Fed's Balance Sheet Approaches $3 Trillion in Latest Week --The U.S. Federal Reserve's balance sheet expanded over the past week, approaching $3 trillion, as the central bank continued with its easy-money policy. The Fed's asset holdings in the week ended Jan. 16 increased to $2.965 trillion from $2.930 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities grew to $1.689 trillion on Wednesday, from $1.676 trillion a week earlier. The central bank's holdings of mortgage-backed securities rose to $947.61 billion, from $926.71 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. Recently Fed officials have sounded differing opinions on how long it should continue buying bonds, with some leaning toward ending the purchases before the end of the year. Thursday's report showed total borrowing from the Fed's discount lending window was $573 million Wednesday, up from $559 million a week earlier. Commercial bank borrowing was $15 million Wednesday, up from a negligible amount a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.259 trillion, from $3.251 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.917 trillion, up from $2.905 trillion in the previous week. Holdings of agency securities fell to $306.74 billion, down from the prior week's $309.95 billion.
Lockhart Says Fed Balance Sheet Expansion Raises Concern - Federal Reserve Bank of Atlanta President Dennis Lockhart said while he’s supported the central bank’s open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet. “Open-ended does not mean without bound,” Lockhart said in a speech in Atlanta. “I do think the growth of the Fed’s balance sheet could have longer-term consequences that are worrisome. While I’ve supported these policy decisions to date, I acknowledge legitimate concerns.”The Atlanta Fed leader supported the Federal Open Market Committee decision in December to add $45 billion in Treasury purchases per month to the central bank’s mortgage-bond buying of $40 billion a month. Policy makers are discussing how long they will keep buying bonds as part of efforts to boost growth and bring down a 7.8 percent unemployment rate. “There is a risk, given the Fed’s cumulative share of the Treasury and MBS markets, that at some point securities purchases could have adverse effects on market functioning and financial stability,” Lockhart said to the Rotary Club of Atlanta. In addition, as rates rise, “the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.”
Bernanke to Weigh QE Costs as Fed Assets Approach Record - Federal Reserve Chairman Ben S. Bernanke indicated that the central bank is weighing the potential costs from its $85 billion in monthly purchases of bonds while saying the unorthodox easing bolsters the economy. “So far, we think we are getting some effect, it is kind of early,” Bernanke said yesterday at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. “We are going to continue to assess how effective” the program is “because it is possible that as you move through time and the situation changes that the impact of these tools could vary.” The Federal Open Market Committee last month decided to add $45 billion in monthly purchases of U.S. Treasury notes to its program buying $40 billion of mortgage-backed securities each month. The committee set no limit on the size or duration of the bond purchases. Minutes from the Dec. 11-12 meeting showed that even as they were preparing to launch new Treasury purchases, “several” FOMC members said it would “probably be appropriate to slow or stop buying well before the end of 2013.” A “few” others were willing to let the program run to the end of the year, while “a few others” didn’t give a time frame.
Fed’s Williams: Bond Buying Likely to Continue Into Late 2013 - WSJ Federal Reserve bond buying will likely continue for months as the central bank works to promote strong growth and lower unemployment, a top U.S. central bank official said Monday. “I anticipate that continued purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of 2013,” Federal Reserve Bank of San Francisco President John Williams said. Fed officials will be “looking for convincing signs of ongoing improvement in the labor market and a range of other economic indicators before we stop this program.” The policymaker also said “we will keep rates low as long as needed to promote recovery and move toward our goals of maximum employment and price stability.”
Fed Shouldn’t Stop Buying Bonds Until Unemployment Drops Substantially, Official Says - The nation’s unemployment rate may have to fall as much as half a percentage point from its present level before the Federal Reserve should consider winding down its current bond buying efforts, a key central bank official said in an interview Tuesday. “We need some substantial improvement” in the jobless rate to consider a major shift in the Fed’s purchases of Treasury and mortgage debt, Federal Reserve Bank of Boston President Eric Rosengren said in an interview with Dow Jones Newswires. Compared to the current 7.8% unemployment rate, the official said once a 7 1/4% rate is achieved, central bankers would need to have a “full discussion” about the utility of pressing forward with bond buying.
Fed Concerned About Overheated Markets Amid Record Bond-Buying - Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases. Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008. Enthusiasm for speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500 issues to a record-low 5.9 percent last week.Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it. “Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.” Bernanke himself raised that concern this week, saying the central bank has to “pay very close attention to the costs and the risks” of its policies
Fed’s Plosser Thinks Policy Will Need to Be Curtailed Sooner Than Anticipated - Federal Reserve Bank of Philadelphia President Charles Plosser held firm in his view that the central bank’s loose monetary policy will need to be reined in sooner than anticipated to prevent an acceleration of inflation in the coming years. Mr. Plosser maintained his view that inflation would remain close to the Fed’s 2% target over the medium to long term, but added that “this expectation is based on my assessment that the appropriate monetary policy is likely to tighten more quickly” than the Federal Reserve Open Market Committee indicated in its latest statement. Mr. Plosser’s stance on monetary policy puts him at odds with Fed Chairman Ben Bernanke, who highlighted Monday that, while there have been some improvements in labor and housing markets, “there is still quite a ways to go,” indicating that he aims to continue loose monetary policies designed to boost economic growth, including $85 billion in monthly bond purchases.
Fed’s Lockhart: Wrong to Call Current Policy ‘QE Infinity’ - WSJ - While it’s not yet clear when the Federal Reserve can pare back or end its current bond-buying campaign, a key central bank official said Monday it’s wrong to call what the Fed is doing “QE Infinity.” In his speech, Federal Reserve Bank of Atlanta President Dennis Lockhart was referring to the open ended Treasury and mortgage bond buying the Fed is pursuing to lift growth and lower unemployment. The central bank has said such efforts will continue until the job market improves substantially, but it has not defined exactly what that success would look like. “The open-ended nature of the asset-purchase programs is called for because the outlook for the pace of improvement in the labor market and the broader economy remains unclear,” Mr. Lockhart said. “With so many unknowns, quite divergent economic scenarios are plausible,” he said, adding “in these circumstances, it would not be prudent to commit up front to a specific size, pace, and mix of asset purchases.”
Monetary Policy at the Zero Lower Bound - Charles Evans - speech excerpt- Recently, the FOMC has made significant changes in its communications by providing economic guidelines for the conduct of future monetary policy. This is part of a larger strategy intended to make monetary policy more transparent and predictable to the public — which we feel can increase the efficacy of our efforts to achieve our dual mandate goals of price stability and maximum sustainable employment. In the current setting, such efforts have meant maintaining a highly accommodative monetary policy well after the end of the financial crisis and steep recession. We have had to do so because the economic recovery has been quite modest by any standard and because we continue to face numerous near-term obstacles to growth. Before discussing the U.S. monetary policy situation in more detail, I’d like to mention some longer-run challenges facing the U.S. and many other advanced economies throughout the world, with an eye on their implications for the medium-term economic outlook.
'Monetary Policy is Currently Not Accommodative Enough' - Via a speech by Minnesota Fed president Narayana Kocherlakota, something that is too often forgotten in discussions of monetary policy, the long (and variable) lags between policy changes and the impact on the economy:...The FOMC acts to achieve its two mandates—maximum employment and price stability—by influencing interest rates through the purchase and sale of financial assets. When the FOMC raises interest rates, households and firms tend to spend less and save more. The fall in spending puts downward pressure on both employment and prices. Similarly, when the FOMC lowers interest rates, households and firms tend to spend more and save less. This puts upward pressure on employment and prices. However, these pressures on employment and prices from lower interest rates are not felt immediately. Instead, it typically takes a year or two for the effects of monetary policy adjustments to manifest themselves in inflation and unemployment. Hence, the FOMC’s decisions about appropriate monetary policy necessarily hinge on the members’ forecasts of the evolution of prices and employment over the next year or two—what we typically call our medium-term outlooks for inflation and unemployment. ...
Fed Watch: Safe Assets and the Coordination of Fiscal and Monetary Policy -- Kansas City Federal Reserve Bank President Esther George considers the long-run consequences of Federal Reserve policy: But, while I agree with keeping rates low to support the economic recovery, I also know that keeping interest rates near zero has its own set of consequences. Specifically, a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the FOMC’s 2 percent inflation goal in the future. A long period of unusually low interest rates is changing investors’ behavior and is reshaping the products and the asset mix of financial institutions.We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances. Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. A sharp correction in asset prices could be destabilizing and cause employment to swing away from its full-employment level and inflation to decline to uncomfortably low levels. Brad DeLong wonders: The Fed's current Quantitative Easing ∞ program involves its buying risky bonds--thus diminishing the pool of risky assets that the private sector can hold. Esther George objects because… it does not make complete sense to me...Because there is less in the way of risky assets for the private sector to hold--and because that pushes prices of risky assets up and returns on risky assets down--QE ∞ actually makes private-sector portfolios riskier? Is that the argument? I think DeLong is looking at a continuum of assets from safe to risky, where cash anchors the safe end of the continuum. Right next to cash is the somewhat riskier Treasury security. Thus by exchanging cash for Treasury securities, you by definition must be removing risk from the continuum, and thus the public's portfolio is now less riskier.
Still a Skeptic: Addressing a Few Questions about Nominal GDP Targeting - Atlanta Fed's macroblog - In a comment to last week's post on inflation versus price-level targeting, David Beckworth asks the following (referring back to an even earlier post on nominal gross domestic product [NGDP] targeting): You refer back to your previous post on NGDP level targeting, but fail to take note of the comments that respond to your concerns about it. Specifically, see the ones by Andy Harless and Gregor Bush. Would love to see your response to those ones. Do you have a response for them? I am listening if you have one. Here is an excerpt from the Harless comment... Most people who advocate NGDP targeting today advocate level path targeting, not growth rate targeting. I don't believe that your "historical justification" applies in this case. Indeed, I think it makes the case for level targeting (of either the price level or NGDP, but there are reasons to prefer the latter) relative to the current system which centers on a growth rate target for the price level (in other words, an inflation target). ...and here is the Bush comment: Just to add to Andy's point, advocates of NGDP level targeting argue that it's precisely because of uncertainty around estimates [of] potential output [that] NGDP targeting should be adopted. They argue that [as] long as the central bank keeps nominal spending on, say, a 5% trend line, there will be neither demand side recessions (mass unemployment) nor high inflation. In other words, AD will be stable and this will produce a stable macroeconomic environment. Whether inflation is 2% and real output [grows] at 3% or inflation is 3% and real output grows at 2% is of no concern.
What a Fed Loss Might Look Like - One worry among Federal Reserve officials, divided over how long the central bank should stick with its bond-buying programs, is the possibility that the Fed could record a loss on its books. In an analysis distributed this week, J.P. Morgan Chase chief U.S. economist Michael Feroli found that the Fed could post billions of dollars in losses down the road, but it would have to buy more securities than he expects and interest rates would have to rise sharply to make it happen. Mr. Feroli found that the Fed could lose $4 billion in 2019 if it continues buying $85 billion a month of Treasury and mortgage-backed securities through the end of 2014 and begins gradually raising its benchmark short-term interest rate in 2015 from near zero to 4.5% in 2019. If a surge in inflation forced the Fed to raise the rate much higher–to 6.5% in 2019–the Fed could lose more than $20 billion that year.
Floor Systems - Currently, the Fed operates under a floor system. The supply of excess reserves is enormous, and the IROR determines short-term interest rates. There are some weird features of the system, such as the fact that the GSEs receive no interest on their reserve accounts, and there is some lack of arbitrage which results in a fed funds rate less than the IROR, but I think those weird features are irrelevant to how monetary policy works.Under a floor system, we are effectively in a perpetual liquidity trap. Conventional open market operations in short-term government debt do not matter, whether the IROR is 5%, 0.25%, 10%, or zero. But, not to worry, the central bank can always change the IROR except, of course, when it hits the zero lower bound (neglecting the possibility of taxation of reserve balances, which is another issue altogether). Steve Randy Waldman seems to agree with that. Paul Krugman does not. Here's what Krugman says: Now, under current conditions that doesn’t matter; dead presidents don’t pay interest, but neither do T-bills, so short term debt and currency form an aggregate (a Hicksian composite commodity, for the serious nerds out there), whose composition doesn’t matter. But interest rates won’t always be zero, and at that point the size of the monetary base — dead presidents plus a sliver of bank reserves that can be converted into dead presidents at will — will matter again. That's incorrect. The nature of the liquidity trap does not change if the interest rate on reserves (IROR) rises. With a positive stock of reserves in the system, there's a liquidity trap no matter what the IROR is.
Do we ever rise from the floor? - Steve Randy Waldman - Paul Krugman has responded to my argument that the distinction between money and short-term debt has been permanently blurred. As far as I can tell, our disagreement is not about economics per se but about how we expect the Fed to behave going forward. Krugman suggests my view is based on a “slip of the tongue”, a confusion about what constitutes the monetary base. It is not, but if it seemed that way, I need to write more clearly. So I’ll try. Let’s agree on a few basic points. By definition, the “monetary base” is the sum of physical currency in circulation and reserves at the Fed. The Fed has the power to set the size of the monetary base, but cannot directly control the split between currency and reserves, which is determined by those who hold base money. The Fed stands ready to interconvert currency and reserves on demand. Historically, as Krugman points out, the monetary base has been held predominantly in the form of physical currency. However, since 2008, several things have changed:
- The Fed has dramatically expanded the size of the monetary base;
- The percentage of the monetary base held as reserves (rather than currency) has gone from a very small fraction to a majority;
- The Fed has started to pay interest on the share of the monetary base held as reserves.
Krugman’s view, I think, is that we are in a period of “depression economics” that will someday end, and then we will return to the status quo ante. The economy will perform well enough that the central bank will want to “tap the brakes” and raise interest rates. The Fed will then shrink the monetary base to more historically ordinary levels and cease paying interest on reserves.
All Your Base Are Belong To Us, Continued - Paul Krugman - Steve Randy Waldman replies reasonably to my post about the currency domination of the monetary base. But I think we’re still having a failure to communicate.What Waldman is now saying is that in the future the Fed will manage monetary policy by varying the interest rate it pays on reserves rather than the size of the conventionally measured monetary base. That’s possible, although I don’t quite see why. But in his original post he argued that under such a regime “Cash and (short-term) government debt will continue to be near-perfect substitutes”.Well, no — not if by “cash” you mean, or at least include, currency — which is the great bulk of the monetary base in normal times. But this could come across as word games. I think the way to get at the substance is to ask the question that set this discussion off: what happens if the US government issues a trillion-dollar coin to pay its bills? Everyone sensible (a group containing nobody on the political right) agrees that right now it makes no difference: financing the government by selling T-bills with zero yield, and financing it by making a deposit at the Fed, which either adds to the monetary base or sells some of its zero-yield assets, has, um, zero implication for anything except some peoples’ blood pressure.
Yet more on the floor with Paul Krugman - Steve Randy Waldman - To recap: I suggested that, from now on, the distinction between base money and short-term government debt will cease to matter in the US, because I think the Fed will operate under a “floor” system, under which the Fed no longer sets interest rates by altering the quantity of base money, but instead floods the world with base money while paying interest on reserves at the target rate. Paul Krugman objected, but I think he was misunderstanding me, so I tried to clarify. He’s responded again. Now I think that the points of miscommunication are very clear and remediable. Krugman: What Waldman is now saying is that in the future the Fed will manage monetary policy by varying the interest rate it pays on reserves rather than the size of the conventionally measured monetary base. That’s possible, although I don’t quite see why. But in his original post he argued that under such a regime “Cash and (short-term) government debt will continue to be near-perfect substitutes”.Well, no — not if by “cash” you mean, or at least include, currency — which is the great bulk of the monetary base in normal times. So, here’s one confusion. I agree with Krugman that zero-interest currency is inherently very different from interest-bearing paper, including both T-bills or interest-paying bank reserves. However, under a regime where cash can be redeemed at will for interest-bearing paper, that inherent difference disappears, and they trade as near-perfect substitutes.
Money and Debt, Continued, by Tim Duy: Paul Krugman responds to Steve Randy Waldman, noting that perhaps they are having a failure to communicate. I hope I can bridge that gap (I suppose we can't discount the risk that I make it wider). Krugman begins: What Waldman is now saying is that in the future the Fed will manage monetary policy by varying the interest rate it pays on reserves rather than the size of the conventionally measured monetary base. That’s possible, although I don’t quite see why. Correct, a key point in this discussion is that the Fed can manage policy by interest on reserves. Indeed, as Waldman notes, now that they have this tool, they are not likely to give it up. I would say that the issue of "I don't quite see why" is irrelevant. The basis of Waldman's argument is that they can, not that they will. This isn't an argument about existing institutional arrangements, but potential institutional arrangements. Krugman continues: But in his original post he argued that under such a regime “Cash and (short-term) government debt will continue to be near-perfect substitutes”.Well, no — not if by “cash” you mean, or at least include, currency — which is the great bulk of the monetary base in normal times. I don't think Waldman means "cash" as currency, but both currency and reserves. Such that reserves and government debt are essentially the same (more on this later). At least, I think this is what Waldman is driving at, but clarification is needed (I find myself getting sloppy on the term "cash," so I can't really throw stones). Back to Krugman:
The Waldman-Krugman-Sumner Debate: It's the IOER Path - Are we headed toward a brave new world of perpetual liquidity traps? Steven Randy Waldman says yes. He believes the Fed will continue operating in a zero lower bound-like environment going forward, even after the economy has recovered and interest rates return to more normal levels:What I am fairly sure won’t happen, even if interest rates are positive, is that “cash and government debt will no longer be perfect substitutes.” Cash and (short-term) government debt will continue to be near-perfect substitutes because, I expect, the Fed will continue to pay interest on reserves very close to the Federal Funds rate... Printing money will always be exactly as inflationary as issuing short-term debt, because short-term government debt and reserves at the Fed will always be near-perfect substitutes. In the relevant sense, we will always be at the zero lower bound...In this brave new world, there is no Fed-created “hot potato”, no commodity the quantity of which is determined by the Fed that private holders seek to shed in order to escape an opportunity cost. It is incoherent to speak, as the market monetarists often do, of “demand for base money” as distinct from “demand for short-term government debt”... Waldman's statement generated swift responses from Paul Krugman and Scott Sumner who disagree. They argue that currency and short-term debt will continue to be different even with the continuation of the Fed's interest payment on excess reserves (IOER). Both sides are making, I believe, reasonable claims but are assuming different future paths for the IOER. This difference is key to reconciling their views.
Once you turn base money into short-term debt, can you go back?…- The most exciting wonky discussion being had right now is between Steve Randy Waldman and Paul Krugman over whether “base money” and short-term debt are perfectly substitutable or not, and what that may or may not mean for central bank policy. We confess that we have a bit of a vested interest here because for a long time we’ve been arguing much the same point as Waldman. That’s not to say that Krugman is necessarily wrong; he may just be taking Waldman slightly too literally. So let’s recap the debate as simply as possible. On Monday Waldman wrote a post arguing that whatever happens from now on.. …cash and (short-term) government debt will continue to be near-perfect substitutes because, I expect, the Fed will continue to pay interest on reserves very close to the Federal Funds rate. This, he says, is because central banks have moved from a pure quantity-focussed regime to what he terms a “floor system”. It’s a lovely post.
All Your Base Are Belong To Us: What Is the Question? - Paul Krugman - OK, we are indeed, as Steve Randy Waldman says, all dorks, and so are you if you are reading this. What’s more, we’re inarticulate dorks, or so it seems. Here’s what I think is going on: somehow, Waldman and I are asking different questions. (Another summary of the discussion here.) I agree with him, mostly, on the question I think he’s asking; it’s not clear to me whether he agrees with me on the question(s) I’m asking. My questions involve whether interest on excess reserves changes any of the fundamentals of monetary policy and its relationship to the budget. That is, does IOER change the fact that the Federal Reserve has great power over aggregate demand except when market interest rates are near zero, and the related fact that when we’re not in a liquidity trap there is an important distinction between debt-financed and money-financed deficits? My answer to both questions is no. Fed policy might in future take the form of changes in the interest rate on excess reserves rather than open-market operations – sort of a mirror-image version of the historic role of the discount rate – but while this might change the operational look of policy, it won’t change the reality of Fed power. And there will continue to be a big difference between debt-financed and money-financed deficits, as long as we’re careful about what we mean by those terms. A federal deficit financed by borrowing from the Fed, which in turn induces a rise in excess reserves and thereby sterilizes any inflationary impact by raising the interest rate it pays, might look like a money-financed deficit to the unwary; but it’s really debt financed. On the other hand, if the government borrows from the Fed and the Fed does not raise IOER, the government will be printing money – literally – to cover the gap, expanding the quantity of currency. And this will be inflationary unless you’re in a liquidity trap.
A confederacy of dorks - It is, to be sure, only a baby step towards world peace.But it is a step! Market monetarists will lie with post-Keynesians, the parted waters will turn brackish, as we affirm, in unison: Paul Krugman and I are both inarticulate dorks. Further, it is agreed, that David Beckworth, Peter Dorman, Tim Duy, Scott Fullwiler, Izabella Kaminska, Josh Hendrickson, Merijn Knibbe, Ashwin Parameswaran, Cullen Roche, Nick Rowe, Scott Sumner, and Stephen Williamson are all dorks, albeit of a more articulate variety. I say the most articulate dorks of all are interfluidity‘s commenters.To mark the great convergence, there will be feastings and huzzahs from all. Or at least from everyone but Paul Krugman and myself, since during feastings, it is the most inarticulate of the dorks who tend to find themselves on a spit. Wouldn’t you all prefer to eat plastic apples?For those not tired of spectacle, let us continue our pathetic grope towards clarity. Paul Krugman asks two questions:My questions involve whether interest on excess reserves changes any of the fundamentals of monetary policy and its relationship to the budget. That is, does IOER change the fact that the Federal Reserve has great power over aggregate demand except when market interest rates are near zero, and the related fact that when we’re not in a liquidity trap there is an important distinction between debt-financed and money-financed deficits?My answer to both questions is no.My answers are “no” and “depends how you define ‘liquidity trap’”. But brevity is the soul of wit, and I’ve a reputation for witlessness to maintain. So let me elaborate.
Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics - I’ve written numerous times already about how a deficit “financed” by bonds vs. “money” doesn’t matter in terms of inflationary effect. Notwithstanding my views there (which are not discussed in this post), the point of this post will be to explore the neoclassical paradigm on this matter, since this is at the core of the recent debate between Steve Randy Waldmann (see here, here, and here) and Paul Krugman (see here and here) on the so-called “permanent floor.” (It might be of interest to some that I explained how a “permanent floor” would work back in 2004.) Let’s consider a time at some point in the future at which the Fed has ceased its current near zero interest policy, IOR, and QE’s, and has completed whatever exit strategy was deemed necessary to drain the reserve balances that the various rounds of QE produced. In terms of the federal funds market, it would look much like it did before the crisis, as in Figure 1. The target interbank rate (iinterbank*) is at some positive rate of interest selected by the Fed in accordance with its reaction function, and the Fed has set its penalty rate at some spread above its target rate. The demand for reserve balances is roughly vertical at the quantity banks desire to hold to settle payments and meet reserve requirements (RB* in the graph), as is now recognized even in neoclassical literature. (Post Keynesian endogenous money folks said this for decades; I explained in my 2002 paper why there could logically be no liquidity effect in the federal funds market when the Fed changes its target rate. I’m glad neoclassicals are catching up to us here.) The quantity of reserve balances supplied by the Fed is essentially a vertical supply curve (dotted vertical line) where the Fed simply attempts to accommodate the demand at the target rate, which is well documented in empirical literatures of central banks and also neoclassical economists to be the actual practice of central banks. (I have argued they have no choice but to do this.)
Fed’s mapmaker charts central bank rethink - Four years ago, Zoltan Pozsar helped change how policy makers visualise the financial world when he worked with colleagues at the New York Federal Reserve to create a gigantic wall map of shadow banking. Astonishingly, it was the first time anyone had laid out these financial flows in detailed, graphic form. And by doing that, the NY Fed researchers showed why the sector mattered – and why policy makers needed to rethink how the financial ecosystem did (or did not) work. Now Pozsar has left the NY Fed and teamed up with Paul McCulley, the former investment luminary of Pimco (and the man who coined that phrase “shadow banking”) to tackle another issue. But this time, it is not securitisation they want to “map” – but “helicopter money”, or quantitative easing. For Pozsar and McCulley argue that just as we needed to rethink finance five years ago, we now need to embrace a new mental map of central banks. For while there has been a widespread assumption that central bank independence is always a good thing, they argue, this paradigm does not hold true. “As long as there will be secular debt cycles, central bank independence will be a station, not a final destination,” they insist. And while that assertion will horrify some commentators, the map provides a timely device to stimulate debate; and doubly so given the splits inside the Federal Reserve about the merits of quantitative easing – and the policy dilemma besetting the European Central Bank, as the European economy ails. The key issue at stake, Pozsar and McCulley argue, is that long-term debt cycles tend to produce diametrically opposed states of the world, in two different fields, which can be plotted as axes on a graph. Sometimes private sector creditors are in a “leveraging” mode; sometimes they are “deleveraging” instead. So too with public policy: sometimes fiscal policy is restrictive (via austerity); sometimes it is stimulative (ie governments are borrowing).
Counterparties: Federal Officially Muddled Committee - The full transcripts of the Fed’s 2007 Open Market Committee meetings are out! To financial nerds, this is a bit like opening Christmas gifts from five years ago: some things look quaint and misguided, others seem ahead of their time. There’s no shortage of embarrassing nuggets in the Fed’s early discussions of the financial crisis. In a March meeting, Ben Bernanke believed the housing market would stay strong; even in December, he said “I do not expect insolvency or near insolvency among any major financial institution”. There’s also cattiness: Richmond Fed President Jeffrey Lacker, as Neil Irwin pointed out, appears to accuse then New York Fed president Tim Geithner of leaking information to Bank of America’s CEO. The transcripts also reveal a very polite, measured group of singing canaries. Binyamin Appelbaum writes that in August that the Fed “began its long transformation from somnolence to activism”, eventually cutting rates and expanding the use of the discount window. To Cardiff Garcia, if there’s a “winner” of the FOMC’s transcripts it’s Janet Yellen. In September, Yellen warned of “utter devastation” in the private equity and mortgage markets, and “severe illiquidity” in the secondary markets for mortgages, securitized products and some interbank loans. A month later, Randall Kroszner was warning of a wave of mortgage rate resets. By December, Geithner was worrying about a “deep and protracted recession”, Eric Rosengren was fretting about derivatives, and Bernanke was sure that the crisis would eventually hit Wall Street (though several members of the Fed didn’t seem to agree).
How Could Ye Be So Blind About Subprime? - There is nothing more frightening than when those in charge of the economy miss something that was as plain as the nose on your face. Such was the situation with the Federal Reserve and the subprime mortgage crisis in 2007. The FOMC met on August 7th and claimed there was not enough evidence of a subprime problem. Three days later on August 10th, Federal Reserve Chair Ben Bernanke held a rush conference to keep a credit freeze from happening and this was the first action out of many for the oncoming financial crisis onslaught: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets. The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.
Credibility - Paul Krugman - Ah. Charles Plosser of the Philadelphia Fed is against the platinum coin, which he says “doesn’t solve any real problem” and would hurt our credibility. Actually, it solves a very real problem: attempted extortion by the GOP. And on the credibility front, who better to lecture us on such matters than a man who has been predicting an inflationary explosion for five years? It’s not especially remarkable that the inflation hawks got it wrong: to err is human (and, as a T-shirt I saw on St. Croix said, to arrr is pirate). What is remarkable is the total absence of either self-reflection or accountability. When you get things this wrong, you’re supposed to ask yourself why, and whether your framework of analysis needs updating. And if you should happen to lack the capacity for self-reflection, there should be some external sanction too; people who get it wrong, keep getting it wrong, and show no sign of learning should pay a price in polite society. But this doesn’t seem to happen to those who got everything wrong about the macroeconomics of a depressed economy; they remain respectable, and even get praised for their consistency.
Monetary Policy and Inequality in the U.S. - Here’s a paper from some of my favorite macroeconomists on the link between inequality and monetary policy. ABSTRACT: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
There’s no such thing as base money anymore - Tim Duy has a great review of why platinum coin seigniorage was a bridge too far for Treasury and the Fed. I think he’s pretty much spot on. However, with Greg Ip (whose objection Duy cites), I’d take issue with the following: Ultimately, I don’t believe deficit spending should be directly monetized as I believe that Paul Krugman is correct — at some point in the future, the US economy will hopefully exit the zero bound, and at that point cash and government debt will not longer be perfect substitutes. Note that there are two distinct claims here, both of which are questionable. Consistent with the “Great Moderation” trend, the so-called “natural rate” of interest may be negative for the indefinite future, unless we do something to alter the underlying causes of that condition. We may be at the zero bound, perhaps with interludes of positiveness during “booms”, for a long time to come. What I am fairly sure won’t happen, even if interest rates are positive, is that “cash and government debt will no longer be perfect substitutes.” Cash and (short-term) government debt will continue to be near-perfect substitutes because, I expect, the Fed will continue to pay interest on reserves very close to the Federal Funds rate. (I’d be willing to make a Bryan-Caplan-style bet on that.) This represents a huge change from past practice — prior to 2008, the rate of interest paid on reserves was precisely zero, and the spread between the Federal Funds rate and zero was usually several hundred basis points. I believe that the Fed has moved permanently to a “floor” system under which there will always be substantial excess reserves in the banking system, on which interest will always be paid (while the Federal Funds target rate is positive).
Did inflation targeting make inflation stickier? - Nick Rowe - I think my last post was very clear. Inflation targeting failed. I know this post won't be clear. But this post tries to answer the question that my last post begs to be answered. Why did inflation targeting fail? I used to think that if the Bank of Canada succeeded in keeping inflation on target, there wouldn't be deficient-demand recessions. There might be falls in output and employment due to droughts, earthquakes, plagues of locusts, and other supply shocks, but there wouldn't be falls in output and employment due to deficient aggregate demand. Unless the Bank of Canada's crystal ball failed, so it let inflation fall below the 2% target, which would cause a deficient-demand recession. I was wrong. The Bank of Canada did keep inflation almost exactly at the 2% target, but there was a deficient demand recession. If you had told me in 2008 how long the recession would last in many countries, I would have predicted that inflation would have fallen a lot in those countries. It didn't fall a lot. In some countries, like the UK, it didn't fall at all. I would have been wrong. It didn't use to be like this. In past recessions, absent significant supply shocks, inflation did fall a lot.
Key Measures show low inflation in December - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.9% annualized rate) in December. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.1% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers was virtually flat 0.0% (-0.2% annualized rate) in December. The CPI less food and energy increased 0.1% (1.2% annualized rate) on a seasonally adjusted basis. Note: The Cleveland Fed has the median CPI details for December here. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.7%, and the CPI less food and energy rose 1.9%. Core PCE is for November and increased 1.5% year-over-year. On a monthly basis, median CPI was at 1.9% annualized, trimmed-mean CPI was at 1.1% annualized, and core CPI increased 1.2% annualized. Also core PCE for November increased 1.6% annualized. These measures suggest inflation is below the Fed's target of 2% on a year-over-year basis.
Treasury yields capped by public sector purchases - Treasury yields have risen at the start of the new year but have since stalled. 1.9% yield seems to be the ceiling on the 10-year note for now. Public sector entities continue to make it difficult for investors to short treasuries. The Fed's securities holdings hit a new record last week as the central bank began purchasing treasuries outright.But public sector treasury purchases are not limited to the Fed. Japan's new government wants to pull the nation out of the recession by devaluing the yen. The approach is two-fold: a massive quantitative easing program (see discussion) as well as direct market intervention. The market action by Japan's government involves selling the yen, buying dollars, and locking up the position in treasuries.Bloomberg: - Abe’s Liberal Democratic Party pledged to consider a fund to buy foreign securities that may amount to 50 trillion yen ($558 billion) according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan deputy governor. JPMorgan Securities Japan Co. says the total may be double that. The purchases would further weaken a currency that has depreciated 12 percent in four months as the nation suffers through its third recession since 2008.
Bernanke Unplugged - Much is made of the fact that Ben S. Bernanke, the Federal Reserve chairman, is more open and candid than his predecessors, but in fairness, that’s a low bar. His public appearances are infrequent by comparison with other national leaders, his remarks are guarded and his personal life is carefully obscured. Except when Mr. Bernanke, a former college professor, speaks with students. The Fed chairman seemed relaxed and happy as he answered questions at the University of Michigan on Monday, much the same as he did last year when he taught a series of classes at George Washington University. Asked what keeps him up at night, Mr. Bernanke joked that he and his wife have a dog that shares their bed. Asked whether he reads online commentary, he replied, “I follow a lot of baseball blogs myself, actually.” Even when he talked about the economy, he sounded like a man who had left work and was spending some time with some friends. So how are things looking, Ben? “As long as fiscal policy isn’t getting too messed up, consumers seem to be more upbeat,” he said. Local governments have stopped cutting jobs. Better yet, people are building houses again
Fed's Beige Book: Economic activity expanded at "modest or moderate" pace - Fed's Beige Book: Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report, with all twelve Districts characterizing the pace of growth as either modest or moderate. ... Overall, holiday sales were reported as being modestly higher than in 2011, though sales were below expectations in the New York, Cleveland, Atlanta, Chicago, and San Francisco Districts. ... Citing concerns that consumers will spend cautiously due to ongoing fiscal uncertainty, retail contacts and auto dealers reported a slightly dimmer, though positive, outlook for future sales. And on real estate: Existing residential real estate activity expanded in all Districts that reported; growth rates were described as moderate or strong in nine Districts. Contacts in the Boston District attributed their strong sales growth to low interest rates, affordable prices, and rising rents. All Districts reporting on price levels saw increases; New York and Chicago reported only very minor increases. The five Districts that reported on housing inventories all reported falling levels. New residential construction (including repairs) expanded in all but one District of those Districts that reported. Contacts in the Kansas City District reported that increased lumber and drywall costs limited construction, causing a slight decline this period..
Fed Beige Book: District-by-District Summary of Conditions - The Federal Reserve's latest "beige book" report noted that the economy grew at a "modest or moderate" pace in recent weeks. The following is a district-by-district summary of economic conditions in the 12 Fed districts for late November through early January.
Do Recessions Affect Potential Output? (FRB WP) - Abstract: A number of previous studies have looked at the effect of financial crises on actual output several years beyond the crisis. The purpose of this paper is to examine whether the growth of potential output also is affected by recessions, whether or not they include financial crises. Trend per capita output growth is calculated using HP filters, and average growth is compared for the two years preceding a recession, the two years immediately following a recession peak, and the two years after that. Panel regressions are run to determine whether characteristics of recessions, including depth, length, extent to which they are synchronized across countries, and whether or not they include a financial crisis, can explain the cumulative four-year loss in the level of potential output following an output peak preceding a recession. The main result is that the depth of a recession has a significant effect on the loss of potential for advanced countries, while the length is important for emerging markets. These results imply that the Great Recession might have resulted in declines in trend output growth averaging about 3 percent for the advanced economies, but appear to have had little effect on emerging market trend growth. Full paper (257 KB PDF)
Fed's Williams expects growth to pickup, Concerned about policy "uncertainty" - From San Francisco Fed President John Williams: The Economy and Monetary Policy in Uncertain Times. On the economic outlook: As far as my outlook is concerned, I expect the economic expansion to gain momentum over the next few years. When final numbers come in, I expect growth in real gross domestic product—the nation’s total output of goods and services—to register about 1¾ percent in 2012. My forecast calls for GDP growth to rise to about 2½ percent this year and a little under 3½ percent in 2014. That pace is sufficient to bring the unemployment rate down gradually over the next few years. Specifically, I anticipate that the unemployment rate will stay at or above 7 percent at least through the end of 2014. And I expect inflation to remain somewhat below the Fed’s 2 percent target for the next few years as labor costs and import prices remain subdued. My forecast takes into account both the fiscal cliff agreement and the various stimulus measures the Fed has put in place.And on uncertainty: The economy has been growing in fits and starts for the past three-and-a-half years. Every time economic growth appears to be picking up steam, something happens that brings it back down again. Sometimes the barriers to growth are natural, like the tsunami of 2011, and the drought and Superstorm Sandy last year. Other times they are man-made, like the crisis in Europe and our own fiscal cliff drama. ...
Goldman's Hatzius: 10 Questions for 2013 - Some short excerpts from a research note by Goldman Sachs chief economist Jan Hatzius:
1.Will the 2013 tax hike tip the economy back into recession? No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year. ...
2.Will growth pick up in the second half? Yes. This forecast is based on the assumption that the drag from fiscal retrenchment—i.e., the ex ante reduction in the government deficit—diminishes in the second half of 2013 but the boost from the ex ante reduction in the private sector financial balance remains large. In our forecast, this causes a pickup in real GDP growth to a 2½% annualized rate in 2013H2, and further to around 3% in 2014....
3.Will capital spending growth accelerate? Yes. We expect a pickup from around zero in the second half of 2012 to about 6% in 2013 on a Q4/Q4 basis. This would contribute 0.6 percentage points to real GDP growth and offset most of the likely slowdown in consumer spending growth.
2013: When economic optimism will finally be vindicated - Will the world economy be in better shape in 2013 than 2012? The Economist asked me to debate this question with Mohamed El-Erian, I argued that the crisis would create a new model of global capitalism, one based neither on the blind faith in market forces that followed the Great Inflation of the 1970s nor on the excessive government intervention inspired by the Great Depression of the 1930s. While this new species of capitalism would doubtless go through a painful period of evolution, its character would be fundamentally optimistic because it would be driven by four historic transformations. Those transformations helped trigger the 2008 crisis, but their roots are in the demolition of the Berlin Wall in 1989. First, the end of the initial wave of communism created a world that was unified under a single property-based economic system. Second, the opening of China and India added 3 billion producers and consumers to global markets. Third, the revolution in information technology made globalization possible by slashing communications and logistics costs. Fourth, the worldwide adoption of pure paper money ‑ money not backed by gold, silver, currency pegs or any other arbitrary standards of value ‑ allowed governments to stabilize macroeconomic cycles to a previously unimaginable degree. These powerful megatrends inspired economic optimism, but for that very reason they created financial bubbles, followed by inevitable busts. The tragedy of 2008 was that a blind faith in markets dissuaded governments from properly managing these boom-bust cycles, thereby creating an unprecedented financial collapse. That crisis, however, is now over.
Why the US economic crisis is a depression and not a recession - John Carney at CNBC has written a good column today detailing the Obama Administration’s negotiating position in the debt ceiling crisis. President Obama does not want to use ‘The Coin’ or the 14th Amendment or any other tricks to keep this from spiralling out of control. The thinking here is that by just playing this straight, it will put pressure on Republicans to eventually cave – as they did when they raised income and payroll taxes at the beginning of the year, something they said they would never do. John thinks that taking this approach is dangerous because it could make default a real possibility. I agree. Nonetheless, this is where we are. To be sure, true fiscal conservatives who back the debt ceiling standoff like Senator Rand Paul don’t want default. Senator Paul has devised a strategy to avoid default by prioritizing spending in a way that puts the onus back on the President, taking default off the table. And, we do still have the sequester cuts to think about. Those items have only been put on ice; they have not been taken care of. More recently, Obama has apparently taken default off the table, just as Paul wanted – and so now the President is backed into a corner. The net-net of this brinkmanship is that additional cuts of some sort are coming – and in conjunction with the existing tax increases, this will probably put the US into recession. That brings me to my macro thesis. I wrote a post in October 2009 entitled, “The recession is over but the depression has just begun“. Here are the most salient points from that post:
The congressional GOP has smothered a more rapid economic recovery - PBS’ Frontline has an interesting piece on the GOP response to President Obama’s election in 2008, reporting that, “After three hours of strategizing, they decided they needed to fight Obama on everything.” Part of this “everything” was the efforts of the new administration to end the Great Recession and restore the economy back to full health. From the start, the GOP sought to block measures that a wide swath of economists agreed would provide help to boost the economy and bring down unemployment. This obstructionism has been a constant theme throughout the past four years, and it continues today. Congressional Republicans have made it clear that they intend to use every bit of leverage they can to force cuts to domestic spending in the coming year. This leverage includes threats to not raise the statutory debt ceiling and/or force a federal government shutdown after March 27, when the standing appropriations continuing resolution (CR) expires. This, of course, would represent the long-promised repeat of the spring and summer of 2011, when congressional Republicans secured over $500 billion in domestic spending cuts in CR fights and another $2.1 trillion in spending cuts in exchange for incrementally raising the debt ceiling by an equivalent amount—better known as the Budget Control Act (BCA) of 2011.
The Big Four Economic Indicators: Real Retail Sales and Industrial Production Both Rise - This commentary has been revised to include the latest Real Retail Sales and Industrial Production data..... The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee." Real Retail Sales (based on yesterday's sales data adjusted with the CPI released today) was up 0.5% in December and an adjusted 0.7% in November. It is the closest of the Big Four to setting a new all-time high, now a mere 0.003% below the peak set in December 2006, a full year before the onset of the last recession. Industrial Production rose a surprising 0.3% in December. The Briefing.com consensus was for 0.2%. At this point, the average of the Big Four (the gray line in the chart) illustrates that economic expansion since the last recession, which had been hovering near a flat line for several months, is showing stronger improvement. These indicators definitely contradict the claims from some that the US is now experiencing a recession. As for the recent data, of course they are subject to revision, so we must view these numbers accordingly. In the next update we will get a look at Real Personal Income Less Transfer Payments for December. That number will reflect an environment that did not have the congressional resolution of the Bush era tax cuts, so we may need to take them with a grain of salt. At this point the major negative economic headwind would seem to be the battle over the debt ceiling
Bank Economists: U.S. Debt Debate Could Stop Growth ‘In Its Tracks’ –Increased taxes and continued uncertainly among government policy makers will slow economic growth and job creation significantly early this year and threaten to tip the economy back into a recession, a panel of chief economists from the nation’s largest banks said Thursday. The tax hikes already put into place following this month’s fiscal cliff deal in Congress will subtract 1.25 percentage points from gross domestic product growth this year, American Bankers Association‘s economists committee said. Additional government spending cuts–or continued uncertainty–would cause the economy to grow even slower than the tepid 2% pace they project in 2013, the panel said.
The Cost of America's Crumbling Roads and Bridges (CNBC video) The decrepit state of the nation's infrastructure will knock more than $3 trillion off the nation's gross domestic product through the end of the decade if more money isn't spent to upgrade the country's roads, bridges, airports and ports, according to a new report from the American Society of Civil Engineers. Based on current trends in the U.S., ASCE estimates the infrastructure investment needs will total $2.7 trillion, and yet they estimate only $1.6 trillion will be spent, leading to an investment gap of $1.1 trillion. The biggest gap in funding is in surface transportation, in other words roads and bridges, which will need a whopping $846 billion. Airports will need $39 billion, and marine ports and waterways will need $16 billion. The costs are measured in terms of such things as unreliable transportation services, and less reliable water and electricity. The impact from not filling that investment gap means $484 billion fewer in exports, and $1.1 trillion in lost total trade. That, in turn, leads to 3.5 million fewer jobs than would otherwise be created, the report said.
Trillion-dollar gap seen in infrastructure spending - This week’s bold warning on infrastructure comes weighted with the sort of price tag that seems abstract to many taxpayers in a nation where a financial bailout costs $500 billion, a war is $113 billion a year, the annual deficit runs to $1 trillion and recent spending cuts amount to $110 billion. The cost of deficit reduction became real when people got their first paycheck this year and realized the payroll tax holiday was over. But experts said the reality of a failure to invest $1.1 trillion more in infrastructure by 2020 will creep up on them. “Infrastructure is a collection of critically important strategic assets, and we generally take them for granted.” If the problem is not addressed, power outages will become more frequent, prices at the supermarket and department store will inch up, traffic will detour around bad bridges, household incomes will drop and millions of people will lose their jobs.The challenge of rebuilding a post-World War II infrastructure at the end of its natural life — roads, bridges, the electrical grid, water and sewer systems, ports — has been well documented by myriad experts. One of the most meticulous accounts has come in a series of reports by the American Society of Civil Engineers (ASCE), which delved into each failing system to calculate not just the cost of restoration but the economic and personal price of doing too little or nothing at all. The exclamation point on the “Failure to Act” reports came Tuesday in an ASCE paper: An investment of $2.7 trillion is needed by 2020
Infrastructure: The Deficit We Should Be Talking About -- It’s fair to ask if the new release by the American Society of Civil Engineers calling for trillions in infrastructure investment is analogous the American Society of Barbers calling for everyone to run out and get haircuts. But while I need to learn more about their methods, their results—we seriously need to upgrade our public goods—strongly resonate: ASCE’s report focuses on the electrical grid, water and wastewater, surface transportation, and airports, waterways and ports. All are obviously critical inputs to the nations productive capacity, they’re all aging, and according to the report, the expected investment levels are well below what’s needed, most notably in surface transportation. It is widely agreed upon by economists of all stripes that the private sector will underinvest in such public goods; no firm or corporation can raise or recoup the costs of national systems of roads, waterways, airports, etc. Of course, this insight far from guarantees that the political system will optimally or efficiently invest in public goods—oversight is as critical here as elsewhere. But the current mantra of “Washington has a spending crisis” is divorced from both the reality of our fiscal accounts and importantly, our infrastructure needs. I can’t vouch for every number in here re the loss of GDP and jobs, but they’re clearly pointing in the right direction.
Money Velocity Free-Fall And Federal Deficit Spending - The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse.Courtesy of Chartist Friend from Pittsburgh, here are three charts overlaying the velocity of money and the Federal surplus/deficit. The charts display the three common measures of money: M1, M2 and MZM. From the St. Louis Federal Reserve site: M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs). M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). Money Zero Maturity (MZM) is M2 less small-denomination time deposits plus institutional money funds. The correlation of deficit spending and money velocity is especially striking in the chart of M2 velocity.
America Should Declare Bankruptcy: Doug Casey - This week started with President Obama Monday demanding lawmakers raise the U.S.’s $16.4 trillion debt ceiling, warning Republicans not to insist on spending cuts in return. The same day, Federal Reserve Chairman Ben Bernanke advocated getting rid of the debt limit altogether. The Washington Post reports in a conversation at the University of Michigan Bernanke said the debt ceiling has only “symbolic value.” And the week ends with lawmakers still careening towards a deadline somewhere between mid-February and late March, when the U.S. will run out of funding for most government programs and risk default. They have no plan to raise the ceiling or abolish it. Even so, perhaps playing chicken with the debt limit, a charade we already witnessed once before in 2011, is not the real story. “Bernanke is quite correct, it is theatrics,” Doug Casey, chairman of Casey Research, professional investor, and author of Totally Incorrect: Conversations with Doug Casey tells The Daily Ticker. “The problem is the amount of debt itself. The problem is so big at this point, I think it’s very questionable whether this can be solved at all.”
Federal Deficit as a % of GDP - I don't know about you, but when I recently updated this chart I was pleasantly surprised by how much the deficit had improved. In the third quarter of 2012 --the last quarter of the previous fiscal year -- the deficit had already fallen to 7.0% of GDP as compared to the peak of 10.5% in the fourth quarter of 2009. Moreover, with the ending of the tax break on payroll taxes and higher taxes on the top incomes aa well as prospects for improved growth in 2013 we may be experiencing the best improvement in the deficit picture since the Clinton presidency. Moreover, the large scale shifting of incomes back to 2012 to avoid higher taxes implies that the last quarter of 2012 could also show a big improvement. This chart clearly shows why all the deficit hawks are keeping quite on what is actually happening to the deficit
The Dwindling Deficit, by Paul Krugman - It’s hard to turn on your TV or read an editorial page these days without encountering someone declaring, with an air of great seriousness, that excessive spending and the resulting budget deficit is our biggest problem. Such declarations are rarely accompanied by any argument...; it’s supposed to be part of what everyone knows. This is, however, a case in which what everyone knows just ain’t so. It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers... Indeed, that’s already happening. ...Still, will economic recovery be enough to stabilize the fiscal outlook? The answer is, pretty much..., the budget outlook for the next 10 years doesn’t look at all alarming. Now, projections that run further into the future do suggest trouble, as an aging population and rising health care costs continue to push federal spending higher. But here’s a question you almost never see seriously addressed: Why, exactly, should we believe that it’s necessary, or even possible, to decide right now how we will eventually address the budget issues of the 2030s?
Government debt isn't what you think it is - Government debt is not debt in any meaningful sense of the word. Well, actually that's not quite true. Let me clarify. The debt of genuinely sovereign governments that issue their own currencies, have properly functioning central banks and full control of monetary policy is not debt in any meaningful sense of the word. This all stems from the nature of our fiat money system. In a fiat money system, governments create money. More accurately, money is created by private banks as agents of the state, backed and supported by the central bank which is part of government. The "independence" of central banks is pure fiction. Central banks may operate independently of political control - if politicians allow them to - but they are part of the government machine just as much as government treasury departments are. Most central banks - with the notable exception of the Federal Reserves - were originally created to fund governments, but their role has changed over the centuries and we have now reached the interesting position where central banks are not allowed to fund governments directly, though they can and do fund them indirectly via the banking system. But there is no reason under a fiat money system why a sovereign government could not simply instruct its central bank to issue money to meet spending commitments, rather than issuing debt. When governments do this it is known as monetization, or "printing money" - although these days not much printing would be involved. It is NOT the same as QE, which exchanges various forms of government debt for money.
So what's the catch? - Oh brilliant. I produce a post trying to explain in non-mathematical terms the equivalence of government debt and interest-bearing money in a fiat money regime. And I immediately get hammered for - variously - writing about the "money tree", playing accounting tricks instead of doing real economics, and inventing a scenario where no-one ever has to pay taxes and governments just print endless amounts of money. How on earth my critics managed to deduce that lot from my post I don't know, but I will at least address the last of these, which is the only serious point. I was awfully tempted to ask my "economics" critic to define "real economics"..... Anyway. let me explain. No, I did not, and do not, suggest that governments can just print money ad infinitum to meet their spending obligations. And no, I did not, and do not, suggest that no-one needs to pay taxes. On the contrary. Taxes are ESSENTIAL in a fiat currency regime. The value of the currency - and of the associated debt (since interest-bearing government debt is simply a stream of future private sector money claims) - depends on the government's ability to tax its population. If it can't then fiat currency is worthless - and by extension, so is debt. Hyperinflation is primarily a political phenomenon.
After the Debt Ceiling is increased ... As I noted earlier this year, there are three short term fiscal deadlines this year: 1) the Debt Ceiling, 2) the "sequester", and 3) the “continuing resolution". I'm convinced the debt ceiling will be increased, and something will be worked out on the "sequester", but there is strong possibility the “continuing resolution" will lead to a government shutdown. Here are some comments from Alec Phillips at Goldman Sachs this morning: A government shutdown -- modest effects but increasingly likely: Congress opted in September 2012 to extend spending authority for six months, until March 27, 2013. This has been done frequently in recent years when lawmakers cannot agree on full-year spending levels. If spending authority is not extended further, the Obama administration will lose its authority to carry out activities funded by appropriations and will be forced to shut down non-essential government operations. This is not as bad as it sounds, for a few reasons: first, only 40% of federal spending relies on congressional appropriations; the remainder is unaffected by a failure to extend spending authority. Second, about two-thirds of that 40% is deemed "essential" and continues even without a renewal of spending authority. This includes defense functions and services "essential to protect life and property." The upshot is that a one-week shutdown of these activities would reduce federal spending by $8bn to $12bn (annualized). Since a shutdown that begins on March 27 would straddle the end of Q1 and the start of Q2, the effect on quarterly growth is hard to estimate but might be around 0.1pp in each quarter.
Treasury Yield Snapshot: I've updated the charts below through yesterday's close. The S&P 500 is at a new interim high of 1,480.93 set yesterday on January 17th. The 10-year note closed yesterday at 1.89, which is 4 basis points off its interim high of 1.93, set on January 4th. The historic closing low was 1.43 on July 25th. The latest Freddie Mac Weekly Primary Mortgage Market Survey puts the 30-year fixed at 3.38 percent, seven basis point above its historic low set in November. Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist.For a eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository. Many first-wave boomers (my household included) were buying homes in the early 1980s. At its peak in October 1981, the 30-year fixed was at 18.63 percent. The 30-year fixed mortgage at the current level is a confirmation of a key aspect of the Fed's QE success, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from recent historic lows of this summer). But, as for loans to small businesses, the Fed strategy is a solution to a non-problem
Abe Aids Bernanke as Japan Seen Buying Foreign Debt - Shinzo Abe is set to become the best friend of investors in Treasuries as Japan’s prime minister buys U.S. government bonds to weaken the yen and boost his nation’s slowing economy. Abe’s Liberal Democratic Party pledged to consider a fund to buy foreign securities that may amount to 50 trillion yen ($558 billion) according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan deputy governor. JPMorgan Securities Japan Co. says the total may be double that. The purchases would further weaken a currency that has depreciated 12 percent in four months as the nation suffers through its third recession since 2008. The support would help Federal Reserve Chairman Ben S. Bernanke damp yields after the worst start to a year since 2009, according to the Bank of America Merrill Lynch U.S. Treasury Index. Government bonds lost 0.5 percent as improving economic growth in the U.S., Europe and China curbed demand for the relative safety of government debt even with the Fed buying $45 billion in bonds a month. “I can’t imagine the U.S. would be disappointed in Japan buying Treasuries,” “The Fed’s been doing all the heavy lifting.”
Safe assets and Triffin's dilemma - There has been quite a bit of puzzlement in some quarters as to why I savaged BIS over the whole idea of a limitless supply of government-produced safe assets purely to meet the needs of the financial system. Firstly, let me make it clear that I do not believe that any asset is ever really "safe". Nor do I believe that global investors have any right whatsoever to expect national governments to provide them with what amounts to unconditional backing for their deposits. The first duty of national governments is to their people, not to the needs of a global financial elite. And it is quite wrong of global financial elites to pressure governments into issuing debt that they do not need purely in order to provide them with liquidity. Nor should global financial elites impose austerity measures that are not warranted by the economic situation, purely to reassure themselves that the assets they rely on for liquidity cannot ever become unsafe. So that is my political stance, if you like. But this post is concerned with the particular effect on the US of producing global safe assets in much the same way as it has hitherto produced the world's reserve currency. Firstly, a reminder of the global safe assets scheme. The BIS paper envisaged that certain governments - notably the US - would provide enough debt assets to meet the needs of the financial system, making up the current (considerable) shortfall. This debt issuance would be considerably more than actually required to meet government spending obligations, and it would mostly be of short tenor (Pozsar). This would leave the US government with surplus funds. However, because investors would expect the effect of actually spending that money to fuel inflation, which would reduce the value of the debt, the BIS authors effectively recommended that the government should not actually spend the funds raised from debt issuance. On the contrary, to ensure that the government could meet its interest and refinancing obligations at all times, the BIS authors expected the government to run primary surpluses - in other words keep public spending commitments below tax income. In addition to the surplus funds from debt issuance, therefore, there would also be surplus funds from the excess of tax income over public spending. These funds would presumably be placed on deposit at the central bank.
Resolving the Safe Asset Shortage Problem - One of the biggest challenges facing the global economy is the shortage of safe assets, those assets that are highly liquid and expected to maintain their value. This shortage matters because safe assets facilitate exchange and effectively function as money. AAA-rated CDOs, for example, served as collateral for repurchase agreements which were the equivalent of a deposit account for institutional investors in the shadow banking system. Therefore, when many of these CDOs disappeared during the financial crisis, a large part of the shadow banking system's money disappeared too. This precipitous decline in institutional money assets declined occurred, of course, just as the demand for them were increasing because of the panic. This problem bled over into retail banking, since it was funded by the shadow banking system, and forced many retail financial firms and households to deleverage. This deleveraging, in turn, meant fewer retail money assets just as panic was kicking in at the retail level. In short, the shortage of safe assets is a big deal because it means there is an excess demand for both institutional and retail money assets. This broad excess money demand is why aggregate nominal expenditures in many countries remain depressed. A full recovery, then, will not happen until there is a sufficient stock of safe assets
The safe asset shortage - The Economist - LAST month, I joined an ongoing conversation within the blogosphere about the shortage of safe financial assets. My conclusion was that the shortage exists for good reasons and that certain governments could help alleviate it by issuing more bonds. David Beckworth, an economist who writes the Macro and Other Market Musings blog, disagrees. This week he posted his rebuttal. As I read it, his argument can be broken down into two claims. First, Mr Beckworth argues that much of the current shortage of safe assets can be explained by forces that would disappear if the economy fully recovered. Second, he argues that governments, even ones with their own currency, could not issue enough safe assets to satisfy investor demand. I disagree with both claims.The collapse of real yields in countries with their own currencies clearly shows that investor appetite for safe financial assets increased in response to the financial crisis. The following chart presents another way to visualise this phenomenon. It shows American household ownership of safe assets (physical currency, government-guaranteed bank accounts, and Treasury debt) as a share of total financial assets and total assets (the second series includes real estate):
The near-term U.S. fiscal situation - Here I briefly survey some recent developments. Forbes had this graphic of the consequences of the recent fiscal-cliff deal (named by its Congressional sponsors the American Taxpayer Relief Act, or ATRA) for various income quintiles. The left bars show how much your after-tax cash income would have gone down in percentage points as a result of the tax increases had there been no deal, broken down by specific contributing factors. The right bars show how much your after-tax income actually fell as a result of the deal. Megan McArdle has some concerns about the outcome: Consider the fiscal cliff deal that we just passed. Virtually every economist agreed on what needed to happen: Congress should extend all the tax cuts and spending hikes temporarily, because any fiscal tightening would also reduce economic growth and raise unemployment. In a month-long round of backroom bargaining interspersed with public name calling, our politicians essentially managed to craft the opposite of this deal. We raised taxes immediately, which will put pressure on a still-weak economy. On the other hand, we also made the overwhelming majority of the Bush tax cuts permanent, at a cost of trillions over the next ten years. Next political cliff-hanger to gawk at: negotiations over raising the debt ceiling. We learned this weekend that this won't be side-stepped with the trillion dollar platinum coin trick. So what will happen? Here is Bill McBride's assessment: The House will raise the debt ceiling before the deadline, and the U.S. will pay the bills. The House majority has no leverage on the "debt ceiling"; as I've noted before, the House majority holds a losing hand and everyone knows it. The sooner they fold (and raise the debt ceiling) the better for everyone.
A Modest Proposal for Jacob Lew: Acknowledge Three Simple Facts about U.S. Fiscal Reality: In a reasonable world, in which we recognized the culpability of big-time D.C. politicians and bureaucrats who allowed Wall Street hyper-speculation to run wild and eventually cause the 2008-09 crash and Great Recession, Jacob Lew would be understood as a terrible choice as President Obama’s second-term Treasury Secretary, replacing Timothy Geithner. The outstanding journalist Robert Sheer gives us the basic background in a recent Nation article. Sheer writes: I suppose that he can’t be much worse than Timothy Geithner, but that should be scant cause for cheer over the news that the president has nominated Jack Lew as Treasury secretary. Both championed the financial deregulation craze of the Clinton administration, and both are acolytes of Robert Rubin, the former Clinton Treasury secretary who unfettered Wall Street greed and then took his own considerable cut of the action. But because we are not living in a reasonable world, at least in terms of D.C.-insider debates on economic policy, Lew’s nomination apparently faces opposition from Republicans because he appears insufficiently committed to an austerity budget that could push the economy back into recession while also devastating spending for Social Security, education, health care, family support, and unemployment insurance.
Bernanke Says 'We're Not Out of the Woods' Despite 'Fiscal Cliff' Deal - Although the "fiscal cliff" deal made "some progress" in resolving the nation's debt problem, "we're not out of the woods yet," Federal Reserve Chairman Ben Bernanke said Monday. "We are approaching a number of other fiscal critical watersheds," Bernanke told the University of Michigan's Gerald R. Ford School of Public Policy. "We have the funding of the government, we have the so called sequester…and we have the infamous debt ceiling which will come into play." Echoing comments made earlier in the day by President Barack Obama, Bernanke said raising the debt ceiling merely gives the government the ability to pay its existing bills. "It doesn't create new deficits, it doesn't create new spending," he said. He said it was like a family deciding that to save money, it won't pay its credit card bill. "It's very, very important that Congress take necessary action to raise our debt ceiling to avoid a situation where our government doesn't pay its bills," Bernanke said.
White House delays 2014 budget after fiscal cliff standoff (Reuters) - The White House will delay submission of its budget proposal to Congress for fiscal year 2014 because of the protracted fight over the "fiscal cliff," according to an official in President Barack Obama's budget office. Jeffrey Zients, deputy director for management at the White House Office of Management and Budget, told Congressman Paul Ryan in a letter dated January 11 that the long period it took to resolve tax issues in the "fiscal cliff" deal led to delays in the administration's budget process. "Because these issues were not resolved until the American Taxpayer Relief Act was enacted on January 2, 2013, the administration was forced to delay some of its FY 2014 Budget preparations, which in turn will delay the budget's submission to Congress," Zients wrote in the letter. "The administration is working diligently on our budget request. We will submit it to Congress as soon as possible." The deal over the so-called fiscal cliff made Bush-era tax cuts for middle class earners permanent while raising rates for individuals making $400,000 or more a year and households making $450,000 or more a year. Ryan, the 2012 Republican vice presidential nominee, is chairman of the House of Representatives Committee on the Budget.
- 1. One might prefer, for macro reasons, to start with fiscal consolidation a year from now rather than now.
- 2. One major problem is that America is aging, and benefit cuts or decelerations will become successively harder to achieve as the years pass. There will be many more elderly voters and the elderly as a voting bloc are already quite effective at getting their way.
- 3. As the years pass, our health care establishment becomes increasingly geared to require especially high revenue streams. It becomes successively harder to back out of an excessively costly health care system.
- 4. Whether one likes it or not, U.S. politics phases in benefit cuts, or benefit decelerations, only slowly. Grandfathering is much preferred, so that a critical mass of elderly voters will support the changes and arguably this is more fair as well.
- 4b. David Henderson makes numerous good points, here is one: “people can adjust better when they have more time to adjust. If the Social Security formula is altered for the future, people can have longer to save to make up for the higher benefits they would have got but will not get. That’s the argument for doing something about it now rather than later.
- 5. Krugman has written about why raising the retirement age is a bad way to make up for fiscal gaps and I agree with many of his arguments.
- 6. The threat is not that future benefits will have to be cut (if that were the case, cutting benefits now would be an odd solution, as Krugman notes). The threat is that future benefits cannot be cut or slowed and that the U.S. will spend far too much on consumption and the elderly, along with having excessively high taxes and permanently slower growth
The Constitutional Option: If 14th amendment were used to bypass debt ceiling, would anyone buy U.S. debt? - As we approach another debt limit deadline, the idea that the president should use language of the 14th amendment (“the validity of the public debt of the United States, authorized by law, . . . shall not be questioned”) to ignore the debt limit has been raised again, this time most prominently by House minority leader Nancy Pelosi. The idea, it appears, is that the 14th amendment language enable the president to issue debt in order to pay the nation’s bills even though the debt exceeds the congressionally established limit. Recently, the administration has said that White House lawyers have not found the argument persuasive and thus that the president would not be pursuing this option. However, that’s not the only reason the 14th amendment caper was never viable.Much of the debate about this issue has been among lawyers interpreting the text and history of the 14th amendment and, as interesting as this might be for lawyers, it is a waste of their and everybody else’s time; the very fact that there is uncertainty about the meaning of the phrase guarantees that the provision will never be used. US government debt is frequently referred to as “risk free,” and it is so in substantial part because its legal validity as an obligation of the United States is not in doubt. However, the existence of a debate about the meaning of the 14th amendment as authority for bypassing the debt limit nullifies the risk free character of the debt that would be issued under that constitutional provision.
No Trillion Dollar Platinum Coin - From Joe Weisenthal at Business Insider: White House Rules Out The Trillion Dollar Coin Option To Break The Debt Ceiling ”Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” [Anthony Coley, a spokesman for the Treasury Department] From HuffPo: "There are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default," said Press Secretary Jay Carney. "When Congressional Republicans played politics with this issue last time putting us at the edge of default, it was a blow to our economic recovery, causing our nation to be downgraded. The President and the American people won't tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job." I don't think of this as "hostage taking" since I remain confident that Congress will raise the debt ceiling (really just about paying the bills) and pay the bills on time - without any concessions from the White House. A better term would be "economic terrorism" since they are just trying to scare people.
Treasury, Fed Oppose Using Platinum Coin to Avoid Debt Limit The U.S. Treasury Department and Federal Reserve oppose the idea of minting platinum coins as a way to avoid the U.S. debt ceiling, according to a statement from Treasury spokesman Anthony Coley. “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” Coley said in an e-mailed statement. “There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default,” according to a statement today from the White House. “When Congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery, causing our nation’s credit rating to be downgraded,” the e-mailed White House statement says. “The President and the American people won’t tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job.”
Treasury Puts the Kibosh on Platinum Coins - Ezra Klein reports an official statement from Anthony Coley, a Treasury spokesperson, killing the platinum coin strategy:“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” So R.I.P. platinum coins of unusual size. The administration has previously ruled out another oft-discussed debt-limit safety valve, overriding the limit based on the 14th amendment. So “Plan B” discussions will now move to two other alternatives that have been bandied about: prioritizing payments or, as Ed Kleinbard suggested the other day, issuing scrip like California did a couple years ago. Of course, issuing scrip *is* prioritizing payments, but with the added feature (or complication) of a written, transferable IOU.
The Platinum Coin Idea Is Officially Dead - Ezra Klein passes along the news that the Treasury Department and the Federal Reserve Board have officially shot down the idea of minting a Platinum Coin as a way to get around the debt ceiling: The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it. That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. ”Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said. The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless.
'Treasury: We won’t Mint a Platinum Coin' - Ezra Klein: Treasury: We won’t mint a platinum coin to sidestep the debt ceiling: The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it. . “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said. ... Republicans are now free to take the economy hostage if they so desire. The question is whether Obama can make them pay for it politically if they decide to invoke this threat. But maybe they've kept a card up their sleeve? Paul Krugman: So What Will You Do, Mr. President?: If I’d spent the past five years living in a monastery or something, I would take the Treasury Department’s declaration that the coin option is out as a sign that there’s some other plan ready to go. Maybe 14th Amendment, maybe moral obligation coupons or some other form of scrip, something. And maybe there is a plan. But as we all know, the last debt ceiling confrontation crept up on the White House because Obama refused to believe that Republicans would actually threaten to provoke default. Is the WH being realistic this time, or does it still rely on the sanity of crazies?
Austerian Obama Kisses Platinum Coin Bargaining Chip Goodbye, but the Coin May Rise Again Yesterday, Ezra Klein
mouthpieced for Treasury and Fed reported in the Washington Post that: The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.. “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,”This statement from Ezra Klein would have us believe that the Federal Reserve is an independent agent in this matter, and that it can refuse to credit the deposit of a newly minted high face value proof platinum coin, if the Treasury makes such a deposit. It also assumes that if the Treasury insisted on the deposit of the coin, that the Fed would be in a position to go Court to contest that; that it has a choice in the matter. It does not appear that either of these things are true. They are just a rationalization, so the President, who most probably decided to pretend that this isn’t his decision ; or at least can be partially blamed on the Fed. Let’s review some critical aspects of the relationship between the Fed and the Treasury.
The Treasury Has Already Minted Two Trillion Dollar Coins - No doubt, you’ve heard about the latest irresponsible fiscal/monetary proposal to be floated by members of Congress and the erstwhile economist, Paul Krugman, whose lunch was just eaten by Jon Stewart. It entails having the Treasury avoid the federal debt limit by handing the Federal Reserve a single $1 trillion platinum coin. The Fed would then credit the Treasury’s bank account with $1 trillion, which the Fed could spend on the President’s lunch, a $200 toilet seat, a new aircraft carrier, more Medicare spending – anything it wants. Is there anything special about platinum? Well, yes. The coin doesn’t have to contain $1 trillion worth of platinum. It can be microscopic for all the Fed cares as long as they can use a electron microscope to read the $1 trillion "In God We Trust" inscription. But it has to be made out of platinum. No other metal or substance, like a piece of pizza, will do. The reason is that the Treasury has the right, by an obscure law, to mint platinum coins, but only platinum coins. Otherwise, making money by making money is the Fed’s domain. Countries that pay for what they spend by printing money or, these days, creating it electronically, are usually broke. That certainly fits our bill.
The Coin Abides - Matt Yglesias has posted a sharp post-mortem on the platinum coin debate. This weekend, the White House imperiously declared that debate over. And perhaps it is – for now. But Yglesias remarks on the salubrious effects of the debate: All that said, I’m glad we had this conversation. Direct discussion of the platinum coin was a good reminder that many people, including influential media figures, appear to have no idea what money is or how the monetary system works. Apart from the shockingly widespread view that the value of coins is determined by their metallic content, there was a lot of insistence that creating money was somehow an act of “magic.” In fact, the way all legal currency is created is that a government agency creates the money. I would go a bit further. The coin debate triggered something. The platinum coin was a big shiny, reminder that in some way, somehow, the monetary authority of the United States rests with the American people, even if the plutocratic architects of our financial system and the owners of our country have succeeded over time in burying that authority under many layers of convoluted technocracy and confusing delegations.
The Bright Shiny Object of Change - The #MintTheCoin gestalt is successful at once on many levels. First, the coin, were it to be minted, would be, literally, money. The “enough platinum to sink the Titanic” objection was so absurd that every thinking person with a dog in the fight was compelled to refute it, and thereby implicitly admit that money is what we say it is; that money is an idea and not a thing. Second, as many acknowledged with their comparisons to Tolkien’s One Ring, the coin would forge will, intention, and latent power into a concentrated object, an instrument, through which profound effects on the world can be made. Third, the coin is, literally, a “bright shiny object” that has proven able to immediately attract the attention of the media, the punditocracy, and large swaths of all the chattering classes from everything else they were doing, and change the terms of the debate. Finally and most importantly moving forward, the coin is a fiction, a creation of pure human imagination; it is a consensual hallucination. If we can imagine the coin and the good that might flow from it, perhaps we can imagine other good things into existence. The coin produced exactly the kind of cognitive dissonance (see, for example, Jay Carney’s press briefing) that is symptomatic of paradigm shifts. On public display was the scorn, anger, denial, and then, for many, acceptance of ideas that are foundational to an understanding of MMT. For a great many others, seeds have been planted; in those minds, more attention will be caught by future references and situations, and more and larger cracks will appear in the neo-liberal worldview.
The Game Theory of the Post-Platinum Coin Debt Ceiling - In a statement given to wonkblog over the weekend, the Treasury department announced that “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” Jay Carney followed up with the statement that there "are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default." The administration decided against negotiating with the GOP over potential terms for raising the debt ceiling, even though they could have tried for the Grand Bargain they’ve been trying to get for the past several years. They’ve asked for a clean increase of the debt limit instead, threatening default. They’ve also now decided to commit to not sidestepping around the debt ceiling using legal measures, either by minting the platinum coin or declaring the debt ceiling unconstitutional via the 14th amendment.The administration thinks that this move will strengthen their position. In general, having more choices makes you better off. But in strategic situations, removing some of your options can strengthen other options, by committing to following them through. Every game theory class has a reference to an army burning bridges and ships and otherwise removing their own escape routes, to tell their soldiers--and their opponents--that they’ll fight to the bitter end. Since the platinum coin decision and subsequent statements seem compatible with game theory dynamics, it might be useful to diagram out the debt ceiling debate via an extensive-form game:
Trillion Dollar Coins, Fourteenth Amendment Powers, Executive Duties versus the Zanies on the Right who Want to Send us to Economic Purgatory: Krugman on the dysfunctional politics of the US economy - Paul Krugman appeared on Bill Moyers PBS program Sunday night, talking sanely and rationally about the economy and why jobs (should) come first--and along the way noting how politics now dominates what and how we can talk about economic policies. See Moyers & Company, Paul Krugman on Why Jobs Come First (Jan. 11, 2013). (While you are at the site, also watch Moyers' essay, The Crony Capitalist Blowout, about the goodies that corporations got out of the fiscal cliff deal, which included everything from immediate expensing to the active financing exception and the R&D credit--all subsidies for big corporations that spent lots of lobbying power ensuring they would get them). We have all kinds of reasons to know that the US is not Greece and will not be like Greece--we are a powerful economy, we have our own currency, and our debt is widely respected. Nonetheless, the right-wing radicals want to destroy the New Deal programs--Social Security, Medicare, and Medicaid, and they are willing to take the entire economy hostage to try to get their way. Just look at Pat Toomey in the clip Moyers shows on the show, threatening to put the US government into default unless the majority in Congress accedes to the will of the wacky minority.
Coins, Bills and the National Debt - But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day. The United States Mint, a division of the Treasury, would have had to create a $1 trillion coin of platinum — though it would not have had to contain $1 trillion of platinum — to meet the letter of the law, and the Fed would have taken ownership. The Fed would then have credited the Treasury’s account with $1 trillion of cash that could be used to make payments authorized by the Treasury. The Fed is, in effect, the Treasury’s bank, accepting deposits and clearing payments on a daily basis. While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase. If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin. In effect, rather than the Treasury selling securities to the public to pay for spending in excess of revenues, the Fed would do so. Bonds in the Fed’s portfolio already count against the debt limit, so that is not a constraint.
The Trillion Dollar Coin: Joke or Game-Changer? - Last week on “The Daily Show,” Jon Stewart characterized the proposal that the White House circumvent the debt ceiling by minting a trillion dollar coin as an attempt to “just make shit up.” Economist and NY Times columnist Paul Krugman responded with a critical blog post accusing Stuart of a “lack of professionalism” for not taking the trillion dollar coin seriously. However, Krugman himself had called the idea “silly.” He thought it was just less silly — and less dangerous — than playing with the debt ceiling, which was itself an unconstitutional shackle on the Treasury’s ability to pay debts already incurred by Congress. Stewart responded on January 15 that he stood by his “ignorant conclusion that a trillion dollar coin minted to allow the president to circumvent the debt ceiling, however arbitrary that may be, is a stupid f*cking idea.” It’s all good fun – or is it? Most commentators have missed the real significance of the trillion-dollar coin. It is not just about political gamesmanship. For centuries, a secret battle has raged over who should create the nation’s money supply – governments or banks. Today, all that is left of the US Treasury’s money-creating power is the ability to mint coins. If we the people want to reclaim that power so that we can pay our obligations when due, the Treasury will need to mint more than nickels and dimes. It will need to create some coins with very large numbers on them.
MMT and Social Norms Chris Hayes’ recent MSNBC show on the Trillion Dollar Coin brought four aspects of the Modern Money debate, for me at least, into a clearer focus. I list them here not in their order of appearance on the show, but in their order of importance and logical connection.
- 1. The first aspect is structured by Stephanie Kelton’s remarks that yes, indeed, there are very REAL constraints on what the federal government can spend, but those constraints are not on the FINANCIAL side (whether or not the government has “enough money” to spend) but, instead, are on the RESOURCE side—whether the labor, materials and manufacturing capacity are actually there to be put to work by the proposed sovereign spending. This, I believe, is the central truth of MMT that people are trying to understand and wrap their minds around. In framing it this way, Dr. Kelton takes the focus OFF the idea of “printing money” and puts it instead on the idea of employing people to create useful goods and services. This is a shift in focus that I think serves the goals of MMT well, and there ought to be a concerted effort to continue framing this message.
- 2. The second aspect is revealed in Chris Hayes’ remarks about social norms (in his intro piece). We like to think of our society as being held together by the rule of law. In reality, however, while laws may form the structural skeleton of the beast, it is “non-articulated” social norms that form the living tissue, muscle and sinew that cling to the bones. Social norms change, but they change slowly, over time—they do NOT, by their nature, change “all at once.”
Fed Watch: On The Disruptiveness of the Platinum Coin - Apparently fiscal and monetary cooperation is alive and well - the US Treasury and the Federal Reserve conspired to kill the platnium coin idea. In retrospect, we should have seen this coming. As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington. This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending? Indeed, the lack of any difference explains how Japan can sustain massive fiscal deficits year after year. At the zero bound, cash and government debt are the same thing. We would assume that as long as inflation was not a concern (which it wouldn't be at the zero bound), the fiscal authority could issue as much cash as it wants, so why couldn't it issue as many bonds as it wants? Carrying the argument further, the illusion of a difference between cash and debt at the zero bound is counterproductive because it prevents the full application of fiscal policy. Fears about the magnitude of the government debt prevent sufficient fiscal policy, but such fears are not rational if debt and cash are perfect substitutes.
A Trap of My Own Making, by Tim Duy: Steve Waldman at interfluidity catches me in a trap of my own making. Waldman focuses on this quote of mine: Ultimately, I don't believe deficit spending should be directly monetized as I believe that Paul Krugman is correct - at some point in the future, the US economy will hopefully exit the zero bound, and at that point cash and government debt will not longer be perfect substitutes.Waldman has two responses. The first: Consistent with the “Great Moderation” trend, the so-called “natural rate” of interest may be negative for the indefinite future, unless we do something to alter the underlying causes of that condition. We may be at the zero bound, perhaps with interludes of positiveness during “booms”, for a long time to come. I am no stranger to concerns that the economy is locked on the zero bound for a long, long time. The second response is this: What I am fairly sure won’t happen, even if interest rates are positive, is that “cash and government debt will no longer be perfect substitutes.” Cash and (short-term) government debt will continue to be near-perfect substitutes because, I expect, the Fed will continue to pay interest on reserves very close to the Federal Funds rate. I call this a trap of my own making because I was headed in this direction: If you follow Ip's analysis through to its logical conclusion, then why should the Treasury issue debt at all? Why not just issue platinum coins? Could cash and government debt combine to serve the same functions together that they serve separately? Consider the disruptiveness of that outcome to the status quo.
New Purpose of Government Is Better Government - For all the bitterness in Washington these days, it’s easy to miss the broad consensus that undergirds our contentious politics. Republicans swear to protect Medicare and Social Security, and most recognize they can no longer hope to repeal Barack Obama’s Affordable Care Act. Democrats voted to make the George W. Bush tax rates permanent for almost all Americans. This is not a stable peace. The Democrats have mostly won the debate over what the government should do, while the Republicans have mostly won the debate over how much the government should tax. Sadly, the two sides of that equation don’t come anywhere near to adding up. The war currently raging from cliff to cliff is about bringing taxation and commitments closer to alignment.Still, it seems probable that the conflict will, eventually, resolve largely in the Democrats’ favor. Paul Ryan’s budget and Mitt Romney’s presidential campaign both proved the difficulty Republicans have in advocating fewer government benefits. For all the sound, fury and impassioned promises of huge deficit reduction, in the end both Republican leaders swore that everyone would get their benefits. The savings, we were told, would come from painless mechanisms such as competition or more flexibility for the states. It is difficult to imagine such rhetoric uprooting treasured programs -- all the more so after the Republicans lost the election.
The Debt Ceiling Is Scarier Than the Fiscal Cliff - Despite its dismal approval rating, Congress deserves thanks for at least not driving the economy over the fiscal cliff. Let me state unequivocally that the New Year's Day deal was a lot better than the alternative, no doubt. That said, a treacherous fiscal obstacle course still looms ahead of us. To get through it, compromise must cease being a dirty word. Jumping off the full fiscal cliff would have amounted to a fiscal contraction of about 4.5% of gross domestic product. Horrible. But the next big budget impasse—over the federal debt ceiling—is even more dangerous. And that impasse is fast approaching. The debt ceiling is one of the worst examples of American exceptionalism. Other countries routinely pass budgets that estimate total receipts and expenditures for the year to come—just as we do. Those budgets imply, by simple arithmetic, how much the government must borrow and, therefore, where the national debt should be by year-end. Only in America is there another law that might, and sometimes does, contradict the budget law: a limit on how much the government may borrow. If the debt limit exceeds the number implied by the budget, all is well. If it doesn't, Congress has passed two conflicting laws. In such cases, the minority party always has a little political fun before letting the debt limit rise.
Debt Ceilings, Bombs, Cliffs and the Trillion Dollar Coin - Needless to say, the US has a long-term debt problem. The problem is long-term both in the sense that it pertains to the next several decades rather than to this year. (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.) The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001. It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs: the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich. The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up. The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents. This familiar frame does not seem right to me. There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.
Citi: "It Is Possible That We Will Get A Technical Default For A Few Days" - It is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in. Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens. However, it also occurred in an environment of slowing EM growth and intensifying euro zone sovereign risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets.
'The White House Insists That it is Absolutely, Positively Not Going to Cave or Indeed even Negotiate over the Debt Ceiling' -- Paul Krugman:... I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP. Truth or famous last words? I guess we’ll find out. The problem is that the White House's definition of what it means to cave may be quite different from my own. If the White House believes entitlements need to be cut, and agrees to "strengthen" programs in this way, is that a cave? Maybe the "or even negotiate" clause covers this, but I'm wary.
Weekend's Most Important Obama Administration Statement Was Not That The Trillion Dollar Coin Idea Was A Nonstarter - The U.S. Treasury yesterday dashed the hopes and dreams of many in the blogosphere when it announced that neither it nor the Federal Reserve saw the idea of a $1 trillion platinum coin as a realistic alternative to raising the debt ceiling. Actually, the Treasury statement was much stronger and more definitive than that. Treasury spokesperson Anthony Coley said "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt ceiling." In other words, neither the Treasury, which would produce the coin, nor the Fed, which would exchange the coin for cash, are wiling to enter into the transaction. This was not, as some immediately said, the federal budget equivalent of unilateral surrender by the president. To the contrary, the reason the White House decided to stick a fiscal fork in the platinum coin plan, which came just about a month after it said in December it would not use another presumed debt ceiling escape route -- the 14th amendment to the U.S. Constitution -- was explained by Obama Press Secretary Jay Carney later in the day on Saturday. "There are only two options to deal with the debt limit," he said. "Congress can pay its bills or they can fail to act and put the nation into default."This is one of the toughest hardball negotiating tacts the Obama administration has ever taken with Congress on the budget. The White House effectively is saying to the House and Senate (but primarily to the GOP-controlled House), that not raising the debt ceiling will be judged to be their fault. By refusing even to consider alternatives such as the platinum coin and saying it will not negotiate on the debt ceiling, the administration is putting the onus unambiguously on congressional Republicans and saying they he will not provide them with an out of any kind.
No clear path for Obama to act alone on U.S. debt cap: experts(Reuters) - The White House would be taking a risk if it tries to make a constitutional end-run around Congress' authority to raise the debt ceiling, legal experts said. The "public debt" clause of the 14th Amendment is being cited by a number of lawmakers as giving President Barack Obama a legal way to issue debt and pay bills, working around the debt ceiling and avoiding default. The 14th Amendment is best known for extending civil rights protections in the wake of the Civil War. The amendment's fourth section was designed to guarantee Union debt incurred during the war, including compensation due to Union soldiers and their widows. The clause states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." On Friday, Senate Democratic leaders told Obama to be ready to take "any lawful" steps to ensure that the United States did not trigger a global economic crisis. Obama has said he would not negotiate with Republicans in Congress on the debt ceiling, increasing the prospect that they may try to block an increase in the borrowing limit. Democrats hope to avoid a replay of the 2011 debt ceiling deadlock that pushed the country to the brink of default.
Behind the Curtain: House GOP eyes default, shutdown - House Republicans are seriously entertaining dramatic steps, including default or shutting down the government, to force President Barack Obama to finally cut spending by the end of March. The idea of allowing the country to default by refusing to increase the debt limit is getting more widespread and serious traction among House Republicans than people realize, though GOP leaders think shutting down the government is the much more likely outcome of the spending fights this winter. “I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious,” House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington state told us. “We always talk about whether or not we’re going to kick the can down the road. I think the mood is that we’ve come to the end of the road.” GOP officials said more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes. Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner “may need a shutdown just to get it out of their system,” said a top GOP leadership adviser. “We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.”
More Than Half Of Republicans Prepared To Let US Default - Yesterday, Citigroup floated the idea that a temporary government shutdown once the full array of debt ceiling extension measures expires some time in mid/late February, is possible, which would also mean the first technical default of the US depending on the prioritization of US debt payments. Now, Politico reports that this idea is rapidly gaining support within the GOP and that "more than half of GOP members are prepare to allow default unless Obama agress to dramatic cuts he has repeatedly said he opposes." "Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner “may need a shutdown just to get it out of their system,” said a top GOP leadership adviser. “We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.”"
Terrorism and the Debt Ceiling... I think that the entire discussion about the debt ceiling is simply comical, akin to building a house, customizing it, but then refusing to pay the contractor. But something else struck me today; when President Obama said they would not ransom the budget today, it got me thinking. I think I understand the GOP goals now. Financial terrorism. McConnell and those that are doing this are committing an act of financial terrorism. I know, I know, that's rather strong language, so let me explain my reasoning: Terrorism is a weapon that people who understand that they will lose a real power struggle use and therefore is derived from a position of weakness. They do not have the resources to wage a real battle. Terrorists often gauge success of their actions based on media coverage with their propaganda and of the fear mongering through psychological warfare that results. When President Obama said that he would negotiate on this issue, and that he would not bend towards this ransoming of the good faith and credit of the US, he really cannot. The US government already has a policy of not negotiating with terrorists. But let's be honest and call this what it is.......financial terrorism.
Great Moments in Policy Analysis: Heritage on the Debt Ceiling - From the Heritage Foundation, today: Very simply, reaching the debt limit means spending is limited by revenue arriving at the Treasury and is guided by prioritization among the government’s obligations. How the government would decide to meet these obligations under the circumstances is a matter of some conjecture. Certainly, vast inflows of federal tax receipts—inflows that far exceed amounts needed to pay monthly interest costs on debt—would continue. Thus, the government would never be forced to default on its debt because of a lack of income. As the Bipartisan Policy Center has noted, there are certain days when inflows exceed outflows for interest payments; Dr. Foster also assumes the government can roll over debt that matures over the February 15-March 15 period (approx. $500 bn). That Dr. Foster could assert with certainty that the Federal government would never default (that is, be late in a payment) strikes me as an unjustified degree of certitude, given what we know about daily inflows in February.
How to Induce Explosive Debt Dynamics - The debt ceiling and implications of: ”We Republicans need to be willing to tolerate a temporary, partial government shutdown.” and more recently "I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious." It is one of the oddities of current discourse in macroeconomic policy that there are concerns about the short term sustainability of the Federal government’s abilities to finance debt, despite the fact that the on the run ten year TIPS (maturing 1/15/2022) is -0.760% (1/11/13). I do believe there is reason for concern in the long term. However, should we encounter difficulties in raising the debt ceiling, the timetable could be greatly accelerated. To see this, consider the following expression: The long term nominal interest rate is the average of expected short term interest rates (the expectations hypothesis of the term structure), plus the term premium associated with liquidity effects (lp), and a premium associated with sovereign risk (rp). In general, for US Treasurys, we suppress the last term. But it is the last term that is relevant in the current debate; if the failure to resolve the debt ceiling manifests itself in a higher rp, then debt dynamics can become more problematic. To see this, consider this expression.
Republican Debt Ceiling Strategy Doomed To Fail - At his press conference today, President Obama made clear once again repeated his previous statements that he was not going to let the GOP hold raising the debt ceiling hostage to their demands for more spending cuts. Republicans, not surprisingly responded fairly quickly by saying once again that they would not agree to any increase in the debt ceiling that was not accompanied by commensurate, and equivalent, cuts in spending. Thus, we’re pretty much in the same position that we’ve been in for weeks now, with little sign that either side is going to blink before we go over the debt ceiling cliff. As I noted earlier today, the GOP is sending word that they’d be perfectly willing to see a government shutdown or a default to get what the want. However, Ross Douthat notes that the Republican Party is pursuing a strategy that is, in the end, likely to fail: [Republicans are unable to provide] an explanation of how, exactly, a default or a shutdown would actually prevent the long term accumulation of new debt and “force President Obama to finally to cut spending.” It’s missing because it doesn’t really exist, and it doesn’t exist because of, well, democratic politics. Yes, refusing to raise the debt ceiling or shutting down the government would technically prevent the national debt from rising the next day. But as with the $1 trillion coin, that technical solution would be a political disaster, because being perceived as the agents of an avoidable crisis would weaken the Republican Party’s standing with the American people
How Boehner Could Find Blue Sky, Above the Debt Ceiling - Over the next few months, Congress faces a new series of deadlines: The spending cuts mandated by the sequestration will begin on March 1, unless Congress delays them again. Congress needs to pass a “continuing resolution” or government will shut down, as it did in the 1990s during the standoff between Bill Clinton and Newt Gingrich. And, finally, the debt ceiling will need to be raised or the government will no longer be able to pay its bills to Social Security beneficiaries, the military or the owners of government bonds — a group that includes nearly everyone with a retirement account. I have listed these deadlines in increasing order of their hazard to our economic health. The spending cuts would be tough and arbitrary but gradual. Incurring them for a couple of months would be bad, but not horrible. Closing down the government is more serious. And even if you’d like a smaller government, you probably still want essential services to continue. OF the three, the debt ceiling is likely to arrive first and is simultaneously the most serious and the most ridiculous. It’s serious because it’s unthinkable that the government would stop paying its bills, and the ramifications if we defaulted on our debt payments would be catastrophic for the nation and the global economy. We don’t even want to think about going there. Which leads to my proposal for restoring Mr. Boehner’s relevance: He should propose that the debt ceiling be raised for at least two years or, even better, propose that it be abolished. He wouldn’t need a majority of his own party to vote for such a bill, of course, because it would have wide support among Democrats. He would just have to propose it and persuade some of his colleagues to support it. That would be enough.
'I’m Open to Making Modest Adjustments to Programs Like Medicare' - President Obama today in his press conference: ... Now, the other congressionally imposed deadline coming up is the so-called debt ceiling... So I want to be clear about this: The debt ceiling is not a question of authorizing more spending. Raising the debt ceiling does not authorize more spending. It simply allows the country to pay for spending that Congress has already committed to. These are bills that have already been racked up, and we need to pay them. ... So ... Republicans in Congress have two choices here: They can act responsibly and pay America’s bills or they can act irresponsibly and put America through another economic crisis. But they will not collect a ransom in exchange for not crashing the American economy. The financial well-being of the American people is not leverage to be used. The full faith and credit of the United States of America is not a bargaining chip. And they’d better choose quickly because time is running short. The last time Republicans in Congress even flirted with this idea, our triple-A credit rating was downgraded for the first time in our history, our businesses created the fewest jobs of any month in nearly the past three years, and ironically, the whole fiasco actually added to the deficit. ...
Obama: No `Ransom’ for Debt Ceiling - President Barack delivered a stern warning today to congressional Republicans — make that the House — about the looming debate over raising the nation’s debt ceiling. It’s not a question of permitting new spending, Obama said. It’s a matter of “paying the bills” for commitments Congress already has made. Any debate over not raising the limit, he said, is “absurd.” The potential damage to the economy of not meeting the next deadline for raising the limit (expected sometime in mid-February) is too costly to even consider, the president said today in his final planned news conference of his first term. “The issue here is whether or not America pays its bills,” he said. “We are not a deadbeat nation.” He also issed a warning about the potential tactics that House Republicans in particular are discussing, including demanding a new round of spending cuts attached to each incremental increase in the debt ceiling. “They will not collect a ransom for not crashing the American economy,” Obama said.
Obama: Congress Must Increase Debt Ceiling or Else - President Barack Obama warned Congress on Monday that it must raise the debt ceiling or risk a "self-inflicted wound on the economy." Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner also delivered ominous calls for action. "We've got to stop lurching from crisis to crisis to crisis," Obama told reporters at the White House in the last news conference of his first term. Hours later, Geithner said in a letter to Congress that even a brief default would be "terribly damaging." And Bernanke said "we're not out of the woods yet," despite the deal to avoid the "fiscal cliff." Senate Minority Leader Mitch McConnell said Republicans look forward to working with Obama on the debt in order to "do something about this huge, huge problem." But he and House Speaker John Boehner said increases in the borrowing authority must be accompanied by spending cuts, despite Obama's insistence that the two issues be dealt with separately.
Obama commits Unilateral Disarmament as a Debt Ceiling Negotiator - William K. Black - President Obama is getting ready to negotiate (or if you believe him, not negotiate) an extension of the debt limit. The Republicans control the House and are promising to follow Donald Trump’s suggestion that they use what he called the “nuclear weapon” to terrorize the U.S. economy and people in order to gain negotiating leverage over Obama. That act of treachery was designed to produce two other acts of betrayal of the American people. First, Trump’s urged the Republicans to use their “nuclear weapon” to force Obama to inflict austerity on our Nation and force us back into recession. Second, Trump urged the Republicans to use their leverage to force Obama to gut the safety net. It is somehow fitting that Trump’s advice to act in unprincipled manner was designed to produce policies that would enrich the wealthy and cause immense harm to the Nation.Naturally, the Republican Party has decided to adopt Trump’s “nuclear weapon” strategy in its entirety. A Party that takes its policy advice from Donald Trump – advice to use a “nuclear weapon” on our economy in order to extort policy changes that will enrich the 1% at the expense of the Nation – has become a self-parody and the enemy of the American people
House GOP eyes default, shutdown - House Republicans are seriously entertaining dramatic steps, including default or shutting down the government, to force President Barack Obama to finally cut spending by the end of March. The idea of allowing the country to default by refusing to increase the debt limit is getting more widespread and serious traction among House Republicans than people realize, though GOP leaders think shutting down the government is the much more likely outcome of the spending fights this winter. “I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious,” House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington state told us. “We always talk about whether or not we’re going to kick the can down the road. I think the mood is that we’ve come to the end of the road.”
If we hit the debt ceiling, can Obama choose which bills to pay?: For some Republicans, the answer is simple: The United States should keep funding the crucial stuff and let the rest of the government shut down. “We should pass a bill out of the House,” said Sen. Pat Toomey (R-Pa.), “saying there will be certain priorities attached to certain things, namely payment of debt services and payment of our military.” This option is known as “prioritization.” It’s the idea that the government can selectively pay some of its bills so that the nation doesn’t default on its debt payments — the doomsday scenario. It may sound appealing. But there’s also good reason to think prioritization might be unworkable. Consider how the U.S. government actually pays its bills. Each and every day, computers at the Treasury Department receive around two million invoices from various agencies. The Department of Labor might say, for example, that it owes a contractor $3 million to fix up a building in Denver. The Treasury computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second. Now say Congress fails to lift the debt ceiling by late February. Treasury will be confronted with around $450 billion in obligations in the next month, and it will only be bringing in enough revenue to cover about $277 billion. Who gets paid and who gets stiffed?
Half of Republicans in Congress Are Apparently Cool With America Defaulting - Fuming over a fiscal cliff deal devoid of big spending cuts, the Republican Party is cranking up the crazy talk by pledging anew to hold America hostage in the brewing fight over raising the nation's debt ceiling. Politico quotes GOP leaders in Congress as saying that "more than half" of Republicans in Congress are willing to let America default "unless Obama agrees to dramatic cuts he has repeatedly said he opposes." Still more Republicans are itching to shut down the federal government, a la Clinton and Gingrich in 1995-96, unless the president bows to their demands: Deep spending cuts to domestic programs, Medicare, Medicaid, and Social Security, but none to military spending.What's most jarring about the GOP's willingness to default or grind the government to a halt is how brazenly political the party's reasons are for doing it, per Politico: House Speaker John Boehner "may need a shutdown just to get it out of [House Republicans'] system," said a top GOP leadership adviser. "We might need to do that for member-management purposes—so they have an endgame and can show their constituents they’re fighting." A default—or even a down-to-the-wire debt ceiling drama (see: 2011) that ends with a deal—has real economic consequences for working Americans. It could jack up interest rates on student loans, car loans, home loans, and credit card debt. It would increase borrowing costs for the government itself. And Federal Reserve Chairman Ben Bernanke has said that a default could torpedo the US economy's slow yet steady recovery.
Fitch: Debt ceiling delay would prompt formal US rating review - Fitch Ratings' expectation is that Congress will raise the debt ceiling and that the risk of a U.S. sovereign default remains extremely low. Nonetheless, and in line with our previous guidance, failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings. On 31 December 2012, U.S. federal government debt reached the statutory debt limit of USD16.394trn and consequently the Treasury has begun to implement extraordinary measures that will create an estimated USD200bn of additional headroom under the debt ceiling. A repeat of the August 2011 'debt ceiling crisis' would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan. In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible. The statutory limitation on federal debt is a long-standing feature of the U.S. fiscal framework and applies to nearly all Treasury debt, whether held by the public or in government accounts. Protracted debate prior to increasing the debt ceiling is not an exceptional event, but against the backdrop of unprecedentedly large peacetime budget deficits and outstanding debt, any delay in raising the limit would pose ever increasing risks to the ability of the federal government to honour its obligations in a timely fashion. The last time Congress approved an increase in the debt ceiling in August 2011, the federal government came perilously close to being in a situation where, in the words of the Treasury Secretary, it would be unable "to meet our commitments securely".
Apparently, the National Review’s Editors Plan to Swear Off Flying. And Eating Farm Products. And Want to Force the Rest of Us To, Too. Today, in another step forward, the National Review calls on Republicans to take the threat of default off the table: Republicans should recognize that the prospect of default is the Democrats’ chief weapon in their campaign of avoidance. That prospect is not a source of Republican leverage in the debt-ceiling fight; it is the primary source of the Democrats’ leverage. It is a way to distract the press and the public from the reality of our fiscal crisis.The Democrats’ strategy offers Republicans an opportunity. Since the Democrats insist that the prospect of default is the reason they will not negotiate about spending restraint, Republicans should begin the debt-ceiling fight by permanently eliminating that prospect, turning the debt-ceiling debate into an argument about future spending rather than past borrowing.The House should pass a bill to redefine the debt limit so that it constrains primary spending but not debt service. Under this reform, a Treasury that had hit the statutory borrowing limit could continue to borrow what it needed exclusively for paying interest on the national debt and to roll over existing debt obligations, but it could not borrow for any other government spending until the limit had been increased. This would take default entirely off the table
Here's Why Republican Talk About Default And Shutdown Is Not An Empty Threat - Politico had an outstanding but truly bone-chilling story yesterday about how appealing the prospects of a default and a government shutdown may be to House Republicans. According to the piece, forcing a default by not raising the debt ceiling and shutting down the government by not passing a continuing resolution may be the preferred ways to go by a majority of the House GOP caucus no matter what that would mean to the U.S. economy, the Republican Party's overall approval rating, the GOP's prospects for a Senate majority in 2014 or a Republican winning the White House in 2016. To those of us who have watched Washington operate for a while, this obviously sounds like totally insane, crazy self-destructive behavior by the House GOP. But it would be wrong to dismiss it out of hand. From the conversations I've had with Republicans House members and staff since the 2012 election, the threats, are real and make a great deal of political sense no matter how obnoxious and damaging it otherwise would be. I've repeatedly been told that, with redistricting in place, House Republicans are relatively certain they'll be able to maintain the majority at least through the end of this decade if they continue to appeal to the GOP base in their congressional districts.
Bernanke: Get rid of the debt ceiling, it has no practical value - Federal Reserve Chairman Ben Bernanke criticized the debt ceiling as an unusual device that can be used to prevent the United States from paying it’s bills, as he suggested that the country would be better off if the debt limit did not exist. “I think it would be a good thing if we didn’t have [the debt ceiling],” Bernanke told students at the University of Michigan today. “I don’t think that’s going to happen. I think it’s going to be around.” Those remarks put Bernanke in agreement with Treasury Secretary Tim Geithner, who has said that Congress should eliminate the debt ceiling. The conversation began when Bernanke was asked if the debt ceiling had any “practical value” as a matter of fiscal policy. “No, it doesn’t really have — it’s got symbolic value, I guess, but . . . no other countries in the world have this particular institution,” he said.“If the Congress is approving spending and it’s approving taxing, and those two things are not equal,” Bernanke continued, “the way to addres it is by having a sensible plan for spending and a sensible plan for revenue and make decisions about how big the government should be or how small it should be.”
Bernanke to Congress: Do your job, Pay the Bills - Fed Chairman Ben Bernanke was very clear. The "debt ceiling" is about paying the bills, not about new spending. He urged congress to do their job, raise the debt ceiling, and pay the bills. His preference was to abolish the "debt ceiling" since it is redundant. From the WSJ: Bernanke Calls on Congress to Raise Debt Ceiling "It’s very, very important that Congress take the necessary action to raise the debt ceiling to avoid the situation where the government doesn’t pay its bills,” said Mr. Bernanke ... “Raising the debt ceiling gives the government the ability to pay its existing bills–it doesn’t create new spending,” he said. At another point, Bernanke said the "debt ceiling" has "symbolic value", but he prefers eliminating it. He was very clear that Congress should do their job and raise the debt ceiling. Bernanke also expressed concern about the long run sustainability of the debt (over decades), but that we also shouldn't cut the deficit too quickly and impact the "fragile recovery". He thought the fiscal cliff deal would subtract about 1.5% from GDP this year. As I've noted before, the "debt ceiling" sounds virtuous, but it is really just about paying the bills. Not paying the bills is reckless and irresponsible.
A Credit Downgrade Warning Both Sides Should Listen To - So far, only one of the three major credit agencies has downgraded U.S. public debt, but Fitch is now warning that the U.S. could lose its AAA credit rating depending on how the debt ceiling crisis is resolved: The United States risks losing its AAA credit rating from Fitch if any deal to raise the legal borrowing limit does not include a plan to put public finances on a more sustainable footing, the ratings agency said Tuesday. Fitch has long warned that a repeat of the 2011 debt ceiling crisis would result in a formal review of its AAA rating on U.S. sovereign debt. While it expects Congress to raise the debt ceiling — making the risk of a U.S. default extremely low — the nature and timing of the agreement will be critical. Congress must also decide on the fate of spending cuts deferred under the Jan. 1 deal that averted the “fiscal cliff” at the turn of the year, and renew the federal government’s spending authority, due to expire March 27. Fitch said Tuesday another round of last minute short-term fixes would perpetuate the uncertainty over tax and spending, and fail to place U.S. finances on a sustainable path in the medium term.
Geithner Says Debt Limit Measures May Run Out by Mid-February - U.S. Treasury Secretary Timothy F. Geithner said so-called extraordinary measures he’s taking to avoid breaching the debt ceiling would work only until mid- February to early March and warned that failure by Congress to raise the limit could “impose severe economic hardship” on the country. “Congress should act as early as possible to extend normal borrowing authority in order to avoid the risk of default and any interruption in payments,” Geithner said in a letter today to House Speaker John Boehner. In the letter, released by the Treasury, Geithner said the department will “provide a more narrow range” of dates with a “more targeted estimate at a later date.” Geithner’s estimate is similar to one made by the Washington-based Bipartisan Policy Center last week. The center projected that sometime between Feb. 15 and March 1, the Treasury will no longer have sufficient funds to pay all its bills.
Geithner expects debt ceiling breach in February or March - One of the mysteries of the debt ceiling debate: When exactly is the deadline? In a letter to Congress on Monday, Treasury Secretary Timothy Geithner said his department is already taking "extraordinary measures" to avoid breaching the $16.4 trillion debt limit. "Treasury currently expects to exhaust these extraordinary measures between mid-February and early March of this year," Geithner wrote. "We will provide a more narrow range with a more targeted estimate at a later date." Geithner's letter came as Obama again said he would not negotiate with Republicans over an increase in the debt ceiling, noting that the law authorizes the government to borrow for bills that have already been racked up.
Geithner Unleashed: Sends Letter To Boehner, Warns Even Brief Default Would Be "Terribly Damaging", Channels Reagan - Following up on today's relentless debt ceiling propaganda, which started with the Politico report that more than half of republicans are willing to push the US into a "temporary" default, going through Obama's "We are not a deadbeat nation", but one whose president apparently will not debate the debt ceiling (the same president who as a Senator was against rising the debt ceiling) and closing with Boehner's rebuttal to Obama, saying the GOP would raise the debt ceiling but in exchange for spending cuts, sure enough it was time to unleash the Treasury Secretary in his last days on the job, toting the party line ("extending borrowing authority does not increase government spending; it simply allows the Treasury to pay for expenditures Congress has previously approved") making it "abundantly clear" that "Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging, calling into question the willingness of Congress to uphold America’s longstanding commitment to meet the obligations of the nation in full and on time. It should also be noted that default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them." The unleashed Geithner then proceeds to threaten: "Threatening to undermine our creditworthiness is no less irresponsible than threatening to undermine the rule of law, and no more legitimate than any other common demand for ransom."
A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013 - There is an obvious solution to Washington’s perpetual budget crisis. But it is unlikely to happen because all the incentives—both political and economic—are completely wrong. First, the solution: The core of a deal was framed last December, when President Obama and House Speaker John Boehner were on the verge of a long-term fiscal agreement that would have cut spending by about $1 trillion and raised revenues by roughly the same amount. Sure, Ds and Rs were quibbling about the last few hundred billion, but this, more or less, would have been the compromise.In the end, the American Taxpayer Relief Act of 2012 raised revenues by about $600 billion (at least as the negotiators counted it) and didn’t cut spending at all (in fact, it may have slightly increased outlays). The obvious next step: Finish the job by agreeing to combine another $400 billion in new taxes with $1 trillion in spending cuts. To avoid the debt limit crisis, Congress could also extend federal borrowing authority for one year to give lawmakers time to turn those goals into law, then increase it for another year once the spending and tax changes are adopted. It is an obvious solution. But the chances of Congress and Obama getting to yes are vanishingly small because they confront political and economic incentives that push them to disagree.
Reactions to the President’s debt limit comments - I worked on debt limit bills from both ends of Pennsylvania Avenue, helping enact eight of them during my time as an aide to Senate Majority Leader Trent Lott and as an advisor to President Bush. Here are a few reactions to the President’s debt limit comments in yesterday’s press conference.
- The President did not threaten to veto a debt limit bill. He substituted insults of Congressional Republicans for formal legislative threats. It’s easy to get distracted by the insults, but the absence of a formal threat is more important.
- This reinforces my view that the President views the debt limit as a must-pass bill, and that anyone in Congress who can attach other legislation to it has a good chance of it becoming law. The debt limit can only carry so much additional legislative weight, so the smart strategy is for House Republican leaders to attach something that is modest, closely related to deficits and debt, and difficult for Democrats to reject. Speaker Boehner and Senator Sessions both have good ideas that meet these criteria.
- Without a veto threat the President must rely on Leader Reid and Senate Democrats to water down or even remove spending cuts or other fiscal reforms that House Republicans may attach. In a strange way this is good for spending cutters, who should prefer to negotiate with Senate Democrats to negotiating with the President.
Counterparties: Prioritization nation - House Republicans are reportedly threatening to force a government shutdown — or even a default — to get the spending cuts they want.This is all about the debt ceiling, of course. The US hit its statutory spending limit on December 31; since then, the Treasury Department has been using a series of “extraordinary measures” to keep the country from defaulting. Those measures, Treasury Secretary Tim Geithner, said into a letter to House Speaker John Boehner yesterday, could expire in mid-February. If they do, some 80 million payments a month could be at risk. Geithner does not say bond payments could be at risk, but that didn’t stop Fitch warning that it — just like S&P, last time around — might downgrade the USA as a result. A bill resurrected by Republican Senator Pat Toomey would require Treasury to prioritize general debt obligations — think bond payments — any time the US hits the debt ceiling. In 2011, Treasury suggested this kind of prioritization is “default by another name.” Similarly, Keith Hennessy, a former Bush Administration economist, says that “the sanctity of contracts and the US government’s credibility” are at stake: not paying benefits or bills, he writes, would be ”the first step to becoming a banana republic”. President Obama echoed this critique yesterday in a press conference. In practice, as Derek Thompson says, prioritization is frightening. “Some days, the government would get enough money to pay Social Security checks and Medicaid providers,” he writes. “Other days it wouldn’t”. And that’s assuming prioritization is even possible. Brad Plumer notes that every day Treasury gets about 2 million invoices from government agencies, which are processed automatically “dozens of times per second”. No one knows whether it’s is legal or even possible to pay bondholders with certainty while deprioritizing everyone else owed money by the government.
Analysis: Preparing for the unthinkable: Could markets handle a U.S. default? (Reuters) - Squabbling in Washington over the debt ceiling is again raising the specter that the United States may be forced to delay payments on its debt. While the stigma of a default would be damaging enough to investor sentiment, the chaos from a breakdown in financial markets' systems that might result would be even scarier. A failure to make payments on U.S. Treasuries, however brief, would create widespread damage in short-term funding markets, which are crucial to daily operations of financial institutions, investment firms and many corporations, said analysts and investors. In the event of a default, confusion would be rampant as trading systems struggle to identify, transfer and settle bonds that have matured but have not been repaid. Interest rates would surge and investors would likely sell stocks and commodities as they fled risky assets, analysts said. But that doesn't mean investors would necessarily run to the safety of Treasuries. Many U.S. government bonds could be shunned as investors worry about which issues are in default - even longer-dated issues that could have a coupon payment due that would potentially be in jeopardy. A default could also trigger a wider paralysis in the financial system that could quite quickly stall the economy, as happened at the height of the financial crisis in September 2008.
The Debt Ceiling and the Art of Being Unreasonable -Using brinkmanship in political negotiations (or in any of kind of negotiations) is not a bad thing. It's often a necessary tactic, particularly for the weaker party. So it's interesting to consider what exactly is so all-fired terrible about the threat House Republicans have been making to refuse to raise the U.S. debt ceiling. It's no surprise that President Obama calls it "absurd," but the view is shared by lots of center-right and not-obviously-political thinkers and commentators, myself among them. Some GOP politicians and conservative groups seem to be coming to the same conclusion, although this may have more to do with political considerations than with principle (House Republicans' last visit to the debt ceiling brink, in 2011, turned out to be something of a bust with voters). Yet Washington has had fiscal showdowns before, and the debt ceiling has repeatedly been used as a negotiating ploy. As the Republicans have been pointing out, lots of Democrats (among them one Senator Barack Obama in 2006) have spoken and voted against raising the debt ceiling in recent years.
Hardliners shift stance on US debt ceiling - A conservative activist group backed by the industrialist Koch brothers is urging Republicans to show restraint during US debt ceiling negotiations, representing a shift in position by the usually hardline Americans for Prosperity. The move by the influential group underscores concern that a political stand-off over extending the US’s borrowing limit, which many Republicans are pushing for at the end of February, would diminish public support for sharp cuts in government spending, AFP’s stated goal. AFP opposed an agreement that raised the debt ceiling in 2011 because it said the deal did not go far enough to cut spending. “We’re saying calibrate your message. Focus on overspending instead of long-term debt,” said Tim Phillips, president of AFP. “Focusing on [the debt ceiling] makes the messaging more difficult.” He warned that a prolonged fight over the $16.4tn debt ceiling could hasten a “grand bargain” between President Barack Obama and John Boehner, the Republican speaker of the house. AFP, among other conservative groups that supported Republican members of Congress in the 2012 election, is staunchly opposed to any such compromise because it would raise taxes as well as cut spending. “Our number one priority is to stop government overspending. The debt limit is a symptom of that but if debt becomes the be all and end all, it becomes easier for liberals to push a combination of future spending cuts that are not enforceable and immediate tax increases,” he said.
Paul Ryan: Government Can Avoid Default, Prioritize Spending if We Hit the Debt Limit -Paul Ryan took a quick break from the House GOP's retreat to discuss the sequence of spending fights to come. There was one small wobble on the debt limit, when Ryan suggested that members were "looking at" -- not decided upon, but considering -- a short-term debt limit increase. But when asked whether the sequester, a shutdown, or default was "worst" for the economy, Ryan suggested that the worst of all possible worlds would be a failure to deal with spending. If the debt limit was reached, then Ryan still believed in a Republican idea from 2011: Letting the federal government prioritize spending, so that interest payments were mae first. "We believe they have the ability to prioritize," he said. "I'm speaking for myself -- I believe Pat Toomey would say the same thing. There's disagreement about whether that's true or not." Toomey, a supporter of the 2011 prioritization concept, has suggested new legislation that would tell the government to pay interest and veterans' benefits first, if cash ran low. Ryan seemed to endorse that. "We obviously believe that the administration should prioritize such things. And people like me are fine with giving the administration crystal-clear authority on how to prioritize such things. Plenty of members have talked about that."
Republicans Considering "Temporary" Debt-Ceiling Increase - In what is sure to be a complete non-starter with the Obama administration, WSJ reports that Paul Ryan said that "Republicans are discussing whether to support a short-term increase in the nation's borrowing authority, possibly linking the debt ceiling to future talks aimed at reaching a major deficit deal....Mr. Ryan said no decisions have been made about how to approach the debt and spending negotiations, but that leaders hope House Republicans will reach consensus on a strategy by the end of the week. The former vice-presidential candidate said "we're discussing the possible virtue of a short-term debt limit" increase that would lead to broader deficit talks with Senate Democrats and the White House. "We hope to achieve consensus on a plan to proceed so we can make progress on controlling spending and deficits and debt," Mr. Ryan said." The logical question immediately arose, and promptly received a non-answer "Mr. Ryan wouldn't say what he meant by a temporary debt-ceiling increase, declining to give a specific increase figure or timeframe for an extension."
Sequester And Shutdown Could Be More Likely Than A Fight Over The Debt Ceiling - Over at The Plum Line, Greg Sargent has an important post about the way the debt ceiling fight could end without triggering a cash-crunch crisis for the federal government. Greg thinks is could be one of two possibilities. First, the House GOP could agree to a version of the plan first proposed by Senate Minority Leader Mitch McConnell (R-KY) that helped solve the last debt ceiling fight in August 2011. That plan effectively transfers the ability to raise the government's borrowing to the president. Greg notes that this time the plan would be approved over the legislative equivalent of McConnell's dead body, that is, over a filibuster McConnell himself would lead. Greg also notes, however, that there may well be enough Senate Republicans willing to join the 55 Democrats to make this happen. Second, Greg says that the same combination of Democrats and some Republicans in the House that voted for the fiscal cliff deal would likely approve the McConnell plan or a clean debt ceiling increase if the GOP leadership allowed the vote to take place. Both options are plausible for a basic reason Greg does not mention: The GOP seems to be coming to the conclusion that fighting over the debt ceiling is not its best option. The better fight, and the one that gives them more leverage and scores them more political points with their base, may be to punt on the debt ceiling and instead use the sequester spending cuts that will occur on March 1 and the threat of a government shutdown on March 28 to force concessions on sending from the White House.
Debt-ceiling economics and politics -- Let me outsource this topic to some others who've said it better than I could. Alan Blinder, professor of economics at Princeton University: At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays-- which includes everything from Social Security benefits to soldiers' pay to interest on the national debt-- will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided. How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come. Keith Hennessey, who was Director of the White House National Economic Council under President George W. Bush: Some conservatives argue for the passive variant of payment prioritization. Let's vote against raising the debt limit, they argue. Today President Obama signaled what he would do in this situation. He will start warning politically powerful constituencies: seniors, veterans, and troops, that they are at risk of not being paid on time, and their Republican Congressman is responsible for it, and his or her phone number is 225-XXXX. I have no idea why some conservatives think it's smart strategy to hand the President this kind of political club.
Republicans Backing Away from Debt Ceiling Brinksmanship, to Hold Line on Sequestration and Budget Yves Smith A important shift in the Republicans’ negotiating stance over the austerity fight (do we go Dem lite or Republican high test?) was duly noted in the Financial Times a day ago, but a search in Google News (“debt ceiling”) suggests a lot of other commentators have not yet digested its significance, so it seemed worthy of a short recap here. Although extremism and brinksmanship have become preferred negotiating tactics of the Republicans, the most relentless practitioners are under the sway of libertarian funders and stealth organizers, primarily the Koch brothers, and intellectual leaders (not quite an oxymnoron) like Grover Norquist. In the new year, some elements of the Republican party have been taking more and more extreme positions, even saying that defaulting on US Treasuries would be a good idea, hewing to the “execution at dawn focuses the mind” school of thought. Although financial markets didn’t yet take that bluster seriously, if it went on any length of time, they might have. Fitch bothered sending a warning shot, effectively indicating they regarded this sort of talk as bluster, but if anyone got serious, they’d review US debt ratings. The reason that was significant isn’t so much that it would affect bond yields (the Fed has been keeping a lid on them of late) but that the possibility of a downgrade by a second rating agency could widen repo haircuts on Treasuries and government guaranteed bonds, and the effects would ripple through the entire financial system. As the Financial Times reported late Tuesday, the Kochs apparently decided things were getting out of hand.
GOP Ponders Alternative to Hostage Shooting -- House Republicans are at a retreat in Williamsburg, Virginia (not the hipster Williamsburg) trying to figure out what to do about their political predicament in general and the debt ceiling in particular. Former Republican budget aide Keith Hennessey has an op-ed in The Wall Street Journal suggesting a kind of partial retreat from the party’s full-on hostage strategy of 2011. Republicans, he recognizes, can’t really threaten to block the debt ceiling. Instead, he suggests they threaten to block a long-term increase in the debt ceiling unless Obama gives in on spending. If Obama refuses, Hennessey suggests they just cough up a series of three-month debt ceiling hikes. Republicans are reportedly weighing this approach. Will it work? You have to ask yourself what the point is. If Republicans can’t threaten to shoot the hostage, what do they gain by holding new debt ceiling votes every few months? It’s either leverage or it isn’t. If it isn’t, then a new vote every few months won’t do anything for the GOP. Indeed, it will annoy Republicans, who will be forced to take more and more “he voted to increase the debt ceiling fourteen times!” votes. Hennessey’s analysis is less an argument than the expression of a party attempting to cope with loss. They thought they had a glorious opportunity to extract a ransom payment from Obama in return for not blowing up the world economy, and Hennessey’s plan is a kind of halfway point on the road to conceding that the debt ceiling will probably return to the old system of a mere posturing opportunity.
Ryan Says GOP Weighing Short-Term Debt-Limit Increase - WSJ.com: House Republicans appeared to be coalescing around a proposal to approve a short-term increase in the government's borrowing limit to give them time to use two other budget deadlines to win spending cuts they are demanding. House Budget Chairman Paul Ryan (R., Wis.) the party's vice-presidential nominee last fall, advanced the idea during a closed-door session with other House Republicans Thursday, the second day of their retreat at a resort in Williamsburg, Va. "We're discussing the possible virtue of a short-term debt limit discussion so we have a better chance of getting the Senate and the White House involved in discussions in March," he said.The proposal was one of several discussed during a wide-ranging strategy session, and no final decisions were made. But several members expressed support for it afterward. Rep. John Fleming, a conservative Republican from Louisiana, said Speaker John Boehner (R., Ohio) liked the idea of a short-term debt ceiling increase, as did many rank-and-file GOP lawmakers. "We're all pretty much on board," he said. "I don't mean that every single person is going to vote for it, but as a working principle, I think we're all pretty solid on it."
Cornyn: Congress will not allow default - Sen. John Cornyn of Texas, the Republican whip, said in Houston Thursday that Congress will not allow an impasse over raising the debt ceiling to result in the federal government defaulting on its spending obligations. "We will raise the debt ceiling. We're not going to default on our debt," Cornyn told the Houston Chronicle editorial board. Cornyn's fellow Republicans, particularly in the House, have been trying to use the issue of the debt ceiling to force President Obama to agree to spending cuts. Obama has said he will not negotiate on the debt ceiling. He has insisted that if Congress refuses to raise the debt limit, the nation will default on its spending obligations, including veterans benefits and Social Security payments. "I will tell you unequivocally, we're not going to default," Cornyn said Thursday. House Republicans, meanwhile, meeting at an annual retreat in Williamsburg, Va., told reporters that they are considering a plan to raise the legal borrowing limit for just a few months, postponing the debt-ceiling debate until March.
A Three-Month Extension on the Budget Ceiling: Institutionalizing Crisis Mode - Two points leading to two conclusions: First, as I said before, and Paul Krugman said today, as far as the actual numbers go, there’s no need to be in fiscal crisis mode. It would take $1.4 trillion to stabilize the debt-to-GDP ratio over the next decade, which in functional times would not be a particularly heavy lift. Second, breaking news from Politico tells me this: House Republicans will vote next week on a plan to raise the nation’s debt ceiling for three months… Put these two points together and you come to one of two conclusions. One, the R’s recognize that the debt ceiling must be raised, a victory of sorts against those who would use the threat of default as leverage. Or two, the House Republicans would like us to lurch from manufactured fiscal crisis to manufactured fiscal crisis on a quarterly basis.
House Republicans Plan Three-Month Debt-Limit Increase - House Republicans plan to vote Jan. 23 on a three-month extension of U.S. borrowing authority in an effort to force the Democratic-led Senate to adopt a budget plan. “We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government’s spending problem,” Speaker John Boehner of Ohio said in a statement today at the end of the party’s private policy retreat at a resort near Williamsburg, Virginia. Majority Leader Eric Cantor of Virginia said in a statement that their plan is to block pay for members of Congress if the House or Senate doesn’t adopt a budget by the end of the proposed debt-limit increase. A leadership aide said Republicans are dropping their insistence that a short-term extension be accompanied by a dollar-for-dollar spending cut. The Treasury Department has said the U.S. will exceed its $16.4 trillion borrowing authority sometime from mid-February to early March. Congress faces two other fiscal deadlines in the next 90 days, and House Republicans plan to use those debates -- rather than the one over the debt limit -- to try to force spending cuts. Financing for government agencies is scheduled to lapse March 27, and lawmakers must pass new spending or face a government shutdown. Also in March, Congress will confront the $110 billion in automatic spending cuts, half from defense, that were postponed in the Jan. 1 tax deal.
Boehner To Obama: "No Budget, No Pay" - And the game continues as Speaker Boehner appears to be kicking the can across the corridor to the Senate (and implicitly the Democrats) as he quite specifically advises them that with no budget, there is no talk of debt-ceiling extensions. The principle is simple, he notes, "no budget, no pay." As Dow Jones reports, the 'compromise' deal is that the House will propose a three-month extension of the debt-ceiling in exchange for a budget (i.e. spending cuts from the Senate) - which of course is all but impossible given the years of inability to pass a budget anyway. Check to Obama (though we know the response)...
GOP Proposal "Sure To Go Nowhere" In The Senate - The market ramped, modestly, on the earlier news that the House would push the debt ceiling by three months with an implied budget/spending cut provision. That the market actually moved on this headline shows front and center just how clueless the algos doing all the trading truly are, because one doesn't need Politico to tell them that this proposal is absolutely DOA and is nothing but more theater. However, those who do need Politico to tell them that, here it is: "House Republicans will vote next week on a bill that would raise the nation’s debt ceiling for three months and attach a provision that would stop pay for members of Congress if the Senate doesn’t pass a budget, GOP officials said Friday. It’s an attempt to force the Senate to lay out a spending plan, but is sure to go nowhere in the Democratic controlled upper chamber."
Not With A Bang But With A Whimper - Krugman - When you’re wrong, you’re wrong. I thought that by ruling out any way to bypass the debt limit, the White House was setting itself up, at least potentially, for an ignominious cave-in. But it appears that the strategy has worked, and it’s the Republicans giving up. I’m happy to concede that the president and team called this one right. And it’s a big deal. Yes, the GOP could come back on the debt ceiling, but that seems unlikely. It could try to make a big deal of the sequester, but that’s ... not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama... The key point to remember here is that Obama achieves his main goals simply by surviving. Above all, health reform gets implemented, and probably becomes irreversible. A good day for sanity, all around.
“I Want a Crisis, Damn It! Get Me a Crisis!! Now!!!” -One of the more important bits of analysis we’ve done lately here at CBPP is this piece by Richard Kogan on what more it would take, given tax increases and spending cuts legislated thus far, to stabilize the debt over the next decade.The President himself underscored the punch line of the paper in his presser yesterday, noting that it would take about another $1.5 trillion in deficit reduction over the next 10 years to achieve the first goal of long term sustainability: a stable debt-to-GDP ratio. Richard’s analysis suggests it would take $1.4 trillion, which breaks down to $1.2 trillion in policy changes, which would save another $200 billion in interest payments. Now, that stabilization would occur at 73% of GDP, a point I’ll get back to in a moment.Coming up with $1.2 trillion in savings over ten years is no cake-walk, but if, as the President suggests, you split it between tax increases and spending cuts–$600 billion each—a functional Congress could do it, and could do it without whacking away at Social Security and Medicare (which isn’t to take them off the table) or getting wound up in major tax reform.
Extortionists Versus Con Men - Paul Krugman - It’s looking increasingly as if House Republicans won’t crash the world economy by refusing to raise the debt ceiling, at least not right now. Score a big one for the White House (provisionally); its bet that it wouldn’t need a way to bypass the ceiling is looking like a winner (although it ain’t over until the tanned guy cries). It’s important, however, to be clear about what’s going on here, and in particular about the nature of the debate within the GOP. Essentially the entire GOP is committed to radical policy goals that are also deeply unpopular. All but 10 House Republicans voted for the Ryan plan, which would privatize and defund Medicare, impose savage cuts on Medicaid, and cut taxes on the wealthy and corporations. There was effectively no dissent from the notion that we need to dismantle the welfare state in order to make room for low taxes at the top. But the public favors higher taxes on the affluent, and strongly supports all the major social insurance programs. So the divide within the GOP is about how to get past this awkward political reality. One faction basically wants to use the party’s power of obstruction: threaten to provoke a crisis over the debt ceiling — in fact, do this again and again — and thereby force Obama to implement the GOP agenda. The other faction wants to achieve the same goals by stealth. Pretend that what you’re really concerned about is debt and the fate of our children; cultivate the Very Serious People and the deficit scolds; impersonate a budget wonk; and smuggle the agenda in by dressing it in fiscal responsibility camouflage. So it is, as I said, the extortionists versus the con men: same goals, different tactics.
The Great Austerity Swindle! - Our Congresspeople, corporate CEOs, tea partiers, most economists, Pete Peterson’s minions, and even our President, tell us that we’re running out of money; and that if we can’t keep running huge deficits, and increasing our national debt forever, because eventually, our creditors will just cease lending us our dollars back. They also tell us that the Government can only raise money by either taxing or borrowing, and that when it comes to taxing, we can’t tax “the job creators” very much or they’ll go on strike and won’t create any jobs because we’ll have killed their incentive. So, here we are, we have to reduce our borrowing, and we can have hardly any tax increases on “the job creators,” so what’s a fiscally responsible nation to do? Well, they say, clearly “we” have to lower taxes on “the job creators” even more, raise them on the “unproductive” 47% or is it the 99%? And also, cut spending substantially on programs that provide benefits for the poor, the middle class, and even the 99%, so we can “. . . live within our means,” and remove the burden of excessive public debt on our grandchildren. But, what if we say to these people, well, “the job creators” aren’t making any jobs? That’s a fact! They give all kinds of excuses, but the truth is that they have no sales, so they have no incentive to create any more jobs.
All Good Democrats Applaud Republicans Rearranging Battle Lines in Austerity Phony War - Yves Smith -As we anticipated, the Republicans have climbed down on making the debt ceiling the key battle line in their plan to impose spending cuts. Good Democrats applauded that move as a sign that Obama had displayed toughness and prevailed. It’s not quite that simple.First, if you widen the frame, the budget jockeying is largely kabuki: which team is going to score more points that appeal (or more accurately, can hopefully be spun to appeal) to their base? The reality is that both parties are fully committed to imposing austerity. The only question is whether we get Dem Lite or Republican Hi Test. But rest assured, neither version will be good for ordinary Americans. Second, the Republicans have not dropped the deficit ceiling cudgel, but they seem to recognize that it is a mutual assured destruction weapon, and therefore not as useful as they once thought. They seem to still be coming to grips with the negotiating implications. As the New York Times reports, the Republicans are willing to extend the deficit ceiling for three months, but that increase was conditioned on having the Democrats approve a budget (during the Obama administration, no budget has been approved; the government has carried on because Congress has passed spending resolutions). Notice that while Obama has said that he would not discuss deficit cuts under a debt ceiling sword of Damocles. But if he accepts this deal (which includes a gimmick, of having Congresscritters go unpaid if they can’t agree on a budget on the normal timetable), he will still be doing that. So why is this a victory of sorts?
Fiscal Affinity Fraud - Paul Krugman - Innocent that I am, I never heard the term “affinity fraud” until the Bernie Madoff affair hit the news. But once you hear it, the concept is obvious: people are most easily conned when they’re getting their disinformation from someone who seems to be part of their tribe, one way or another. And I found myself thinking about that reality when the predictable reaction to today’s column came in: irate and, I believe, sincere if often incoherent voice mails etc. declaring that I must be an idiot, evil, or an evil idiot for saying that the budget deficit isn’t a big problem. They know that I’m completely wrong.But how? Have these callers gone through the numbers themselves? Of course not. No, they know I’m an evil idiot because they heard someone they trust say it — maybe Rush, maybe someone on Fox, maybe CNBC (which is often indistinguishable from Fox). The question then becomes, why do they believe their sources? For on matters economic, the right-wing media have had a spectacular track record for at least 7 years, having been totally wrong about everything. Remember, Rush and others furiously denied that there was a housing bubble — that was all made up by the liberal media. Then they denied that we were in a recession. Then they insisted that expansionary monetary and fiscal policy would lead to soaring inflation and interest rates. Boy, you could have gotten rich just by taking their implicit investment advice and doing the opposite. So why does anyone listen at all to these sources? The answer, surely, is a feeling of affinity — mainly, I’d say, based on shared anger and dislike. Rush hates snooty professors who presume to know something about economics, or climate, or whatever, moochers living on public aid (except Medicare and Social-Security-receiving conservatives, of course), and, above all, Those People. Hey, he’s their kind of guy! And the fact that he’s always wrong doesn’t register at all.
House passes $50.5 billion in Sandy aid, Republicans trim items - The House of Representatives on Tuesday approved $50.5 billion in long-delayed federal disaster aid to victims of Superstorm Sandy, but not before Republicans flexed their budget-cutting muscle to strike some spending provisions. The aid package for the storm that ravaged New York and New Jersey coastlines now moves to the Democratic-controlled Senate, where it is expected to win swift passage. The legislation had been tied up for weeks in the House amid congressional brawling over U.S. deficit reduction, spending and taxes in the New Year's new fiscal drama. And surprisingly stiff opposition from Republicans in the 241-180 vote foreshadows a tough road ahead for winning House approval of future budget deals over the debt limit and other looming fiscal deadlines.
Boehner Again Breaks Majority of the Majority Principle For Sandy Relief - Yesterday the House of Representatives approved a $50 billion clean Sandy relief bill. What is particularly interesting about this bill is that it was passed with almost no Republicans votes. From The Hill: The House approved a $50 billion Sandy relief bill Tuesday evening, after several hours of contentious debate in which scores of Republicans tried unsuccessfully to cut the size of the bill and offset a portion of it with spending cuts. Members approved the Disaster Relief Appropriations Act, H.R. 152, in a 241-180 vote. Among Republicans, 179 voted against it, and just 49 voted for it, a protest against a bill that many conservatives say is too big and provides funding for things other than immediate relief for New York, New Jersey and Connecticut. This normally shouldn’t happen in the House. The Speaker of the House has basically complete power over what bill ever make it to the floor and Republicans have traditionally used this to enforce a “majority of the majority” principles. The general idea is that no bill should be allowed to make it to the floor unless at least a majority of the party in control supports it
Here Comes The Sequester, And Another 1% Cut To 2013 GDP -From Goldman Sachs: "Allowing the sequester to hit would, in our view, have greater implications for growth than a short-lived government shutdown, but would not be as severe as a failure to raise the debt limit. Although Republicans in Congress generally support replacing the defense portion of the sequester with cuts in other areas, there is much less Republican support for delaying them without offsetting the increased spending that would result." And in bottom line terms: "Sequestration would reduce the level of spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent fiscal years through 2021. The actual effect on spending in calendar 2013 would be smaller--around $53bn, or 0.3% of GDP--since reductions in spending authority reduce actual spending with a lag. The reduction in spending would occur fairly quickly; the change would be concentrated in Q2 and particularly Q3 and could weigh on growth by 0.5pp to 1.0pp." In other words: payroll tax eliminates some 1.5% of 2013 GDP growth; on the other side the sequester cuts another 1%: that's a total of 2.5%. So: is the US now almost certainly looking at a recession when all the fiscal components to "growth" are eliminated? And what will the Fed do when it is already easing on "full blast" just to keep US growth barely above 0%?
How the New Tax Act Affects the Alternative Minimum Tax - In the alphabet soup of Washington, ATRA fixed the AMT, sort of. In English, the newly enacted American Taxpayer Relief Act of 2012 will permanently protect millions of taxpayers from having to pay the alternative minimum tax without Congress having to approve a temporary patch every year or so. It even knocks a few hundred thousand people off the AMT this year. But it still doesn’t really fix the dreaded tax. Since the first Bush tax cuts in 2001, Congress has protected millions of taxpayers from the AMT with one- or two-year patches. Each patch boosted the amount of income exempt from the tax, saving millions of households from having to pay the levy. The 2011 patch, for example, left just 4.3 million taxpayers owing AMT, down from 29 million who otherwise would have paid the additional tax. Congress never approved a permanent fix because it deemed the revenue loss too high. With ATRA, Congress bit the fiscal bullet, which the Joint Committee on Taxation pegged at $1.8 trillion over the next decade. It set a higher permanent exemption for 2012 and indexed that and other AMT parameters for inflation. New estimates from TPC show what those changes—in combination with other ATRA provisions—will mean.
Who Owns the MBS Claims? AIG or the Fed? - Alison Frankel has a great column today on the fight going on between AIG and the NY Fed about who owns the securities fraud claims associated with the MBS that AIG sold to the NY Fed (or more precisely, its Maiden Lane SPV) as part of its bailout. I have no idea who is right in this dispute, but as Frankel observes, if the NY Fed is correct, it raises the question why the NY Fed has failed to prosecute the MBS fraud claims. The argument that there aren't meritorious claims is rather hard to swallow given that other regulators (FDIC, FHFA, NCUA) and institutions have brought fraud claims relating to MBS and some of those claims have resulted in settlements (including the still not finalized $8.5 billion settlement with BoA/Countrywide).
Richard Alford: To Learn or Not to Learn, That is the Question - Yves here. Richard Alford, a former New York Fed economist, chose to put aside the questions of corruption and kleptocracy to look at another issue that is plaguing the financial system, that of failing to learn from mistakes. I suspect that this lapse is on the rise due to the fact that investigating a mistake requires admitting a mistake happened. I’ve harped before on the fact that in the 1987 Crash, President Reagan authorized the Brady Commission to investigate it and had a report on his desk a smidge over two months later. By contrast, the Financial Crisis Inquiry Commission was late to get started, politically hamstrung, understaffed, and decided to focus on flash (hearings before doing groundwork, hiring six journalists to produce easily-digestible text) at the expense of substance. In our hall-of-mirrors logic, escaping liability (or if you are a politician or regulator, blame) is more important than preventing the recurrence of disasters. I also want to turn to this issue in a broader sense in later posts, because I’ve been seeing a decline in competence in providing banking services, an increase in errors that would have been unthinkable 10 or 20 years ago. And that is before we consider the horrorshow known as mortgage servicing.
Bank Reform Takes One Flawed Step Forward - Ludwig and Volcker The Financial Accounting Standards Board finished 2012 on a high note, issuing a draft new rule to change the way banks build reserves against losses on loans. It is a major step forward from our current system. Still, FASB's proposed rule is flawed conceptually and in its application, and in itself it cannot achieve the international consistency that is desirable. The good news: The board recognizes that its existing rules on the Allocation for Loan and Lease Losses may have worsened the 2008 financial crisis. These rules limited bank reserves to those that are already "incurred." This all but ensures that banks' rainy day funds will be too skinny, particularly in periods when credit markets are under stress. Worse yet, limiting loss estimates to events that have already occurred makes the allowance for loan and lease losses procyclical—reported earnings are too high in good times and losses hit hardest in bad times. The FASB's draft proposal to reform these rules incorporates what is known as the "Current Expected Credit Loss Model." It is meant to expand reserves to reflect losses that are expected over the life of the loan, and it is a big improvement over the existing regime. But as it stands, the proposal could create risks for the financial system. In an effort to ensure that everything is "auditable," the proposal ties the loan-loss reserve to what the accounting profession will decide is an acceptable "model." While the proposal is well-intentioned and makes clear that various models can be used, this model-driven approach is dangerous.
Buffett Says Banks Free of Excess Pose No U.S. Threat - Warren Buffett, the billionaire investor who oversees stakes in some of the largest U.S. banks, said the nation’s lenders have rebuilt capital to the point where they no longer pose a threat to the economy. “The banks will not get this country in trouble, I guarantee it,” Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in a phone interview last week. “The capital ratios are huge, the excesses on the asset side have been largely cleared out.” Lenders including Bank of America Corp. (BAC) and Citigroup Inc. (C) have sold assets, cut jobs and bolstered balance sheets after repaying taxpayer bailouts from 2008, when the companies were overwhelmed by losses on securities tied to the housing market. Those actions helped boost financial stocks last year and increased the value of Berkshire’s holdings. Buffett’s firm has investments in at least four of the seven biggest U.S. lenders by assets, including a stake of more than $14 billion in San Francisco-based Wells Fargo & Co. (WFC), $5 billion in Bank of America and warrants that allow it to buy $5 billion of Goldman Sachs Group Inc. shares. Berkshire also has a holding in U.S. Bancorp.
Latest in private Libor cases: California city, counties file suit - The first time I wrote about private antitrust claims against banks for rigging the London Interbank Offered Rate (or Libor), it was August 2011 and the judicial panel on multidistrict litigation had just consolidated 18 class actions alleging a conspiracy to manipulate the benchmark rates, which are used to set variable interest rates on all sorts of securities around the world. I titled the piece, “The megabillions litigation you’ve never heard of.” How things have changed in the 17 months since then! The private Libor litigation still has megabillions potential, but thanks to the tsunami of Libor news in 2012, everyone knows it. The consolidated cases are proceeding in federal court in Manhattan before U.S. District Judge Naomi Reice Buchwald, who is considering fully briefed motions to dismiss by more than a dozen bank defendants. Meanwhile, new claimants have piled on. I’ve already told you about the class actions filed after the $450 million Barclays settlement last summer, which tried to distinguish themselves from the cases already under way. Now there’s another wrinkle in the private Libor litigation: On Wednesday, the counties of San Diego and San Mateo, the city of Riverside and the municipal utility district of Oakland filed simultaneous antitrust complaints in three different federal courts in their home state of California.
JPMorgan Chase Gambles Away $6B, Gets "Slap on the Wrist" - Federal banking regulators have decided it's a bad thing that JPMorgan Chase lost $6 billion on a risky bet last year and failed to close money-laundering loopholes. But that's pretty much all they've decided.The Office of the Comptroller of the Currency and the Federal Reserve ordered the bank Monday to fix risk-management failures that led to the massive loss on a trade out of its London office in May 2012, as well as tighten up monitoring of cash transactions that may have allowed suspected terrorists and drug dealers to launder money. But there will be no fines or hard penalties levied for the bank's failures. Since the revelation of the bet gone sour last year, Chase has been under ramped-up scrutiny—a swirl of congressional inquiries and calls to break up the nation's big banks. A London-based executive who oversaw Chase's sketchy trading strategy resigned, and the bank fired some senior managers. But until today, the practices that led that scrutiny hadn't changed, says Michael Greenberger, a University of Maryland law professor and former CFTC director who teaches on financial instruments and counterterorrism law. "Losing $6.2 billion, one would think, would be such a shock to the system that as a matter of good business practices, [Chase's] risk management would have been updated sufficiently, and there would not be a need for the Fed and the Comptroller to ask for a plan," he says.
JPMorgan slashes CEO Dimon's pay on "Whale" trade - (Reuters) - Jamie Dimon, JPMorgan Chase's Chief Executive, had his 2012 bonus cut in half after the bank's board decided he should shoulder blame for $6.2 billion of "London Whale" trading losses.Dimon's bonus cut, which cost him more than $10 million, came even as JPMorgan posted a 53 percent jump in fourth-quarter profit and record 2012 earnings. The fourth-quarter results were helped by increased mortgage lending profits and a decline in bad loan costs. Without these results, Dimon's pay would have been worse. Dimon's 2012 pay of $11.5 million will fall from being high for the sector to being ordinary. John Stumpf, the CEO of Wells Fargo & Co made $18.9 million in 2011, while Brian Moynihan, CEO of Bank of America , made $8.1 million. In 2011, Dimon was paid $23 million.In addition to posting earnings and disclosing Dimon's pay, JPMorgan released two company reports about the losing trades. The positions, known as the "London Whale" trades because they were so large relative to the market, lost a little more money for the bank in the fourth quarter. The reports added more detail to prior disclosures about the trades.
How Much Do You Get Paid to Lose .2 Billion? - The answer is $11.5 million, at least if you work at J.P. Morgan. That is what Jamie Dimon took home last year according to the WSJ. This was half of his prior year's take, apparently this is the punishment for allowing his London Whale crew to engage in risky trading that cost the bank $6.2 billion.
JPMorgan Puts Jamie Dimon Underlings In Charge of Investigating Dimon’s Failures In London Whale Episode - Wall Street’s thoroughly discredited self-regulation that has blazed a trail of corruption across much of the securities trading landscape of America, has now given birth to a new brand of hubris – self investigation and self reporting. Yesterday, JPMorgan released a report from its Board of Directors that found [drum roll] that the Board was not culpable in the London Whale episode, it just needed to tweak a few things going forward. London Whale refers to the blowing up of $6.2 billion of insured deposits at JPMorgan’s commercial bank through reckless trading in derivatives in London. Likewise, a 132-page Task Force report was released which found CEO Jamie Dimon guilty of no greater sin than being too reliant on information from below. The report said: “As Chief Executive Officer, Mr. Dimon could appropriately rely upon senior managers who directly reported to him to escalate significant issues and concerns. However, he could have better tested his reliance on what he was told.”
Once Again, Jamie Dimon Gets Special Treatment By Marcy Wheeler. Yesterday, the Office of the Comptroller of the Currency issued two orders to JP Morgan Chase, one related to its London Fail Whale, the other related to failures in its Bank Secrecy Act/Anti-Money Laundering compliance. With respect to latter order, OCC said, in part:
- (1) The OCC’s examination findings establish that the Bank has deficiencies in its BSA/AML compliance program. These deficiencies have resulted in the failure to correct a previously reported problem and a BSA/AML compliance program violation under 12 U.S.C. § 1818(s) and its implementing regulation, 12 C.F.R. § 21.21 (BSA Compliance Program). In addition, the Bank has violated 12 C.F.R. § 21.11 (Suspicious Activity Report Filings).
- (2) The Bank has failed to adopt and implement a compliance program that adequately covers the required BSA/AML program elements due to an inadequate system of internal controls, and ineffective independent testing. The Bank did not develop adequate due diligence on customers, particularly in the Commercial and Business Banking Unit, a repeat problem, and failed to file all necessary Suspicious Activity Reports (“SARs”) related to suspicious customer activity.
- (3) The Bank failed to correct previously identified systemic weaknesses in the adequacy of customer due diligence and the effectiveness of monitoring in light of the customers’ cash activity and business type, constituting a deficiency in its BSA/AML compliance program and resulting in a violation of 12 U.S.C. § 1818(s)(3)(B).
That last one is the real peach. You see, in spite of the fact the order includes 22 pages of things JPMC “shall” do to fix this problem, the order did not include any fine. Remember, it has been less than 18 months since JPMC got caught–among other things–sending a ton of gold bullion to Iran in violation of sanctions. That time, at least, Treasury’s Office of Foreign Asset Controls fined JPMC, if only $88.3 million. Still, here were are a year and a half later, with JPMC still refusing to police what it is helping its customers do, and the government is letting JPMC off with no fine.
Goldman Raises Blankfein’s Stock Bonus 90% to $13.3 Million - Bloomberg: Goldman Sachs Group Inc. (GS) boosted Chief Executive Officer Lloyd C. Blankfein’s stock bonus 90 percent to $13.3 million, topping JPMorgan Chase & Co. (JPM)’s Jamie Dimon for the first time in five years, as profit climbed. While the bank didn’t disclose Blankfein’s cash bonus, a person familiar with the payout said his total bonus was about 70 percent restricted stock and 30 percent cash, like last year. On that basis, the total would be about $19 million including $5.7 million in cash. Pay for Blankfein, whose $69.7 million bonus for 2007 set a Wall Street record, has trailed Dimon’s since then as Goldman Sachs’s profitability lagged behind that of JPMorgan, which this week reported a third consecutive year of record profit. Dimon, 56, who leads the biggest U.S. bank by assets, had his compensation cut in half to $11.5 million because of a trading loss.
Treasury Nominee Jack Lew Retained Citigroup Foreign Investments After Joining Obama State Department; Public Kept In Dark - Pam Martens - It has been previously reported that President Obama’s Treasury Secretary nominee, Jacob (Jack) Lew, earned millions in salary and bonus from Citigroup in the brief two and one half years he worked there. That should not come as a surprise to anyone. Former Treasury Secretary Robert Rubin left his post as Treasury Secretary in 1999 to join Citigroup and was paid $120 million over the next eight years for non-management work. Citigroup is the mega bank the Securities and Exchange Commission charged with lying about its financial condition while Lew worked there in an executive position. Citigroup went from lying about its finances in 2007 to cumulatively requiring over $2.51 trillion in Federal Reserve loans, TARP capital and Federal asset guarantees to remain afloat during the financial crisis. During Lew’s stint at Citigroup, July 2006 through early 2009, Citigroup lost 85 percent of its shareholders’ value. A review of documents submitted to the U.S. Senate Budget Committee for Lew’s confirmation hearing on September 16, 2010 to become Director of the Office of Management and Budget indicates Lew’s financial ties to Citigroup continued long after he joined the Obama administration. The public is being kept in the dark about the extent of Lew’s winnings at the Citigroup casino and its heads we win, tails you lose dealer tables.
Counterparties: Like water for profit - In the unlikely event that you were harboring deep anxiety about the profitability of Goldman Sachs or JP Morgan, you can skip the Xanax. At the big banks, profits are very much back. The new Goldman Sachs, Stephen Gandel writes, looks “a little bit like the old Goldman Sachs”. Goldman today reported that its fourth quarter profit rose 53% and full year earnings jumped 70%. The bank also pulled $6 billion in revenue from its own investments for the year, or 17% of its overall revenue. Goldman even found time to placate the rival — and overlapping — factions of employees and shareholders by cutting the amount of revenue going to employees, reports Lauren LaCapra. At 38%, Goldman’s compensation ratio is second lowest since the bank went public. Still, in absolute dollars, bank employees got a bump: comp rose 6% over last year. Things were even better at JP Morgan: the bank set fourth quarter and full year profit records, an increase of 54% over last last year’s fourth quarter and 12% over 2011’s full year results. Despite the break-out profits, CEO Jamie Dimon was forced to accept just a $10 million bonus in penance for the botched trades in the bank’s Chief Investment Office.
Wells Fargo’s loan-margin pressure highlights bankers’ plight: Too much money - Wells Fargo posted record quarterly earnings Friday, but a lot of attention was on the bank's declining profit margin on lending, which one analyst called "ugly." The net interest margin, or the difference on what Wells pays on deposits and the rate it charges on loans, fell to 3.56 percent from 3.66 percent in last year's third quarter.Still, the bank posted a record profit of $5.09 billion in the fourth quarter, up from $4.11 billion a year earlier. Revenue jumped 6.3 percent to $21.95 billion.Wells Fargo CEO John Stumpf blames the squeeze, experienced industrywide amid the Fed's low-rate policies, is due to the flood of deposits pouring into the bank.Wells saw customers deposit another $30 billion into their accounts, bringing total deposits to more than $945 billion.
Have we solved 'too big to fail'? - Andrew Haldane - No. That is not my pessimistic verdict; it is the market’s. Prior to the crisis, the 29 largest global banks benefitted from just over one notch of uplift from the ratings agencies due to expectations of state support. Today, those same global leviathans benefit from around three notches of implied support. Expectations of state support have risen threefold since the crisis began. The Subprime Crisis became the Global Crisis when one too-big-to-fail bank was allowed to fail. This column argues that too-big-to-fail is far from gone despite years of reform efforts. It is important that it not be forgotten. Further analytical work, weighing the costs and benefits of different structural reform proposals, would help keep memories fresh and policies on the right track.
Banks get reprieve on new rules - International banks won a concession Sunday from the Basel Committee on Banking Supervision, which relaxed rules for lenders that had been proposed in hopes of preventing another global financial crisis. The rule change affects the "liquidity coverage ratio," a minimum standard set by regulators as part of the Basel III accord. Banks will now have more time to comply with the rule, and the standard has been eased. Tougher capital requirements are considered a key step toward making banks safer and avoiding future taxpayer bailouts. The decision comes after years of pressure from banks, which view the elevated capital requirements as onerous. Opponents of the higher standard have also argued that the capital requirements will limit access to credit at a time when lending is needed to boost economic growth. The changes announced Sunday will delay full implementation of of the liquidity coverage ratio until 2019 -- a four-year extension. The ruling also expands the definition of "high quality liquid assets," which should make it much easier for banks to comply with the regulations.
When Wall Street Hands Employees IOUs, It’s Time to Pay Attention - With the nation focused on fiscal cliffs, debt ceilings and austerity plans in Washington, the news from Reuters and the Wall Street Journal might get short shrift that Morgan Stanley has decided to hand its most productive traders and investment bankers IOUs instead of cold hard cash tomorrow for their eagerly awaited 2012 bonuses. When giant Wall Street banks begin to hoard cash and voluntarily impose austerity measures on lavishly paid workers, Congress needs to pay attention. According to Reuters, Morgan Stanley will take up to three years to pay 2012 bonuses. The plan will cover all employees, except retail brokers, who make more than $350,000 in wages and whose bonuses are at least $50,000. Adding more angst, the Wall Street Journal reports the bonuses will consist of half cash and half Morgan Stanley stock. Some traders and investment bankers on Wall Street receive as much as 70 percent of their annual compensation in the form of bonuses and have built lifestyles around that compensation system. There is a simple reason the retail brokers have been carved out from this plan: an old maxim on Wall Street is that when the lights go off at 6 p.m. in the brokerage firm, the assets walk out the door. The gist is that retail brokers can take their clients and their clients’ assets to another firm if a big enough carrot is waived. Stealing brokers with “front money” of a million dollars or more is a standard practice on Wall Street. Because the broker, not the firm, maintains the close relationship with the client, clients typically follow the broker to the next firm.
Dallas Fed president: Time for Congress to break up the big banks - Richard Fisher, president of the Dallas Fed, has been a proponent of breaking up America’s biggest banks and ending Too Big To Fail. In a speech yesterday, he floated a plan on how to do it.
- 1. Under our proposal, only the commercial bank would have access to deposit insurance provided by the FDIC and discount window loans provided by the Federal Reserve. These two features of the safety net would explicitly, by statute, become unavailable to any shadow banking affiliate, special investment vehicle of the commercial bank or any obligations of the parent holding company. This is largely the current case—but in theory, not in practice. And consistent enforcement is viewed as unlikely.
- 2. To reinforce the statute and its credibility, every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company would be required to agree to and sign a new covenant, a simple disclosure statement that acknowledges their unprotected status.
- 3. This two-part step should begin to remove the implicit TBTF subsidy provided to BHCs and their shadow banking operations. As indicated earlier, some government intervention may be necessary to accelerate the imposition of effective market discipline. We believe that market forces should be relied upon as much as practicable. However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF BHCs. A subsidy once given is nearly impossible to take away. Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, reestablish a competitive landscape and level the playing field.
If too big then, what are they now? -- Jon Ogden at Switch Your Bank offers a graphic picture of too big to fail. Lifted from an e-mail response to me...: The units on the left axis are total assets in billions. So, yes, the total domestic assets of these 4 US megabanks grew from nearly $4.5T in 2007 to nearly $6T in 2012, or about 30%. The data comes from the FDIC database, where I looked up each individual megabank's assets each year since 1995.And we also have too big to prosecute" added to the titles via HSBC. Goldman Sachs on Wednesday reported a fourth-quarter profit of $2.89 billion, or $5.60 a share, well above the results a year earlier and handily beating analysts' expectations of $3.78 a share. The results were buoyed by strong trading and investment banking results. The firm's conference call is at 10:30 a.m. JPMorgan Chase reported a record profit of $5.7 billion for the fourth quarter, up 53 percent from the period a year earlier. Revenues were also strong, rising 10 percent to $23.7 billion. The results were bolstered by a surge in mortgage lending.
Corporate Profits Soar as Executives Attack Obama Policy - Tom Donohue, the president of the U.S. Chamber of Commerce, last week said higher taxes and a “flood of new regulations” will damage an already subpar economy. “In many ways, we’re going backwards,” he said. Such complaints, echoed by corporate executives throughout President Barack Obama’s first term, obscure one fact: American business has never had it so good.U.S. corporations’ after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947, according to data compiled by Bloomberg. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy. Business leaders cite low labor costs in an era of high unemployment, the Federal Reserve’s easy-money policies, and their own management savvy for the profit boom. Prosperity has come in spite of the president, not because of him, they say.
Corporate Profits Have Grown By 171 Percent Under 'Anti-Business' Obama - Business executives like to portray the Obama administration as the “most anti-business” in history, creating an “increasingly hostile environment for investment and job creation.” However, the data tells a far different story. According to a Bloomberg News analysis, corporate profits have grown by 171 percent under Obama, the most in the post-war era: U.S. corporations’ after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947, according to data compiled by Bloomberg. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy. Average annual corporate profit growth under Obama is the highest since 1900, whereas profit growth declined during both Bush presidencies. As a share of the economy, corporate profits have never been higher. Unfortunately, this profit deluge has not been shared by workers, whose wages as a percentage of the economy have fallen to all-time lows. Workers also got dinged by the recent increase in the payroll tax, which was large enough to wipe out a minimum wage increase in some states.
Markets to Washington: You know nothing of our work - Markets are funny. Sometimes basic intuition tells you a lot: If there is a recession, the stock market almost certainly falls, for example; if there is high inflation, bond yields rise as investors demand compensation. But sometimes, basic intuition is all wrong. This is one of those times. On a couple of key questions around U.S. policy, the conversation in Washington is getting two things about markets particularly wrong, clouding the debate on some of the most important policy debates of our time. Markets can misprice assets and get things wrong, of course, sometimes for long periods of time. But they also reflect the combined knowledge of traders and investors around the globe, with trillions of dollars on the line. And understanding what markets are and are not telling policymakers is a first step to making better decisions. These are the two big things anyone who cares about America’s fiscal policy debates needs to know about the signals being sent from Wall Street. The markets are not demanding deficit reduction now. This is the most widespread misconception among most Republicans in Washington, many centrists, and no small number of Democrats. The notion is that global investors are on a knife’s edge, ready to pounce and drive up U.S. government interest rates if we don’t enact a major deficit reduction package. There just isn’t any evidence from movements in the bond and currency markets that this is the case.
Using Social Media Efficiently - Yves Smith - This Onion talk shows how much the state of what is cool (as in what investors will pay the most for) in technology has changed since the dot-com era. One of the hallmarks of a dot com was you had lots of young people working really hard and not sleeping and going to meetings spouting impenetrable jargon. I recall I gasped out loud when I read Jeff Bezos saying he slept 8 hours a night. Bad enough that he did that…but admitting to doing that? Amazon had gone public by then, so he could afford a luxury like shut-eye. I’ve spent more of my life doing meetings through translation than I care to admit, plus I’ve worked with firms that had bleeding edge, large scale IT implementations, so I’ve also had more exposure to geeks than most finance types. After a few dot-com meetings, I realized they bore absolutely no resemblance to other cutting edge tech presentations I’d been party to. In those, content was clearly being conveyed, even though I might not understand it all. It clearly could be translated, and the more technical stuff unpacked. With the dot coms, I realized almost no content was being conveyed in these discussions. It was all atmospherics and noise, or what is more generally described as smoke and mirrors, except the kids hadn’t seen anything else, and really thought this was what it took to build businesses.
Devolution: Welcome to the World Where Things Don’t Work Well - Yves Smith - It’s become fashionable to discuss the creeping decay in advanced economies, particularly the US, both in term of third worldification and end of empire. The more apocalyptic turn to theories of collapse from writers like Jared Diamond and Jacques Tainter. But I think they miss one aspect that may prove to be important, that of how the pursuit of efficiency doesn’t always produce net gains, as economic theory might tell us. The measure of productivity, more stuff per unit input, misses how service/product quality can deteriorate. Some of this is deliberate: I have readers in comments regularly lament how old durable goods and tools were more reliable and lasted longer than contemporary versions. But there are other aspects of the downside of the willy-nilly pursuit of efficiency that have become so routine we accept these indignities and often don’t recognize them (unlike other ones that remain annoying years after the change, such as the widespread implementation of call routing and prompts in place of humans answering phones). Let’s look at banking. The public has become desensitized to the fact that banks do something that is still rather amazing: they handle a ginormous volume of transactions, and they give you a report, every month, of what happened to you. And they were able to do this in the bad old days, when computers were mainframes, a lot of banking work was done on adding machines (when I started on Wall Street in the 1980s, I did spreadsheets on green ledger paper with a calculator, copying information from hard copies of SEC filings), and you got your paper checks back with your bank statement. You really need to sit back and think on what a computational and logistical challenge it was. And this worked, transaction processing was highly reliable.
Unofficial Problem Bank list declines to 832 Institutions -The first bank failure of 2013: From the FDIC: Sunwest Bank, Irvine, California, Assumes All of the Deposits of Westside Community Bank, University Place, Washington As of September 30, 2012, Westside Community Bank had approximately $97.7 million in total assets and $96.5 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $20.3 million. ... And the unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Jan 11, 2012. Changes and comments from surferdude808: The FDIC cranked up a closing team to get the first full week in 2013 underway, otherwise it would have been a quiet week for the Unofficial Problem Bank List. Along with the failure, there was one action termination, which leaves the list count at 832 institutions with assets of $310.7 billion. A year ago, the list held 969 institutions with assets of $391.2 billion.
Paying the Price in Settlements, but Often Deducting It - THE numbers seem eye-popping. So many billions here for supposed mortgage abuses, so many billions there for questionable foreclosures. But there’s more than meets the eye to the big legal settlements you’ve been reading about involving some of the nation’s biggest banks. Actually, there’s less than meets the eye. The dollar signs are big, but they aren’t as big as they look, at least for the banks. That’s because some or all of these payments will probably be tax-deductible. The banks can claim them as business expenses. Taxpayers, therefore, will likely lighten the banks’ loads. There is nothing new about corporations reaping tax benefits from payments made to remedy wrongdoing. Every so often, though, the topic stirs outrage. After the Gulf of Mexico oil spill, for example, BP received a $10 billion tax windfall by writing off $37.2 billion in cleanup expenses. With multibillion-dollar mortgage settlements making headlines this year and last, the question has come to the fore again. Why should taxpayers subsidize corporations that are paying to right sometimes egregious wrongs? That is a particularly weighty question, given the urgent need for tax revenue to offset the ballooning federal budget deficit.
The Mortgage Mess and Jack Lew: The more information we learn about the mortgage settlement that was announced Monday—official documents are yet to be made public—the more of a smarmy backroom deal it turns out to be. The deal lets ten major banks and other “loan servicers” off the hook for a corrupted and illegal process of millions of foreclosures, with a paltry one-time settlement of $8.5 billion. The economic damage inflicted on homeowners, and by extension on the economy, was many times that. The deal was hatched by the weakest of the federal bank regulatory agencies, the Comptroller of the Currency, and signed off on by the Federal Reserve. There was no consultation with the more consumer-oriented agencies, such as the FDIC or the Consumer Finance Protection Bureau. The Comptroller just went and did it. Nor was the Justice Department consulted, even though the deal, nominally a civil settlement, will make criminal prosecutions more difficult now that a major regulator has signed off on an bargain to close the books on past misdeeds. Well-placed sources say that other regulators were appalled. The relevance to Jack Lew? The comptroller of the currency is part of the Treasury and reports to him, assuming that Lew is confirmed.
More Whistleblower Leaks on Foreclosure Settlement Show Both Suppression of Evidence and Gross Incompetence - Yves Smith No wonder the Fed and the OCC snubbed a request by Darryl Issa and Elijah Cummings to review the foreclosure fraud settlement before it was finalized early last week. What had leaked out while the Potemkin borrower reviews were underway showed them to be a sham, as we detailed at length in an earlier post. But even so, what actually took place was even worse than hardened cynics had imagined. We are going to be reporting on this story in detail, since we are conducting an in-depth investigation. But this initial report by Huffington Post gives a window on a good deal of the dubious practices that took place during the foreclosure reviews. I strongly suggest you read the piece in full; there is a lot of nasty stuff on view. The OCC had entered into these consent orders in the first place with the aim of derailing the 50 state attorney general settlement negotiations. This was all intended to be diversionary, but to make it look like it had some teeth, borrowers who were foreclosed on in 2009 and 2010 who thought they were harmed were allowed to request a review. If hard was found, they could get as much as $15,000 plus their home back if they had suffered a wrongful foreclosure, or if they home had already been sold, $125,000 plus any equity in the home. Needless to say, the forms were written at the second grade college level, making them hard to answer. A whistleblower for Wells Fargo reported that of 10,000 letters, harm was found in none because the responses were interpreted in such a way as to deny harm
The Foreclosure Fiasco - It’s been five days since Jessica Silver-Greenberg’s article on the latest bank settlement was posted on The New York Times’s Web site. I’m still shaking my head. Her “story behind the story” of the $8.5 billion settlement between federal bank regulators and 10 banks over their foreclosure misdeeds illustrates just about everything that is wrong with the way the government has handled the Great Foreclosure Crisis. Shall we count the ways? 1. It is more about public relations than problem-solving. Pick a program — any program — that the Obama administration unveiled to help troubled homeowners over the past four years. Not one has amounted to a hill of beans. This settlement is no different. The country’s primary bank regulator, the Office of the Comptroller of the Currency — which, along with the Federal Reserve, engineered the settlement — is trying to make it look like a victory. Of the $8.5 billion, $3.3 billion will go directly to foreclosed-upon borrowers, making it “the largest cash payout to date,” In truth, the O.C.C. needed to save face after a foreclosure review process it had mandated had become an expensive fiasco. As amply demonstrated by Silver-Greenberg and American Banker, the government insisted that the banks hire expensive consultants to do a review of every foreclosure that took place in 2009 and 2010. The consultants racked up more than $1 billion in fees, while proceeding at such a molasseslike pace that the feds and the banks finally threw up their hands. The settlement made the whole thing go away.
New Ruling on Mortgage Putbacks a Potential Huge Win for Banks - Yves Smith - Even though, for most people, the housing crisis is a thing of the past, the fight over who should bear the cost of sloppy and openly fraudulent mortgage origination and securities sales continues to grind through the courts. We’ve written now and again about mortgage putback cases, which are also called representation and warranty, or “rep and warranty” litigation. Investors in mortgage-backed securities were not quite as dumb as the crisis aftermath had made them look. .Alison Frankel of Reuters points to a new ruling which could make this investor-unfriendly picture even uglier. A new ruling has told bond investors to file separate cases on each loan they think was misrepresented. No, I am not making that up. From her post: I did a double take Wednesday, when I noticed a pair of new suits by Lehman Brothers Holdings in federal court in Colorado. The complaints, which are almost identical, claim that the mortgage originator Universal American Mortgage breached representations and warranties about loans it sold to Lehman, which subsequently suffered losses as a result of those breaches. But here’s the thing: Each suit addresses only one supposedly deficient loan! Lehman’s lawyers at Akerman Senterfitt allege that Lehman sustained about $100,000 in damages on one of the loans and $120,000 on the other — numbers that are light years apart from the multibillion-dollar claims we’ve seen from groups of mortgage-backed securities investors who band together to assert contract breaches in thousands of loans at a time.
Taxpayers will ease banks' costs in mortgage deal - US News and World Report: — Consumer advocates have complained that U.S. mortgage lenders are getting off easy in a deal to settle charges that they wrongfully foreclosed on many homeowners. Now it turns out the deal is even sweeter for the lenders than it appears: Taxpayers will subsidize them for the money they're ponying up. The Internal Revenue Service regards the lenders' compensation to homeowners as a cost incurred in the course of doing business. Result: It's fully tax-deductible. Critics argue that big banks that were bailed out by taxpayers during the financial crisis are again being favored over the victims of their mortgage abuses. "The government is abetting the behavior by not preventing the deduction," said Sen. Charles Grassley, R-Iowa. "The taxpayers end up subsidizing the Wall Street banks after the headlines of a big-dollar settlement die down. That's unfair to taxpayers."
QM Impact on the Mortgage Market - The American Banker has a story (paywalled) about the impact of the QM rule on subprime lending. Subprime loans are unlikely to qualify for the full QM safe harbor because they are typically priced at more than 150 bps above prime. This means that subprime borrowers now have a possible foreclosure defense if they can show that the lender failed to properly account for their ability to repay. The result is to increase the risk lenders incur with subprime loans. But how much does this matter? The American Banker story contains an estimate that only 5% of today's mortgage volume would fall outside of QM. Today, however, is an ultra conservative mortgage market. We can get a rough sense of what the impact of QM would have been in the past by looking at the market share of subprime and Alt-A loans. The CFPB's rulemaking has an estimate for the 1997-2003 period roughly 70% of originations would have been QM, with 22% non-QM and 8% consisting of loans that can no longer legally be made. (The CFPB's rulemaking also estimates a very minimal impact on mortgage pricing, p.582 and following in the rulemaking.) My own back-of-the-envelope estimate roughly in line with that.
Usury Laws Are Dead. Long Live the New Usury Law. The CFPB’s Ability to Repay Mortgage Rule - The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act. The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure. The Dodd-Frank Act requires that mortgages be underwritten based on the borrower's ability to repay. Failure to do so is an absolute defense against foreclosure. There is an execption allowed, however, for Qualified Mortgages. The CFPB rulemaking defined the term Qualified Morgage. Oversimplifying (but only slightly), a QM is defined as a mortgage that has regular payments that are substantially equal excepting ARMs and step-rate mortgages, and that are always positively amortizing, have terms no longer than 30 years, limited points and fees, and are underwritten in a certain fashion (qualification for purchase/guarantee by Fannie/Freddie/FHA/VA will suffice).
The CFPB’s New Stealth Usury Law on Mortgages and Why It’s Desirable - Yves Smith With the looming debt ceiling pigfight consuming a lot of financial media bandwidth, some important stories are not getting the attention they warrant. One is on the hard fought and finally settled qualified mortgage rules just finalized by the Consumer Financial Protection Bureau. Georgetown law professor Adam Levitin in a new post describes how the new QM rules are a defacto usury law for the 21st century. Despite his good discussion of the QM and the history of usury laws, however, he peculiarly does not explain why usury laws are a good thing. Perhaps it seems obvious, given the explosion of economically unproductive consumer debt since they’ve effectively been eliminated. Let me give you the reason why well designed usury laws are desirable, then I’ll turn the mortgage-related issues specifically. One of things that early economists agreed on was the necessity and importance of usury laws as a foundation of a healthy, productive economy. Their reasoning was simple. Lenders would tend to seek out the highest return they could get, in light of repayment risk. Even a very successful business or venture could afford only so much in the way of interest payments on borrowers. If creditors could lend at any rate to any borrower, they would prefer wealthy speculators (in those days, aristocrats with gambling habits) to loans that would support trade and enterprise.
Will New Consumer Financial Protection Bureau New Rules for Struggling Homeowner Stop Predatory Servicing? - Yves Smith - The Wall Street Journal gives a teaser, in the form of excerpts from a speech to be made later today, on new rules the Consumer Financial Protection Bureau will be implementing to regulate how servicers treat homeowners who become severely delinquent on their mortgages. Unlike past efforts to stop servicer abuses, the CFPB’s new rules will cover all servicers, as opposed to bank-affiliated ones. On paper, the proposed changes sound like a big step forward:Under the rules laid out by the agency, lenders would be barred from starting the foreclosure process until borrowers have missed at least four months of payments, a move designed to give borrowers time to submit applications for help. This requirement would end so-called dual-tracking—starting foreclosure if a borrower has applied for help.They are required to send a written notice to borrowers within 15 days of a second missed payment that includes examples of alternatives to foreclosure and information about housing counseling. Servicers are barred from completing a foreclosure if a borrower submits an application for aid more than 37 days before the home is scheduled to be repossessed. I’m highly skeptical that these new measures will make much of a difference unless the CFPB has aggressive monitoring and tough penalties, and those details have yet to be released. The sorry history of the servicing industry is, again and again, various servicing standards have been promulgated and are routinely violated, even with consent orders in place.
Can These New Federal Rules Rein in Foreclosure-Frenzied Banks? - On Thursday, the Consumer Financial Protection Bureau, the federal consumer watchdog set up by the Dodd-Frank financial reform bill, announced a new set of foreclosure-prevention rules focused on keeping loan servicers honest. Servicers, which collect mortgage payments from borrowers and work out terms of a loan, are supposed to explore all alternatives to foreclosure before reclaiming a home, and to give homeowners a fair and clear evaluation process. But as millions of borrowers fell behind on payments in the wake of the financial meltdown, loan servicers got slammed by tons of added legwork and administration, and many more got perverse incentives to fast-track borrowers into default. Some servicers put on a spectacular show of incompetence and outright fraud, routinely losing paperwork, "robo-signing" people into wrongful foreclosures, and locking people out of their houses when the borrowers thought they were on road to loan modification. Much of this is still happening. The new CFPB rules are supposed to help fix it. (A similar set of regulations targeting mortgage lenders was released last week.)
Banksters’ Useful Idiots: Brockton Considers Dubious Eminent Domain Strategy, Tainting More Legitimate - Yves Smith - Regular readers may recall about a dozen municipalities, with San Bernardino getting the most press by being one of the earliest to consider it, were looking into using municipal powers of eminent domain to deal with the foreclosure mess. The particular scheme they were considering was beaten back, and as we’ll discuss soon, for very good reasons. Let me stress that eminent domain could be a very powerful, positive tool to deal with a whole series of problems: foreclosed properties the banks are letting fall apart (accompanying fines would also help), condemning mortgages in the “zombie title” status, where banks have walked away after scaring homeowners into leaving via foreclosure actions that were never completed, or homes just entering foreclosure. Now to the particulars. Brockton, MA is looking at both a good idea and a bad idea. From Huffington Post: In a move that’s pitting grassroots housing activists against Wall Street interests, the City Council of Brockton, Mass., decided this week to commission a study into the feasibility of using eminent domain powers to seize the mortgages of local residents struggling to pay off their loans. The plan being studied would essentially use municipal government’s prerogative of eminent domain to take possession of foreclosed residential mortgage notes, selling them back to residents, as the City Council resolution put it, “for the purpose of removing blight and restoring family home-ownership within the city.” The city would also focus on seizing the mortgages of “underwater” homeowners, those who owe more on their homes than their current appraised worth and would greatly benefit from a new loan that resets the value of their property.
Mortgage Delinquencies Rise in November - Mortgage industry technology and services company Lender Processing Services Inc. (NYSE: LPS) reported today that mortgage delinquencies rose to 7.12% in November 2012, up from 7.03% in October, but down from 7.83% in November 2011. Mortgages in the foreclosure process fell from 3.61% in October to 3.51% in November and are well below the 4.2% rate posted in November 2011. Added together, mortgages in foreclosure or delinquent now total 10.63% of all mortgages, or 5.35 million loans. The number of mortgages 30 to 90 days past due and not in foreclosure totals 1.999 million; the number more than 90 days past due and not yet in foreclosure totals 1.584 million; and the number in foreclosure totals 1.767 million. In October 5.3 million loans were delinquent or in foreclosure, while the number totaled 6.172 million in November 2011. November’s totals were higher in part due to the effects of Hurricane Sandy. In the area hit by the storm, mortgage delinquencies increased sharply since August — up 15.4% in Connecticut, 15.2% in New Jersey and 14.8% in New York, compared with a national rate of increase of just 3.7%. The other issue having an impact on foreclosures was the September adoption of the new National Mortgage Settlement requirements. Lenders slowed the pace of foreclosure filings while waiting for the new rules to be implemented. Now that the rule are in place, LPS says that foreclosures will pick up again.
LPS: Mortgage Delinquency Rates increased slightly in November - LPS released their Mortgage Monitor report for November today. According to LPS, 7.12% of mortgages were delinquent in November, up from 7.03% in October, and down from 7.83% in November 2011. LPS reports that 3.51% of mortgages were in the foreclosure process, down from 3.61% in October, and down from 4.20% in November 2011. This gives a total of 10.63% delinquent or in foreclosure. It breaks down as:
• 1,999,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,584,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,767,000 loans in foreclosure process.
For a total of 5,350,000 loans delinquent or in foreclosure in November. This is up slightly from 5,300,000 in October, and down from 6,172,000 in November 2011. This following graph from LPS shows the total delinquent and in-foreclosure rates since 1995.Even though delinquencies were up slightly in November, it was mostly seasonal. However there was a large increase in delinquencies in the areas impacted by Hurricane Sandy, From LPS: The November data also showed that the impact of Hurricane Sandy continued in ZIP codes hit hardest by the storm. While national delinquencies are moving in line with seasonal trends – that is, tending to rise slightly through the remainder of the calendar year – mortgage delinquencies increased sharply in those areas affected by Sandy. Whereas the national delinquency rate has increased 3.7 percent since August of this year, delinquencies in Sandy-impacted ZIPs have risen at more than threefold that pace – climbing 15.4 percent in Conn., 15.2 percent in N.J. and 14.8 percent in N.Y. The second graph from LPS shows foreclosure starts were off sharply. From LPS:
CoreLogic: Negative Equity Decreases in Q3 2012 - From CoreLogic: CORELOGIC® Reports 1.4 Million Borrowers Returned to "Positive Equity" Year to Date through the end of the Third Quarter 2012 CoreLogic ... today released new analysis showing approximately 100,000 more borrowers reached a state of positive equity during the third quarter of 2012, adding to the more than 1.3 million borrowers that moved into positive equity through the second quarter of 2012. This brings the total number of borrowers who moved from negative equity to positive equity September YTD to 1.4 million. 10.7 million, or 22 percent, of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2012. This is down from 10.8 million properties, or 22.3 percent, at the end of the second quarter of 2012. An additional 2.3 million borrowers had less than 5 percent equity in their home, referred to as near-negative equity, at the end of the third quarter. Together, negative equity and near-negative equity mortgages accounted for 26.8 percent of all residential properties with a mortgage nationwide in the third quarter of 2012, down from 27 percent at the end of the second quarter in 2012. This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic: "Nevada had the highest percentage of mortgaged properties in negative equity at 56.9 percent, followed by Florida (42.1 percent), Arizona (38.6 percent), Georgia (35.6 percent) and Michigan (32 percent). These top five states combined account for 34 percent of the total amount of negative equity in the U.S." The second graph shows the distribution of home equity. Close to 10% of residential properties have 25% or more negative equity - it will be long time before those borrowers have positive equity. But some borrowers are close.
Why the Housing Recovery is Nearly Homeowner-Less - The financial crisis of 2008 was terrible for homeowners saddled with heavy mortgage payments, especially the millions of low-income, first-time buyers who were tempted to buy in with deceptive loans during the height of the housing bubble. About 4 million foreclosures have been completed since the financial crisis of 2008, according to CoreLogic, a data provider to the real estate industry. Since 2006, when subprime loans first began to default in large numbers, there have been 9.4 million foreclosures initiated, according to the Federal Reserve Bank of New York (US Fed). To a select group of hedge fund and investment bankers the financial crisis that pivoted on these foreclosures was the opportunity of a lifetime. They made billions from the crash by wagering against the stability of the US housing market. Now some of the same elite investors are tacking backward and betting on a recovery of the housing market. It's a strange recovery though, propelled not so much by families seeking their own piece of the American dream, but instead by the US Fed's monetary policies. Low-interest rates fostered by the Fed are causing big-money investors to purchase foreclosed single-family homes in blocks of hundreds, even thousands. Expected gains in home prices are also leading hedge funds and investment bank traders to gamble on housing derivatives.
Report: Housing Inventory declines 17% year-over-year in December - From Realtor.com: December 2012 Real Estate Trend Data The total U.S. for-sale inventory of single family homes, condos, townhomes and co-ops (SFH/CTHCOPS) in December dropped to its lowest point since Realtor.com has been collecting these data, with 1,565,425 units for sale, down 17.32% compared to a year ago and roughly half its peak of 3.1 million units in September 2007. The median age of the inventory also decreased 9.01% on a year-over-year basis...On a year-over-year basis, the for-sale inventory declined in all but one of the 146 markets tracked by Realtor.com, while list prices increased in 66 markets, held steady in 31 markets and declined in 49 markets. Note: Realtor.com only started tracking inventory in September 2007, but this is probably the lowest level in a decade. On a month-over-month basis, inventory declined 6.5%. Some of the decline in December is seasonal because some sellers take their homes off the market for the holidays. Going forward, I expect to see smaller year-over-year declines simply because inventory is already very low. Here is a comparison of Realtor.com’s for-sale inventory numbers and the NAR’s existing home inventory estimate. As noted above, the Realtor.com data reflect monthly average listings, while the NAR estimates are end-of-month listings. Given the “normal” tendency for listings at the end of December to be well below the monthly average, the NAR December inventory number is likely to show a significantly larger monthly decline that the Realtor.com number.
CoreLogic: House Prices up 7.4% Year-over-year in November, Largest increase since 2006 - Notes: This CoreLogic House Price Index report is for November. The recent Case-Shiller index release was for October. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Rises 7.4 Percent Year Over Year in November Home prices nationwide, including distressed sales, increased on a year-over-year basis by 7.4 percent in November 2012 compared to November 2011. This change represents the biggest increase since May 2006 and the ninth consecutive increase in home prices nationally on a year-over-year basis. On a month-over-month basis, including distressed sales, home prices increased by 0.3 percent in November 2012 compared to October 2012. The HPI analysis shows that all but six states are experiencing year-over-year price gains. ...Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 6.7 percent in November 2012 compared to November 2011. On a month-over-month basis excluding distressed sales, home prices increased 0.9 percent in November 2012 compared to October 2012. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.3% in November, and is up 7.4% over the last year. The index is off 26.8% from the peak - and is up 9.6% from the post-bubble low set in February 2012 (the index is NSA, so some of the increase is seasonal). The second graph is from CoreLogic. The year-over-year comparison has been positive for nine consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit). This is the largest year-over-year increase since 2006
CoreLogic: US housing recovery accelerates at yearend as November home prices increase nationwide by 7.4% - CoreLogic is reporting today that its repeat-sales Home Price Index, based on sale prices for the same homes over time, posted a 7.4% year-over-year gain in November (including distressed sales), which was the largest annual increase in home prices nationwide in more than six years, going back to May 2006 (see chart above). It also the ninth consecutive monthly increases in national home prices on a year-over-year basis starting in March of last year. The last time there were that many back-to-back monthly increases in year-over-year home prices was in 2006. Excluding distressed sales, CoreLogic reports that national home prices increased annually by 6.7% in November. Looking forward one month, the CoreLogic Pending Home Price Index predicts that national home price appreciation will accelerate even higher in December, with an estimated 7.9% annual increase in last month’s home prices compared to December 2011 (see chart above).
FNC: Residential Property Values increased 4.2% year-over-year in November - In addition to Case-Shiller, CoreLogic, FHFA and LPS, I'm also watching the FNC, Zillow and several other house price indexes. From FNC: Home Prices Up 0.3% in November; Price Increase Expected to Continue Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that home prices nationally were up 0.3% in November. This was the ninth consecutive month that prices moved higher, leading to a total appreciation rate of 5.3% year to date. For the 12 months ending in November, home prices rose 4.2%, the largest year-over-year increase since October 2006. All three composite indices show similar trends of price recovery. ...Two-thirds of the component markets tracked by the FNC 30-MSA composite index show continued price improvement in November. . The recovery in Phoenix continues to significantly outpace the rest of the country. Home prices have surged 23.6% year to date. Foreclosure sales continue to shrink rapidly, making up only 13.0% of total home sales in November.The year-over-year change continued to increase in November, with the 100-MSA composite up 4.2% compared to November 2011. The FNC index turned positive on a year-over-year basis in July - that was the first year-over-year increase in the FNC index since year-over-year prices started declining in early 2007 (over five years ago).
Housing Starts Rise Sharply In 2012's Final Month - New residential construction in December rose substantially more than expected, posting a 12.1% increase last month (seasonally adjusted annual rate). Yours truly and several consensus forecasts were looking for a solid but considerably lesser growth rate of around 3.0%, as I noted yesterday. The key point, of course, is that the housing recovery remains on track, as today's update reminds in rather convincing terms. Housing starts are near a five-year high. A similarly bullish trend also describes the recent data for newly issued housing permits, which are considered a leading indicator of starts. Although permits rose only marginally in December, that's enough to keep this series near a five-year high as well. From a business cycle perspective, today's housing report data delivers another positive number for the December economic profile. Last month's tally of housing starts is nearly 37% above the year-earlier level.
Housing Starts increase sharply to 954 thousand SAAR in December - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in December were at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000. Single-family housing starts in December were at a rate of 616,000; this is 8.1 percent above the revised November figure of 570,000. The December rate for units in buildings with five units or more was 330,000. An estimated 780,000 housing units were started in 2012. This is 28.1 percent above the 2011 figure of 608,800. Building Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 903,000. This is 0.3 percent above the revised November rate of 900,000 and is 28.8 percent above the December 2011 estimate of 701,000. Single-family authorizations in December were at a rate of 578,000; this is 1.8 percent above the revised November figure of 568,000. Authorizations of units in buildings with five units or more were at a rate of 301,000 in December. The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) increased sharply from November. Single-family starts (blue) increased to 616,000 thousand in December. The second graph shows total and single unit starts since 1968.
Some Comments on Housing Starts - A few key points:
• Housing starts increased 28.1% in 2012 (initial estimate). This is a solid year-over-year increase, and residential investment is now making a positive contribution to GDP growth.
• Even after increasing 28% in 2012, the 780 thousand housing starts this year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011). This was also the fourth lowest year for single family starts since 1959.
• Starts averaged 1.5 million per year from 1959 through 2000. Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.
• Residential investment and housing starts are usually the best leading indicator for economy. Note: Housing is usually a better leading indicator for the US economy than manufacturing, see: Josh Lehner's The Handoff – Manufacuturing to Housing. Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.
The following table shows annual starts (total and single family) since 2005:
Pent-up demand for new homes is boosting construction, but another market will see growth as well - As discussed earlier (see post), household formation and historically low new home inventory (see post) is stimulating construction of new homes in the US. The large shadow inventory, which many view as holding back resi construction, is simply converting some portion of homeowners into renters. But for every renter there is an owner - and there are just not enough existing homes for sale. That's why US housing starts hit a new post-recession high.Pent-up demand for construction however is not the only market stimulated by adjustments in demographics. Demand is growing for home renovation as well. Since very few new homes have been built recently, the median age of US homes is rising, requiring additional maintenance. Furthermore, as homes change hands to younger owners, the need for renovation increases. That's because older homeowners spend half the national average on monthly maintenance.
Vital Signs Chart: Rising Residential Construction - Builders broke ground for more new houses in December. Residential construction rose 12% from November and 37% from a year ago to an annual rate of 954,000 units. That is the highest level since 2008, but below the 1.4 million-unit pace seen before the recession. The number of building permits issued also rose, indicating future gains in construction.
Number of the Week: Don’t Expect Too Big a Housing Boost - 2.5%: Residential fixed investment’s share of GDP in the third quarter of 2012. An unexpectedly strong jump in December housing starts put a nice coda onto housing’s upward run in 2012. But while the latest numbers on starts–as well as sales and prices–suggest housing is firmly in recovery with more gains to come, the news doesn’t herald a sudden jump in overall economic activity. Especially not with consumers turning more pessimistic. The December 12.1% increase in starts to a more than four-year high of 954,000 may say more about the weather than the strength in the housing sector. December was one of the 10th warmest on record, according to the U.S. National Oceanic and Atmospheric Administration. What was more encouraging for the outlook was the uptrend in building permits. Even with the burst in starts at the end of 2012, the number of homes authorized but not yet started in December was 19.5% above the level of December 2011. Pent-up orders will lift homebuilding this year. The problem is that the homebuilding sector isn’t a large enough share of gross domestic product to move the growth needle. Even if residential construction, less than 3% of GDP, jumps 20% this year, the gain would add only between one-quarter to one-third percentage point to GDP growth.
Builder Confidence unchanged in January - The National Association of Home Builders (NAHB) reported the housing market index (HMI) was unchanged in January at 47. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Holds Steady in January Builder confidence in the market for newly built, single-family homes was unchanged in January, remaining at a level of 47 on the National Association of Home Builders/Wells Fargo Housing Market Index, released today. This means that following eight consecutive monthly gains, the index continues to hold at its highest level since April of 2006. ...“Builders’ sentiment remains very close to the index’s tipping point of 50, where an equal number of builders view conditions as good and poor, and fundamentals indicate continued momentum in housing this year,” . “However, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the ongoing stalemate in Washington over critical economic concerns continue to impede the housing recovery.” This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the January release for the HMI and the November data for starts (December housing starts will be released tomorrow). This was slightly below the consensus estimate of a reading of 48.
Consumer Sentiment Drops at Start of Year - U.S. consumers started 2013 feeling more worried about the economy, according to data released Friday. Consumers may be responding to their thinner paychecks, a result of the fiscal-cliff deal. The Thomson-Reuters/University of Michigan consumer sentiment index’s early reading for January fell to 71.3–the lowest reading in more than a year–from 72.9 at the end of December, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the early-January index to increase to 75.0.
Preliminary January Consumer Sentiment declines to 71.3 w/graph - The preliminary Reuters / University of Michigan consumer sentiment index for January declined to 71.3 from the December reading of 72.9.This was below the consensus forecast of 75.0. There are a number of factors that can impact sentiment including unemployment, gasoline prices and other concerns - and, for January, the payroll tax increase and Congress' threat to not pay the bills.Back in August 2011, sentiment declined sharply due to the threat of default and the debt ceiling debate. Unfortunately it appears Congress is negatively impacting sentiment once again.
Michigan Consumer Sentiment Again Falls Below Expectation - The University of Michigan Consumer Sentiment preliminary number for January came in at 71.3, an unexpected decline from the December final of 72.9, which was also a surprise to the downside. The Briefing.com consensus was for 75.0 and Briefing.com's own forecast was for 76.0.See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 16% below the average reading (arithmetic mean) and 15% below the geometric mean. The current index level is at the 18th percentile of the 421 monthly data points in this series.The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number of 71.3 puts us a mere 2.04 above the average recession mindset.
Confidence Falls as U.S. Payroll Tax Rise Hits: Economy - Confidence among American households unexpectedly fell to a one-year low in January, as higher payroll taxes create a risk that the biggest part of the economy will slow in early 2013. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 71.3, the lowest since December 2011, from 72.9 the prior month. The gauge was projected to rise to 75, according to the median forecast in a Bloomberg survey. A boost to confidence in the second half of 2012 from a pickup in job growth has evaporated, just as lawmakers in Washington remain divided about raising the debt ceiling and cutting government spending. Discounters including Target Corp. (TGT) are trying to lure shoppers with year-round promotions as households brace for smaller paychecks due to a two percentage- point increase in payroll taxes.
Weekly Gasoline Update: Regular Unchanged for the 2nd Week - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump were again relatively unchanged last week. Rounded to the penny, the average for Regular was unchanged and Premium rose a penny. Given the hike in FICA taxes, households should can, for the time being, take solace in the fact the gas prices are steady. According to GasBuddy.com, Hawaii has the highest gasoline price, averaging $4.03, up six cents from last week. New York is second at $3.71, down a penny from last week. At the other end of the price range, ten states have average prices from $2.79 to $3.00 or less. From lowest to highest they are: Wyoming, Utah, Colorado, Oklahoma, Idaho, New Mexico, Minnesota, South Dakota, Missouri and Montana.
Gasoline Prices up Recently, Expected to be lower than in 2012 - Another update on gasoline prices. From the EIA (Energy Information Administration): EIA expects that the Brent crude oil spot price, which averaged $112 per barrel in 2012, will fall to an average of $105 per barrel in 2013 and $99 per barrel in 2014. The projected discount of West Texas Intermediate (WTI) crude oil to Brent, which averaged $18 per barrel in 2012, falls to an average of $16 per barrel in 2013 and $8 per barrel in 2014, as planned new pipeline capacity lowers the cost of moving Mid-continent crude oil to the Gulf Coast refining centers. EIA expects that falling crude prices will help national average regular gasoline retail prices fall from an average $3.63 per gallon in 2012 to annual averages of $3.44 per gallon and $3.34 per gallon in 2013 and 2014, respectively.This graph shows the EIA forecasts for crude and gasoline. There are some seasonal factors for gasoline with prices rising during the summer. This forecast is mostly just some small changes to current prices, and as we all know, there can be wild event driven swings for oil and gasoline prices.
Charging by the mile, a gas tax alternative, sees serious movement - Because of vehicles with higher fuel efficiency, slightly less driving, and the gas tax not being changed since 1993, the motor vehicle fuel tax, or “gas tax”, has failed to pay for everything that Congress has legislated that it should pay for. The Highway Trust Fund, which includes the Mass Transit Account, has received several infusions of money from the “general revenue fund” – to the tune of over $60 billion. But a new report from the Government Accountability Office, the congressional think tank focused on financing, past, present, and future, has made the country take a giant step forward in considering a switch to a fee that more accurately charges usage. The report, like all GAO studies, was commissioned by the House Transportation Appropriations Subcommittee. The gas tax charges drivers based on their use of petroleum, different vehicles can go different distances on the same amount of petroleum: essentially, some pay less than others for the same use of the road. Additionally, the counts of how much people drive has decreased (called vehicle miles traveled, or VMT), yet our demand for funds to maintain and build new infrastructure outpaces the incoming revenues from the gas tax. Lastly, the federal gas tax hasn’t changed at all, sticking to a cool 18.4 cents per gallon (for non-diesel drivers) since 1993. ”While the gas tax was equal to 17 percent of the cost of a gallon of gas when it was set at its current level in 1993, it is now only 5 percent” (Streetsblog).
New pay-per-mile scheme would boost taxes 250 percent - An on-again, off-again move by the Obama administration to scrap the federal gas tax in favor of a pay-per-mile fee would boost the tab to Americans as high as 250 percent, raising their current tax of 18.4 cents a gallon to as high as 46 cents, according to a new government study. But without a tax increase, said the Government Accountability Office study, the government's highway fund is going to go dry. One reason the fund is going broke: President Obama's push for fuel efficient cars has resulted in better mileage, and fewer stops at the pump. The GAO study is just the latest review of federal spending that paints a grim picture of the nation's infrastructure. Just keeping spending at current levels, the GAO said, would require a near doubling of the gas tax to 32 cents a gallon, and that would jump to as high as 46 cents should the federal government add spending to fix crumbling infrastructure and build new roads.
Annual Gasoline Usage in Millions of Barrels Inquiring minds are once again taking a look at annual gasoline sales in the United States. Reader Tim Wallace provides the following chart for discussion. Data is from the US Energy Information Administration (EIA) Weekly Petroleum Report. The current downturn happened back in 2007 in gasoline, and it is one of the things I saw that got me out of the market. I cannot see an improved economy from these numbers, and the numbers also cannot be explained by "higher mileage" vehicles - the impact would be some, but not as major as we see here, with usage numbers now back to 2001 levels. The drops in the past two years can only be explained by less driving, which also would mean less wear and tear on the roads and therefore less spending. Interestingly, I have seen a lot of repaving of roads that are perfectly serviceable. So why pave them? And talking about paying for things that you use ... You and I both know that the highways North of the Mason-Dixon line eat up much more tax dollars as the weather in winter tears them apart. Therefore y'all up there should have a much higher fee than those in the South here who use much less of the federal spending pie!
Global PC Shipments Decline 6.4%; Best Buy Sales Flat; Toys R Us Sales Decline 4.5%; 4th Quarter GDP Estimate Reduced to .8% from 1.5% - Holiday sales of electronics and toys plunged this past Christmas season. Also of note, JPMorgan lowered its annualized 4th quarter GDP estimates down to .8% from 1.5%. Nonetheless, analysts see a silver lining to the data. They always do. Toys R Us Sales Decline 4.5%. MSN Money reports Gloomy Holiday Sales at Toys R Us Toys R Us reported a key sales figure declined in November and December, hurt by weak demand for videogames, electronics and toys and shoppers who pulled back because of Superstorm Sandy.USA Today reports Best Buy sales flat or down during holidays Struggling consumer electronics chain Best Buy said Friday that a key revenue metric declined during the critical holiday season. But its flat performance in the U.S. was better than the past several quarters, and online revenue showed strong growth. The chain said revenue at stores open at least a year fell 1.4% for the nine weeks ended Jan. 5. This figure is a key gauge of a retailer's health because it excludes results from stores recently opened or closed. USA Today reports Global PC shipments fall 6.4% to 89.8 million in 4Q Desktop and laptop sales in the fourth quarter fell 6.4% from a year earlier to 89.8 million, affirming the PC market's gradual decline throughout 2012, according to an industry report released Friday. With consumers steering more of their tech budgets to tablets and smartphones, "the PC market continued to take a back seat to competing devices and sustained economic woes,"
Retail Sales increased 0.5% in December - On a monthly basis, retail sales increased 0.5% from November to December (seasonally adjusted), and sales were up 4.7% from December 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $415.7 billion, an increase of 0.5 percent from the previous month and 4.7 percent above December 2011. ... The October to November 2012 percent change was revised from +0.3 percent to +0.4 percent.Sales for November were revised up to a 0.4% gain. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 25.4% from the bottom, and now 9.7% above the pre-recession peak (not inflation adjusted) The second graph shows the same data, but just since 2006 (to show the recent changes). Retail sales ex-autos increased 0.3%. Excluding gasoline, retail sales are up 22.5% from the bottom, and now 10.0% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.1% on a YoY basis (4.7% for all retail sales).
Retail Sales: An Unexpectedly Strong December - The Advance Retail Sales Report released this morning shows that sales in December came in at 0.5% month-over-month. Today's number is well above the Briefing.com consensus forecast of 0.2%. The year-over-year change is 4.7%. The latest overall sales number undercuts recent rumors of soft holiday season sales. Lower gasoline prices in December no doubt contributed to the stronger-than-expected data. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact. After the cliff-dive of the Great Recession, the recovery in retail sales has taken us (in nominal terms) 9.7% above the November 2007 pre-recession peak. The green trendline is a regression through the entire data series. The latest sales figure is 4.9% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.1% below the blue line end point.We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy.
Remember that report that Christmas sales only grew 0.7%? ... Never mind ... A couple of weeks ago it was breathlessly reported that Holiday retail sales growth comes in at just 0.7%, Weakest since 2008: U.S. holiday retail sales this year grew at the weakest pace since 2008, when the nation was in a deep recession. In 2012, the shopping season was disrupted by bad weather and consumers' rising uncertainty about the economy. Uh ... well .... Never mind. This morning it was reported that seasonally adjusted December retail sales grew 0.5% month over month, and over 4% YoY. Just as analysts had expected. As I pointed out at the time, citing Gallup's daily consumer spending report: The last two weeks [before Christmas] have seen the highest amount of consumer spending since 4 years ago, and the spike last week is by far the highest since 4 years ago as well. ....
Retail Sales Deliver Another Positive Number For December's Economic Profile - Retail sales beat expectations with a moderately strong 0.5% rise in December (seasonally adjusted), the Census Bureau reports. After stripping out gasoline sales, retail purchases rose even more, advancing 0.8% for the month. The numbers look encouraging on a year-over-year basis too, with retail sales advancing 4.7% for the 12 months through December. That's up a decent amount from November's 4.1% annual rate. The main takeaway in is that retail sales ended 2012 on a strong note, which puts another nail in the coffin for predictions that the economy wouldn't escape last year without stumbling into a new recession. December's pop in consumption was broadly distributed, with most major sectors of the retail space posting gains. The two exceptions: gasoline sales and electronic/appliance stores. Nonetheless, the relatively strong, broad-based jump in retail sales last month adds another data point on the side of growth for the December economic profile.
Core Retail Sales Beat Despite Electronics And Appliance Sales Drop; Empire Fed Misses Big - Good news, bad news on the economic front this morning. The good news: December advance retail sales rising 0.5% on expectations of a 0.2% increase, up from a 0.4% revised November print. Excluding the volatile auto sales, the number was up 0.3% on expectations of a 0.2% increase, and up from a 0.1% decline. Excluding autos and gas, the print was 0.6%, on expectations of a 0.4% increase. The biggest increase in December retail sales by category was in food services and drinking places which rose 1.2% in December, the same as November. Strong numbers were posted at clothing and accesory stores (+1.0%) and health and personal care (+1.4%) - all very low margin sales. Yet where the report was undisputedly weak, and where many were hoping for a boost but did not get it, was in the higher margin electronics and appliance stores, which dropped -0.6% in December, down big from the 2.3% increase in November, and further weakness for those hoping that December saw a surge in spending over gadgets and gizmos.As for the bad news: it was all in the Empires State Manfuacturing Index which missed expectations big, and in fact posted a decline from the abysmal November miss, revised to -7.30, and now down to -7.78, the sixth negative print in a row, on expectations of an unchanged print. This was the 5th miss in the series in the last 6 reports, the worst miss in 4 months, and the lowest number in 4 months. Alas there was no hurricane in December to blame this major miss on. Oh yes, we remember, "the fiscal cliff."
Retail Data Look Dated - These data look dated. Tuesday’s economic news showed a consumer ready to shop. Retail sales increased 0.5% in December, better than expected. The control group of sales–which excludes autos, gasoline, and building materials–suggest real consumer spending grew at a annualized pace just above 2% last quarter, much faster than the rates for the previous two quarters. The problem for the outlook: the momentum sketched out in the December data hit a wall in January. No matter how upbeat or flush consumers felt last month, new fiscal policy argues for weak spending through at least the first half of 2013. It’s a matter of money: most consumers have less of it after the cliff deal.
BLS: CPI unchanged in December, Core CPI increases 0.1% - From the Bureau of Labor Statistics (BLS): Consumer Price Index - December 2012 The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. The gasoline index declined again in December, but other indexes, notably food and shelter, increased, resulting in the seasonally adjusted all items index being unchanged. ...The index for all items less food and energy increased 0.1 percent in December, the same increase as in November. ... The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as last month. On a year-over-year basis, CPI is up 1.7 percent, and core CPI is up 1.9 percent. Both below the Fed's target. This was at the consensus forecast of no change for CPI, and a 0.1% increase in core CPI.
Headline and Core Inflation Decline Fractionally - The Bureau of Labor Statistics released the CPI data for December this morning. Year-over-year unadjusted Headline CPI came in at 1.74%, which the BLS rounds to 1.7%, down fractionally from 1.76% last month (rounded to 1.8%). Year-over year-Core CPI (ex Food and Energy) came in at 1.89% (BLS rounds to 1.9%), down from last month's 1.94%. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. The gasoline index declined again in December, but other indexes, notably food and shelter, increased, resulting in the seasonally adjusted all items index being unchanged. Gasoline was the only major energy index to decline; the indexes for natural gas and electricity both increased. Within the food category, five of the six major grocery store food groups increased as the food at home index rose for the third consecutive month. The index for all items less food and energy increased 0.1 percent in December, the same increase as in November. Besides shelter, the indexes for airline fares, tobacco, and medical care also increased. The indexes for recreation, household furnishings and operations, and used cars and trucks all declined in December. The all items index increased 1.7 percent over the last 12 months, compared to a 1.8 percent figure in November. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as last month. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.5 percent. More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.
Inside the Consumer Price Index - Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link. The chart below shows the cumulative percent change in price for each of the eight categories since 2000. Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. The latest Apparel number is the first fractional nudge above zero in about nine years. Another unique feature of Apparel is the obvious seasonal volatility of the contour. Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For a closer look at gasoline, see my weekly gasoline updates.
For Inflation Outlook, Look to Services = Depending on what you’re in the mood to buy, the U.S. economy looks like a bargain basement or a high-price market. Wednesday’s consumer price index report showed a contrast in inflation trends. Prices of core goods–that exclude food and energy–increased an almost deflationary 0.3% over the course of 2012, while core service prices increased 2.5%, at the Federal Reserve’s upper bound of overall inflation tolerance. Both sectors will probably see higher inflation in 2013. But given its current rate as well as its majority share of the core CPI, the service sector will hold more sway on overall inflation–and the Fed’s attention. As 2013 starts, the fundamentals suggest service inflation will pick up, but not to a hazardous degree.
Producer Price Index: Headline and Core Both Below Forecast - Today's release of the December Producer Price Index (PPI) for finished goods shows a month-over-month decline of 0.2%, seasonally adjusted, in Headline inflation. Core PPI rose 0.1%. Briefing.com had posted a MoM consensus forecast of 0.0% for Headline and 0.2% for Core PPI. Year-over-year Headline PPI is up 1.3% and Core PPI is up 2.0%.Here is a snippet from the news release: In December, most of the decline in the finished goods index can be traced to a 0.9-percent decrease in prices for finished consumer foods. The index for finished energy goods fell 0.3 percent. By contrast, prices for finished goods less foods and energy inched up 0.1 percent. Finished foods: Prices for finished consumer foods fell 0.9 percent in December, the first decrease since a 0.4-percent decline in May 2012. Over one-third of the December decrease can be traced to the index for beef and veal, which moved down 4.8 percent. Lower prices for fresh and dry vegetables and for natural, processed, and imitation cheese also were factors in the decline in the finished consumer foods index. (See table 2.) Finished energy: The index for finished energy goods moved down 0.3 percent in December, the third straight decrease. Leading the December decline, gasoline prices fell 1.7 percent. Finished core: The index for finished goods less foods and energy edged up 0.1 percent in December, the same rate as in November. Leading the December advance, cigarette prices increased 2.0 percent. More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI declined significantly during 2009 and increased modestly in 2010 and more rapidly in 2011. This year the YoY Core PPI trend had been one of gradual decline.
China’s Impact on U.S. Inflation - New York Fed - U.S. import prices of consumer goods shipped from China have been moderating in recent quarters, following an upward surge of 11 percent between mid-2010 and the end of 2011. These price changes have far-reaching consequences for U.S. businesses and consumers, because China is the largest single supplier of imports to the United States, accounting for more than 20 percent of nonoil imports and more than 30 percent of consumer goods. In this post, we track U.S. import price movements in different product categories from China by constructing import price indexes that use highly disaggregated data. We also explore various underlying factors that might explain these important trends. To identify trends in import prices of consumer goods from China, we construct our own price index, because official statistical agencies only provide aggregate price indexes. Each month, the U.S. Bureau of Labor Statistics (BLS) publishes an aggregate U.S. import price index that averages movements across all source countries. The aggregate index in turn is divided into separate indexes by type of goods imported, referred to as end-use categories, that include industrial supplies, consumer goods, capital goods, and autos. In addition, the BLS computes a separate price index for some source countries, including China. These country-specific indexes, however, are not broken out by end-use categories.
Industrial Production Increased Moderately In December - Industrial production increased 0.3% in December, which is a slightly faster pace than expected. Nonetheless, the general forecast of a slowdown in growth for last month proved to be accurate. That's not a surprise, given the sharp 1.0% rise in industrial production in November, which was primarily due to an unsustainable snapback after the weather-related interruptions from Hurricane Sandy in October. Overall, industrial activity continues to grow a modest pace. December's report brings another positive contribution to the year-end economic profile. With today's update, there's even a stronger case for arguing that the economy ended 2012 in an expansion mode. But the latest news on the industrial front also raises some new challenges for thinking about January's numbers and beyond. But first, let's recap the monthly data. As the first chart shows, industrial production increased in December for the second consecutive month. The manufacturing component posted a considerably stronger rise at year's end. On a year-over-year basis, industrial production increased 2.2% through December. That's a decent if unspectacular rate of growth… if it holds. But as the next chart shows, the annual pace has been slipping recently--December's 2.2% gain is near the lowest levels in several years.
Fed: Industrial Production increased 0.3% in December - From the Fed: Industrial production and Capacity Utilization - Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. For the fourth quarter as a whole, total industrial production moved up at an annual rate of 1.0 percent. Manufacturing output advanced 0.8 percent in December following a gain of 1.3 percent in November; production edged up at an annual rate of 0.2 percent in the fourth quarter. The output at mines rose 0.6 percent in December, and the output of utilities fell 4.8 percent as unseasonably warm weather held down the demand for heating. At 98.1 percent of its 2007 average, total industrial production in December was 2.2 percent above its year-earlier level. Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 12 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.8% is still 1.5 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007. The second graph shows industrial production since 1967. Industrial production increased in December to 98.1. This is 17.5% above the recession low, but still 2.6% below the pre-recession peak.
Empire State Manufacturing Comes in Below Expectation - Now that I'm tracking the Big Four economic indicators, which includes Industrial Production, I'm watching these indexes more closely. This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions was not good. There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. The -8.1 was substantially below the Briefing.com consensus of 2.0. Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead): Here is the opening paragraph from the report. The one positive note was the modest improvement in future business conditions. The December Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a fifth consecutive month, falling three points to -8.1. The new orders index dropped to -3.7, while the shipments index declined six points to 8.8. At 16.1, the prices paid index indicated that input prices continued to rise at a moderate pace, while the prices received index fell five points to 1.1, suggesting that selling prices were flat. Employment indexes pointed to weaker labor market conditions, with the indexes for both number of employees and the average workweek registering values below zero for a second consecutive month. Indexes for the six-month outlook were generally higher than last month, although the level of optimism remained at a level well below that seen earlier this year.
Philly Fed Business Outlook: A Moderate Contraction - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows a moderate decline, moving from 4.6 last month to -5.8. Moreover, the 3-month moving average fell to -3.4, the seventh negative reading in eight months. Since this is a diffusion index, negative readings indicate contraction, positive indicate expansion. Here is the introduction from the Business Outlook Survey released today: Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. Following reported increases in business activity in late 2012, most indicators fell back from the readings posted last month. The survey's broad indicators of future activity, however, showed some improvement this month. (Full PDF Report) The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.
Philly Fed Manufacturing Survey Shows Contraction in January - Catching up ... earlier from the Philly Fed: January Manufacturing Survey Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. ... The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to ‐5.8 this month. Labor market conditions at reporting firms deteriorated this month. The employment index, at ‐5.2, fell from ‐0.2 in December. ...The survey’s future indicators suggest that firms expect recent declines to be temporary. The future general activity index increased from a revised reading of 23.7 to 29.2, its second consecutive monthly increase. Earlier this week, the Empire State manufacturing survey also indicated contraction in January. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through January. The ISM and total Fed surveys are through December. The average of the Empire State and Philly Fed surveys decreased in January, and is back below zero. This suggests another weak reading for the ISM manufacturing index
Biggest Philly Fed Miss In 7 Months Ignored As Fed Injects Reserves Via Repo - A month ago we mocked the Philly Fed number which printed at an outlier level of 8.1, slamming expectations of a negative print, and sending algos into overbuydrive. A week ago we were validated when the annual revision brought that number down from 8.1 to 4.6. Today we get confirmation that the December print was a total farce, with a January Philly Fed print which is once again solidly in negative territory, or -5.8, which just happens to be the biggest miss to expectations of 5.6 in seven months. Yet while a month ago the huge beat was a reason for the robots to ramp stocks, today's miss is a reason to... ramp stocks even more. Why? Because moments before the disappointing announcement the Fed decided to inject even more liquidity in addition to the now daily unsterilized POMO, following the resumption of repos, which injected some $210 million in reserves into dealers. This is in addition to the $3 or so billion that today's POMO will add as stock purchasing dry powder for banks.
Philadelphia Fed Solidly in Contraction; Unwarranted Future Optimism; 3-Month Moving Average Suggests Recession; Hiring Plans Collapse - Inquiring minds are digging into the Philadelphia Fed Manufacturing Survey for January 2013. Observations
- The business conditions index is solidly in the red following an increase in December
- New orders are in contraction
- Prices received is in contraction
- Shipments are treading water
- The only component solidly in the green is prices paid. This is indicative of a margin squeeze on producers who cannot pass on costs.
Please note the current index is -5.8 but future expectations rose from 23.7 to 29.2. That rise is indicative of unwarranted rampant optimism that will not pan out.
As manufacturing bounces back from recession, unions are left behind - Last July was a good month for factory workers in Anderson, Ind., where a Honda parts supplier announced plans to build a new plant and create up to 325 jobs. But it was a grim month in the Cleveland suburbs, where an industrial plastics firm told the state of Ohio it was closing a plant and laying off 150 people. Nearly all of the Ohio workers belonged to a labor union. Workers at the Indiana plant don’t. Their fates fit a post-recession pattern: American factories are hiring again, but they’re not hiring union members.U.S. manufacturers have added a half-million new workers since the end of 2009, making the sector one of the few bright spots in an otherwise weak recovery. And yet there were 4 percent fewer union factory workers in 2012 than there were in 2010, according to federal survey data. On balance, all of the job gains in manufacturing have been non-union. The trend underscores a central conundrum in the “manufacturing renaissance” that President Obama loves to tout as an economic accomplishment: The new manufacturing jobs are different from the ones that delivered millions of American workers a ticket to the middle class over the past half-century. It used to be that factory jobs paid substantially better than other jobs in the private sector, particularly for workers who didn’t go to college. That’s less true today, especially for non-union workers in the industry, who earn salaries that are about 7 percent lower than similar workers who are represented by a union. By one measure — average hourly earnings — a typical manufacturing worker now earns less than a typical private-sector worker of any industry.
Manufacturing jobs used to pay really well. Not anymore.: From the mid-1970s until shortly before the Great Recession, it really paid to be a factory worker in America. Specifically, manufacturing workers earned more per hour, on average, than workers across the private sector at large. That’s what you see in this chart — the blue line is manufacturing wages, and the gap between it and the red line, which represents wages in the private sector at large, is what we call the “wage premium” that factory workers enjoyed. That premium was one of the big reasons factory jobs were for so long such a reliable ticket to the middle class in this country. Notice that the premium disappears around 2007. Today the premium has gone negative. Here’s part of the explanation for why that is: The factory sector has been almost entirely de-unionized.This is factory employment since 1977, for non-union workers and for workers in or covered by a union. Non-union employment grew, fell and is growing again post-recession (as I document in the Post today.) The net result is that there are about as many non-union factory workers today as there were in 1977. Meanwhile, about 80 percent of union factory jobs have disappeared.
Counterparties: RoboCapitalists - The robots are coming for your job. In the past few months there’s been a boomlet of very smart people worrying about the economic consequences of our increasingly robotic future. Kevin Kelly, in a cover story for Wired last month, describes this imminent — but not yet sentient — threat: “before the end of this century, 70 percent of today’s occupations will likewise be replaced by automation… robot replacement is just a matter of time”. He’s not worried, however, because “The one thing humans can do that robots can’t (at least for a long while) is to decide what it is that humans want to do”. You will always have a job; it will just consist primarily of telling robots what to do. Robot servants and factory workers may give us more leisure time, but Noah Smith worries they’ll further erode labor’s declining share of national income. Even more problematic, they will cause “old mechanisms for coping with inequality break [to] down”. Paul Krugman agrees that a shift is necessary: if labor’s share if income continues to decline, “it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets”.
Interactive Map: Job Gains and Losses in the Recovery by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc) - Inquiring minds are investigating job creation and losses during the economic recovery. Data for following Tableau Software interactive map is courtesy of Economic Modeling Specialists. The interactive map below may take a while to load. Please give it time on a slow connection. Hover your cursor over any line to see additional information. You can also select a single category from the drop-down boxes to isolate a particular type of job.
Job Gaining and Job Losing Industries 2007-2012 - In response to Interactive Map: Job Gains and Losses in the Recovery by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc), I exchanged Emails with Salil Mehta who has a blog on Statistical Ideas. Salil asked for a better representation of some of the data in my post, specifically, a pair of tables I posted on jobs gains and losses since 2007. I put together a line chart of what Salil asked, but I like the pie charts he sent much better. Click on either chart to see a sharper image. Credit for the data itself goes to Economic Modeling Specialists. 2007 is December of 2007 (just as the recession started)
1012 is December of 2012 (the latest job data) Healthcare gained jobs every year since 2007, a total of 1,543,846
- Private Education Services gained every year since 2007, a total of 443,210
- Mining and Quarrying gained every year since 2007, a total of 106,863
Jobless Claims in U.S. Fell to Lowest Level in Five Years - The number of Americans filing first-time claims for unemployment insurance payments fell more than forecast last week to the lowest level in five years, pointing to further improvement in the labor market.Applications for jobless benefits decreased by 37,000 to 335,000 in the week ended Jan. 12, the lowest level since the period ended Jan. 19, 2008, Labor Department figures showed today. Economists forecast 369,000 claims, according to the median estimate in a Bloomberg survey. A spokesman for the agency said the drop may reflect the difficulty the government has in adjusting the data after the holidays when seasonal workers are let go. Fewer claims indicate businesses have grown comfortable with their current headcounts, a necessary development before hiring starts to pick up. At the same time, higher payroll taxes that shrink paychecks may prompt companies to hold the line on expanding headcount should Americans cut back on discretionary spending.
Weekly Initial Unemployment Claims decline to 335,000 - The DOL reports: In the week ending January 12, the advance figure for seasonally adjusted initial claims was 335,000, a decrease of 37,000 from the previous week's revised figure of 372,000. The 4-week moving average was 359,250, a decrease of 6,750 from the previous week's revised average of 366,000. The previous week was revised up from 371,000. 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 decreased to 359,250. This was the lowest level for weekly claims since January 2008, and the 4-week average is near the low since early 2008. Note: Data for January has large seasonal adjustments - and can be very volatile, but this is still good news.
Weekly Unemployment Claims Fall Dramatically to 335K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 335,000 new claims number was a 37,000 decrease from a 1,000 upward revision for the previous week. That is the lowest number of initial claims since January of 2008. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell from 366,000 to 359,250. Here is the official statement from the Department of Labor: In the week ending January 12, the advance figure for seasonally adjusted initial claims was 335,000, a decrease of 37,000 from the previous week's revised figure of 372,000. The 4-week moving average was 359,250, a decrease of 6,750 from the previous week's revised average of 366,000. The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 5, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 5 was 3,214,000, an increase of 87,000 from the preceding week's revised level of 3,127,000. The 4-week moving average was 3,195,750, a decrease of 6,000 from the preceding week's revised average of 3,201,750. Today's seasonally adjusted number was way below the Briefing.com consensus estimate of 370K. The unemployment report footnotes for the previous week's unadjusted data identifies 15 state with a decrease of more than 1,000 layoffs (Michigan at the top, where claims fell by 12,536) and 15 states with an increase of more than 1,000 new claims (New York topping that list with 37,189 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
Initial claims fall to "normal" range for fist time since Great Recession - Initial jobless claims were reported at 335,000 this morning. This is the lowest level since January 19, 2008, five years ago. Beyond that, it is the first time that initial claims have been reported in what would be a normal, expansionary range on a population-adjusted basis since the Great Recession. In the last expansion, claims averaged between 280,000 and 325,000 before they turned south towards the end of 2007. US population has grown 4% since that time, according to the Census Bureau, making the top end of the proportionate expansionary range 338,000. When the stragglers get added in next week, we could very well be back above that range, but for now, this is the very first time that initial claims can be reported as unambiguous "good" news.
Unemployment Initial Claims Illusionary 37,000 Plunge for January 12, 2013 - The DOL reported Initial weekly unemployment claims for the week ending on January 12th, 2013 were 335,000, a 37,000 drop from the previous week of 372,000. Last week's initial claims were originally reported to be 371,000, a 1,000 upward revision. The 10% weekly initial claims plunge is the lowest level since January 2008, the start of the recession, and also the biggest weekly decline since February 2010. Alas, the decline is only a warm fuzzy and artificial. This week is a very weird one for seasonal adjustments. The unadjusted data swings wild and the DOL has a seasonal pattern algorithm to smooth out those swings. The 2nd week in January the DOL expects to see a flood of new claims due to the end of seasonal hiring and the worst month for summer type of jobs, such as construction. This week, they didn't see it. Marketwatch clearly did their homework and called the DOL to find the DOL's seasonal expectations for initial claims versus what data was actually reported by the states. Unadjusted claims don’t rise nearly as much if the second week of January ends on the 12th, as it did in 2013. A Labor official called it an “odd calendar configuration.”In the seven days ended Jan. 12, unadjusted claims were expected by Labor officials to rise 11.7%. Instead, they rose just 0.4%. Raw claims edged up to 555,708 from 553,348 in the prior week.
State Unemployment Rates "little changed" in December - From the BLS: Regional and State Employment and Unemployment Summary - Regional and state unemployment rates were generally little changed in December. Twenty-two states recorded unemployment rate decreases, 16 states and the District of Columbia posted increases, and 12 states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-two states and the District of Columbia registered unemployment rate decreases from a year earlier, six states experienced increases, and two states had no change. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan, Ohio and Nevada have seen the largest declines - New Jersey is the laggard. The states are ranked by the highest current unemployment rate. Only two states still have double digit unemployment rates: Nevada and Rhode Island. In early 2010, 18 states and D.C. had double digit unemployment rates.
Wal-Mart to Hire Any Veteran Who Wants a Job - Wal-Mart, the nation’s largest retailer, will announce Tuesday a plan to hire every veteran who wants a job, provided that the veterans have left the military in the previous year and did not receive a dishonorable discharge. The announcement, to be made in a speech in New York by William S. Simon, the president and chief executive of Wal-Mart U.S., represents among the largest hiring commitments for veterans in history. Company officials said they believe the program, which will officially begin on Memorial Day — May 27 this year — will lead to the hiring of more than 100,000 people in the next five years, the length of the commitment. “Let’s be clear: Hiring a veteran can be one of the best decisions any of us can make,” Mr. Simon will say in his keynote speech to the National Retail Federation, according to prepared text. “These are leaders with discipline, training and a passion for service.” In a statement, the first lady, Michelle Obama, who has led a campaign by the White House to encourage businesses to hire veterans, called the Wal-Mart plan “historic,” adding that she planned to urge other corporations to follow suit.
Are Walmart's Jobs for Vets Any Good? —Walmart drew positive press and White House praise this morning for pledging to hire 100,000 veterans over the next five years. The plan, first reported by the The New York Times, was formally announced by Walmart US President Bill Simon in a keynote address at a National Retail Federation conference. It was panned by labor activists, dozens of whom marched through the Jacob Javits convention center lobby following Simon’s speech. “Sadly,” Simon told the NRF gathering, “too many of those who fought for us abroad now find themselves fighting for a job when they get home.” He called veterans “leaders with discipline” and “a purpose instilled in them by their military training. We need that in our business.” Simon urged the assembled retailers to followed Walmart’s example: “We could be the ones who step up for our heroes just as they stood for us.” Reached by phone, Tulsa Walmart worker Christopher Bentley Owen was less than impressed. “You’re still subject to all the crap that comes from working for Walmart,” Owen told The Nation. “Extremely low wages, poor benefits and everything else. If that’s the best that’s available for veterans, then there is something wrong.” Owen served in the US navy for two years. He joined the union-backed workers’ group OUR Walmart after being required to attend a meeting in which management read a statement urging workers not to go on strike.
Americans feel austerity’s bite as payroll taxes rise (Reuters) - Americans are beginning to feel the pinch from Washington's decision to embrace austerity measures aimed at bringing down the nation's budget deficit. Paychecks across the country have shrunk over the last week due to higher federal tax rates, and workers are already cutting back on spending, which will drag on the economy this year. In Warren, Rhode Island, Ben DeCastro got his first paycheck on Friday in which taxes on his wages rose by 2 percentage points. That works out to about $30 a week. "You sit back and do the calculation, and that's $30 I'm not going to spend at a restaurant," said DeCastro. He said he worries that people hit by higher taxes will spend less at the chain of furniture stores where he works as a marketing manager. Politicians in Washington made much hubbub last week about a bipartisan deal to soften or postpone some $600 billion in scheduled tax hikes and government spending cuts. President Barack Obama said the deal would shield 98 percent of Americans from a middle-class tax hike. Nevertheless, for most workers, rich and poor alike, taxes went up on December 31 as a temporary payroll tax cut expired. That cut - a 2 percentage point reduction in a levy that funds Social Security - was put in place two years ago to help the economy, which was still smarting from the 2007-09 recession.
Ouch! No, you’re not imagining it. Your paycheck just shrank.: Many Americans received their first paycheck of 2013 today. That sound you hear is the collective “What the . .. “ they have emitted upon looking at their pay stub. For all the self-congratulatory back-patting from the White House and Congress on the deal that averted the “fiscal cliff” of tax increases—the deal locked in the George W. Bush-era tax cuts for households making under $450,000—they tended not to mention what the deal did, or rather didn’t do, on the payroll tax. A 2 percentage point reduction in the Social Security tax, which hits all American workers, had been enacted at the end of 2010. In the fiscal cliff deal, Congress and President Obama neither extended it further nor agreed on any other policies that might have the similar effect of leaving more money in workers’ pockets.The numbers, for anybody who hasn’t checked their paycheck yet (or won’t get paid in 2013 until later in the month): For someone who makes the U.S. average for private sector workers of $818.69 a week and is paid every other week, that adds up to a reduction of $32.75 in each paycheck. For higher earners, anyone making over $113,700 annually, each bi-weekly paycheck will decline by $87.46.
America’s Productivity Climbs, but Wages Stagnate - FEDERAL income tax rates will rise for the wealthiest Americans, and certain tax loopholes might get closed this year. But these developments, and whatever else happens in Washington in the coming debt-ceiling debate, are unlikely to do much to alter one major factor contributing to income inequality: stagnant wages. For millions of workers, wages have flatlined. Take Caterpillar, long a symbol of American industry: while it reported record profits last year, it insisted on a six-year wage freeze for many of its blue-collar workers. Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide. “We went almost a century where the labor share was pretty stable and we shared prosperity,” says Lawrence Katz, a labor economist at Harvard. “What we’re seeing now is very disquieting.” For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes. The share of wages going to the top 1 percent climbed to 12.9 percent in 2010, from 7.3 percent in 1979.
America’s Productivity Climbs, but Wages Stagnate - Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide. “We went almost a century where the labor share was pretty stable and we shared prosperity,” says Lawrence Katz, a labor economist at Harvard. “What we’re seeing now is very disquieting.” For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes. The share of wages going to the top 1 percent climbed to 12.9 percent in 2010, from 7.3 percent in 1979. Some economists say it is wrong to look at just wages because other aspects of employee compensation, notably health costs, have risen. But overall employee compensation — including health and retirement benefits — has also slipped badly, falling to its lowest share of national income in more than 50 years while corporate profits have climbed to their highest share over that time.
The Crisis of the Middle Class and American Power - Last week I wrote about the crisis of unemployment in Europe. I received a great deal of feedback, with Europeans agreeing that this is the core problem and Americans arguing that the United States has the same problem, asserting that U.S. unemployment is twice as high as the government's official unemployment rate. My counterargument is that unemployment in the United States is not a problem in the same sense that it is in Europe because it does not pose a geopolitical threat. The United States does not face political disintegration from unemployment, whatever the number is. Europe might. At the same time, I would agree that the United States faces a potentially significant but longer-term geopolitical problem deriving from economic trends. The threat to the United States is the persistent decline in the middle class' standard of living, a problem that is reshaping the social order that has been in place since World War II and that, if it continues, poses a threat to American power.
Can’t Save? Here’s Why - THE odds are good that you haven’t yet given up on your New Year’s resolutions and that one of them is to swear off those expensive cappuccinos and save money for your old age. That’s a typical suggestion from finance gurus, who say we can add thousands of dollars annually to our nest eggs by eliminating such wasteful spending. But deciding to take your lunch to work or to cancel your cable television won’t help nearly as much as you’d think. For all the attention we pay to overspending, we struggle with our personal finances not because we spend too much money on small luxuries but because salaries have stagnated at the same time as the costs of nonluxuries have gone up. Even as the average household net worth plunged by almost 40 percent between 2007 and 2010, the cost of everything from health care to housing has risen for decades at rates well beyond that of inflation. Almost half of us are living paycheck to paycheck, barely able to save a penny. In fact, it’s long been known that the majority of bankruptcies result from health issues, job losses and fractured families, something no amount of cutting back can protect against. One of the main reasons we need to borrow money is college loans. Our collective student loan debt is more than $1 trillion, a sum greater than both our credit card debt and our auto loans.
Wage Inequality: Opening Salvo - Dylan Matthews gets the award for the first news item on the new paper on wage inequality (still in draft form) from my former boss Larry Mishel, et al. Mishel, et al (MSS) take issue with the job polarization explanation of wage inequality, put forward most prominently by M.I.T. professor David Autor. Autor's claim is that the pattern of inequality we have seen over the last three decades can be explained in large part by a loss of middle class jobs, with gains in employment for occupations at both the top and bottom end of the wage distribution. The MSS paper shows that the shifts in occupational shares don't fit the pattern for trends in inequality very well over the last three decades. They also show that most of the rise in inequality, especially in the last two decades, has been within occupations and not between them. I will just note a couple of points in Matthews write-up. He cites Autor as saying that much of the inequality within occupations could be attributable to technical change. This is of course true, but his occupational analysis has nothing to say on this issue. His analysis is designed to show that inequality is driven by changing demand for different occupations. Insofar as inequality is attributable to differences in the demand for workers within an occupation, his occupational shift theory can provide no insight. The other point is one of motives. Matthews quotes Autor:"Larry and people in that group hate technical change as an explanation of anything. My opinion about why they hate it that much is that it’s not amenable to policy, ...All these other things you can say, Congress can change this or that. You can’t say Congress could reshape the trajectory of technological change."
Visualizing the 2012 Distribution of Income in the U.S. by Age - While we've previously built a tool where you can find out your percentile ranking among all individuals, men, women, families and households in the U.S., we thought it might be fun to break the data for individuals down a little differently - by age group! Our chart below reveals what that distribution looked like for 2012, as indicated by the curves showing the major income percentiles from the 10th through the 90th percentile for each indicated age group on the horizontal axis. The data in the chart represents the income distribution for the estimated 194,271,175 Americans from Age 15 through Age 74. As such, the space between each of the percentile curves on the chart then covers the total money income of some 19.4 million individual Americans. What stands out most in the chart are the changes in the vertical spread between the 10th, 50th and 90th percentiles by age group, which might be taken as a measure of the relative income inequality for each age group. For example, we see the Age 15-24 group seems to have the greatest income equality, with the least amount of vertical separation between each of the income percentile thresholds.
Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles - Dylan Matthews has a nice post on the inequality & skill biased technical change debate between David Autor, who is one of my favorite labor economists, and some folks at EPI. I wanted to highlight this paper by David Card and John DiNardo that goes through some problems and puzzles for the skill biased technical change story. Here’s how they conclude: contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation for the evolution of the U.S. wage structure in the 1980s and 1990s. Indeed, we find puzzles and problems for the theory in nearly every dimension of the wage structure. This is not to say that we believe technology was fixed over the past 30 years or that recent technological changes have had no effect on the structure of wages. There were many technological innovations in the 1970s, 1980s, and 1990s, and it seems likely that these changes had some effect on relative wages. Rather, we argue that the SBTC hypothesis by itself is not particularly helpful in organizing or understanding the shifts in the structure of wages that have occurred in the U.S. labor market. Based on our reading of the evidence, we believe it is time to reevaluate the case that SBTC offers a satisfactory explanation for the rise in U.S. wage inequality in the last quarter of the twentieth century.
Paul Krugman is Wrong about the Rise of the Robots - Paul Krugman has recently taken a keen interest in the rise of robots and automation — an issue that I have been focusing on since the publication of my book on this subject back in 2009. In a recent post, Krugman says the following: Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots.I think there is a fundamental problem with this way of thinking: as jobs and incomes are relentlessly automated away, the bulk of consumers will lack the income necessary to drive the demand that is critical to economic growth. Every product and service produced by the economy ultimately gets purchased (consumed) by someone. In economic terms, “demand” means a desire or need for something – backed by the ability and willingness to pay for it. There are only two entities that create final demand for products and services: individual people and governments. (And we know that government can’t be the demand solution in the long run). Individual consumer spending is typically around 70% of GDP in the United States.
Redistribution in the age of robots - I have a new Atlantic column,, about how to prevent extreme inequality after most human tasks are replaced by automation. Excerpts: For most of modern history, inequality has been a manageable problem. The reason is that no matter how unequal things get, most people are born with something valuable: the ability to work, to learn, and to earn money. In economist-ese, people are born with an "endowment of human capital."... But in the past ten years, something has changed. Labor's share of income has steadily declined, falling by several percentage points since 2000. It now sits at around 60% or lower. The fall of labor income, and the rise of capital income, has contributed to America's growing inequality... The big question is: What do we do if and when our old mechanisms for coping with inequality break down?..A society with cheap robot labor would be an incredibly prosperous one, but we will need to find some way for the vast majority of human beings to share in that prosperity, or we risk the kinds of dystopian outcomes that now exist only in science fiction. How do we fairly distribute income and wealth in the age of the robots?...
Missing in action: Growth and shared prosperity - EPI - Two articles in the Sunday New York Times, appearing side-by-side, together told the fundamental truth that our current discussion of economic policy ignores: Generating greater economic growth and ensuring that middle-class wages grow with productivity are essential for restoring shared prosperity and achieving our budget goals. Steven Greenhouse’s piece, “Our Economic Pickle,” states: “Federal income tax rates will rise for the wealthiest Americans, and certain tax loopholes might get closed this year. But these developments, and whatever else happens in Washington in the coming debt-ceiling debate, are unlikely to do much to alter one major factor contributing to income inequality: stagnant wages.”The article notes, “Wages have fallen to a record low as a share of America’s gross domestic product” and quotes Harvard’s Larry Katz appropriately summarizing the situation: “What we’re seeing now is very disquieting.” Annie Lowrey’s accompanying piece, “The Low Politics of Low Growth,” is a perfect complement and rightly points out: “… growth has broadly disappeared from the fiscal discussion that continues to occupy Congress and the White House, a discussion that has focused obsessively on deficits and debts, spending and taxes and fairness. But growth will be one of the most crucial determinants
Can job polarization explain wage trends? - EPI - The recently posted introduction of Assessing the job polarization explanation of growing wage inequality, a paper I wrote with Heidi Shierholz and John Schmitt, has started to raise some interest in the topic so it’s worth surfacing some of the issues and evidence it contains. John has already written a blog post on the fact that job polarization (the expansion of low and high-wage occupations and the shrinkage of middle-wage occupations) did not occur in the 2000s and that recent occupational employment shifts are clearly not driving recent wage trends. Our paper raises two sets of empirical issues. First, we point out that the evidence that job polarization caused wage polarization (growing inequality in the top half of the wage distribution but stable or shrinking inequality in the bottom half) in the 1990s is entirely circumstantial, relying on the two trends (employment and wage polarization) occurring at the same time without demonstration of any linkage. Second, the paper challenges whether occupational employment trends drive key wage patterns.
The Psychological Toll and Economic Fallout of High Unemployment - Payroll employment grew 153,000 a month. Payroll gains in 2010, 2011, and 2012 have now offset a little more than half the loss in payroll jobs we suffered in 2008 and 2009. The net improvement is less than these numbers suggest, because we need employment to increase about 90,000 every month in order to accommodate the growth of the working-age population. Two features of the recovery have inflicted harsh burdens on the nation’s unemployed. First, an exceptionally high proportion of unemployment has been long-term, that is, has lasted six months or longer. Second, since reaching a peak of 10% in October 2009, unemployment has fallen at a glacially slow pace. Unemployment and the burden it imposes are very unequally distributed across the population. Young workers, employees in cyclically sensitive industries like construction and manufacturing, and members of historically disadvantaged minorities are more likely to suffer layoffs than other workers. The labor income of most unemployed workers falls to zero, and only part of it is replaced by unemployment compensation and other social benefits. Workers who lose their jobs after short spells of employment or who become unemployed after leaving school or rejoining the labor force seldom qualify for any unemployment benefits at all.
The Inequality Staircase - I posted a piece yesterday about the factors behind the growth of wage inequality. Well, today we find the BLS releasing some relevant data on the issue. The figure below shows the annual growth rates of weekly earnings of full-time workers by various wage percentiles. Two things to note: the staircase function characteristic of inequality is clear—the higher your pay, the better (or less bad) you did. Second, the bottom half of full-time workers lost ground in real terms. Weekly earnings of 10th percentile workers fell by almost two percent, to about $350 per week. That’s $18,200 per year, assuming full-year work, a bit below the poverty threshold for a parent with two kids. Paychecks of workers at the middle of the pay scale were relatively unchanged last year, down half-a-percent in real terms. High-wage workers, those at the 90th percentile, did the best, up almost two percent, to $1,875 per week, or $97,500 per year. This is, of course, a continuation of a long-term trend. Back in 2000, the weekly earnings at the 90th %’ile were 4.5 times that at the 10th percentile. By last year, that ratio had grown to 5.2. The economy grew in 2012—GDP and productivity were up and more folks were working. Once again, however, much of that growth eluded many of those folks.
Number of working poor families grows as wealth gap widens -(Reuters) - The number of U.S. families struggling with poverty despite parents being employed continued to grow in 2011 as more people returned to work but mostly at lower-paying service jobs, an analysis released on Tuesday shows. More working parents have taken jobs as cashiers, maids, waiters and other low-wage jobs in fast growing sectors that offer fewer hours and benefits, according to The Working Poor Project, a privately funded effort aimed at improving economic security for low-income families. The result is 200,000 more such working families - the so-called "working poor" - emerged in 2011 than in 2010, according to the report, based on analysis of the most recent U.S. Census Bureau data. About 10.4 million such families - or 47.5 million Americans - now live near poverty, defined as earning less than 200 percent of the official poverty rate, which is $22,811 for a family of four. Overall, nearly one-third of working families now struggle, up from 31 percent in 2010 and 28 percent in 2007, when the recession began, according to the analysis. "Although many people are returning to work, they are often taking jobs with lower wages and less job security, compared with the middle-class jobs they held before the economic downturn," the report said. "This means that nearly a third of all working families ... may not have enough money to meet basic needs."
Presenting The Working Poor Of America - Much has been made of the slow but steady 'improvement' in the unemployment data we are treated to on a weekly and monthly basis from the hallowed eves of the BLS. Just as much has been written on the ugly under-belly of this apparent improvement with the work-force becoming dominated by older workers forced to stay in jobs for longer and an increasing downshift in the kind of jobs available and taken. To wit, Reuters cites a report from the The Working Poor Families Project that highlights the surprising levels of poverty so many Americans find themselves in. The number of low-income 'working' families has increased three straight years - and now stands at over 10.2million, with more than 46 million people living in low-income families. "Although many people are returning to work, they are often taking jobs with lower wages and less job security, compared with the middle-class jobs they held before the economic downturn," which means that nearly one in three working families in the United States is struggling to meet basic needs. Although they are often overlooked, the number of low-income working families has been increasing steadily, resulting in a shrinking middle class and challenging a fundamental assumption that in America, work pays - as we have pointed out before (at these levels, it simply doesn't thanks to the benefit availability)
America's 'Invisible' Poor - An Infographic - Are more and more people in the western world dropping off the radar and becoming the invisible poor or is the opposite happening? We are always interested in looking at the financial health of real people. We noted earlier that an astounding 46 million Americans are officially below the poverty line (That's $23,050/year for a family of four according to the official sources). That number really caught PaydayLoan.co.uk's eye and as such they decided to do a little more digging to help put some more facts and figures around it. The below is an excellent visualization of the results they came up with. Conservative MP Norman Tebbit when responding to a question on unemployment noted "I grew up in the 30's with an unemployed father. He didn't riot. He got on his bike and looked for work, and he kept looking 'til he found it." Are the American (and possibly other western populations) poor really in this mess because they are lazy (27% of Americans think so) or is it because they don't have the right work ethic (49% of Americans think this is all it would take!)?
Proposals to drug-test the unemployed gain momentum - GOP lawmakers in statehouses around the country are pushing legislation that would force the unemployed to pass a drug test in order to receive benefits. In February 2012 Congress gave states the go-ahead to introduce such legislation, despite criticism from worker advocacy groups and civil libertarians. When the federal law was passed, House Republicans initially wanted to let states have all 7.5 million people collecting unemployment compensation pee in a cup. A compromise was reached, which authorizes states to test applicants for benefits in two circumstances: if they were fired for using drugs, or if the only occupation they’re suited for is one the Department of Labor lists as commonly requiring drug testing. Which jobs the department might include in the provision is not yet determined (Democrats say a small number of professions, Republicans say most), but in the meantime GOP state legislators are pushing forward with drug-testing proposals. Texas Gov. Rick Perry has asked lawmakers to push through legislation requiring not only unemployment beneficiaries to be drug tested, but also individuals applying for food stamps — a particularly draconian move on the governor’s part, A state GOP senator in Arkansas filed legislation Tuesday that would require applicants for unemployment benefits to undergo a drug test, while the Wyoming statehouse is currently considering a similar bill.
US Incarceration Rates Are Out of Control -I admit the graph is a tiny bit misleading — it uses absolute numbers rather than percentages of population, which would be better. But even making that correction doesn’t change much: US population grew from 226.5 million in 1980 to 308.7 million in 2010, a 73% increase. Meanwhile, however, the number of persons incarcerated almost quadrupled. Our incarceration rate is by far the highest in the world. The United States has less than 5 percent of the world’s population. But it has almost a quarter of the world’s prisoners. However you draw it, we need to change the shape of this curve. Drug laws are probably the place to start. Three strikes rules would be next. Preventing the privatization of prisons — which creates a lobby for more incarceration — is another good move. Similarly, changing the electoral rule that counts prisoners as (usually non-voting due to felony disqualification) residents of the district in which they are incarcerated rather than their last regular address would also decrease the incentive for state and congressional representatives from those rotten boroughs to push for more rules that create more prisoners. Ian Welsh argues that plea bargaining should be eliminated also. Civil law trained ethicists tend to agree, however, that the plea bargaining system is immoral since it empowers the prosecutor at the expense of the neutral (the judge) thus producing outcomes we have less faith are just, and puts the defendant to a terrible choice in which he is threatened with punishment — more charges, no deal on sentence — for exercising his right to mount a defense. I’ve long thought there’s something to it but one has to admit that as things stand eliminating plea bargaining would drive the system to a halt unless we first cut down on the number of things we call crimes.
If we go over the fiscal cliff, will people spend or save? Childhood environments may hold the key: In the face of hard times, which strategy gives us the best shot at survival: saving for the future or spending resources on immediate gains? The answer may depend on the economic conditions we faced in childhood, according to new research published in Psychological Science, a journal of the Association for Psychological Science. Drawing on life history theory, Vladas Griskevicius of the University of Minnesota's Carlson School of Management and colleagues hypothesized that the strategy a person takes when times are tight may be determined, at least in part, by features of their childhood environment. The researchers hypothesized that people who grew up unpredictable, harsh conditions (e.g., poverty), would take a "fast" strategy, focusing on immediate gains and ignoring long-term consequences. People who grew up in more predictable, comfortable conditions, however, would take a "slow" strategy, delaying immediate gratification in an effort to increase future payoffs.
How Severe Was the Credit Cycle in the NewYork-NorthernNewJersey Region? - NY Fed - U.S. households accumulated record-high levels of debt in the 2000s, and then began a process of deleveraging following the Great Recession and financial crisis. In some parts of the country, the rise and fall in household indebtedness was quite a bit sharper than in others. In this post, we highlight some of our research examining the magnitude of the recent credit cycle, and focus on how significant it’s been in New York State and northern New Jersey. Compared with the nation as a whole, we find that the region experienced a relatively mild credit cycle, although pockets of elevated household financial stress exist. The chart below shows the national debt-to-income ratio, a measure of the magnitude of household indebtedness, which we define as aggregate debt divided by aggregate personal income. The ratio increased until late 2007, then held fairly steady at a value of around 1—debt essentially equal to annual personal income—until 2009, when it began to decline modestly (see the New York Fed’s latest quarterly Report on Household Debt and Credit for more details on household finances). However, in some places household indebtedness grew much more rapidly than average. Because the vast majority of debt that households owe is associated with their homes (such as mortgages and home equity lines of credit), it should come as no surprise that the rise in household debt largely reflected the degree to which local housing markets boomed. For example, in Las Vegas the debt-to-income ratio doubled from around 0.8 in 1999 to more than 1.6 in 2009.
Post-Sandy the Generator Is Machine of the Moment - NYTimes.com: Just steps from the Hudson River, the construction site was partially flooded. “Their mandate was to figure out how the building would have stayed open in a storm like this,” said Steven Witkoff, the developer. “They came back with a list of five things, and we implemented every single one.” The efforts delayed the project by some six weeks and added as much as $3 million to its cost. It was one of a number of projects that convened their engineers and construction teams to reconsider their plans after the rising waters rushed over the city’s embankments and into the basements of countless residential buildings across Lower Manhattan. Now, more than two months after the storm caused millions of dollars in damage, novel and costly waterproofing techniques are being employed, including the addition of backup generators and floodgates, and the relocation of mechanical equipment. The owners of buildings that predate the flooding are also looking at these measures, although retroactive installation is so complex and costly that some may decide not to do anything.
After Disastrous Delay, House Will Vote On Funds For Sandy Recovery And Resiliency, But Not Sea-Level-Rise Planning - This afternoon the House of Representatives plans to debate and vote on a multibillion-dollar disaster aid package for Hurricane Sandy victims more than two months after the super storm devastated New Jersey and New York. To placate conservative Republicans who don’t want to vote for the entire relief package, the aid provision is divided into two parts. Appropriations Chairman Hal Rogers (R-KY) will offer a bare-bones bill that allocates $17 billion in funding mostly to meet immediate needs, including aid for individuals, community disaster relief and emergency transportation funding for affected areas in the two states.Rep. Rodney Frelinghuysen (R-NJ) will offer an amendment to add $33.6 billion to the Rogers bill. His supplemental package includes money for both immediate disaster relief and future community resilience projects. The latter programs are an essential investment to prevent or reduce damages from future climate-related extreme weather events.
House Passes $50 Billion in Sandy Aid Over GOP Opposition - Rep. Rodney Frelinghuysen’s (R-NJ) amendment to complete the Hurricane Sandy recovery and resiliency package just passed the House by a 228-192 vote. It adds $33.7 billion to the underlying $17 billion aid bill sponsored by Rep. Hal Rogers (R-KY). The final package passed by a vote of 241-180. Only 49 Republicans, mostly from the Northeast, voted for final passage. These measures, along with prior flood insurance funding, would provide close to $60.4 billion in aid. This critical victory comes attached with some unfortunate strings, including Republican-backed legislation that will cut hundreds of millions of dollars in coastal rebuilding. In addition, a measure was passed to prohibit the Agriculture and Interior departments from acquiring federal land using supplemental Sandy funding, inhibiting coastal restoration efforts. Luckily, other destructive amendments failed including an attempt to cut $13 million in funding for National Weather Service and an attempt to offset $17 billion of Sandy aid with discretionary spending cuts.
Nebraska governor is latest to propose ending state income tax (Reuters) - Nebraska Governor Dave Heineman on Tuesday became the second Republican governor in the last week to propose ending his state's income tax, saying he wants to make Nebraska more competitive with its neighbors by eliminating the tax on both individuals and corporations. Heineman said that if a complete elimination of the two taxes could not be passed, he would push to lower rates on both individuals and corporations. He promised to make up the lost revenue by reducing business exemptions to the sales tax. Last week, Louisiana Governor Bobby Jindal said he wanted to eliminate all personal and corporate income taxes in his state. Louisiana's personal income tax rate is 3.9 percent. Nebraska's personal income tax rate is 6.84 percent, higher than every one of its neighbors -- Iowa, Kansas, Missouri, Colorado and Wyoming -- according to a table accompanying Heineman's remarks. Heineman's fellow Republicans control Nebraska's single-house legislature.
California teams up with Amtrak on high-speed rail - “High-speed rail is well on its way, and it is not turning back,” Transportation Secretary Ray LaHood told a train-happy crowd at this week’s Transportation Research Board Annual Meeting. LaHood is right, and not just because of hefty federal funding earmarked for building infrastructure and boosting speeds. Today, Amtrak announced it is teaming up with the California High-Speed Rail Authority to find trains that would run at up to 220 mph along both the West Coast and East Coast corridors. By combining their buying power, they could both save serious resources as they look to purchase about 60 trains over the next 10 years — and the partnership could make California’s high-speed rail look a little less pie-in-the-sky. From the Associated Press: The high-speed rail efforts in California have come under increased scrutiny by members of Congress who say it has become too expensive to build and operate. The more ties it has with Amtrak, the better its future prospects might be, but officials said the announcement was not designed to bolster high-speed rail in California. “It doesn’t make any sense whatsoever to go out and have a different set of standards for California or any other high-speed train,” said Amtrak President and CEO Joe Boardman. “So, no, it’s about doing the right thing for the United States.”
States Gave Gunmakers $49 Million In Tax Breaks Over The Last Five Years - President Obama today rolled out a list of executive orders and suggested Congressional legislation to reduce gun violence, the first major response to the school shooting in Newtown, Connecticut. It includes banning assault weapons and certain types of ammunition, along with better background checks, as well as some measures to address mental health. Meanwhile, at the state level, lawmakers are taking a look at some of the tax breaks they dole out to gun manufacturers. As Bloomberg News noted, states have handed out $49 million over the last five years in tax breaks to companies that make guns: Governments in nine states have awarded at least $49 million in subsidies in the past five years to gun and ammunition makers whose products are under scrutiny after last month’s school shooting in Connecticut. Almost 85 percent of those tax breaks or grants have gone to two companies: Olin Corp. (OLN), the Clayton, Missouri-based maker of Winchester-brand bullets and shotgun shells, and a unit of Freedom Group Inc., the Madison, North Carolina-based company that produces the rifle used in the Dec. 14 killing of 20 children and six adults at Sandy Hook Elementary School in Newtown.
Obama administration plan to fund police, surveillance equipment in schools - The Obama administration is considering funding many more police officers in public schools to secure campuses, a leading Democratic senator said, part of a broad gun violence agenda that is likely to include a ban on high-capacity ammunition clips and universal background checks. The school safety [sic] initiative, one of several under consideration, would make federal dollars available to schools that want to hire police officers and install surveillance equipment, although it is not nearly as far-ranging as the National Rifle Association's proposal for armed guards in every U.S. school.
Poor ranking on international test misleading about US student performance, researcher finds - Socioeconomic inequality among U.S. students skews international comparisons of test scores, finds a new report released today by the Stanford Graduate School of Education and the Economic Policy Institute. When differences in countries' social class compositions are adequately taken into account, the performance of U.S. students in relation to students in other countries improves markedly. The report, "What do international tests really show about U.S. student performance?", also details how errors in selecting sample populations of test-takers and arbitrary choices regarding test content contribute to results that appear to show U.S. students lagging. In conducting the research, report co-authors examined adolescent reading and mathematics results from four test series over the last decade, sorting scores by social class for the Program on International Student Assessment (PISA), Trends in International Mathematics and Science Study (TIMSS), and two forms of the domestic National Assessment of Educational Progress (NAEP). Based on their analysis, the co-authors found that average U.S. scores in reading and math on the PISA are low partly because a disproportionately greater share of U.S. students comes from disadvantaged social class groups, whose performance is relatively low in every country.
International tests show achievement gaps in all countries, with big gains for U.S. disadvantaged students - In a new EPI report, What do international tests really show about U.S. student performance?, we disaggregate international student test scores by social class and show that the commonplace condemnation of U.S. student performance on such tests is misleading, exaggerated, and in many cases, based on misinterpretation of the facts. Ours is the first study of which we are aware to compare the performance of socioeconomically similar students across nations.Some critics, disturbed by the unsophisticated way in which policymakers and pundits use international tests to condemn American student performance, have commented that American students in relatively affluent states, like Massachusetts or Minnesota, or students in schools where few students are from low-income families, perform as well or better than average students in the highest scoring countries. But while such comparisons are well-intended, they can’t tell us much because a proper comparison would be between affluent states in the U.S., and affluent provinces or prefectures in other countries, or between schools with little poverty in the U.S. and schools with little poverty in other countries. Critics have not previously had data by which such comparisons can properly be made.
High School Graduation Rate Moves Up - America’s high school graduation rate, which stagnated for the last three decades of the 20th century, is now climbing, according to a new, comprehensive look at the key education gauge by Harvard University economist Richard Murnane. Even with the recent rise in the graduation rate, about one in five American men between 20 and 24 doesn’t have a conventional high school diploma, a significant barrier to getting a decent-paying job or going on to college. About one in seven women lack a diploma. President Barack Obama has described what he calls “the dropout crisis” as “a problem we can’t afford to accept or ignore.” Mr. Murnane says he and other academics can’t fully explain the fall and rise of high school graduation rates. The economic reward for getting a diploma — higher wages — is substantial and grew during the years when dropout rates were rising, confounding economists who would have expected that to encourage people to finish high school. The recent improvement, he speculates, may be the welcome byproduct of a upturn in math and reading skills, as measured by test scores, among minorities in the years before the students reach ninth grade. Alternatively, Ms. Goldin suggests, the lousy economy of the late 2000’s may have led students to stay in school because jobs were so scarce.
Don’t pay for all of your kids’ college education …a new study…found that the more money (in total and as a share of total college costs) that parents provide for higher education, the lower the grades their children earn. The findings — particularly grouped with other work by the researcher who made them — suggest that the students least likely to excel are those who receive essentially blank checks for college expenses. The Inside Higher Ed piece is here. The NYT piece is here. Here is a summary of the research from the researcher, Laura Hamilton. Here is the paper itself, forthcoming in the American Sociological Review, available to subscribers and university systems only I suspect.I should note that this piece includes all of the appropriate controls, but still we do not know how good those controls are and perhaps parental paying practices are proxying for other features of the situation.
Florida colleges rank high in ‘sugar daddies’ paying student tuition - Imagine you’re a college student, struggling to pay steep tuition and living expenses. Mid-bite of boxed macaroni and cheese, you stumble upon the option of joining a free, “mutually beneficial” online service that promises to pair you with a wealthy man or woman who will chip in for school costs. Would you do it? Apparently, an increasing number of Florida college students are taking up the offer. Four Florida universities — Florida International University in Miami-Dade, the University of Central Florida in Orlando, the University of South Florida in Tampa, and Florida State University in Tallahassee — made the Top 20 list of fastest-growing “sugar baby” memberships for SeekingArrangement.com, a website with more than two million users worldwide. The site matches “sugar babies” — who may or may not be in college — with well-to-do “sugar daddies” who are willing to help support them.
Will Online Education Reduce the Income Gap? - The potential for massive, open, online courses (“MOOCS”) to widen and improve educational opportunities has been widely noted, and many see broadening educational opportunities as a remedy for rising inequality. Some observers even predict that low-cost, quality online education will mean the end of traditional brick and mortar institutions. But traditional colleges are not going away, and the potential of online education to reduce inequality is overrated. . Before the printing press was invented, books were extraordinarily expensive and only a select few could afford to own copies of the great works. Then came the Gutenberg press, and there were worries that the widespread availability of books would lead to the demise of universities. But there was still a need for someone – professors – to explain what the books meant. A student could struggle with a particular book and perhaps understand its true message with enough work, but it was much more efficient to have a professor short-circuit this process by telling students what to look for in the texts, to highlight the important points, to bring in extra materials, problem sets, and so on to facilitate learning. Today, most students hardly read the originals at all, they rely instead upon the interpretation of experts at universities. Online education will follow a similar path. It may reduce the number of traditional colleges, especially state supported brick and mortar schools. With so many budget pressures, why pay the huge amount it costs to support state colleges when a much cheaper alternative is available? But it won’t eliminate traditional colleges, especially private ones. If anything, those that remain will become more, not less valuable.
Pension drain to hit governments, schools in preliminary state budget — Education programs face a $400 million cut in next year’s state budget because of increased pension costs, according to preliminary figures released by Gov. Pat Quinn’s office. The new report also shows an expected $265 million reduction under the heading of “government services,” which includes budgets for the General Assembly, courts, statewide officials and agencies under Quinn. “It would be a bit premature to say if there’s going to be any reduction in workforce. Who knows what tomorrow may bring?” said Quinn assistant budget director Abdon Pallasch. “There are no plans, there’s no notices going out. It’s just here’s how bad things are looking. If we pass pension reform tomorrow, that helps start us back on the right path.”
Alaska's 'unfunded liability' sits at $11 billion and growing - Like many states, Alaska is on the hook for billions in future retirement obligations, what's known as the “unfunded liability” for school, state and municipal retiree pensions and health care. For Alaska, that amounts to $11 billion -- more than the entire state government costs to run for a year. But Alaska does have something that no other state has: piles of cash. The state's Constitutional Budget Reserve, coincidentally, currently holds $11 billion.The reserve is something like the state's emergency savings account, and it doesn't include the $44 billion in the Alaska Permanent Fund nor billions more in readily available pots of money that are more akin to checking accounts. Alaska is required each year to pay a portion of that unfunded liability. That's not a problem now, but threatens to become a big problem down the road. Alaska leaders have looked at options such as direct payments to the trust funds, issuing bonds to augment the retirement trust funds or other options to lessen the impact of the unfunded liability on future Alaskans.
R.I.P. Retirement: 28% Of Americans Are Raiding Their 401k Plans - This trend has been in place since the financial crisis, but the fact that it is accelerating is extremely disconcerting. First off, this is not the kind of behavior that should be witnessed in an “economic recovery.” Second, we need to remember the huge percentage of Americans on food stamps and/or disability. As we have discussed previously, many of them also have jobs. So essentially, a wage and a check from the government is still not enough to survive. They still need to tap into a loan from their 401k plans.
401(k) breaches undermining retirement security for millions - The Washington Post: A large and growing share of American workers are tapping their retirement savings accounts for non-retirement needs, raising broad questions about the effectiveness of one of the most important savings vehicles for old age. More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans. With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees.
401(k) breaches undermining retirement security for millions - A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans. Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008. In 2010, 28 percent of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy. And nearly 7 percent of employees took hardship withdrawals that year — roughly a 40 percent increase since the recession, while 42 percent of workers cashed out their plans rather than rolling them over when they changed jobs.
Americans Are Making a Grave Mistake With 401(k) Plans - Only one in five employees in private industry today has a defined benefit pension plan that will pay a fixed amount in retirement. The rest of the private workforce is left to the volatile markets of the 401(k) plan and other savings to supplement their Social Security benefits. Adding to the dilemma, less than half of private industry workers are participating in any form of employer-sponsored plan at any moment in time. This is shaping up as a disaster for the next generation of retirees. A study conducted by the Center for Retirement Research at Boston College using data from the Federal Reserve’s 2010 Survey of Consumer Finances found that the typical household approaching retirement is ill prepared financially. (The Survey of Consumer Finances is conducted every three years and will be updated again this year.)The study found that 401(k)s have been battered by the financial markets. As a result, median 401(k)/IRA balances for households approaching retirement remain at $120,000, roughly the same as in 2007. (IRAs are included because these are mostly rollovers from 401(k) plans, according to the study.) For those not immediately approaching retirement, account balances declined. According to the study, “households 45-54 actually had lower balances in 2010 than in 2007 — $70,000 versus $75,000, and younger households held only $35,000 in 2010 compared to $44,000 in 2007. Those figures are not adjusted for inflation. “With prices rising more than 5 percent between the 2007 and 2010 Survey of Consumer Finances, balances have fared even worse in real terms,” notes the study.
More on Retirement (In)Security - Important piece by Mike Fletcher in this AMs WaPo that strongly amplifies points I stressed here the other day. The Post reports that more workers, financially stressed by cash flows that fall short of their family budgets, are turning to early withdrawals from their 401(k)’s:More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans. With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees.OK, federal deficits are not “soaring”—they’re eminently manageable—and while it’s legitimate for the large social insurance to be in the mix in budget negotiations, the point I’ve been stressing and that this article underscores is that any version of entitlement “reform” must protect the economic security of vulnerable retirees.
New Social Security Retirees Will Outlive Trust Fund - For the first time since Social Security's cash crisis in 1983, the program can't afford to pay full benefits for its youngest crop of new retirees through life expectancy, government data show. The hastening of the Social Security Trust Fund's demise to 2033 means that workers just becoming eligible for Social Security at age 62 face steep future benefit cuts if they live to the average life expectancy, now about 84. Those abrupt benefit cuts of about 25% a year for today's 62 year olds and workers nearing the early retirement age would come at an especially bad time — late in life when savings have dwindled and health care bills are on the rise. While the trust fund's nonmarketable Treasuries — really IOUs from one branch of government to another — have no value to offset the cost of benefits, they provide Social Security the legal authority to run cash deficits until they're spent. Under current law, a worker who just turned 62 would face a 25% benefit cut once the trust is spent in early 2033.
Misguided Social Security ‘Reform’ - At the end of last year, just shy of the 11th hour in the fiscal cliff negotiations, President Obama made an offer that included a Republican-backed idea to cut spending by lowering the cost-of-living adjustment for Social Security benefits. The move shocked Congressional Democrats and dismayed Mr. Obama’s liberal base.The offer, however, was rejected by House Republicans who could not stomach the tax increases and other concessions that Mr. Obama demanded as part of the deal. The talks moved on, and when all was said and done, Republicans did not get the lower cost-of-living adjustments (known as COLAs) and Mr. Obama did not get the concessions he had sought. But that is not the end of the story. As the next round of deficit reduction talks gets under way, the administration seems determined to include the COLA cut in any new package of spending reductions. Rather than using the issue as a bargaining ploy, the administration appears to have embraced it as a worthy end in itself. Is it? In a word, no. That is not to say that Social Security should be off the table. There are reforms that are eminently sensible, if only the political will could be found to enact them. But reducing the COLA is not a sound idea now and may never be.
US already has high elder poverty rate; how can cutting Social Security even be on the table? In the recent debate over the so-called "fiscal cliff," President Obama was reportedly at one point offering to raise the eligibility age for Medicare from 65 to 67 and Social Security. However, in view of the coming retirement crisis due to the decline in defined benefit plans guaranteeing a specific retirement income, this is a terrible idea. Given that proposals to cut Social Security and Medicare will be repeatedly floated in the coming debt ceiling and related budget fights, we need to understand just how bad an idea this is. First, let's look at what Social Security and Medicare have done to elderly poverty in the U.S. over time, using the standard poverty line as our measure. Daniel R. Meyer and Geoffrey L. Wallace of the University of Wisconsin have published data on official poverty rates for those over 65: Official poverty rate for the elderly by year
1968, of course, is just three years after the enactment of Medicare and Medicaid. We can see that elder poverty was halved between 1968 and 1994, and dropped at a slower pace through 2006. In the bad old days, one in four of the elderly lived in poverty: why would we want to go back to that when we are a much richer society today than we were in 1968?
Why Social Security Can’t go Bankrupt: Rerun - Reader mmcosker sends this e-mail pointing to Why Social Security Can’t go Bankrupt: Rerun at Forbe's Magazine: It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.” This belief is the result of a common error: conceptualizing Social Security from the micro (individual) rather than the macro (economy-wide) perspective. It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be–there is no other possible way for it to work.
Dean Baker: The 3 Percent Cut to Social Security: aka the Chained CPI: While the politics of cutting Social Security are bad, it also doesn't make much sense as policy. In Washington, the gang who couldn't see an $8 trillion housing bubble until its collapse sank the economy, has now decided that deficit reduction has to be the preeminent goal. They don't care that we are still down more than 9 million jobs from our growth trend; deficit reduction must take priority. These whiz kids apparently also don't care that the cuts that have already been made are slowing growth and costing us jobs. If we actually did have to reduce the deficit it's hard to see why Social Security would be at the top of the list. After all, the vast majority of seniors are not doing especially well right now. Our defined benefit pension system is disappearing and 401(k)s have not come close to filling the gap. Retirees and near retirees have lost a large portion of whatever wealth they had managed to accumulate when the collapse of the housing bubble destroyed much of their home equity. From a policy standpoint it would make far more sense to tax Wall Street speculation. Congress' Joint Tax Committee estimated that a 0.03 percent tax on each trade could raise almost $40 billion a year. Such a tax would also make the financial sector more efficient by eliminating a huge volume of wasteful trading.
The Social Security System Is Already Broke - As 1.4 million people have been kicked off the 99 week unemployment rolls, the number of people applying for SSDI skyrocketed. Just because the scumbags on Wall Street and in the rest of corporate America commit fraud on a massive scale does not mean we should look the other way when lowlifes in our community do the same thing on a smaller scale. The working middle class pays the bill for the cost of both frauds. More than 90% of all the people who go onto SSDI never go back to work. This program was supposed to be short term until people could recover and go back to work. There are now 8.83 million people so disabled, they supposedly can’t work. There are only 12 million officially unemployed people in the country. The government is so incompetent, they barely check the applications for SSDI. Anyone with an ounce of brain power (this disqualifies anyone on MSNBC) knows that at least 50% of the people on SSDI are capable of some form of employment.
AARP comes out against COLA cut - AARP unveiled new research from its Middle Class Security Project yesterday, with related papers focusing on topics ranging from rising health care costs to credit card debt. At the release, AARP CEO Barry Rand gave a rousing speech, coming out strongly against a proposed cut in the Social Security cost-of-living adjustment (COLA), echoing a similar stance by the New York Times this Sunday. Rand focused on the need for both solvency and adequacy, emphasizing that Americans don’t want Social Security reform to be part of deficit reduction talks and were willing to contribute more to strengthen the program. Policy director Debra Whitman, an economist and Social Security advocate Rand hired to replace the too-quick-to-compromise John Rother, said most Americans were surprised at how low Social Security benefits were—less than $14,000 per year on average. In the report, Whitman and her co-authors highlight the fact that benefits would be cut further for future retirees with a scheduled increase in the normal retirement age to 67, equivalent to an across-the-board benefit cut. As a result of this and other negative trends, the report estimates that three out of 10 middle-income workers will become low-income retirees.
Business Roundtable Wants to Increase Medicare and Social Security Age to 70 - In roughly a month Washington’s focus will again turn to attempts to get a “grand bargain” on deficit reduction when the sequestration cuts are set to go into effect, so the Business Roundtable is already laying down their goals. Their proposal for Social Security and Medicare reform including adopting the chained-CPI and increasing the eligibility age for both programs to 70. There are trying to push the envelope on the issue of Medicare age beyond what has even been discussed so far. From the Business Roundtable:Increase Retirement Age: The Social Security retirement age should be raised from age 67 to age 70. The unique needs of individuals in in physically demanding occupations should be accommodated and the Social Security Disability Insurance Program should be modernized. [...]Protect Medicare for Those Approaching Retirement: Medicare’s age of eligibility should be moved to age 70. However, this will not affect those age 55 or older today.Raising the Medicare age is an unique terrible policy idea. It doesn’t save the federal government much money and by forcing older people into the less cost effective private insurance, it increases overall health care spending. It increases spending for almost everyone including seniors, everyone buying individual insurance, and state Medicaid programs
CEOs want to raise the retirement age to 70 - A lot of CEOs have gotten on the deficit-reduction bandwagon, but they’ve often been loath to push for specific proposals, endorsing instead an overall “framework” for fiscal consolidation that’s big and bipartisan. That’s now starting to change: A group of the country’s leading CEOs from the Business Roundtable has put out an entitlement reform plan that proposes to raise the eligibility age for both Social Security and Medicare to 70. Leading Republicans have long rallied to raise the eligibility age for Social Security to 70, but the Business Roundtable’s recommendations for Medicare go significantly further than the GOP consensus: During the fiscal cliff negotiations, for instance, Boehner proposed raising the Medicare eligibility age from 65 to 67 years, while the CEOs want to push it three years higher.The group wants a slew of other changes as well: higher premiums for wealthy beneficiaries, chained CPI and more private competition for Medicare and private retirement programs.
Call to raise age for US’s Medicare - FT.com: Chief executives of America’s largest companies are pressing Congress and the Obama administration to increase the eligibility age for Medicare and Social Security, the popular health and pension schemes for seniors, to 70, as part of a package of spending reforms. The Business Roundtable, a lobbying group representing the US’s blue-chip corporations, presented the proposals on Wednesday, as Washington grapples with a new fiscal crisis over the need to raise the country’s borrowing authority by the end of next month. The plan by Gary Loveman, chief executive of Caesars Entertainment, and Randall Stephenson, chief executive of AT&T, who led the effort on behalf of the BRT, is in some areas more aggressive than previous measures floated in Washington. It highlights the deep concern in corporate America about the finances of the so-called “entitlement” programmes as the country ages and baby-boomers retire. “The view of my fellow CEOs was that if we’re going to fight this battle, recognising that these battles are very difficult to fight, better to fight them for a meaningful change that is consistent with demographic reality rather than for a modest increase and then have to fight it again,” Mr Loveman said at a briefing with reporters in Washington. As well as proposing rises in the eligibility age for Medicare from 65 and for Social Security from 67, the BRT is embracing a contentious plan championed by Paul Ryan, the Republican chairman of the budget committee and former vice-presidential nominee, to turn Medicare into a “premium support” system.
Comparing the Quality of Care in Medicare Options - My previous three posts on Medicare elicited strong reactions on the quality of health care delivered under traditional Medicare and under Medicare Advantage plans that operate under Part C of Medicare. Two rival theories can be discerned in the commentary.. Theory I holds that the profit motive will induce Medicare Advantage plans to short-change patients by skimping on the quality of their care. Theory II holds that Medicare Advantage plans have powerful incentives to improve the quality of the care they procure for patients, because the plans are subjected to far more systematic quality monitoring than is traditional Medicare. Poor quality ratings hurt them financially, because these ratings are made known to patients who are free to switch plans or return to traditional Medicare. These theories appear to be based mainly on personal experiences — that is, on anecdotal evidence. The question is what systematic, more robust empirical evidence might shed light on these two theories.A good place to start is the evidence gathered by the Medicare Payment Advisory Commission, known as Medpac, established by Congress in 1997 to advise it on matters related to Medicare. It is a body of experts and stakeholders, supported by an excellent research staff.
Congress Kills Part of the Affordable Care Act - If the ACA is a bundle of experiments in how to lower health care costs and make it more affordable for everyone, then this deal gives Republican a mark in their "kill" column for the ACA and consumers. On the very last page of the part of the fiscal cliff bill dealing with various Medicare extenders, the doc fix and other health care considerations, there is a provision which de-funds appropriations allowed in the Affordable Care Act for Community Operated and Owned Plans, or "co-ops". The appropriations were for loans to be made to new, non-profit plans established by people who were not already health insurance providers, with a goal to increasing competition in the insurance marketplace. Sarah Kliff at the Washington Post reports: When Congress struck a deal to avert the fiscal cliff, it also dealt a quiet blow to President Obama’s health overhaul: The new law killed a multibillion-dollar program meant to boost health insurance competition by funding nonprofit health plans. The decision to end funding for the Consumer Operated and Oriented Plans has left as many as 40 start-ups vying for federal dollars in limbo. Some are considering legal action against the Obama administration, after many spent upwards of $100,000 preparing their applications.
Health Care Thoughts: Electronic Medical Record Meltdown - In the past I have predicted the EMR focus of the Obama administration might not work as well as intended. Sadly, and many billions of dollars later, I may be correct. And next year we make the ICD-10 conversation, sort of throwing gasoline on a raging fire. There are a multitude of problems:
- Too many vendor systems, making EMR to EHR linkages difficult
- Crazy long and complex federal regulations
- The input devices irritate physicians and disrupt the flow of the office practice
- Medicare thinks EMRs are inflating billings, due to text cloning and auto-coding
- The hospital and nursing home systems are distractions to nursing
- Going totally paperless is largely a myth so far
- HIPAA security issues abound
Health Care Rationing Is Nothing New - Opponents of the 2010 Patient Protection and Affordable Care Act warn that the new health care law will lead to rationing, or limits on medical services. But many observers point out that health care is already rationed in the United States. "We've done it for years," "In this country, we mainly ration on the ability to pay." ... Rationing in the United States is practiced by government agencies, private health insurance companies, hospitals, and providers, in ways both official and unofficial, intended and unintended, visible and invisible. The American way of rationing is a complex, fragmented, and often contradictory blend of policies and practices, unique to the United States. ... Health care has been rationed by race, in the case of the Jim Crow health system and other types of racial discrimination; by region, in the case of the uneven distribution of health facilities and personnel throughout the country; by employment and occupation, in the case of the job-based health insurance system; by address, in the case of residency requirements for various kinds of health care; by type of insurance coverage, in the case of health insurance that limits benefits and choice of doctor and hospital; by parental status, in the case of Medicaid (childless individuals are often excluded); by age, in the case of Medicare and the State Children's Health Insurance Programs—and the list goes on. These types of health care organization ... have rarely been called rationing. ...
Premiums to Soar; Aetna CEO Says Some Rates Will Double - Consumers are about to find out that the Affordable Care Act, widely known as Obamacare is not exactly affordable. The Wall Street Journal says Health-Insurance Sticker Shock is just around the corner. Health-insurance premiums have been rising—and consumers will experience another series of price shocks later this year when some see their premiums skyrocket thanks to the Affordable Care Act, aka ObamaCare. The reason: The congressional Democrats who crafted the legislation ignored virtually every actuarial principle governing rational insurance pricing. Premiums will soon reflect that disregard—indeed, premiums are already reflecting it. Central to ObamaCare are requirements that health insurers (1) accept everyone who applies (guaranteed issue), (2) cannot charge more based on serious medical conditions (modified community rating), and (3) include numerous coverage mandates that force insurance to pay for many often uncovered medical conditions.Guaranteed issue incentivizes people to forgo buying a policy until they get sick and need coverage (and then drop the policy after they get well). While ObamaCare imposes a financial penalty—or is it a tax?—to discourage people from gaming the system, it is too low to be a real disincentive. The result will be insurance pools that are smaller and sicker, and therefore more expensive.
Tax Exclusions for Health Insurance - The magnitude and distributional effects of the tax exclusion for health insurance look quite different when viewed from the perspective of the entire safety net. Expenditures on health services, especially those made through employer-sponsored health-insurance plans, are largely excluded from a host of taxes. The tax exclusions affect both the size of the health-services sector and society’s distribution of disposable income. By excluding health services from tax, governments in effect redirect money toward health care and away from other activities that might be subsidized or prevent government from reducing overall tax rates, or both. The tax exclusions therefore have a lot in common with direct government spending on health, and for this reason are often described as “tax expenditures.” A typical approach to estimating the size of the health subsidy implicit in the tax exclusions is to estimate the amount of federal personal income tax revenue that is lost because of the income that escapes tax. It’s important to know the amount of the implicit subsidy, because it is directly related to the amount by which the health sector is enlarged by public policy.
Healthcare and the profit motive—do they work well together? - It was refreshing to see Eduardo Porter, in his Economic Scene column last week in The New York Times, call for widening the debate on the social safety net, particularly healthcare. Porter moved away from what has become a dreary discussion about how much to slice away from Medicare and Social Security, and posed a different question: How can the country best serve social needs, which include healthcare, at the lowest possible cost? He answers it by discussing whether the profit motive—which increasingly permeates US healthcare—is the best approach in that realm: 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? Porter built his column around some of those conflicts, beginning with an anecdote about pharmacy researchers at the University of Wisconsin-Madison who discovered 30 years ago that patients in for-profit nursing homes received, on average, more than four times the dosage for sedatives than patients at nonprofits received. As any reporter who has covered nursing homes knows, it’s easier and cheaper to use “chemical restraints” on residents than hire expensive staff to interact with them. Yet it is the for-profit companies that have come to dominate the industry.
The troubling state of America’s health - America is dangerous to your health. A recent international commission reported that U.S. men rank last in life expectancy for the 17 industrial nations in the study; U.S. women rank next to last. When it comes to health, the United States is exceptional — exceptionally bad. The stunning report on “America’s health disadvantage” received virtually no attention in Washington and far too little in the media. Washington is fixated on “fixing the debt.” Americans are dying sooner than citizens in other industrial nations. We rank at or near the bottom in nearly every category — deaths from heart and lung disease, diabetes, infant mortality, violence, alcohol and drug abuse, car crashes. Yet Washington focuses on bookkeeping. This deficit obsession not only saps attention from our shameful health failures, but also contributes directly to them. Our sorry life expectancy is a classic example. “Something fundamental is going wrong,” said the panel’s leader, Dr. Steven Woolf, chairman of Virginia Commonwealth University’s Center on Human Needs. “This is not the product of a particular administration or political party. Something at the core is causing the U.S. to slip behind these other high-income countries. And it’s getting worse.”
Gov. Cuomo Declares Public Health Emergency Over Flu Epidemic - Just in case you haven't already entrenched yourself inside your panic room over this flu epidemic (or since you definitely don't have room for a panic room, perhaps you are at least huddled under a desk?), Gov. Andrew Cuomo declared a Public Health Emergency today for all of NY State in response to the increasingly severe flu season. This comes as confirmed cases of influenza increased 55% last week alone, and at least two children in NY state—and 18 across the country—have died as a result.“We are experiencing the worst flu season since at least 2009, and influenza activity in New York State is widespread, with cases reported in all 57 counties and all five boroughs of New York City,” Governor Cuomo said in a release. He noted that there have been 19,128 cases of influenza reported in NY this season; last season, there were only 4.404 reports altogether. As of January 5th, the DOH has received reports of 2,884 patients hospitalized with laboratory-confirmed influenza, compared to 1,169 total hospitalizations in 2011 Cuomo's Executive Order allows pharmacists to administer flu vaccinations to patients between six months and 18 years of age; previously, pharmacists only were authorized to administer the vaccine to people who are 18 or older.
The Flu, Explained - This year's flu season is no joke: On Friday, the Centers for Disease Control and Prevention announced that it had reached epidemic status. Although experts believe that the season may have peaked in most places, flu incidence is still thought to be very high. The media blitz about the flu seems to be an epidemic of its own—so I spoke to several experts to set the record straight on some of the most common flu questions.
Limits to Growth: Bacteria in a Bottle - Retired physics professor Al Bartlett vividly demonstrates the shocking power of exponential growth. This scene from the documentary, GrowthBusters: Hooked on Growth, shares a moment from Dr. Bartlett's world-famous lecture addressing the impossibility of perpetual population growth and economic growth.Half of medical treatments of unknown effectiveness - The British Medical Journal posted on their website, Clinical Evidence, the results of an analysis of randomized controlled trials focusing on harms and benefits of 3,000 medical treatments. The effectiveness of each treatment was rated based on six criteria: (a) beneficial, (b) likely to be beneficial, (c) trade-off between benefits and harms, (d) unlikely to be beneficial, (e) likely to be ineffective or harmful, and (f) unknown effectiveness. The results were striking. Only about a third of the treatments were shown to be beneficial (11%) or likely to be beneficial (23%). Another 7% were rated as trade-offs between benefits and harms, with 6% rated unlikely to be beneficial and another 3% rated likely to be ineffective or harmful. The authors at Clinical Evidence rated the remaining 50% of medical treatments as being of unknown effectiveness. The challenge that evidence ratings like these pose for clinicians is not new. That’s the opening paragraph of the introductory paper to the shared decision making-focused February supplement of Medical Care Research and Review (MCRR). Here’s the Clinical Evidence findings in chart form:
CDC Researchers Find Lower Mortality Rates Among Overweight People - The world of public health was knocked off the rails a bit this week with the release of a study demonstrating that you can, in fact, be too thin. Reviewing 97 studies involving almost 3 million people divided into groups according to weight, researchers at the Centers for Disease Control demonstrated that the overweights—not the obese, but decidedly not the thins or the very thins—had lower overall mortality rates than the rest of the pack. The finding represents the first momentum shift in a century, since fashion and cinema made thin synonymous with beauty and health. The rout of the public by the thin-ocracy has been so complete that a goal other than blind pursuit of the flat stomach and the sharp jaw seems sacrilegious. Well, the low body mass index (BMI) hegemony appears to be coming to an end. The findings are clear and simple. Researchers pored over endless studies that previously had examined rates of death in people of various shapes and sizes. And they had a lot to select from: the researchers found more than 7,000 articles in the medical literature that have studied the issue. They placed patients into categories according to BMI (normal, overweight, obese) and ran a series of complex statistical analyses.
Path-blazing researcher explores environmental links to autism - What causes autism? The question has spurred about a billion dollars' worth of genetics research that has found no clear answer. But University of California, Davis, epidemiologist Irva Hertz-Picciotto has been pursuing another angle: Does the environment around a pregnant woman play a role in determining whether her child develops autism? Over the last 10 years, her work with more than 1,000 autistic children has changed how science looks at autism, refocusing the debate on the crossroads of environment and genetics. Hertz-Picciotto's group has published hundreds of papers, including one that suggests, among other things, that a mother's proximity to congested roads and, thus, dirty air increases her risk of giving birth to an autistic child. Her group more recently suggested that obese women may be 67 percent more likely to have autistic children.
Fecal transplant more effective than antibiotics for bacterial infection: study - While many people might be more comfortable taking pills to fight off a dangerous infection, it turns out that there may be a more effective treatment: excrement. A new study found that fecal transplants can be a dramatically more effective course of treatment than antibiotics in the case of at least one kind of bacterial infection, reported the Los Angeles Times. The study found that transplanting the feces of a healthy individual into someone with the infection Clostridium difficile, or CDI, which kills about 100,000 people annually, cured three times as many people as those who took just antibiotics. In fact, the study ended early because the researchers decided it would be unethical to continue to provide some participants with only antibiotics, reported the New York Times. Fecal transplants has garnered more interest recently, as bacteria have become more resistant to antibiotics, although records of the treatment can be found as far back as the 4th century in China.
Leprosy bacteria use ‘biological alchemy’ - Infectious bacteria have for the first time been caught performing "biological alchemy" to transform parts of a host body into those more suited to their purposes, by a team in Edinburgh. The study, in the journal Cell, showed leprosy-causing bacteria turning nerves into stem cells and muscle. The authors said the "clever and sophisticated" technique could further therapies and stem-cell research. Experts described the discovery as "amazing" and "exciting". Alchemists may have failed to morph base metals into gold, but a team at the University of Edinburgh has shown that bacteria can transform parts of the body into something more valuable to them. It is a feat that scientists have already achieved in the laboratory. Skin cells have been transformed into flexible stem cells that can become any of the body's building blocks from heart muscle to brain cells.
Neonicotinoid pesticides determined unsafe for bees by the European Food Safety Authority - The world's most widely used insecticide has for the first time been officially labelled an "unacceptable" danger to bees feeding on flowering crops. Environmental campaigners say the conclusion, by Europe's leading food safety authority, sounds the "death knell" for the insect nerve agent. The chemical's manufacturer, Bayer, claimed the report, released on Wednesday, did not alter existing risk assessments and warned against "over-interpretation of the precautionary principle". The report comes just months after the UK government dismissed a fast-growing body of evidence of harm to bees as insufficient to justify banning the chemicals.Bees and other pollinators are critical to one-third of all food, but two major studies in March 2012, and others since, have implicated neonicotinoid pesticides in the decline in the insects, alongside habitat loss and disease. In April, the European commission demanded a re-examination of the risks posed by the chemicals, including Bayer's widely used imidacloprid and two others.Scientists at the European Food Safety Authority (EFSA), together with experts from across Europe, concluded on Wednesday that for imidacloprid "only uses on crops not attractive to honeybees were considered acceptable" because of exposure through nectar and pollen. Such crops include oil seed rape, corn and sunflowers. EFSA was asked to consider the acute and chronic effects on bee larvae, bee behaviour and the colony as a whole, and the risks posed by sub-lethal doses. But it found a widespread lack of information in many areas and had stated previously that current "simplistic" regulations contained "major weaknesses".
FAO Food Price Index down 7 percent in 2012: The FAO Food Price Index dropped for the third consecutive month in December 2012, edging down 1.1 percent. The decline in December, when the Index averaged 209 points, was led by drops in the international prices of major cereals and oils and fats. The Index’s previous low in 2012 was in June, at 200 points. For 2012 as a whole, the Index averaged 212, that is, 7.0 percent less than in 2011, with the sharpest falls year-on-year registered by sugar (17.1 percent), dairy products (14.5 percent) and oils (10.7 percent). Price declines were much more modest for cereals (2.4 percent) and meat (1.1 percent). “The result marks a reversal from the situation last July, when sharply rising prices prompted fears of a new food crisis,” . “But international coordination, including through the Agricultural Market Information System (AMIS), as well as flagging demand in a stagnant international economy, helped ensure the price spike was short-lived and calmed markets so that 2012 prices ended up below the previous year’s levels.” The FAO Cereal Price Index averaged 250 points in December, down 2.3 percent, or 6 points, from November. In 2012 as a whole, the index averaged 241, or 2.4 percent below 2011.
Iran wheat output to reach 15 mmt next year — Iran plans to produce 15 mmt of wheat in the next Iranian calendar year which begins March 20, Deputy Agricultural Jihad Minister Naser Tavakoli said. Putting the country's annual wheat consumption at nine to 10 mmt, Tavakoli went on to note that Iran can export up to five mmt of wheat next year. According to the UN Food and Agriculture Organisation (FAO), Iran was the eleventh leading producer of wheat in the world in 2012. Based on the latest FAO report, 'Crop Prospects and the Food Situation', Iran's wheat production reached 13.8 mmt in 2012. The report added that Iran's wheat production in 2011 was 13.5 mmt and the country ranked thirteenth among the world's largest wheat producers.
Iowa corn yield, production fell 20% last year - Iowa farmers on Friday got the tally for the damage done to their 2012 corn crop by the heat wave and drought: a 20 percent drop in yield and production. Iowa’s average yield of 137 bushels per acre for 2012, down from 172 bushels in 2011, was the lowest since 1996. Total production of 1.87 billion bushels was down from 2.36 billion bushels a year earlier and the lowest since the 1.86 billion production of 2003. The damage to Iowa’s signature crop will be offset by higher prices and insurance. Corn closed up 10 cents per bushel at $7.08 Friday on the Chicago Board of Trade, which would put a paper cash value on the 2012 crop of $13.1 billion, down from $14.5 billion for the 2011 crop. But Iowa’s farmers have received more than $1 billion in crop insurance claims for damage to the corn crop, according to U.S. Department of Agriculture figures through Jan. 4.
Biofuels and Hunger in Low-Income Countries - TBack in late 2011, I amused myself for a time tracking the reports in which various well-known agencies pointed out the flaws in subsidizing biofuels. a June 2011 post, "Everyone Hates Biofuels," I pointed out a report in which 10 international agencies made an unambiguous proposal that high-income countries drop their subsidies for biofuels. I followed up with "The Committee on World Food Security Hates Biofuels" in August 2011 and "More on Hating Biofuels: The National Research Council" in October 2011. But of all the problems with subsidizing the production of ethanol from corn--the cost, the distortions in price of farmland, the lack of any reductions in carbon dioxide emissions, and others--clearly the most serious problem is that that it is causing people in low-income countries to go hungry. Timothy A. Wise lays out "The Cost to Developing Countries of U.S. Corn Ethanol Expansion" in a working paper published in October 2012 by the Global Development and Environment Institute at Tufts University. The article offers a lot more detail, but the basic outline is simple enough. Primarily because of government subsidies, the share of the U.S. corn crop going to produce ethanol has risen dramatically in the last few years, up to about 40%.
Record Taxpayer Cost Is Seen for Crop Insurance - — The worst drought in 50 years could leave taxpayers with a record bill of nearly $16 billion in crop insurance costs because of poor yields. The staggering cost of the program has drawn renewed attention, as the Obama administration and Congressional Republicans wrangle over ways to cut the deficit. Last month, Treasury Secretary Timothy F. Geithner said that reducing farm subsidies was one way that the administration could cut government spending. But Congress has resisted. The Agriculture Department, which runs the program, said that the total losses from crops harvested last year would not be known for weeks, but that costs from the program were estimated to be $15.8 billion, up from $9.4 billion in 2011. Separately, a record $11.4 billion in indemnities for crop losses has been paid out to farmers, and officials say that number could balloon to as much as $20 billion. In 2011, a then-record $10.8 billion was paid out in indemnities.
Crop insurance could cost record $16 billion - The worst drought in 50 years could leave taxpayers with a record bill of nearly $16 billion in crop insurance costs because of poor yields. The staggering cost of the program has drawn renewed attention as the Obama administration and congressional Republicans wrangle over ways to cut the deficit. Last month, Treasury Secretary Timothy Geithner said that reducing farm subsidies was one way the administration could cut government spending. But Congress has resisted. The Agriculture Department said that the total losses from crops harvested last year would not be known for weeks but that costs from the program were estimated to be $15.8 billion, up from $9.4 billion in 2011. Separately, a record $11.4 billion in indemnities for crop losses has been paid out to farmers, and officials say that number could balloon to as much as $20 billion. In 2011, a then-record $10.8 billion was paid out in indemnities
Don’t Ignore the Drought - Droughts, it could be argued, are the opposite of news. By definition, they represent the absence of something (namely, adequate rain) happening. And they only occur when that something has already been not-happening for a very long time. As a result, droughts tend not to make the front page. It's time to start paying attention.Why? Well, first off, the current drought – which is essentially the same one the U.S. has been experiencing since 2010, and which last year encompassed more than 65 percent of the country, more than at any time since the Dust Bowl in the 1930s – is having some eye-popping impacts that make it tough to ignore. In 2012, more than 9 million acres went up in flames in this country. Only dredging and some eleventh-hour rain kept the mighty Mississippi River from being shut down to navigation due to low water levels; continuing drought conditions make "long-term stabilization" of river levels unlikely in the near future. Several of the Great Lakes are soon expected to hit their lowest levels in history. In Nebraska last summer, a 100-mile stretch of the Platte River simply dried up. Drought led the USDA to declare federal disaster areas in 2,245 counties in 39 states last year, and the federal government will likely have to pay tens of billions for crop insurance and lost crops. Still, it's easy to dismiss even the worst impacts of drought as temporary problems – once some rain falls, we get to move on. It's over. Right? Sadly, no. Major droughts have effects that endure long after they've technically ended. Food production and food prices can suffer long-term disruptions. Drought-related culling and destocking has left the U.S. cattle herd at a 60-year low; beef prices hit an all-time high in November and are expected to increase. The current drought has also hit producers of staple crops from corn to wheat to hay. Furthermore, drought depletes water reserves in glaciers, aquifers and groundwater on which future growing seasons depend. Officials have reported rapidly declining water levels in the crucial, shrinking Ogalalla Aquifer, and some areas are seeing spikes in water violations as farmers and ranchers overdraw their permits.
Texas Drought Pushes Lawmakers to Focus on Water in New Session - There is usually no shortage of controversial and politically divisive issues for lawmakers to address in the opening days of a state legislative session, from abortion to immigration to gun rights. But throughout the opening of the 83rd Texas Legislature last week, one of the most frequently discussed topics had bipartisan support: improving the state’s water infrastructure as the population booms and a devastating two-year drought drags on. Lt. Gov. David Dewhurst and other Republicans proposed tapping an emergency fund that is fed by taxes on oil production to finance the building of new reservoirs and other projects identified in the state’s 50-year water plan, an unusual move in a state where fiscal conservatives usually push to streamline government and limit spending. In 2011, the last time the Legislature convened for one of its biennial sessions, Representative Allan Ritter, a Republican and the chairman of the House Natural Resources Committee, was unsuccessful in getting lawmakers to approve legislation imposing an annual fee on water users like homeowners and businesses to help finance projects in the state water plan.
Texas And Oklahoma, Hotbeds Of Climate Change Denialism, Wracked By Another Year Of Warming-Worsened Droughts - If the latest news reports are any indication, the droughts that have wracked a large portion of the contiguous United States continued piling on the damage in Texas and Oklahoma through 2012. The effects will reverberate for years — and global warming will make such brutal droughts (or worse) the region’s normal climate if we keep listening to the deniers’ call to inaction. It’s a particular bitter irony, given that the political and media cultures of both states, with Sen. James Inhofe (R-OK) leading the charge, have been contributing enthusiastically to climate change denialism. The National Oceanic and Atmosphere Administration recently determined that 2012 was the hottest year on record for the lower 48 states, and research by NOAA and other institutions has linked extreme events like Texas and Oklahoma’s drought to climate change. As of December 2012, more than 42% percent of the lower 48 states were experiencing “severe” drought conditions, and 63% of the United States’ new winter wheat crop is in the drought-hit areas. In Texas in particular, the situation is sufficiently dire that the Republicans in charge of the state are being forced to finally take concrete steps to build new reservoirs and repair the state’s water infrastructure:
Drought Stokes Water Fights Between Texas and Neighbors - WSJ.com: Water wars are heating up in Texas, where officials are suing New Mexico and Oklahoma over river water as the Lone Star State tries to quench the thirst of its booming population. The U.S. Supreme Court agreed this month to take up a dispute between Texas' Tarrant Regional Water District, an agency that supplies water to 1.7 million people in north Texas, and Oklahoma, over water that flows into the Red River. So far, lower courts have ruled for Oklahoma. Drought-plagued Texas also asked the Supreme Court this month to consider a separate lawsuit alleging that New Mexico isn't giving Texas its allotted share of water from the Rio Grande as spelled out under a 1938 compact. No other court has ruled on that case. Texas officials maintain they had to take action against New Mexico because farmers and ranchers are illegally siphoning off some of Texas' share of the river, which provides about half of the drinking water for El Paso.
Drought-Stricken Stretch of Mississippi Gets Some Relief - WSJ.com: Emergency rock blasting on a portion of the Mississippi River and a change in weather is giving the Army Corps of Engineers increasing confidence it can keep the river—a major conduit of bulk materials like grains, fertilizer and fuel oil—open to shippers through spring. But the news, while welcomed by shippers and others that rely on the river, offers only temporary relief. The shipping lanes remain historically shallow and a closing could be in the offing if expected rains don't arrive. Severe drought has dropped river levels close to the 9-foot level that would ordinarily prompt an official closure of the river in the stretch from St. Louis to Cairo, Ill. The river is normally twice as deep this time of year and hasn't been this low since the severe drought of 1988.In recent weeks, the Corps and the Coast Guard have been fighting for every inch of depth. They are releasing water from some reservoirs, dredging and blowing up rock formations in a six-mile stretch around Thebes, Ill. This past weekend, the Corps said the first phase of rock removal—which blasted away 365 cubic yards of limestone—was completed, giving shippers at least two extra feet of clearance near Thebes, a portion of the river with under 10 feet of depth in recent days. "The success of the rock-removal work, combined with recent and forecast rain, increases our confidence we will sustain an adequate channel through this spring,"
Mississippi Rock Blasting Puts River In Ship Shape - Crews have completed the most critical phase of removing bedrock that threatened barges along a crucial stretch of the drought-starved Mississippi River, staving off the shipping industry’s fears that the treacherous channel could close to traffic, the U.S. Army Corps of Engineers said Saturday. Using excavators and explosives, corps-hired contractors cleared 365 cubic yards of limestone and added two vital feet of depth to the channel near Thebes, Ill., about 130 miles south of St. Louis, the corps said. That phase, which began last month, addressed the most pressing threat to mariners and additional rock removal is expected nearby, the corps said. “The river rock removal contractors executed their work quickly and efficiently in the primary areas of concern,” said Maj. Gen. John Peabody, commander of the corps’ Mississippi Valley division. “The work has deepened the channel enough to successfully maintain navigation though this critical reach of the river.” While averting a potentially crippling shutdown of the river, the work wasn’t without its inconvenience to shippers. Barge traffic at that stretch has been limited to an eight-hour window each day, causing bottlenecks and slowing transit times of cargo as crews removed the jagged bedrock that threatened to tear barge bottoms to ribbons.
Using the Tragedy of the Commons to the benefit of society - In a different context (Asian Carp), I have advocated for taking advantage of the Tragedy of the Commons to eliminate invasive species. The principle is simple: Given the proper incentives and open access, anglers/hunters/gatherers will overfish/overhunt/strip a common property resource into non-existence. Looks like the State of Florida may be figuring this out: Nearly 800 people signed up for the month-long “Python Challenge” that started Saturday afternoon. The vast majority — 749 — are members of the general public who lack the permits usually required to harvest pythons on public lands.“We feel like anybody can get out in the Everglades and figure out how to try and find these things,” said Nick Wiley, executive director of the Florida Fish and Wildlife Conservation Commission. “It’s very safe, getting out in the Everglades. People do it all the time.”Twenty-eight python permit holders also joined the hunt at several locations in the Everglades. The state is offering cash prizes to whoever brings in the longest python and whoever bags the most pythons by the time the competition ends at midnight Feb. 10.
Will The Levees Break?: Hundreds Of Levees In Need Of 'Urgent Repair' - In 2005, the levees of New Orleans famously buckled during Hurricane Katrina, contributing to the devastation of that city and surrounding communities. Officials were warned that the levees were a problem before the storm, yet did nothing to ensure that they could hold through the strongest of storms. New Orleans’ levees may have been improved (and mostly held through Hurricane Isaac). But according to an ongoing investigation by the U.S. Army Corps of Engineers, hundreds of levees around the country are in need of “urgent repair“: Inspectors taking the first-ever inventory of flood control systems overseen by the federal government have found hundreds of structures at risk of failing and endangering people and property in 37 states. Levees deemed in unacceptable condition span the breadth of America. They are in every region, in cities and towns big and small: Washington, D.C., and Sacramento Calif., Cleveland and Dallas, Augusta, Ga., and Brookport, Ill. The U.S. Army Corps of Engineers has yet to issue ratings for a little more than 40 percent of the 2,487 structures, which protect about 10 million people. Of those it has rated, however, 326 levees covering more than 2,000 miles were found in urgent need of repair. By some estimates, more than half of Americans reside in counties “that contain levees or other kinds of flood control and protection systems.” Even leaving out the billions of dollars in damage cause by Katrina, levee failures have cost the U.S. hundreds of millions of dollars in the last few decades.
PHOTOS: Freakish dust storm causes ‘red wave’ on Australia’s west coast - A hellish dust storm caused a “red wave” of sand off the coast of Western Australia on Wednesday. Tugboat workers near the coastal town of Onslow snapped photos on their phones as they watched the towering dust storm pass over calm ocean waters. "I've never seen anything like it, it was pretty special and it was definitely an eerie feeling," Mother Nature started working at sunset. A thunderstorm with gusts of up to 75 mph picked up sand and dust as it swept over Onslow and toward the Indian Ocean. The dust storm, called a haboob by meteorologists, raged for an hour. After that, the water was calm.
What's causing Australia's heat wave? - Australia has always experienced heat waves, and they are a normal part of most summers. It is very unusual to have such widespread extreme temperatures — and have them persist for so long. On those two metrics alone, spatial extent and duration, the last two weeks surpasses the only previous analogue in the historical record (since 1910) – a two-week country-wide hot spell during the summer of 1972–1973. A good measure of the spatial extent of the heat is the Australian-averaged maximum daily temperature. This is the average of the highest daily temperature of the air just above the surface of the Australian continent, including Tasmania. The national average is calculated using a three-dimensional interpolation (including topography) of over 700 observing sites each day. On Monday and Tuesday last week (January 7 and 8) that temperature rose to over 40°C. Monday’s temperature of 40.33°C set a new record, beating the previous highest Australian daily maximum of 40.17°C set in 1972. Tuesday’s temperature came in as the 3rd highest on record at 40.11°C. The accompanying map of temperatures shows just how much of the country experienced extremely high temperatures, with over 70% of the continent recording temperatures in excess of 42°C.
Sydney bakes on hottest day on record as bushfires rage: The Australian city of Sydney is experiencing its hottest day on record, with temperatures reaching nearly 46C. A temperature of 45.8C was recorded at Observatory Hill in the city at 14:55 local time (01:55 GMT). Some areas in the wider Sydney region were even hotter, with the town of Penrith, to the west, registering a temperature of 46.5C. In Victoria state, one man has been killed by a bushfire, one of dozens raging across southern Australia.
Amazon rainforest showing signs of degradation due to climate change, NASA warns - The US space agency Nasa warned this week that the Amazon rainforest may be showing the first signs of large-scale degradation due to climate change. A team of scientists led by the agency found that an area twice the size of California continues to suffer from a mega-drought that began eight years ago. The new study shows the severe dry spell in 2005 caused far wider damage than previously estimated and its impact persisted longer than expected until an even harsher drought in 2010. With little time for the trees to recover between what the authors describe as a “double whammy”, 70m hectares of forest have been severely affected, the analysis of 10 years of satellite microwave radar data revealed. The data showed a widespread change in the canopy due to the dieback of branches, especially among the older, larger trees that are most vulnerable because they provide the shelter for other vegetation. “We had expected the forest canopy to bounce back after a year with a new flush of leaf growth, but the damage appeared to persist right up to the subsequent drought in 2010,”
Coastal damage to be more common and extensive? - From The Guardian comes this news: Marcia McNutt, who last week announced her resignation as director of the US Geological Survey, told a conference that Sandy had left coastal communities dangerously exposed to future storms of any size. "Superstorm Sandy was a threshold for the north-east and we have already crossed it," McNutt told the National Council for Science and the Environment conference in Washington. "For the next storm, not even a super storm, even a run-of-the-mill nor'easter, the amount of breaches and the amount of coastal flooding will be widespread."McNutt, a professor of marine geophysics, was careful to preface her public remarks by saying she spoke as a scientist and not an Obama Administration official. But the unusually stark warning from a departing Obama official indicates the challenges ahead in protecting American population centres from the extreme storms of a changing climate. "Before Sandy, someone asked me what my climate change nightmare was. Before Sandy, I said it was that with the extra energy in the atmosphere-ocean system it feeds super storms that intersect mega-cities left rendered defenceless by rising seas," McNutt said in a brief interview following her public remarks. "That is where we now are."
How Climate Change Is Damaging The Great Lakes, With Implications For The Environment And The Economy - Great Lakes Michigan and Huron set a new record low water level for the month of December, and in the coming weeks they could experience their lowest water levels ever. It’s becoming certain that, like the rest of the country, the Great Lakes are feeling the effects of climate change. Last year was officially the warmest year on record for the lower-48 states. The hot summer air has been causing the surface water of the Great Lakes to increase in temperature. One might think this causes more precipitation around the lakes, but the warmer winter air is causing a shorter duration of ice cover. In fact, the amount of ice covering the lakes has declined about 71 percent over the past 40 years. Last year, only 5 percent of the lakes froze over –- compared to 1979 when ice coverage was as much as 94 percent. Furthermore, the continuing effect of the historic drought in the Midwest is causing increased levels of evaporation. This combination of climate change side-effects results in low water levels for the Great Lakes. The impact climate change has on the five lakes (Superior, Michigan, Huron, Erie, and Ontario) will have serious implications for aquatic life, as well as high economic costs for communities.
2012 Was One of Earth’s 10 Warmest Years, NOAA and NASA Say - Last year was one of the world’s 10 warmest years on record going back to 1880, according to reports from two U.S. agencies. The National Oceanic and Atmospheric Administration ranked 2012 the 10th-warmest on record, with an average temperature of 58.03 degrees (14.46 Celsius). It was the 36th consecutive year to exceed the 20th-century average of 57 degrees, according to NOAA’s National Climatic Data Center. “The long-term warming trend, including continual warming since the mid-1970s, has been conclusively associated with the predominant global climate forcing, human-made greenhouse gases, which began to grow substantially early in the 20th century,” James E. Hansen, director of NASA’s Goddard Institute for Space Studies . The National Aeronautics and Space Administration ranked 2012 the ninth-warmest year on record. There are small differences in the data the agencies use, said Thomas R. Karl, director of the climatic data center.
NOAA: 2012 global temperatures 10th highest on record - According to NOAA scientists, the globally-averaged temperature for 2012 marked the 10th warmest year since record keeping began in 1880. It also marked the 36th consecutive year with a global temperature above the 20th century average. The last below-average annual temperature was 1976. Including 2012, all 12 years to date in the 21st century (2001-2012) rank among the 14 warmest in the 133-year period of record. Only one year during the 20th century--1998--was warmer than 2012. Most areas of the world experienced higher-than-average annual temperatures, including most of North and South America, most of Europe and Africa, and western, southern, and far northeastern Asia. Meanwhile, most of Alaska, far western Canada, central Asia, parts of the eastern and equatorial Pacific, southern Atlantic, and parts of the Southern Ocean were notably cooler than average. Additionally, the Arctic experienced a record-breaking ice melt season while the Antarctic ice extent was above average. This analysis (summary, full report) from NOAA's National Climatic Data Center is part of the suite of climate services NOAA provides government, business and community leaders so they can make informed decisions.
Now no one can deny that the world is getting warmer | Observer editorial - The draft version of the US National Climate Assessment, released on Friday, makes remarkable reading – not just for Americans but for all humanity. Put together by a special panel of more than 240 scientists, the federally commissioned report reveals that the US is already reeling under the impact of global warming. Heatwaves, droughts, floods, intense downpours, rising sea levels and melting glaciers are now causing widespread havoc and are having an impact on a wide range of fronts including health services, infrastructure, water supply, agriculture, transport and flood defences. Nor is there any doubt about the cause of these rising temperatures. "It is due primarily to human activities, predominantly the burning of fossil fuel," the report states. As carbon dioxide levels in the atmosphere soar, temperatures rise and chaos ensues. Air pollution intensifies, wildfires increase, insect-borne diseases spread, confrontations over water rights become more violent and storm surges rise. This is the near future for America and for the rest of the world. Earth is set to become a hotter, drier, unhealthier, more uncomfortable, dangerous and more disaster-prone place in coming years.
U.S. average temperature has increased by about 1.5° F (0.8°C) since 1895—and notably, more than 80% of this increase has occurred since 1980. The most recent decade was the nation’s hottest on record, and the warming will continue—the report estimates that U.S. temperatures will rise by 2° to 4° F (1.1°C to 2.2° C) over the next few decades. Of course, the amount of warming will depend on the sensitivity of the climate system — something that remains up for debate — and the rise or fall in carbon emissions we’ll see in the future. Under a high emissions scenario — if the world isn’t able to curb the use of fossil fuels — we could see warming as high as 10° F (5.5° C) by the end of the century. Climate change will increase the likelihood of water shortages and competition for water, especially in arid but growing areas like the U.S. Southwest. Spring snowpack is on the decline in the mountain West, and we’ll see more seasonal water shortages throughout the country — even in areas where total rainfall will increase. Some good news: over the next 25 years, the agricultural sector is predicted to be relatively resilient to changes in the climate, including rising temperatures and more sporadic rainfall. That’s important to remember. U.S. farmers have always been the best in the world at getting the most out of their land, but it’s also true that there’s a ceiling to adaptation, and by mid-century, yields of major U.S. crops are expected to decline — seriously bad new for the U.S. and those who depend on American farmers.
NASA Finds 2012 Sustained Long-Term Climate Warming Trend - For media briefing materials related to this story, click here (pdf). NASA scientists say 2012 was the ninth warmest of any year since 1880, continuing a long-term trend of rising global temperatures. With the exception of 1998, the nine warmest years in the 132-year record all have occurred since 2000, with 2010 and 2005 ranking as the hottest years on record. NASA's Goddard Institute for Space Studies (GISS) in New York, which monitors global surface temperatures on an ongoing basis, released an updated analysis Tuesday that compares temperatures around the globe in 2012 to the average global temperature from the mid-20th century. The comparison shows how Earth continues to experience warmer temperatures than several decades ago. NASA's analysis of Earth's surface temperature found that 2012 ranked as the ninth-warmest year since 1880. NASA scientists at the Goddard Institute for Space Studies (GISS) compare the average global temperature each year to the average from 1951 to 1980. This 30-year period provides a baseline from which to measure the warming Earth has experienced due to increasing atmospheric levels of heat-trapping greenhouse gases. While 2012 was the ninth-warmest year on record, all 10 of the warmest years in the GISS analysis have occurred since 1998, continuing a trend of temperatures well above the mid-20th century average. The record dates back to 1880 because that is when there were enough meteorological stations around the world to provide global temperature data.
NOAA And NASA: 2012 Warmest 'La Niña Year' On Record, Sustaining Long-Term Climate Warming Trend - NOAA: La Niña, which is defined by cooler-than-normal waters in the eastern and central equatorial Pacific Ocean that affect weather patterns around the globe, was present during the first three months of 2012…. It was also the warmest year on record among all La Niña years. The three warmest annual ocean surface temperatures occurred in 2003, 1998, and 2010—all warm phase El Niño years. Global surface temperature anomalies relative to 1951-1980. The Nino index is based on the temperature in the Nino 3.4 area in the eastern tropical Pacific5. Dark green triangles mark the times of volcanic eruptions that produced an extensive stratospheric aerosol layer. Via NASA. What follows is a NASA news release. NASA Finds 2012 Sustained Long-Term Climate Warming Trend NASA scientists say 2012 was the ninth warmest of any year since 1880, continuing a long-term trend of rising global temperatures. With the exception of 1998, the nine warmest years in the 132-year record all have occurred since 2000, with 2010 and 2005 ranking as the hottest years on record. NASA’s Goddard Institute for Space Studies (GISS) in New York, which monitors global surface temperatures on an ongoing basis, released an updated analysis Tuesday that compares temperatures around the globe in 2012 to the average global temperature from the mid-20th century. The comparison shows how Earth continues to experience warmer temperatures than several decades ago.
Manmade Global Warming Has Increased Monthly Heat Records By A Factor Of Five, Much Worse To Come - On average, there are now five times as many record-breaking hot months worldwide than could be expected without long-term global warming, shows a study now published in Climatic Change. In parts of Europe, Africa and southern Asia the number of monthly records has increased even by a factor of ten [full graphic in the study]. 80 percent of observed monthly records would not have occurred without human influence on climate. “The last decade brought unprecedented heat waves; for instance in the US in 2012, in Russia in 2010, in Australia in 2009, and in Europe in 2003,” lead-author Dim Coumou says. “Heat extremes are causing many deaths, major forest fires, and harvest losses – societies and ecosystems are not adapted to ever new record-breaking temperatures.” The new study relies on 131 years of monthly temperature data for more than 12.000 grid points around the world, provided by NASA. Comprehensive analysis reveals the increase in records. The researchers developed a robust statistical model that explains the surge in the number of records to be a consequence of the long-term global warming trend. That surge has been particularly steep over the last 40 years, due to a steep global-warming trend over this period. Superimposed on this long-term rise, the data show the effect of natural variability, with especially high numbers of heat records during years with El Niño events.
Global warming is changing the way we live, national report says Global warming is already changing America from sea to rising sea and is affecting how Americans live, a massive new federally commissioned report says. A special panel of scientists convened by the government issued Friday a 1,146-page draft report that details in dozens of ways how climate change is already disrupting the health, homes and other facets of daily American life. It warns that those disruptions will increase in the future. "Climate change affects everything that you do," said report co-author Susan Cutter "It affects where you live, where you work and where you play and the infrastructure that you need to do all these things. It's more than just the polar bears." The blunt report takes a global environmental issue and explains what it means for different U.S. regions, for various sectors of the economy and for future generations. The National Climate Assessment doesn't say what should be done about global warming. White House science adviser John Holdren writes that it will help leaders, regulators, city.
John Quiggin – Utopia and climate change: Even to those who are thoroughly inured to warnings of impending catastrophe, the World Bank’s recent report on climate change, Turn Down the Heat (November, 2012), made for alarming reading. Looking at the consequences of four degrees of global warming, a likely outcome under current trajectories, the Bank concludes that the full scope of damage is almost impossible to project. Even so, it states: ‘The projected impacts on water availability, ecosystems, agriculture, and human health could lead to large-scale displacement of populations and have adverse consequences for human security and economic and trade systems.’ Among the calamities anticipated in the paper are large-scale dieback in the Amazon, the collapse of coral reef systems and the subsistence fishing communities that depend on them, and sharp declines in crop yields. By contrast, most of us are already inured to the continuing catastrophe reported in the Bank’s annual World Development Report. Hundreds of millions of people go hungry every day. Tens of millions die every year from easily treatable or preventable diseases. Uncontrolled climate change could produce more crop failures and famines, and spread diseases and the pests that cause them even more widely.Economic development and technological progress provide the only real hope of lifting billions of people out of poverty and destitution, just as it has done for the minority in the developed world. Yet the living standards of the developed world have been built on cheap energy from carbon-based fossil fuels. If everyone in the world used energy as Americans or even Europeans do, it would be impossible to restrict climate change to even four degrees of warming.
On the Non-equivalence of Greenhouse Gases and Entitlement Spending - Krugman - One fairly common trope in budget discussions – I’m pretty sure I’ve done it myself, somewhere along the line – is to compare attitudes toward fiscal issues and those toward environmental issues. The usual version, which I must have used, is to compare attitudes toward the long run: pointing out how strange it is that many people profess to be deeply concerned about the state of the Social Security trust fund in the year 2037, while being apparently indifferent to the state of the climate around the same time, which is all too likely to involve things like a permanent drought in the southwest and so on. But can you make the analogy work in reverse, and say that liberals concerned about the future of the environment should be equally concerned about the long-run budget outlook Tom Friedman recently made that argument, so it’s worth pointing out, respectfully, why I disagree. And I think that explaining what’s wrong here helps make the broader point that we are spending far too much time worrying about long-term budget projections. So, let’s start with climate change. Serious people are and should be deeply worried, indeed horrified, by the lack of action on greenhouse gases. But why? Why not just assume that when climate change becomes undeniable, we’ll do whatever is necessary? The answer, first and foremost, is that each year we fail to act has more or less irreversible physical consequences. We’re pumping around 35 billion tons of carbon dioxide into the atmosphere annually; this stuff will stick around for a very long time, and its consequences for warming and sea level rise will last even longer. So each year that we fail to act has a direct physical impact on the future. There’s also an investment aspect: each year that we fail to get the incentives right, people commit limited resources to the wrong technologies, especially coal-fired power plants instead of wind, solar, conservation, whatever. Again, these choices have a physical impact on the world of the future.
Moving to Greenland in the face of global warming - There are two ways to deal with climate change: mitigation and adaptation. This column argues that in order to adapt, we need to take another look at an age-old coping mechanism: migration. Indeed, if overall hotter temperatures lower productivity in hot regions but raise productivity in what are currently cooler regions, the negative economic effects of climate change are likely to stem from frictions preventing the movement of people and goods. Without these frictions, adapting to climate change becomes that much easier. Climate change policy ought to aim at alleviating mobility frictions. If populations don’t move, global warming is likely to have disastrous consequences.
- 44% of the world’s population lives within 150 kilometres of a coastline, so rising sea levels may prove fatal (United Nations 2013).
- Millions of people in the tropics may see their livelihoods destroyed by falling crop yields as climate change pushes temperatures above certain thresholds (Intergovernmental Panel on Climate Change 2007).
Russia roars ahead in race to develop Arctic shipping route The new headquarters for the Northern Sea Route (NSR) will open in Moscow on January 28. The new, state-owned enterprise will have a budget of 35 million rubles (about $1.1 million) and will set forth tariffs and regulations regarding "navigation safety and the prevention, reduction, and control of pollution in the marine environment," according to a July 2012 law passed by the State Duma on the regulation of commercial navigation in the NSR. The law also defines the NSR (translated with Google Translate) as: "The aquatic space adjacent to the northern coast of the Russian Federation, covering internal waters, territorial sea, the contiguous zone and the exclusive economic zone of the Russian Federation and bounded by division lines across maritime areas with the United States and the parallel Cape Dezhnev in the Bering Strait, west meridian of the Cape of Desire to the Novaya Zemlya archipelago, eastern coastline of the Novaya Zemlya archipelago, and the western boundaries of the Matochkin, Kara, and Yugorsky Straits."
Save the Arctic Sea Ice - The biggest change on earth isn't our economics, politics, or technology. It is our arctic sea ice cap, which has been generally getting smaller every autumn. This isn't a liberal conspiracy. It is measured by satellite and observed from space. Even before satellites, recorded human history is that the Arctic Ocean is unnavigable, or at least it was until the past decade. Each summer and fall the sea ice melts and gets smaller and thinner. It re-freezes in winter, but it doesn't regain its thickness or quite its extent. But this isn't just a measure of global warming. It is probably an immediate cause of climate change in our lifetime. Weather is largely 'created' by the differences in temperature and moisture around the world seeking balance. With sea ice, the white Arctic Ocean reflects its heat, but without it the dark water absorbs heat. Air over the arctic sea ice was usually much colder and drier than over the northern Atlantic and Pacific. These differences creates high and low pressure systems. Between the low pressure system of the Arctic and the high pressure systems of warmer oceans, strong seasonal winds are created which move the cold air out of the north pole and into the temperate zones. Without these regular cold fronts the inland parts of continents become stagnant deserts.
Sudden Stratospheric Warming Split the Polar Vortex in Two - Sudden stratospheric warming has split the polar vortex in two. The polar vortex, which forms and deepens as the atmosphere loses heat to space in the darkness of the long Arctic winter night, was split in two by massive heating from below. A series of intense storms in the far north Pacific intensified a very long wave in the lower atmosphere. Energy on that planet sized wave went upwards from the lower atmosphere around the Himalayas and Tibetan Plateau and broke into the stratosphere, causing major sudden warming. It rapidly reversed the strong cyclonic winds in the stratosphere around the pole, creating a central dome, breaking the vortex into two smaller vortices. We can see the splitting by making a map of the heights a weather balloon rises to to reach the very low atmospheric pressure of 50 mb. A standard atmosphere is 1013mb.Major stratospheric warmings have taken place, on average, every other year over the past 50 years. The physics of these warmings is very complicated. Since 1998 these warmings have been more frequent and earlier in the winter. Previously, major warmings typically happened in February. Over the past decade they have happened in December and January, but this one is exceptional on all counts. This stratospheric warming is apparently the strongest ever observed in the first half of January according to the NOAA figure. No one knows why the number of major warmings is increasing but a correlation has been with positive sea surface temperature anomalies and the active phase of the solar cycle. This year the sun is active and there are large positive sea surface temperature anomalies in the north Indian ocean and the north-west Pacific.
Climate change: Soot's role underestimated, says study: Black carbon, or soot, is making a much larger contribution to global warming than previously recognised, according to research. Scientists say that particles from diesel engines and wood burning could be having twice as much warming effect as assessed in past estimates. They say it ranks second only to carbon dioxide as the most important climate-warming agent. The research is in the Journal of Geophysical Research-Atmospheres. Black carbon aerosols have been known to warm the atmosphere for many years by absorbing sunlight. They also speed the melting of ice and snow. Half a degree This new study concludes the dark particles are having a warming effect approximately two thirds that of carbon dioxide, and greater than methane. Continue reading the main story “ Start Quote If we did everything we could to reduce these emissions we could buy ourselves up to half a degree less warming”End Quote Prof Piers Forster University of Leeds "The large conclusion is that forcing due to black carbon in the atmosphere is larger," lead author Sarah Doherty told BBC News.
Burning Fuel Particles Do More Damage to Climate Than Thought, Study Says - The tiny black particles released into the atmosphere by burning fuels are far more powerful agents of global warming than had previously been estimated, some of the world’s most prominent atmospheric scientists reported in a study issued on Tuesday. These particles, which are known as black carbon and are the major component of soot, are the second most important contributor to global warming, behind only carbon dioxide, wrote the 31 authors of the study, published online by The Journal of Geophysical Research-Atmospheres. The new estimate of black carbon’s heat-trapping power is about double the one made in the last major report by the United Nations’ Intergovernmental Panel on Climate Change, in 2007. And the researchers said that if indirect warming effects of the particles are factored in, they may be trapping heat at almost three times the previously estimated rate.
Black Carbon Larger Cause Of Climate Change Than Previously Assessed - Black carbon is the second largest man-made contributor to global warming and its influence on climate has been greatly underestimated, according to the first quantitative and comprehensive analysis of this issue. Key findings:
- Black carbon has a much greater (twice the direct) climate impact than reported in previous assessments.
- Black carbon ranks “as the second most important individual climate-warming agent after carbon dioxide”.
- Cleaning up diesel engines and some wood and coal combustion could slow the warming immediately.
The landmark study published in the Journal of Geophysical Research-Atmospheres today says the direct influence of black carbon, or soot, on warming the climate could be about twice previous estimates. Accounting for all of the ways it can affect climate, black carbon is believed to have a warming effect of about 1.1 Watts per square meter (W/m²), approximately two thirds of the effect of the largest man made contributor to global warming, carbon dioxide. Co-lead author David Fahey from the U.S. National Oceanic and Atmospheric Administration (NOAA) said, “This study confirms and goes beyond other research that suggested black carbon has a strong warming effect on climate, just ahead of methane.” The study, a four-year, 232-page effort, led by the International Global Atmospheric Chemistry (IGAC) Project, is likely to guide research efforts, climate modeling, and policy for years to come.
Big boost to role of black carbon (from diesel,...Big boost to role of black carbon (from diesel, wood, inefficient coal) in global warming calculations from important new study. (Black carbon on @dotearth here). News release:
● Black carbon has a much greater (twice the direct) climate impact than reported in previous assessments.
● Black carbon ranks “as the second most important individual climate-warming agent after carbon dioxide”.
● Cleaning up diesel engines and some wood and coal combustion could slow the warming immediately.
Black carbon larger cause of climate change than previously assessed Black carbon is the second largest man-made contributor to global warming and its influence on climate has been greatly underestimated, according to the first quantitative and comprehensive analysis of this issue. The landmark study published in the Journal of Geophysical Research-Atmospheres today says the direct influence of black carbon, or soot, on warming the climate could be about twice previous estimates. Accounting for all of the ways it can affect climate, black carbon is believed to have a warming effect of about 1.1 Watts per square meter (W/m2), approximately two thirds of the effect of the largest man made contributor to global warming, carbon dioxide.
Standing mute in the face of climate catastrophe - It’s amazing how much more interest was paid to the ridiculous Mayan apocalypse prediction than to last year’s ominously growing body of evidence suggesting our planet is teetering on the knife-edge of a mass extinction event as the result of global warming. Australians do not have to be lectured about global warming.Their continent today -- which in January is experiencing summer as opposed to our so-called modern-era “winter” -- is wilting under a blast furnace of heat. Australia’s mean temperature last week, that is, the average for the entire continent, was 104 degrees. As a measure of how hot that is, photosynthesis, the process by which plants utilize the sun’s energy to grow, stops at 104 degrees. Here in the United States over the past few decades, anyone can see with their own eyes the changes being wrought by a more inhospitable climate. Extreme heat waves, droughts, violent weather outbursts, sudden and unpredictable events completely out of season, have become commonplace. True, there have been weather catastrophes like October’s Hurricane Sandy throughout our long history, the result of the unfortunate converging of conflicting weather systems, but today’s weather calamities affect millions rather than thousands of people.
Climate Change Study: Emissions Limits Could Avoid Damage By Two-Thirds: The world could avoid much of the damaging effects of climate change this century if greenhouse gas emissions are curbed more sharply, research showed on Sunday. The study, published in the journal Nature Climate Change, is the first comprehensive assessment of the benefits of cutting emissions to keep the global temperature rise to within 2 degrees Celsius by 2100, a level which scientists say would avoid the worst effects of climate change. It found 20 to 65 percent of the adverse impacts by the end of this century could be avoided. "Our research clearly identifies the benefits of reducing greenhouse gas emissions - less severe impacts on flooding and crops are two areas of particular benefit," said Nigel Arnell, director of the University of Reading's Walker Institute, which led the study. In 2010, governments agreed to curb emissions to keep temperatures from rising above 2 degrees C, but current emissions reduction targets are on track to lead to a temperature rise of 4 degrees or more by 2100. The World Bank has warned more extreme weather will become the "new normal" if global temperature rises by 4 degrees. Extreme heatwaves could devastate areas from the Middle East to the United States, while sea levels could rise by up to 91 cm (3 feet), flooding cities in countries such as Vietnam and Bangladesh, the bank has said.
CO2 Concentration in "Panic and Repent" Scenarios - In Friday's post, I argued that the likely pattern of human response to climate change would be characterized by very limited action until manifestly serious consequences were clear by looking out the window; then, and only then would serious action ensue. In other words, the pattern would be one of panic and repentance. Of course, some action is occurring on the fringes now: we are installing some wind turbines, we are installing some solar panels, we are making new vehicles more energy-efficient than in the past, new houses likewise. If you think back ten years to 2003, there were no usable electric cars on sale, fuel economy regulations were far more lax, there was a tenth the amount of wind power deployed, ductless minisplit heat-pumps were unknown in the US, and solar panels cost over twice as much as they do now. So in some ways we have made a lot of progress on the technology required to be carbon neutral. But at the same time, developing countries are rapidly coming into the fossil-fuel age, and the overall result is that the global carbon emissions curve, rather than declining, is going up faster than it has in decades (data from BP):
The Myth of Human Progress - Clive Hamilton in his “Requiem for a Species: Why We Resist the Truth About Climate Change” describes a dark relief that comes from accepting that “catastrophic climate change is virtually certain.” This obliteration of “false hopes,” he says, requires an intellectual knowledge and an emotional knowledge. The first is attainable. The second, because it means that those we love, including our children, are almost certainly doomed to insecurity, misery and suffering within a few decades, if not a few years, is much harder to acquire. To emotionally accept impending disaster, to attain the gut-level understanding that the power elite will not respond rationally to the devastation of the ecosystem, is as difficult to accept as our own mortality. The most daunting existential struggle of our time is to ingest this awful truth—intellectually and emotionally—and continue to resist the forces that are destroying us. The human species, led by white Europeans and Euro-Americans, has been on a 500-year-long planetwide rampage of conquering, plundering, looting, exploiting and polluting the Earth—as well as killing the indigenous communities that stood in the way. But the game is up. We have bound ourselves to a doomsday machine that grinds forward, as the draft report of the National Climate Assessment and Development Advisory Committee illustrates. Complex civilizations have a bad habit of destroying themselves. That pattern holds good for a lot of societies, among them the Romans, the ancient Maya and the Sumerians of what is now southern Iraq. There are many other examples, including smaller-scale societies such as Easter Island. The very things that cause societies to prosper in the short run, especially new ways to exploit the environment such as the invention of irrigation, lead to disaster in the long run because of unforeseen complications. We have failed to control human numbers. They have tripled in my lifetime. And the problem is made much worse by the widening gap between rich and poor, the upward concentration of wealth, which ensures there can never be enough to go around. The number of people in dire poverty today—about 2 billion—is greater than the world’s entire population in the early 1900s. That’s not progress.”
Are Photovoltaics Or Biofuels Better At Energy Conversion? - “The energy source for biofuels is the sun, through photosynthesis. The energy source for solar power is also the sun. Which is better?”This is the question posed by University of California – Santa Barbara Bren School of Environmental Science & Management Professor and life cycle assessments (LCA) expert Roland Geyer. The premise is simple: in 2005 the US saw corn ethanol as the new wave of powering vehicles while doing the environment and the local economy a wealth of good. Subsequently 4 billion gallons of renewable fuel was added to the gasoline supply in 2006, which rose to 4.7 billion gallons in 2007 and 7.5 billion in 2012.According to the research, published in the journal Environmental Science & Technology, photovoltaics is a much more efficient option than biomass. “PV is orders of magnitude more efficient than biofuels pathways in terms of land use – 30, 50, even 200 times more efficient – depending on the specific crop and local conditions,” says Geyer. “You get the same amount of energy using much less land, and PV doesn’t require farm land.”
German Power Tumbles to Record Low as Solar Damps Demand - Power for 2014 delivery in Germany and France dropped to records as rising solar output is expected to cut demand for other electricity sources. German power, a European benchmark, fell as much as 1.5 percent, according to broker data compiled by Bloomberg. The equivalent French contract declined 0.3 percent. Electricity for Germany next year lost 65 cents to 43.30 euros ($57.93) a megawatt-hour, it’s biggest decline since March 6, according to broker data compiled by Bloomberg. The French equivalent lost 15 cents to 46.20 euros. As much as 18 percent of electricity demand may be replaced by solar panels not connected to Germany’s grid, reducing demand for other sources by 6 to 10 percent by 2020, Per Lekander, a Paris-based analyst at UBS AG (UBSN), said in a research note. “The unsubsidized solar growth should drive wholesale power prices further down,” he said.
Japan to Build World's Largest Offshore Wind Farm off the Fukushima Coast - In order to reduce its reliance on nuclear energy following the meltdown of three reactors back in 2011, Japan is attempting to increase its renewable energy capacity and has recently unveiled its plan to build the world’s largest ever offshore wind farm just off the coast of the destroyed Fukushima Daiichi nuclear power plant. The plan is to install 143 wind turbines 10 miles off the coast of the Fukushima Prefecture by 2020. The wind farm will have a capacity of one gigawatt, making it larger than the 504 megawatt Greater Gabbard farm off the coast of Suffolk and the 630 megawatt London Array, both in Britain. It will provide a huge boost to Japan’s renewable energy plans Takeshi Ishihara, the project manager, has stated that “this project is important -- I think it is impossible to use nuclear power in Fukushima again.” Plans have also been made to enable the Fukushima Prefecture to become fully energy sefl-sufficient by 2040, using only renewable energy source. Part of the plans includes the development of Japan’s largest solar park in Minamisoma City.
Bringing fusion electricity to the grid - The European Fusion Development Agreement (EFDA) has published a roadmap which outlines how to supply fusion electricity to the grid by 2050. The roadmap to the realisation of fusion energy breaks the quest for fusion energy down into eight missions. For each mission, it reviews the current status of research, identifies open issues, proposes a research and development programme and estimates the required resources. It points out the needs to intensify industrial involvement and to seek all opportunities for collaboration outside Europe. The goal of fusion research is to make the energy of the stars available on Earth by fusing hydrogen nuclei. Fusion energy is nearly unlimited as it draws on the abundant raw materials deuterium and lithium. It does not produce greenhouse gases or long-lived radioactive waste. It is intrinsically safe, as chain reactions are impossible. So far, fusion scientists have succeeded in generating fusion power, but the required energy input was greater than the output. The international experiment ITER, which starts operating in 2020, will be the first device to produce a net surplus of fusion power, namely 500 megawatts from a 50 megawatt input.
Why the Car of the Future Will Be Powered by … Gasoline - The consensus among auto insiders is that hybrid cars that run on battery and gas have a much brighter future than vehicles powered by electricity alone. And hotter still in the decade or so ahead? Cars that just use plain old gas. The advisory company KPMG surveyed 200 car industry executives from around the world, including 22 in North America, and compiled the findings in the latest edition of an annual report revealing where auto insiders think the industry is going. The results show that few anticipate a major impact in the near future from purely battery-powered plug-in vehicles such as the Nissan Leaf and Honda Fit EV. “Just one in 10 of all survey participants think that battery electrified vehicles will be the next big thing,” the report states. On the other hand, 85% of those surveyed said that downsizing and innovating the traditional gas-powered internal combustion engine offers automakers the best chance of boosting fuel efficiency and lowering vehicle emissions.
2012 Brief: Coal prices and production in most basins down in 2012 - Wholesale (spot) coal prices across all basins fell during the first half of 2012 before stabilizing in the latter half of the year. Competition between natural gas and coal for electric power generation drove price declines in the Appalachian and Powder River Basins (PRB), two key sources for thermal coal, through the summer. Also, mild temperatures in the winter and high stockpiles at electric power plants limited demand for more purchases of coal in the second half of 2012. While spot prices fell across the country, the Appalachian and Powder River Basins were affected the most. With new competition from Illinois Basin and ongoing natural gas displacement, annual average Central and Northern Appalachia prices reflected their most significant declines since 2009, falling 18% and 14%, respectively, from 2011. Average annual PRB spot prices for 2012 fell almost 30% compared to 2011. Illinois Basin coal prices declined just 5%, partially offset by a 9% increase in production because of robust demand for the low-cost, high-sulfur coal from the region. U.S. coal production, down almost 7%, fell almost everywhere. Central Appalachia production decreased significantly, down 16%, followed by a 9% production decline in PRB. By contrast, coal production volumes in the Illinois Basin rose above its five-year range, up 9% from 2011.
Sell US Coal to China and Watch Carbon Emissions Fall - Exporting coal from the western US to China could actually lower overall greenhouse gas emissions, an energy economist argues. Western US coal companies looking to expand sales to China will likely succeed, according to Frank Wolak, professor of economics at Stanford University. But, due to energy market dynamics in the United States, those coal exports are likely to reduce global emissions of greenhouse gases. US natural gas prices have plummeted while coal prices have risen. That, combined with stricter environmental rules on coal burning, has caused US electric utilities to use more natural gas-fired generators and fewer coal-fired power plants to produce electricity. That switch has lowered US emissions of greenhouse gases, primarily carbon dioxide. For every kilowatt-hour of electricity generated, burning coal emits more than double the carbon dioxide that natural gas does. “For US utility executives, the economics are making being an environmentalist very attractive,” says Wolak, the director of Stanford’s Program on Energy and Sustainable Development.
Reduce greenhouse gas by exporting coal? Yes, says Stanford economist - Coal's share of U.S. electricity production has fallen from more than half 10 years ago to just a third currently. That switch has lowered U.S. emissions of greenhouse gases, primarily carbon dioxide. For every kilowatt-hour of electricity generated, burning coal emits more than double the carbon dioxide that natural gas does. "For U.S. utility executives, the economics are making being an environmentalist very attractive," said Wolak, the director of Stanford's Program on Energy and Sustainable Development."Perhaps counter-intuitively, the United States selling coal to China, and Asia generally, likely will reduce greenhouse gas emissions globally," said Wolak. "The assumption here is that China will burn all the coal necessary to keep the lights on, the factories running and electricity rates low. Different from the United States and Europe, China does not have significant natural gas-fired generation units and its electricity demand continues to grow rapidly, so it must burn the coal to meet this demand growth. It's just a question of where it comes from." To the degree that this coal comes from the United States, U.S. coal prices will rise. This will cause U.S. utilities to switch even more of their electricity production from coal to gas, further reducing U.S. emissions of carbon dioxide.
Wholesale natural gas prices fell 31% in 2012 to 13-year low - From the Energy Information Administration: Average wholesale (spot) prices for natural gas fell significantly throughout the United States in 2012 compared to 2011 (see red line in chart). The average wholesale price for natural gas at Henry Hub in Erath, Louisiana, a key benchmark location for pricing throughout the United States, fell from an average $4.02 per million British thermal units (MMBtu) in 2011 to $2.77 per MMBtu in 2012. This was the lowest average annual price at Henry Hub since 1999. Note: Adjusted for inflation, the 2012 spot price is the lowest average annual price in at least 16 years, going back to 1996 or earlier (see blue line in chart). The EIA’s annual wholesale price series starts in 1997, and earlier data aren’t available. A mild 2011-12 winter, sustained high natural gas inventories, and rising natural gas production in the Marcellus and Eagle Ford basins contributed to lower average spot natural gas prices at Henry Hub. Average spot natural gas prices at Henry Hub fell despite rising natural gas use for power generation, lower overall natural gas net imports from Canada by pipeline, reduced liquefied natural gas imports, higher natural gas exports to Mexico, and temporary production shut-ins related to Hurricane Isaac. Total natural gas production was higher in 2012 than in 2011; however, in contrast to 2011, when production grew steadily over the course of the year, 2012 saw production generally remain flat, close to the level reached towards the end of 2011.
Top economies face LNG price spike as supply shrinks - Global prices for liquefied natural gas are rising toward record highs this year as increasing demand runs up against stuttering supply, threatening to drive up fuel costs in some of the world’s biggest economies. After a record, unexpected drop in LNG output in 2012, production is expected to grow only marginally this year. Demand, meanwhile, continues to march higher, driven by energy-hungry Asia’s rapid economic growth, Japan’s near total shutdown of its nuclear industry and a drought in Brazil that has forced the South American nation to buy emergency fuel supplies at high prices. With 80 percent of global LNG supplies locked up under long-term contracts, it is countries such as Brazil, Argentina, number two economy China and India that rely on short term deals who could face the biggest hit. LNG helps bridge fuel supply gaps in countries where domestic output fails to keep up with demand. The intricate process of liquefying gas, shipping and regasifying the fuel can also make it more expensive than pipeline supplies.
When Natural Gas Replacing Diesel in Frac Jobs - With China slowing down, and a recessionary GDP projection (below 3%) for the developed world in the next two years or so, many analysts are also projecting far less bullish commodity prices. Due to the very limited export capacity, the price outlook of the land-locked U.S. natural gas (Henry Hub) is even gloomier without the cushion of more robust demand from emerging nations. After hitting a decade low of $1.90/mmbtu last April, Henry Hub (HH) natural gas price has managed to climb almost 80% to $3.398 on Jan. 14. Unfortunately, the same factors tanking natural gas to below $2.00 -- increasing production from unconventional sources via new technologies such as horizontal drilling and fracking, mild weather, weak domestic demand and economic environment – are still alive and well. Production has been rising despite a 46% drop of gas rig count during 2012 -- According to Baker Hughes, the natural gas rig count was 434 as of January 11, 2012, vs. 811 at the start of 2012. Natural gas working inventories already hit a record-high level in early November, and the EIA now expects natural gas consumption to stay relatively flat year-over-year in 2013 with continued production growth.
Alaska: Gas Rich, but No Longer Relevant - The natural gas boom in the US has rendered Alaska’s otherwise bountiful reserves less relevant. Never fear, Japan may turn out to be an alternative market for Alaskan gas. Of course, all of this depends on whether the US decides to go ahead with natural gas exports, an increasingly controversial issue. This week, Alaska Senator Lisa Murkowski will broach the subject in Japan, as her state reels from its new market irrelevance in the US. On the surface, it’s simple: Alaska’s state economy needs a new market for its gas; Japan’s nuclear reactors are offline and it is desperate for cheap gas. Below the surface, it’s not so simple.
• US energy policy is still evolving and there is no decision on export volumes yet
• There is insufficient infrastructure to pump large volumes of Alaskan gas to Japan (though small amounts already go through)
• The cost of transport would eat away at the profit margin
Total chief signals shift from US dry shale gas - Total will halt making new investment in dry shale gas in the United States while gas prices remain low, chief executive Christophe de Margerie has said. The French oil major has joint ventures with Chesapeake Energy in the Utica shale area of eastern Ohio and the Barnett gas shale area in Texas. "It is not great because we have invested on the basis of gas prices that were far higher than today," de Margerie said in an interview with French daily Le Monde on France's current national debate on its energy future. The French giant shelled out $2.25 billion for a 25% slice of Chesapeake Energy's Barnett Shale assets in January 2010. "Our investment in Texas shows a serious loss which, of course, does not question Total's results or development," he said. The Total chief said the company had invested in Texas on the basis of gas at more than $6 per British thermal unit, but that "today we are at $3.2 (per btu). It does not work".
Study Links Oil And Gas Extraction To Ozone Chemicals - Oil and gas development in an area of Colorado that is in the midst of a huge drilling boom is contributing more than half of the chemical pollution that contributes to the formation of ozone, a new study by University of Colorado scientists has found. The research by scientists at the Cooperative Institute for Research in Environmental Sciences (CIRES) at the University of Colorado may have important implications for the shale oil and shale gas revolution underway in many parts of the U.S. It may have particular relevance to other rural areas of the West – in the Uinta Basin of northeastern Utah and Sublette County, Wyoming south of Jackson — that have been plagued by high ozone alerts in recent winters, sometimes higher than the Los Angeles basin. Both the Utah and Wyoming regions have intensive oil and gas development and the ozone alerts in those areas have often been described as a puzzle with possibly many contributing factors. A $5 million study is underway in the Uinta Basin to ferret out the likely causes of the region’s ozone problem. Ozone pollution is a factor in a range of health problems including respiratory illnesses and asthma. In the Colorado study, published online in the journal Environmental Science and Technology, researchers determined that 55 percent of the airborne volatile organic compounds that contribute to ozone in the town of Erie were coming from oil and gas operations.
CU-Boulder, NOAA study uncovers oil and gas emission’s ‘chemical signature’ - Emissions from oil and natural gas operations account for more than half of the pollutants -- such as propane and butane -- that contribute to ozone formation in Erie, according to a new scientific study published this week. The study, the work of scientists at the Cooperative Institute for Research in Environmental Sciences at the University of Colorado, concluded that oil and gas activity contributed about 55 percent of the volatile organic compounds linked to unhealthy ground-level ozone in Erie. Key to the findings was the recent discovery of a "chemical signature" that differentiates emissions from oil and gas activity from those given off by automobiles, cow manure or other sources of volatile organic compounds. "There were very, very few data points that did not fall on the natural gas line," Jessica Gilman, research scientist at CIRES and lead author of the study, said Wednesday. "We had a very strong signature from the raw natural gas." CIRES is a joint institute of CU and the National Oceanic and Atmospheric Administration. Its study was published online Monday in the journal Environmental Science and Technology.
Millennials Occupy TransCanada Offices Across the US - More than 100 young people stormed a TransCanada office in Houston, Texas on Monday as part of a Tar Sands Blockade mass action targeting company offices across the United States. Blockaders streamed into the Houston office, occupying the space with their own hand-crafted “KXL pipe monster.” Activist Alec Johnson was arrested Monday while refusing to leave the lobby of the Houston office after police ushered protesters outside. A videographer with the Chicago Indymedia Center was also arrested. Four others were arrested in a separate action in Liberty County, Texas for interrupting construction on the Keystone XL at work sites there. Solidarity actions took place in Michigan, Maine, Massachusetts, Wisconsin and New York, including actions at banks known to have investments in the Alberta tar sands. In Massachusetts eight student organizers locked themselves inside a TransCanada office, super-gluing their hands together to symbolize how fossil fuel corporations have us all locked into to irreversible climate change. The sit-in was organized by Students for a Just and Stable Future, a student coalition also campaigning to divest university endowments from the top 200 fossil fuel companies.
EPA changed course after oil company protested - When a man in a Fort Worth suburb reported his family's drinking water had begun bubbling like champagne, the federal government sounded an alarm: An oil company may have tainted their wells while drilling for natural gas. At first, the Environmental Protection Agency believed the situation was so serious that it issued a rare emergency order in late 2010 that said at least two homeowners were in immediate danger from a well saturated with flammable methane. More than a year later, the agency rescinded its mandate and refused to explain why. Now a confidential report obtained by The Associated Press and interviews with company representatives show that the EPA had scientific evidence against the driller, Range Resources, but changed course after the company threatened not to cooperate with a national study into a common form of drilling called hydraulic fracturing. Regulators set aside an analysis that concluded the drilling could have been to blame for the contamination. For Steve Lipsky, the EPA decision seemed to ignore the dangers to his family. His water supply contains so much methane that the gas in water flowing from a pipe connected to the well can be ignited. "I just can't believe that an agency that knows the truth about something like that, or has evidence like this, wouldn't use it," said Lipsky, who fears he will have to abandon his dream home in an upscale neighborhood of Weatherford.
When Privatization Works, and Why It Doesn’t Always - Few corporate sagas capture the virtues and vices of state-owned companies and private enterprise better than the drama of BP’s roller-coaster ride between failure and success. Ten years ago, BP was the darling of the energy world — the unprofitable duckling transformed by privatization under the government of Margaret Thatcher into a highly profitable swan. The London civil servants of the 1960s and ’70s who all but ignored profitability as they issued directives across British Petroleum’s bloated corporate network were replaced by highly motivated managers who were rewarded for cutting costs, reducing risk and making money. The company’s more incongruous businesses — food production and uranium mines, for instance — were sold. Payroll was cut by more than half. Oil reserves jumped. The time it took to drill a deepwater well plummeted. Profits soared. But then, in 2005, a BP refinery in Texas City blew up, killing 15 and injuring around 170. In 2006, a leak in a BP pipeline spilled hundreds of thousands of gallons of oil in Prudhoe Bay, Alaska. And in 2010, an explosion on the Deepwater Horizon oil rig killed 11 and resulted in the biggest offshore oil spill in the history of the United States. These days, BP’s stock trades about 25 percent below where it was before the disaster off the coast of Louisiana, about the same place it was a decade ago.
Why We Now Oppose Drilling in the Arctic - The Arctic Ocean is subject to some of the most volatile weather patterns on the planet. Geologists believe it also contains vast undersea oil and gas reserves. Last year, the Arctic’s ice cover shrank to the lowest levels in recorded history and, not coincidentally, Royal Dutch Shell Plc (RDSA) received the first permits in decades to begin prospecting for oil and gas in federal waters north of Alaska’s wilderness. Developers and President Barack Obama’s administration assured us these operations would be safe, thanks to strict oversight and new technology. Now it seems this optimism was misplaced. Unfortunately for Shell and other oil producers seeking to exploit the region, the company’s best efforts were met with multiple failures. We were open to offshore oil and gas development in the Arctic provided oil companies and the government could impose adequate safeguards, ensure sufficient response capacity and develop a deeper understanding of how oil behaves in ice and freezing water. Now, following a series of mishaps and errors, as well as overwhelming weather conditions, it has become clear that there is no safe and responsible way to drill for oil and gas in the Arctic Ocean.
BP's Big Plan: Burn It. Burn It All. - Ignoring overtly and by design the dire and repeated warnings of scientists who say that in order to avoid catastrophic and irreversible changes to the world's climate we must drastically reduce carbon emissions by curbing our use of fossil fuels, BP has a different plan for the next two decades which translates to this: Burn it. Burn whatever we can find. Amid release of its annual Energy Outlook Report, BP's chief executive Bob Dudley says that a surge in unconventional carbon fuel extraction should be heralded, not challenged.“The Outlook shows the degree to which once-accepted wisdom has been turned on its head," Dudley said in the statement. "Fears over oil running out — to which BP has never subscribed — appear increasingly groundless."Focusing on shale oil and other hard-to-reach fuels and citing "favourable regulatory terms" in North American countries (namely the US and Canada) for current profit growth, BP plans says that it now hopes less developed countries "will succeed" in paving a path for more unconventional fuel extraction in the coming years. BP's plan says that its global oil extraction could increase over the next two decades.But the result, as The Guardian's Fiona Harvey points out, is thatcarbon dioxide emissions will rise by more than a quarter by 2030 – a disaster, according to scientists, because if the world is to avoid dangerous climate change then studies suggest emissions must peak in the next three years or so.
Alberta oil selling at 50% discount to world price… …which explains why the Canadian government is Hell-and-High-Water-bent on building a pipeline, any pipeline, anywhere. First, the stats Over the past few months, new stories have noted that Canada’s oil sector isn’t getting full price for its heavy oil — in large part because American pipelines are well-supplied with newly-flowing tight oil (“shale oil”) from North Dakota. As a side note, I should clarify that heavy oil — termed Western Canada Select — is a somewhat-upgraded form of bitumen. Removing the sulfur and upgrading the oil a bit more, would turn it into the “light sweet crude” used for the world’s billion automobiles.) Western Canada Select is more refined, and more value-added, than the diluted bitumen that Enbridge has proposed to ship to the coast of British Columbia. The Kalamazoo River spill in 2010 that added $750+ million in cleanup costs to the local economy, involved diluted bitumen (and Enbridge). The discount on Alberta heavy oil is measured relative to the North American benchmark price, which is for West Texas Intermediate (WTI) crude. And said discount has been growing faster than a pimple before prom reaching a jaw-dropping $40 per barrel this week. WTI sells for $96 per barrel, and Alberta heavy sells for … $56. One barrel of oil is about 160 Litres, so this means that Alberta is giving up 25 cents per litre on its oil exports. By way of comparison, the current WTI price works out to a total price of only 60 cents per litre. We’re talking some serious discounting, here.
Bakken Well Stats - In response to my last post on US oil rig counts several people pointed me at some interesting data on Bakken (North Dakota) oil. The above graph is plotted from that data and shows the total number of producing wells and the average number of barrels/day coming from each member of that producing pool. (Note that wells could be being retired from the pool by being shut-in due to low production as well as being added by new drilling). Overall, the conclusion I take away is that the productivity of the Bakken well population is reasonably stable and there is no sign of a drop off. These aren't very high productivity wells, but obviously it's been enough to allow the operators to make money. There's also no sign of a slowing down in the rate of wells being added. In short, no sign of an end to the boom here.
Not at that price: Why long-term forecasts for cheap oil and natural gas are baseless - Here's the short version of why forecasts of low long-term oil and natural gas prices are almost certainly wrong: It costs more than that to get the stuff out of the ground. Only two things could actually lead to low long-term prices: 1) Somebody could invent and deploy some genuinely brand new technology that makes it really cheap once again to get oil and gas out of the ground or 2) we could have a deep and grinding deflationary depression that brings demand for oil and natural gas down so much that prices collapse. The people who are predicting $50, now $45 oil, and $3, now $2 natural gas (in the United States) for as far as the eye can see believe that such prices will result from the already widespread application of current technology. And yet, the very companies that use that technology to extract these hydrocarbons say that there's no way they can produce them profitably at those prices. ExxonMobil's CEO said last year, "We are losing our shirts" selling natural gas at such low prices. Forecasts for much lower oil prices would also represent losses on new wells for most oil producers. Here's why: The full cost of producing new oil for the 50 largest publicly traded oil companies in the world is $92 a barrel according to Bernstein Research. While average costs are lower because they include previously discovered conventional oil which is cheaper and easier to produce, the Bernstein report challenges the notion that new technologies will lead to cheaper oil.
U.S. to Become Largest Liquid-Fuels Producer in 2013, BP Says - The U.S. will surpass Russia and Saudi Arabia this year to become the largest producer of liquid fuels, BP Plc (BP/) said. Liquids output, which includes oil, natural gas liquids and biofuels, will be boosted in the U.S. by tight oil extracted by the same technology that sparked a boom in shale gas, BP said today in its Energy Outlook 2030. Tight oil will account for 9 percent of global supplies by 2030, with North America dominating. “The speed with which tight oil is following shale gas has surprised us,” BP Chief Economist Christof Ruehl said on a conference call with journalists. “It’s also surprising how fuel intensity and fuel efficiency have improved so rapidly.” BP maintained its projections for world energy demand growth in the next two decades of about 1.6 percent a year, with most of the increase coming from developing countries outside the Organization for Economic Cooperation and Development. The rate of increase in global consumption is declining as fuel efficiency rises. The U.S. will become the biggest oil producer for about five years starting in 2020, the International Energy Agency said in November. While Russia and Saudi Arabia will overtake the U.S. again by 2030 as shale oil production slows, the U.S. will be 99 percent self-sufficient by then, BP said today.
America, the Saudi Arabia of tomorrow - Let's stop for a moment and take a look at a slow-motion development changing the world as we know it: The United States is giving up its addiction to foreign oil. For decades, we bemoaned the awful toll this addiction has taken. The need for oil and natural gas -- much of it from Middle Eastern dictatorships -- shaped the foundation of global geopolitics. It created morally questionable alliances and repeatedly placed Washington in a position to choose between its fundamental values and its economic interests. Now all that could change. When President Obama started his first term, the country faced stiff economic headwinds. Now, as he prepares to start his second term, the country enjoys a rare and unexpected tailwind, propelling it in one of the most important areas, with a host of positive implications.Clearly, the booming American oil and gas businesses are not problem-free, but the benefits -- economic, geopolitical and environmental -- of this impending energy independence far outweigh the drawbacks. The days when Mideast oil-producing dictatorships and their friends at OPEC could so easily wave their power over a trembling, oil-thirsty West are on their way to becoming a relic of the past.
N.D. oil yield drops — Winter weather contributed to a 2 percent decline in North Dakota’s oil production in November, the first drop in 19 months, the Department of Mineral Resources said Friday. North Dakota produced 733,078 barrels of oil per day in November, according to preliminary figures from the department, a 2.2 percent drop from October’s daily production of 749,212 barrels. Helms said officials expected another increase of 2 percent to 3 percent for November, but Nov. 10, 2012, was the snowiest day for Williams County since 1901. The storm caused some operators to shut down operation for a few days and truck transportation of oil “slowed to a halt,” Helms said. The last time North Dakota saw a month-to-month decline in oil production was in April 2011, also due to a snowstorm, said Alison Ritter, spokeswoman for the department. The number of idle wells waiting for hydraulic fracturing crews at the end of November rose to 410, about a 20 percent increase over October. “The fracking has really slowed down,” Helms said. “It certainly is a trend that concerns me.”
Bakken Oil Output Fell in November for First Time in 18 Months - Bloomberg: Oil output from North Dakota’s portion of the Bakken shale formation slipped in November for the first time in 20 months after producers began pulling rigs out of the state. Production declined 2.2 percent from October to 669,000 barrels a day, according to the North Dakota Industrial Commission. It was the first month-to-month drop since April 2011. The decline closely followed a decline in rig counts in the state, from 210 on Oct. 19 to 181 on Nov. 30, according to data compiled by Smith Bits, a drilling products and services provider owned by Houston- and Paris-based Schlumberger Ltd. (SLB) Bakken wells tend to have steep decline rates because they’re created with directional drilling and hydraulic fracturing, James Williams, president of WTRG Economics in London, Arkansas, said by telephone. “The question is, are you drilling enough new wells to make up for the decline?” he said. “With a little decline in the rig count, and the very fast depletion rate of the wells, it’s not terribly surprising that the Bakken production leveled off.”
US Oil Rig Count Declining - I noted back in October that there seemed to be something of a pause in the huge oil-drilling boom in the US. Going back to the data again today, it appears that the rig count in the US peaked in the summer of 2012 and has actually been declining since. Given the very high decline rates of the shale-oil plays that most of these rigs are drilling in, it seems this means that the US oil production increase will also have to slow sharply or stop in 2013/2014. Unless the rig count starts increasing again - it's not clear to me why it stopped, so it's hard to say whether or not the climb will resume.
New Saudi refineries to reduce crude oil export cushion - Saudi Arabia’s drive to build new refineries means its maximum capacity to export crude, the big gun it aims at other producers wanting higher oil prices, is set to decline over the next five years. Major oil importers are not alarmed, as actual Saudi crude exports are well below their maximum and because more US and Iraqi crude will become available. But India’s refining industry has reason to worry about the emergence of a rival processing more than a million barrels a day. The three new refineries, each able to process 400,000 barrels per day (bpd) of mainly heavy crude, could consume nearly a tenth of the kingdom’s current officially declared production capacity of 12.5 million bpd when they are all fully operational in 2017. Saudi Arabia has so far used its unique ability to produce much more crude than needed to counter price hawks led by Iran in the Organization of the Petroleum Exporting Countries and keep prices at levels that do not over burden the world economy. Now the world’s largest crude exporter has invested tens of billions of dollars raising refinery capacity to maximize profits by selling more products while cutting a fuel import bill that has ballooned since 2007 as domestic demand grew. The trio of refineries will continue major exports of petroleum in the form of diesel and gasoline, moderating any erosion of the kingdom’s overall clout in crude oil markets.
Saudi Arabia Says Oil Production Cut Not to Boost Price - Saudi Arabia denied what it said were suggestions that it cut oil production in December to push crude prices higher and accused unidentified media of misinterpreting the kingdom’s response to weaker demand. The world’s biggest crude exporter is “strongly committed to a stable oil market” and is “optimistic that economic uncertainties will pass and growth will resume in 2013,” Ibrahim Al-Muhanna, an adviser to Oil Minister Ali al-Naimi, said today in a statement e-mailed to energy journalists. Saudi Arabia reduced output in December by 4.9 percent to 9.025 million barrels a day, the lowest level in 19 months, a Gulf official with knowledge of the country’s energy policy said last week. The kingdom is the largest member of the Organization of Petroleum Exporting Countries and the only one with significant unused capacity to produce more. Some recent media reports were “categorically wrong” for interpreting the decrease in Saudi output last month as a “deliberate attempt” to push oil prices higher, Al-Muhanna said. “Production is primarily driven by customer requirements, not by price levels. It is the market which sets the price of oil.”
IEA Head Doesn't See Further Decline in Crude Production - Saudi Arabia cut its oil production by close to 5% to 9.025 million barrels a day in December in response to lower demand chiefly from Asian customers, and comes amid expectations for lower demand for crude oil from the Organization of the Petroleum Exporting Countries this year. Asked by Dow Jones Newswires in an interview if the market is likely to see further production cuts this year, Mrs. Van der Hoeven said: "I don't think so." "What strikes me when looking at Saudi Arabia is that they always have a very, very keen eye on the demand of the market," said Mrs. Van der Hoeven. She declined to comment about the current oil price but said that, "OPEC met demand and they did it in a very reliable way." Demand has been slowing down in Asian and European countries "and we have also seen that stocks have been built, there is a lot of oil, floating stocks, traveling in ships," she said. But there were some signs that the global economy is recovering and that the economic picture could change this year, Ms. Van der Hoeven said.
Oil Trades Near Four-Month High After Crude Supply Drop - Oil traded near the highest level in four months in New York as a surprise drop in U.S. crude inventories countered concern that the global economic recovery may falter and curb fuel demand. West Texas Intermediate was little changed after rising 1 percent yesterday, the most in two weeks. Crude supplies slid 951,000 barrels last week, Energy Department data showed. They were forecast to increase by 2.2 million, according to a Bloomberg survey. WTI’s discount to Brent futures narrowed to less than $15 a barrel for the first time since July after the start of an expanded pipeline that is set to pare a glut in the U.S. Midwest.
Peak oil theories 'increasingly groundless', says BP chief - Warnings that the world is headed for "peak oil" – when oil supplies decline after reaching the highest rates of extraction – appear "increasingly groundless", BP's chief executive said on Wednesday. Bob Dudley's remarks came as the company published a study predicting oil production will increase substantially, and that unconventional and high-carbon oil will make up all of the increase in global oil supply to the end of this decade, with the explosive growth of shale oil in the US behind much of the growth. As a result, the oil and gas company forecasts that carbon dioxide emissions will rise by more than a quarter by 2030 – a disaster, according to scientists, because if the world is to avoid dangerous climate change then studies suggest emissions must peak in the next three years or so. So-called unconventional oil – shale oil, tar sands and biofuels – are the most controversial forms of the fuel, because they are much more carbon-intensive than conventional oilfields. They require large amounts of energy and water, and have been associated with serious environmental damages. While some new conventional oilfields are likely to come on stream before 2020, they will be balanced out by those being depleted.BP predicts that by 2030, the US will be self-sufficient in energy, with only 1% coming from imports, the company's analysts predict. That would be a remarkable turnaround for a country that as recently as 2005, before the shale gas boom, was one of the biggest global oil importers.
IEA Sees Tighter Oil Market, Boosts Global Demand F’cast - The International Energy Agency raised forecasts for global oil demand this year because of stronger growth expectations for China and said the world oil market is “tighter” than previously estimated. “All of a sudden, the market looks tighter than we thought,” the Paris-based agency said, boosting its 2013 global demand forecast by 240,000 barrels a day. World consumption will increase by 900,000 barrels a day, or 1 percent, this year to average a record 90.8 million. Saudi Arabia, the world’s largest exporter, reduced production from its highest in 30 years, and inventories in developed economies are contracting after accumulating in much of 2012, according to the IEA. “China has been doing quite a bit of growth-supportive policy,” Amrita Sen, chief oil market strategist at research consultant Energy Aspects Ltd. in London, who predicts the IEA may further increase its demand forecast for the Asian country. “Clearly there’s an underlying momentum” in the nation’s consumption, she said. Brent crude futures traded at $111 a barrel on the London- based ICE Futures Europe exchange today, after advancing 3.5 percent last year. Economic growth in China, the world’s biggest energy user, accelerated in the fourth quarter for the first time in two years amid government measures to revive demand. China will use 390,000 barrels a day, or 4 percent, more oil this year than in 2012, to reach 10 million a day, according to the adviser to energy-consuming nations. That’s 135,000 more than previously predicted.
Goldman Sachs Strategist: Oil Price Could Reach $150/Bbl in Summer | Fox Business: The price of oil could reach as much as $150 per barrel this summer, Goldman Sachs chief commodities strategist Jeff Currie said Thursday. At this year's global strategy conference in Frankfurt, Mr. Currie that he thinks it possible the price may reach $150 a barrel for Brent oil. He said he wouldn't be surprised "if we woke up in summer and oil cost $150" per barrel. In December, Goldman's official forecast for 2013 was around $100 a barrel. Brent oil to be delivered in February at present costs $110, while WTI costs $94. Mr. Currie pointed out that despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran. Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.
High oil prices nothing to do with supply and demand, IEA head says - Record high oil prices cannot be explained by today's supply and demand levels, says the head of the International Energy Agency (IEA). "The strange thing is that though demand is sufficiently supplied, the price is high, and well, this might have to do with expectations," said Maria van der Hoeven, the executive director of the IEA. "It might also have to do with a risk premium. But we cannot say for sure that there is a direct relation between price and what some say is speculation." Oil advanced to the highest level in four months in New York yesterday as a surprise drop in US crude inventories countered concern that the global economic recovery may falter and curb fuel demand. West Texas Intermediate (WTI) for delivery next month was at US$94.76 a barrel, up 52 cents, in electronic trading on the New York Mercantile Exchange at midday London time. The contract climbed 96 cents to $94.24 the day before, the highest close since September 18. Brent for March settlement on the London-based ICE Futures Europe exchange gained 64 cents to $110.32 a barrel
Why you should Ignore any Long-Term Forecasts of Cheap Crude - Here's the short version of why forecasts of low long-term oil and natural gas prices are almost certainly wrong: It costs more than that to get the stuff out of the ground. Only two things could actually lead to low long-term prices: 1) Somebody could invent and deploy some genuinely brand new technology that makes it really cheap once again to get oil and gas out of the ground or 2) we could have a deep and grinding deflationary depression that brings demand for oil and natural gas down so much that prices collapse. The people who are predicting $50, now $45 oil, and $3, now $2 natural gas (in the United States) for as far as the eye can see believe that such prices will result from the already widespread application of current technology. And yet, the very companies that use that technology to extract these hydrocarbons say that there's no way they can produce them profitably at those prices. ExxonMobil's CEO said last year, "We are losing our shirts" selling natural gas at such low prices. Forecasts for much lower oil prices would also represent losses on new wells for most oil producers. Here's why: The full cost of producing new oil for the 50 largest publicly traded oil companies in the world is $92 a barrel according to Bernstein Research. While average costs are lower because they include previously discovered conventional oil which is cheaper and easier to produce, the Bernstein report challenges the notion that new technologies will lead to cheaper oil.
Despite Sanctions, Iran’s Economy Limps Along - In the 20th century, upright moral nations developed a new method of showing international opprobrium to rogue nations, the implantation of economic sanctions, designed to modify a recalcitrant nation’s behavior to accommodate international political mores. The most infamous example is the U.S. unilaterally imposing an oil embargo on Japan in July 1941, which most historians now agree led directly to Pearl Harbor, Fast forward to 2013, and Washington is seeking yet again to use sanctions to influence Iran’s domestic policies, most notably its support for insurgent (terror) regimes and its civilian nuclear uranium enrichment program, which Tehran maintains is entirely peaceful, but which the U.S. and Israel assert in fact masks a covert program to develop a nuclear weapon capacity. Iran is now unique in the world that it is currently subject to a series of sanctions regimes, including those imposed by the U.S., the European Union and the United Nations Security Council.
Iran Removes Euro and Dollar From Trade Exchanges; More Symptoms of Iranian Hyperinflation - Inquiring minds note that Iran removes euro and dollar from its trade exchanges. Minister of Economic Affairs and Finance Shamseddin Hosseini said Monday that Iran would no longer use euro and dollar in its trade exchanges according to a decision made by the government's economic working-group. Iranian state news agency IRNA writes about this. "Iran's government is determined to remove euro and dollar from its foreign trade and is to change its foreign trade pattern," said the minister while speaking to reporters at the end of a meeting with the representatives of the Economic Cooperation Organization (ECO) member countries. Iran removed the Euro and dollar from its foreign trade patterns not because it wished to do so, but rather because it has no euro or dollar reserves it can use.
Diesel demand in India seen immune to stepped price hikes - Yahoo! News: - India's demand for diesel will stay buoyant despite its plan to hike the price of the fuel in small monthly steps, analysts and company officials said on Friday, and the country will keep up the pace of its exports of diesel. From Thursday, government allowed state fuel retailers to raise prices by up to 0.50 rupees, or one U.S. cent, a litre each month to gradually align them with market rates, and has also freed up the price of gasoil sold to bulk consumers. The plan aims to prop up public finances without triggering a popular backlash ahead of 2014 elections as India struggles to rein in fuel subsidies and hold down its fiscal deficit. The country's biggest fuel retailer, Indian Oil, said it now loses revenue of about 9 rupees a litre on the sale of diesel, meaning the hikes will have to run for about a year-and-a-half in order to reflect market realities. "This is a sensible approach and I don't think this will impact demand because they are going to increase the prices in a gradual way and people will get used to it,"
Greenland rare earths: No special favours for EU: The prime minister of Greenland says he will not favour the EU over China or other investors when granting access to highly prized rare earth minerals. Kuupik Kleist said it would not be fair "to protect others' interests more than protecting, for instance, China's". Greenland, a vast autonomous Danish territory, is not in the EU, even though Denmark is. The EU, US and Japan are in dispute with China over its restrictions on exports of rare earths. China currently produces 97% of the world's rare earths, vital in the manufacture of mobile phones and other high-tech products. The dispute has gone to the World Trade Organization (WTO). Last year China argued that its export restrictions were needed to protect the environment, conserve supplies and meet domestic demand. Currently Greenland's rare earth resources are being intensively investigated. The European Commission estimates that those resources could total 9.16% of the global rare earth deposits.
China Power Output Rises to Four-Month High as Industry Expands - China’s power output rose to the highest in four months in December as industrial production in the world’s largest energy user grew more than forecast. Electricity production increased to 432.7 billion kilowatt- hours, the most since August, data from the National Bureau of Statistics showed today. That’s up 7.6 percent from the same period last year. Power generation climbed 4.7 percent over the year to 4.82 trillion kilowatt-hours, down from 12 percent growth in 2011 as the nation’s economy slowed. Industrial output expanded by a more-than-expected 10.3 percent in December, accelerating for a fourth month. The increase compared with the 10.2 percent median forecast in a Bloomberg survey of 44 analysts and was the fastest pace since March. Gross domestic product rose 7.9 percent in the fourth quarter from a year earlier and 7.8 percent for the full year. China’s growth in power use will accelerate this year to more than 9 percent, the State Electricity Regulatory Commission said yesterday. Electricity consumption rose 5.5% to 4.96 trillion kilowatt-hours last year, the commission said. The nation has set a 2013 industrial-output growth target of 10 percent, equivalent to the nation’s real industrial production rate for 2012
Beijing air pollution soars to hazard level - Air pollution in the Chinese capital Beijing has reached levels judged as hazardous to human health. Readings from both official and unofficial monitoring stations suggested that Saturday's pollution has soared past danger levels outlined by the World Health Organization (WHO). The air tastes of coal dust and car fumes, two of the main sources of pollution, says a BBC correspondent. Economic growth has left air quality in many cities notoriously poor. A heavy smog has smothered Beijing for many days, says the BBC's Damian Grammaticas, in the capital. By Saturday afternoon it was so thick you could see just a few hundred metres in the city centre, our correspondent says, with tower blocks vanishing into the greyness. WHO guidelines say average concentrations of the tiniest pollution particles - called PM2.5 - should be no more than 25 microgrammes per cubic metre. Air is unhealthy above 100 microgrammes. At 300, all children and elderly people should remain indoors. Official Beijing city readings on Saturday suggested pollution levels over 400. An unofficial reading from a monitor at the US embassy recorded 800.
Beijing skylines yields dramatic view of choking city - Beijing is choking - as these two pictures vividly demonstrate. Above is the city's skyline yesterday; below is the same view on 4 February 2012. The suffocating smog is not just bad for health, it may also have a more potent effect on climate change than previously thought. Dense smog shrouded Beijing over the weekend, causing levels of airborne soot, also known as black carbon, to go off the charts. Some reports put levels of one type of tiny airborne soot particle at well over 30 times the World Health Organization's recommended limit in parts of the city, and hospital admissions were up. But as well as hurting health, soot has an effect on climate change - and a new study suggests this is more potent than we thought. Tami Bond of the University of Illinois at Urbana-Champaign and colleagues report that its warming effect is almost twice the Intergovernmental Panel on Climate Change's estimates, which would make soot the second biggest warmer after carbon dioxide (Journal of Geophysical Research: Atmospheres, DOI: 10.1002/jgrd.50171).
Beijing Orders Official Cars Off Roads to Curb Pollution - Beijing ordered government vehicles off the roads as part of an emergency response to ease air pollution that has smothered China’s capital for the past three days, while warning the smog will persist until Jan. 16.Hospitals were inundated with patients complaining of heart and respiratory ailments and the website of the capital’s environmental monitoring center crashed. Hyundai Motor Co. (005380)’s venture in Beijing suspended production for a day to help ease the pollution, the official Xinhua News Agency reported. Official measurements of PM2.5, fine airborne particulates that pose the largest health risks, rose as high as 993 micrograms per cubic meter in Beijing on Jan. 12, compared with World Health Organization guidelines of no more than 25. It was as high as 500 at 6 a.m. today. Long-term exposure to fine particulates raises the risk of cardiovascular and respiratory diseases as well as lung cancer, according to the WHO.
Pettis: The 2013 points of Chinese rebalancing - The speed with which China’s GDP growth slows in 2013 will tell us a lot about how determined Beijing is to rebalance the economy in such a way that growth is driven more by higher household income and consumption and less by investment funded by rising government and government-related debt. It will also tell us how successful Beijing’s new leadership will be in consolidating power and forcing the kinds of economic and financial reforms on which most economists now agree, but which are likely to be politically difficult. China is ending the year on what many are interpreting as a strong note. Manufacturing seems to be growing at its fastest pace in a while. Here is the relevant article in an article from the People’s Daily: December’s HSBC China final manufacturing PMI rose to a 19-month high of 51.5, thanks to stronger new business in-take and expansion of production, according to figures released by HSBC Monday. The statistics suggest that China’s economy remains on track for recovery as it enters 2013, said the HSBC report. Despite persistent external headwinds, as indicated by still contracting new export orders, the financial organization expects China’s GDP to rebound to 8.6 percent in 2013, underpinned by China’s continued policy support. An article in Monday’s Financial Times puts a little more meat on the bones: Although China is still set for sub-8 per cent growth in 2012, its weakest in more than a decade, momentum picked up noticeably in the fourth quarter after the government increased its spending on infrastructure. “Such momentum is likely to be sustained in the coming months when infrastructure construction runs [at] full speed and property market conditions stabilise,” said Qu Hongbin, HSBC chief economist for China.
China economy rebounds in final quarter - FT video. : The Chinese economy made a strong finish to a difficult 2012 after its growth rebounded in the fourth quarter, setting the stage for a good start to this year. For 2012 as a whole, Chinese growth was 7.8 per cent, its slowest in more than a decade, dragged down by global woes and a domestic campaign to deflate a property bubble. But the economy closed off the year with a jump to 7.9 per cent year-on-year growth in the final three months, up from 7.4 per cent in the third quarter and breaking a streak of seven consecutive weaker quarters. “Overall the economy has been stabilising,” the national statistics bureau said in a statement on Friday. The rebound was driven by a jump in infrastructure spending by the government, which began in the middle of the year when worries mounted about the depth of the slowdown. It was a far cry from the massive stimulus deployed by China when the global financial crisis struck in 2008, but accelerated approvals for rail, road and drainage projects, among others, gave the economy a much-needed boost. A loosening of monetary policy, including two mid-year interest rate cuts, fed through into improved sentiment about property – the single most important sector in the Chinese economy, accounting for more than 10 per cent of GDP – and a recovery in housing prices and construction activity lent support to the rebound.
China Exits Slowdown as Quarterly Growth Tops Forecasts -- China’s economic growth accelerated for the first time in two years as government efforts to revive demand drove a rebound in industrial output, retail sales and the housing market.Gross domestic product rose 7.9 percent in the fourth quarter from a year earlier, the National Bureau of Statistics said in Beijing today. That compared with the 7.8 percent median estimate in a Bloomberg News survey and 7.4 percent in the previous period. Industrial output in December rose a more-than- expected 10.3 percent and fixed-asset investment for the year gained 20.6 percent. The recovery adds to evidence that the global economy is improving, after U.S. data yesterday showed housing starts at a four-year high, European bond yields receded from crisis levels and Japan announced a $116 billion stimulus. To sustain growth, China’s incoming premier, Li Keqiang, may need to confront the fading effects of government support, a likely pickup in inflation and rising risks from shadow banking. “China’s recovery is in quite good shape,” Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, said in a telephone interview. “Domestic pro-growth policies are likely to wane in mid-2013,” yet demand from abroad may pick up in the second half, he said.
Reading the China GDP growth entrails - China’s GDP grew 7.8 per cent in 2012; the slowest full-year of growth in 10 years, as the FT points out.However the figure for Q4 was 7.9 per cent; a little above the consensus for 7.8 per cent. This was the first quarterly increase after seven straight quarters of decline, so it’s probably going to be seen as turning point after which China gets back towards the 8 per cent-plus growth that most forecasts are anticipating.We’d argue it’s hard to say whether that trajectory will take place given the uncertainty about the recent stimulus efforts, and about how the new leadership will tackle the very difficult reforms needed.Zhiwei Zhang of Nomura (who’d forecast an above consensus 8 per cent, based on his observation that stimulus efforts during the quarter looked like being stronger than expected) writes that other data and business sentiment indicators released so far this month are not : This data set reinforces our view that the growth recovery is on track. We expect GDP growth to strengthen further in Q1 2013 to 8.2%. As growth recovers and inflation rises, the likelihood of cuts to the reserve requirement ratio (RRR) or to interest rates declines. We expect authorities to focus more on controlling the risks from inflation and shadow banking.
China Could Be in for Steeper Slowdown - China reported on Friday that its economy rebounded in the fourth quarter after seven straight quarters of declining growth. Market analysts are touting a recovery. But economists Barry Eichengreen, et al warn that Beijing shouldn’t start celebrating yet. China’s economy has already downshifted from more than 10% growth in 2010 to about 8% growth now – and another sharp deceleration is likely to occur in a couple of years, they say. “Our results point to the possibility, but not the certainty, that there will be another step deceleration (in growth) in a few years,” Mr. Eichengreen says. The three economists made a splash with a 2011 analysis that said fast-growing countries tend to slow down by at least two percentage points once they hit a median GDP per capita of around $15,000 in 2005 dollars – the so-called “middle-income trap” — using purchasing power parity adjustments. (PPP tries to account for different prices of products in different countries.) China would hit that mark in a few years, the economist said. In a new paper published this month, the three economists refined their estimates and found that growth usually slows in two steps. The first is when a country reaches GDP per capita of around $11,000 in 2005 dollars, roughly where China is now, and at $15,000, roughly where China is likely to be in a couple of years.
PBOC May Seek More Liquidity Operations - China's central bank will "soon" start gauging demand for two key money market instruments from 12 major banks on a daily basis, indicating a desire to rely on more frequent interbank operations to adjust liquidity conditions and financing costs, three people familiar with the situation told Dow Jones Newswires Friday. The People's Bank of China currently surveys interest in and conducts open market operations with repurchase agreements and reverse repurchase agreements twice a week. Repurchase agreements, or repos, are instruments that the PBOC uses to withdraw liquidity, while reverse repos are short-term loans meant for injecting cash into the system. The PBOC announced the decision at a recent internal meeting with key money market participants, according to the people briefed on the matter. The 12 lenders targeted by the PBOC for the reform include China Development Bank, a former policy bank, and China's Big Four commercial lenders.
China Export Surge Spurs Data Skepticism at Goldman, UBS -- China’s unexpected surge in exports last month renewed concern from analysts at Goldman Sachs Group Inc., UBS AG and Australia & New Zealand Banking Group Ltd. (ANZ) that statistics from the nation can be unreliable. The 14.1 percent jump from a year earlier was the biggest positive surprise since March 2011, according to data compiled by Bloomberg. The increase didn’t match goods movements through ports and imports by trading partners according to UBS, while Goldman Sachs and Mizuho Securities Asia Ltd. cited a divergence from overseas orders in a manufacturing index. Smaller trade gains could signal a less robust recovery from a seven-quarter slowdown just as Australian Treasurer Wayne Swan says the economic rebound is a sign of improving global demand. Accurate statistics from the world’s second-biggest economy are increasingly important for domestic and foreign investors and for China’s government, ANZ’s Liu Li-Gang says. “China’s influence on the global economy has become bigger, so not only Chinese policy makers but also business people and the rest of the world need better data,”
Even Goldman Says China Is Cooking The Books - That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by "hope" from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task - as Bloomberg reports, even the major banks: Goldman, UBS and ANZ - are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.
China Defends Credibility Of Its Trade Data - That China openly manipulates, goalseeks and otherwise distorts its economic data is no secret to anyone: and it is not at all surprising - after all the Chinese GDP model is based on how much goods and services are produced, which means end demand is completely irrelevant, and thus unfalsifiable. It also explains why as part of its miraculous 8% GDP growth year after year, we get such wonderful externalities as ghost cities, the biggest mall in the world lying totally empty, and shoddy buildings that tumble over. But one piece of data that not even China dared to fudge was trade data, for the simple reason that every Chinese "credit" is someone else's "debit", and vice versa, and could therefore be easily confirmed or denied. After all, bilateral trade is always a zero sum game. Except... in China. Which is what the observent eyes of some ANZ (and even Goldman) analysts caught over the weekend, and as was described in "Even Goldman Says China Is Cooking The Books." It didn't take long for China to take offense and boldly state that there is nothing at all wrong with its books.
Is the US trade deficit with China a lot smaller than we think? - The above chart from The Economist is one that sticks in my brain. I love how counterintuitive it is, showing that as China’s currency has strengthened, China’s trade deficit has widened. Perhaps the supposed undervaluation of the renminbi isn’t such a big deal. (And keep in mind that this chart doesn’t adjust the exchange rate for inflation. On that basis, the appreciation has been far more dramatic.) And anyway, it may be that America’s trade deficit with China is far smaller than currently thought. The FT: In a joint study, the Organisation for Economic Co-operation and Development and the World Trade Orgaisation have for the first time highlighted the flaws in labels such as “Made in China” or “Made in Germany”, by tracking the origin of components and services rather than final products. While traditional trade figures classify the sale of a Munich-assembled BMW to the US as an entirely “German” export, many of the components will have been sourced outside Germany. According to the joint study, the US trade deficit with China in 2009 was not $176bn but $131bn – or 25 per cent lower – because so much of the value of “Chinese” electronic exports include components sourced from other countries such as South Korea and Japan.
Analysis: Japan’s Abe rolls out strategic PR, policy campaign (Reuters) - Buoyed by a December election landslide, Japanese Prime Minister Shinzo Abe is rolling out a comprehensive PR strategy mixing Facebook, public appearances and policy announcements to prop up voter ratings ahead of a crucial July poll in an effort to avoid becoming just the latest of the country's short-term leaders. Backed by media-savvy advisers, Abe and his Liberal Democratic Party (LDP) hope to stay in power long enough to implement a broader agenda going well beyond reviving a stagnant economy to altering a pacifist constitution, seeking a bigger global security role and revising Japan's take on its wartime history. The strategy, a far cry from the often mixed and amateurish messages of Japan's revolving door leaders, is aimed at giving the LDP and its coalition partner a good shot at winning a July upper house poll to take control of both houses of parliament. "They are not only being strategic in what they announce and when - taking time for people to digest the announcements - but they are being strategic in how they talk about things," "They're giving people a sense of what it means - the 'whys' rather than just 'here are the facts'."
Japan Steps Out, by Paul Krugman - For three years economic policy throughout the advanced world has been paralyzed ... by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing ... can be done, except ever harsher austerity, which will someday, somehow, be rewarded. But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan. This isn’t the maverick we were looking for. In Japan governments come and governments go, but nothing ever seems to change — indeed, Shinzo Abe, the new prime minister, has had the job before, and his party’s victory was widely seen as the return of the “dinosaurs” who misruled the country for decades. Furthermore, Japan, with its huge government debt and aging population, was supposed to have even less room for maneuver than other advanced countries. But Mr. Abe returned to office pledging to end Japan’s long economic stagnation, and he has already taken steps orthodoxy says we mustn’t take. And the early indications are that it’s going pretty well
Worthwhile Japanese Initiative - Paul Krugman - Shinzo Abe has taken Japan off in a surprisingly Keynesian direction. Noah Smith points out, again, that he’s probably doing it for disreputable reasons, mainly old-fashioned LDP pork-barrel (katsu barrel? tofu barrel?) politics. But this may not matter. Noah also raises a different point: does Japan really need a big boost? He points to the low measured unemployment rate; after a couple of decades of watching Japanese unemployment numbers, I don’t think that tells us much. But there is a case to be made that Japan’s economy is in better shape than most people believe. Overall GDP growth since the crisis has been roughly comparable to the euro area, but with far worse demography: In fact, given that Japan’s working-age population is actually shrinking, there’s a reasonable argument to the effect that Japan is closer to potential output than the US. But if Japan is doing relatively well in cyclical terms, it’s still far from clear that macroeconomic caution is appropriate. After all, Japan has a much longer-term monetary issue: persistent deflation, which among other things has meant that Japanese real interest rates have been well above those in the United States even though nominal rates are low. (I wrote about that here.)What Japan needs, then, is to boot itself out of its deflationary trap; and a situation where there isn’t too much economic slack is actually a very good time to do that.
Japan's Teachable Moment - Paul Krugman - Whatever else you can say about the new turn in Japanese policy, it’s offering a great demonstration of the peculiarities of zero-lower-bound economics. (JGBs meet the ZLB, OK!) The key point here is that Japanese short-term rates are hard up against zero. Long-term rates aren’t, but they’re still constrained: the long rate is, to a first approximation, the average of expected future short rates; short rates can go up but not down; so the long rate is kept some ways above zero, no matter how bad the current economy, by this one-way option. Long rates are also, as part of this process, fairly sticky, responding only slightly to changes in economic fundamentals. (Serious econowonks may recognize the affinity with the old target zones literature). As a result, Japanese long rates have dropped much less than rates in other advanced countries: And now that Japanese policy makers have, at least for now, managed to persuade markets that deflation will give rise to mild inflation, this has not been reflected at all in a rise in nominal interest rates; instead, it’s all a fall in real rates. In the figure below, from here, the orange line is the nominal rate on 10-year Japanese bonds; the green line the rate on inflation-indexed bonds; and the red line the implied forecast of inflation:
Notes on Japanese Numbers (Boring) - Paul Krugman - A bit of a backup, utility post, for those trying to keep track of these things. First, about Japanese employment performance. I’ve been getting some comments from people who look at the FRED numbers of the employment-population ratio, which look like this: Catastrophe, right? Well, you want to read the fine print: the “working-age” population used here is everyone 16 and up — that is, it doesn’t correct for aging. If you use the ep ratio for Japanese aged 16-64, available from Eurostat, it looks like this: Kind of a different story. Second, some people have been pointing out that the Japan breakeven, the implied inflation forecast from the spread between ordinary and inflation-linked bonds, behaved very erratically in 2008-2009, and they suggest that this casts doubt on the measure’s usefulness. But this isn’t a uniquely Japanese phenomenon: the same thing happened to the US breakeven. And we know why: in the immediate post-Lehman environments, anything that wasn’t hugely liquid, including indexed bonds, sold at a huge discount. There’s no reason to believe that recent breakevens are anything like that unreliable.
The Japanese Stimulus – Will It Work? - There’s a lot of talk flying around about the Japanese stimulus. Some appears to be misguided, some appears to be sensible. Let’s review the off-base reactions first, then the sensible talk and then finally review the results of the previous stimulus to see what the present stimulus might produce. In a recent article, Bloomberg cited a number of economists from various banks who argued the stimulus probably won’t work very well. One of these, Azusa Kato from BNP Paribus, sums up this attitude nicely. “Fiscal stimulus is like morphine, because if you want to maintain the same level of effect you have to keep upping the dose,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Japan has failed to achieve a sustainable economic expansion, and the country’s record proves the strategy is wrong.”Nice metaphor, but what does it mean? When economists discuss the effects of fiscal stimulus they generally refer to what they call the “multiplier”. The multiplier is the amount by which national income and employment will increase when new spending or investment is injected into the economy. So, for example, if the Japanese government hires a bunch of construction workers it is assumed that these workers will spend some of their income on consumer goods. This then generates employment and incomes in the consumer goods sector and these people in turn spend their income on, say, other consumer goods which generates further employment. This process goes on and on in an ever-diminishing cascade until finally comes to a halt. The amount of income this generates at the end of the process is known as the “multiplier”
Japan to Sell Debt Worth 7.8 Trillion Yen to Pay for Stimulus - Japan will sell an additional 7.8 trillion yen ($88 billion) in bonds this fiscal year to help pay for economic stimulus, the government said, slowing its attempt to curb the world’s largest debt burden. The finance ministry said today in Tokyo it will issue 5.5 trillion yen in construction bonds, while reducing deficit- financing bonds by 299 billion yen, bringing new financing debt sales for the year through March to 49.5 trillion yen. It will also sell 2.6 trillion yen trillion yen in so-called bridge bonds to finance pension payments. Prime Minister Shinzo Abe wants to spur growth to bring the economy out of recession and end more than a decade of deflation. The extra bond issuance may heighten concern that the government’s commitment to fiscal reform is slipping, adding to the risk that a public debt more than twice the size of the economy may trigger a surge in bond yields. “Abe’s stance on fiscal consolidation is still unclear, whether he wants to pursue more spending combined with bond sales or if it’s just limited to this latest supplementary budget,”
BOJ eyes open-ended asset buying, agrees new inflation goal (Reuters) - Japan's government and central bank have agreed to set 2 percent inflation as a new target next week, when the Bank of Japan will also consider making an open-ended commitment to buy assets until the target is in sight, sources familiar with the BOJ's thinking told Reuters. The central bank will also discuss at its policy review on Monday and Tuesday, scrapping interest it pays on banks' reserves, a move that will nudge money market rates to zero, according to the sources. Faced with relentless pressure from Prime Minister Shinzo Abe to do more to pull Japan out of deflation, the BOJ is expected to double its inflation target and ease policy again at a two-day policy review that ends on Tuesday. While the most likely option would be for the BOJ to top up its long-standing asset buying programme, central bankers will likely debate other measures such as open-ended asset purchases, to live up to market expectations for bolder monetary stimulus. Any new initiatives would surprise investors, possibly putting the yen under more selling pressure and further boosting Japanese stocks, which have hit their highest levels in nearly three years on hopes of bolder policy measures. The BOJ and the government are finalizing a joint statement they plan to issue on Tuesday, which would include 2 percent inflation as the bank's policy goal, deputy economics minister Yasutoshi Nishimura told Reuters.
IMF’s Zhu Says Japanese Debt Overhang Is Getting More Serious - International Monetary Fund official Zhu Min said Japan’s debt burden is becoming “more serious” as the government takes extra steps to stimulate growth in the world’s third-biggest economy. “The debt overhang is becoming more serious so they need to go further in fiscal consolidation,” Zhu, a deputy managing director at the IMF, said in an interview in Hong Kong today, where he’s attending the Asian Financial Forum. Japan announced 10.3 trillion yen ($115 billion) in fiscal stimulus last week as Prime Minister Shinzo Abe followed through on election pledges to weaken the yen, counter deflation and spur economic growth. The risk is that the nation’s debt burden, estimated by the IMF at 237 percent of gross domestic product last year, will lead to a surge in government bond yields.
Japan should rethink its stimulus - Adam Posen - Japan demonstrates a different reality about the problems of excessive debt – one that Shinzo Abe, its new prime minister, should keep in mind as he launches a fiscal stimulus package. Japanese public debt has ballooned for 20 years, rising from 60 per cent to 220 per cent of gross domestic product (though the true figure net of government holdings may be 130 per cent). During that time Japan has been in recession, recovery and back in recession, but interest rates on Japanese government bonds have remained below 2 per cent for the past 13 years. While the debt accumulated, the yen appreciated from Y130 to Y78 to the dollar, before reversing to Y89 over the past few months. Japan was able to get away with such unremittingly high deficits without an overt crisis for four reasons. First, Japan’s banks were induced to buy huge amounts of government bonds on a recurrent basis. Second, Japan’s households accepted the persistently low returns on their savings caused by such bank purchases. Third, market pressures were limited by the combination of few foreign holders of JGBs (less than 8 per cent of the total) and the threat that the Bank of Japan could purchase unwanted bonds. Fourth, the share of taxation and government spending in total Japanese income was low. Getting away with something is not the same as getting off cost-free. Each of these factors enabling the ongoing fiscal deficits has had its costs to Japan. Stuffing bank balance sheets with JGBs has constrained commercial lending by those banks – even during the recovery of 2003-08 – which harmed small and new business development. The persistently low returns on Japanese savings have further squandered investment opportunities, thereby creating a negative feedback loop with deflation and older savers’ risk aversion. The absence of external pressure has fed the combined long-term appreciation of the yen and stagnation of Japanese stock market returns, both severely distorting the economy. Needed public investment and funds for adequate healthcare and disaster recovery have been crowded out by debt payments, given a relatively fixed share of government in Japanese GDP.
Shinzo and the Helicopters (Somewhat Wonkish) - Paul Krugman - Shinzo Abe’s turn toward expansionary policies has, rather oddly, drawn fire from economists you might have expected to be supportive. Adam Posen — who taught me most of what I know about Japan — is against the fiscal stimulus, and wants a sole focus on monetary expansion to end deflation. Richard Koo likes the stimulus but wants to forget about the whole deflation thing. And I’m a bit puzzled. I have no stake in Abe’s success politically, and no sense of whether he knows what he’s doing. But the case for a coordinated fiscal-monetary push seems overwhelming given the intellectual framework all of us, I think, more or less share. So there is a clear case for breaking out of the deflation trap and moving to modest positive inflation. The question then is how to get there. As far as I can tell, Posen is going with the notion that unconventional monetary policy, by working both on asset demand and on expectations, can do the job. Maybe, but most of us have taken the limited payoff to quantitative easing as a cautionary tale. There’s a lot to say for the notion of using temporary fiscal stimulus to push the output gap down, ideally even causing some economic overheating, to jump-start the transition to an inflationary regime.
World Bank cautions on economic stimulus - FT.com: Developing countries should not be tempted to stimulate their economies this year in the face of weak growth, the World Bank warned on Wednesday even though the world faces another challenging year. In forecasts that suggest 2013 will see only marginally stronger growth than last year, the Bank recommends that poor and middle-income countries concentrate on fundamental drivers of prosperity rather than attempt a quick fix. The warning comes as growth rates in large emerging economies including Brazil, Russia and India slowed sharply last year and just days after Japan’s incoming government launched a Y10.3tn ($116bn) stimulus package to revive its economy. Four years after the global economic crisis, the world economy is still expected to struggle to expand at the rates seen in the years immediately before 2008. But the international organisation said “the majority of developing countries are operating at or close to full capacity”. Jim Yong Kim, the World Bank’s new president, said: “The economic recovery remains fragile and uncertain, clouding the prospect for rapid improvement and a return to more robust economic growth”. In its twice-yearly Global Economic Prospects report, the World Bank forecast that global economic growth would pick up from 2.3 per cent last year, measured at market exchange rates, to 2.4 per cent in 2013 although the marginal rise masks an acceleration of activity throughout this year.
How much spare capacity does the world have left? - Most economists accept that the developed economies have been operating considerably below potential GDP since 2008, but there is much less agreement about the size of the output gap, and what should be done about it. This is obviously crucial. The larger the output gap, the greater the waste of resources. Furthermore, the larger the gap, the smaller is the budget deficit when economies return to potential, so the greater is the scope for fiscal expansion today. Keynesians have been focused on these issues for some time, and have generally had the better of the argument in the current recession. Paul Krugman’s contribution to a panel discussion on the macroeconomics is here. Professor Krugman asked the following question: if the output gap is really as large as the Keynesians have claimed, why has inflation not fallen into negative territory? In most developed economies, the core rate of inflation has remained stuck at close to 2 per cent, despite the fact that real GDP has been about 10-13 per cent below its long term trendline for several years in succession. Does this not tell us that potential GDP is in reality much lower than the simple extrapolation of previous trends would suggest? If so, the case for fiscal and monetary expansion suddenly looks much weaker. Paul Krugman’s explanation for the absence of any significant decline in inflation, despite what he believes is a massive output gap, is that nominal wages get stuck at zero instead of turning negative as the recession takes hold.
World Bank Chief Economist: ‘Risky Year’ Ahead For Global Economy - In a new forecast Tuesday, the World Bank projected another year of slow global growth as the U.S. budget showdown joins Europe’s recession to restrain the world economy. The year ahead will be “risky,” World Bank chief economist Kaushik Basu said in an interview with The Wall Street Journal. But the relative calm in financial markets could provide an opportunity for emerging economies to boost growth without being dragged down by advanced economies, said Basu, who joined the bank last fall. Here are excerpts of the conversation: This still looks like a fairly glum outlook for the global economy. What’s wrong? We have come already into a very interesting year – though interesting for analysts does not mean it will bode well for people who live through the year. Downside risks have gone down. Financial markets are calmer. The indicators show that the concerns we had a year ago have diminished. But on the real side, it doesn’t translate into growth. In high-income countries, growth in 2012 was 1.3% and this year will be 1.3%. For developing countries, our forecast is better. It’s a bit of a good sign that emerging economies – the big ones – are expecting some revival. This could well turn out to be a year in which, in the long sweep of retrospective viewing, the baton gets passed from the industrial countries being growth leaders to emerging countries – China, India, Brazil – being the growth leaders.
Rocky road ahead: Global economic challenges 2013 - The next several years will be crucial not only for Russia, but the whole world, which enters an epoch of intensive geopolitical transformations, and possibly upheavals, as President Vladimir Putin noted in his annual Address to parliament. We are facing enhanced competition not only for traditional raw materials, but mainly for human resources, intellect and innovative technology. Those nations that fail in this global race, as British Prime Minister David Cameron describes it, could become more dependent on external factors and end up finding themselves in the backyard of international life. The Global Financial Crisis has been going on for more than four years and prospects remain uncertain and unpredictable. To our deep concern the eurozone problems persist, while Europe is the main trade and investment partner both for the UK and Russia. Ineffective and protracted government measures to resolve the “eurocrisis” and the “fiscal cliff” problem in the US make markets and investors jittery. As a result, we see continued falls in business activity, jobs, trade and investment. The forced fiscal consolidation in developed counties leads to cyclical and spillover decrease in growth in the emerging markets. We are also concerned about wide-spread direct central bank financing, particularly, the so-called programs of “quantitative easing”, i.e. money “printing” instead of normal market financing, while growing budget deficits are not accompanied by concrete and realistic plans of consolidation in the medium-term.
I.M.F. Director Says Global Recovery Is Not Yet Secure - Nations around the globe, especially the United States and those in Europe, need to press forward with fiscal and reform promises to reduce the uncertainties shackling growth, the head of the International Monetary Fund said on Thursday, warning that the global economy barely dodged a bullet last year. Christine Lagarde, the I.M.F.’s managing director, said the euro zone debt crisis and the budget dispute in the United States could have brought growth to a halt, an outcome only avoided by decisions often made at the last minute. In particular, she urged the United States to raise its borrowing limit and pressed Europe to follow through with commitments to tackle its debt crisis. “Clearly, the collapse has been avoided in many corners of the world,” Ms. Lagarde told reporters, even as she expressed concern that policy makers’ resolve could weaken just because there is a “bit” of recovery in sight and financial stresses have eased. “It’s important to follow through on policies to put uncertainty to rest,” she said. “There is still a lot of work to be done.” In her first news conference of 2013, Ms. Lagarde focused on political battles over the budget in the United States and the risks the euro zone’s debt crisis still presents. That focus is not new, but Ms. Lagarde made clear she worried that complacency could set in. Ms. Lagarde warned that a fight in the United States over raising the nation’s $16.4 trillion borrowing limit could be “catastrophic” for the global economy if it is not raised in time.
Too Much Concern about International Reserves? - Everyone agrees that international reserves have taken off in recent years, largely driven by changes in China, along with other emerging and developing nations. Worrying about large and growign international reserves may be part of the intellectual DNA of the IMF; after all, the organization was formed in large part to provide a way of dealing with balance of payments problems imbalances across countries. But as the Independent Evaluation Office report points out, countries holding these reserves feel that the IMF should be turning its attention to other targets. Here are some of the arguments (footnotes omitted). International reserves are modest relative to overall global capital markets--and the private-sector portion of those markets in particular should be the real cause of instability and concern. "International reserves remain small relative to the global stock of financial assets under private management ... There is considerable historical precedent and economic analysis to suggest that concerns about global financial stability should focus more closely on trends in private asset accumulation and capital flows. Country officials and private sector representatives also noted that the IMF should be more attentive to the accumulation of the private foreign assets that are the consequence of persistent current account surpluses, and which from a historical perspective have arguably been more destabilizing than official reserve accumulation." For illustration, here's a figure showing those international reserves in comparison with other global financial assets.
Measuring trade deficits and trade flows value - The Washington Post calls attention to changes in measuring international trade values: The U.S. trade deficit with China may be much smaller than thought according to new trade measurements that capture the flow of raw materials and intermediate goods as they work their way around the world into final products. In a significant revision to economic record keeping the Organization for Economic Cooperation and Development and the World Trade Organization have patched together international databases that show not just the value of final goods trading hands between countries – the traditional method of measuring imports and exports. Rather, they have tried to unpack each step that a good takes through what has become an increasingly fragmented global system – with raw materials from one country becoming steel in another, becoming a car part in a third, becoming a finished auto in a fourth that is then exported to a fifth. [snip]In releasing the study, the WTO and OECD highlighted how the data could influence the world trade agenda. They argue, for example, that the impact of tariffs around the world can’t be fully understood without looking at value chains, since a final product may include import duties from several different stops.
NYT Runs Propaganda Piece to Promote Europe-U.S. Trade Deal - The NYT ran a news article promoting a trade agreement between the United States and the European Union. The article wrongly referred to the trade deal as a "free trade" agreement three times. The agreement is almost certain to include greater restrictions on intellectual property. These restrictions are forms of protection, they are the opposite of free trade. It would have been possible to both more the piece more accurate and save space by leaving out the word "free." It also told readers that European leaders: "have argued that a free-trade deal would be both a cheap and a relatively painless way to stimulate growth. ..."Richard Bruton, the Irish minister for jobs, enterprise and innovation, said in a statement that a trade deal could lift the E.U. economy by €120 billion, or $160 billion, per year and the U.S. economy by $100 billion." The piece provides no clear context for these numbers, nor does it make it clear that these are one time gains that are projected to be realized over a substantial period of time. (Most of the terms in any agreement will be phased in over time.) These gains come to about 0.7 percent of GDP for the U.S. and 0.9 percent of GDP for the EU. Assuming it takes ten years to achieve them, the projections imply that the deal will increase growth in the U.S. by roughly 0.07 percentage points and in the EU by 0.09 percentage points.
We are on the threshold of 'currency wars' -- In an effort to keep domestic currencies artificially low and competitive in global markets the world economies can end up with another wave of currency wars, warns the First Deputy Head of the Central Bank of Russia Aleksey Ulyukaev. “We are now on the threshold of a very serious, I think, confrontational action, which is called, maybe excessively emotionally, “currency wars,” Ulyukaev said on Wednesday. Japan is showing an aggressive monetary policy expansion, with the yen having lost 11% since December when Abe’s Liberal Democratic Party won the general election. Lowering the yen’s value is good for the Japanese economy, as it allows domestic companies to receive bigger export revenues, but it hits developing economies, warns Anna Bodrova of Investcafe. In December 2012, the Bank of Japan raised the limit for the asset purchase program by 10tn yen ($120bn) to 101tn yen ($1,210bn). The stimulus measures in the country are aimed at driving Japan out of deflation and achieve 2% inflation. The Japanese economy is marred by over 20 years of negative growth and deflation. Such an artificial currency downgrade is a way “to a separation, a split into separate zones of influence, up to a very sharp competition, up to the world currency wars, which is definitely counterproductive,” Ulyukaev said.
Russia Says World Is Nearing Currency War as Europe Joins - The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates. “Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern. The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.
World War Is Coming, Currency War That Is - Russia Warns - It will not come as a surprise to anyone who has spent more than a few cursory minutes reading ZeroHedge over the past few years (initially here, and most recently here, and here) but the rolling 'beggar thy neighbor' currency strategies of world central banks are gathering pace. To wit, Bloomberg reports that energy-bound Russia's central bank chief appears to have broken ranks warning that "the world is on the brink of a fresh 'currency war'." With Japan openly (and actively) verbally intervening to depress the JPY and now Juncker's "dangerously high" comments on the EUR yesterday, it appears 2013 will be the year when the G-20 finance ministers (who agreed to 'refrain from competitive devaluation of currencies' in 2009) tear up their promises and get active. Rhetoric is on the rise with the Bank of Korea threatening "an active response", Russia now suggesting reciprocal devaluations will occur (and hurt the global economy) as RBA Governor noted that there is "a degree of disquiet in the global policy-making community." Critically BoE Governor Mervyn King has suggested what only conspiracists have offered before: "we'll see the growth of actively managed exchange rates," and sure enough where FX rates go so stocks will nominally follow
Winning The Global Export Race - It is no secret to anyone that as we said some 3 years ago, the world is now engaged in all out currency warfare whose sole goal is destroying one's own currency faster and more brutally than "the other guy" can. Because while devaluing one's currency is imperative in order to return to a viable debt load, about $40 trillion less than where it is now (as per BCG) by pushing monetary inflation upon one's people and inflating said debt away, just as important is to stimulate one's economy and exports which, all else equal, can only be done by making them cheaper to one's trading partners. It is, after all, a zero sum world. This is precisely the tug of war that the developed world is caught in currently, where every attempt is made to talk down one's currency, and when that fails, to dilute it by printing more of it (the Fed), to backstop it with collateral of every lower quality (the ECB, although in Europe's case it is more of an involuntary phenomenon), or just to talk, and talk, ant talk (Japan). Yet while every country with a self-respecting central bank (i.e., currency printer) hopes that they will be the ultimate winner of the currency debasement export race, what has become obvious over the past 30 years, is that when it comes to specializing in exports, there is just one true winner: a winner which is self-evident from the chart below.
Europe drawn into global currency wars as slump deepens - The world is edging closer to all out currency conflict as Europe’s politicians join a chorus of policy-makers across the globe pushing for devaluations to fight for market share.Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer willing to be the last economic player holding the toxic parcel of an over-valued exchange rate, describing the euro as “dangerously high” after its three-month surge against the dollar, yuan and yen. The comments follow warnings by two French ministers this month that the strong euro is holding back efforts to pull the France out of deep industrial slump. Alexei Ulyukayev, deputy head of Russia’s central bank, said the tilt in EMU policy marks a new escalation as every major bloc of the global economy tries to drive down its exchange rate at the same time. “We are now on the threshold of very serious currency wars,” he said. Korea has asked the G20 take a stand against beggar-thy-neighbour policies in Moscow next month, accusing Japan and the West of covert debasement through loose money. Japan’s premier Shinzo Abe kicked off the latest skirmishes by threatening to change the Bank of Japan’s statute unless it agrees to launch a monetary blitz and weaken the yen. The euro has rocketed by 20pc against the yen since July. “This will soon start to hurt core Euroland and Germany.
Balance of Payments in the European Periphery - SF Fed - The countries of the European periphery are experiencing a balance of payments crisis stemming from persistent current account deficits and sharply lower private capital inflows, a condition known as a sudden stop. In countries with fixed exchange rates, sudden stops typically drain foreign reserves, forcing currency depreciation which eventually shifts the current account from deficit to surplus. However, the sudden stop has not prompted the European periphery countries to move toward devaluation by abandoning the euro, in part because capital transfers from euro-area partners have allowed them to finance current account deficits.
Catalonia Drafts Declaration of Sovereignty, Announces Vote of Independence, Seeks Self-Determination in 2014 - Via Google translate from El Pais, please consider Catalonia proclaimed "sovereign subject" The Catalan Parliament proclaimed that Catalonia is "legal and sovereign political subject" in the vote will mark the formal start of the independence process and solemnly opened by the President of the Generalitat, Artur Mas . The Catalan House will vote on the first floor of the legislature, scheduled for the 23th, the statement called sovereignty of Catalonia, first step to call the query for self-determination in 2014. Convergence and Union and Republican Left (ERC) yesterday closed a first draft of the text, they sent groups to a greater or lesser extent, defending the right to decide: Partit dels Socialistes (PSC), Initiative for Catalonia (ICV-EUiA ) , and d'Unitat Popular Bid (CUP ). The text is open to nuances, but CiU and ERC, a parliamentary majority, will not accept major changes. The resolution does not set the date of the consultation, although both parties in the legislature signed agreement, have signed a commitment to hold the vote in 2014. Without the permission of the Government, the referendum is unconstitutional, so the claims and makes clear that it will look for any possible legal formula to perform: "They used all existing legal frameworks to implement the strengthening of democracy and the right to decide. "
Draghi’s Bond Rally Masks Debt Doom Loop Trapping Spain - The bond rally that has sent Spanish borrowing costs to 10-month lows has distracted attention from the nation’s growing debt pile. Spain’s budget deficit probably exceeded 9 percent for a fourth year in 2012 as Europe’s highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government’s 62 billion euros ($83 billion) of spending cuts and tax increases, according to economists at Societe Generale SA (GLE), Lombard Street Research and the Madrid-based Applied Economic Research Foundation. Total debt will reach 97 percent of gross domestic product this year, the International Monetary Fund forecasts. “This is a classic example of the doom loop,” Societe Generale’s London-based chief European economist, James Nixon, said in a Jan. 10 telephone interview. “They just aren’t making any progress.”
Mario Draghi has saved the rich, now he must save the poor - The European Central Bank has washed its hands of any further responsibility for the 27m people across the eurozone listed as unemployed or classified as discouraged workers. The Governing Council has concluded that nothing more can usefully be done to lift the region out of double-dip recession, a relapse that it failed to foresee and to a great extent caused by allowing all key measures of the money supply to contract in early-to-mid 2012. It will not take fresh action to offset fiscal tightening this year of 2.3pc of GDP in Spain, 2pc in France, or 1.2pc in Italy -- not to mention draconian retrenchment in the three indentured states of Greece, Portugal, and Ireland -- or take action to cushion the shock of deep reforms. Japan’s premier Shinzo Abe has more or less ordered his central bank to both reflate and target jobs creation. The US Federal Reserve stands ready to inject stimulus until America’s jobless rate falls to 6.5pc. Yet the ECB professes itself helpless in the face of 11.8pc unemployment, a post-EMU record and rising each month. The ECB’s Mario Draghi said there is "not much" that monetary policy can do to fight structural unemployment. If it really was "structural", his plea might convince. It is not.
Wall Street Journal: Get a Fact Checker - Jeffrey Sachs - The Journal editorial board is egregious in its misuse of data. It writes what it wants without fact checking. Where is the journalistic profession to call them out? There are two editorial pieces this weekend on "Europe's Bankrupt Welfare State" (http://online.wsj.com/article/SB10001424127887324081704578231483854441820.html ) asserts that, "the European way of welfare is bankrupt." This is easy to check. Look at European countries with large welfare states, and see how they are doing in terms of debt, deficits, unemployment, and other indicators of "bankruptcy." I do this in Table 1 here (http://jeffsachs.org/wp-content/uploads/2013/01/comparison-europe-us-welfare-states.pdf ) comparing the US with Europe's five leading welfare states: the Netherlands, Denmark, Norway, Sweden, and Germany. For all six countries, I use the IMF data easily available on http://www.imf.org The IMF reports data on key macroeconomic variables. The IMF reports fiscal and debt data for "general government," meaning the combination of federal, state, and local levels. That is handy, as it enables comparisons across countries without distortions by the level of government or fiscal-federal definitions and practices. Looking at Table 1 (http://jeffsachs.org/wp-content/uploads/2013/01/comparison-europe-us-welfare-states.pdf ), the conclusion is simple. The European welfare states tax and spend more than the US as a percent of GDP, yet also have lower budget deficits as a share of GDP, lower debt-GDP ratios, and lower unemployment rates. Note that the government sectors of Norway and Sweden have net assets rather than net debt. Some bankruptcy!
Italy's public debt hits new record of 2.02 trillion - Italy's public debt reached a new record of 2.020668 trillion euros in November, the Bank of Italy said on Monday. Italy's huge national debt, which crossed the two-trillion-euro mark for the first time in October and is around 126% in relation to gross domestic product (GDP), is the reason the country has been exposed to the eurozone debt crisis. However, the central bank said in a report that it expected to debt figure for December to go back "under the threshold of 2,000 billion euros". The Bank of Italy said the national debt increased by 113.9 billion euros in the first 11 months of 2012. A big factor was the 23 billion euros Italy had to fork out in contributions to the EFSF and ESM European rescue funds.
Hotel Mama: Bad Economy Has Young Europeans at Home - Young Europeans in countries hit hardest by the Continent's economic crisis are finding it difficult to move out of their parents' home. Data shows that over 50 percent of those aged 25 to 34 in some countries have yet to move out. Most young adults are eager to leave home to start independent lives. But in those European countries where the economic crisis has hit hardest -- particularly in southern and eastern EU member states -- that appears to be a difficult move to make. In 2011, more that 50 percent of the 25- to 34-year-olds in Greece, Bulgaria, Slovakia and Malta still lived in their parents' homes, a SPIEGEL analysis of information from the European Commission statistics division Eurostat has revealed. In Portugal, Italy, Hungary and Romania more than 40 percent of those in this age group remain in the nest (see graphic). Nations with a high percentage of Catholics show a particularly high number of young adults who have yet to move out of their parents' home. This is also the case in Eastern Europe, where working conditions for entry-level workers are particularly precarious. These numbers are in stark contrast to those in the EU's most northerly member nations, where less than 5 percent of 24- to 34-year-olds in Finland, Sweden and Denmark continue to enjoy the luxuries of Hotel Mama. In Germany, the level is 14.7 percent.
German Economy Probably Contracted 0.5% in Fourth Quarter - Germany’s economy, Europe’s largest, probably shrank in the final quarter of 2012 as the sovereign debt crisis and weaker global growth damped exports and company investment. Gross domestic product may have dropped as much as 0.5 percent from the third quarter, the Federal Statistics Office in Wiesbaden said today in a preliminary estimate. It said growth slowed to 0.7 percent in 2012 from 3 percent in 2011. Economists had forecast 0.8 percent expansion for last year, according to the median of 28 estimates in a Bloomberg News survey. Germany posted a budget surplus of 0.1 percent of GDP, the first since 2007 and up from a deficit of 0.8 percent in 2011. While today’s fourth-quarter estimate leaves Germany on the brink of recession, the Bundesbank predicts the economy will stabilize and avoid two consecutive periods of contraction even as the debt crisis curbs growth across the euro region. Latest data suggest confidence is improving, and European Central Bank President Mario Draghi last week expressed optimism that the 17- nation euro economy will return to health later this year
Germany’s economy shrinks most in 3 years as crisis hits eurozone powerhouse — The German economy was hit hard by the eurozone crisis in the final quarter of last year, shrinking more than at any point in nearly three years as traditionally strong exports and investment slowed, the Statistics Office said on Tuesday. Economists expect Germany to bounce back after forecasts for weak growth in the first quarter but Europe’s largest economy will be less of a pillar of support for the rest of the currency bloc, where many of its peers are deeply in recession.Gross domestic product shrank by 0.5% in the final three months of 2012, the worst quarterly performance since Germany fell into a recession during the global financial crisis in 2008/2009 and only the second contraction since it ended. The parlous fourth quarter pushed overall growth for the year down to 0.7%, a sharp slowdown from the 3.0% registered in 2011 and a post-reunification record of 4.2% in 2010. The 2012 figure was a tad below a Reuters consensus forecast for growth of 0.8%.The government is due to publish an estimate for 2013 growth on Wednesday. An official from the Economy Ministry said growth would be 0.4% this year, less than half the government’s existing forecast of 1.0%.
Germany's economic growth slows sharply in 2012: The German economy grew by 0.7% in 2012, a sharp slowdown on the previous year, preliminary figures show. The figure was well below the 3% growth seen in 2011 and suggests the economy contracted in the fourth quarter. "In 2012, the German economy proved to be resistant in a difficult economic environment and withstood the European recession," the federal statistics office Destatis said. Some analysts believe the German economy will enter recession itself. Destatis said economic activity "slowed down considerably" in the second half of the year, and particularly in the final quarter. "The full-year growth figure [of 0.7%] implies a contraction of around half a percentage point in the fourth quarter," the office's top statistician Norbert Raeth said.
Concern over German after economy shrinks - Germany's economy has shrunk in the last quarter, according to new data that is likely to force the Berlin government to slash its economic growth forecasts for this year. The German Statistics Office reported this morning that Germany's economy contracted by 0.5% between October and December, as the financial crisis hit Eurozone's powerhouse economy. This means that Germany grew by just 0.7% during 2012, a sharp slowdown that does not bode well for 2013. Economists had expected annual growth of 0.8%, so today's number is slightly weaker. Even +0.8% would have meant "a significant contraction in Q4". according to CMC's Michael Hewson. In 2011 Germany had expanded by 3%, while in 2010 it posted growth of 4.2% - the best results since East and West Germany were re-unified. The data, just released, may deflate some of the optimism that has been flowing around the financial markets in recent weeks. Or investors may decide that it's all history, and cling to their confidence that the crisis is abating. The key question now is whether Germany's government will slash its forecast for growth in 2013. It currently forecasts a 1% increase in GDP, but business newspaper Handeslblatt reports this morning that it will halve it, to just 0.5%.
German growth goes negative but Merkel’s press becomes more glowing By William K. Black - It is good to be Angela Merkel. Growth in Germany goes sharply negative in the last quarter of 2012 and press reports emphasize how sound the German economy is because it is a net exporter. This article analyses how the Wall Street Journal and the New York Times presented the news about Germany’s economy. I show that the presentation reveals more about the pathologies of our major media than about the pathologies of Germany and the Eurozone. The Wall Street Journal article about Germany has one glancing reference to austerity, in the tenth paragraph. The journalists used a power shovel to bury the lead.“Germany’s contraction suggests euro-zone GDP declined for a third straight quarter at the end of last year, and failed to expand for a fifth straight period as fiscal-austerity programs and rising unemployment likely spurred additional output declines in Spain and Italy. A report Tuesday from the European Union’s statistics office showed a euro-zone trade surplus of €11 billion ($14.7 billion) in November, which should limit the expected decline in GDP.”We have a grudging admission that the story in Europe is austerity, which has thrown most of the continent back into a second recession. The article mushes causality by implying that unemployment is a separate cause of the recession unrelated to austerity. The reality is that austerity drives reduced demand, which reduces output, which reduces growth (and can turn it negative), which reduces employment, which increases inequality, emigration, and budget deficits.
Doomsday, gold and the Bundesbank - Noah Smith has a great blog post on the obsession with gold as a store of value or as an investment strategy. I fully share his views on gold and in particular about the arguments made by those who see gold at the center of the world economy and the best investment one can do these days. Interestingly, his blog post comes the same day that all business media report on the announcement of the Bundesbank that they are moving some of the gold reserves back to Germany. The move of these gold reserves is partly seen as a response to an earlier report by the German court of auditors that was concerned with the lack of checks on the gold reserves held abroad. The story not only made up the headlines but it also came with a quote from Mr Thiele, Bundesbank board member who commented on the purpose of the reserves and the move by saying "To hold gold as a central bank creates confidence. We build trust at home and have the possibility to exchange gold at short notice into foreign currency abroad."I am really curious about what (doomsday) scenarios he has in mind where the gold reserves of the Bundesbank would become crucial to restore confidence. By the way, the gold reserves of the Bundesbank which at 130 Billion Euros are large compared to other central banks seem small compared to many other magnitudes that matter in financial markets, more so during crisis time. And I am assuming that these scenarios are catastrophic, otherwise why would gold be needed to buy foreign currency. And given that they are thinking that those scenarios are likely, is there anything that they are planning to deal with them?
What are the German Bankers Thinking? from naked capitalism - Some readers would probably come up with less polite versions of the question above, but regardless of how one states it, policy in the Eurozone is very much driven by both the needs and the wants of German banks. This Real News Networks segment skips over the needs, the continuing concerns about their capital levels, to focus on how German bankers and policymakers have come to believe that austerity is a good solution for the fix they are in.European Car Demand Near 20-Year Low - The market for new cars in the European Union is at its weakest in nearly two decades, and recession across much of the region could dent sales further this year. New car registrations fell more than 8% to just over 12 million last year -- the lowest total since 1995, the European automotive industry association ACEA said Wednesday. It was the sharpest decline in demand since 1993, when Europe was again lagging the world in recovering from a global downturn. December alone saw registrations slump 16%, the industry's weakest performance for the month since 2008. Of the major suppliers, U.S. and French manufacturers bore the brunt. Renault's registrations fell by almost a fifth, while those for Peugeot/Citroen, General Motors (GM) and Ford (F) were down by 13%. Demand for Volkswagen (VLKAF) brands declined 1.6%. Eurozone countries that have been hit hardest by the debt crisis have suffered the worst. Registrations in Greece collapsed by 40% in 2012, closely followed by Portugal, Cyprus and Italy, where they fell by 38%, 25% and 20% respectively.
European car sales plunge ends woeful year for automotive industry - Europe's market for new cars shrank in December at its fastest monthly rate since October 2010, closing a year burdened by heavy declines in all major eurozone economies. Two fewer working days on average helped send new car registrations in the European Union tumbling 16.3% last month to 799,407 vehicles, according to data published on Wednesday by the European automotive industry association Acea. The figures highlight the crisis for carmakers in Europe, where over-indebted banks will not lend cash-strapped consumers the funds to buy new cars as austerity pushes joblessness to a record high of almost 12%. Exceptions last month were non-eurozone EU members such as Britain and Sweden, where demand increased. But states not even in the EU, such as Switzerland and Norway, suffered contractions. Annual car sales volumes in the EU fell 8.2% to 12.05m vehicles in 2012, Acea said. In the eurozone, they dropped 11.3% to just under 9m, according to Reuters' calculations.
European car market plunges to lowest since 1995 (Reuters) - Demand for new cars in recession-bound Europe fell to a 17-year low in 2012, leaving mass market manufacturers little hope for this year as they try to cut costly excess factory capacity and aggressive discounting dents their margins. Registrations data released on Wednesday also showed the biggest annual drop since a 16.9 percent downturn in 1993, highlighting the crisis for automakers in Europe. Consumers are fretting over austerity measures, job security and rising living costs, and those who want to buy new cars are struggling to secure credit. Even Germany's mighty Volkswagen suffered a drop in sales, according to the figures from the European automotive industry association ACEA. However, South Korean brands Hyundai and Kia, which are making an aggressive push in Europe, proved it is possible to expand sales even during a grim downturn. Peter Fuss, senior advisory partner at Ernst & Young's Global Automotive Center, said an industry practice of registering new cars before offering them as used vehicles at a discount was flattering even the dire new sales figures. "The actual decline is much worse than the statistics would have us believe as sales figures for the year were artificially inflated as a result of self-registrations by dealers and automakers, especially in the region's biggest market, Germany," said Fuss.
The Eurozone Crisis Is Over, but the Eurozone Economy Is Worse Than Ever - One of the odder trends this winter is the widespread sense that the eurozone crisis is "over" and Mario Draghi's "whatever it takes" speech saved the day. It's not that I think the conventional wisdom is wrong, exactly. But the eurozone has slid back into recession over the course of 2012 and if anything the recession seems to be getting worse. Not only are Greece and Spain in tatters and Ireland basically treading water, but German GDP shrank 0.5 percent in the forth quarter. That's hardly the worst recession on the record books. And if Germany improves a little in Q1 they may even avoid technical recession altogether. But Germany, you'll recall, is the country that's supposed to be doing well. And that's not a "doing well" number. It's not even close. Things are so bad that EU officials are touting Latvia as a success story even though Latvian GDP is still 16 percent below peak level. Worst of all, as Ambrose Evans-Pierce writes the European Central Bank seems to have entirely washed its hands of the situation, deciding that as long as there's no acute banking crisis they don't need to care about anything else. This is, among other things, exactly the attitude from the Trichet-Weber years that let the acute banking crisis develop. Over the long-term, it's all tied together. Banks and sovereigns can't be solvent if citizens don't have incomes, Germany can't export if Spain can't import.
The euro crisis: Mario Draghi's premature canonisation - ONE additional point related to the previous post: I find it shocking how readily we all seem to be accepting the European Central Bank's inaction on euro-zone economic weakness. Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn't grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012. That's simply a dismal macroeconomic performance. I mean really, really awful: falling output, rising unemployment, and inflation below target. The European Central Bank acted aggressively to essentially end the euro-zone sovereign-debt crisis, and we all appreciate that. But its demand stabilisation efforts have been woefully inadequate. Where the Bank of England and the Federal Reserve have deployed a range of tools to address high levels of joblessness amid low inflation the ECB has basically shrugged. That's all the more stunning, to me anyway, given that macro stabilisation is the ECB's first job, and given that all the austerity and reform it has demanded will be for nought given rubbish monetary policy.
Ryan Avent is correct about Draghi and the eurozone I find it shocking how readily we all seem to be accepting the European Central Bank’s inaction on euro-zone economic weakness. Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn’t grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012. I would stress that it is even worse than Ryan is suggesting. Countries such as Greece, Portugal, and Spain have consumed remarkable amounts of political capital. Britain is considering leaving the EU. Credit channels are still either in tatters or on life support, relying on ECB guarantees. More countries are seeing zero or negative growth. Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s. It seems the bailout funds, especially the ESM, have given up on the notion of detaching sovereign and bank liabilities from each other. The so-called banking union is at best a common supervisor rather than real risk-sharing for deposit liabilities. The fact that we don’t have daily bond market crises, filling up my Twitter feed, is certainly welcome but constitutes a remarkable lowering of the bar for what success means. In my rather (currently) unfashionable view, the eurozone crisis is still getting worse, not better.
European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"... The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:
- 1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...
- 2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...
- 3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...
- 4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...
- 5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...
- ...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...
- 6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different.
Level of Spanish debt hits new record of 11.38 percent - Spain's central bank says the level of bad debt in the country's banks rose to a new record 11.38 percent in November, up from 11.23 percent in October. In data released Friday, the bank said non-performing loans totalled €191.63 billion ($256.17 billion) in November, up by €2.01 billion from the previous month. It was the 17th monthly increase in a row. With 25 percent unemployment, Spain is battling to emerge from its second recession in just over three years. Many banks were badly hit by the country's property market collapse in 2008. Spain last month received €40 billion from a ñ100 billion credit line earmarked for its troubled banks by the other 16 European Union countries that use the euro.
Massive Fraud in Spain Threatens Entire Government of Prime Minister Mariano Rajoy; Protestors in Madrid Shout "Resignation" - I am piecing together a story of fraud and corruption involving the highest levels of Spanish government. My unnamed sources think it could bring down Prime Minister Mariano Rajoy. However, the news articles I have (primarily in Spanish) are particularly choppy. The brief background story is "black money" (under the table fraud or bribes) was paid monthly to top Partido Popular (PP) party leaders. PP is the party of prime minister Rajoy. Amounts ranged from 5,000 to 15,000 euros per month, between executive secretaries, public officials and other members of the PP. Top party officials were aware of, approved, or were part of the scheme. Starting with an article in English, the Irish Times reports Ex-treasurer of Spain's PP had €22m in Swiss bank.That story is just the tip of the iceberg.. El Economista reports "Black money bonuses paid to the dome of the PP during the last twenty years". I presume "dome" means top. & El Pais reports A thousand people are concentrated along the PP headquarters in Madrid
Italy’s Recession to Be Deeper Than Expected, Central Bank Says - Italy’s recession will be worse than previously expected, the country’s central bank said today as it cut its 2013 estimate for gross domestic product on weakness in the global economy and disappointing internal demand. Italian GDP will probably contract 1 percent this year, the Bank of Italy said today in its economic bulletin. That compares with a July estimate from the central bank for a 0.2 percent reduction. “In our country, internal demand still hasn’t reached an inflection point,” the Bank of Italy said. The lower GDP forecast was “due to the worsening of the international scenario and the continuation of the weakness in business activity in recent months.” Italians are mired in their fourth recession since 2001 as they prepare to vote next month in parliamentary elections. The tax increases and budget cuts imposed by Prime Minister Mario Monti’s caretaker government have pushed joblessness to 11.1 percent, the highest in more than 13 years. Household confidence was near a record low last month.
Britain to drop out of world’s top ten economies - The UK is set to lose its place among the world's top ten economies by 2050, economists at PriceWaterhouseCoopers (PwC) have warned. Britain will be overtaken by Mexico and Indonesia in the next four decades to push the nation's GDP to 11th place in world rankings, according to a report released by the accountancy giant on Wednesday. PwC's report, BRICs and Beyond, projected a rapid rise of the so-called E7 of emerging economies, also pushing the US, Japan, Germany, France and Italy down the league table - although only the UK and Italy lost their top ten status. Nonetheless the UK is set to retain a prime spot on measures of GDP per head of population by 2050, ranking fourth after the US, Canada and France. Strong growth among E7 nations, led by Asian powerhouses India and China, but also driven by Brazil, Russia, Indonesia, Mexico and Turkey, could see their collective GDP overtake that of the G7 as early as 2017, the report contended. PwC economists also predicted that China could overtake the US as the world's largest economy by 2017 - sooner than figures put out by Chinese Academy of Sciences which predicted a takeover by 2019.
FSA opens investigation into JP Morgan's London Whale loss - Telegraph: The Financial Services Authority has opened a formal investigation into the multi-billion pound trading loss racked up by JP Morgan traders in the City, including one nicknamed the "London Whale".The formal enforcement action comes after the regulator spent time analysing the more than $6bn (£3.7bn) of losses, which stunned Wall Street when JP Morgan chief executive Jamie Dimon first disclosed them last May. Although it is not clear when the FSA moved from an initial analysis to a formal investigation, in doing so the regulator now has power to demand documents from JP Morgan and summon executives to be interviewed. The first confirmation that the losses are being formally investigated in London came as JP Morgan faced official sanction in the US. The Federal Reserve and the Office of the Comptroller of the Currency gave the bank 60 days to deliver a plan to improve its internal risk oversight and audit. The order from the regulators found fault with JP Morgan's management and as well as the bank's ability to model risk. JP Morgan's board, which meets on Tuesday before the release of its fourth-quarter results on Wednesday, is said to be contemplating releasing its own internal investigation into the trading loss that damaged the bank's reputation for risk management.
Goldman Sachs pay and bonuses rise to $400,000 each - Goldman Sachs risked stoking the row over City pay on Wednesday by revealing its bankers were paid an average of $400,000 (£250,000) each last year, a rise of more than $30,000 a head on 2011. Goldman's annual financial results show the bank has set aside $13bn to cover the salaries, bonuses and perks for the 32,400 it employs around the world. Details of the payroll come just a day after the bank was forced to back down from plans to defer bonuses until April so that its highly paid staff could avoid the 50% tax rate. The size of the bill to pay staff is 6% higher than a year ago. However, the average individual payouts to staff are higher as the number of employees has fallen by 3%. Staff will find out in the coming days what their bonuses for 2012 will be. Some of them will be expecting to receive millions of pounds . Pressure from Bank of England governor Sir Mervyn King – who said he found it "depressing" that highly paid staff might attempt to avoid the highest rate of income tax – forced Goldman to abandon plans to defer part-payment of bonuses from 2009, 2010 and 2011 which were due to be handed to staff this year. The top rate of income tax falls to 45% on 6 April, the start of the new tax year.
U.K. Cuts Starting Pay for Police to 19,000 Pounds - U.K. Home Secretary Theresa May will cut the annual starting salary for rank-and-file police officers by 17 percent to 19,000 pounds ($30,500) as the government reviews officers’ working conditions amid budget cuts. May said the revamp of police pay is the first for 30 years in Britain. Policing unions reacted with anger when recommendations were published last year. May said in a written statement to Parliament in London today that the decision reflected “the tough economic conditions and the government’s wider economic objectives, which include reduction of the deficit and the challenging but manageable reduction in government funding to the police over the spending review period.” Chancellor of the Exchequer George Osborne said last month the government’s austerity program will continue until 2018, three years later than planned when the Conservative-led government took power in 2010 and began tackling a record deficit equal to 11 percent of gross domestic product.
Bang Goes the Theory: How they must bleed for us. In 2012, the world’s 100 richest people became $241 billion richer(1). They are now worth $1.9 trillion: just a little less than the GDP of the United Kingdom. This is not the result of chance. The rise in the fortunes of the super-rich is the direct result of policies. Here are a few: the reduction of tax rates and tax enforcement; governments’ refusal to recoup a decent share of revenues from minerals and land; the privatisation of public assets and the creation of a toll-booth economy; wage liberalisation and the destruction of collective bargaining. The policies which made the global monarchs so rich are the policies squeezing everyone else. This is not what the theory predicted. Friedrich Hayek, Milton Friedman and their disciples – in a thousand business schools, the IMF, the World Bank, the OECD and just about every modern government – have argued that the less governments tax the rich, defend workers and redistribute wealth, the more prosperous everyone will be. Any attempt to reduce inequality would damage the efficiency of the market, impeding the rising tide that lifts all boats(2). The apostles have conducted a 30-year global experiment and the results are now in. Total failure.