or 5 percent of assets, it could have a risk-weighted capital ratio of 10 percent.

Ring-fencing Explained - Everyone wants to ring-fence something, but they can’t agree on what:  Vickers, Liikanen, Volcker. In all proposals, the idea is to have bank capital separately allocated for some activity, and to prevent that capital from being exposed to any other activity.  Some people want to lock the wild animals in a cage to keep them away from us; some people want to lock the tame animals in a cage to keep them safe from the dangerous world outside.Vickers wants to ringfence retail banking, with the idea of trying to protect Main Street from the other more risky activities of banks.  Liikanen wants to ringfence all trading activities (i.e. Wall Street), apparently in the hope of keeping the rest of the bank safe from them.  And Volcker wants simply to ring fence the market-making aspect of trading, in order to separate it from so-called proprietary trading which exposes bank capital to price risk.All three proposals represent attempts to come to regulatory grips with the dramatic changes in the nature of banking over the last 30 years or so, changes that were revealed to the world by the global financial crisis that began in August 2007 and continues to this day.

Banks confront a post-crisis world of tougher regulations and lower profits - Securities firms are cutting jobs. Bonuses are down sharply. The prestige of being a Wall Street banker has plummeted. And the profits that underpinned the heady years of the past are harder to come by.  The big five US banks on Wall Street made more than $50bn a year in combined revenues between 2005 and 2010 from fixed income trading, with the exception of 2008.  Last year, according to Credit Suisse, their combined revenue fell 22 per cent. As the new Basel III rules are phased in, the business is set to come under further pressure. Basel III enforces greater levels of loss-absorbent equity capital for the banks but also lasers in on the structured credit businesses at the heart of the last crisis, ascribing particularly punitive capital levels to those areas. With less leverage it is difficult, perhaps impossible, to make the returns on equity that banks used to enjoy – with the happier trade-off that it is also harder for them to fail. On top of Basel III, US banks must contend with the Volcker rule, also aimed at limiting risk-taking in fixed income divisions. Banks contend that this will damage their traditional ability to act as market makers, bringing together investors wanting to buy with those who want to sell. The banks are struggling to identify a new cash cow that grazes between the new rules. The equivalent of the junk bonds of the 1980s or the credit derivatives of the 1990s has not been discovered. “We’re waiting really for the unveiling for what the new bank models are going to be. I’m surprised that there hasn’t been more forced innovation,”

Why Breaking Up MegaBanks Would Help Investors -  Yves Smith - Last weekend, the Harvard Law blog posted a piece by Peter Wallison of the American Enterprise Institute. For those who don’t know Wallison, both he and the AEI are fond of making strained at best, completely dishonest at worst, cases for large financial services industry players. I had wanted to shred his piece regardless and a comment in the Financial Times by Andrew Haldane, executive director of financial stability at the Bank of England and widely recognized as one of the savviest economists on this beat, happens to rebut one of Wallison’s main arguments, that of the “value” of these complex financial firms. Haldane’s article was prompted by an EU proposal to break up banks along risky trading businesses versus deposit-taking related activities. This overview comes from the Wall Street Journal: Mind you, we think this focus is somewhat misplaced. While it would clearly be desirable to reduce the size and degree of integration of the “too big to fail” banks, the first order of business is to reduce interconnectedness. Even if the officialdom finally got the willpower to split up the behemoth firms, the authorities clearly regard the capital markets as too important to allow to fail. Although bank lending is important, in the US, more credit is ultimately provided through securities markets than on balance sheet bank lending. These markets are over the counter, meaning the big dealer banks buy and sell from end investors. The dealer banks are tightly interconnected via counterparty exposures (particularly in derivatives markets). As we saw with Lehman, if one goes down, it has serious ramifications for its peers. And because the dealers tend to pursue similar strategies, when one looks wobbly, providers of short-term funding for the entire industry start looking for the exits. So reining in over-the-counter derivatives, particularly credit default swaps, needs to be a top priority. But reducing the size and complexity of the big firms is nevertheless a worthy goal, if nothing else to reduce their political influence (smaller, more specialized firms would have different interests and instead of seeing megabanks all on the same page, you’d see the new players duking it out on some issues).

Mirabile Dictu! Schneiderman Files Fraud Suit Against JP Morgan Over Bear Stearns MBS - Yves Smith - Wellie, on schedule, we have our October surprise. The Wall Street Journal reports that Eric Schneiderman has filed against JP Morgan for mortgage securitizations created and sold by its Bear Stearns subsidiary. I don’t yet have a copy of the claim and will update the post when I get it. The article indicates that the Bear suit will serve as a template for other mortgage-securitization-related litigation against major originators.From the WSJ: The case is the first brought under the aegis of a law enforcement group that was formed by President Barack Obama in January to pursue alleged wrongdoing related to the financial crisis.More cases from the group are expected to follow. “We intend to follow up with similar actions against other sponsors and underwriters of RMBS,” said an official in the attorney general’s office. The allegations relate to billions of dollars of subprime securities issued by Bear Stearns Cos. before the troubled firm, now owned by J.P.Morgan, collapsed in 2008. The suit alleges that losses on residential-mortgage securities issued by Bear Stearns in 2006 and 2007 alone were “astounding,” totaling $22.5 billion, or more than a quarter of the original principal balance. The action asks that the company be made to pay an undisclosed amount of damages “caused, directly or indirectly, by the fraudulent and deceptive acts.”Note that the article indicates that the suit is filed by the New York attorney general alone (despite the “under the aegis”of the mortgage task force). Unless the legal theories and fact sets hinge on unique aspects of New York law, it seems peculiar not to have parallel filings from Federal agencies.

JP Morgan's Subprime Horror - There are two jaw-dropping elements to the case brought Monday night against JP Morgan by the attorney general of the state of New York. First is the estimate that investors incurred $22.5bn of losses on $87bn of bonds made out of low-quality mortgages and sold to them in 2006 and 2007 alone. Second is the disclosure of a manic and frenzied culture of procuring and packaging as many mortgages as humanly possible, to maintain the bonds spewing from the investment bank, to generate as much short-term profit as humanly possible. All this is a bit like the fifth instalment in a series of horror films, with each succeeding production gorier than the preceding one. Strong language is involved in the evidence detailed below. It is important to point out that JP Morgan itself may well feel itself something of a victim here, because the charges of fraud are against Bear Stearns, the investment bank acquired by Morgan with the encouragement of regulators, in 2008. While JP Morgan's apparent ignorance of selling practices at Bear Stearns may be a defence in the court of public opinion, it may not be in a court of law

NY sues JPMorgan over Bear Stearns mortgage securities - Reuters - New York Attorney General Eric Schneiderman filed a civil fraud lawsuit against JPMorgan Chase & Co (JPM.N) on Monday over mortgage-backed securities packaged and sold by Bear Stearns. It was the first action to come out of a working group created by President Barack Obama earlier this year to go after wrongdoing that led to the financial crisis. JPMorgan, which bought Bear Stearns for $10 a share in March 2008, said in a statement it would contest the allegations. The suit accuses Bear Stearns of failing to ensure the quality of loans underlying residential mortgage-backed securities it packaged and sold in 2006 and 2007. Investors lost more than $22.5 billion on more than 100 of those securities, or one-quarter of their original value, the lawsuit said. The lawsuit said there were "serious long-standing concerns" about the quality of reviews done by Bear Stearns, and that defects uncovered among the loans sold to investors were largely ignored. The due diligence process was compromised "in order to increase their volume of securities", the complaint says. It also alleged a "systematic abandonment of underwriting guidelines". JPMorgan noted in its statement that the allegations concern actions by Bear Stearns before the investment bank was acquired by JPMorgan.

NY Mortgage Suit Against JPMorgan Could be Model For Future Cases - A multibillion-dollar civil suit filed by the New York State Attorney General’s office against JPMorgan Chase over mortgage-backed securities could become a template for state and federal officials seeking accountability for the 2008 financial crisis, according to sources close to the case. The lawsuit, filed in New York State Supreme Court in Manhattan on Monday, is the highest profile effort yet by a mortgage-backed securities working group first announced by President Barack Obama in his State of the Union address in January. The group includes officials from multiple federal agencies, as well as 10 state attorneys general, including New York’s Eric Schneiderman, who has broad powers to prosecute financial fraud under a state law known as the Martin Act. While it was Schneiderman’s office that ultimately brought the suit, a federal official familiar with the investigation told CNBC 11 U.S. prosecutors, as well as three attorneys from the Justice Department’s Civil Division, helped develop the case. The official says the interagency cooperation is a model for future cases, but would not say whether similar suits are imminent against other Wall Street firms. A spokeswoman for Schneiderman also declined to comment about ongoing investigations. The lawsuit filed Monday alleged “a systemic fraud on thousands of investors” in mortgage-backed securities sold by Bear Stearns, which was taken over by JPMorgan as part of a government rescue package during the financial crisis in 2008.

Money, Power and the Rule of Law - Simon Johnson - The most effective way to push back against powerful special interests is to have the same rules for everyone – and to enforce those rules fairly, even when they are broken by the richest and most politically connected people in the land. Attorney General Eric Schneiderman of New York took a major step toward restoring the rule of law this week, by bringing a case against JPMorgan Chase. But it will be an uphill battle; the forces against him are incredibly strong, including some within the Obama administration. Special interests always want to take over and organize society for their own benefit. In the terminology of economics, there are always some “rents” to be had – meaning some form of extra compensation that you get from tilting the playing field in your favor. Powerful people are always “rent-seeking,” another way of saying that they would like to feather their own nests. And such activities impose costs on society, lowering incomes and limiting opportunities for everyone else. When money is the primary source of power, the special interests win hands down. They can create advantages for themselves. One way is through the market mechanism – as monopolists did with railroads and industrial sectors at the end of the 19th century.Or they can capture the government and use state policies to help themselves – for example, by deregulating the financial sector and allowing excessive risk-taking in big banks. The ability to take such risks hurts all consumers and taxpayers while helping the special interests who get this advantage.

JPMorgan Chase Lawsuit: New York Attorney General’s Suit Is First For Task Force -The New York Attorney General sued JPMorgan Chase on Monday, alleging that Bear Stearns, the troubled investment bank it bought in 2008, "kept investors in the dark" about the quality of the mortgage-backed bonds it was selling as the market started to sour. The lawsuit is the first legal action against a Wall Street bank to come from a joint federal and state task force announced by President Barack Obama during his State of the Union address in January. It alleges civil fraud violations, which means that potential penalties will be measured in dollars, not jail terms. Nevertheless, the JPMorgan Chase lawsuit qualifies as one of the more significant actions taken by a law enforcement agency to date against a Wall Street bank. JPMorgan Chase acquired Bear Stearns in March 2008 in a deal brokered and supported by the federal government. According to the lawsuit, filed in Manhattan federal district court, Bear promised a "robust and intensive" review process for selecting loans for sale to investors. But Bear didn't do that, according to the complaint. In order to continue the securitization machine -- the packaging and sale of home loans to investors -- the bank increasingly placed risky loans into the bonds, even as an outside contractor it had hired to evaluate those loans was warning the bank about their poor quality.

NYAG MBS Suit -- A few very quick impressions about the NYAG's suit against JPMorgan.  

  • 1. The suit brought under the Martin Act. That's a NY state statute and this is a NY AG suit, even though it has evolved as part of the federal-state mortgage crisis taskforce. The Martin Act is a very potent tool because it has only two elements that must be shown: a misrepresentation/omission and materiality. Unlike a 10(b)/10b-5 federal securities fraud suit, the Martin Act does not require scienter. Unlike a section 11/12 federal securities fraud suit (and 10(b)/10b-5), the Martin Act does not require loss causation (or have a negative loss causation defense). The Martin Act only requires a material misstatement or omission in connection with the purchase, sale, etc. of securities.
  • 2. The suit is not about a specific deal. It's a platform-wide case. That's a new type of suit, and not one that has been brought under the Martin Act before. The platform-wide basis for the case also majorly ups the ante for JPMorgan. There's a 6-year statute of limitations for the causes of action in the complaint, so that takes us back to October 2006. Tolling agreements might push this back further. That means this compliant covers an enormous volume of deals. From Q4 2006-2008, Bear Stearns entities issued around $56 billion in private-label MBS. Bear was involved with an even greater volume of private-label MBS underwriting: approximately $91.5 billion. (These numbers pro-rate annual 2006 figures for a single quarter.) It's not clear to me from the complaint if Bear would only be on the hook when an issuer or also as an underwriter--the precise division of roles in the MBS manufacturing process doesn't always track statistical breakdowns. In either case, that's an awful lot of MBS at issue. And note that this is just about JPM's Bear Stearn's liability. The allegations in the suit hardly seem specific to JPM/Bear.

Schneiderman Suit Against JP Morgan: A Rehash of Other Lawsuits, Likely to Produce Meager Settlement - Yves Smith -- It looks like Eric Schneiderman is living up to his track record as an “all hat, no cattle” prosecutor. Readers may recall that he filed a lawsuit against the mortgage registry MERS just on the heels of Obama’s announcement that he was forming a mortgage fraud task force. Schneiderman’s joining forces with the Administration killed the attorney general opposition to the settlement, allowing the Administration to put that heinous deal over the finish line. The MERS filing was a useful balm for Schneiderman’s reputation, since it preserved his “tough guy” image, at least for the moment, and allowed his backers to contend that he had outplayed the Administration. By contrast, we were skeptical of the suit, both in timing and in substance, and thought it had substantial hurdles to overcome. Indeed, despite invoking an impressive-sounding $2 billion in lost recording fees and other harm, the suit settled for a mere $25 million (you have to love Schneiderman’s pushback; this was a “partial” settlement. Puhleeze. We’ve been told by lawyers who aren’t pro bank that the judge assigned the case was not buying what Schneiderman was selling, and the claim that he has residual claims he can pursue, while narrowly true, is pretty desperate). Schneiderman has churned out another lawsuit that the Obama boosters and those unfamiliar with this beat might mistakenly see as impressive. It’s a civil, not criminal suit against JP Morgan he conduct of Bear Stearns in originating and misrepresenting $87 billion of mortgage backed securities (the link takes you to the court filing). And also notice no individuals are being sued. Being a banker apparently means never having to be responsible for your actions. There is nothing new here; this claim is cobbled together from other litigation and investigations. And to add insult to injury, the damaging information has been in the public domain for years.

Bank of America’s Cascade of Settlement Payoffs Continue - Yesterday, Bank of America fired off one of their biggest settlements yet, spending $2.4 billion to quiet claims with investors over their purchase of Merrill Lynch. As Lehman Brothers failed in September 2008, Bank of America agreed to buy Merrill Lynch. But in the weeks after that agreement, the bank tried unsuccessfully to scrap the deal. Merrill Lynch generated more than $15 billion of losses and its executives agreed to award employees up to $5.8 billion of bonuses. Bank of America’s shareholders voted to approve the deal in December 2008. After the merger closed, Bank of America shares fell sharply, and investors sued, saying Merrill’s losses and bonuses should have been disclosed before the vote. This was outright securities fraud, and I’m more than surprised that the investors plaintiffs, led by public pension funds in Ohio and Texas, accepted this. BofA clearly withheld information from their shareholders that caused a material loss; the stock is down 2/3 since the Merrill deal, even while the bank returned to profitability (though not this quarter, as we’ll see). But the investors had little leverage. The SEC should have been all over this, but they settled over the acquisition in 2009, in a settlement so bad that the judge made them rework it. In the end, the SEC got just $150 million for their settlement, and the fact that the investors got 16 times as much should truly embarrass them.

M Stanley chief warns on Wall St pay - Morgan Stanley is preparing to wield its axe again with more job cuts and smaller bonuses planned for next year as the investment bank attempts to boost shareholder returns. In the latest sign of the pressure Wall Street is under to cut costs and address high pay levels, James Gorman, chief executive, said that staff and remuneration would have to be sacrificed as banks cope with lower profits. “There’s way too much capacity and compensation is way too high,” Mr Gorman said in an interview with the Financial Times. “As a shareholder I’m sort of sympathetic to the shareholder view that the industry is still overpaid.” In common with other large investment banks, Morgan Stanley is responding to pressures caused by new regulation, lower trading volumes and increased competition from non-bank financial companies such as hedge funds and private equity firms. Deutsche Bank plans to lose at least 1,900 bankers, while Citigroup has said it is shedding an extra 350 employees, mostly traders. Credit Suisse and UBS are both pressing ahead with job cuts announced late last year. Morgan Stanley itself is already axing 4,000 jobs, 7 per cent of its workforce, by the end of this year. In the new year, Mr Gorman said, the bank will consider its next round of cost-cutting, including lower pay and bonuses.

Agency MBS market will be shrinking rapidly: The chart below shows fixed rate agency MBS issuance since the financial crisis. With the Fed taking out some half of this gross issuance (see post), one would think there should be paper left for other investors, right? Wrong. The net (vs. the gross) issuance of fixed rate agency MBS has actually been negative. That's in part because the GSEs are shrinking their balance sheets. In fact they've been told to start shrinking mortgage portfolios by 15% a year (see discussion).  The GSEs issue new bonds slower than the old bonds amortize due to mortgage prepayments, producing a negative net. As agency bond issuance declines, the Fed purchases are picking up (locking these securities away - probably to maturity). The amount of MBS bonds in the market will begin contracting rapidly going forward.

Fed's 'Trickle-Down' Policy Lines Pockets Of Mortgage Originators - The yield on MBS has been crushed over the last few weeks (front-running from before QEternity and then afterwards as every manager with a balance sheet warehoused as much as possible to sell back to the Fed). This rally has reduced the spread between 'risky' MBS and supposedly risk-free US Treasuries to practically nothing as the Current Coupon 30Y MBS trades around 1.67%. However, where the real differential has occurred is in the spread between the risky wholesale rate that Main Street is charged on their mortgage and the government-sponsored wholesale rate they finance this debt at. The spread between wholesale and retail mortgage rates has never been higher (in absolute and ratio terms) providing a new ATM for all those banks and mortgage originators trying so hard to scrape by these days. We just assume the Fed's policy transmission-channel had modeled this trickle-down of mortgage banker bonuses (and taxes) into local Ferrari dealerships and Lafite wholesalers.

Mortgage hedge funds love Bernanke -  If there is one set of investors that has been cheering Ben Bernanke on, it is the mortgage-focused hedge funds. This group of funds has by far outperformed the hedge fund universe as the Fed decided to take a big chunk of MBS paper out of the market (see discussion) - in addition to the previous securities purchase programs. Other long-biased fixed income hedge funds (such as ABS) have done reasonably well on the back of Fed's action, though most lag their indices. Equity funds on the other hand have struggled for the past two years (except for stat arb) as both the long-biased AND the short-biased equity funds lost money this and last year. It's not clear how that happened but it speaks to the stock picking "prowess" of the hedge fund community.

Reis: Office Vacancy Rate declines slightly in Q3 to 17.1% -- From Reuters: U.S. office market barely gains in third quarter: [T]he vacancy rate dipped in the third quarter by a scant 0.1 percentage point to 17.2 percent from the second quarter. The vacancy rate declined by just 0.30 percentage points compared with a year earlier. ... [T]he average asking rent for U.S. office space rose only 1.4 percent over the past 12 months and just 0.2 percent to $28.23 per square foot from the second quarter. Effective rent, which takes into account months of free rent and other perks landlords offer to lure or keep tenants, rose 0.3 percent to $22.78 per square foot. Reis also sees no significant improvement for the rest of the year. "The office market is not going to move in the right direction until the labor market starts to move in the right direction," Severino said. "Nobody is going to lease space until they're hiring, and nobody is going to hire until they feel more confident about the direction of the economy." This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual). Reis is reporting the vacancy rate declined in Q3 to 17.1%, down slightly from 17.2% in Q2, and down from 17.4% in Q3 2011. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010.

Unofficial Problem Bank List and Quarterly Transition Matrix - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Sept 28, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  FDIC released its enforcement action activity through August 2012 and closed a bank this week leading to many changes in the Unofficial Problem Bank List. In total, there were 12 removals and eight additions that leave the list with 874 institutions with assets of $334.9 billion. While the number of banks on the list declined, it was the first weekly increase in assets since June 29th. A year ago, the list held 986 institutions with assets of $405 billion. For the month, assets increased by $3.4 billion while the institutions count fell by 17 institutions after 18 action terminations, nine unassisted mergers, three failures, and a voluntary liquidation.With the end of the third quarter, it is time to refresh the transition matrix. As seen in the table below, there have been a total of 1,588 institutions with assets of $810.9 billion that have appeared on the list. Removals have totaled 714 institutions or 45 percent of the total. Failures continue to be the leading removal cause as 340 institutions with assets of $288.2 billion have failed since appearing on the list. Removals from unassisted mergers and voluntary liquidations total 122 institutions. This year, there has been an acceleration in action terminations. In all, actions have been terminated against 252 institutions with assets of $112.9 billion, with 53 termination occurring in this quarter.

Analysis: Mark Zandi wrong about housing tax credit - I think  Mark Zandi is wrong about the housing tax credit and confused about some of the timing of the housing bust. First, from Mark Zandi, chief economist at Moody’s Analytics in the WaPo: Obama policies ended housing free fall Temporary tax credits also enticed home buyers to act sooner rather than later, breaking a self-reinforcing deflationary cycle in the housing market. The tax credits didn’t spark additional home sales so much as pull sales forward from the future; sales weakened sharply as soon as the credits expired. The credits also were expensive, costing the Treasury tens of billions of dollars, and much of the benefit went to home buyers who would have bought homes anyway. But the tax benefit gave buyers a reason to stop waiting, ending the downdraft in prices. Critics charge that the government’s intervention was costly and ineffective, that the administration should have let the housing market sort things out on its own. This would have been a reasonable position if house prices had been too high when Obama’s policies kicked in; but they weren’t. First, house prices declined about 7.5% from January 2009 to the recent low earlier this year. In real terms, house prices declined about 16% from January 2009 to the recent low!. How can Zandi say the tax credit ended "the downdraft in prices"? That is incorrect. Most of the decline in house prices happened before January 2009, but the decline since early 2009 would still have been the largest decline in house prices nationally from the Depression through 2006. In fact the housing tax credit was expensive and ineffective. I opposed the tax credit early and often. The tax credit for buying new homes was especially dumb. A key problem during the housing bust was the excess supply of vacant housing units, and incentivizing people to buy new homes (and add to the supply) made no sense at all.

Is QM What's Holding Back the Housing Market? - Mitt Romney made a surprising claim in last night's Presidential debate:  that the lack of a regulatory definition of Qualified Mortgage (QM) under the Dodd-Frank Act is what's causing banks to hold back from lending. This claim, while perhaps narrowly accurate in the sense that regualtory uncertainty is likely to have some chilling effect, takes a misleadingly selective view of what's going on in the housing finance market.  Dodd-Frank prohibits the making of residential mortgage loans "unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments." Failure to comply with the ability to repay requirement is an absolute defense against foreclosure or debt collection on the non-compliant loan.  The statute, however, provides that ability to repay shall be presumed if the loan is a "Qualified Mortgage."  In other words, QM is a safeharbor.  The statute itself provides a fairly extensive definition of "Qualified Mortgage".  If Romney's point is merely that on the margin the lack of a QM regulation is chilling lending, I've got no quarrel with him. But I don't think Romney's point was just about the marginal mortgage loan. I think he's claiming that QM is really what's holding back the housing market, not the millions of underwater borrowers or borrwers with damaged credit and a tenuous employment market. 

Counterparties: What’s holding back mortgage lending? - Even with mortgage rates at record lows and the Fed’s recent $40 billion per month commitment to the market, mortgages aren’t terribly easy to get these days. Mitt Romney, for his part, blames confusion over “qualifying mortgages“. But the mortgage market is also being held back by the scourge of “put-backs”. In the post-housing-bubble era, Nick Timiraos reports, mortgage giants Fannie Mae and Freddie Mac have hired “bounty hunter” consultants to apply a ridiculous amount of scrutiny to billions of solid loans from mortgage lenders. If these consultants find even small problems – like a stray deposit in a borrower’s bank account – Fannie and Freddie can force lenders to buy back loans: “Why do I care about that $100 deposit? Why am I triple checking your credit score?” “Because I’m scared to death of the buyback.” If you already have a mortgage, things are weirdly sunnier. Refinancing rates have hit their highest level in more than three years. This recent data, Matt Zeitlin writes, is very good news: Not only are underwater homeowners refinancing but more people are actually paying their mortgages down early. At the other end of the mortgage spectrum, there’s subprime, which, Bloomberg’s Jody Shenn reports, is a remarkably lucrative, shrinking market. Subprime mortgage bonds – basically bonds containing loans not backed by Fannie and Freddie – are up 30% so far this year, and ”have outperformed almost every other asset class”. Goldman and Cerberus are among the companies launching funds to buy these bonds. Which isn’t to say there is a large supply of new subprime bonds. Since 2008, only $3.5 billion of these subprime loans have been packaged into securities. For comparison’s sake, sales of bonds containing those safer, government-backed loans hit $1.2 trillion last year alone.

Do We Really Need Freddie to Subsidize Rental Investors? - Yves Smith - Just because the banks are on one side of an issue does not always mean they are wrong, just that they might be right for the wrong reason. The Wall Street Journal reports today that a Fannie plan to subsidize substantial investors in rental properties is stymied thanks to bank lobbying. The housing giant had planned to launch a program to lend to institutional investors in single family rental properties (note that small investors would not have access). The rationale was to “jump start” a housing recovery and boost short term demand. Banks argue they are willing to lend and hence there is no need. The truth is that professional investors are already pursuing the single family home market aggressively, which means the case for goosing their returns with cheap government funding is weak. Spreads between returns on single family rentals and multifamily rentals are the highest they have ever been. Professional investors also believe they have solutions to managing dispersed homes: concentrations within suburban areas (as in you buy a lot in say Atlanta, not in 10 cities across the South), renovating properties using standard installations (for those that do rehabs) so that you can inventory only one type of bathroom faucet). Investors also see certain plusses in single family homes relative to apartments: less frequent turnover. Multifamily buildings typically experience 50% turnover in a year, while renters of single family homes stay in place longer (and rental income loss due to turnover is a big cost). Mind you, I’m not completely sold on the bull case (which sees all the risks to the upside). But there are investors now who are assembling portfolios and earning attractive current yields who aren’t assuming home price appreciation as part of their total returns. And even the enthusiasts have reservations about certain markets as far as the jobs outlook in concerned (Las Vegas, for instance).

Banks Forgive Debt That Isn't There - GREETINGS, unhappy homeowners! Here’s some wonderful news: “We are canceling the remaining amount you owe Chase!” says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. “You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America.  Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.  What’s going on?  Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.  So, to the ire of customers who couldn’t get banks to work with them before, banks are now forgiving debts that no longer exist.

Blatant Violation of Mortgage Settlement Elicits Predictable Limp-Wristed Response From Mortgage Monitor - Yves Smith - Gretchen Morgenson has a good piece up today which again proves that no matter how bad you think the mortgage settlement is, it’s worse. Readers may recall that one of the dubious features of the settlement was that banks could accumulate credit for activities other than mortgage modifications of loans they owned, which meant that anything other than the actual hard dollars paid in the settlement, net of fines the officialdom chose to forgive, was the only believable number, since the rest could and likely would be gamed in various ways. The cash portion of the settlement was just shy of $6 billion, with fines owed to the Treasury and Fed clocking in at over $1 billion, making the only sure costs inflicted on the five biggest servicers for years of abuses of borrowers and making a mess of title an average of under $1 billion each. One of the ways banks can earn credits toward the remainder of the balance is by extinguishing first and second liens. But the banks look to be taking debts that were uncollectable, from a legal perspective, and claiming credit nevertheless. The most egregious version is the one fingered by Morgenson, that of debts that were already erased in bankruptcy. Morgenson has unearthed multiple instances where the banks have sent out cheery letters saying they are wiping out consumers’ debts, when those debts in fact are long gone. And to add injury to insult, these servicers are also reporting these phony extinguishments of debt to the IRS as if they were actual debt forgiveness, so the consumers will have an uphill battle proving that the banks have done them a dirty by misreporting for fun and profit.

Another Foreclosure Fraud Settlement Scam: Banks Trying to Get Credit for Already Discharged Debt - Though I’m not sure anyone pays attention to them anymore, the President delivered his weekly address this weekend, and it was all about how Congress has to help “responsible” homeowners (because the irresponsible ones deserve nothing, after all they fleeced those responsible banks to get the loan). In the address, President Obama contrasted his approach with a Congress that won’t expand refinancing for underwater borrowers, by saying that his Administration “teamed up with state attorneys general to investigate the terrible way many homeowners were treated, and secured a settlement from the nation’s biggest banks – banks that were bailed out with taxpayer dollars – to help families stay in their homes.” So what about that? We know from early reports that the bulk of the consumer relief in the first three months of the foreclosure fraud settlement went to short sales, which involve families forced into SELLING their homes, not staying in them. The bulk of these short sales, which amount to a bank waiving the right to seek money from a homeowner who sells a home for less than they owe on their mortgage, occurred in states whose laws bar banks from going after those homeowners anyway. Other aspects of the settlement are largely incomplete at the moment. Nevertheless, I have seen a number of letters received by families with congratulatory statements like “You are approved for a full principal forgiveness of your account.” Gretchen Morgenson, inquiring with banks as to why they sent letters discharging debt that homeowners no longer owed, found that the bank often still holds liens against their properties, regardless of the prior debt forgiveness. And this is what they claim to be giving up. 

The Mortgage Settlement's Big Day - Today, October 2, is the last day for the nation's five largest mortgage companies to implement the servicing reforms in the National Mortgage Settlement. As California Monitor, I issued my first report to highlight one of the most important changes--restricting dual tracking. Dual tracking is the name given to the race between foreclosure and loan modifications. Because banks control both processes, beyond some specified waiting periods by state law, many families lose the race to get a decision on whether they can save their home with a loan modification. Restrictions on dual tracking are key to avoiding preventable foreclosures and creating fundamental fairness in the foreclosure process.  The report gives some data on dual tracking to bring visibility to this issue. After the jump, I report some bad news and good news on how the Settlement implementation reforms are going.  The California Monitor Program received 224 complaints about dual tracking since the Settlement was announced. The bad news is this clearly understates the degree of the problem. Most families do not file a complaint, and even among the 1,482 total complaints received, some may focus on confusing communication from their banks, meaning my staff doesn't realize dual tracking is occuring into well into its work to help the family. The good news is the trend line is sharply downward in September. As the chart shows, dual tracking complaints were half as frequent last month.

After Mortgage Settlement, Banks Continued Abusive Practice, California Monitor Says - The five big banks that agreed in a $25 billion mortgage settlement to reform foreclosure practices have continued to "dual-track" homeowners, an abusive technique that pushes families out of homes they thought their bank was trying to help them save, according to a new report by a monitor overseeing the settlement in California. The report, by Katherine Porter, a University of California-Irvine law professor, is the first official look at the progress the banks have made in complying with the terms of the deal, reached in March after federal and state investigations. Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial have until Wednesday to implement hundreds of "servicing" reforms mandated by the settlement, or face penalties of up to $1 million per occurrence. HuffPost recently reported that the settlement has yet to spur discernible change in bank behavior.

Report Finds Banks Continued Abusive Practice After Foreclosure Settlement - The nation’s five biggest banks signed a settlement in February with the Department of Justice and most of the nation’s state attorneys general that allowed the banks to avoid going to court for their role in the foreclosure fraud scandal. Under the terms of the settlement, the banks agreed to pay $25 billion and end certain abusive practices. However, a new report from the California Monitor, an office overseeing the settlement, found that the banks continued at least one pernicious practice until the last possible moment: Banks agreed to make all changes by one of three deadlines: 60 days, 90 days, or 180 days. While some changes, such as implementation of a single point of contact for borrower communication, occurred quickly, the banks have taken the full 180 days (six months) to stop dual tracking.  But this waiting has been painful for homeowners, whose fate is uncertain under the dual track regime. To date, dual tracking has continued. As the graph illustrates, the California Monitor Program has received dozens of requests for help each month from families who have submitted loan modification applications but fear that foreclosure will occur, despite their hard work. In August, 25% of complaints received by the California Monitor stated a dual tracking problem. “Dual-tracking” is the practice of continuing the foreclosure process even as a homeowner is being evaluated for a mortgage modification. It has caused problems for borrowers with several large banks, and results in borrowers faithfully making payments while awaiting a permanent mortgage modification, but seeing their homes foreclosed upon and sold out from under them anyway.

PricewaterhouseCoopers Paid $1 Billion as Consultant on Mortgage Settlement - Francine McKenna has a useful column in American Banker about the 50 state AG mortgage settlement. The foreclosure reviews are a “look back” at the past. No one hates admitting and paying for mistakes more than banks. The “independent consultants” selected by the banks in November, after more than six months of contract negotiations, haven’t calculated any final damage numbers yet. It wasn’t until June of this year that, 15 months after the consent orders were signed, regulators finally issued a “financial remediation framework” prepared by the consultants. Rest assured the consultants are getting paid, even if borrowers are not. PricewaterhouseCoopers will bill more than $1 billion for four of the 14 ordered reviews, according to my sources. I think banks will spend at least $5 billion in total on consultants just to find out how much they’ll owe.Settlement monitor Joe Smith continues to emphasize strong deference to bank executives. Back in April, Smith said the following. “If litigation against the banks continues and plaintiffs’ claims continue to contradict what I’m hearing from bank leadership,” Smith says. “I’ve got to pay attention to it.” In other words, if bank executives continue to lie to him, he might have to start paying attention to the lies. This is an interesting and important perspective, because it comes from someone who is considered to be on the left side of the aisle.

Foreclosure mills in the clear, state closes cases with no findings - Florida’s attorney general has closed a high-profile investigation into alleged wrongdoing by the state’s largest foreclosure law firms with no findings. The probes, opened by former attorney general Bill McCollum in 2010, ended not with the swiftness of a gavel falling, but in a slow fizzle of court judgments, law firm implosions and the firing of two top state investigators by Attorney General Pam Bondi. A February Florida Supreme Court decision that upheld a ban on the state from investigating the firms under the Florida Deceptive and Unfair Trade Practices Act was the real decider, attorney general communications director Jennifer Meale said Friday. “Accordingly, we have closed our law firm investigations and anticipate that any enforcement action will be up to the discretion of the Florida Bar,” Meale said. The Florida Bar has maintained it only has the power to investigate individual attorneys. As of mid-August, 149 cases of attorney-related foreclosure fraud had been investigated by the Florida Bar with no disciplinary actions taken. There were 171 cases pending at that time.

LPS: Mortgage prepayment rates highest since 2005 - LPS released their Mortgage Monitor report for August today. According to LPS, 6.87% of mortgages were delinquent in August, down from 7.03% in July, and down from 7.68%% in August 2011.  LPS reports that 4.04% of mortgages were in the foreclosure process, down slightly from 4.08% in July, and down from 4.12% in August 2011.  This gives a total of 10.91% delinquent or in foreclosure. It breaks down as:
• 1,910,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,520,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 2,020,000 loans in foreclosure process.
For a total of ​​5,450,000 loans delinquent or in foreclosure in August. This is down from 5,562,000 last month, and down from 6,080,000 in August 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995.The total delinquency rate has fallen to 6.87% from the peak in July 2010 of 10.57%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go. The in-foreclosure rate was at 4.04%. There are still a large number of loans in this category (about 2 million), but it appears this is starting to decline.  The second graph shows prepayment speeds vs. mortgage rates. CPR is conditional prepayment rate, a ratio of prepayments to outstandings. From LPS:  [P]repayment rates in August rose above those seen in the “mini refinance waves” of both 2009 and 2010, hitting their highest levels since 2005. LPS Applied Analytics Senior Vice President Herb Blecher explains that the impact of this increase has been both pronounced and broad-based.

MBA: Mortgage Refinance Applications increases sharply, Highest Since 2009 - From the MBA: Mortgage Refinance Applications Highest Since 2009 as Rates Reach Record Lows in Latest MBA Weekly Survey The Refinance Index increased 20 percent from the previous week. This was the highest Refinance Index recorded in the survey since April of 2009. The seasonally adjusted Purchase Index increased 4 percent from one week earlier. “Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in MBA's survey dropped to new record lows in the survey,” . “"The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.53 percent from 3.63 percent, with points decreasing to 0.35 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance activity is at the highest level since 2009. Refinance activity has been generally moving up over the last year, and really took off last week. The second graph shows the MBA mortgage purchase index. The purchase index is up 5% over the last two weeks.However the purchase index has been mostly moving sideways over the last two years.

US Rate on 30-Year Mortgage Hits Record 3.36 Percent - Average U.S. rates on fixed mortgages fell to fresh record lows for the second straight week. The declines suggest the Federal Reserve’s stimulus efforts are having an impact. Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan dropped to 3.36 percent. That’s down from last week’s rate of 3.40 percent, which was the lowest since long-term mortgages began in the 1950s. The average on the 15-year fixed mortgage, a popular refinancing option, dipped to 2.69 percent, down from last week’s record low of 2.73 percent.

Vital Signs Chart: Another Record Low for Mortgage Rates - Home-mortgage rates continue to fall to record low levels, helping lift the slowly mending housing market. Rates for a 30-year fixed mortgage fell to 3.36% this week, from 3.4% a week earlier and over 4% during the early part of the year. While lending standards remain tight — making new mortgages hard to secure — low rates have helped move home sales forward.

Mortgage rates to set more record lows: A look at stories across HousingWire's weekend desk, with more coverage to come on bigger issues: Mortgage rates after likely to grind lower as originators continue trying to attract the marginal borrowers who are increasingly less responsive. Last week, rates dropped to their lowest point ever. Originators with significant infrastructure such as Wells Fargo adjust their capacity to meet demand, it’s still a process that takes months to conduct. Barclays Capital points out that originators could hire a significant number of temporary workers. However, the firm says, most prefer to keep critical tasks such as credit decisions with in-house employees, and training those employees is a time-consuming process. “We believe that originators will take time to ramp up their capacity, precluding a sharp drop in mortgage rates in response to the drop in the current coupon,” analysts at Barclays say. “In the meantime, rates are likely to grind tighter as originators continue trying to attract the marginal borrowers who are increasingly less responsive, given that a new lifetime low in mortgages rates has been almost continuously on offer for more than three years.”

Housing: Inventory down 21% year-over-year in early October - Here is another update using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), inventory is off 21.4% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through August (left axis) and the HousingTracker data for the 54 metro areas through early October. Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well.  On a seasonal basis, housing inventory usually bottoms in December and January and then increases through the summer. Inventory only increased a little this spring and has been declining for the last five months by this measure. It looks like inventory peaked early this year.The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

Measure of US Home Prices Rise by Most in 6 Years --A measure of U.S. home prices jumped 4.6 percent in August compared with a year ago, the largest year-over-year increase in more than six years. CoreLogic, a private real estate data provider, also said Tuesday that prices rose 0.3 percent in August from July, the sixth straight monthly gain. Steady price increases, combined with greater home sales and rising builder confidence, suggest the housing recovery may be sustainable. Other measures of home prices have also increased. The Standard & Poor’s/Case Shiller index rose in July compared with a year ago, the second straight yearly increase after two years of declines. And an index compiled by a federal housing regulator has also reported annual increases. Housing prices are rising in most areas, according to CoreLogic. Only 20 large cities out of 100 tracked showed declines in the 12 months ending in August. That compared with 26 in July. “The housing market’s gains are increasingly geographically diverse with only six states continuing to show declining prices,” States with the biggest price increases in the past 12 months were Arizona, Idaho, Nevada, Utah and Hawaii. Prices soared 18.2 percent in Arizona, partly because the supply of homes for sale is low and foreclosure sales have slowed. Prices have risen 10.4 percent in Idaho.

CoreLogic: House Price Index increased in August, Up 4.6% Year-over-year -  Notes: This CoreLogic House Price Index report is for August. The Case-Shiller index released last week was for July.  The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).From CoreLogic: CoreLogic® August Home Price Index Rises 4.6 Percent Year-Over-Year Home prices nationwide, including distressed sales, increased on a year-over-year basis by 4.6 percent in August 2012 compared to August 2011. This change represents the biggest year-over-year increase since July 2006. On a month-over-month basis, including distressed sales, home prices increased by 0.3 percent in August 2012 compared to July 2012. The August 2012 figures mark the sixth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. The HPI analysis from CoreLogic shows that all but six states are experiencing price gains. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.9 percent in August 2012 compared to August 2011. On a month-over-month basis excluding distressed sales, home prices increased 1 percent in August 2012 compared to July 2012, also the sixth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.3% in August, and is up 4.6% over the last year.  The index is off 26.7% from the peak - and is up 10.1% from the post-bubble low set in February (the index is NSA, so some of the increase is seasonal). The second graph is from CoreLogic. The year-over-year comparison has been positive for six consecutive months suggesting house prices bottomed earlier this year on a national basis. Excluding the tax credit bump in 2010, these are the first year-over-year increases since 2006 - and this is the largest year-over-year increase since 2006.

Home Prices Rise Again, And Now It's More Widespread - Home prices, including distressed sales, were up 4.6 percent year-over-year according to CoreLogic's latest home price index. Prices were up 0.3 percent from a monh ago. This is the sixth straight increase in home prices. Excluding distressed sales home prices were up 4.9 percent on the year, and 1.0 percent on the month-over-month. One of the criticisms leveled at those that say housing has turned the corner is that housing is a local story and many markets are getting worse. But Mark Fleming, CEO of CoreLogic said more markets are seeing improvement. "The housing market's gains are increasingly geographically diverse with only six states continuing to show declining prices," according to Fleming. Many argue this phenomenon is key if housing is expected to drive economic growth.

Trulia: Asking House Prices increased in September - Press Release: Asking Prices On Track To Rise 4 Percent Nationally in 2012 Trulia today released the latest findings from the Trulia Price Monitor and the Trulia Rent Monitor ... Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through September 30, 2012. In September, asking prices on for-sale homes–which lead sales prices by approximately two or more months – increased 2.5 percent year over year (Y-o-Y). Excluding foreclosures, Y-o-Y asking prices rose 3.5 percent. Meanwhile, asking prices rose nationally 1.6 percent quarter over quarter (Q-o-Q), seasonally adjusted, and 0.5 percent month over month (M-o-M), seasonally adjusted.  ...Nationally, rent gains continue to outpace home price increases in September, rising by 4.8 percent Y-o-Y. Among the largest 25 rental markets, Y-o-Y rents rose the most in Houston and Miami, where they climbed more than 10 percent ...These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases over the next few months on a SA basis

Shiller Data Questions Housing Revival Power: Cutting Research - Don’t bet the house on a robust revival of the U.S. property market, says the Yale University professor who predicted the bursting of the dot-com and subprime-mortgage bubbles.There is no “unambiguous” sign of a strong recovery in the market, Robert Shiller and fellow economists Karl Case and Anne Thompson say in a paper published this week by the National Bureau of Economic Research. The study seeks to shed light on the role buyer expectations play in house prices, an angle the authors say has been ignored in analyzing the housing slump. The results of their work, entitled “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” are based on the responses of almost 5,000 recent homebuyers in four cities to regular mail surveys over the past 25 years. The answers to the latest questionnaire indicate that while perceptions of short-term price direction have turned positive, long-term expectations continue to weaken. The upshot for Shiller and his colleagues is that while “a recovery may be plausible, and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.”

Reis: Apartment Vacancy Rate declined slightly to 4.6% in Q3, More Supply coming in 2013 - Reis reported that the apartment vacancy rate (82 markets) fell slightly to 4.6% in Q3, down from 4.7% in Q1 2012. The vacancy rate was at 5.6% in Q3 2011 and peaked at 8.0% at the end of 2009. Some data and comments from economist Dr. Victor Calanog at Reis:  3Q Vacancy Rate: 4.6%, down 10 bps from second quarter’s 4.7%. 3Q Absorption: 22,615, down from the second quarter’s 31,014 and the first quarter’s 36,423 - 3Q Completions: 13,531 units (similar to the second quarter’s figure of 13,370 units. "The national vacancy rate barely fell, inching downward from 4.7% to 4.6%, during a quarter that usually exhibits seasonal strength. This is the slowest rate of improvement since the recovery began in early 2010. For perspective, note that vacancies declined by an average of 35 basis points per quarter in 2010 and 2011; this year, vacancies fell by 30 basis points in the first quarter, 20 basis points in the second quarter, and 10 basis points in the third. Net absorption, or the net change in occupied stock, slowed accordingly. Only 22,615 units were leased up in the third quarter, a clear trend downwards from the second quarter’s figure of 31,014 and the first quarter’s figure of 36,423. This is the lowest rate of absorption since the first quarter of 2010, and represents less than half the quarterly average rate of about 50,000 units that the sector enjoyed in 2010 and 2011.

Construction Spending decreased in August - This morning the Census Bureau reported that overall construction spending decreased in August:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during August 2012 was estimated at a seasonally adjusted annual rate of $837.1 billion, 0.6 percent below the revised July estimate of $842.0 billion. The August figure is 6.5 percent above the August 2011 estimate of $786.3 billion. Both private construction spending and public spending declined:Spending on private construction was at a seasonally adjusted annual rate of $562.2 billion, 0.5 percent below the revised July estimate of $564.8 billion. ... In August, the estimated seasonally adjusted annual rate of public construction spending was $274.9 billion, 0.8 percent below the revised July estimate of $277.2 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 60% below the peak in early 2006, and up 23% from the post-bubble low. Non-residential spending is 30% below the peak in January 2008, and up about 27% from the recent low. There were upward revisions to construction spending for June and July (especially for residential investment). Without the upward revisions, construction spending would have increased in August compared to July.

Vital Signs Chart: Declining Saving Rate - The saving rate is falling as Americans spend more. The personal saving rate –which captures what consumers have left after spending and taxes—dropped to 3.7% in August from 4.4% in June, this year’s highest rate. Economic concerns prompted Americans to save this spring, but rising gasoline prices meant they had less cash to sock away in August.

Wary Americans saving more, even as government encourages risk - Americans have poured record amounts of money into savings accounts even though interest rates are at historic lows, new federal data show, a sign that average people may be missing out on a booming stock market and recovering real estate sector. The total amount in those accounts climbed nearly 5 percent to $6.9 trillion in the spring, the highest level recorded since the Federal Reserve launched its regular reports on the flow of money in the economy in 1945. At the same time, other data show that Americans are fleeing the stock market and avoiding the purchase of new homes. The pattern suggests that Americans, wounded by the financial crisis and scared by an uncertain job market, do not want to take any risks with their money — even as the government is encouraging risk-taking.

US consumer credit rose $18.1 billion in August compared to July, biggest increase in 3 months - — Americans boosted their borrowing in August by the largest amount in three months with strong gains in the category that covers auto and student loans and in credit card debt. Total consumer borrowing increased $18.1 billion in August compared to July, the Federal Reserve reported Friday. In July, consumer borrowing had fallen for the first time in nearly a year.The August borrowing gains reflected a $4.2 billion increase in borrowing on credit cards and a $13.9 billion increase in auto and student loans. “Some consumers with healthy finances are making more use of credit to buy autos and retail goods,” Retail sales rose in August, in part because consumers bought more cars and trucks. However, they were cautious elsewhere, as rising gas prices left them less to spend in other areas. Activity through August left total consumer debt at $2.73 trillion, putting it 5.5 percent above the pre-recession peak for credit hit in July 2008.

Consumer Credit Soars As Uncle Sam Resumes Handing Out Billions In Student Loans With Reckless Abandon - Following a major miss in July consumer credit which declined by $3.3 billion (since revised to a -$2.5 billion decline), it was only natural that August would be the opposite, and see a rebound over consensus. Sure enough, the August total consumer credit number came in at $2.73 trillion, an increase of $18.1 billion from last month, on expectations of an increase by $7.25 billion. Why did the number rise? Same reason as always: a government-funded pump into non-revolving (i.e., Student and Government motor loan) credit which soared by $14 billion while revolving credit posted a modest $4.2 billion increase unable to even offset the July decline. But in headline scanning algo news, this was the highest jump in post-revision (recall last month the Fed completely redid its consumer credit series data which is now useless for any analysis going back before December 2010). Yet oddly even with this massive pump the stock market has refused to rebound and instead is acting in a very odd fashion and the now traditional green color of stock moves has taken on an odd reddish hue that is unfamiliar to the current generation of traders.

Vital Signs Chart: Confidence Improves, but Majority Still Pessimistic - Confidence in the economy is up, but the outlook is far from rosy. Gallup’s Economic Confidence Index rose to -19 in September from -27 a month earlier. That was the highest reading since May — and well above the -50 reading from last September. However, a zero reading means an equal number of respondents feel positive and negative about the economy, so a majority of Americans remain pessimistic.

Consumer Outlook Retreats a Bit - After jumping in September, U.S. consumer economic confidence gave back a bit in October, according to a survey released Thursday. The Royal Bank of Canada said its consumer outlook index declined to 48.4 this month after it rose to 50.4 in September from 46.4 in August. The jump in the RBC September index foreshadowed gains in other confidence surveys done by Reuters/University of Michigan and the Conference Board. “Consumers appear to be in a ‘holding pattern’ now, with optimism fairly flat–uncertainty about the election outcome may play a role here,” the RBC report said. The RBC current conditions index fell sharply to 37.9 this month from 41.3 in September. The expectations index slipped to 57.5 from 59.6. The RBC jobs index was little changed at 57.7 after it jumped more than 5 points to 57.9 in September. RBC said only 32% of respondents reported a direct experience with job loss, the lowest reading so far this year. The inflation index increased to 77.3 from 76.8.

Retailers Report Slower Sales Growth in Sept. — Americans slowed down their spending in September as they took a pause after wrapping up their back-to-school buying, according to monthly reports from major retailers released Thursday. Retailers reported monthly revenue results that were mixed. Merchants such as Limited Brands and Costco posted gains that beat Wall Street estimates, while Target and Macy’s had increases that missed expectations. Still, analysts say spending was fairly strong for the month. That is an encouraging sign for retailers as they’re preparing for the upcoming winter holiday season, which traditionally the busiest shopping period of the year.

ICSC/Goldman Sachs Chain Store Sales Down 0.3% | Fox Business: The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index edged down 0.3% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis, as customer traffic slowed. "Last week retailers saw a decline in customer traffic, which caused weekly sales to moderate," said ICSC Chief Economist Michael Niemira. ICSC expects September industry sales will increase 3% to 4%, excluding drug stores. On a year-on-year basis, the reading rose 2.4%.

Reis: Regional Mall Vacancy Rate declines in Q3, Strip Mall vacancy rate unchanged -- Reis reported that the vacancy rate for regional malls declined to 8.7% in Q3 from 8.9% in Q2. This is down from a cycle peak of 9.4% in Q3 of last year. For Neighborhood and Community malls (strip malls), the vacancy rate was unchanged at 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.0% in Q2 of last year.  This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.  In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.  The yellow line shows mall investment as a percent of GDP. This has been increasing a little recently because this includes renovations and improvements. New mall investment has essentially stopped.

Weekly Gasoline Update: A Second Week of Price Declines - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump, rounded to the penny, dropped for the second week, although the decline was quite small. The average for Regular and Premium both fell by two cents. They are both up 58 cents from their interim weekly lows in the December 19, 2011 EIA report.As I write this, shows six states (Hawaii, California, Connecticut, New York, Alaska and Washington) with the average price of gasoline above $4. That's up one from last week. Another 7 states plus DC have prices above $3.90 (last week it was 8 states in the $3.90-to-$4.00 range). How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

California Gas Stations Begin to Shut on Record-High Spot Prices - Gasoline station owners in the Los Angeles area including Costco Wholesale Corp. (COST) are beginning to shut pumps because of supply shortages that have driven wholesale fuel prices to record highs.“We’re obviously extremely disheartened that we are unable to do this, and we’re pulling fuel from all corners of California to fix this.” Spot, or wholesale, gasoline in Los Angeles has surged 70 cents this week to a premium of $1.15 a gallon versus gasoline futures traded on the New York Mercantile Exchange, data compiled by Bloomberg show. That’s the highest level for the fuel since at least November 2007, when Bloomberg began publishing prices there. On an outright basis, the fuel jumped to $3.9495 a gallon. Gasoline at the pump gained 8.3 cents to $4.315 a gallon in California yesterday, according to, 53.1 cents more than the national average of $3.784. In Los Angeles the price was $4.347. Gasoline futures for November delivery on the Nymex rose 7.45 cents to $2.874 a gallon at 9:16 a.m. today, after falling yesterday to a 10-week low. Retail price movements tend to lag behind those of futures.

California's High Gas Price To Persist - California drivers may have to wait until November to see any relief at the pump, analysts say. The state's gas prices surged 17 cents last night and have spiked 36 cents in the past week. A confluence of factors have caused Golden State gas prices to jump, including refinery outages and pipeline disruptions. But the most persistent driver has been the government's mandate that summer blend gasoline be sold through Oct. 31, AAA analyst Avery Ash told us by phone. Wholesalers have begun petitioning the EPA for waivers to switch to winter blends for some early relief, he said. Without that relief, prices could top the state's 2008 record of $4.61 early next week.'s Gregg Laskoski told us prices could average between $4.70 and $4.85 per gallon.

AAR: Rail Traffic "mixed" in September - Once again rail traffic was "mixed". However all of the decline in rail carloads was due to fewer coal shipments. From the Association of American Railroads (AAR): AAR Reports Mixed Weekly Rail Traffic for September: The Association of American Railroads (AAR) today reported U.S. rail carloads originated in September 2012 totaled 1,152,174 carloads, down 3.7 percent (43,746 carloads) compared with September 2011. Intermodal traffic in September totaled 973,715 containers and trailers, up 2.5 percent (24,126 units) compared with September 2011. September 2012 represents the 34th straight month of intermodal gains. This graph shows U.S. average weekly rail carloads (NSA).  On a non-seasonally adjusted basis, total U.S. rail carload traffic fell 3.7% (43,746 carloads) in September 2012 from September 2011 ... As has been the case for many months, coal was largely to blame for the decline in total carloads. Coal carloads were down 12.1% (65,867 carloads) in September 2012 from September 2011, more than accounting for the total carload decline for the month. Excluding coal, U.S. carloads were up 3.4% (22,121 carloads) in September 2012 The second graph is for intermodal traffic (using intermodal or shipping containers): U.S. rail intermodal traffic rose in September for the 34th straight month too, rising 2.5% (24,126 containers and trailers) over September 2011. Intermodal volume averaged 243,429 units per week in September 2012, the third-highest monthly average so far this year.

U.S. Manufacturing Grows for 1st Time in 4 Months - U.S. manufacturing grew for the first time in four months, buoyed by a jump in new orders. The increase was a hopeful sign that the economy is improving. The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of factory activity rose to 51.5. That’s up from 49.6 in August. A reading above 50 signals growth and below indicates contraction. The index had been below that threshold from June through August. A measure of employment also increased, suggesting manufacturers added workers last month. The increase could signal that manufacturing is picking up after a weakening this spring because of declining consumer demand and a drop in exports. The improvement in the United States comes even as growth is slowing overseas. Europe’s financial crisis has pushed many countries in the region into recession. Growth in emerging nations such as China and India has slowed.

ISM Manufacturing index increases in September to 51.5 -The ISM index indicated expansion after three consecutive months of contraction. PMI was at 51.5% in September, up from 49.6% in August. The employment index was at 54.7%, up from 51.6%, and the new orders index was at 52.3%, up from 47.1%. From the Institute for Supply Management: September 2012 Manufacturing ISM Report On Business® The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment."  Here is a long term graph of the ISM manufacturing index. This was above expectations of 49.7% and suggests manufacturing expanded in September. The internals were positive too with new orders and employment increasing.

September Manufacturing Activity Revives After 3 Sluggish Months - Manufacturing activity modestly rebounded in September, the Institute for Supply Management reports. Today's update of the organization's widely followed ISM Manufacturing PMI Index reveals that "economic activity in the manufacturing sector expanded in September following three consecutive months of slight contraction." The index rose to 51.5 last month, up from 49.6 in August. A reading above 50 equates with economic expansion. Overall, it's a relatively upbeat report and one that surprised many economists.  It's also encouraging to see components of the broad index reviving as well. For example, the new orders and employment benchmarks also moved higher last month. It's too soon to say that manufacturing has decisively turned away from what appeared to be a fatal swoon. But for the moment, at least, we can indulge in a sigh of relief with the news that the ISM index didn't continue dropping after a summer slump.

ISM Manufacturing Business Activity Index: Expansion after Three Months of Contraction - Today the Institute for Supply Management published its August Manufacturing Report. Today's headline PMI at 51.5 percent is showing expansion after three months of contraction. The consensus was for 49.7 percent. Here is the report summary:The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. The chart below shows the Manufacturing series, which stretches back to 1948. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

ISM Reports Manufacturing Expansion - PMI 51.5% for September 2012 -- The September 2012 ISM Manufacturing Survey PMI increased, 1.9 percentage points, to 51.5% and moved into expansion. This is welcome news for the ISM manufacturing survey showed contraction for the previous three months. One of the survey respondents called the previous manufacturing slowdown a summer thing, let's hope they are right. New Orders increased 5.2 percentage points, to 52.3%. New Orders inflection point, where expansion turns into contraction, is not 50%, it is 52.3%, so we're right on the cusp. From the ISM: A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. The Census reported manufactured durable goods new orders plunged -13.2% in August where factory orders, or all of manufacturing data, will be out October 4th. The ISM claims the Census and their survey are consistent with each other. To wit, below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics, July. Here we do see a consistent pattern between the two.

Manufacturing ISM Rebounds Slightly - Following three months of contraction, the September 2012 Manufacturing ISM PMI is back in the green at 51.5%. Production is still in contraction. Deliveries and inventories are nearly flat. The big jump is in employment, still in its 36th month of expansion. I doubt that trend continues given the global slowdown.
PMI™ 51.5 49.6 1.9 Growing From Contracting 1
New Orders 52.3 47.1 5.2 Growing From Contracting 1
Production 49.5 47.2 2.3 Contracting Slower 2
Employment 54.7 51.6 3.1 Growing Faster 36
Supplier Deliveries 50.3 49.3 1 Slowing From Faster 1
Inventories 50.5 53 -2.5 Growing Slower 2
Customers' Inventories 49.5 49 0.5 Too Low Slower 10
Prices 58 54 4 Increasing Faster 2
Backlog of Orders 44 42.5 1.5 Contracting Slower 6
Exports 48.5 47 1.5 Contracting Slower 4
Imports 49.5 49 0.5 Contracting Slower 2

Analysis: Some Relief From Manufacturing Sector - Wells Fargo Chief Economist John Silvia talks with Jim Chesko about this morning’s report showing that the U.S. manufacturing sector expanded in September, ending three months of contraction, according to data from the Institute for Supply Management.

U.S. Manufacturing: Best Horse in Glue Factory - The U.S. factory sector is looking like the best horse in the glue factory. Factory surveys from around the world were almost universally weak in September. (See the entire list.) The important “almost” exception was the Institute for Supply Management‘s U.S. report. The ISM’s purchasing managers’ index unexpectedly increased to 51.5 from 49.6 in August. A reading above 50 indicates expansion. While the ISM report was a positive and welcome surprise, don’t expect a manufacturing growth spurt in the fourth quarter. The overall U.S. economy faces headwinds, not the least of which is the uncertainty over future tax liabilities and government spending. Even the ISM report noted a mix in sentiment among respondents, with hope coming from a pickup in new orders but “continued concern over soft global business conditions and an unsettled political environment.” The ISM survey did show a bounce back in demand. The September new orders index returned to expansion territory, rising 5.2 points to 52.3. But the gain follows three months of shrinking order books, and the index level itself is below the 57.1 averaged in the first five months of this year.

Vital Signs Chart: Manufacturing Rebound - Factories rebounded during September, notching expansion for the first time since May. The Institute for Supply Management’s index of manufacturing activity rose to 51.5 during the past month from 49.6 in August. Readings above 50 indicate expansion, and September marked the first time since May that the index eclipsed that mark. The ISM survey’s measure of new orders — which is a gauge of future activity — also turned positive.

Factory activity caps worst quarter in three years (Reuters) - U.S. manufacturing ended its worst quarter in three years in September as foreign demand for U.S. goods fell sharply, an industry survey showed on Monday. The final Markit U.S. Manufacturing Purchasing Managers Index fell to 51.1 in September from 51.5 in August, and averaged 51.4 in the third quarter. Both the monthly and quarterly readings were the lowest in three years. A reading above 50 indicates expansion. The index's reading for the manufacturing sector's output fell to 50.6 from 51.9, also a three year low, while employment slipped to 51.9, the lowest reading since 51.1 in December of 2010. Indicators suggest manufacturing production and employment could be on the verge of contracting, "meaning that the sector is now likely to be acting as a drag on the wider economy," said Chris Williamson, Markit chief economist.

Manufacturing New Orders Plunge -5.2% for September 2012 - The Manufacturers' Shipments, Inventories, and Orders report shows factory new orders plunged -5.2% for August 2012. This Census statistical release is called Factory Orders by the press and covers both durable and non-durable manufacturing orders, shipments and inventories. This is the largest monthly drop since January 2009, although July showed a 2.6% increase. In other words, we had an unusual bump up in July from which to fall. Below is the value of manufacturing new orders on a monthly basis and this report is not adjusted for inflation. Manufactured durable goods new orders cliff dove -13.2% for August and part of the reason was nondefense aircraft, which carpet bombed the manufacturing statistics with a volatile -101.8% monthly percentage change. Motor vehicles bodies, trailers & parts manufacturers' wheels came off, with a -14.9% monthly decline in new orders. Notice the gray bars in some graphs to show recessionary periods. Some in the press are also blaming computers, not so. Their new orders increased 11% for the month. It was electronics which bombed out for August, with communications equipment leading the pack. Nondefense communications equipment dropped -7.0% and this sector has been heavily offshored. Computers, also heavily offshored are less than $1 billion in new orders for the month, whereas electronic measuring and test is almost $6 billion. Motor vehicle bodies, trailers & parts were $18.6 billion in new orders for the month to show the scale of these sectors in the new order monthly tallies. 

Chrysler’s September sales soar; GM, Ford flat - It was a mixed bag for U.S. auto makers in September as Chrysler Group LLC reported Tuesday some of its best sales increases in years, while Ford Motor Co. and General Motors Co. posted results that were largely flat.  Foreign car makers were up across the board, with Toyota Motor Corp.’s sales surging 42% and Volkswagen AG’s jumping 34%.  Overall, sales have been “slightly better than expected,” said Jesse Toprak, analyst at  Auburn Hills, Mich.-based Chrysler, controlled by Italy’s Fiat, said that it sold 142,041 vehicles last month, a jump of 12% over 2011, with the Chrysler, Jeep, Dodge, Ram Truck and Fiat marques all posting gains.  Fiat ranked as a particular standout, rising 51% for the highest percentage increase of any Chrysler Group brand. “Last month marked our 30th consecutive month of year-over-year sales increases and our strongest September in five years,” said Reid Bigland, president and chief executive of Dodge. Citing expectations for the company’s product lineup and a “stable” U.S. economy, as well as interest rates standing at record lows, Bigland added “we remain optimistic about the health of the U.S. new-vehicle sales industry and our position in it.”

U.S. Light Vehicle Sales at 14.96 million annual rate in September, Highest since Feb 2008 - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.96 million SAAR in September. That is up 14% from September 2011, and up 3% from the sales rate last month. This was above the consensus forecast of 14.5 million SAAR (seasonally adjusted annual rate).  This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for September (red, light vehicle sales of 14.96 million SAAR from Autodata Corp). Sales have averaged a 14.25 million annual sales rate through the first nine months of 2012, up from 12.5 million rate for the same period of 2011. Last year sales were depressed for several months (May through August) due to supply chain issues related to the tsunami in Japan. By September 2011, the supply chain issues were mostly resolved, and this year-over-year increase for September is significant. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate. This shows the huge collapse in sales in the 2007 recession. It looks like auto sales were up about 2.7% in Q3 compared to Q2, and auto sales will make another small positive contribution to GDP. However it appears there is a shift to smaller cars, so total revenue might not increase much.

Auto Sales, Production, and Employment  -Auto and light truck sales for September was just reported at a rather strong 14.96 million units. This puts sales back above the strong trend line for this recovery. But it might be more interesting to look at production that has also been very strong. Since production bottomed during the cash for clunkers program industrial production of autos and light trucks has risen more that 150% . Remember, the original rational for the cash for clunkers program was to reduce excess inventories so that the auto firms would expand production. But an even more interesting comparison is to compare total vehicle output -- including light and heavy trucks as well as parts -- to employment in the production of motor vehicles. Total output is now at new all time record highs, surpassing the early 2000s peak. But employment in the motor vehicle industry is now 780,700 as compared to 1,330,000 in February, 2000 and 651,100 at the recession bottom. So since the recession bottom employment in the industry is up 21% while production is up over 150%.

How Do High Gas Prices Impact Detroit Vehicle Producers? - Chicago Fed - The Detroit automakers (Chrysler, Ford, and GM) appear to be making headway in their market shares during this era of high and volatile fuel prices. If so, this represents something of a turnabout.  When the price of gasoline rises quickly, Detroit usually tends to struggle in the marketplace. It is not surprising that increases in the price of oil can lower the demand for automobiles. But the Detroit automakers feel the pinch more than their foreign-headquartered competitors. Those companies produce a more fuel-efficient mix of vehicles, not least because their home markets face much higher taxes for gasoline and, therefore, they need to focus on fuel efficiency all the time, not just when gas prices go up. Let’s take a closer look at the two most recent episodes when the price of gasoline in the U.S. rose quickly and to similar levels. Between October 2007 and July 2008, the price of gasoline rose by 45%, topping out at $4.06 per gallon in the summer of 2008 (see figure 1). Just over two years later, after giving back all of its increase and then some during the second half of 2008, the price of gas rose in a similar fashion from September 2010 to May 2011, when it peaked at $3.91 per gallon. (Figure 1 also includes a third episode of rising gasoline prices. It is shorter in duration than the other two, ending in April 2012 with gasoline topping out around $3.90.)

ISM Non-Manufacturing Index increases in September - From the Institute for Supply Management: September 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in September for the 33rd consecutive month, "The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was above the consensus forecast of 53.5% and indicates faster expansion in September than in August. The internals were mixed with the employment index down, but new orders up.

ISM Non-Manufacturing Business Report: Third Month of Faster Growth - Today the Institute for Supply Management published its August Non-Manufacturing Report. Today's headline NMI Composite Index is at 55.1 percent, registering its third month of faster growth and its best level since March. The consensus was for 53.0 percent. Here is the report summary: The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions.

Another Good Services ISM; Outlier or Strengthening Economy? - For the second consecutive month the Non-Manufacturing ISM surprised to the upside. In September, the NMI™ registered 55.1 percent, indicating continued growth in the non-manufacturing sector for the 33rd consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.
NMI™/PMI™ 55.1 53.7 1.4 Growing Faster 33
Business Activity/Production 59.9 55.6 4.3 Growing Faster 38
New Orders 57.7 53.7 4 Growing Faster 38
Employment 51.1 53.8 -2.7 Growing Slower 2
Supplier Deliveries 51.5 51.5 0 Slowing Same 2
Inventories 48.5 52.5 -4 Contracting From Growing 1
Prices 68.1 64.3 3.8 Increasing Faster 3
Backlog of Orders 48 50.5 -2.5 Contracting From Growing 1
New Export Orders 50.5 52 -1.5 Growing Slower 3
Imports 50 49.5 0.5 Unchanged From Contracting 1
Inventory Sentiment 65 67 -2 Too High Slower 184

Vital Signs Chart: Service-Sector Expanding - Service-sector activity is gaining momentum. An index of activity in nonmanufacturing industries — a broad barometer of the service sector — increased to 55.1 in September from 53.7 a month earlier. Any reading over 50 indicates expansion, so activity was expanding at faster rate last month. A measure of orders — a gauge of future activity — also expanded at a faster clip.

Jump in New Orders in Service Sector Overstated - Don’t get giddy over the “jump” in new orders in Institute for Supply Management‘s September nonmanufacturing index. The new orders subindex climbed to 57.7 last month, compared to 53.7 in August. Reading above 50 indicate expansion. A closer look reveals the increase was actually driven mainly by an exceedingly high percentage of respondents — 65% — who said new orders were flat, combined with a much lower number — 11% — who said orders fell. Only 24% said September orders were higher, better than 22% in August, but notably below the 28.6% average in 2012′s first eight months. At 65%, the percentage who reported flat orders was up from 60% in August and 55% in July, and also the highest percentage in monthly data going back to July 1997.

US CEOs Sharply Reduce Expectations for Economic Outlook, Hiring; Third Largest Plunge in 6-Month Expectations in History; Reflections On "Uncertainty" - The quarterly survey of CEO expectations looking six months out shows that while CEOs are still positive in regards to capital spending and sales, the recent plunge was the third largest plunge in expectations in history. Jim McNerney, Chairman of Business Roundtable and Chairman, President and CEO of The Boeing Company discusses CEO sentiment in the following video. Link If Video Below Does Not Play: CEO Rountable Video

Reports Show Small Businesses Are Reluctant to Hire - Small businesses cut back on hiring over the summer and small-to-medium sized firms have lowered their staffing plans for the future, according to two reports released Thursday. The National Federation of Independent Business, a small-business trade group, said the net change in employment per firm over the three months ended in September was -0.23, worse than the July and August readings. The negative result indicates slightly more firms cut workers than the share of firms who added staff. Manufacturing was the only sector to report a “substantial” job gain, the NFIB said, with a net job creation of 0.76 workers per firm. “Uncertainty has cast a cloud over the future for owners, making it difficult to make commitments to new spending and hiring,” the NFIB said. The outlook for hiring among smaller firms is also very muted. A survey of companies with annual revenues between $100,000 to $250 million, done by PNC Financial Services Group, shows 23% of companies expect to add new employees over the next six months, down from the 28% saying that in the spring survey.

Retail Hiring Weakens in September, Raising Concerns About Holiday Season - Retail hiring activity continued to weaken in September, reflecting broader labor-market troubles, in what could be a worrisome development for the upcoming holiday season. A report released Wednesday by Kronos Inc., which makes software for retail-employee management, and economic analysis firm Macroeconomic Advisers, said retail-level hiring declined in September to a seasonally adjusted 31,776 new hires, the fourth-straight monthly decline. Over the last two months average monthly hiring in the sector has come in at 32,450, from the 36,700 average seen in January and February. The report also said fewer people sought retail jobs, with applications falling by 10.5% in September to 705,997, the weakest on record. “The recent softening in the overall economy, especially household spending, has likely made retailers more cautious and resulted in delayed hiring decisions,” said Chris Varvares, senior managing director with Macroeconomic Advisers. Although job seekers are facing less competition, “applicants still face a tough job market,” he said. He noted that the levels of hiring seen last month didn’t replicate the rise in hiring seen in the same month a year go. While “we don’t know” exactly what that means, it could suggest employers may be bracing for a weaker holiday period and aren’t starting with the early ramping up of seasonal hiring, he said.

Sept. planned layoffs up nearly 5%: Challenger -- U.S.-based employers announced plans to cut 33,816 jobs in September, up 4.9% from 32,229 in August, according to outplacement firm Challenger, Gray & Christmas. Last month's total was 71% lower than a year ago. Employers announced 102,910 job cuts in the third quarter, down 27% from the previous quarter and 56% lower than the third quarter of 2011. It was the lowest quarterly total since the second quarter of 2000, when planned layoffs numbered 81,568

Weekly Initial Unemployment Claims increase to 367,000 -The DOL reports: In the week ending September 29, the advance figure for seasonally adjusted initial claims was 367,000, an increase of 4,000 from the previous week's revised figure of 363,000. The 4-week moving average was 375,000, unchanged from the previous week's revised average. The previous week was revised up from 359,000. 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 was unchanged at 375,000. This was lower than the consensus forecast of 370,000. And here is a long term graph of weekly claims: Mostly moving sideways this year ...

Weekly Unemployment Claims at 367K, Up 4K from a 4K Upward Adjustment - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 367,000 new claims number was a 4,000 increase from the previous week's upward revision of 4,000. The less volatile and closely watched four-week moving average, which is a better indicator of the recent trend, is at 375,000, unchanged from the last week's 1,000 upward adjustment. Here is the official statement from the Department of Labor:  In the week ending September 29, the advance figure for seasonally adjusted initial claims was 367,000, an increase of 4,000 from the previous week's revised figure of 363,000. The 4-week moving average was 375,000, unchanged from the previous week's revised average.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 22, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 22 was 3,281,000, unchanged from the preceding week's revised level. The 4-week moving average was 3,285,250, a decrease of 12,750 from the preceding week's revised average of 3,298,000.  Today's seasonally adjusted number was slightly above the consensus estimate of 365K. Here is a close look at the data since 2006 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

ADP: Private Employment increased 162,000 in September - ADP reports: Employment in the U.S. nonfarm private business sector increased by 162,000 from August to September, on a seasonally adjusted basis. The estimated gains in previous months were revised lower: the July increase was reduced by 17,000 to an increase of 156,000, while the August increase was reduced by 12,000 to an increase of 189,000. Employment in the private, service-providing sector expanded 144,000 in September, down from 175,000 in August. This was above the consensus forecast of an increase of 140,000 private sector jobs in September. The BLS reports on Friday, and the consensus is for an increase of 113,000 payroll jobs in September, on a seasonally adjusted (SA) basis.  ADP hasn't been very useful in predicting the BLS report, but this suggests a stronger than consensus report.

ADP: A Modest Gain For September Payrolls - Private non-farm payrolls increased by 162,000 last month, according to this morning's ADP Employment update for September. That's down a bit from August's revised 189,000 gain, which suggests that we should keep our expectations in check for Friday's official September jobs report from the Labor Department. Nonetheless, there's nothing conspicuously dark in today's data dump to suggest that the slow growth trend rolled over last month. In fact, when you consider today's ADP release with yesterday's mild rebound in the ISM Manufacturing Index last month, the case is a bit stronger for expecting September to remain in the growth camp (once all the month's numbers are published). Here's how the last 12 months of ADP data compare with the Labor Department estimates:

Noisy ADP Print Declines But Beats Expectations; Just 4000 Manufacturing Jobs Added - For some reason, despite the ADP number coming month after month within a 3 std deviation of the actual NFP, and thus confirming it has absolutely no predictive power, vacuum tube headline scanning algos continue to trade off the number which explains why futures had a brief spike moments ago after the latest September ADP Private Payrolls number came out at 162K, on expectations of 140K. Of course, last month's print which initially came at 201K only to see the August NFP come in at less than half this print, was revised materially lower to 189K, as was the July ADP which was cut by 17K to 156K. But who cares - the algos already had done their ramp job a month ago. Remember: in an election year, all Initial Claims will be revised upward, while all ADP. NFP prints must be revised downward - it's not called the economy for nothing. In other news, when adding the +/-150,000 margin of error on both side of the equation, we can boldly say that according to the ADP, Friday's NFP will come in a range of -1,000,000 to +1,000,000. Courtesy of John Lohman:

U.S. Jobless Rate Falls to 7.8 pct., 44-month Low - The U.S. unemployment rate fell to 7.8 percent last month, dropping below 8 percent for the first time in nearly four years. The rate declined because more people found work, a trend that could have an impact on undecided voters in the final month before the presidential election. The Labor Department said Friday that employers added 114,000 jobs in September. The economy also created 86,000 more jobs in July and August than first estimated. Wages rose in September and more people started looking for work. The revisions show employers added 146,000 jobs per month from July through September, up from 67,000 in the previous three months. The unemployment rate fell from 8.1 percent in August, matching its level in January 2009 when President Barack Obama took office.

September Employment Report: 114,000 Jobs, 7.8% Unemployment Rate - From the BLSThe unemployment rate decreased to 7.8 percent in September, and total nonfarm payroll employment rose by 114,000, the U.S. Bureau of Labor Statistics reported today. ...[Household survey] Total employment rose by 873,000 in September, following 3 months of little change. The employment-population ratio increased by 0.4 percentage point to 58.7 percent, after edging down in the prior 2 months. The overall trend in the employment-population ratio for this year has been flat. The civilian labor force rose by 418,000 to 155.1 million in September, while the labor force participation rate was little changed at 63.6 percent.  The change in total nonfarm payroll employment for July was revised from +141,000 to +181,000, and the change for August was revised from +96,000 to +142,000. Even though payroll growth was weak, this was a much stronger report than the last few months, especially considering the upward revisions to the July and August reports. And that doesn't include the annual benchmark revision (that will also show more jobs). This was slightly above expectations of 113,000 payroll jobs added. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate decreased to 7.8% (red line). This is from the household report, and that report showed strong job growth.

Only 114K New Jobs, But the Unemployment Rate Drops to 7.8% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bracketed text added by me: The unemployment rate decreased to 7.8 percent in September [from 8.1 percent last month], and total nonfarm payroll employment rose by 114,000, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care and in transportation and warehousing but changed little in most other major industries.  Today's nonfarm number is slightly below the consensus, which was for 120K new nonfarm jobs. However, the prior month's number for new jobs was revised upward from 142K from the original 96K, and despite the lower-than-expected increase in new jobs, the unemployment rate declined. This month's data add more evidence of the ongoing boomer retirement demographics and others who have given up the search for suitable employment. For statistical support for this view, see the employment-population ratio chart (third below). The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.3% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric still remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

The-employment-situation (7 graphs) The employment situation was mixed with the headline number, payroll employment adding 114,000 and the household report showing a gain of 873,000. To a great extent the very large increase in the household survey appears to be just a make up for earlier weakness when the payroll report was showing larger gains than the household survey. On a year over year basis the two reports are showing very similar gains. With the very large gain in the household survey the unemployment rate fell to 7.8%. It is now lower than when Obama took office. In the modern era every democratic administration saw the unemployment rate fall during their term in office while only one Republican saw the unemployment rate lower when they left office than it was when they took office. That was Reagan. Interestingly, the unemployment rate for those with less than a high school showed a very large drop When I first saw the very large gain in the household survey I though it might be the seasonal adjustment creating a very large gain in education employment, but that was not the case. The average work week increased from 34.4 to 34.5. Together with the gain in employment this generated a 0.6 % increase in aggregate hours worked. Average hourly earnings increased from $23.51 to $23.58, or 0.3%. Together this generated a 0.6% increase in average weekly earnings, the largest monthly gain in this cycle.

September Jobs +114,000; Unemployment Rate 7.8%; Part-Time Workers +582,000; Initial Reaction and Election Impact - The establishment report of +114,000 jobs was pretty much about what most expected. The four-month average is a mere 120,000 a month (a very weak set of establishment numbers for this point in a recovery). However, the household survey surprise shows the unemployment rate fell three-tenths of a percent to 7.8%.. I suggest these numbers will overshadow a horrendously weak performance by the president in the debate. That said, a closer look shows the entire drop in the unemployment rate can be attributed to a surprise rise of 582,000 in part-time workers. U-6 unemployment remained at 14.7%. U-6 includes part-time workers who want a full-time job. Still, all things considered, this was the strongest report in four months. Here is an overview of today's release.

  • September Payrolls +114,000 - Establishment Survey
  • Four-month average +120,000 - Establishment Survey
  • US Employment +873,000 - Household Survey
  • Involuntary Part-Time Work +582,000 - Household Survey
  • Baseline Unemployment Rate -.03 at 7.8% - Household Survey
  • U-6 unemployment did not drop. It remained at 14.7%.
  • The Civilian Labor Force +418,000

Unemployment Rate Drops Below 8% Amid Weak Jobs Growth - The last time U-3, the unemployment number reported by the Bureau of Labor Statistics that gets the most attention when jobs numbers are reported each month, was below 8% a guy named George W. Bush was President and the world was in the middle of the most serious economic downturn since the Great Depression. For the next 40 odd months, the economy continued to shed jobs and the unemployment rate skyrocketed to near 10%. Even in the several years that the economy has been in “recovery” jobs growth has been incredibly weak, with an average of just 153,000 jobs created per month in 2011, and a current average of about 142,000 per month for 2012 to date. Both of those numbers are far below the numbers we’d expect to see from a health economy and, as we’ve seen for several months, the U-3 rate was falling largely because there were large drops in the Labor Force Participation Rate representing people who were essentially giving up on looking for work. With July and August both being relatively weak, the September report was looked at as a sign of exactly where the economy was headed. On balance, it was a mixed bag: The unemployment rate declined by 0.3 percentage point to 7.8 percent in September. For the first 8 months of the year, the rate held within a narrow range of 8.1 and 8.3 percent. The number of unemployed persons, at 12.1 million, decreased by 456,000 in September. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (7.3 percent), adult women (7.0 percent), and whites (7.0 percent) declined over the month. The unemployment rates for teenagers (23.7 percent), blacks (13.4 percent), and Hispanics (9.9 percent) were little changed. The jobless rate for Asians, at 4.8 percent (not seasonally adjusted), fell over the year. (See tables A-1, A-2, and A-3.) In September, the number of job losers and persons who completed temporary jobs decreased by 468,000 to 6.5 million. (See table A-11.)

Private Payrolls Growth Remains Sluggish In September - September was another month of slow jobs growth, the government reports. Private payrolls increased 104,000 last month, according to the Labor Department's establishment survey. (Total payrolls, which include government jobs, rose 114,000.) That's up from August's revised gain of 97,000 for the private sector, but no one will be impressed with these numbers. Nonetheless, there's no smoking gun here for arguing that the labor market is collapsing. It may be suffering a slow and lingering death, in which case the last rites may be administered at some point down the road. In the here and now, however, private-sector job growth of 104,000 doesn't signal that the economy's in recession, even if it's not hard to envision a change for the worse in the near-term future. Nor does the 1.7% year-over-year growth in private payrolls through last month tell us that the jig is up. It'd be another matter if September data so far from other sources screamed of free-fall. But that's not the case either (see here and here, for instance). Meantime, a curiosity worth mentioning: A separate employment survey from the Labor Department shows a much-brighter picture for September. The so-called household survey, which is calculated with a separate methodology, is used for estimating the monthly unemployment rate. The official jobless rate for the nation reportedly fell to 7.8% last month vs. 8.1% in August. Why? The household survey reports that employment rose an incredible 873,000 last month--the best month in nearly a decade. Huh?!?! That's almost certainly overstating the case, and dramatically so, which is probably why most economists tend to focus on the establishment survey. Indeed, the household numbers are far more volatile on a monthly basis vs. the establishment data. (For some details on how the two series compare, see the Labor Department's explanation here.)

September Jobs Report is the Strongest in Months; Unemployment Falls to 7.8 Percent - After a spring and summer when the monthly jobs reports have brought nothing but gloom, the September data are strong across the board. The headline numbers—114,000 new payroll jobs and an unemployment rate of 7.8 percent—are themselves encouraging enough. In many respects, the details behind them look even better. Let’s begin with the payroll jobs numbers. As shown in the following chart, the September gain of 114,000 nonfarm payroll jobs is respectable, although unspectacular, especially compared with the 202,000 new jobs created in the same month a year ago. But the best news lies not in the figure for September, but in the revisions for July and August. Recall that July payroll jobs were originally reported at 163,000, then revised down to 141,000. That number is now revised up to 181,000. The August job gain, originally reported at just 96,000, is revised up to 142,000. If we add the September preliminary number to the upward revisions, it would be accurate to say that the economy has a full 200,000 more jobs than we thought it had a month ago. Next consider the unemployment rate, which fell to 7.8 percent. That is a magic number for Democrats because it brings the rate down to where it was when President Obama took office. Unemployment is still well over most economists’ estimate of the natural rate, but at least the White House no longer has to answer to the charge that joblessness has gotten worse on its watch.

Unemployment Falls Below 8.0 Percent for the First Time Since January 2009 - Dean Baker - The unemployment rate fell by 0.3 percentage points in September to 7.8 percent, the lowest level since January of 2009. The drop was driven by an 873,000 reported increase in employment. The employment-to-population ratio (EPOP) rose to 58.7 percent, its highest rate since May of 2010. While the establishment survey showed just 114,000 new jobs for the month, the prior two months’ numbers were revised upward by a total of 86,000. This brings the average rate of job growth over the last three months to 146,000. The jump in employment reported in September was almost certainly a statistical fluke. It is common to have large monthly changes in the employment numbers that are not consistent with other economic data. For example, employment reportedly rose by 649,000 in November of 2007, the month before the recession began. It dropped by 640,000 in May of 2000, when the economy was still in the middle of a boom. Still, this month’s numbers almost certainly indicate that the unemployment rate is moving downward, even if the speed is considerably slower than the latest data indicate. There were few notable differences across demographic groups. Black men saw a drop of just 0.1 percentage points to 14.2 percent in their unemployment rate. Their EPOP actually fell by 0.2 percentage points to 57.5 percent. High school grads also saw little benefit with a drop of just 0.1 percentage points to 8.7 percent in their unemployment rate while their EPOP fell by 0.2 percentage points to 54.4 percent. The percentage of unemployment due to quitters rose to 7.9 percent, the second-highest level since the end of 2008. The number of discouraged workers also fell sharply from 1,032,000 to 802,000.

Jobs Day…First Impressions (with Reflections on the Fiscal Cliff) - Payrolls grew by 114,000 last month and the unemployment rate ticked down significantly to 7.8% according to today’s jobs report from the BLS.  That’s the lowest unemployment rate since January of 2009.  Moreover, unlike last month’s report, September’s decline in the unemployment rate was due to more job seekers finding work, not giving up and leaving the labor market.Both July and August’s jobs numbers were revised up significantly such that in the third quater of the year, payrolls grew by  to 146,000 per month on average, a notable acceleration over the second quarter’s growth pace of only 67,000 jobs per month.*  A notable difference in this last quarter relative to the past few years is that the public sector, which has been consistently slashing payrolls even as the private sector was expanding, added jobs in each of the past three months. An interesting and timely question is whether the large fiscal contraction otherwise known as the fiscal cliff is depressing hiring.Here we have some helpful analysis by Goldman Sachs researchers to help sort this out.  They’ve divided industries into those that are more and less exposed to movements in government spending.  For example, aerospace and defense contractors (70% of their sales are to the federal government) and health care (60%) are two obvious sectors where this matters. They then make a scatter chart of recent employment growth (not including today’s numbers) against these government sales shares.  As you see, there’s a slight negative slope, but it’s far from significant. If those industries more dependent on government spending were hiring less in expectation of the cliff, that slope would be a lot more negative.  So not much evidence, at least by this metric, that the fiscal cliff is depressing hiring.

A Good Jobs Report - Today’s jobs data exceeded expectations. Payrolls expanded by 114,000 in September, in line with expectations, but upward revisions to July and August added another 86,000 jobs, so the overall payroll picture is better than the headline. The big news, though, is that the unemployment rate fell to 7.8%. That’s big economically and symbolically. Indeed, it’s so big that conspiracy-mongerers are suggesting the BLS cooked the numbers to help President Obama get re-elected. Let there be no doubt: That’s utter nonsense. Other numbers also indicate an improving job market: the labor force participation rate ticked up to 63.6%, the employment-to-population ratio rose 0.4 percentage points to 58.7%, and the average workweek increased by 0.1 hours. All remain far below healthy levels, but in September they moved in the right direction. Despite the drop, unemployment and underemployment both remain very high, as well. After peaking at 10% in October 2009, the unemployment rate has declined a bit more than 2 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 14.7%:

Number of the Week: 2.4 Million Found Jobs Last Month - 2.4 million: The number of unemployed workers who found jobs in September. That number likely sounds high, even for people who follow the job market relatively closely. The media, and even many economists, tend to focus on the headline jobs numbers, which are much smaller: Employers added 114,000 last month, down from 142,000 in August but up from the 45,000 jobs created in June. But those are net numbers. Employers didn’t hire just 114,000 workers last month — they hired millions, and fired or laid off millions more. The monthly jobs number is simply the difference between the two. Except in times of great turmoil, that difference is generally little more than rounding error. (Indeed, the margin of error on the monthly payroll figure is around 100,000 jobs.) Net numbers are useful for getting a quick read on the state of the labor market. But to get a true picture of the economy in all its scale and complexity, you have to look at gross numbers, the millions of people who were hired or fired, who quit or retired, who entered the job market or gave up looking for work. Economists refer to such data as “flows,” the monthly movements between employment and unemployment, and in and out of the labor force. (These numbers are based on the Labor Department’s monthly survey of households, and are separate from the payroll data, which are based on a survey of employers.) The first thing that jumps out looking at gross data is their sheer size. In any given month, more than 12 million people enter or leave the labor force, and more than 10 million start or leave jobs. Those numbers shift, but only very slowly: Last month, a great month as far as the household survey was concerned, 2.4 million unemployed workers found jobs and 1.9 million employed workers lost them. In January 2009, the worst month of the recession for job losses, 2.2 million unemployed workers got jobs, and 2.7 million lost them. And of course, in any given month, the vast majority of workers don’t move at all.

On The Surface Better, But Underneath The Same, by Tim Duy: The jobs numbers are out, and they are reasonably solid. Reasonably solid as long as you weren't expecting miracles. Very strong if you thought the economy was heading into recession. But just about where they should be if you think the economy is just sort of grinding along at a slow but steady pace. Nonfarm payrolls gained by 114k, about consensus, but both July and August were revised, adding 40k and 46k jobs, respectively. As upward revisions tend to follow upward revisions, we can expect the final September number will print higher as well. The average of the past three months is 146k. The average of the past twelve months is 150k. In short, ignoring the twists and turns of the data leaves you with pretty consistent job growth over the past year: In my mind, the policy significance of the twists and turns is not so much that the economy was threatened with excessive slowing this spring, but that the Fed's anticipated acceleration in activity was to be unrealized. The continuation of slow and steady is what prompted open-ended QE (although the downside risks didn't hurt either). Note that hours worked, which had flattened out, are again on the rise: Likewise, the unemployment rate unexpectedly dropped to 7.8% after holding steady for much of the year: Again, look through the twists and turns. On average, the economy is adding about 150k jobs a month. At the moment, holding the unemployment rate constant probably takes something closer to 100k jobs. As a consequence, the unemployment rate grinds lower.

Good News for the Worst Off - The American economy may be starting to help some of those who need it the most. The overall unemployment rate fell in September to 7.8 percent from 8.1 percent a month earlier. But the really impressive figures were in the categories of people who have suffered the most. The jobless rate among people with college degrees was unchanged at 4.1 percent. But the rate among high school dropouts fell to 11.3 percent, the lowest figure for that group in nearly four years. It has declined by 1.4 percentage points over the last two months. Similarly, the number of people who have been out of work for more than six months fell below five million for the first time since mid-2009. It peaked at 6.7 million in the spring of 2010. None of those numbers are good, but they show real improvement, even if we should remember the household survey, on which the unemployment numbers are based, can be volatile. And the establishment report found 114,000 jobs were added during the month, in sharp contrast to the 873,000 additional people with jobs found in the household survey.

BLS Numbers - All of the talk today has been over the recent unemployment numbers. The unemployment rate fell from 8.1% to 7.8% and employment increased by 873,000. With these numbers came the conspiracies (google Jack Welch). Without going into a lot of details about the conspiracies, I'm going to post two graphs that will hopefully end this debate. Here is the first graph that simply compares month-to-month change in employment reported by the household survey.  First thing one is likely to notice is the considerable noise in the data. The next thing you will likely notice is the spike that occurred in January of 2000. During this month the economy added 2 million jobs. In fact you will likely notice that April of 1960 and January of 1990 also included large spikes in employment. In 2012 there were two employment spikes, the first in February (went largely unnoticed) and then in September. The economy added 847,000 and 873,000 jobs, respectively. These number also compared to those posted in 1983. In June of 1983 the economy added 991,000 jobs and the May of 1984 added another 857,000. Both 2012 and 1983-4 are very similar in that they follow large periods of declines in the employment numbers.  Here is a table showing the months with the most change in employment levels:

Constant-demography Employment - Krugman - These days everyone knows that the unemployment rate is a problematic measure, because it can fall not because more people are working but simply because fewer people are looking for work. (This isn’t what happened in September, but it has been an issue in the recent past). An alternative is therefore to count employment rather than unemployment; one simple measure is the employment-population ratio, which suggests no improvement for years: But this measure too has problems; it’s the fraction of people 16 and over at work, which means that the denominator includes a rapidly growing number of seniors, who presumably don’t want to keep working. How can we correct for this demographic bias? One answer, which I’ve used before, is to focus on prime-age adults, between 25 and 54; Calculated Risk did this yesterday, and pointed out that there has been some real improvement over the past year. This is a good quick-and-dirty approach. But it can lead to (false) accusations of cherry-picking, and it also throws out information.So here’s an arguably better measure: constant-demography employment, which shows what would have happened to the employment-population ratio if the age structure of the population had stayed constant. For my calculation, I’ve divided the population into three age groups, 16-24, 25-54, and 55 plus, for which employment-population ratios are available in the BLS databases. (Scroll down and use the one-screen data search). I’ve then taken a weighted average of these ratios, where the weights are the 2007 shares of each group in the civilian noninstitutional population. And here’s what you get:

The outrageous attack on BLS - Apparently, Jack Welch, former chairman and CEO of General Electric, is accusing the Bureau of Labor Statistics of manipulating the jobs report to help President Obama. Others seem to be adding their voices to this slanderous lie. It is simply outrageous to make such a claim and echoes the worrying general distrust of facts that seems to have swept segments of our nation. The BLS employment report draws on two surveys, one (the establishment survey) of 141,000 businesses and government agencies and the other (the household survey) of 60,000 households. The household survey is done by the Census Bureau on behalf of BLS. It’s important to note that large single-month divergences between the employment numbers in these two surveys (like the divergence in September) are just not that rare. EPI’s Elise Gould has a great paper on the differences between these two surveys. BLS is a highly professional agency with dozens of people involved in the tabulation and analysis of these data. The idea that the data are manipulated is just completely implausible. Moreover, the data trends reported are clearly in line with previous monthly reports and other economic indicators (such as GDP). The key result was the 114,000 increase in payroll employment from the establishment survey, which was right in line with what forecasters were expecting. This was a positive growth in jobs but roughly the amount to absorb a growing labor force and maintain a stable, not falling, unemployment rate. If someone wanted to help the president, they should have doubled the job growth the report showed.

Explaining the Big Gain in Job-Getters - Jack Welch and some of the cable news programs are casting aspersions on the legitimacy of the Labor Department’s latest jobs numbers, asserting that the unexpectedly large drop in the unemployment rate indicates that someone cooked the books to help President Obama right before the election. After all, the household survey — the survey that the unemployment rate comes from — showed that the number of people with jobs rose 873,000 in September, when the gain had averaged 164,000 each month earlier this year. Here’s the thing. These numbers are always tremendously volatile, but the reasons are statistical, not political. The volatility arises because the numbers are based on a tiny survey with a margin of error of 400,000. Every month there are wild swings that no one takes at face value. But the swings usually attract less attention because the political stakes are lower.

Impossible to Manipulate Labor Survey Data — Former BLS Head - Even if the U.S. government wanted to manipulate monthly jobs figures, it would be impossible to accomplish, said a former head of the U.S. government’s labor statistics agency. Accusations that the government had manipulated the latest employment report spread across Twitter and other forums Friday after the U.S. unemployment rate fell to its lowest level since President Barack Obama’s inauguration. Among those questioning the better-than-expected report was former General Electric Chief Executive Jack Welch, who tweeted the suggestion that the “unbelievable jobs numbers” were fabricated to help Obama’s electoral chances in next month’s presidential election. But, Keith Hall, who served as Commissioner of the Bureau of Labor Statistics from 2008 until 2012, said in an interview Friday that there is no way someone at the agency could change any of the data from its two monthly employment surveys. The significant improvement in the unemployment rate may reflect normal statistical errors in the sampling process, he said, but that has nothing to do with manipulation.“There’s nothing wrong with the numbers,” said Mr. Hall. “The only issue is the interpretation of the numbers. The numbers are what they are.”

Why Did the Unemployment Rate Drop? - The U.S. unemployment rate tumbled to 7.8% in September but a broader measure was flat at 14.7%. The decline in the main unemployment rate was driven by positive factors. In previous months, the rate has fallen because more Americans were no longer looking for work. That wasn’t the case in September. The labor force increased, as more people were seeking jobs. Meanwhile, the number of unemployed tumbled by 456,000, while those with jobs surged 873,000. That number may come as a shock, considering that the number of jobs in the economy rose just 114,000 last month. That’s because the number of jobs added to the economy and the unemployment rate come from separate reports. The number of jobs added comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month. One possible explanation: The Labor Department revised up its estimate of payroll growth in July and August, but the unemployment rate doesn’t get revised. So it’s possible the big one-month drop in the unemployment really reflects improvements over the past two or three months. Though the headline of the household survey looks good, the fact that a broader rate of unemployment didn’t budge presents a puzzle. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

Analysis: Some Catch-Up in Unemployment Rate - Wells Fargo Senior Economist Mark Vitner talks with Jim Chesko about today’s September jobs report, which showed the economy added 114,000 jobs in the month, with the unemployment rate falling to 7.8%.

Reason For Today's Unemployment Rate Plunge: Part-Time Jobs For Economic Reasons Surge Most Since QE1 Announcement - We already noted the absolutely stunning surge in reported Household Survey jobs which "added" 873,000 jobs, or the most since 2003 and the second most in the past decade, which was just a little bit off the Household Survey used in the monthly NFP jobs changes, which came at 114,000, or about 8 times less. But what was the reason for this epic jump in Household survey jobs? Simple, and those who have read our series on America's transition to a part-time worker society know the answer. The reason is that the number of part-time people employed for economic reasons soared by 582,000 to 8,613,000, the most since October 2011, and the largest one month jump since February 2009, when "restoring" confidence in the economy was all the rage... and just before the Fed announced the full blown QE1 in March of 2009. Odd symmetry.

Rise of the Reluctant Part-Timer Class - The unemployment rate fell substantially in September, but a large part of that increase appears to reflect people who found part-time work when they really wanted full-time work. The Labor Department reported Friday that the number of people with jobs rose by (an improbably high) 873,000 in September. The number of people who are working part time but want to be working full time rose by 582,000. Of course, if you want to work full time, having a part-time job is better than no job at all. Even so, there has been frustratingly little progress in turning those part-time jobs into full-time ones. Today, of all workers with jobs, about 6 percent are part time but would prefer full-time work if they could find it. The average for the five years before the recession began was about half that, at 3.1 percent.

The Curious Case of the Part Time Worker: The BLS Jobs Report Covering September 2012 = In September’s report, we are presented with two contradictory numbers. An uninspiring 114,000 jobs were created versus a stellar three-tenths of a percent decline in unemployment to 7.8%. Basically, what we had was an anomalous spike in employment in September of 873,000. This was made up of 456,000 unemployed. A tenth percent change in unemployment represents about 150,000 people. Three-tenths would come to about 450,000. So that checks. The September employment spike also includes some 418,000 people entering the labor force. The main driver of the spike appears to be a 582,000 increase in involuntary part time workers. Turning to the report, revisions in the number of jobs for the last two months were larger than normal. Jobs in July increased 40,000 (28%) from 141,000 to 181,000. This was unusual in that they were originally revised down 22,000 last month from 163,000. August’s disappointing number of 96,000 (48% increase) was adjusted up to a more respectably mediocre 142,000. In all, revisions added 86,000 jobs. This is on top of the 114,000 reported for September. In September the potential labor force of the non-institutional population over 16 increased 206,000 from 243.566 million to 243.772 million. The employment-population ratio increased an impressive 0.4% to 58.7. So multiplying these two gives us 121,000 or the number of jobs needed in September to keep up with population growth. From the Household survey, seasonally adjusted, the labor force increased 418,000 from 154.645 million to 155.063 million. Seasonally unadjusted, it decreased 180,000 from 155.255 to 155.075 million. This decrease reflects the tailing off of the end-of-summer, going-back-to-school trend begun in August. The seasonal adjustment is a smoothing of this trough.

An 11% Unemployment Rate? - In Virginia on Friday, Mitt Romney said that “if the same share of people were participating in the work force today as on the day the president got elected, our unemployment rate would be around 11 percent.” Is it true? Yes, but you’d have to assume that all of the growth in the number of labor force dropouts is a result of discouragement about the job market, as opposed to other factors like the wave of baby boomers now hitting retirement age. A closer look at big issues facing the country in the 2012 election. If you had the same labor force participation today as you did in January 2009 (65.7 percent, instead of today’s 63.6 percent), that would bring the total number of people in the labor force up to about 160 million, instead of about 155 million. Then if you assumed that those five million people you added into the labor force didn’t get jobs, that would bring the total number of unemployed people up by five million, to a total of about 17 million. That would bring the overall unemployment rate to 10.7 percent. This exercise, though, assumes that the entire drop in the labor force participation rate from January 2009 to the present is a result of discouraged people giving up on looking for work. It ignores the fact that the baby boomers are hitting retirement age, meaning that demographics would probably bring down the labor force participation rate even if the economy were booming.

Questions About Quality of Jobs Created - Jobs day is about numbers. But even after the unexpected decline of September’s unemployment rate to 7.8% in Friday’s report, you also have to look at some words. One word is polarization. That word appeared in the minutes of the most recent meeting of the Federal Reserve‘s monetary policy setting Federal Open Market Committee. The meeting, where the Fed decided it had to ease policy more to help the stubborn unemployment problem, took place Sept. 12-13. The minutes were released Thursday. “It was also suggested that there was an ongoing process of polarization in the labor market, with the share of job opportunities in middle-skill occupations continuing to decline while the shares of low and high skill occupations increased.”

Average Monthly Employment Growth Revised Up - With the September employment release, average monthly employment figures over the last four months is 120.5 thousand, versus the three month average as of the August release of 94 thousand. Furthermore, taking into account the preliminary benchmark revision for March 2012, one sees that not only is the trajectory higher, so too is the level of employment. The March 2012 preliminary benchmark revision, based on more complete records, is assumed to apply linearly to the level of employment over 2011M04-2012M03 (i.e., "wedged in"), and assumed to hold constant thereafter. Figure 3 provides context. Note the series, based on the household survey, adjusted to conform to the NFP concept also rose.

Trying to make sense of today's employment numbers - It is difficult to explain today's employment report from the Bureau of Labor Statistics. Back to school distortions, changes in temporary employment, and early harvest - all potentially distorted the results. Many of the numbers reported should be taken with a grain of salt. Here are some observations: The headline unemployment number dropped to the lowest level since early 09 and was a complete surprise to the forecasters/  It's unclear however where this sudden improvement in the unemployment rate came from. In the past big declines were the result of decreasing labor participation. But the Employment to Population ratio actually ticked up this month. Some are pointing to the big spike in US Employment Total in Labor Force of 873K as an explanation for this decline in the unemployment rate. But that number is notoriously volatile and difficult to adjust for back to school seasonality. The chart below compares the US Employment Total in Labor Force survey (white) with the non-farm payroll changes (yellow). The survey has basically fluctuated - sometimes wildly - around the payrolls data, but on average followed payrolls closely. And payrolls growth continues to be anemic - certainly not enough to explain the drop in the unemployment rate.

Employment: Somewhat Better (also more graphs) - The payroll job growth was still weak, but there was some encouraging news in the employment report. This is just one report, but it was great to see the employment-population ratio increase for the key working age demographic of 25 to 54 years old (first graph below). Also the unemployment rate is now at the lowest level since January 2009 (when the economy was collapsing), and it was encouraging to see the number of long term unemployed drop below 5 million for the first time since early 2009. The preliminary benchmark revision showed an upward revision of 386,000 payroll jobs as of March (this is an annual revision bench marked to state tax records). A fairly large portion of the upward revision was for construction workers (85,000 more jobs added), and I suspect that the BLS statistical model that estimates new company formation (the Birth/Death model) is currently underestimating the formation of small construction companies. All that said, the economy has only added 1.3 million payroll jobs over the first nine months of the year. At this pace, the economy would only add around 1.8 million private sector jobs in 2012; less than the 2.1 million added in 2011. Also U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, was unchanged at 14.7%. A key reason this didn't decline in September was because of an increase in part time workers (see 3rd graph below).The average workweek and average hourly earnings both increased. "The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.5 hours in September. ... In September, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $23.58. Over the past 12 months, average hourly earnings have risen by 1.8 percent." This is sluggish earnings growth, but it appears to be picking up. Even though payroll growth was sluggish, this employment report was an improvement over recent reports, especially with the upward revisions, the increase in hourly earnings, and the increase in the 25 to 54 employment-population ratio. Here are a few more graphs...

Middle-Skill Jobs Are Lagging - WSJ - The notion that technology is an enemy to many types of middle-class jobs isn’t novel. Many economists and policymakers recognize computers and related technologies render redundant jobs that can be automated. Lower-skilled workers, while not well paid, are protected because their jobs often need some form of personal contact. Highly skilled workers perform tasks computers can’t and possess the education to take advantage of and exploit technological advances. So the worker in the middle, the office workers and factory laborers, are the ones that take the hit from the rise of the machines. A report released Monday by the Federal Reserve Bank of New York puts some numbers behind the evolution of the work force. The report found that from 1980 until 2010, job growth happened “disproportionately” at the high and low ends of skill levels. The middle-skilled jobs lost in recessions haven’t been recovered in rebounds. Meanwhile, low- and high-skill jobs don’t lose any notable ground during downturns and grow in better times. That means the pain of recessions is felt almost exclusively in the middle of the skills curve, the report noted. The broad swath of middle-level-skill jobs includes repair, construction, factory, office and sales workers, among other classes. Average annual wages range between $25,000 and $40,000.

Our Crisis of Bad Jobs by Jeff Madrick -- The Commerce Department just reported that GDP grew at an annual rate of only 1.3 percent in the second quarter. Job growth has been tepid, with continued high unemployment and underemployment. When one counts all those looking for full-time jobs and unable to get them, the true unemployment rate is close to 17 percent. Meanwhile, the US faces looming threats of a new European recession and a slowdown in China and other parts of the developing world. But the starkest evidence that something is seriously amiss in the American economy is the dramatic deterioration of the middle class. Median household income—the midpoint income of all American households—was reported by the Census Bureau (whose data is a year or so behind) to be down in 2011 compared to 2010, despite an economic recovery that began in mid-2009. More disturbing, that figure is now down to around $50,000, which is 7 percent or so below what it was in 2000 and its lowest level since 1996, adjusted for inflation. Incomes are falling still more sharply for black households. The Census Bureau also reports on poverty levels, and these too are reason for serious concern. At 15.1 percent—some 46 million people—the proportion of Americans in poverty is now at its highest level since 1993. Moreover, according to a recent Rutgers University report, more than half of those who have received a college degree since 2006 cannot find full-time jobs. The reason that the economic recovery is coinciding with middle class decline is increasingly clear. America is creating jobs, but they are bad jobs: retailing, food preparation, and table waiting, for example—in other words, jobs that don’t pay much.

King Ludd is Still Dead, by Kenneth Rogoff - Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment. Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment. By and large, that prediction has proven to be correct. Two hundred years of breathtaking innovation since the dawn of the industrial age have produced rising living standards for ordinary people in much of the world, with no sharply rising trend for unemployment. Yes, there have been many problems, notably bouts of staggering inequality and increasingly horrific wars. On balance, however, throughout much of the world, people live longer, work much fewer hours, and lead generally healthier lives. But there is no denying that technological change nowadays has accelerated, potentially leading to deeper and more profound dislocations. In a much-cited 1983 article, the great economist Wassily Leontief worried that the pace of modern technological change is so rapid that many workers, unable to adjust, will simply become obsolete, like horses after the rise of the automobile. Are millions of workers headed for the glue factory?

Entrepreneurs Starting Up With Fewer Employees - When Mike Farmer started a digital search company in 2004, he had a staff of 10. Today, in his third start-up, he has one employee: himself, aided by seven contractors working more or less part time. His budget, like his head count, is smaller, and by his account the new model is much more sustainable.For more than a decade, start-ups have been getting leaner and meaner. In 1999, the typical new business had 7.7 employees; its counterpart in 2011 had 4.7, according to an analysis of Labor Department data. The lean model bodes well for companies like Leap2 that hope to become power players with much less manpower. With a work force of contractors, Mr. Farmer said Leap2 could “dial it up and dial it down” as business demanded without having to spend money unless it was necessary, improving the company’s chances of survival. But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs. On Friday, two days after the issue dominated the first presidential debate, the Labor Department will release the unemployment rate for September along with payroll gains, which economists predict will barely keep pace with new people joining the labor force. For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977. The number of people employed by new businesses peaked in 1999, the height of the tech bubble, and has fallen by 46 percent since then, to 2.5 million in 2011, creating a slow leak in job creation that has proved difficult to plug.

Long-term unemployment: Does not having a job make it harder to get a job? - One of the most troubling features of America’s economic stagnation is the ever-increasing ranks of the long-term unemployed. Almost half of current job seekers have been out of work for half a year or more. Beyond serving as an indication of the brutal job market nationwide, it’s also raised concerns that millions of Americans could slide into a cycle of poverty and unemployment: After a few months on the unemployment rolls, skills stagnate and employers aren’t willing to take on those stigmatized by joblessness. If he’d be such a good employee, why can’t he get a job? Without downplaying the significance of the uptick in long-term unemployment—job loss has a substantial impact on lifetime earnings and indeed even life expectancy—there’s at least some good news for the employment prospects of the Great Recession’s unemployed. A field study run by economists at the University of Chicago finds that employers are far less likely to penalize the unemployed for being out of work in communities hammered by recession, since there’s less of a sense that job loss signals that an applicant is “damaged goods.”

Immigrants Needed - I wanted to quickly draw attention to two good posts on our need for high-skilled immigrants. The first is a great article from Noah Smith on why we need a huge amount of Asian immigration. Noah is good at thinking about immigration more broadly than typical economists, and this article is no exception:East Asia, South Asia, and Southeast Asia together have over half the world’s population, but Asians make up only 5% of the United States. I believe that the cultural benefits of Asian immigration will be just as big as the economic and political benefits. Adding diversity to our melting pot will speed up America’s inevitable and necessary transition from a “nation of all European races” to a “nation of all races.” The sooner that happens — the sooner people realize that America’s multi-racialization is a done deal — the quicker our political debate can shed its current ethnic overtones and go back to being about the issues.  The second article is from Matt Yglesias who emphasizes what is perhaps the most important and least appreciated truth of our times: immigration is more important than most of the issues we spend all our time arguing about.Imagine a counterfactual history of the United States in which we never opened our borders to the ethnic “others” of the past—the Catholics and Jews of Eastern and Southern Europe, then more recently Asians and Latin Americans. That is a very different vision of America. Not a bad place, necessarily, but probably one that looks a lot more like New Zealand—pleasant, much less densely populated, much more focused on primary commodities, somewhat poorer, and much more monolithically focused on the originally settled port cities.It’s the most important economic issue of our time, far more important than tax reform, and it is a lever that could help improve a lot of problems we have in this country. We should be shouting this from the rooftops daily.

Boeing Members Reject Labor Contract by Wide Margin - In a widely expected show of force Boeing's engineers and technical workers rejected a pay offer late Monday, setting the stage for talks to resume Tuesday for labor agreements covering 23,000 workers. The Society of Professional Engineering Employees in Aerospace said 95.5 percent of engineers and 97.1 percent of technicians voted against the contract offer, sending their bargaining teams back to the negotiating table. The union and Boeing [BA 70.01 0.415 (+0.6%) ] had agreed before the mail-in ballots were counted that if the contract offer was voted down they would meet Tuesday to continue discussions on a deal to replace two labor agreements that expire on Oct. 6. Figures released by Speea showed 15,097 members voted to reject the contract, compared with 608 who supported it, with 72 percent of all members voting.

Walmart warehouse strike, week 3: rally, civil disobedience planned - Ten busloads from Chicago will join hundreds of Joliet-area supporters – including clergy who will block an access road and face arrest – to rally Monday for Walmart warehouse workers whose strike is now in its third week.  A rally in a public park on Deer Run in Elwood, Illinois, across from Walmart’s distribution center at 26453 Centerpoint Drive, starts at 2 p.m., with a march and civil disobedience to follow. The action will “bring out of the shadows” some of the abuses taking place in Will County’s vast warehouse district, the third largest container port in the world and the largest in the Western Hemisphere, which supplies virtually all major retailers, said Leah Fried of Warehouse Workers for Justice. Warehouse workers walked out on September 15 when several workers were fired by Roadlink Workforce Solutions, a Walmart subcontractor, after they tried to present demands for improved conditions to management.  One of the fired workers was also a plaintiff in a wage theft lawsuit filed against Roadlink days earlier that week.The strikers belong to the Warehouse Workers Organizing Committee, which is part of Warehouse Workers for Justice.

Striking Wal-mart workers and police repression outside Chicago - Video streaming by Ustream

Wal-Mart workers on strike - Today, for the first time in Wal-Mart’s 50-year history, workers at multiple stores are out on strike. Minutes ago, dozens of workers at Southern California stores launched a one-day work stoppage in protest of alleged retaliation against their attempts to organize. In a few hours, they’ll join supporters for a mass rally outside a Pico Rivera, Calif., store. This is the latest – and most dramatic – of the recent escalations in the decades-long struggle between organized labor and the largest private employer in the world. Rivera, a department manager, said her store is chronically understaffed: “They expect the work to be done, without having the people to do the job.” Wal-Mart is entirely union-free in North America, and has worked aggressively to stay that way. Today’s strike is an outgrowth of a year of organizing by OUR Walmart, an organization of Wal-Mart workers. OUR Walmart is backed by the United Food and Commercial Workers union, but hasn’t sought union recognition from Wal-Mart; its members have campaigned for improvements in their local stores and converged at Wal-Mart’s annual shareholder meeting. They say their efforts have won some modest improvements, but also inspired a wave of illegal retaliation by the retail giant, which they charge is more concerned with suppressing activism than complying with the law. I reported in July on three workers’ allegations that Wal-Mart retaliated against them for their activism. Since then, OUR Walmart has filed many more Unfair Labor Practice (ULP) charges with the National Labor Relations Board, alleging further punishment of activists.

A Glimpse of the Oligarchy’s View of the Future for US Workers - The richest humans on the planet no longer bother masking their control over nations and individuals. In England, employment is falling, wages are falling, and people are falling into poverty. The rich are doing quite well during austerity, though, thanks to Quantitative Easing: But Spencer Dale, the Bank of England economist, said that for pensioners the negative impact of QE [because it depresses interest rates on savings] was offset by the rise in asset prices. He said that without the central bank creating money and using it to buy bonds, the stock market would have collapsed and property prices fallen through the floor. Pension funds are heavily invested in shares, bonds and property, which means they might not be getting a good interest rate, but the value of their assets has largely been maintained. Dale doesn’t say it, but it’s obviously true that this is huge benefit to the richest Britons, who own most of the stocks and real property. Dale also avoids another piece of reality, the richest Britons joined the richest Americans in wrecking the lives of millions of their fellow citizens, and now insist that those citizens protect them from loss, and accept poverty as their lot in life. Screw those 3.5 million British kids in poverty, and especially the 1.6 million kids in extreme poverty.

Blankfein, No Socialist, Sees Flaws in Wealth Distribution - - Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said he isn’t a socialist, though he believes economic growth hasn’t resulted in a fair enough distribution of wealth. Two goals of the economic system should be to expand and spread global wealth, Blankfein, who turns 58 tomorrow, said in a discussion today with Royal Bank of Canada CEO Gordon Nixon at an event hosted by the Canadian Club of Toronto. “Over the long term, if the system works well, it should accomplish both goals,” Blankfein said. “It hasn’t accomplished enough of the second goal in the right way, and that’s what the distress is over.”Occupy Wall Street, the global movement against inequality that ignited in Manhattan last year, marked its first anniversary with demonstrations on Sept. 17. Protests against income disparity, bankers’ greed and corporate abuse sprouted from San Francisco to Hong Kong after demonstrators established an encampment in Manhattan’s Zuccotti Park a year ago. “In the United States over the last generation or two we’ve been much better at generating wealth and much less good at distributing it,” Blankfein said. Still, he said he doesn’t believe in wealth redistribution.

Median Household Incomes: The Grim Reality -- Last month I posted a pair of commentaries on median household incomes based on latest annual data released by the Census Bureau. The first looked at the distribution of household incomes by quintile and the top 5 percent. The second examined median household incomes by age bracket. More recently Sentier Research, an organization that focuses on income and demographics, published a fascinating report on median household incomes (available here as a PDF file). The data in their report differs from the Census Bureau's data in three key respects:

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

The company makes the data available in Excel format for a small fee (here). I have used that data to create a pair of charts to illustrate the nominal and real income trends during the 21st century. We'll look at the charts, but first, a word about inflation adjustment. The Sentier Research report includes charts showing real (inflation-adjusted) median household income with their own Household Income Index (HHI), in which January 2000 = 100.0. As of August 2012, the index registered 91.0, a nine percent decline from January 2000. The advantage to this approach is that it highlights the real trend itself without a potentially distracting reference to dollar values.

Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened - The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583. The recovery that officially began in mid-2009 hasn’t arrived in most Americans’ paychecks. In 2010, the top 1 percent of U.S. families captured as much as 93 percent of the nation’s income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data. The earnings gap between rich and poor Americans was the widest in more than four decades in 2011, Census data show, surpassing income inequality previously reported in Uganda and Kazakhstan. The notion that each generation does better than the last -- one aspect of the American Dream -- has been challenged by evidence that average family incomes fell last decade for the first time since World War II.

Inequality and Growth - As part of an event celebrating the National Employment Law Project, I participated in a panel moderated by Bob Herbert, former oped writer for the NYT (an extremely compelling one at that, whose themes were race, poverty, inequality, and justice) and now a senior fellow at Demos (the other panelists were Dorian Warren and Lynn Rhinehart). The question of the impact of inequality on growth came up and that made me want to work out my thoughts on that relationship.  These issues are very usefully addressed in this recent paper by Boushey and Hersh (more on that below; see their page 8 for a short summary of the ineq/growth lit), but here, in an extended post (it’s early Sat AM and no one’s bugging me yet) are some of my thoughts about it. The classic theory on how growth affects inequality maintains that there’s an inverted U-shaped relationship over long periods of economic development.  As emerging economies grow they initially become less equal as the few with high financial endowments profit off of their ownership of key productive resources, like land.  Then, as industrialization evolves, much more of the population has the chance to participate in higher value-added work which reduces inequality.

U.S. Births Decline for the fourth consecutive year in 2011 - From the National Center for Health Statistics: Births: Preliminary Data for 2011. The NCHS reports: The 2011 preliminary number of US births was 3,953,593, 1 percent less (or 45,793 fewer) births than in 2010; the general fertility rate (63.2 per 1,000 women age 15-44 years) declined to the lowest rate ever reported for the United States. The birth rate for teenagers 15-19 years fell 8 percent in 2011 (31.3 births per 1,000 teenagers 15-19 years), another record low ... The birth rates for women in their twenties declined as well, to a historic low for women aged 20-24 (85.3 births per 1,000). The birth rate for women in their early thirties was unchanged in 2011 but rose for women aged 35-39 and 40-44. Here is a long term graph of annual U.S. births through 2010 .. Births have declined for four consecutive years, and are now 8.4% below the peak in 2007 (births in 2007 were at the all time high - even higher than during the "baby boom"). I suspect certain segments of the population were under stress before the recession started - like construction workers - and even more families were in distress in 2008 through 2011. And this led to fewer babies.

Why the Falling U.S. Birth Rates Are So Troubling - We’re becoming Europe. At least that’s what a long line of birth rate figures seems to being telling us. And that’s bad news for the future of the country. New numbers released by the U.S. government Tuesday show record low birth rates in 2011: The general fertility rate (63.2 per 1,000 women aged 15 to 44 years old) was the lowest ever recorded; the birth rate for teenagers 15 to 19 declined; birth rates for women aged 20 to 24 hit a record low; rates for Hispanic and non-Hispanic black women dipped. Some birth rates remained unchanged, like that of women in their late 40s. Only women aged 35 to 39 and 40 to 44 are more likely to have babies now than in the past. Those data are part of a broader post-crash trend. Every year since 2007, when the number of births in the U.S. hit 4.3 million, Americans have brought fewer babies into the world each year. Much of that had to do with the recession: Americans apparently decided that they couldn’t afford to have as many kids in an unstable economy, even if they were married.

Low Income Households Have Expenses More Than Twice Their Income - A shocking claim was made by various press sources that those at the bottom of the American economic pile have living expenses which are double their income.  The bottom fifth of the U.S. income distribution -- 24.4 million households -- on average earned $10,074 in after-tax annual income and spent $22,001 last year,  The shocking statistics are derived from the BLS Consumer Expenditure Survey, a quarterly and annual survey of people's income and spending habits. The first thing to notice is the average income of the lowest income quintile in America isn't enough to rent a cardboard box to live in for many areas of the country. Yet, how can it possibly be that these households have expenses over double the money they have coming in? If we look over the history of the bottom 20% of households by income, average annual expenditures have always exceeded income as shown in the below historical chart.  Many in the press dismiss these figures by claiming many of these people are retirees, living off of their retirement savings. Is that true? Not as a whole actually, 23.5% were 65 or over.  Another claim is that many of the lowest income quintile are living off of credit cards, family and friends and payday loans.  That doesn't seem quite right either. The survey reports a net decline in liabilities during the recession with a recent increase in debts for the poorest by income Americans.  If we look at the Federal Reserve flow of funds, which doesn't break down debt by quintiles, we see lower household debt in 2011. At the same time the Pew Research Center reports record student debt and it's hitting the lowest income households the worse. The lowest income quintile has 13% of this group owing student debt. Of that 13%, student debt represents 24% of their annual income in 2010.  Believe this or not, the BLS sources of income include food stamps, social services, welfare, social security, unemployment compensation and so on. The below graph shows some select sources of money for the bottom income quintile. What the graph also shows is how little public assistance and unemployment insurance have kept up in comparison to social security to help those with low income.

Debating Real Value of Health Benefits in Poverty Calculations - As a nation, we devote almost one-sixth of our spending to health care, twice the share of 30 years ago. Medical bills for the elderly are climbing, threatening to blow up the budget in a few decades. Politicians from both parties are consumed by how to pay for it all. Yet we cannot quite agree on how valuable government health care benefits are to Americans.In July, the Congressional Budget Office — the nonpartisan arbiter of the costs and consequences of government spending — decided that we had not been valuing these benefits enough. In a report on how income and taxes are distributed across the population, it decided, for the first time, to value health benefits provided by the government at every penny they cost. The decision stoked a long-simmering debate about how much health care is really worth to poor families who may not have enough to eat. The reclassification of health benefits added $4,600 a year to households in the bottom fifth of income. It shrank the nation’s yawning income gap and muted the increase of inequality over the last three decades. And it changed the picture of what the government does for Americans.

Social Networks and Risk of Homicide Victimization in an African American Community - That is a new paper from Andrew V. Papachristos and Christopher Wildeman, here is the abstract: This study estimates the association of an individual’s position in a social network with their risk of homicide victimization across a high crime African American community in Chicago. Data are drawn from five years of arrest and victimization incidents from the Chicago Police Department. Results indicate that the risk of homicide is highly concentrated within the study community: 41 percent of all gun homicides in the study community occurred within a social network containing less than 4 percent of the neighborhood’s population. Logistic regression models demonstrate that network-level indicators reduce the association between individual-level risk factors and the risk of homicide victimization, as well as improve overall prediction of individual victimization. In particular, social distance to a homicide victim is negatively and strongly associated with individual victimization: each social tie removed from a homicide victim decreases one’s odds of being a homicide victim by approximately 57 percent. Findings suggest that understanding the social networks of offenders can allow researchers to more precisely predict individual homicide victimization within high crime communities.

US Foodstamp Usage Rises To New Record High - While the 0.4% perfectly unmanipulated and totally coincidental swing in the unemployment rate in an Obama favorable direction one month before the election came at a prime time moment for the market, one hour ahead of the open, setting the market mood for the rest of the day, there was one other, far more important data point released by the government's department of agriculture, sufficiently late after the market close to impact no risk assets. That data point of course was foodstamps (or the government's Supplemental Nutrition Assistance Program, aka SNAP), and we are confident that no readers will be surprised to learn that foodstamp usage for both persons and households, has jumped to a new all time record.... Finally, and putting it all into perspective, since December 2007, or the start of the Great Depression ver 2.0, the number of jobs lost is 4.5 million, while those added to foodstamps and disability rolls, has increased by a unprecedented 21 million.

Poverty rises dramatically in Michigan - Poverty in Michigan has increased a staggering 66 percent since 2001 according to the US Census Bureau's American Community Survey (ACS) released in September. This is the largest increase in poverty in any state in the country. Three-fourths of this rise occurred before the recession began in 2008. Michigan’s poverty rate continued to rise sharply through 2011, to 17.5 percent up from 16.8 percent just a year earlier, and well above the national average of fifteen percent. The climb in the poverty rate only partially measures growing social distress because state and federal governments are at the same time cutting safety net programs once available to the most economically vulnerable populations. Almost 1 in 4 children in Michigan lives in poverty. Child poverty rose to 24.4 percent in 2011, up from 23.1 percent in 2010 and 14.2 percent level in 2001. Michigan is in the worst third of the nation for child poverty.Thirteen other states, all in the US south or southwest and the District of Columbia, had child poverty rates even higher. Mississippi continues to have the highest child poverty rate in the nation at 32 percent. North Carolina recorded 25.6 percent, and West Virginia had 25.8 percent.

Local Shelter Faces Food Shortage - Demand for food and other help at local shelters tends to slow down in the fall, but not this year. The Lansing City Rescue Mission is seeing a steady increase of people coming through the door, especially men. It's not just homeless people eating there though; it's a type of "new homeless," as City Rescue Mission Communications Manager Laura Grimwood describes it. People who are working but can't afford anything else, or recently lost their home or job. With more and more of them using the services, the food supply is running low, even after generous donations from the community. "We're at 48 pounds of ground beef left, and so, it looks pretty scarce," Program Coordinator Bryan McGruder said. The cooks said they can use up to 40 lbs. of meat for just one meal. McGruder said the meals always include a dairy and vegetable as well, but starting in October, protein portions will have to be smaller.

Brown vetoes Calif. domestic workers rights bill - Gov. Jerry Brown on Sunday announced that he had vetoed legislation that would have provided overtime pay, meal breaks and other labor protections to an estimated 200,000 caregivers, nannies and house cleaners in California. Brown called their work a "noble endeavor" and said they deserve fair pay and safe working conditions. But the Democratic governor said the bill "raises a number of unanswered questions," prompting him to reject the measure. It was among dozens of bills he acted on in the final hours before his midnight deadline to consider bills sent to him this fall by the Legislature. Advocates said the legislation, dubbed the Domestic Workers of Bill of Rights, is necessary to protect a primarily female, immigrant workforce from abuse. They were successful in persuading New York lawmakers to pass similar legislation in 2010. Among other things, the bill would have required that live-in workers be compensated if their rest period was interrupted during an eight-hour period and eased eligibility requirements for workers' compensation.

Illinois' state debt climbs to $21,607 per person -  Blame the pensions.Illinois' pension woes have earned it fifth place among states with the highest debt-per-capita, according to a new report. The liabilities -- mostly pension related -- would cost every person in the state $21,067 to pay it off, says State Budget Solutions, a nonpartisan advocate for budget reform. Only Alaska, New Jersey, Connecticut and New Mexico rank higher in terms of debt-per-capita. Additionally, Illinois has the fourth-highest debt in the nation, with liabilities totaling $271 billion. Only California, New York and Texas are carrying more debt, according to the report. Pension liability is by-far the largest culprit, according to Cory Eucalitto a research analyst at State Budget Solutions and the study's author. About $192 billion of the state's total debt, he said.

To Fight Crime, a Poor City Will Trade In Its Police - Two gruesome murders of children last month — a toddler decapitated, a 6-year-old stabbed in his sleep — served as reminders of this city’s reputation as the most dangerous in America. The police acknowledge that they have all but ceded these streets to crime, with murders on track to break records this year. And now, in a desperate move to regain control, city officials are planning to disband the Police Department.  The reason, officials say, is that generous union contracts have made it financially impossible to keep enough officers on the street. So in November, Camden, which has already had substantial police layoffs, will begin terminating the remaining 273 officers and give control to a new county force. The move, officials say, will free up millions to hire a larger, nonunionized force of 400 officers to safeguard the city, which is also the nation’s poorest.  Hardly a political battle of the last several years has been fiercer than the one over the fate of public sector unions. But Camden’s decision to remake perhaps the most essential public service for a city riven by crime underscores how communities are taking previously unimaginable steps to get out from under union obligations that built up over generations.

Which subject's students have the most sex? - What is it? Well just as the Sex League shows which universities get the most (and least) sex, the Inter-course league does the same, but by subject. So, now we come to the results... Our parents were wrong - it turns out money does make the world go round, as economics tops the table with an average of 4.88 sexual partners per student. Just scraping into the top five is agriculture, and no, before you make the obvious joke we're NOT including animals. You scamps. At the other end of the table environmental science comes in 43rd (and last) place, marginally behind theology and earth sciences.

The Death of the Golden Dream of Higher Education - These days, it seems like going to college increasingly means heading for the nearest pawn shop or loan shark to hock your valuables. Based on a recent spate of figures, it looks as if we'll soon need to find a replacement term for the “public” in public higher education. After all, the cost of a public college education is rising at a startling clip. Tuitions at four-year universities have gone up by 15% between 2008 and 2010 (and are still on the upswing). Since 2001, in fact, tuition and fees have climbed at a 5.6% rate annually. In some states, it’s far worse. At six Georgia public universities, for instance, costs jumped by more than 40%. In Arizona, California, and Washington, it was 16% to 21% last year alone. Meanwhile, for the 2011-2012 school year, state funding of higher education nationwide plunged by 7.5%. At the moment, tuition increases at public colleges are almost double those at private ones. It shouldn’t surprise you, then, to discover that “public” education is increasingly becoming a very private nightmare. A recent analysis by the Pew Research Center found that student debt is soaring, with a record 22.4 million American households -- nearly one in five -- carrying it. In 2010, the average debt burden of those households was $26,682 (“more than double the share two decades earlier”) and 10% of them owed more than $61,894. Though this debt burden falls on every sector of society, perhaps this won’t surprise you either that the poorest and youngest households are in the worst trouble. Student debt is eating up nearly a quarter of their household income. As the Pew study puts it, “[T]he relative burden of student loan debt is greatest for households in the bottom fifth of the income spectrum, even though members of such households are less likely than those in other groups to attend college in the first place.”

Education Profiteering; Wall Street's Next Big Thing?: The end of the Chicago teachers' strike was but a temporary regional truce in the civil war that plagues the nation's public schools. There is no end in sight, in part because -- as often happens in wartime -- the conflict is increasingly being driven by profiteers. The familiar media narrative tells us that this is a fight over how to improve our schools. On the one side are the self-styled reformers, who argue that the central problem with American K-12 education is low-quality teachers protected by their unions. Their solution is privatization, with its most common form being the privately run but publicly financed charter school. Because charter schools are mostly unregulated, nonunion and compete for students, their promoters claim they will, ipso facto, perform better than public schools. On the other side are teachers and their unions who are cast as villains. The conventional plot line is that they resist change, blame poverty for their schools' failings and protect their jobs and turf. It is well known, although rarely acknowledged in the press, that the reform movement has been financed and led by the corporate class. For over twenty years large business oriented foundations, such as Gates (Microsoft), Walton (Wal-Mart) and Broad (Sun Life) have poured billions into charter school start-ups, sympathetic academics and pundits, media campaigns (including Hollywood movies) and sophisticated nurturing of the careers of privatization promoters who now dominate the education policy debate from local school boards to the US Department of Education. In recent years, hedge fund operators, leverage-buy-out artists and investment bankers have joined the crusade. They finance schools, sit on the boards of their associations and the management companies that run them, and -- most important -- have made support of charter schools one of the criteria for campaign giving in the post- Citizens United era.

Gap between college tuition and consumer income is at record levels - Analysts point out that higher education costs in the US have significantly outpaced inflation. Another way to look at the issue however is to compare college costs with disposable income. The gap between the two has widened to historical highs. This is another market distortion created by the US government (similar to the housing market) by providing an almost unlimited amount of credit and pricing it below market. It allowed schools to raise tuition without the demand constraint that would normally exist in a market. As a result the US consumer student loan burden is now higher than either auto or credit card debt (see discussion). And now we are also seeing a rise in delinquencies (see post).This is not going to end well, particularly for the second and third tier private schools, especially if the government credit spigot is suddenly turned off.

Chart Of The Day: College Tuition Vs Real Disposable Income --  Curious why distinguished, Nobel-prize winning economics professors (most of whom have their own Op-Ed columns and blogs to fill all that free time they have when they are not actually filling impressionable minds with "this time the model will work" ideas, keeping Solitaireoffice hours or coming up with arcane, meaningless equations to explain human behavior) have gone "all in" to defend a system which promotes the ubiquity of cheap credit, and the creation of a generation of nondischargeable debt slaves? Because if it wasn't for said cheap, ubiquitous debt, their salaries would be utterly unsustainable (and for once austerity would hit the academic ivory tower headquarters of Keynesianism located in Cambridge, New Haven and West Philadelphia). And for this they have to thank an economic system they created which is now disintegrating before their eyes, and in which every incremental dollar of systemic debt raises total disposable income per capita by less and less and less.

More college students defaulting on student loans - Student loan defaults have risen for the sixth straight year, as students from traditional non-profit universities have an increasingly difficult time paying off their college debt. Numbers released by the Department of Education Friday show that of the 4.1 million borrowers who began making payments in late 2009 and early 2010, 9.1% defaulted within two years, up from 8.8% the year before. "Student loan defaults still continue to plague too many borrowers," said Debbie Cochrane, research director for The Institute for College Access & Success. "The numbers are distressing, and they needn't be so high." Experts credited the combination of skyrocketing student debt, the poor economy and a lack of borrower education for the increase. Unlike previous years, when default rates rose because borrowers at for-profit universities were having trouble paying off their loans, this year's rise was attributed to borrowers who attended more traditional non-profit public and private universities. Public school borrowers defaulted at a rate of 8.3%, up from 5.9% just four years ago

‘Generational’ accusations are nearly always wrong - Jim Tankersley really strikes out in his column yesterday. He levels the charge that the Baby Boom generation has somehow put the nation into unsustainable debt and calls them, only half-jokingly, “parasites.” As a member of Generation X, I used to enjoy some good-ol’ hating on the Baby Boomers, but it turns out that such generational finger-pointing is really silly. The prime exhibit offered in defense of the parasite charge is a comparison between federal debt as a share of GDP in 1965 and 2012. It’s 37.9 percent in 1965 and 74.2 percent in 2012 so, voila! Parasites! Here’s a similar chart. Look closely at what happened between 1965 and 2007—debt held by the public is lower in 2007 than 1965. So, the charge must be somehow that the Baby Boomers’ mooching in the past five years is the real culprit, right?  Or, more likely, some very large economic event happened between 2007 and 2012 that caused Federal borrowing to rise. What could that have been?

State's pension fund underfunded by $19.2 billion - Florida's massive retirement fund now has a $19.2 billion gap between the amount of money it has and the amount of money it needs to cover all current and future benefits. A report released Monday shows that the Florida Retirement System — home to some 900,000 active and retired public employees — is now underfunded by 13.1 percent. That's an increase of $1.2 billion over last year. The overall pension fund is worth nearly $128 billion. The size of the gap is still within a range considered healthy by many financial experts, but it could still fuel a political debate in the Florida Legislature.

Alan Simpson: “I get so damn sick and tired of listening to the little guy” - Alan Simpson is upset that somebody besides those with the accumulated wealth of a Pete Peterson gets a voice in our democracy: SIMPSON: I get so damn sick and tired of listening to the little guy, the vulnerable, the veteran — I am a veteran, and the seniors and this and this and this and the meanwhile this country is headed for second-class status while everybody just babbles into the vapor. Where is the evidence that Alan Simpson has ever in his life listened to “the little guy?” He’s really sick and tired of the PUBLIC listening to those pleas – in other word, he doesn’t like the public thinking for themselves, with appeals from those who look and talk and think like them. He’d much rather the rest of the country worked the way it works in Washington, where the little guy remains silent while the blob of corporate lobbyists and consultants and associated grifters dominate the conversation. The vulnerable never penetrate the minds of the political class, save for maybe two or three weeks around election season. The rest of the time, they’re just 300 million moochers sucking at the public teat. Simpson really wants to shut down this thing we call democracy, so the enlightened, self-appointed guardians can go about looting the public treasury in peace.

Liberals slam Obama on Social Security - Sen. Bernie Sanders (I-Vt.) on Thursday strongly criticized President Obama for not taking a more forceful stance on Social Security in the presidential campaign. Sanders, founder of the Senate’s Defending Social Security Caucus and a leading voice on the issue in the Senate Democratic caucus, said he was deeply concerned by Obama’s effort to minimize differences between himself and Mitt Romney. “It was very distressing. It was very distressing not only because it is extremely bad public policy and will cause serious damage to a whole lot of vulnerable Americans. It was also bad because he’s going against what the vast majority of the American people want and it’s going to be very bad for his re-election effort,” said Sanders in an interview. “The American people in poll after poll after poll have been very clear, do not cut Social Security and for the president to say I expect that my position is somewhat similar to Gov. Romney is very, very distressing,” Sanders said.

On Social Security, if not now, when? - In an otherwise forgettable conversation, things became newsworthy when the conversation turned to Obama’s position on Social Security reforms. At that point, the president’s consigliere, David Axelrod, responded not with a clear position, but instead by trying to halt the conversation. “I’ll tell you what, when you get elected to the United States Senate and sit at that table, we’ll have that discussion,” he told the panel. When pressed, Axelrod insisted that the election season meant no debate should proceed. “This is not the time, he said. “We’re not going to have that discussion right now.” There are two disturbing problems with Axelrod’s statements. First and foremost is his suggestion that a Social Security policy debate should only be conducted between White House officials and U.S. senators – not between all government officials and the general public. It’s a fundamentally elitist idea that evokes notions of smoky back rooms and secret deals. Not only that, it both contradicts basic notions of civic engagement and confirms Americans’ fears about a government that wholly disregards the citizenry. Along the same lines is Axelrod’s insistence that even if we were to have a public debate about Social Security, we somehow shouldn’t “have that discussion right now” because of the impending election.

U.S. Post Office defaults on retiree pre-payment - Because of congressional inaction, the U.S. Postal Service today defaulted on a $5.6 billion pre-payment for future retiree health benefits, the second such default in two months. The Postal Service missed a $5.5 billion payment in August, bringing the missed pre-payments to $11.1 billion for the fiscal year that ended Sunday. Overall, the postal service expected a $15 billion deficit for last year, and a projected shortfall of $238 billion over the next 10 years. Congress mandated the early funding in 2006. No other government agency or private business is required to make such over-payments. Despite the defaults, "customers can be confident in the continued regular operations," Postmaster General Patrick Donahoe said in a statement. "We will continue to deliver the mail and pay our employees and suppliers. Postal Service retirees and employees will also continue to receive their health benefits," Donahone said, noting that current retirees' health care is paid from the agency's general operating budget. "Comprehensive reform of the laws governing the Postal Service is urgently needed in order for the Postal Service to fully implement its five-year business plan and return to long-term financial stability," Donahoe said.

CalPERS Weighs 75% Premium Increase for Long-Term Care - CalPERS is considering a 75% premium increase for most of its 150,000 long-term care beneficiaries, the Sacramento Bee reports. The increase would take effect in July 2015. Background Unlike its pension benefits program, CalPERS' long-term care program is not funded by taxpayers and must pay its own claims. According to CalPERS officials, the long-term care program has enough money for now but will face budget shortfalls in decades to come. Ann Boynton, CalPERS' deputy executive officer, said, "At current course and speed, we would not have enough money ... to pay anticipated claims" in the long-term care program. Details of Possible Premium Increase The 75% rate hike being considered by CalPERS would be its largest to date, possibly requiring some beneficiaries to pay hundreds or thousands of dollars more annually. Officials are considering phasing in the hike over three to five years. Officials also are looking into offering a cheaper, less-comprehensive policy as an alternative. The alternate plan would cap benefits at 10 years without inflation protection. Officials say that the less-comprehensive plan would be popular because most people do not need more than a few years of long-term care services.

Big Pharma Medicaid Fraud Penalties at Record High - Settlements between pharmaceutical companies and state and federal governments over cases of Medicaid fraud are at an all time high, with financial penalties for major drug companies on the rise, according to a new report by Public Citizen. However, as Public Citizen urged Thursday, much still needs to be done in order to curb big pharma malpractice, as major profits still largely outweigh the costs of legal penalties, making it difficult to deter future violations. The charges against major pharmaceutical companies accused of defrauding their Medicaid programs, include overcharging health programs, largely in the form of drug pricing fraud, as well as unlawful promotion of 'off-label' drugs (promoting drugs for unapproved uses). 2012 has already broken the record for financial penalties and court settlements against the pharmaceutical industry, with $6.6 billion recovered by mid-July. The big pharma corporations associated with the largest penalties include GlaxoSmithKline, Johnson & Johnson and Abbott. These companies were responsible for two-thirds of the financial penalties paid out to the federal and state governments over the course of the study period. GlaxoSmithKline topped the list with $3.1 billion in settlements. “It should come as no surprise that states facing Medicaid budget shortfalls are finally deciding to root out fraud that likely has cost their taxpayers billions of dollars over the years,

Doctor Visits Dropping, New Census Figures Show - Americans of working age are going to the doctor less frequently than they were 10 years ago, according to a new report by the Census Bureau. In 2010, people age 18 to 64 made an average of 3.9 visits to doctors, nurses and other medical professionals, down from 4.8 visits in 2001, said the report, which was released on Monday. The precise reasons for the decline were unclear, said Brett O’Hara, an official at the Census Bureau and a co-author of the report. But the changing demographics of the American population most likely had something to do with it. As baby boomers retire, for example, they leave a working-age population that is on average younger and that tends to use less health care. Still, that is likely to be only a small part of the explanation, as the baby boomers began to move into retirement only at the end of the report’s period, about two years ago. Another possible reason for the decline in doctor visits, Mr. O’Hara said, is that the share of uninsured working-age people has expanded over the past decade. People without insurance are less likely to visit a doctor, said the report, which was based on the Survey of Income and Program Participation, a long-running survey of more than 80,000 households. The share of working-age Americans without health insurance was 21.8 percent in 2010, according to the Census Bureau, up from 17 percent in 2001.

Visiting the Doctor Less, but Spending More on Health - The average annual number of times Americans visit medical providers has been falling over the last decade, according to a new report from the Census Bureau. But their overall spending on health care is still rising. Among Americans 18 to 64 years old, the average person visited medical providers 3.9 times in 2010, compared to 4.8 times in 2001. Both healthy Americans and less healthy Americans reported going to the doctor less frequently in 2010 than they did in 2001: Visits to the doctor and other medical providers may be falling, but health spending is still substantially higher today than it was a decade ago, according to the Labor Department’s Consumer Expenditure Survey. The typical household (including residents of all ages) spent $3,313 on health care in 2011, compared to $2,771 in 2001, after adjusting for inflation.

Health Care Thoughts: Hospital Job Cuts and Job Gains - I have been spending a great deal of time lately communicating with health care experts far above my modest standing, mostly on publishing projects and seminar scheduling for next year. One hot topic among the wired in folks is hospital layoffs, not usually large per hospital but a steady drip drip since 2009. The buzz I am getting is the next two or three years will see a net job loss of about 400,000 as Medicare and Medicaid cuts, combined with incentives to reduce stays and re-admissions, chip away at hospital budgets. Most of the cuts will be from clinical and maintenance areas. Notice the "net," hospitals will be doing some hiring during the job cuts. The hospitals will be hiring IT geeks, finance and accounting geeks, nurse managers, case managers and executives. Some of this is fallout from the economy, but much of it will be changes necessitated by PPACA, especially for those organizations moving into accountable care organizations. More accountants, fewer nurses. Beware of unintended consequences.

Doctors Call For Repeal Of Obamacare, Say They'll Vote for Romney…Looks like Obamacare is not what the doctor ordered. More than half of physicians say they’ll vote for Mitt Romney come November 6th compared to just 36 percent for Obama, according to a recent survey by medical staffing firm Jackson and Cokey. In fact, 15 percent of survey respondents said they’ll be switching to the Republican camp this election, with most citing the Affordable Care Act as the reason.  The majority of the 3,660 doctors polled in the survey said they also are in favor of repealing and replacing Obama’s signature piece of legislation because it failed to address tort reform, an issue relating regulations surrounding malpractice lawsuits. It’s not just doctors that aren’t pleased with Obamacare, however. Other critics include the food service industry, which fears the law may adversely affect restaurants’ ability to maintain slim profit margins since it requires companies with more than 50 employees to provide affordable health insurance. In August, Papa John’s pizza CEO John Schnatter said that at least some of those extra costs would be passed on to the customer.  Christian-leaning companies such as Oklahoma-based Hobby Lobby aren’t pleased with the law either because it requires them to cover costs associated with contraception, including the morning after pill.

Insurers, Some States and Co-op Plans Moving Forward with Obamacare - More than half the states say they can't figure "it" out. But that does not appear to be the case with co-op plans in a number of states and with insurance companies. "It" is the PPACA (Patient Protection and Affordable Care Act of 2012 - aka Obamacare). As summarized in a GEI News story yesterday (03 October 2012), 26 states are not taking actions required by the law to implement Obamacare by October of next year. A common complaint from those states is that they "have not had their questions answered by Washington" or have received "inadequate guidance on what is required under the law." Follow up: Some states (24 in number), insurance companies and co-op plans do not appear to have the "insurmountable barriers" that the 26 states not moving forward have encountered. The 26 states that have not been able to take action on how to implement insurance exchanges are shown in gray on the following map from the NCSL (National Conference of State Legislatures), updated as of 02m October 2012: States that have elected not to create a state-based exchange will default to a federally-based exchange. That will apparently be the outcome for any of the 26 gray states that do not take action and establish their own exchange by October 2013.

Romney’s Sick Joke, by Paul Krugman - “No. 1,” declared Mitt Romney in Wednesday’s debate, “pre-existing conditions are covered under my plan.” No, they aren’t — as Mr. Romney’s own advisers conceded after the debate.  Was Mr. Romney lying? Well, either that or he was making what amounts to a sick joke. Either way, his attempt to deceive voters on this issue was the biggest of many misleading and/or dishonest claims he made over the course of that hour and a half.  So, about that sick joke: What Mr. Romney actually proposes is that Americans with pre-existing conditions who already have health coverage be allowed to keep that coverage even if they lose their job — as long as they keep paying the premiums. As it happens, this is already the law of the land. But it’s not what anyone in real life means by having a health plan that covers pre-existing conditions.

Study linking GM maize to cancer must be taken seriously by regulators - Professor Gilles-Eric Séralini, professor of molecular biology at Caen university in France, knows how to inflame the GM industry and its friends. For seven years he and his team have questioned the safety standards applied to varieties of GM maize and tried to re-analyse industry-funded studies presented to governments. The GM industry has traditionally reacted furiously and personally. Séralini has been widely insulted and smeared and last year, in some desperation, he sued Marc Fellous, president of the French Association of Plant Biotechnology, for defamation, and won. But last week, Seralini brought the whole scientific and corporate establishment crashing down on his head. In a peer-reviewed US journal, Food and Chemical Toxicology, he reported the results of a €3.2m study. Fed a diet of Monsanto's Roundup-tolerant GM maize NK603 for two years, or exposed to Roundup over the same period, rats developed higher levels of cancers and died earlier than controls. Séralini suggested that the results could be explained by the endocrine-disrupting effects of Roundup, and overexpression of the transgene in the GMO.This was scientific dynamite. It was the first time that maize containing these specific genes had been tested on rats over two years - nearly their full lifespan - as opposed to the 90-day trials demanded by regulators. Around a dozen long-term studies of different GM crops have failed to find similar effects. Séralini's study also looked at the toxicity of the Roundup herbicide when fed directly to rats.

US farmers using more pesticides on ‘superweeds’ -  U.S. farmers are using more hazardous pesticides to fight weeds and insects due largely to heavy adoption of genetically modified crop technologies that are sparking a rise of "superweeds" and hard-to-kill insects, according to a newly released study. Genetically engineered crops have led to a 404 million pounds increase in overall pesticide use by from the time they were introduced in 1996 through 2011, according to the report by Charles Benbrook, a research professor at the Center for Sustaining Agriculture and Natural Resources at Washington State University.Of that total, herbicide use increased over the 16-year period by 527 million pounds while insecticide use decreased by 123 million pounds.Benbrook's paper -- published in the peer-reviewed journal Environmental Sciences Europe over the weekend and announced on Monday -- undermines the value of both herbicide-tolerant crops and insect-protected crops, which were aimed at making it easier for farmers to kill weeds in their fields and protect crops from harmful pests, said Benbrook. But in recent years, more than two dozen weed species have become resistant to Roundup's chief ingredient glyphosate, causing farmers to use increasing amounts both of glyphosate and other weed-killing chemicals to try to control the so-called "superweeds." "Resistant weeds have become a major problem for many farmers reliant on GE crops, and are now driving up the volume of herbicide needed each year by about 25 percent," Benbrook said.

Get Ready for Rising Rice Prices - Analysts say the market for rice is poised for a price surge, with futures prices exceeding $20. Why are price gains likely to accelerate? The cash market — where rice is bought and sold physically rather than through futures contracts — already is close to the $20 price point in Brazil. Rough rice was selling for as much as $19 there earlier this month. Brazilian cash prices are at a huge premium to futures prices compared to historic norms, he says. Brazil is the No. 1 rice producer in the Western Hemisphere, which is largely segregated from the world market for the grain. In the Americas, the trade is in rough, or unprocessed, rice. In Asia, the other key rice region, the focus is on milled rice. Two factors are squeezing Brazilian supplies and pushing the cash market higher. As in the U.S., rice farmers are switching to other, more profitable crops such as soybeans. Also, there is a drought in Brazil, leading to fewer acres planted and, most likely, lower production—around 7% less than the previous crop cycle, according to Brazil’s Agroconsult.

World food prices near crisis levels - World food prices rose in September and are moving nearer to levels reached during the 2008 food crisis. The United Nations food agency reported on Thursday that the worst drought in more than 50 years in the United States had sent corn and soybean prices to record highs over the summer, and, coupled with drought in Russia and other Black Sea exporting countries, raised fears of a renewed crisis. The Food and Agriculture Organisation's (FAO) price index, which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, rose 1.4% in September, mainly due to higher dairy and meat prices. "It's highly unlikely we will see a normalisation of prices anytime soon," said FAO senior economist Abdolreza Abbassian. Parmjit Singh, head of the food and drink sector at London law company Eversheds, said higher prices would place further pressure on squeezed international food supply chains. "Manufacturers and producers will naturally want to pass on increased costs to their clients but they will meet with stiff resistance from retailers who are reluctant to increase checkout prices for increasingly value-conscious customers," Singh said. FAO's index is below a peak reached in February 2011, when high food prices helped drive the Arab spring uprisings in the Middle East and north Africa, but current levels are very close to those seen in 2008, which sparked riots in poor countries.

Global population is food for thought -- PICK a number and forecast global growth population by 2060. You know that by 2050 it will be nine billon. Exponentially that figure will increase to 10b by 2060, according to consultant Julian Cribb, author of The Coming Famine. Mr Cribb told delegates at last week's Global Agribusiness Conference the consequences of global population growth were dire considering the confluence of peak oil, peak water, peak fish, peak land and peak phosphorous. "Major lakes are vanishing, rivers are drying up and it is forecast we will have serious water shortages in the 2030s," he said. "Each year more than 75 million tonnes of topsoil is being lost and the world will run out of good topsoil in 50 years. "By 2050, 7.7b people will live in cities and the obvious question is who will feed them. "Peak oil was in 2006 yet by 2030 there will be 1.2 billion vehicles on the planet and oil will be expensive. "So what will fuel tractors?

Agricultural Area in Developed Countries - The above shows the fraction of land area devoted to agriculture for a selection of developed countries according to the UN's Food and Agriculture Organization.  The data run 1961-2009 (all available data).  The country sample is hand-picked - most of the current European crisis countries plus some of the more important economies in the OECD. My overall impressions are as follows:

  • Land devoted to agriculture tends to decline over time in developed countries.
  • This trend doesn't seem to be very sensitive to agricultural prices - for example the huge run-up in commodity prices in the 1970s didn't result in an increase in agricultural land usage, and the similar run-up in recent years hasn't either.
  • There's also no sign of a response to macroeconomic events - Sweden and Japan had financial crises in the early 1990s, and Spain and Greece have been in very severe crisis in recent years.  So far, these events have left little discernible trace in the data.
  • The 2002-2007 four percent increase in farm count in the US is associated with a small decline in the total area in agriculture, so presumably it must represent a splitting of existing farms, rather than colonization of unused land.

Ongoing fall drought threatens next year's crop yields - Iowa’s drought has worsened, spelling concerns for next year’s growing season. The weekly U.S. Drought Monitor map, released Thursday, shows that the epicenter of the drought has moved westward from Indiana and Illinois onto Iowa. The map showed that as of Tuesday, 75.3 percent of the state was in extreme drought, up from 65.8 percent a week ago. State climatologist Harry Hillaker noted that to be effective in replenishing soil moisture, rains need to fall by Dec. 1 and the usual freezing of Iowa’s soils.“After that, moisture generally just runs off the frozen ground,” Hillaker said. “The clock is ticking. We need some rain soon to build up the soil moisture.” The cool front that dropped temperatures into the low 50s in Iowa on Thursday failed to bring much moisture. That means the state’s drought will persist going into the fall season, which normally is crucial for replenishing soils dried by summer

Drought conditions worsen in some key Midwest farming states, hold steady for US as a whole - - The nation’s worst drought in decades is showing no sign of letting up in several key Midwest farming states, worrying farmers harvesting the summer’s withered corn crop in record time that their winter crops may also be at risk. Overall drought conditions in the lower 48 states held steady over the seven-day period ending Tuesday, with about one-fifth of the total land area in extreme or exceptional drought, the two worst classifications, according to the U.S. Drought Monitor’s weekly update of its drought map released Thursday.Conditions worsened, though, in Kansas and Iowa, the nation’s biggest corn producer, and nearly 98 percent of Nebraska was still deemed to be in one of the two worst categories. The unrelenting dryness won’t have much effect on the region’s corn and soybean crops, which are already being plucked from the fields. But it could hurt other crops, such as winter wheat. According to the map, which is put out by the National Drought Mitigation Center at the University of Nebraska in Lincoln, 75 percent of Iowa is enduring extreme or exceptional drought. That’s up roughly 10 percentage points from the previous week. Just over 93.25 percent of Kansas was in the same predicament, which was an increase of roughly 5 percentage points.

A Drought’s Toll on Farm Families - They have canceled vacations. Their children are forgoing out-of-state colleges for cheaper ones close to home. They are delaying doctor’s visits, selling off land handed down through generations and resisting luxuries like new smartphones. And then there is the stress — sleepless nights, grumpiness and, in one extreme case, seizures. Lost amid the withered crops, dehydrated cattle and depleted ponds that have come to symbolize the country’s most widespread drought in decades has been the toll on families whose livelihoods depend on farming. Although most are not in danger of losing their homes or going hungry, the drought is threatening the way of life in rural America. “You probably can’t print our mood,” said Dallis Basel, a sheep rancher in western South Dakota who sold off half of his herd because of the high feed prices caused by the drought. “It’s been kind of depressed. Like the wife says, she can’t drink enough to dull the pain of selling all the sheep.” Adding to the uncertainty has been Congress’s failure to pass a farm bill; the previous version expired on Sunday. Although crop farmers will still get their insurance payments, livestock producers are now without an equivalent safety net. While lawmakers are expected to pass a farm bill after the November election, that might be too late for livestock producers, several of whom said they were losing tens of thousands of dollars a week because they were paying more to feed their animals than they were getting when they sold them.

Epic ‘Dust Bowl Of 2012′ Expands Again - The latest weekly Drought Monitor update set another grim record. The brutal U.S. drought expanded to 65.45% of the contiguous U.S. — the highest ever in the Monitor’s 12-year history. The previous record was 64.8% — set just last week. In the third quarter alone, crop production dropped $12 billion “due to this summer’s severe heat and drought.”  The drop in farm inventories was so sharp in the last quarter that it wiped 0.2% off of U.S. GDP in the latest revision. In Texas, the drought has killed more than 300 million trees. Nearly 98% of Nebraska is in extreme to exceptional drought — 3 months ago, none of it was! Climate Central explains:The drought is the worst to strike the U.S. since the Dust Bowl era of the 1930s and lengthy droughts of the 1950s. It came on suddenly and largely without warning, and although the main trigger was most likely the pattern of water temperatures in the Pacific and Atlantic Oceans, the drought was exacerbated by extremely hot temperatures during the spring and summer.

On the Great Lakes, a Dry Summer Slows a Recovering Shipping Industry - Low water levels on the Mississippi River, which have snarled cargo traffic and completely halted hundreds of barges at a time, got most of the media attention during this year’s arid summer. But the weird weather is also having a severe impact on those making a living transporting goods in the Great Lakes region. Thanks to the Drought of 2012, the Great Lakes are approaching and may fall below the lowest levels ever recorded, back in the 1960s. Lake Michigan-Huron (often recorded together by hydrologists) is about two feet below its average level, and the rest of the Great Lakes are also several inches below normal, according to the U.S. Army Corps of Engineers. That may not seem like much, but those inches mean a lot for shippers navigating the lakes’ canals. Glen Nekvasil of the Lake Carriers’ Association, which represents U.S.-flag vessel operators on the Lakes, says that cargos are carrying 1,200 to 1,500 fewer tons than they did a year ago.

Drought sparks water war in Texas - CBS News: The amount of the continental U.S. in drought has fallen slightly over the past week, but the record dry conditions are still intense in the heartland. And in Texas, two-thirds of the state is in drought. It's meant tough choices when water is scarce. "We've just basically got a barren wasteland here because we didn't have water," said Ron Gertsen, whose family has been growing rice on their Texas land since 1910. But this is their worst year ever. "So you can drive out across this prairie here and see nothing green for miles in some cases," he said. "It's never, ever been that way."Gertsen and other central Gulf Coast rice farmers get much of their water supply from Lake Travis, a reservoir managed by the Lower Colorado River Authority. Last year, the drought caused lake levels to drop by more than half. So this year, for the first time, state officials cut off most farmers' water supply. Just five percent of the area's normal rice crop will be harvested this year. "The drought just highlighted a condition that was already coming to be," he said, and then added, "not enough water to go around for everybody to continue doing things in the way that they're used to." That's because Lake Travis also supplies drinking water for cities including Austin, and supports recreation around the lake, like Janet Caylor's marina. She points out last year, in the middle of the severe drought, nearly 60 percent of the water drained from the lake system went to the farmers. "They want things to remain as they always were," said Caylor. "That's not the way the world works." Her marina is losing business. Waterfront homes now sit hundreds of feet away from water.

The Energy-Water Nexus - The principal challenge of this century, in my view, will be adapting to a life without abundant, cheap fossil fuels. It has been the lifeblood of our society, and turns out to have some really fantastic qualities. The jury is still out as to whether we will develop suitable/affordable replacements. But additional challenges loom in parallel. Water is very likely to be one of them, which is especially pertinent in my region. For true believers in the universality of substitution, let me suggest two things. First, come to terms with the finite compactness of the periodic table. Second, try substituting delicious H2O with H2O2. It has an extra oxygen atom, and we all know that oxygen is a vital requisite for life, so our new product will be super-easy to market. Never-mind the hydrogen peroxide taste, and the death that will surely visit anyone foolish enough to adopt this substitution. Sometimes we’re just stuck without substitutes. Substitution silliness aside, water and energy are intimately related in what has been termed the Energy-Water Nexus (see for example the article by Michael Webber from this conference compilation; sorry about the paywall). We’ll explore aspects of this connection here, touching on pumping water, use of water for the production and extraction of energy, and desalination. As glaciers and snowpack melt and drought becomes more common in the face of climate change, our water practices will need to be modified, hitting energy right in the nexus.

Why is Brazil the new America? Hint: water. Drive around and take a good look at the worst drought in half a century. Remind yourself as you look at the desiccated fields that the US Department of Agriculture (USDA) predicted a record corn crop for 2012.   Meanwhile, this year’s corn crop in Brazil is up 27 percent year-over-year. Brazil’s farmers are growing rich as American farmers go broke. . It is a little understood that in much of America’s farm belt, water is in chronically scarce supply. In eight states, the Ogallala (or High Plains) fossil aquifer provides the irrigation required to prevent the return of John Steinbeck’s 1930s Dust Bowl. In other words, American agricultural output is supported by the hydrological equivalent of deficit spending. The Dust Bowl was not dampened by greater rainfall, but by the invention of more powerful pumps that could lift water from deep underground. The Ogallala is a wide but shallow aquifer that was formed in the last Ice Age and has been drained every year since the 1930s to a far greater degree than it can be recharged by natural rainfall. What does this have to do with Brazil? As I spell out in my new book, "Brazil is the New America," Brazil is the world’s superpower of water.

US farmers scramble to buy Brazil’s farmland (AlJazeera) Phil Corzine, a fourth-generation farmer from Illinois, is living the American dream, but it's happening on dusty soy farms in the interior of Brazil, rather than the cornfields of Iowa. Corzine, 53, owns or manages seven farms in Goias and Tocantins states in the agricultural heartland of Brazil. He started farming in Brazil in 2004, and now his company, South American Soy, has 100 foreign investors from the US, is worth about $6m, and has started to turn a profit the past two years. A productive, sought-after piece of farmland in the US sells between $12,000 and $15,000 an acre, Corzine said, while a comparable piece of land in Brazil costs between $500 and $1,500 per acre. "I can buy a lot more land down here with a lot less money," Corzine said. "For example, a 5,000-acre track of farm pasture with sufficient rainfall for soybeans is hard to find for sale in the US right now. And that is what I have down here in Brazil, and there is a lot more of it available here. So it's price and availability that drives what we are doing."

How organized crime groups are destroying the rain forests - The phrase “organized crime” typically conjures up images of drug trafficking or stolen-car rings. But it turns out that the illegal logging trade is just as lucrative — and far more destructive. Between 50 to 90 percent of forestry in tropical areas is now controlled by criminal groups, according to a new report (pdf) from the United Nations and Interpol. Across the globe, deforestation is a major contributor to climate change, responsible for one-fifth of humanity’s emissions. Farming and logging both play big roles. What makes this area so difficult to regulate, however, is that a great deal of logging simply takes place illegally — much of it in tropical areas such as the Amazon Basin, Central Africa, and Southeast Asia. The U.N. estimates that illicit logging is now worth between $30 billion to $100 billion, or up to 30 percent of the global wood trade.

World fish stocks declining faster than feared - Fish stocks across the world are declining faster than feared, with the smallest fisheries faring worst, a comprehensive study shows – but there is still time to turn the situation around. More than half of fisheries worldwide face shrinking stocks, with most of these in worse condition than previously thought, leading to yearly economic losses of $50bn. This more worrying picture emerged from the most wide-ranging and detailed analysis to date, led by scientists at the University of California Santa Barbara and published online by the journal Science. It applied stock patterns from the few hundred big fisheries for which abundant data are available to analyse thousands of fisheries which have never been formally assessed and about which much less is known. Prior studies produced skewed results by omitting these ‘data-poor’ or ‘unassessed’ fisheries – which account for 80 per cent of the global catch – and only focusing on the few hundred largest, ‘data-rich’ stocks. These earlier investigations tended to overestimate the global fish population since the most severe decline is found at smaller fisheries, where management is generally less scrupulous. The latest study showed that data-poor fisheries operate with an average of 64 per cent of the fish required to yield the largest sustainable catch, much less than data-rich fisheries where the average fish population was 94 per cent of this optimum

The Great Barrier Reef has lost half of its coral in the last 27 years - The Great Barrier Reef has lost half its coral cover in the last 27 years. The loss was due to storm damage (48%), crown of thorns starfish (42%), and bleaching (10%) according to a new study published in the Proceedings of the National Academy of Sciences today by researchers from the Australian Institute of Marine Science (AIMS) in Townsville.  "We can't stop the storms but, perhaps we can stop the starfish. If we can, then the Reef will have more opportunity to adapt to the challenges of rising sea temperatures and ocean acidification, says John Gunn, CEO of AIMS.  "The study shows the Reef has lost more than half its coral cover in 27 years. If the trend continued coral cover could halve again by 2022. Interestingly, the pattern of decline varies among regions. In the northern Great Barrier Reef coral cover has remained relatively stable, whereas in the southern regions we see the most dramatic loss of coral, particularly over the last decade when storms have devastated many reefs. "

Half of Great Barrier Reef Lost in Past 3 Decades - Australia's Great Barrier Reef is a glittering gem — the world's largest coral reef ecosystem — chock-full of diverse marine life. But new research shows it is also in steep decline, with half of the reef vanishing in the past 27 years. Katharina Fabricius, a coral reef ecologist at the Australian Institute of Marine Science and study co-author, told LiveScience that she has been diving and working on the reef since 1988 — and has watched the decline. "I hear of the changes anecdotally, but this is the first long-term look at the overall status of the reef. There are still a lot of fish, and you can see giant clams, but not the same color and diversity as in the past." To get their data, Fabricius and her colleagues surveyed 214 different reefs around the Great Barrier Reef, compiling information from 2,258 surveys to determine the rate of decline between 1985 and 2012. They estimated the coral cover, or the amount of the seafloor covered with living coral. That overall 50-percent decline, they estimate, is a yearly loss of about 3.4 percent of the reef.

Ocean acidification emerges as new climate threat - In the past five years, the fact that human-generated carbon emissions are making the ocean more acidic has become an urgent cause of concern to the fishing industry and scientists. The ocean absorbs about 30 percent of the carbon dioxide we put in the air through fossil fuel burning, and this triggers a chemical reaction that produces hydrogen, thereby lowering the water’s pH. The sea today is 30 percent more acidic than pre-industrial levels, which is creating corrosive water that is washing over America’s coasts. At the current rate of global worldwide carbon emissions, the ocean’s acidity could double by 2100. What impact it is having on marine life, how this might vary by geography and species, and what can be done about it if humans do not cut their carbon output significantly are some of the difficult questions scientists and policymakers are seeking to answer. The decline in pH will likely disrupt the food web in many ways. It is making it harder for some animals, such as tiny pteropods and corals, to form their shells out of calcium carbonate, while other creatures whose blood chemistry is altered become disoriented and lose their ability to evade predators.

The Ultimate Weapon of Mass Destruction: “Owning the Weather” for Military Use - Rarely acknowledged in the debate on global climate change, the world’s weather can now be modified as part of a new generation of sophisticated electromagnetic weapons. Both the US and Russia have developed capabilities to manipulate the climate for military use. Environmental modification techniques have been applied by the US military for more than half a century. US mathematician John von Neumann, in liaison with the US Department of Defense, started his research on weather modification in the late 1940s at the height of the Cold War and foresaw ‘forms of climatic warfare as yet unimagined’. During the Vietnam war, cloud-seeding techniques were used, starting in 1967 under Project Popeye, the objective of which was to prolong the monsoon season and block enemy supply routes along the Ho Chi Minh Trail. The US military has developed advanced capabilities that enable it selectively to alter weather patterns. The technology, which is being perfected under the High-frequency Active Auroral Research Program (HAARP), is an appendage of the Strategic Defense Initiative – ‘Star Wars’. From a military standpoint, HAARP is a weapon of mass destruction, operating from the outer atmosphere and capable of destabilising agricultural and ecological systems around the world.

PIOMAS September 2012 (minimum) We already knew a few weeks ago that the PIOMAS sea ice volume record had been broken, but with the latest data release by the Polar Science Center at the University of Washington we now know the minimum sea ice volume for 2012, as calculated by the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS). Here's the graph from the PSC: Yearly minimum sea ice volume for the 2005-2012 period (in km3):

  • 2005: 9159
  • 2006: 8993
  • 2007: 6458
  • 2008: 7072
  • 2009: 6893
  • 2010: 4428
  • 2011: 4017
  • 2012: 3263

So this year's melting season has gone 1165 and 754 km3 below the 2010 and 2011 minimums. That's, how shall I put it? A lot! More than at the time of the last update. Almost double the difference between the 2010 and 2011 minimums. Half the 2007 minimum. Here is Wipneus' version for which he calculated the "expected" 2012 values (dotted lines), based on the same date values of 1979-2011 and an exponential trend. The minimum ended up slightly above the expected values based on statistics. Here's Larry Hamilton's widely used bar graph:

An Illustrated Guide To 2012 Record Arctic Sea Ice Melt - We already knew a few weeks ago that the PIOMAS sea ice volume record had been broken, but with the latest data release by the Polar Science Center at the University of Washington we now know the minimum sea ice volume for 2012, as calculated by the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS). Here’s the graph from the PSC: So this year’s melting season has gone 1165 and 754 km3 below the 2010 and 2011 minimums. That’s, how shall I put it? A lot! More than at the time of the last update. Almost double the difference between the 2010 and 2011 minimums. Half the 2007 minimum. Here is Wipneus‘ version for which he calculated the “expected” 2012 values (dotted lines), based on the same date values of 1979-2011 and an exponential trend. A caveat from Wipneus: “Note that the statistical error bars are quite large.”

Running the Numbers on Antarctic Sea Ice - The agency that tracks polar ice reported Tuesday that winter coverage of sea ice in Antarctica has set a 33-year high. The ice hit its maximum extent on Sept. 26, at the peak of Antarctic winter, when it covered 7.5 million square miles of the Southern Ocean. That’s a half-percent increase over the previous record, set in 2006. The National Snow and Ice Data Center uses a five-day moving average to track such matters, and always waits a few days before announcing a minimum or maximum in sea ice at either pole. That is to make sure the low or high point for the year has really been reached, given that sea ice can change abruptly in response to winds and other factors. The five-day averaging also helps smooth out small errors in the satellite tracking data. This longstanding practice has been explained publicly many times, but that has not stopped climate-change contrarians from asserting that the snow and ice center had been trying to hide this year’s record in Antarctica by supposedly failing to make any announcement. Skeptic blogs have been humming for days about the likelihood of a record, and claiming that the growth in Antarctica offsets the disappearance of sea ice in the Arctic. This is a claim the climate contrarians tend to make almost every time Arctic sea ice sets a record or near-record low. In reality, the trends in Antarctic sea ice are pretty small compared to what’s happening in the Arctic. Finally, to compare the trends at the poles with your own eyes, go to this NASA Web site and click the radio buttons to move through time. The video embedded at the top of the post gives a sense of the change in Antarctic winter maximums through time. And the image below shows how much the summer sea ice in the Arctic has declined.

Dock Your Boat At Fenway Park? Why Policymakers And Insurers Need To Take Sea Level Rise Seriously - Rising seas will bring big changes to Boston, and sooner than you might think. Climate change is expected to raise average global sea levels between two and six feet by century’s end, and a recent US Geological Survey study suggests that the waters around the Hub and other East Coast cities are rising even faster than the global average. To put that in perspective, if seas rise just 2.5 feet, a strong Nor’easter could put much of Back Bay, East Boston, South Boston, Chelsea and Cambridge under water. Hundreds of billions of dollars of real estate and vital infrastructure, from sanitation, sewer and water systems to highways, tunnels and Logan Airport, are at risk. Faced with these dire predictions, some progress has been made to boost Boston’s resiliency. East Boston salt marshes are being restored for better flood control. Waterfront structures are being elevated, including the new Spaulding Rehab Center in Charlestown, which was raised two feet to prevent flood damage. Like the New England Aquarium, it also installed electrical systems on its roof. Developers investing in the city’s waterfront Innovation District are being required to take similar steps.

Miami Beach gets rising seas sticker shock - The city of Miami Beach is vetting a $200 million storm water concept that is one of the first in the nation to respond to sea level rise resulting from global warming. As part of the process, global storm water engineering firm CDM Smith is going to explain its methodology at the Sea Level Rise Public Meeting & Discussion at 10 a.m. on Aug. 17. The CDM Smith plan was created to address storm water-related issues in Miami Beach over the next 20 years. It lays out various strategies that include New Orleans-style pumps and sea walls to combat higher water levels and increased flooding. The city’s finance committee was reviewing the plan, which could be funded by bonds and backed by an increase in water and sewer bills. Interim City Manager Kathie G. Brooks told the Business Journal she is still evaluating the plan. “To the best of our knowledge, this is one of the first storm water master plans in the state of Florida that considers potential impacts of sea level rise,” she said in an email response to questions. “The draft plan presents projections of sea level rise from various sources; however, sea level rise studies are still ongoing, and we will need to continue to evaluate any future studies.”

Climate change may force evacuation of vunerable island states within a decade -  One of the world's foremost climate scientists has warned that vulnerable island states may need to consider evacuating their populations within a decade due to a much faster than anticipated melting of the world's ice sheets. Michael Mann, director of the Earth System Science Center at Pennsylvania State University, said the latest evidence shows that models have underestimated the speed at which the Greenland and west Antarctic ice sheets will start to shrink. Mann, who was part of the IPCC team awarded the Nobel peace prize in 2007, said it had been expected that island nations would have several decades to adapt to rising sea levels, but that evacuation may now be their only option. His warning comes just weeks after the National Snow and Ice Data Centre in Boulder, Colorado disclosed that sea ice in the Arctic shrank a dramatic 18% this year on the previous record set in 2007 to a record low of 3.41m sq km. "We know Arctic sea ice is declining faster than the models predict," Mann told the Guardian at the SXSW Eco conference in Austin, Texas. "When you look at the major Greenland and the west Antarctic ice sheets, which are critical from the standpoint of sea level rise, once they begin to melt we really start to see sea level rises accelerate. "The models have typically predicted that will not happen for decades but the measurements that are coming in tell us it is already happening so once again we are decades ahead of schedule.

So Far, So Good: The Global Carbon Sink in 2011 -  While humans emit excess carbon into the atmosphere every year, not all of it stays there.  Some is absorbed by the ocean, and some by the land and biosphere such that the amount of carbon dioxide in the atmosphere goes up by less than humans emit: There are plausible reasons to worry about this carbon sink becoming less effective in the future:

  • a warming Arctic will melt peat in permafrost which could oxidize and release carbon.
  • increasing drought will cause more forest fires which release carbon from forests into the atmosphere.
  • humans clear more forests which could cause soils to release carbon.

So far, although these things are happening to varying degrees, they have not resulted in an overall reduction in the sink.  To track this, I like to keep tabs on the fraction of carbon emissions reabsorbed each year.  This is based on the Mauna Loa carbon data as well as BP's estimates of carbon emissions.  My detailed methodology was described here.  Since BP came out with 2011 numbers a couple of months back, I decided to update my graph, which came out as follows:

Drop in Emissions Not a Trend Set in Stone, Study Says - A report released today by Climate Central asks a provocative question: Can United States carbon emissions keep falling? This comes with the year 2050 in mind, by which time climate scientists have said there needs to be a major reduction in greenhouse gas emissions if the worst impacts of climate change are to be avoided. The report by Eric D. Larson from the Energy Systems Analysis Group at Princeton shows that American carbon emissions have dropped by nearly 9 percent since 2005. The downward trend comes largely as a result of the recession, increased use of natural gas and solar and wind power, and advancements in energy-saving technologies. But the study suggests that the downward trend won’t continue. Once the economy rebounds, the recession’s restrictive impact on carbon emissions will probably fall away, the report suggests. A stronger economy means greater demand for energy – and when 80 percent of the country’s energy comes from fossil fuels, carbon emissions will probably spike again. Then add in a rising population, which will draw yet more energy. The author says optimistic projections for the future based on the current 9 percent decrease in carbon emissions forget to take these factors into account.

Energy transition: We need to do it fast and we're way behind - No doubt you've heard people speak of an energy transition from a fossil fuel-based society to one based on renewable energy--energy which by its very nature cannot run out. Here's the short answer to why we need do it fast: climate change and fossil fuel depletion. And, here's the short answer to why we're way behind: History suggests that it can take up to 50 years to replace an existing energy infrastructure, and we don't have that long. Perhaps the most important thing that people don't realize about building a renewable energy infrastructure is that most of the energy for building it will have to come from fossil fuels. Currently, 84 percent of all the energy consumed worldwide is produced using fossil fuels--oil, natural gas and coal. Fossil fuels are therefore providing the lion's share of power to the factories that make solar cells, wind turbines, geothermal equipment, hydroelectric generators, wave energy converters, and underwater tidal energy turbines. Right now we are producing at or close to the maximum amount of energy we've ever produced from fossil fuels. But the emerging plateau in world oil production, concerns about the sustainability of coal production, and questionable claims about natural gas supplies are warnings that fossil fuels may not remain plentiful long enough to underwrite an uneven and loitering transition to a renewable energy society.

UK's Largest Coal Power Plant to be Converted to a Biomass Plant - The U.K.'s largest coal-fired plant will become western Europe's largest clean-energy producer with the announcement of Drax Group Plc's $1 billion effort to transition from burning coal to burning wood. “We see a key part of our future as converting from essentially a coal station to a biomass station,” Chief Executive Officer Dorothy Thompson told Bloomberg. “It will take Drax from being the largest carbon emitter by site in the U.K. to being, probably, one of the largest renewable plants in the world.” By June, one of the site's six units will start burning wood pellets with two others to follow shortly after. Through 2017, Drax will spend up to 700 million pounds ($1.13 billion) upgrading its boilers in England—an effort that will also require ordering millions of tons of biomass from around the world and building facilities to store the fuel.

Analysis: Threatened duties push China solar firms offshore (Reuters) - Chinese solar companies are being forced to speed up plans to move a big chunk of their manufacturing offshore as Europe looks increasingly likely to join the United States in implementing duties on imports of Chinese-made solar equipment. The timing could not be worse for the Chinese firms, whose balance sheets are already being strained by nearly two years of weak prices and slowing demand for solar energy products. The risk now is that they will lose much of the cost advantage that has been the basis for their dominance of global solar industry, analysts and investors say. At stake in Europe is a market that was worth $27 billion to the companies in 2011 -- about a third of their production and about 7 percent of all Chinese exports to the European Union. The European Commission is investigating whether Chinese solar companies are selling below cost, or "dumping", in the world's biggest solar market. European companies have complained that their Chinese rivals benefit unfairly from subsidies. China's state-run banks have extended billions of dollars of credit to solar companies. And even on the day the EC subsidy complaint was announced last week the China Securities Journal reported that China Development Bank Corp CHDB.UL would prioritize loans to 12 top solar companies

China’s Solyndra Problem - The NYTimes reports that China has a much bigger Solyndra problem than the United States ever did: …China’s strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war. The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices. China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of solar power has fallen, it still remains triple the price of coal-generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy.

Nuclear plant repairs could hit $3.4 billion - Repairs to a crippled nuclear plant that was a key factor in the Duke Energy-Progress Energy merger tempest could cost up to $3.4 billion, more than double previous estimates, Duke said Monday. The July 2 merger brought Progress's Crystal River plant in Florida into Duke's nuclear fleet. The plant has been shuttered since 2009, when a project to replace parts inside its thick reactor containment structure led to separating concrete.

EU nuclear reactors need 10-25 billion euros safety spend (Reuters) - Europe's nuclear reactors need investment of 10-25 billion euros, a draft European Commission report said, following a safety review designed to ensure a disaster like Japan's Fukushima cannot happen. The Commission is expected to finalize the stress test report by Thursday and it will be debated by EU ministers later this month. After that, the Commission intends in 2013 to propose new laws, including on insurance and liability to "improve the situation of potential victims in the event of a nuclear accident", the draft seen by Reuters said. Of the 134 EU nuclear reactors grouped across 68 sites, 111 have more than 100,000 inhabitants living within 30 km (18 miles). Safety regimes vary greatly and the amount that needs to be spent to improve them is estimated at 10-25 billion euros ($13-32 billion) across all the reactors, the draft says. France's nuclear watchdog has already said the country, which relies on nuclear power for about 75 percent of its electricity, needs to invest billions of euros. The lesson of Fukushima was that two natural disasters could strike at the same time and knock out the electrical supply system of a plant completely, so it could not be cooled down.

Europe's nuclear reactors need $30b repairs, upgrades: report: "Practically all" of the more than 130 active nuclear reactors in the European Union need safety improvements, repairs or upgrades, at a cost up to 25 billion euros ($30 billion), according to a draft copy of a European Commission report that is scheduled to be released Thursday. The scale of the problems detailed in the report, as well as the size of the expected repair bill, may amplify public concerns about the safety of nuclear power on the part of Europeans, who are already deeply divided over the technology and whose governments still zealously guard control over energy policy at the national level. The European Commission undertook the safety review of its nuclear plants after the March 2011 earthquake and tsunami in Japan, which led to the disaster at the Fukushima Daiichi plant. Part of the assessment was the performance of "stress tests," which are meant to assess how a nuclear facility would fare in various kinds of failures and crises. National experts conducted the stress tests in conjunction with the commission's advisory group on nuclear safety. The tests identified the need for "hundreds of technical upgrade measures," the draft report says.

Top Nuclear Experts: Technology Doesn’t Yet Exist to Clean Up Fukushima - World-renowned physicist Michio Kaku said recently: It will take years to invent a new generation of robots able to withstand the radiation. AP reports: Hiroshi Tasaka, a nuclear engineer and professor at Tama University who advised the prime minister after the disaster …  said the government target of removing all the rods by the end of next year may prove too optimistic because of many unknowns, the need to develop new technology and the risk of aftershocks. The world leader in decommissioning nuclear reactors, and one of the main contractors hired to clean up Fukushima – EnergySolutions – made a similar point in May: Concerning the extraction of fuel debris [at Fukushima], which is considered the most challenging process, “There is no technology which may be directly applied,” said [top EnergySolutions executive] Morant. A top American government nuclear expert – William D. Magwood – told the U.S. Senate Committee on Environment and Public Works: It is very difficult to overstate how difficult the work is going to be at that site. There will need to be new technologies and new methodologies created to be able to enable them to clean the site up and some of these technologies don’t exist yet, so there’s a long way to go with that …. There’s a long, long way to go.

AMERICAN Government Forces Re-Start of Japanese Nuclear Reactors  - Archaic nuclear reactor designs such as those used at Fukushima – built by American company General Electric – were chosen because they were good for making nuclear bombs.   The U.S. secretly helped Japan develop its nuclear weapons program starting in the the 1980s.  Therefore, the U.S. played a large role in Japan’s development of nuclear energy, albeit indirectly. After the Fukushima disaster – in an effort to protect the American nuclear industry – the U.S. has joined Japan in raising “acceptable” radiation levels.  U.S. Secretary of State Hillary Clinton also signed a pact with her counterpart in Japan agreeing that the U.S. will continue buying seafood from Japan, despite the fact that the FDA is refusing to test seafood for radiation in any meaningful fashion.  So U.S. actions are helping to protect a pro-nuclear policy in Japan. Indeed, mainstream Japanese newspaper Nikkei reports that it was President Obama and Secretary of State Clinton who have pressured the Japanese to re-start that country’s nuclear program after the Japanese government vowed to end all nuclear power in the wake of the Fukushima disaster. Ex-SKF reports: Japanese media has been saying for some time that it was the US government who pressured the Noda administration to drop the “zero nuke by 2030″ (which morphed into “zero nuke sometime in 2030s) from its new nuclear and environmental policy decision. Tokyo Shinbun reported it a while ago, and now Nikkei Shinbun just reported it with more details. There is no news reported in the US on the matter. The difference of the Nikkei Shinbun’s article is that it names names: President Obama and Secretary of State Hillary Clinton.

With New Delays, a Growing Sense That Gov. Andrew Cuomo Will Not Approve Gas Drilling -  A few months after Gov. Andrew M. Cuomo was poised to approve hydraulic fracturing in several struggling New York counties, his administration is reversing course and starting the regulatory process over, garnering praise from environmental groups and stirring anger among industry executives and upstate landowners.Ten days ago, after nearly four years of review by state regulators, the governor bowed to entreaties from environmentalists to conduct another study, this one an examination of potential impacts on public health. Neither the governor nor other state officials have given any indication of how long the study might take. Then on Friday, state environmental officials said they would restart the regulatory rule-making process, requiring them to repeat a number of formal steps, including holding a public hearing, and almost certainly pushing a decision into next year. The move also means that after already receiving nearly 80,000 public comments, the state Department of Environmental Conservation will be soliciting more input from New Yorkers about hydrofracking, or fracking, as the drilling process for natural gas is known. The developments have created a sense in Albany that Mr. Cuomo is consigning fracking to oblivion. The governor has been influenced by the unshakable opposition from a corps of environmentalists and celebrity activists who are concerned about the safety of the water supply. The opponents include a number of people close to the governor, including Robert F. Kennedy Jr., a longtime environmental activist in New York whose sister is the governor’s ex-wife.

Analysis: Is There a Seachange on Fracking in New York? – Chesapeake Energy’s business model is being questioned… by, among others, its own stockholders, some of whom have brought suit.  Fortune has run a number of articles on this, and there are some damning quotes directly from Aubrey McClendon that seem to prove that flipping leases has been a more important component of the plan than selling natural gas.  There is a wider understanding, also, of the “drilling treadmill” that Deborah Rogers discusses in Energy Policy Forum. This line of evidence is very well substantiated by the behavior of the gas drillers in the face of record low prices.  A Saudi Prince, who does not need the money, judiciously stops production when the price tanks.  Continued development in the face of gas prices in the cellar suggests that the confidence in the gas asset in the ground may not be as high as it once was…. and/or that debt service is driving drilling new wells, which then require debt service… This squares very nicely with the study from the USGS, indicating that gas in the ground has been massively over-estimated, meaning that in-ground natural gas assets (which the SEC indulgently allows gas companies to estimate for themselves with no oversight) are vastly over-valued.  And, that squares with evidence that the sounder gas development companies may be re-evaluating the value of their assets.  The recent decision by Anschutz Energy to allow their gas leases in Dryden, NY, to expire, and assign a few of those leases to Norse Energy, a Norwegian company with holdings concentrated in New York, indicates this.  Norse will take over Anschutz’s place in appealing the Dryden home rule case. Anschutz is owned by one of the richest men in America.  If he is folding his hand in Dryden, one could assume that there are no high hopes for prevailing on appeal; or, at least, that the potential HVHF wells in Town of Dryden, which sits only half in the widest version of the Marcellus fairway, will not be worth what it would cost to drill them, even if higher courts reverse the home rule decision.

New Report Aims to Hit Fracking Right in the Pocketbook - It’s nothing new to hear environmental groups raise concerns over the health dangers of hydraulic fracturing – that’s all in a days work. But a new report from Environment Texas questions one aspect of fracking that rarely comes under scrutiny: its supposed economic benefit. “The Costs of Fracking” collects data from academic and government studies to paint a picture of an industry that may be a bigger drain on state tax money than previously thought. The report looks at things like damage to roads, increased cost for water infrastructure projects, and drilling’s impact on property values in the Dallas-Fort Worth area. “Truck traffic to bring water to a single fracking site does as much damage to roads as 3.5 million cars,” Environment Texas director Luke Metzger tells StateImpact Texas. “So as a result the state of Texas has been forced to approve $40 million to repair roads here in the Dallas-Fort Worth and Barnett Shale region.”  Other costs enumerated in the report includes:

  • $400 million requested in the state’s water plan to support the mining sector over the next 50 years.
  • A three to 14 percent decrease in property values for homes in the Barnett Shale region located near wells.
  • An estimated $270,000 per day in health care costs, due to pollution from fracking operations in the Barnett Shale region.

Unusual Dallas Earthquakes Linked to Fracking, Expert Says - Three unusual earthquakes that shook a suburb west of Dallas over the weekend appear to be connected to the past disposal of wastewater from local hydraulic fracturing operations, a geophysicist who has studied earthquakes in the region says. Preliminary data from the U.S. Geological Survey (USGS) show the first quake, a magnitude 3.4, hit at 11:05 p.m. CDT on Saturday a few miles southeast of the Dallas-Fort Worth (DFW) International Airport. It was followed 4 minutes later by a 3.1-magnitude aftershock that originated nearby. A third, magnitude-2.1 quake trailed Saturday's rumbles by just under 24 hours, touching off at 10:41 p.m. CDT on Sunday from an epicenter a couple miles east of the first, according to the USGS. Before a series of small quakes on Halloween 2008, the Dallas area had never recorded a magnitude-3 earthquake, said Cliff Frohlich, associate director and senior research scientist at the University of Texas at Austin's Institute for Geophysics. USGS data show that, since then, it has felt at least one quake at or above a magnitude 3 every year except 2010. Frohlich said he doesn't think it's a coincidence that an intensification in seismic activity in the Dallas area came the year after a pocket of ground just south of (and thousands of feet below) the DFW airport began to be inundated with wastewater from hydraulic fracturing.

Cabot’s Methodology Links Tainted Water Wells to Gas Fracking - Methane in two Pennsylvania water wells has a chemical fingerprint that links it to natural gas produced by hydraulic fracturing, evidence that such drilling can pollute drinking water. The data, collected by the U.S. Environmental Protection Agency, are significant because the composition of the gas --its isotopic signature -- falls into a range Cabot Oil & Gas Corp. (COG) had identified as that of the Marcellus Shale, which it tapped through hydraulic fracturing, or fracking. “The EPA data falls squarely in the Marcellus space” established by Cabot’s scientists,. That evidence backs up his findings linking gas drilling and water problems in the town of Dimock, applying the very methodology that Cabot established to try to debunk it, he said. Cabot maintains that its operations haven’t contaminated homeowners’ wells, and its scientists say further analysis shows this gas isn’t from the Marcellus, a mile-deep formation running from New York to the southwestern tip of Virginia. Industry groups say there hasn’t been proof of fracking contaminating water anywhere, and dispute research that suggests pumping millions of gallons of water, sand and chemicals underground to break apart rock and free trapped gas endangers the environment.

Penn State Faculty Snub of Fracking Study Ends Research - A natural-gas driller’s group has canceled a Pennsylvania State University study of hydraulic fracturing after some faculty members balked at the project that had drawn criticism for being slanted toward industry. The Marcellus Shale Coalition, which paid more than $146,000 for three previous studies, ended this year’s report after work had started, said Kathryn Klaber, coalition president. The earlier studies were co-written by former Penn State professor Tim Considine, an economist now at the University of Wyoming who has produced research on economic and energy issues under contract to trade associations. The first study, in 2009, initially failed to disclose its industry funding and was used by lawmakers to kill a state tax on gas drillers. It was characterized as advocacy for producers by groups such as the nonprofit Pennsylvania Budget and Policy Center in Harrisburg.

Judge Rejects Binghamton's Fracking Ban -- A court has struck down a moratorium on natural gas drilling in Binghamton, N.Y., yet both sides are claiming victory. Binghamton, in Broome County, is among dozens of municipalities that have enacted bans and moratoriums blocking high-volume hydraulic fracturing, or fracking, a  gas extraction process that is under consideration by Gov. Andrew M. Cuomo’s administration. Two previous court decisions have upheld the rights of municipalities to determine whether to allow fracking within their borders and use their zoning laws to ban it. But in an order signed on Tuesday, a state Supreme Court justice, Ferris D. Lebous, said that a moratorium adopted in December in Binghamton “fails to meet the criteria for a properly enacted moratorium” and so was invalid. In passing the ordinance, the city did not invoke zoning laws but rather used its police powers to protect the health and welfare of its citizens. (Some fear that the drilling could contaminate drinking water or lead to other environmental depredations.) Justice Lebous ruled that the city had failed to show that the moratorium was needed because the state has not decided whether to allow fracking.

How Shale Gas Can Benefit Us and the Environment - A suite of technologies has brought vast supplies of previously unrecoverable shale gas within reach of humans, dramatically expanding natural gas reserves in the U.S. and around the world. Horizontal drilling and hydraulic fracturing have produced a fuel that can at once promote a cooler planet and an expanded economy, essentially eliminating the tradeoff between climate change mitigation and the pursuit of other public projects and, perhaps, economic growth. But unlike the iPhone, the productivity gain embodied in shale gas technologies doesn’t attract a cult following and its benefits get obscured. Among some of the most ardent advocates of climate policy, the growth of shale gas extraction is lamented because, in addition to being 30-50% cleaner than coal (even accounting for escaped methane), it is also (gasp) cheaper than coal. And cheaper than wind. And cheaper than solar. And that means shale gas not only postpones a day when renewables are competitive with fossil fuels, but also increases carbon emissions concomitant with the economic growth spurred by cheap energy. That’s why Mother Jones’s Kevin Drum recently wrote that the story of shale gas “gets a lot grimmer as you dig deeper.” According to the International Energy Agency, the carbon emissions from expanded production are sufficient to wipe away nearly all the carbon emissions savings from substituting shale gas for coal. But consultancies estimate shale gas alone drives incremental GDP growth through 2020 and annually contributes between $100 billion and $230 billion to the U.S. economy by 2035.

Natural gas in storage approaches historical levels - US natural gas prices have stabilized just under $3.50/MMBTU (for Henry Hub delivery NYMEX futures) - about 20% above the August lows. Production continues to be considerably higher than in 2011 but growth in production has finally slowed. Rig count in the Gulf and elsewhere is lower. With the hot summer we've had, some of the excess in storage (from the unusually warm winter) has been burned off. The supply in storage is now close to historical norms, though still in the high end of the range. Another warm winter like the last one however could do some damage to this industry, as it remains vulnerable to oversupply risks (particularly with dry shale gas production still going strong - chart below).

Natural gas for transportation - Although there are many areas in which the American economic performance has been disappointing, one task we've been exceptionally good at is finding and producing more natural gas. In fact, America is currently just burning some of this potentially useful fuel as a waste product associated with oil production. On a dollar-per-BTU basis, natural gas and crude oil sold at a similar price 10 years ago. But today, energy from oil costs 6 times as much as natural gas. Any move to replace oil with natural gas would pay a big economic dividend.  One obvious strategy is to heat more homes with natural gas instead of heating oil. U.S. consumption of heating oil averaged 900,000 barrels/day in 2005 but has been about 400,000 b/d this year. New pipelines such as those recently approved serving New York City will help make further progress in this direction. The biggest uses of oil are for transportation, where there are three main options for using natural gas. For heavy-duty trucks, it's possible to use fuel tanks that keep the gas cold enough (-260o F) to be stored in liquid form. In 2010, nine million heavy-duty vehicles on U.S. roads consumed 2.2 mb/d of petroleum. Of these, 40,000 (or 0.4%) were using natural gas. Clean Energy Fuels Corp. is planning to complete 150 new LNG fueling stations by the end of next year to connect major trucking corridors across the country. Waste Management Inc. plans for 80% of the trucks it purchases during the next five years to be fueled by natural gas.

Exxon, BP Estimate Alaska LNG Export Project at $65 Billion - Exxon Mobil Corp. ConocoPhillips, BP and TransCanada said a project to liquefy and export natural gas from Alaska will cost as much as $65 billion and take more than 10 years to construct. The venture includes an 800-mile (1,300-kilometer) pipeline from the North Slope to Alaska’s southern coast as well as a liquefaction plant and storage tanks, the companies said in an Oct. 1 letter received by Alaskan Governor Sean Parnell’s office yesterday. The governor had asked the companies to “harden the numbers” on the project by the end of September, Parnell said in a statement. As oil output from the North Slope has dropped, energy companies and Alaska’s government are seeking ways to sell the area’s gas, which may generate as much as $20 billion in annual revenue as demand from Asia increases. The North Slope may hold 35 trillion cubic feet of reserves and more than 200 trillion cubic feet of undiscovered, technically recoverable gas, making it one of the largest sources in the world, according to the governor. The pipeline and liquefaction facility would be “a mega- project of unprecedented scale and challenge,” executives of Exxon Mobil, ConocoPhillips (COP), BP and TransCanada said in the letter to Parnell. “The opportunity is challenged by its cost, scale, long project lead times and reliance upon independent oil and gas operations with declining production.”

Proposed Alaska Natural Gas Pipeline Could Cost More Than $65 Billion: A liquefied natural gas project in Alaska could cost more than $65 billion and would represent a mega-project of "unprecedented scale and challenge," officials behind the project told Gov. Sean Parnell. In a letter to Parnell released by the governor's office late Wednesday, officials with TransCanada Corp. and the North Slope's three major players said good progress has been made in pursuing a project. But they said "significant environmental, regulatory, engineering and commercial work remains to reach upcoming decisions to bring North Slope gas to market." They estimated the cost of a pipeline project could range from $45 billion to more than $65 billion, involve up to 1.7 million tons of steel and employ up to 15,000 people during peak construction and more than 1,000 in Alaska permanently. The project concept description lists capacity for a large-diameter line at 3 billion to 3.5 billion cubic feet of natural gas a day. It does not specify the terminus for any line, only that it would run from the North Slope about 800 miles to south-central Alaska. "We will continue to keep you advised of our progress and stand committed to work with the state to responsibly develop its considerable resources," the officials said in their letter.

South Africa Decides to go Forward with Hydraulic Fracturing - South Africa’s Department of Mineral Resources in April 2011 placed a moratorium on hydraulic fracturing. Two weeks ago the DMR lifted the moratorium, specifically on fracking for shale natural gas and last week released the detailed version of the report it commissioned on hydraulic fracturing. The DMR report, “Investigation of hydraulic fracturing in the Karoo Basin of South Africa” noted,, "The study comprises reports written by specialists in their various fields as well as the results of a study tour to the United States which included field trips to Pennsylvania (Marcellus Shale) and Texas (Eagle Ford Shale) and visits to the Environmental Protection Agency and the Railroad Commission of Texas, both being US regulatory organizations directly involved with shale gas exploitation.” The report further continues, “The primary conclusion reached in this report is that South Africa’s regulatory framework must be robust enough to ensure that, if hydraulic fracturing associated with shale gas exploration and exploitation were approved, any resultant negative impacts would be mitigated. This will require a comprehensive review of the adequacy of the existing framework in order to identify any shortfalls or omissions and to ensure that it is sufficiently detailed and specific. The use of existing regulations from mature regulatory environments to inform the development of South African regulations in this matter is recommended.”

Yet another oil sheen spotted in Gulf of Mexico - The National Oceanic and Atmospheric Administration puts it drily: This hotline is being started for new reports of sheen of unknown origin in and near lease block Mississippi Canyon 252. This incident is likely related to reports in August 2011 … Although the source of these sheens may be the wrecked BP Macondo Well, this relationship has not been established at this time. If the mystery sheen is from the Deepwater Horizon disaster, does that mean that this thing is just going to keep leaking forever? That, like Charlie, we’ll never be rid of it, despite its noxious odors and massive societal damage? Environmental lawyer Stuart Smith — who, we’ll note, is involved in legal action against BP — says: yeah, maybe. Experts had predicted such oil leaks would likely take place after the Deepwater Horizon rig was capped. That’s because the blocked oil continues to seek a path to the surface, and that could create fissures or cracks in the sea floor for the hydrocarbons to escape. This situation is exactly what we’d warned about in 2010 — that the rig disaster, caused by BP’s reckless and foolish actions, would continue to wreak havoc on the Gulf environment for years to come.

NEW 4-Mile Long Oil Slick Near BP's Gulf Oil Well -  CNN reports: An oil sheen about four miles long has appeared in the Gulf of Mexico near the site of the worst oil spill in U.S. history, a Coast Guard spokesman said Thursday. It was not immediately clear where the oil is coming from, said Petty Officer 3rd Class Ryan Tippets. [Although previous oil has been matched as a "dead ringer" to the BP well.] Coast Guardsmen went to the location after seeing the oil on a satellite image, Tippets said. The response team collected samples and sent them to the Coast Guard Marine Safety Lab in Connecticut for testing. The sheen is near the spot where, on April 20, 2010, BP’s Deepwater Horizon drilling rig exploded over the Macondo well, killing 11 workers and spewing oil that spread across a huge portion of the Gulf. (And see this.) As we’ve noted for years, BP’s Macondo oil well is still leaking … and will leak for years.

Ambitious plans for oil sands would create lakes from waste - It could one day be Alberta’s very own Lake District, a recreational haven complete with campgrounds, boating, fishing – even swimming. Or it could turn into a landscape of ponds sullied by toxins and oil, a malingering presence left by an industrial experiment gone wrong. It may take a century to find out what is left around Fort McMurray. Because the lakes, 30 of them, will be built by Canada’s oil sands industry. When the companies mining heavy crude from northeastern Alberta finish their work, they intend to pump water into old mine pits, some with toxic effluent at their bottoms, before leaving the area to biological processes to restore it to health. But the coming lake district also highlights the scale of the ecological gamble under way in the province. The 30 bodies of water will be what are known as end pit lakes, left behind because it’s less costly to fill a mine with water than dirt. Their size and scale are laid out in a new document produced by Alberta’s industry-funded Cumulative Environmental Management Association.

Enbridge Pipeline Spill In Michigan Requires More Cleanup, EPA Says — The U.S. Environmental Protection Agency on Wednesday told Enbridge Inc. that the pipeline company's massive 2010 oil spill in the Kalamazoo River system requires more cleanup work. The Calgary, Alberta-based company owns a 30-inch pipeline from Griffith, Ind., to Sarnia, Ontario. It burst near Marshall, Mich., in July 2010, spewing oil into a Kalamazoo River tributary. EPA says crews removed 1.1 million gallons of oil and 200,000 cubic yards of oil-contaminated sediment and debris. The agency says it informed Enbridge more work is need upstream from the Ceresco and Battle Creek dams and Morrow Lake. It says Enbridge has 10 days to request a conference about the proposed order. Company spokesman Jason Manshum says the EPA's notice isn't a formal directive and says Enbridge is reviewing it.

Why I Remain Irritated at the Sierra Club - One of Maine’s issues as a state is that we have an extractive economy that’s doesn’t support us as well as it used to, But the sort of people who play golf together and fly over the state in executive jets seem to see two main “opportunities”: One is our oodles of empty space,* hence landfills and importing of out-of-state trash.** The other is our geographical position between Quebec and New Brunswick. Location, location, location!Which brings me to the “East-West Corridor.” Here’s a map. The blue strip shows the Corridor’s route, kinda sorta. (The local oligarch shilling the plan, Cianbro construction czar Peter Vigue, has the real map, but he keeps it locked up in his office.)  Now, a word about the business model behind the Corridor. The Corridor is essentially a land deal. Key point: The Corridor would be privately owned. That means that the (unnamed, as yet unknown) owners of the corridor would be able to run whatever they want along the strip:*** Could be a highway, could be power lines, could be pipelines for tar sands.**** The sales pitch is that the Corridor would enable Maine to “compete in the global” economy, which is exactly what a lot of Mainers — and especially the Mainers who moved north into all that empty space and bought farms that have turned out to be right in the Corridor’s footprint — do not want to do. (And why should we?)  Now, Vigue et al. are marketing the Corridor as a “highway,” and that’s clever, because people think, just as I thought, “Super! We can drive to Montréal!” So let’s consider the Corridor under that aspect for one moment, assuming that the descriptions used by proponents are not deceptive.

Cracks in the Pipeline System: Whistleblower Sounds Alarm over Flawed Weld Inspections (series) Acclaimed energy issues journalist Andrew Nikiforuk keys off the revelations of former TransCanada engineer Evan Vokes to reveal the risks built into pipeline projects in harsh climates, and dangers posed by inadequate inspections of critical welds.

Pipeline Violations Poorly Enforced: Engineer: A pipeline materials engineer, who worked for TransCanada Pipeline for five years, says some of the nation's major pipeline companies are breaking the rules on pipeline safety and that National Energy Board is not adequately enforcing them. Evan Vokes, a 46-year-old Calgary-based engineer and former TransCanada employee, has filed complaints with the National Energy Board, the Association of Professional Engineers and Geoscientists of Alberta (APEGA is a self-regulating professional group that represents engineers) and the Prime Minister's Office documenting repeated violations of standard safety regulations and codes.  The alleged offences include repeated violations of several sections of the nation's Onshore Pipeline Regulations (OPR-99) on issues as varied as welding inspections, the safety of materials and conflict of interest.  In addition Vokes also charges that engineers do not always make project and scheduling decisions during pipeline construction (a common lament) and that "unskilled practice by professional engineers in a hurry" is a routine problem throughout the multi-billion dollar industry

Utica Shale Needs ‘Nodding Donkeys’ to Unleash Bonanza - Energy prospectors in Ohio’s Utica Shale will need to install pump jacks or other specialized well equipment to coax crude to the surface, increasing costs to harvest an estimated 5.5 billion barrels of oil. In the oil-soaked section of the Utica formation beneath central Ohio, underground pressure is insufficient to force crude to the surface in commercial quantities, said Jim Pritt, a member of the Utica drilling team for EnerVest Ltd., the largest oil and gas producer in the state. Drillers haven’t encountered similar low-pressure problems on the eastern side of the state, where output is mostly natural gas and gas liquids such as propane, he said.Energy companies including Chesapeake Energy Corp, Devon Energy and Range Resources began drilling wells in the Utica region about two years ago in a bid to replicate the shale-oil bonanzas of North Dakota’s Bakken formation and the Eagle Ford Shale of Texas. Pump jacks, known as “nodding donkeys,” are an 87-year-old technology normally used to prolong the life of oilfields nearing depletion

Egypt Struggles To Pay Oil Bill - A prime example of the difficult financial and economic circumstances that the new Egyptian government faces is the billions of dollars it owes foreign oil companies. The Oil Ministry is in the midst of negotiating new payment deals with the companies, which are among the leading investors in the country, oil executives say. Industry executives estimate that the government is $6 billion to $7 billion behind in payments to the companies for oil and natural gas they have produced and delivered to the state-owned Egypt General Petroleum Corp. The companies are supposed to be paid within two months, but the government has been delaying payments to conserve cash. “It’s a burden largely shared across all the oil companies,” said Nick Dancer, country manager for Egypt at Dana Petroleum of Britain. The company received 78 percent of overdue debts by April, a company financial statement said. But it is still discussing “different forms of repayment schedules” with the E.G.P.C.

Iraq sets bar lower on oil output and looks to attract foreign firms - Iraq is looking to reduce its ambitious crude production targets, and is working to improve the terms offered to international oil companies (IOCs) bidding for contracts in the country. Baghdad was contemplating a target of 9.5 million barrels per day (bpd) of crude by 2020, said a senior government figure, in a significant departure from the previously held ambition of pumping 12 million bpd within the next five years. The government was considering options ranging from 6 million to 12 million bpd by 2020, laid out in a strategy paper drawn up by the consultancy Booz & Co, said Thamir Ghadhban, the top energy adviser to the Iraqi prime minister. "If we go to a very high level, there will be redundant capacity, which is very expensive for Iraq," said Mr Ghadhban. "If you go too low, this is not enough for Iraq because of the need for revenues. That's why we choose around 9 million bpd." The previous target of pumping 12 million bpd by 2017 has proved unrealistic as infrastructure and logistical bottlenecks hamper the development of the sector.

Why an Islamic Revolution in Saudi Arabia Is a Surefire Way to Send Oil to $300 a Barrel - There is little that would rock the oil world more than a revolution in Saudi Arabia. But with a coming leadership crisis, it is becoming all too likely. Saudi is facing major economic challenges as dramatic increases in social spending and domestic fuel consumption eat through the kingdom's all-important oil revenues. Saudi Arabia is smack in the middle of the Middle East, an ever-tumultuous region currently rocking and rolling more than usual as the Arab Spring challenges longstanding autocratic assumptions, while war-torn Syria and defiant Iran tip the delicate Sunni-Shia religious balance in the world's most important oil region. While the House of Saud might present itself as a stable, strong, and cohesive royal family, in truth the king and his successors are growing old and incapacitated in a throne room full of competing contenders. Meanwhile, the only other organized social group in the country – the Islamists – are waiting just outside the door. To see $300/bbl oil, or to watch the news as Saudi troops attack Tehran, or to see a stranglehold on US oil imports, watch what a failed succession battle in the House of Saud that ends up destroying the whole family and ushering in an Islamist age in Saudi Arabia would do to the price of oil. It could happen sooner than you think.

Hyperinflation in Iran - Steve Hanke estimates that Iran’s monthly inflation rate has reached 70%.: When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar. The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.

Protests over Currency Bring Crackdown in Iran - Protests over the plunging Iranian currency erupted on Wednesday around Tehran's main bazaar, the country's commercial hub, as escalating economic woes become a rising political challenge. The demonstrations marked the first time in three decades that the conservative merchant classes, a backbone of the Islamic Revolution in 1979, have publicly turned against the government. Tens of thousands of people, among them merchants, workers, shopkeepers and opposition activists, packed the large squares and streets around the bazaar drawing in security forces to disperse the crowds and make arrests. Protesters chanted antigovernment slogans and called for President Mahmoud Ahmadinejad to step down, in the largest public antigovernment gathering since February 2010, when the regime crushed a rising opposition movement. On Wednesday, most of the shops in the bazaar were closed to honor a strike called by several unions, witnesses said, after Iran's currency lost more than a third of its value against the dollar since the beginning of last week.

Iran currency crisis sparks Tehran street clashes - Hundreds of demonstrators in the Iranian capital clashed with riot police on Wednesday, during protests against the crisis over the country's currency. Police used batons and teargas to try to disperse the crowds. The day after President Mahmoud Ahmadinejad appealed to the market to restore calm, the Grand Bazaar – the heartbeat of Tehran's economy – went on strike, with various businesses shutting down and owners gathering in scattered groups chanting anti-government slogans in reaction to the plummeting value of the rial, which has hit an all-time low this week. "Mahmoud [Ahmadinejad] the traitor … leave politics," shouted some protesters, according to witnesses who spoke to the Guardian. Other slogans were "Leave Syria alone, instead think of us," said opposition website Iran's alleged financial and military support for the regime of Bashar al-Assad appears to have infuriated protesters in the wake of the country's worst financial crisis since the Iran-Iraq war in the 1980s. Angry protesters and foreign exchange dealers were demonstrating near the bazaar in the south of the capital, where many exchange bureaux are located.

Counterparties: Hyperinflation is so hot right now (in Iran) The official Iranian rial-to-US dollar exchange rate has been surprisingly steady over the past several months. That’s somewhat odd, because in 2010, the US and EU imposed tough new sanctions against Iran. But in recent weeks, says the Cato Institute’s Steve Hanke, “hyperinflation has arrived in Iran”: Using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation. Terrifyingly, the black-market (i.e., realistic) value of the rial recently dropped 60% in eight days. Tougher sanctions in part explain the sudden drop. The US, for its part, seems increasingly unwilling to allow Western financial institutions to pal around with the Iranian regime. Any further reduction in the access Iran’s central bank has to global financial markets would put further pressure on the rial. Reuters’ Yeganeh Torbati explains how the regime’s attempt to dampen the effects of the currency crisis may have exacerbated the rial’s sudden collapse. As you might expect, the Iranian population is not taking these developments well: Al Jazeera reports that police have clashed with currency protesters in Tehran. Further sanctions from the EU appear imminent. And that could cause a jittery Iranian regime to pull out the biggest bargaining chip it currently has by closing the Straight of Hormuz. More broadly, Jay Newton-Small rounds up the three most likely outcomes — regime change, a push for greater nuclear capabilities or economic collapse — none of which are particularly heartening.

Ironically, Sanctions Success Strengthens Iran’s Strait of Hormuz Trump Card -  Yves Smith -- Military strategists appear to have missed a foreseeable outcome in their efforts to pressure Iran. As the temperatures are rising in the Mideast, as reader chatter about Turkey’s involvement in Syria attests, a Financial Times article describes how the success of economic sanctions against Iran have strengthened its ability to make credible threats to restrict oil shipments. Market participants have long discounted the idea that Iran would restrict the flow of oil through the Strait of Hormuz, a comparatively narrow channel though which 35% of the world’s oil supplies pass. Threatening cargo ships would also interfere with Iran’s own oil shipments, far and away its biggest source of foreign exchange, and critical food imports. But that dynamic has now changed. As the Financial Times notes: Sanctions imposed over Iran’s nuclear programme have grown tighter, and the effects are being felt across the country. Fears are rising that Iran’s leadership, facing increasing domestic unrest over spiralling inflation, has less and less to lose through brinkmanship in the channel now that its own oil income is being squeezed to a trickle. For years, oil traders were inured to rhetoric from Iran that it stood poised to shock world energy markets by blocking the seaway in retaliation for sanctions or an Israeli attack. They were sceptical it would engineer a crisis in a region so critical to its own economic survival. But Iran’s plummeting oil exports mean that a cornered Tehran could see a confrontation in the strait as less an act of self-immolation and more a calculated gamble.

Is War with Iran Inevitable? – Yves Smith - In light of the reader interest in the post yesterday on the impact of sanctions on Iran’s strategic options, this Real News Network interview provides a useful, if sobering, follow on (hat tip charles sereno). Lawrence Wilkerson describes which constituencies in the US, Iran, and Israel regard a conflict in their best interest, and how the evolving drama reminds him of the march towards war in Iraq. But is the focus on Iran misplaced? Reader Antifa pointed out yesterday that a much bigger shoe may drop before the escalating conflict with Iran reaches a critical stage: Along the entire Iranian shoreline of the Persian Gulf leading up to the Strait are the formidable Atlas Mountains, a desert warren of smuggler’s routes, caves, tunnels and tens of thousands of places to stage ambushes of all sorts. Truly a godforsaken, dried out wasteland of steep slopes, snakes, scorpions and hidey-holes. No army in the world could put enough people in there to police it, to keep it from being a perpetual hornet’s nest of missile-launching Iranian patriots forever and ever, Amen. No military vessel of any kind could survive 24 hours in the Gulf or threaten Iran from there in any way. Lloyd’s of London would not insure a single oil tanker going there, so none would. Please note that only one Iranian patriot need sink only one tanker, with one missile, to bring all shipping to a complete halt, compliments of Lloyd’s. Nobody ships without insurance, and insurance would be unobtainable.The real risk of war and instability in the Middle East lies not with gay crooners nor sanctions nor imaginary Iranian nukes nor Israel’s psychotic ambitions for Lebensraum.  It lies in the imminent collapse of the Saudi monarchy due to political decrepitude and mortal age. When the Kingdom falls in the next few years, it will be impossible to stop the popular will of the Saudi people for an Islamic state. Nor can American or other Western troops set foot there to forcibly establish a friendly regime. That would be an unforgivable blasphemy upon the land of Mecca. So we won’t be invited to the party, as in Libya.

China September official factory PMI ticks up; growth seen slow (Reuters) - China's economy offered more evidence of a seventh straight quarter of slowing growth on Monday, with an official survey of factory managers remaining in contractionary territory for a second successive month despite improving from August's low. China's official factory purchasing managers' index rose to 49.8 in September from 49.2 in August, the National Bureau of Statistics said on Monday. August had marked the lowest reading since November 2011, as the world's second-biggest economy struggles against cooling exports, factory output and fixed asset investment. "The data continues to reinforce the hard landing that we have predicted for China, because this is the second consecutive month of a sub-50 reading," said Prakash Sakpal of ING in Singapore, which forecasts Chinese economic growth will be close to 7 percent in both the third and fourth quarters of this year. "September PMI readings are normally fairly strong and we don't see that this month is that much better than last month." A sub-index for new orders crept back towards the 50-mark that separates expansion from contraction, hitting 49.8, its highest point since May, while the output sub-index also strengthened to 51.3.

China’s Manufacturing Shrinks for 11th Month, HSBC PMI Shows - Bloomberg: China’s manufacturing contracted for an 11th straight month, a private survey found, increasing pressure on the government to bolster growth in the world’s second-largest economy. The purchasing managers’ index from HSBC Holdings Plc (HSBA) and Markit Economics had a final reading of 47.9 for September, compared with 47.6 in August and a preliminary level of 47.8 released Sept. 20. New export orders declined in September at the fastest pace in 42 months and purchasing activity in manufacturing fell for a fifth consecutive month. The data add to challenges for Chinese leaders who are preparing for a once-a-decade handover of power that begins in November and also trying to balance the priorities of growth with avoiding a resurgence in home prices. Speculation that authorities will take steps to counter a deepening slowdown spurred a 4.1 percent surge in the benchmark Shanghai Composite Index in the week’s final two trading days. “The failure of both external and internal demand is weighing heavily on Chinese manufacturing,”

China New Export New Orders Decline At Fastest Pace in 42 Months; China's Precarious Rebalancing Act - HSBC China Manufacturing PMI™ shows Output falls at fastest pace since March. Key points:

  • New export orders fall at fastest rate in 42 months
  • Output and input prices continue to fall
  • Purchasing activity declines amid weak demand and lower production requirements

Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand, while lower workloads were linked to a fall in backlogs of work. After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 47.9 in September, up slightly from 47.6 in August, and signalling an eleventh successive month-on-month deterioration in Chinese manufacturing sector operating conditions. However, the latest data signalled the rate of deterioration eased marginally.

China Manufacturing Disappoints Expansion Expectation, Contracts For Second Month -  Following HSBC's PMI data, China's official Manufacturing PMI just printed well below economists' expectations and is now signaling contraction for the second month in a row. Critically the expectation was for a return to expansion at 50.1 but the data came at 49.8 - still marginally higher MoM. Most sub-indices improved modestly from August but of most interest was the fifth month-in-a-row that the employment index dropped. For all the iron-ore-recovery believers, the Inventories of Raw Materials index also jumped by its most in three months as Input Prices also surged for the second month in a row. So contraction confirmed, a CCP in 'leadership' turmoil, and a PBOC stymied by inflationary concerns and the need to push through structural reform.

China's economy: Pettis + Sumner v FE | The Economist - MICHAEL PETTIS and Scott Sumner disagree about China. But they both agree that a recent Free Exchange column about China's investment spending is bunkum. To be honest, I'm having my doubts about the column too.Mr Pettis, a finance professor at Beida's school of management, thinks China's investment-led growth model is impossible to sustain and yet hard to replace. It cannot go on. Yet without it, China's high-speed growth cannot go on either. As a consequence, he argues, China's growth this decade will "barely break 3%". Bet on it. Mr Sumner, on the other hand, is more relaxed about China's heavy capital spending. China, he points out, needs to build a lot more of almost everything, even if it doesn't always build everything in the right order. He invokes a deep theorist--the only Westerner to understand China--to buttress his case. Much of China's investment, he concludes, is a prelude and complement to consumption.  Isn't all investment a prelude to consumption? It should be. But Mr Pettis thinks China's investment is mostly a prelude to further investment. The Chinese dig fresh iron-ore mines to supply new steel mills, which serve the grand designs of property developers, who sell their flats to speculators. The fruit of this long chain of investment is supposed to be "housing services" in this example. But that is not what property speculators are buying. If China's capital spending appears profitable, it is only because each stage of investment creates artificial demand for the products of the previous stage.

The Myth of Chinese Efficiency - One of the most persistent – and persistently bewildering – conversations I’m forced to endure with international businessmen (and especially Americans) is about their view on the marvels of Chinese efficiency. They paint China as a wonderland of quick transport, quick decision making, and quick-witted government officials. If only the U.S. operated like China, the argument goes, all of America’s problems could get solved. My response to this is: Live here for a while. I can imagine pampered visitors thinking China is something it is not. If you fly into the nifty airports in Beijing or Shanghai, get whisked by a waiting driver to your snazzy hotel, have a few meetings, and then get escorted out again, China might appear to be a sparkling vision of modernity. But spend any time here, or try to really do anything, and the notion that China is an efficient place is rudely exposed as a myth.

The end of the Great Migration: China's workers return home - It’s not exactly a welcome home party, but it’ll do. Thousands of workers mill about inside a building resembling an airplane hangar outside the city of Chengdu, capital of Sichuan province. They scan local job listings on a red electronic board the size of a jumbotron. Nearly all the people here are locals who recently returned home from factory jobs on China’s coast. Zhang Xianjun just returned from a factory in Guangzhou, where he assembled plastic parts. He left home ten years ago, joining a quarter of a billion other Chinese in the largest human migration the world has known. But times have changed. These days, factories are migrating. Companies are relocating manufacturing from China’s coast to inland provinces like Sichuan and Henan, where the labor came from in the first place. Zhang can now choose between making iPads at Foxconn or microprocessors at Intel. Both companies are hiring here. After years of focusing on its coast, China is now investing in its interior. Chengdu, for example, enjoyed fifteen percent GDP growth last year. Ben Schwall is a factory consultant in the former boomtown of Dongguan. He says all of this began in 2009, after the financial crisis in the U.S. Americans stopped buying things, and millions of Chinese factory workers were suddenly unemployed. They returned home and realized home wasn’t so bad anymore. "Cost of living was a lot cheaper," says Schwall, "You can live at home. Mom cooks good. you’re not locked in a dorm room with six people. You can perhaps sleep with your wife, you can see your children. Hey! Being at home was not so bad."

Analysis: China slides faster into pensions black hole (Reuters) - Eighty-year-old Chinese farmer Guo Shuhe receives a state pension equivalent to just $9 a month, not enough to buy a month worth of groceries, but enough it seems, to risk punching a gaping hole in government finances. Guo, whose palms are thick and rough from a life spent hoeing fields in southwest China, is one of over 150 million people covered by a rapidly expanding rural retirement scheme which is accelerating the nation's slide into a pension crisis. Guo, though, is fortunate because he also has the financial support of six children. But for younger and future generations of retirees, China's traditional family safety net is disappearing, replaced by state-backed pension schemes tailored for a graying society. Policy makers and economists have long been worried about the financial burden of China's expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years. The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion in the next 20 years from $2.6 trillion in 2010, towering over China's $3 trillion onshore savings, the biggest hoard of domestic savings in the world. Time is not on China's side. Its fast-maturing

China slowdown hits Asian growth forecast - Slowing growth in China and India has hit prospects across the rest of Asia and led the Asian Development Bank to make the biggest cut in its regional economic growth forecast since 2008, according to its chief economist. The bank cut this year’s forecast for Asian gross domestic product growth by almost a full percentage point to 6.1 per cent, down from the 6.9 per cent predicted when it last issued a 2012 outlook in April this year. Changyong Rhee, the ADB’s chief economist, said that China and India could not just blame external factors such as the crisis in the eurozone and slower economies in other big import markets for their own slowdown. “In the PRC, the investment slowdown and the end of the real estate boom are big factors, and that is healthy,” he said. “In India, it is the failure to push through promised reforms that is harming growth.” While China attracts more global attention, it is India that is seeing the far more drastic deceleration, according to the ADB, which slashed its forecast for the southern-Asian nation by 1.4 percentage points to 5.6 per cent.

China To Challenge US Dollar Reserve Currency Status - Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status. China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing.   In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem". China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment. China’s goal is to decrease transactions costs for Chinese importers and exporters. Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee. "The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."

China Banks Pull Out Of World Bank, IMF Events - Several big Chinese banks say they've canceled participation in the high-profile annual meeting of the World Bank and International Monetary Fund--to be held in Tokyo next week--as well as in the constellation of events taking place alongside. Some of the banks say they've also pulled out of another big financial-industry conference scheduled to take place in the western Japanese city of Osaka at the end of the month. Most of the banks haven't given a reason for their last-minute no-shows. But the withdrawals come amid an escalating tit-for-tat between China and Japan, which recently nationalized a set of islands in the East China Sea that are also claimed by Beijing. China has shown its displeasure by canceling some diplomatic events and sending patrol boats into what Japan considers its territorial waters--with one group going through Tuesday. Some Japanese companies have reported falling demand for their goods in China and unusually strict inspections as well as processing delays at Chinese ports. "Quite frankly, it's Japan-China relations,"

Tokyo has no plan to extend currency swap deal with Seoul: media (Reuters) - Japan has decided not to extend a currency swap deal with South Korea after it expires at the end of this month unless Seoul seeks an extension, Japanese media reported on Wednesday. The decision comes as Tokyo's ties with Seoul frayed badly after President Lee Myung-bak visited a set of islands in August claimed by both countries and located about midway between them, known as Takeshima in Japan and Dokdo in Korea. The government will make a final decision later this month although South Korea has not asked for an extension so far, the Nikkei business daily reported, citing a Japanese official. The two countries expanded their currency swap arrangements over five-fold to $70 billion in October 2011, citing the need for pre-emptive arrangements amid global economic uncertainty. Expiration means that the total swap arrangements would be reduced to $13 billion as before from November.

Japan says too early to decide on fiscal stimulus — Japan's new finance minister said on Tuesday he would be concentrating on passing a key debt-financing bill for now and will make a decision on further stimulus for the flagging economy at a later date. Officials have warned Japan's government could grind to a halt if parliament does not pass legislation allowing it to borrow more money. But Prime Minister Yoshihiko Noda's political opponents are threatening to hold up bills until they have a timetable for a general election. "It is important to look carefully at the condition of the economy, but it is too early to decide if any new fiscal stimulus is required," Finance Minister Koriki Jojima said on his first full day in the job. Jojima restated the administration's position that there was a danger of government shutdown if a debt-financing bill for this year's budget is not enacted, because the country will effectively run out of money.

World Bank signals Asian growth forecast downgrade - The World Bank has signalled it may lower its economic forecasts for Asia next week as Europe's protracted sovereign-debt crisis, a faltering recovery in the United States and slowing Chinese growth crimp the region's prospects. "In line with other people we are also looking at a downgrade of the forecast," Mr Bert Hofman, the Washington-based lender's Chief Economist for the East Asia and Pacific region, said in an interview in Singapore yesterday. The bank will publish a review of the region's developing economies on Oct 8. In May, it said that growth in developing East Asia, which excludes Japan, will probably ease to 7.6 per cent this year from 8.2 per cent last year. Last November, the forecast for this year had been 7.8 per cent. "We continue to see the headwinds from Europe and, to some extent, the United States, where the recovery is still not as buoyant as one would like,"

World-Wide Factory Activity, by Country - interactive table - Manufacturing in much of the world remained in contractionary territory in September, as concerns about a crisis in Europe and a Chinese slowdown continued. The U.S. was one of the bright spots, as the Institute for Supply Management‘s purchasing managers’ index increased to 51.5 from 49.6 in August, indicating that the factory sector is expanding. Reading below 50 indicate contraction. Subindexes for employment and new orders offered signs of hope, both posting readings about 50. Meanwhile, according to an official measure released earlier China continued to be in contractionary territory. Europe continues to struggle, with the euro zone still shrinking, though at a slower pace than August. Individual members France, Germany, Greece, Italy and Spain were all contracting.

Global PMIs shuffle on - September was a better month for global manufacturing, though hardly rosy. The J.P.Morgan global PMI rose from 48.1 to 48.9: The downturn in the global manufacturing sector continued in September, following further contractions in both output and new orders. The JPMorgan Global Manufacturing PMI™ – a composite index produced by JPMorgan and Markit in association with ISM and IFPSM – posted 48.9, up slightly from August’s 38-month low of 48.1, but below the neutral 50.0 mark for the fourth month running. The average reading for the global manufacturing PMI through Q3 2012 as a whole is 48.5, below Q2′s 50.4 and the weakest outcome since Q2 2009. Production and new orders each declined for the fourth successive month in September, although rates of contraction eased for both variables. New export orders also fell and for the fifth straight month. The outlook for production in the coming months also remained muted. Although the cyclically-sensitive new orders to inventory ratio ticked higher, it stayed at a broadly neutral level. The bright spot overnight was the US ISM,which bounced nicely into expansion in defiance of recent dour industrial reports:“The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August’s reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction.

Global Slowdown, Surging Unemployment Create Major Challenge to Consensus Policy - Politicians and central bankers around the world are struggling to find solutions for what appears to be a coordinated economic slowdown after sharp falls in manufacturing data threatened the pace of recovery in the world's most important markets and helped push the jobless rate in Europe to an all-time high. Data from China, Europe and the United Kingdom have all indicated marked contractions for the month of September, with slowdowns also reported in Norway and Switzerland. The figures will make grim reading for policy makers around the world as they grapple with a sagging global economy that remains mired in the debts Europe's government finances and the legacy of bank rescues from the 2008 financial crisis. Even more troubling for Europe, however, is the persistent rise in joblessness around the single currency area, which comes just as EU leaders frame the final debates for the region's fiscal pact and hundreds of thousands of citizens march in protest over government spending cuts and rising unemployment

World Bank’s Basu: Global Economy Faces ‘Difficult Phase’ --Kaushik Basu, the World Bank’s new chief economist, once proposed measuring a nation’s economic progress by tracking gains in the bottom fifth of its population. He’ll have the opportunity to do that in dozens of countries in his new role. He takes his post at the Washington-based development institution as the global economy faces what he calls a “difficult phase” that could run for years as Europe’s troubles spread. Basu, who served as the Indian government’s chief economic adviser since December 2009, joined the bank on Monday. He is on leave from Cornell University, though he is still teaching a fall course for Ph.D. students with the help of his Cornell colleagues. In his first interview in his new role, Basu talked with The Wall Street Journal about his background and the state of the global economy. Excerpts:

U.S. "fiscal cliff" a risk to global growth, Europe to tell G7- - Europe will tell the United States, Japan and Canada next week that it is acting to resolve its sovereign debt crisis, but that U.S. fiscal policy and slowing growth in Japan and China also pose risks to the global economy. Finance ministers of Germany, France, Italy and Britain will meet those from the other major developed economies in the Group of Seven at a dinner in Tokyo on October 11. "Developments in the euro area are not the only source of risks for the global economy," says a document with the main European policy messages prepared for the G7. "Risks emanate also from fiscal uncertainty in the U.S., the decelerating recovery in Japan and slowing growth ... in several emerging market economies, especially in China," it said. Euro zone states in the G7 have long been under pressure from the rest of the world to deal decisively with the debt crisis that has so far ensnared Greece, Ireland, Portugal and Spain and undermined investor confidence globally.

Currency-War Fears Are Overblown, Bergsten Says - With officials from Latin America to Asia now attacking the U.S. Federal Reserve for driving up their exchange rates, it’s tempting to believe the Fed’s third round of “quantitative easing” has thrust the world into what some are calling a “currency war.” But for at least one seasoned observer of international financial conflict, there’s a lot more hot air than substance in all these bellicose statements. Fred Bergsten, a former Treasury assistant secretary for international affairs who heads the Peterson Institute for International Economics in Washington, believes the recent rebalancing in the global economy will keep the tensions down. That would separate the global impact of QE3 from that which occurred during “QE2″ two years ago, when Brazilian Finance Minister Guido Mantega first inserted his now notorious “currency war” phrase into public debate. “The magnitude of the [economic] imbalances has come down a lot and I think that at least for the moment reduces to some extent the anxiety” surrounding currency levels, Mr. Bergsten said. He noted that the U.S. trade deficit and China’s trade surplus — the twin elements of the “global imbalances” problem — have both shrunk since the global recession of 2009, which reduces the incentive for the two countries to aggressively spar with each other in foreign exchange. As a one-time critic of China’s intervention in exchange rates, Bergsten is now more conciliatory, noting that Beijing has let its currency rise “a fair amount.”

Banks Group Notes Risk of Global Recession Next Year - There is a “non-negligible risk that the global economy will enter another recession in 2013,” the Institute of International Finance said Monday. The IIF, an association of more than 400 of the world’s largest private banks and other financial firms, said a recession isn’t their baseline forecast. But the warning underscores a message in the IIF’s economic report that policy makers must act quickly to address budget and financial problems in Europe and the U.S. to avoid a return to a worldwide contraction. One of the IIF’s most immediate concerns is the reluctance of Spain to ask for a euro-zone bailout that would open the door to European Central Bank intervention in the country’s sovereign-debt markets. Madrid’s resistance raises the real risk of a renewed intensification of the crisis

Randy Wray: The World’s Worst Central Banker - OK, I know you think this is yet another critical column on Chairman Ben Bernanke. Nay, I just returned from a conference held by the Central Bank of Argentina—“Central Banks, Financial Systems and Economic Development” held in Buenos Aires on October 1st and 2nd. Yours truly gave a talk on Modern Money—and the powerpoint will appear below. In attendance were what appeared to be about 200 central bankers from across the globe, plus a smattering of reps from international financial institutions like the IMF and as well a few from academia. Well, here’s the deal. The head of the Argentine Central Bank—Mercedes Marco del Pont–has been awarded the distinction as “the world’s worst central banker”. By whom, you might ask? Well, by Wall Street’s sycophantic press. Wall Street hates Mercedes. The woman, not the car. Why? Well, for one thing she’s a woman. Wall Street hates female heads of central banks (take a look at the list of the top ten worst—3 out of 10 are female; then take a look at the 10 best, of which all but one are males.) But that’s not anywhere near the most important reason. Ms. Marco del Pont kicked off the conference with a rousing talk, defending her central bank’s recent move away from a single mandate (inflation target) to pursuit of multiple mandates: financial stability, employment creation, and economic development with social equity. Boy does Wall Street hate that.  Stability? Where’s the profit in stability? Employment creation?—Wall Street is a job destroyer. Economic development? Nay, Wall Street wants de-development, a return to a feudal economy as finance plays the role of wealth-extracting feudal lord. Social Equity? You’ve got to be pulling my leg. Wall Street is overseeing the greatest concentration of wealth in the hands of the new oligarchy that the world has ever seen.

Total Global Losses From Financial Crisis: $15 Trillion - The former chief credit officer of Standard & Poor’s, whose guidance helped set the stage for the unprecedented downgrade of U.S. debt last year, has spent the month since his ouster from S&P aggregating the fallout of the financial crisis, coming up with losses that may exceed what other analysts have proffered since 2008. By his estimates, total global losses could be as large as $15 trillion. Mark Adelson, now an independent consultant, has come up with what he says may be the broadest take on the impact of the crisis. It is also one that puts the genesis not in the U.S. mortgage boom where blame has been so sharply focused, but in developments dating back to the 1970s that led to increased risk-taking as financial firms adapted to a world with less regulation. “I think people have been looking at it wrong and trying to explain it only with mortgages,” the 52-year-old Mr. Adelson said in an interview. “The causes run back to older things that took longer to build up, including deregulation, spread of the risk-taking culture and the conversion of investment banks from partnerships to corporations,” he said. “All together, they produced this kind of inevitability.”

Is unlimited growth a thing of the past? - Might growth be ending? This is a heretical question. Yet an expert on productivity, Robert Gordon of Northwestern university, has raised it in a provocative paper. In this, he challenges the conventional view of economists that “economic growth ... will continue indefinitely.” Yet unlimited growth is a heroic assumption. For most of history, next to no measurable growth in output per person occurred. What growth did occur came from rising population. Then, in the middle of the 18th century, something began to stir. Output per head in the world’s most productive economies – the UK until around 1900 and the US, thereafter – began to accelerate. Growth in productivity reached a peak in the two and a half decades after World War II. Thereafter growth decelerated again, despite an upward blip between 1996 and 2004. In 2011 – according to the Conference Board’s database – US output per hour was a third lower than it would have been if the 1950-72 trend had continued (see charts). Prof Gordon goes further. He argues that productivity growth might continue to decelerate over the next century, reaching negligible levels.

IMF chief economist says crisis will last a decade (Reuters) - The world economy will take at least 10 years to emerge from the financial crisis that began in 2008, the International Monetary Fund's Chief Economist Olivier Blanchard said in an interview published on Wednesday. Blanchard told Hungarian website, in an interview conducted on September 18, that Germany would have to accept higher inflation and a real strengthening of its purchasing power as part of the solution to Europe's problems. But even though the focus was on Europe's troubles now, he said, the United States also had a fiscal problem which it had to resolve. "It's not yet a lost decade... But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape," Blanchard said. "Japan is facing a very difficult fiscal adjustment too, one which will take decades to solve. China has probably taken care of its asset boom but has slower growth than before, but we do not forecast any really hard landing," he added. Blanchard said that adjustment in the euro zone required a decrease in prices in the bloc's indebted southern half and a rise in core countries. For the European Central Bank to maintain 2 percent inflation for the bloc as a whole, core states would have to have higher inflation than 2 percent - something strongly resisted in Germany, where 1920s hyperinflation still haunts the popular debate on interest rates.

IMF Brings Good Tidings: Prepare For Another Lost Decade - "It will surely take at least a decade... for the world economy to get back to decent shape" is the somewhat shockingly honest (and at the same time hopeful that ECOpocalypse does not happen before) outlook that the IMF's Olivier Blanchard offers in a recent interview with Hungary's via Reuters. His diatribe of expectations that Germany would have to accept higher inflation, the US had to fix its fiscal problem, "Japan is facing a very difficult fiscal adjustment too" is more an understatement of facts than a forecast but on the bright-side he thinks China has turned the corner on its asset boom (but faces slower growth ahead). The reality is that, as he also notes, debt reduction (via default or deleveraging) is unavoidable and while he believes that this can be done without stifling growth in this credit-fueled world in which we have lived (though no mention of the tooth fairy). Dismissing the idea of inflation-targeting, he warns "You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks." It seems the IMF is waking to the new reality - perhaps as evidenced by their actual disagreement with Greece over fantasy GDP data - though we fear what another decade of this will do to global instability.

The World Bank's Modest Proposal: Create 600 Million Jobs In 15 Years And All May Yet Be Well - In order to avoid social unrest and absorb the world's young people entering the global workforce, the World Bank Development Report states that 600 million jobs must be created from 2005 to 2020. As Bloomberg BusinessWeek reports, jobs should be at the top of governments' agendas or they could face  further uprisings such as toppled leaders in Egypt and Tunisia. "Demographic shifts, technological progress, and the lasting effects of the international financial crisis are reshaping the employment landscape in countries around the world," World Bank President Jim Yong Kim said in a foreword to the report. "Countries that successfully adapt to these changes and meet their jobs challenges can achieve dramatic gains in living standards, productivity growth, and more cohesive societies." However, those countries that don't adapt, face the kind of social unrest we have warned of again and again - and are starting to see in more and more civilized Western nations. So - a mere 600 milion jobs and all is well - amazing!!!

Eurozone Unemployment Stuck at Record 11.4 Pct -Unemployment across the 17 countries that use the euro remained at its record high rate of 11.4 percent in August, official data showed Monday, renewing concerns that efforts to slash debts have sacrificed jobs. While European leaders have managed to calm financial markets in recent months with promises to cut spending and build a tighter union, they have been unable to solve the eurozone’s deep-rooted economic problems and the rising tide of joblessness.In August, 34,000 more people lost their jobs in the eurozone, according to data released Monday by the European statistics agency, Eurostat. The unemployment rate – the highest since the euro was created in 1999 – is the same as July’s, which was revised up from 11.3 Monday.

Eurozone unemployment at fresh high: Unemployment in the eurozone hit a fresh high of 18.2 million in August, the EU statistics agency has said. The number out of work rose by 34,000, but after the July data was revised up, it meant the unemployment rate remained stable at a record high of 11.4%. The highest unemployment rate was recorded in Spain, where 25.1% of the workforce is out of a job, and the lowest of 4.5% was recorded in Austria. The unemployment rate in Germany was 5.5%, Eurostat said. Last week, the European Commission warned of the existence of "a real social emergency crisis" due to the fall in household income and growing household poverty. Youth unemployment remains a particular concern, with the rate among under-25s hitting 22.8% across the eurozone, and 52.9% in Spain. The commission repeated its call to governments and businesses to act to try to avoid the "disaster" of "a lost generation". In Greece, the most recent figures recorded in June show that more than 50% of the young workforce has no job.

Euro-zone jobless rate hit record highs - The number of people out of work in the euro zone climbed further in August reaching a fresh record high, underscoring the hardship that the currency area's fiscal crisis is inflicting on households, and suggesting any economic recovery is some way off. Eurostat, the European Union's official statistics agency, said Monday that 18.196 million people were without jobs in August, an increase of 34,000 from the previous month and the highest total since records for the 17 nations that use the euro were first compiled in January 1995. That left the jobless rate in August at 11.4% of the workforce, unchanged from the previous month and matching economists' expectations in a Dow Jones Newswires poll. Eurostat revised up July's rate from 11.3% to 11.4%, which is a fresh record high. The currency area's unemployment rate is likely to rise further in the coming months, since recent surveys indicate that businesses plan to cut jobs in response to an uncertain economic outlook. A survey of purchasing managers released Monday found manufacturing companies trimmed their payrolls for the eighth straight month in September, although at the slowest pace since March.Rising unemployment will likely curb consumer spending and hinder a return to economic growth. The euro-zone economy contracted at an annualized rate of 0.7% in the second quarter, and most recent surveys and economic data suggest it shrank again in the third quarter.

Eurozone unemployment hits record high and reveals two-speed Europe - Eurozone unemployment has hit a record high, revealing further evidence of a two-speed Europe as increasing numbers of young people in Spain, Greece and Italy desperately seek work while Germany's jobless rate continues to fall.The eurozone unemployment rate was 11.4pc in August, up from 10.2pc last year.  Data from the EU statistics agency Eurostat estimated that 25.5m men and women were out of work over the period, 18.2m of whom were in the eurozone. Compared with the previous month the number of unemployed people in the EU rose by 49,000 and in the eurozone by 34,000. The overall unemployment rate in Spain has reached 25.1pc, while the latest data from Greece for June shows a figure of 24.4pc. The outlook is far more optimistic in Germany, however, where just 5.5pc of people are out of work. Youth unemployment in the eurozone is stable at 22.8pc, down slightly from 22.9pc during July, but up from 20.7pc year-on-year.

The Wilder View » Unemployment Rates Across the Euro Area – Tough Times in Key Markets: Today Eurostat released its unemployment rate figures for the month of August. The Euro area unemployment rate held firm at 11.4% for the third consecutive month. Spain still has the highest unemployment rate in the euro area, 25.1%, and Greece is catching up quickly, 24.4% (in June, which is the latest data point). The chart below illustrates the level of the unemployment rate and its month-month change for the euro area 12 countries. The periphery are underperforming the average, with Spain, Greece, Portugal, and Ireland leading the way. Internal devaluation, or driving up the unemployment rate to reduce relative prices with demand, is really taking its toll. Respectively, the unemployment rates in Spain, Greece, Portugal, and Ireland are 178.9 ppt, 234.2 ppt, 93.9 ppt, and 212.5 ppt above their pre-crisis minimums (loosely defined since January 2008) – a simple average of 179.9 ppt above the joint minimum for these four countries. The average euro area 17 unemployment rate is just 56.2 ppt above its 7.3% pre-crisis minimum. Hard days in the periphery, to be sure. Against this backdrop, weekend protests in Paris, Madrid, Lisbon, and Rome are not a surprise.

Pension Dilemma in Europe’s Debt Crisis - The differences in approach could not be more distinct — or telling. Two of the most economically distraught countries in the euro zone, Greece and Spain, mapped out additional budget cuts last week. In the case of Greece, under last-chance pressure from its international creditors, the governing coalition tentatively agreed on an austerity package that includes some of the most severe cuts in public pensions ever imposed in a developed country. Pension payouts to retirees would be trimmed by as much as 10 percent. And then there was Spain, where last Thursday the government of Prime Minister Mariano Rajoy introduced one of the most draconian budgets in the country’s history. It was intended to reassure international investors and demonstrate the fiscal discipline that the euro zone was demanding of Madrid. The markets need reassuring: Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request European aid. Nevertheless, Mr. Rajoy declined to cut pensions or even to freeze them. Instead, his budget would actually increase payouts 1 percent next year on pensions for former public employees as well as on the social security payments that go to all retired Spaniards.

Spain to Borrow $267 Billion of Debt Amid Rescue Pressure - Spain plans to borrow 207.2 billion euros ($266.5 billion) next year, the Budget Ministry said today, as pressure builds for Prime Minister Mariano Rajoy to tap the European rescue fund instead of financial markets. Spain’s debt will widen to 90.5 percent of gross domestic product in 2013 as the state absorbs the cost of bailing out its banks, the power system and euro-region partners Greece, Ireland and Portugal. This year’s budget deficit will be 7.4 percent of economic output, Budget Minister Cristobal Montoro said at a press conference. Spain’s 6.3 percent target will be met because it can exclude the cost of the bank rescue, he said. Spain’s borrowing plans may test investors’ willingness to continue financing the government with the European Central Bank waiting to buy the country’s debt should Rajoy agree to conditions. The government this past week unveiled 43 measures designed to boost economic growth that Economic and Monetary Affairs Commissioner Olli Rehn said go beyond the European Union’s recommendation for Spain’s restructuring.

Latest threat to the Eurozone: Catalonia independence quest - Just when it seemed stability was on the horizon for the tumultuous Eurozone, with Spain getting a grip on its debt financing and a plan to bail out insolvent banks, a fresh threat to the common currency has emerged with Catalonia's reignited drive to secede from the Spanish kingdom. More than a million residents of the country's most prosperous region rallied for independence in a protest of historic proportions on Sept. 11, Catalonia's National Day. Some estimates put the crowd as high as 2 million, or more than a quarter of the 7.5 million who live in the northeast region including Barcelona. This week, after Madrid rebuffed Catalonia leader Artur Mas’ demand for more control over his region’s tax revenues, the regional parliament set a Nov. 25 date for polling Catalans on "self-determination." Spain’s constitution doesn’t empower the regions to call votes on sovereignty and questions of national integrity. But Mas has said his region will go ahead with a referendum without the central authorities’ approval to address what Catalans consider a grave injustice: They pay as much as $20 billion more into national coffers each year than they get back in public services.

At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed - Calls for the splintering of Spain have picked up steam. EHB, a left-wing, Basque nationalist party, has called for "A Great National Act" in Favor of Independence according to El Pais. EH Bildu has called "a great national political act" in favor of the independence of the Basque Country for the next October 13 in the BEC Barakaldo (Bizkaia), announced its candidate for lehendakari, Laura Mintegi in an appearance before the media at EA headquarters in Bilbao. Mintegi has defended "the pressing need to build a framework sovereign" in the Basque country that allows this community to have the tools to address their own economic, social and employment. "Only from the sovereignty we orient our policies towards true social justice," said the candidate. In his view, "it is truly reckless remain at the expense of a corrupt system like Spanish, you're sacrificing the rights and freedoms of all the people to ensure the interests of a political and economic elite." With the "corrupt system" called on "break ties". According to El Economists, Catalan Separatists Not Quite at Absolute Majority. About the option of independence for Catalonia, El País published a survey in which, in case of a referendum, 43% would vote for secession, compared with 41% who would decide against. The complete data interpretation contrasted with other numbers registered in June, when only 21% of respondents said anti-secession and another 21% abstained. The current difference can be understood as a translation of abstention towards not to Catalan independence, which in June this survey enjoyed the favor of 51%.

Thousands swell streets for third protest outside Congress -Thousands of demonstrators poured into Neptune square Saturday night for the third protest in a week in front of Congress over the Popular Party (PP) government’s cutbacks and austerity measures. Students, retired workers, unemployed people and professionals gathered in downtown Madrid to express their displeasure at Prime Minister Mariano Rajoy’s economic policies. “What does the government believe, that we should not protest the decisions that it is taking?” asked one demonstrator. On Tuesday, the day of the so-called 25-S protest outside Congress, 36 people were arrested following violent confrontations between anti-riot police who used nightsticks to keep people from approaching the chamber building. A Madrid judge has charged them all with altercation, resisting arrest and crimes against government institutions. This time around the protestors had fresh complaints to add to their growing list of grievances. They said they were outraged by the “police brutality” and excesses that occurred on Tuesday. They were also incensed by the government’s appraisals the following day, when the police actions were described as “extraordinary, splendid, brilliant and exemplary.” Also arousing their furor was the news photograph of Rajoy walking along the streets of New York City, smoking a cigar. Later Rajoy added more fuel to the fire when he publicly made mention of “the majority of Spaniards who don’t protest”

Spanish police attack journalists and anti-austerity protesters - As the Spanish government defends police response to anti-austerity protests surrounding the country’s Parliament building, Russia Times and other outlets reported instances of police violence against both media members and demonstrators. An Associated Press photographer reported seeing police “severely beat” at least one protester Saturday, who had to be hospitalized. And an RT producer, Fernando Ausín, said an officer grabbed him and threw him to the ground earlier this week, even though he had identified himself as a member of the press. When he fell, he said, another officer clubbed him in the back with his nightstick. Saturday’s protest was the latest in a series of demonstrations by tens of thousands of residents against the latest budget by Spanish Prime Minister Mariano Rajoy, which would implement measures including salary freezes for public employees, a cut on unemployment spending and an overall budget cut of $51.7 million.

Demo shuts downtown Lisbon - A massive protest rally against Portugal’s austerity measures attracted tens of thousands into downtown Lisbon on Saturday. Traffic between the main train station in Santa Apolonia and Cais do Sodré was closed off to traffic. The leader of Portugal’s small ‘Left Bloc’ political party, Francisco Louçã, said before the prottest he was expecting “a huge turnout” at the protest rally that would “signal the collapse of this government”. “I believe it will be an enormous demonstration because it will call on everyone’s indignation, (…) everybody will tell this government that there is no solution to our problems without breaking off with the troika (International Monetary Fund, European Central Bank and European Commission)", he said.

Leftists march in Paris against austerity - Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU’s new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis. The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday. The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

Thousands march in Paris against ‘austerity’ - Chanting "resistance", demonstrators took to the streets of Paris on Sunday to protest against austerity policies and Europe’s new budget treaty, in the first major demonstration since President François Hollande took power four months ago. Tens of thousands of people marched through the sunny streets of Paris on Sunday to protest against an EU fiscal treaty requiring governments to commit to stricter economic practices, in the latest in a string of anti-austerity rallies across Europe. In Pictures: Demonstrators take to Paris' streets to protest against austerity The march, which organisers say drew 80,000 people, weaved its way across the east of Paris, near the historic Place de la Bastille, with demonstrators chanting “resistance, resistance”, while hundreds of flags and protest signs bobbed above the crowd. Others sang, “Hollande, do you know where we’re going to stick your treaty?”

Federalism or death! - If there is no political Europe, the euro will die. This death could take many forms and there may be many detours along the way. It could be an explosion, an implosion, a slow death, a dissolution, or a division. It could take two, three, five, ten years, and be preceded by a large number of remissions, which, on each occasion, give the impression that the worst has been avoided. The trigger event might be the collapse of Greece, bludgeoned by austerity plans that are impossible to implement and unbearable for the people, or it might be sparked by some court of Karlsruhe that will refuse, in the name of Germany, to take on the unlimited risk prompted by the default of a member state. But it will die. One way or another, if nothing happens, it will die. This is no longer a hypothesis, a vague fear, a red rag waved in the face of recalcitrant Europeans. It is a certainty. And this certainty is not only a logical deduction (that takes account of the absurd chimera of an abstract single currency cut adrift from economies, resources, and common taxation if things stay as they are) but also a historical one (all the situations over the last two centuries that are reminiscent of the crisis we are currently experiencing).

Spain jobless claims rise 1.7% in September - Jobless claims in Spain rose 79,645 in September, or 1.7%, to over 4.7 million, according to government statistics released Tuesday. The total number of jobless claims in Spain now stands at 4,705,279. Official data show some improvement on a year ago, when jobless claims rose by 95,817. Spain has the highest jobless level in the European Union, with roughly 25% of the population unemployed, as a consequence of the housing market collapse and economic downturn. Economic Minister Luis de Guindos said a day prior that the government continues to analyze whether it should seek a bailout. Reuters reported a day prior that the government could make a formal request as soon as next weekend, citing European sources, though Germany is against this because Chancellor Angela Merkel doesn't want to ask parliament to rescue yet another struggling euro-zone nation.

Europe is Revolting - A general strike in Greece, massive protests by the indignados in Spain, public transport strikes in Portugal (and Spain), and industrial action by aluminium, steel and public sector workers in Italy headlined this week. On Saturday mass protests will erupt again in Portugal as the indignaos movement that brought out a million into the streets of the country on September 15 – the same day there was another huge scale turn out into the plazas in Spain – join action called by the country’s largest trade union, CGTP. And it’s not just in the Continent’s south. On Sunday mass demonstrations are expected in France, calling for a referendum over the EU Fiscal Compact, the ‘permanent austerity’ treaty. The focus of popular anger is ‘Europe’s austerity madness’, as Paul Krugman puts it in his latest column in the New York times. But the protests also reflect a wider rejection of a political elite that is rolling back basic democratic rights, from protections at work to welfare support and gains for women and minority groups, and privatising as well as slashing public services. A slew of economic data this week confirmed what is now patently obvious to anybody but the criminally insane (and economists) – austerity is not working.

Greek, Spanish riots shatter European market calm -- Europe's fragile financial calm was shattered Wednesday as investors worried that violent anti-austerity protests in Greece and Spain's debt troubles showed that the region still cannot get a grip on its financial crisis and stabilize its common currency, the euro. Police fired tear gas at rioters hurling gasoline bombs and chunks of marble Wednesday during Greece's largest anti-austerity demonstration in six months _ part of a 24-hour general strike that was a test for the nearly four-month old coalition government and the new spending cuts it plans to push through. The brief but intense clashes by a couple of hundred rioters participating in the demonstration of more than 60,000 people came a day after anti-austerity protests rocked the Spanish capital, Madrid. Hundreds of Spanish anti-austerity protesters gathered again Wednesday, ending near parliament in Madrid amid a heavy presence of riot police. In Tuesday's protest, police arrested 38 people and 64 were injured.

Foreigners Dump €89.6 Billion Spanish Bonds; Spanish Bank Exposure Increases by €108.8 Billion - European banks are supposed to be deleveraging. By now, most realize they are headed the opposite direction. In Spain, the increased leverage is pro-cyclical, 100% certain to cause a bigger problem down the road. Here is a Mish-modified translation of an El Economista article on Spanish Bond PurchasesFinancial institutions have become the main investor in Spanish government bonds after foreigners withdrawn €89.6 billion in the first eight months of the year, according to Treasury data. In these eight months, Spanish exposure has risen €108.8 Billion, a record 106.84% increase.  Meanwhile, foreign investment in Spanish debt has dropped 31.8% during the same period, standing at €191.836 billion euros, compared to €281.439 at the end of 2011. This is the second consecutive time since 2008 that the debt in foreign hands is below the €200 billion.

Spanish Banks Need More Capital Than Tests Find, Moody’s Says - Spain's banks face a capital shortfall that could climb to 105 billion euros ($135 billion), almost double the estimate the government provided last week, according to Moody’s Investors Service. The nation’s lenders may need infusions of 70 billion euros to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote yesterday in a report. That compares with the 53.7 billion euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses. “The recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” the analysts, Maria Jose Mori and Alberto Postigo, said in the report. “If market participants are skeptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”

Spain Adds $32 Billion Power-System Bailout to Rescue of Banks - After Spain’s rescue of its banks and cash-strapped regions, the 2013 budget reveals a bailout of the power industry to cover 25 billion euros ($32 billion) of debt accumulated by the electricity system. The spending blueprint released two days ago adds 100 billion euros to the nation’s debt from the rescue packages by the end of 2012, driving its ratio to gross domestic product up 16.8 percentage points to 85.3 percent of total output. Power companies such as Iberdrola SA (IBE) and Gas Natural SDG SA (GAS) booked more revenue than they received from their clients for most of the past decade -- the difference between government-set prices for buyers and sellers -- with the shortfall booked as receivables on their balance sheets.

Why the Euro Crisis Is Nowhere Near Being Over -- It’s astonishing, but everyone is behaving as though the euro crisis were over. Long-term bond yields are bellwethers of investor confidence. And over the past few months, yields on 10-year Spanish bonds have fallen from 7.5% to 6%, while those on similar Italian issues have dropped to 5%. The U.S. stock market is shrugging off not only the likelihood of an economic slump in 2013, but also the possibility that a crisis in the euro zone could send shock waves throughout the global banking system. Something seems very wrong with this picture — at least to me. Focus only on the European elite, and everything may appear under control. The May election of Socialist François Hollande to replace Nicolas Sarkozy as President of France has shifted European finances in the direction of easy money. The ruling three weeks ago by Germany’s Constitutional Court removed the biggest remaining stumbling block for future bailouts in the euro zone. And German Chancellor Angela Merkel has also softened on financial questions, declaring last Thursday, “We will continue to do everything necessary to develop the economic and currency union so that it is stabilized permanently.”But as soon as you turn from the elites’ self-congratulation to stories about people in the streets, you get a very different impression. Formerly middle-class Spaniards are scrounging for food in dumpsters. Greeks are rioting when they are not engaged in neofascist marches. Rich French people are thinking about leaving their country because of staggering new income tax

Liikanen is at least a step forward for EU banks - 2010, US banks had assets of €8.6tn. But those of the EU’s were €42.9tn. In the US, bank assets were close to 80 per cent of gross domestic product. In the EU, they were 350 per cent. Half of the world’s 30 biggest banks are headquartered in the EU. If the EU makes a mess of banking, it can explode the world economy. In brief, while individual US banks may be “too big to fail”, the EU has a banking sector that is not only too big to fail, but too big to save. European banks have to be safer than American ones because the damage they can do is so much greater. Managing these risks is of overwhelming importance. Happily, the review of the structure of EU banking carried out by an expert committee chaired by Erkki Liikanen, governor of Finland’s central bank, could, with important modifications, be a big step forward. So what does the Liikanen report suggest? Here are four salient points. First, it suggests the ringfencing of trading, not of retail, activities as the UK’s Independent Commission on Banking (on which I served) recommended. Proprietary trading and either assets or derivative positions incurred in market-making would be assigned to separate legal entities. The latter could not fund themselves with insured deposits. Second, it demands a hierarchy of “bail-inable” debt instruments that must not be held by banks. Such instruments should also be part of remuneration of top management, in order to align their interests with those of creditors, not shareholders. Third, the capital requirements on trading assets and real estate loans should take into account the shortcomings of risk-weighting. An extra capital buffer for trading book assets might be imposed. Finally, the report makes a number of suggestions for improved governance. Apart from changes in the structure of remuneration a potentially important reform would be greater disclosure of risks.

Euro Counterfactuals (Wonkish) - Paul Krugman - Via The Irish Economy, a new paper (pdf) from the IMF looks at how, exactly, massive current imbalances emerged within Europe, with Germany running huge surpluses and the GIPSIs running huge deficits. The paper shows that there were indeed huge capital flows from the European core to the periphery, in Spain largely taking the form of lending to banks, presumably by other banks: The surprising result in the paper is that much of the rise in imbalances within the euro area involved trade with non-euro nations. Germany sharply increased exports to Asia and Eastern Europe, which had strong demand for German durable manufactures. Meanwhile, southern Europe saw a sharp increase in imports from low-wage countries. There are two questions this result raises. First, what does it say about the causes of euro imbalances? Second, what does it say about the adjustment now required? On the first question, should we say that external factors rather than those core-periphery capital flows were responsible for the huge imbalances? I don’t think so. If Spain hadn’t had those capital inflows it wouldn’t have had an economic boom, in fact it would have suffered mild weakness due to those rising imports from Asia, and its wages would have grown less than those in Germany, not more. On the second, should we say that internal devaluation is less urgent because external factors had a role in causing the original imbalances? On the contrary, internal devaluation becomes even more necessary – and the size of the relative wage change bigger – if the euro is to survive. 

U.S., Europe Nowhere Close to Ending Crisis, Krugman Says - The U.S. and the European Union are “nowhere close to ending” the financial crisis and German-led austerity efforts may lead to a 1930s-style economic depression, Nobel laureate Paul Krugman said.  Five years into the crisis, the U.S. needs “another round of stimulus” and Federal Reserve officials “should be doing whatever they can” to aid the recovery, while Europe needs a fiscal union to save its single currency, Krugman said in a speech in Belgrade today.  “Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Krugman, an economics professor at Princeton University. “No country will have prosperity until Germany and the ECB have decided that too much pain has been inflicted.”  Europe needs to “contain immediately the financial threat to troubled countries and stabilize yields on their borrowing, which in the end requires the ECB to be ready to be the lender of last resort and buy sovereign bonds,” Krugman said. “And that is now sort of happening,” he said, adding “there are 60 percent odds that they’ll save the euro.”

Euro area periphery countries seeing improved monetary policy transmission mechanism - Rebecca Wilder - The ECB released its August report of euro area MFI interest rates (link .pdf). According to mortgage and non-financial corporate lending rates, the transmission channel of monetary policy to the periphery economies improved through August. See this post for links and associated detail on the ‘hampered’ transmission channel. Since the  outset of the ECB’s most recent rate-cutting cycle -  here I’m referring to recent cuts that occurred after the ECB mistakenly hiked its policy rate in July 2011 – mortgage and non-financial corporate lending rates declined across the euro area except in Italy. Italy is the one country with a clearly ‘hampered’ transmission channel, as mortgage rates and non-financial corporate lending rates rose 0.51% and 0.36%, respectively, despite the ECB cutting its policy rate. Portugal and Spain did see lending rates fall, but to varying degrees. Since the month of July – July 26 was the date that Draghi promised markets that “the ECB is ready to do whatever it takes to preserve the euro” – rates in Spain and Portugal declined in line with the core. In the case of non-financial corporate lending rates, the average periphery rate declined  0.46% more than the average core rate.

Euro-zone PMI points to 'inevitable' recession  -- The final euro-zone composite purchasing managers' index for September came in slightly above a preliminary estimate on Wednesday, but still pointed to a steep monthly downturn for the region and a return to recession in the third quarter, according to survey compiler Markit. The index fell slightly to a four-month low at 46.1 from 46.3 in August, coming in a shade above a preliminary estimate of 45.9. A reading of less than 50 indicates a contraction in activity. The services PMI fell to its lowest level since July 2009 at 46.1, down from 47.2 in August. "It seems inevitable that the region will have fallen back into recession in the third quarter," said Chris Williamson, chief economist at Markit. "After falling by 0.2% in the second quarter, a steeper fall in output is likely for the third quarter," Williamson said

France’s Private Sector Is Heading Off A Cliff - This should have been an exciting moment: the Paris auto show, “Mondial de l’Automobil,” this weekend. Over 100 new models from around the world, from econo-boxes with rounded corners to exotic prototypes that will never see production. Chicks next to some of them. Nausea-inducing colors, downsized motors. Something for everyone. But it had been preceded by two days of supplier events loaded with the dire verbiage of an industry on a death march. Particularly in France, whose private sector is veering into economic fiasco. And on Monday, it became official. A barometer of the real economy in France, new car sales as measured by registrations, crashed in September—down 18.3% from September last year, and accelerating (year-to-date, sales were down “only” 13.9%). It was the worst September in years, worse even than the infamous Lehman September of 2008. And 2012 is shaping up to be the worst year since long before the financial crisis.

France facing double-dip recession - Bad economic news from France continues to pour in, pointing to weakness in the Eurozone core states. As discussed earlier (see this post), France is facing a second recession in 3 years. This morning's manufacturing PMI numbers confirmed the nation's economic difficulties. The chart below compares Markit Manufacturing PMI with INSEE Production index, which is reported on a lag. The PMI survey has been a good predictor of the country's manufacturing output and is now at levels not seen since 2009. Markit: - Business conditions in the French manufacturing sector worsened further in September. The headline Purchasing Managers’ Index® – a seasonally adjusted index designed to measure the performance of the manufacturing economy – recorded 42.7, down from 46.0 in August. That was the lowest reading since April 2009 and indicative of a substantial deterioration in operating conditions.  Underlying the latest weak PMI figure was a steep reduction in the volume of new orders received by French manufacturers during September. The rate of contraction in new work accelerated to the sharpest for three-and-a-half years, with panelists commenting on a tough economic climate and clients postponing orders.As an example of how serious the situation has become, Alen Mattich had a nice write-up this morning looking at France as "Spain in disguise". A comparison such as this would have been inconceivable a few months ago, but that is no longer the case.

French Economy Implodes - As expected, at least in this corner, the French economy has started to implode. Service sector business activity is dropping at fastest rate since October 2011. More importantly, the Markit Composite PMI sports the steepest rate of contraction since March 2009 with job losses accelerating at the fastest pace in 33 months and output plunging at the fastest rate in 42 months. Key points:
Final Markit France Services Activity Index at 45.0 (49.2 in August), 11-month low.
Final Markit France Composite Output Index at 43.2 (48.0 in August), 42-month low.
Summary: French service providers reported a steeper decrease in business activity during September. The latest fall in activity reflected a considerable drop in incoming new work. Companies adjusted staffing levels down accordingly, leading to an accelerated drop in employment. Input prices rose at a sharper rate but output charge discounting gathered pace, highlighting a deepening squeeze on companies’ margins. Future expectations meanwhile dipped into negative territory for the first time since February 2009. The seasonally adjusted final Markit France Services Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared with one month ago – posted 45.0 in September, down from 49.2 in August. The latest reading pointed to a marked rate of contraction in activity and the fifth decline in the past six months. The seasonally adjusted final Markit France Composite Output Index – which measures the combined output of the manufacturing and service sectors – registered 43.2 in September, down from 48.0 in August. The latest reading was indicative of a substantial decline in activity and the steepest rate of contraction since March 2009.

55 straight months of job cuts in Spain's service sector - With Spain's recession deepening, the nation's service sector continues to struggle. Service industries such as hotels and restaurants are caught between rising input costs and falling output prices, as margins become compressed. Markit: - The Spanish service sector ended the third quarter of 2012 deep in contraction territory. Moreover, September data signalled faster reductions in both activity and new orders as the economic crisis in Spain continued. Higher fuel costs contributed to an acceleration in input price inflation to its fastest since July 2011. On the other hand, companies continued to lower their output prices, despite a rise in the rate of VAT limiting the extent to which they were able to do this. Driven by sharp declines in demand, employment is Spain's services sector has been hit especially hard. This is the 55th straight month of service jobs losses. Markit: - With workloads falling, service providers lowered their employment accordingly, extending the current sequence of job cuts to 55 months. The sharpest reduction in staffing levels was at Renting & Business Activities companies, while Hotels & Restaurants was the only sector to take on extra staff.

Italy service sector shrinks at slower pace in September: PMI (Reuters) - Italy's service sector shrank for the 16th month in a row in September, albeit at the slowest pace since January, with a drop in new business and one of the sharpest falls in employment since 2009, data showed on Wednesday. The Markit/ADACI Business Activity Index, covering service companies from hotels to banks, rose to 44.5 from 44.0 a month earlier, but remained well below the 50 line separating growth from contraction. The data underlines the gloomy economic picture facing Prime Minister Mario Monti's government, which last month cut its growth forecast, saying it expected a 2.4 percent contraction in 2012 and a 0.2 percent decline in 2013. But after the equivalent PMI survey for the manufacturing sector showed factory activity contracting last month at the slowest rate since March, it offered some hope that the worst phase of a recession that began in 2011 may have passed. The PMI data showed new orders falling for the 17th month in succession, a decline attributed by survey participants to uncertainty among clients. It said service companies continued to cut staffing levels and said the rate of decline in employment accelerated for the fourth month in a row to the fastest pace since the series record in June 2009. More than 21 percent of survey respondents cut staffing levels compared with August, mainly due to falling workloads and cost-cutting efforts.

Portugal announces 'enormous' tax rises -- Portugal announced sweeping new tax increases in an effort to keep the country's faltering bailout programme on track amid a powerful public backlash against increased belt-tightening. The new round of what the government described as "enormous" tax rises came as Lisbon revealed it would miss this year's recently relaxed budget deficit target by the equivalent of 1.1 percentage points if it failed to take exceptional measures. Vítor Gaspar, finance minister, said on Wednesday these tax measures, including an additional 4 per cent levy on 2013 earnings, would replace a planned "fiscal devaluation" involving deep pay cuts, which the government withdrew following mass anti-austerity protests. An unexpectedly strong backlash against austerity has fractured Portugal's mainstream consensus in support of deficit-reduction measures and highlighted the political difficulties facing eurozone governments struggling to implement increasingly tough fiscal reforms. The main trade unions immediately called a general strike for November 14 following Mr Gaspar's statement.

Euro Area Budget? More on Tax Rates - Rebecca Wilder - Megan Greene comments on the leaked plan for a common eurozone budget via Herman Van Rompuy’s draft proposal. Specifically, Megan outlines key reasons why she thinks we shouldn’t ‘hold our breath’ on a common EZ budget anytime soon (a .pdf link to the proposal via Peter Spiegel at the FT). Her points are well taken. I look at this draft proposal and wonder how can they credibly attack any of these issues in detail at the 18-19 October Summit. I digress and expand on Megan’s statement:The German government has signaled support for rerouting taxes (including corporate and value added tax) to Brussels. How will the German (and Dutch, Austrian, and Finnish) electorate feel about this when they are paying higher taxes that are then redistributed not only to basket cases like Greece but also to Ireland, which benefits hugely from a low corporate tax rate? There are two additional points worth noting. First, of the 15-odd euro area countries that are listed in the OECD tax database, Ireland has the lowest corporate tax rate in 2012. However, as regards the 2011 cross-country VAT tax rates, the Irish rate ranks the 5th highest. This brings me to my next point. To my knowledge, it’s not clear whether Rompuy is proposing a pan-euro taxing authority or simply subsidizing the budget with national contributions. This makes a difference. A pan-euro taxing structure would be much more opaque, whereas national contributions would be more widely televised. I suspect that the issue of redistribution of tax payments from core to periphery economies (see Megan’s point above) would be less meaningful if the budget was funded via a federal tax net rather than national contributions.

Cyprus Said to Seek 11 Billion Euros in Fifth European Bailout - The Cypriot government will seek an 11 billion-euro ($14.2 billion) bailout, 62 percent of gross domestic product, to recapitalize its banks and pay its bills, according to three people with direct knowledge of the matter. The country’s banks, which lost more than 4 billion euros in Greece’s debt restructuring earlier this year, need 5 billion euros of fresh capital, according to Finance Minister Vassos Shiarly, the people said. The so-called troika that oversees euro-area rescues puts Cypriot banks’ recapitalization needs at about 10 billion euros, the people cited Shiarly as saying. A Finance Ministry spokesman declined to comment immediately on the information when contacted by Bloomberg News. Cyprus on June 25 became the fifth country in the euro area to seek external aid. No amount was specified for the rescue, which will encompass the public sector as well as banks. Cyprus has also sought a 5 billion-euro loan from Russia. Igor Shuvalov, a first deputy prime minister, said Sept. 8 that Russia may make a decision on the request within a month. The Cypriot government also needs 6 billion euros to redeem debt and close a budget gap through 2015, Shiarly has said, according to the people who declined to be identified because the information hasn’t been made public. Cyprus faces 4.7 billion euros of bond redemptions in the period, according to data compiled by Bloomberg.

Spain bailout 'inevitable'- Catalonia president - Catalonia's president Artur Mas said Wednesday a sovereign bailout for Spain is unavoidable, and Madrid should ask for it without a long delay. "External aid will be inevitable, so it would be better to face it without a lot of delay," said the head of the northeastern region, who is pushing for greater financial independence from the rest of Spain. The bailout prediction flies in the face of Spanish Prime Minister Mariano Rajoy's studious refusal to say whether the country needs rescuing, insisting instead on the need to study the matter. Mas, who met the previous day with Rajoy and other regional government leaders for deficit-cutting talks in Madrid, said there was no reason that he should share the opinion of the Spanish government. "Since the Spanish government has more information, it should decide when it is done and whether it is done or not," Mas said.

EU doubts Spain's 2013 deficit target: report -- European Union officials told Spain that the country's plan to cut its deficit to 4.5% of gross domestic product in 2013 relies on overly rosy economic assumptions, Bloomberg reported Thursday, citing unnamed persons. The assessment was delivered to Spanish Economy Minister Luis de Guindos in a Madrid meeting on Oct. 1, the report said. The country's 2013 budget plan pencils in a 0.5% contraction in gross domestic product.

Greece pushes for austerity deal as time runs short - Greece held a new round of talks with foreign lenders to bridge differences over 2 billion euros of disputed austerity cuts yesterday, with time running short to clinch a deal before a key meeting of euro zone ministers next week. Athens has been haggling for weeks over 12 billion euros of cutbacks that its European Union and International Monetary Fund lenders have refused to sign off on over fears that some of the proposed savings are unlikely to materialise. For the second day in a row, inspectors from the so-called troika of European Commission, European Central Bank and IMF lenders had to face rows of angry Greeks heckling them as they entered a ministry building to start discussions. At the labour ministry on Tuesday, dozens of disabled Greeks and their carers blocked the main entrance and chanted "We won't let it pass!" in protest at the cuts. One held a banner saying: "They handed 200 billion to bankers but cut down on medicine, treatment and benefits for the disabled."

Troika Rejects $2.58 Billion in Greek Budget Plan - With a report showing Greece will suffer a sixth year of recession in 2013 because of harsh austerity measures, envoys from the Troika of international lenders putting up $325 billion in rescue monies reportedly rejected two billion euros ($2.58 billion) in a government budget plan. Prime Minister Antonis Samaras, after weeks of wrangling, convinced his reluctant coalition partners, the PASOK Socialists and tiny Democratic Left, to accept an austerity budget that projected 10.5 billion euros ($13.54 billion) in cuts and another 3 billion euros ($3.87 billion) in yet more tax hikes for weary Greeks. Representatives from the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) met with Finance Minister Yiannis Stournaras and then with Samaras to go over the budget blueprint plan for 2013-14 and Greek media said they did not accept the projected savings in some areas, without identifying where they were. Government officials told Reuters that Greece will aim for a primary surplus before debt servicing of 1.1 percent of GDP next year, from a 1.5 percent deficit in 2012, the first positive balance since 2002. But the economy will continue to shrink for a sixth year in 2013 by 3.8 to 4 percent and even that was considered optimistic because more pay cuts, tax hikes and slashed pensions are expected to take the bottom out of what’s left of consumer spending and close possibly hundreds of thousands of additional businesses.

Troika Wants Faster Cuts - The troika is demanding that Greece increase the amount of spending cuts it will make next year by more than 1 billion euros in order for the country’s lenders to approve the austerity package the government has put together. Kathimerini understands the European Commission, European Central Bank and International Monetary Fund want to increase the frontloading of the measures because they believe the Greek economy will perform worse than forecast in the draft 2013 budget presented by Finance Minister Yannis Stournaras this week. The government predicted that the recession will reach 3.8 percent of gross domestic product next year but the troika believes that the contraction is likely to be as high as 5 percent, Finance Ministry sources said. This has prompted visiting inspectors to ask the Greek side to increase from 7.8 billion euros to as much as 9.2 billion the amount of cuts to be implemented next year. The total package is worth about 13.5 billion euros. The troika thinks this will lead to Greece wiping out its primary deficit next year but not achieving a primary surplus of 1.1 percent of GDP, as forecast by Stournaras.

Greece Proposes Another Austerity Budget, Its Lenders Decide It’s Not Cruel Enough - The Greek government submitted a draft budget for next year that would only further increase the pain and suffering directed at the population, despite depression conditions. But the European leaders determining whether the fresh austerity plan is good enough to meet their conditions want even more pain, in the form of deeper wage cuts. First, to the draft budget: The draft budget spells out about $10 billion in spending cuts and savings for 2013. About one-quarter of that would come through reductions in civil servants’ salaries and social welfare benefits, and about 15 percent through cuts in spending on health, defense and local authorities, the government said. It also stipulates raising the retirement age to 67 from 65, but that is not expected to alter the bottom line in 2013. So here’s the plan. In the middle of a depression, Greece has agreed to cut wages, benefits and social welfare spending. But the troika wants more cuts, including layoffs. Those are the two options: pain and more pain. Unbelievably, this draft budget would leave the government in SURPLUS for 2013 of 1.1% of GDP. That’s partially because GDP would continue to cascade downward; a 6.5% reduction this year and a 3.8% reduction next year. Unemployment would hit nearly 25% next year under this budget. The phrase you’re looking for is “impossibly cruel.” The draft budget cuts aren’t enough for the far crueler troika, however. As The Guardian reports, the troika rejected €2 billion of Greece’s proposed spending cuts, and demanded “further cuts in wages and pensions.” So you have a group of international lenders who don’t live in Greece forcing the country’s democratically elected government into savage cuts to the public sector, literally taking money out of their pockets. The troika’s demands are completely unsustainable, but they don’t have to live under them, so what do they care.

Greek police send crime victims to neo-Nazi ‘protectors’ - Greece's far-right Golden Dawn party is increasingly assuming the role of law enforcement officers on the streets of the bankrupt country, with mounting evidence that Athenians are being openly directed by police to seek help from the neo-Nazi group, analysts, activists and lawyers say. In return, a growing number of Greek crime victims have come to see the party, whose symbol bears an uncanny resemblance to the swastika, as a "protector". One victim of crime, an eloquent US-trained civil servant, told the Guardian of her family's shock at being referred to the party when her mother recently called the police following an incident involving Albanian immigrants in their downtown apartment block. "They immediately said if it's an issue with immigrants go to Golden Dawn," said the 38-year-old, who fearing for her job and safety, spoke only on condition of anonymity. "We don't condone Golden Dawn but there is an acute social problem that has come with the breakdown of feeling of security among lower and middle class people in the urban centre,"

New poll shows popularity of Greece’s Golden Dawn at 22 percent -Greece's political barometer for September has revealed that 54 percent of Greeks do not trust any political party. The measure of the popularity of political parties has shown a dramatic swing in favour of Golden Dawn (Chrysi Avgi). Whilst politicians are held in low regard and more than half of Greek citizens are so disillusioned with the political process that 54 percent no longer trust any political party, there are a few notable changes in the political landscape. A report in shows that the popularity of the the ultra-nationalist Golden Dawn has risen 10 points since May, winning the party a popularity score of 22 percent. Moreover, their share of the vote as evidenced in polls for September, now stands at 13 percent. According to Ekathimerini the popularity of Golden Dawn's leader Nikos Mihalolioakos has risen eight points since May to 22 percent. Golden Dawn attribute their rise in popularity to their words and their actions that speak to Greeks: their opposition to the rising tide of illegal immigration: and disillusionment with the main political parties that lied to win votes.

Greece to run out of money by November without next bailout tranche: Greek PM (Xinhua) -- Greece will run out of money by November if the next tranche of international aid does not arrive, Greek Prime Minister Antonis Samaras said in an interview with a German newspaper published on Friday. "Until the end of November. Then the coffers are empty," Samaras told the business daily Handelsblatt, answering the question of how long the struggling country can hold on without the next credit tranche. Greece has been dependent on international bailout aid on condition of drastic austerity measures, including pay cuts and higher retirement ages. Samaras said he is confident that the next tranche of aid will arrive on time, but added that it is very difficult to make further cuts to pensions and wages. Inspectors from the so-called "troika," the International Monetary Fund (IMF), the European Commission and the European Central Bank (ECB), are currently in Greece to assess the country's progress in fulfilling austerity promises before receiving the aid.

Greek PM: society will disintegrate without urgent financial aid - Greece is teetering on the edge of collapse with its society at risk of disintegrating unless the country's near-empty public coffers are shored up with urgent financial aid, the country's prime minister has warned. Almost three years after the eruption of Europe's debt drama in Athens, the economic crisis engulfing the nation has become so severe that democracy itself is now imperiled, Antonis Samaras said. "Greek democracy stands before what is perhaps its greatest challenge," Samaras told the German business daily Handelsblatt in an interview published hours before the announcement in Berlin that Angela Merkel will fly to Athens next week for the first time since the outbreak of the crisis. Resorting to highly unusual language for a man who weighs his words carefully, the 61-year-old politician evoked the rise of the neo-Nazi Golden Dawn party to highlight the threat that Greece faces, explaining that society "is threatened by growing unemployment, as happened to Germany at the end of the Weimar Republic". "Citizens know that this government is Greece's last chance," said Samaras, who has repeatedly appealed for international lenders at the EU and IMF to relax the onerous conditions of the bailout accords propping up the Greek economy.

Greece bailout: Tension in Athens over unpaid workers - Protesters are appearing in court in the Greek capital Athens a day after a rally by shipyard workers against job cuts descended into violence. A line of blue police lorries flanked the courthouse as riot police kept back supporters of those detained during the clashes on Thursday. Police had used truncheons when at least 100 protesters broke into the courtyard of the defence ministry. Greece may run out of money next month, its prime minister has warned. Antonis Samaras told the German daily Handelsblatt that his country could only survive until the end of November without the next planned tranche of bailout loans.

IMF lowers economic outlook for Germany -The International Monetary Fund has lowered its economic growth predictions for Germany, German daily Handelsblatt reported Friday, citing government sources in Berlin. The IMF now looks for Germany's economy to grow 0.9% this year, down from its forecast of 1% in July. For 2013, the IMF now looks for 0.9% growth, instead of 1.4% before. The forecasts are expected to be officially released on Tuesday, the newspaper said.

Leading institutes cut euro-zone growth forecast - Three of Europe's key economic institutes lowered their growth outlook for the euro zone Friday, predicting the bloc will enter recession in the third quarter and remain slack until at least next spring, even as inflation is expected to stay elevated. Germany's Ifo Institute, France's Insee and Italy's Istat now predict a contraction of 0.2% for the third quarter, instead of the 0.1% contraction they forecast in July. They expect gross domestic product to shrink another 0.1% in the fourth quarter and to stagnate in the first quarter of next year. If so, the euro zone's economy would have stagnated or contracted for six consecutive quarters by the end of the first quarter of 2013. The contraction "reflects a continuing downward pressure on domestic demand exerted by recently intensified austerity measures in several member states and the high level of economic uncertainty," the institutes said.

Why Italy Will Be The Place The Euro Dies - Beppe Grillo is a well know TV personality/comedian in Italy. At age 64 he ran for political office in Parma, and won. He has been doing a lot of talking since, and his philosophies have become very popular. His message is Italian nationalism, an end to the link with the Euro, he has even advocating defaulting on Italy’s debt. From the WaPo article:Four months after his Five Star Movement swept into government here in a surprise victory that sent his national profile soaring, he stood in a town square and delivered a breathless tirade against “the forces” seeking to destroy Italian society. He called for a referendum on the euro and said Rome should follow in the footsteps of Argentina and Ecuador by suspending payments on the national debt. In the country that could make or break the future of the euro with its next election, he described Germany and France as European paymasters who would bleed Italy dry. “He is a thermometer of Italy’s political temperature, and the success of a demagogue like him would send a dangerous message to our allies in Europe that credibility and sacrifice are no longer on Italy’s agenda.” Recent surveys suggest that almost one in five Italians now back it, placing his movement only single digits behind the nation’s two leading parties in popularity. I have no real understanding of Italian politics, but I think there is an important message in Grillo’s meteoric rise in popularity. My conclusion is that Mario Draghi’s effort to save the EU (and the Euro) is doomed to failure.

Iceland's Economy now growing faster than the U.S. and EU - Iceland didn’t follow the rest of the world by bailing out bankers. Surprisingly, they arrested them instead. Now their economy is recovering faster than the EU and the United States. Remember when the United States government told the American people that action was required to save the banks? Action in the form of Billions of dollars of debt. Hard to forget that. Hundreds of Billions of dollars in National debt later were still digging our way out of the hole. At the start of the world wide 2008 economic collapse, Iceland was in worse shape than almost any other country in the world. Imagine what America would be like today if we bailed out the victims of poor banking practices, while punishing the bankers who were responsible instead of bailing them out. After watching this video tell us what you think? Is Iceland merely being a rebel desperate for revenge against a powerful industry, or on to something that America should have done as well?

Rising government debt threatens UK's AAA rating - Fitch - Ratings agency Fitch has warned the UK’s AAA credit rating is under increasing pressure because of growing government debt, which could hit 100% of GDP this year, and the continuing eurozone crisis. Fitch has affirmed the UK’s coveted credit rating for now, but has maintained the country on a ‘negative outlook’ and expects it will remain so until at least 2014. The nation’s spiraling budget deficit is partly to blame for this outlook, Fitch said. “The agency believes the UK's high-income, flexible and diversified economy, robust institutions, and high degree of political and social stability support the 'AAA' rating. However, weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK rating, resulting in a negative outlook since March 2012.

UK hooked on debt, PIMCO boss warns - Britain is part of a debtor nation “ring of fire” where bondholders are at risk of being “burned to a crisp”, the head of the world's biggest bond house has warned.  Bill Gross, PIMCO’s founder and chief investment officer, compared the UK to a drug addict who is hooked on debt and struggling to kick the habit in his monthly investment outlook. His comments were part of a broader warning that the US would turn into Greece within a decade if the government did not find $1.6 trillion (£990bn) of savings “over the next five to 10 years”.  Mr Gross, whose company manages $1.8 trillion across the world and whose head of European investment is Ed Balls’ younger brother Andrew, is famous for his florid warnings and influence over market sentiment, if not his consistency.

Britain's Gap Trap - Krugman - The always interesting Izabella Kaminska points us to a study suggesting that Britain’s output gap — the difference between real GDP and the economy’s capacity — is much bigger than the official estimates. This is actually a theme I’ve heard from a number of people. Why might we think this? The official estimates assume that Britain’s productive capacity — not just the actual level of output, but the economy’s potential — took a huge hit from the financial crisis. It’s never been clear why this should be so. m And here’s the thing: if British capacity is a lot bigger than estimated, everything people say about fiscal policy, in particular, is wrong. The structural budget deficit is much smaller than claimed, as is the need for adjustment. The case for austerity is also weaker, and the costs of austerity in keeping the economy depressed are much larger.

Wages, Prices, Depressions, Deficits (Wonkish) - Paul Krugman - I mentioned the piece by Capital Economics arguing that policy makers in Britain are greatly understating the output gap, the amount of excess capacity in the economy, which is leading to badly skewed policies. This actually raises a whole set of related issues, with bearing on the US as well. So here’s a longish, wonkish discussion.So: the starting point here is the official estimate by the Office of Budget Responsibility that Britain right now has an output gap of less than 3 percent. This is a remarkable assertion, when you bear in mind that real GDP remains well below its level pre-crisis, and that we used to think that Britain’s long-run growth rate was around 2.5 percent. As the CE guys say, simple trend projection would indicate a shortfall of 14 percent; how did that become less than 3? Part of the answer is the assertion that the UK economy was operating well above sustainable levels in 2007, even though there were none of the usual signs of overheating. Beyond that, however, is the claim that the financial crisis somehow reduced potential output by a huge amount. As CE says, there is no plausible story about how that might have happened.

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