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

Saturday, January 12, 2013

week ending Jan 12

Fed's Balance Sheet Expands in Latest Week - The Fed's asset holdings in the week ended Jan. 9 increased to $2.930 trillion, up from $2.919 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities grew to $1.676 trillion on Wednesday, from $1.666 trillion a week earlier. The central bank's holdings of mortgage-backed securities edged up to $926.71 billion, from $926.69 billion a week ago. In December, Fed officials committed to buying $40 billion of mortgage-backed securities and $45 billion of long-term Treasurys each month, until the labor market improves significantly. If the Fed buys bonds at the current pace through the end of 2013, it will be expanding its portfolio by another $1.02 trillion. Thursday's report showed total borrowing from the Fed's discount lending window was $559 million Wednesday, down from $587 million a week earlier. Commercial bank borrowing was negligible Wednesday, down from $29 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.251 trillion, from $3.241 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.905 trillion, up from $2.893 trillion in the previous week. Holdings of agency securities fell to $309.95 billion, down from the prior week's $311.24 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 10, 2013: Federal Reserve statistical release

Fed’s Record-Breaking Profit - The Federal Reserve is breaking all kinds of records these days. Its balance sheet has swelled to more than $2.9 trillion and will reach new highs in 2013 as the Fed purchases $85 billion a month in Treasury and mortgage-backed bonds. The growth of its holdings in turn is causing the central bank to remit record amounts to the U.S. Treasury. On Thursday, the Fed said it sent $89 billion back to the government in 2012, the highest ever. It’s a strangely circular arrangement: the government pays the Fed interest and the Fed pays it back to the government. Of course, the current record isn’t likely to last long. The Fed’s balance sheet could swell to nearly $4 trillion by the end of this year. If the Fed generates a return similar to that of 2012, next year’s payout could easily top $100 billion. These are eye-popping returns when compared to private sector banks or hedge funds.

Fed's Yellen: Fed Likely to Vary Interest on Reserves in Future - The Federal Reserve will “almost surely” use its power to change the interest rate on reserves that banks park at the central bank when the time comes to tighten its easy-money policy, Fed Vice Chairwoman Janet Yellen said Saturday. Since she last taught economics in 2003, the tools of monetary policy have changed dramatically, Ms. Yellen said in opening remarks at a panel at the American Economic Association annual meeting. For example, the central bank now has the power to change the interest it pays banks on the excess reserves they keep at the Fed, she said. “We are quite likely and have decided we will almost surely rely on varying that level of interest on reserves” when the Fed decides to exit its very accommodative monetary policy, she said.

Bullard: Fed’s Specific Guidance Likely to End When Rates Rise The Federal Reserve’s newly adopted policy of offering more guidance on the factors that drive monetary policy will likely end when short-term interest rates start to rise. Federal Reserve Bank of St. Louis President James Bullard said in an interview that the central bank’s decision to name inflation and unemployment thresholds that, once crossed, will argue for tighter policy, are “mostly tailored to the specific situation we are in.” Mr. Bullard will be rotating into a voting slot at this year’s gatherings of the interest-rate-setting Federal Open Market Committee. In December, the FOMC said it will keep interest rates near 0% until what is currently a 7.8% unemployment rate goes below 6.5%, so long as expected inflation doesn’t breach 2.5%. The new regime allowed policymakers to no longer conditionally pledge to keep rates low based on a calendar date, a method that begat broad dissatisfaction both in and outside the Fed.

Fed Watch: Bullard and the "Fiscalization" of Monetary Policy - I am struggling with the latest speech by St. Louis Federal Reserve President James Bullard. The speech is titled "The Global Battle Over Central Bank Independence," but in the process confuses fiscal policy stabilization as necessarily a threat to central bank independence, travels down a bizarre road that appears to be a misunderstanding of European monetary policy, and misses the obvious example of recent events in Japan.  Bullard begins with a description of the conventional wisdom of the relationship between fiscal and monetary policy. Basically, the former should focus on the medium- and long-run but is poorly suited for short-run stabilization. Such stabilization is the purview of monetary policy, or, more accurately, an independent monetary authority. Bullard quickly goes off the rails:

  • The central banks in the G-7 encountered the zero lower bound on nominal interest rates.
  • This led many to talk about the need for fiscal authorities to step up and conduct macroeconomic stabilization policy.
  • However, the usual political hurdles asserted themselves and led to a hodgepodge of fiscal policy responses not particularly well-timed with macroeconomic events.

By itself, the zero bound did not give rise to increased interest in stabilization though fiscal policy. Instead, it was the inability of central banks to stabilize activity that raised the focus on fiscal policy. Consider the gap between private saving and investment: Further, consider the gap across the era of the Great Moderation: So, what's difference? The magnitude of the dislocation. While it is reasonable to believe that monetary policy is the preferable stabilization tool for relatively small perturbations in economic activity, it is not evident that the same is true for large perturbations, especially when the economy is at the zero bound. Does Bullard really believe that the US economy would be in better shape in the absence of a fiscal response?

2013 Fed Voter George Warns of Risks in Current Policy - As she prepares to take on a direct role in setting monetary policy this year, the leader of the Federal Reserve Bank of Kansas City said Thursday she sees big risks associated with the aggressive course of action currently being taken by the central bank. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances,” Federal Reserve Bank of Kansas City President Esther George said. She added the central bank’s stance could ultimately “hamper attainment of the [Federal Open Market Committee's] 2 percent inflation goal in the future.” “I am concerned about the high rate of unemployment, but I recognize that monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it,” the official said.

A Look At The Fed's Nest In 2013: Here Are This Year's Voting Hawks And Doves - Back in December 2011, we previewed the rotation in the FOMC's voting block with "When Doves Laugh: 4 Weeks Until The Quiet Coup In The Fed Gives QE3 A Green Light", a post whose summary was that as a bevy of new voting doves came in, it made QE3, then very much a taboo topic - because, you see, "the economy was improving on its own" - virtually inevitable (despite some angry comments from even our own readers). Naturally, as 2012 played out, we got not only QE3 but QE4EVA. So now what? Well, with the new year comes the now traditional new roster of voting regional Fed president members. And while the supremacy of the Bernanke core supermajority group of 8 permanent voters (especially with the three new hires) will never be in jeopardy, 4 new regional presidents join the core group of Bernanke doves. The new voting FOMC members: Evans, Rosengren, Bullard and George. They replace Pianalto, Lockhart, Williams and consummate critic and sole voice of reason and opposition at the Fed in 2011, Lacker. So how does the layout of the 2013 FOMC nest of hawks and doves look like? SocGen summarizes.

The liquidity trap heralds fundamental change - This tweet from MacroResilience caught my eye today: "In a world of interest-bearing money, money = govt bonds & The "liquidity trap" is a permanent condition, not a temporary affliction". And he then expanded his argument in this post. The first thing to note is that nearly all money is interest-bearing - and not because central banks are paying interest on reserves, although this is a contributory factor. It is because nearly all money now is held in bank accounts and other forms of investment, and nearly all bank accounts and investments carry interest. Actually this has been the case for a long time, but the change in the last decade has been the ease with which people can move money around between accounts, funds and investments. As MacroResilience points out in his post, there is no reason for anyone to leave significant amounts of money in a non-interest bearing account. And I would add that there is no reason for anyone in the Western world to keep large amounts of physical cash, either. So for the first time in history virtually all money bears interest. The fact that money is interest bearing, and money can be readily exchanged with other safe assets - especially government debt - means that investors have no preference for safe assets over money. Any real difference between yields on safe assets and interest rates on government-insured deposit accounts will be immediately arbitraged away, so it is reasonable to assume that they are now equivalent for any given maturity (deposit accounts are not time-bounded) and liquidity (time deposits don't have immediate access). This is the liquidity trap, and as originally envisaged by Keynes and described more recently by (among others) Paul Krugman, it is a "temporary affliction" in a distressed economy.

A bold dissenter at the Fed, hoping his doubts are wrong -  Jeffrey M. Lacker, the Federal Reserve’s most persistent internal critic, does not much resemble a firebrand. He is personally cheerful, professionally inclined to see both sides of an issue and quick to acknowledge he may not be right. He says he would rather be wrong. But for the last several years, Mr. Lacker, president of the Federal Reserve Bank of Richmond, has warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate and, worst of all, that the Fed is undermining its hard-won ability to control inflation. Last year, Mr. Lacker cast the sole dissenting vote at each of the eight meetings of the Fed’s policy-making committee, only the third time in history a Fed official dissented so regularly. “We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.” As the Fed enters the sixth year of its campaign to revitalize the economy, the debate between the Fed’s majority and Mr. Lacker — whose views are shared by others inside the central bank, as well as some outside observers — highlights the extent to which the Fed is operating in uncharted territory, making choices that have few precedents, unclear benefits and uncertain consequences.

Has quantitative easing had its day? - QE's failure to power recovery is clear, but the US and UK remain wedded to the policy to stifle debate about fiscal policy. Since the first two rounds had patently failed to generate recovery, he now announced a QE3 with a difference: not only did he announce QE3, its sheer scale and boundlessness made it a veritable QE infinity. The Fed would continue buying up mortgage-backed securities to the tune of $40bn a month until the labour market improved and would keep interest rates to their current near-zero levels until unemployment fell below 6.5%. Having targeted inflation to please the holders of capital for almost two decades, even when the resulting high interest rates stifled investment and kept unemployment high, the Fed's concern about employment was certainly novel.  Meanwhile, the UK's new central banker in waiting, Mark Carney, proposed his own innovation in monetary policy: the Bank of England's two-decade-old policy of targeting inflation should be dropped in favour of targeting nominal GDP growth.  Bernanke and Carey's new and improved monetary policies are designed to retain QE as the chief policy instrument for engineering recovery despite its failure so far. Given that its most vocal opponents are the economic neanderthals of the US Tea Party right, it is usually assumed that QE is progressive, if not, so far at least, very effective. In reality, QE has served, first and foremost, to socialise the losses of the financial systems of the two countries at the centre of the financial crisis, the US and the UK. Some find consolation in the thought that at the very least QE prevented the economies of these two countries from falling into outright depression. In reality, two other things accomplished this. First, unlike in the 1930s, the "automatic stabilisers" – government spending and transfers – formed a floor beneath which the economy could not fall. Second, there were mild fiscal stimuli. But their end now threatens to send economic activity south again in both economies.

In Defense of the Fed's New Interest-Rate Policy - At the most recent meeting of its Federal Open Market Committee, the Federal Reserve broke new ground by announcing the explicit criteria it would use to begin raising its target for the federal-funds rate. The FOMC said it will keep the rate near zero as long as the unemployment rate remains above 6.5%, and the inflation rate one to two years ahead is projected to be no higher than 2.5%. The Fed's increased clarity about its intentions is highly desirable. This is especially so now, when the current funds-rate target cannot be further lowered, yet aggregate demand remains insufficient. A commitment not to raise rates in the future as soon as might have been expected is an obvious way the FOMC can loosen current financial conditions. Yet the new approach has downsides that the Fed needs to address. Providing policy criteria to the public is a significant improvement over the Fed's previous guidance to markets—in which the FOMC stated that near-zero rates were "likely to be warranted at least through mid-2015." Pledging to keep rates unchanged for more than two years, regardless of what happens in the meantime, would be reckless—and of course was not what the central bank intended. But date-based guidance runs the risk that announcement of a distant date will be taken to indicate that the Fed has pessimistic information about the economy's future prospects. Still, the Fed's new approach has invited confusion about its longer-run policy targets. Many have read the FOMC statement as an important departure from the policy framework codified as recently as January 2012: The Fed is now taken to have a numerical target for unemployment alongside its inflation target, and the inflation target appears to have increased from 2% to 2.5%. In fact, the Fed stated in its Jan. 25, 2012 policy statement that it would not be appropriate to specify a fixed goal for employment, because the maximum level of sustainable employment is difficult to estimate and is not something that can be controlled by the Federal Reserve.

Michael Woodford Continues to Do God's Work - Michael Woodford continues to do God's work on the pages of the Wall Street Journal and an in an interview with Bloomberg.  In the former, he, along with Frederick Mishkin, advance the case for nominal GDP (NGDP) level targeting by showing how the current innovations to Fed policy are effectively a step in that direction.  They carefully point out these changes allow for catch up aggregate demand growth while still anchoring long-run inflation expectations, the very essence of a NGDP level target.  Woodford further expounds on this idea in his Bloomberg interview.     This is an important point, because many see nominal GDP level targeting as giving license to the Fed to do excessive money creation.  On the contrary, it provides a solid long-run nominal anchor while allowing inflation to move in response to supply shocks in the short-run.  Here is how I described it earlier:A level target anchors long-run inflation expectations, but allows for temporary catch-up growth or contraction in NGDP so that past misses in aggregate nominal expenditure growth do not cause NGDP to permanently deviate from its targeted path.  Woodford notes that currently NGDP is anywhere from 10-15% below its trend (and thus expected) growth path.  Any increase in inflation under this target, therefore, would not be some ad-hoc temporary increase but part of a systematic approach that would return NGDP to its trend.  I have used the following figure before to illustrates this idea:

Former Fed Governor Frederic Mishkin joins the NGDP bandwagon -- Evan Soltas sent me an important new WSJ piece by Frederic Mishkin and Michael Woodford: The Fed also needs to clarify that the threshold of 2.5% for the inflation rate in no way suggests that it is weakening its commitment to its long-run inflation target of 2%. It would be dangerous to weaken this commitment, as it would lead to a permanent ratcheting up of inflationary expectations and inflation.Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis. That means ensuring a long-run inflation rate of 2% in terms of the PCE (personal consumption expenditure) deflator, and an average unemployment rate that is consistent with price stability.It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.

On the transient necessity of central bank independence - Nowadays, the idea of not having an independent central bank is seen as being a bit backward. One could even say that central bank independence is widely accepted as the optimum set-up for any country’s monetary system, a reflection of its developmental status.  Yet, can we really be so absolute about the matter? In Raiders of the QE surplus — a post that challenged the controversy regarding the UK Treasury’s so-called raid of Bank of England surpluses — David and myself proposed that central bank independence must not be treated so resolutely. We argued, in fact, that any central bank’s status should be determined by the economic context it finds itself in. After all, it’s impossible to separate the notion that, however you look at it, a central bank is always an agent of the Treasury. The two are in effect a married couple. Or as we put it, regarding independence: …it’s just another type of Chinese wall — and whichever way you look at it, the BoE and the HMT will always be a married couple, just one whose professions vary and conflict on occasion to varying degrees

Fed Watch: More on Central Bank Independence - Two obvious themes are in play. First, should central banks always be independent? Second, are the supposed threats to independence widespread? On the first topic, Izabella Kaminska offers this: Nowadays, the idea of not having an independent central bank is seen as being a bit backward. One could even say that central bank independence is widely accepted as the optimum set-up for any country’s monetary system, a reflection of its developmental status. In Raiders of the QE surplus — a post that challenged the controversy regarding the UK Treasury’s so-called raid of Bank of England surpluses — David and myself proposed that central bank independence must not be treated so resolutely. We argued, in fact, that any central bank’s status should be determined by the economic context it finds itself in.I tend to agree. I don't recall there being an Eleventh Commandment to the effect of "Thou shalt always grant independence to the monetary authority." Ultimately, the central bank serves the public, and the latter only grants independence if the former is adequately meeting the needs of the public. In other words, central bank independence is ultimately tied to job performance.  With this in mind, note this Reuters piece by Leika Kihara:Abe had run his campaign with a relentless focus on economic policy and had called on the Bank of Japan (BOJ) to take drastic steps to end the nation's long bout of deflation, or else face a radical makeover at the hands of parliament.The vote had become an unexpected referendum on the BOJ itself, and the bank had lost. Kihara suggests that what many perceive as the loss of independence is the Bank of Japan's response to the will of the people: The counterargument is that the Bank of Japan is fooling itself; a response to political pressure, by the fiscal authority or the electorate, is simply a loss of independence.

DE central banks' balance sheets approaching $6 trillion; expected to grow another $1 trillion in 2013 - This is a well covered subject, but it's worth taking a quick look at the combined balance sheets of the developed economies' (DE) central banks. We are quickly approaching six trillion dollars. It is important to note that not all of this would qualify as "QE". For example the Fed expanded balance sheet in 2012 without materially impacting either the bank reserves or the monetary base (see discussion). Although it was unintentional, the Fed effectively "sterilized" its purchases. The ECB also views some of its programs as sterilized. Nevertheless it is expected that the developed nations' central banks will expand their balance sheets by another 1 trillion dollars in 2013. This will be driven mostly by the Fed and the BOJ (see discussion). And unlike last year, the US monetary base will grow sharply in 2013 (and so will Japan's). Central banks continue to feed the markets' addiction to stimulus (see discussion).

US and EU printing money furiously to shift debt burden - The United States and the European Union have adopted the policy of quantitative easing, and kept their money-printing machines running around the clock over the past few years. This has increased the imported inflationary pressure facing China, and reduced the value of its huge foreign exchange reserves. "The United States and the European Union have adopted the policy of quantitative easing in order to solve their own economic problems," said Xu Hongcai, deputy director of the Information Department under China Center for International Economic Exchanges. The United States wants to boost employment because it involves the support of voters and domestic political stability. The European Union has had a hard time since the debt crisis erupted, and has thus adopted a loose monetary policy to promote economic growth and to solve social contradictions. The United States has kept printing more money also to shift its debt burden. Xu said that the debt-ridden country has barely resolved the "fiscal cliff" problem lately through debt monetization, instead of through reducing expenditure and increasing taxes on the wealthy. In other words, it has shifted its debt burden onto other countries through money printing and inflation.

The problem of cash - The "zero lower bound" (ZLB) constraint on interest rates exists because of the presence of non-interest bearing forms of money in the economy, of which the most important is physical cash. Were all money entirely electronic and interest-bearing, negative nominal rates would have become reality years ago. But where there are non-interest bearing forms of money that are near-perfect substitutes for interest-bearing forms, the view is that at the ZLB investors will switch funds to non-interest bearing forms of money rather than accept loss of principal. In short, they will hoard cash. The effect of the ZLB constraint is to force central banks to adopt all manner of peculiar ways of forcing real interest rates below zero, because cutting policy rates directly (particularly the interest rate on excess reserves) would have undesirable contractionary effects due to the reluctance of banks to impose negative interest rates on depositors. banks believe, with some justification, that the general public objects to paying banks to keep their money safe and provide an efficient payments service. The prevalent belief is "I shouldn't have to pay to use my own money". This neatly sums up the problem with cash. Physical cash is a free good: people do not expect to have to pay to use it, though holding it as an investment carries both cost (vaulting charges, inflation) and risk (theft, fire). And yet it could be argued that retaining physical cash as a non-interest bearing form of money when nominal interest rates on all other forms are negative is a subsidy to people who prefer cash. As I've noted before, negative interest rates are a tax. If the general economic environment is such that money is taxed, why should holders of physical cash be exempt?

Potential Problem Amid Big Fed Profit - WSJ  - The Federal Reserve made a lot of money off its bond holdings last year, but in these numbers lies a potential problem for the future. The Fed took in a record $91 billion. After expenses it sent $88.9 billion to the Treasury, making the Fed a notable force in cutting deficits. But with around a $3 trillion balance sheet, the Fed paid $4 billion in interest on excess reserves. Central bankers do this to keep the massive amount of bank reserves on the Fed’s books, preventing it from flooding into the economy and starting an inflation surge. At some point the Fed will tighten rates and as part of doing that it will also have to raise the rate it pays on excess reserves.

Platinum Currency: What's The Fed's End Game? - Steve Randy Waldman as usual gets practical about Treasury issuing platinum coins. JKH in comments there does typically likewise. Suppose the Department of the Treasury says: “We have a statutory obligation to pay all amounts that have been authorized by Congress — both expenditure and debt obligations. Since the borrowing limit has been reached and Congress won’t let us sell bonds to make the payments they’ve authorized, we are now issuing physical currency, in the form of platinum coins, to meet those obligations. We are required to do this by statute.” Let’s say the coins are worth $1 million each. Treasury would have to issue about $100 billion in coins per month, which is about what it currently issues in bonds. The coins would be effectively the same as zero-interest, perpetual bonds. It doesn’t matter conceptually whether Treasury deposits that currency at their bank (the Fed) then pay bills normally using checks and wire transfers, or issues the coins to payees. Payees will deposit them at their banks, banks will deposit them in their accounts at the Fed, and the result is the same. The Fed has a bunch of platinum coins in its vault, and the government has met its obligations.  But: Suppose the Fed starts feeling inflation looming. So it sells bonds and receives bank deposits (reserves) in return, to sop up excess money/reserves.  But the Fed’s only got about $3 trillion in bonds to sell. What happens when it runs out? Can it still control inflation?

Inflation versus Price-Level Targeting in Practice - Atlanta Fed's macroblog - In last Wednesday's Financial Times, Scott Sumner issued a familiar indictment of "modern central banking practice" for failing to adopt nominal gross domestic product (GDP) targets, for which he has been a major proponent. I have expressed my doubts about nominal GDP targeting on several occasions—most recently a few posts back—so there is no need to rehash them. But this passage from Professor Sumner's article provoked my interest: Inflation targeting also failed because it targeted the growth rate of prices, not the level. When prices fell in the U.S. in 2009, the Federal Reserve did not try to make up for that shortfall with above target inflation. Instead it followed a "let bygones be bygones" approach.  In principle, there is no reason why a central bank consistently pursuing an inflation target can't deliver the same outcomes as one that specifically and explicitly operates with a price-level target. Misses with respect to targeted inflation need not be biased in one direction or another if the central bank is truly delivering on an average inflation rate consistent with its stated objective. So how does the Federal Reserve—with a stated 2-percent inflation objective—measure up against a price-level targeting standard? The answer to that question is not so straightforward because, by definition, a price-level target has to be measured relative to some starting point. To illustrate this concept, and to provide some sense of how the Fed would measure up relative to a hypothetical price-level objective, I constructed the following chart.

Inflation vs. Price Level Targeting - Dave Altig and Mike Bryan of the Atlanta Fed’s Macroblog argue here that it wouldn’t make much difference if the Fed were doing price level targeting (in which the future target path stays fixed even when you miss a target, so you need catch-up inflation or catch-up disinflation) rather than inflation targeting.  Their evidence is mostly from a chart like this (my replication using monthly data, which you can confirm looks fairly similar to theirs which appears to use annual data): Quoting from their blog post: Consider the first point on the graph, corresponding to the year 1993….This point on the graph answers the following question: By what percent would the actual level of the personal consumption expenditure price index differ from a price-level target that grew by 2 percent per year beginning in 1993? The succeeding points in the chart answer that same question for the years 1994 through 2009. In my case, as I said, it’s monthly, and it goes all the way to 2012, but the idea is the same. OK, fine. So here it looks like a price level target would have produced roughly the same results as the Fed’s (unofficial until January 2012) inflation target, and whether it would have undershot or overshot depends on when you start the target path.. BUT… The problem with this chart is that it uses the headline PCE price index, whereas during most of this time (until January 2012 when the official inflation targeting policy was introduced), the Fed was perceived to be targeting corePCE inflation (excluding food and energy, that is), not headline inflation. Price-setters were making their decisions largely under that assumption. It makes no sense to go back to 1993 and set up a target path using the headline price index when that index was irrelevant to the policy that the Fed seemed to be following at the time.

Fed's Plosser: Fed Should Keep Focus on Inflation - WSJ - Don’t muddy the Federal Reserve’s primary mission of keeping inflation under control by making it use monetary policy to keep financial markets running smoothly, a U.S. central bank official said Saturday. “Financial stability should not be an explicit objective of monetary policy,” Federal Reserve Bank of Philadelphia President Charles Plosser said in remarks given to a panel at the American Economic Association conference in San Diego.

Vital Signs Chart: Dollar Gaining Ground - The dollar is gaining ground against the world’s currencies. The WSJ Dollar Index, which measures the dollar against the world’s most heavily traded currencies, edged higher to 71.042, the second-highest reading since August. The dollar has recently strengthened against the yen, on expectations of stimulus measures in Japan, and against the euro, on new signs of weakness in Germany.

Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift - After a somewhat lengthy hiatus, Curve Watcher's Anonymous is taking a good long look at the US treasury yield curve. There have been three consecutive headfakes higher in treasury yields only to see yields plunge to new lows on repeated QE announcements by Bernanke. Is the fourth time a charm? Certainly Bernanke is not about to hike interest rates as Greenspan did. But what happens to the long end of the curve if Bernanke simply ends QE later this year? The question stems from Minutes of the December FOMC Meeting released last week. While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings.  In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.  Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

Fed Officials ‘Cautiously Optimistic’ About Growth - Federal Reserve officials were “cautiously optimistic” about economic growth in November and December, pointing to continued improvement in the housing market but noted flat activity in the manufacturing sector and continued elevated levels of unemployment, according to minutes of discount-rate meetings held late last year and released Tuesday.The Fed’s Board of Governors kept the discount rate unchanged at 0.75%, according to minutes of the November and December meetings. Ten of 12 regional Fed banks recommended keeping the discount rate, the rate charged to banks on short-term loans they receive from the Fed, unchanged at the board’s December meeting. Directors from the Kansas City Fed voted for an increase to 1.00% while directors from the Boston Fed called for a decrease in the discount rate to 0.50%, as they had earlier in 2012.

Visualizing Improvement - Atlanta Fed's macroblog - The December employment report has come and gone without much of a splash. The roundup of commentary at MarketWatch included these observations: "In short, not especially strong nor weak. While a 150–170K per month trend in payrolls is far from booming, it is strong enough over time to keep the unemployment rate moving down given slowing in the secular trend in labor force growth. Unemployment was flat in December, but it is down 0.4 points in the last six months." —Jim O'Sullivan, chief U.S. economist, High Frequency Economics "The overall picture is that the labor market remains lackluster. If this state of affairs continues throughout most of this year, as we expect, then it is hard to see the Fed dialing back or stopping its [quantitative-easing] purchases as some officials currently envisage." —Paul Ashworth, chief U.S. economist, Capital Economics Today's Job Openings and Labor Turnover Survey (JOLTS) report from the U.S. Bureau of Labor Statistics (BLS) did little to change that impression. The interest in the Fed's reaction, always acute given the employment half of the Fed's dual mandate from Congress, has been heightened since the Federal Open Market Committee (FOMC) announced, first in September, that it will continue its asset-purchase programs as long as "the labor market does not improve substantially." But what constitutes substantial improvement is a matter of some art, as Fed Chairman Ben Bernanke made clear at his press conference following the December meeting

2013 forecast: housing and refinancing vs. oil and austerity, part 1 - My method of foecasting is pretty simple. In fact, so simple, I call it the K.I.S.S. method. Even though the LEI is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly-paid punditocracy, especially at turning points.  Since I'm not a highly paid Wall Street pundit, I simply rely upon the LEI for the short term, and the yield curve for the longer term with the caveat of watching out for deflation. The simple fact is, with one exception, if real M1, and real M2 (less 2.5%), are positive, and the yield curve 12 months ago was positive, the economy has always been in expansion. When real money supply is negative, and the yield curve was inverted 12 months ago, the economy has always been in contraction. The exception is that the yield curve does not help to project the economy 12-16 months later if the economy at that later date is in deflation - as it was in 1930-32 and late 2008 and early 2009.  Since in the last couple of years I have also learned a lot about the methods of the late Prof. Geoffrey Moore, the founder of ECRI, I've also been able to intergrate his findings about short and long leading indicators into my forecast.  This year, the LEI, the yield curve, and the short and long leading indicators of Prof. Moore are in close agreement: they suggest that, for the next 3 to 6 months, the economy will continue to shamble along just barely avoiding recession. Thereafter all of the long leading indicators are suggesting further improvement. But as we saw in late summer 2012, an unexpected Oil price spike can complicate the picture. And the embrace of austerity as enacted by last week's "fiscal cliff" agreement also throws a monkey wrench into the forecast. Let's take each of those items in order.

Industrial Production And Real GDP Growth - I spend a lot of time talking about and analyzing manufacturing data for both the US and other countries.  There are also tons of US manufacturing indicators but (oddly) only one  macro level services index (the ISM services index).  In addition, industrial production is a key metric used by the NBER to date recessions.  But manufacturing is a small part of the US economy.  So, why all this focus on manufacturing? Because it's a really good coincident indicator.  Let's look at industrial production (the most visible manifestation of manufacturing activity and also a stat for which we have a long series of historical data) and compare it to GDP.  The data series below have been normalized so that both real GDP and IP are based on 100.  I've also made the IP data quarterly by summing the monthly data.The above chart shows the relationship between industrial production and real GDP.  While correlation does not equal causation, these two data series have a similar trajectory for most of the other's existence.

JPMorgan: US recovery about to "hit a pothole" - As discussed earlier (see post), US manufacturing sector has begun to recover. Manufacturing orders in the US as well as in Emerging Asia (see post) have diverged from other large economies. This trend is becoming reflected in the broader economic activity.However according to JPMorgan, the result of the latest fiscal negotiations will soon create headwinds for this expansion and dampen GDP growth. The tax increases on  higher income households as well as the hike in payroll taxes will crate a drag on growth. That in turn will limit global economic activity. JPMorgan: - Regionally the US and Emerging Asia are leading the move up in our global surveys. In the US, early December labor market reports and consumer indicators reinforce this message. Unfortunately, the economy is about to hit a pothole as the household sector absorbs a large front-loaded drag resulting from the fiscal cliff agreement. The increase in payroll taxes and higher marginal rates on high-income households is set to depress 1H13 income growth by roughly 2%-pts at an annualized pace.

The Big Fail - Paul Krugman - If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong? The answer, mainly, is the triumph of bad ideas. . The financial crisis led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession. For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar. So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough. At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

J.P.Morgan analysts cut their estimate for fourth-quarter GDP growth to an annualized 0.8% from a prior forecast of 1.5%n wider trade deficit -  Economists cut their forecasts for economic growth in the fourth quarter after the government reported disappointing results Friday morning that showed a sharply wider U.S. trade deficit in November. J.P.Morgan analysts cut their estimate for fourth-quarter GDP growth to an annualized 0.8% from a prior forecast of 1.5%. “The trade deficit for the month was much wider than expected, and it now looks like net exports will subtract a few tenths from GDP growth in the fourth quarter,” according to a J.P. Morgan research note. Elsewhere, Barclays analysts cut their estimate for fourth-quarter GDP growth to 1.3% from 2.0%, while analysts with Morgan Stanley cut their forecast to 0.7% from 1.5%. According to the U.S. Department of Commerce, the U.S. trade deficit widened in November to the highest point since April. The trade gap widened 15.8% to $48.7 billion in November. Imports rose 3.8% to $231.3 billion, the highest level since April, while exports increased 1% to $182.6 billion. Government analysts revised the deficit in October to $42.1 billion.

US Q4 GDP: From 2.5% To Sub 1% in Under Six Months - The previously noted surge in the US trade deficit may or may not be due to the iPhone (which either leads to a rise or fall in GDP, depending on which "strategist" is goalseeking their excel model to reality), but the result is clear: Q4 GDP just got slammed. Below is a summary of the Wall Street penguins all of whom had no choice but to revise their Q4 GDPs far lower.

  • Goldman Sachs: 1.8% to 1.3%
  • JPM: 1.5% to 0.8%
  • RBS: 1.5% to 0.7%
  • Nomura: 2% to 1.3%
  • Last, and least, Deutche Bank's Joe Lavorgna: unchanged at 1.3%

Look forward to hope being forced to surge even more to offset for this cut by nearly 50% ot the consensus Q4 GDP estimate of 1.5% prior to today. And while we wait for Bloomberg to compile today's massive downward revision to economic growth, this is how Q4 GDP tracking estimates looked like in the past 6 months before today's downward revision which will take the consensus line to 1% or under.

Up To 3.5% Of US 2013 GDP Could Evaporate Due To Enacted Tax Hikes - We were surprised to learn that according to at least one model created by Goldman, the total consumption hit for all of 2013 (not just H1), may well be higher than what most people assume (roughly 1.5%). In fact, as Goldman shows, based on a model conceived by Christina and David Romer, it is possible that US GDP growth in the second half is slashed by an additional 2-2.5%, something which very likely will tip the country into recession as the combined impact over the entire year could be as high as 3.5%, eliminating even the most optimistic forecasts for organic growth in the US for the new year. But it gets worse. As Goldman observes, "based on our reading of the debate in Washington, we have become more concerned about our assumption that the automatic spending cuts (or "sequester") will be delayed into 2014. If the sequester takes effect as scheduled from March 1, this would present an additional downside risk to our growth forecast in the later part of the  year." So the worst case scenario for GDP growth from tax hikes alone is already 3.5%, and one may have to add to that another several percent in GDP reduction from an spending cuts, which might well lead to a 4-5% GDP drop in 2013 in the worst case, a case determined solely by the dysfunction in Washington.

What can Washington do to Boost the Recovery?: As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment.  Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

Video: Paul Krugman Explains the Keys to Our Recovery [via]

Fed’s Lacker Warns of Damage Over Debt Ceiling Debate - Federal Reserve Bank of Richmond President Jeffrey Lacker said Tuesday that it would be damaging to the economy if it starts to look like Congress won’t raise the debt limit before the Treasury runs out of room to borrow. “It would be damaging if it became widely believed that Congress wouldn’t at the end of the day take an orderly course–even if they go up to the limit in identifying what that course is,” Mr. Lacker told reporters on the sidelines of a business conference.

US Double-Dip Death Watch Continues -- Jay Carney’s press conference today leaves no doubt that the situation is substantially as I described it in my previous post.  The White House commitment not to negotiate on the debt ceiling is mainly fluff.  Their public position is that the Congress must lift the debt ceiling with a “clean” vote first, before a deal can be struck on the massive spending cuts that will take place automatically in March.  Carney implores listeners to believe that the debt ceiling and sequester are “separate” issues, and insists that “this not a negotiation the White House is going to have.”  But of course the entire press conference is itself a public gambit in an ongoing negotiation that obviously includes back-channel talks. As before, the difference between Republicans in Congress and the White House is that the Republicans prefer a cuts-only form of austerity, while the White House prefers an alternative Shared Painer austerity party mix made up of both cuts and tax increases.  Both plans, of course, will cause a significant fiscal drag on a stagnant economy that is in no condition to endure such a drag.  But the European austerity disease, like an influenza virus slowly but inevitably spreading through the United States after making its way here from abroad, is now so deeply established in the US among the political class and the punditry  that any hope of ordinary Americans escaping infection is just about lost. Both Congress and the White House long ago let Americans know that they have no particularly pressing concerns about the millions of Americans whose forlorn abandonment constitutes the human reality behind the massive 7.8% unemployment rate – a figure that never seems to budge.   Lowly working people without jobs don’t count for much in Washington these days.  But it is both interesting and mildly surprising to see just how willing both parties in Washington are not just to prolong the new normal of permanent  mass joblessness, but also to court a second recession and bring more serious political repercussions down on their heads.

Vital Signs Chart: Growing National Debt - The national debt is growing. Total public debt outstanding was $16.07 trillion as of the third quarter, up from $15.86 trillion three months earlier. The federal debt is now equivalent to 101.6% of the nation’s gross domestic product, up from 53.5% in early 1990. Not all the federal debt is subject to the nation’s borrowing limit of $16.394 trillion.

Fed to send record $88.9 billion to Treasury - The Federal Reserve will send $88.9 billion to the Treasury after earning a record $91 billion in 2012, the central bank said Thursday. The Fed made $80.5 billion from the interest income on the securities it's acquired through its quantitative easing programs. In 2010, the Fed sent $79.3 billion to the Treasury, and in 2011, it sent $75.4 billion to America's coffers

US Chamber chief: ‘Exploding debt’ is threat to economy - The chief executive of the U.S. Chamber of Commerce on Thursday said the “exploding national debt” is the greatest threat to the U.S. economy. U.S. Chamber chief Tom Donohue called for Washington to reach a broad deal to rein in deficits in the coming months, while warning that entitlement spending was unsustainable. “As a nation and a people, we must finally face up to the single biggest threat to our economic future — and that is our exploding national debt, driven by runaway deficit spending, changing demographics and unsustainable entitlements,” Donohue said. “Congress and the administration must focus their attention on this critical priority. Economic growth cannot solve all of our problems, but without growth, we will not be able to solve any of them Donohue said policymakers had squandered the chance for a larger tax-and-spending pact during the recent “fiscal cliff” negotiations, and said that officials on both sides of the aisle needed to put their partisan differences aside.

What Would It Take to Stabilize the Debt? - We’ve issued a new analysis of the additional deficit reduction — on top of the policies that the President and Congress have enacted over the last two years (most notably the 2011 Budget Control Act and this month’s budget deal) — needed to stabilize the debt as a share of the economy over the next decade.  Here’s the opening: With the “fiscal cliff” deal in place, President Obama and Congress are now expected to seek more deficit reduction to replace the automatic spending cuts (“sequestration”) that are scheduled to take effect on March 1.  Policymakers can stabilize the public debt over the coming decade, ensuring that it doesn’t grow faster than the economy and risk eventual economic problems, with $1.4 trillion in additional deficit savings over the next decade.  Policymakers can achieve the $1.4 trillion with $1.2 trillion in policy savings — tax increases and spending cuts — because that would generate almost $200 billion in savings in interest payments.  That $1.4 trillion in deficit savings would stabilize the debt at about 73 percent of Gross Domestic Product (GDP) over the latter part of the decade (see graph).

The Quadrillion Dollar Thought Experiment - Imagine this:  In a burst of manic, public-spirited zeal and budgetary enthusiasm, the US Congress passes, and the President signs, the following law. 

  • L.1  The Secretary of the Treasury shall by a date no later than September 30, 2013 consolidate all United States Treasury accounts into a single account, to be called the “General Account”, and to be held at the Federal Reserve Bank of New York.
  • L.2  The General Account shall be used to settle and record all payments to and from the US Treasury.
  • L.3  The Federal Reserve Bank of New York shall on midnight, October 1, 2013 credit the General Account with an initial balance of $1,000,000,000,000,000.00

That’s one quadrillion dollars, about 263 times the current US annual budget, and about 63 times the current US Gross Domestic Product. There is no question that Congress has the authority to do this.  Constitutionally, the monetary authority of the United States rests with Congress.  The Federal Reserve was created by an act of Congress, the Federal Reserve Act, and exercises its powers under that act.  The Fed operates according to congressionally assigned mandates and regulations, and those governing rules can be changed any time Congress so desires. Congress also possesses the power of the purse; that is, it controls the US Treasury subject only to the possibility of a Presidential veto – which it can override.  So suppose it passed such a law.  What would change?

The Fiscal Grand Canyon - With the benefit of hindsight, I think the adoption of the "massive fiscal cliff" metaphor for our fiscal policy challenge was a bad idea.  I think Ben Bernanke introduced it to motivate action -- 10 months in advance -- to improve fiscal policy.  But what was meant to suggest urgency actually led to unnecessary panic.  A clear statement by a newly re-elected Obama in November that unless the Congress sent him a thoughtful bill to sign, the tax code would simply revert would have been a much better course of action.  The Republicans would then have to specifically introduce legislation to achieve their objectives.  The sad story of the last two years is that they have been able to get Obama to acquiesce to their demands without having to actively promote their agenda through legislation.  In this case, Obama really did hold all the cards, and yet almost all of the Bush tax cuts have been made permanent.   Not to be outdone by Chairman Bernanke, I introduce the phrase "fiscal grand canyon" in an op-ed in the New York Daily News today.  We certainly jumped out of the frying pan and into the fire.  The key excerpt: Unfortunately for Obama, he signed away the opportunity to pursue an ambitious second-term agenda when he signed this legislation. In this era of partisan disagreement, we can expect congressional Republicans to oppose any new idea the White House may propose on the grounds that it costs more money and the budget is already projected to be in large deficit.

With U.S. fiscal problems unresolved, treasured AAA rating may fall off cliff - The United States looks increasingly likely to lose its gold-plated AAA credit rating in the next few months amid warnings by Wall Street rating agencies that last week’s $650 billion “fiscal cliff” deal did not go far enough to reduce $1 trillion deficits and stabilize the debt. Moody’s Investors Service, in particular, warned last week that more stringent spending cuts or tax increases will be needed in the next round of budget negotiations if the U.S. is to avoid a second major downgrade of its rating — one that would definitively kick the nation out of the exclusive club of AAA-rated nations. The U.S. was knocked down a notch from AAA by Standard & Poor’s Corp. after the 2011 fight over the debt limit, but it has continued to claim AAA status because its rating was not changed at that time by Moody’s or Fitch Ratings, Wall Street’s other two top credit agencies.

The debt reduction that's already happened - When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments. What the debate tends to ignore is the debt reduction that's already happened. Michael Linden and Michael Ettlinger reported yesterday that since the start of 2011 fiscal year, President Barack Obama "has signed into law approximately $2.4 trillion of deficit reduction" over the next decade. Their Center for American Progress report came with this terrific chart. Roughly three-quarters of the deficit reduction has come is in the form of spending cuts, which should further make Republicans happy. And while the $2.4 trillion in savings will be spread out over the next 10 years, it's also worth noting that the deficit has shrunk by $300 billion in Obama's first term, and we're in the midst of the fastest deficit reduction since the end of World War II.

US joins misguided pursuit of austerity - When viewing the US fiscal stand-off from Europe, it all looks eerily familiar. The US has become very European. But for me the main problem is not an inability to deal with the structural deficit, as the Economist argued in its latest cover story, but rather the contrary. I fear that the US is blindly rushing into semi-automated austerity, which is exactly the mistake we have made in Europe. The problem is not the size of the national debt as such, which is manageable in both cases, but our policies in dealing with it. The various measures in last week’s US budget deal imply revenue increases in the order of about 2 per cent of gross domestic product. This is the absolute size of the agreed measures. It does not include any further spending cuts that may, or may not, come as part of an agreement on a debt ceiling. The gross fiscal contraction of the US will be larger than the UK’s in 2013, though not as large as that in Spain, Portugal or Greece. Still, this would make the US an honorary member of Europe’s austerity club. If there has been an overriding lesson from the eurozone crisis, then it must be that the fiscal multipliers – the effect of austerity on growth – become very high when monetary policy has reached the zero bound, and when everyone pursues austerity at the same time. The International Monetary Fund started a debate on the multiplier last year, culminating in a recent paper by Olivier Blanchard and Daniel Leigh, explaining why economic forecasts have been so persistently wrong during the crisis. Just how large the multiplier will be this year is difficult to say exactly and may vary across countries, but it is certainly higher now than before the crisis.

Austerity and Ideology - Wolfgang Munchau has another interesting editorial on austerity, in yesterday’s Financial Times. He argues that the US may become the next paying member of the austerity club, thus making the perspective of another lost decade certain. Munchau’s article could be the n-th plea against austerity, as one can by now read everywhere (except in Berlin or in Brussels; but this is another story). What caught my attention are two sentences in particular. First, when Munchau argues that In Europe, “perma-austerity” comes primarily in the form of social entitlements cuts. In most countries, the scope for tax increases is relatively small. There are a few genuine structural fiscal reforms that may well be worth undertaking – cuts in levels of regional government, plugging tax loopholes, or ending subsidies. But these are hard to do, and governments find it more expedient to cut welfare benefits, which is what European conservatives usually mean when they talk about “economic reforms”. The remark is interesting, and it comes at the same time as a long post of Paul Krugman on the subject of ideology and macroeconomics. A few years ago Jean-Paul Fitoussi had already spoken about an hidden agenda: The inertia of European governments in the past decades is due to a “hidden agenda”, namely the tentative to bring the European social system to a lower degree of protection, and hence to prove the ineluctability of structural reforms.

Fiscal stimulus debate: Endless frustration - Mathew Yglesias - The final session of the American Economics Association conference I attended was a very popular throwdown between Paul Krugman and UCSD's Valerie Ramey on the subject of fiscal stimulus. It was, I thought, a frustrating affair that well summed up the dialogue of the deaf that proceeds in this debate. Krugman advanced basically two key arguments on behalf of stimulus. One is the argument from sectoral balances. The recession was associated with a huge move toward private sector de-leveraging, indicating a clear need for public sector leveraging to avoid the creation of a gigantic output gap. Logically the only alternative strategy would be a huge boost in net exports but it's not possible for the large developed economies to all simultaneously increase net exports. The second is the empirical evidence from Europe. Krugman then goes on to say that this is a specific argument about a specific kind of situation in which there's a large output gap and no monetary policy offset. Ramey in response has time-series data from throughout the twentieth century which points to low multipliers for government spending—multipliers below one.

Why the multiplier doesn't matter - - Why not? Because right now, the U.S. should be investing in infrastructure whether "pure" Keynesian stimulus works or not. When economists like Paul Krugman debate "the multiplier" in public, what they're actually talking about is the theoretical multiplier in a Keynesian-type model. That is an interesting theoretical debate, but it is of limited use when making real policy, because there is lots of real-world stuff that those models leave out. For example, as many of the neo-monetarist types like Scott Sumner and David Beckworth have pointed out, the multipliers that come out of those models assume that the Fed doesn't react to neutralize the effects of fiscal policy. But another important thing that Keynesian theory leaves out is public goods. If there are certain kinds of goods that only government can or will provide, and if these goods are complements to private business activity, then government spending could have huge effects even if the "pure" Keynesian multiplier is zero! For example, take the famous paper of Baxter & King (1993), in which there is "government capital" that complements private capital and labor. In that sort of a world, government spending on "government capital" is efficient even without any aggregate demand deficiencies at all. Efficient, that is, as long as the current amount of "government capital" is below the optimal amount - in other words, as long as the country has recently been underinvesting in things like infrastructure. It is pretty clear that "government capital" really exists. There is no country in the world that has produced a world-class network of roads, bridges, and ports without large amounts of government funding. Infrastructure isn't the kind of "pure public good" often discussed in the theoretical literature, but it's clearly something that we need government to do.

Stephanie Kelton appears on UP with Chris Hayes - Stephanie Kelton will be appearing on UP with Chris Hayes on MSNBC this Saturday January 12, 2013 at 8:00 AM Eastern.

Between Greece and Zimbabwe - Brad DeLong - Within limits—until it starts printing money fast enough to become Zimbabwe—a country that controls its own currency and can print its own money does not face a tight and binding government budget constraint: the government spends what it wishes, taxes what it wishes, borrows what it wishes, prints money to make up the difference, and the exchange rate and the price level and interest rates then do their things as investors try to figure out on what terms they want to hold domestic as opposed to foreign assets and on what terms they want to hold bonds rather than cash. By contrast, a country with a fixed exchange rate has its money stock nailed by the requirement that it maintain its exchange rate peg. That then forces spending, taxes, and borrowing into a configuration in which bond vigilantes believe that the debt will be paid off—and if they don’t believe that, then spending must be equal to taxes minus the debt repayment the bond vigilantes demand. But suppose that you are in an intermediate case, where the Treasury and the central bank do not want to peg the currency (and the internal price level) but do not want to let it (them) do their own thing without limit either? Suppose the Treasury Secretary believes that a strong dollar is in America’s interest. What you then have is a mix of the polar gold-standard and MMT cases. But what are the proportions of the mix?

Thoughts on the Budget Deficit - Note: The US government is on a fiscal year that runs from October 1st through September 30th of the following year. Fiscal year 2012 ended on September 30th of 2012, and fiscal year 2013 started on October 1, 2012.  The graphs below use fiscal year GDP. A few points on "short term" vs. "long term" issues, and cyclical vs. structural deficits. None of this should be controversial (or political).
1. The "fiscal cliff" was about reducing the deficit too quickly in the short term. This was concerning because a rapid reduction in the deficit (aka "austerity") would probably have taken the economy back into recession. The fiscal agreement reduces the deficit this year compared to fiscal 2012 - the payroll tax hike alone adds almost $120 billion in revenue this year. Those saying "nothing was accomplished" are possibly confusing the short term with the long term.
2. There is a long term budget problem mostly related to spending for health care.  I'll have more on this in a future post, but I think it helps to focus on the short term right now.
3. There is a significant difference between a "structural" budget deficit, and a "cyclical" deficit. A cyclical deficit happens when the economy goes into recession because tax revenues decline, and spending on safety net programs like unemployment insurance and food stamps increases. A cyclical deficit is expected during recessions, and the Federal government is (and should be) counter-cyclical. (this should not be controversial).
4. A structural deficit is a mismatch between tax revenue and outlays even during good times. A structural deficit is much worse for the economy than a cyclical deficit since a cyclical deficit will decline as the economy recovers, but a structural deficit is ongoing.
Here are a couple of graphs.

‘Cliff’ deal leaves big deficits in place - Legislation passed this week to avert the “fiscal cliff” could still leave in place deficits averaging more than $900 billion a year over the coming decade if Congress fails to follow its tax increases up with further spending cuts or tax hikes, the nonpartisan scorekeeper for Congress said Friday. The Congressional Budget Office also says the measure should reduce the risk of recession this year by not slamming the economy with a huge tax increase. The CBO issued a study in August predicting a $10 trillion deficit over the next 10 years if Congress simply followed existing tax and spending policies instead of following the laws that threatened a combination of automatic tax increases and spending cuts. This weeks’ cliff law would cut $700 billion to $800 billion from CBO’s 10-year, $10 trillion deficit estimate. But it also leaves in place across-the-board spending cuts that would cut more than $1 trillion from the budget over that time. The analysis also estimates that the new law will increase the size of the economy by 1.5 to 1.75 percentage points compared with what would have happened if the government went over the cliff. Using data from last summer, when the economy was still limping badly, CBO now estimates the economy will grow by just 1 percentage point next year. An official CBO estimate of the nation’s economic and budget outlook is due next month.

The US Deficit Almost Completely Disappeared In December- The U.S. December budget deficit was just $260 million. This is according to the latest Monthly Treasury Statement from the Financial Management Service. Economists were forecasting a deficit of closer to $1 billion. The December deficit was also the lowest December number since 2007, reports Bloomberg.It's worth noting that monthly numbers are noisy, and that seasonal factors tend to be considerable in December. Regardless, this is an encouraging sign. Receipts were $269.5 billion while the spending was $269.7 billion.  This is important to remember, because budget deficits and surpluses aren't just about spending levels.  Indeed, growth plays just as important a role. As GDP grows, the deficit shrinks.  To better understand this, read this and this. Here's a look at some historical numbers.

The Mostly Solved Deficit Problem - Krugman - The Center on Budget and Policy Priorities has a graph: The vertical axis measures the projected ratio of federal debt to GDP. The blue line at the top represents the projected path of that ratio as of early 2011 — that is, before recent agreements on spending cuts and tax increases. This projection showed a rising path for debt as far as the eye could see. And just about all budget discussion in Washington and the news media is laid out as if that were still the case. But a lot has happened since then. The orange line shows the effects of those spending cuts and tax hikes: As long as the economy recovers, which is an assumption built into all these projections, the debt ratio will more or less stabilize soon. CBPP goes on to advocate another $1.4 trillion in revenue and/or spending cuts, which would bring the debt ratio at the end of the decade back down to around its current level. But the larger message here is surely that for the next decade, the debt outlook actually doesn’t look all that bad.

The next ‘fiscal cliff’ fight has officially begun - In the next stage of the “fiscal cliff” fight — news outlets are already calling it the “debt ceiling fight,” though the White House would probably prefer to think of it as a sequester fight — the debate will essentially boil down to two questions: What kind of entitlement and spending cuts will Republicans be demanding? And will Democrats manage to get revenue on the table? On the Sunday morning shows, leaders from both parties laid down their opening positions. The challenge for the Democrats will be to make the case that changes to the tax code shouldn’t stop with the George W. Bush tax cuts, which they’ve so monolithically focused on in the lead-up to Dec. 31. On Sunday, CNN’s Candy Crowley challenged Sen. Dick Durbin (D-Ill.) to answer whether he thought “that taxes have been raised enough on the wealthy.” Durbin’s response was revealing: Rather than focus directly on the tax treatment of the wealthiest, he framed the need for more tax revenue in terms of broader “tax reform” to get rid of loopholes and deductions, eluding to the need to eliminate tax breaks for the “1 percent”: I can tell you that there are still deductions, credits, special treatments under the tax code which ought to be looked at very carefully. We forgo about $1.2 trillion a year in the tax code, money that otherwise would go to the government, and when you look closely, some of those things are near and dear to us individually and to the economy — the mortgage interest deduction, charitable deductions, deductions for state and local taxes, but beyond that, trust me, there are plenty of things within that tax code, these loopholes where people can park their money in some island offshore and not pay taxes, these are things that need to be closed.  Durbin, in essence, outlined the Democratic strategy for the next round of the “fiscal cliff” debate: Find revenue to offset the sequester by promising to get rid of “loopholes” in the tax code, framed as common-sense tax reform.

The Debt Ceiling and the Remainder of the Fiscal Cliff - If I’m ever taken hostage and someone hires a hostage negotiator on my behalf, I hope it isn’t President Obama. Based on his history thus far, he’s been far too willing to make offers of spending cuts when Republicans demanded them and wouldn’t detail them out. How do you negotiate when they won’t provide specifics? At a minimum, if they want spending cuts and you’re inclined to go along, they should be made to own them. The other thing that stands out with Obama as a negotiator is he’s willing to disarm himself; e.g., he has already ruled out using the 14th amendment route to get around the debt ceiling altogether. Even if you think it’s the wrong thing to do legally, don’t tell your opponents that! Also, people seem to have forgotten about the sequester. We did settle the matter of how to deal with the Bush tax cuts, but the sequester is still out there and has always been a part of the fiscal cliff (plus I wanted to use a picture of Wile E. Coyote). The media seems to have abandoned that narrative in favor of the debt ceiling. One thing that baffled me going into the resolution of the Bush tax cuts last week is that the Republicans were asking for spending cuts up to the end, when the sequester will provide them with very large spending cuts without doing anything. They apparently don’t like this option, and should Obama fold and enter negotiations, he should use the sequester as a bargaining chip over the debt ceiling. At any rate, the Democrats seem to be standing behind the president on the “no negotiation” position and in a few weeks we will find out if it’s just bluster or not

Default Ceiling: Bluffing into the Nuts - I wrote several posts about the "debt ceiling" debate in 2011.  I prefer "default ceiling" because "debt ceiling" sounds like some sort of virtuous limit, when, in reality, the vote is about whether or not to the pay the bills - and voting for default is reckless and irresponsible. Several financial articles recently have used poker terms - and the title of this post is my contribution to this sad trend.  "The Nuts" is the best possible poker hand in a given situation. Bluffing into the nuts is a losing play - and that is what the Congress is trying to do with the "debt ceiling".  The sooner they fold, the better for the economy and the Congress. From the WaPo: GOP dissension over debt-ceiling strategy:House Speaker John A. Boehner (R-Ohio) likewise insisted that Republicans hold the line, telling his members they must demand that every dollar they raise the debt limit be paired with commensurate spending cuts. But other Republicans counseled caution, warning that pressure from the business community and the public to raise the $16.4 trillion federal borrowing limit renders untenable any threats not to do so and will weaken the GOP’s hand if their stance is perceived to be a bluff. It is a bluff. As Republican Senator Mitch McConnell noted in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility. Part of the problem is some congressmen don't understand economics. Look at this quote from the WaPo article:  “It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain,” [Senate Minority Whip John Cornyn (R-Tex.)] wrote.

The Debt Limit and the Next Financial Crisis - In the latest phase of our endless budget brinksmanship, congressional Republicans will attempt to extract policy concessions in return for raising the debt limit (Republicans are not only demanding cuts to Social Security and Medicare—they are brazenly demanding that Democrats propose, and therefore own, these unpopular cuts).  The administration and key allies are claiming they will not negotiate over the debt limit. At stake in this standoff is not just whether the federal government will default on its financial commitments (which is to say, whether Congress will absurdly prevent the government from paying the bills that Congress has legally obligated it to rack up) but also whether we will move one step further toward making these standoffs a customary part of the (mal)functioning of government.

Deja Broke: Presenting The Treasury's Options To Continue Pretending The US Is Solvent - The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.

McConnell rules out raising taxes, points to spending 'addiction' -  Senate Minority Leader Mitch McConnell on Sunday ruled out raising tax revenues on top of the tax hike on the wealthy in the "fiscal cliff" deal, and said the full focus must now be on spending cuts to curb U.S. deficits."The tax issue is finished, over, completed," the Kentucky Republican said on ABC's "This Week." "That's behind us. Now the question is what are we going to do about the biggest problem confronting our country and our future, and that's our spending addiction." McConnell used the Sunday morning news shows to lay out his position in the upcoming fight over raising the U.S. debt ceiling and funding the government that is expected to come to a head in March, just three months after the struggle to avert the Jan. 1 fiscal cliff of severe tax hikes and spending cuts that economists said could have brought a recession. Republicans want big spending cuts in programs including Medicare healthcare for the elderly and the Social Security pension program as a condition for raising the U.S. borrowing limit. President Barack Obama has said he will not negotiate over the debt ceiling, arguing thatCongress must pay the bills for spending it approved.

We don’t have a spending problem, we have a military spending problem: Have you read Brad Plumer’s terrific, chart-heavy primer on America’s insane defense budget? If not, I’ll wait while you do. Done? Good. The numbers there should shock you. In particular, this one: “Since 2001, the base defense budget has soared from $287 billion to $530 billion — and that’s before accounting for the primary costs of the Iraq and Afghanistan wars.” Or, if you prefer to see it in graph form:That’s big money. More than we spent on Medicare, in fact. But it’s big money that doesn’t often get recognized in our budget conversation. The forward of Rep. Paul Ryan’s 2011 budget — which was later adopted by both House and Senate Republicans — offers a concise version of the Republican take on our deficits. “The U.S. government is not running sustained deficits because Americans are taxed too little,” the authors write. “The government is running deficits because it spends too much.”So where did all the new spending come from? Well, largely from the post-9/11 defense build-up. “One major factor that worsened the fiscal outlook was a large increase in federal discretionary spending. Much of this, of course, happened after the United States was attacked on September 11, 2001. The U.S. thereafter conducted major military operations in Afghanistan and Iraq, and also increased expenditures on homeland security.”

Yes, We Have A (Defense) Spending Problem Last year, in 2012, the U.S. government spent about $841 billion on security—a figure that includes defense, intelligence, war appropriations, and foreign aid. At the same time, the government collected about $1.1 trillion in individual income taxes. (And about $2.4 trillion in revenues overall if you include payroll, corporate, estate, and excise taxes.)  In other words, about 80 cents of every dollar collected in traditional federal income taxes went for security.  That's an astonishing statistic, and it captures the most underappreciated aspect of today's fiscal challenges: We have a security spending problem. Such spending is significantly higher than all non-defense discretionary domestic spending.  Worse yet, almost nobody in Washington seems interested in seriously curtailing defense spending that is greater in real terms than what the U.S. spent in the Cold War—despite the fact that the U.S. will be officially at peace when we withdraw from Aghanistan next year and the U.S. faces no major global adversaries. While the Simpson-Bowles Commission advocated over a trillion dollars in defense cuts, President Obama's budget would only reduce spending modestly, and even that's a hard sell on Capitol Hill. Both parties happily suspended planned defense cuts under sequestration as part of the fiscal cliff deal.

Republicans talk the talk on spending cuts – but won't walk the walk - Mitch McConnell thinks America has a spending problem.With the fiscal cliff now in the rearview mirror and the "debtlimitsequestrationsbudgetshowdownclusterfuck" staring America in the face, the nation's Senate minority leader is making it clear to everybody who will listen that it's time "to pivot and turn to the real issue" – namely, America's "spending addiction". Because, according to McConnell: "The biggest problem confronting the country is our excessive spending."Such statements are, of course, practically pro forma in Washington. For decades, Republicans and more than a few Democrats have peddled this nonsense in calling for the government to trim its fiscal profligacy. The problem (besides the fact that it's not true) has always been that while politicians love to complain about waste, fraud and abuse or "big" government spending, they are far less interested in actually doing anything about it. Still, McConnell and his fellow Republicans claim to be so concerned about Washington spending – he used the word "spending" 14 times in his NBC News Meet the Press appearance Sunday and "excessive" as a modifier six times – that they appear willing to risk an economic catastrophe by not extending the nation's debt limit when it expires in a few months. Yet, even though they are the ones manufacturing the crisis, since extending the debt limit has traditionally been treated as a formality rather than an opportunity for legislative hostage-taking, Republicans believe that it is the president's job to solve the problem.

Obama warns congressional Republicans on ‘dangerous game’ with debt ceiling | The Raw Story: US President Barack Obama on Saturday warned congressional Republicans against what he called a “dangerous game” with the country’s economy as lawmakers prepared for a new battle over the national debt ceiling. “As I said earlier this week, one thing I will not compromise over is whether or not Congress should pay the tab for a bill they’ve already racked up,” the president said in his weekly radio and Internet address. “If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic,” he pointed out. Obama recalled that the US economy “suffered” and congressional Republicans clashed over national debt in 2011, a row that resulted in a downgrade of the US credit rating. “Our families and our businesses cannot afford that dangerous game again,” the president said.

Will the Republicans’ The-Debt-Ceiling-Is-About-Appropriating-NEW-Spending-Measures Disinformation Campaign Succeed? (Well, only if Obama lets it.) - So, isn’t it paramount the president explain to the public what the debt ceiling issue actually is, rather than allowing the Republicans to keep misinforming the public that it’s an increase in budget allocations rather than a payment for budget allocations already made?  This quirk in the law--the requirement that Congress authorize payment of costs already budgeted, already promised (e.g., in bond interest, Medicare payments, Social Security payments, veterans benefits)--is something that almost no member of the general public knows. Obama keeps saying, in a single sentence, that he won’t allow default on money already appropriated and owing.  That’s nice.  But does he really not understand that this goes right over most people’s heads, because the Repubs keep telling them the opposite, and because the debt ceiling law is a technicality that most people simply don’t know about, and because that technicality has no counterpart in, say, normal living experience? So here’s a suggestion: Obama’s shown a fondness for adopting the Republicans’ messaging by analogizing the federal government to a family’s finances, even though this analogy, when involving economic stimulus and other fiscal-appropriations issues, actually amounts to a misrepresentation of fact.  But on the debt ceiling matter, the government-is-similar-to-families analogy is exactly apt.  If someone already runs up large credit card bills, he owes the money even if he decides to rip up his credit cards and stop running up personal debt.  If he doesn’t pay the credit card bills he’s accrued, he’s DEFAULTING on those debts, and his credit rating will plunge.  And if someone owes monthly mortgage payments, he can’t simply stop paying them, and expect to keep his home.  He’ll lose the home in a foreclosure proceeding.

Debt Ceiling Hostage Enablers -  The House Republicans’ averred position of making the occasion of a debt ceiling hike into a high-stakes negotiation is a new and dangerous turn in American politics. Fortunately for them, it is not being treated as such. Consider recent columns by Ross Douthat, Ramesh Ponnuru, and Megan McArdle. All are right-of-center columnists but not reliable Republican water carriers. If the GOP were to receive signals that it is going beyond the pale and risking an extreme backlash among elites, these sort of writers would be the canary in the coal mine. Instead, they are sending the opposite message. Douthat and McArdle do disavow debt ceiling hostage-taking. But, in pox-on-both-houses, assert that the prospective response of minting platinum coins is just as bad. (McArdle: “Silly loopholes are exploited for bargaining power, and the resulting stalemates are generally solved with a temporary patch that solves the immediate problem by creating a bigger one down the road.” Douthat: “One party behaves irresponsibly, the other side counters with a wave of irresponsibility of its own.”) And so, if Republicans do refuse to raise the debt ceiling, they can assume that the result will not be a wave of abhorrence directed at them but instead a diffuse disgust at Washington in general, perhaps accompanied by more calls for third parties, as happened the last time Republicans flirted with financial disaster in 2011.

McConnell Tossing the Gauntlet on Debt, Taxes and the GOP's dream of dismantling Social Security and Medicare - Linda Beale - Pretty much as I predicted, Obama's failure to go over the fiscal cliff--instead "negotiating" and settling for a half-assed deal that hardly got rid of any of the stupidities of the Bush tax cuts--convinced the Republicans that they can play their brinkmanship game on the debt ceiling debate yet again and perhaps finally get the Democrats to undo their own most significant programs of the last 100 years--Social Security and Medicare. What we ought to be doing is cutting the military/defense and corporate welfare budgets.  And then increasing taxes--with (1) new layers of tax brackets and tax rates corresponding to our new levels of income inequality, so that multimillionaires are taxed at a higher rate than mere millionaires and billionaires are taxed higher than multimillionaires and (2), at the least, legislation to eliminate the farce of the so-called "carried interest: privileged compensation taxation for LBO managers, who get mostly preferential capital gains for their "services" in buying companies and loading them with debt that makes the managers but not the workers wealthy. But the Democrats somehow still thought they would get some kind of credit, even from the staunchest of the right-wingers, for being "bipartisan" and working out a "deal" to avoid the "fiscal cliff."  So they made the ridiculous Bush tax cuts permanent, except for those in the upper-upper crust making three times as much as anybody in the middle class.  And they made the estate tax cut even larger than it was--with a $5.2 million exemption (double for a couple) and only a 40% rate.  Inequality will continue to grow at accelerated rates.  And they extended the litany of truly egregiously stupid corporate tax breaks, like the bonus depreciation/expensing provisions that ultimately permit corporate multinational giants a NEGATIVE effective tax rate

Dealing with Hostage Takers Like Senator McConnell (R-KY) - Brad DeLong - Hostage-takers like Senator Mitch McConnell (R-KY) reason that although they do not like what happens if the situation blows up, you dislike what happens if the situation blows up more--so given that they have the power to blow up the situation if they are not satisfied, all they have to do is (a) declare what will make them satisfied, (b) wait, and (c ) accept your knuckling-under to their demands. In order to get hostage-takers like Senator Mitch McConnell (R-KY) to back down from their crazy and accept a real deal, you have to persuade them of two things:

  • They prefer the real deal to what happens if the situation blows up.
  • You prefer--or are at least indifferent to--what happens if the situation blows up to the real deal.

I don't see a strategy from Obama to convince Senator Mitch McConnell (R-KY) and the other debt-ceiling hostage-takers that Obama has a path for what happens after the debt ceiling is breached that he prefers to a real defusing deal. And unless Obama has such a strategy, I don't see how the debt-ceiling cliff is defused.

U.S. may default on its debt half a month earlier than expected, new analysis shows - The U.S. government may default on its debt as soon as Feb. 15, half a month earlier than widely expected, according to a new analysis adding urgency to the debate over how to raise the federal debt ceiling. The analysis, by the Bipartisan Policy Center, says that the government will be unable to pay all its bills starting sometime between Feb. 15 and March 1. The government hit the $16.4 trillion statutory debt limit on Dec. 31 , but the Treasury Department is able to undertake a number of accounting schemes to delay when the government runs into funding problems. The Treasury has said that the accounting schemes, known as “extraordinary measures,” ordinarily would forestall default for about the first two months of the year, though officials were clear that they could not pinpoint a precise date because of an unusual amount of uncertainty around federal finances.

Barring a Debt Ceiling Solution, the US Will Begin Defaulting on February 15 2013 - We’ve now have just a little over 30 days until US breaches its debt ceiling. We would have already done so, except Treasury Secretary Tim Geithner borrowed some $200 billion from emergency funds to buy a few weeks’ time (announcing that he’d be leaving his post before the actual ceiling was breached). The “solutions” to the debt ceiling discussions range from outright insane ($1 trillion coins) to just staggeringly irresponsible (just get rid of any oversight and grow the debt without restriction). Let us consider the facts. The only reason the US is even having these discussions is because we’ve added $1+ trillion in debt to our balance sheet every year since 2008. The reason we were able to get away with this was because Congress hasn’t even implemented a budget since that time. Indeed, the last time a budget was even proposed (by President Obama in that case) it was rejected 97-0. Let’s say a US family spent all of its savings and income and so began using credit cards to fund its purchases. Then, instead of implementing reforms and a budget, these folks decide to abandon any kind of tracking of their expenses and start spending even more. Eventually this family would begin to stop paying its bills. What would you tell these folks if their proposed solution to this situation was to stop opening their mail?

Debt Ceiling End Game: Who Gets Paid, Who Gets Bilked? - With relatively little time left before it begins to run out of  borrowing authority, the Treasury could soon be forced to pick and choose between paying interest on the national debt and mailing Social Security checks to retirees and  paying defense contractors and keeping the federal government fully operating. A year and a half after weathering the last debt ceiling crisis, Treasury officials are bracing for another bruising battle between the Obama Administration and congressional Republicans over terms for extending the government’s borrowing authority beyond the current $16.4 trillion limit. Technically, the Treasury bumped into that limit on Jan. 1, but has begun employing a series of budget gimmicks at its disposal to buy some extra time.  Yet the government will be unable to pay all of its bills as early as Feb. 15, or the “X Date,” according to Steve Bell, a senior official at the Bipartisan Policy Center. “Our numbers show that we have less time to solve this problem than many realize,” Bell told reporters at a briefing on Monday. “It will be difficult for Treasury to get beyond the March 1 date in our judgment.”That could trigger a worse-case scenario, in which cash-strapped government officials would have to pick winners and losers in deciding who gets paid and who doesn’t.

After the Debt-Ceiling Breach: What Day 1 in Default America Might Look Like - On December 31, the United States hit the debt ceiling. What, you didn't feel it? Well, no, you didn't, and neither did I. For that, we can thank "extraordinary measures," the extraordinarily vague term Washington uses to describe the various way the Treasury department can move around money to keep us from straight-up defaulting on our promised payments. But extraordinary only lasts so long. These measures buy us about six weeks -- basically until Valentine's Day. After six weeks, the United States government will be living hand to mouth on cash and daily revenue, and it's hours or days before ... DEFAULT. What happens then? The only honest answer is: Nobody has any idea. It is the moment the Bipartisan Policy Center calls the X Date: The first day the U.S. government doesn't have the money it needs to pay all of its bills. The United States has never hit the X Date. Hopefully, we never will. But here's what we know about what would happen on day one in Default America. On a typical day in late February 2013, the government can expect to take in about $9 billion and spend about $15 billion. In Default America, however, we wouldn't have the authority to spend that extra $6 billion. So those payments would simply go unpaid. Somebody in Washington would have to decide who gets the money they were promised and who doesn't. Every day. As long as the debt ceiling isn't raised. Basically, we'd default on 40 percent of our obligations, over and over again.

Be Ready To Mint That Coin - Krugman - Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious. For those new to this, here’s the story. First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit — tax and spending bills the president is legally required to implement — and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default. And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can’t pass through normal constitutional processes. Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all. So why not?

Mint the Platinum Coin? - I haven't said anything about the platinum coin option, until now, because I am of two minds about it. One part of me says this is a very bad idea. We all understand the intent of the law that would allow this, to permit commemorative coins to be minted. Do we really want leaders who are willing to take advantage of any loophole to do things that are contrary to the intent of a law just because it suits their purposes? How can the public trust Democrats to be responsible if they are willing to do things like this? What other stunts might they pull? If they want to go to war, attack Iran for example, does this mean they will take a Bushian approach and 'just do it' no matter what the intent of the constitution is on these matters? I don't want those kinds of leaders. But what do you do if the other side refuses to play by the traditional rules? What if they are already using tactics that push far beyond the intent of congressional rules to impose their will? If one side is ignoring the traditional rules of engagement and hiding behind trees rather than marching in straight battle lines, is it okay to do so yourself? If the other side tortures, does that mean you should?  For torture, the answer is no, but in this case I think the answer is different. The Republicans will not play by fair rules of engagement, and worse they have taken members of the public hostage as a way to win/influence the battle. If we don't get our way, we'll crash the economy and hurt people -- the threat is clear. Obama, in his role of leader of all, not just Democrats, has chosen to, in effect, pay the ransom by giving in on key issues. But if the hostages can be freed another way, one that avoids giving in to the hostage-takers, it ought to be considered.

America going platinum -  AMERICA'S government is full of oddities, and here's one: it is possible for the government to pass spending and tax bills which lead to an illegal amount of accumulated debt. The government's borrowing results from all the tax and spending choices made by past and present elected officials and leads to annual deficits that add to a stock of public debt. Once the tax and spending choices are made, the resulting debt load is a fait accompli, a residual. Yet said elected officials have also seen fit to pass a law declaring that debt must fall below a specific limit. From time to time, then, Congress has to pass a law raising the limit—essentially, declaring its past choices legal—or face dire fiscal consequences. If the limit is reached and not raised government outlays must be cut immediately and dramatically or the government must default on some of its debt-interest payments. Those are both terrible options, and so until recently the government has simply raised the limit when necessary.But in 2011 congressional Republicans decided to use the threat of major economic disruption to extract policy concessions, generating a nasty debt-limit stand-off that sent markets into a tailspin and consumer confidence tumbling (while also setting off the process that gave us the fiscal cliff). After that fiasco, President Obama vowed never to negotiate over a debt-limit increase again, but Republicans, having used the tool effectively once, may be prepared to call his bluff.

Should we mint the platinum coin? - The economics of such a move would work fine, and I understand the game-theoretic rationale, but still I agree (strongly) with Kevin Drum’s “no” answer.  I don’t know if the courts would uphold such a move, but I do know they would not uphold such a move instantaneously.  The uncertainty would in the meantime whipsaw and shut down the markets and the shadow banking system. And let’s say that — somehow — the whole thing miraculously worked out well from start to finish.  The testier Republicans would in fact get exactly what they want.  They would receive isolation from any negative consequences from brinksmanship, and a new narrative about how President Obama is a fascist incarnate.  Keep in mind that since the coin would bear the sparkling image of Sayyid Qutb, there are even some members of the American electorate who would find such charges plausible.

Why we won’t mint a platinum coin - Let’s be clear about this: no one’s going to mint a trillion-dollar platinum coin. Nor is anybody going to mint a million million-dollar platinum coins. But it would probably be stupid for anybody in the government to say that they’re not going to do it. The trillion-dollar coin is the fiscal equivalent of the Flying Spaghetti Monster: a logical reductio ad absurdum designed to emphasize the silliness of an opposing position. For instance, if you don’t believe that churches should be tax-exempt, then you just claim that your entire family are Pastafarian priests, and that therefore all your investment income should be tax-exempt.  In this case, the absurdity to be pointed out is the debt ceiling. Everybody who’s ever been in charge of any country’s finances knows that the concept of a debt ceiling is profoundly stupid, self-defeating, and generally idiotic. And we discovered in 2011 that it can do very real harm. Back then, I hated the idea of the platinum coin: Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion.

Why Platinum Coin Opponents Are All Wrong - -This morning, Joe Weisenthal and I took our message in favor of minting a trillion-dollar platinum coin to "Bloomberg Surveillance," where we were met with the usual shock and horror from hosts Tom Keene and Sara Eisen. Platinum coin opponents are so distressed that one, Republican Representative Greg Walden, has said he will introduce legislation to ban the coin, citing my post from last week as a dangerous instigation.Walden, Keene and Eisen are all wrong. Here are my responses to the most common objections we are getting to the platinum coin proposal, in increasing order of persuasiveness:

  • 1. "That's silly/zany/juvenile!" This is probably true, but it's not a dispositive objection. Republican intransigence over the debt ceiling is juvenile. There is no particular reason that the president should not use a juvenile strategy in response.
  • 2. "Where will we get all the platinum?" I'm honestly surprised by this question, but I'm hearing it a lot, including from the Guardian's Heidi Moore and from Keene this morning. To be clear: We do not need a trillion dollars' worth of platinum to make the trillion-dollar coin -- less than an ounce will do. This is not a move to a "platinum standard," and it shouldn't even have any impact on the markets in platinum.
  • 3. "But that will be inflationary!" This is a more serious objection, and it gets at what the platinum coin strategy really is -- financing the federal government's operations by printing money instead of borrowing it. The trillion- dollar coin will never circulate, but it will be used to back cash payments coming from the Treasury that would have otherwise been financed by bond purchases.
  • 4. "This will undermine confidence in the U.S. government/dollar/central bank." Well, it's all relative. The best solution, from a confidence perspective, would be for Congress to simply repeal the debt limit, or at least increase it without conditions, thus eliminating this manufactured "crisis" and any need for a trillion-dollar coin.

US ‘seriously’ considering $1 trillion coin to pay off debt - The US is "seriously" considering creating a $1 trillion platinum coin to write down part of its debt to stop the world's largest economy defaulting as early as next month, according to financial analyst Cullen Roche. Speaking to the BBC's Today programme, Mr Roche, founder of Orcam Financial Group and blogger at Pragmatic Capitalism, said the idea was being taken "somewhat seriously" in Washington. "I know it’s been spoken about at the White House and a number of prominent people, including congressman, are talking about it," he said. In theory the US Treasury would mint the coin and deposit it into its own account at the Federal Reserve, which would allow the government to write down or cancel $1 trillion of its $16.4 trillion debt pile. The Treasury began shuffling funds in order to pay government bills after the country hit its $16 trillion debt limit on December 31. However, the Treasury's accounting maneouvres will last only until around the end of February as the latest fiscal cliff deal gives US politicians two months to raise the debt limit before the country defaults. The idea, which was raised last year, has been floated by several financial analysts in the States over recent days as Congress and the government approach the key fiscal vote.

Rebranding the “trillion-dollar coin” - So, hopefully you know about the whole #MintTheCoin thing. If you need to get up to speed, Ryan Cooper has a roundup of recent commentary, and the indefatigable Joe Wiesenthal has fanned a white-hot social-media flame over the idea. For a longer-term history, see Joe Firestone, and note that all of this began with remarkable blog commenter beowulf. See also Josh Barro, Paul Krugman, Dylan Matthews, Michael Sankowski, Randy Wray among many, many others. Also, there’s a White House petition. Basically, an obscure bit of law gives the Secretary of the Treasury carte blanche to create US currency of any denomination, as long as the money is made of platinum. So, if Congress won’t raise the debt ceiling, the Treasury could strike a one-trillion-dollar platinum coin, deposit the currency in its account at the Fed, and use the funds to pay the people’s bills for a while. Kevin Drum and John Carney argue (not persuasively) that courts might find this illegal or even unconstitutional, despite clear textual authorization. For an executive that claims the 2001 “authorization to use military force” permits it to covertly assassinate anyone anywhere and no one has standing to sue, making the case for platinum coins should be easy-peasy. Plus (like assassination, I suppose), money really can’t be undone. What’s the remedy if a court invalidates coinage after the fact? The US government would no doubt be asked to make holders of the invalidated currency whole, creating ipso facto a form of government obligation not constrained by the debt ceiling. I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious. We are all accustomed to sighing in a world-weary way over what a banana republic the US has become. But, we’d probably prefer that the US-as-banana-republic meme remain more a status marker for intellectuals than a driver of financial market behavior. Probably.

Wake Up Progressives: The Bad Guys Are Trying To Steal the Trillion Dollar Coin to Save the Financial Status Quo! - Among the many posts on the Trillion Dollar Coin (TDC) and Platinum Coin Seigniorage (PCS) we’re seeing this week, is a category of posts favoring using PCS in a limited way to avoid the debt ceiling crisis, rather than using it in a much more robust way, that would change the procedures underlying Federal spending, so that fiscal policies advocating austerity no longer have a political foundation in a visible and rising national debt that austerity advocates can constantly talk about fixing through “shared sacrifice.”  In the latest outburst of posts, tweets, articles, and videos about the TDC, we’re beginning to see, a feeding frenzy in which the participants self-organize around the TDC meme AND the objective of avoiding the debt ceiling, but without providing any consideration at all to higher value PCS options that could both make the debt ceiling a dead letter and also remove the driving force for austerity politics. This focus on the bare TDC and its application to the debt ceiling is “small ball” policy analysis that ignores larger issues related to PCS. It needs to stop before it totally drives PCS into a defend the status quo solution, that may defuse the debt ceiling, but still leave us in the sorry state of austerity-driven politics.  If the small ballers get to control the PCS debate it will result in the waste of a remarkable opportunity to change the whole direction of American politics. Progressives need to wake up and try to grasp this opportunity, before the fiscal conservatives save their version of the financial system with its increasing tendency to impose austerity on the rest of us while the 1% get more and more wealthy.

On the Platinum Coin - Okay, so the Treasury mints a Platinum coin, and deems it to be worth One Trillion Dollars.  We have a fiat currency, so what is the problem? There are fiat currencies, and there are fiat currencies.  Depositing something as collateral into the central bank where the “melt value” is decidedly less than one million, much less trillion dollars, is ridiculous.  I realize that many believe that the Fed can do whatever it wants, but eventually cash flows will catch up with a central bank as inflation rises. The Trillion dollar coin would have value only because the taxation authority of the US Government stands behind it.  But that is not the way the government is behaving.  The taxation authority is not taking in as much and more so that they can redeem the promises inherent in the coin.  Instead, they are looking to the Fed to absorb losses in a stealth monetizing of the debt.Monetizing government debt leads to inflation.  Receiving something worthless, and deeming it to be of high worth is the same as monetizing the debt.  Yes, the Fed can try to sterilize the effects, but it leaves the Fed with a problem — it will never be able to shrink its balance sheet to 2007 levels.  Thus inflation, eventually. The platinum coin is a bad joke, and bad policy if eventually done.

Moral Obligation Coupons - Krugman - Don’t like the platinum coin option? Here’s a functionally equivalent alternative: have the Treasury sell pieces of paper labeled “moral obligation coupons”, which declare the intention of the government to redeem these coupons at face value in one year. It should be clearly stated on the coupons that the government has no, repeat no, legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value. Consider, for example, the fact that the government has no legal responsibility for guaranteeing the debt of Fannie and Freddie; nonetheless, it is widely believed that there is an implicit guarantee (because there is!), and this is very much reflected in the price of that debt. So the government should have no trouble raising a lot of money by selling MOCs. It’s true that if they’re sold on the open market, they would probably sell at a substantial discount from face value, so this would in effect be high-interest-rate financing. But that’s better than either default or giving in to blackmail. And maybe the coupons wouldn’t have to be sold on the open market; why not just have the Fed buy them? Bear in mind that the Fed doesn’t always buy safe assets; it’s buying a lot of mortgage-backed securities (from Fannie and Freddie; see above), and during the worst of the financial crisis it bought lots of commercial paper. So why not slightly speculative pieces of paper sold by the Treasury?

The trillion dollar coin would be bullish for Treasurys --I just wanted to follow up on Randy Wray’s last post to look at this Trillion Dollar Coin idea from an investing perspective. I believe the coin would be bullish for Treasuries because it lowers average Treasury duration and alters private portfolio preferences in a manner similar to quantitative easing. Otherwise, it has no real economy effects. We discussed similar mechanics in 2010 regarding QE2 when Randy wrote his post about QE2 being the equivalent of issuing Treasury Bills. In that case, the Federal Reserve was buying longer duration US government bonds, making them relatively more scarce for bond market investors. The result was that average duration for all Treasurys outstanding was shortened. Moreover, to the degree investors had a duration preference as pension funds do in order to match liability duration, the shortening of duration should therefore be Treasury bullish, ceteris paribus. In practice, however, what we saw is that increased inflation and policy interest rate expectations worked at cross purposes with the QE and so interest rates were not lower post-QE than pre-QE. In the present situation, we are faced with a situation in which the US could default on its bonds voluntarily because Congress failed to raise the debt ceiling. Voluntary default is a political risk that the United States has, much as Ecuador and Russia had when each nation defaulted voluntarily on bond principal and interest payments that they had the funds to make.  From a ratings perspective, this willingness to default voluntarily is a very serious risk for any sovereign debtor. I believe that it warrants additional downgrades to the US credit rating as I said when this issue was first raised. The risk should also slightly increase longer duration yields due to higher default risk premia.

Is the Trillion-Dollar Platinum Coin Clever or Insane? - Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:

  • 1.     A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.
  • 2.     Most observers think this is a terrible idea, but the legal arguments against it are weak at best.
  • 3.     The economic arguments against the coin are stronger but manageable.
  • 4.     The best arguments against the platinum coin involve image and politics.
  • 5.     Nonetheless the platinum coin strategy might be better than the alternatives if we reach the brink of default.

The game theory of #mintthecoin - As Cardiff Garcia says, when it comes to #mintthecoin, “it’s important for advocates to define carefully what they’re actually calling for”. The basic matrix, as I see it, looks a bit like this: I’m in the bottom-left corner: Negotiate. That’s the job of the President of the United States: to negotiate with Congress, rather than to do tricksy, Constitutionally-dubious end-runs around it. Joe Weisenthal, to his credit, is also clear where he stands — he’s in the bottom-right corner. He doesn’t advocate using the threat of minting the coin as a negotiating tool; rather, he’s advocating that negotiations should happen as normal, and only in the very last resort, if all negotiations fail, should the coin be deposited at the Federal Reserve so as to avoid a catastrophic default. One problem is that it’s very hard to keep the existence of the coin secret, especially if the executive-branch negotiators, who are going to be spending a lot of time with the representatives of House Republicans, know that they have it in their metaphorical back pocket. Basically, the existence of  a secret plan to mint a coin is functionally equivalent to a public threat to mint the coin, if the House Republicans find out about the secret plan. In that event, the Negotiate strategy becomes the Bluff strategy. And as Cardiff says, the Bluff strategy is really stupid:

What Goes Around (Comes Back Around) - I find little to disagree with in Scott Lemieux’s look at the legality of minting a trillion-dollar coin. For those who have no idea what I’m talking about, the idea is simple. When the president is required to spend all money authorized by Congress, in most instances, that requires the Treasury to borrow money to fulfill congressional obligations. But Congress has also imposed a borrowing limit on the Treasury. In the past, Congress has lifted the limit with little fuss, but beginning in 2011, House Republicans have used it as leverage for spending cuts. If Treasury reaches the limit without paying its full obligations, it defaults, which would have catastrophic consequences for the global economy. At the moment, Republicans are threatening not to lift the limit (though, there is some question of their sincerity). This leaves President Obama with three options: He can let the government default, triggering a global recession. He can concede spending cuts to the GOP, giving further incentive to legislative hostage taking, or he can take advantage of a loophole in the law, which allows Treasury to mint platinum coins of any denomination.

Put Away Your Wand, Platinum Coins Aren’t Magic - One barrier to acceptance of the platinum coin strategy to avoid the debt ceiling is that most observers are overstating its bizarreness. In particular, numerous media outlets have been describing the coin as "magic." But there would be nothing magic about minting one or many large-denomination platinum coins -- it would just be another way of printing money. Under this strategy, the government would pay its bills by printing money instead of borrowing it. That's it. It's not magic or even all that novel. Indeed, we should probably give this option a more dignified name -- I propose "The Seigniorage Option" -- to de-emphasize questions like whose face will go on the coins. Remember, we are only even talking about using platinum because that happens to be required by the federal law that authorizes the Treasury secretary to issue money in unlimited denominations and quantities. Sending a trillion dollar coin to the Federal Reserve and sending a trillion dollars in newly-printed $100 bills would have exactly the same economic effect -- it's just that only one of these options is legal. Of course, financing government through seigniorage is usually a sign of severe distress -- governments do it because they lack the economic capacity to tax or borrow. But in our case, the barriers to taxing and borrowing are purely legal, not economic. The Federal Reserve can even be expected to demonstrate the government's ability to borrow by selling Treasury securities to offset Treasury's coin-financed expenditures. So, even as Treasury prints money, the markets can be expected to treat the government's actions like borrowing.

Ezra Klein Chooses Fear Mongering the Big Coin, I Choose Ending Austerity! - Here’s a commentary on Ezra Klein’s recent diatribe against Platinum Coin Seigniorage (PCS). But there’s nothing benign about the platinum coin. It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring. Name calling, labeling, and fear mongering aside, does Ezra understand the first thing about PCS? Does he know that if a $60 T coin were minted, and the Treasury General Account (TGA) filled with $60 T in electronic credits, the US would be able to just say goodbye to the international markets? If we were paying off the national debt as it fell due, we would not only not be defaulting, but would be paying all our creditors on time and in full, and without benefit of further debt instrument issuance. Nor would we care whether the markets trusted us or not; since we would not be borrowing money from them for the foreseeable future. So, how could our borrowing costs rise?

Barbarous Relics - Krugman - I feel comfortable in my understanding of the economics of the platinum coin, but don’t claim any legal expertise. However, Laurence Tribe knows whereof he speaks — and he says that it’s quite legal. And so there you have it: if we have a crisis over the debt ceiling, it will be only because the Treasury department would rather see economic devastation than look silly for a couple of minutes. There will, of course, be howls from the usual suspects if that’s how it goes. Some of these will be howls of frustration because their hostage-taking plan was frustrated. But some will reflect sincere horror over a policy turn that their cosmology says must be utterly disastrous. For many people on the right, value is something handed down from on high It should be measured in terms of eternal standards, mainly gold;  And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn’t tied to gold is a kind of theft, not to mention blasphemy. For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change.

Trillion Dollar Platinum Coin Is "Not The Solution" - PIMCO's Gross - PIMCO founder and co chief investment officer Bill Gross gives no credence to the trillion dollar platinum coin scheme. "We feel that such an action would not only jeopardise the U.S. Fed and Treasury standing with Congress but with creditor nations internationally - particularly the Russians and Chinese." It appears to be a bit of a stunt by and may be a convenient distraction away from the substantive issue of how the U.S. manages to address its massive budget deficits, national debt and unfunded liabilities of between $50 trillion and $100 trillion. It may also be designed to create the false impression that there are easy solutions to the intractable US debt crisis - thereby lulling investors and savers into a false sense of security ... again. Gross said that subject to the debt ceiling, the Fed is buying everything that Treasury can issue. He warns that we have this "conglomeration of monetary and fiscal policy" as not just the US is doing this but Japan and the Eurozone is doing this also. Gross has recently criticised the Fed's 'government financing scheme.'  He has in recent months been warning of the medium term risk of inflation due to money creation and recently warned of 'inflationary dragons.'

El-Erian on the coin -- It’s not exactly a slow news week, but the platinum coin meme is gaining momentum daily all the same: today it jumped from Paul Krugman’s blog to his newspaper column, and now Mohamed El-Erian has weighed in, too, at Fortune. As the overseer of well over $1 trillion in fixed-income assets at Pimco, El-Erian’s views on this are important, and, in Fortune at least, he seems not to hate the idea: “much would depend,” he writes, “On whether the coin option is viewed as an end in itself or a means to an end”. El-Erian worries about a large possible downside if the coin is seen as an end in itself, but at the same time, every single proponent of the platinum-coin idea is crystal-clear that they see it as a means to an end. So what does El-Erian think of that case? I suspect that market reaction would be generally calm if the option were used as a way to diffuse what could otherwise be a repeat of the debt ceiling debacle in the summer of 2011 — when political brinkmanship and bickering harmed growth, risk assets and the country’s credit rating. Indeed, some argue that, by broadcasting very loudly the dysfunction of Congress and essentially embarrassing its members, such an unusual (and for many — and here you can pick your preferred wording — unthinkable, unprecedented, absurd, creative, etc.) approach could provide the catalyst needed to shock our politicians into more constructive behavior, thereby reducing headwinds to growth and job creation.

Fed’s Plosser: Platinum Coin Not Worth Risk to Credibility - The “mint the coin” gang doesn’t have a friend in Philadelphia Fed chief Charles Plosser. The currency in question is the so called “platinum coin” some say the Treasury could create in a bid to do an end run around hitting the debt ceiling. As advocates see it, if Congress fails to raise the debt limit to facilitate spending they’ve already mandated, President Barack Obama could exploit a law allowing the Treasury to mint commemorative coins. As the idea goes, the Treasury could create a coin — $1 trillion seems to be the popular figure — and deposit it at the Federal Reserve in exchange for cash. It would allow the nation to continue to pay its bills while debt ceiling negotiations move forward. It’s never been tried, no one in the government has suggested it will happen, but the topic has nevertheless become hot among some economists and the financial market.

White House declines to rule out the minting of a ‘platinum coin’- The White House on Wednesday declined to rule out minting a “platinum coin” to avoid default if Congress fails to raise the debt ceiling. Press secretary Jay Carney on Wednesday said there is “no substitute” for Congress raising the borrowing limit but declined to explicitly rule out issuing new currency to pay the government's debts. "The option here is for Congress to do its job and pay the bill," Carney said. "There is no Plan B, there is no backup plan. There is Congress's responsibility." A loophole in federal law — originally designed to allow for the manufacture of collectable coins — appears to give the Treasury secretary unchecked ability to mint platinum coins of any denomination. Treasury could hypothetically mint a $1 trillion coin, deposit it at the Federal Reserve and continue paying bills even if the $16.4 trillion debt ceiling is reached in a few weeks — and all without congressional approval. The idea is getting attention from Democrats who argue President Obama should not negotiate spending cuts with Republicans in return for an increase in the debt ceiling.

Thinking About the Brink - Krugman - The platinum coin discussion has moved with startling speed, from an idea nobody took seriously (and which, as I’ve mentioned, senior officials were unaware of just last month), to assertions that it’s ridiculous and illegal, to grudging acknowledgment that it’s almost surely legal coupled with strained attempts to dismiss it as an option nonetheless. Ezra Klein has now opened up a new front, which I would consider a sort of progressive version of the shock doctrine: we shouldn’t invoke the coin option, he says, precisely because it would work too well, and therefore let us sidestep the real issues: The argument against minting the platinum coin is simply this: It makes it harder to solve the actual problem facing our country. That problem is not the debt ceiling, per se, though it manifests itself most dangerously through the debt ceiling. It’s a Republican Party that has grown extreme enough to persuade itself that stratagems like threatening default are reasonable. It’s that our two-party political system breaks down when one of the two parties comes unmoored. Minting the coin doesn’t so much solve that problem as surrender to it.

Coins Against Crazies, by Paul Krugman - So, have you heard the one about the trillion-dollar coin? It may sound like a joke. But if we aren’t ready to mint that coin or take some equivalent action, the joke will be on us — and a very sick joke it will be, too.  It’s crucial to understand three things about this situation. First, raising the debt ceiling wouldn’t grant the president any new powers; every dollar he spent would still have to be approved by Congress. Second, if the debt ceiling isn’t raised, the president will be forced to break the law, one way or another; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.  Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means. Republicans go wild at this analogy, but it’s unavoidable. This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met. Which brings us to the coin.

Blogs review: The trillion-dollar platinum coin option to the debt ceiling - What’s at stake: What started as an arcane idea on a finance blog a couple of months ago – that the debt ceiling crisis could be averted by exploiting a legislation designed to govern the issuance of commemorative coins, which allows the Treasury to mint platinum coins, and only platinum coins, in any denomination – has moved center stage in the punditry debate and gone viral on Twitter under the hashtags #MintTheCoin and #StopTheCoin. The idea has gotten so much traction that U.S. Rep. Greg Walden (R-Ore.) announced plans to introduce a bill to modify the current legislation on commemorative coins to prevent such a scheme and White House Press Secretary Jay Carney came under heavy fire during the daily news briefing to give the official position. Ezra Klein gives a refresher: to avoid running into the debt ceiling in the next couple of months, the Treasury secretary could exploit a legal loophole, create a platinum coin, assign it a value of $1 trillion or some other very high number, and deposit it at the Fed, thus enabling the government to carry out its previously promised tax and spending policies without broaching the legal cap on debt issuance.

Goldman On The Debt Ceiling: "It's Different This Time" - As Obi-Wan Kenobi might have said "This is not the debt ceiling debacle you are looking for." That is the seeming 180-degree shift that Goldman appears to have taken with its latest missive on the pending 'discussions'. Their reasoning that this time is different is based on the fact that, in contrast to now, the S&P 500 seemed immune to 'cliff' risks and traded in the 1300 range for the first half of 2011, even as the macro backdrop began to sharply deteriorate. Their models suggest it was clear that risk sentiment was buoying the market even as macro fundamentals were deteriorating. Goldman's view is that the swift market 20% sell-off was in part a reflection of a levitating market reconnecting to still-deteriorating macro fundamentals, possibly catalyzed by the political debate. This time around, they claim, the macro backdrop is, at least for now, stable and far better then in 2011, which perhaps, will allow the market to better absorb the upcoming debt ceiling debate. Unless, this happens...

Silly Worry of the Day: US Will Default; Politics of the Debate - Of all the over-dramatized nonexistent threats, the silly worry of the day is the US is at risk of default if Congress does not raise the debt ceiling. Earlier today, I saw a couple of articles outlining how and why a US default could happen. Well, it won't, and there is no need for all the surrounding drama either. The best rebuttal to the default idea comes from Bloomberg columnist Caroline Baum in her article Obama’s Default Drama Is No Way to Run a CountryThe United States of America isn’t going to default on its debt, even if Congress doesn’t increase the statutory borrowing authority in the next couple of months. Everyone in Washington knows, or should know, this. Any assertions to the contrary are tantamount to playing politics with the debt ceiling.  A shutdown is certainly possible. A debt default? Not gonna happen. Why? Because the income taxes withheld from most of our paychecks each month exceed the interest the Treasury owes on its debt outstanding. In November, for example, the Treasury’s interest expense totaled $25 billion. That compares with tax receipts of $161.7 billion. The ratio of receipts to interest expense varies from month to month, but what comes in more than covers what goes out in debt service.

An Escape Hatch for the Debt Ceiling - THE fiscal cliff may have been avoided, but an even higher-stakes political standoff — this time, over the federal debt ceiling — is just around the bend.  Congressional Republicans have said they will demand immense cuts to popular government programs in exchange for agreeing to raise the nation’s authorized borrowing limit of $16.4 trillion. The Treasury Department briefly nudged against that ceiling on Dec. 31, but used “extraordinary” financial measures to buy more time. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin.  There are no great options. Most of the ideas floated so far would either severely disrupt the public markets for Treasury debt or rely on a constitutional claim of executive authority so far-reaching that we would very likely spend the next two years locked in an impeachment fight.  However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The Latest Crazy Solution To the Debt Ceiling: IOU’s - The impending debt ceiling crisis, which we’ll reach by some time in mid-February unless Congress and the President are able to reach a deal to extend the debt ceiling, has already led to a couple bizarre banana republic like plans by which the President could avert the crisis without having to worry about Congress. One argument says that the 14th Amendment authorizes the President to create new debt despite the fact that the law doesn’t authorize it. As I noted the other day, though, it seems fairly clear that the legal arguments advanced in favor of this plan are a stretch at best, and that any debt that would be created would be of legally questionable status at the very least. Another argument says that the President can authorize the minting of a Trillion Dollar Coin, or several such coins, to authorize the Federal Government to spend money despite its inability to borrow. As I’ve noted, that strategy is of dubious legal merit and would have economic implications nearly as bad as failing to raise the debt ceiling itself. Now, someone’s come out with yet another idea, and this one just demonstrates how absurd the political conversation in Washington has become:The $1 trillion platinum coin seems too wacky; the 14th amendment too risky. But could IOU’s be the solution to an impasse on raising the nation’s borrowing limit? Yes, and President Obama should publicly adopt the idea, Edward Kleinbard, a University of Southern California law professor and former chief of staff to Congress’s Joint Committee on Taxation, argues in a Thursday New York Times op-ed. If lawmakers can’t reach an agreement before the nation hits its debt ceiling–which could happen as soon as next month–then Obama should have a backup plan of issuing IOU’s in place, Kleinbard argues.

We Need to End The Debt Ceiling Distraction – Now - The debt ceiling standoff is a massive national distraction, as is the rampaging blogospheric discussion of the standoff and its various possible resolutions.   I am convinced that both the White House and Congress are eager to keep the debt ceiling debate and conflict alive to distract the country from a much more important reality: that they are currently negotiating the final shape of an economically punishing and magnificently stupid austerity package that will be substituted in for sequestration cuts due to take effect in March.   The austerity package is Washington’s obsequious response to the disaster capitalism cattle stampede that has been urged on by Pete Peterson, Fix the Debt and affiliated groups of debt hysterics.  Whatever combination of tax increases and spending cuts are finally accepted, the result will be to tie a fiscal cement block amounting to about 1.5% of GDP to the legs of an economy that is barely treading water. But on the odd chance that the White House is actually serious about bringing a quick end to this standoff, the President should make a curt and frank public statement that plainly calls on Republicans to discipline the incompetents in their increasingly ridiculous party before they humiliate the party even further.

Lawmakers urge the President to consider "any lawful steps" to pay the bills - From the NY Times: ‘Any Lawful Steps’ Urged to Avert Default “In the event that Republicans make good on their threat by failing to act, or by moving unilaterally to pass a debt-limit extension only as part of unbalanced or unreasonable legislation, we believe you must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis — without Congressional approval, if necessary,” wrote Senators Harry Reid of Nevada, Richard J. Durbin of Illinois, Charles E. Schumer of New York and Patty Murray of Washington. Democratic leadership aides said the Senate would probably take up legislation in early February that would allow the president to raise the debt ceiling on his own in set increments, perhaps of $1 trillion. Congress would have the ability to reject the increase, but that would take a two-thirds majority. I remain confident that the debt ceiling will be raised, and that the US Government will pay the bills.However "fear" will start slowing the economy soon - just like in 2011 - and the House will receive (and deserves) all of the blame for any damage done to the economy.

Senate Dems: We’ll back Obama if he raises debt limit unilaterally - Senate Democratic leaders have sent a letter to President Obama pledging their support if he raises the nation's $16.4 trillion debt ceiling unilaterally in the face of Republican resistance. Support has been growing among Democrats in Congress for Obama to invoke the 14th Amendment or another legal justification for expanding the nation’s borrowing authority without congressional approval. “In the event that Republicans make good on their threat by failing to act, or by moving unilaterally to pass a debt limit extension only as part of unbalanced or unreasonable legislation, we believe you must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis — without Congressional approval, if necessary,” Senate Majority Leader Harry Reid (D-Nev.) and other Democratic leaders wrote in a letter dated Jan. 11.

Is That A Backbone I See? - Krugman - Senate Democrats give Obama full backing in any unilateral action he might take on the debt ceiling. Reports say that Harry Reid is still partial to the 14th amendment; but there’s also the coin and the coupons.Just to be clear, there’s no need for the administration to commit to a solution now, or even to admit that it has one in mind. You still want the pressure on the GOP to turn away from this cliff. But you also want to be careful not to rule anything out, partly so that the GOP understands that it may face a grand fizzle, partly because it may be necessary to do something to avert default. So the appropriate response of senior officials, if asked about the coin and all that, is to say “Hey, look, isn’t that a crack in the ceiling? And how about that game last night?” Keep it ambiguous; but meanwhile, secretly, get that coin ready — preferably, as Felix Gilman says, smithed by dwarves in the deep places of the earth.

The Disastrous Consequences Of Not Raising The Debt Limit - As we face another brutal fight over the federal debt ceiling at a time when the economy still remains fragile, the stock market is oddly complacent. Even if the debt ceiling crisis is resolved, the result would be some combination of spending cuts and tax increases that would weaken the economy in 2013. A settlement, however, is far from a done deal as both sides remain far apart and determined to defend their positions. This week the Bipartisan Policy Center issued a 41-page report detailing the disastrous consequences of not raising the debt limit. We outline the report as follows. The full report can be found at The U.S. government hit its debt limit on January 1st. The Treasury secretary then tapped into the $201 billion emergency borrowing authority to allow for an additional period of fully-funded government operations. It is estimated that the emergency funds will run out sometime between February 15th and March 1st. After that, the government can pay out only what it receives in revenues, which covers only about 60% of the obligations due between February 15th and March 15th. The Treasury then has two choices as to how to make the payments. It can make all of each day's payments once enough cash is available. In this case all payments would be late, and they would get later and later with the passage of time. An exception could be made for interest payments on the debt so that no default actually occurs. The second choice would be to pay some bills on time while others would not be paid. It is unclear whether this method is legal or even feasible, given the design of the Treasury's computer system. The department makes about 100 million individual payments monthly, and would be forced to pick and choose which ones to make and which to skip.

An Argument For The Debt Ceiling: As we rapidly approach the great "debt ceiling debate," of which we are told that we should we should "rise above," there has been a rising chorus of arguments for ways to get around the debt ceiling, such as the platinum coin idea, as well as utilizing the 14th Amendment. There have also been numerous comments made that the debt ceiling should be disposed of entirely.  The idea of the "Trillion Dollar Coin" or utilizing the 14th Amendment are just simply bad ideas that should be dismissed immediately. I say they are "bad ideas" because the last thing that we need, as a country, is an Administration that is trying to find ways to circumvent the law. As such I want to focus my comments today on the later argument for disposing of the debt ceiling entirely. To fully understand my argument for WHY we should maintain the debt ceiling it is important to understand what it actually is and is not.

How to Pay for What We Need - Just after the election of 2008, the Nobel laureate liberal economist Paul Krugman made a prophecy: we will not restore prosperity, he warned in The New York Review of Books, “unless we are willing to think clearly about our problems and to follow those thoughts wherever they lead.” But as Krugman’s thoughts drifted back to the maxims of John Maynard Keynes—maxims he called “more relevant than ever”—our thoughts could be turning to the older and in some respects wiser innovations of President Lincoln and the Republican Congress during the Civil War. Here’s the gist of it: using the monetary methods of Lincoln, updated to employ the inflation-fighting tools of the Federal Reserve, we could pay for a faster recovery and a great many worthy projects without higher taxes, without more national debt, and believe it or not, without inflation. How? By letting Congress exercise a little-known power that is used (very quietly indeed) by the Federal Reserve: the power to create new money.If the Federal Reserve can create new money, couldn’t Congress do the very same thing? The answer is yes, and here’s the precedent: the Legal Tender Act of 1862, in which the Republican-controlled Congress authorized creation of “United States Notes,” known as greenbacks, that were printed up and spent into use.

How Good is the Fiscal Agreement? Becker - Not good at all in my opinion. The biggest defect is the failure to do much about federal spending, which has grown rapidly since 2000, especially during the past 4 years, and will continue to grow unless major reforms are made. Some of the increases in taxes are desirable but many are not, and the whole set of tax changes will do little to close present and future fiscal deficits. Most of the reforms in taxation and spending that I advocate in this piece will not be considered politically feasible because of the power of special interests. In fighting special interests, however, one needs to be clear on the desired goals, and that is the spirit motivating my discussion. The fiscal agreement has very little reform of the basic tax code. Nothing was done about the many undesirable special exemptions called “corporate welfare”. These include, among many, employer deductibility of contributions to health care coverage of its employees; subsides to the oil industry, and subsidies also to alternative sources of energy, such as solar.Middle income and rich families mainly take advantage of the deduction for interest paid on home mortgages that cost about $90 billion in federal tax revenue in 2012. Although many attempts have been made to provide economic and social justifications for encouraging home ownership, the arguments and evidence have been weak.Charitable contributions are the other major itemized deduction. That deduction has greater justification because it helps decentralize charitable giving away from the government. Nevertheless, with such large fiscal deficits, that deduction should also be restricted. The fiscal agreement did limit total deductions by couples earning more than $300,000, but it did not distinguish among deductions, and the limit should apply to all personal income tax filers.

More on the Fiscal Cliff—Posner - I shall discuss several closely related questions: (1) was the deal that averted the “fiscal cliff” a good one? (2) what would be the best deal to avoid a repetition of a fiscal-cliff type of crisis in the near future? (3) should there be a debt ceiling? (4) what is Republican economic policy and is it coherent and economically sound? and (5) where is Mitt Romney in all this?  Had no deal to avert falling off the fiscal cliff been struck, large federal income tax increases would have gone into effect at the beginning of the new year and a rapid process of huge cuts in federal spending would have been triggered. The result would have been a sharp negative jolt to the economy, though how sharp no one knows. But given the present fragility of the economy, failing to avert a fall off the cliff would have been irresponsible, and quite possibly a public relations disaster for the Republican Party, which is having trouble getting its act together after the intense disappointment of the election result.

New York Times Article Tells Big Lies on Impact of Fiscal Cliff Deal on Rich v. Ordinary Americans -  Yves Smith -- If the media was licensed, the New York Times story, “After Fiscal Cliff Deal, Tax Code May Be the Most Progressive Since 1979,” would be grounds for disbarment. I flagged the piece as a Big Lie in comments yesterday, and figured that since anyone who was either old enough to have been paying taxes in the 1980s or had minimal Google skills could ascertain its claims were nonsense, that it would be debunked elsewhere. Instead, it was apparently tweeted actively by soi-disant liberals on Saturday. This piece is one of a series of changes over the last month of so of a ratcheting up in the propaganda war against what is left of middle class America. It appears that the effort to sell citizens the necessity of cutting Social Security and Medicare has led our fearless leaders to take us across an event horizon into a late Soviet “all propaganda all the time” footing.  What is disconcerting now is the frequency with which articles that are thinly veiled media plants are run uncritically, and the intensity with which they are touted on Twitter and other social media. Post election, I’ve seen a big increase in newbie commentors running right wing talking points in an effort to re-educate the NC readership. The New York Times has moved decidedly to the right after the crisis, as has the Financial Times, and both have been trumpeting how the bad the debt problem is and why Something Must Be Done. “Something,” of course, is goring your ox, a point that will be kept largely out of view until it is too late for the public to do anything about it.

On Budget Cuts, the Political Gap Is Informational, Not Ideological - Dean Baker, co-director of the Center for Economic and Policy Research The Washington political crowd often claims that political gridlock is the result of ideological extremes dominating the two major political parties. For the Democrats, spending on programs like Social Security, Medicare, and Medicaid is sacrosanct. For the Republicans tax increases are strictly verboten. With one side refusing to accept spending cuts and the other side refusing to accept tax increases, deficit reduction is impossible. That’s a cute story with which to fill news articles and opinion pieces, but it is almost completely wrong – and not just because it exaggerates the need for deficit reduction. While it is absolutely true that the vast majority of Democrats strongly oppose cuts to Social Security, Medicare, and Medicaid, so do the vast majority of Republicans, including self-identified supporters of the Tea Party. This is not a debatable point. Poll after poll consistently shows that huge majorities across the political spectrum strongly support these programs and do not want to see them cut. While the support is somewhat lower among more conservative voters, any politician would be delighted to enjoy the same approval rating with potential voters as Social Security enjoys among Tea Party conservatives. This one is not a close call, even the most conservative voters are huge supporters of the big three social programs

Krugman and Obama’s Dangerous Austerity Myths By William K. Black -- Austerity in response to the Great Recession has proven to be an economic weapon of mass destruction.  On January 10, 2013, Paul Krugman (Nobel Laureate in Economics) and President Obama launched the same dangerous austerity myth in remarkably similar language.

    • -Krugman: Lately, revenue has fallen far short of spending, mainly because of the depressed state of the economy. If you don’t like this, there’s a simple remedy: demand that Congress raise taxes or cut back on spending. And if you’re frustrated by Congress’s failure to act, well, democracy means that you can’t always get what you want.”
    • -Remarks by the President in Nomination of Secretary of the Treasury “And thanks in large part to [Treasury Secretary Geithner’s] steady hand, our economy has been growing again for the past three years, our businesses have created nearly 6 million new jobs. And we’ve begun to reduce our deficit through a balanced mix of spending cuts and reforms to a tax code….”

I know that many, perhaps most Americans, would read these quotations and think:  “of course, they’re repeating obvious truisms.”  Both quotations are, however, dangerous myths.  My colleagues at UMKC who specialize in macroeconomics have been discrediting these myths for many years, and Krugman has come to the same viewpoint. Krugman knows what he wrote is a dangerous myth.  I assume he fell victim to limits on the word count of his column and did not have time to reiterate the point he has made many times as to why trying to balance the budget in our situation would likely cause a recession.

Program Cuts Far Outweigh Tax Increases in Deficit Reduction - CBPP - President Obama and Congress have enacted roughly $2 trillion of policy savings (tax increases and spending cuts) over the past few years to help reduce budget deficits, our recent report points out, and 72 percent of them have come through program cuts — most notably, those in the 2011 Budget Control Act (see graph). As we noted yesterday, our analysis finds that policymakers can stabilize the public debt as a share of the economy over the next decade with $1.2 trillion in additional policy savings over the decade, which would generate almost $200 billion in interest savings — for a total of $1.4 trillion in deficit reduction. Our paper also explains that: even if the additional savings were divided evenly between revenue increases and program cuts, the total deficit reduction under the three deficit-reduction packages would be heavily weighted toward budget cuts:  64 percent budget cuts to 36 percent revenue increases, or a ratio of nearly 2 to 1.  To achieve a 50-50 split for the combined deficit-reduction packages, policymakers would have to obtain nearly 90 percent of the additional $1.2 trillion in savings from revenue increases. In contrast, if all of the additional savings were to come from program cuts, as Republican congressional leaders have suggested, the overall ratio would be still more skewed, with more than four-fifths coming on the spending side — a ratio of nearly 5 to 1.

Shared sacrifice – except for CEOs - The hypocrisy over deficits and calls for shared sacrifice can be illustrated with one simple statistic. According to the Institute for Policy Studies, 25 of the most-well-paid chief executives got higher compensation than their companies paid in federal taxes.  There’s a class war on, as Warren Buffett has noted, and his class is winning it. The drive for austerity, with its attendant manufactured crises, carries with it a host of mini-outrages making this point. Americans learned after the fiscal cliff negotiations ended that the final agreement, ostensibly to pass “tax hikes for the wealthy,” extended huge corporate handouts. These included special breaks for NASCAR, help for Hollywood movie studios, $3 billion a year for General Electric, support for mining and railroad companies, and even a push for electric scooters. Outrage over this story flamed everywhere, from the floor of the House of Representatives to cable news networks, including ESPN. The anger at these corporate subsidies was justified because breaks like these are a symbol of a budget process designed to shift money and power to people who already have too much of it. The real story of the fiscal cliff negotiations, and the coming debt ceiling debate, are corporate tax cuts and the CEOs who love them. There are many corporations that don’t pay taxes. They then pass along some of that increased profit to their CEOs, who also shelter their income from the Internal Revenue Service. It’s a veritable circle of life

Why Corporate Subsidies in the Fiscal Cliff Bill Matter: We Can Stop Corruption If We Understand It - Three days ago, Naked Capitalism published a story, Eight Corporate Subsidies in the Fiscal Cliff Bill, From Goldman Sachs to Disney to NASCAR. Basically, when everyone else was focused on taxes for the wealthy or spending cuts, we actually looked at the underlying bill. And loh and behold, the corporate extenders were egregious and included cash for NASCAR, Hollywood, mining companies, GE, Citigroup, and so on. The reaction has been swift, and is useful to understand, because it points to an underlying political dynamic. And that is, change is possible, and “the system” isn’t inherently dirty. We can make a difference, if we try. The story made it into the New York Times and into a Brad Plumer front-page piece in the Washington Post. NBC, ABC, CBS, the Huffington Post, US News and World Reports, Think Progress, and the Wall Street Journal ran with it.  The story really traveled, going into local papers all over, just to pick a sampling - the Dallas Morning News, the Charleston Daily Mail, the Austin Statesman, specialty papers like the Boston Business Journal, BDN Maine Business, and right-wing papers like Reason Magazine and the Washington Examiner (where Tim Carney did some useful digging). Popular autoblog Jalopnik defended NASCAR, ESPN and Yahoo Sports even got in on the action. Whether these tax breaks should be extended, how much they cost, and what the recipients think are important aspects of the story. The media outcry had an impact. Congressman Darryl Issa on the floor of the House argued about the egregiousness of the tax breaks, and Jared Bernstein on NPR is now talking about how we need to close tax loopholes in the debt ceiling. These tax breaks are known as “extenders”, which means they must be extended every year. They must be renewed, and next year (or even sooner, if some smart member proposes closing them for the debt ceiling fight), the renewal fight will happen under a microscope.

The most money goes to which law enforcement agency?Think Progress offers a note of caution when we think we have reality nailed for government spending and results. And how 'public displays' by our politicians offer up little information: During the 2012 fiscal year, the federal government spent more on immigration enforcement — $18 billion — than on every other federal law enforcement agencies combined, according to a new report from the Migration Policy Institute. The spending on Immigration and Customs Enforcement and Customs and Border Protection dwarfs the combined $14.4 billion spent on the FBI; Bureau of Alcohol, Tobacco, Firearms and Explosives; Drug Enforcement Administration and U.S. Secret Service.  The U.S. has spent more than $187 billion on immigration enforcement since President Reagan signed the Immigration Reform and Control Act in 1986 — which first made it illegal for employers to hire undocumented workers along with strengthening U.S. border security. Adjusted for inflation, the U.S. now spends 15 times as much on immigration enforcement as it did in the mid-1980s. And the number of deportations and immigration-related prosecutions has also jumped along with the increased spending:

The Cliff Game - The latest fiscal cliffhanger was only one in a series of games of political brinkmanship in Congress that are likely to continue. So it’s worth trying to understand the underlying strategic dilemma. What political and economic factors are making negotiations over the future of government spending increasingly contentious? Economists increasingly rely on game theory as a tool for understanding behavior in situations where individual or group actors can’t be sure what others are going to do. In technical terms, the fiscal cliff game fits the description of a “game of chicken” made famous in the 1955 film “Rebel Without a Cause.” James Dean plays a young man pressured to prove his manhood by racing his car toward a seaside cliff, in competition with another young man named Buzz. The first one to swerve is a chicken. In this game, both lose if they follow the same strategy. In the worst case, they both go over the cliff and die. If they both swerve at once, they are both labeled cowards. Each hopes the other will swerve first. In the film, Buzz tries to jump from his moving car but catches his sleeve and goes over the cliff to certain death. Dean’s character jumps clear before his car goes over the cliff.  The outcome reminds us that unanticipated events amplify the uncertainty of the game itself.

Republican Anti-Tax Pledge May Again Be What Protects Medicare and Social Security - The best hope for protecting Social Security and Medicare from benefit cuts during the next round of manufactured crises continues to be the Republican unwillingness to accept any new taxes. Top Republicans are very directly calling for benefit cuts in the next round of possible deals. Just yesterday Senate Minority Leader Mitch McConnell (R-KY) said we need to raise the Medicare age and adopt more means testing. There is every reason to believe President Obama would support a deal that includes benefit cuts. He has quietly pushed for a deal cutting entitlement benefits during his entire tenure in office. Obama also agreed to benefits cuts during both the failed debt ceiling negotiation in 2011 and during his fiscal cliff negotiations with John Boehner. The only real major disagreement that would potentially stop any deal is the issue of new revenue. Obama still wants a big deficit reduction package in the near future but Democrats insist any deal contains roughly a 1:1 ratio of spending cuts to new revenue. On the other hand, Republicans are adamantly claiming that taxes have now been dealt with and no new revenue will be allowed.Democrats somehow think they broke the back of the GOP opposition to tax increase during the last deal. Democrats think they can get Republicans to agree to more revenue this time by doing it only through “closing loopholes.” This seems to be wishful thinking. Technically Republicans only approved a slightly smaller tax cut than they really wanted, and roughly half  the GOP still voted against it

Letting the payroll tax cut expire was a terrible idea - From the abstract of a new paper by New York Fed staff economists: This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present-bias or unanticipated shocks, and is likely a consequence of mental accounting. Those arguably-well-designed tax cuts, of course, have now expired. According to several estimates, this will result in roughly $120bn less in workers’ pockets this year. In Appendix B of the paper we find this (emphasis ours): Response to Expiration of Payroll Tax Cuts We see that, on average, workers plan to largely cut down spending. They plan to reduce consumption by 71.4 percent of the amount of the tax cut, followed by a reduction in savings of 26.1 percent of the size of the tax cuts, and an increase in debt of 2.4 percent of the tax cut amount. This is in sharp contrast to the actual reported use of the tax cut funds.

The payroll tax hike wiped out a year’s worth of wage gains: The good news: Many Americans saw their paychecks get fatter in 2012, as average weekly earnings rose 2.4 percent over the course of the year. The bad news: The expiration of the payroll tax cut this January will basically wipe away all of last year’s gains. Cardiff Garcia brings us the above chart from Credit Suisse, which notes: We look at average weekly earnings of all employees on private non-farm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. … That’s the equivalent of losing all the 2012 gain in weekly earnings in one month. And if you include inflation on top of that, then average weekly earnings actually went down 1.4 percent compared to this time last year. So how will Americans respond now that their paychecks are shrinking? A new study (pdf) from the Federal Reserve Bank of New York suggests one answer: They’ll spend a lot less this year. And that, in turn, could bruise the larger U.S. economy.

Most U.S. taxpayers lose out on ‘fiscal cliff’ deal -   How much do the newly enacted tax hikes on the wealthiest Americans actually affect them? Hardly at all. Almost all of the debate that convulsed Capitol Hill in December concerned the reinstatement of the highest marginal tax rate on earned income — that is, on wages and salaries. But as Fitzgerald said, the rich are different from you and me, and one of the primary ways they’re different is that they don’t get their income from wages and salaries. In 2006, the bottom four-fifths of U.S. tax filers got 82 percent of their income from wages and salaries, a Congressional Research Office study found. The richest 1 percent, however, got just 26 percent of their income that way; for the richest one-tenth of 1 percent, the figure is just 18.6 percent. The study also looked at dividends and capital gains. The bottom four-fifths got just 0.7 percent of their income from those sources. (Those who believe we’ve become an “ownership society,” please take note.) The wealthiest 1 percent, however, realized 38.2 percent of their income from investments, and the wealthiest one-tenth of 1 percent realized more than half: 51.9 percent. The tax deal Congress passed last week raised the top rate on wages and salaries from 35 percent to 39.6 percent. The rate on income from capital gains and dividends, however, was raised to only 20 percent from 15 percent. There has been no rending of garments nor gnashing of teeth from our super-rich compatriots; they got one sweet deal.

The Fiscal Cliff Deal in One Picture -  The 2013 American Tax Relief Act (aka ATRA or the fiscal cliff deal) is a big complicated law. But here is one chart that pretty much tells the story.  The tale, based on Tax Policy Center analysis of the new law, comes in three chapters:

  • First, this whole debate was always about much more than the “Bush tax cuts.”
  • Second, for most Americans the end of the 2010 payroll tax cut is by far the biggest reason their taxes will go up in 2013.
  • Third, the tax increases in the American Tax Relief Act turn out to be pretty progressive.

No, Ari, The Cliff Deal Will Raise The Economic Incentive To Give To Charity - Huffington Post reports on this tweet/warning from former Bush press secretary, Ari Fleischer: I increased donations to charity in 2012. This deal limits my deductions so I, & many others, will likely donate less in 2013. Mr. Fleischer is referring to the phaseout of itemized deductions, which had temporarily expired but was reinstated by the Tax Relief Act of 2012 (the official name for the deal that averted the fiscal cliff).  Fleischer expanded on this point in an op ed in the Wall Street Journal. Fleischer is wrong,  but it’s easy to understand why he might be confused since the phaseout is designed to obfuscate.  The phaseout works this way.  Singles with incomes over $250,000 and couples with incomes over $300,000 lose 3 cents of itemized deductions for every dollar of income above the threshold.  If Mr. Fleischer is married and makes $500,000, his itemized deductions are reduced by $6,000 (3% of the $200,000 of income above $300,000).  If he earns more money, his deductions will continue to be reduced.  If Mr. Fleischer is considering giving another $10,000 to some worthy cause (or even an unworthy one, so long as it’s a 501(c)(3)), his deductions will increase by that $10,000.  The amount of the phaseout is unaffected, since it depends only on income, not the total amount of deductions (except for that miniscule fraction of taxpayers at the limit). Assuming he is in the 39.6% bracket, he will save $3,960 in federal income taxes (and more in state income taxes).  That is an increase of $460 from 2012 when the top rate was  35%.  So the new law increases the tax incentive to give by raising his marginal tax rate (and making deductions more valuable).

Stealth Tax Hikes - The editors of the Wall Street Journal point argue that the deal to avert the fiscal cliff contains a “Stealth Tax Hike” and that “the new $450,000 income threshold is a political fiction.” The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake. The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn’t going to be pretty. Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000. Here’s why: During the negotiations, the White House won a concession from Republicans to allow phaseouts for personal exemptions and limitations on itemized deductions, starting at an income of $250,000 for individuals and $300,000 for joint filers. The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point

To Simplify Taxes, Start by Standardizing Them Despite early, ambitious proposals to reduce tax expenditures -- the myriad exemptions, deductions and credits within the tax code -- lawmakers couldn't agree on a single simplification.Big tax reform isn’t likely to get any further this year, when Republicans and Democrats resume conversations on fiscal issues to avert two pending government shutdowns: the debt ceiling and the expiration of the "continuing resolution," which funds the federal operating budget.The very thing that makes base-broadening tax reform so attractive in the abstract makes it unattainable in political practice. You offend few people by pledging to reduce tax expenditures. But try to actually eliminate the deduction on mortgage interest? Prepare to have the National Association of Realtors block the deal. Take away the deduction on charitable contributions and every non-profit organization in the country will call for your headAlmost every major tax expenditure has a powerful interest group ready to rally in its defense. That's why the expenditures are there in the first place, and why they are worth several hundred billion dollars in foregone annual tax revenue.

Some Sunny Day - James Howard Kunstler - The story behind the "fiscal cliff" melodrama and the much-memed handwringing about the "good-for-nothing congress" is probably not quite what it appears -- a set of problems that will eventually be overcome by "better leadership" armed with "solutions." The story is really about the permanent disabling of government at this scale and at this level of complexity. In other words, the federal government will never solve its obvious problems of mismanagement and bankruptcy and is now only in business to pretend that it can discharge its obligations (while employees enjoy the perqs). It's just another form of show business.  The same can be said of most of the state governments, too, of course, except that they have a lower capacity to pretend they can take care of anything. They can and will go bankrupt, and then they'll go begging to the federal government to bail them out, which the federal government will pretend to do with pretend money. By then, though, the practical arrangements of daily life would probably be so askew that politics would take a new, darker, and more extreme turn --among other things, in the direction of secession and breakup.   The wonder of it all is that there hasn't been civil disorder yet. When I go into the supermarket, I marvel at the price of things: a single onion for a dollar, four bucks for a jar of jam, five bucks for a box of Cheerios, four bucks for a wedge of cheese. Is everybody except Jamie Dimon, Lloyd Blankfein, and Mark Zuckerberg living on store-brand macaroni and ketchup? It's hard to measure the desperation of households in this culture of rugged individualism. At social gatherings friends rarely tell you that they are two months behind in their mortgage payment and maxed out on their credit cards. And that's the supposed middle class, at least the remnants of it. I can't tell you what the tattoo-and-falling-down-pants crowd talks about in the parking lot outside the 7-Eleven store. Perhaps they swap meth recipes.

Should We Tax People for Being Annoying? - Driving home during the holidays, I found myself trapped in the permanent traffic jam on I-95 near Bridgeport, Conn. In the back seat, my son was screaming. All around, drivers had the menaced, lifeless expressions that people get when they see cars lined up to the horizon. It was enough to make me wish for congestion pricing — a tax paid by drivers to enter crowded areas at peak times. After all, it costs drivers about $16 to enter central London during working hours. A few years ago, it nearly caught on in New York. And on that drive home, I would have happily paid whatever it cost to persuade some other drivers that it wasn’t worth it for them to be on the road. Each car added an uncharged burden to every other person. In fact, everyone on the road was doing all sorts of harm to society without paying the cost. I drove about 150 miles that day and emitted, according to E.P.A. data, about 140 pounds of carbon dioxide. My very presence also increased (albeit infinitesimally) the likelihood of a traffic accident, further dependence on foreign oil and the proliferation of urban sprawl. According to an influential study by the I.M.F. economist Ian Parry, my hours on the road cost society around $10. Add up all the cars in all the traffic jams across the country, and it’s clear that drivers are costing hundreds of billions of dollars a year that we don’t pay for.

The Benefits of Uncertainty - When people argue that uncertainty about taxation and regulation is freezing corporate decision-making, they are generally arguing that more certainty would be a good thing for the economy. The idea, deemed so self-evident that it sometimes is left unspoken, is that corporations are hesitating to invest in the United States.But an interesting study flips this story on its head. It finds that manufacturing employment in the United States declined sharply as a direct result of a 2000 government decision to fix in place the level of tariffs on imports from China.The level of tariffs had remained constant for years, but only because Congress acted each year to extend the status quo. Without that annual vote, tariffs on many goods would have increased, in some cases quite sharply. Then in 2000, Congress granted “permanent normal trade relations” to China. The legislation mostly left the existing tariffs unchanged. What it eliminated was uncertainty about next year. The result was a burst of corporate decision-making. Newly confident that tariffs on imports would not increase, executives responded by firing workers in the United States and moving production to the other side of the Pacific. The effect was huge, according to the paper, by Justin R. Pierce, a Federal Reserve economist,

Jacob Lew: Another brick in the Wall Street on the Potomac By William K. Black -- The New York Times has just run two articles confirming that President Obama intends to appoint Jacob Lew as Treasury Secretary Geithner’s replacement.  Most people assume that Geithner is a creature of Wall Street through direct employment, but Geithner never drew a paycheck directly from Wall Street.  Geithner worked for a wholly-controlled subsidiary of Wall Street – the Federal Reserve Bank of New York.  Lew is the real deal, another brick in Obama’s creation of Wall Street on the Potomac.  While the first NYT article ignored Lew’s work on Wall Street, the second article simply tries to minimize it. “Mr. Lew had a brief turn in the financial industry before joining the Obama administration four years ago, working at the financial giant Citicorp, first as managing director of Citi Global Wealth Management and then as chief operating officer of Citigroup Alternative Investments.” “Global Wealth Management” refers to banking services for the wealthiest people in the world, a club in which mere millionaires are barely worth having as a client.  “Alternative investments” refers to financial derivatives traded for the bank’s own account.  Lew’s training was as a lawyer. “Obama is clearly comfortable bringing another ex-Wall Streeter into an administration that, beyond a recent ratcheting up of populist rhetoric, has done relatively little to rein in the financial industry. That, in turn, reflects the ease with which Washington hands like Lew shuttle between the Street and the Hill. Case in point: Lew’s predecessor as budget chief, Peter Orszag, left the agency and joined Citi as vice chairman of global banking. A job in politics is no longer a back-door to a lucrative job in banking — it’s a red carpet. The revolving door keeps spinning.

NEP’s William Black appears on Democracy Now - NEP’s William K. Black appeared along on Democracy Now. The appearance has been split into two parts and posted below.

"Failure of Epic Proportions": Treasury Nominee Jack Lew’s Pro-Bank, Austerity, Deregulation Legacy --- MATT TAIBBI: I think there’s a couple things. I agree with everything that Professor Black said. I think it’s—the symbolism of this choice is, I think, very important for people, just the mere fact of picking somebody from Citigroup and from that same Bob Rubin nexus that Timothy Geithner came from. And, you know, you heard Barack Obama, as he’s introducing Jack Lew, praising Tim Geithner as somebody who’s going to go down in history as one of the great treasury secretaries of all time. I think what this tells everybody is that Jack Lew is going to represent absolute continuity with the previous treasury secretary, who had a very specific agenda when it came to Wall Street. And I think we’re just going to expect more of the same, more of the same really being overt and covert support of these too-big-to-fail institutions that Lew worked for, Citigroup being the worst and most disastrous example of that kind of company.
-- AMY GOODMAN: That’s Jack Lew responding to Bernie Sanders, who, when President Obama announced his nomination of treasury secretary—to treasury secretary of Jack Lew, Senator Sanders said, "We don’t need a treasury secretary who thinks that Wall Street deregulation was not responsible for the financial crisis." Professor Black?
-- WILLIAM BLACK: Well, I mean, we can agree that he lacks expertise in the area, but he was supposed to have expertise. This was supposed to be his area of expertise, both in his role as OMB head under Clinton, and then, of course, as being in the industry and actually implementing the fruits of this deregulation.

    Banks Win an Easing of Asset Rules -  A group of top regulators and central bankers on Sunday gave banks around the world more time to meet new rules aimed at preventing financial crises, saying they wanted to avoid the possibility of damaging the economic recovery. The rules are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008. Meeting in Basel, Switzerland, the committee, made up of bank regulators from 26 countries, also loosened the definition of liquid assets. The decision marks the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010. The easing takes some pressure off banks, which have complained that the new guidelines would throttle lending and hurt economic growth. Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. “Nobody set out to make it stronger or weaker,” he said of the rules in a conference call with reporters, “but to make it more realistic.” Still, the decision was a public concession from the authors of the so-called Basel III rules that the regulations could hurt growth if applied too rigorously. It was endorsed unanimously by participants, including Ben S. Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank.

    Banks win victory over new Basel liquidity rules - The heads of the world's top regulators and central banks yesterday approved plans to require banks to hold significantly higher levels of liquid assets in order to reduce the chances of a repeat of the 2008-09 financial crisis. But in an apparent response to financial sector lobbying, they also relaxed the definition of what will be considered a liquid asset, and said banks will have four years longer than expected to implement the new standards. The Group of Governors and Heads of Supervision (GHOS), meeting in the Swiss city of Basel, approved the Liquidity Coverage Ratio (LCR) put forward by the Basel Committee on Banking Supervision.Sir Mervyn King, present chairman of the GHOS and outgoing Governor of the Bank of England, said: "The agreement reached today is a very significant achievement. For the first time in regulatory history, we have a truly global minimum standard for bank liquidity." He added that the objective of building up liquidity buffers of easily saleable assets was to prevent commercial banks using central banks as a "lender of first resort" in times of financial stress,

    How Safe Is The New International Liquidity Agreement? - William K. Black appears on al Jazeera discussing how safe the Basel III International Liquidity agreement truly are.

    Why the Basel change was a bad idea - But here’s the problem: Basel’s leverage requirements haven’t actually changed at all. It’s the liquidity requirements which have changed. And while I’m not worrying about banks’ leverage, I am worrying about their liquidity. Here’s the difference: leverage requirements protect banks against a sudden drop in the value of their assets. Liquidity requirements, on the other hand, protect banks against bank runs. And bank runs are all about trust and confidence. Banks, especially in the US, might have reasonably strong balance sheets these days. But no one trusts them, or their accounting. (If you don’t believe me, just read Jesse Eisinger and Frank Partnoy in the Atlantic, then you will.) When you don’t have trust, you need liquidity to make up for it — which is why the liquidity requirement is exactly the wrong place for the Basel committee to be fiddling. What’s more, the Basel committee didn’t just delay the implementation of the leverage requirements: they changed the requirements themselves. Liquidity is not a completely well-defined term, but it basically means money, or something very very close to it. But the Basel committee has now given up on saying that you need cash, or government bonds, to count against your liquidity requirement. Now, you can even use mortgage-backed securities, if you have enough of them: the rule is that $100 of mortgage-backed securities provide the same amount of liquidity as $50 of cash.

    What Was Just Watered Down in Basel? - - These ideas are behind two of the additional special forms of capital requirements designed by the Basel Committee on Banking Supervision in Basel III. The first is a “Liquidity Coverage Ratio” (LCR), which is designed to make sure that a financial firm has sufficiently liquid resources to survive a crisis where financial liquidity has dried up for 30 days. The second is a “Net Stable Funding Ratio,” which is designed to complement the first rule and seeks to incentivize banks to use funds with more stable debts featuring long-term horizons. Basel has just introduced some changes into their final LCR rule, so let’s take a deep dive into this capital requirement rule. Before we introduce some headache-inducing acronyms, remember that the basics are simple here. Banks have a store of assets and they have obligations that they have to make. Or, at the simplest level, banks have a pile of money or things that can be turned into money and people and firms who are demanding money. So any watering down of the rule has to impact one of those two things.

    Why New Basel Rules Won’t Make Safer Banks - If there were a banker version of sugarplums dancing in one's head, surely an easing of the liquidity coverage ratio would be it. The liquidity coverage ratio is new regulatory requirement aimed at ensuring that banks can withstand short-term financial crises. Under rules proposed by the Basel Committee on Banking Supervision, banks will be required to hold a portfolio composed of officially approved "High Quality Liquid Assets" equal to the amount of liquidity outflows they might experience under stressed conditions over thirty days. The basic idea is to make sure banks have enough assets they can easily sell to support a month's worth of liabilities if we have a repeat of 2008 and one or more banks lose access to the credit market and depositors start to flee. Banks despised the original set of liquidity rules proposed in by the Basel Committee in 2010, although at first they downplayed their opposition and went out of their way to say they support the goals of the new rules. They objected that the proposed rules over-estimated the amount of deposits likely to flee in a time of stress, defined high quality liquid assets too narrowly, and put in place too tight a timetable for compliance. The Basel Committee on Banking Supervision played the slightly belated Santa Claus role Sunday by delivering the news that banks were getting relief on all three of these objections. The outflow forecasts will be lower, the definition of high quality assets will be expanded, and the rules will not be fully enforced until 2019, four years later than expected. The sugarplums are now well in-hand.

    Betrayed by Basel - Simon Johnson - The fundamental assumption of modern bank regulation is that nations need to coordinate, and they negotiate the relevant international standards in the Swiss city of Basel, home to the Bank for International Settlements, under whose auspices such negotiations are held. The United States has an important seat at the table, but so do the Europeans and others. These negotiations are shaped by three main forces: the United States, Britain and the euro zone, with Japan often siding with the euro zone. (It’s one country, one vote, so this can easily go against the United States.) This week the Basel Committee on Banking Supervision, as it is known, let us down – once again. Faced with renewed pressure from the international banking lobby, these officials caved in, as they did so many times in the period leading to the crisis of 2007-8. As a result, our financial system took a major step toward becoming more dangerous. (A visual representation of the Basel Committee’s centrality to all key regulatory matters is clear on this organizational chart, as well as in its charter.) Why did this happen? Must Basel always let us down? And is there any alternative? You will no doubt have noticed that very large banks with a global span have an unusual degree of political influence. In particular, they have the ability to threaten the economic recovery. Their line is: if you don’t give us what we want, credit will not flow and jobs will not come back. Because they receive downside protection from the public sector – the too-big-to-fail phenomenon – bank executives want to take a great deal of risk. When things go well, they get the upside; when things go badly, that is largely someone else’s problem.

    Banks at risk of ‘perpetual’ cycle of bankruptcy, warns Alix - Large banks risk getting caught in "perpetual" cycle of bankruptcy like aerospace companies and carmakers unless they radically alter the way they do business, according to a leading industry consultant. Alix Partners, one of the most influential advisers to senior banking executives, warns that global investment banks must tackle head-on issues such as bonuses and their addiction to the "steroids" of debt-fuelled growth. "Just look at the auto manufacturing and commercial aviation industries, where over the past two decades, changes in regulatory and operating environments combined to render formerly solid businesses into perpetual wards of the bankruptcy court," said the consultants. According to Alix, investment banks still pay their staff far too much, pointing out that the "overpayment effect" last year was $18bn (£11bn), or close to 30pc of the world's top 15 banks' combined pre-tax profits. Senior bankers agree lenders must change their ways if they are survive. The head of one major British bank said he agreed with the findings and that those businesses, which did not adapt to the new world, would "die". "There was a major change in 2008 and a lot of people seem to be acting like it never happened. The choice is pretty stark; you can either carry on as you are and disappear into irrelevance, or you can change. There is no other option," he said.

    Ring-Fencing and "Financial Protectionism" in International Banking - New York Fed - Some market watchers and academic researchers are concerned about a “Balkanization” of banking, owing to a sharp decline in cross-border international banking activity (see chart below), and an increased home bias of financial transactions. Meanwhile, policy and regulatory efforts are under consideration that may further induce banks to shift away from international activity, including ring-fencing of domestic banking operations, other forms of "financial protectionism," and enhanced oversight and prudential measures.  While enhanced oversight and prudential measures are familiar concepts, it is not always clear what ring-fencing and financial protectionism mean in the context of international banking. In this post, we try to lift the fog in terminology by presenting concepts and subtext behind recent policy discussions. We also point out that while some initiatives are relatively new, other policies less frequently discussed have been in place for some time, both in the United States and internationally.

    Captured Regulators Are Caving In To Wall Street Demands As If 2008 Never Happened - The insipid regulators of Wall Street’s biggest and most dangerous banks are recklessly caving in to outrageous demands to roll back or water down protections designed to prevent another 2008-style financial collapse.  And the cave-ins are happening in some of the most critical areas of promised financial reform. The latest Wall Street giveaway was announced this past Sunday evening when Mervyn King, Governor of the Bank of England, announced that the new global banking rules on capital adequacy and liquidity, known as Basel III, will not go into effect in January 2015 as promised, but will be phased in over four years and not become fully effective until January 1, 2019.  In addition, the rules themselves have been watered down to allow more risky assets, like mortgage backed securities – which caused many of the problems in 2008 – to count toward emergency liquidity requirements rather than restricting the emergency funds to government bonds and cash.

    Republicans join liberal view of megabanks - America’s liberals have long demanded that the largest US financial groups be forcibly broken up following the financial crisis. Now, an increasing number of influential conservatives are joining their cause. Republican lawmakers on Capitol Hill have introduced legislation and written letters urging government officials to study the allegedly harmful effects on financial stability and economic growth posed by “megabanks”. Leading Republican commentators have called for the restructuring of big financial institutions and had even urged Mitt Romney to make the pledge part of his election campaign last year when he ran as the Republican presidential candidate. What was once dismissed as a fringe idea during the debate over the 2010 Dodd-Frank law that reformed US financial regulation is becoming part of the conversation in Washington, as lawmakers consider additional measures that threaten the largest US banks. These include forced divestments and higher capital requirements. “The Republican response to Dodd-Frank’s overkill is to break up the banks. The far left also wants to break up the big banks,” said Jaret Seiberg, senior policy analyst at Guggenheim Securities. “There are . . . serious threats here.”

    Secret Goldman Team Sidesteps Volcker After Blankfein Vow - Sitting onstage in Washington’s Ronald Reagan Building in July, Lloyd C. Blankfein said Goldman Sachs had stopped using its own money to make bets on the bank’s behalf. “We shut off that activity,” the chief executive officer told more than 400 people at a lunch organized by the Economic Club of Washington, D.C., slicing the air with his hand. The bank no longer had proprietary traders who “just put on risks that they wanted” and didn’t interact with clients, he said.  That may come as a surprise to people working in a secretive Goldman Sachs group called Multi-Strategy Investing, or MSI. It wagers about $1 billion of the New York-based firm’s own funds on the stocks and bonds of companies, including a mortgage servicer and a cement producer, according to interviews with more than 20 people who worked for and with the group, some as recently as last year. The team’s survival shows how Goldman Sachs has worked around regulations curbing proprietary bets at banks. Former Federal Reserve Chairman Paul A. Volcker singled out the company in 2009, saying it shouldn’t get taxpayer support if it focuses on trading. A section of the 2010 Dodd-Frank Act known as the Volcker rule, drafted to prevent banks from taking on excessive risk, limits short-term investments made with firms’ capital.

    Rescued by a Bailout, A.I.G. May Sue Its Savior - Fresh from paying back a $182 billion bailout, the American International Group Inc. has been running a nationwide advertising campaign with the tagline “Thank you America.” Behind the scenes, the restored insurance company is weighing whether to tell the government agencies that rescued it during the financial crisis: thanks, but you cheated our shareholders. The board of A.I.G. will meet on Wednesday to consider joining a $25 billion shareholder lawsuit against the government, court records show. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.” Maurice R. Greenberg, A.I.G.’s former chief executive, who remains a major investor in the company, filed the lawsuit in 2011 on behalf of fellow shareholders. He has since urged A.I.G. to join the case, a move that could nudge the government into settlement talks.

    AIG Considers Suing US Over US Bailout Of AIG - Sometimes you just have to laugh - or you will cry. In what could well have been Tuesday Humor if it wasn't so real, the AIG board (fulfilling its shareholder fiduciary duty) is considering joining Hank Greenberg's suit against the government over the cruel-and-unusual bailout that saved the company. The $25bn lawsuit, as NY Times reports, based not on the basis that help was needed but that the onerous nature "taking what became a 92% stake in the company with high interest rates and funneling billions to the insurer's Wall Street clients" deprived shareholders of tens of billions of dollars and violated the Fifth Amendment (prohibiting the taking of private property for "public use, without just compensation"). The 'audacious display of ingratitude' comes weeks after the firm has repaid the $182 billion bailout funneled to it and its clients by an overly generous Treasury. The firm has asked for 16 million pages of government documentation, this "slap in the face of the government" portends a question of whether the government will sue The Fed for enabling the recovery that strengthened Greenberg's case that the bailout was so harsh. Happy retirement Tim Geithner.

    A Heaping Helping of Chutzpah: AIG Considers Suing the U.S. Government For Bailing It Out - Hank Greenberg didn’t get to where he is today by being timid. The former chairman of AIG built the company up from humble beginnings in the 1960s to become the world’s largest insurance company, before a 2005 accounting scandal forced Greenberg to step down. But he remained a major shareholder through the U.S. government’s 2008 bailout of the company, when the feds took an 80% stake in the firm in exchange for an $85 billion loan, which saved the company from certain bankruptcy. (The bailout eventually ballooned to $182 billion loan in exchange for a 92% stake.) But Greenberg isn’t thankful for the rescue. In fact, he thinks we the taxpayers ripped him off in the deal, and he will meet with AIG’s board today in an attempt to convince the company to join his company, Starr International, in a law suit against the federal government, according to a report yesterday in The New York Times. The suit does not argue that the bailout was unnecessary, but rather that the government exploited AIG’s near-bankrupt position to extract unfair concessions — concessions it did not require of other bailed-out financial institutions. Furthermore, the suit argues, the government used the company to issue “back-door” bailouts to financial institutions across the world. Greenberg is demanding $25 billion in damages to make him and his fellow AIG shareholders whole.

    Schadenfreude Alert: With or Without AIG’s Help, Hank Greenberg Plans to Torture Treasury and Geithner -  Yves Smith - Never underestimate the greed of a billionaire. But I have to say separately that I will thoroughly enjoy the pigfight between former AIG chief Hank Greenberg’s C.V. Starr (now the biggest shareholder in AIG) versus the Federal government over the rescue of AIG. Any cost and embarrassment that the Administration suffers will be the direct result of the Bush-Obama policies of being concerned only about saving financial players rather than meting out any punishments, and for being incompetent negotiators. The media and even some Congressmen exploded over the notion that AIG might join Greenberg in a suit against its rescuer, the US government, meaning ultimately the American taxpayer. For instance, Elijah Cummings, ranking member of the House Committee on Oversight and Government Reform, wrote: The idea that AIG might sue the government is an unbelievable insult to our nation’s taxpayers, who cleaned up the mess this firm created. I understand that AIG’s board has a fiduciary duty to consider this action, but the simple fact is that AIG did not have to accept these terms — it could have entered bankruptcy. This is like suing the paramedic who just gave you CPR because he didn’t give you a pillow. The American taxpayers were a lifeline to this firm, and for certain shareholders to now criticize the terms of the rescue is utterly ridiculous.

    OCC lowers JP Morgan Chase’s CRA Grade to Satisfactory -The Wall Street Journal has the story here.  Previously the grade had been outstanding.  The other three giant US banks retain ratings of outstanding.  Two thoughts: If JP Morgan Chase undertakes new lending to improve its rating, that will say something about the importance of the Community Reinvestment Act in spurring banks to act.  And second, this may be more evidence that the Office of the Comptroller of the Currency (now led by Thomas Curry) under the Obama administration is more protective of consumers than under earlier administrations. 

    Dimon Says Some JPMorgan Execs ‘Acted Like Children’ on Loss - JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said some top executives at the largest U.S. bank “acted like children” in handling an errant derivatives bet that cost the company more than $6.2 billion last year. “Instead of helping, they were running around with their head chopped off, ‘what does this mean for me personally, how’s my reputation?’” Dimon, 56, said yesterday at a conference in San Francisco hosted by the New York-based bank. Some people “felt they could take advantage of it personally, they were willing to hurt the company by maneuvering.”The so-called London Whale, the nickname of the U.K.-based trader Bruno Iksil because his trading book was so large, made a wrong-way bet on credit derivatives that led to the company’s single biggest trading loss and at one point wiped out as much as $51 billion in market value. At least a dozen state, federal and international bodies are investigating the trades. “We had 100 people who worked every day for 90 days to help the real problem, the risk, not the ongoing regulatory review, but the real problem to get the risk down so we didn’t have ongoing exposure,” Dimon said.

    UBS Risk Management Fiasco Illustrates Hidden Big Bank IT Time Bombs - Yves here. One of the sources of risk in big and even moderately big banks that does not get the attention it deserves is information systems. Having mission critical systems function smoothly, or at least adequately, is crucial to a major trading operation. Huge volumes of transactions flow through these firms, and the various levels of reporting (customer exposures, funds flows, risk levels, transaction and reconciliation failures) need to be highly reliable or things get ugly fast. Witness MF Global, where the firm was unable to cope with the transaction volume of its final days and literally did not know where money was at various points in time during the day.  Now one would think that in the wake of a super duper financial crisis, that big banks would up their game on the risk management/IT front. My guess is the reverse. First, regulators haven’t thought much about operational risks; that’s only recently been considered something worth thinking about. Second, even though I suspect that over time trading managers have gotten better at managing IT, that likely means they have gone from terrible (as in too preoccupied with the press of business to do an adequate job of specing projects or being willing to try approaches like Extreme Programming) to merely garden variety not very good (as in pretty much no one in corporate-land is willing to spend the extra 20% or so to have developers document their work in sufficient detail that a completely new person could understand what was done). And banks have a monster legacy system problem. Multihundred million dollar programs to tidy up and integrate systems into the One System to Rule (Big Parts of Them) All have this funny way of being cashiered after running up monstrous bills and not getting very far.

    Former Deutsche Bank Employee Claims Bank Took Big Libor Bets During Crisis Because It Could Influence Rates -  Yves Smith - The Wall Street Journal has an exclusive story based on a whistleblower leak, apparently with supporting transaction records. In 2008, Deutsche Bank made very large bets instruments linked to one, three, and six month dollar, euro, and sterling Libor, that differential between one month rates versus the three and six month tenors would widen as the crisis became more severe. The German bank reportedly made over €500 million on these trades. What is significant is that these were very large wagers, particularly at a time when most banks were desperate to shed risk. This is the guts of the story: The documents from the former Deutsche Bank employee set out how traders in London and New York working for the German bank’s global-finance unit successfully bet that borrowing costs in euros, U.S. dollars and British pounds over three- and six-month periods would rise faster than one-month interest rates because of deepening stress throughout the global financial system. The interest-rate bets included an estimated potential profit of €24 million for each hundredth of a percentage point that the three-month U.S. dollar Libor increased compared with the one-month U.S. dollar Libor, according to the documents.

    Bad language can catch financial rogues - Phrases such as “nobody will find out”, “cover up” and “off the books” are among those most likely to litter the in-boxes of corporate rogues according to fraud investigators deploying increasingly popular linguistic software. Expressions such as “special fees” and “friendly payments” abound for those embroiled in bribery cases, while rogue employees feeling the heat are likeliest to write that they “want no part of this” as well as the somewhat misguided “don’t leave a trail”. More than 3,000 such words and phrases used in email conversations among employees engaged in corporate wrongdoing have been identified through specialist anti-fraud technology, according to research by Ernst & Young based on evidence from corporate investigations in conjunction with the FBI. “The language, which is a mix of accounting phrases, personal motivations and attempts to conceal, are very revealing,” said Rashmi Joshi, Ernst & Young’s director of fraud investigation and disputes services. He said that the monitoring of email traffic played almost no role in the compliance efforts of companies looking for possible problems. “While most organisations only focus on the numbers when investigating discrepancies, what we are seeing are ways of analysing words – emails, SMS or instant messaging – to identify and isolate wrongdoing.” Linguistic analysis software, which initially protects employee anonymity, can flag uncharacteristic changes in tone and language in electronic conversations and can also be tailored for particular types of employees, especially traders.

    Secrets and Lies of the Bailout - Taibbi : It has been four long winters since the federal government, in the hulking, shaven-skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, committed $700 billion in taxpayer money to rescue Wall Street from its own chicanery and greed. To listen to the bankers and their allies in Washington tell it, you'd think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we've been told, but the money has all been paid back, and the government even made a profit. No harm, no foul – right? Wrong. It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it. The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.

    Credit-default swaps: The case for the prosecution - The Economist -  AMONG the welter of papers presented at the AEA meetings in San Diego this past weekend was a paper to make opponents of financial innovation cheer. The authors used a database of North American CDS transaction records that ran from 1997 to 2009, and found that the odds of bankruptcy rose steeply for firms after CDSs started being traded, and decreased when the CDSs expired. Credit ratings dropped by half a notch, on average, in the two years after the instruments start trading. The authors control for the possibility that credit-default swaps are being written because investors anticipate that firms are going to get into trouble, and find that the relationship between CDS trading and higher bankruptcy risk appears to be causal.How to explain this effect? One explanation is that CDSs make it likelier that firms get into financial distress. By making it safer for lenders to extend credit to companies on which insurance can be bought, CDSs enable these firms to take on more leverage, which increases the risk of a blow up. Another explanation is that CDSs make it more difficult for firms that get into distress to navigate their way out of trouble. Creditors are less inclined to be forgiving if they have an insurance policy to collect on; and CDS trading appears to lead to an increase in the number of lending relationships that a company has, which makes it harder for creditors to co-ordinate with each other.

    88% Of Hedge Funds, 65% Of Mutual Funds Underperform Market In 2012 - 2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds

    US Suit Forces Closure of Swiss Bank, or More Accurately, What Little Was Left of It - Yves Smith - Now it is narrowly true that the filing of a criminal suit by US prosecutors did force the closure of a bank. But as one might suspect, there is vastly less here than meets the eye. And that isn’t simply because the institution in question was a Swiss bank I am pretty certain you never heard of. The oldest private bank in Switzerland, Wegelin, decided to try to fill the gap in the tax evasion market that opened up when the US went after UBS. From 2002 to 2010, the bank helped US clients file bogus tax returns, enabling them to escape paying taxes on about $1.2 billion of assets. The US decided to go after them (as it is with other Swiss banks, including Julius Baer and Credit Suisse). The US filed suit, first against Wegelin executives, then the bank itself. After the indictment last Feburary, the bank said it would fight. Instead, it pleaded guilty, agreed to pay $57.8 million in restitution and fines and said it would cease operating as a bank. Wow, what a victory, right?  Maybe not. Let’s look at the sequence, which you can discern simply from reading the Financial Times:

    US fear index plummets to a 5½-year low - Wall Street’s “fear index” has tumbled to a fresh 5½-year low as investors turn increasingly positive on the outlook for global stock markets. The Vix index tracks investor expectations of market volatility revealed in the pricing of options that protect against violent moves on the S&P 500. As money managers typically seek protection against sharp share declines, the Vix is considered a gauge of how fearful investors are. Despite the limp economic recovery and political gridlock in the US, and the simmering European debt crisis, the Vix has continually been ground lower over the past year, and touched 13.2 points on Wednesday, the lowest since June 2007. Fund managers and strategists said the low Vix reflects the fact that central banks are seen as backstopping financial markets, lessening demand for downside protection. Signs of a tentative rotation by investors out of bonds and back into equities has further bolstered optimism. “It is a reflection of this global recovery broadening out, starting to stabilise,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “Market players are starting to become de-sensitized to Armageddon, end-of-the-world stories.”

    Beware the ‘central bank put’ - Mohamed El-Erian on the split between prices and fundamentals : The investment recommendations made by many financial commentators are now dominated by cross-asset class relative valuation rather than the fundamentals of the investment itself. A typical refrain runs something like this: buy X because it is cheaper than other things out there. This is an understandable approach as unusual central bank activism has artificially elevated certain asset prices. Yet the dominance of this increasingly popular advice comes with potential risks that need to be well understood and well managed. Several asset classes now have highly manipulated prices due to experimental central bank activities, both actual and signalled. The more this happens, the more investors come under pressure to migrate to higher risk investments in search of returns. Ben Bernanke, Federal Reserve chairman, said as much at his latest press conference, noting that the aim of policy is to “push” investors to take more risk. True to his wish, many pundits seem eager to discard fundamentals in favour of searching for (and levering) anything that “yields” more. This situation is reminiscent of 2006-07, when hyperactive liquidity factories also pushed some asset prices to artificial levels, thus contributing to a generalised and indiscriminate compression of risk premia. In the process, investors were comforted by the then-popular notion of the Great Moderation (the belief that central banks and governments had conquered the business cycle). We all know what happened next.

    Small business lending is profitable as long as lenders stay away from the really small businesses - A couple of months ago we discussed the SBIC program, a government initiative that provides leverage to mezz funds focusing on small business lending (see post). Attached is the SBIC 2012 annual report with some interesting data. One result that stands out is the contrast in long-term performance between smaller SBIC funds and the larger ones. Typically an SBIC fund will lend to maybe 15-20 companies. If investors put $20 million into the fund and the SBA lends the fund another $40 million, that the fund has $60 million to put to work. That means that such a fund will typically provide $3-4 million dollar loans to each of the portfolio companies. A $5 million fund on the other hand would provide $750K - $1 million dollar loans (roughly). It turns out that lending to the "larger small companies" is far more profitable than to the really small ones.The loss ratio (the percentage the government lost on it's loans to these mezz funds) due to defaults is almost negligible for funds that are above $17.5 million, but increases sharply for smaller funds (that provide smaller loans to smaller companies).

    On diminishing capital intensity - An interesting debate is popping up regarding the topic of capital expenditure. Take the latest from Societe Generale’s Andrew Lapthorne and team. They argued on Thursday that the commonly held belief that companies’ capital investing ratios have been falling, whilst hoarded cash pools have been going up, is inaccurate. As they note: We would also argue that from a corporate behaviour perspective, there has been very little difference between this cycle and previous ones. In the last few years we have witnessed a strong increase in capital expenditure, growing well in excess of cash flow. Reading through many press articles over that period you may have got the impression that US companies have been under-investing and simply hoarding cash. This is simply not true. As the chart below shows, this is simply not corroborated in US report and account data. As is typical, as cash flow accelerated so too (with a lag) did capital expenditure. It is also clear that cash flow growth has rapidly decelerated during the past six months, and where cash flow goes, investment is sure to follow. In other words, we have already been through a mini investment cycle, but more importantly it would appear that this is coming to an end.

    Banks Are Still Too Big and Fragile, Stanford Economist Says - What a difference a few years makes. Or not, in the case of banking regulation, says Anat Admati, a Stanford University economist who studies banks and finance. During an interview on the sidelines of this weekend’s American Economic Association confab in San Diego, Ms. Admati warned that, despite the effects of the Great Recession, the world’s big banks remain too large, too fragile, too indebted and too interconnected in hard-to-predict ways. Rather than building huge cushions of capital to protect themselves from potential losses, for example, some banks have returned cash to shareholders, she says. Banks still finance themselves heavily with debt, not equity, even though massive indebtedness, especially short-term debt, got them in trouble in the first place. This underlying fragility of the banking system augers more crises, Ms. Admati argues.

    Big Banks Systematically Hiding Potential Losses: Report - If you think the big banks learned painful lessons about risk-taking during the financial crisis, think again: They're still taking the same risks, and we don't even know how big those risks are. In the latest edition of The Atlantic, Frank Partnoy and Jesse Eisinger have a 9400-word opus on the untold horrors lurking on big-bank balance sheets. The elevator summary: Boy, banks sure do a lot of dodgy trading, and they hide their potential losses from investors. This may not come as shocking news. But it's one of those things that we can't hear often enough, with the momentum for reform cooling every day we get further away from the crisis. Big banks still have the capacity to blow up the financial system, and our inability to trust them makes another disaster even more likely.  Particularly useful is Partnoy and Eisinger's deep dive into the latest annual report of a supposedly staid, conservative bank, Wells Fargo. The authors discover that the bank is not simply lending money and giving away toasters, like banks used to do. Based on the authors' accounting, it looks like nearly $20 billion of Wells Fargo's $81 billion in revenue in 2011 came from one kind of trading or another.  And the bank doesn't offer much, if any, detail about the potential risks of that trading. How much money could Wells Fargo lose on its trades, which include hard-to-trade and hard-to-value derivatives? In the worst case, could the losses threaten the $148 billion in capital reserves Wells Fargo claims to have? Nobody knows, because Wells Fargo doesn't tell us, and they're not required to.

    Watchdog to Set Loan Rules - This week, the Consumer Financial Protection Bureau will define standards that all mortgage lenders are likely to follow when originating home loans. The rules don't specify a minimum down payment and instead focus on ensuring that banks document borrowers' ability to make their monthly loan payments. Loans in which borrowers make only interest payments for a set period and those in which the principal balance can increase are excluded by law from being "qualified" mortgages. CFPB is likely to offer two ways in which lenders can meet the regulator's standard ... Under the first approach, the regulator will consider as qualified mortgages all loans that receive an approval after being run through the automated underwriting engines maintained by [Fannie, Freddie, FHA], even if they aren't ultimately sold to or insured by those institutions. Under the second approach, loans would be deemed qualified mortgages if borrowers are spending no more than 43% of their pretax income on monthly debt payments.

    Deal in Foreclosure Case Is Imminent, Officials Say - A $10 billion settlement to resolve claims of foreclosure abuses by 14 major lenders is expected to be announced as early as Monday, several people with knowledge of the discussions said on Sunday. The settlement comes after weeks of negotiations between federal regulators and the banks, and covers abuses like flawed paperwork and botched loan modifications ... An estimated $3.75 billion of the $10 billion is to be distributed in cash relief to Americans who went through foreclosure in 2009 and 2010, these people said. An additional $6 billion is to be directed toward homeowners in danger of losing their homes after falling behind on their monthly payments.

    Surprise, Surprise: The Banks Win - IF you were hoping that things might be different in 2013 — you know, that bankers would be held responsible for bad behavior or that the government might actually assist troubled homeowners — you can forget it. A settlement reportedly in the works with big banks will soon end a review into foreclosure abuses, and it means more of the same: no accountability for financial institutions and little help for borrowers.  Last week, The New York Times reported that regulators were close to settling with 14 banks whose foreclosure practices had ridden roughshod over borrowers and the rule of law.  The possible settlement will conclude a regulatory enforcement action brought in 2011 by the Comptroller of the Currency and the Federal Reserve. Regulators moved against 14 large home loan servicers after evidence emerged of rampant misdeeds marring the foreclosure process.  Under the enforcement action, the banks were required to review foreclosures conducted in 2009 and 2010. Some back-of-the-envelope arithmetic on this deal is your first clue that it is another gift to the banks. It’s not clear which borrowers will receive what money, but divvying up $3.75 billion among millions of people doesn’t amount to much per person. If, say, half of the 4.4 million borrowers were subject to foreclosure abuses, they would each receive less than $2,000, on average. If 10 percent of the 4.4 million were harmed, each would get roughly $8,500.  This is a far cry from the possible penalties outlined last year by the federal regulators requiring these reviews. For instance, regulators said that if a bank had foreclosed while a borrower was making payments under a loan modification, it might have to pay $15,000 and rescind the foreclosure. And if it couldn’t be rescinded because the house had been sold, the bank could have had to pay the borrower $125,000 and any accrued equity.

    In Case There Was Any Confusion Just Who The Fed Works For... Today, to little fanfare, the Fed announced a major binding settlement with the banks over robosigning and fraudclosure, which benefited the large banks, impaired the small ones (which is great: room for even more consolidation, and even more TBest-erTF, which benefits America's handful of remaining megabanks), and was nothing but one minor slap on the banking sector's consolidated wrist involving a laughable $3 billion cash payment. As part of the settlement, the US public is expected to ignore how much money the banks actually made in the primary and secondary market over the years courtesy of countless Linda Greens and robosigning abuses. A guess: the "settlement" represents an IRR of some 10,000% to 100,000% for the settling banks. We are confident once the details are ironed out, this will be an accurate range.  Yet what is most disturbing, or not at all, depending on one's level of naivete, is the response of Elijah Cummings, ranking member of the house Committee on Oversight and Government Reform. As a reminder, Congress had demanded that the settlement not be announced before there was a hearing on it. This did not even dent the Fed's plans to proceed with today's 11 am public announcement which can now not be revoked.

    U.S. banks to pay $8.5 billion to end foreclosure reviews - (Reuters) - A group of 10 mortgage servicers agreed on Monday to pay a total of $8.5 billion to end a U.S. government-mandated case-by-case review of housing crisis foreclosures in an acknowledgement the program had proven too cumbersome and expensive. Roughly 3.8 million borrowers whose homes were in foreclosure within the time frame of the review will receive cash compensation ranging from hundreds of dollars up to $125,000, depending on the type of errors they experienced, the U.S. Office of the Comptroller of the Currency (OCC) said. The reviews followed the "robo-signing" scandal that emerged in 2010 involving allegations banks pursued faulty foreclosures by using defective or fraudulent documents. Bank of America Corp , Citigroup Inc , JPMorgan Case & Co , Wells Fargo & Co , MetLife Bank , and five others will pay $3.3 billion directly to eligible borrowers, and $5.2 billion in loan modifications and forgiveness, regulators said.The OCC and the Federal Reserve Board said they accepted the agreement to get relief to consumers more quickly than through the reviews.

    10 Banks Agree to Pay $8.5B for Foreclosure Abuse — Ten major banks and mortgage companies agreed Monday to pay $8.5 billion to settle federal complaints that they wrongfully foreclosed on homeowners who should have been allowed to stay in their homes. The banks, which include JPMorgan Chase, Bank of America and Wells Fargo, will pay billions to homeowners to end a review process of foreclosure files that was required under a 2011 enforcement action. The review was ordered because banks mishandled people’s paperwork and skipped required steps in the foreclosure process. Under the new settlement, people who were wrongfully foreclosed on could receive from $1,000 up to $125,000. Failing to offer someone a loan modification would be considered a lighter offense; unfairly seizing and selling a person’s home would entitle that person to the biggest payment, according to guidelines released last summer by the Office of the Comptroller of the Currency. Monday’s settlement was announced jointly by the OCC and the Federal reserve. The agreement covers up to 3.8 million people who were in foreclosure in 2009 and 2010. Of those, about 400,000 may be entitled to payments, advocates estimate.

    Is the $8.5 billion Foreclose and Fraud Settlement Enough of a Penalty? - Are The Federal Reserve and the OCC acting in good faith in letting banks off the hook for their past predatory lending practices? Yves Smith at Naked Capitalism labels it a sellout at the expense of mortgage holders: $8.5 billion Foreclosure Fraud Settlement: Yet Another Loss for Homeowners Touted as a Victory. When compared to TARP and other programs created to save TBTF and STBB (soon to be banks) plus the trillions pumped into the economy as a result the failures of banks and Wall Street, the $8.5 billion does seem paltry in comparison. Rather than taking the lead and closely auditing the review of wrongfully foreclosed mortgages and past practices, the OCC once again lets banks off the hook by giving them the ability to independently review both issues. Haven't we come this way before? Banks will not do it or will be selective in what they choose to disclose. Besides the history of banks failing to act in good faith, there is also a history of government agencies and branches failure to provide consumer protection.  It appears the dogs causing much of this debacle are kicking back their hind legs in an attempt to hide the droppings left behind because of their failures. Frankly, it is amazing the OCC is still in that mode of protecting thrifts and national banks, which caused much of the issue in the last decade after they were identified as the culprits who failed to regulate. For those who may not be familiar with the OCC's lack of supervision, I would offer Columbia's "The Audit" as a refresher: Let Sleeping Dogs Lie.

    Another Slap on the Wrist for Big Banks - The banks had to hire consultants to review foreclosures in 2009 and 2010. If violations were found, they were supposed to reimburse wronged borrowers “as appropriate.” Regulators pledged to ensure that the reviews would be comprehensive and reliable. In practice, it was left up to banks to decide what constituted wrongful foreclosure and appropriate redress. Not surprisingly, after spending an estimated $1.5 billion on consultants, the banks have found little wrongdoing and provided no meaningful relief. Equally unsurprising, regulators will let the banks off with a wrist slap for their failure to execute credible and effective reviews. This week, the Federal Reserve and the Office of the Comptroller of the Currency reached a deal with 10 banks under which the regulators will end the reviews and the banks will instead provide $8.5 billion in aid to borrowers. Of that, $3.3 billion is earmarked for cash payments to borrowers who lost their homes and $5.2 billion is for loan modifications and other help for borrowers currently at risk of foreclosure. Regulators have said that the goal in ending the reviews is to provide relief to borrowers “in a more timely manner.” If it’s timely relief they wanted, they would not have instituted the deeply flawed review process in the first place, nor would they have let the sham reviews drag on for more than a year. Worse, the settlement amount is inadequate.

    $8.5 Billion Foreclosure Fraud Settlement: Yet Another Loss for Homeowners Touted as a Victory -  Yves Smith - It’s bad enough to see long suffering homeowners take it once again in the chin, thanks to the way the bank regulators prostrate themselves before their supposed charges. It adds insult to injury to see this type of ritualized sellout yet again presented as a boon for consumers. The latest case study is the $8.5 billion foreclosure fraud settlement announced today. This agreement came out of a consent decrees among 14 servicers, the OCC, and the Fed entered into in April 2011. This was never a good faith effort to change bank behavior; the OCC was using this ruse to try to undermine the (then) 50 state AG-Federal regulator negotiations (which looked like they might be serious because Elizabeth Warren was informally advising the government side).  There were two major elements of the consent decrees, also known as cease & desist orders. One was a list of servicing standards, which were a partial recitation of what they were supposed to be doing already under current law. The second was a Potemkin review of foreclosures. The cover story was that this process was to identify wrongful foreclosures and compensate harmed borrowers. The real purpose was to whitewash servicer behavior.  And I can’t stress enough that the outcome was not only predictable, it was predicted as soon as the consent orders were published: that the OCC had deliberately devised a process that the servicers could exploit to claim that nothing bad had taken place

    Foreclosed Upon Americans Get Chump Change While Banks Erode Regulations - The Federal Reserve and the Office of the Comptroller of the Currency are cutting a deal against fourteen of the largest banks for their systematic foreclosure and loan modifications abuse which resulted in millions losing their homes. The New York Times:The initial report said borrowers who had lost their homes because of improprieties would receive a total of $3.75 billion in cash. An additional $6.25 billion would be put toward principal reduction for homeowners in distress. There are an estimated 4.4 million households who would qualify for such a settlement, which means they all get chump change after banks illegally took their homes. Of those 4.4 million households, initially only 200,000, now estimated at 323,000, bothered to file with an independent review of their plight at all. As part of a consent order in April 2011, the comptroller’s office and the Federal Reserve established the Independent Foreclosure Review, which mandated that banks hire independent consultants to audit loan files and look for illegal fees, bungled loan modifications and instances where borrowers lost their homes even though they were current on their payments. Only 323,000 homeowners submitted files to be reviewed. Under the enforcement action, the banks were required to review foreclosures conducted in 2009 and 2010. They hired consultants to analyze cases in which borrowers suspected that they had been injured by bank practices, such as levying excessive and improper fees or foreclosing when a borrower was undergoing a loan modification. Banks themselves turned each mortgage case review into a rule hell paper chase. They hired the $250/hr consultants, costing them $1.5 billion. The banks along with the OCC and the Fed set up so many rules and a maze of conditions that took at least 20 hours per case to even start examining systemic mortgage loan abuses. Banks did this to bury any finding of wrong doing. Homeowners did not even submit their claims due to the rigging of the game for foreclosure reviews. Their house was gone, seized and the banks are going to get 100% away with it all.

    The Banks Win Again - Last February, the big banks agreed to a major “settlement” to protect themselves from litigation by state attorneys general stemming from fraudulent documentation of mortgages. Though some, such as New York’s crusading attorney general Eric Schneiderman, believed that the government had leverage to get a lot more, the settlement required the banks to pony up some $25 billion to settle outstanding charges.  Only about $2.5 billion has found its way to actual principal reduction, to just 22,000 homeowners out of some ten million at risk of foreclosure. As part of the deal, Schneiderman was made co-director of a federal task force on banking and mortgage abuses headquartered at the Justice Department. Schneiderman’s frank hope, expressed to me and other reporters, was that the leverage of increased prosecution efforts would compel the banks to part with a lot more money in a second round of settlement talks. But now, the other shoe has dropped and the banks have won again. In the settlement announced Monday between the Federal Reserve, the Comptroller of the Currency and ten of the largest banks and other mortgage providers, the government gives up the right to prosecute banks for past wrongful foreclosures. In exchange, the banks part with another $8.5 billion, of which $5.2 billion is for loan modifications and $3.3 billion is for people whose mortgages were wrongfully foreclosed. It’s a pittance. With 3.8 million homeowners covered by the settlement, that works out to less than $2,000 per homeowner.

    Bank Deal Ends Flawed Reviews of Foreclosures  - Federal banking regulators are trumpeting an $8.5 billion settlement this week with 10 banks as quick justice for aggrieved homeowners, but the deal is actually a way to quietly paper over a deeply flawed review of foreclosed loans across America, according to current and former regulators and consultants. To avoid criticism as the review stalled and consultants collected more than $1 billion in fees, the regulators, led by the Office of the Comptroller of the Currency, abandoned the effort after examining a sliver of nearly four million loans in foreclosure, the regulators and consultants said. Because they have no idea how many borrowers were harmed, the regulators are spreading the cash payments over all 3.8 million borrowers — whether there was evidence of harm or not. As a result, many victims of foreclosure abuses like bungled loan modifications, deficient paperwork, excessive fees and wrongful evictions will most likely get less money. “It’s absurd that this money will be distributed with such little regard to who was actually harmed,” said Bruce Marks, the chief executive of the nonprofit Neighborhood Assistance Corporation of America.

    Banks Put Linda Green Behind Them With $10 Billion Robosigning Settlement - The chapter on robosigning, i.e., Fraudclosure, is now closed with a $10 billion wristslap on US banks, of which a whopping $3.3 billion in the form of direct cash and $5.2 billion in "other assistance." The banks who are now absolved from any and all Linda Green transgressions in the past include: Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. And so, banks can resume to resell properties with mortgages on which the original lien may or may not have been lost in the sands of time.

    US Foreclosure Settlement Angers Wall Street Critics - A multibillion-dollar settlement announced Monday between US financial regulators and major banks over alleged abuses related to home foreclosures is the latest example of the financial industry running roughshod over the rule-of-law without repercussions, Wall Street critics said. “The bottom line is: Fraud pays, and it pays big time,” William Black, a former federal bank regulator and a professor of economics and law at the University of Missouri-Kansas City, told RIA Novosti. The US Office of the Comptroller of the Currency (OCC) and the US Federal Reserve said they had reached an $8.5 billion settlement with 10 banks and mortgage firms that would halt independent reviews of their mortgage servicing and foreclosure processing practices. Last year, the country’s top five mortgage servicing firms—Citibank, Wells Fargo, JPMorgan Chase, Bank of America, and Ally Financial—agreed to a $25 billion settlement with the federal government over what US Attorney General Eric Holder called “abusive practices” related to foreclosures, including the so-called “robo-signing” of unverified documents. Bank of America, Citibank, JPMorgan Chase, and Wells Fargo were also part of the agreement announced Monday, which promises $3.3 billion in direct payments to eligible mortgage-holders and $5.2 billion in other assistance, such as loan modifications. But critics of both deals say these settlements send a message to the American people that Wall Street gets a slap on the wrist for behavior that lands people on Main Street behind bars.

    Bank of America to pay $11.6 billion in Fannie Mae settlement  - Bank of America said Monday it would pay $11.6 billion to settle agency mortgage repurchase claims on soured loans sold to mortgage finance giant Fannie Mae. The settlement covers residential mortgage loans originated and sold directly to Fannie Mae from January 1, 2000, through December 31, 2008, the big US bank said in a statement.

    Bank of America in $10B-plus Mortgage Settlement - Bank of America says it will spend more than $10 billion to settle mortgage claims resulting from the housing meltdown. Under the deal announced Monday, the bank will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the North Carolina-based bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans. CEO Brian Moynihan said the agreements were “a significant step” in resolving the bank’s remaining legacy mortgage issues while streamlining the company and reducing future expenses.

    Wall Street Throws Another $20 Billion At Its Regulators -- Monday was settlement day on Wall Street.  The four largest Wall Street banks and a handful of smaller ones tossed $20 billion at their various regulators and slid home free without going to jail over egregious foreclosure abuses that have ravaged the nation and left millions of families in desperate straits.  In the first settlement, ten U.S. banks including the four largest U.S. banks — JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – agreed to pay $8.5 billion to shut down a review of individual foreclosure case files in a process established by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve in 2011.  As we reported last week, that program was hopelessly compromised from the start by its structure. So-called “independent” reviewers were  paid directly by the banks and had to rely on the banks for much of their information, rather than being able to speak directly to the abused foreclosure victims. In a separate settlement with the Federal Housing Finance Agency, the regulator and conservator of Fannie Mae, Bank of America agreed to pay $11.6 billion to settle charges it sold improper mortgages to Fannie Mae between 2000 and 2008.  As part of the settlement, Bank of America agreed to buy back 30,000 of those mortgages.

    Consumers Win Some Mortgage Safety in New Rules - Banks and other lenders will be prohibited from making home loans that offer deceptive teaser rates or require no documentation from borrowers, and will be required to take more steps to ensure that borrowers can repay, under new consumer protections to be announced on Thursday. The rules, being laid out by the Consumer Financial Protection Bureau and taking effect next January, will also set some limits on interest-only packages or negative-amortization loans, where the balance due grows over time. Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so.  And mortgage originators will in most cases be restricted from charging excessive upfront points and fees, from making loans with balloon payments and from making loans that load a borrower with total payments exceeding 43 percent of income.  With the sweeping rules, financial regulators are trying to substantially overhaul the market for home mortgages by creating a legal distinction between “qualified” loans that follow the new rules and are immune from legal action, and “unqualified” mortgages that continue practices that regulators have frowned on. The new rules are also aimed at getting banks to lend again, something they have been slow to do since the financial crisis and since the Dodd-Frank Act required new limits on bank activities.

    The Ability-To-Repay Act is a Sign Of The Apocalypse - Kid Dynamite - I am angry about this new “Ability To Repay and Qualified Mortgage Standards Under the Truth In Lending” Act.   Not so much because I think it will actually do anything (although the “Law of Unintended Consequences” resulting in mortgages becoming harder to get certainly might come into play), it’s more that it makes me utterly depressed that Our Nation thinks we need such legislation on our books. I actually wrote about this proposal almost 2 years ago, and I’d encourage readers to read my prior post first, as this one will likely sound similar in many ways.  So let’s just dissect the CFPB’s blog post trumpeting the populism of this asinine law, shall we? Richard Cordray begins: “Today, we’re issuing one of our most important rules to date, the Ability-to-Repay rule. It’s designed to assure the reliability of mortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market.” There is no doubt that we had a housing market that was reckless about originating loans and lending money.  However, as I noted in my previous post, we need to clarify a crucial point of this entire discussion:  the lender is the person who ends up holding the loan – not the person who signs the docs.   In other words, if, as I called them in my prior post, Scumbag Mortgage Originator (SMO) is the one who signs your craptastic loan docs, and then immediately sells your loan to a Norwegian Pension Fund, the Norwegian Pension Fund is the LENDER.  They are the ones who have the risk that you won’t pay back your loans.

    Exclusive: Bank of America to sell service rights on $100 billion of mortgages (Reuters) - Bank of America Corp is looking to sell collection rights on at least another $100 billion of mortgages after announcing similar deals for more than $300 billion on Monday, according to two sources familiar with the situation. Any sale would be the latest example of a big bank deciding that collecting mortgage payments on some loans is too costly, and the cost of capitalizing the business was too high given new capital rules. Banks have been unloading these assets for years. These sales are an opportunity for smaller companies like Nationstar Mortgage Holdings and Walter Investment Management that specialize in managing these collection rights, known as mortgage servicing rights, and do not have to follow bank capital rules. Bank of America said on Monday that Nationstar was buying servicing rights on $215 billion of mortgages for $1.3 billion, and Walter Investment was buying servicing rights on $93 billion of mortgages for $519 million. Ally Financial Inc's banking subsidiary is also looking to sell $122 billion of mortgage servicing rights. Ocwen Financial Corp, Nationstar and Walter are among a handful of firms looking at purchasing a portion of Ally's MSRs, according to the sources.

    The Latest Myth About the Government’s Mishandling of the Housing Market -   No matter how many times people debunk the notion that government policy created the housing bubble, it doesn't die. It's part of what the blogger Barry Ritholtz has called the "big lie [1]" of the financial crisis. Now, we are having another argument about whether the government is creating a new housing disaster for taxpayers.  The target this time: the Federal Housing Administration, the government's mortgage insurer mostly for low-to-moderate income and minority borrowers. Late last year, the F.H.A. issued its annual report [2] to Congress. According to estimates, over its lifetime, the agency would have to pay more out on the mortgages it has insured than it has taken in. The report estimated the potential shortfall at $16 billion, which is a lot in absolute terms, but minuscule in relation to the federal budget [3] and the $1.1 trillion F.H.A. portfolio.Despite these modest numbers (more on that below), the same crew that assailed the government's role in the housing bubble is now rending its garments about the F.H.A. Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the agency has not only failed to help low-income communities, but is actually destroying them with reckless loans.

    Special Report: The latest foreclosure horror: the zombie title - Five years ago, Keller, 10 months behind on his mortgage payments, received notice of a foreclosure judgment from JP Morgan Chase. In a few weeks, the bank said, his three-story house with gray vinyl siding in Columbus, Ohio, would be put up for auction at a sheriff's sale. The 58-year-old former social worker and his wife, Jennifer, packed up their home of 13 years and moved in with their daughter. Joseph thought he would never have anything to do with the house again. And for about a year, he didn't. Then it started to stalk him. First, in 2010, the county sued Keller because the house, already picked clean by scavengers, was in a shambles, its hanging gutters and collapsed garage in violation of local housing code. Then the tax collector started sending Keller notices about mounting back taxes, sewer fees and bills for weed and waste removal. And last year, Chase's debt collector began pressing Keller to pay his mortgage, which had swollen, with penalties and fees, from $62,100.27 to $84,194.69. The worst news came last January, when the Social Security Administration rejected Keller's application for disability benefits; the "asset" on Avondale Avenue rendered him ineligible. Keller's medical problems include advanced liver disease, hepatitis C and inactive tuberculosis. Without disability coverage, he can't get the liver transplant he needs to stay alive.

    Another Nightmare, “Zombie Title” Shows How Servicer Refusal to Foreclose Hurts Stressed Homeowners and Communities - Yves Smith - One of the popular conservative memes is to fulminate that lots of Americans have been living “rent free” in homes slotted for foreclosure, taking advantage of the fact that court dockets are crowded. This talking point is untrue on multiple levels. First, the delay in foreclosure is due to servicers gaming the system. Attenuated foreclosures allow servicers to suck more of the value of the properties away from investors to themselves by continuing to charge late and various “junk” fees, which will be recouped when the home is finally sold. In Florida, one of the ground zeros of foreclosures, it is overwhelmingly the banks, not borrower attorneys, who are putting off foreclosures. Second, borrowers not living cost-free in the homes; are maintaining the properties and liable for property taxes. Third, it is not a party to live in a home with the uncertainty of eviction hanging over your head.  An important Reuters piece documents the flip side of this picture: what happens when the servicer starts foreclosure but keeps the property in limbo-land, and the homeowner has decamped, on the mistaken assumption that foreclosure was imminent? The Reuters tag phrase for this syndrome, “zombie title” doesn’t begin to do justice to the horrorshow that borrowers experience. Consider: a stressed borrower leaves the home, thinking that the bank will take it, so he pays moving expenses and is renting somewhere else. In reality, the bank is continuing to rack up more and more mortgage payments and related fees, and his local city/town is not only continuing to assess property taxes, but may also fine him for abandonment of the property. The knock-on consequences can be devastating. They show in fact that borrowers who do not stay in place until a bank forecloses are committing economic suicide. And the article by Reuters reporter Michelle Conlin makes clear this is not a trivial number of homes. Of 10 million homes where the banks have started foreclosure in the wake of the crisis, roughly 2 million in limbo

    Inside the Radical Plan to Fight Foreclosures With Eminent Domain - He parks and bounds into Merced's modest city hall to speak to a small gathering of city council members, realtors, and housing activists. "If we sit around and wait for the solution to come from Washington, DC, or Sacramento, it will not come," Gluckstern tells them between deep dives into stats on underwater mortgages, negative home equity, and loan default rates. "It will not come! It hasn't come in five years." Merced, whose foreclosure rate is twice the national average, is just the latest stop as Gluckstern crisscrosses California to sell struggling cities on a radical, untested way to fix the mortgage crisis. His scheme is almost as complicated as the derivatives and collateralized debt obligations that caused this mess to begin with. However, its underlying mechanism is simple: Cities should use the power of eminent domain to seize troubled mortgages from the bondholders that own them.

    Housing: Inventory down 24% year-over-year in early January - Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays. That is why it helps to look at the year-over-year change in inventory. According to the for (54 metro areas), overall inventory is down 23.9% year-over-year in early January, and probably at the lowest level since the early '00s. This graph shows the NAR estimate of existing home inventory through November (left axis) and the HousingTracker data for the 54 metro areas through early January. Since the NAR released their revisions for sales and inventory in 2011, the NAR and HousingTracker inventory numbers have tracked pretty well. On a seasonal basis, housing inventory usually bottoms during the holidays and then starts increasing in February - and peaks in mid-summer. So inventory is probably near the seasonal bottom right now and should start increasing again soon. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early January listings, for the 54 metro areas, declined 23.9% from the same period last year.

    Housing Inventory Continues to Drop - In my 2013 economic prediction, made the following observation about housing: Housing will continue to rebound.  Inventory of both new and existing homes are both at far more realistic levels and the Fed is driving down interest rates with its MBS program.  Housing affordability is at levels not seen in a very long time and builder confidence is rising.  Put all of these factors together and it appears that housing should remain on the comeback trail for most of next year. CR published the following graph of total housing inventory earlier today: Notice that it's taken between 5-6 years for the economy to get here.  That's a tremendously long adjustment process during which the economy has suffered a tremendous amount of pain.

    Can I Buy Your House, Pretty Please?  -  Rob and Julia Israch won a fierce bidding war for a three-bedroom townhouse in Mountain View, Calif., late last year even though their $750,000 offer—while $92,000 above the asking price—was topped by 11 rivals and was several thousand dollars below the highest bid.A key reason: The seller, software engineer Lev Stesin, was moved by a letter in which the Israchs said they worked in the technology industry and explained how the home’s spacious layout would be perfect given the imminent arrival of their first child. In an echo of the last housing boom, ardent pitch letters from eager home buyers are popping up again in hot U.S. real-estate markets like Silicon Valley, Seattle, San Diego, suburban Chicago and Washington, D.C., housing economists and real-estate brokers say. The heartfelt missives, often accompanied by personal photos, aim to create an emotional bond that can give their writers an edge—especially in situations where multiple bidders are vying for the same house.  “The market has gotten so crazy that money alone doesn’t talk,’’ explained Glenn Kelman, chief executive of Redfin

    Housing today is more affordable than at any time in history - The chart above is updated from a previous post and shows one measure of housing affordability over time by displaying the monthly mortgage payments (adjusted for inflation in 2012 dollars) for a median-priced new home (Census data here) financed at the prevailing 30-year mortgage rate in each month back to January 1978, assuming a 20% down payment.  Payments for a $246,200 median-price new home purchased in November with a 20% down payment and a 3.35% fixed-rate 30-year mortgage would be $868.03.  Average monthly mortgage payments have been at or below $900 for the last 16 months starting in August 2011, and the November payment is about 34% below the average of $1,321 per month over the last 33 years. The incredible housing affordability today is a major factor in the home sales rebound over the last year, as buyers take advantage of low home prices and low mortgage rates.  The incredible affordability of housing has to counteract and offset some of the “gloom and doom” about younger generations being worse off than their parents, stagnating income, increasing income inequality, the necessity of a dual-earner household to survive financially and the dangers of inflation.   In the 1990s, the average monthly mortgage payment was $1,224, or $356 higher than today’s average monthly payment.  Today’s lower payments would translate into annual savings of $4,200 in housing costs compared to the average mortgage payments of the 1990s.

    Fitch Ratings Calls for Housing Price Correction - Home prices are overvalued and price growth is not being driven by fundamentals but by technical factors that could easily change, advised Fitch Ratings Friday. The ratings service believes national prices are 10 percent overvalued, but will likely drop by no more than 2 percent due to inflation. Fitch stated it believes price movement is “highly dependent on the pace of distressed sales and liquidations.” For example, states such as Michigan, Arizona, and Georgia have been able to dispose of their distressed inventory quickly and have also seen “both steeper drops and quicker stabilization,” while states with long foreclosure timelines-New York, New Jersey, and Connecticut-may see price declines. In order to determine sustainability, Fitch conducted an analysis using its Sustainable Home Price (SHP) model. The ratings agency found 22 metros out of 41 are currently “undervalued” or “sustainable,” while five were categorized as “overvalued” by 5 to 10 percent. In 2010, 23 metro areas were overvalued by 10 to 25 percent. The report highlighted hardest hit metros such as Phoenix, Atlanta, and Riverside, noting they are now beginning to recover and are currently considered “undervalued.” New York and New Jersey, though, were categorized as overvalued by 10 percent to 15 percent, hindered by their large inventory of distressed properties and long foreclosure timelines, according to Fitch. And, high unemployment could hurt Los Angeles and Union, New Jersey and lead to a roughly 10 percent decline. On a national level, Fitch said price growth “is likely to be muted or even modestly negative in the near-term as liquidation volumes increase and expand supply, particularly in the lengthy judicial states where inventory has been off the market.”

    Reis: Apartment Vacancy Rate declined to 4.5% in Q4 - Reis reported that the apartment vacancy rate fell to 4.5% in Q4, down from 4.7% in Q3 2012. The vacancy rate was at 5.2% in Q4 2011 and peaked at 8.0% at the end of 2009. Some data and comments from Reis Senior Economist Ryan Severino: Vacancy declined by another 20 bps during the fourth quarter to 4.5%. This exceeded performance during the third quarter when vacancy declined by 10 bps. On a year-over-year basis, the vacancy rate declined by 70 bps.  There was a bit of a resurgence in demand for apartment units during the fourth quarter when 45,162 units were absorbed. This represents an increase versus the 24,951 units that were absorbed during the third quarter but a slight decrease versus the 47,396 units that were absorbed during the fourth quarter of 2011. Net absorption has been consistently positive since the second quarter of 2009. New construction also increased during the quarter. 24,614 units were delivered during the fourth quarter, versus 17,378 units during the third quarter. This is also an increase compared to the 10,145 units that were delivered during the fourth quarter of 2011. This is the third consecutive quarter of construction increases and the highest level of quarterly completions since the second quarter of 2010. For calendar year 2012, 66,846 units were completed. This is an increase versus the 42,290 that were completed during 2011.  Asking and effective rents both grew by 0.6% during the fourth quarter. This was below the third quarter performance when asking and effective rents grew by 0.8% and 0.9%, respectively. Both asking and effective rents have consistently increased since the first quarter of 2010. However, this was the weakest performance since the fourth quarter of 2011.

    Reis: Office Vacancy Rate declines slightly in Q4 to 17.1% - Reis released their Q4 Office Vacancy survey this morning. Reis reported that the office vacancy rate declined slightly to 17.1% from 17.2% in Q3. On absorption from Reis Senior Economist Ryan Severino: During the fourth quarter 3.691 million square feet were absorbed. This represents a decrease versus the 4.819 million square feet that were absorbed during the third quarter and the 4.842 million square feet that were absorbed during the fourth quarter of 2011. However, this is the eighth consecutive quarter of positive net absorption. On new construction:  3.170 million square feet were delivered during the fourth quarter, versus 3.821 million square feet during the third quarter. This is also a slowdown compared to the 3.653 million square feet of office space that were delivered during the fourth quarter of 2011. For calendar year 2012, 12.025 million square feet were completed. This is a decline from the 15.164 million square feet that were completed during 2011.On rents: Asking and effective rents both grew by 0.8% during the fourth quarter. This exceeded the third quarter performance when asking and effective rents both grew 0.2%. This was the ninth consecutive quarter that asking and effective rents have increased. This was the strongest performance of both measures since mid‐2008 before the downturn in the office market.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 Q4 to 17.1%, down slightly from 17.2% in Q3, and down from 17.4% in Q4 2011. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

    Office Vacancy Rate and Office Investment - Earlier this morning I noted that Reis reported the office vacancy rate declined slightly to 17.1% in Q4 from 17.2% in Q3. A key question is when will new office investment increase. The answer depends on how quickly the vacancy rate falls. The following graph shows the office vacancy rate and office investment as a percent of GDP. Note: Office investment also includes improvements - and as Reis Senior Economist Ryan Severino noted this morning, there is very little new construction. Here is Reis Senior Economist Ryan Severino's office forecast for 2013: "The outlook for 2013 is slightly better than what we experienced in 2012. Although some of the uncertainty over the potential “fiscal cliff” has been resolved, spending decisions still remain and the debt situation in Europe, which oscillates in and out of panic, is still uncertain. Moreover, higher payroll and income taxes are likely to reduce consumption and the government is expected to implement some spending cuts, if not outright sequestration. Nonetheless, job growth is expected to accelerate slightly during 2013 while the unemployment rate is expected to tick marginally lower. Reflecting this moderate improvement, we expect an acceleration in both rent growth and vacancy compression next year."

    Reis: Mall Vacancy Rate declines in Q4 - Reis reported that the vacancy rate for regional malls declined to 8.6% in Q4 from 8.7% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.7% in Q4, down from 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011. Comments from Reis Senior Economist Ryan Severino: [Strip mall] Vacancy declined by only 10 bps during the fourth quarter. This was an improvement versus the third quarter when the vacancy rate was unchanged. On a year‐over‐year basis, the vacancy rate declined by only 30 bps. During the quarter absorption exceeded construction by a sufficient enough margin to lower the vacancy rate, but only marginally. With only 915,000 square feet delivered, more robust demand would cause vacancy to compress expeditiously. But even with so few completions occurring, the economy is not generating enough demand for space. .. Asking and effective rents grew by 0.2% and 0.1%, respectively, during the quarter. This was only a negligible increase versus the third quarter when both metrics increased by just 0.1%. It was the fifth consecutive quarter that asking and effective rents have increased. .. [New construction] With tepid retail sales and scant demand for space, new construction remained near record‐low levels during the quarter. 915,000 square feet were delivered during the fourth quarter, versus 723,000 square feet during the third quarter. However, this is a slowdown compared to the 2.951 million square feet of retail space that were delivered during the fourth quarter of 2011. 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.

    NFIB: U.S. December Small-Business Optimism Index Remains Low - Small-business owner confidence increased in December, but remained at one of the lowest readings in the survey’s 38-year history, according to data released Tuesday. The National Federation of Independent Business’s small-business optimism index rose 0.5 point last month to 88.0. But the December gain followed a 5.6-point plunge in November which was one of the largest declines on record. The latest reading is more consistent with a recession than an expansion, the small business trade group said. “Were it not for population growth supporting consumption and net new small-business creation, we would have no growth at all,” the report said.

    Small Business Sentiment: Up Fractionally But One of the Lowest Readings in Survey History - The latest issue of the NFIB Small Business Economic Trends is out today (see report). The January update for December came in at 88. This is the 12th lowest reading in history of this series. Here is the opening summary of the report: Small business owner confidence did not rebound in December, according to the NFIB Small Business Optimism Index. While owner optimism crept up 0.5 over November's historically low report, the 88.0 point reading was still the second lowest since March 2010. December's poor report resulted largely from a deterioration of labor market components, and the surprising percentage of owners who still expect business conditions to worsen in the next six months  "Congress played chicken right up to the end of the year, leaving small-business owners with no new information about the economy's future—no sense of how much their taxes would increase or if the economy would go over the now infamous 'cliff. The eleventh hour 'deal' has brought marginal certainty about tax rates and extenders and will provide some relief to owners, but it certainly doesn't guarantee a more positive forecast for the economy."  The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.

    Consumer Credit Rises for Fourth Month in November - U.S. consumer credit rose in November for the fourth straight month, beating expectations and giving a hopeful sign for the strength of the economy. The Federal Reserve said on Tuesday consumer credit increased by $16.05 billion in November after rising by an slightly revised $14.08 billion in October. Economists polled by Reuters had forecast consumer credit rising $12.75 billion after advancing by a previously reported $14.2 billion in October. Nearly all of November's increase was in non-revolving credit, which includes auto loans as well as student loans made by the government. Non-revolving credit increased $15.23 billion during the month. Revolving credit, which includes credit cards, climbed by a modest $817 million.

    Consumers Take on More Debt - U.S. consumers’ overall borrowing expanded in November at a quicker pace than the previous month, led by bank loans and student borrowing. The total outstanding dollar amount of credit card, auto and other loans excluding home loans increased from October by a seasonally adjusted $16.05 billion to $2.768 trillion, a Federal Reserve report showed Tuesday. Consumer credit rose at a 7% annualized rate in November, after expanding 6.17% the previous month. That marks the fourth straight month of gains.

    Americans add debt, but not with credit cards - — U.S. consumers took on plenty of debt in November for auto purchases and student loans, but they didn’t use their credit cards very much in the first month of the holiday season. Consumer credit rose by a seasonally adjusted $16.1 billion in November, marking the second straight sizable gain, according to the Federal Reserve. In October, consumers racked up a slightly revised $14.0 billion in additional debt. Most of the increase in November came from non-revolving debt such as auto and student loans. Non-revolving debt jumped $15.2 billion. Credit-card debt grew by less than $1 billion based on preliminary Fed data, indicating that Americans were cautious consumers in the first month of the holiday season. Consumers usually add debt when they feel more confident about the health of the economy and their ability to pay off their loans.  The smallish increase in credit-card use might indicate Americans were trying to rebuild their savings. Alternatively, they may have been waiting for additional Christmas-related sales before buying gifts. At the end of November, consumer credit stood at $2.77 trillion. It’s up 5.2% since the beginning of the year.

    November Consumer Credit Soars, Driven By Student And Car Loans: 95% Of All 2012 Consumer Debt Funded By Uncle Sam - SSDM: just like in October, and September, and August, and so on, November consumer credit saw a decent pick up of $16 billion, well above the expectation of $12.75 billion, above the $14.1 billion in October, and the third highest monthly print of 2012. And if this was driven even remotely by actual short-term consumption demand, it would likely be a good sign, as it would imply consumers have more faith in being able to repay their credit cards. Sadly, of the entire $16 billion jump, only $817 million, or 5%, was based on a jump in revolving credit. The real "growth" came as usual courtesy of Uncle Sam handouts, solely in the form of auto and student loans, which accounted for a whopping $15.2 billion of the increase in consumer debt, the second largest jump in the year, second only to the $18 billion in January. And as everyone knows, student loans are already on fast track to forgiveness (full forgiveness in 10 years if one works for the government), as will be the case for those NINJAs who buy GM cars using government loans. For all of 2012, a whopping $130 billion of the $137 billion total has been in the form of government handouts. In other words, nearly 1% of 2012 GDP has been funded by Uncle Sam in the form of (dischargeable) loans which everyone else will be responsible for, until nobody at all is responsible.

    Consumer Credit 7.0% Increase Driven By Student Loans for November 2012 - The Federal Reserve's consumer credit report for November 2012 shows a 7.0% annualized monthly increase in consumer credit, once again driven by student loans. Revolving credit increased by 1.1%, and non-revolving credit jumped another 9.6%. October showed consumer credit increasing by a 6.2% annualized rate. Revolving credit are things like credit cards and non-revolving are things like auto loans and student loans. Mortgages, home equity loans and other loans associated with real estate are not included in this report. Overall consumer credit increased $16.1 billion dollars to $2,768.5 billion, seasonally adjusted. Revolving credit increased by $800 million while non-revolving increased $15.2 billion from October. The report gives percent changes in simple annualized rates, also known as a continuously compounded annualized rate of change. Consumer credit contractions correlate to recessions. The consumer credit report does not include charge offs and delinquencies. Credit card charge-offs were 3.90% in November and the delinquency rate for Q3 is at an 18 year low, 2.75%.  Graphed below is total consumer credit. Student loans continue to soar. Federal government non-revolving consumer credit includes loans originated by the Department of Education under the Federal Direct Loan Program, as well as Federal Family Education Program loans that the government purchased from depository institutions and finance companies. In other words, Federal government non-resolving credit is student loans. This month student loans increased another $4.9 billion to $521.3 billion, not seasonally adjusted. When removing student loans from the not seasonally adjusted data, we have a consumer credit increase of $3.0 billion by institution type. This implies auto loans also increased.  The federal government started making 100% of guaranteed student loans in July 2010. People went more into debt, clearly, to pay for the soaring, absurdly high, educational costs. Below is the not seasonally adjusted ballooning non-revolving credit held by the Federal Government, i.e. student loans.

    Vital Signs Chart: Jump in Consumer Borrowing - Americans stepped up their borrowing in November. Consumer credit outstanding — including money owed on credit cards, auto loans and student loans but not mortgages — rose 7%, on an annual basis, from October, to $2.77 trillion. The growth was driven by a sharp increase in nonrevolving credit, which includes student loans and auto financing.

    Gallup Finds December Consumer Spending... Soared? - Listening to talking heads and certainly to various retail associations, US consumer spending in December was lackluster driven by such traditional scapegoats as "lack of confidence ahead of the Fiscal Cliff", lack of clarity on taxation, fears about what the market may do, etc. And while retailers certainly did report a very mixed sales report for both November and December, it certainly was not due to lack of spending, at least not according to Gallup. Curiously, and rather inexplicably, the polling organization found that in December the average self-reported daily spending in stores, online, and in restaurants rose by a whopping $10 to $83. This was the highest monthly figure Gallup has reported since December 2008. It is also the first reading above the $80 mark since the 2008-2009 recession. But how is that possible? Wasn't the strawman that nobody would spend due to fiscal and tax uncertainty? Apparently not, and this unleashes merely the latest episode of baffle with BS, where data from one source contradicts directly what has been reported from other aggregators of spending data.

    It's Official: US November Sales Increased Across The Board - Some analysts have been predicting a collapse in sales for the US economy. One prominent economist announced in a recent round of TV interviews that sales generally were in the process of "rolling over." On that assumption, the economy is in recession, he explained. But a funny thing happened on the way to the collapse: sales have held up, and even turned up. Yesterday's November update on wholesale trade figures is the latest data point that contradicts the pessimistic view on the macro trend. Wholesale trade sales rose a respectable 2.3% in November, the Census Bureau reports. That follows the previously released updates on November retail sales (+ 0.3%) and November manufacturers' sales (+0.4%). The message is clear: sales in November increased across a broad spectrum of the US economy.More importantly, the year-over-year trend remains positive through November for all three data sets. In fact, the pace of annual growth overall has turned modestly higher vs. recent history. The latest numbers through November show that the year-over-year percentage increases range from 3.7% (manufacturing and retail) to 5.6% (wholesale).

    Consumer Outlook Improves Even in Face of Higher Taxes - U.S. consumers in January feel better about the economy despite a large majority knowing their take-home pay will decline this month thanks to the fiscal-cliff resolution. The Royal Bank of Canada said its consumer-outlook index rose to 48.0 this month, from 46.9 in December. The subindexes improved but remain at historically low levels. The RBC current-conditions index increased to 38.6 from 37.3. The expectations index edged up to 56.0 from an 11-month low of 55.3 hit in December. The RBC jobs index improved to 56.4 from 55.6. In its second-consecutive month of gains, the inflation-expectation index jumped to 77.6 from 75.8. The January inflation index is the highest since August.

    Question for Krugman: Can the Rich Provide All the Demand? - I’ve long been troubled by a Paul Krugman comment from 2008: There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. And I find in his concluding comment from his recent AEA session that he remains completely uncertain on the issue: …we do not know how rising inequality interacts. There are more poor people who are liquidity constrained but they have less spending power, so we are not sure how it goes. I’m kind of astounded by this thinking, and even more by his apparent lack of curiosity about the issue. It strikes me as being absolutely central to any discussion of public policy. (Viz: all the talk about a strong middle class vs. trickle-down.) Paul has clearly been shifting his thinking to encompass the possibility of a post-Luddite-Fallacy world. I wonder if his thinking has also developed on the related issues of inequality and distribution, and their effect on demand.

    The War on the Core CPI... - Brad DeLong - It is a fact that when distributions have thicker tails than the normal Gaussian distribution, trimmed-mean and other robust estimators do a better job of estimating central tendencies than simple averages. It is a fact that food and energy sector prices, especially, have deviations from the overall inflation rate that have much thicker tails than the Gaussian normal. And it is a fact that over the past fifty years in America whenever the full CPI inflation rate has moved away, either up or down, from the core CPI inflation rate--the inflation rate excluding food and energy prices--the odds are better than 9-1 that the gap will then be closed by the full CPI moving back to the core, and not the core moving to the full CPI: Thus our jaws drop when we read:

    • Robert Murphy: we are talking about CPI for all urban consumers, all items. In other words, this is old-school CPI, not "core" CPI (which excludes food and energy). And we're not doing anything fancy like looking at the middle 80% or whatever the newfangled techniques are.
    • Or: David Henderson: We will use the standard CPI, not the nonsense CPI excluding food and energy.
    • Or: Stephen Williamson: [W]hich prices are volatile and which are not will depend on the monetary policy regime and what the central bank is attempting to target

    Weekly Gasoline Update: Very Little Change - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump was relatively unchanged last week. Rounded to the penny, the average for Regular rose one cent and Premium was unchanged. According to, Hawaii has the highest gasoline price, averaging $3.97, up two cents from last week. New York is second at $3.72, unchanged from last week. At the other end of the price range, eight states have average prices from $2.85 to $3.00 or less. From lowest to highest they are: Wyoming, Utah, Colorado, Oklahoma, Minnesota, New Mexico, Idaho and Arizona. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

    Vital Signs Chart: Gas Prices Moving Up - Gasoline prices are beginning to edge higher. The average cost of a gallon of regular gasoline climbed for the second consecutive week and now stands at $3.299. Prices have risen about four cents since just before Christmas. However, prices are still eight cents lower than they were a year ago, when geopolitical tensions in the Middle East caused a spike.

    2013 Gas Price Forecast: Around $4 Per Gallon by Spring - The current national average for a gallon of regular gasoline is $3.30. Drivers shouldn’t expect prices to get cheaper at any point in 2013.  That’s according to the analysts at GasBuddy, who have just released a forecast for gas prices throughout 2013, which include month-by-month projections. The predictions call for an average price of $3.29 throughout January, followed by a gradual run-up to the year’s highest prices come springtime. Prices are expected to retreat in fall and early winter, though the lows reached in December 2012—average of $3.25 per gallon nationwide—aren’t likely to be repeated. For the most part, however, GasBuddy’s forecast calls for a repeat of trends seen in 2012, which was the most expensive year ever for gas, and which in turn was a followup to the record-setting gas prices of 2011. Gas prices around the country reached the high point for 2012 in the springtime, when the average gallon sold for nearly $4.

    Wholesale Inventories Jumped in November - Inventories at U.S. wholesalers rose in November, but the pace of sales increased more rapidly, suggesting demand may have been stronger than expected among final retailers early in the holiday season. U.S. wholesalers’ inventories increased by 0.6% from October to a seasonally adjusted $498.95 billion, the Commerce Department said Thursday. It was the fifth consecutive month wholesale inventory levels rose. Economists surveyed by Dow Jones Newswires had forecast an 0.3% increase in inventories during November. Sales for wholesalers advanced 2.3% in November to $419.33 billion. The gain came after sales retreated 0.9% the prior month, according to revised figures.

    U.S. Trade Deficit Unexpectedly Surges to $48.7B - The U.S. trade deficit unexpectedly grew in November, a drag on economic growth, although the gap's widening was driven by a surge in consumer goods imports, which gives a positive signal for consumer spending. The Commerce Department said on Friday the trade gap increased 16 percent in November to $48.7 billion. Analysts were expecting the deficit to shrink to $41.3 billion, so the report could lead some economists to trim their forecasts for economic growth in the fourth quarter. Net imports suck cash out of the economy, subtracting from gross domestic product. The trade deficit was the widest since April, and its expansion was driven by a 3.8 percent increase in imports, the largest gain in eight months. Imports of consumer goods rose by $4.6 billion, while imports of petroleum products fell by $870 million. That might point to firmer consumer demand, which is the main engine of the U.S. economy. While the Commerce Department does not release seasonally adjusted data for the U.S. trade deficits with countries and regions, the U.S. goods trade gap with China fell 1.7 percent from October. with a drop in exports outweighing a slighter fall in imports. Imports surged 4.1 percent from the European Union, and were up 6.4 percent from Germany.

    Trade Deficit increased in November to $48.7 Billion - The Department of Commerce reported[T]otal November exports of $182.6 billion and imports of $231.3 billion resulted in a goods and services deficit of $48.7 billion, up from $42.1 billion in October, revised. November exports were $1.7 billion more than October exports of $180.8 billion. November imports were $8.4 billion more than October imports of $222.9 billion. The trade deficit was much larger than the consensus forecast of $41.1 billion. The first graph shows the monthly U.S. exports and imports in dollars through October 2012.Both exports and imports increased in November. US trade has slowed recently. Exports are 10% above the pre-recession peak and up 3.3% compared to November 2011; imports are near the pre-recession peak, and up 2.5% compared to November 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The increase in the trade deficit in November was due to non-petroleum products. Oil averaged $97.45 in November, down from $99.75 per barrel in October. The trade deficit with China increased to $28.95 billion in November, up from $26.78 billion in November 2011. Most of the trade deficit is still due to oil and China. The trade deficit with the euro area was $10.6 billion in November, up from $8.2 billion in November 2011.

    US November Trade Deficit Soars To $48.7 Billion, Sub 1% Q4 GDP Revisions Imminent  - So much for the US trade renaissance. After posting a better than expected October trade deficit of ($42.1) billion, November saw the net importer that is the US revert to its old ways, with a massive deficit of some $48.7 billion - the worst number since April, far more than the $41.3 billion in expectations, which makes it the biggest miss to expectations since June 2010, driven by a $1.8 billion increase in exports to $182.6 billion, and a surge in imports which rose from $222.9 billion to $231.3 billion. Specifically "The October to November increase in imports of goods reflected increases in consumer goods ($4.6 billion); automotive vehicles, parts, and engines ($1.5 billion); industrial supplies and materials ($1.3 billion); foods, feeds, and beverages ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.1 billion)." And with this stark reminder that the US has to import the bulk of its products, something which a weak USD does nothing to help, expect a bevy of lower Q4 GDP revisions, as this number may push Q4 GDP in the sub-1% category.

    Trade Deficit Jumps 15.9% to $48.7 Billion for November 2012 - The U.S. November 2012 monthly trade deficit increased by 15.85%. This is an increase of $6.667 billion to give a monthly trade deficit of $48.731 billion. November's U.S. exports increased $1.744 billion or 0.96%. Imports soared by $8.410 billion which is a 3.8% increase from last month. The three month moving average gives a trade deficit of $43.691 billion and a increase of $2.05 billion. This is a 4.92% jump in the quarterly moving average of the trade deficit. Adjusted for prices, just the three month moving average goods part of the trade deficit by a Census accounting basis, in real dollars, gives a whopping 15.8% annualized increase. Both of these moving averages imply Q4 GDP will be lower due to the never ending flood of imports.  Below are imports vs. exports of goods and services. Notice how much larger imports (maroon) are than exports (purple), but also notice the growth, or rate of change between months of U.S. exports over time. To state the obvious, imports subtract from GDP and exports add and why trade deficits matter.  Below are the goods import monthly changes, seasonally adjusted. Overall imports soared $8.425 billion from last month on a Census accounting basis. Who knew one could import $8.422 billion in cell phones and other household goods in a month. Cell phones & other household goods, part of consumer goods, jumped by $1.811 billion from October. Drug imports also increased by $1.263 billion. A jump in auto parts is no surprise since bad trade deals enabled the offshore outsourcing of parts manufacturing. Industrial supplies import increases were chemicals, by $746 million and non-monetary gold, which increased by $413 million from last month.

    Economists and the public are both right about free trade - - Noahpinion has a nice post this morning on how the public doesn't trust economists.  Exhibit A: "Free trade" is the one issue on which economists - at least, American economists - famously agree. And yet, substantial majorities of Americans think that free trade has hurt them. In the Zingales paper, trade was the issue where there was the greatest divergence between economists and the public. How can the common people disagree so sharply with the overwhelming expert consensus? Are the common people simply a bunch of flat-earthers who refuse to look at the evidence? Or do they have a point? The workhorse model of trade is the Heckscher-Olin model.   The model predicts that trade leads to higher output for the countries that trade.  I actually think that this is hard to dispute.  But the model also predicts that when a country opens up trade, its scarcer factor of production winds up worse off.  In the case of a capital intensive country like the United States, Heckscher-Olin predicts that returns to capital will rise and returns to labor will fall.  The return to capital rising is greater than the return to labor falling, so the size of the pie increases.  Nevertheless, without redistribution, trade makes labor (particularly unskilled labor) in the US worse off.

    Snapshot – The December Employment Report – More Feeble Job Growth (9 graphs) There was little news in an altogether moderate jobs report for December. Non-farm payrolls added 155,000 jobs in December, coming close to the average monthly net change in 2012 of 153,000. The gains largely came from health care (+45K) and food services and drinking places (+38K). Retail trade and temporary help services both contracted (-11K and -.6K respectively). 61 months after the start of the recessions and most labor market indicators are still well below their peak level. Non-farm employment remains close to 3% below while hours remains 5.4% below and showing signs of slowing down.  The unemployment rate remained at 7.8% showing that the labor market has made little progress since the end of the summer.  Participation also remained steady at 63.9% as well as the employment population ratio at 58.6%. There are a few positive signs in the report that suggest improvements in the labor market may be ahead for 2013. The mean duration of unemployment fell from 39.7 weeks to 38.1, marking the biggest monthly decline since the recession began. It is still a far cry from an average of 16.6 weeks at the peak of the cycle, but it is the first signs that the whole distribution of unemployment duration is shifting lower.

    Jobs Stall Out in 2012-Q4 - According to the December 2012 employment situation report, job growth stalled out in the final three months of 2012, as the number of employed Americans (143,305,000) was nearly unchanged from the levels recorded in the previous two months. That outcome is consistent with our earlier observation that the fourth quarter of 2012 would likely see a significant deceleration in economic activity following the comparatively robust pace of growth recorded in the third quarter.  Breaking down the employment situation by age groups, we find that the number of employed teens (Age 16-19) fell by 66,000 from November 2012 to December 2012 to 4,402,000 as the number of young adults (Age 20-24) declined by just 25,000 over the same time to 13,570,000. Meanwhile, the number of employed individuals Age 25 and older increased by 119,000 from the previous month to reach 125,333,000.  The latest employment situation report revises all the employment data obtained in the seasonally-adjusted household survey portion of the report going back to January 2008 to account for updated seasonal factors, which is typically done with the December jobs repot each year. Our chart in this post reflects these revisions, which affect the period of time in which the U.S. economy first went into recession (it peaked in December 2007 and began declining in the months afterward) and its subsequent recovery.  Perhaps the most remarkable aspect in the chart above is that there has been no effective improvement in the employment situation for U.S. teens since the recession officially ended in June 2009.

    Madness In December Employment Numbers - The new job numbers are out and, at first glance, there is nothing surprising here. Job growth continued to inch upward in December, with 155,000 new jobs added. We are just running in place.  But here's a statistic that jumped out at me: 89,000 public sector workers lost their jobs in October, November, and December—with most of those losses, 66,000, occurring in October.  Large-scale layoffs of government workers continue across the United States. Such layoffs undermine local economies and stymie the recovery. For every five workers who were hired in the past three months, one was laid off by government.  This doesn't make sense. Government may not always do such a great job of stimulating employment growth through fiscal and monetary policy, but it sure as heck can bolster the job market by continuing to employ those people who do have jobs. Instead, thanks to austerity policies, government has been doing the exact opposite.  Many of these laid off workers will get on unemployment and perhaps collect other government benefits such as food stamps, the EITC, or SCHIP. They also, obviously, will no longer be paying taxes. So quite apart from the human costs and economic costs, in terms of depressed consumer spending, layoffs of public workers don't deliver all of the fiscal gains imagined because the unemployed cost government money while no longer contributing to the tax base.

    Construction Numbers May Not be What They Seem - The Washington Post rightly noted the increase of 30,000 jobs in the construction industry as one of the bright spots in the December jobs report. As the piece points out, construction was one of the largest sources of job loss in the downturn and presumably a substantial portion of the job growth in the recovery will also be construction. However the link between construction employment and actual construction is not nearly as close as would be expected. Housing starts peaked at just under 2.1 million in 2005, just before the top of the bubble. By the beginning of 2007, starts had dropped by close to one-third to just 1.4 million at an annual rate. Yet construction employment had barely changed over this period. Similarly, since 2010 housing starts have increased by more than 20 percent, yet employment has been virtually flat. This pattern can be explained by the fact that many of the workers in the residential construction sector are undocumented workers who are likely not showing up on employers' payrolls. Essentially the data in the establishment survey are only giving us part of the employment picture in the residential construction sector.

    Running out of time - WITH another month of jobs data in hand, economics writers can't help but note the remarkably stable pattern in employment growth. Payrolls rose by 155,000 jobs in December of 2012, according to figures released by the Bureau of Labour Statistics on Friday. Average monthly employment growth for all of 2012 was 153,000—the same as in 2011. This coincidence could be down to shortcomings in data gathering; new revisions may well nudge up the rate of employment growth in 2012. We had better hope so.  December marked half a decade since the beginning of the last recession and 42 months since the recovery began in June of 2009. It would be nice if business cycle expansions never had to end. In some places they seem not to (see Australia). Yet new downturns have been an inevitability in modern economies. The chart at right shows the duration of expansions since the Second World War. On average, the economy has grown about 58 months at a time during this period, an age the current American expansion will reach in April of next year. Since the Volcker recession, good times have gone on for longer—95 months on average—though the expansion of the 2000s was just 73 months long, a milestone the current recovery will reach in July of 2015. Perhaps the present recovery will more closely resemble that of the 1990s, which lasted a full decade. But it would probably be unwise to count on that

    Why the Unemployment Rate Is So High - Laura D’Andrea Tyson -According to the last jobs report for 2012, the United States labor market continues to recover at a steady but modest pace despite a global slowdown, Hurricane Sandy and anxieties about future fiscal policy. Private payrolls increased by two million in 2012, and the unemployment rate fell by 0.7 percentage point to 7.8 percent. Over the last 34 months, the economy has added 5.8 million jobs. But that leaves a four million shortfall in employment relative to its 2007 peak. And the jobs gap, the number of jobs necessary to return to this peak and cover the growth in the labor force since then, is stuck around 11 million. The labor market is still far from full recovery, with a tremendous waste of human talent and a personal toll on unemployed workers and their families.This year is likely to be more of the same, as the deal on the fiscal cliff — the American Taxpayer Relief Act — will take about 0.4 to 0.6 percent off the economy’s growth rate. Additional cuts in government spending later this year, above those already emanating from the cap on discretionary spending, would further restrain job creation. Proven policies to increase aggregate spending and near-term job growth, like the continuation of payroll tax relief and infrastructure investment, appear to be off the table. That’s a mistake, because weak demand and slow growth of gross domestic product are the primary factors behind the tepid pace of job creation.

    Startling Look at Employment Demographics by Age Group: Spotlight on Age 25-54 - Last month I posted a chart showing employment by age group. Here is an update as of Friday's job release.Note that 100% of the job growth since the recession is in age group 55 and over. Last month, someone proposed the above chart was blatantly misleading because it does not reflect the aging workforce. Let's investigate that hypothesis with a look at actual data (numbers in tables and charts in thousands). Age Group 25-54 Key Facts:

    •In 2007 the civilian population was 125,652,000
    •In 2007 the labor force was 104,353,000
    •In 2012 the civilian population was 124,314,000
    •In 2012 the labor force was 101,253,000

    Numbers are non-adjusted from BLS tables. Simply put, the decrease in civilian population in age group 25-54 was 1,340,000. The decrease in the labor force was a staggering 3,100,000! Let's explore this idea in still more detail looking at employment, unemployment, and non-employment.

    Labor Force Participation Rate Update -- I've written extensively about the participation rate, see: Understanding the Decline in the Participation Rate and Further Discussion on Labor Force Participation Rate. In trying to forecast the change in the unemployment rate for 2013, it is important to forecast what will happen to the participation rate this year. The participation rate is the percentage of the working age population in the labor force. If more people join the workforce, then more jobs will be needed to push down the unemployment rate. However, if the participation rate stays flat in 2013 - or even declines further - then fewer jobs are needed to push down the unemployment rate. Here is a repeat of a graph from the December employment report. The Labor Force Participation Rate was unchanged at 63.6% in December (blue line). A key point: The recent decline in the participation rate was expected, and a large portion of the decline in the participation rate was due to changing demographics, as opposed to economic weakness. The second graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for prime working age women increased significantly from the mid 30s to the mid 70s and has mostly flattened out since then. The participation rate for women increased slightly in December to 74.5% and might increase a little in 2013. The participation rate for prime working age men has been decreasing for decades - from the high 90s in the 1950s to just over 90% in 2005. In December, the participation rate for men increased slightly to 88.4% . I still expect a little bounce back for both prime working age men and women - but not much.

    Real Hourly Wages and Hours Worked: New Update - Here is a look at two key numbers in the latest monthly employment report for the December Average Hourly Earnings and Average Weekly Hours. The government has been tracking the data for Production and Nonsupervisory Employees for decades. But coverage of Total Private Employees only dates from March 2006. Let's look at the broader series, which goes back far enough to show the trend since before the Great Recession. I want to look closely at a five-snapshot sequence. First, here is a chart of the Average Hourly Earnings. I've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward.  But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, I've used the seasonally adjusted CPI, and I've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. As we see, the difference is amazing. The decline in real wages at the onset of the recession accords with our expectations. But why the rise in the middle of the recession when the Financial Crisis began unfolding in earnest? Let's add another data series to the mix: Average Hours per Week. About eight months into the recession, hours per week began to fall. The number bottomed a few months before the recession ended and then began increasing a few months after it ended.

    US Unemployment Aid Applications Tick Up to 371K -- Weekly applications for U.S. unemployment benefits ticked up slightly last week, the latest sign of stability in the job market. The Labor Department says applications rose 4,000 to a seasonally adjusted 371,000, the most in five weeks. The four-week average, a less volatile measure, increased 6,750 to 365,750, after falling to a four-year low the previous week. A department spokesman says all states reported data and none were estimated. In the previous two weeks, many states were estimated because they weren’t able to report data over the holidays. Weekly applications are a proxy for layoffs. They have fluctuated for most of the past 12 months between 360,000 and 390,000. At the same time, employers added an average of 153,000 jobs a month in 2012, the same as in 2011.

    Weekly Initial Unemployment Claims at 371,000 - The DOL reports: In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000. The previous week was revised down from 372,000.The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 365,750. Weekly claims are very volatile during and just after the holiday season, but even with the increase, the 4-week average is near the low for last year. The recent spike was due to hurricane Sandy. Weekly claims were above the 362,000 consensus forecast.And here is a long term graph of weekly claims:

    Weekly Unemployment Claims at 371K, Higher than Expected - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 371,000 new claims number was a 4,000 increase from a 5,000 downward revision for the previous week. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose from 359,000 to 365,750. Here is the official statement from the Department of Labor:In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000.  The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending December 29, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 29 was 3,109,000, a decrease of 127,000 from the preceding week's revised level of 3,236,000. The 4-week moving average was 3,197,250, a decrease of 26,000 from the preceding week's revised average of 3,223,250.  Today's seasonally adjusted number was above the consensus estimate of 364K. The unemployment report footnotes for the previous week's unadjusted data identifies eight state with a decrease of more than 1,000 layoffs (Florida at the top, where claims fell by 11,015) and 18 states with an increase of more than 1,000 new claims (Michigan topping that list with 15,107 new claims). Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

    US Job Openings Barely Grew in November - U.S. employers advertised about the same number of jobs in November as in October, suggesting hiring will stay modest over the next few months. The Labor Department says job openings ticked up 11,000 last month to 3.67 million. That’s about 12 percent more than were advertised in the same month a year ago. The number of available jobs is slowly climbing back to the roughly 4 million that were advertised each month before the recession began in December 2007. More than 12 million people were unemployed in November. That means there were 3.3 unemployed people, on average, competing for each open job. That’s the lowest ratio since November 2008. Still, in a healthy economy, the ratio is roughly 2 to 1.

    BLS: Job Openings "unchanged" in November - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in November was 3.7 million, unchanged from October....The level of total nonfarm job openings was 2.4 million at the end of the recession in June 2009. .. The number of quits (not seasonally adjusted) was little changed over the 12 months ending in November for total nonfarm and total private. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December.Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased slightly in November to 3.676 million, up from 3.665 million in October. The number of job openings (yellow) has generally been trending up, and openings are up about 12% year-over-year compared to November 2011.  Quits increased slightly in November, and quits are up 8% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

    Fewer Unemployed Workers Per Job Opening - Good news for job seekers: There were 3.3 unemployed workers for every posted job opening in November, the lowest ratio in more than four years. The Labor Department on Thursday released its monthly report on job openings and turnover, known as JOLTS. The data lag a month behind the more widely covered jobs reports, but they provide a more detailed look inside the workings of the job market. In keeping with other recent data, Thursday’s figures show a job market that’s slowly on the mend. Indeed, despite fears of the then-imminent “Fiscal Cliff,” both workers and employers showed signs of confidence in November. Employers laid off 17,000 fewer workers than in October, and posted 11,000 more job openings. Some 46,000 more workers quit their jobs — a sign they see the job market as improving.

    There were 3.3 Unemployed for every Job Available in November 2012 - The BLS November JOLTS report, or Job Openings and Labor Turnover Survey shows there are 3.3 official unemployed per job opening. Opportunities, actual hires were flat lined, showing a stagnant, dead pool job market. While openings increased by 0.3%, actual hires had no change, 0.07%. There were 3.7 million job openings for November, still way below pre-recession levels of 4.7 million. Job openings have increased 68% from their August 2009 Mariana Trench trough, yet real hiring has only increased 17% from June 2009. There were 1.8 official unemployed persons per job opening at the start of the recession, December 2007. Below is the graph of the official unemployed per job opening. The official unemployed ranked 12 million in November 2012.  This report confirms November's drop in the unemployment rate was due to people no longer counted as part of the labor force. Simply put, people dropped out of the job market in November. Job openings are all types of jobs, temporary, part-time, seasonal and full-time. Hires are U.S. citizens, permanent residents, illegal workers and foreign guest workers. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 6.2* unemployed people per each job opening. The November U-6 unemployment rate was 14.4%. Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening. We have no idea the quality of these job openings as a whole, as reported by JOLTS, or the ratio of part-time openings to full-time.  The rates below mean the number of openings, hires, fires percentage of the total employment. Openings are added to the total employment for it's ratio. Only the layoff rate dropped a 10th of a percentage point, all other rates below had no change from October. Other separations are people who became disabled, sick, died or retired.

    • openings rate - 2.7%
    • hires rate - 3.2%
    • separations rate - 3.1%

    The Myth of 'Jobless Recoveries' - It is rare to call an economic relationship a “law.” But Okun’s Law has earned its name. In 1962, Arthur Okun found a relationship that has become enshrined in textbooks as Okun’s Law. The textbook version states when U.S. output dips one percent below its potential, unemployment rises above its natural rate by about half a percentage point. Fifty years after Okun’s paper, we find that this relationship fits very well, including during the Great Recession. Deviations from Okun’s Law occur, but they are usually modest in size and short-lived. Our results imply that it is a fallacy to claim that the last three U.S. recoveries have been “jobless recoveries”. Rather, the recoveries have been slow, and the slow job growth that has resulted has been just about what one would expect based on Okun’s Law.  Our results matter for policy choices. Okun’s Law is a part of textbook models in which there are shocks to aggregate output, which lead firms to hire and fire workers. Paul Krugman for instance wrote in 2011: “Why is unemployment remaining high? Because growth is weak — period, full stop, end of story. Historically, low or negative growth has meant rising unemployment, fast growth falling unemployment (Okun’s Law) ... what we’ve been seeing lately is well within the normal range of noise.” Krugman’s policy prescription since the onset of the Great Recession has been for sufficient aggregate demand stimulus to boost growth and lower unemployment.

    How Will Older People’s Participation in the Labor Force Be Affected by the Coming Increase in the Full Retirement Age for Social Security?: CBO expects that the share of older people who work will increase in the latter part of this decade in response to the scheduled increase in the full retirement age (FRA) for Social Security. As a result, economic output will be slightly greater and budget deficits slightly smaller than would otherwise be the case. This blog entry explains CBO’s estimate of the effect of the change in Social Security on the size of the U.S. labor force—an effect that is incorporated in CBO’s economic and budget projections for the next decade (in The Budget and Economic Outlook: Fiscal Years 2012 to 2022) and the longer term (in The 2012 Long-Term Budget Outlook).  The FRA, the age at which participants are eligible to receive full Social Security retirement benefits, rose by two months per year during the past decade. It increased from age 65 for people born before 1943 to age 66 for people born from 1943 through 1954. Under current law, for people who turn 62 starting in 2017, the FRA will rise again by two months per year until it reaches age 67 for people who were born after 1959 (see the figure below).

    Massive Cuts to Postal Service a Step Towards Privatization? Real News Network video & transcript -  A proposal is currently being considered by the US Postal Service to sell its building in downtown Berkeley, CA and relocate its services. This is just one city that is feeling the impact of a crippling financial crisis currently affecting the Postal Service. In fiscal year 2012 it lost approximately 5.9 billion. And now thousands of buildings may be sold and thousands of workers laid off in what USPS says is an attempt to save itself, but critics argue is a step toward privatization.  It’s commonly understood that the internet and e-communication is causing the demise of USPS, but that's not the full story. What seems to be the prime cause is actually a little-known law passed in 2006.  Susan Hammers, APWU: The Postal Accountability and Enhancement Act requires prefunding of pensions 75 yrs into the future.

    An Easy Task for Congress: Save the Post Office : The US Postal Service is in the midst of a manufactured crisis. It is supposedly broke and headed toward a sort of fiscal cliff of its own. If it goes over, the likely result is privatization of its profitable enterprises and elimination of the commitment to universal service that has been the service's promise since the founding of the republic. But that does not have to happen. Congress undermined the financial stability of the postal service during a lame-duck session six years ago. It can repair the damage done during this session. The task is not difficult. The lift is not heavy. It is merely a matter of will. Friday’s New York Times noted that “the Postal Service on Thursday reported a record $15.9 billion net loss for the fiscal year that ended Sept. 30, bringing the financially troubled agency another step closer to insolvency.” That’s the CliffsNotes version of the story. And if people read no further, they’ll think that the USPS is a mess. But it’s not. It’s merely in a financial mess created by Congress.

    The Decline and Fall of Technological Unemployment - The concept of "technological unemployment" appears to have peaked in 1936, after which it has been on a steady decline. Meanwhile "Luddites" -- which I take to indicate mainly disparaging mentions of Luddites has been on the rise, slowly and unsteadily throughout the 20th century and into the first decade of the 21st. I'm working on a long post but in the meanwhile here's a thought: maybe technology "creates more jobs than it destroys" because it isn't really "labor-saving" in the first place. That is to say, machines aren't intrinsically productive but simply mask the uneven exchanges that occur between the industrialized global North and the extractive South. It would admittedly be difficult to prove such a hypothesis but my question is: what evidence is there for the commonly-assumed believe that machines are "intrinsically productive"? I know, I know, there doesn't need to be any evidence for the assumption because it is "self evident" to the extent that anyone who questions that self-evidence reveals themselves to be a fool, a crank, a crackpot, a Luddite and an enemy of progress. 

    The robots are coming - “The Robots Take Over!” cries this month’s cover story in Wired Magazine. “They’re coming for your job – and you’ll be glad they did.” The piece, by Kevin Kelly, chronicles the amazing roles robotic technology is poised to take on – from warehouse worker and waitress to artist, musician, therapist and even comedian. One of the core tenets of economics is that technological advance is the wellspring of human betterment. Yes, new technologies disrupt old arrangements and devastate industries and workers they displace. But, over time, such innovation spawns new industries and jobs whose scale vastly exceeds the losses suffered by technology’s “losers.”  The Luddites, as we learned in school, were wrong. Or, to put it more precisely, no one could blame them for fighting the machines that eliminated their skilled textile jobs. But the broader notion – that technological advance could destroy more jobs than it creates or cause widespread economic harm – is a fallacy. Well, what if the Luddite Fallacy was a fallacy only for the first 250 years of modern capitalism’s existence? What if we’re entering an era of geometrically accelerating technological advance in which artificial intelligence, robotics and nanotechnology will together pose much more profound threats to jobs, wages and social stability than has commonly been imagined? And what if it’s not just the “unskilled” who are at risk, but most of us?

    Remember That Jobless Recovery? China’s Fault - As trade with China continues to be a potent political issue on Capitol Hill, academics have increasingly looked in detail at the downside of U.S. moves to liberalize trade. Take the case of the U.S. recession of 2001, which followed the bursting of the tech bubble and was mild by most measures. It lasted  eight months. GDP declined just a bit. Unemployment topped out at 5.5% during the downturn. But it also ushered in a huge decline in manufacturing employment. About 1.5 million manufacturing jobs were lost in the first year of that downturn –and continued to fall for years afterward– far more than the 900,000 manufacturing jobs lost in the first year of the so-called Great Recession of December 2007 through mid-2009.  What happened? In a word: China.

    Are the ‘good jobs’ in America really disappearing? - High-paying jobs aren’t going away, at least for high-skill workers. But for less educated workers, the folks that used to find quality jobs in manufacturing, things aren’t looking so hot. From the new paper “Are Good Jobs Disappearing in the US?” by Harry J. Holzer, Julia Lane, David Rosenblum, and Fredrik Andersson: Across industries, we find a dramatic shrinkage in the extent to which manufacturing – especially durable manufacturing – accounts for jobs in the top two quintiles. At the very top, these jobs are being replaced by those in professional services, information, and other sectors where good pay generally requires strong postsecondary credentials. And, where jobs remain in manufacturing, they were increasingly being filled by workers from the top of the skills distribution. … In the end, we show that good jobs remain plentiful in America – but they are becoming harder for workers with limited skilled and education to obtain.

    Are There Really No Good Job Applicants Out There? - The latest Small Business Optimism Index data from the National Federation of Independent Business — a major industry group for small businesses that surveys a sample of its members each month — is very disappointing. The report, issued Tuesday, showed business optimism to be near recessionary levels in December. Hiring plans in particular weakened substantially. There was potentially one bright spot: the share of businesses saying that there were few or no qualified applicants for open positions fell for the third month in a row. In December about 3 in 10 firms said they had trouble finding qualified workers, down from about 4 in 10 in September..It’s hard to tell if this is the start of a real, sustainable trend or just statistical noise. In any case, December’s figure is still bafflingly high, given that there were more than 12 million unemployed workers available to hire last month. That’s around three unemployed workers per available job, based on the latest Labor Department job openings data.  Despite the glut of workers, the share of small businesses saying they couldn’t find the talent they wanted was generally rising from December 2009 until September 2012, when it reached its highest point since the recession began five years earlier.

    Does Unemployment Insurance Explain (and Cause) High Unemployment? - Casey Mulligan would very much like you to believe it does. “cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs.” Here’s one pretty well-done data point (several, actually) suggesting that he’s wrong:In theory, greater employment protection should dampen the effects of output movements on employment and therefore reduce the Okun coefficient. In Figure 10 (right panel), we test this idea by plotting the coefficient against the OECD’s overall EPL index (averaged over 1985-2008, the period for which it is available). The relationship has the wrong sign, and it is statistically insignificant.[9] [9] For New Zealand, the EPL index is available over 1990-2008. We also find no relationship between the Okun coefficient and the various components of the EPL index.

    Over 50, and Under No Illusions - IT’S a baby boomer’s nightmare. One moment you’re 40-ish and moving up, the next you’re 50-plus and suddenly, shockingly, moving out — jobless in a tough economy.  Too young to retire, too old to start over. Or at least that’s the line. Comfortable jobs with comfortable salaries are scarce, after all. Almost overnight, skills honed over a lifetime seem tired, passé. Twenty- and thirty-somethings will gladly do the work you used to do, and probably for less money. Yes, businesses are hiring again, but not nearly fast enough. Many people are so disheartened that they’ve simply stopped looking for work. For millions of Americans over 50, this isn’t a bad dream — it’s grim reality. The recession and its aftermath have hit older workers especially hard. People 55 to 64 — an age range when many start to dream of kicking back — are having a particularly hard time finding new jobs. For a vast majority of this cohort, being thrown out of work means months of fruitless searching and soul-crushing rejection.  To which many experts say, “What did you expect?”

    The Global Domestic Workforce is Enormous -- and Very Vulnerable : The rights of domestic workers may be an important issue in the United States, but we’re far from alone in having growing ranks of workers who suffer from few labor protections and abusive working conditions. A new report out from the ILO yesterday sheds some much-needed light on what the global domestic worker workforce looks like. Firstly, it’s huge. Just take a look at some of these figures: The ILO report counts a conservative minimum of at least 52.6 million domestic workers across the globe as of 2010, accounting for just under four percent of all wage employment. It’s also getting bigger: that number nearly doubled since the mid-1990s, increasing by 19 million. The growth isn’t just because of a growing population, either—domestic workers’ share of total employment grew from 1.5 percent to 1.7 percent in the same time period. As the report notes, “If all domestic workers worked in one country, this country would be the tenth largest employer worldwide.” Domesticworkistan would be quite the global economic player. This is just a conservative estimate based on measurable data, however. Given the shadow market that many domestic workers operate in, that number could be as large as 100 million workers.

    Unpaid internships: Denying opportunities and exploiting young workers - Laura Rowley has an excellent response to the silly op-ed by Steve Cohen published in Tuesday’s Wall Street Journal. Cohen wrote that paying interns to deliver clothing for photo shoots, run copy machines, or clean the green room at a TV studio is dumb. The young people doing those jobs are not employees, according to Cohen; they’re simply auditioning. Cohen admits that the grunt work he and his son did in separate internships at a law firm and a magazine was “boring, mindless, repetitious” and yet, “essential to the workings of our offices.” Nevertheless, Cohen says the chance to prove himself a good employee was so valuable to him, as was the exposure to a law office’s operations, that his employer shouldn’t have had to pay him even minimum wage. Rowley accepts Cohen’s conclusion that his internship was valuable but says the experience shouldn’t be limited to people like Cohen (a former media executive) and his son, who can afford to work for free. What about the kids graduating from college with $50,000 of debt, or the children of factory workers or waitresses who can’t support their grown children in New York City? Should they be denied the audition, the exposure to interesting work environments, the chance to prove themselves?

    So Much for the Growing Class War - Despite all the talk of the lazy 47 percenters, the scruffy 99 percent versus the entitled top 1 percent, contentious proposals to raise taxes on the rich, and the uncapped political donations of billionaires, the “class war” apparently abated last year, if you believe the American public.  Based on two surveys by the Pew Research Center. The latest survey is a telephone poll conducted Nov. 28 to Dec. 5, 2012, with a nationally representative sample of 2,511 adults ages 18 and older. Margin of sampling error is plus or minus 2 percentage points. The previous survey was conducted Dec. 6-19, 2011, with a nationally representative sample of 2,048 adults ages 18 and older. Margin of sampling error is plus or minus 3 percentage points. Asked by Pew Research Center about conflicts between rich and poor, Americans were less likely to say there were “strong” or “very strong” conflicts at the end of 2012 than they were a year earlier. In 2012, 58 percent of Americans believed there were significant conflicts between rich and poor, compared with 66 percent in 2011. The biggest conflict Americans perceived was along partisan lines, not economic ones. Here are the numbers from previous years Pew asked about conflicts between rich and poor, showing that Americans perceive about as much class warfare today as they did in 1987:

    What the Fiscal Cliff Deal Means for the States - The fiscal cliff deal is done and the question on everyone’s mind: What about the states?  Okay, so only a handful of us are actually asking this question. But there are some important provisions that will matter to states still woozy from the Great Recession. The good news for states is that American Tax Relief Act of 2012 will end much of the uncertainty that has plagued the income tax code in recent years. No longer will states have to guess what will happen to many provisions of the federal revenue code that were set to expire. The bad news is some states will lose revenue they were counting on from scheduled changes in the federal estate tax that won’t happen. The federal credit for state estate and inheritance taxes is gone for good. The 25 dormant states that had an estate tax only when the federal credit existed will continue to not collect estate taxes.  (My brief on state estate taxes and the fiscal cliff has more details but ATRA is the nail in the coffin on the state death tax credit.)  Twenty states and the District of Columbia, because they either have an inheritance tax or an estate tax independent of the current federal law, will continue to collect the tax that can still  be deducted on the federal return.  Five states completely repealed the estate tax.  Those  states with zombie estate taxes still on their books, knowing the credit is not coming back, may choose one of these options. Or some may just wait to see if Congress changes its mind again.

    State comptroller: NY government debt tops $63B - The state government's debt has topped $63.3 billion, with New York on track to approach its borrowing limit in early 2014, the comptroller's office reported Monday. That debt burden, averaging $3,253 per resident, is almost three times the national median, according to the report. New York's state-funded debt is second only to California's $96.4 billion and 80 percent higher than New Jersey, which is third. New York paid $6.8 billion on its loans in 2011-12, though borrowing has continued to outpace payoffs. The $63.3 billion debt as of last March 31 was $1.6 billion higher than a year earlier. "At this point, 95 percent of the borrowing over the past 10 years has been without voter approval," Comptroller Thomas DiNapoli said. Most came from public authorities, avoiding the general prohibition in the state constitution against issuing debt without the approval of voters and the Legislature.

    Before Rebuilding Beaches, Plucking Debris From Storm-Tossed Sand - Hurricane Sandy’s toll — already well-documented in power failures, forced evacuations and insurance losses — can also be measured in grains of sand. There were the mounds of it piled along avenues, raked into backyards and poured into basements, giving the landscape along the New York and New Jersey coasts a strangely Saharan quality in the storm’s wake. And now, it needs to be cleaned before it can be replaced on area beaches. That is a job so big that, in one stretch of the Rockaways alone, the process has been going on 24 hours a day, seven days a week, for more than a month — truckload after truckload of sand being poured through super-size versions of children’s toy sifters. The Army Corps of Engineers, which is overseeing the operation on behalf of the city’s parks department, says that in the six weeks leading up to New Year’s Day, the crews in Queens had filtered 94,000 cubic yards of sand. That is enough, the agency estimated, to fill a football field to a depth four feet higher than the goal posts — or 44 feet.

    Superstorm Sandy’s amazing parking lot: Tens of thousands of damaged cars fill N.Y. airport runway -Tens of thousands of vehicles damaged by Superstorm Sandy are being temporarily stored on runways and taxiways at Calverton Executive Airpark in Calverton, New York. Insurance Auto Auctions Inc., a salvage auto auction company specializing in total-loss vehicles, acquired the cars and trucks that were damaged, destroyed or flooded by the storm and needed a place to store them. The company made a deal with the Town of Riverhead to lease the airport land and then the vehicles are auctioned online.

    New York State Storm Panel Recommends Major Changes - A new commission formed by Gov. Andrew M. Cuomo, charged with figuring out how New York should adapt in the long term to cope with worsening storms amid climate change and population growth, has recommended an extensive menu of programs: it includes turning some of the state’s industrial shoreline back into oyster beds, hardening the electric and natural gas systems, and improving the scope and availability of insurance coverage, according to a draft version obtained by The New York Times. The NYS 2100 commission, one of four that Mr. Cuomo established in the aftermath of Hurricane Sandy, is tasked with evaluating and recommending changes to the state’s infrastructure to better prepare for the harsher weather expected in the future. Its broad 175-page study says the state should consider storm barriers with movable gates that would span the Narrows, at a cost of tens of billions of dollars, and endorses a variety of “soft infrastructure” investments like building dunes and wetlands and oyster reefs, which were more prevalent along New York’s coastline in the 1800s.

    Municipal Bonds: Where to in 2013? Is There a Muni Bubble? Will it Pop? -- On Wednesday, I posted a chart of US Treasury Yields asking the question Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift.Today's focus is on municipal bonds, but first let's take a look at a chart from the above link. Certainly Bernanke is not hiking rates any time soon. However, that does not preclude upward pressure on long-term rates. And if there is sustained upward pressure on interest rates (see the above link for why that may be the case), treasuries, corporates, and municipal bonds will all likely suffer. With that thought in mind, please consider the following chart from Bloomberg on municipal bond yields.

    City's $2 billion debt comes to a head --- With nearly $2 billion in long-term debt, the city can’t afford to borrow any more money. This is the message that the city treasurer will deliver to the Sacramento City Council at Tuesday’s meeting. "The city's tapped out," said City Treasurer Russell Fehr, who will be presenting an hour-long report on the topic. "We have very large, long-term liabilities and we have to be very cautious about assuming any new ones. That's the essence of the message." According to the report, the long-term debt and interest must be paid over the next 30 years, which passes the financial burden onto future generations. However, the debt is at a fixed rate, so it won't increase and there are "no time bombs that will go off," Fehr said. "Because we had such a significant decline in revenue during the recession, our debt burden is too high. So we shouldn't borrow any more."

    The California Budget Surplus - Back in November I was interviewed by Joe Weisenthal at Business Insider. One of my comments during our discussion on state and local governments was: I wouldn’t be surprised if we see all of a sudden a report come out, “Hey, we’ve got a balanced budget in California.” And today from Reuters: California Governor's budget has surprise: a surplus..The state expects $98.5 billion in revenues and transfers and plans spending $97.7 billion, according to the proposal published on the state Department of Finance website. That leaves a surplus of $851 million for the year, in addition to a projected $785 million surplus for the current fiscal year, which ends in June, allowing the state to put $1 billion toward a rainy day fund. Brown said he saw a balanced budget for the next four years. Spending in the upcoming year is set to rise 5 percent, or $4.7 billion, from the current 2012-13 budget. Schools and universities will see a $4 billion boost, health care spending will rise $1.2 billion, while transfers to local government will drop $2.1 billion.  This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly in the upcoming year after several years of budget cuts.

    Why US Prisons Are So Overcrowded -  This past weekend, as part of a system update to the CalWIN software of California's Social Services department, HP accidentally cancelled EBT cards for some 37,000 Californians. We can only imagine the resulting panic and the scramble by all these Californians who suddenly could not live within their means to print trillion, and other denomination, coins, in the shining example of their government. The OC Register reports that eighteen counties were affected in the CalFresh chaos (the 'friendly' name given to California's food stamp program - also formerly known as the Supplemental Nutrition Assistance Program or SNAP). While we worry for the strippers and liquor stores, CalWIN and Xerox (the state's primary contractor for administering CalFresh) developed a process to reactivate the cards by Tuesday morning. While this must have been a tough day or two for many, we wonder if Geithner's 'extraordinary' efforts to extend the debt ceiling deadline have perhaps gone a little too far?

    Panic In California As Thousands Of Food Stamps Cards Suffer Brief Outage - On the day that California's Governor Jerry Brown asks federal judges to lift an order to release prisoners to reduce overcrowding, this brief clip seemed extremely appropriate when considering just why it is that the US prison population is so high (as we noted most recently here). Professor Daniel D'Amico provides some insightful color, noting that fully 24 percent of inmates in U.S. prisons are non-violent drug offenders. The drug war has been adding to a growing U.S. prison population for the past 40 years. Today, the United States holds more human beings in prisons than any other country, both as a percentage of the population and in counting total numbers. The war on drugs has led to significant increases in the U.S. prison population and he argues that perhaps this is an ineffective way to address drug use in America. An interesting dilemma on the day when another 'freedom', that of gun ownership, is up for potential prohibition.

    Child Poverty Rate in California Up 30 Percent Since 2008 - The percentage of California children living in poverty has soared by 30 percent since the onset of the Great Recession in 2008, and more than 1 in 5 children now live in households with incomes below the federal poverty threshold, a study released Monday shows. The rate is even higher, about 1 in 3, among black and Latino children and those being raised by a single mother. The report, entitled "Prosperity Threatened: Perspectives on Childhood Poverty in California," was produced by the San Francisco-based Center for the Next Generation, using data from the U.S. Census Bureau. The report finds that the child poverty rate statewide has climbed from 17.8 percent in 2008 to 21.5 percent at the start of last year, a 30 percent increase. (View or download the full report) It warns that failure to reverse this trend will have damaging long-term consequences for the state economy, noting that about half of all those who spend most of their childhoods living in poverty remain poor after they become adults.

    A California drought: not enough children- Declining migration and falling birthrates have led to a drop in the number of children in California just as baby boomers reach retirement, creating an economic and demographic challenge for the nation's most populous state. "After decades of burgeoning population and economic growth…the state now faces a very different prospect," The report, "California's Diminishing Resource: Children," analyzed data from the 2010 census and the American Community Survey to conclude that the trend marks a "historic transition" for the state. In 1970, six years after the end of the baby boom, children made up more than one-third of California's population. By 2030, they will account for just one-fifth, California's demographic shift mirrors that of many Northeast and Midwest states, including New York, Massachusetts, Illinois and Michigan, where the percentage of children fell even more sharply from 2000 to 2010. But unlike those states, California has always relied on migrants from other states and abroad to fuel its economy, and the change represents a new reality for the Golden State. Ever since the Gold Rush, the majority of Californians has been born elsewhere. That pattern began to change in the 1990s, when migrants were attracted by the lower cost of living and rapid growth in other Western and Southern states. Then, the housing bust and 2008 financial crisis hit California harder than most states. By 2010, more than half of all adults 25 to 34 years old were born in California.  At the same time, the state's birthrate fell to 1.94 children per woman in 2010, below the replacement level of 2.1 children, according to the study. California's rate is lower than the overall U.S. rate of 2.06 children in 2012, according to the Central Intelligence Agency.

    Rick Perry Versus the School Children of Texas - The conservatives of the Texas legislature are about to try again to fool the state's taxpayers into funding private schools with a voucher program. The Republican argument, which falls apart under scrutiny, has been that no child should be condemned to attend a failing public school. No conservative wants to talk about why the public school system might be troubled, however, nor do they contemplate the even greater long-term damages to be wrought by school choice.All of this present and future harm belongs at the feet of shortsighted conservative politicians. As Governor Rick Perry was preparing to run for the GOP presidential nomination, he pushed the legislature to approve a $5.4 billion budget cut in Texas education. His transparent goal was political, and simply to build upon a no tax reputation, which, unsurprisingly, came at the expense of school children. The consequences of such a funding reduction were easily predicted. According to the Texas Higher Education Coordinating Board, Perry's money slashing occurred just as an additional 84,000 new students were entering Texas' public school system. School districts around the state were forced to reduce their operational expenses and had to fire 11,487 teachers and eliminate 15,000 staff positions.  The impact of this civic disaster might have been mitigated if Perry had urged the legislature to tap into the estimated $6 billion in the state's Rainy Day Fund. Instead, he continued with his fatuous contention that Texas needs to leave that money untouched in case of a natural disaster.

    Obama’s Race To The Top Drives Nationwide Wave of School Closings, Teacher Firings - Black Agenda Report - A nationwide epidemic of school closings and teacher firings has been underway for some time. It's concentrated chiefly in poor and minority communities, and the teachers let go are often experienced and committed classroom instructors, and likely to live in and near the communities they serve, and disproportionately black. It's not an accident, or a reflection of changing demographics, or more educational choices suddenly becoming available to families in those areas. It's not due to greedy unionized teachers or the invisible hand of the marketplace or well-intentioned educational policies somehow gone awry. The current wave of school closings is latest result of bipartisan educational policies which began with No Child Left Behind in 2001, and have kicked into overdrive under the Obama administration's Race To The Top. In Chicago, the home town of the president and his Secretary of Education, the percentage of black teachers has dropped from 45% in 1995 to 19% today. After winning a couple skirmishes in federal court over discriminatory firings in a few schools, teachers have now filed a citywide class action lawsuit alleging that the city's policy of school “turnarounds” and “transformations” is racially discriminatory because it's carried out mainly in black neighborhoods and the fired teachers are disproportionately black.

    The Myth of the 4-Year College Degree - While undergraduate education is typically billed as a 4-year experience, many students, particularly at public universities, actually take five, six, or even more years to attain a degree. According to the Department of Education, fewer than 40% of students who enter college each year graduate within 4 years, while almost 60% of students graduate in six years. At public schools, less than a third of students graduate on time. “It’s a huge issue for the individual students who are spending more money on tuition than they need to. The longer they wait to graduate and get a job, those are extra years of their careers when they’re in college and not working and not making money.” Chingos points out that delayed graduation at public schools also affects taxpayers who are subsidizing students’ education. Reasons for delaying graduation are numerous. For students who choose to participate in co-ops or internships during the school year, it can be tough to fit in all the necessary courses. Overcrowded classes can make it impossible for students to fulfill degree requirements in a timely manner. And the common practice of changing majors midway through college can make a 4-year degree impractical.

    Downturn Still Squeezes Colleges and Universities - An annual survey of colleges and universities found that a growing number of schools face declining enrollment and less revenue from tuition. The survey, released by the credit ratings agency Moody’s Investors Service on Thursday, found that nearly half of colleges and universities that responded expected enrollment declines for full-time students, and a third of the schools expected tuition revenue to decline or to grow at less than the rate of inflation. “The cumulative effects of years of depressed family income and net worth, as well as uncertain job prospects for many recent graduates, are combining to soften student market demand at current tuition prices,” Emily Schwarz, a Moody’s analyst and lead author of the report, said in a statement. The growing financial challenges for colleges and universities come as students and graduates have amassed more than $1 trillion in student debt, and many are struggling to pay their bills. Nearly one in six people with an outstanding federal student loan balance is in default, the federal government says.

    Colleges Caught in Value Trap - The demand for four-year college degrees is softening, the result of a perfect storm of economic and demographic forces that is sapping pricing power at a growing number of U.S. colleges and universities, according to a new survey by Moody's Investors Service. Facing stagnant family income, shaky job prospects for graduates and a smaller pool of high-school graduates, more schools are reining in tuition increases and giving out larger scholarships to attract students, Moody's concluded in a report set to be released Thursday.  But the strategy is eating into net tuition revenue, which is the revenue that colleges collect from tuition minus scholarships and other aid. College officials said they need to increase net tuition revenue to keep up with rising expenses that include faculty benefits and salaries. But one-third of the 292 schools that responded to Moody's survey anticipate that net revenue will climb in the current fiscal year by less than inflation.  For the fiscal year, which for most schools ends this June, 18% of 165 private universities and 15% of 127 public universities project a decline in net tuition revenue. That is a sharp rise from the estimated declines among 10% of the 152 private schools and 4% of the 105 public schools in fiscal 2012.  The financial pressures signal that many schools are starting to capitulate to complaints that college has become unaffordable to many American families, observers say. At least two dozen private colleges froze tuition this fall, roughly double the previous year's total.

    Less Pay for New M.B.A.s - Like many students, Steve Vonderweidt hoped that a master's degree in business administration would open doors to a new job with a higher paycheck.But now, about eight months after receiving his M.B.A. from the University of Louisville, Mr. Vonderweidt, 36 years old, hasn't been able to find a job in the private sector, and continues to work as an administrator at a social-service agency that helps Louisville residents obtain food stamps, health care and other assistance. He is saddled with about $75,000 in student-loan debt—much of it from graduate school.For graduates with minimal experience—three years or less—median pay was $53,900 in 2012, down 4.6% from 2007-08, according to an analysis conducted for The Wall Street Journal by Pay fell at 62% of the 186 schools examined. Even for more seasoned grads the trend is similar, says Katie Bardaro, lead economist for "In general, it seems that M.B.A. pay is either stagnant or falling," she says. The pressures are greatest for those attending less prestigious schools, says Stanford Business School professor Paul Oyer, who studies personnel trends. But even at top programs, some graduates are likely to struggle in today's environment, he says.

    Here Comes The Student Loan Bailout - 2012 is the year the student loan bubble finally popped. While on one hand the relentlessly rising total Federal student debt crossed $956 billion as of September 30, and was growing at a pace that will have put it over $1 trillion by the end of 2012, the one data point confirming the size, severity and ultimately bursting of this latest debt bubble was the disclosure in late November by the Fed that the percentage of 90+ day delinquent loans soared from under 9% to 11% in one quarter. Which is why we were not surprised to learn that the Federal government has now delivered yet another bailout program: this time focusing not on banks, or homeowners who bought McMansions and decided to not pay their mortgage, but on those millions of Americans, aged 18 to 80, that are drowning in student debt - debt, incidentally, which has been used to pay for drugs, motorcycles, games, tattoos, not to mention countless iProducts. Which also means that since there is no free lunch, all that will happen is that even more Federal Debt will be tacked on to replace discharged student debt loans, up to the total $1 trillion which will promptly soar far higher as more Americans take advantage of this latest government handout. But when the US will already have $22 trillion in debt this time in four years, who really is counting? After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on.

    Illinois again fails to act on pensions, risking credit downgrade (Reuters) - The Illinois legislature adjourned on Tuesday without acting to restore the health of the nation's most underfunded state pension systems, risking another downgrade of its already low credit ratings. After days of wrangling at the state Capitol of Springfield, lawmakers ended their last meeting of a "lame duck" legislative session without voting on a pension reform measure. Majority Democrats, worried about opposition from labor unions, realized they did not have enough support to pass a reform proposal and decided not to vote on any measure. Failure to act means that work to fix a pension shortfall of $96.8 billion will have to start from scratch when a newly elected legislature is sworn in on Wednesday. Moody's Investors Service warned last month that without action on the pension problem, it could downgrade the current A2 Illinois debt rating, the lowest among the states it rates. A lower credit rating could increase the cost of borrowing.

    Milliman analysis: Historic low interest rates widen pension funding deficit by $74 billion in 2012 - Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its latest Pension Funding Index, which consists of 100 of the nation's largest corporate defined benefit pension plans. In December, these pensions experienced a $54 billion increase in funded status based on a $46 billion decrease in the pension benefit obligation (PBO) and a $8 billion increase in assets. The $54 billion improvement in December follows a $33 billion improvement in November, but it would still take many more months of improvement to make up for a year of ballooning pension deficit. At year end, the deficit of $412 billion is $74 billion higher than it was when 2011 ended. "It was a good year on the asset side, with these pensions experiencing a $90 billion gain," said John Ehrhardt, co-author of the Milliman Pension Funding Study. "But it was a rough year on the liability side, with interest rates driving a $164 billion increase in the pension benefit obligation. People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that's not going to change in 2013."

    GAO calls on Postal Service to prefund retiree benefits - U.S. Postal Service officials and postal unions have long pushed Congress to relieve the agency of its obligation to prefund retiree health benefits. It’s a burden other agencies don’t share and one that officials say the Postal Service can’t afford. Defaults on prefunding payments total $11.1 billion. But not everyone agrees that removing or substantially reducing the prefunding requirement is the best way out of the USPS hole. A recent Government Accountability Office report says the “USPS should prefund its retiree health benefit liabilities to the maximum extent that its finances permit.” The GAO said that deferring the prefunding payments “could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for some or all of its liability.” The report said the Postal Service’s financial condition makes it difficult for the agency “to fully fund the remaining $48 billion unfunded liability over the remaining 44 years of the schedule” set up by the 2006 Postal Accountability and Enhancement Act. USPS officials say they can pay $0.00. The Postal Service is losing $25 million a day.

    Fiscal Cliff Aftermath: New Option for 401(k) Savers - In an effort to unlock tax revenue, not just raise rates on the wealthy, architects of the fiscal cliff deal handed certain retirement savers a small bonus: You can now convert traditional 401(k) plan assets into a Roth 401(k) regardless of age and employment status. Under the old rules, to convert you typically had to leave your job, retire, become disabled, or reach age 59½ and be eligible for normal distributions. So this is welcome flexibility, though it won’t be available to everybody. Only 40% of employers offer a Roth 401(k) in the first place, and not all of those plans allow conversions. But at those that do, there is now nothing to stop you from making the switch. Whether you should is another matter. Roth 401(k) contributions are made after tax; they grow tax-free. Traditional 401(k) contributions are made pre-tax; they are taxed upon withdrawal. In general, you need to believe you’ll be in a higher tax bracket in retirement for the conversion to make sense. You also need enough other funds to pay the potentially sizable one-time tax bill that comes due when you convert.

    Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries - Inquiring minds are digging into social security trends including the numbers of beneficiaries, average costs, total costs, number of workers, and the ratio workers to beneficiaries.  First, let's take a look at the CNS News report Social Security Ran $47.8 Billion Deficit in Fiscal Year 2012The Social Security program ran a $47.8 billion deficit in fiscal 2012 as the program brought in $725.429 billion in cash and paid $773.247 for benefits and overhead expenses, according to official data published by Social Security Administration. The Social Security Administration also released new data revealing that the number of workers collecting disability benefits hit a record 8,827,795 in December--up from 8,805,353 in November. With that backdrop, let's look at the actual data to see the underlying trends.

    Social Security Isn’t a Pension Plan But  -  The most obvious way Social Security is like a pension plan is that the rich are trying to destroy it, just like Hostess Brands wrecked the retirement plans of its bakers. But there are other similarities. Since 1983, we have all paid in a lot more money in FICA taxes than needed to fund current payments on the theory that it would be there for baby boomers when it was needed.  Pension plans do the same thing. They use actuarial calculations to figure out how much money they need in out years, and how much they need to take in today to make those payments. Then they invest the money as safely as possible so that it will be there when it is needed. The Social Security Trust Fund was ordered to use the excess contributions to buy Treasury obligations, albeit of a type supposedly not to be sold to the public. Those obligations are the bulwark of the demands of citizens who don’t want to see any more cuts to Social Security. They also constitute a partial explanation for the desire of the rich to cut Social Security: the bonds will have to be redeemed, meaning either the Treasury will have to sell bonds to replace them or we will have to increase taxes to fund the repayment of the bonds, or some other step will be necessary that the rich don’t like. The deep desire not to pay the bonds is part of a longer term project, tax reduction for the rich. In fact, the use of the Special Treasury Obligation/Trust Fund was meant to disguise the reality of the huge tax cuts handed to the wealthy in the 1980s in a lovely bipartisan way. The unfairness and stupidity of the tax cut for the rich was hidden by the increase in the FICA taxes imposed only on income from work, and only modestly affecting the income of the rich. Meanwhile, the rich funded the increasing Reagan deficits by lending money to the Treasury that should have been paid in taxes.

    The Hoax of Entitlement Reform - Robert Reich - It has become accepted economic wisdom, uttered with deadpan certainty by policy pundits and budget scolds on both sides of the aisle, that the only way to get control over America’s looming deficits is to “reform entitlements.”  But the accepted wisdom is wrong.  Start with the statistics Republicans trot out at the slightest provocation — federal budget data showing a huge spike in direct payments to individuals since the start of 2009, shooting up by almost $600 billion, a 32 percent increase.  And Census data showing 49 percent of Americans living in homes where at least one person is collecting a federal benefit – food stamps, unemployment insurance, worker’s compensation, or subsidized housing — up from 44 percent in 2008.  But these expenditures aren’t driving the federal budget deficit in future years. They’re temporary. The reason for the spike is Americans got clobbered in 2008 with the worst economic catastrophe since the Great Depression. They and their families have needed whatever helping hands they could get. If anything, America’s safety nets have been too small and shot through with holes. That’s why the number and percentage of Americans in poverty has increased dramatically, including 22 percent of our children.  What about Social Security and Medicare (along with Medicare’s poor step-child, Medicaid)? Social Security won’t contribute to future budget deficits. By law, it can only spend money from the Social Security trust fund. That fund has been in surplus for the better part of two decades, as boomers contributed to it during their working lives. As boomers begin to retire, those current surpluses are disappearing

    Social Security Payouts Per Worker; Accrued Interest on Accrued Promises; Imagination - Inquiring minds are digging still further into social security trends and costs. Here is a chart from Tim Wallace in response to my post Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries.The line in red shows the expected trend if payouts had increased at the rate of inflation. Instead, escalating costs and the shrinking number of workers per beneficiary, has placed tremendous  stress on workers ability to support beneficiaries. Here are a few of charts from the top link to highlight the reason for this trend.

    • The ratio of workers to beneficiaries peaked in 1999 at 2.927 to 1.
    • The ratio of workers to beneficiaries was 2.361 to 1 at the end of 2012.
    • The ratio of workers to beneficiaries is falling fast and will continue to fall fast for a decade as the baby boomer population ages.
    • The average payout and the number of payouts are both rising fast
    • Total Social Security payouts (a multiplication of two rising numbers) are on an unsustainable exponential growth path.

    Bad News on Social Security: We're Going to Live Longer - That's what Gary King and Samir Soneji tell us in a NYT column this morning. The piece tells readers: "For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall." That's not exactly right. The program spent more than it received in payroll taxes, but Social Security also earned more than $117 billion in interest on the government bonds in the trust fund. This means that the program actually had an annual surplus and the trust fund grew in 2010. But let's get to the crisis of living longer. Based on their projections of life expectancy, King and Soneji calculate that in 2031 Social Security will cost about 0.65 percentage points more than the trustees currently project measured as a share of taxable payroll. This comes to 0.25 percentage points measured as a share of GDP. Should we be scared by this? Well, the amount is certainly not trivial, but the increase in defense spending associated with the wars in Iraq and Afghanistan came to 1.7 percent of GDP. So, we have dealt with much bigger expenses without too much disruption to the economy. However there is a bit more to the story. They only dealt with the impact of improving health on life expectancy. There are other ways in which better health can be expected to affect the finances of the program. For example, the disability portion of the program currently accounts for almost 18 percent of the program's cost. If better health reduced disability rates then this could go a substantial portion of the way toward offsetting the higher costs associated with a longer period of retirement.

    Debunking (Yet Another) Scaremongering New York Times Op Ed on Social Security - Yves Smith - Some readers were decidedly unhappy about a New York Times op-ed over the weekend that argued the need to reform Social Security was even more urgent than the catfood futures sellers thought because people are going to live longer than the budget mavens assume. Given the op-ed space limits, the authors couldn’t supply much in the way of backup for their views, but the argument was that improvements in longevity due to the decline in smoking and improved cardiovascular health were not adequately reflected in the data. It’s not clear that we should take this forecast all that seriously. Demographers have upon occasion been spectacularly wrong. One of their big misses (and this was the overwhelming consensus) was in predicting falling population levels for the US in the 1990s, following the pattern of other advanced economies. Some factors that could offset the favorable developments the authors cited:

      • 1. Long term unemployment reduces life expectancy
      • 2. Diabetes epidemic. The op ed peculiarly mentions obesity in passing and not diabetes. Type 2 diabetes reduces life expectancy by roughly 10 years. Only 3.3% of the population was diabetic in 1980; the incidence rose to 7.7% by 2011.
      • 3. Growing inequality. Inequality has a negative impact on the health of every income group, even the rich
      • 4. Restricted access to health care. I’ll elaborate on this in future posts, but I’m already seeing my insurer doing every thing possible not to pay my bills including invoking provisions of the ACA that do not apply to me, including trying to not reimburse certain types of preventive care, such as an annual EKG and a urine test (and lo and behold, looking at the list of preventive services, they indeed might not be covered under the ACA).
      • 5. Severe economic downturns. Note this factor may not overlap much with 1. Lifespans fell in 2008. That was likely a result of the severe economic decline (we now know GDP fell at nearly a 9% rate in the fourth quarter) as opposed to long-term unemployment

    On "Noteworthy" - The most recent report from the Congressional Budget Office (CBO) used the following language it the summary section: The resulting rise in the projected rates noteworthy. "Noteworthy" is an interesting word for the CBO to use. Normally, the reports don't use words like that, so the word is, by itself, noteworthy. The CBO report is a discussion of the Full Retirement Age (FRA). How could that be interesting, and why is it noteworthy? Some background. In a few years, Social Security will (gradually) increase the FRA from 65 years, to 66. This change in eligibility has been on the books for some time, so no one should be surprised when it happens. If you put your economics hat on for a moment, and ponder the broader implications of changing the FRA, you probably would conclude that increasing the FRA causes older people to stay in the workforce longer. That conclusion is pretty obvious, and by itself, is not noteworthy. What is worthy of note is how significant the implications of adjusting the FRA are. The CBO estimates: If you look at these results and conclude that the 3-4% changes over a 5-8 year period is a rounding error, and not of any consequence, you would be wrong. This is a very big deal.

    A Reminder Why Protecting Social Security Is So Important - Take a look at this useful set of pictures from the BLS on the not-very-healthful status of defined benefit (DB) private pension plans in America today (DB pensions provide guaranteed, periodic payments in retirement).  A quick glance led me to believe that these data points should be a front-and-center defense against those who would cut deeply into Social Security and Medicare benefits. In sum, as DB private pensions weaken, we need to strengthen public ones.  The loss of DB private pensions—and their partial replacement by financial-market-dependent defined contribution plans—represents a shift in the locus of risk of retirement security from employers to workers. Simple economics dictates a role for government to absorb the risk as it can do so far more efficiently than individuals on their own.  That means ensuring the viability of social insurance.  That, in turn, is not an argument against “entitlement reform,” whatever that is.  But it’s very much an argument that such reform must absorb the added risk in such a way as to protect vulnerable retirees as private pensions fade.

    Latest Scare Talk on Social Security Is No Cause for Alarm - Social Security’s financial projections receive periodic criticism — either for being too optimistic or too pessimistic.  Sunday’s New York Times, for example, devoted a full page to an opinion column with the scary headline “Social Security: It’s Worse Than You Think.” Its authors charge that the projections are outdated and inaccurate and that they understate future improvements in longevity.  But the column is highly misleading and needlessly alarming.Social Security’s trustees issue annual projections of the program’s finances for the next 75 years.    Such projections are necessarily uncertain, especially for the later years.  Over the past 30 years, however, the trustees’ projections of changes in longevity have proven remarkably accurate. The trustees project that average life expectancy will continue to rise and reach 20.2 years by 2030.  The authors of the Times column argue that the improvement in longevity will be even greater because smoking has declined, but they ignore the many other variables affecting the financial projections, such as the rate of growth of wages.  They also imply that the trustees’ methodology produces “crazy death rates,” but the estimates they depict are their own extrapolations — not the trustees’ actual assumptions.

    Ronald Reagan: “Social Security has nothing to do with the deficit.” - If you’re following the debt ceiling debacle – you have no doubt asked yourself if Republicans are really crazy and reckless enough to sabotage the American economy by failing to raise the debt ceiling for the first time in American history. One of the favorite talking points by Republicans is that in order for there to be Republican support to raise the debt ceiling – Democrats must give in and cut Social Security, Medicare and Medicaid. That’s their position. But as Ronald Reagan has said and it’s as true today as it was the day he said it: “Social Security has nothing to do with the deficit.” That didn’t stop Republicans from supporting the privatization of Social Security in 2004 under Bush. That didn’t stop House Republicans from voting to privatize Social Security in 2011 – yes … 2011 (source). Republicans have moved so far off the reservation on this issue since the days of Reagan. In 1984 – Reagan defended Social Security; in 2005 – Paul Ryan called Social Security a “welfare transfer system” (source). Yes – they think it’s welfare

    Expanding Medicaid to Low-Income Adults Leads to Improved Health, Fewer Deaths: A new study from Harvard School of Public Health (HSPH) finds that expanding Medicaid to low-income adults leads to widespread gains in coverage, access to care, and—most importantly—improved health and reduced mortality. It is the first published study to look specifically at the effect of recent state Medicaid expansions on mortality among low-income adults, and the findings suggest that expanding coverage to the uninsured may save lives.The HSPH researchers analyzed data from three states—Arizona, Maine, and New York—that had expanded their Medicaid programs to childless adults (aged 20-64) between 2000 and 2005. They selected four neighboring states without major Medicaid expansions—New Hampshire (for Maine), Pennsylvania (for New York), and Nevada and New Mexico (for Arizona)—as controls. The researchers analyzed data from five years before and after each state’s expansion. The results showed that Medicaid expansions in three states were associated with a significant reduction in mortality of 6.1% compared with neighboring states that did not expand Medicaid, which corresponds to 2,840 deaths prevented per year for each 500,000 adults gaining Medicaid coverage. Mortality reductions were greatest among older adults, non-whites, and residents of poorer counties. Expansions also were associated with increased Medicaid coverage, decreased uninsurance, decreased rates of deferring care due to costs, and increased rates of “excellent” or “very good” self-reported health.

    Social Security/Medicare vs Corporate Welfare - Linda Beale - The denouement of the fiscal cliff debate behind us (and not, I regret, with the best results--more on that later) we now face the next stage, in which we can expect the right-side extremists to threaten to hold the government hostage unless spending is cut (meaning, to the right-side, spending for people-oriented projects like the safety net but not extending generally to spending on the military or the corporate welfare with which the tax code was reinforced through the fiscal cliff deal that extended or made permanent many of the notorious giveaways from the Bush years) and debt is limited. All of this will be pushed by those in the "tea party" and Koch-funded right-wing as so-called "fiscal conservatism." It isn't.  The agenda on the right is about as far from fiscal conservatism as anything can be.  The right is quite happy to take a "no tax increases forever" position, at that same time as gleefully opting for more and more expansive defense and defense-related spending.  Similarly, the fiscal cliff deal with its reinforcement of corporate welfare in the extension or making permanent of the Bush year corporate tax giveaways demonstrates that there is hardly a corporate tax expenditure that this gang doesn't like.  Take two examples:  the R&D credit and the "active financing" exception to Subpart F.

    Projected Medicare Spending - Via an email from Austin Frakt with the subject "should we worry a lot about Medicare growth?," and the answer in the text "It doesn't seem like it. Massively demographically driven. A bit more revenue and it's fixed for a long time." [Remember that projected health care cost growth is the main source of worry about future debt problems, and hence the driving force behind the push from deficit hawks for spending cuts and tax increases, well spending cuts anyway, the so-called deficit hawks are not so fond of tax increases which betrays their true motives.]: Chart of the day: Projected Medicare spending, by Austin Frakt: The vertical axis is percent of GDP. “Excess cost growth” means in excess of the rate of GDP growth. The chart is from a new ASPE report by Richard Kronick and Rosa Po. Description of OACT’s alternative scenario is here, beginning on page 12 (PDF). Note that in addition to assuming a perpetual doc fix, it also assumes “a gradual phase-down of the productivity adjustments [about which, see Figure 1 here] and the elimination of the IPAB requirements.” Given these, is an excess cost growth totaling three-quarters of a percentage point of GDP over two decades a lot? UPDATE: Link to and quote from the OACT’s alternative scenario

    Wendy’s Franchise Cuts Employee Hours To Part-Time To Avoid Obamacare - Not long after the owner of the Olive Garden and Red Lobster chains admitted their anti-Obamacare campaigns hurt more than helped, the owner of a Wendy’s franchise in Omaha, Nebraska plans to cut 300 employees’ hours to part-time to avoid providing them health care coverage. By moving workers to part-time status in order to avoid paying for their health benefits, the Wendy’s franchise would shift the costs of insurance coverage onto hundreds of employees: The company has announced that all non-management positions will have their hours reduced to 28 a week. Gary Burdette, vice president of operations for the local franchise, says the cuts are coming because the new Affordable Health Care Act requires employers to offer health insurance to employees working 32-38 hours a week. Under the current law they are not considered full time and that as a small business owner, he can’t afford to stay in operation and pay for everyone’s health insurance.  But anecdotal evidence suggests this strategy may backfire on the Omaha Wendy’s operations. This fall, Denny’s quickly distanced itself from a franchisee’s similar ploy, while Darden Restaurants saw a sharp 37 percent drop in profit after threatening to cut workers to part-time.

    NP’s Care Equal to Doc’s, Review Finds - Expanding the scope of practice for nurse practitioners (NPs) would not diminish quality of care, a literature review found. In fact, states struggling to meet the growing demand for primary care services should expand scope-of-practice laws for NPs and other advanced practice registered nurses (APRNs), the National Governors Association said in its review of the issue. The group looked at 22 articles, including 10 published since a 2008 review by the Colorado Healthcare Institute, which the current study sought to expand upon. "Most studies showed that NP-provided care is comparable to physician-provided care on several process and outcome measures," the report, The Role of Nurse Practitioners in Meeting Increasing Demand for Primary Care, released late last week, stated. "Moreover, the studies suggest that NPs may provide improved access to care."

    Chart of the day: U.S. health spending by service and age - From Deloitte and h/t Bruce Bartlett (click to enlarge):

    Health-Cost Pause Nears End - U.S. health-care spending grew at a record low pace for a third consecutive year in 2011, according to federal figures released Monday, but signs are emerging that the slow growth may not last. National health expenditures rose 3.9% in 2011, the same rate as in 2009 and 2010, when people cut back on their use of medical services amid the economic downturn. The figures were the slowest growth in the 52 years that government actuaries have tracked such spending. But data published Monday also showed that the amount spent to treat individuals, as opposed to spending on administration and insurance premiums, began to rise in 2011, signaling that cutbacks in health spending hadn't become permanent. Bruce Stowell examines Robert Busch in Grants Pass, Ore. Spending has risen for such Medicare patients. Growth in spending on doctors' visits and prescription drugs rose in 2011, while hospital spending continued to slow, the figures showed. Government actuaries said they believed those changes reflected people regaining health coverage through their jobs. In 2014, Americans are expected to use more health services when millions gain health insurance and greater access to medical care as part of the federal health overhaul. The U.S. figures suggest there had been little impact on spending as a result of the law in 2011, when few of its provisions had taken effect.

    Unpaid Hospital Bills Rise To $41 Billion Annually - Amid a still soft economy and high unemployment, hospitals uncompensated care costs — medical care for which no payment is received — jumped nearly five percent to $41.1 billion in 2011, according to a new report from the American Hospital Association.. The 2012 report comes even as the number of hospitals fell slightly to 4,973 in 2011 from 4,985 in 2010 amid ongoing mergers, sales, closures and related consolidation. Their uncompensated care costs, which include charity care and other expenses they eat when patients cannot pay their bills, increased to $41.1 billion from $39.3 billion in 2010. The costs have nearly doubled since 2000, the AHA report said. Hospitals will eventually see their costs of uncompensated care fall when broader health care coverage under the Affordable Care Act kicks in next year. In January 2014, private insurance companies will be providing subsidized coverage to individuals and small businesses via state or federally-regulated exchanges established under the health law. In addition, most states will be participating in expansions of the Medicaid health insurance programs for the poor.

    Health Insurers Raise Some Rates by Double Digits - Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers. Particularly vulnerable to the high rates are small businesses and people who do not have employer-provided insurance and must buy it on their own. In California, Aetna is proposing rate increases of as much as 22 percent, Anthem Blue Cross 26 percent and Blue Shield of California 20 percent for some of those policy holders, according to the insurers’ filings with the state for 2013. These rate requests are all the more striking after a 39 percent rise sought by Anthem Blue Cross in 2010 helped give impetus to the law, known as the Affordable Care Act, which was passed the same year and will not be fully in effect until 2014. In other states, like Florida and Ohio, insurers have been able to raise rates by at least 20 percent for some policy holders. The rate increases can amount to several hundred dollars a month. The proposed increases compare with about 4 percent for families with employer-based policies.

    Here is your Obamacare, America: Health insurers raise rates by double digits: One of the primary drivers behind President Obama's quest for Uncle Sam to take over one-seventh of the U.S. economy by engulfing the healthcare industry was that such a huge usurpation of the private sector would at least lead to lower insurance premiums for Americans. Like so many other aspects of "Obamacare" over which the public was hoodwinked, now comes news that the promise of lower premiums will be, shall we say, elusive, for millions of consumers. "Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration's health care law was to stem the rapid rise in insurance costs," The New York Times reported recently. Who are the most vulnerable to the increases? That would be small businesses and people who don't otherwise have employer-provided insurance and who will be forced, thanks to a summer ruling by the U.S. Supreme Court upholding as constitutional the law's individual mandate requiring everyone - and every business with more than a few employees - to buy coverage. In California, insurance giants Aetna, Anthem Blue Cross and Blue Shield are proposing to hike rates by 22, 26 and 20 percent respectively for some policy holders, according to the companies' filings with the state for 2013. In other states such as Ohio and Florida, insurance companies have managed increases of at least 20 percent for some policy holders - increases which can amount to as much as several hundred dollars per month.

    Health Care and Pursuit of Profit Make a Poor Mix - Patients entering church-affiliated nonprofit homes were prescribed drugs roughly as often as those entering profit-making “proprietary” institutions. But patients in proprietary homes received, on average, more than four times the dose of patients at nonprofits. Writing about his colleagues’ research the economist Burton Weisbrod provided a straightforward explanation: “differences in the pursuit of profit.” Sedatives are cheap, Mr. Weisbrod noted. “Less expensive than, say, giving special attention to more active patients who need to be kept busy.” This behavior was hardly surprising. Hospitals run for profit are also less likely than nonprofit and government-run institutions to offer services like home health care and psychiatric emergency care, which are not as profitable as open-heart surgery. A shareholder might even applaud the creativity with which profit-seeking institutions go about seeking profit. But the consequences of this pursuit might not be so great for other stakeholders in the system — patients, for instance. One study found that patients’ mortality rates spiked when nonprofit hospitals switched to become profit-making, and their staff levels declined. These profit-maximizing tactics point to a troubling conflict of interest that goes beyond the private delivery of health care. They raise a broader, more important question: How much should we rely on the private sector to satisfy broad social needs?

    Megan McArdle sows confusion on health spending - At the Daily Beast, Megan McArdle pooh-poohs the conventional expert wisdom that health care cost growth forms the bulk of our nation's long-run deficit problem. Most of her article is gravely mistaken. She makes (at least) three major errors. First, McArdle posts the following pie chart: About which she writes: As you can see, healthcare is not anything close to our largest spending category; the largest expenditure is on straight transfers to various folks, most of them older. It's hard to interpret this statement as other than intentionally, deliberately ingenuous. Look at the chart. The "health" slice comprises 10%. The "Medicare" slice comprises 13%. Together they sum to 23%, which is bigger than any other item in the pie chart. Did McArdle just accidentally omit Medicare from her definition of "healthcare" spending? Did she overlook the small words on the pie chart, and assume that the "Health" slice contained Medicare? No, because in the very same sentence, she refers to "straight transfers to various folks, most of them older." She therefore knows that Medicare is on the chart. She has deliberately chosen not to call it "healthcare" spending. How can this be anything other than intentionally disingenuous?

    Americans Die Younger Than Peers - Americans die younger and have more illnesses and accidents on average than people in other high-income countries—even wealthier, insured, college-educated Americans, a report said Wednesday. The study by the federally sponsored National Research Council and Institute of Medicine found the U.S. near the bottom of 17 affluent countries for life expectancy, with high rates of obesity and diabetes, heart disease, chronic lung disease and arthritis, as well as infant mortality, injuries, homicides, teen pregnancy, drug deaths and sexually transmitted diseases. "The [U.S.] health disadvantage is pervasive—it affects all age groups up to age 75 and is observed for multiple diseases, biological and behavioral risk factors, and injuries," said the report's authors, who are public-health and medicine academics recruited by the government panels. The shorter life expectancy for Americans largely was attributed to high mortality for men under age 50, from car crashes, accidents and violence. But the report also said U.S. women's gains in life expectancy had been lagging behind other well-off countries.

    Americans Far Less Healthy, Die Younger Than Global Peers, Study Finds | PBS NewsHour: Americans die sooner and experience unhealthier lives than residents in other high-income countries even though the United States spends far more on health care, according to  a report released Wednesday by the National Academy of Sciences. This health disadvantage exists across all ages and demographics. The report -- commissioned by the National Institutes of Health and conducted by the National Research Council and the Institute of Medicine -- compares health statistics in 16 high-income democracies in western Europe, as well as Australia, Canada and Japan. In many cases, the U.S. ranks last. "The U.S. is doing worse than these others countries both in terms of life expectancy and health throughout their entire lives. This is a pervasive problem from birth to old age; it affects everyone and has been a long standing problem," Dr. Steven H. Woolf, chair of the committee that wrote the report, told PBS NewsHour. The U.S. has been falling behind other high-income countries since 1980, with the trend showing continuing deterioration regardless of administration or social reform policies. "When asking why this trend is happening, it cannot be blamed on a particular administration or social reform policies. All we do know is that our life expectancy is shorter and we have poorer health throughout our lifetimes," Woolf said. Of the 17 countries analyzed, the U.S. ranks last in life expectancy and overall health care coverage.

    Live Free and Die: Americans' Health Even Worse Than You Thought - A new and newly comprehensive study finds Americans have poorer health and shorter lives than 16 other developed countries, ranking dead (sorry) last at all stages of life. Showing that if guns don't get you, fries will, we die at stunningly higher rates from violence - homicide to car accidents - as well as alcohol and drugs, heart disease, lung disease, obesity, and diabetes. We know many of the solutions: affordable health insurance, education, safety net, fewer guns. Also the problems: obstruction from the right.

    David Brooks Pushes His Protectionist Line on Health Care Again - David Brooks is very upset about the possibility that the cost of Medicare will prevent the United States from being as large a military force in the world in the future as it has been in the past. He tells readers: "Medicare spending is set to nearly double over the next decade. This is the crucial element driving all federal spending over the next few decades and pushing federal debt to about 250 percent of G.D.P. in 30 years. ... So far, defense budgets have not been squeezed by the Medicare vice. But that is about to change. Oswald Spengler didn’t get much right, but he was certainly correct when he told European leaders that they could either be global military powers or pay for their welfare states, but they couldn’t do both." Of course fans of arithmetic everywhere know that the basis for these projections is the assumption that per person health cares costs, which are already more than twice the average for other wealthy countries, will increase to three or four times the cost in other countries. This means that our health care system will become ever more dysfunctional. While that is of course possible, the problem is not the American people getting what they want, as Brooks asserts, it is the health care industry using its political power to extort incredible sums from the rest of us. If our health care costs were in line with costs in other countries, we would be looking at budget surpluses, not deficits.

    Flu season has Boston declaring health emergency - Boston declared a public health emergency Wednesday as flu season struck in earnest and the state reported 18 flu-related deaths so far. The city is working with health care centers to offer free flu vaccines and hopes to set up places where people can get vaccinated. The city said there have been four flu-related deaths, all elderly residents, since the unofficial start of the flu season Oct. 1. ‘‘The best thing you can do to protect yourself and your family is to get the flu shot,’’ said Boston Mayor Thomas Menino. The city was experiencing its worst flu season since at least 2009, Menino said, with about 700 confirmed cases of the flu, compared with 70 all of last season. Massachusetts was one of 29 states reporting high levels of ‘‘influenza-like illness,’’ according to the most recent weekly flu advisory issued by the Centers for Disease Control and Prevention. The CDC said the proportion of people visiting health care providers with flu-like symptoms climbed from 2.8 percent to 5.6 percent in four weeks. By contrast, the rate peaked at only 2.2 percent during the relatively mild 2011-12 flu season.

    Flu Widespread, Leading a Range of Winter’s Ills -  The country is in the grip of three emerging flu or flulike epidemics: an early start to the annual flu season with an unusually aggressive virus, a surge in a new type of norovirus, and the worst whooping cough outbreak in 60 years. And these are all developing amid the normal winter highs for the many viruses that cause symptoms on the “colds and flu” spectrum. Influenza is widespread, and causing local crises. On Wednesday, Boston’s mayor declared a public health emergency as cases flooded hospital emergency rooms. Google’s national flu trend maps, which track flu-related searches, are almost solid red (for “intense activity”) and the Centers for Disease Control and Prevention’s weekly FluView maps, which track confirmed cases, are nearly solid brown (for “widespread activity”).

    Nasty Flu Season Could Lead to Sickly Growth - Please wash your hands before reading this. The Centers for Disease Control and Prevention has labeled the 2013 flu season as one of the worst in the last 10 years — and it hasn’t even peaked yet. The virus has been reported in 41 states — with 29 reporting high or “severe” levels. Public officials in Boston declared a health emergency Wednesday as flu sufferers flooded emergency rooms. A major flu outbreak could be an additional drag on first-quarter growth. Lost work time, canceled meetings and slower productivity growth can combine to sends chills through an economy already hobbled by higher taxes. A study by the U.S. Bureau of Labor Statistics looked at employee absences and found, not surprisingly, that illness-related absences spike during the winter flu season. (Sick time included time off for a worker’s own illness or to take care of a family member.) For the six years studied, sickness-related absences ran 32% higher during the flu season than for the rest of the year. The highest number of workers absent was 3.3 million in February 2008, coinciding with 2007-08 flu season that was more severe than in past seasons. While 3.3 million may not seem large in a labor force of 156 million, the number far surpasses the number of workers who stay home because of bad weather. For instance, the severe January 1996 blizzard caused only 1.85 million employees to miss work.

    During The Worst Flu Season In A Decade, Workers Across The Country Can’t Stay Home Sick: The 2013 flu season is in full swing, and according to the Centers for Disease Control, it will be the worst in ten years. The New York Times reported that “the country is in the grip of three emerging flu or flulike epidemics: an early start to the annual flu season with an unusually aggressive virus, a surge in a new type of norovirus, and the worst whooping cough outbreak in 60 years.” The CDC recommends that those who experience flu-like symptoms “should stay home and avoid contact with other people except to get medical care.” However, for a huge number of American workers, that option doesn’t exist due to a lack of paid sick days. 40 percent of private sector workers and a whopping 80 percent of low-income workers do not have a single paid sick day. One in five workers reports losing their job or being threatened with dismissal for wanting to take time off while sick. This problem is especially acute in the food industry, with its high potential for spreading disease. 79 percent of food workers say they have no paid sick time.

    Hourly Wage Linked With Hypertension Risk: Study - The amount you make per hour could play a role in your heart health, a new study suggests. Researchers from the University of California, Davis, found an association between earning low hourly wages and an increased hypertension risk, particularly among two groups of people: younger adults between 25 and 44, and women. Hypertension increases risk of deadly conditions like stroke and heart attack. The findings, published in the European Journal of Public Health, were surprising since these two groups are "not typically associated with hypertension, which is more often linked with being older and male,"  "Our outcome shows that women and younger employees working at the lowest pay scales should be screened regularly for hypertension as well." The research was based on data from the Panel Study of Income Dynamics, which included employment, wages (calculated by taking the yearly income and dividing it by hours worked) and health information from 5,651 households in the United States.  Researchers didn't use data from people who had high blood pressure in the first year of each time period included in the study. The researchers found that the lower the hourly wage, the higher the risk of hypertension was. They also found that if the hourly wage were to be doubled, the high blood pressure risk would decrease by 16 percent. The effect was even more pronounced in younger people -- where it was linked with a 25 to 30 percent lower risk -- and women -- where it was linked with a 30 to 35 percent lower risk.

    Photo: Evolution Less Accepted in U.S. Than Other Western Countries, Study Finds = This chart depicts the public acceptance of evolution theory in 34 countries in 2005. Adults were asked to respond to the statement: "Human beings, as we know them, developed from earlier species of animals." The percentage of respondents who believed this to be true is marked in blue; those who believed it to be false, in red; and those who were not sure, in yellow. A study of several such surveys taken since 1985 has found that the United States ranks next to last in acceptance of evolution theory among nations polled. Researchers point out that the number of Americans who are uncertain about the theory's validity has increased over the past 20 years.

    An Astonishing New Argument for Why Violent Crime Rates Have Dropped - It seemed, at first, preposterous. The hypothesis was so exotic that I laughed. The rise and fall of violent crime during the second half of the 20th century and first years of the 21st were caused, it proposed, not by changes in policing or imprisonment, single parenthood, recession, crack cocaine or the legalisation of abortion, but mainly by … lead. I don’t mean bullets. The crime waves that afflicted many parts of the world and then, against all predictions, collapsed, were ascribed, in an article published by Mother Jones last week, to the rise and fall in the use of lead-based paint and leaded petrol(1). It’s ridiculous – until you see the evidence. Studies between cities, states and nations show that the rise and fall in crime follows, with a roughly 20-year lag, the rise and fall in the exposure of infants to trace quantities of lead(2,3,4). But all that gives us is correlation: an association that could be coincidental. The Mother Jones article, based on several scientific papers, claimed causation.

    How Americans Stack Up In Dying From Violence, War, Suicide, And Accidents - Now some new fodder for the gun-control debate that the horrid events in Connecticut suddenly stirred into a frenzy, though it had been snoozing through the daily drumbeat of murders in Oakland, CA, a few miles across the Bay from me, or in Richmond to the north, or really in any other city. The fodder is inconvenient, however. For both sides of the debate. The Institute of Medicine and the National Research Council released a troubling book-length report, U.S. Health in International Perspective: Shorter Lives, Poorer Health, that dug deeply into various studies and statistics of mortality for the year 2008, and came up with some uncomfortable conclusions—uncomfortable particularly if you’re male and under fifty: not only do Americans live less long than their counterparts in the developed world, but much of the damage happens at a younger age (more of that in the next post). So the first thing I did was check out the category “deaths from intentional injuries” and its three subcategories, “self-inflicted injuries,” “war,” and “violence.” Grisly statistics, all of them. As expected, the US has the most violence among the 17 “peer” countries in the study with 6.5 deaths per 100,000. Almost three times the rate of Finland, the next most violent country in the group with 2.2 deaths per 100,000 people, and over 15 times the rate of Japan with 0.43 deaths per 100,000 people. The third most violent country, Canada (1.6), is practically a bastion of safety for those Americans who make it across the border.

    Minnesotans pay a price for crop fertilizer at faucet - She's the wife of a well digger who can't find good water for his own family. Like one out of three wells in Dakota County, hers is so contaminated with nitrates she won't let anyone drink from it -- especially her 8-year-old granddaughter. Most likely it comes from nitrogen used as fertilizer on the cornfields surrounding her home. "Nitrogen was a great thing for the family farm," Carlson said. "But I am paying the price." Thanks to a combination of geology and some of the country's richest farmland, thousands of Minnesotans face elevated levels of nitrates in their drinking water. It's a health risk -- mostly for infants and pregnant women -- and a significant economic burden. Hastings is one of nearly a dozen Minnesota communities that has spent millions to clean the toxin from drinking water. Well owners like the Carlsons have three choices: Drink it, which some do. Pay thousands for a new well. Or install expensive treatment systems. The prairie that once protected groundwater is long gone from Dakota County and from most of Minnesota and the Midwest. That loss lays bare what one leading agricultural economist calls the "wicked problem" of global nitrogen pollution.

    Almost Half of all Food Produced is Thrown Away - Between 30 and 50 percent of all food produced globally, equivalent to two billion tons, is thrown away each year according to a recent report written by the UK-based Institution of Mechanical Engineers (IME), titled ‘Global Food; Waste Not, Want Not’. The Guardian states that overly-cautious sell by dates, buy one get one free deals, and an obsession with only consuming fruit and vegetables that look perfect are some of the main reasons for this colossal waste of, not only food, but also the water, energy, and arable land used in the creation of the food.  The two billion tons of food wasted each year use 550 billion cubic metres of water to produce, with meat requiring 20-50 times more water than vegetables. As the global population increases to nine and a half billion by 2075, will the lack of available water to produce enough meat lead the majority to become vegetarians?

    Grocery Bag Bans and Foodborne Illness - Recently, many jurisdictions have implemented bans or imposed taxes upon plastic grocery bags on environmental grounds. San Francisco County was the first major US jurisdiction to enact such a regulation, implementing a ban in 2007. There is evidence, however, that reusable grocery bags, a common substitute for plastic bags, contain potentially harmful bacteria. We examine emergency room admissions related to these bacteria in the wake of the San Francisco ban. We find that ER visits spiked when the ban went into effect. Relative to other counties, ER admissions increase by at least one fourth, and deaths exhibit a similar increase

    The Human and Economic Devastation of Leaded Gas: How the Visible Hand Saved the Day - With all the well-deserved attention going to Kevin Drum’s excellent Mother Jones article on crime rates and lead in gasoline (more here), I thought it worth revisiting my post on the subject from a year and a half ago, which was itself prompted by Angry Bear’s own inimitable Robert Waldmann. Government Gets the Lead Out, Crime Plummets In which I said: We’re seeing it in spades: the history of tetraethyl lead (read it and weep) is a tragic textbook case of market/profit interests eviscerating the commons and making us all (including the rich) far worse off, in the name of “the invisible hand” making us all better off. That ebil gubmint man with his heavy-handed regulations impinging on honest businesspeople (who are just trying to make a buck, for everyone’s benefit) sure did have a pernicious effect, huh? I can only imagine how many trillions of dollars that lead-driven crime wave has cost our country, and how many tens of millions of lives that lead poisoning has destroyed. But don’t worry: you can rely on profit-making companies to “allocate our resources most efficiently.” Trust me on this.

    Cancer Risk Linked to Oil Sands in Canada - The development of Alberta’s oil sands has increased levels of cancer-causing compounds in surrounding lakes well beyond natural levels, Canadian researchers reported in a study released on Monday. And they said the contamination covered a wider area than had previously been believed. For the study, financed by the Canadian government, the researchers set out to develop a historical record of the contamination, analyzing sediment dating back about 50 years from six small and shallow lakes north of Fort McMurray, Alberta, the center of the oil sands industry. Layers of the sediment were tested for deposits of polycyclic aromatic hydrocarbons, or PAHs, groups of chemicals associated with oil that in many cases have been found to cause cancer in humans after long-term exposure. “One of the biggest challenges is that we lacked long-term data,” said John P. Smol, the paper’s lead author and a professor of biology at Queen’s University in Kingston, Ontario. “So some in industry have been saying that the pollution in the tar sands is natural, it’s always been there.” The researchers found that to the contrary, the levels of those deposits have been steadily rising since large-scale oil sands production began in 1978. Samples from one test site, the paper said, now show 2.5 to 23 times more PAHs in current sediment than in layers dating back to around 1960. “We’re not saying these are poisonous ponds,” Professor Smol said. “But it’s going to get worse. It’s not too late but the trend is not looking good.” He said that the wilderness lakes studied by the group were now contaminated as much as lakes in urban centers.

    Gregoire emerges as top contender to boss EPA - President Obama is about to nominate outgoing Washington Gov. Chris Gregoire as the new head of the U.S. Environmental Protection Agency, according to a very private prediction from a very senior source in Washington’s congressional delegation. Gregoire was director of Washington’s Department of Ecology before being elected Attorney General in 1992. The future governor made her reputation by negotiating a Hanford nuclear waste cleanup agreement with the first Bush administration, which has held up in court through efforts by the feds’ to wiggle out of their commitments.The administration’s top environmental post became vacant with the recent resignation of EPA administrator Lisa Jackson. A former boss of New Jersey’s environmental agency, Jackson enjoyed an up-and-down ride in the Obama administration. The EPA has begun to set emission standards for power plants that emit greenhouse gases, and Jackson was a player in setting new standards that will double the mileage efficiency of new cars and SUV’s — arguably the administration’s chief environmental accomplishment.

    New York Times Dismantles Its Environment Desk - The New York Times will close its environment desk in the next few weeks and assign its seven reporters and two editors to other departments. The positions of environment editor and deputy environment editor are being eliminated. No decision has been made about the fate of the Green Blog, which is edited from the environment desk. "It wasn't a decision we made lightly,"  coverage of the environment is what separates the New York Times from other papers. We devote a lot of resources to it, now more than ever. We have not lost any desire for environmental coverage. This is purely a structural matter." On Dec. 3 the Times announced that it was offering buyouts to 30 newsroom managers in an effort to reduce newsroom expenses. But Baquet said the decision to dismantle the environment desk wasn't linked to budgetary concerns and that no one is expected to lose his or her job. Instead, Baquet said the change was prompted by the shifting interdisciplinary landscape of news reporting. When the desk was created in early 2009, the environmental beat was largely seen as "singular and isolated," he said. It was pre-fracking and pre-economic collapse. But today, environmental stories are "partly business, economic, national or local, among other subjects," . "They are more complex. We need to have people working on the different desks that can cover different parts of the story."

    In Fields and Markets, Guatemalans Feel Squeeze of Biofuel Demand - In the tiny tortillerias of this city, people complain ceaselessly about the high price of corn. Just three years ago, one quetzal — about 15 cents — bought eight tortillas; today it buys only four. And eggs have tripled in price because chickens eat corn feed. Meanwhile, in rural areas, subsistence farmers struggle to find a place to sow their seeds. “We’re farming here because there is no other land, and I have to feed my family,” said Mr. Alvarado, pointing to his sons Alejandro and José, who are 4 and 6 but appear to be much younger, a sign of chronic malnutrition. Recent laws in the United States and Europe that mandate the increasing use of biofuel in cars have had far-flung ripple effects, economists say, as land once devoted to growing food for humans is now sometimes more profitably used for churning out vehicle fuel. In a globalized world, the expansion of the biofuels industry has contributed to spikes in food prices and a shortage of land for food-based agriculture in poor corners of Asia, Africa and Latin America because the raw material is grown wherever it is cheapest. Nowhere, perhaps, is that squeeze more obvious than in Guatemala, which is “getting hit from both sides of the Atlantic,” in its fields and at its markets

    Why Bark Beetles are Chewing Through U.S. Forests - The conifer forests of the North American west have been under a massive assault over the past decade by bark beetles: one species alone, the mountain pine beetle, has killed more than 70,000 square miles’ worth of trees, equivalent to the area of Washington State, and two recent studies have shed some light on how climate change is helping fuel the assault, and what’s likely to happen in a world that continues to warm.The first, published in the journal Ecology, shows how intense drought can bring on a population explosion in the voracious insects — and how this creates a vicious cycle of tree-killing even when drought subsides. The second, published in Proceedings of the National Academy of Sciences (PNAS) reveals that warming lets beetles move to higher elevations, where they’re encountering trees that are unusually susceptible to infestations.

    Kansas loses 30% of winter wheat crop to drought - Weather is a complex, multi-tiered phenomenon, and no event can be tied to a single cause. But we do know that climate change likely increases the incidence and severity of droughts. Last summer's widespread drought, which took big bites out of the US corn and soy crop, has lingered through the winter in large swaths of the country—and is now stunting winter wheat, which is planted in the fall and is harvested in early summer.  Winter wheat is responsible for 70% of the annual US wheat crop. "About 61% of the country is mired in a dry spell that the government says will last at least until March in states growing the most winter wheat," Bloomberg reports. In Kansas, the heartland of US wheat production, the problem is particularly bad—the entire state is in drought. Winter wheat goes dormant during the winter months before resuming growth in the spring, so it's still too early to say what the effect will be on crop yields. But in some places, damage is already severe. Rosie Meier, a grain merchandieser at the Great Bend Co-op in Great Bend, Kansas, told Bloomberg, "About 30% of the winter wheat in central Kansas has already failed, with further damage likely unless there is rain."

    Kansas drought isn't easing up; forecasters optimistic for later in the year - The intense drought that crippled much of the growing season for numerous states in the nation’s mid-section in 2012 is showing little sign of easing early in the new year, weather officials say. But some Kansas forecasters retain hope that enough moisture will fall to provide for a decent winter wheat crop in 2013. “I’m reasonably optimistic,” AccuWeather vice president Mike Smith said in an e-mail response to questions from The Eagle. Long-range forecasts offered by computer models suggest precipitation levels will be normal from February through June, he said. “That wouldn’t break the drought but it would give enough moisture for the wheat crop,” Smith said. Smith said the main reason for his optimism is that the high-pressure dome that camped out over the heartland for most of 2012 shifted west – well out into the Pacific Ocean – in early December and shows no signs of moving.

    Extreme drought prompts statewide disaster declaration in Oklahoma - Federal officials declared a disaster area Wednesday for the entire state of Oklahoma, along with parts of 13 other drought-stricken states stretching almost coast to coast. In its first disaster declaration of 2013, the U.S. Department of Agriculture made low-interest emergency loans available to farmers in 597 counties nationwide, including all 77 counties in Oklahoma. Suffering from severe to extreme or even exceptional drought conditions, the affected counties reach from South Carolina to eastern California. But Oklahoma, Kansas and western Texas make up the hardest hit area. "The drought situation here in our state is proving to be a challenge for all sectors of agriculture," said Jim Reese, Oklahoma secretary of agriculture. "While we're starting 2013 with drought conditions, we're hoping for more favorable weather this year." To qualify for disaster relief, counties had to have at least eight straight weeks of severe drought. But parts of Oklahoma have been in a drought for the past 2 1/2 years.

    USDA declares drought disaster in much of Wheat Belt (Reuters) - The government declared much of the central and southern Wheat Belt a natural disaster area on Wednesday due to persistent drought that imperils this year's winter wheat harvest. In its first disaster declaration of the new year, the Agriculture Department made growers in large portions of four major wheat-growing states - Kansas, Colorado, Oklahoma and Texas - eligible for low-interest emergency loans. The four states grew one-third of the U.S. wheat crop last year. Kansas was the No. 1 state at 382 million bushels. In all, USDA listed 597 counties in 14 states as natural disaster areas. They suffered from at least severe to in some instances extraordinary drought for eight weeks in a row to qualify for the designation. More than half of them, 351 counties, were in the Wheat Belt, running through the Plains from Texas to North Dakota. All but one of Oklahoma's 77 counties were termed disaster areas along with 88 of Kansas' 108 counties, 30 of Colorado's 64 counties and 157 of Texas' 254 counties. Growers are certain to collect record insurance payments for losses on their 2012 crops, hit by the worst drought in half a century. Indemnities totaled $10.7 billion at the start of this week, up $670 million from the preceding week and just shy of the record $10.8 billion paid on 2011 losses.

    Hay — the Stuff Horses Eat — Is the Latest Weird Item Targeted by Thieves -  Never mind hunting for a needle in a haystack — what if you’re hunting for the actual haystack? Last summer’s drought across the nation’s agricultural belt has led to a spate of hay thefts as farmers face record prices for this crucial livestock feed.  Industry publication Farm Progress reports that hay that should have been worth around $200 sold for record highs of around $320 a ton at auction. It’s just supply and demand, auction manager Dale Leslein told the magazine. Oklahoma is screaming for hay… Missouri is running short; Nebraska is very tight as is Iowa, Wisconsin, Illinois, Indiana, Tennessee and Kentucky. They’re all running out of hay. Some thieves will just sneak away with a couple of bales and hope the owner doesn’t notice them missing, authorities in Missouri say. Others are more brazen: The Denver Post says one group of criminals made off with $5,000 worth of hay in a front-end loader back in September.

    The U.S. Will Again Produce More of the Nitrogen Fertilizer it Uses for Agriculture  - Since fracking technology in this nation advanced beginning in about 2006, the U.S. energy situation has changed so rapidly that markets have yet to adapt. So far, the larger supply of natural gas is increasingly being used to replace coal for electricity generation and it has reduced energy costs for industrial and residential consumers.  Current levels of natural gas production help promote industrial manufacturing because of the competitive edge given to U.S. industry as compared to regions of the world which have much higher energy prices. The recent glut in natural gas, demonstrated by its average 2012 price (below) is expected to even out going forward as its supply and demand balance equilibrates with the cost of production. Consequently, coal use for electricity generation is expected to gain back a few percentage points over the next few years, according to the EIA.While there are skeptics who think the current rate of natural gas production through fracking is unsustainable, others expect it to continue for multiple decades. Though increasing the domestic use of natural gas (or exporting LNG) would help to ensure its economic viability, ethical and environmental challenges remain related to its use and the contamination of water and land in fracking areas.

    Desert groundwater dirtier than most - A new water quality study from the U.S. Geological Survey released Wednesday found arsenic, boron and other inorganic elements in 42 percent of the Coachella Valley’s aquifers. The valley figures were part of larger study conducted between 2006 and 2008, showing higher levels of eight naturally occurring elements in aquifers across the Southern California desert compared to the rest of the state. Federal scientists only looked at the presence of the contaminants in raw, untreated groundwater and did not analyze tap water. Water agencies typically treat groundwater supplies to produce drinking water and to comply with health standards. The USGS study found trace elements in high concentrations in 35 percent of groundwater used for public supply in the desert aquifers, compared with 10 percent to 25 percent elsewhere in the state. The study found contamination levels ranging from 22 percent in Owens Valley in Inyo County to 62 percent in Indian Wells Valley in Kern County.

    Drought could reverse flow of Chicago River- Water levels on Lake Michigan are the lowest in recorded history. If the level continues to drop, the Chicago River could reverse itself and send untreated sewage into Lake Michigan. "We've been monitoring since 1918 and this is the lowest Lake Michigan and Lake Huron have been," Roy Deda, U.S. Army Corps of Engineers, said. "There would be some potential water quality impact to the Great Lakes if we were to continue to lock vessels when the river is higher than the lake." "Our river is 70-percent sewage. I think we need to recognize that. This is an open sewer. It depends upon gravity to go away from us. If that gravity does not work with the lake going down, it goes the other way, and we have done nothing to deal with the contaminants that we need to actually invest in fixing," Henry Henderson, Natural Resources Defense Council The Army Corps of Engineers said it is carefully monitoring the situation, and if lake levels continue to drop, they may have to modify how they operate the locks to limit the amount of water that goes into the lake, which would have an impact on recreational boats and barge traffic.

    Drought makes stretch of river 'ghost town': The Army Corps of Engineers and Coast Guard are working to keep the Mississippi's navigation channel, newly shallow and narrow because of the drought, open with dredging, the removal of rock formations and the release of water from reservoirs and lakes upstream. The commercial shipping industry has warned since November that if low water makes moving cargo too dangerous, a 200-mile stretch of the Mississippi between St. Louis and Cairo, Ill., would be effectively closed. If that happens, says Debra Colbert of the Waterways Council, which represents shippers and ports, billions of dollars' worth of goods and thousands of jobs would be affected, rattling the entire U.S. economy. The river still can accommodate the 9-foot drafts — the depth of boats below the water's surface — needed for most towboats and barges. Whether the stretch will remain open depends on the Army Corps of Engineers' management of water flow and the whims of the weather. The corps "is confident they can maintain the channel deeper than 9 feet up until late January," says Coast Guard spokesman Lt. Colin Fogarty. "Without a crystal ball, it's really too hard to look beyond a two- to three-week period." Shippers say the threat of closure is hurting business

    Barge Owners Say Drought May Wipe Out Mississippi Gains -  Barge operators on the Mississippi River say the worst drought in 80 years may put at risk gains from emergency dredging and rock removal aimed at keeping the nation’s busiest waterway open at least for this month. “The only way that we could maintain a navigable channel would be releases from the Missouri River system” if Mississippi conditions worsen. That option is “probably not very likely,” he said later in an interview.Shipping company officials joined the U.S. Coast Guard, the Army Corps of Engineers and lawmakers including Senator Richard Durbin, an Illinois Democrat, yesterday in Thebes, a hamlet on the eastern bank of the Mississippi where rocks pose the greatest hazard to river traffic. Emergency dredging and excavation work will keep the river navigable for most towboats at least through this month, Corps of Engineers officials said. The Mississippi River in a typical January carries as much as $2.8 billion in cargo, including grain, coal and crude oil. The worst drought since the 1930s has exposed submerged rock formations and shrunk the river to levels that may become too shallow for navigation.

    NOAA: 2012 Warmest & 2nd-Most Extreme Year On Record in U.S.: It’s official: 2012 was the warmest year on record in the lower 48 states, as the country experienced blistering spring and summer heat, tinderbox fire weather conditions amid a widespread drought, and one of the worst storms to ever strike the Mid-Atlantic and Northeast. According to the National Oceanic and Atmospheric Administration (NOAA), 2012 had an average temperature of 55.3°F, which eclipsed 1998, the previous record holder, by 1°F. That was just off Climate Central’s calculation in mid-December, which projected an expected value of 55.34°F, based on historical data. The 1°F difference from 1998 is an unusually large margin, considering that annual temperature records are typically broken by just tenths of a degree Fahrenheit. In fact, the entire range between the coldest year on record, which occurred in 1917, and the previous record warm year of 1998 was just 4.2°F.

    2012 Saw 362 All-Time Record High Temperatures In U.S. But Zero All-Time Record Lows - Describing how off the charts our weather has become gets harder and harder. Fortunately, we have wunderground historian Christopher Burton to put things in perspective. He tallies the data from NOAA’s National Climatic Data Center in his recap of “the warmest calendar year on record for the continental U.S. according to NCDC data going back to 1895″: A chart of the total number of NCDC sites that measured daily and/or monthly record high and low temperatures. There are about 5,500 of these sites in the NCDC database all together and it is important to note that the first two columns of this table are not all-time record highs or all-time record lows but daily and monthly records. So, for instance, a single site may have broken dozens of daily records over the course of the year. The 5th and 6th columns are for all-time record highs and lows: a total of 362 such heat records and 0 such cold records occurred. The ratio of daily record highs to daily record lows (about 5 to 1) were the greatest for any year in NCDC records.

    2012 Was Hottest Year Ever in U.S. -   The numbers are in: 2012, the year of a surreal March heat wave, a severe drought in the Corn Belt and a huge storm that caused broad devastation in the Middle Atlantic States, turns out to have been the hottest year ever recorded in the contiguous United States.  How hot was it? The temperature differences between years are usually measured in fractions of a degree, but last year’s 55.3 degree average demolished the previous record, set in 1998, by a full degree Fahrenheit. If that does not sound sufficiently impressive, consider that 34,008 daily high records were set at weather stations across the country, compared with only 6,664 record lows, according to a count maintained by the Weather Channel meteorologist Guy Walton, using federal temperature records. That ratio, which was roughly in balance as recently as the 1970s, has been out of whack for decades as the country has warmed, but never by as much as it was last year. “The heat was remarkable,” said Jake Crouch, a scientist with the National Climatic Data Center in Asheville, N.C., which released the official climate compilation on Tuesday. “It was prolonged. That we beat the record by one degree is quite a big deal.” Scientists said that natural variability almost certainly played a role in last year’s extreme heat and drought. But many of them expressed doubt that such a striking new record would have been set without the backdrop of global warming caused by the human release of greenhouse gases. And they warned that 2012 was probably a foretaste of things to come, as continuing warming makes heat extremes more likely.

    It's Getting Hot In Here: 2012 Hottest Year On Record - 2012 was a historic year for extreme weather that included drought, wildfires, hurricanes and storms. But, as NOAA reported yesterday, 2012 marked the warmest year on record for the contiguous United States. The average temperature for 2012 was 55.3°F, 3.2°F above the 20th century average, and 1.0°F above 1998, the previous warmest year. Rainfall was dismal also at 26.57 inches, 2.57 inches below average, making it the 15th driest year on record for the nation. NOAA also adds that the U.S. Climate Extremes Index indicated that 2012 was the second most extreme year on record for the nation, nearly twice the average value and second only to 1998. 2012 saw 11 disasters that reached the $1 billion threshold in losses. Climate Central also confirms that fully two-thirds of the lower 48 states recorded their first-, second- or third-hottest years, and 43 states had one of their top 10 warmest years ever recorded. Globally, 2012 appears to be the eight warmest on record.

    2012: Hottest Year On Record For United States - After a brief hiatus (10 graduate school credits & TA-ing leaves no time for blogging), I’m back posting on FDL.  I expect to post much more regularly in 2013 as school activities ramp down.  More of my writing will also include a policy angle.  I want to do more to bridge the science and policy worlds in my blogging as well as in my future career. It’s official: 2012 was indeed the hottest year in 100+ years of record keeping for the contiguous U.S. (lower 48 states).  The record-breaking heat in March certainly set the table for the record and the heat just kept coming through the summer.  The previous record holder is very noteworthy.  2012 broke 1998′s record by more than 1°F!  Does that sound small?  Let’s put in perspective: that’s the average temperature for thousands of weather stations across a country over 3,000,000 sq. mi. in area for an entire year.  Previously to 2012, temperature records were broken by tenths of a degree or so.  Additionally, 1998 was the year that a high magnitude El Niño occurred.  This El Niño event caused global temperatures to spike to then-record values.  The latest La Niña event, by contrast, wrapped up during 2012.  La Niñas typically keep global temperatures cooler than they otherwise would be.  So this new record is truly astounding! The official national annual mean temperature: 55.3°F, which was 3.3°F above the 20th century mean value of 52°F.

    Jeff Masters: 2012 was the warmest and 2nd most extreme in U.S. history - The contiguous U.S. smashed its record for hottest year on record in 2012, according to NOAA's National Climatic Data Center (NCDC). The annual U.S. average temperature was 3.3 °F above the 20th century average, and was an astonishing 1.0 °F above the previous record set in 1998. It is extremely rare for an area the size of the U.S. to break an annual average temperature record by such a large margin. Nineteen states, stretching from Utah to Massachusetts, had annual temperatures which were record warm. An additional 26 states had a top-ten warmest year. Only Georgia (11th warmest year), Oregon (12th warmest), and Washington (30th warmest) had annual temperatures that were not among the ten warmest in their respective period of records. As wunderground's weather historian Christopher C. Burt reported, of the approximately 5,500 U.S. stations in the NCDC database, 362 recorded their all-time highest temperature during 2012, and none recorded an all-time coldest temperature. This was the most since the infamous Dust Bowl summer of 1936. Approximately 7% of the contiguous U.S. experienced an all-time hottest day during 2012, and every state in the contiguous U.S. except Washington had at least one location experience its warmest year on record. One notable warmest year record occurred in Central Park, in New York City, which has a period of record dating back 136 years. The 2012 weather was also very dry, and the year ranked as the 15th driest year on record for the contiguous U.S.  Wyoming and Nebraska had their driest year on record, and eight other states had top-ten driest years. The area of the contiguous U.S. experiencing moderate-to-exceptional drought peaked at 61.8% during July. This was the largest monthly drought footprint since the Dust Bowl year of 1939.

    By The Numbers: Breaking Down America's Hottest Year On Record - According to new data, 2012 was a chart-topping year for the United States – but not in a good way. The National Oceanic and Atmospheric Administration’s (NOAA’s) National Climate Data Center (NCDC) recently declared 2012 to be the hottest year on record for the contiguous United States. This year shattered the previous record temperature, set in 1998, by 1.0°F. The year was also marked by 11 extreme weather events that each caused more than $1 billion of damages. In a year that brought the United States record-breaking wildfire activity, an ongoing drought, and Hurricane Sandy, perhaps these announcements aren’t surprising. But they are troubling: Record-breaking temperatures and the rising frequency of extreme weather events illustrate that climate change is happening. These trends are expected to worsen the longer we delay serious action to reduce carbon pollution.Take a look at a few of the figures illustrating the intensity and impacts of 2012’s extreme weather and climate events:

    • 356: Number of all-time temperature highs tied or broken in the United States in 2012
    • 5-to-1: The ratio of daily record highs to daily record lows in 2012 – the largest ratio of this kind since record-keeping began in 1895
    • 55.3°F: The average temperature in the United States in 2012 (3.3°F higher than the 20th Century average)
    • 76.9°F: Average temperature in July 2012, the hottest month ever recorded in the contiguous United States (3.6°F above the historical average)
    • 19: Number of states experiencing a record warm year

    Climate change set to make America hotter, drier and more disaster-prone - Future generations of Americans can expect to spend 25 days a year sweltering in temperatures above 100F (38C), with climate change on course to turn the country into a hotter, drier, and more disaster-prone place. The National Climate Assessment, released in draft form on Friday , provided the fullest picture to date of the real-time effects of climate change on US life, and the most likely consequences for the future. The 1,000-page report, the work of the more than 300 government scientists and outside experts, was unequivocal on the human causes of climate change, and on the links between climate change and extreme weather. "Climate change is already affecting the American people," the draft report said. "Certain types of weather events have become more frequent and/or intense including heat waves, heavy downpours and in some regions floods and drought. Sea level is rising, oceans are becoming more acidic, and glaciers and Arctic sea ice are melting." The report, which is not due for adoption until 2014, was produced to guide federal, state and city governments in America in making long-term plans. By the end of the 21st century, climate change is expected to result in increased risk of asthma and other public health emergencies, widespread power blackouts, and mass transit shutdowns, and possibly shortages of food

    Water, energy and the economy - …let’s set aside the issue of environmental water and concentrate on water as a resource that can be used for economic activities. Most resource water is managed, priced and distributed by local monopolies, whether it’s an irrigation district delivering water to farmers or a utility delivering water to residential and industrial users. These monopolies often sell their water at the cost of delivery — covering the fixed costs of pipes and variable costs of treatment and pumping. It’s extremely rare that water prices reflect water scarcity, which means that it’s also rare for the price of water to rise when demand exceeds supply. This means that some users may consume “too much” water, leaving other users high and dry. (Or they may not – deciding that they’ve taken “their fair share,” but such restraint is rare when it’s possible to use more cheap water to increase profits.) Water managers may not work to prevent these shortages, since they are not penalized for shortages, allowed to raise their prices above cost, or worried about losing business to competitors. That’s not the case for energy, steel or trucks, as each of these businesses operate in markets, where prices adjust to equalize supply and demand and where competition makes it easier for new suppliers to meet demand when their competitors run out of inventory.The solution to these problems is the same solution that will end our need to discuss the water-energy nexus: price water for scarcity. Such a solution would treat “economic water” as we treat oil, coal, shoes, coffee or any other product: prices will rise when demand exceeds supply and fall when supply exceeds demand.

    Dying forests are the latest victims of climate change - Last week, researchers once again sent an SOS distress call to denizens of Earth -- drought conditions are placing deadly water-stress on forests around the globe. Moreover, Earth's forests and the myriad "ecosystem services" they provide are approaching an irreversible tipping point. In 2009, the International Union of Forest Research Organizations came to a very bleak conclusion: "The carbon storing capacity of Earth's forests could be lost entirely if the planet heats up 4.5 F above pre-industrial levels." So far, we have increased by about 2 degrees Fahrenheit, which means we are already well on our way toward this fateful threshold. The result of crossing it would be an uninhabitable world. Rising greenhouse gases are also wreaking unimaginable havoc in the tropical forests, more specifically in the Ferrari of jungles -- the Amazon. The heart of the Amazon has not evolved to contend with winds, never mind fierce winds, nor with drought. In 2005, a vicious combination of climate disruption occurred across 733,600 square miles of land. In January, an intense thunderstorm, spanning 62 by 124 miles, ripped through the whole Amazon Basin from southeast to northwest. On its path, the storm leveled between 441 million and 663 million trees, or the equivalent of 23% of the estimated mean annual carbon accumulation capacity of the Amazon forest.

    Oysters Killed by Climate Change’s Evil Twin - The oyster industry is in trouble. A few years ago, oyster hatcheries in the Pacific Northwest began losing their “seed,” as oyster larvae are known, by the millions. They scrambled to figure out what was behind the massive die-off and discovered that it had to do with “ocean acidification,” also known as climate change’s evil twin. As with climate change, ocean acidification happens when there’s too much carbon dioxide in the atmosphere. The earth’s waters absorb some of that CO2 — more than a quarter of the amount that we produce — as a way of achieving chemical equilibrium between water and air. “When CO2 mixes with seawater,” Jim Meyer explains, “it creates carbonic acid, and, spoiler alert, increasing acid in the oceans makes the oceans more acidic.” Acidified waters are deadly for sea creatures like oysters which have a hard time forming shells in that environment. The CO2 buildup can also cause “stunted growth, reproductive failure, respiratory problems, and even death,”

    Poisoned Planet: Doubling of Ocean Mercury Levels Threatens Global Health - The world's rivers, lakes, and oceans are suffering the severe consequences of modern industrial mercury pollution, according to a new UN report, which also warns the health of the entire planet and its inhabitants face a perilous future if serious action is not soon taken. Hundreds of tons of mercury from sources such as coal-fired power plants, gold mining and other industrial processes have seaped into the world's water systems over the past century, dramatically increasing health and environmental risks for people all over the world, according to the Global Mercury Assessment 2013 released Thursday by the United Nations Environment Programme (UNEP). The report comes just days before representatives of countries are scheduled to meet in Geneva to discuss a proposed, legally-binding treaty to reduce global mercury emissions. Mercury, which accumulates in fish and climbs up the food chain, poses the greatest risk of nerve damage to pregnant women, women of childrearing age and young children, according to the AP.

    Global Mercury Pollution In Oceans Top Layer Doubled In Last Century, Says U.N. Environment Agency: Mercury pollution in the top layer of the world's oceans has doubled in the past century, part of a man-made problem that will require international cooperation to fix, the U.N.'s environment agency said Thursday. The report by the U.N. Environment Program showed for the first time that hundreds of tons of mercury have leaked from the soil into rivers and lakes around the world. As a result of rising emissions, communities in developing countries face increasing health and environmental risks linked to exposure to mercury, the U.N. agency says. Mercury, a toxic metal, is widely used in chemical production and small-scale mining, particularly gold. It is a naturally occurring element that is found in air, water and soil, and it cannot be created or destroyed. Mercury emissions come from sources such as coal burning and the use of mercury to separate metal from ore in small-scale gold mining, and mercury pollution also comes from discarded electronic and other consumer products. Mercury in the air settles into soil from where it can then seep into water.

    Citing Shrinking Sea Ice, Feds List Several Arctic Seal Species As Threatened And Endangered - Recognizing that the best available science suggests a significant loss of Arctic sea ice in the next few decades, federal biologists last week finalized Endangered Species Act protection for two species of ice-dependent seals. NOAA will list as threatened the Beringia and Okhotsk populations of bearded seals, and the Arctic, Okhotsk, and Baltic subspecies of ringed seals. The Ladoga subspecies of ringed seals will be listed as endangered. The species that exist in U.S. waters (Arctic ringed seals and the Beringia population of bearded seals) are already protected under the Marine Mammal Protection Act. “Our scientists undertook an extensive review of the best scientific and commercial data. They concluded that a significant decrease in sea ice is probable later this century and that these changes will likely cause these seal populations to decline,” said Jon Kurland, protected resources director for NOAA Fisheries’ Alaska region. “We look forward to working with the State of Alaska, our Alaska Native co-management partners, and the public as we work toward designating critical habitat for these seals.”

    More Rinks in Far North Find Need for Cooling Systems - Winter has come to the vast, northernmost reaches of Canada, the sparsely populated area surrounding the Arctic Circle historically characterized by severely cold weather. But these days refrigeration systems are needed to keep the ice cold at hockey arenas. It has been too warm for December hockey in the Arctic, the latest sign that climate change is altering the environment and the way people live — especially in the far north, where the effects of rising temperatures are most pronounced. Nine of the 14 villages in Nunavik, a region in northernmost Quebec, have installed cooling systems at community arenas within the last five years. In Canada’s Nunavut Territory, towns including Arviat, Igloolik, Sanikiluaq and Repulse Bay have resorted to cooling systems. A system is also being installed at the community arena in Cape Dorset, a hamlet of 1,400 just 150 miles south of the Arctic Circle. “We used to have natural ice in the arena in October, but that hasn’t happened for a long time,” said Mike Hayward, a Cape Dorset town official. Now the ice isn’t fit for hockey until mid-January, he said. That is why a cooling system is being installed in the building. The Canadian environmental ministry reports that the country is warming more than twice as fast as the world as a whole, with annual average temperatures in Canada up about 2.7 degrees Fahrenheit since 1948. The warming in winter is even faster, almost 6 degrees Fahrenheit over the same period, and scientists have documented a substantially shorter outdoor skating season as a result.

    Australia's average temperature for 5 days above 39 C (102 F) -- never before in history - Click on map to see temperature scale.Never before in recorded history has Australia experienced 5 consecutive days of national-average maximum temperatures above 39 C (102.2 F). Until today.   42 C = 107.6 F      45 C = 113 F   This heat is expected to continue for another 24-48 hours, extending the new record run to 6 or even 7 days. For context, the previous record of 4 days occurred once only (1973) and 3 days has occurred only twice (1972 and 2002).  Latest weather observations for South Australia:

    Temperatures off the charts as Australia turns deep purple - Australia's "dome of heat" has become so intense that the temperatures are rising off the charts – literally.The air mass over the inland is still heating up - it hasn't peaked The Bureau of Meteorology's interactive weather forecasting chart has added new colours – deep purple and pink – to extend its previous temperature range that had been capped at 50 degrees. The range now extends to 54 degrees – well above the all-time record temperature of 50.7 degrees reached on January 2, 1960 at Oodnadatta Airport in South Australia – and, perhaps worringly, the forecast outlook is starting to deploy the new colours. "The scale has just been increased today and I would anticipate it is because the forecast coming from the bureau's model is showing temperatures in excess of 50 degrees," David Jones, head of the bureau's climate monitoring and prediction unit, said. While recent days have seen Australian temperature maps displaying maximums ranging from 40 degrees to 48 degrees - depicted in the colour scheme as burnt orange to black – both Sunday and Monday are now showing regions likely to hit 50 degrees or more, coloured purple. Clicking on the prediction for 5pm AEDT next Monday, a Tasmania-sized deep purple opens up over South Australia – implying 50 degrees or above.  (54 C= 129.2 F)

    Too Hot: Australia’s big heat breaking records - Australia is gripped by a massive heatwave, records are tumbling and fires are burning across the continent. I’m not going to attempt a comprehensive post on the subject — events are moving too fast — but I would like to note a few things. The Bureau of Meteorology forecast chart above (courtesy of Watching The Deniers) for next Monday has forced BOM to add new colours to the hot end of the range, to allow for forecast temperatures over 52ºC — well above the previous national record high of 50.7ºC. Meanwhile the current heatwave has already set a new record for the number of consecutive days where the national average temperature has exceeded 39ºC — now running at seven days, with the heat forecast to continue. That’s the average temperature for the whole of the continent, which is no small place. The previous record was four consecutive days, set in 1973. The Sydney Morning Herald has a good summary of the records being broken here. See also: Jeff Masters, Climate Progress, New Scientist and the Guardian. NASA’s Earth Observatory provides this overview of the fires in Tasmania over the weekend that caused chaos and destruction in the normally cool state — Hobart hit an all time high temperature of 41.8ºC, a full degree above its previous record.

    Bushfires in Australia leave path of destruction - Australia is bracing for days of "catastrophic" fire and heatwave conditions, with fires burning in five states and a search continuing for people missing after devastating wildfires in the island state of Tasmania. Julia Gillard, the Australian prime minister, toured fire-ravaged Tasmanian townships and promised emergency aid for survivors, who told of a fireball that engulfed communities across the thinly populated state on Friday and Saturday. There are fires in five of Australia's six states, with 90 in the most populous state of New South Wales and in mountain forests around the national capital, Canberra. Severe fire conditions were forecast for Tuesday, replicating those of 2009, when the Black Saturday wildfires in Victoria state killed 173 people and caused $4.4bn-worth (£2.7bn) of damage. A record heatwave, which began in western Australia on 27 December and lasted eight days, was the fiercest in more than 80 years in that state and has spread east across the nation, making it the widest-ranging heatwave in more than a decade, according to the Australian Bureau of Meteorology.

    'Sprawling Heat Wave Of Historical Proportions' Brings 'Horrendous' Wildfires To Australia -- A “dome of heat,” has settled over Australia since the start of the new year, creating an historic heat wave. The temperatures have nurtured fires in five of Australia’s six states, including at least 90 wildfires throughout New South Wales in southeastern Australia, as well as the Island of Tasmania. In the latter case, the fires consumed over 100 homes and other buildings, 60,000 hectares of land (approximately 148,000 acres) and left up to 100 people unaccounted for as of January 6. “We saw tornadoes of fire just coming across towards us,” one Tasmanian survivor said. “The next thing we knew everything was on fire, everywhere, all around us.” Another local resident said that “the trees just exploded” as he tried to help fire crews in the township of Murdunna, which was mostly destroyed by the blaze. The heat wave is also setting new records: On Monday the national average temperature hit 40.33 degrees Centigrade (104.6 degrees Fahrenheit), topping the previous December 21, 1976 record 40.17 degrees Centigrade. “It’s been a summer like no other in the history of Australia, where a sprawling heat wave of historical proportions is entering its second week,” wrote Jeff Masters of the Weather Underground today.

    Record Heat Fuels Widespread Fires in Australia -  Bush fires raging across some of the most populous parts of Australia — feeding off widespread drought conditions and high winds — pushed firefighters to their limits and residents to their wits’ end on Wednesday as meteorologists tracked the country’s hottest spring and summer on record into uncharted territory.Four months of record-breaking temperatures stretching back to September 2012 have produced what the government says are “catastrophic” fire conditions along the eastern and southeastern coasts of the country, where the majority of Australians live. Data analyzed on Wednesday by the government Bureau of Meteorology indicated that national heat records had again been set. The average temperature across the country on Tuesday was the highest since statistics began being kept in 1911, at 40° Celsius (104° Fahrenheit), exceeding a mark set only the day before. Meteorologists have had to add two new color bands to their forecast maps, extending their range up to 129° Fahrenheit. “From this national perspective, one might say this is the largest heat event in the country’s recorded history,” said David Jones, manager of climate monitoring prediction at the Bureau of Meteorology. Firefighters were struggling to contain huge bushfires in Australia’s most populous state, New South Wales, which have scorched around 500 square miles of forest and farmland since Tuesday. Fires on the island state of Tasmania off the country’s southern coast have destroyed more than 300 square miles since Friday.

    Climate change looms large as Australia swelters - Australia is baking in a record-breaking "dome of heat", threatening to unleash the worst firestorms since those that claimed hundreds of lives in 2009. Temperatures reached almost 48 °C on Monday at the Oodnadatta airport in South Australia, and 43 °C on Tuesday in Sydney. The typical January high is 37.7 °C at Oodnadatta. The average across the country is tipped to break the previous record of 40.17 °C in 1976."It's likely to just beat it," Karl Braganza of the Australian Bureau of Meteorology told The Age newspaper on Monday. "It's just an extensive dome of heat over the continent." At least 90 fires were sweeping through New South Wales by Monday, and 100 people remained unaccounted for in Tasmania following major fires covering 60,000 hectares. Bushfire experts warned that things could get worse. "The current heatwave is unusual due to its extent, with more than 70 per cent of the continent currently experiencing heatwave conditions," says John Nairn, South Australia's acting regional director for the Bureau of Meteorology, in comments to the Australian Science Media Centre.

    New Weather, New Politics. The extremes now hammering Australia leave old perspectives stranded - I wonder what Tony Abbott will say about the record heatwave now ravaging Australia. The opposition leader has repeatedly questioned the science and impacts of climate change. He has insisted that “the science is highly contentious, to say the least” and asked – demonstrating what looks like a willful ignorance – “If man-made CO2 was quite the villain that many of these people say it is, why hasn’t there just been a steady increase starting in 1750, and moving in a linear way up the graph?" He has argued against Australian participation in serious attempts to cut emissions.  Climate change denial is almost a national pastime in Australia. People like Andrew Bolt and Ian Plimer have made a career out of it. The Australian – owned by Rupert Murdoch – takes such extreme anti-science positions that it sometimes makes the Sunday Telegraph look like the voice of reason.  Perhaps this is unsurprising. Australia is the world’s largest exporter of coal – the most carbon intensive fossil fuel. It’s also a profligate consumer. Australians now burn, on average, slightly more carbon per capita than the citizens of the United States, and more than twice as much as the people of the United Kingdom. Taking meaningful action on climate change would require a serious reassessment of the way life is lived there.

    Worst drought in 50 years hits Brazil's Northeastern states of Bahia, Pernambuco, Piauí, and Minas Gerais - Brazil's Northeast is suffering its worst drought in decades, threatening hydro-power supplies in an area prone to blackouts and potentially slowing economic growth in one of the country's emerging agricultural frontiers. Lack of rain has hurt corn and cotton crops, left cattle and goats to starve to death in dry pastures and wiped some 30% off sugar cane production in the region responsible for 10% of Brazil's cane output. Thousands of subsistence farmers have seen their livelihoods wither away in recent months as animal carcasses lie abandoned in some areas that have seen almost no rain in two years. "We are experiencing the worst drought in 50 years, with consequences that could be compared to a violent earthquake," Eduardo Salles, agriculture secretary in the northeastern state of Bahia, said in an emailed statement. Dams in the Northeast ended December at just 32% of capacity, according to the national electrical grid operator. That puts them below the 34% the operator, known as ONS, considers sufficient to guarantee electricity supplies.

    Snow in the Desert Foreign Policy (photo essay)

    Extreme Weather Grows in Frequency and Intensity Around World - Britons may remember 2012 as the year the weather spun off its rails in a chaotic concoction of drought, deluge and flooding, but the unpredictability of it all turns out to have been all too predictable: Around the world, extreme has become the new commonplace. Especially lately. China is enduring its coldest winter in nearly 30 years. Brazil is in the grip of a dreadful heat spell. Eastern Russia is so freezing — minus 50 degrees Fahrenheit, and counting — that the traffic lights recently stopped working in the city of Yakutsk.  Bush fires are raging across Australia, fueled by a record-shattering heat wave. Pakistan was inundated by unexpected flooding in September. A vicious storm bringing rain, snow and floods just struck the Middle East. And in the United States, scientists confirmed this week what people could have figured out simply by going outside: last year was the hottest since records began. “Each year we have extreme weather, but it’s unusual to have so many extreme events around the world at once,” said Omar Baddour, chief of the data management applications division at the World Meteorological Association, in Geneva. “The heat wave in Australia; the flooding in the U.K., and most recently the flooding and extensive snowstorm in the Middle East — it’s already a big year in terms of extreme weather calamity.”

    Natural Disasters Cost The World $160 Billion In 2012 - The world’s largest reinsurance firm, Munich Re, has stated that Natural Disasters alone have cost the world $160 billion in 2012. The US accounted for 67% of those total losses, with Hurricane Sandy proving to be single most expensive disaster of the year, costing around $50 billion in total. Munich Re actually noted that, “had it not been for this exceptional storm, losses would have been very low in 2012.” Hurricane Sandy is the largest hurricane ever on record, and the second most expensive after Hurricane Katrina. The second most costly natural disaster was the summer-long drought which blighted the Corn Belt across the US Midwest, causing severe crop damage to the sum of $20 billion....  As high as the global losses were in 2012 they were still less than 2011 when the cost hit as high as $400 billion due to major earthquakes in Japan and New Zealand and severe floods in Thailand.

    Temperatures to rise by six degrees in Middle East countries. World Bank report says there will be lower rainfall, higher temperatures and continuing desertification in the region - Countries in the Middle East and north Africa will be among those hardest hit by global warming, unless the upward trend for greenhouse gas emissions can be checked, the World Bank warned last month at theDoha climate change conference. There will be lower rainfall, higher temperatures and continuing desertification, said Rachel Kyte, World Bank vice-president for sustainable development, during her presentation of the report onAdaptation to a Changing Climate in the Arab Countries. According to the forecasts, average temperatures could rise by 3 C between now and 2050. But night temperatures in city centres could increase by double that figure. The report notes that over the last three decades 50 million people have been affected by climate disasters. Severe flooding is now a recurrent event. But the increasing scarcity of water resources is the biggest challenge for countries in the region, which already have some of the lowest per capita reserves in the world.

    Global warming to shift timing of North American monsoon—Global warming result in a significant shift of the North American monsoon, with less rain during the early part of the season, in June and July, and more rain later in the summer and early autumn. The trend toward a later start to summer precipitation has already started, but will become more pronounced — and easier to distinguish from the background “noise” of natural variability — during the next few decades, according to researchers with NASA and Columbia University’s Lamont-Doherty Earth Observatory. “We expect that increased greenhouse gases will make the atmosphere more stable and more difficult for precipitation to occur … When the warming is strong enough, it effectively delays the start of the monsoon,” said NASA researcher Benjamin Cook. “One way to overcome that is when the air near the surface is really moist. That’s what happens at the end of the monsoon season. At that point, it leads to an increase in rainfall,” Cook said, explaining that the study points to big change in the total amount of monsoon precipitation, but that the change in timing is still likely to have significant ecological societal impacts.A second factor driving the change in timing is less surface moisture at the local level resulting from reduced evapotranspiration.

    Looking for winter weirdness 5 » WattsUpWithThat: Increased evaporation combined with more heat loss in the Arctic due to a record low amount of Arctic sea ice is the likely cause. The likely cause of this: This graph is made and updated by the Rutgers University Global Snow Lab. . They also have maps showing the Northern Hemisphere December and daily (in this case January 5th 2013) departure from normal: Three of the five highest positive anomalies for December have all occurred in the last four years. It does indeed make sense that all of that open water in the Arctic Ocean has something to do with it. If that keeps up for a couple of more years, we could start calling it climate change, right? Not in a couple of decades, but now, as we speak. It's exhilarating to see fake skeptics acknowledge this so casually. Just recently, the only fake skeptic scientist with any credentials they could find for the first Climate Dialogue on Arctic sea ice, Dr. Judith Curry, even acknowledged that at least 50% of the disappearance of Arctic sea ice was due to human activity. And so you could even plausibly posit that all the deaths and damage due to the recent extreme cold in Russia and Chinaare partially caused by AGW. I'm not saying it is definitely so, but it isn't that far-fetched either. And it's most probably not the last we've seen of it. If September sea ice cover stays at the level of the last 5-6 years or even diminishes further, we could be seeing more snowfall anomalies during winter. In other words, more deaths and damage.

    Sampling Greenland: The Dark Snow Project, with Jason Box and Peter Sinclair  Sampling Greenland: The Dark Snow Project (  The “Burning Question” 25 June 2012, on his way for his 23rd Greenland expedition, sitting in New York’s LaGuardia airport terminal, writing a blog on Greenland’s declining reflectivity (a.k.a. albedo), Box beheld the crowded waiting area with crowds glued to TV monitors that blared news about record setting fires in  Colorado's wilderness. Box’s research had linked Greenland’s albedo decline with the warming of the past decade, but was wilderness soot making the ice even darker? From the airport, Box rang snow optics expert Dr. Tom Painter to ask if snow surface samples could identify wilderness soot and its source (Colorado? Siberia? Arctic Canada?) and whether it was possible to discriminate between industrial and wilderness soot.  Painter, “YES.”

    West Greenland warming anomaly hits 10 °C - Some parts of west Greenland have warmed more than 10 °C in winter in the last 20 years. That is according to a team from the UK, US, Denmark and Switzerland, which has conducted the first major systematic analysis of Greenland's temperatures since 2002. "Some locations along the west coast of Greenland have warmed really strongly by about 2–4°C in summer and as much as 10°C locally in winter in their average surface air temperatures since 1991," Edward Hanna of the University of Sheffield, UK, toldenvironmentalresearchweb. "In general, warming has been much stronger in west Greenland than in the east. Similar warming trends are seen on the western flank of the ice sheet –- at 1,200 metres above sea level –- as on the west coast, which indicates a significant impact of this strong warming on enhancing ice-sheet melt and mass loss." As west Greenland has been one of the strongest warming regions globally over the last decade, Hanna said that we should not be surprised about the recent findings of record loss of mass from the Greenland ice sheet (Rignot et al. (2011), Geophys. Res. Lett.) or by the NASA announcement of record surface melt of the ice sheet in July 2012.

    Arctic Sea Ice Volume Death Spiral graph - This graph is often overlooked, but it tells the story of the Arctic sea ice like no other (from Main graph at this link: .. Other related graphs:

    PIOMAS: Arctic sea ice volume figures for December 30, 2012, show increased decline - Click chart to see December details.

    Snow Cover Extent Declines in the Arctic : Image of the Day: In the high latitudes of the Northern Hemisphere, snow typically covers the land surface for nine months each year. The snow serves as a reservoir of water, and a reflector of the Sun’s energy, but recent decades have witnessed significant changes in snow cover extent. Studies of snow cover published in Geophysical Research Letters and the Arctic Report Card: Update for 2012 found that, between 1979 and 2012, June snow cover extent decreased by 17.6 percent per decade compared to the 1979–2000 average. The maps on this page show June snow cover extent anomalies for every third year from 1967 through 2012. Each June’s snow cover is compared to the 1971–2000 mean. Above-average extent appears in shades of blue, and below-average extent appears in shades of orange. Toward the beginning of the series, above-average extents predominate. Toward the end of the series, below-average extents predominate. The graph shows June snow cover in millions of square kilometers from 1967 through 2012, and the overall decline in snow cover is consistent with the changes shown in the maps. The graph and maps are based on data from the Rutgers University Global Snow Lab.

    NSIDC Arctic Sea Ice Report, January 8, 2013: Arctic Oscillation Switches to Negative Phase - Arctic sea ice extent for December 2012 remained far below average, driven by anomalously low ice conditions in the Kara, Barents, and Labrador seas. Thus far, the winter has been dominated by the negative phase of the Arctic Oscillation, bringing colder than average conditions to Scandinavia, Siberia, Alaska, and Canada.  The average sea ice extent for December 2012 was 12.20 million square kilometers (4.71 million square miles). This is 1.16 million square kilometers (448,000 square miles) below the 1979 to 2000 average for the month, and is the second-lowest December extent in the satellite record.At the end of December, ice extent in the Atlantic sector remained far below normal, as parts of the Kara and Barents seas remained ice-free. Ice has also been slow to form in the Labrador Sea, while Hudson Bay is now completely iced over. On the Pacific side, ice extent is slightly above normal, with the ice edge in the Bering Sea extending further to the south than usual. The Bering Sea has seen above-average winter ice extent in recent years and is the only region of the Arctic that has exhibited a slightly positive trend in ice extent during the winter months.

    Arctic Storms: A Climate Danger Nobody’s Talking About - Summer and fall are hurricane season, but for the storms known as polar lows, prime time falls in the dead of winter, when frigid air blows off sea ice to collide with warmer, moister air in the North Atlantic. Polar lows are a lot smaller and weaker than hurricanes, they’re generally shorter-lived, and the only danger they generally pose is to shipping and oil rigs. However, according to a new study in Nature Geoscience, the dozens of polar lows that roil the Greenland, Iceland and Norwegian seas every year may have an effect on the climate of North America and Europe. And if polar lows move northward with the changing climate, as some studies have predicted, winters in both places could become colder, even as the planet warms. A polar low northeast of Scandinavia in the Barents Sea. Credit: Erik Kolstad/flickr.As if that weren’t bad enough, a northward displacement of these Arctic storms could also raise sea level higher along America’s mid-Atlantic coast than the average increase of 3 feet or so projected for the world as a whole by 2100.

    Ending the Silence on Climate Change - Bill Moyers (video) Remember climate change? The issue barely came up during the presidential campaigns, and little has been said since. But bringing climate change back into our national conversation is as much a communications challenge as it is a scientific one. Scientist Anthony Leiserowitz, director of the Yale Project on Climate Change Communication, joins Bill to describe his efforts to do what even Hurricane Sandy couldn’t – galvanize communities over what’s arguably the greatest single threat facing humanity. Leiserowitz, who specializes in the psychology of risk perception, knows better than anyone if people are willing to change their behavior to make a difference.

    Pigovian Taxes May Offer Economic Hope - NO one enjoys paying taxes — and no politician relishes raising them. Yet some taxes actually make us better off, even apart from the revenue they provide for public services.  Taxes on activities with harmful side effects are a case in point. Strongly favored even by many conservative Republican economists, these levies are known as Pigovian taxes, after the British economist Arthur C. Pigou, who advocated them in his 1920 book, “The Economics of Welfare.” In today’s deeply polarized political climate, they offer one of the few realistic hopes for progress.   But the mere fact that Pigovian taxes produce greater benefits than costs doesn’t make them an easy sell politically. Like other changes in public policy, a Pigovian tax produces winners and losers. And it’s an iron law of politics that prospective losers lobby harder to block change than prospective winners do for its adoption. That asymmetry creates a powerful status-quo bias that makes even broadly beneficial policy changes hard to achieve.  Yet, in principle, any change that makes the economic pie larger makes it possible for everyone to enjoy a bigger slice than before. The practical challenge is to slice the larger pie so that everyone comes out ahead.

    James Hansen et al., Climate Sensitivity, Sea Level, and Atmospheric CO2 [in review] - Abstract - Cenozoic temperature, sea level and CO2 co-variations provide insights into climate sensitivity to external forcings and sea level sensitivity to climate change. Pleistocene climate oscillations imply a fast-feedback climate sensitivity 3 ± 1 °C for 4 W/m2 CO2 forcing for the average of climate states between the Holocene and Last Glacial Maximum (LGM), the error estimate being large and partly subjective because of continuing uncertainty about LGM global surface climate. Slow feedbacks, especially change of ice sheet size and atmospheric CO2, amplify total Earth system sensitivity. Ice sheet response time is poorly defined, but we suggest that hysteresis and slow response in current ice sheet models are exaggerated. We use a global model, simplified to essential processes, to investigate state-dependence of climate sensitivity, finding a strong increase in sensitivity when global temperature reaches early Cenozoic and higher levels, as increased water vapor eliminates the tropopause. It follows that burning all fossil fuels would create a different planet, one on which humans would find it difficult to survive.

    A climate change apocalypse -  As you may have noticed, the end of the year was all about the end of the world. Mayan doomsday prophesies. Rogue planets on a collision course with Earth. Fear-mongering about an artificial “fiscal cliff.” House Republicans doing, well, what they usually do. Fortunately, for now, life as we know it continues. And scary as all of this sounds, the real horror show, the true existential threat, is yet another crisis of our own making: the catastrophic effects of climate change.There’s no need to read Revelations or catch a Michael Bay-Jerry Bruckheimer matinee to understand what it will look like. Just Google image search “Hurricane Sandy and Staten Island,” and you’ll get the general idea. Certainly, it will take much more research to understand whether there’s a direct link between Sandy and climate change. But we do know that storm’s impact was made worse by rising sea levels, increasing ocean temperatures and unusual weather patterns, all of which are definitively connected to climate change. 2012 was the hottest year on record. Arctic sea ice is melting. Sea levels are rising faster than projected. And extreme weather events — droughts, storms, heat waves — are increasing in number and intensity, disproportionately harming the world’s most vulnerable populations. But forget trying to pass climate-change legislation before the next storm. Republicans in Congress can barely bring themselves to help out the victims of the last storm.

    Climate change won't wait - Societal change usually happens slowly, even once it's clear there's a problem. That's because, in a country as big as the United States, public opinion moves in leisurely currents. Change often requires going up against powerful, established interests, and it can take decades for those currents to erode the foundations of our special-interest fortresses. Think civil rights, gay marriage, equal rights for women. Even facing undeniably real problems — say, discrimination against gay people — one can make the case that gradual change is the best option. Had some mythical liberal Supreme Court declared, in 1990, that gay marriage was now the law of the land, the backlash might have been swift and severe. With climate change, however, there simply isn't time to waste. It's not a fight, like gay marriage, between conflicting groups with conflicting opinions. It's a fight between human beings and physics. And physics is entirely uninterested in human timetables. Physics couldn't care less if precipitous action raises gas prices or damages the coal industry in swing states. It couldn't care less whether putting a price on carbon slowed the pace of development in China or made agribusiness less profitable.

    'Catastrophic Mass Extinction' Likely if Temperatures Rise 6 Degrees in Next Century | Common Dreams: "Catastrophic" mass extinction is likely within the next 100 years as the earth's temperature increases approximately 6º C and carbon dioxide accumulates in the atmosphere, predict scientists studying the last time the temperature rose rapidly by that much—55 million years ago.Animals will shrink in order to survive and adapt to exist on less nourishing food, according to the Bighorn Basin Coring Project, currently being conducted by scientists from the US, UK, Germany and the Netherlands who are studying the last time the planet's temperature rose rapidly by 6º C, Climate News Network reports. Dr. Phillip Jardine of Birmingham University in the UK, among the leaders of the study, said the previous period of warming "led to catastrophic extinctions of life in the deep oceans, partly because of increased acidification and partly through lack of oxygen." "What worries the scientists is that this current warming period will take as little as 200 years, if the Intergovernmental Panel on Climate Change  is correct," Joint Editor Paul Brown reports for Climate News Network. "This gives many long-lived species, for example trees, no time to evolve and migrate. ... The result will be mass extinction, and for the survivors, humans, animals and insects, there will be a scramble to eat a diminishing and less nutritious food supply."

    Can a collapse of global civilization be avoided?  -Throughout our history environmental problems have contributed to collapses of civilizations. A new paper published yesterday in Proceedings of the Royal Society B addresses the likelihood that we are facing a global collapse now. The paper concludes that global society can avoid this and recommends that social and natural scientists collaborate on research to develop ways to stimulate a significant increase in popular support for decisive and immediate action on our predicament.  Paul and Anne Ehrlich's paper provides a comprehensive description of the damaging effects of escalating climate disruption, overpopulation, overconsumption, pole-to-pole distribution of dangerous toxic chemicals, poor technology choices, depletion of resources including water, soils, and biodiversity essential to food production, and other problems currently threatening global environment and society. The problems are not separate, but are complex, interact, and feed on each other.  The authors say serious environmental problems can only be solved and a collapse avoided with unprecedented levels of international cooperation through multiple civil and political organizations. They conclude that if that does not happen, nature will restructure civilization for us.

    The Human Response Function to Climate Change - The chart above shows various emissions scenarios for anthropogenic CO2 emissions out to 2100 (expressed in Gigatonnes of C/yr).  The black curve shows actual data according to BP from 1965 to 2011.  The next four curves (green, yellow, orange, and red) are from the four representative concentration path (RCP) scenarios that are being used in the 5th IPCC report.  These replace the old A1FI, B1, etc.  You can find the data for them here (they ask for your  contact details).  The blue dashed curve we will come to shortly. I would like to critique the RCP curves which I find implausible in various ways.  Let's start by characterizing them. The highest emissions scenario is the red curve labeled RCP-8.5 (the curves are labeled by the total increase in radiative forcing by 2100, so RCP-8.5 corresponds to 8.5W/m2 of additional forcing by the end of the century).  This is clearly the "business as usual" scenario that assumes we grow emissions at pretty high rates (they grew 2.8%/yr on average from 2001 to 2011) and continue to do so well out into the second half of the century.  Emissions (not concentration in the air) only start to stabilize in the last decade or two of the century. At the other extreme, the green curve (RCP-2.6) assumes that the emissions curve starts to bend immediately right now, peaks in the next ten years, and then heads down over the course of several decades until it turns negative after 2080 (we start reabsorbing carbon from the atmosphere).

    Imperfect climate policy unlikely to increase domestic emissions -  By promising to reduce fossil fuel demand in the future, some claim that climate policies will induce supply side responses today; firms will pump out emissions now before demand restrictions tighten. However, this column argues that the ‘green paradox’ is a red herring. Evidence from US coal prices suggests that, in industrialised countries, there is little danger of an increase in domestic emissions in response to imperfect climate policies.

    The Post-Crisis Crises by Joseph E. Stiglitz - In the shadow of the euro crisis and America’s fiscal cliff, it is easy to ignore the global economy’s long-term problems. But, while we focus on immediate concerns, they continue to fester, and we overlook them at our peril. The most serious is global warming. While the global economy’s weak performance has led to a corresponding slowdown in the increase in carbon emissions, it amounts to only a short respite. And we are far behind the curve: Because we have been so slow to respond to climate change, achieving the targeted limit of a two-degree (centigrade) rise in global temperature, will require sharp reductions in emissions in the future. Some suggest that, given the economic slowdown, we should put global warming on the backburner. On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth. At the same time, the pace of technological progress and globalization necessitates rapid structural changes in both developed and developing countries alike. Such changes can be traumatic, and markets often do not handle them well.

    Rogue geoengineering could 'hijack' world's climate - The world's climate could be hijacked by a rogue country or wealthy individual firing small particles into the stratosphere, claims a warning that comes not from a new Hollywood movie trailer but a sober report from the World Economic Forum (WEF). The deployment of independent, large-scale "geoengineering" techniques aimed at averting dangerous warming warrants more research because it could lead to an international crisis with unpredictable costs to agriculture, infrastructure and global stability, said the Geneva-based WEF in its annual Global Risks report before the Davos economic summit later this month. It also warned that ongoing economic weakness is sapping the ability of governments to tackle the growing threat of climate change. "The global climate could, in effect, be hijacked. For example, an island state threatened with rising sea levels may decide they have nothing to lose, or a well-funded individual with good intentions may take matters into their own hands," the report notes. It said there are "signs that this is already starting to occur", highlighting the case of a story broken by the Guardian involving the dumping of 100 tonnes of iron sulphate off the Canadian coast in 2012, in a bid to spawn plankton and capture carbon. The top two global risks identified for the WEF by more than 1,000 business leaders and experts were the growing wealth gap between rich and poor and a major financial economic crisis. But the next three on the list of 50 were environmental, including climate change, and water and food supply crises.

    Clean Tech Investments Plunged in 2012 - Global investments in clean technologies tanked in 2012, as investors shied away from capital-intensive deals and technology risks, according to Cleantech Group. The San Francisco-based analysis firm’s preliminary 2012 results recorded venture capital (VC) investments of $6.5 billion in the clean-tech sector, down from the record $9.6 billion in 2011. The number of deals seen in 2012 were 704, 15% lower than the 829 tracked in the previous year. Clean-tech mergers and acquisitions (M&A) deals have consistently dropped in value over the past eight quarters, and totalled $39.7 billion in 2012. Early last year, the firm predicted that 2012 would be a record-breaking year for clean-tech investment. Factors that hurt clean-tech investments were difficult macroeconomic conditions, the low price of natural gas in the US and the commoditisation of solar modules, he explained. “There is a trend away from solar and towards things like green chemicals, transportation and energy efficiency,” he said. “Energy efficiency is still very much the most popular category, which really makes sense since investors are favouring capital-light deals.”

    Shining a light on Wall St’s power role - Most people think about banks when they borrow or save money, not when they flip a light switch. But a recent set of investigations by an obscure energy watchdog highlights how some of the world’s biggest lenders stand in the middle of the $140bn-plus wholesale US electricity market. Late last year, the Federal Energy Regulatory Commission accused Barclays and Deutsche Bank of manipulating electricity markets and in November curtailed JPMorgan Chase’s rights to sell power for half a year. Banks are now in a retreat and figures published Monday show just how rapidly so. Platts Megawatt Daily, an industry publication, revealed JPMorgan Chase sold a third less physical power in the third quarter of 2012 compared with the same period a year earlier. Sales from Goldman Sachs, Morgan Stanley, Citigroup and Deutsche Bank were 52.7 per cent, 18 per cent, 36.6 per cent and 3.7 per cent lower on the year, respectively. By contrast, total sale volumes were down 0.9 per cent in the quarter, the publication said, basing its calculations on FERC and voluntary company reports. The banks’ flight comes as abundant natural gas supplies have damped electricity price spikes, reducing trading opportunities. New rules such as higher bank capital requirements are also a burden. Now the FERC, wielding authorities granted in the aftermath of the Enron scandal, is adding to jitters. Deutsche Bank argues in a filing that if government enforcers prevail they could “fracture the foundation of organised power markets”.

    Radioactive waste dumped into rivers during decontamination work in Fukushima - Cleanup crews in Fukushima Prefecture have dumped soil and leaves contaminated with radioactive fallout into rivers. Water sprayed on contaminated buildings has been allowed to drain back into the environment. And supervisors have instructed workers to ignore rules on proper collection and disposal of the radioactive waste. The 'decontamination' work witnessed by a team of Asahi Shimbun reporters shows that contractual rules with the Environment Ministry have been regularly and blatantly ignored, and in some cases, could violate environmental laws.

    Black substance destroying Hawaii’s largest barrier reef - The graphic is a representation of the spread of radioactive cesium (and other isotopes) across the Pacific, which has been leaking from the site of the ruins of the Fukushima Daiichi nuclear plant. This website, Hawaiian White Coral Disease – Hawaiian Reefs In Crisis, documents the rapid destruction of life on the coral reefs off of Kaua’i and Oahu. It seemed to commence around Aug. 1 2012. They are being afflicted with rapid growths of cyanobacteria and fungi. This black substance is familiar, it is all over Japan. It is highly radioactive. A staggering amount of 43,000,000 Bq/kq of radioactive cesium was measured from it recently. This black substance has been determined to contain cyanobacteria, as well as radionuclides. Apparently these cyanobacteria (blue-green algae) accumulate radiation at an amazing rate. It is not hard to see the arrival of radioactive seawater in the Hawaiian islands has coincided with the appearance of the black substance of the reefs. They both contain cyanobacteria.Cyanobacteria release poisons called cyanotoxins. Blooming cyanobacteria can produce cyanotoxins in such concentrations that they poison and even kill animals and humans. Cyanotoxins can also accumulate in other animals such as fish and shellfish, and cause poisonings such as shellfish poisoning.

    US Sailors Sue Over Fukushima Radiation  - Tokyo Electric Power Co. (TEPCO) lied about the dangers of radiation exposure, according to eight US sailors involved in disaster relief operations following the March 2011 Fukushima meltdown. Now the sailors are suing the Japanese company—the owner of the power plant that ended in the world’s biggest nuclear disaster since Chernobyl. The sailors were on board the USS Ronald Reagan nuclear-powered aircraft carried that helped with disaster relief, and they claim that TEPCO purposefully lied about the dangers of radiation exposure in order to ensure disaster relief after the earthquake and tsunami that led to a nuclear meltdown. The sailors have filed a complaint in the US federal court, claiming that the Japanese government gave them the false impression that the radiation leaking from Fukushima did not pose a threat. The sailors entered areas that were too close to the power plant during relief efforts as a result of this false impression. According to the sailors’ legal team, Tokyo was “lying through its teeth about the reactor meltdown”, assuring the disaster relief team that “everything is under control”. The complaint alleges that TEPCO “lulled” the Navy into “a false sense of security”. The lawsuit claims that the Japanese authorities only belatedly admitted that radiation had leaked into the atmosphere.

    China blazes trail for ‘clean’ nuclear power from thorium - The Chinese are running away with thorium energy, sharpening a global race for the prize of clean, cheap, and safe nuclear power. Good luck to them. They may do us all a favour. Princeling Jiang Mianheng, son of former leader Jiang Zemin, is spearheading a project for China's National Academy of Sciences with a start-up budget of $350m. He has already recruited 140 PhD scientists, working full-time on thorium power at the Shanghai Institute of Nuclear and Applied Physics. He will have 750 staff by 2015. The aim is to break free of the archaic pressurized-water reactors fueled by uranium -- originally designed for US submarines in the 1950s -- opting instead for new generation of thorium reactors that produce far less toxic waste and cannot blow their top like Fukushima. "China is the country to watch," "They are really going for it, and have talented researchers. This could lead to a massive break-through."

    N.W.T. town surrounded by untapped gas reserves, but trucking in propane - There is plenty of blame to go around for failing to turn Canada’s vast Arctic natural gas deposits into one of the country’s major sources of fuel. Regulatory delays, disagreements between First Nations, opposition from green groups, the discovery of competing shale gas deposits, increasing construction costs — all played a role in the shelving last year of the Mackenzie Valley natural gas pipeline from Inuvik, N.W.T., to Alberta. But it’s the economy of the North that is bearing the brunt of the consequences. In a cruel twist, the blow has just expanded as communities such as Inuvik and Norman Wells, N.W.T., surrounded by vast hydrocarbon deposits, are forced to import large and costly quantities of fuel from southern Canada to keep homes warm and businesses running.“It’s like ordering up a truckload of ice from Alberta,”

    Monthly coal- and natural gas-fired generation equal for first time in April 2012 - Recently published (April 2012) electric power data show that, for the first time since EIA began collecting the data, generation from natural gas-fired plants is virtually equal to generation from coal-fired plants, with each fuel providing 32% of total generation. In April 2012, preliminary data show net electric generation from natural gas was 95.9 million megawatthours, only slightly below generation from coal, at 96.0 million megawatthours. The 2011 and 2012 data shown above are preliminary and are subject to change (final 2011 data will be released this fall, and 2012 data will be revised at that time). Preliminary data are derived from a survey of a sample of large power plants, and final data come from a census of all power plants. For 2010, the difference between preliminary and final net generation data from all sources was 0.1%.  As shown in the chart above, there are strong seasonal trends in the overall demand for electric power. In April 2012, demand was low due to the mild spring weather. Also in April, natural gas prices as delivered to power plants were at a ten-year low. With warmer summer weather and increased electric demand for air conditioning, demand will increase, requiring increased output from both coal- and natural gas-fired generators.

    What is Holding Back Natural Gas as the Transportation Fuel of the Future? -  The natural gas revolution has brought big changes to the U.S. energy scene. Natural gas prices, which used to move closely together with oil prices, have plunged in the last five years, as the following chart shows. One result has been the rapid displacement of coal by natural gas in electric power generation. According to a recent report from the Union of Concerned Scientists, some 100 gigawatts of coal-fired electric plants, representing more than a quarter of coal capacity and nearly a tenth of total U.S. electric capacity, have either been closed or are likely soon to be closed because they have become uncompetitive with natural gas. Natural gas has also been displacing oil at a rapid rate as a home heating fuel. In transportation, however, the use of natural gas is spreading more slowly. Transportation ranks second only to electric power generation in total energy use. There are at least three ways to use natural gas to power transportation. One is to generate electricity with natural gas, which can then power electric cars or electrified rail lines. Another is to convert natural gas to liquids like methanol or synthetic gasoline. However, as I discussed in this post two years ago, the biggest potential lies in the direct use of compressed natural gas (CNG) or liquid natural gas (LNG) as a fuel for natural gas vehicles (NGVs).

    Exports of American Natural Gas May Fall Short of High Hopes - Only five years ago, several giant natural gas import terminals were built to satisfy the energy needs of a country hungry for fuels. But the billion-dollar terminals were obsolete even before the concrete was dry as an unexpected drilling boom in new shale fields from Pennsylvania to Texas produced a glut of cheap domestic natural gas. Now, the same companies that had such high hopes for imports are proposing to salvage those white elephants by spending billions more to convert them into terminals to export some of the nation’s extra gas to Asia and Europe, where gas is roughly triple the American price. Just like last time, some of the costly ventures could turn out to be poor investments. Countries around the world are importing drilling expertise and equipment in hopes of cracking open their own gas reserves through the same techniques of hydraulic fracturing and horizontal drilling that unleashed shale gas production in the United States. Demand for American gas — which would be shipped in a condensed form called liquefied natural gas, or L.N.G. — could easily taper off by the time the new export terminals really get going, some energy specialists say. “It will be easier to export the technology for extracting shale gas than exporting actual gas,” said Jay Hakes, former administrator of the Energy Department’s Energy Information Administration. “I know the pitch about our price differentials will justify the high costs of L.N.G. We will see. Gas by pipeline is a good deal. L.N.G.? Not so clear.”

    Why the natural gas industry hates the movie 'Promised Land' so much - Matt Damon's new fictional movie about natural gas development in a rural township was being lambasted by the natural gas industry even before it premiered. And yet, the film shows no tanker trucks laden with toxic fracking fluid. It depicts no roughnecks descending on a small town unprepared for the influx of new workers. It features no ghastly wastewater ponds and not even one drilling pad or derrick. In fact, drilling has yet to begin in the fictional township of McKinley. As a result there are no wheezing people made sick from fumes associated with the drilling. There are no flaming water taps--first seen by many in the documentary Gasland, a film which displays devastation which it attributes to hydraulic fracturing and other processes associated with natural gas drilling in America's deep shale deposits. In Promised Land there is not even one dead farm animal unless you count the ones pictured on a yard sign distributed by an environmental activist who opposes the drilling. So why is the natural gas industry having such a hissy fit over the film? I think the answer lies in its premise: That the people of this small community ought to have a public discussion about whether they want the drilling--one informed by all the facts, not just the ones the natural gas drillers want them to hear--and that the community should then take a vote. God knows that in corporate America, democratic governance should never, ever take precedence over corporate imperatives. Could things be any more infuriating than that?

    Energy myths - Which of the following statements is true? The United States of America now has a 100-year supply of natural gas, thanks to the miracle of shale gas. By 2017, it will once again be the world’s biggest oil producer. By 2035, it will be entirely “energy-independent”, and free in particular from its reliance on Middle Eastern oil. Unless you’ve been dead for the past couple of years, you’ve been hearing lots of enthusiastic forecasts like this, but not one of them is true. They are generally accompanied by sweeping predictions about geopolitics that are equally misleading, at least insofar as they depend on assumptions about cheap and plentiful supplies of shale gas and other forms of “unconventional” oil and gas.Production of shale gas has soared in the US in the past 10 years, but it is only compensating for the decline in conventional gas production in the same period. Moreover, while the operators’ calculations assume a 40-year productive lifetime for the average shale gas well, the real number is turning out to be around five to seven years. That means that in the older shale plays, they have to drill like crazy just to maintain current production — and since drilling is very expensive, they aren’t making a profit. They are hoping to make a profit, of course, once the gas price recovers from the ridiculous level of $2 per million BTU that it fell to in 2009, when a great many people believed this really was a miracle. But it’s clear that shale gas is no miracle that will provide ultra-cheap fossil fuel for the next 100 years. In that case, the prediction that the US will be the world’s biggest oil producer by 2017 is nonsense. Even on an ultra-optimistic estimate of how much “unconventional oil” it can eventually get out of the shale formations, it will still be importing a large proportion of its oil in 2035.

    Hunger Strike Puts Spotlight on Canadian Crude - A U.N. special envoy on the rights of indigenous peoples expressed concern about the ongoing hunger strike of a tribal leader protesting certain natural resource laws in Canada. The Canadian government is pressing ahead with plans to diversify an oil economy that relies almost exclusively on the United States for energy exports. Aboriginal communities along the western Canadian coast, as well as provincial leaders, have said the economic gains aren't worth the environmental risks. A recent study from Canadian researchers into oil sands development provides what may be the "smoking gun" that eventually busts the bitumen boom. Green advocates with the group Tar Sands Blockade expressed their opposition to plans for parts of the Keystone XL oil pipeline in Texas by occupying trees in the state. The group said it was standing in solidarity with the Canadian indigenous movement Idle No More, saying pipeline planner TransCanada is eroding the sovereign rights of tribal communities. This week, U.N. special envoy on the rights of indigenous peoples James Anaya called on the Canadian government to hold "meaningful dialogue" with the tribal community given the month-long hunger strike waged by Attawapiskat First Nation Chief Theresa Spence. "Both the government of Canada and First Nations representatives must take full advantage of this opportunity to rebuild relationships in a true spirit of good faith and partnership," said Anaya in a statement.

    Canada Pipeline Hits Slippery Patch - Canadian Prime Minister Stephen Harper's government promised to push new oil pipelines to the Pacific—a gateway to thirsty Asian markets—after Washington early last year rejected a pipeline expansion to boost Canadian exports to the U.S.But the pillar of that plan—a 730-mile line called the Northern Gateway that would carry crude from landlocked Alberta to the Pacific port of Kitimat—is mired in political and public opposition, focused in the province of British Columbia. That is threatening Mr. Harper's efforts to open new markets for Canada's crude. British Columbia has historically been a hotbed of the environmental movement in Canada. To boost the chances of the Northern Gateway—a six billion Canadian dollar development proposed by Calgary-based Enbridge—the Harper government streamlined environmental reviews of big energy projects, and made the rules retroactive to apply to the pipeline project. But now the project's chances are fading, industry executives and former British Columbia government officials say. The stakes have risen in recent months amid a plunge in the price that Canadian producers get for their oil. Because of a lack of pipeline capacity out of Alberta's oil patch to non-U.S. markets, and a growing supply glut in the U.S., Canadian blends are selling at sometimes-sharp discounts to other oil.

    Obama Administration Lies, Then Covers Up, to Minimize BP Liabilities for Deepwater Horizon Disaster - The National Oceanic & Atmospheric Administration (NOAA) of the Federal Government has refused to investigate why it vastly underestimated the amount of oil spilled in BP’s Deepwater Horizon huge blowout in the Gulf of Mexico, and thus refused to understand why the actual liability of BP will never be able to be estimated accurately, for calculating BP’s penalties and compensation-payments. Several efforts to get NOAA to investigate this acknowledged underestimate, have now been rejected by the Obama Administration; and, so, as PEER’s Executive Director Jeff Ruch said in a final news release on this matter January 3rd, “The only investigation into the estimates of the oil leak rate will be by BP’s lawyers,” who are the very same people who are negotiating against the Government, in order to determine the amount of BP’s liability. This willful absence of information sets a precedent for future environmental disasters. The precedent is: the responsible polluters can lie about the extent of their pollution, and the Federal Government can refuse to investigate the matter; and this combination of business and government means that if politicians (and the governmental agents, such as NOAA, that are under politicians’ control) are paid enough, in order to induce them to accept a polluter’s numbers on its pollution, then there may be no reliable correlation at all between the firm’s actual harms, and the amount of money that the company will be legally obliged to pay, for its cleanup, damages, and penalties.

    BP hopes to cut Gulf of Mexico fine by $3.4bn - The oil giant wants credit for capturing the oil before it could do any damage and has asked a US judge to acknowledge the success. Under environmental legislation, BP could be liable for a fine of up to $3.4bn (£2.1bn) if the 810,000 barrels are judged to have caused marine pollution. BP is facing a potential fine of more than $20bn for the 4.9m barrels that gushed from its deep water well in 2010, although the company has estimated the cost of resolving the claims at $7.8bn. The US government has admitted that roughly 833,000 barrels were “recovered” during the spill response. In the court filing, BP asked the government not to overestimate the size of the spill. “The oil BP successfully captured without it entering the Gulf of Mexico waters should not be considered in the court’s determination of Clean Water Act civil penalties,” a BP spokesman said. Under the US Clean Water Act, polluters face a penalty of $1,100 to $4,300 per barrel of oil, depending on whether the polluter acted in a grossly negligent or reckless manner.

    Obama Environmental Picks Seen Focusing On Oil Boom -  Four years ago, President Barack Obama said his energy and environmental advisers would work to develop a “new hybrid economy” based on wind, solar, and other renewable energy sources. Lisa Jackson has announced her exit as head of the Environmental Protection Agency, and Energy Secretary Steven Chu, who faced congressional criticism over green-energy programs, could follow. Obama may end up assembling a second- term team for a different task: how to manage the boom in U.S. production of oil and natural gas.“When the Obama team came in the first go around, there was great hope that the president would be transformative and really try to shift the energy policy much more heavily towards renewables,” Charles Ebinger, an energy policy expert at the Brookings Institution in Washington, said in an interview. Instead, the growth of hydraulic fracturing to drill for oil and gas in shale rock formations is offering a “unique opportunity to revitalize the American economy and reinvigorate American manufacturing,” Ebinger said.

    Interior Dept. Expedites Review of Arctic Drilling After Accidents— The Interior Department on Tuesday opened an urgent review of Arctic offshore drilling operations after a series of blunders and accidents involving Shell Oil’s drill ships and support equipment, culminating in the grounding of one of its drilling vessels last week off the coast of Alaska. Officials said the new assessment by federal regulators could halt or scale back Shell’s program to open Alaska’s Arctic waters to oil exploration, a $4.5 billion effort that has been plagued by equipment failures, legal delays, mismanagement and bad weather. Interior Secretary Ken Salazar said that the expedited review, which is to be completed within 60 days, was prompted by accidents and equipment problems aboard Shell’s two Arctic drilling rigs, the Kulluk and the Noble Discoverer, as well as the Arctic Challenger, a vessel designed to respond to a potential well blowout and oil spill. In addition, the Coast Guard announced Tuesday that it would conduct a comprehensive marine casualty investigation of the grounding of the Kulluk on Dec. 31. Shell’s repeated and early misadventures have confirmed the fears of Arctic drilling critics, who said that the company and its federal partners had not shown that they had the equipment, skill or experience to cope with the unforgiving environment there.

    Hands Off, Oil Industry Warns Government -  Jack Gerard, the often-combative chief executive of the American Petroleum Institute, said Tuesday that the United States was “at the crossroads of a great turning point” in the nation’s energy history.As long as Congress and the Obama administration don’t mess it up, he warned. In a broad-gauge speech in Washington on the state of the American oil and gas industry, Mr. Gerard said that because of new petroleum finds and new drilling techniques – chiefly directional drilling and hydraulic fracturing in shale formations – the United States could become the world’s leading energy producer. “North America could become self-sufficient in liquid fuels in roughly 12 years,” Mr. Gerard said, citing figures from the International Energy Agency. “And as a potential energy exporter, we can help bring greater stability to the geopolitics of energy, to say nothing of the positive impacts increased U.S. supply would have for U.S. businesses, workers and consumers.” But he cautioned that this rosy future was dependent on the federal government’s not interfering with his industry, by, say, raising taxes on oil companies, or imposing new environmental regulations on fracking operations, or limiting greenhouse gas emissions from refineries.

    Big Oil Lobby Claims The Industry 'Gets No Subsidies, Zero, Nothing' - Despite ranking among the most profitable corporations in the world, Big Oil benefits from $4 billion in annual tax breaks. It fights to maintain them through aggressive political donations, lobbying, and heavy ad spending, but also employs another tactic: Pretending these tax breaks don’t exist. “The oil and gas industry gets no subsidies, zero, nothing,” API President Jack Gerard said on Tuesday. “We get cost-recovery benefits, much like other industries. You can go down the road of allowing economic activity, generating hundreds of billions to the government, or you can take the alternative route by trying to extract new revenue from industry by increasing their cost to do business.” Tax deductions are indeed subsidies, as API admitted in a document that labeled “subsidies for alternative fuels” as “preferential tax treatment.” And the oil industry’s $4 billion preferential treatment is written permanently into the tax code. These include:

      • Percentage depletion allowance: lets companies deduct the costs of an oil or gas well, about 15 percent, from its taxes.
      • Domestic manufacturing tax deduction: Allows oil companies to collect $1.8 billion each year, even though there are vast differences between oil and traditional U.S. manufacturing. It is a benefit that was never intended for them, according to Sen. Bob Corker, a Tennessee Republican, who said Congress included oil producers “almost inadvertently.”
      • The foreign tax credit: Oil companies overwhelmingly fall into the category of companies that can claim credits for payments to foreign governments.
      • Expensing intangible drilling costs: For over a century, oil companies have written off wages, fuel, repairs, and hauling costs.

    US oil imports to fall to 25-year low - US oil imports will fall to their lowest level for more than 25 years next year, as production booms while demand grows only slowly, according to a government forecast. The US Energy Information Administration predicted that net imports of liquid fuels, including crude oil and petroleum products, would fall to about 6m barrels per day in 2014, their lowest level since 1987 and only about half their peak levels of more than 12m during 2004-07. The figures reflect the spectacular growth of US production thanks to the unlocking of “tight oil” reserves using hydraulic fracturing and horizontal drilling in states led by North Dakota and Texas. The declining US dependence on imports will still bring benefits, including increased resilience to crude price shocks and job creation in the oil industry. The EIA also said it expected increased US production to put downward pressure on oil prices. It forecast that internationally traded Brent crude would drop from an average of $112 per barrel last year to $99 in 2014, while US West Texas Intermediate dropped from $94 to $91. US crude production hit a low point of 5m b/d in 2008, but rebounded to 6.43m last year and is expected by the EIA to rise to almost 8m in 2014. At the same time, consumption has been falling, from 20.7m b/d, for all liquid fuels, in 2007, to 18.7m last year. The EIA expects it to rise very slightly over the next couple of years, but expects that the US will still use less oil in 2014 than in 2011.

    ‘Saudi America’s’ oil output went above 7m barrels per day last week for first time since March 1993, almost 20 years ago - According to new EIA data released today, U.S. oil production surpassed 7 million barrels per day (bpd) last week for the first time since the first week of March in 1993, almost 20 years ago (see chart above).  Compared to the first week of January last year when the U.S. was producing less than 6 million bpd, domestic oil output has increased almost 20% (and by more than 1 million bpd), as a result of the ongoing huge gains in shale oil production in Texas (now producing more than 2 million bpd as of October, double the state’s output just three years ago) and North Dakota (almost 750,000 bpd in October, a new state record). And we can expect even more gains in crude oil output from domestic producers this year and in the future, here’s what CNBC is reporting: “U.S. oil production continues to accelerate at a surprising rate, and the government now predicts the U.S. industry could pump 14 percent more oil this year alone. The use of non conventional drilling techniques in places like North Dakota and Texas has created an explosion in U.S. production to the point where the U.S. is expected to surpass Saudi Arabia in crude production by 2020, according to the International Energy Agency.”

    The Numbers Speak For Themselves - Sometimes statistics lie and liars use statistics yet when it comes to the shale gas revolution the numbers are saying that the energy world has changed forever. Numbers released yesterday by the Energy Information Administration speak volumes and they tell a story of an industry that has achieved what many said was impossible. They tell a story of the free market place, where high prices and the pursuit of profits inspired man to think outside of the box and solve the impossible. Instead of talking about “peak oil” or being held hostage to foreign oil producers we are now trying to decide the best way to handle our energy abundance. In the past I used to say that peak oil believers and their theories were more like a religion than a science because if you look at the history of the energy markets there has always been innovation when prices got high enough. If you would have predicted numbers like the Energy Information Agency predicted yesterday the “peak freaks” as I called them would say that it was impossible.  Yet the impossible is happening now. Just think that according to the EIA US crude oil production is going increase by a whopping 25% in the next two years. On the other hand the EIA is predicting that US oil imports are going to drop imports are going to drop to the lowest level in 25 years.  This is a far cry from the doomsday predictions we were hearing during the last decade. Instead of declining production, US production is on the rise expected to hit 7.9 million barrels a day by 2014.

    With domestic crude production in the US rising sharply, WTI is becoming less relevant as a benchmark - The US Department of Energy reported a large drop in crude oil stocks last week. As expected, a great deal of that decline was driven by a drop in crude imports - a trend that has been ongoing for some time now (see discussion). The chart below compares 2012 US imports with that in 2011.And in spite of that drop is inventory, the US crude oil market is extremely well supplied for this time of the year. As crude oil supplies stay at unusually high levels due to domestic production, the US oil market is becoming more decoupled from the global energy markets. One can see this effect in the persistently elevated Brent-WTI spread (see discussion). A year ago it was believed that as the Seaway Pipeline begins moving crude from Cushing Oklahoma to the Gulf of Mexico (with the flow's direction now reversed), the price of the two crude oil markets should converge (Brent and WTI represent the same type of crude, just delivered to different locations). That has not occurred, and the Brent-WTI spread remains in the $20/barrel range.

    Shell Leads the Way to Move Offshore Production Process to the Seabed - Shells latest fiasco with offshore drilling in the Arctic highlights the risks involved with such ventures; so it is of little surprise that many oil & gas companies, Shell (NYSE: RDS.A) being at the forefront, are researching ways in which to extract oil and natural gas in offshore locations without the need for a platform. At the bottom of a giant water filled pit in western Norway Shell are in the process of testing a thousand-ton gas compressor which it will use to achieve platform-free production at its Ormen Lange natural gas field in the Norwegian Sea. Oil companies are driven to move all offshore equipment to the seabed rather than have it on a platform in order to avoid sea ice and violent storms, reduce the operating cost of the well, and eliminate much of the risk generally associated with offshore drilling. The leaders in the field are Shell and Statoil, who are both racing to develop the world’s first subsea gas compression unit which will prove a major step along the path to move the entire extraction process underwater.

    A future scenario with oil prices dominated by ‘above-ground’ factors - Veteran economist and oil analyst Phil Verleger in his latest note has roundly criticised everyone who forecast in recent years that oil prices would keep rising forever; which he says includes just about everyone who has an opinion about oil prices. He highlights the work of Morris Adelman, an MIT economist who’s little known these days — unjustly, according to Verleger: His mistake was rejecting the consensus view that world resources were exhaustible while calling Harold Hotelling’s theories irrelevant. His views doomed him to temporary oblivian. You can probably see where this is going: Verleger segues into the development of US shale oil resources, which has nearly all the pundits (Bernstein Research being one exception) shouting about how new extraction technologies applied to shale reserves will revolutionise US oil production, just as it did for natural gas. Only, Verleger doesn’t believe that this soon-to-be abundance of oil production will necessarily lead prices to fall in a kind of predictable trajectory. He hypothesises about what a flood of US oil production might mean for the Gulf OPEC producers: Professor Adelman often stated that oil prices fall as reserve constraints are broken. He may prove correct. However, lower prices need not be the long-run consequence, at least not all the time.

    Turkey Beating Norway as Biggest Regional Oil Driller - Turkey is drilling for oil and natural gas with more rigs than any European country and plans new rules in 2013 to speed exploration of energy supplies for the fastest-growing major economy after China.  The country fielded 26 rigs at Dec. 31, according to data compiled by Bloomberg, and the number has since risen to 34, Energy Ministry officials said yesterday. Turkey has leapfrogged Norway as offshore drilling increased in the Black and Mediterranean seas. Spending on exploration jumped to $610 million last year from $42 million a decade earlier. With economic growth forecast at 3.5 percent this year and about twice the pace of the most advanced economies to 2017, Turkey is drilling for its own energy to ease reliance on imports from Iran, Iraq and Russia. State-owned Turkish Petroleum Corp. has taken Royal Dutch Shell and Exxon Mobil Corp. as partners, after neighboring Israel and Cyprus made some of the decade’s biggest gas finds in the past three years.

    Nigeria state oil firm borrows $1.5 bln to pay fuel debt -source - Nigerian state oil firm NNPC has obtained a $1.5 billion syndicated loan to help it pay debts to international fuel traders, a senior banking source with knowledge of the deal said on Monday. The deal struck at the end of last year is seen as crucial to easing the burden on big commodity traders, who were facing the prospect of painful multi-million dollar write-offs, oil trading sources told Reuters. The loan, provided by several Nigerian and international banks and brokered by Standard Chartered, will be paid back over five and half years. The NNPC has put up 15,000 barrels per day of its oil production as collateral, the source said

    Middle East's Largest Refuelling Station Struggles Due to Iran Sanctions -- The Middle East’s biggest ship refuelling station, at the port of Fujairah in the UAE, may soon have to start charging higher costs as the West’s sanctions against Iran start to restrict supplies of fuel oil. Fuel oil is a residue that is removed during the refining of crude oil, and is used as fuel for ships and power plants. Fujairah depends on Iran to supply nearly a third of the one million metric tonnes of fuel that it buy and sells each month, but as the sanctions curb Iran’s export volumes, the majority of the fuel will be shipped to the port of Singapore, as the preferred customer, because it buys four times as much fuel as Fujairah. Barclays confirmed that, “with the pressure from sanctions increasing over the past two months, more Iranian fuel oil is heading to Singapore, thereby reducing supplies to Fujairah.”

    Exclusive: Financial Times shops for China buyer - Three months after British media company Pearson reportedly started testing the waters for a possible sale of its flagship newspaper the Financial Times, one of my knowledgeable sources is telling me the company's advisers have even come to China in their search for potential buyers. My source was quick to add that a Chinese buyer is highly unlikely to make a bid for Pearson for mostly political reasons, which I'll explain shortly and many of which are detailed in my new book, "The Party Line" about how China's media work. But what I find most intriguing is the fact that Pearson might even consider selling one of its crown jewels to a Chinese buyer, which perhaps reflects just how difficult the market has become for print publications that once ruled the global media market. Pearson's advisers looking in China also highlights the fact that Chinese media are one of the few global groups in the sector that is relatively cash rich, since many of the nation's biggest media groups have near-monopoly status in their local markets and often have highly diverse holdings that run the range from print, to broadcasting and new media assets.

    Charting China’s 2013 Economic Outlook  - What’s the outlook for China’s growth in 2013? China Real Time asked economists to flip their best forecasting coin, then charted the results… The starting point for analysis is that – even when its economy is firing on all cylinders – China doesn’t have its old capacity to grow. “At the moment unemployment is not serious, and inflation isn’t high, which suggests that the current 7.5% growth rate isn’t far from the potential growth rate,” wrote CICC economist Peng Wensheng. That’s a marked deterioration from an average of about 10% annual growth in the last decade. Even as potential growth declines, economists are hopeful that 2013 will be slightly better than 2012. The median forecast of 19 private sector, think tank and international organization economists polled by China Real Time is that gross domestic product will expand 8% in the year ahead, an improvement on 7.7% in the first three quarters of 2012.Qu Hongbin at HSBC has an above consensus call of 8.6% growth, supported by strong infrastructure spending, stabilizing property investment, and resilient consumption. Wei Yao at Societe Generale has a below consensus 7.4% forecast, with weak global demand and leaders focused on shoring up medium term growth, rather than another short term stimulus.

    Nomura on China: Expect 8% Year-over-year growth in Q4 - From Wendy Chen at Nomura:  After slowing for seven straight quarters, we expect China's GDP growth to rebound to 8% in Q4 2012. We expect real GDP growth to rebound to 8.0% y-o-y in Q4 from a low of 7.4% in Q3, underpinned by accommodative monetary and fiscal policies, inventory destocking coming to an end and a modest improvement in exports. Industrial production growth is likely to rise to 10.6% y-o-y in December from 10.1%, as a return to more normal inventories lifts production. We expect fixed asset investment to rise slightly to 20.8% y-o-y (ytd) in December from 20.7% in November, driven by infrastructure investment and possibly real estate investment. It appears China's growth is picking up in the short term, but growth will probably slow again. Michael Pettis wrote last month: Three cheers for the new data?I expected that politics would require a jump in growth over the rest of this year and the beginning of the next, this “good growth” tells us nothing about the health of the underlying economy. Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all. They simply represent the fact that Beijing cannot afford politically to allow the adjustment to taker place too quickly,

    The appreciating renminbi - Vox EU - China is perennially accused of currency manipulation. Yet, this column argues that a weak currency value doesn’t necessarily reflect currency manipulation. China is a fast growing economy with strong financial frictions and a high saving rate, and such countries naturally have weak currencies. Instead of focussing on accusations of currency manipulation, it might be more helpful for economists to encourage policies that foster Chinese consumption, gradually leading the renminbi to an appreciating path.

    Chinese 'Currency Manipulation' Is Not the Problem - When things are not going well, it is common to seek scapegoats. In this vein, populists of various stripes allege that China manipulates the value of its currency to favor its exports and undercut American workers, particularly in manufacturing.  The reality is that the value of China's yuan in terms of dollars is not the major reason why China exports over three times as much to us as we do to them. Its exchange rate is a minor source of weak U.S. job growth.  From 1995 to 2005, China pegged its currency, holding it steady at slightly over eight yuan to the dollar. Then, in late 2005, China allowed its currency to appreciate relative to the dollar until July 2008. The rate held steady again for the two years following that date at 6.8 yuan to the dollar. In 2010, gradual appreciation occurred again. The current exchange rate now stands at about 6.2 yuan per dollar, which means that a yuan is worth about 16 cents. If currency movements were the key factor in determining trade patterns, one would expect that exports to the U.S. from China would bear a strong relation to currency movements. They have not.

    China's 2012 trade surplus surges 48%  - China's trade surplus surged 48.1 percent to $231.1 billion in 2012 from the previous year, though total trade volume grew at a much slower pace, official data showed on Thursday. Exports from the world's second-largest economy rose 7.9 percent to $2.05 trillion, while imports increased 4.3 percent to $1.82 trillion, the national customs bureau said. China's trade volume, or the total of exports and imports, grew 6.2 percent in 2012, well below the government's target of about 10 percent. Customs spokesman Zheng Yuesheng said 2012's performance came "despite a sharply slowing world economic recovery, weak international market demand and rather big downside pressure on the domestic economy". Zheng told reporters: "China's foreign trade continued to grow steadily and made further progress in improving quality, increasing profits and optimising structure."

    China's economic improvement is becoming visible in global markets - An unexpected rise in China's trade surplus announced today had a material impact on global markets. The increase in trade activity shows that China's economy may be picking up steam faster than originally anticipated (see discussion).Exports rose 14% on a YoY basis against 4.5% consensus. Global markets responded with the "risk-on" trade. The dollar sold off while commodities rallied.One of the broader developments in recent weeks in response to the China growth story has been the rally in US transport shares. DJ Transports index has materially outperformed DJI since mid-December. Cognito: - China is the world’s second largest and most rapidly growing major economy. It is also the world’s largest exporter. As a result, a bottom and potential turn in China’s international shipments can be reasonably viewed as a sign of a bottom and potential turn in worldwide trade. Many of the twenty companies comprising the Dow Jones Transportation Average are engaged in the international shipment of goods. Hence their sales and earnings would benefit from an increase in global trade. This is not unique to the US, with Australian transport shares rallying as well. An improvement in the transport sector is good news for global growth because it tends to lead economic expansion.

    They Are Getting Ready: “No Obvious Reason” For Why China Is Massively Boosting Stockpiles of Rice, Iron Ore, Precious Metals, Dry Milk - If there were ever a sign that something is amiss, this may very well be it. United Nations agricultural experts are reporting confusion, after figures show that China imported 2.6 million tons of rice in 2012, substantially more than a four-fold increase over the 575,000 tons imported in 2011. The confusion stems from the fact that there is no obvious reason for vastly increased imports, since there has been no rice shortage in China. The speculation is that Chinese importers are taking advantage of low international prices, but all that means is that China’s own vast supplies of domestically grown rice are being stockpiled. Why would China suddenly be stockpiling millions of tons of rice for no apparent reason?  Perhaps it’s related to China’s aggressive military buildup and war preparations in the Pacific and in central Asia. If a 400% year-over-year increase in rice stockpiles isn’t enough to convince you the Chinese are preparing for a significant near-term event, consider that in Australia the country’s two major baby formula distributors have reported they are unable to keep up with demand for their dry milk formula products. Grocery stores throughout the country have been left empty of the essential infant staple as a result of bulk exports by the Chinese. A surge in sales of one of Australia’s most popular brands of infant formula has led to an unusual sight for this wealthy nation: barren shelves in the baby aisle and even rationing of baby food in some leading retail outlets.

    Japan Monetary Base Jumps 11.8% In December - The monetary base in Japan spiked 11.8 percent on year in December, the Bank of Japan said on Monday, standing at 131.983 trillion yen. That follows the 5.0 percent annual increase in November. Banknotes in circulation gained 2.8 percent on year, while coins in circulation added 0.5 percent. Current account balances surged 36.5 percent on year, including a 46.4 percent spike in reserve balances. Seasonally adjusted, the monetary base soared 39.0 percent on year to 129.930 trillion yen. For the fourth quarter of 2012, the monetary base was up 9.2 percent on year. For all of 2012, the base climbed 7.0 percent.

    Abe Seen Spending 12 Trillion Yen to Boost Japan’s Economy --The Japanese government will announce around 12 trillion yen ($136 billion) in fiscal stimulus measures to boost the nation’s shrinking economy, Japanese media reported today. The Yomiuri newspaper and Kyodo News both reported the figure for extra spending in the fiscal year through March, with the Yomiuri saying that 5-6 trillion yen will be directed to public works projects, without citing anyone. Prime Minister Shinzo Abe told business leaders today that he hopes to compile the measures this week. The spending may help to accelerate a recovery from recession as Abe pledges to boost growth and end deflation in the world’s third-largest economy. While Japan’s public debt is more than twice gross domestic product, Finance Minister Taro Aso said last week that the government doesn’t need to adhere to a 44 trillion-yen cap on new bond issuance in this fiscal year. “The scale of this budget suggests that Abe’s new administration is serious about stimulating the economy,”

    Japan PM leans on BOJ as government launches big economic stimulus (Reuters) - Japanese Prime Minister Shinzo Abe made his biggest push yet to make jobs growth part of the Bank of Japan's mandate as his government approved $117 billion of spending to revive the economy in the biggest stimulus since the financial crisis. Under intense pressure from Abe, the BOJ will likely adopt a 2 percent inflation target at its January 21-22 rate review, double its current goal, and consider easing monetary policy again, most likely by increasing government debt and asset purchases, sources told Reuters this week. Japan's current account, which is normally in surplus, swung to a rare and hefty deficit in November, which helped push the yen to a 2-1/2 year low against the dollar and highlighted the need to support the economy as exports weaken. Abe's recipe to jolt Japan from years of deflation is big fiscal spending and central bank purchases of government debt, but there are risks as the country's debt burden is already the worst among major economies. "Bold monetary easing is essential in beating deflation and a strong yen," Abe said as he unveiled direct spending worth 10.3 trillion yen ($117 billion) on public works, incentives for corporate investment and financial aid for small firms. Taken together with spending by local governments and private-sector firms, the size of the entire package was 20.2 trillion yen, according to government officials.

    Japan OKs $224 Billion Economic Stimulus Package — The Japanese Cabinet approved a fresh stimulus package of more than 20 trillion yen ($224 billion) on Friday, aiming to lift the economy out of recession and create 600,000 new jobs. Prime Minister Shinzo Abe announced the decision at a news conference where he said the new measures were intended to add 2 percent to Japan‘s real economic growth. Abe urged the central bank to move more aggressively to encourage lending and meet a clear inflation target to break out of the economic doldrums that have plagued Japan for two decades. Abe took office late last month after a parliamentary election victory by the Liberal Democratic Party, which is touting public works spending and subsidies to strategically important sectors as part of its plan to revive the economy.

    Japan unveils Y10.3tn stimulus package - Japanese prime minister Shinzo Abe unveiled a Y10.3tn ($116bn) economic stimulus package that the government expects will lift the country’s gross domestic product by 2 per cent and create 600,000 jobs. “We are making a bold shift . . . towards an economic policy that will create wealth through economic growth,” Mr Abe said on Friday. The stimulus package will exacerbate Japan’s deteriorating fiscal health as gross government debt is already at 220 per cent of GDP. The newly-elected Mr Abe, however, is under significant pressure to lift the economy out of its fifth recession in 15 years before Upper House elections in July. The package approved by the Abe cabinet on Friday will focus on measures to rebuild the Tohoku area devastated by the earthquake and tsunami of March 11, 2011, bolster disaster prevention, strengthen social security and revitalise regional economies. Mr Abe said that his plan to revitalise Japan’s economy would be based on “the three arrows of a bold monetary policy, flexible fiscal policy and a growth strategy to stimulate private investment”. Of the Y10.3tn in fresh government spending, Y3.8tn will go towards rebuilding the Tohoku region and strengthening disaster prevention, Y3.1tn will be allocated for wealth creation, through measures to improve the competitiveness of Japanese industry and stimulate innovation, and Y3.1tn will go towards social security such as healthcare and education as well as regional revitalisation, Mr Abe said.

    Japan Approves $116 Billion in Emergency Economic Stimulus - The Japanese government approved emergency stimulus spending of more than $100 billion on Friday, part of an aggressive push by Prime Minister Shinzo Abe to kick-start growth in Japan’s long-moribund economy. Mr. Abe also reiterated pressure on Japan’s central bank to make a firmer commitment to stopping deflation by pumping more money into the economy — a measure the prime minister says is crucial to getting businesses to invest and consumers to spend. “We will put an end to this shrinking, and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe told a televised news conference. “For that, the government must first take the initiative to create demand, and boost the entire economy.” Under the plan, the Japanese government will spend about 10.3 trillion yen (about $116 billion) on public works and disaster mitigation projects, subsidies for companies that invest in new technology and financial aid to small businesses. The government will seek to raise real economic growth by 2 percentage points and add 600,000 jobs to the economy, Mr. Abe said. The measures announced Friday amount to one of the largest spending plans in Japan’s history, he stressed.

    Yen Falls to Lowest Since 2010 on Stimulus - The yen reached the weakest since June 2010 versus the dollar after Japanese Prime Minister Shinzo Abe’s government said it will spend 10.3 trillion yen ($116 billion) in new stimulus efforts that tend to weaken a currency.  The yen headed for a ninth weekly decline, the longest losing streak since 1989, on speculation the Bank of Japan (8301) is also preparing measures to spur growth. Japan’s government will spend about 3.8 trillion yen on disaster prevention and reconstruction, and 3.1 trillion yen on stimulating private investment and other measures, the Cabinet Office said in a statement. The Bank of Japan is set to adopt the 2 percent inflation target advocated by Abe, doubling its existing goal of 1 percent, without setting a deadline for achieving it, according to people familiar with discussions within the central bank. They requested anonymity because the talks are private. The BOJ meets on Jan. 21-22.

    Japan to Buy European Debt With Currency Reserves to Weaken Yen - Japan plans to use its foreign- exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said. “The financial stability of Europe will help the stability of foreign-exchange rates, including the yen,” Aso told reporters today at a briefing in Tokyo. “From this perspective, Japan plans to buy ESM bonds,” he said. The purchase amount is undecided, Aso said.The move may help Prime Minister Shinzo Abe temper criticism of Japan’s currency policies from trading partners such as the U.S. The yen has fallen around 8 percent against the dollar since mid-November on Abe’s pledge to reverse more than a decade of deflation as his Liberal Democratic Party won an election victory last month. “The Europeans would be happy to see Japan buy ESM bonds, so Japan can avoid criticism from abroad and at the same time achieve its objective,”

    Is Shinzo Abe the Great Keynesian Hope? - A lot of people were very excited about Shinzo Abe's talk of revoking the Bank of Japan's independence and forcing the Bank to adopt a far more expansionary/easy/inflationary monetary policy. I was not among them. I said that Abe was just "talking down the yen". This now seems to have become the conventional wisdom in the press, though as Paul Krugman points out, talking down the yen is a good (if not revolutionary) idea in its own right.Now, here comes Abe with some Keynesian magic: an "emergency stimulus" package worth over $100 billion.  Is this for real? Well, sure, it's for real. And it will probably continue. So Keynesians should be happy. But they should also realize that the reason for Japan's new "stimulus" has nothing to do with Keynesian ideas. Instead, it has to do with re-establishing traditional back-scratching relationships between the LDP and its grassroots supporter base.

    Is Japan the Country of the Future Again? - Paul Krugman = In the broad sense, surely not, if only because of demography: the Japanese combine a low birth rate with a deep cultural aversion to immigration, so the future role of Japan will be severely constrained by a shortage of Japanese. But something very odd is happening on the short- to medium-term macroeconomic front. For the past three years macro policy all across the advanced world has been dominated by Austerian orthodoxy; even where there haven’t been explicit austerity policies, as in the United States, fear of deficits has led to de facto fiscal tightening, while monetary policy has fallen far short of the kind of dramatic expectation-changing moves theoretical analysis suggests are crucial to getting traction in a liquidity trap.Now, one country seems to be breaking with the orthodoxy — and it is, surprisingly, Japan: The Japanese government approved emergency stimulus spending of ¥10.3 trillion Friday, part of an aggressive push by Prime Minister Shinzo Abe to kick-start growth in a long-moribund economy.Mr. Abe also reiterated his desire for the Japanese central bank to make a firmer commitment to stopping deflation by pumping more money into the economy, which the prime minister has said is crucial to getting businesses to invest and consumers to spend.

    Japanomics strikes a revolutionary note - Suddenly it is game on in Tokyo – and the world is watching. For the past 15 years Japan has been trying to shrink its way out of its problems. That did not work. Now it is about to try the opposite approach. Japan’s “lost decades” have long been an awful warning to the world of the damage that a spectacular boom and bust can inflict on an economy’s long-term prospects. Now Japan could become another kind of example. If the pedal-to-the-metal reflationary policies of Shinzo Abe, the recently elected prime minister, succeed, there will be a profound impact on post-crisis policy making everywhere. History shows that Japan rarely does things by half-measures. The financial bubble of the 1980s was probably the biggest in history. At its peak the Tokyo stock market was worth more than half of global market capitalisation. The contraction was equally intense. Twenty-three years after the Japanese bubble burst in 1989, the Nikkei Index was flirting with new bear market lows. Weak growth and deflation have meant that Japan’s nominal gross domestic product is no higher now than it was in 1992. Even so, macroeconomic policy has remained contractionary. Just last year Yoshihiko Noda, the former prime minister, pushed through a bill to double consumption taxes. Unfortunately the reward for such rectitude has been an explosion in the debt to GDP ratio. Tax revenues have collapsed and social spending has soared – a phenomenon now familiar in Europe.

    What’s So Great About Independent Central Banks? - The new government in Tokyo wants to see more aggression from the Bank of Japan. The monetary prong of its legislative program calls for a higher inflation target and also an open-ended commitment on the part of the BOJ to expand its balance sheet. It will get its way too, as perhaps a democratically-elected government should. Indeed, it has threatened to strongarm the BOJ with legislation but may not have to go so far. The current BOJ governor, Masaaki Shirakawa, will come to the end of his term in April. It will probably be far easier to appoint an independent successor who will decide, independently, to deliver what the politicians want. So, is central bank independence more broadly just another pillar of pre-crisis finance destined to topple in our post-crisis world?

    The politicisation (or not) of central banks - The macroeconomic debate is now buzzing about “political dominance” over the central banks, under which elected politicians force central bankers to take actions they would not choose to take, if left to their own devices [1]. This is clearly what is happening in Japan, where the incoming Shinzo Abe government is not only imposing a new inflation target on the Bank of Japan (which is legitimate), but is changing the leadership of the central bank to ensure that the BoJ adopts policies compliant with the fiscal regime. This is not just political dominance, it is fiscal dominance, where monetary policy is subordinated to the decisions of those who set budgetary policy. There have also been some early signs of political or fiscal dominance emerging elsewhere, notably in the use of the ECB balance sheet to finance cross-border financial support operations in the eurozone, and the “coupon raid” conducted by the UK Treasury on the Bank of England. Many investors have concluded that there is now an inevitable trend in place that will overthrow central bank independence throughout the developed world, allowing politicians to expand fiscal policy, while simultaneously inflating away the burden of public debt. It seems to me that this is a very premature conclusion. While there is no denying that this is indeed the objective in Japan, the direct opposite seems to be happening in the rest of the developed world.

    City Setting, but Village Mentalities - India is essentially a village, and because it is a village it is a woman’s ancient foe. Even the country’s apparent cities are overwhelmed by deep and enduring infestations of rural tradition and the fellowships of the conservatives who hold women in low esteem. The Parliament and legislative assemblies are largely confederations of village headmen. The Indian village is the most formidable preserve of caste hierarchies, and at the very bottom of its many social rungs is the woman. The city, for its part, attempts to dissolve everything that the village holds dear, especially its hierarchies, its “narrow mindedness” and its close scrutiny of women. All of India’s struggles for modernity have been about this — the battle of the idea of the city against the idea of the village. The latest uprising in India is a part of this tired war, even though at first glance it appears to be a society’s outrage at the rape and murder of a young woman in Delhi. On the night of Dec. 16, a 23-year-old student was raped and brutalized for nearly an hour in a moving bus in Delhi by six drunken men, and thrown out of the vehicle. She battled for her life for nearly two weeks before succumbing to complications arising from severe injuries. India reacted to the rape and eventually to her death in a profound way. How it reacted became an accidental survey of the many psychological states of urban India, which included, inexorably, the city’s contempt for the village.

    India Aims to Keep Money for Poor Out of Others’ Pockets - India has more poor people than any nation on earth, but many of its antipoverty programs end up feeding the rich more than the needy. A new program hopes to change that. On Jan. 1, India eliminated a raft of bureaucratic middlemen by depositing government pension and scholarship payments directly into the bank accounts of about 245,000 people in 20 of the nation’s hundreds of districts, in a bid to prevent corrupt state and local officials from diverting much of the money to their own pockets. Hundreds of thousands more people will be added to the program in the coming months. In a country of 1.2 billion, the numbers so far are modest, but some officials and economists see the start of direct payments as revolutionary — a program intended not only to curb corruption but also to serve as a vehicle for lifting countless millions out of poverty altogether. The nation’s finance minister, Palaniappan Chidambaram, described the cash transfer program to Indian news media as a “pioneering and pathbreaking reform” that is a “game changer for governance.”  Some critics, however, said the program was intended more to buy votes among the poor than to overcome poverty. And some said that in a country where hundreds of millions have no access to banks, never mind personal bank accounts, direct electronic money transfers are only one aspect of a much broader effort necessary to build a real safety net for India’s vast population.

    Governments urged to prepare for the worst - Governments should learn from companies and appoint dedicated "risk ministers", according to the authors of a World Economic Forum (WEF) report. The "ministers" should assess a broad range of economic, environmental, geopolitical, societal and technological risks, the Global Risks 2013 report's authors reason. Companies have long had their own "finance ministers", though they call them chief financial officers, and in recent years it has become common to also have risk management functions in companies, according to Axel Lehmann, himself a chief risk officer at Zurich Insurance and a co-author of the report. It would be useful, adds Lee Howell, managing director of the WEF's Risk Response Network and editor of the report, if governments were to create similar functions, with a view to "take an interdisciplinary and holistic approach to risk". "How often do you see a central bank governor talk to a defence minister?" he says. "It doesn't really happen."

    Growth Slowdowns Redux: New Evidence on the Middle-Income Trap: We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.

    Billionaires gain as living standards fall - The world’s 100 richest people added $241 billion to their combined wealth in 2012, according to the Bloomberg Billionaires Index. The top 100 controlled an aggregate $1.9 trillion as calculated by the prices on world stock markets December 31, for an average of nearly $20 billion apiece. If the top 100 were a separate state, their combined wealth would outstrip the Gross Domestic Product of all but eight countries. They would rank behind Italy, but ahead of India and Russia. Of course, being billionaire capitalists, the top 100 don’t actually produce anything. They own, and they reap the benefits of the labor of others.

    EU antitrust chief hints at forced changes for Google - Google is abusing its dominant place in the search market, according to Europe's antitrust chief Joaquin Almunia. In an interview with the Financial Times of London, Google could be forced to change the way that it provides and displays search results or face antitrust charges for "diverting traffic," in the words of Almunia, referring to Google's self-serving treatment to its own search services. Despite the U.S. Federal Trade Commission's move earlier this month to let off Google with a slap on the wrist -- albiet, a change to its business practices, a move that financially wouldn't dent Google in the short term but something any company would seek to avoid -- the European Commission is looking to take a somewhat different approach: take its time, and then hit the company hard. Almunia said in the interview: "We are still investigating, but my conviction is [Google] are diverting traffic," adding: "They are monetising this kind of business, the strong position they have in the general search market and this is not only a dominant position, I think -- I fear -- there is an abuse of this dominant position."

    Turkey Passes Law Curbing Market Comment - Turkey has had a great economic run over the last several years, and it's government really wants to keep it going. Perhaps that's why, as Bloomberg reports, the legislators passed a new law making certain types of commentary on markets a criminal offense punishable with five years in prison. As a result of this measure, SocGen has ordered its employees to stop commenting on the country all together, and Bank of America and Commerzbank AG are figuring out how the law will affect their business. From Bloomberg: Turkey’s Capital Markets Law enacted on Dec. 31 stipulates punishment for “those who provide untruthful, wrong or misleading information, start rumors, or provide news, commentary, or prepare reports with the intention of influencing prices, values of capital markets instruments or investor decisions.”...

    Greece HIV Remedies Hit as Crisis Threatens Drug Curbs - Greece’s efforts to control its debt crisis threaten to hobble the fight against an outbreak of HIV that has become the largest among drug users in the European Union. The nation’s Organization Against Drugs, or Okana, may close treatment centers after its budget was more than halved to 18 million euros ($23.5 million) this year from about 40 million euros in 2011, said Meni Malliori, Okana’s president. That’s jeopardizing progress the group has made in almost tripling the number of centers it operates in Athens to help arrest new infections.“We have to face this very difficult problem under the worst circumstances,” Malliori said in a telephone interview. “If we don’t get more money, we can’t even maintain what we did during the last year.” New infections among drug users have exploded 35-fold in two years, adding pressure on a strained medical system that’s been battling simultaneous outbreaks of malaria and West Nile virus with shrinking resources amid the financial crisis. A government hiring freeze and spending cuts aimed at curbing the nation’s spiraling debt threaten to stall the response and extend the almost four-year wait for opioid substitutes that ease withdrawal symptoms so addicts can quit and avoid HIV.

    Greek Tax Scandal Distracts From a Collection Shortfall - The tax scandal that reignited in Greece over the holidays had all the makings of a grade-B drama. A former finance minister, George Papaconstantinou, was accused of scrubbing his relatives’ names from a CD containing the identities of thousands of possible Greek tax dodgers. Within hours, his chief political rival tossed him from their party. Mr. Papaconstantinou, in turn, hinted darkly that he was the victim of a plot masking malfeasance at higher levels. While the firestorm may have made for political theater of a sort, it has diverted attention from a much bigger problem: Greece, its foreign lenders say, has fallen woefully short of its tax collection targets and is still not moving hard enough to tackle widespread tax evasion — long tolerated, particularly among the country’s richest citizens. Greek officials agreed to the targets as part of an international lending pact last year, but there is no penalty for missing them. In recent weeks, however, two reports by Greece’s foreign lenders have found that Athens pulled in less than half of the additional tax income that it expected last year and performed fewer than half of the expected audits.

    Rajoy Stealth Order Adds to Off-Balance Sheet Debt: Euro Credit - Spanish Prime Minister Mariano Rajoy added more than 3 billion euros ($3.9 billion) to his debt load in the closing hours of 2012 with a New Year’s Eve order removing a cap on utilities’ government-guaranteed losses. The decision, announced in the official gazette, added to the snowballing power-tariff debt, which isn’t included in the public accounts. The shortfall exceeded 20 billion euros at year end, according to government filings. Spain’s government-controlled electricity system has raised less revenue from consumers than it pays to power companies for most of the past decade. Officials have covered the difference with bonds in the so-called FADE program. “With an explicit guarantee, any final losses are passed on to the Spanish taxpayer, as happened in Ireland with its banks in a bigger scale,”

    Pamplona’s locksmiths join revolt as banks throw families from their homes - Tired of accompanying court officials to evict unemployed people as banks foreclosed mortgages, De Carlos consulted his fellow Pamplona locksmiths before Christmas. In no time at all, they came to an agreement. They would not do the dirty work of banks whose rash lending pumped up a housing bubble and then, after it popped, helped bring the country to its knees. "It only took us 15 minutes to reach a decision," says De Carlos amid the racks of keys in the family's shop in the centre of this small northern city best known for its annual bull-runs and the adoration heaped on it by Ernest Hemingway in The Sun Also Rises. "We all had stories of jobs we had been on where families had been left on the street. When you set out all you have is an address and the name of the bank, but I recall an elderly, sick man who was barely given time to put his trousers on."The logic behind their decision was clear and simple. While Spain's banks mop up billions of euros in public aid, they are also busy reclaiming homes that in some cases they lent silly money for. At the height of Spain's housing madness, banks were, in effect, offering mortgages of more than 100%. They aggressively chased clients – especially among the immigrants who arrived from Latin America in their millions to build new homes – creating an uncontrolled spiral of self-fulfilling, but ultimately doomed, demand. Complex networks of guarantors were pieced together by middlemen among immigrants who often barely understood what they were doing.

    300 health center directors resign in Spanish capital to protest privatization plans - More than 300 directors of some 140 health centers in Madrid resigned from their posts Tuesday to protest plans to partly privatize the region’s public health service. The regional government of the Spanish capital plans to outsource the management of six of 20 large public hospitals in its territory and 27 of a total of 270 health centers. It argues it must do so to fix the region’s finances and secure health services. On Monday, thousands of medical workers marched through Madrid to protest the plans and other budget cuts. Health care and education are currently administered by Spain’s 17 semi-autonomous regions rather than the central government. Most of the regions, however, are struggling financially with high debt and an economic recession. Hit badly by a real estate crash in 2008, the national unemployment rate has soared above 26 percent.

    Spain Plans Record Bond Issues —Spain announced plans on Tuesday to issue a record amount of government bonds this year, kicking off Thursday with an auction that investors and analysts say will likely benefit from a recently improved market appetite for riskier euro-zone debt. The Spanish Treasury said it aims to sell €121.3 billion ($158.53 billion) worth of bonds this year, 7.6% more than in 2012. This figure includes €23 billion for the country's semiautonomous regions, most of which have lost access to financial markets. It will offer €4 billion to €5 billion on Thursday, split between a new two-year bond and reopened 2018 and 2026 bonds. Italy, which like Spain saw funding costs rise to unsustainably high levels when the euro-zone crisis deepened last summer, will also launch its first 2013 bond sale this week as it heads toward February elections that are seen widely as a referendum on the country's austerity program. It will likely announce auction details later on Tuesday. Italy plans to sell €410 billion in bonds and bills in 2013, down from around €470 billion in 2012, the country's debt chief said in October. Since last year's summer crisis, private investors have been tempted back into Spanish and Italian bond markets by the European Central Bank's promise in September to buy those countries' bonds in the secondary market if they seek an international bailout. More recently, the U.S. fiscal cliff deal further bolstered confidence in riskier euro-zone debt.

    Italians face 'elevated risk of poverty' says EU - There is an ''elevated risk'' that many Italians may fall into an ''enormous poverty trap'' as the economic crisis worsens, according to an EU report on unemployment and social development released Tuesday.The news was coupled with a bleak forecast for the entire 27-member European Union. Lazslo Andor, EU social affairs and employment commissioner, on Tuesday warned that the economic crisis would probably endure with few improvements in 2013 if leaders failed to implement notable changes.'It is improbable that Europe will see many socioeconomic improvements in 2013,'' he said, ''unless it makes more credible progress towards resolving the crisis, finds the resources to make necessary investments and jumpstarts the real economy''.

    Eurozone unemployment reaches new high - The unemployment rate across the eurozone hit a new all-time high of 11.8% in November, official figures have shown. This is a slight rise on 11.7% for the 17-nation region in October. The rate for the European Union as a whole in November was unchanged at 10.7%. Spain, which is mired in deep recession, again recorded the highest unemployment rate, coming in at 26.6%. More than 26 million people are now unemployed across the EU. For the eurozone, the number of people without work reached 18.8 million said Eurostat, the official European statistics agency said. Greece had the second-highest unemployment rate in November, at 20%. The youth unemployment rate was 24.4% in the eurozone, and 23.7% in the wider European Union. Youth unemployment - among people under 25 - was highest in Greece (57.6%), followed by Spain (56.5%). Overall unemployment was lowest in Austria (4.5%), Luxembourg (5.1%) and Germany (5.4%).

    European unemployment hits ‘unacceptable high’ - European unemployment has hit an unacceptable high, as one national leader put it on Tuesday, with dire figures in Spain highlighting a growing north-south divide that experts warn will only get worse. The unemployment rate across the troubled 17-nation eurozone hit 11.8 percent in November, up from 11.7 percent in October, with the number of people out of work in the single currency area now nudging 19 million. The 19th rise in a row for the eurozone, home to some 330 million people, represented an increase of more than two million on the dole compared with a year ago, according to data published by the EU statistics service Eurostat.

    Eurozone unemployment reaches record high; Greece soars to 26 per cent jobless rate — Record unemployment and fraying social welfare systems in southern Europe risk creating a new divide in the continent, the EU warned Tuesday, when figures showed joblessness across the 17 EU countries that use the euro hit a new high. Eurozone unemployment rose to 11.8 per cent in November, the highest since the euro currency was founded in 1999, according to the statistical agency Eurostat. The rate was up from 11.7 per cent in October and 10.6 per cent a year earlier. In the wider 27-nation European Union, the world’s largest economic bloc with 500 million people, unemployment broke the 26 million mark for the first time. But the trend is not uniform. Unemployment is increasing mainly in those countries, mostly in southern Europe, where market concerns over excessive public debt have pushed governments to make the toughest savings, pushing the economies into recession. States have raised taxes and slashed spending — including by cutting wages and pensions, measures that hit the labour force in the pocket and reduce demand in the economy.

    Eurozone Unemployment Hits Record High 11.8%; Spain 26.6%; Greece 26%; Youth Unemployment top 56% in Greece and Spain - Inquiring minds are investigating miserable unemployment stats in Euroope as reported this morning by Eurostast.  The euro area (EA17) seasonally-adjusted unemployment rate was 11.8% in November 2012, up from 11.7% in October. The EU27 unemployment rate was 10.7% in November 2012, stable compared with October. In both zones, rates have risen markedly compared with November 2011, when they were 10.6% and 10.0% respectively. These figures are published by Eurostat, the statistical office of the European Union. Eurostat estimates that 26.061 million men and women in the EU27, of whom 18.820 million were in the euro area, were unemployed in November 2012. Compared with October 2012, the number of persons unemployed increased by 154 000 in the EU27 and by 113 000 in the euro area. Compared with November 2011, unemployment rose by 2.012 million in the EU27 and by 2.015 million in the euro area.  Compared with a year ago, the unemployment rate increased in eighteen Member States, fell in seven and remained stable in Denmark and Hungary.  The largest decreases were observed in Estonia (12.1% to 9.5% between October 2011 and October 2012), Latvia (15.7% to 14.1% between the third quarters of 2011 and 2012), and Lithuania (13.9% to 12.5%). The highest increases were registered in Greece (18.9% to 26.0% between September 2011 and September 2012), Cyprus (9.5% to 14.0%), Spain (23.0% to 26.6%) and Portugal (14.1% to 16.3%).

    Austerity drives up European unemployment to record levels -The policy of unrelenting austerity adopted by the European political elite has driven up unemployment across the continent to record levels, as shown in data released Tuesday by the Eurostat statistics agency.Unemployment in the 17 European countries that make up the euro zone rose in November to 11.8 percent, with the number of jobless workers hitting 18.8 million. This is the highest figure since the single currency was introduced in 1999. Euro zone unemployment rose by 0.1 percent compared to the previous month and was up by 1.2 percent from November 2011. Joblessness across the 27 members of the European Union was 10.7 percent and topped 26 million for the first time. The biggest increases in unemployment have occurred in those European countries that have been selected by the International Monetary Fund (IMF) and the European Union for economic shock treatment. Joblessness in Greece soared to 26 percent in September, an increase of over 7 percent from September of 2011. The European leader for unemployment, however, is the continent’s fourth largest economy, Spain, where 26.6 percent of the work force was registered as unemployed in November.

    EU warns dramatic rise in unemployment in some countries may create new north-south divide - Record unemployment and fraying social welfare systems in southern Europe risk creating a new divide in the continent, the EU warned Tuesday, when figures showed joblessness across the 17 EU countries that use the euro hit a new high. Eurozone unemployment rose to 11.8 per cent in November, the highest since the euro currency was founded in 1999, according to the statistical agency Eurostat. The rate was up from 11.7 per cent in October and 10.6 per cent a year earlier. In the wider 27-nation European Union, the world's largest economic bloc with 500 million people, unemployment broke the 26 million mark for the first time. But the trend is not uniform. Unemployment is increasing mainly in those countries, mostly in southern Europe, where market concerns over excessive public debt have pushed governments to make the toughest savings, pushing the economies into recession. States have raised taxes and slashed spending - including by cutting wages and pensions, measures that hit the labour force in the pocket and reduce demand in the economy.

    Unemployment in Greece reaches record highs - Unemployment has reached new highs in Greece, with October 2012 figures showing the jobless rate at 26.8 percent, a major increase from the same month in 2011. The country's Statistical Authority said Thursday that unemployment increased from the 26.2 percent in September 2012, and marked a significant jump from the 19.7 percent of October 2011. The young are the worst affected, with 56.6 percent of those aged between 15 and 24 out of work. Greece has been struggling through a severe financial crisis since late 2009, and has been dependent on international rescue loans since May 2010. In return, the government has imposed strict austerity measures that have slashed salaries, increased taxes and plunged the country into a recession. Tens of thousands of businesses have shut down.

    Desperately seeking silver linings - ALL appears (relatively) quiet in Europe these days. Political battles have been subdued in recent months and bond yields have been surprisingly well behaved at levels that are almost tolerable. Calm has yet to produce growth, however, and while the macroeconomic picture looks grim the odds of another round of euro-crisis panic will remain distressingly high. According to the latest release from eurostat the euro-zone unemployment rate ticked up to 11.8% in November, 1.2 percentage points above the level a year earlier. The total number of unemployed across the euro zone was more than 2m higher than in November of 2011, with nearly half a million of that increase coming among those under 25 years of age. The pain is concentrated in the south. More than a quarter of Greek and Spanish workers are jobless (as are nearly 60% of youths in those countries). Is there any hope for a turnaround? It's reaching a bit, perhaps, but as the chart at right shows it does seem that the year-on-year decline in employment is leveling off for the euro zone as a whole and has actually improved some in Greece and Spain. The problem is getting worse more slowly, in other words, which is roughly where America found itself in April of 2009 when some began to ponder the appearance of "green shoots" in the economy

    Barroso, the existential threat to the euro is mass unemployment - A day after European Commission chief Manuel Barroso said the "existential threat to the euro has essentially been overcome", we have the monthly jobless data from Eurostat. Unemployment has reached a record 26.6pc in Spain, rising to 56.5pc for youth. It is almost the same in Greece: 26.0, (57.6). but Greece's data is old. It will soon be worse. Followed by: Portugal: 16.3, (38.7) Ireland: 14.6, (29.7) … but improving, since Ireland is highly competitive in EMU Slovakia: 14.5, (35.8) Italy: 11.1, (37.1) … though be cautious of the Italian data because it famously undercounts discouraged workers. Italy's rate is probably nearer 14pc, comparing like with like. It is a record 11.8pc for EMU as a whole. Mr Barroso may well be right about the debt crisis. The ECB's `Draghi Put' has effectively taken default risk off the table (though not entirely, since political strings are attached to any rescue). But the EMU disaster is not at root a public debt crisis, and never was. As EMU leaders themselves say – correctly – Euroland's aggregate public debt is lower than in the UK, US, and Japan as a share of GDP.

    ECB in Wait-and-See Mode - The European Central Bank is likely to leave interest rates on hold for a sixth straight month on Thursday, amid tentative signs that the euro zone’s battered economy is bottoming out although some economists don’t rule out a rate cut at some point in the first quarter of the year. Just four of the 44 economists surveyed by Dow Jones Newswires expect the ECB to cut its main interest rate on Thursday, with the remainder expecting it to stay at its current record low of 0.75%.Still, more than a third of respondents expect rates to fall to 0.5% by the end of March. ECB President Mario Draghi indicated last month that at least some members of the 23-strong governing council had argued for a cut already at December’s meeting, saying the bank had a “wide discussion” before taking a “consensus” decision to keep rates unchanged.

    The Underlying Improvement in EU Funding But the Lack Of Transmission Thereof -- From Draghi's press conference: Following our non-standard monetary policy measures and action by other policy-makers, a broadly based strengthening in the deposit base of MFIs* in a number of stressed countries was observed. This allowed several MFIs to reduce further their reliance on Eurosystem funding and helped to reduce segmentation in financial markets. M3 growth was also supported by an inflow of capital into the euro area, as reflected in the strong increase in the net external asset position of MFIs.  *MFI = Major Financial Institution. Draghi'a primary assumption in the above statement is that when banks rely on the central bank for the primary source of their overall funding there is an inherent problem in the system.  The reason is that depositors have withdrawn their money from the banks and placed these funds elsewhere, which indicates a deteriorating confidence in the financial sector.  Conversely, when depositors begin placing their deposits back in banks it indicates more confidence in the financial system and, hence, a better underlying situation. With that in mind, consider the following chart from the latest monthly ECB bulletin:

    German trade, industry data point to economy shrinking - More evidence of sliding German exports and industry orders on Tuesday compounded concerns that the euro zone crisis may have battered the region's largest economy into contraction at the end of last year. German imports and exports slid in November, narrowing the trade surplus, and industry orders fell more than expected. Imports slid 3.7 percent, while exports fell 3.4 percent, data from the Federal Statistics Office showed on Tuesday. Economists polled by Reuters had expected imports to increase by 0.4 percent and shipments abroad to drop 0.5 percent. Seasonally-adjusted industrial orders fell 1.8 percent in November, due mainly to a sharp fall in demand from non-euro zone countries. That was below a 1.4 percent drop forecast by a Reuters poll of 29 economists. Germany has served as a pillar of regional strength through the three-year euro zone debt crisis but the economy slowed in the third quarter of last year and economists expect it to have contracted in the last quarter. Although many see Germany escaping a recession and staging a steady improvement this year, Tuesday's data prompted some economists to predict a bumpy road.

    Germany hurt by the Eurozone's massive demand shock, but has the economy bottomed? Today's German factory orders came in weaker than expected. Econoday: - Manufacturing orders were much weaker than expected in November. After a marginally smaller revised 3.8 percent jump in October, orders dropped 1.8 percent on the month and on a workday adjusted basis, were 1.0 percent lower on the year. As discussed before, the nation's economy continues to be dragged down by the Eurozone's demand shock. In fact the divergence between the EMU-based orders and orders from the rest of the world has been unprecedented.Going forward, economists are divided over the prospects for growth in Germany's economy. Some are estimating that economic activity in Germany and even that of the Eurozone as a whole may have already bottomed. GS: - ... we expect Q4 to be the trough in this cycle and forecast a (moderate) acceleration [in German economy] at the beginning of next year. Some economists for example point to the December uptick in the Eurozone PMI.

    German Trade Unions Demanding Big Pay Increases After Years of Restraint - German trade unions plan to demand big pay increases this year and look set to get their way. Economists say that after years of wage moderation, it is high time that German firms agreed to bigger hikes -- not least because this would help the entire European economy. Frank Bsirske, the head of the Ver.di service workers' union, gets annoyed when he hears people say that Germany is doing pretty well. "That only applies to the well-off," he says angrily. "The gap between rich and poor has never been this wide, and never has the middle class felt this threatened." The union leader is even worried that social conflict could escalate. ANZEIGEHis recipe against the erosion of society is hardly surprising: Wages have to go up, and by a significant amount, at that. In the current collective bargaining round, Ver.di is calling for a 6.5-percent pay increase -- the highest in years -- for German public sector employees. Bsirske has the support of other unions with his demand for a substantial pay hike. After metalworkers' union IG Metall fought for improvements in the treatment of temporary workers and more assistance for trainees in the last bargaining round, the union's main focus in the new round beginning in May will be on money. "Our demand will focus on a decent pay increase,"

    What's Good For the Goose...?, by Tim Duy: Via a tweet from Edward Harrison, Germany is preparing secret plans - not so secret anymore - to implement a wide-ranging austerity program after the elections. From Spiegel: The government in Berlin is living in a dual reality. Strategists in the center-right coaliton parties are planning to enhance benefits for families, pensioners and the long-term unemployed in a bid to woo voters in the upcoming elections.  By contrast, due to the economic slowdown, experts in Schäuble's ministry are anticipating an entirely different scenario: The next government -- no matter who will be chancellor and which parties will be in power -- won't be able to boost spending. Instead, it will have to impose rigorous spending restraint. According to the recommendations made by Schäuble's team...Germany will have to drastically increase taxes and make painful cuts in social services over the coming years. These ideas don't fit with the current political climate in Germany...Schäuble nevertheless feels that his experts' forecasts are realistic. He has expressly approved their proposals and ordered them to continue to work on the cost-cutting program. At the same time, he has ordered strict secrecy to avoid any adverse effects on his party's campaigns for the upcoming state election in Lower Saxony in January and the general election in the fall of 2013. Speigel describes Schäuble's plan as: ...nothing less than the most comprehensive austerity program in postwar German history.

    France, the Hidden Zombie in Europe - Via Google Translate from Spanish, GurusBlog asks and answers the question Is France the zombie hidden in Europe? Here are some data for me is the great Zombie in Europe and also on the legacy of Sarkozy Hollande mandate goes straight to the precipice. In 1999 France sold 7% of world exports. Today only sells 3% and the figure continues to deteriorate. In 2005 the trade balance was positive in France +0.5% of GDP today is negative -2.7% of GDP. Ie imports far exceed exports. The French economy is becoming less competitive, for example in cars and machinery equipment sales to China are seven times lower than the annual sales volume of these products from Germany. High labor costs, which combine high wages, little flexibility to fire and high taxes. French workers are uq emenos hours work in the developed world and 86% of the contracts are fixed. 42 of every 100 euros of wage costs of a company are social charges or taxes in Germany are 34 out of 100 €, in UK 26 out of 100. Since 2005, unit labor costs in France have not only increased, and the cost to produce a car in France have incrmeentado 17%, Germany 10%, Spain 5.8% and 2% in Ireland . In France a worker earns on average € 35.3 per hour worked, in Italy the average is 25.8 € and 22 € in UK and Spain.

    Business leaders warn UK’s David Cameron that leaving the EU would be bad for economy - Top business executives have warned U.K. Prime Minister David Cameron that he could damage Britain’s economy if he seeks to renegotiate the terms of its membership in the 27-country European Union. In a letter published in the Financial Times on Wednesday, Virgin Group’s Richard Branson, London Stock Exchange head Chris Gibson-Smith and eight other business leaders challenged Cameron’s plan to renegotiate the U.K.’s EU membership terms and put the matter to a referendum. However, popular distrust of the EU has grown in Britain — one of the 10 countries in the region that doesn’t use the euro. The British public shows no interest in the EU’s plans to move closer together. Most can’t even seem to stomach the current level of power of the EU, which many Britons see as meddlesome and inefficient.

    UK risks 'turning inwards' over EU referendum - US official: The Obama administration has publicly expressed concern about the impact of a UK referendum on its future relationship with the EU. Philip Gordon, a senior official in the US State Department, said it was in America's interests to see a "strong British voice within the EU". "Referendums have often turned countries inwards," he added. The comments come as David Cameron prepares to make a major speech later this month on future European policy. In response, No 10 said: "The US wants an outward-looking EU with Britain in it, and so do we." The prime minister is facing pressure to hold a referendum on Europe at some stage during the next Parliament and has said the Conservatives will offer voters "real change" and "real choice" on the UK's position in Europe at the next election - scheduled for 2015.

    Pensioner fury expected over inflation reform - The Government is braced for a backlash from pensioners and institutional investors over changes to the way inflation is measured that are expected to slash incomes but save the taxpayer at least £2.5bn a year. Jill Matheson, the National Statistician, will on Thursday propose how the retail prices index (RPI) should in future be calculated – a decision that will have major implications for the £280bn index-linked government bond market. Although the recommendation will be made independently, final approval sits with the Bank of England and ultimately the Chancellor. Market analysts expect the statistics office to prefer a calculation that will lower RPI by 0.9 percentage points. If approved, the change would reduce the taxpayers’ annual interest bill on index-linked gilts by around £2.7bn from February, according to Barclays Research. However, owners of government debt such as pension funds and insurers have expressed outrage about the possible reforms, warning that they could bring the government bond market “into disrepute” and set back vital infrastructure projects – £40bn of which are currently financed with RPI-linked corporate bonds.

    Weak industry will drag on GDP - Industrial production in Britain is weak, down 2.4% in November compared with a year earlier, with manufacturing down 2.1%. The details are here. The question is whether it is weak enough to produce a negative reading for gross domestic product in the fourth quarter. In November alone, industrial production rose by 0.3% month on month, thanks to a recovery in North Sea oil and gas output but manufacturing was down by 0.3% and domestic energy supply by 4.1%. This leaves the arithmetic for industrial production in the fourth quarter looking very tricky. Taking October and November together, industrial production is a huge 2.3% down on the third quarter average. It would take an implausibly large rise in December for industrial production, 15.6% of GDP, not to be a drag on GDP. There is slightly better news for construction, which may make a small contribution to growth in the fourth quarter. Though output fell by 3.4% in November, according to figures also released today, a strong rise in October means the two months together are 4.2% above the third quarter average on a non-seasonally adjusted basis. More on that here. Even so, the onus will be on services to prevent a fourth quarter GDP fall. Here, we're more or less in the dark. The only hard number we have is for October, which was very similar to the third quarter average. We won't know more until January 25, when the GDP first estimate is released.

    Libor scandal: RBS executives under pressure to resign - Telegraph: Two of Royal Bank of Scotland’s best-paid executives are under pressure to resign and hand back up to £15m in bonuses over alleged Libor-rigging at the group.The pressure comes as RBS is closing in on a settlement with US and UK regulators that is likely to see the state-backed bank fined at least £300m. John Hourican, head of RBS’s investment bank, and Peter Nielson, head of markets, are understood to be “under pressure” to step down. Sources suggested Mr Hourican and Mr Nielson were “stunned” and “let down” by the developments, described by one insider as “political convenience for the relentless baying of blood from regulators”. The two bankers have together earned in excess of £30m in the past four years and were yesterday working as usual in RBS’s London offices. Neither had been asked to offer their resignation. There is no suggestion that either man knew about the alleged manipulation of Libor. However, RBS and regulators are thought to be concerned over the “culture” of the investment banking division, which allowed Libor-rigging to happen while the two were at the helm.

    Avoiding the B word - As I briefly listened to the radio the other morning, I heard the new head of the TUC (Trades Union Congress) talking about macroeconomic policy. She said the government’s policy of austerity has failed, and we need more investment in jobs. The interviewer asked whether this would mean more borrowing by the government. She avoided answering the question.  Unfortunately I have heard exactly the same from many UK public figures who are critical of austerity. It is as if a memo has gone round with the following instruction: whatever you do, do not say your alternative policy will involve more government borrowing. The writer of this memo presumably thinks that the general public believes additional borrowing is bad, and so it is best to avoid any admission that a policy might require it, even if this borrowing is temporary and at very low interest rates. Following Polly Toynbee, the paradox of thrift is too paradoxical for the public.

    Is there a case for inflation targets? The UK vs the US - One of my projects for the year ahead is to come off the fence (one way or another) on nominal GDP targeting. As an experiment, I’ll try and track my progress on this project with blog posts, although only if my thinking might be interesting to others. It is going to be a long process, because there is a lot involved: levels vs rates of change, GDP deflator vs CPI, nominal GDP versus its price component, and uncertainty about the natural rate to name some of the most obvious issues. However there is also another issue that may be just as important, and that is whether we need targets at all. In this post I just want to think about this last issue in relation to inflation targets, and not any other kind of target. An obvious way for a macroeconomist to approach this is to imagine a world in which the central bank acts in society’s best interests, and has as good an idea as anyone else what those interests are. (The policy maker is benevolent, and knows the appropriate measure of social welfare to maximise.) Actually, for both the US and UK I do not think that is such a bad place to start. Let’s also suppose, as is standard, that society’s best interests involve getting inflation close to some desired level, and getting the output gap close to zero. Call this a dual mandate if you like. In such a world, why impose a target on the central bank? In other words, why do what is done in the UK rather than do what is done in the US?

    The inflation dragon is just around the corner - People who believe this are not confined to the US. In articles in the Telegraph and the FT (HT Frances Coppola), Andrew Sentance says the job of the new Governor of the Bank of England should not involve messing with the inflation target, but to “reassure the British public that under his governorship they can expect stable prices”, which he thinks probably means putting up interest rates and withdrawing QE this year. The article contains the inevitable reference to the 1960/70s: “We have been here before in the UK. A creeping tolerance of higher inflation in the 1960s paved the way for double-digit inflation in the 1970s and early 1980s.” I would not bother with this if it was not for two things. First, Andrew Sentance was on the Monetary Policy Committee, and his persistent warnings then and since that CPI inflation would be higher than expected have been largely right. Second, the factors that have been helping to keep CPI growth high – commodity prices and fiscal austerity – are not obviously about to disappear, so the Bank of England may still be having to explain why they are ‘ignoring’ above target inflation through 2013.

    The long run government debt target -   In a recent post I had an imaginary interviewer asking “But surely no government can keep on borrowing more forever.” To which my suggested reply was “Of course not. But the right time to cut government borrowing is when the economy is strong, and the cost of borrowing is high.” This prompted a little discussion in comments about the long run desirability or otherwise of government borrowing. What I have to say here is only about the long run, and has no immediate relevance while we are still in a recession.  I have to stress here that by long run, I really do mean very long run. It is the period to which Keynes dictum applies. Why? One of the most robust ideas when it comes to government debt is that it should adjust very slowly, and absorb any shocks coming from the economy along the way. The reason, which is just tax smoothing, I have discussed at greater length here. Which prompts an obvious question: if any long run debt target is meant to be achieved in centuries rather than years or decades (I did say very long run), do we need to worry too much about it? This turns out to be a rather good question.

    Era of independent central banks is over - Whether they like it or not, central bankers are being dragged into the political fray. It is not so much an issue of whether independence is good or bad. Rather, monetary policy itself is no longer a job for technocrats. Pre-crisis, it was assumed the achievement of price stability would keep everybody happy. Yes, central bankers would have to nudge interest rates in one direction or the other, making some of us better off and others worse off. Across an economic cycle, however, these effects would even out. In that sense, monetary policy could be regarded as politically neutral. No longer. Since the recession, developed world economies have stagnated and central bankers have had little choice but to keep rates close to zero and to pursue increasingly unconventional monetary policies in the hope that they will trigger a robust recovery. Monetary policy today carries big political connotations. In the UK, for example, the most obvious sign is the Bank of England’s willingness to tolerate a rate of inflation far above the target set by parliament. While there is a reasonable justification – far better, surely, to squeeze all workers’ wages in real terms than to have a Depression-style rise in unemployment – it is not at all obvious that it is a decision to be made by the high priests of the central banking community alone. There are less obvious effects that also warrant greater scrutiny. Quantitative easing may make it easier for governments to raise funds cheaply; but, by increasing the net present value of pension funds’ future liabilities, it creates problems for those funds already running deficits. That, in turn, means either bigger pension contributions for workers; lower prospective pension benefits; or, in the case of some public sector pensions, tax increases or spending cuts to make the numbers add up. Meanwhile, some of the biggest beneficiaries of QE are those already asset-rich and relatively old who prefer to sit on their windfall gains rather than spend them. Put another way, monetary policy is doing more to redistribute income and wealth than to trigger a rebound in economic activity. Central bankers are making decisions that are more political than economic.

    Learning to Be A Central Banker in 10 Easy Steps (Update) - Welcome Mark Carney! I am certain many people have been offering you advice on what to me appears to be a rather thankless task. Undoubtedly  your experience at the Squid will have given you the necessary sharp elbows and diplomacy to thrive, and your Canadian upbringing arms you with the right amount of earnestness for public service. Nonetheless, I thought you might find something worthy below in the primer  I penned for Mr Bernanke in the waning days of 2007. Best of luck in your mission! Oh, and one final piece of advice: No matter how seductive and enthralling you might initially find the quality of life here in Blighty (considering the digs the Old Lady will finance for you), DO NOT NOT SELL YOUR CANADIAN BOLTHOLE. The novelty wears off quickly and England all-too-quickly becomes Moosonee without the clean air and the blue Walleye...

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