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

Saturday, January 26, 2013

week ending Jan 26

Fed's Balance Sheet Tops $3 Trillion in Latest Week: The Fed's asset holdings in the week ended Jan. 23 increased to $3.013 trillion from $2.965 trillion a week earlier, the central bank said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.697 trillion Wednesday from $1.689 trillion a week earlier. The central bank's holdings of mortgage-backed securities rose to $983.17 billion, from $947.61 billion a week ago.Thursday's report showed total borrowing from the Fed's discount lending window was $567 million Wednesday, down from $573 million a week earlier. Commercial bank borrowing was $13.0 million Wednesday, down slightly from $15.0 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts fell to $3.252 trillion, from $3.259 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.908 trillion, from $2.917 trillion in the previous week. Holdings of agency securities rose to $308.11 billion, up from the prior week's $306.74 billion.

Fed Pushes Balance Sheet to Record $3 Trillion on Bond Buying - The Federal Reserve pushed its balance sheet beyond $3 trillion for the first time this week while undertaking open-ended purchases of Treasuries and mortgage-backed securities to combat 7.8 percent unemployment.  The Fed’s total assets climbed by $48 billion in the past week to $3.01 trillion as of Jan. 23, according to a release from the central bank today in Washington. Holdings of Treasuries climbed by $7.8 billion while mortgage-backed securities in the Fed portfolio rose by $35.6 billion.  The bond buying is part of Chairman Ben S. Bernanke’s campaign to use the full force of the central bank’s balance sheet to stoke the economic recovery. The Fed began purchasing $40 billion of mortgage-backed securities a month in September and this month added $45 billion in Treasury securities to that pace, bringing total monthly purchases to $85 billion. The Fed’s balance sheet is now more than triple its size before the financial crisis. Fed assets stood at $924 billion on Sept. 10, 2008, the week before the bankruptcy of Lehman Brothers Holdings Inc. helped spark a global financial crisis.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 24, 2013: Federal Reserve statistical release

Fed's balance sheet grows above $3 trillion, finally impacting the monetary base - Total assets of Fed's balance sheet broke through $3 trillion last week, hitting a new high, as securities purchases are stepped up (including treasuries).And for the first time since this program was launched it is starting to have a material impact on bank reserves (the dynamic component of the monetary base), which spiked last week. As discussed earlier (see post), 2013 will look quite different from last year. The monetary base will be expanded dramatically as long as the current securities purchases program is in place. "Money printing" is in now full swing.

Bernanke Seen Pressing On With Stimulus Amid Debate on QE - Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers will probably forge ahead with their unprecedented bond buying when they meet next week, even as they pick up a debate that began in December on when to end the purchases.  The job market has yet to show the “substantial” gains Bernanke said he wants to see before halting asset purchases. Unemployment has persisted at 7.8 percent or higher since January 2009 while Bernanke held the main interest rate near zero and expanded the Fed’s assets to a record $2.97 trillion. Meanwhile, all 19 Federal Open Market Committee participants see no immediate threat from inflation, now at 1.4 percent.  The Fed chairman can count on the FOMC to endorse the current program to buy $45 billion in Treasury notes and $40 billion in mortgage bonds each month, said Nathan Sheets, Bernanke’s top adviser on international economics from 2007 to 2011. Six Fed officials have indicated in interviews and speeches that the central bank probably won’t pare its stimulus yet, and two district bank presidents who advocate record easing, Charles Evans of Chicago and Eric Rosengren of Boston, gained voting power this year in an annual FOMC rotation.

Is it time for the Fed to raise its policy rate? - What would happen if the Fed was to adopt a different policy rule--one that entailed an immediate increase in its policy rate? The effect of such a policy change in the OLG model I studied here would be to raise the real interest rate and contract the level of output. But I recently came across a paper by Stephanie Schmitt-Grohe and Martin Uribe who ask the same question using a more conventional model: The Making of a Great Contraction with a Liquidity Trap and a Jobless Recovery. Here is the abstract: The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.

The Fed Drives Best at Higher Speeds, by Christina Romer: WITH all the drama about fiscal policy in Congress and at the White House, it’s easy to miss the quiet policy evolution taking place nearby, at the Federal Reserve. The central bank has adopted a more aggressive monetary policy that could be very helpful to the recovering economy.  But the Fed’s commitment to its new policies appears shaky. Soon after the December meeting, some members of the policy-making committee spoke out against the action... So why has the Fed moved slowly, and why are some policy makers threatening to undo the recent actions? In a recent paper, Prof. David Romer of the University of California, Berkeley (my husband), and I found that pessimistic views about the effectiveness and costs of expansionary actions have played a major role in limiting Fed moves over the last few years. Policy makers worry that such actions will do little good and that they could cause inflation, distortions in financial markets and losses on the Fed’s portfolio.  When monetary policy makers meet again at the end of this month, the Cassandras on the committee might want to reread the policy record from the 1930s. The degree to which some of them sound like their Depression-era counterparts might shock them — and give them pause. ... The important thing is that hypothetical fears shouldn’t stop the Fed’s evolution. History is on the side of doing more, not standing on the sidelines.

Low money multiplier does not justify ultra easy monetary policy -An number of readers responded to the post (here) on growth in US monetary base with "so what?" After all the so-called "money multiplier" has been at historical lows - meaning that the Fed's monetary expansion has not made its way into the broader economy. The argument is that all this new liquidity is "trapped" in bank reserves, as lending remains tepid. According to this traditional school of thought, you need sharp growth in the broader money supply to generate inflation - a major threat to the economy. But there is a problem with this argument.  Greenspan's Fed also believed that as long as the money multiplier was at historical lows, loose monetary policy is justified. And in 2002-2005 the money multiplier was indeed at historical lows. This is what the trend looked like to economists before the crisis.Inflation of course was not a major issue at the time - at least not by historical standards. And the Fed continued with loose monetary policy, as fed funds target rate hit 1% during 2003-2004. The fed began to raise rates in the second half of the decade, but by that time it was too late. Rate increases ultimately served to burst the housing bubble in 2006. What many economists failed to realize - and many continue to do so today - was that the risk of excessive liquidity is not necessarily the overall price inflation. With US wages stagnant, those looking for a 70s-style inflation will not find it. Instead liquidity manifests itself in asset bubbles, which is exactly what was happening in the housing market at the time when the money multiplier was at the lowest levels in recent history (chart above). Plus in a global economy, inflation (including wage inflation) was simply exported to emerging markets nations.

NGDP level targeting: Yellen it..., but nobody heard - Given the boost that Goldman’s economists gave to the nominal GDP level targeting movement when they endorsed the idea near the end of 2011, it’s probably a good idea to listen to them when they write about the subject (whether you agree with them or not). NGDPLT itself has many more high-profile evangelists now than it did then: the Fed adopting an Evans Rule was the latest shift in its direction, and of course the idea is being openly debated in the UK after Mark Carney suggested it would be more potent than flexible inflation targeting.But in Goldman’s note from the weekend, they first explain how the Fed’s increased emphasis on the unemployment side of its mandate has led to a commitment to keep policy looser into the future (as unemployment declines) than might have been dictated by its rough pre-crisis guidelines, which used the Taylor Rule.And then they spot something that’s been mostly overlooked:But Fed officials appear to be contemplating an even bigger shift. This is evident from a series of speeches given by Vice Chair Janet Yellen in 2012 that presented simulations with the Board staff’s large-scale econometric model, FRB/US, using an “optimal control” approach to monetary policy. Under such an approach, the central bank chooses a path for the federal funds rate which best meets its objectives over the next several years as a whole, even if this means committing to a policy that may appear suboptimal at certain points along the way. For example, the chosen path may imply that in 2013, the Fed expects inflation in 2015 to be above its target but nevertheless commits to refraining from an aggressive monetary tightening at that point. Economist Paul Krugman has referred to this approach, approvingly, as “credibly promising to be irresponsible.”

Central, banks, safe assets and that independence question - Simon Wren-Lewis weighed in on the safe assets discussion last week - his post is here and I strongly recommend a read even though it is definitely wonkish (I had to read it twice). Simon's discussion of collateral effects on interest rates adds a dimension that has so far been missing from the debate and helps to explain why long-term, as well as short-term, debt is needed by the financial system - a point that Pozsar misses. Long-term government debt can be used as collateral in the creation of shorter-term private sector "safe assets", which reduces the need for short-term government debt as collateral. Simon suggests that government depositing cash from excess government borrowing at the central bank, as I suggested, would not be tenable. He doesn't explain why, so I thought I would have a go. When you consider the central bank and treasury as a consolidated entity, the cash balances at the central bank and the borrowing net out and are eliminated. Neither the excess borrowing nor the uninvested cash show up on the consolidated balance sheet. So it can't be a consolidated balance sheet risk problem. However, as I've noted before, just because something is eliminated in accounting terms doesn't mean it disappears in reality. Unconsolidated, the government has debt, and the central bank has cash.

The Visible Hand Of The Fed: There has been a burst of exuberance of late as the market, after four arduous years, got back to its pre-crisis levels. Much has been attributed to the recent surge of optimism in the financial markets from:

  • 1) Better than expected earnings - not counting the fact that expectations had been dramatically lowered over the last quarter.
  • 2) Stronger economic growth ahead - expectations are once again, as we have seen over the last 3 years,  Unfortunately, most of the most of the economic data suggests that 2013 will remain mired closer to 2% after a very lackluster first half of the year.

The point to made here is that each time the market has rallied the media, and analysts, try to attribute the rally to a fundamental support. In most cases the arguments boil down to "hope" more than "reality." However, what is really driving the current rally is likely far more simplistic: $85 billion a month. With the Federal Reserve currently engaged in two simultaneous quantitative easing programs (QE 3 and 4) totaling $85 billion a month in purchases of both mortgage backed and treasury bonds - the excess reserve accounts of the banks have soared in recent weeks. There is a very high historical correlation (85%) between the expansion of the Fed's balance sheet and the stock market. The chart below shows the relationship between the financial market and the expansion/contraction of excess reserves held by banks.

Treasury Investors Fret About Fed Danger Zone - Ahead of a Wednesday policy statement from the U.S. Federal Reserve, worries are growing about whether the central bank’s bond purchases will keep Treasurys from reversing a three-decade rally.The Fed’s bond-buying programs, started in late 2008 and designed to boost economic growth, lately has become the main sources holding up U.S. Treasurys. With recent data showing an improving U.S. labor market and housing market, investors have sold these safe-haven assets.Any talk of reining in the Fed purchases will hit a nerve with bondholders. They don’t want to be the last investors holding Treasurys when the Fed slows or stops buying and prices fall. This growing discomfort was seen when Treasurys sold off sharply on Jan. 3, after minutes from the Fed’s December meeting revealed several members thinking it is necessary to curb the program before year-end.

From Central Bank Independence to Democratic Public Finance - Effective governance in any country requires a well-designed system of public finance through which that government can achieve its various purposes and pursue the public interest.  If the system of public finance is poorly structured, the public interest will be poorly served.   So, badly designed systems of public finance must be altered or abolished. We have reached that point in the United States.  The present system of public finance in the US is inefficient and antiquated: its fusty architecture hampers the capacity of the national government to respond to economic fluctuations and crises in a timely and effective manner; its byzantine operational complexity thwarts democratic governance and generates pervasive public confusion about the full range of public policy options; and its over-reliance on government bonds means that wasteful and unearned profits flow to some of the most affluent members of US society, as they are paid service fees for intermediating what ought to be routine operations of the government. The anchor of the existing US financial system is the Federal Reserve System: a central bank that possesses forms of operational and political dependence that have become a model for central banks around the world during the neoliberal era.   But it is this high degree of independence that is the main source of financial inefficiency.  The central bank anchor that was intended to produce stability serves instead to drag the country down when it most needs to move briskly.  Central bank independence – at least in its current form – is an idea that has failed the test of crisis, and should be discarded.

Our Leaders Are Mistaking the Modern Money System for a Fistful of Dollars – Part 1 - One of the components of macroeconomic management recommended by Keynes but theorized only later by Modern Money Theorists, was ending the gold standard and transitioning to a fiat currency.  A fiat currency is a money system that was designed to provide adequate liquidity to the economy to produce politically-acceptable levels of growth and full or politically-acceptable levels of employment without causing adverse effects like excessive price inflation from the demand side.   Fiat currencies are money created by “fiat”, by government command or initiative.  While fiat currencies and the fiat element of all money itself have existed from the time government-issued money was invented, since the 1930’s a consensus gradually emerged among economic observers which still holds that the gold standard created unacceptable rigidities in the supply of money, leading to depressions and economic misery caused by the monetary system itself.  Despite the enthusiasm for a return to the gold standard among some “Austrian” economic philosophers and the right-wing fringe, no one who analyzes the dynamics of the economy using real world data recommends the return to the fixed or arbitrarily limited stock of money that the gold standard would require.

Why We Need More Private Safe Assets: Risk Premiums, the Triffin Dilemma, and Cyclical Changes - Matthew C. Klein of the Economist and I have been debating how best to address the shortage of safe assets. His view is that fiscal policy alone can solve this problem by creating more safe assets. I, on the other hand, believe that fiscal policy cannot create enough assets to close the safe asset shortfall without jeopardizing the U.S.Treasury's risk-free status. The solution, then, lies with increasing investors' appetite for privately-created safe assets. Should this happen, financial firms would respond by creating the assets needed to close the safe asset gap.  In his latest response, Klein argues that investors' appetite for private assets has already increased to no avail, that the government can create sufficient safe assets with jeopardizing its safe asset status, and that the main story here is most likely a secular shift in safe asset demand, not a cyclical one. I disagree on all counts and believe my approach--catalyzing private safe asset creation through an aggressive NGDP level target--is still the better one to take.  Let me explain why

Chicago Fed Nat'l Activity Index: US Economy Ended 2012 With Modest Growth - The Chicago Fed National Activity Index (CFNAI) slipped marginally to a monthly reading of +0.02 in December from an upwardly revised +0.27 in November, the Chicago Federal Reserve reports. Today's update translates to a three-month moving average (CFNAI-MA3) of -0.11, or comfortably above the -0.70 level that's considered to be the tipping point for the onset of recessions. CFNAI, a weighted average of 85 indicators, is designed as a benchmark of US economic activity broadly defined. The December reading of the CFNAI-MA3 offers another strong signal for arguing that the US economy ended 2012 in a recession-free state and that modest growth rolls on. That's been the message all along. As I noted earlier this month, business cycle risk is low, based on a broad reading of economic and financial indicators through December. That analysis has only strengthened in the two weeks since I ran the numbers. As more December data has been published, the overall trend has remained positive. Examples include the upbeat news on housing starts through last month, followed by today's CFNAI release.

Chicago Fed: Economic Activity Moderated in December - According to the Chicago Fed's National Activity Index, December economic activity decreased from the previous month, now at +0.02, down from a revised +0.27 (previously +0.10). However, this indicator has been negative (meaning below-trend growth) for seven of the past ten months, and the all-important 3-month moving average has been negative for all ten of those months and 23 of the last 29 months. Here are the opening paragraphs from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.02 in December from +0.27 in November. Two of the four broad categories of indicators that make up the index decreased from November, and only two of the four categories made positive contributions to the index in December.  The index's three-month moving average, CFNAI-MA3, edged up from –0.13 in November to –0.11 in December—its tenth consecutive reading below zero.   The CFNAI Diffusion Index also moved up in December, increasing to –0.05 from –0.12 in November. Forty-one of the 85 individual indicators made positive contributions to the CFNAI in December, while 44 made negative contributions. Thirty-six indicators improved from November to December, while 48 indicators deteriorated and one was unchanged. Of the indicators that improved, 17 made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. Negative values indicate below-average growth, and positive values indicate above-average growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. As we can readily see, the CFNAI-MA3 trend since February of this year has been one of slow economic contraction.

Chicago Fed "Economic Growth Moderated in December" - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Growth Moderated in December Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.02 in December from +0.27 in November. Two of the four broad categories of indicators that make up the index decreased from November, and only two of the four categories made positive contributions to the index in December. The index’s three-month moving average, CFNAI-MA3, edged up from –0.13 in November to –0.11 in December—its tenth consecutive reading below zero. December’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests economic activity "moderated" in December, and growth was slightly below trend (using the three-month average).  The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

It's Official: Worst. Recovery. EVER - If there was any debate whether the Fed's policies have helped the economy or just the market (and specifically the Bernanke-targeted Russell 2000), the following two charts will end any and all debate. As the following chart from the St Louis Fed shows, as of the just completed quarter, US GDP "growth" since the "recovery" is now the worst in US history, having just dipped below the heretofore lowest on record.

Slow Economic Growth Is the ‘New Normal’ – Fannie Mae - The gradual but below-potential economic growth seen in 2012 is likely to continue in 2013 and into 2014, according to a new report from Fannie Mae. The mortgage-finance company noted that the recovery’s slow pace has become the “new normal,” as the fiscal cliff and continuing debt-ceiling debate–which are likely to suppress consumer spending in the first half of 2013–continue to present potentially strong headwinds to meaningful growth activity. Overall, Fannie forecasts a 2% growth rate for 2013, similar to the “subdued pace” of 2012, despite the fact the housing sector has become a “bright spot in the economy” since home prices began to rebound last year and is expected to provide a rising contribution to GDP in 2013 and in coming years.

Watch Out, Economists Increasingly Agree on 2013 Outlook - Economists are famous for not agreeing about much of anything. But when it comes to their forecasts for U.S. economic growth in 2013, they’ve achieved a remarkable consensus.And that may be a cause for caution, because such forecasts help drive investment decisions and behavior. If the consensus is setting the stage for a big miss, some investors and companies may be left wrong-footed.In a survey of economists the Federal Reserve Bank of Philadelphia conducted in the fourth quarter, individual forecasts for the change in gross domestic product from the end of 2012 to the end of 2013 were unusually clumped around the average forecast of a 2.3% gain. The forecast at the top of the 25th percentile—that is, a pessimistic outlook in which three-quarters of forecasts were higher—was for a 2.1% increase in GDP. The forecast at the 75th percentile, or the optimistic camp in which just a quarter of forecasts were higher, called for a 2.5% gain. The gap between the average pessimist and the average optimist was bigger at the end of 2011, ranging from 2.2% GDP growth in 2012 to 3%. It was also bigger at the end of 2010, with a range of 2.5% growth in 2011 to 3.2%.  In fact, in the 45-year history of the Philadelphia Fed survey, the dispersion in economists’ annual GDP forecasts was slimmer only two times, ahead of both 1994 and 1996.

Inequality Is Holding Back The Recovery, by Joseph Stiglitz - Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues — as it did in a special feature in October — that the magnitude and nature of the country’s inequality represent a serious threat to America, we should know that something has gone horribly wrong. And yet, after four decades of widening inequality and the greatest economic downturn since the Depression, we haven’t done anything about it.. There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996. Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses. Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s — the last time inequality of income and wealth in the United States was so high — ended with the Great Crash and the Depression.

Inequality and Recovery, by Paul Krugman - Joe Stiglitz has an Opinionator piece arguing that inequality is a big factor in our slow recovery. Joe is an insanely great economist, so everything he says should be taken seriously. And given my political views and general concerns about inequality, I’d like to agree. But — you knew there was a “but” coming — I’ve thought about these issues a lot, and haven’t been able to persuade myself that this particular morality tale is right. It’s worth noting that two of Joe’s four points aren’t really about the current recovery. He argues that high inequality is causing huge waste of human talent, because the poor and increasingly the middle class lack access to good education; and I agree. He also argues that inequality fosters financial crisis, and I agree with that too. But we’re talking about the financial crisis aftermath, not the crisis itself. What role does inequality play? Joe also argues that high income inequality depresses tax receipts, fueling fiscal fears. Again, I have trouble with this point: our tax system isn’t as progressive as it should be, but it is at least mildly progressive even when you take state and local taxes into account. So I don’t know where this is coming from. I wish I could sign on to this thesis, and I’d be politically very comfortable if I could. But I can’t see how this works.

Krugman versus Stiglitz on Inequality and Economic Growth - Dean Baker  - Joe Stiglitz had an Opionator piece in the NYT arguing that inequality was bad for growth. Krugman responded by taking issue with a couple of the points raised by Stiglitz: that upward redistribution of income leads to fiscal problems and that upward redistribution of income leads to stagnation.On the first point, Krugman correctly notes that the tax code is at least marginally progressive. This means that in general upward redistribution of income should increase revenues, the opposite of what Stiglitz claimed. It is possible that Stiglitz was considering the broader tax and transfer picture. This is certainly more ambiguous and could well go the other way. The more important point is whether we may suffer from a lack of consumption if we redistribute from low income people, who Stiglitz argues will spend most of their income, to rich people who he argues will spend a smaller share of their income. Krugman dismisses this assertion, noting the problem that consumption will depend on lifetime income, not temporary income. This would mean that people will always be spending a higher share of their income when their income is low than when it is high. He then turns to the macro picture to see if there is evidence of a rise in the savings rate as income shifted upwards in the last three decades.

More On Inequality - Paul Krugman - Responses to my response to Joe Stiglitz have varied. Some are outraged that I might suggest that inequality isn’t the source of all problems — there are even some suggestions that I am acting as an apologist for the plutocrats, which will come as news to the plutocrats. But there have also been some interesting points raised. About the first bit: I often warn on this blog about the pitfall of making economics into a morality play in which doing what you think is right is also the magic elixir that solves all problems. Usually I’m criticizing the kind of people who believe that deficits are terrible, awful, and therefore that slashing deficits now now now will promote recovery — when it would actually kill it. But progressives need to be careful too; if you find yourself telling a story in which the changes you want to see in American society just happen to be exactly what we need to improve economic performance in the next year or two, you should make a point of asking yourself whether you’re really being objective. Personally and politically, I would have loved to write a piece blaming slow growth on inequality. But I couldn’t and can’t convince myself that the theory and evidence really support that view. Inequality is a huge problem — but not for employment growth in 2013 or 2014.

Inequality's effects - Paul Krugman and Joe Stiglitz have been debating the role inequality has played in contributing to the US's weak recovery. As chance would have it, three new papers suggest that Stiglitz is right to worry about its effects. First, Roland Benabou and Jean Tirole model how competition for "talent" can damage companies and the economy, by diverting workers' efforts from important but hard-to-measure jobs and over-incentivizing the easily measured aspects of performance:Highly competitive labor markets make it difficult for employers to strike the proper balance between the bene…fits and costs of high-powered incentives. The result is a  bonus culture that takes over the workplace, generating distorted decisions and signi…cant efficiency losses, particularly in the long run. It takes no imagination to apply this to banks and CEOs' pay generally. Secondly, some laboratory experiments with asset markets have found that short-term bonuses can contribute to larger and longer price bubbles. This is consistent with the theory that big bonuses (and hence inequality) contributed to the crash by inflating the bubble in mortgage derivatives.Thirdly, Eckhard Hein suggests that the high-powered incentives that contributed to rising inequality:  [have] imposed short-termism on management. This meant a decrease in management’s “animal spirits” with respect to real investment in capital stock and long-run growth of the firm, and an increase in the preference for financial investment, generating high profits in the short run.

The Last Four Years of the US Economy: Housing, Employment and Debt - As President Obama is at his second inauguration, it seems appropriate to review some of the economic details of his last four years as President. During the Great Recession, the employment to population ratio plunged from 60.6% in January 2009 to 58.6% currently. Likewise, the labor force participation rate plunged from 65.8% in January 2009 to 63.6% currently. The Civilian Labor Force has grown by only 1.28 million since January 2009 despite the US population growing 9.05 million since January 2009. That is an abysmal ratio of only 14.15% of labor force additions to population additions. Like the labor numbers, wages and salaries as a percentage of GDP have fallen since January 2009. Mean duration of unemployment has skyrocketed from a January 2009 reading of 20 weeks to the current reading of 36.1 week.

Snapshot: The Economy in Obama’s First Term - As the president begins his second term following the inauguration, here’s a look back at how some key pieces of the economy performed during his first term. Click for full-size image:

Contra Raghu Rajan: Economic Stimulus Has Not Failed, It Has Not Been Tried (on a Large Enough Scale) - Perhaps the most fundamental truth of monetary economics that the government can always boost (or reduce) the flow of spending, and in a sticky-price world thus drive the flow of production and employment wherever it wants. As Ben Bernanke said, as a last resort to increase production and employment the government can simply throw money out of helicopters--less picturesquely, cut taxes and print cash to fill the resulting deficit, or to get a little more umph buy extra stuff and thus put some extra unemployed people to work in the process of getting the money out into the economy. Expansionary fiscal and expansionary monetary policy together trigger a rise in the circular flow of nominal spending, and unless price expectations are unanchored and prices flexible enough that 100% of that rise shows up as higher inflation, the greater circular flow puts more people to work making more stuff. Economists fight over what happens when you do one of the two--when you just do a monetary expansion buying government bonds for cash (because people might not spend their extra cash but hoard it as a savings vehicle), or when you just do a fiscal expansion buying stuff or cutting taxes and paying for it not by printing money but by selling bonds (because purchases of government bonds that crowd-out purchases of private bonds simply shift demand away from private investment). Now comes the very smart Raghu Rajan to say, apparently, not so: Why Stimulus Has Failed: Two fundamental beliefs have driven economic policy around the world in recent years… the world suffers from a shortage of aggregate demand… [and] monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong?…

Predicting the Next Recession - A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers". Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism). In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Predicting the next recession: a reply to Calculated Risk - Last weekend, Bill McBride a/k/a Calculated Risk wrote about "Predicting the Next Recession".  As it happened, I had just finished writing a post that appeared Tuesday, "A note about the next recession"" which was markedly more pessimistic than Bill's view.  In this note, I want to explain where I disagree with Bill and the reasons why. The bullet point explanation is (1) I simply don't think we can reliably see that far ahead, so we shouldn't assume an optimistic outlook; (2) the odds of any expansion lasting 8 years as a general statement aren't good, and this one has been pretty weak for households; and (3) to the extent we can see murkily more than a year or so ahead, several adverse conditions are reasonably likely to occur. I should begin by saying that CR and I have been generally on the same page for most of the last 5 years.  The only other time I recall a specific disagreement was about the NBER dating the end of the last recession, and what would be required (CR thought new peaks in all the coincident metrics would be required to avoid a "double-dip."  Citing past data, including from the Great Depression, I disagreed.  In the end, the NBER did what I expected it to).  CR and I also see eye-to-eye about 2013, although I am more concerned about the impact of the 2% increase in tax withholding

Elevated energy prices pose a threat to US recovery - Gasoline prices could create headwinds for US economic recovery. The recent sharp rise in gasoline inventories (below) was thought to provide some relief to the consumer by bringing down fuel prices - at least in the near-term.But in spite of adequate supplies, prices remain elevated. This is driven by firm crude oil prices as well as demand for distillates from outside the US. Furthermore, the Fed's monetary policy is not helping matters. In fact Econoday is attributing - at least in part - the unexpected weakness in Jan-2013 consumer sentiment to elevated energy prices. Econoday: - Consumer sentiment is flat at soft levels. January's mid-month reading of 71.3 is down 1.6 points from the full month reading for December and compares with a low 70s trend during the latter part of December. Expectations continue to slip, down 1.1 points to 62.7 which is the lowest reading for this component since the aftermath of the debt-ceiling battle in 2011. Current conditions, which had been holding up better than expectations, are showing noticeable weakness, falling 3.7 points in December and another 2.2 points so far this month to 84.8. Today's decline in current conditions is not a positive signal for January's slate of economic data.  Oil prices are climbing and the consumer isn't ignoring it. One-year inflation expectations are up two tenths to 3.4 percent.

Goldman Still Sees Potential Growth Risks From Washington - The U.S. looks to have averted another debt-ceiling debacle, but Goldman Sachs economists warn two more fiscal drags looming in March could hurt growth: sequestration cuts and a failure to extend the government-agency spending authority.  Goldman says the sequester — if totally implemented — could reduce its gross-domestic-product growth estimate by 0.5-1.0 percentage points in the first and second quarters, and a government shutdown lasting a week might only reduce annualized growth by 0.1-0.2 percentage point in the quarter it occurs, “but it could have a more meaningful effect if it lasted longer.” Goldman forecasts 2% U.S. growth for all of 2013. In other words, Washington politics still a risk to U.S. economy.

2012 Financial Report of the US Government -- This report is so despised by the US Government, that they always release it at a time where it will be buried by the news cycle.  This year is no different; they released it near the inauguration.  Let me give you the first graph:  Excluding the times when new social entitlements were added, or added to the report, the unfunded liability of the US Government tended to increase at a rate of 9%, because less was being contributed to the social insurance programs than was necessary to keep up with the liability.  We have cheated these programs since the beginning, as a political ruse to gain favor for them, and giving a huuge subsidy to all who came before the baby boomers… now the price tag is coming due, and it ain’t pretty. In the graph above, I attempt to explain two scams of the US government.  They stem from the same source — PPACA (Obamacare).  First, the true cost of PPACA was a lie.  Taxes were front-ended.  Benefits were back-ended.  The net benefit is gone now, and we face the black hole of insufficient taxes to meet benefits.  Second, Medicare was raided by reducing reimbursements, which C0ngress then undoes. There is no true savings, and there can’t be; government almost never produces anything as efficiently as the private sector.  It is normal for government to downplay the initial cost so that the program will be approved.  Once approved, cost overruns are the norm.As such I expect the liability to grow until it is broken, or until it breaks us. 

America’s debt dilemma: A looming crisis - The US economy is in the doldrums, unemployment is stubbornly high and Social Security, the New Deal-era safety net for older Americans, is running out of money. It is 1981. To salvage the popular programme, President Ronald Reagan forms a commission. At its head is Alan Greenspan, the man he later makes chairman of the US Federal Reserve. The commission procrastinates but then, in a model of backroom bipartisanship that is hard to imagine today, a “gang of nine” does a deal. Payroll taxes go up; over time, so does the Social Security retirement age, from 65 to 67. But as Mr Greenspan recalls today, from his office overlooking Connecticut Avenue in downtown Washington, the fix was not forever. “Funding over a 75-year period was all that the political system would take. What that does is create a very large deficit in the 76th year and forward.” The US is once again mired in budget warfare over huge deficits projected for the long term, and Mr Greenspan’s experience illustrates the central reason why: the government pays for retirement benefits out of today’s taxes. There is no pile of assets saved up because in 1939 Congress gave a first lucky generation their pensions for free. The large baby boom generation paid for the smaller generation of their parents. Now they are retiring and expect to be looked after. Other countries have a fiscal problem due to ageing (consider Japan) but US ideas about limited government make it uniquely troublesome. Medicine is private, for example, yet Medicare, the health insurance system for retirees, causes most of the fiscal pressure. It is forecast to take an extra 3 percentage points of gross domestic product by 2037 and more after that.

Warren Buffett: The Debt Is Not A Problem - CBS's Rebecca Jarvis had a brief profile on billionaire Warren Buffett this morning. Among other things, they discussed the history of inequality in America and the world. "The womb from which you emerge determines your fate to an enormous degree," he said. "I was born in 1930. I had two sisters that had every bit of intelligence I had. Every bit the drive. But they didn't have the same opportunities." "Because you were a man," said Jarvis. "And I was white," added Buffett. "So, if I'd been black, my future would've been entirely different. If I'd been a female, my life would've been entirely different." "What about our debt?" asked Jarvis. "$16.4 trillion." "It's a lower percentage of GDP than it was when we came out of World War II," said Buffett. "You've gotta think of it in relation to GDP. It is not a good thing to have it going up in relation to GDP. That should be stabilized. But the debt itself is not a problem." The took a drive to his regular McDonald's, his old elementary school, and his current home.

A long-run perspective on the U.S. deficit and debt - Federal Reserve Bank of St. Louis economist Daniel Thornton has a new paper looking at long-run factors in the U.S. deficit and debt. His graphs tell a familiar story, but one worth repeating. Federal debt has been growing as a percent of GDP for the last 30 years. Mechanically, that's because spending went up relative to GDP and taxes did not.  In terms of explaining why spending as a percent of GDP went up, defense spending as a percent of GDP is about the same as it was in 1980, whereas transfer payments have grown significantly. And within transfer payments, the growth has primarily come from Medicare and Medicaid. To the extent recent declines in tax rates have contributed, one sees this primarily in the form of lower tax rates for the bottom four income quintiles in the following graph of combined income and Social Security tax rates. The political impasse facing the U.S. arises from one simple reality: Americans want an increasing government contribution to health care, but don't want to pay for it.

End the damaging obsession with deficit - Larry Summers - There is a recognition that debts cannot indefinitely be allowed to grow faster than incomes and the capacity to repay them. There is a heavy moral dimension with regard to this generation not unduly burdening its children. There is also an international and security dimension, with worries that the excessive buildup of debt would leave the United States vulnerable to foreign creditors and lacking flexibility to respond to international emergencies. Economic forecasts are of course uncertain. Yet the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken beyond those in the 2011 budget deal and the recent “fiscal cliff” agreement. So even without the risk of self-inflicted catastrophes — the possibility of default or a potential government shutdown this spring — it is appropriate for policy to focus on reducing prospective deficits. Those who argue against a further focus on prospective deficits on the grounds that the ratio of debt to gross domestic product may stabilize for a decade contingent on a forecast that assumes no recessions counsel irresponsibly. Given all the uncertainties and current U.S. debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

Summers: End the Obsession with the Deficit - After saying: the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken beyond those in the 2011 budget deal and the recent “fiscal cliff” agreement. So even without the risk of self-inflicted catastrophes — the possibility of default or a potential government shutdown this spring — it is appropriate for policy to focus on reducing prospective deficits. Those who argue against a further focus on prospective deficits on the grounds that the ratio of debt to gross domestic product may stabilize for a decade contingent on a forecast that assumes no recessions counsel irresponsibly. Given all the uncertainties and current U.S. debt levels, we should be planning to reduce debt ratios if the next decade goes well economically. Larry Summers then says: Reducing prospective deficits should be a key priority but should not take over economic policy. But I don't get the very next sentence at all. How does a tax cut reduce the deficit? Such an obsession risks the enactment of measures like pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens.  It's late, and it's been a long day -- I must be missing something.

The Most Important Graph on the Deficit - Another friendly reminder, especially as you are deluged by pundit commentary about the budget, debt, and deficit, that there's one graphic to keep in mind about the current budget situation. From CBO: As you can see, in 2009 our country goes into a deep recession. As a response, automatic stabilizers kick in, increasing spending through things like unemployment insurance and food stamps. Meanwhile receipts fall, as there is less economic activity and jobs that generate tax revenue, and taxes are cut further as a stimulus measure. This is not only natural, but to push back against it would have made the economy worse. That, in turn, would probably have blown out the deficit more. The deficit is just the difference between the two lines. As the economy slowly recovers, spending decreases and tax revenues increases. We already see this happening in the CBO graphic. From the Budget Control Act there will be less spending, and from the fiscal cliff there will be more revenue. If anything, we should be worried that gap is closing too quickly, suffocating the recovery as it starts to gain strength. But the gap is still decreasing. As many people noted, the gap is closing at record-high rates.

Obama’s Inauguration Speech Dealt A Devastating Blow To Deficit Hawks - Obama used his second Inaugural Address today to spell out his big ideas for his second term.  He hit on some big liberal ideas: Gay rights, gun control, climate change, and immigration.  The real bombshell was what he didn't include, however.  He could have included a serious paragraph about a "Grand Bargain" to reduce the deficit.  Instead, he only addressed it in a half-hearted manner. In fact, he almost mocked the idea of deficit reduction.  Philip Klein at the Washington Examiner observed  He declared that, “We must make the hard choices to reduce the cost of health care and the size of our deficit.” This is Barack Obama, bold leader speaking (with an extra twist of irony given that the signature legislative accomplishment of his first term was supposedly aimed at containing the growth of health care costs). Then, he said, “But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.” Translation: he isn’t going to do anything to seriously reform Social Security, Medicare or Medicaid, and wants more economic stimulus spending, too. So, within a breath of calling for hard choices, he rejected the need for them...

Deficit Hawks Down, by Paul Krugman -  Mr. Obama’s clearly deliberate neglect of Washington’s favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing.  Why have the deficit scolds lost their grip?  First, they have cried wolf too many times. They’ve spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.   But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit. Second, both deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

The Future of American Political Economy: Deficits-and-Debts the Very Thoughtful Ezra Klein Gets One Wrong,- Ezra Klein writes: After ‘the end of big government liberalism’: "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. This seems to me to get the future dynamic wrong. The debt-to-GDP ratio is now stable for ten years in the forecast. And beyond that everything depends on health care. So we do not have a long-run deficit-and-debt problem here in the United States unless:

  1. There is another economic collapse that greatly reduces tax revenue (10% chance);
  2. There is a collapse in demand for U.S. Treasury securities (10% chance);
  3. The Affordable Care Act fails to rein in health-care cost growth after 2020 (30% chance); or
  4. We dodge bullets (1), (2), and (3), but then the Republicans once again gain power and try again to break America's public finances and bankrupt the government as they did in 1981 and 2001-3 (30% chance).

America’s fiscal policy is not in crisis - In a widely cited piece, published this month by the Center on Budget and Policy Priorities, Richard Kogan argues that “policymakers can stabilize the public debt over the coming decade ... with $1.4tn in additional deficit savings”. The explanation for this improved medium-term outlook is a combination of economic recovery and policy measures, particularly the Budget Control Act of August 2011 and the American Taxpayer Relief Act enacted this month. Moreover, because of savings on interest payments, policy makers could achieve this amount of deficit reduction with just $1.2tn in further savings. That would be just 0.6 per cent of prospective gross domestic product, even on the pessimistic assumption that nominal GDP grows at an annual rate of just 4 per cent. Under these assumptions, the ratio of debt to GDP would stabilise at about 73 per cent (see chart). Would this be unbearable? No. At current real interest rates, the cost would be zero. Even if real rates of interest were to rise to, say, 3 per cent, the fiscal cost, in real terms, would be a mere 2 per cent of GDP. That is perfectly manageable. Now consider the long term. On this, the Congressional Budget Office notes in its 2012 Long-Term Budget Outlook that “if current laws remained in place, spending on the major federal health care programs alone would grow from more than 5 per cent of GDP today to almost 10 per cent in 2037 and would continue to increase thereafter. Spending on Social Security is projected to rise much less sharply, from 5 per cent of GDP today to more than 6 per cent in 2030 and subsequent decades ... Absent substantial increases in federal revenues, such growth in outlays would result in greater debt burdens than the US has ever experienced.” To be precise, under the assumption that revenue is kept at 18.5 per cent of GDP, just above the average of the past 40 years, debt held by the public could reach 200 per cent of GDP by 2040.

Martin Wolf, Hippie - Paul Krugman -- Martin Wolf has a piece in today’s FT making the case that (shock!) the deficit is not America’s biggest problem, or indeed a problem at all right now. His case is pretty much the same one I’ve been making; also, unlike Larry Summers yesterday, his piece doesn’t blur its point by starting with an extended exercise in dutiful deficit-bashing. Wolf also puts this in the context of what has been happening to the private sector. As he says, the collapse of the housing bubble and a sharp rise in saving (due both to wealth destruction and to deleveraging) has led to a sharp movement from financial deficit to financial surplus in the private sector. Those who claim to be deeply upset about public sector deficits should be asked, what would have happened, given this attempt by the private sector to move into surplus, if the public sector had tried to stay in balance. Can you say Second Great Depression? Meanwhile, via Mark Thoma I see that Robert Waldmann and Karl Smith have also gotten into the “what spending surge?” debate. Actually, here’s what may be the simplest way to see things. Here is total government spending (federal, state, and local) since 2000 on a log scale, so that a constant slope means a constant rate of growth. See the spending surge under Obama? Well, actually the reverse.

Why Balance the Budget?—Americans like the idea of a balanced budget. As an economic issue, however, the question is less clear. Here’s Matthew Yglesias asking if there’s anything—anything at all—that we gain from having a balanced budget: The budget will, presumably, cut spending down to a level that conservatives think is appropriate. Say that sums up to 18 percent of GDP. Well if you’re spending 18 percent of GDP and 18 percent of GDP is the right amount to spend, then why is it better to raise 18 percent of GDP in taxes rather than raise 16 percent and borrow the rest?Is it because a 2 percent of GDP budget deficit would be inflationary? Is it because an inflation-targeting central bank faced with a 2 percent of GDP budget deficit would be forced to peg short-term interest rates at a high level? What’s the problem, exactly, that the budget balancing solves once we’ve stipulated that spending has been cut to an appropriate level?The fact of the matter is that the United States can run deficits indefinitely. Of course, this doesn’t mean $1 trillion deficits as far as they eye can see; as Josh Barro noted a few years back in a post for the National Review, the key to budget sustainability isn’t balance, it is “it is making sure that the public debt does not grow faster (over the long term) than the economy.” Deficits of the current size—if stretched out over the long-term, across business cycles—are detrimental to the economy. But moderate deficits are fine, as long as the economy grows at a healthy clip

The Macroeconomic Task Ahead -- And why countercyclical macro policy is still needed -- pro Summers, contra Barro. As we contemplate the future of macroeconomic policymaking (or not), it’s important to recall the stakes. We have avoided the disastrous outcome that would arisen had the plan for further massive tax cuts aimed a high income households and extensive spending cuts been implemented; however, output remains far below full employment levels. Since 2008Q1 through 2012Q3, the cumulative output loss has totaled $3.75 trillion (Ch.05$).A further $0.94 trillion loss will be incurred by the end of 2013, should the economists surveyed by WSJ be proven correct on average. This makes clear that we are far from a complete recovery. However, it is important to recall that the Administration had proposed additional measures that, had we implemented, the gap would have been measurably smaller right now. Consider where we would be had the President’s American Jobs Act:

The case for deficit optimism - Here’s a secret:  For all the sound and fury, Washington’s actually making real progress on debt.  Let’s do some quick math. Start the clock — and the deficit projections — on Jan. 1, 2011. Congress cut expected spending by $585 billion during the 2011 appropriations process. It cut another $860 billion as part of the resolution to the 2011 debt-ceiling standoff. And it added another $1 trillion in spending cuts as part of the sequester. Then it raised $600 billion in taxes in the fiscal cliff deal. Together, that’s slightly more than $3 trillion in deficit reduction. After accounting for reduced interest payments — as there’s now less debt to pay interest on — it’s more like $3.6 trillion. That’s real money! In fact, that’s about enough to stabilize the nation’s debt-to-GDP ratio over the next decade. If over the next few years, say, there’s another $800 billion in deficit reduction — imagine a new deal that cuts $400 billion from Medicare and other mandatory spending while raising $400 billion in taxes — then the country is put on a declining debt path. But there’s bigger, better news than that. You might have heard about a recent spat in which House Speaker John Boehner told the Wall Street Journal that President Obama told him, “we don’t have a spending problem.” Cue the shock and horror from right!

Tim Geithner Is Wrong - Paul Krugman - But he’s right, too.He has a very interesting interview with Liaquat Ahamed; I was struck by what he says about the fiscal outlook: TG: There’s something strange about the debate today. The magnitude of additional deficit reduction – revenue increases or spending cuts – that you need to lock in in order to achieve fiscal sustainability is pretty modest. By most accounting, because of what we’ve already done on the spending side and tax side, we have to find another ¾ of 1 percent of GDP of policy measures. And if we did that, that would achieve the economist test of sustainability, meaning it would get the deficit down to a modest primary surplus so the debt would start falling as a share of GDP.That’s basically consistent with the CBPP analysis: 3/4 of a percent over the next decade is around $1.5 trillion. It’s important to note that this same analysis suggests that it’s not a disaster if we don’t take any more deficit-reduction steps: instead of stabilizing the debt at around 73 percent of GDP, it rises to around 80 percent, which isn’t great but isn’t cause for panic.Where Geithner goes wrong is in suggesting that since what should be done over the next decade is fairly modest, we ought to be able to get bipartisan agreement. I don’t know if he really believes this or just feels that it’s what he has to say, but nobody who has actually been paying attention can take this seriously.

Ron Paul: "The Coming Debt Limit Drama: Government Wins, We Lose" - If governments or central banks really can create wealth simply by creating money, why does poverty exist anywhere on earth?  Why haven’t successive rounds of quantitative easing by the US Fed solved our economic recession?  And if Fed money creation really works, and doesn’t create inflation, why haven’t Americans gotten richer as the money supply has grown? The truth is obvious to everyone.  Fiat currency is not wealth, and the creation of more fiat dollars does not mean that more rice, steel, soybeans, Ipads, or Honda Accords suddenly come into existence. The creation of new fiat currency simply strengthens a fantasy balance sheet, either by adding to cash reserves or servicing debt.  But this balance sheet wealth is an illusion, just as the notion we can continue to raise the debt limit and borrow money forever is an illusion.

On the Debt Ceiling-Becker -- Various attempts have been made to introduce rules that limit the aggregate level of federal spending, such as restricting the growth in spending over time to be no greater than the growth in GDP (aside from wartime and other emergencies). Balanced budget proposals do not limit spending per se, but require that enough taxes be raised to cover whatever level of spending passes the legislature and chief executive. However, neither spending limits nor balanced budget rules have ever received enough votes from Congress, although many states and local governments do require a (nominally) balanced budget.  The “debt ceiling” is much closer to balanced budget rules than to limits on federal spending since it tries to cap the budget deficits that are solely responsible for the growth in debt. As Posner shows, this so-called “ceiling” is not really a ceiling since it can be lifted by a majority vote in both houses of Congress combined with the support of the President. In fact, Congress has raised the ceiling more than 85 times since 1940, and 11 times since 2001.  More economically meaningful ceilings would relate debt to the level of GDP- and perhaps also to interest rates on the debt- since countries with higher incomes and lower interest rates can afford to carry higher debt levels. One good reason to have properly defined debt ceilings, even though the President and Congress must approve every piece of spending and taxing legislation, is to force politicians to discuss how this legislation aggregates to produce shortfalls or surpluses between total spending and total tax revenue. Budget deficits are far more common than surpluses in recent decades.

Should There Be a Debt Ceiling?—Posner -- The “debt ceiling” is a statutory cap on the amount of money the federal government is permitted to borrow. The concern with the size of the federal debt is legitimate but the debt ceiling is an illegitimate device for seeking to limit the debt. The reason is that the ceiling enables the requirement that I just mentioned that legislation to be valid be passed by both houses of Congress and signed by the President to be circumvented. The various programs that require federal spending—programs that range from defense expenditures and civil servants’ salaries and agricultural subsidies to Social Security benefits and Medicare benefits—were all enacted by Congress in the prescribed manner. If the government cannot fund the programs without borrowing, a refusal by Congress to raise the debt ceiling operates in effect as a partial repeal of the statute creating, and prescribing or authorizing funding for, the program. The repeal of a statute is governed by the same requirements as initial promulgation—passage by both houses of Congress and presidential signature. By refusing to vote to raise the debt ceiling, therefore, the House of Representatives would be effecting a partial repeal of many federal programs, all duly authorized, all by itself, without the concurrence of Senate and President.  This strikes me as improper but also as reckless because of the possible economic consequences. It is true  that defaulting on bonds and other securities issued by the federal government could be averted simply by paying the holders of federal securities ahead of other persons entitled to money from the government, such as social security annuitants, civil servants, military personnel, and contractors who sell goods and services to the government and are owed payment. Debt service—interest on government securities—is actually only a small part of the federal budget. But because the federal deficit (the excess of revenue over expenditures) was $1 trillion this past year—though that was 20 percent below the deficit in 2011, a result of the economy’s improving—a reduction of the 2013 deficit to zero because the debt ceiling wasn’t raised would cause substantial economic dislocation, so substantial that the Republicans are now willing to raise the ceiling to avert a default, though only for three months.

House GOP on debt limit – Linda Beale - So the House Republicans finally sort of recognized that holding the country's economy hostage until the GOP minority could extort changes to Medicare and Social Security that the majority doesn't want wasn't a very good idea.  See House GOP Agrees to Lift Debt Limit, New York Times (Jan 18, 2013).   The bills are already due, based on expenditures that the Congress has already approved.  Nobody likes a slacker who borrows and then renegs on his debt, and for the Congress to even consider doing that is nothing short of despicable. But this is just another bargaining ploy to try to build up pressure, with the sequester and other provisions, to argue for cutting social welfare programs.  And that's what is really despicable.  These guys (and a few gals) don't mind paying off big companies and their lobbies with extensions of economically wasteful tax breaks.  They are willing to give away huge amounts to the uberwealthy who have garnered all the gains from the last few decades through an estate tax bill that lets multimillionaires pass on $10 million without taxation, and then pay a piddling rate on any in excess of that amount.  But they wanna get at the vulnerable elderly through benefit cuts to Social Security and Medicare--ideally through privatizing them.  In their world, the rich merit it all and everybody else--that's the vast majority of us--will just have to suffer along in a diminishing world of incredible inequality.

House Votes On Debt Ceiling Suspension Wednesday As Pelosi Calls It "Gimmick Unworthy Of Challenges We Face" -- While it is not news that the GOP has proposed a temporary debt ceiling extension that would suspend the provisions of the debt ceiling target until May 19, as was reported last week, however which would demand that the Senate do something unthinkable, and something it has not done for 4 years, namely pass a budget by April 15, it is news that as The Hill reports, the vote to suspend the debt ceiling in the House will take place "as soon as Wednesday." From The Hill: "While past measures to address the debt limit have simply increased the borrowing cap, the House bill would actually suspend the debt limit for three months. Then, on May 19, the debt limit would be automatically increased from $16.4 trillion to accommodate whatever additional borrowing the Treasury had done during that time frame." As we explained last week, this is merely a plan to shift fiscal (ir)responsibility into the Democrat camp, as it is virtually impossible that America can have a budget now or ever again. After all with $1 trillion deficits as far as the eye can see, the possibility to bluster and claim one is fiscally responsible while demanding $4 trillion in debt until 2016, will hardly fool the majority of the people any more of the time. Sure enough, Pelosi's response has made it quite clear this entire plan is DOA: "the proposed three-month debt- limit increase does not relieve the uncertainty faced by small businesses, the markets and the middle class. This is a gimmick unworthy of the challenges we face.”

The Debt Ceiling and Playing With Fire - Simon Johnson - Congressional Republicans are again threatening not to increase the ceiling on the amount of federal government debt that can be issued. On Wednesday, they agreed to postpone this particular piece of the fiscal confrontation, but only until May. The decision to turn the debt ceiling into a confrontation is a big mistake for the Republicans and extending the indecision is likely to prolong the agony of uncertainty and have damaging economic consequences for the country. I made these points at a hearing on Tuesday of the House Ways and Means Committee, but unfortunately the Republican majority seems determined to persevere with its destabilizing strategy. (The hearing can be viewed on C-Span’s Web site; see the playlist on the right.) In most countries, decisions about government spending and revenue bring with them an implied, even automatic decision about how much debt to issue. Spending minus revenue in a year gives you the annual deficit (a flow), while government debt is a stock of obligations outstanding.

House Republicans Propose Ignoring Debt Ceiling For Three Months: The short term debt ceiling increase that House Republicans will vote on  this week is a bit unusual: Forget about raising the federal debt limit. House Republicans are proposing to ignore it altogether — at least until May 18. The House plans to vote Wednesday on a measure that would leave the $16.4 trillion debt limit intact but declare that it “shall not apply” from the date the measure passes until mid-May. This approach — novel in modern times — would let Republicans avoid a potentially disastrous fight over the debt limit without actually voting to let the Treasury borrow more money. The House Ways and Means Committee unveiled the measure Monday; it is scheduled for a hearing in the Rules Committee on Tuesday and to hit the House floor on Wednesday. In addition to postponing a partisan fight over the debt limit, the measure seeks to force Senate Democrats to negotiate over a formal budget resolution by mandating that lawmakers’ paychecks be held in escrow starting April 15 unless Congress adopts a comprehensive framework for spending and tax policy.

GOP Moves to Suspend Debt Ceiling Until May: House Speaker John Boehner indicated Tuesday that Republicans will vote on an extension of the federal debt ceiling to allow Treasury to borrow money until mid-May. The move would reverse the order of a series of expected debt and spending fights in Washington, an effort designed to put the GOP on more sound political footing. The Speaker said the measure would be tied to a provision that would suspend the pay of lawmakers if they do not agree to a budget by April 15th. A vote is expected Wednesday. "I think the American people understand that you can't continue to spend money that you don't have," Boehner said. At the White House, spokesman Jay Carney indicated the president would likely sign the measure if the Congress passes it. "The House Republicans made a decision to back away from the kind of brinksmanship that was very concerning to the markets, very concerning to business, very concerning to the American people," Carney said.

The brilliantly stupid new plan to raise the debt ceiling without raising it - The big debt ceiling question over the last year has been whether the Republican Party’s grown-ups, who understand that “not raising the debt ceiling” is a horrible idea, would be able to convince the nuts, who believe — and they believe this because the “grown-ups” spent the last year recklessly dissembling on the function and purpose of the debt ceiling in order to score political points against Barack Obama — that not raising the debt ceiling would be no big deal and possibly even beneficial to the American economy, because it would force us to take “tough medicine.” It looked for all the world like the elite were losing the argument. The disorganized and hilarious coup against John Boehner was proof that a significant chunk of the House majority wasn’t going to listen to reason.  Thankfully for the nation and for Republican unity, a compromise has been reached. The new plan is to raise the debt ceiling while pretending that we’re not raising the debt ceiling. And it might pass, thanks to conservatives convincing themselves that it won’t really count as raising the debt ceiling. The plan was apparently concocted and sold at the recent GOP retreat and the Tuesday luncheon of the Republican Study Committee, the ultra-conservative House policy caucus. Here’s how it works:

Suspending the Debt Ceiling -  From CNBC: GOP Moves to Suspend Debt Ceiling Until May House Speaker John Boehner indicated Tuesday that Republicans will vote on an extension of the federal debt ceiling to allow Treasury to borrow money until mid-May. ... the next moment of high political and market drama will occur when the so-called "sequester" or automatic across the board spending cuts, kicks in on March 1. After the "sequester" comes the "continuing resolution" on March 27th. Note: Congress decided last September to extend spending authority for six months with a "continuing resolution". I expect something will be worked out on the sequester, but there is a strong possibility the “continuing resolution" will lead to a government shutdown. A government shutdown would be disruptive, but probably not catastrophic since most of the government expenditures would continue.

Suspending the debt ceiling is a great idea. Let’s do it forever! - House Republicans aren’t voting to lift the debt ceiling. They’re voting to suspend it for three months. It’s an entirely political, meaningless distinction, but it points the way towards an entirely sensible, overdue solution. As Suzy Khimm reports, temporarily suspending the debt-ceiling raises some troubling technical questions. But it also sets a delightful precedent. Congress will have shown it can make the debt ceiling disappear. For three months, the debt ceiling simply won’t exist. And it won’t exist for exactly the right reasons.  House Republicans are choosing to “suspend” rather than “increase” because it sounds really bad to say you voted for an increase in the debt ceiling. What, $16.4 trillion in debt isn’t enough for you? Well, no, it’s not. It’s just raw dollars. So even when our finances are fully in order and the national debt is holding steady or declining as a percentage of our economy, we typically still have to raise the debt ceiling. That’s why, in 1997, when we the economy was booming and a surplus was around the corner, Congress had to raise the debt ceiling by $450 billion.

Is There a Poison Pill in the Debt Ceiling Bill? - The House GOP leadership introduced its 3-month debt limit increase yesterday and plans to vote on it tomorrow. As a sweetener to paper over their turnaround on the debt limit, the GOP attached a “no budget no pay” provision to H.R. 325 that could change the payment of Congressional salaries. While this looks like unconstitutional grandstanding, there is a chance that — intentionally or not — the “no budget no pay” part of the statute could function as a poison pill clause. If so, I am concerned that any challenge to the unconstitutional part could have the effect of restoring the debt ceiling while seeming to put the blame on the courts rather than Congress. Explaining what I’m worried about is slightly convoluted, involving first the validity of a Constitutional Amendment with a strange ratification history and second the arcane rules about “severability” — what courts should do when they find part of a statue unconstitutional — so bear with me.  As you may know, the House GOP’s fig leaf for its temporary parole of the hostage it had taken (the international economy) was to say that unless the Congress passes a budget this year — instead of the various continuing resolutions and such under which we’ve operated for some time — federal legislators would not get their salaries.  This provision is (almost certainly) blatantly unconstitutional.

Five Key Facts about the House Debt Limit Bill - On Wednesday, the House will vote on a bill to delay the upcoming debt limit showdown. The bill includes no spending cuts, no tax increases, and no platinum coins of unusual size. Instead, it will “suspend” the debt limit through May 18 to give lawmakers time to pass a budget in each chamber. To give them extra incentive, it also includes a new twist: If they fail to pass a budget by April 15, it will withhold their pay.  Here are five things you should know about the bill.

  • 1. The bill doesn’t just suspend the debt limit, it raises it. Section 1(a) of the bill suspends the debt limit through May 18. You might think that the current limit would go back into effect on May 19. And it would, except for section 1(b) which increases the debt limit to reflect new debt issued between now and then.
  • 2. Treasury can’t build up an enormous cash hoard.  To prevent such gaming, the bill limits the obligations that could be financed with new debt. An obligation isn’t covered “unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.” In short, no funny stuff.
  • 3. Nevertheless, the bill could allow Treasury running room well beyond May 19. A big question is whether the bill would allow the Treasury Secretary to undo those extraordinary measures and reload for the next time we hit the debt limit. The folks at the Bipartisan Policy Center, who do a great job tracking the debt limit, believe that it would. If so, the bill would put off the day of debt limit reckoning well beyond May 19.
  • 4. Because of a constitutional issue, the bill threatens to delay congressional pay, not eliminate it. But that idea ran afoul of the 27th Amendment  (the weird one that was ratified in 1992 after passing Congress back in 1789). It says: No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.
  • 5. Members of Congress don’t need to enact a budget to get paid on time. Instead, the bill focuses on the first steps of the process, in which the House and Senate pass their own budget resolutions.

Obama would likely sign 3-month debt ceiling extension - President Obama would likely sign off on a three-month extension of the debt ceiling but would prefer to see a longer-term deal, his spokesman said Tuesday. Obama "would not stand in the way" if a House Republican proposal for a three-month extension is approved by Congress and reaches his desk, spokesman Jay Carney said. The Treasury Department reports that the government is close to breaching the $16.4 trillion debt ceiling, which enables the government to borrow money to pay its bills. Failure to raise the debt ceiling could lead to a government default. Treasury officials have not set a specific deadline but said the nation will lose borrowing authority in mid-February or early March.

GOP Stunt On Debt Ceiling Is Total Surrender To White House - Given what happened in July 2011 when they decided to do the opposite (you remember the anything-but-super committee, right?), we should all be happy House Republicans have agreed that this time they won't hold hostage the increase in the federal debt ceiling the Treasury says will be needed by the end of February. We should also be grateful that legislation embodying the House GOP plan will be debated and presumably passed in the House today -- about a month before the deadline. But it's important to note this moment in federal budget history: The House GOP plan is nothing less than total capitulation to the Obama administration and Senate Democrats. How much of a surrender? In 2011 Senate Minority Leader Mitch McConnell (R-KY) was saying that a debt ceiling would never again get adopted unless the president agreed to concessions. Eighteen months later the debt ceiling effectively is being raised with no White House concessions and the GOP is struggling to come up with some kind of spin it can use to counteract what everyone can see...that it tucked its tail between its fiscal legs and rolled over.

What’s Really Novel About the Fiscal Standoff is the Refusal to Pass a Budget - The so-called debt limit crisis is, in actuality, a budget process crisis. The Senate’s refusal to pass a budget resolution since 2009 has deprived Congress of the normal conventions used to establish budget discipline. Without a budget resolution to set revenue and spending aggregates, lawmakers have been forced to instead rely on the debt limit as a mechanism to enforce fiscal discipline. This is obviously far from ideal given the extent to which the threat of default tends to roil financial markets and draws rebuke from the ratings agencies. But the attention paid to the supposed novelty of the debt limit strategy – which has been analogized to hostage taking – has it precisely backwards: opposing a debt limit extension to extract budgetary concessions from the Administration has a long history and is hardly an innovation; what’s new is the refusal to pass a budget and the associated media campaign to suggest that budgets don’t really matter. The argument on the left seems to be that since government can operate without a budget resolution, a budget resolution must not be all that important. This is sophistry at its worst: Yes, it’s true that the government can operate without a budget resolution. It’s also true that operating without a budget has led directly to trillion dollar annual deficits that have increased the public debt by 36% of GDP over four years – nearly twice as large as the incremental debt generated in any other four-year period in peacetime history.

How will Congress fix the sequester? Nobody knows!: The House GOP’s bill would prevent a debt-ceiling stand-off in February. But even if everything goes according to plan, the agreement won’t do anything to stop the automatic, across-the-board cuts from taking effect on March 1, which both parties insist they want to avoid.Here’s why: The bill suspends the debt-ceiling for three months, with the understanding that the Senate will pass a budget resolution in the next few weeks. On Sunday, Senate Democrats indicated that they’ll be willing to go along with the plan, promising to pass a budget resolution by March 1 that they say will include both spending cuts and tax increases.In theory, that budget document—a blueprint that sets broad targets for fiscal policy—could be a vehicle for a big deficit reduction deal that could replace or suspend the sequester. But even if the Senate came up with a budget blueprint by March 1, it’s highly unlikely that the House would simply pass that bill without batting an eye. As such, the House and Senate would almost certainly have to go to conference to come up with a compromise between each chamber’s budget resolution—essentially kicking off another round of the negotiations that President Obama and House Speaker John Boehner (R-Ohio) had in the lead up to the fiscal cliff. That’s likely to be a protracted process—one that will probably take weeks after the March 1 sequester deadline to finish. So as it stands, Congress will still have to put together a separate plan if it wants to prevent the sequester cuts from going into effect on March 1.

GOP ready to let sequester happen - Here comes the sequester. I think political analyst Dan Clifton of Strategas Research is on point: Although spending is cut heavily on the Defense industry and the cuts are across the board, Republicans seem intent on letting the sequester go through if Democrats are not willing to engage in entitlement reform given that the GOP believes spending should be more in line with its historical average. Here’s your trouble: The GOP would love to replace those deep defense cuts with entitlement reform. Letting them all happen would bring the defense budget to historic lows, around 2.5% of GDP. Some context: Right before 9-11, the “peace divided” brought defense spending down to 3%. Moreover, defense spending accounted for, on average, a 7% share of GDP from 1948 to 2000. But the White House will surely demand more tax increases to replace any spending reductions. Indeed, even though the sequester cuts would bring overall spending down closer to is historical norms, the long-term debt trajectory doesn’t change.

Here are all the budget deadlines we’re facing in the next 3 months - In the fiscal cliff debate, it all came down to a single day: Dec. 31, 2012. The limited deal legislators struck that day means we’re now facing a protracted debate strung out over the next three months, with deadlines popping up every few weeks. Some are just politically symbolic; others carry very real and serious consequences. In theory, a sweeping budget agreement would take render nearly all of these deadlines moot. But Congress and the White House have failed time and again to pull that off, making it more likely that we’ll muddle through from deadline to deadline. Here’s what happens when:

What Is Driving Growth in Government Spending? -What’s driving the growth in government spending? And it has a relatively straightforward answer: first and foremost, spending on health care through Medicare and Medicaid, and other major social insurance and entitlement programs.But I thought it was worth reviewing the evidence in a bit more detail. The Web site has an abundance of data on federal, state and local spending at different points in time. My focus will be on how government has been spending its money in the present and the past, rather than evaluating any future budgets or projections. I’ll be looking principally at government spending as a share of the overall economy, specifically as compared to the gross domestic product. The first chart, below, documents the growth in federal government spending over the past hundred years as a share of gross domestic product spending is broken down into four major categories:
1. Entitlement programs, under which I classify government expenditures on health care programs; pensions and retirement programs like Social Security; and welfare or social insurance programs like food stamps and unemployment compensation.
2. Military spending
3. Interest on the national debt
4. Infrastructure and services, under which I include everything else — the pot that is often referred to as discretionary spending: education spending; fire services, police and the criminal justice system; spending on physical infrastructure including transportation; spending on science, technology, and research and development; and the category called “general government,”

Government Expenditure Growth - Matt Yglesias writes: If you believe that restraining government spending should supercharge private sector economic activity, then you ought to know that since 2010 we’ve been living through a nearly unprecedented level of public sector spending restraint.  Perhaps private sector growth would have been even weaker had public sector spending risen at a more normal level. But an unusually low level of spending growth isn’t a policy we might try in the future, it’s a policy that we’re trying right now and have been trying for the past few years. That seems correct though, the graph he has accompanying it seems to just show federal expenditures. We can look at the growth rate of all expenditures directly. Now, of course growth rates were higher in the past in part because of higher inflation. If we use “real government consumption and investment” we get the resources used in government production which doesn’t count transfer payments. So, we can try deflating total expenditures by the CPI. We can pull into to 1980 to get rid of some of the previous volatility caused mostly by war.

The Non-Surge in Government Spending - Paul Krugman - The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis, an assertion belied both by the low interest rates at which the Feds can borrow and by the fact that medium-term deficit projections really aren’t that alarming. Another is the notion that our current deficit is driven by a surge in government spending.I’ve written on various occasions about that latter point, but we’re further along in the business cycle now, so it’s time for an update. The crucial thing to understand here is that you do need to take the state of the business cycle into account; it’s not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery. Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don’t want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.

Real Spending Cuts in the Real World - The factoid I think I’m been touting the most in cable TV arguments lately is that when it comes to spending cuts, we’ve already cut government spending by $1.5 trillion over ten years ($1.7 with interest savings) by lowering discretionary spending caps. Yet, Republicans—and too many moderators—deny that these cuts occurred.  Just yesterday, Ezra quotes Paul Ryan as saying the cuts don’t count because they came out of “the last session” of Congress, though as Ez points out, so did the tax increases.  So if they really want to start at zero…Obviously, this is all more posturing and understandable, I guess, in a negotiating framework where you signal intransigence to your opponent.  But the cuts are real and they’re showing up in the economy, as per this AM’s WaPo re the defense contractor General Dynamics: One of the nation’s largest federal contractors reported a $2 billion loss Wednesday and blamed it on defense cuts, a sign that the government spending that provided the rocket fuel for the metro area’s decade-long economic expansion is now dissipating. The figure below shows that the loss was came out of their IT production.

The Vision and the Budget - Jeffrey Sachs - In his second inaugural address, President Obama offered a stirring vision of the future of America, and the role of the federal government in enabling America to achieve it. He rightly emphasized that "preserving our individual freedoms ultimately requires collective action." An active federal government is needed, he said, to ensure quality education for all, mobilize new technologies, care for the elderly, fight climate change, and address global poverty.  The challenge he faces -- that America faces -- is that the vision must be coherent with the budget. This has been the Achilles' heel of Obama's government from the start. And if he's not careful, he could put his powerful vision out of reach by budget blunders in the coming few weeks.  The problem is this. Almost all of the policy areas that Obama described are within what is called the non-security discretionary budget. This is the part of the budget that covers programs for education, job training, infrastructure, renewable energy, science and technology, the environment, and everything else not associated with the Pentagon, safety net programs (like Social Security, Medicaid, and Medicare), and interest on the debt.

Government Spending is Down in the Obama Era - The chart below has been making the rounds today, so I thought I'd colorize it and annotate it to drive home its point a little more clearly. Republicans like to say we have a spending problem, not a taxing problem, but the evidence doesn't back that up. Total government spending didn't go up much during the Clinton era, and it's actually declined during the Obama era. In the last two decades, it's only gone up significantly during the Bush era, the same era in which taxes were cut dramatically. What we have isn't a spending problem. That's under control. What we have is a problem with Republicans not wanting to pay the bills they themselves were largely responsible for running up.

The White House Un-Reality Show - Like an abusive spouse who preys on the emotional desperation and dependency of his domestic victim, Barack Obama knows that all he need do is offer some cheap street corner flowers and a few sweet words, and the previous nights and months and years of beatings will be forgiven. Just hum a bar or two of an old, shared song, and the battered partner will supply a full symphony of Barry White’s Love Unlimited Orchestra – because she needs to hear it, if only inside her own head. After four years of chasing Republican skirts in search of a grand austerity bargain; of debauching himself in marathon binges of global lawlessness and aggressive war; of defiling the Bill of Rights through preventive detention and massive domestic spying; of callous neglect of the jobs and lost wealth crisis afflicting the most loyal members of his political family; and of brazen cavorting with the vile and filthy rich, sheltering them from incarceration for crimes against the national and global economy, Barack Obama slunk home on the morning of January 21, to be smothered with kisses

The Force: How Much Military Is Enough? - Sixty-two legislators sit on the House Armed Services Committee, the largest committee in Congress. Since January, 2011, when Republicans took control of the House, the committee has been chaired by Howard P. McKeon, who goes by Buck. He has never served in the military, but this month he begins his third decade representing California’s Twenty-fifth Congressional District, the home of a naval weapons station, an Army fort, an Air Force base, and, for the Marines, a place to train for mountain warfare. McKeon believes that it’s his job to protect the Pentagon from budget cuts. On New Year’s Day, after a thirteenth-hour deal was sealed with spit in the Senate, McKeon issued a press statement lamenting that the compromise had failed to “shield a wartime military from further reductions.” The debate about taxes is over, which is one of the few good things that can be said for it. The debate about spending, which has already proved narrow and grubby, is pending. The United States spends more on defense than all the other nations of the world combined. Between 1998 and 2011, military spending doubled, reaching more than seven hundred billion dollars a year—more, in adjusted dollars, than at any time since the Allies were fighting the Axis. The 2011 Budget Control Act, which raised the debt ceiling and created both the fiscal cliff and a Joint Select Committee on Deficit Reduction, which was supposed to find a way to steer clear of it, required four hundred and eighty-seven billion dollars in cuts to military spending, spread over the next ten years. The cliff-fall mandates an additional defense-budget reduction of fifty-five billion dollars annually. None of these cuts have gone into effect. McKeon has been maneuvering to hold the line.

No Joy in Vindication - You may have seen the news about the latest GAO report on auditing the U.S. government: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated Financial Statements, GAO-13-271R, Jan 17, 2013, The reasons why the GAO can’t audit the U.S. government:

    • (1) serious financial management problems at DOD that have prevented its financial statements from being auditable,
    • (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and
    • (3) the federal government’s ineffective process for preparing the consolidated financial statements.

Number 2 reminds me of: The 560+ $Billion Shell Game, where I provided data files based on the OMB Sequestration report, detailing that over 560 $billion in agency transfers could not be tracked. That problem has now been confirmed by the GAO.

Healthcare is America’s real problem, by Peter Orszag, Commentary, FT: Healthcare costs are the core long-term fiscal challenge facing the US... This is why the recent deceleration of these costs is so encouraging... The good news is that recent developments in health costs are better than many appreciate. Cost growth has slowed dramatically...  Last year, the Congressional Budget Office estimated that the gap between revenue and expenditure in the next 75 years would amount to 8.7 per cent of GDP. Since then, enacted revenue increases and an improved underlying budget outlook have reduced the gap to perhaps 7.5 per cent. Achieving the lower health-cost growth would knock another 2.5 per cent of GDP off, bringing the long-term fiscal hole down to 5 per cent of GDP – a greater impact than any policy change currently being debated in Washington. ...

An Insurance Company With an Army - Paul Krugman - Jonathan Chait and Greg Sargent both weigh in on the absurd Republican claim that they’ll produce a plan to balance the budget in 10 years, without a penny in additional revenue. Chait points out that the Ryan plan, even if you accepted all its magic asterisks, still didn’t produce a balanced budget until 2040. Sargent, armed with numbers from the Center on Budget and Policy Priorities, points out that if the GOP were to honor its promises not to cut military spending or benefits for those over 55, you’d have to impose savage cuts on everything else. What all this comes down to is a collision between GOP deficit scare tactics and the reality of what the federal government does. The government really is an insurance company with an army; if you demand rapid deficit reduction without raising taxes or cutting military spending, you have to cut deeply into programs that the public values. Republicans have, for the most part, managed until recently to skate over this reality, simultaneously calling for lower spending in the abstract while posing as the defenders of seniors against Obama’s Medicare cuts. But they’ve now run out of room, and are facing a crisis of arithmetic.

How To Avoid Raising Taxes on the Middle Class or Cutting Programs the Middle and Poor Depend On - Robert Reich - Brace yourself. In coming weeks you’ll hear there’s no serious alternative to cutting Social Security and Medicare, raising taxes on middle class, and decimating what’s left of the federal government’s discretionary spending on everything from education and job training to highways and basic research. “We” must make these sacrifices, it will be said, in order to deal with our mushrooming budget deficit and cumulative debt. But most of the people who are making this argument are very wealthy or are sponsored by the very wealthy: Wall Street moguls like Pete Peterson and his “Fix the Debt” brigade, the Business Roundtable, well-appointed think tanks and policy centers along the Potomac, members of the Simpson-Bowles commission. These regressive sentiments are packaged in a mythology that Americans have been living beyond our means: We’ve been unwilling to pay for what we want government to do for us, and we are now reaching the day of reckoning. The truth is most Americans have not been living beyond their means. The problem is their means haven’t been keeping up with the growth of the economy — which is why most of us need better education, infrastructure, and healthcare, and stronger safety nets. The real median wage is only slightly higher now than it was 30 years ago, even though the economy is twice as large.

Tax reform in the Senate - Senator Schumer recently said the Senate Democratic majority will pass a budget resolution, in part so it can create a reconciliation instruction to pass tax reform with a simple Senate majority. This is important. I don’t begrudge the majority for creating that hardball procedural option – we Republicans did it in 2001 and 2003 to enact two rounds of tax cuts. In 2001 we used a reconciliation bill to pass a center-right bipartisan bill 58-33 (Democratic now-Chairman Baucus supported it). in 2003 we used it to pass a Republican-only bill 51-50. Having a reconciliation vehicle creates the opportunity to pass a bill with a simple majority, but it does not require the bill to be partisan. If Senate Democrats follow this procedural path, they will have to choose between a bipartisan bill (likely Baucus-Hatch) or a partisan Democrat-only bill. The former would be easier to conference with a tax reform bill passed by a Republican House, while the latter would more closely hew to the policy goals of most Senate Democrats and our newly-avowed liberal/progressive President.

When Tax Cuts Were a Tough Sell - Fifty years ago this week, on Jan. 24, 1963, John F. Kennedy sent a special message to Congress on tax reduction and tax reform. Enacted the following year by Lyndon B. Johnson, the legislation cut the top federal income tax rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent. Ironically, it later became the template for Republican tax policy. Those who don’t know the history probably assume that the tax cut was a slam-dunk for Kennedy, something that was overwhelmingly popular. In fact, a big tax cut was highly controversial because at that time Republicans actually cared about the deficit and recognized that tax cuts would increase it. This view was shared by the large bloc of conservative Southern Democrats then in Congress and the general public as well. For example, on Dec. 14, 1960, before Kennedy was inaugurated, Senator Harry F. Byrd Sr., Democrat of Virginia and chairman of the powerful Senate Finance Committee, warned Kennedy against even thinking about a big tax cut, given the deficit situation. A July 1962 Gallup poll asked the American people, “Would you favor or oppose a cut in federal income taxes at this time, if a cut meant that the government would go further in debt?” Only 19 percent of people supported a tax cut, even though the high World War II-era tax rates were still in place; 72 percent were opposed.Even among those who said that their taxes were too high, only 31 percent supported a tax cut if it would add to the deficit; 61 percent were opposed.

Is the corporate income tax progressive? - We missed this, last September. From the nonpartisan Urban-Brookings in the U.S., a study of the 'incidence' of corporate taxes.  Their conclusion? They have somewhat reduced their earlier estimate of the progressivity of the tax, estimating now that 20 percent of the corporate income tax burden as falling on labor, 20 percent on the normal return to all capital, and 60 percent on the supernormal returns to corporate equity (shareholders.) Overall:  "The corporate income tax remains a very progressive component of the federal tax system." Which shouldn't really surprise anyone. Tax corporations, and you are effectively taxing their mostly wealthy owners (OK, OK, some are pension funds, but ownership as we all know is concentrated at the very top of the wealth and income scales). This table above is of course overly precise, and is modeled only on the United States. But this kind of study is important, because it helps rebut the lobbyists' routine claim that "most economists agree that the burden of corporate taxes falls on workers." Which is total nonsense. More on tax incidence here, here, here, here and here.

Much of MNEs' "offshore" (and hence untaxed) cash hoards held onshore -  Linda Beale - The Wall Street Journal, in its editorial pages a great friend to big business and low taxes for same, had a decent front-page article  on the corporate hoard of cash designated as "permanently invested offshore".  In fact, much of that cash is sitting in U.S.-dollar-denominated assets in the good ole USA.  Nonetheless companies are permitted under the tax rules to claim that those profits are earned overseas and kept there.  See Firms keep stockpiles of cash in U.S., Some companies, including Internet giant Google. software maker Microsoft and data-storage specialist EMC Corp keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies' cash positions. In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn't flow back to the U.S. parent company, the U.S. doesn't tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

Missing Half the Cash - The front page of Wednesday’s Wall Street Journal carried a tax story rich with promise, but like so much of what appears in the mainstream media these days short on reporting. For starters, there were serious factual problems with the lede: There's a funny thing about the estimated $1.7 trillion that American companies say they have indefinitely invested overseas: A lot of it is actually sitting right here at home. So just who did the estimating? And is “indefinitely invested overseas” the right measure of corporate cash? Or does that term of art significantly understate the total cash and near-cash holdings of offshore subsidiaries of American multinationals, which are often deposited in U.S. banks or in dollar-denominated accounts? On more than one level the Journal piece missed the big story here, which is about how multinational corporations have figured out how to shift profits earned in high tax jurisdictions to low-tax jurisdictions, how a 1986 law lets them hoard cash and how the cash hoard is twice the size the Journal reported.  I know because I broke that story six months ago, attributing information to verifiable sources and getting the full measure of cash.

Do Businesses Borrow to Invest in Productive Assets? Does the Business-Interest Tax Deduction Encourage That? - J.W. Mason at The Slack Wire gives us a telling and trenchant analysis of that question:Short answer: They used to, but not any more. The correlation in the U.S. between fixed-capital investment and a) debt levels and b) change in debt levels has been vanishingly small since the late eighties.…in the 1960s and 70s, a firm that was borrowing heavily also tended to be investing a lot, and vice versa; but after 1985, that was much less true. It’s gotten really bad lately: Regressing nonfinancial corporate borrowing on stock buybacks for the period 2005-2010 yields a coefficient not significantly different from 1.0, with an r-squared of 0.98. As CEOs and their cronies have moved from being business-runners to financial arbitrageurs,*…the marginal dollar borrowed by a nonfinancial business in this period was simply handed on to shareholders, without funding any productive expenditure at all.

Revisions to Basel III’s Liquidity Requirements - So the Basel Committee finally released its revisions to the all-important Liquidity Coverage Ratio (LCR), which I have written about at length. Most of the press coverage has painted the revisions as weakening the LCR, and it’s true that some of the revisions weaken the LCR, but after delving into the document, I find more of a mixed bag. The bottom line (for those who don’t want to read some of the gory details) is that while there were unfortunately more losses than wins, the core of the LCR is absolutely still intact, and the implementation of the first liquidity regime for major banks will undoubtedly be a huge upgrade to the financial regulatory framework. Here are some of the major wins and losses, in my opinion, in the revised LCR.

Who Participates In Basel Committee Rulemakings? - The Basel Committee just put out some core principles with the un-earth-shaking but nonetheless important goal "to strengthen banks' risk data aggregation capabilities and internal risk reporting practices."  Who helped them come up with the principles?  You might begin to answer that question by looking at the comment process.  Who wrote in once the committee completed a draft of the principles and sent it around?  It turns out that Basel kept a list:

Prefontaine is a Canadian professor, and JWG a beltway bandit/think tank.  So, in other words, other than the Poles, this is a comment process dominated by banking industry groups.  Basel has not in the past radically changed its rules during the comment process (though it changes them some), and I'm glad the committee is no longer operating entirely in secret.  But it does show that the new openness in international financial regulation isn't being exploited by everyone.

In the next four years, we’ll see if Wall Street can be reformed - Four years ago, President Obama was sworn in as a financial crisis was still engulfing the markets and the economy. Now he can point to a Wall Street overhaul that he helped push through Congress, intended to prevent such a meltdown from happening again. But to a large extent, the real impact of those financial reforms will depend on what happens over the next four years.  The Dodd-Frank Wall Street Reform Act passed in the summer of 2010, but more than half of the new rules have yet to take effect. The law created a blueprint for the most sweeping rules, which the Treasury Department, Federal Reserve and individual agencies still have to write. The complexity of the law and the huge pushback from financial industry lobbyists has slowed the process: As of Jan. 2, only 136 of the 398 rules that are required have been written, and many pending ones are past deadline, according to Davis Polk’s analysis: The way these pending rules are written will help determine how far the federal government will go in reducing risk on Wall Street. One of the biggest pending rules includes the Volcker Rule, which is intended to prevent big banks from gambling with taxpayer-insured money and has been one of the most disputed parts of Dodd-Frank.

Econ4 Discusses Regulation - Yves Smith - Econ4, a group of heterodox economists who “believe that the economy should serve the people, the planet, and the future,” has released its latest video, on regulation. Yours truly has a bit part.

Davos aka Banksters, politicians, CEOs party and plot our demise -  The concept of Davos is fantastic. Party at taxpayer expense, drink, surround yourself with sycophants of all ranks (including CNBS), and plot the demise of the average citizen in countries across the globe at a supranational level. And if anyone dares state the obvious that people really should listen to their own citizens and shareholders and taxpayers and not plan the demise of those very same groups while partying with people that don't have any allegiance to us, such "troublemakers" are labeled "conspiracy nuts." A sane person must ask how is this even possible without these elitist criminals being fired or arrested? Selling out one's own citizens used to be labeled treason. Screwing up corporate deals and books and bets in the tens of millions of dollars (let alone tens of billions) used to be grounds for being fired and indicted for fraud, convicted, and sued into oblivious at the same time. And yet we, the taxpayer, through the FDIC and pensions and taxpayers funds (including TARP) are paying for these shindigs? According to CNN, "the World Economic Forum brings together business, political and intellectual leaders of society." Oh really? Something tells me we could find the same caliber of leaders in any maximum security prison, and those people would have more integrity than the Davos crew, but the inmates just didn't have the right connections to escape justice or get an invite.

Exclusive: UBS Chairman proposes industry-wide settlement over Libor - UBS Chairman Axel Weber raised the possibility of an industry-wide settlement for the rest of the banks involved in the Libor rate fixing scandal at a meeting of top bankers in Davos, sources familiar with the matter said. Among the top bankers and officials present at the meeting on Thursday were Bank of Canada Governor Mark Carney, JP Morgan Chase Chief Executive Jamie Dimon, Citigroup CEO Mike Corbat and HSBC Chairman Douglas Flint. Carney is due to take over as head of the Bank of England later this year. Swiss bank UBS reached a $1.5 billion settlement in December with U.S. and British regulators over its role in the manipulation of the London interbank offered rate, a benchmark used for trillions of dollars of financial instruments ranging from home loans to complex derivative products. It was the second bank to settle, after Britain's Barclays. U.S. British and other regulators are investigating more than a dozen global banks over manipulating the rate, which is compiled from data banks submit about how much interest they are charged for loans from other banks.Weber used the meeting of bankers at the annual World Economic Forum in the Swiss Alpine resort to argue that an industry-wide settlement - similar to deals which have been struck with U.S. regulators in the past - would prevent further reputational damage to the industry.

The Illegal "Geithner Leak" That Cost Normal People Millions, But Saved His Banker Buddies - Remember poor Martha Stewart?  The old gal went to prison for trading on inside information that might have ooched her up a few thousand here or there.  Well while the rest of the world was focused on the distraction of uber liar Lance Armstrong, the underworld press types are focused on a far bigger scandal (and one that of course is going totally unreported by the mainstream media.) The scandal is the disclosure that Timothy Geithner is accused of leaking sensitive federal reserve policy information to his banker buddies.  If true, the information that he leaked would have allowed them to profit monstrously (or at least cover their otherwise lost positions) while at the same time those small fry traders who were not aware would get killed. And the data suggests that this is exactly what happened.  But again, you will find no reporting of this event.  Not a word will be written in the mainstream press. They’re too busy with Honey Boo Boo and useless scandals like Lance Armstrong.

Geithner allegations beg Fed reform (Reuters) - Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007 underscores the pressing case for reform to safeguard the integrity and independence of the central bank. Specifically Congress needs to act to make the lines between the banking industry and the governance of the regional Federal Reserve banks cleaner, guarding against a "we are all boys in this together" attitude and ensuring a diversity of views from outside the financial services industry. As revealed in transcripts released last week of Fed meetings from 2007, Richmond Fed President Jeffrey Lacker said Geithner, now the outgoing Secretary of the Treasury, discussed with banks an upcoming change in the discount rate, a move which proved highly price sensitive when it was publicly announced. "From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market," Lacker said in the statement. "My understanding was that President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives." ( here )

What’s the Economic Cost of Wall Street’s Revolving Door - This month, U.S. Senators David Vitter (R-La.) and Sherrod Brown (D-Ohio) sent a letter to the Government Accountability Office (GAO) asking the federal watchdog agency to research and report on the economic subsidy that too-big-to-fail banks receive as a result of actual or perceived taxpayer support. Last week, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, delivered a speech on the same topic. While the points made by these gentlemen are both valid and critically important, they fail to take note of four other dangerous subsidies: (1) the market perception that the Washington and Wall Street revolving door has rendered these firms immune from prosecution – even for repeated, illegal cartel behavior;  (2) the ability to spend billions buying back their own stock, effectively propping up their own share price and bad behavior; (3) self-regulation with compromised bodies creating the market perception and reality of a competitive edge; and (4) Congress and the Supreme Court tolerating Wall Street running its own private justice system (mandatory arbitration) where corrupt acts are kept hidden from public view until they blow up into catastrophic events to the economy.

How much value does the finance industry create? -  That is the question asked by John Cochrane in this recent draft essay (non-PDF version here), in response to a recent Journal of Economic Perspectives article by Robin Greenwood and David Scharfstein. Both should be required reading for any introductory finance class. There is so much in these essays that one blog post couldn't hope to adequately cover the topic, so don't expect this to be anything resembling a complete response. Everyone knows that the finance industry has grown in America. In 1980, finance took home about 5% of all the income in America; in 2007, about 8%. This has led many people to question whether all this activity is worth what we pay for it; in other words, how much of the increase in finance-industry GDP is actually value added, and how much is "rent" extracted from the rest of the economy? Cochrane makes the excellent point that the question of "How much value does industry X really create?" is always an incredibly difficult question to answer:

The Social Cost of Finance - Noah Smith has a great post that bears on the topic that I have been discussing of late (here and here): whether the growth of the US financial sector over the past three decades had anything to do with the decline in the real rate of interest that seems to have occurred over the same period. I have been suggesting that there may be reason to believe that the growth in the financial sector (from about 5% of GDP in 1980 to 8% in 2007) has reduced the productivity of the rest of the economy, because a not insubstantial part of the earnings of the financial sector has been extracted from relatively unsophisticated, informationally disadvantaged, traders and customers. Much of what financial firms do is aimed at obtaining an information advantage from which profit can be extracted, just as athletes devote resources to gaining a competitive advantage. The resources devoted to gaining informational advantage are mostly wasted, being used to transfer, not create, wealth. This seems to be true as a matter of theory; what is less clear is whether enough resources have been wasted to cause a non-negligible deterioration in economic performance.

The Persistent Power of Finance, Um, JP Morgan - In a move that went contrary to what is expected of regulators, the Securities and Exchange Commission of the US approved in mid-December a controversial JP Morgan-created exchange-traded fund (ETF) backed by physical supplies of copper. The fund will use investor money to buy and hold copper, presumably to earn a profit when prices rise. According to a NASDAQ analysis the investment vehicle will register 6.18 million shares backed by 61,800 metric tonnes of copper in physical form stored in warehouses approved by the London Metal Exchange or located in the Netherlands, Singapore, South Korea, China and the US, and not approved by the LME. With this decision of the SEC, copper joins metals such as gold, silver, platinum, and palladium that are already traded through ETFs. If the JP Morgan proposal goes through so would another ETF proposed by Blackrock titled iShares Copper Trust, which awaits SEC approval.

Why financial markets are inefficient - The efficient market hypothesis – in various forms – is at the heart of modern finance and macroeconomics. This column argues that market efficiency is extremely unlikely even without frictions or irrationality. Why? Because there are multiple equilibria, only one of which is Pareto efficient. For all other equilibria, the whims of market participants cause the welfare of the young to vary substantially in a way they would prefer to avoid, if given the choice. This invalidates the first welfare theorem and the idea of financial market efficiency. Central banks should thus dampen excessive market fluctuations.

Counterparties: The job destroying financial recovery - Finance is in the midst of its very own jobless recovery. The money side of things is going great: the S&P 500 is at its highest level since 2007, and banks are producing astonishing profits, both dull and less dull. Bank employees, on the other hand, aren’t faring so well. Commerzbank today announced it’s shedding up to 6,000 jobs. UniCredit is cutting 1,000 jobs in its German unit. Lloyds has announced 1,300 job cuts this month and Barclays is jettisoning 2,000 workers. And they’re just catching up to their US competitors. Citi infamously “repositioned” 11,000 people out of work in December, while Morgan Stanley more recently decided to cut 1,600 jobs. As Bloomberg’s Michael Moore points out, Wall Street’s bulge bracket is slimming down. UBS is ridding itself of 10,000 employees and closing its fixed-income business, while RBS is getting out of the equities, advisory, and equity capital markets businesses. It’s estimated that more than 500,000 financial sector jobs have been lost in the US and UK since 2008. Matt Yglesias writes that glee is the wrong response to this trend: The financial sector isn’t all moustache-twirling fatcat CEOs. Lots of people work at these banks in lots of different kinds of jobs, and nobody likes to see anyone lose theirs. But at the same time these waves of layoffs… emphasize that to a perhaps larger degree than is generally recognized, the financial sector really is shrinking.

Credit hedge funds will continue to demand appropriate liquidity terms from investors  - JPMorgan's prime brokerage division recently published a report on hedge fund liquidity terms (2012 Hedge Fund Terms Analysis). Here are some key highlights: Over 60% of funds have quarterly or longer redemption frequency - which is to be expected. A large portion of the funds with longer periods between redemptions are credit funds, many of whom also restrict how much one can actually redeem per quarter (investor-level gate). This is important for these funds' survival because trigger-happy investors could quickly devastate them. Investors who "grew up" with listed equities often don't appreciate what it takes to liquidate credit assets such as bonds and CDS. And liquidity in these products is only getting worse, as the Volcker rule pushes dealers out of full market making (see discussion). This puts hedge funds at risk of having to unwind in markets where very few players stand behind their bid/ask quotes.Credit funds also require initial lockups (such as a year from initial investment) to make sure they build a diverse pool of investors. This way no one investor can force a devastating liquidation by pulling out. When it comes to "hard locks", lockup periods during which investors can not redeem under any circumstances, credit funds dominate.

Leverage is Back! But This Time It's Different - From the Wall Street Journal today: Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees. Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios. What could possibly go wrong? Apparently nothing. Proponents of this strategy say that their brand of leverage is nothing at all like that nasty old-school kind of leverage that produced a global economic crisis five years ago: Money managers such as Bridgewater Associates, the world's largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns.

Kashkari Resigns Amid 'Spotty' Fund Performance, Heads Back To Public Office - The ex-back of the envelope TARP calculation "chump" become wood-chopper, turned equity portfolio manager has gone full circle and decided his time is better spent serving the public good once again. As the WSJ reports, Neel Kashkari is considering running for office in California. The napkin-laden chrome-dome has seen his funds suffer from spotty performance since their launch - all underperforming the benchmarks. We can't help but think the timing of his announcement odd given his love affair with Apple and tonight's collapse but that would be harsh judgment on the always self-denigrating 39 year-old. Of course, we will hear the impressive nature of him leaving a well-paid job to run for office as his patriotism runs wild; we are less 'believer'. Still, managing to have your name turned into a noun and a verb is no easy task...

Mirabile Dictu! Obama Likely to Nominate Mary Jo White to Head SEC - Yves Smith - Obama’s likely nomination of Mary Jo White to head the SEC is such a departure from his normal picks that it is enough to make me believe in the claims that he plays 11 dimensional chess. There must be more here than meets the eye.  Mary Jo White is an esteemed former prosecutor known for her independence and toughness. Colleagues who know the New York bar describe her as “universally respected”. Via e-mail, Neil Barofsky was enthusiastic about the idea that she’d be nominated.  One negative is the fact that Obama has decided to nominate someone serious as the statute of limitations on securities fraud for misdeeds during the crisis has pretty much expired and after the horrific Jumpstart Obama’s Bucket Shops Act is law. So White would shut the barn door after the horse is in the next county. The 11 dimensional chess angle may be that the Republicans will fight any appointment if it comes before June. Per the Wall Street Journal: Some observers predicted the White House would have difficulty getting any SEC nominee through the Senate until Republican Commissioner Troy Paredes’s term expires in June, possibly creating an opening for a Republican. Nominees can stand a better chance at confirmation if they are paired with a member of the opposing party. The SEC currently has one empty seat.

Mary Jo White’s Task - The first, most obvious reading of President Obama’s decision to nominate former federal prosecutor Mary Jo White as head of the Securities and Exchange Commission is that he wants to get tough on financial crime—to ensure that we don’t see a repeat of the days when regulators averted their eyes from Wall Street chicanery. Obama said as much when he introduced White Thursday: “We also need cops on the beat to enforce the law.” White, he said, “brought down John Gotti” and prosecuted the terrorists behind the 1993 World Trade Center bombing. “You don’t want to mess with Mary Jo. As one former S.E.C. chairman said, Mary Jo ‘does not intimidate easily.’ And that’s important, because she has a big job ahead of her.” Obama’s put a cop on the beat. Yet the story is more complex, and more interesting, than that. While White does have a long track record of prosecuting white-collar crime, she has also—more recently, as a partner at Debevoise and Plimpton—compiled an impressive record defending white-collar clients, including the former Bank of America C.E.O. Ken Lewis and the former Morgan Stanley C.E.O. John Mack, and has represented corporations in S.E.C.-enforcement proceedings. White is, in other words, someone who has worked on both sides.

Obama Names Wall Street Defense Attorney to Head the SEC - Will America finally get justice for crimes on Wall Street?  We think not.  Today, President Barack Obama named Mary Jo White to head the Securities and Exchange Commission.  The White House and most of the press are touting her credentials as a former New York Southern District prosecutor.  From the White House press briefing: Mary Jo White -- for those of us, as you were, here in the ‘90s, know of her extraordinary record as a U.S. attorney in the Southern District of New York. I mean, she prosecuted a number of large-scale white-collar crimes in complex securities and financial institution fraud. She brought justice to the terrorists responsible for the bombing of the World Trade Center and for the bombing of American embassies in Africa. She also served as a director of the Nasdaq Stock Exchange. As you know, the SEC plays an essential role in the implementation of Wall Street reform and rooting out reckless behavior in the financial industry. The President believes that that appointment and the other one -- the re-nomination he’s making today -- demonstrate the commitment that he has to carrying out Wall Street reform, making sure that we have the rules of the road that are necessary and that are being enforced in a way that ensures we don't have the kind of financial crisis that we had that led to the worst economic crisis that we've seen since the Great Depression. Sounds good right?  Uh, not so fast.  If one even bothers to read White's bio from her current law firm Debevoise & Plimpton LLP,  they would find she has been getting Wall Street off the hook for a decade.

Matt Taibbi’s Rolling Stone article posted today about Mary Jo White is devastating -  Beverly Mann  I hadn’t read Taibbi’s reporting about a jaw-dropping series of events in 2004-05 involving White until just now, when I read his article posted today on the Rolling Stone website, summarizing them.  Call me naive--which is what I’m calling myself--but the article really shocked me.    I wonder who recommended White to Obama.  The idea, I believe, was to pick someone from outside the SEC and from outside Washington--someone with serious major law enforcement cred who also knows the ins and outs of securities law and securities practices--whose nomination would send a signal that enforcement of finance laws would be a priority in Obama’s second term.   I’m certainly no expert in any of the possibly relevant criminal laws, but I do know that the major federal criminal conspiracy law has a 10-year statute of limitations.  The time period, I believe, would include any illegal obstruction of justice, which, if there was any, would have occurred, I guess, in 2004 and 2005.   From Taibbi’s article, the extent of White’s involvement is unclear, but, assuming the accuracy of the facts the article states, she did play a role.   I don’t see how this won’t be a high-publicity issue during her confirmation hearing if the mainstream media picks it up.

The Untouchables - Frontline investigates why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages.

The Untouchables: PBS Asks Why U.S. Justice Department Isn’t Prosecuting Wall Street - Pam Martens -  The Untouchables, which aired last evening on the PBS program “Frontline,” builds on the outstanding 2012 series Money, Power, and Wall Street. (I highly recommend watching all four episodes of the earlier documentary, then rewatching The Untouchables if you want an epiphany into why Wall Street can’t be tamed.) The unabbreviated question and the one that infuriates Americans is: why has no executive of a major Wall Street firm been criminally prosecuted for anything.  If the U.S. Justice Department was serious about doing its job, it has a cornucopia of crimes to pick from: Wall Street CEOs and CFOs attesting to fraudulent financial filings with the SEC, money laundering, lying in prospectuses, illegal foreclosures, rigging the Libor interest rate benchmark and then selling interest rate swaps based on a rigged index to school districts, cities and counties across America, manipulating the futures market with a rigged Libor interest rate, and so forth.  By asking the attenuated question, viewers may reach a myopic conclusion: that the head of the Criminal Division of the U.S. Justice Department, Lanny Breuer, is not prosecuting because he is too afraid of losing cases. A much stronger case can be made that Breuer is too afraid of facing his law partners when his stint is up at DOJ and he returns to his high paying job at the law firm of Covington & Burling — which represents Wall Street’s denizens of casino capital.

One Day After Frontline Airs Critical Report on Justice Department’s Lanny Breuer, WaPo Reports He’s Stepping Down - The Washington Post is reporting this afternoon that Lanny Breuer, head of the Criminal Division of the U.S. Department of Justice and the focus of a damaging report by producer Martin Smith for the PBS program, Frontline, that aired last evening, is stepping down from his post. The portion of the program that likely garvanized the White House was the startling report by prosecutors that had worked under Breuer in the criminal division of the DOJ that there wasn’t even a pretense of a real investigation against the major Wall Street firms: no subpoenas, no document reviews, no wiretaps. Following is the verbatim transcript of that portion of the program: Frontline spoke to two former high-level Justice Department prosecutors who served in the Criminal Division under Lanny Breuer. In their opinion, Breuer was overly fearful of losing. We spoke to a couple of sources from within the Criminal Division, and they reported that when it came to Wall Street, there were no investigations going on. There were no subpoenas, no document reviews, no wiretaps.These sources said that at the weekly indictment approval meetings that there was no case ever mentioned that was even close to indicting Wall Street for financial crimes.

Assistant Attorney General Breuer Gets DOJ Boot In "Untouchables" Aftermath - Earlier today, we reported that "Assistant Attorney General Admits On TV That In The US Justice Does Not Apply To The Banks" when we commented on last night's PBS special "The Untouchables." Explicitly, we said that it was "Lenny Breuer who made it very clear that when it comes to the concept of justice the banks are and always have been "more equal" than others. He does so in such shocking clarity and enthusiasm that it is a miracle that this person is still employed by the US Department of Justice." As of minutes ago that is no longer the case as his employment contract has been torn up. The WaPo reports, that Lanny A. Breuer is leaving the Justice Department "after leading the agency’s efforts to clamp down on public corruption and financial fraud at the nation’s largest banks, according to several people familiar with the matter....It is not clear when Breuer intends to leave, nor what he plans to do once he departs, but it is certain that the prosecutor’s days in office are winding down, according to people who were not authorized to speak publicly about the matter."

For Once, Maybe Lying Does Not Pay: DoJ’s Lanny Breuer Resigns Abruptly After Frontline Appearance - Yves Smith - I am delighted to be proven to be wrong on the premise of the last post, which is that lying pays and it has become so routine that an op-ed writer for a liberal newspaper can point that out without being concerned about the broader ramifications. But this is almost certain to fall into “the exception that proves the rule” category.  Lanny Breuer, former Covington & Burling partner and more recently head of the criminal division at the Department of Justice, resigned abruptly today. The proximate cause is a Frontline show that ran two nights ago, part of a series on the financial crisis. The segment in which Breuer speaks is below and of course on the PBS website (the last of four segments).  Breuer has been criticized for his lack of interest in prosecuting banks and more important, bank executives for their conduct during the crisis.  He also was the DoJ co-chairman on the do-virtually-nothing residential mortgage task force formed as a way to suborn Eric Schneiderman, who was leading a group of state attorney generals that were on their way to putting in place tougher sanctions in the banks. We’ve noted how it was Breuer who had taken to embarrassing Schneiderman for his choice: The Administration started undercutting Schneiderman almost immediately. He announced that the task force would have “hundreds” of investigators. Breuer said it would have only 55, a simply pathetic number (the far less costly savings & loan crisis had over 1000 FBI agents assigned to it). And they taunted him publicly by exposing that he hadn’t gotten a tougher release as he has claimed to justify his sabotage….

Are banks too big to jail? - Update:  Dealbook at the NYT interviews the producers of 'The Untouchables'. Yves Smith at Naked Capitalism comments begin: Lanny Breuer, former Covington & Burling partner and more recently head of the criminal division at the Department of Justice, resigned abruptly today. The proximate cause may be a Frontline show that ran two nights ago, part of a series on the financial crisis...and ends But sadly, Breuer’s resignation is unlikely to be a bellwether that lying does not pay. He simply didn’t lie well enough and that made him an embarrassment. David Sirota at Salon discusses the significance of: PBS Frontline’s stunning report last night on why the Obama administration has refused to prosecute any Wall Streeter involved in the financial meltdown doesn’t just implicitly indict a political and financial press that utterly abdicated its responsibility to cover such questions. It also — and as importantly — exposes the genuinely radical jurisprudential ideology that Wall Street campaign contributors have baked into America’s “justice” system. Indeed, after watching the piece, you will understand that the word “justice” belongs in quotes thanks to an Obama administration that has made a mockery of the name of a once hallowed executive department. The Frontline report is titled “The Untouchables,”…..As this excerpt from Breuer’s 2012 speech to the New York City Bar Association shows, that characterization of Breuer’s declarations is not an overstatement

Breuer Identifies Real Clients on Frontline then Quits - Lanny Breuer is out as head of the Criminal Division of the Department of Justice, according to the Washington Post. After his ratlike performance on Frontline (transcript here) it won’t be long before we find him at some creepy New York or DC law firm defending his best friends, the banks and their sleazy employees. His legacy is simple: too big to fail banks can’t possibly commit crimes, so minor civil fines and false promises of reform are punishment enough. Jamie Dimon couldn’t have put it better.  Breuer tried his best to dodge questions about why he violated his promise to Senator Kaufman that he was actually conducting an investigation of Wall Street fraud.  He doesn’t deny that there were no investigations; no subpoenas, no document reviews, no wiretaps. Instead, he tries to shift the subject to his pointless insider trading cases, his Ponzi cases, the Lee Farkas case (the mortgage firm Taylor, Whitaker and Bean), and a few hapless mortgage originator cases, and even a policeman defrauded by some fraud or other.

Untouchables: How Obama’s administration shielded Wall Street from prosecutions - Glenn Greenwald - PBS' Frontline program on Tuesday night broadcast a new one-hour report on one of the greatest and most shameful failings of the Obama administration: the lack of even a single arrest or prosecution of any senior Wall Street banker for the systemic fraud that precipitated the 2008 financial crisis: a crisis from which millions of people around the world are still suffering. What this program particularly demonstrated was that the Obama justice department, in particular the Chief of its Criminal Division, Lanny Breuer, never even tried to hold the high-level criminals accountable.  What Obama justice officials did instead is exactly what they did in the face of high-level Bush era crimes of torture and warrantless eavesdropping: namely, acted to protect the most powerful factions in the society in the face of overwhelming evidence of serious criminality. Indeed, financial elites were not only vested with immunity for their fraud, but thrived as a result of it, even as ordinary Americans continue to suffer the effects of that crisis.  Worst of all, Obama justice officials both shielded and feted these Wall Street oligarchs (who, just by the way, overwhelmingly supported Obama's 2008 presidential campaign) as they simultaneously prosecuted and imprisoned powerless Americans for far more trivial transgressions. As Harvard law professor Larry Lessig put it two weeks ago when expressing anger over the DOJ's persecution of Aaron Swartz: "we live in a world where the architects of the financial crisis regularly dine at the White House."

Department of Justice Attacks Frontline As Lanny Breuer Resigns - Well that didn’t take long. Less than 24 hours after PBS aired Frontline’s The Untouchables, a program focused on the failures of the Department of Justice to make cases against Wall Street bankers despite ample evidence of fraud, the head of DOJ’s criminal division resigns. It’s hard to dismiss as a coincidence given that Lanny Breuer was rather clearly identified in the program – which he participated in – as the person unwilling to go forward with Wall Street prosecutions out of both a fear of losing the cases and some strange fixation on the possibility the firms engaging in criminal fraud might go out of business. I am not sure anyone regrets Enron and Arthur Andersen going out of business. But more to the point, that concern is totally outside a prosecutor’s purview. Breuer was supposed to enforce the law not play systemic risk analyst – a job he is in no way qualified for. It is also worth noting that Lanny Breuer was interviewed extensively for the program. He had his say repeatedly as did others whom he worked with, a good deal of the program involved him offering the best arguments he could muster to defend his actions/inactions. For DOJ to now punish the journalists for a program that provided their officials with a forum is truly ridiculous. It’s time to face the facts, DOJ failed on one of the most important legal issues of our time. They have no one to blame for their bad reputation but themselves.

The SEC Holds a “Secret Conversation” With Wall Street Defense Counsel; But at the Justice Department the Pitches Are Made in the Conference Room - Pam Martens -  Two stunning assertions came out of the Martin Smith investigative report on Tuesday evening on the PBS program, Frontline. Titled The Untouchables, producer, writer and correspondent Martin Smith interviews Lanny Breuer, the head of the criminal division of the U.S. Department of Justice, who tells Smith he didn’t prosecute any senior executive of the major Wall Street firms because he couldn’t find a criminal case where he could “prove beyond a reasonable doubt every element of a crime.”  As the public has watched big money settlements and deferred prosecutions at the largest banks, the public has assumed that every available device of the U.S. Department of Justice — the top law enforcement agency in America – was being deployed to root out and prosecute those who collapsed Wall Street in 2008, costing the U.S. taxpayer trillions in bailouts, the economy trillions in lost jobs and home values, and investors trillions more in stock and bond losses.  But according to two Frontline sources at the Justice Department who worked for Breuer in the criminal division, “when it came to Wall Street, there were no investigations going on. There were no subpoenas, no document reviews, no wiretaps.”  The obvious question is: if the Justice Department wasn’t using any of the basic law enforcement techniques, how did Breuer know he couldn’t make a criminal case. According to the program’s sources inside the Justice Department, at the weekly indictment approval meetings, “there was no case ever mentioned that was even close to indicting Wall Street for financial crimes.”

The New York Times would rather cover a Breuer chair than cover Lanny Breuer -  Literally! And just like the rest of 'em. Which we'll get to. For now, what I want to know is, When is the remarkably unprosecutorial prosecutor Lanny Breuer actually going to start spending more time with his family? Because here he is explaining how Third World-style elite impunity really works in his PBS interview from "The Untouchables": These sources said that at the weekly indictment approval meetings that there was no case ever mentioned that was even close to indicting Wall Street for financial crimes. [See Professor William R. Black, who successfully prosecuted thousands of bankster executives in the S&L crisis*] Jamie and Michael still "doing God's work" on the streets? Yeah? How about Lloyd? Anyhow...  So, one day after the "The Untouchables" airs, we find our Lanny on the windowsill. But he hasn't actually jumped (or been pushed (by whom?)):Lanny A. Breuer is leaving the Justice Department after leading the agency’s [succesful, yes? No?] efforts to clamp down on public corruption and financial fraud [snort] [/snort]at the nation’s largest banks, according to several people familiar with the matter. It is not clear when Breuer intends to leave his post, nor what he plans to do once he departs [besides making a shit ton of money from the banksters he didn't prosecute], but it is certain that the prosecutor’s days in office are winding down, according to people who were not authorized to speak publicly about the matter.

Something Sinister About the Lack of Prosecutions at Lehman Brothers - This is the first interview that Chicago lawyer Anton Valukas has given since the publication of his 2,292 page report into the bankrutpcy of Lehman Brothers on March 11th, 2010. At that time, Valukas found strong evidence of financial and accounting fraud designed to deceive investors at the defunct New York-based investment bank. Valukas is surprised, especially given Lehman Brothers’ rampant abuse of Repo 105 to disguise its precarious financial position in the quarters ahead of its September 2008 collapse, that neither the former Lehman Brothers’ chief executive Dick Fuld or any other Lehman Brothers’ director has been charged with fraud or related offences. And surprise, surprise, that incredibly honest and upstanding international firm of accountants, Ernst & Young, the failed bank’s auditors, failed to carry out their legal duties (they should have alerted their client’s audit committee or the board of directors to Lee’s concerns after their meeting with whistleblower — at which he warned them of among other things, the bank’s persistent abuse of accounting trick Repo 105 to park toxic assets offshore and manipulate its balance sheet).

Banks ‘ports in the storm’ during crisis, says JP Morgan’s Dimon - Global regulators are “overwhelmed” by their own efforts to curb financiers and have failed to realise that banks have been “ports in the storm” during financial crisis, according to Jamie Dimon. The JP Morgan boss led a powerful panel at Davos in an attack on global regulators, pouring scorn on their criticism of bank complexity. “Businesses can be opaque. They are complex. You don’t know how jet engines work either,” he said. He argued that his bank continued to lend to Spain and Italy knowing that “something might go wrong”, because “we are not a fair-weather friend... What shall we say? That it’s too much risk? We provide a service to you, that’s what happens.” Mr Dimon argued that regulators are out of their depth and have failed to fix the system despite having spent five years trying. “I think a lot of regulators are also overwhelmed,” he said. “They’re overwhelmed with rules and regulations.” Unless this changes, Mr Dimon said: “It’s not going to fix. It’s just five more years of pointing fingers, scapegoating, using misinformation and thinking we’re making a better system.”

JPMorgan Chase Trying To Block Shareholder Vote On Breaking Up Bank - A federation of U.S. labor unions is looking to force JPMorgan Chase's board to consider breaking up the company after the disastrous "London Whale" affair, but the bank is trying to ensure that its shareholders do not get to vote on the union's proposal. The largest U.S. bank is seeking permission from the U.S. Securities and Exchange Commission to omit the proposal from the measures that shareholders vote on this spring, according to a letter sent to the agency on January 14. The AFL-CIO's Reserve Fund, a union fund that owns JPMorgan shares, wants the bank's board to form a committee that would explore "extraordinary transactions that could enhance stockholder value," including breaking off one or more of the company's businesses. The panel should hire third-party advisers and make a report to shareholders 120 days after this spring's annual shareholder meeting, according to the proposal. The bank has become too big manage, the proposal said, citing more than $6 billion in losses last year by a trader nicknamed the "London Whale" in the bank's Chief Investment Office in London.

Winding Down TARP: A Progress Report - Treasury Notes - Overall, to date, we’ve recovered nearly 93 percent ($387 billion) of the funds disbursed for TARP ($418 billion). And we expect further income for taxpayers from the program moving forward. In 2012, Treasury continued making significant progress winding down TARP – collecting nearly $70 billion in additional repayments and other income. Indeed, during the last year, we saw a number of important milestones, including the sale of our final shares of AIG common stock, Treasury’s announcement that it intends to exit its remaining investment in General Motors within the next 12-15 months (subject to market conditions), and other key transactions.  As we begin 2013, we thought it would be good opportunity to provide an update on our exit strategy for our remaining TARP investments[1] – program-by-program. There’s more work to be done, but we’re moving toward the finish line as we continue winding down TARP.

The CFPB Is Up and Running and Making Important Changes - Remember the Dodd-Frank financial reform law?  Remember the Consumer Financial Protection Bureau it created? Perhaps not, given all the sturm und drang over fiscal cliffs and ceilings.  But the CFRB is up-and-running and doing good works, as in this case involving realigned housing finance incentives to protect borrowers and to be less bubble-inducing: Starting next January brokers’ and loan officers’ compensation will no longer be based on the terms of the mortgages they originate, according to new guidelines released Friday by the Consumer Financial Protection Bureau. Under the CFPB’s new rules, mortgage brokers and loan officers can no longer be paid more if the borrower takes a loan with a higher interest rate, a prepayment penalty or higher fees — all features of subprime loans. The agency also outlawed “dual compensation,” whereby brokers are paid by both the consumer and the lender for their services. Originators must be screened for felony convictions and undergo training to ensure they are knowledgeable about the rules governing the types of loans they originate.

Obama’s consumer finance agency just handed down 3,000 pages of new mortgage lending rules. Now, a lesson on unintended consequences …In his inaugural address, President Obama made the case for a more active and intrusive government. Obama’s 2nd Inaugural Address was, in its essence, a rebuttal to Reagan’s 1st, 32 years later. That was the address when President Reagan said “government is not the solution to our problem;government is the problem.”) So it was a fascinating coincidence to see this research note this morning from GS Washington Research Group on new mortgage lending rules from the Obama administration:The [Consumer Financial Protection Bureau] has released more than 3,000 pages of rules this month related to mortgage lending. We believe this will create a compliance nightmare which will force banks to be more cautious when originating purchase mortgages. This further fuels our worry that purchase mortgage conditions will remain excessively tight in 2013, which is negative for mortgage lenders, home builders, mortgage insurers and others with exposure to the housing market.

Recess at the CFPB? -As has been widely reported , the D.C. Circuit today ruled unconstitutional the president's power to make recess appointments. This is a good thing. The ruling draws into question not only draws into question the National Labor Relations Board's power but also draws into question the regulatory powers of the Consumer Financial Protection Bureau because its current directors, Richard Cordray, was a recess appointment. This is a bad thing -- a very bad thing.  The CFPB was not given its full powers until the president appointed its director. Thus, to the extent the D.C. Circuit's ruling calls into question Cordray's recess appointment -- and it is difficult to see how it does not -- then the CFPB's post-creation regulatory and enforcement actions may all be a nullity. All of these actions might have to start over from scratch. I suppose the CFPB might be able to get appellate review of the issue in a different court of appeals. The D.C. Circuit's ruling, however, already created a circuit split with the 11th Circuit. The issue seems a likely one for the Supreme Court to take.

Appeals Court Ruling May Nullify Consumer Finance Protection Bureau Rulemakings -  Yves Smith - A ruling by the Washington, DC federal appeals court in Noel Canning v. NLRB pretty much ends the ability of presidents to make recess appointments, a measure that has been used since 1867. The suit successfully challenged a NLRB rulemaking on the grounds that three of the five directors were recess appointments which meant the NLRB lacked a quorum to give it authority to act. Georgetown law professor Adam Levitin believes this decision will stick: The DC Circuit’s held on two separate grounds that the NLRB members were not validly appointed. All of the NLRB members in question were appointed as so-called “recess” appointments by the President, meaning that they were appointed without the advice and consent of the Senate. First, the DC Circuit held that these appointments were invalid because they were appointed under the Recess Appointments power at a time when the Senate was not in recess. And second, the DC Circuit held that the appointments were invalid because the Recess Appointments power only applies to vacancies that arise during a recess, not vacancies that are continuing during a recess, and the vacancies in question arose before the (non-)recess. The ruling is based on the DC Circuit’s close textual reading of the Recess Appointments clause of the Constitution (in particular, the use of the term “the Recess” instead of “a Recess”), but is also butressed by policy arguments.  This decision throws a huge monkey wrench in the Consumer Finance Protection Bureau. The agency was created by combining various existing consumer finance regulatory authority in one place. Actions related to those powers should be unaffected by this decision. However, the CFPB acquired additional powers under Dodd Frank that became effective only when the agency’s director was in place. Richard Cordray, the agency’s first and current director, was a recess appointment.

The microfoundations of banking - MAINSTREAM macro models fail to represent some of the most basic realities of the financial system. One reason is that doing so is hard. Another is that for a long time it did not seem to make much difference. In the absence of crises, the activities of the financial sector can appear irrelevant for long stretches of time. Small wonder so many academics model the economy as if banks and other intermediaries simply do not exist. The crisis, which was completely unanticipated by the vast majority of academics and policymakers, revealed some of the drawbacks of these shortcuts. In response, a few scholars are trying to rebuild the field. This week’s print edition has some of the story. For this post, I want to focus on one particularly interesting new area of research: the “microfoundations” of the banking sector. Subsequent posts will cover additional topics.

Unofficial Problem Bank list declines to 826 Institutions - Here is the unofficial problem bank list for Jan 18, 2012.  Changes and comments from surferdude808:  With the FDIC having a closing for the second consecutive week and the OCC releasing its actions through mid-December 2012, it was a busy week for the Unofficial Problem Bank List. In all, there were 10 removals and four additions, which leave the list holding 826 institutions with assets of $308.7 billion. A year ago the list held 963 institutions with assets of $389.2 billion. The following four banks joined the list this week -- Citizens Financial Bank, Munster, IN ($1.1 billion Ticker: CITZ); Fieldpoint Private Bank & Trust, Greenwich, CT ($682 million); Delanco Federal Savings Bank, Delanco, NJ ($133 million); and Ben Franklin Bank of Illinois, Arlington Heights, IL ($100 million Ticker: BFFI). Next week, we anticipate the FDIC will release its actions for December 2012.

AIA: "Fifth Consecutive Month of Gains in Architecture Billings Index" - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Fifth Consecutive Month of Gains in Architecture Billings Index: Business conditions at architecture firms continue to improve. As a leading economic indicator of construction activity, the Architecture Billings Index (ABI) reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI score was 52.0, down from the mark of 53.2 in November. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.4, down slightly from the 59.6 mark of the previous month. This graph shows the Architecture Billings Index since 1996. The index was at 52.0 in December, down from 53.2 in November. Anything above 50 indicates expansion in demand for architects' services.

The (Partial) Myth of Concentrated Mortgage Market - It’s become a popular argument these days, as banks continue to report rising profits on mortgage banking, that one of the problems with the mortgage market is that it’s more consolidated and that, as a result, consumers have fewer choices when it comes to getting a home loan. The problem with that argument is that it isn’t entirely supported by actual data. Figures compiled by the Federal Reserve show that at the retail level, the mortgage banking sector in 2011 was only slightly more consolidated than it was in 2006, at the peak of the housing bubble. The top 10 mortgage companies accounted for around 37% of all loan production in 2011, up from 35% for the top 10 companies in 2006.

Bank of America Foreclosure Reviews: Whistleblowers Reveal Extensive Borrower Harm and Orchestrated Coverup (Part I – Executive Summary) - Yves Smith - On January 7, ten servicers entered into an $8.5 billion. We interviewed five contract workers at the largest site Bank of America site where the foreclosure review work took place, Tampa Bay, Florida. All had worked on the project from relatively early on, and all had considerable knowledge of mortgage and foreclosure processes and documentation, with the least experienced having worked five years as a paralegal in small real estate-focused law firm. The reviewers also provided comprehensive documentation from some of the major tests designed by Promontory and operated on its CaseTracker software program as well as other documents provided by Bank of America.The foreclosure reviews showed persistent, widespread efforts by Bank of America to avoid any finding of borrower harm. These efforts were supported and enabled by Promontory. The whistleblowers, all of whom told their role would be to act as investigators and help borrower get compensation they deserved, described the review process as seriously flawed. Yet even with those obstacles, they saw abundant evidence of serious damage to borrowers. We asked our five whistleblowers to estimate the amount of borrower harm they saw for the borrowers whose cases they reviewed, and what portion of that was serious harm (all reviewers will be described as male irrespective of gender):

    • Reviewer A: 90% harmed, with 30% to 40% suffering serious harm
    • Reviewer B: 30% harmed, including instances of serious harm; described multiple instances of serious harm of on other tests performed on his borrowers but could not readily quantify
    • Reviewer C: 67% harmed on his test; like B, saw multiple instances of serious harm in the borrower history not captured on his test as harm; could not readily quantify but specific examples cited during interviews alone exceed 10%
    • Reviewer D: 95% harmed, with 30% to 40% suffering serious harm
    • Reviewer E: 80% sufferd serious harm

Bank of America Foreclosure Reviews: Whistleblowers Reveal Extensive Borrower Harm and Orchestrated Coverup (Part II) -  Yves Smith - In the executive summary to this series, we provided an overview of OCC/Federal Reserve foreclosure reviews which were abruptly settled at the beginning of January. Critics anticipated that the flawed design, of having supposedly “independent” review firms hired by the banks themselves, meant the reviews were highly unlikely to find much if any damage to homeowners. Leaks during the course of the reviews confirmed these concerns, revealing that the review process at many of the major servicers was chaotic and the reviews were designed and scored so as to make a finding of harm virtually impossible.As bad as that sounds, the reality is even worse. We obtained extensive review documentation from whistleblowers at Bank of America and debriefed them at length. They provided compelling evidence that the foreclosure reviews were plagued by persistent, widespread efforts by Bank of America to avoid any finding of borrower harm. These efforts were supported and enabled by its “independent” review firm, Promontory Financial Group.  The whistleblowers, all of whom told their role would be to act as investigators and help borrower get compensation they deserved, described the review process as seriously flawed. Yet even with those obstacles, they saw abundant evidence of serious damage to borrowers. The whistleblowers reviewed 1600 borrower files in a “live” environment, and saw hundreds more in the attenuated start-up period. Reviewer estimates of harm varied widely primarily because they worked on different tests and thus focused on different documents and issues (see Appendix II to the Executive Summary for a description of tests). Whistleblowers were asked to estimate the percentage of harm and serious harm in the files they reviewed. The lowest estimate of harm was 30% and the highest estimate of serious harm was 80% of files reviewed.

Inside the Foreclosure Reviews - Yves Smith has a pair of damning posts about the OCC foreclosure reviews (part I and part II). Yves is compiling an extensive documentary record about the way the foreclosure reviews were structured to guarantee a whitewash that would provide little assistance even to borrowers who were seriously harmed. There's plenty of material here for any investigative journalist or Congressional committee to run with, and I really hope that this story gets picked up elsewhere.   That said, I suspect that the complexity of the review process combined with the general ennui about foreclosure shennanigans will mean that the story doesn't go much further. After five years of regulatory tolerance of outrageous behavior involving loan modifications and foreclosures, it's hard for anyone to get excited about the problems with the review process.  I'm afraid it's become a dog bites man story. This isn't to say that it isn't all awful, but just to express my sense that media--and political--interest in the issue is waning. The only interesting and ironic twist with the last reconfiguration of the settlement was that it turned out that the accounting/consulting firms doing the reviews ended up squeezing the banks for a lot more money than they anticipated.

Ruling Could Cost Thousands of New Jerseyans Their Homes - Wells Fargo Bank can charge New Jersey homeowners full back interest on mortgages in foreclosure cases that were delayed by a judicial review of abuses in the process, a Superior Court judge has ruled. The decision by chancery Judge Margaret Mary McVeigh boosts the debt owed on thousands of properties at a time when major banks ostensibly are offering loan modifications to homeowners in arrears. Now, the debt starting point for modifications will be higher for thousands of borrowers, which may increase the likelihood of foreclosure. They will be hit with back interest accrued at rates as high as 13 percent, set before the cost of borrowing plunged along with the economy.

LPS: Mortgage delinquencies increased slightly in December, "In Foreclosure" Declines - LPS released their First Look report for December today. LPS reported that the percent of loans delinquent increased in December compared to November, and declined about 9% year-over-year. Also the percent of loans in the foreclosure process declined further in December and were down significantly in 2012. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 7.17% from 7.12% in November. Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.44% in December from 3.51% in November.   The number of delinquent properties, but not in foreclosure, is down about 11% year-over-year (465,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 20% or 434,000 properties year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but the number of loans in the foreclosure process is now declining. LPS will release the complete mortgage monitor for December in early February.

Number of homes entering foreclosure drops 22.1% to six-year low - California's foreclosure crisis eased considerably during the final quarter of last year, with the number of homes entering foreclosure dropping to a six-year low. The real estate research firm DataQuick reported a 22.1% decline in default notices during the final three months of 2012 compared with the previous quarter — and a 37.9% drop from a year earlier. A total of 38,212 default notices were logged on California houses and condominiums last quarter, the lowest number since the final quarter of 2006. A default notice is the first formal step in the state's foreclosure process. Since the number of new foreclosure cases peaked in early 2009, experts and analysts have feared a second wave of home loan defaults flooding the market. Three years later, that appears unlikely as banks turn to foreclosure alternatives and home prices rise.

Lawler: Table of Short Sales and Foreclosures for Selected Cities in December - Economist Tom Lawler sent me the table below of short sales and foreclosures for several selected cities in December. This shows distressed sales are down just about everywhere, and there are more short sales than foreclosures in most areas (Minneapolis and Colorado are exceptions. Look at the right two columns in the table below (Total "Distressed" Share for Dec 2012 compared to Dec 2011). In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in most areas.   Also there has been a decline in foreclosure sales just about everywhere. Look at the middle two columns comparing foreclosure sales for Dec 2012 to Dec 2011. Foreclosure sales have declined in all these areas, and some of the declines have been stunning (the Nevada sales were impacted by a new foreclosure law).  There will probably be an increase in foreclosure sales in some judicial states in 2013, but overall foreclosures will probably be down this year. Also there has been a shift from foreclosures to short sales. In most areas, short sales now far out number foreclosures. Below is an updated “distressed sales” share report for December (or, for Colorado and Columbus, Ohio, Q4). Data are based on releases by realtor associations/MLS, save for California and Memphis, which are based on property records (and for California, Dataquick’s estimates for short sales).

Morris Davis gives a talk where he shows that fewer American homeowners think they are underwater than actually areMorris--along with Erwan Quintin--calculates median house prices by MSA using the American Community Survey from 2006-2010.  Because the ACS samples all houses, the change in price from year to year is largely not biased by the change in composition of the housing stock (the only change comes via new construction and home improvements--and the US had little of either from 2008-2010).  As such, the calculation, which is based on what people think their house is worth, is in some ways superior to house price indexes, which inevitably suffer from composition bias, even when their designers make admirable efforts to mitigate such bias. In his talk, Morris showed that people thought the value of their houses went down substantially less than Case-Shiller implies.  Where Case-Shiller or people are right is not particularly important to mortgage performance, because people will not default if they think their house is worth more than their house.  Those who are forced to move for economic reasons might find themselves unpleasantly surprised, and may wind up selling (now) through a short-sale.  But it is possible that the reason many underwater borrowers are not walking away is that they think they are not under water.

Brokers Getting Secret Payments Through Real Estate Software - California prosecutors have stumbled across a neat little real estate scam.  Title insurance companies are using software used by real estate brokers to facilitates unlawful secret payments to the brokers for the referral of business to title insurers and other providers. Last week, Jacksonville, Florida-based title insurance company Fidelity National Financial settled a case brought by the district attorneys of San Diego, Ventura and Los Angeles counties. Fidelity National Financial will pay $873,588 to settle the charges. In the civil complaint filed under California’s Unfair Competition Law, the district attorneys alleged that Fidelity National operated a software platform — called Transaction Point — for real estate brokers and other settlement service providers in California. The state alleged that the system facilitated unlawful secret payments to the brokers for the referral of business to title insurers and other service providers.

Was 2012 the Year the Housing Market Recovered? - On many occasions during the past few years, housing market conditions have been cited as a key factor contributing to the slow recovery. For a typical household, the largest component of wealth is house value. As house prices fell and sales were depressed, household wealth shrank. The decline in house values has been indicted as leading cause of restrained consumption, as households saved from current income to recoup the loss in housing wealth. The decline in house values has also been suggested as partly responsible for stubbornly high unemployment due to “lock-in,” where a household that is underwater on its mortgage limits its job search because it cannot afford to move. Fortunately, over this past year there have been signs of modest, yet sustained, improvement in the housing market. According to the latest report, sales of single-family units, both of new and existing, have been up year-over-year from January to November. The latest month shows new and existing sales up by 15.3 and 12.4 percent, respectively, compared to their values in November 2011. Since April 2012, monthly sales of existing multifamily units have also been positive relative to the previous year, with the November data turning in a whopping 33 percent increase. After several years of weakness in the home construction sector, 2012 has also been marked by large increases in home starts. For single-family units, the change each month from its counterpart in 2011 has averaged 23.6 percent; for multifamily units the average is 38.0 percent. The descent of home prices has leveled off, and prices have begun to move upward again.

The Media Is Misreporting The Housing Turnaround Story - The chart below shows the data released by the Census Bureau for housing starts on both a non-seasonally and seasonally adjusted basis.  As you can see there is an extreme amount of volatility in the non-seasonally adjusted data.  The Census Bureau takes the reported monthly housing starts data and annualizes it.  Therefore, if 10,000 homes were started in January it is reported as 120,000 on an annualized basis.  Then a seasonal adjustment factor is added to account for seasonal weather and demand patterns.   For example let's take a look at the housing start data that was just released for December of 2012.  The headlines read that "Housing starts surged by 12.1% in December proving that the housing recovery is back."  In reality the numbers were as follows:

  • December starts:  61,500 (down 2.8% from November)
  • Annualized December starts:  738,000
  • Reported seasonally adjusted December starts:  954,000  (Up 12.1% from November)
  • Seasonal adjustment to December starts:  +216,000

Historically, the data smoothing methodology was "close enough"  and the variations were, more or less, worked out over time.  However, in the current economic environment, the seasonal adjustment process may be overstating that actual activity that is occurring within the underlying economy.  With housing currently making a very small contribution to overall economic activity, just slightly more than 2.5% as shown in the chart below, the difference between the "real" economic impact of 61,500 homes being started nationwide versus 954,000, of which 216,000 were a mathematical seasonal adjustment, can be quite dramatic. 

Mortgage Purchase Index the highest since 2010 - As discussed earlier (see post), mortgage rates have bottomed. In spite of that, mortgage activity for home purchases (as opposed to refinancing) has risen to the highest level since 2010. The chart below shows 30y fixed mortgage rate relative to the "Purchase Index" - a measure of mortgage applications to buy a home. Mortgage rates are still near historical lows, with small increases unlikely to deter buyers.

Existing Home Inventory up 2% in mid-January - One of key questions for 2013 is Will Housing inventory bottom in this year?.  If inventory does bottom, we probably will not know for sure until late in the year. In normal times, there is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The NAR data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) kindly sent me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year. In 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year. So far - and this is very early - it appears inventory is increasing at a more normal rate. Note: the data is a little weird for early 2011 (spikes down briefly). The key will be to see how much inventory increasses over the next few months. In 2010, inventory was up 8% by early March, and up 15% by the end of March. For 2011 and 2012, inventory only increased about 5% at the peak.

Existing Home Sales in December: 4.94 million SAAR, 4.4 months of supply - The NAR reports: Existing-Home Sales Slip in December, Prices Continue to Rise; 2012 Totals Up Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, but are 12.8 percent above the 4.38 million-unit level in December 2011. The preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2 percent from 4.26 million in 2011. It was the highest volume since 2007 when it reached 5.03 million and the strongest increase since 2004. Total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005 when it was 4.3 months, which was near the peak of the housing boom.  Listed inventory is 21.6 percent below a year ago when there was a 6.4-month supply. Raw unsold inventory is at the lowest level since January 2001 when there were 1.78 million homes on the market. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in December 2012 (4.94 million SAAR) were 1.0% lower than last month, and were 12.8% above the December 2011 rate. The second graph shows nationwide inventory for existing homes. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales for December 2012 - NAR reported their December 2012 Existing Home Sales.  Existing home sales decreased -1.0% from last month and inventories are down to an absurdly tight 4.4 months of supply.   Existing homes sales have increased 12.8% from a year ago.  While this is the highest annual increase in five years, existing home sales on a monthly basis are not to even 2009 levels.  Volume was 4.94 million against November's 4.99 million, annualized existing home sales.  Taking existing home sales by year is a different story.  For the 2012 year, existing home sales increased 9.2% from 2011 and volume was 4.65 million sales.  This is the highest annual number of sales since 2007's 5.03 million and the strongest yearly percentage increase since 2004.  This month's existing home sales decline might have been pushed off the fiscal cliff as there were capital hill whispers about rescinding the mortgage interest tax deduction as well as potential massive tax rate increases.  Existing home inventory decreased 8.3% for the month or 1.82 million existing homes for sale.  We have not seen inventory levels this low since January 2001.  This is a 4.4 months supply and down 21.6% from a year ago.  Inventories by months to sell at current sales volume is now at 2005 levels. Short supply also partially explains the increasing prices.  The national median existing home sales price, all types, is up, now at $180,800, a 11.5% increase from a year ago. The average home price for December was $231,400, a 10.5% annual increase and up 1.5% from November.. According to NAR, we have bubble like price increases. For all of 2012, the preliminary median existing-home price was $176,600, up 6.3 percent from $166,100 in 2011, and was the strongest annual price gain since 2005 when the median price rose 12.4 percent.According to RealtyTrac, foreclosure filings are down 36% from 2010, but only 3% since 2011. Below are the 2012 annual levels. Compare these figures to existing home sales annualized volume.

Existing Home Sales: Another Solid Report - Here is how Reuters reported on existing home sales: Existing Home Sales Unexpectedly Fall 1 Percent U.S. home resales unexpectedly fell in December as fewer people put their properties on the market, although not by enough to derail the boost housing will likely provide to the economy this year. There is so much wrong with that sentence. First, for those reading the correct site, the forecast was for 4.97 million sales on a seasonally adjusted annual rate basis, and inventory decling to 1.87 million. The NAR reported sales of 4.94 million and inventory of 1.82 million. Hard to call that "unexpected" (although sales were below the less accurate "consensus" forecast). But far more important is that flat or even declining existing home sales is the wrong place to look for a "housing recovery". As the number of distressed sales decline, the number of total sales might decline too - but the number of conventional sales is increasing! An increase in conventional sales would be good news, not bad news.  Although I have limited confidence in the NAR survey, the NAR reported:  Distressed homes - foreclosures and short sales - accounted for 24 percent of December sales ... below the 32 percent share in December 2011.

Understanding the Existing Home Sales Report - The reporting on the Existing Home sales report was pretty negative yesterday even though I thought it was a solid report. And some of the positive reports were about prices - the NAR reported "The national median existing-home price for all housing types was $180,800 in December, which is 11.5 percent above December 2011" - and I completely ignore the median price.  What gives? First, on prices, the median is impacted by the mix, and the mix changed in 2012 with fewer low end foreclosures.  And on sales, the lead for many articles was that seasonally adjusted sales declined in December compared to November, and that sales were below the consensus forecast.   There were some suggestions that this called into question the "housing recovery".   Nonsense. What is a "housing recovery"?  There are really two recoveries: House prices and residential investment.  Most people - homeowners and potential buyers - focus on prices, and for prices we should use the repeat sales indexes, and not the NAR median price (repeat sales indexes include Case-Shiller, CoreLogic, etc).  But for GDP and jobs, the key is what the Bureau of Economic Analysis (BEA) calls "residential investment" (RI) .  For existing homes, only the broker's commission is part of GDP, but for new homes the entire sales price is part of GDP.  This graph shows the components for RI as a percent of GDP. According to the BEA, RI includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes).

In Housing, You Can’t Buy What’s Not for Sale - The latest drop in existing home sales is good news for home builders. Sales of existing homes unexpectedly fell 1.0% in December, but the drop may be more a matter of tight supplies rather than weak housing demand. That means more buyers, facing fewer choices of older homes, will decide to purchase a new home, creating work for builders. According to the National Association of Realtors, the inventory of existing homes for sale in December was the lowest since 2001. At the current sales pace, the supply of existing homes would last only 4.4 months, suggesting supplies are as tight as they were during the boom years.

What Ever Happened to the Big, Bad “Shadow Inventory” of Homes? - One of the great economic success stories of 2012 was that the housing market finally found a bottom, and even began to show signs of a nascent recovery. But even as positive data on the real estate market began to trickle in early last year, not everyone was convinced. The main reason for skepticism were millions of homes that had not yet hit the market, but probably would soon — either because they were already in foreclosure or because the homeowners were so far behind on payments that foreclosures were imminent. These properties, which last year were estimated to range anywhere from 3 million to 10 million in number, were dubbed the “shadow inventory” of homes. The reason the shadow inventory was thought to be bad news for the housing market was that when these homes finally did go up for sale, they would overwhelm the demand for housing, which had slowed in recent years due to the poor economy and sluggish population growth. But a recent report from analytics firm CoreLogic says that the shadow inventory as of October 2012 has fallen to 2.3 million, a 12.3% drop year-over-year. In other words, this catalog of homes has been reduced significantly without the detrimental effect on nationwide home prices that some had feared. So what happened, and why has the dreaded shadow inventory not yet sunk the convalescent U.S. housing market? I asked Sam Khater, Deputy Chief Economist at CoreLogic, and he outlined three key reasons:

Cloudy future for REO-to-rental asset class - While the single-family/real estate-owned rentals could grow in the short term — absorbing excess inventory through shadow inventory pipeline — the long-term outlook remains cloudy.  For single family rentals to develop into a sustainable asset class, property managers and investors will need to show the advantages of scale in operating efficiencies compared to individual investors who manage bulk rentals in a single location of the nation, Barclays said in its housing and residential credit outlook. An in-depth analysis ran in the December 2012 issue of HousingWire magazine. Non-agency mortgage-backed securitizations are slightly concentrated in parts of the Sun Belt region of the U.S., with the exception of Florida. As a result, the impact on defaults and severities are expected to be limited. The opportunity in rentals remains bright over the next two to three years as slow inventory pipelines are projected to keep a steady supply of distressed properties. Debate remains on how monetizable this asset could be, long term, on the secondary market. Moody's Investors Service already warns that the asset class may pose risks not typically found in traditional (multifamily) CMBS and (single-family) RMBS.

FHFA: House Prices increase 0.6% in November, Up 5.6% Year-over-year - From the Federal Housing Finance Agency (FHFA): FHFA House Price Index Up 0.6 Percent in November U.S. house prices rose 0.6 percent on a seasonally adjusted basis from October to November, according to the Federal Housing Finance Agency’s monthly House Price Index (HPI). The previously reported 0.5 percent increase in October was revised upward to a 0.6 percent increase. For the 12 months ending in November, U.S. prices rose 5.6 percent. This monthly index is for loans owned or guaranteed by Fannie or Freddie.  It appears price were up around 6% in 2012 on the repeat sales indexes (Case-Shiller, Corelogic, etc).   The Case-Shiller index for November will be released next Tuesday, January 29th.2012 New Home sales will be up about 20% from 2011 - On Friday, the Census Bureau will release the New Home Sales report for December. It looks like sales will be up close to 20% in 2012, the first year-over-year increase since 2005. This table shows the annual sales rate for the last eight years (2012 estimated).Even with the sharp increase in sales, 2012 will still be the third lowest year for new home sales since the Census Bureau started tracking sales in 1963. The two lowest years were 2010 and 2011. A key question looking forward is how much sales will increase over the next few years. My initial guess was sales would rise to around 800 thousand per year, but others think the peak may be closer to 700 thousand. Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or another 22% to 25% on an annual basis. For the period 1980 through 2000, new homes sales averaged 664 thousand per year, with peaks at 750 thousand in 1986 (annual) and over 800 thousand in the late '90s - and two deep "busts" in the early '80 and early '90s. I think the demographics support close to 800 thousand per year, but even if sales only rise to the average of 664 thousand for the '80s and '90s, sales would still increase over 80% from the 2012 level.

Zillow Forecast: November Case-Shiller Composite-20 Expected to Show 5.3% Increase from One Year Ago -On [Tuesday] January 29th, the Case-Shiller Composite Home Price Indices for November will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 5.3 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 4.5 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from October to November will be 0.3 percent for both the 20-City Composite and the 10-City Composite Home Price Index (SA).  To forecast the Case-Shiller indices we use past data from Case-Shiller, as well as the Zillow Home Value Index (ZHVI), which is available a month in advance of Case-Shiller numbers, paired with foreclosure re-sale numbers, which we also have available a month prior to Case-Shiller numbers. Together, these data points enable us to reliably forecast the Case-Shiller 10-City and 20-City Composite indices. The ZHVI does not include foreclosure re-sales and closed 2012 (December) with home values up 5.9% from year-ago levels. We expect home value appreciation to moderate in 2013, rising only 3.3 percent from December 2012 to December 2013. Further details on our forecast can be found here. Zillow’s December 2012 data can be found here.

Rising House Prices, Not Stocks, Make People Feel Wealthy - As a key influence on households’ spending decisions, the health of the housing sector trumps stock-market moves, a paper released this week by the National Bureau for Economic Research claims. The study, written by prominent economists Karl Case, John Quigley and Robert Shiller, refines their existing study of what is called the wealth effect. Case and Shiller are well known names, especially on housing issues. Quigley, another luminary, died in May, before the research’s publication. Most economists and policymakers agree asset price gains can be big drivers of consumer spending power. Rising home or stock prices are generally agreed to increase consumer spending, while falling asset prices cut the other way.That said, economists and policymakers have had a hard time quantifying the wealth effect. That’s problematic for many reasons, but it’s even more so due to the fact that the housing market’s crash and apparent recovery are considered central to the overall fate of the economy. To that end, the Federal Reserve is pursing a policy course deliberately aimed at driving up all manner of asset prices in hopes its actions will boost household spending to power better overall growth.

A confidence hit for US housing? - On Friday, I argued that the US housing market was experiencing a tentative recovery based on the fact that: 1) house prices had finally begun to increase, rising by 5% since their January 2012 lows; and 2) the number of dwelling starts in December rebounded to their highest level since June 2008. Over the weekend, the University of Michigan Consumer Sentiment Index was released for January, which registered a preliminary fall in the index to 71.3, down from 72.9 in December. It was the second consecutive monthly fall in the index, with sentiment falling by -11.4 points since  November 2012. It also represented the lowest consumer sentiment reading since December 2011 (see next chart). The result is potentially important for the US housing market, since there appears to be a strong correlation between consumer sentiment and US house prices, with sentiment typically the leading indicator (see next chart). While the relationship between consumer sentiment and housing starts is less clear, there does also appear to be a clear correlation between US house prices and housing starts (see next chart).

New Home Sales at 369,000 SAAR in December - The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 369 thousand. This was down from a revised 398 thousand SAAR in November (revised up from 377 thousand). Sales for September and October were revised up too. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.Annual 2012 sales were up almost 20% compared to 2011: "An estimated 367,000 new homes were sold in 2012. This is 19.9 percent above the 2011 figure of 306,000." The second graph shows New Home Months of Supply. The months of supply increased in December to 4.9 months from 4.5 months in November.  The all time record was 12.1 months of supply in January 2009.  This is now in the normal range (less than 6 months supply is normal). "The seasonally adjusted estimate of new houses for sale at the end of December was 151,000. This represents a supply of 4.9 months at the current sales rate." "Sales of new single-family houses in December 2012 were at a seasonally adjusted annual rate of 369,000 ... This is 7.3 percent below the revised November rate of 398,000, but is 8.8 percent above the December 2011 estimate of 339,000."This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was just above the record low in December. The combined total of completed and under construction is also just above the record low since "under construction" is starting to increase.The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

New Home Sales Decline by -7.3% for December 2012 -  December New Residential Single Family Home Sales decreased by -7.3%, or 369,000 annualized sales. The decline wipes out November's revised 9.3% increase. As we've repeatedly cautioned, beware of this report for most months the change in sales is inside the statistical margin of error and will be revised.  New single family home sales are now 8.8% above December 2011 levels, but this figure has a ±24.8% margin of error. A year ago new home sales were 339,000. Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year. These figures are seasonally adjusted as well.  We also have an annual estimate for all new homes sold in 2012. New home sales increased 19.9% annually with a volume of 367,000 for the year. This figure is outside the ±4.8% error margin.  The average home sale price was $304,000, a 4.9% increase from last month's average price of $289,900. Most wages in America simply cannot afford these prices. December's median price increased 1.3%, from $245,600 to $248,900. Median means half of new homes were sold below this price and both the average and median sales price for single family homes is not seasonally adjusted.   

December 2012 New Home Sales Were Not Pretty - New home sales data for December 2012 was definitely worse than last month’s data.

  • December 2012 was the worst year-over-year growth of 2012 – and the only month in 2012 with single digit year-over-year growth;
  • The three month rolling average is now declining.
  • The headline seasonally adjusted numbers say new home sales are down 7.3%, and Econintersect‘s analysis is even worse.

Econintersect Analysis:

  • sales down 17.8% month-over-month
  • year-over-year sales up 8.3%.

Let us start with perspective – new home sales are less than 1/4 of the peak values seen in 2005 – and are running at levels last seen in the 1970′s (non seasonally adjusted data). But still, since mid-2011 new home sales have been growing year-over-year.  The table below is unadjusted data.

New-Home Sales Soar - and Remain Low - New-home sales rose 20 percent in 2012, the government said Friday. That is the largest annual gain since 1983. The year 2012 was the third-slowest year in terms of new-home sales since the government began tracking the number in 1963. So it goes in the housing market these days. As my column in Friday’s paper noted, the housing market these days is not good. But it is getting better at an impressive rate. The government estimated that 367,000 new homes were sold last year, up from 306,000 a year earlier. That year was the worst ever. The second worst was 2010. The fourth worst was 2009. The five highest years were from 2002 through 2006, with 2005 the best. Sales in 2012 were less than 30 percent of that record level.  One statistic that is back to normal is the age of new homes that have been completed but not yet sold. The latest report puts it at 4.6 months, which is (just) within the range of figures reported before the crisis began. At the worst, in early 2010, the average such house was 14.4 months old.

Analysis: Fall in New Home Sales Doesn’t Change Story of Housing Recovery - Sales of new homes in the U.S. fell in December, a decline of 7.3% to a seasonally adjusted annual rate of 369,000. Even so, that end-of-year rate was well above that of a year earlier, marking the beginnings of a recovery for the building industry. The median price for a new home sold in December was $248,900, up 13.9% from a year ago. Wells Fargo economist Anika Khan discusses the data with the Wall Street Journal Online’s Jim Chesko.

New Home Sales and Distressing Gap - The Census Bureau reported a month-to-month decline in new home sales in December, but sales for the three previous months were revised up - so 2012 annual sales were at the expected level of 367 thousand (before further revisions).  This was an increase of 19.9% from 2011. Note: I also expect sales for December will be revised up (almost all the recent revisions have been up). This table shows the annual sales rate for the last eight years.Even with the sharp increase in sales, 2012 was the third lowest year for new home sales since the Census Bureau started tracking sales in 1963. The two lowest years were 2010 and 2011. Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or another 22% to 25% on an annual basis.

Shiller Says Housing Still Is ‘Somewhat Risky Investment’ - “Neutral.” That is the one-word answer given by Yale University professor and noted housing and markets expert Robert J. Shiller when asked to describe the current state of the U.S. housing market. “It’s going up in the short run. What it will do in the longer run is hard to say. Maybe it will go down,” Mr. Shiller said in an interview on the sidelines of the World Economic Forum annual meeting in Davos, Switzerland. Housing is still a “somewhat risky investment,” said Mr. Shiller.

NMHC Apartment Survey: Market Conditions Loosen Slightly - From the National Multi Housing Council (NMHC): Expansion Moderates for Apartment Markets in January After a seven-quarter run, expansion moderated for apartment markets according to the National Multi Housing Council’s (NMHC) January Quarterly Survey of Apartment Market Conditions. For the first time since 2010, two of the four indexes – Market Tightness (45) and Sales Volume (49) – dipped below 50, though just barely. The two financing indexes show continued improvement for the 8th consecutive quarter, as the Equity Financing (56) and Debt Financing (57) Indexes remained above the breakeven level of 50. New construction has picked up considerably since its 2009 low, but is still playing catch-up with the increase in demand for apartment residences.”  Market Tightness Index declined to 45 from 56. The change ends an 11-quarter run for the index at 50 or higher. Fifty-nine percent of respondents said that markets were unchanged, reflecting stable demand conditions. One quarter of respondents saw markets as looser, up from 14 percent in October, while 16 percent viewed markets as tighter.This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. This quarterly decline followed eleven consecutive quarters with tighter market conditions.

A Quick Note On Auto and Housing From The Latest Beige Book -- From the Beige Book: Reports of auto sales were steady to stronger in ten Districts. Richmond, Atlanta, and San Francisco noted strong sales. New York and Dallas cited mixed sales that were generally positive, while auto sales in Kansas City slowed but remained higher than a year ago. 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.  Hurricane Sandy disrupted construction activity initially in New York, but this has since led to increased work for subcontractors on repairs and reconstruction.  Consumer durable goods sales are an important indicator of confidence in future economic prospects.  The above points tell us that there is at least enough confidence in the economy overall to engage in long-term financing.

Construction Jobs May Be Ready to Take Off - Among all the measures of housing’s recovery, one gauge lags far behind: building jobs. But this year, construction payrolls may catch up finally with building activity. Although Friday’s new home sales data reported a disappointing 7.3% drop in new home sales in December, for all of 2012 sales were up nearly 20% from 2011′s pace. New home sales remain well below the 1-million mark seen during the boom years, but fundamentals such as low interest rates and firmer job growth should support another sales gain this year. The home sales report also showed builders were able to sell more higher-priced homes, not just in absolute terms but also as a share of all new homes sold. During the housing bust of 2007 though mid-2011, lower-price homes (those selling for less than $200,000) grabbed as much as 44% of the new-home market, while homes priced above $300,000 accounted for as low as 26%. The middle-price range of $200,000 to 299,999 stayed fairly stable around 30%-32%.

Remodeling Market Index was near a 9-year high in Q4 2012 - Another postive report on the US housing market, this one from the National Association of Home Builders, which reported yesterday that home remodeling activity in the US was near a near nine-year high in Q4 of last year: The Remodeling Market Index (RMI) reached 55 in the fourth quarter of 2012, increasing five points from the previous quarter, according to the National Association of Home Builders (NAHB). This is the highest reading since the first quarter 2004.An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity.“With existing home sales up, the increase in the RMI partially reflects the remodeling work new home owners undertake when they move in,” said NAHB Chief Economist David Crowe. “Consumers are gaining confidence in the economy and feeling more comfortable pulling the trigger on large and small renovations.”

Richard Koo Debunks the “Deleveraging is Almost Done, American Consumer Getting Ready for Good Times” Meme -  Yves Smith - Richard Koo of Nomura published an important piece earlier this week which got some attention in the financial blogosphere (Clusterstock, FT Alphaville). It takes issue with a critical part of the economist optimists’ case, namely, that consumer deleveraging is about done and therefore the economy is likely to perform much better in the next few years.  I have doubts even with the thesis as stated, given that the assumption is that having consumers releverage would be a good thing. We have stagnant wages and short job tenures and concerns that demographics will no longer drive growth in the US, combined with the fact that the BIS has found that household debt to GDP ratio of over 85% are associated with a negative impact on economic growth, and we are still above that level:  And that’s before you get into the issue of the composition of debt: a lot of the deleveraging has been involuntary (foreclosures and bankruptcies) and has been partially offset by rising levels of student, which is more pernicious than credit card or mortgage debt, since it can’t be discharged in bankruptcy, and is accumulated at the beginning of an adult’s income-earning years.  Koo makes a different point: that some of the figures that the bulls have cited as positive are anything but: Those making this argument [that deleveraging is over] seem to be basing their views on the fact that the Fed’s Flow of Funds Accounts show the US household sector as a net investor in 2012 Q3, the first time that has happened since 2007 Q2…the US household sector was characterized by a financial deficit of 2.8% of GDP, and this, I suspect, led some to argue that the US balance sheet recession was over.Koo refers to this chart to make his point (click to enlarge):

US might be a 'nation of deadbeats'-  President Barack Obama said on Monday that "we are not a nation of deadbeats," but instead a people who "pay our bills." A close look at the data reveals a very different story -- and one that gets far too little airing in public discourse. Far from paying our bills, the current generation of Americans -- or some of them -- have set records for default which probably have no parallel in the history of the human race. During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household. And if the numbers are to be believed, there is probably a lot more to come. Turn on any news program devoted to the economy and you will doubtless hear some Wall Street blowhard telling you that American households have been "repairing their balance sheets" and paying down their debts. They make it sound so virtuous, and they often then segue into sneering remarks about those degenerate Greeks and other Europeans who don't behave in the same responsible way. The truth is very different. According to the Federal Reserve, U.S. household debt peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion -- a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998.

Median Household Incomes: Down 0.5% in 2012 - The traditional source of household income data is the Census Bureau, which publishes annual household income data each September for the previous year. Sentier Research, an organization that focuses on income and demographics, offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research has now released its most recent update, data through December (available here as a PDF file). Their numbers are more current, the latest through December 2012. In September the Census Bureau released the 2011 annual numbers (going on nine months into the next year). Sentier Research uses the more familiar Consumer Price Index (CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for "research series") as the deflator for their annual data.  Sentier makes the data available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The first chart below chains the nominal values and real monthly values in December 2012 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for the January 2000 and the peak and post-peak trough in between.

Many Young People Will Die in Debt, but Hopefully Not From Debt - The story was by Laura Rolland of the Huffington Post, and contained some grim news from a recent Ohio State Study published in the January issue of the Journal of Economic Recovery. It claims, consistent with informal data from my financial literacy class, that young people are up to their eyeballs in debt. According to Rowley, Millions of young Americans will die in debt to credit card companies. The study data show that people in their late 20s and early 30s (born 1980 to 1984) carry significantly higher credit card debt than older generations and pay it off more slowly, have about $5,700 more than people born 1950 to 1954, and $8,200 more than those born 1920 to 1924. The study even predicts that these young people will continue to charge well into their 70s.  The study examined Capitol One credit card data for more than 32,000 people from 1997 to 2009, including borrowers age 18 to 85, and examined both how people borrow and how they pay off their cards, allowing researchers to forecast payoff times. The paper posits that people born in the early 1980s have been guinea pigs in a massive social experiment, as the physics of spending have been radically changed by the internet, which requires nary a physical movement from the couch, and  exposure to and access to luxury goods has skyrocketed. Stagnant wages help complete the picture.

Americans Downbeat on State of U.S., Prospects for Future: U.S. President Barack Obama begins his second term at a time when Americans are as negative about the state of the country and its prospects going forward as they have been in more than three decades. Fewer than four in 10 Americans (39%) rate the current status of the U.S. at the positive end of a zero to 10 scale. This is about the same as in 2010, but it is fewer than have said so at any point since 1979. As they usually are, Americans are more upbeat in their predictions of where the U.S. will be in five years (48% positive), but this is also lower than at any time since 1979. Fifty-five percent of Americans say the state of the nation five years ago was positive.The 39% of Americans who give a six to 10 rating when asked to evaluate the nation's current status is similar to the 37% who said the same three years ago. Prior to that, however, assessments were generally more positive, including a 73% six to 10 rating in January 2001 -- the highest on record. The three previous points in time when ratings were as low as or lower than the 2013 rating were in August 1979 (34%), April 1974 (33%), and January 1971 (39%). The 1979 measure came at a time when the economy was in bad shape and inflation was rampant, while the 1974 measure came in the midst of the Watergate scandal. When Gallup first asked the question in August 1959, 68% of Americans rated the state of the nation in the six to 10 range.

Prices of Energy, Food Hurt Americans' Finances Most: Americans are most likely to say the price of energy, the price of food, taxes, and healthcare costs are hurting their family's finances a lot or a little, out of a list of nine economic issues. Americans appear relatively unaffected by the availability of credit or immigration policies. In addition to energy, food, taxes, and healthcare, the federal debt ceiling is the only other situation that more than half of Americans say is hurting them financially. This relatively high level of negativity about the debt ceiling is partly attributable to the views of Republicans, 74% of whom say it is hurting their finances, compared with 54% of independents and 48% of Democrats. This is not surprising; Republicans are more likely to name the deficit as the nation's most important problem than any other issue.

LA area Port Traffic: Little impact from strike in December - Clerical workers at the ports of Long Beach and Los Angeles went on strike starting Nov 27th and ending Dec 5th. The strike impacted port traffic for November and early December, but traffic bounced back quickly following the strike. I've been following port traffic for some time. Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for December. LA area ports handle about 40% of the nation's container port traffic. Some of the LA traffic was routed to other ports in early December, so this data might not be as useful this month. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up slightly and outbound traffic down slightly compared to the rolling 12 months ending in November.  In general, inbound and outbound traffic has been mostly moving sideways recently.The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Rail Traffic Declines to Start 2013 - The first reading on rail traffic showed a modest decline to -0.1%.  The beginning of the year is usually a volatile period for rail traffic trends so it’s better to take a bit longer view here.  The 12 moving moving average remains modestly positive at 2.23%.  That’s consistent with an economy that is expanding, but still muddling through.  Here’s a bit more detail via the AAR: “The Association of American Railroads (AAR) today reported mixed 2012 rail traffic compared with 2011.  U.S. rail intermodal volume totaled 12.3 million containers and trailers in 2012, up 3.2 percent or 374,918 units, over 2011. Carloads totaled 14.7 million in 2012, down 3.1 percent or 476,322 carloads, from 2011.  Intermodal volume in 2012 was the second highest on record, down 0.1 percent or 14,885 containers and trailers, from the record high totals of 2006.

ATA Trucking Index increases 2.8% in December - From ATA: ATA Truck Tonnage Index Jumped 2.8% in December The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.8% in December after surging 3.9% in November. (The 3.9% gain in November was revised from a 3.7% increase ATA reported on December 18, 2012.) The back-to-back increases in November and December were by far the best of gains of 2012. As a result, the SA index equaled 121.6 (2000=100) in December versus 118.3 in November. Despite the solid monthly increase, compared with December 2011, the SA index was off 2.3%, the worst year-over-year result since November 2009. For all of 2012, tonnage was up 2.3%. In 2011, the index increased 5.8%.  “December was better than anticipated in light of the very difficult year-over-year comparison,”  Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. Overall the index has been mostly moving sideways this year due to the slowdown in manufacturing. The spike down in October was related to Hurricane Sandy

DOT: Vehicle Miles Driven increased 0.8% in November - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by +0.8% (1.9 billion vehicle miles) for November 2012 as compared with November 2011. Travel for the month is estimated to be 238.8 billion vehicle miles. Cumulative Travel for 2012 changed by +0.6% (16.7 billion vehicle miles). The Cumulative estimate for the year is 2,702.9 billion vehicle miles of travel. The following graph shows the rolling 12 month total vehicle miles driven.  Traffic in the Northeast was down 0.9%, but there were gains in every other region. The rolling 12 month total is still moving sideways.

Weekly Gasoline Prices: Relatively Unchanged (But Crude is Rising) - 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 rose a penny and Premium was unchanged, the reverse of last week's data. Given the hike in FICA taxes, households can, for the time being, take solace in the fact the gas prices are steady. Crude oil, however, continues to rise (see below).. According to, Hawaii, as usual, has the highest gasoline price, averaging $4.06, up three cents from last week. New York is second at $3.69, down two cents from last week. At the other end of the price range, five states have average prices under $3.00, with the cheapest at $2.73. From lowest to highest they are: Wyoming, Colorado, Utah, Montana and South Dakota. Last week there were 10 states in the under $3.00 cohort.

How to Get High-Speed Internet to All Americans - President Obama said that during his second term, Americans would act together to “build the roads and networks and research labs that will bring new jobs and businesses to our shores” and that “we cannot cede to other nations the technology that will power new jobs and new industries — we must claim its promise.” The president is right that digital communication networks — especially high-capacity fiber networks reaching American homes and businesses — can be a powerful economic engine. But we are far away from being able to realize that vision, even as we cede the advantage such technology offers to other countries. Although Julius Genachowski, the chairman of the Federal Communications Commission, has challenged the country to build additional gigabit fiber networks — about 100 times faster than most residential connections today — his words won’t advance our digital future unless they are backed up with the leadership necessary to enact pro-growth, pro-innovation and competition-enabling rules. At the heart of the problem lie a few powerful companies with enormous influence over policy making. Both the wireless and wired markets for high-speed Internet access have become heavily concentrated, and neither is subject to substantial competition nor oversight. Companies like Time Warner Cable routinely get their way when they seek to prevent local officials from encouraging competition. At the federal level, Verizon Wireless is keeping the F.C.C. in court arguing over the scope of its regulatory powers — a move that has undermined the agency’s authority.

Richmond Fed Notes Weakness in Central Atlantic Manufacturing - Manufacturers in the central Atlantic region report that activity turned decidedly worse this month as nearly all categories turned negative, the Federal Reserve Bank of Richmond said Monday. Service-sector revenue in the area rebounded this month. The Richmond Fed’s manufacturing current business conditions index fell sharply to -12 in January from 5 in December. Numbers above zero indicate expanding activity. The Richmond Fed report followed weak reports from the Fed Banks of New York and Philadelphia and raises concerns the overall U.S. factory sector started 2013 without any momentum.

January Richmond Fed Plunges, Quadruple Dips In Biggest Miss To Expectations Since 2009 - So much for the latest "recovery." While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

Kansas City Fed Reports Contracting Manufacturing - Factory activity in the Plains states is still contracting this month, according to a regional Federal Reserve bank report released Thursday. The report echoes weakening conditions reported elsewhere in the nation, raising worries about the health of the U.S. manufacturing sector at the start of 2013. The Kansas City Fed’s manufacturing composite index declined to -2 in January from a revised -1 in December, first reported as -2. A reading below zero denotes contraction. Within the January report, the Kansas City Fed revised the 2012 data to reflect new seasonal factors. The new numbers show a slightly firmer tone at the end of 2012. On a year-over-year comparison, the composite index fell to 1 from an unrevised 7 in December.

Kansas City Fed: Regional Manufacturing Contracted Modestly in January - From the Kansas City Fed: Tenth District Manufacturing Survey Contracted Modestly The survey revealed that Tenth District manufacturing activity contracted modestly again in January, but factories’ production expectations remained relatively optimistic for the months ahead. “Regional factory activity has now edged down for four straight months, as fiscal policy uncertainty continues to weigh on firms’ plans, said Wilkerson. On the positive side, expectations for new orders rose quite a bit in January, but hiring and capital spending plans were only modestly positive.” The month-over-month composite index was -2 in January, largely unchanged from readings of -1 in December and -3 in November. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Manufacturing activity declined at most durable goods-producing plants, while nondurable producers noted a slight increase overall. Most other month-over-month indexes were below zero but higher than in December. The production index inched higher from -5 to -3, and the shipments, new orders, and order backlog indexes also rose somewhat but stayed in negative territory. In contrast, the employment index fell from -1 to -8, its lowest level since mid-2009, and the new orders for exports index also declined. This follows contraction in the Richmond Fed survey earlier this week:  In January, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — lost seventeen points to settle at −12 from December's reading of 5. Among the index's components, shipments fell seventeen points to −11, the gauge for new orders moved down twenty-seven points to end at −17, and the jobs index slipped two points to −5. The NY Fed (Empire state) and Philly Fed surveys showed contraction last week.

Kansas Fed Joins NY, Philly And Richmond Fed In Contracting; Employment Index Drops To 2009 Levels -  We are now four-for-four (five-for-five if we include the drastic downward revisions in the Chicago PMI) for regional Fed business outlooks taking a serious (and consistent) turn for the worse. Kansas Fed manufacturing just missed expectations turning negative once again. Amid the sub-indices (which were broadly weak) was a plunge in employment as it fell to August 2009 levels. This weakness in Kansas follows Richmond's quadruple dip, Empire State's weakness, and Philly's major miss and in aggregate suggests a very weak ISM to come. Of course, all of this flies in the face of today's US PMI which beat expectations and pushed to recent highs.

Manufacturing is picking up, but are we in for a disappointment? - U.S. manufacturing PMI from Markit came in stronger than expected today. The trend of manufacturing stabilization (discussed here) is intact. But the sector remains vulnerable. Each year during the post-recession period, we saw manufacturing activity pick up early in the year, just to disappoint later. It remains to be seen if this year will be any different.

Outsourcing tide is not likely to turn - During his re-election campaign Mr Obama often suggested the US was poised for an industrial and manufacturing renaissance – a theme set to resurface in next month’s State of the Union address. Corporate titans have followed suit, with Jeffrey Immelt, chief executive of outsourcing pioneer General Electric, saying last year that he now viewed outsourcing as an outdated strategy. Other global companies, including Apple and Lenovo, have since announced plans to bring production facilities home from Asia, while reports last year suggested that GE would also take in house much of the software development it contracts to India. All of these threads came together most cogently in an essay in last month’s Atlantic, which heralded an “insourcing boom”, highlighting a rejuvenated GE factory in Kentucky churning out water heaters and washing machines once made in China and Mexico. Enthusiasts for reshoring typically begin their case by noting China’s rising wage costs and declining labour force. Others focus on energy costs, homing in on America’s shale gas boom as a potential source of competitive advantage for its manufacturers. A third argument is that companies now see outsourced relationships as convoluted and insecure, especially after the type of supply-chain disruption that followed last year’s Japanese tsunami. Insourcing’s more careful advocates point just to the beginnings of a trend away from Asian manufacturing. Even so, most evidence fails to back up even these more modest assertions. China’s labour costs are rising, but they remain far below those in western economies, with hourly manufacturing pay roughly 25 times lower than in the US, according to the latest figures from the US Bureau of Labor Statistics.

Retail Sales and Jobs - From Panzner Insights: Economists rely on a variety of indicators to try and get a read on the economy. But the apparent connection between certain data points and trends and future activity isn't always obvious or straightforward. That doesn't seem to be the case in regard to the connection between retail sales and employment. Indeed, it makes sense that concerns about the job market would be quickly felt when it comes to household spending. If workers fear they might lose their jobs, they don't wait until they get the bad news before cutting back. More broadly, if a large enough number of workers believes the job market is deteriorating, then it's a good bet the overall trend of retail sales will signal the change before the payroll data does. As the following chart shows, this has been the pattern previously. Under the circumstances, the latest readings on the pace of retail sales suggest it's only a matter of time before the headline employment data reveals that the jobs market is heading south.

Top Gaining and Losing Jobs in the "Recovery" - This is part three in a series of articles on jobs gained and lost since December 2007. The first article was an interactive map from Tableau: Job Gains and Losses in the Recovery by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc). The second article Job Gaining and Job Losing Industries 2007-2012 displayed data in an interesting pie chart fashion by Salil Mehta who has a blog on Statistical Ideas. This article contains another look at the data, but focus is on jobs gained or lost in the recovery. Data for all three posts is courtesy of Economic Modeling Specialists. The recession ended in June of 2009, but the data I have is annual. Data in the following charts uses December of 2009 as a proxy for the start of the recovery. Once again, pie charts are by Salil Mehta.

Appeals Court: Obama's Labor Appointments Unconstitutional The U.S. Court of Appeals for the D.C. Circuit ruled Friday that President Obama's recess appointments to the National Labor Relations Board last year were unconstitutional because the Senate was technically never out of session for the holidays, but in "pro-forma" session, the AP reports. GOP lawmakers used the tactic specifically to prevent Obama from using his recess power to fill vacancies in an agency they claimed was too pro-union. The Obama administration is expected to appeal the decision to the Supreme Court. Obama appointed two Democrats, union lawyer Richard Griffin and Labor Department official Sharon Block, and a Republican, NLRB lawyer Terence Flynn, to the board last January.

Obama Promise to Boost Middle Class Already in Peril -   Most Americans started this year with a cut in take-home pay as Congress let a temporary 2-percentage-point reduction in payroll taxes expire. Workers’ own leverage to gain wage increases will be limited for years by competition from the swollen ranks of jobless Americans as forecasters expect the unemployment rate to remain at or above 7 percent through 2014. Even with bright spots such as signs of strength in housing and an energy boom that’s lowering fuel costs for manufacturers, forecasters predict a slower expansion as federal tax increases and spending cuts crimp growth and demand for exports drops with a weakening global economy. While the U.S. economy advanced at a 3.1 percent rate in the third quarter, growth of just 2 percent is seen this year, according to the median estimate of economists surveyed by Bloomberg. Obama at the same time faces united Republican opposition to his agenda and pressure to slash federal spending. “The president is still fundamentally on the defensive,” said Damon Silvers, policy director for the AFL-CIO labor federation. “His fundamental task is to avoid being forced into austerity measures that will hurt the economic recovery or the capacity of our government to serve the people.”

Yes, the middle class really is falling behind - There’s a provocative new op-ed Thursday in the Wall Street Journal from economists Donald Boudreaux and Mark Perry, who argue that the middle class isn’t stagnating, even though middle-class incomes have flatlined for decades. Their basic point is that middle-class living standards keep going up and that middle-class consumers have “more buying power than ever before.”Here are their two key paragraphs, an American born today can expect to live approximately 79 years — a full five years longer than in 1980 and more than a decade longer than in 1950.…According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics” — food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities — fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.” It’s undeniable, and a great thing, that Americans are living longer. But the second point – that we’re spending less on “basics” – well, that turns out to depend a lot on what you call “basic.” Boudreaux and Perry count the basics as food, clothing, shelter and cars. Fine. But what if we add in gasoline (to run those cars), health care (to help us live longer) and education (which is increasingly required for getting and keeping a middle-class job)? Then the math looks a lot different.

Taxes and job creators - Via Robert Waldmann Richard Thaler at Bloomberg provides a different take on innovators and job creators: A recurring theme of this year’s presidential campaign is the need to encourage the formation of new businesses. Republicans in general, and Mitt Romney in particular, have stressed that the best way to stimulate such startups is via low tax rates on high-income earners. In other words, this is a strategy that emphasizes maximizing the after-tax returns if and when you hit it big. Yet if you think about the way most new businesses are started, it should be clear that these tax incentives have very little to do with the decisions facing most new entrepreneurs. The typical business startup (think Joe the Plumber) begins with an initial stake that has been saved or borrowed, and 97 percent of small-business owners make less than $250,000 a year. It is a good bet that when Bill Gates, Steve Jobs and Larry Page were creating their new businesses in their proverbial garages, they weren’t giving much thought to the tax rate they would have to pay if they struck it rich..

Weekly Initial Unemployment Claims decline to 330,000 - The DOL reports: In the week ending January 19, the advance figure for seasonally adjusted initial claims was 330,000, a decrease of 5,000 from the previous week's unrevised figure of 335,000. The 4-week moving average was 351,750, a decrease of 8,250 from the previous week's revised average of 360,000. The previous week was unrevised. 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 351,750. This is the lowest level for the 4-week average 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 Again Drop Dramatically - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 330,000 new claims number was a 5,000 decrease from 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 359,250 to 351,750, the best reading since March of 2008. The first three weeks of 2013 show the sharpest decline in claims for the comparable opening weeks for the previous three years. Here is the official statement from the Department of Labor: In the week ending January 19, the advance figure for seasonally adjusted initial claims was 330,000, a decrease of 5,000 from the previous week's unrevised figure of 335,000. The 4-week moving average was 351,750, a decrease of 8,250 from the previous week's revised average of 360,000.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 12, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 12 was 3,157,000, a decrease of 71,000 from the preceding week's revised level of 3,228,000. The 4-week moving average was 3,197,500, a decrease of 12,250 from the preceding week's revised average of 3,209,750.  Today's seasonally adjusted number was way below the consensus estimate of 355K, and's own estimate was for 365K. 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:

California May Hold Key to Big Drop in Jobless Claims - Wondering how we’ve had two big blowout drops in weekly jobless claims? Why do economists keep highballing their estimates? Perhaps California holds the answers. And while it might be tempting to conclude that five-year low of 330,000 claims reported earlier Thursday reflects a greatly improved labor market, a small San Francisco research firm suggests it has more to do with the fact that California, whose 38 million population gives it the biggest workforce in the nation, hasn’t filed its claims numbers for past two weeks. That meant the state’s bean counters had to come up with a guesstimate — and by Southbay Research’s reckoning, they may have come up with too low a number.

Vital Signs Chart: Fewer Jobless Applying for Benefits - Fewer workers are losing their jobs. Workers filing first-time claims for jobless benefits fell last week to 351,750, on a four-week moving average. That is the lowest level since March 2008, during the recession. However, data in recent weeks haven’t been as reliable because several states, including California, failed to report claims, requiring officials to make estimates.

Number of the Week: Why Disability Figures Are Good for Job Market - 2,820,812: The number of applications for Social Security Disability Insurance in 2012. The number of people applying and getting approved for disability benefits hit multiyear lows in 2012, a potential sign of an improving labor market. Last year some 2.8 million people applied for Social Security Disability Insurance, the lowest level since 2009, and about 980,000 approvals were issued, the lowest level since 2008. Historically, both numbers remain elevated and are likely to continue to be high as the average age of SSDI applicants is about midway through the Baby Boom generation. There has long been a link between high unemployment and rising applications for disability. A 2011 report from the White House noted that as many poor Americans reach the end of their unemployment benefits, they apply for disability benefits. Applying for benefits doesn’t mean automatic approval, of course. About 33% of applications in 2012 were approved, down from more than a 50% approval rate in 1998. Part of the lower rate is attributable to a backlog in the system. Many applications made in 2012 still haven’t been decided. But the lower rate could also be affected by workers seeking benefits because they see no alternative. But the decline could be an indication of better conditions in the jobs market. Though 2012 wasn’t exactly a gangbuster year for employment, the economy did manage to add about 1.8 million jobs and the unemployment rate declined more than half a percentage point to 7.8% over the course of the year.

Older, but Not Yet Retired - The labor force participation rate has fallen drastically in the last few years, partly because a huge chunk of the American population — the baby boomers — is rolling into retirement age. But the aging of Americans born from 1946 to 1964 has not actually had as big a drag on labor-force participation rates as demographers might have guessed a few decades ago.That’s because it has become much more common for people over 65 to continue working. According to a new Census Bureau report, in 2010, 16.1 percent of the population 65 years and older was in the labor force, meaning either working or actively looking for work. Two decades earlier, that share was 12.1 percent. The increased labor-force participation rate for the most senior Americans is partly tied to more women joining the work force over time, though men have shown large increases too:

Over 65 and Working -  The proportion of U.S. adults who are "in the labor force"--that is, who either have jobs or are unemployed and looking for a job--has been falling for a decade, as I explored in an April 26, 2012, post on "Falling Labor Force Participation."  But for one demographic group, the elderly, labor force participation is rising substantially.  Braedyn Kromer and David Howard of the U.S. Census Bureau offer some snapshots of the data in their just-released survey brief, "Labor Force Participation and Work Status of People 65 Years and Older." For example, here are some comparisons for the labor force participation of men and women, for those over 65 and for some age subgroups. While labor force participation is down a bit for the 75+ age group, it is noticeably higher since 1990 for the 65-69 and 70-74 age group. 

Union Membership at All Time Low - The attack on unions has been clearly effective. America's workers who are members of a union declined by 0.5 percentage points in 2012 to a low of 11.3%. In 1983 20.1% of all workers were members of a union and in 2011 11.8% of America's employed were union members. We have not seen union membership rates this low since the Great Depression.  In 1932, before FDR's New Deal, union membership was 6.0%. After the FDR administration passed the National Labor Relations Act in 1935 to protect the rights of labor organization, union membership started to rise. By 1937 union membership was 12.9 %. America has just gone backwards in labor rights and organization The BLS issued their annual union membership statistics and if it was ever more clear what a union can do for you it is wages. The wage difference between union members and non-union workers is huge. In 2012, the median weekly wage for workers not in a union was $742. Union members, on the other hand, had a median weekly wage of $943. That's a difference of $201 a week or $10,452 a year assuming one has paid vacation time and sick days, which many workers these days do not.

Union Membership Drops Despite Job Growth - The long decline in the number of American workers belonging to labor unions accelerated sharply last year, according to data reported on Wednesday, sending the unionization rate to its lowest level in close to a century. The Bureau of Labor Statistics said the total number of union members fell by 400,000 last year, to 14.3 million, even though the nation’s overall employment rose by 2.4 million. The percentage of workers in unions fell to 11.3 percent, down from 11.8 percent in 2011, the bureau found in its annual report on union membership. That brought unionization to its lowest level since 1916, when it was 11.2 percent, according to a study by two Rutgers economists, Leo Troy and Neil Sheflin. Labor specialists cited several reasons for the steep one-year decline in union membership. Among the factors were new laws that rolled back the power of unions in Wisconsin, Indiana and other states, the continued expansion by manufacturers like Boeing and Volkswagen in nonunion states and the growth of sectors like retail and restaurants, where unions have little presence.

Unions in America: 2012 Data - Even as the labor market expanded in 2012, union membership fell again, both in the private and public sectors, according to data released this morning by the BLS.

  • –Among all workers, 11.3%, or 14.4 million were union members in 2012, compared to 11.8% (14.8 million) in 2011.
  • –The share of union members in the public sector remains much higher than that of the private sector: in 2012, private sector unionization was 6.6%; the public sector rate was 35.9%.
  • –Comparing last year’s median weekly earnings for full-time workers reveals a 27% union premium—this has remained relatively constant over the last decade.  (The measure, however, is unadjusted for worker characteristics, as discussed below.)

The first figure shows the long, sad, decline in unionization in America, at least outside of the public sector.  Some of this is a result of industry employment shifts from more heavily unionized sectors, like manufacturing, but that’s not the whole story.  As you can see, manufacturing itself is increasingly less unionized.  In fact, it’s seen a larger than average decline since the early 1970s.

Vital Signs Chart: Union Membership Hits Postwar Low - Union membership fell in 2012, continuing a decadeslong drop. Labor unions represented 11.3% of employed workers last year, down half a percentage point from 2011 and a new postwar low. The latest decline partly reflected a drop in public-sector workers, as states cut jobs to repair budgets. At their peak, unions represented roughly a third of employed workers in the mid-1950s.

What Can Obama Do for the Labor Movement? -Steven Greenhouse, the labor reporter for the Times, has a fascinating piece in Thursday’s paper about the fact that union membership, as a proportion of the work force, has fallen to the lowest level since 1916. While the article focusses on the challenges facing the labor movement, it also involves larger political and economic issues. In particular, it raises the question of what, if anything, President Obama can do to help unions reverse decades of decline. And if the Republicans’ control of the House means he can’t do anything much, what does that mean for his pledge to increase the living standards of middle-class Americans?  Union membership has been sliding for a long time. But it is still striking to see it falling when the economy is recovering (albeit slowly); the manufacturing sector—traditionally a union stronghold—is doing pretty well; and the Democratic Party is, at least nominally, in power. Five or ten years ago, with unions like the S.E.I.U. making gains in organizing low-paid workers in the service sector—such as janitors, nurses, and cleaners—the decline in unionization seemed to be bottoming out. No longer. With big manufacturers still moving their operations to the non-union South, and with states such as Wisconsin, Indiana, and Michigan seeking to undermine their public sector unions (and generally succeeding), the labor movement is facing another big crisis.

An Early Wake-Up Call - First, we hear about the effects of centralization and discuss suggestions for both broad policy changes and wise alterations of behavior for businesses and individuals.  Our economy is in a “slow burn.”  People are terrified because of a lack of transparency, privacy has declined extraordinarily, and everything is politicized.  The pie has shrunk and the world is dangerous, and people are feeling it, despite their desire for things to be going well.  Next, we take a look at the United States in comparison to Russia, after the collapse of the Soviet Union.  While many predicted complete failure in the beginning, Russia’s solid social services protected the people’s basic needs during the rough transition.  The country is now progressing on every level, embracing change as necessary to progress.  The United States, on the other hand, appears to be attached to the idea of maintaining the status quo.  Entrenched interests are fighting tooth and claw to maintain their positions in American society, and the political system is supporting their tenacity.  There is an appearance of political will for obust social services, but crises reveal its thin veneer.  There has been a great deal of disinvestment in the country in general; the economic sector having been hollowed out and class divides increasingly sharply.  This situation could become startlingly life-changing for many Americans in a short amount of time.  Awareness is a crucial first step.  How are we aiding and abetting a future we do not intend?

Work in the Walmartocene - Some scientists contend that we should label the era we live in the Anthropocene, because we humans (anthropoi) have fundamentally altered our global ecosystem. Economists might, for similar reasons, consider labeling the current economic era the Walmartocene. The world’s largest retail company (and second-largest business), having easily survived recent skirmishes with workers, shareholders and the law, just announced that it would virtually guarantee jobs to most recent American veterans, who currently suffer from higher-than-average unemployment rates. In some ways, Walmart represents the archetype of modern capitalism. It is Tyrannosaurus rex. It pioneers cost-saving methods of global outsourcing and resistance to unionization. It leaps national borders in a single bound. It generates huge profits for its shareholders by delivering a gazillion goods to consumers around the world at prices that few other big-box stores – much less small retail businesses – match. Many of its regular shoppers adore it. Many of its workers, on the other hand, feel underpaid and underappreciated, and have filed numerous suits, accusing it of violations of labor law, including failure to pay overtime, locking workers in stores overnight, union-busting and sex discrimination. The details of the company’s bribery of Mexican officials, in a successful effort to bypass community opposition to store construction in proximity to a historic site, proved particularly embarrassing to its shareholders.

The New Geography of the Working Class - - The highest ranked metro is Elkhart-Gohsen, Indiana, where the working class makes up 46 percent of total employment, followed by Dalton, Georgia with 45.6 percent. The working class makes up between 35 and 40 percent of employment in six additional metros. One thing is abundantly clear: the economic crisis has substantially reduced the working class, even in its leading centers. There is not a single metro in America where the working class approaches the average national level of the 1940s and 1950s. The share of the working class in Elkhart-Goshen fell from 55 percent in 1999 to 46 percent in 2010. It has shrunk even more in large metros, none of which made the top 20. Among those metros, its largest concentrations are found in Memphis (26.2 percent), Louisville (26.1 percent), and Houston (24.4 percent), where the working class accounts for roughly one in four jobs. In the once-great industrial centers of Cleveland, Detroit, and Pittsburgh, just one in five workers belongs to the working class today. The trend is even more pronounced for production workers—the workers who actually make things. Although roughly one in five U.S. workers (20.5 percent) are members of the working class, the ranks of production workers have fallen to just six percent of the total U.S. workforce.

The Evolution of Household Income Volatility - Researchers have found it relatively straightforward to document changes in the volatility of the U.S. economy as a whole over the last several decades. The aggregate U.S. economy entered a period of relative stability known as the Great Moderation in the mid-1980s and, much more recently, has been in dramatic flux since the onset of the financial crisis and Great Recession in 2007 and 2008. However, aggregate trends do not necessarily translate into trends in the experiences of individual households. For example, the Great Moderation is generally thought to be a period over which the economy became more dynamic, with globalization, deregulation, and technological change increasing the competitive pressures and risks faced by workers. Given these developments, it is not clear that the economic environment facing individual households was in fact more stable during this period. Thus, to the extent that one is interested in household economic security, one is compelled to consider micro data. Accordingly, a large literature has developed that directly examines the volatility of earnings and income at the household level. While income volatility is not the same thing as the risk or uncertainty faced by households, changes in volatility are likely to be associated with changes in risk and uncertainty.

Inequality and demand - Let’s start with the obvious. The claim that income inequality unconditionally leads to underconsumption is untrue. In the US we’ve seen inequality accelerate since the 1980s, and until 2007 we had robust demand, decent growth, and as Krugman points out, no evidence of oversaving in aggregate. Au contraire, even. And Krugman is correct to point out that simple cross-sectional studies of saving behavior are insufficient to resolve the question. But that’s why we have social scientists! Unsurprisingly, more sophisticated reviews have been done. See, for example, “Why do the rich save so much?” by Christopher Carroll (ht rsj, Eric Schoenberg) and “Do the Rich Save More?”, by Karen Dynan, Jonathan Skinner, and Stephen Zeldes. These studies agree that the rich do in fact save more, and that they do so in ways that cannot be explained by any version of the permanent income hypothesis. Further, these studies probably understate the differences in savings behavior, because the “rich” they study tend to be members of the top quintile, rather than the top 1% that now accounts for a steeply increasing share of national income.

Inequality and Technology: Did the Robots Do It? - Adam Davidson has an interesting piece in the NYT Magazine on the debate over whether technology is responsible for the growth in inequality over the last three decades or whether the increase has been primarily the result of policies that have redistributed income upward. (As the author of The End of Loser Liberalism: Making Markets Progressive, I am firmly in the latter camp.) The immediate basis for the piece is a new paper by Larry Mishel, John Schmitt, and Heidi Shierholz that questions the widely accepted work of M.I.T. professor David Autor, which attributes rising inequality to the loss of jobs in middle class occupations. (The paper is not yet available, but several of the main points are presented in blogposts here, here, here, and here.) Davidson does a good job laying out the central issues at one point turning to Frank Levy, another M.I.T. economist, to help define the terrain. However Davidson's conclusion may mislead readers.  The idea that there is tradeoff between growth and inequality does not follow from Levy's comments. It could be the case that policy decisions were aggravating trends in equality rather alleviating them. For example increasing the length and scope of patent and copyright protection is a policy that would have the effect of redistributing income upward as would protecting doctors and lawyers from international competition.

'Robots and All That' - Fred Moseley responds to my comments on his comments (I suggested that if he wants a theory of exploitation that is consistent, he should consider dropping Marx's Labor Theory of Value, which does not actually explain value, and instead explain exploitation in more modern terms, i.e. with reference to why workers have not received their marginal products in recent decades): Thanks to Mark for posting my critical comment on Krugman’s explanation of stagnant real wages and declining wage share of income, and for his introductory comment, which raises fundamental issues. A question for Mark: how do you know what the “MP benchmark” is that workers should have received. The MP benchmark is presumably the “marginal product of labor”, but how do you know what this is? I know of no time series estimates of the aggregate MPL (independent of income shares) for recent decades. If you know of such estimates, please send me the reference(s). What you have in mind may be estimates like Mishel’s estimates of the “productivity of labor” and the “real wage of production workers”, which shows a widening gap in recent years (see Figure A in “The wedges between productivity and median compensation growth”; ). But these estimates of the “productivity of labor” are not of the MPL of marginal productivity theory, but are instead the total product divided by total labor. These estimates are more consistent with Marxian theory than with marginal productivity theory. And I agree that explaining this divergence is an important key to understanding the increasing inequality in recent decades.”.

Meet "Baxter" the Robot Out to Get Your Minimum-Wage, No Benefits, Part-Time Job, Because He's Still Much Cheaper; Fed Cannot Win a Fight Against Robots - The federal Minimum wage in the US is $7.25 per hour. Ten states have higher minimum wages with Rhode Island clocking in 50 cents higher at $7.75. Costs to the employer are higher of course, even if the employer ducks benefits by using part-time workers. For starters, employer contributions to Social Security are 6.2% of hourly wages which adds another 45 cents to employer costs. That brings employer costs up to $7.95 per hour minimum, not counting training costs, vacation (if any), sick-time disruptions, and other such costs. Of course, employers must also factor in the cost of Obamacare. Small businesses do not have to provide health-care, but under employer responsibility provisions of the affordable care act, businesses that employ more than 50 workers will pay a steep penalty in 2014 if they don't.  What if companies, small or large, did not have to worry about Obamacare? What if they did not have to worry, about training, sick-leave disruptions and weather-related disruptions? What if companies only had to pay $3.00 per hour, rivaling wages in China?

How unemployment insurance affects the unemployment rate - Scott Sumner offers this explanation, by way of Larry Summers, on how unemployment insurance influences the unemployment rate: In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits. The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

State Unemployment and Payrolls for December 2012 - The December state employment statistics show yet another half and half situation. . Sixteen state's unemployment rate increased for December as did the District of Columbia . Twelve states had no change in unemployment, 22 showed declines. The November national unemployment rate was 7.7%. Below is the BLS map of state's unemployment rates for the month. There are now only two states with unemployment rates above 10%, Nevada at 10.2% and Rhode Island, at 10.2%. There are three states have unemployment rates above 9%, California at 9.8%, New Jersey at 9.6% and North Carolina at 9.2%.  The states with the lowest unemployment rates are North Dakota at 3.2%, Nebraska at 3.7% and South Dakota with a 4.4% unemployment rate.  Payrolls were a mixed bag and generally are not growing in ratio to the dropping unemployment rates. While jobs increased in 27 states plus the District of Columbia, payrolls actually shrank in 23 . From the report are the most significant percentage changes per state from last month in jobs.  New Jersey experienced the largest over-the-month percentage increase in employment (+0.8 percent), followed by Kansas (+0.6 percent) and Alaska, Georgia, Missouri, and New York (+0.4 percent each). Hawaii experienced the largest over-the-month percentage decline in employment (-0.7 percent), followed by Louisiana and Wyoming (-0.6 percent each).  Superstorm Sandy payroll recovery continues and the states hit the hardest showed the biggest increases in payrolls.  The largest over-the-month increase in employment occurred in New York (+35,100), followed by New Jersey (+30,200), Georgia (+14,400), and Missouri (+10,200). The largest over-the-month decrease in employment occurred inCalifornia (-17,500), followed by Florida (-15,300), Louisiana (-11,400), and Michigan (-10,600).

Philly Fed: State Coincident Indexes increased in 36 States in December - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for December 2012. In the past month, the indexes increased in 32 states, decreased in 10, and remained stable in eight for a one-month diffusion index of 44. Over the past three months, the indexes increased in 41 states, decreased in seven, and remained stable in two (New Mexico and Wisconsin) for a three-month diffusion index of 68. .  Note: These are coincident indexes constructed from state employment data. From the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. The map was all green early in 2012, than started to turn red, and is mostly green again.

‘Job Piracy’: Why States Paying For Corporations To Move Is Bad For The Economy - A favorite tactic for lawmakers on both sides of the political aisle is to use tax incentives as a way to attract jobs to their state. Texas Gov. Rick Perry (R) even referred to his trips to sweet-talk companies into moving “hunting trips.” The theory is that, by providing tax breaks and other financial supports, a lawmaker will create more jobs in the local economy. But is that what actually happens? According to a new report from Good Jobs First, the answer is a resounding no. All these incentives do is waste taxpayer money that would be better spent on real economic development: There are three problems with this strategy. It is wasteful because the costs are high and the benefits are low: a tiny number of companies get huge subsidies but the net impact of interstate job relocations is microscopic. It is incredibly unfair to in-state employers, who are forced to pay higher taxes or suffer lower-quality public services (or some of both) when newly arriving companies are excused from paying their fair share of taxes. And some would add that it is a tragic distraction from things that matter more to the U.S. economy, including the trade deficit.

Federal appeals court upholds Wisconsin Gov. Scott Walker’s restrictions on public unions - A federal appeals court on Friday upheld Wisconsin Gov. Scott Walker’s contentious law stripping most public workers of nearly all of their collective bargaining rights in a decision hailed by Republicans but not undoing a state court ruling keeping much of the law from being in effect. The decision marks the latest twist in a two-year battle over the law that Walker proposed in February 2011 and passed a month later despite massive protests and Senate Democrats leaving for Illinois in a failed attempt to block a vote on the measure. The law forced public union members to pay more for health insurance and pension benefits, which Walker said was needed to address a budget shortfall. It also took away nearly all their bargaining rights. Walker and Republican Senate Majority Leader Scott Fitzgerald, who fought for passage of the bill, called the ruling a win for Wisconsin taxpayers. “As we’ve said all along, Act 10 is constitutional,” Walker said in a statement, referring to the law’s official designation.

This Week in Poverty: An Anti-Poverty Contract for 2013?: This past year I’ve had the opportunity to cover the anti-poverty movement—and I do believe it’s a movement—it’s just a little too much of a well-kept secret right now. But I think in 2013, the people and groups at the forefront of anti-poverty thinking and action are poised to reach a much wider audience, and gain far greater popular support. That’s in part because the movement is led by organizations and individuals who have been fighting poverty for decades, and they offer solutions that are grounded in empirical data and the everyday experiences of millions of working Americans and families. In contrast, the opposition to anti-poverty reform relies largely on tired stereotypes, myths and prejudices—that low-income people are lazy and don’t want to work; that they only want handouts, or to live off of welfare; that anti-poverty policies have failed; and, most recently, that we can’t afford these investments. But an economy that is short on opportunity and concentrates wealth in the hands of a few is coming into focus. People are beginning to recognize that we have a proliferation of low-wage work—over 25 percent of the jobs in the nation pay less than the poverty line for a family of four, and 50 percent pay less than $34,000 a year. It’s no wonder that 28 percent of all workers last year earned wages below the poverty line, and that more than 70 percent of low-income families and half of all families in poverty were working in 2011.

Superstorm Sandy Prods Northeast to Update Electric Grid - Superstorm Sandy has put muscle into efforts to strengthen the Northeast's electric system. New Jersey utility regulators Wednesday approved 103 measures that would force utilities to expand their preparations for storms and improve communications with customers and state officials. Most of the changes ordered by the New Jersey Board of Public Utilities must be completed by September.Among the changes, utilities must create Web pages for each municipality they serve and update them frequently after storms. Sandy left millions of residents in the dark for days, and even weeks, and utilities were criticized for failing to let customers know when their service would be restored. Customers are likely to see the cost included in utility rates. Regulators also carved out a larger role for themselves to vet "mutual-assistance" arrangements in which utilities across the country lend each other workers to help restore power.

Should worst-flooded areas be left after Sandy? - - Superstorm Sandy, one of the nation's costliest natural disasters, is giving new urgency to an age-old debate about whether areas repeatedly damaged by storms should be rebuilt, or whether it might be cheaper in the long run to buy out vulnerable properties and let nature reclaim them. The difficulty in getting aid for storm victims through Congress — most of a $60 billion package could get final approval next week — highlights the hard choices that may have to be made soon across the country, where the federal, state and local governments all say they don't have unlimited resources to keep writing checks when storms strike. But the idea of abandoning a place that has been home for years is unthinkable for many. "We're not retreating," said Dina Long, the mayor of Sea Bright, N.J., a chronically flooded spit of sand between the Atlantic Ocean and the Shrewsbury River only slightly wider than the length of a football field in some spots. Three-quarters of its 1,400 residents are still homeless and the entire business district was wiped out; only four shops have managed to reopen.

Distribution of Katrina refugees -  The above map shows the dispersion of the 800,000 refugees from Louisiana that fled as a result of the 2005 Hurricane Katrina disaster.  This is measured by applicants for federal emergency assistance and is drawn from Chapter 9 of the draft US National Climate Assessment (big pdf).  I found the map fascinating for showing how widely the disaster must have drawn on the resources of much of the southeastern US, but also the nation as a whole.  I think Hurricane Katrina is a prototype for many 21st century disasters - where the combination of increasingly extreme storms combines with increasingly below sea-level coastal cities.  Therefore it's particularly interesting to understand it's impact.

Kindergartner Suspended Over Bubble Gun Threat - ABC News: A 5-year-old girl was suspended from school earlier this week after she made what the school called a “terrorist threat.” Her weapon of choice? A small, Hello Kitty automatic bubble blower. The kindergartner, who attends Mount Carmel Area Elementary School in Pennsylvania, caught administrators’ attention after suggesting she and a classmate should shoot each other with bubbles. “I think people know how harmless a bubble is. It doesn’t hurt,” said Robin Ficker, an attorney for the girl’s family. According to Ficker, the girl, whose identity has not been released, didn’t even have the bubble gun toy with her at school.

Number of homeless Topeka students on the rise - The number of homeless students in the Topeka school district has gone up in the last decade, while federal funding to meet their needs is at a 10-year low. The Associated Press reports the district had about 580 homeless students last year, compared with about 340 homeless students 10 years ago. This year's federal grant to help homeless students is $50,000, down from $61,000 a year earlier. Rosanne Haberman, who coordinates homeless matters for the district, said the tight funding means fewer resources, including hygiene kits and city bus passes for high school students who can't afford them. She said the district has also had to reduce to part-time two positions for teachers who work at the Topeka Rescue Mission helping students before and after school.

The Gospel of Wealth: towards a new generation of American consumership: Economics and Finance for the American Way of Life is a textbook for a mandatory full year Texas public school course at the end of middle school. It was deemed necessary at this level because this is the age when students take their place among the ranks of their adult peers as consumers, with credit cards and cell phones and online shopping and as soon to be de facto owners of automobiles. Furthermore, fully thirty percent of the students in Texas will not advance beyond this level of education. There are difficulties with such an ambitious text. Most of the students cannot read with comprehension beyond the level of comic books and it is not expected that they can comprehend newspapers in Texas until their senior year, though that is more of a goal than an expectation. This is not deemed a significant problem in Texas, in part because it is a Southern state and also because the state legislature works at the comic book level. Important documents in Texas are translated into comic book format, an innovation from Louisiana necessary to provide driver’s license tests for illiterates. However, it could be problematic for other states that will likely be required to adopt this text.

Chart of the day: Administrative bloat in US public schools - From Benjamin Scafidi at The Friedman Foundation for Educational Choice: America’s public schools are bloated with bureaucracy and skinny on results.  Nationwide since 1950, the number of public school administrative and non-teaching positions has soared 702 percent while the student population increased just 96 percent. Over that same period, teachers’ numbers also increased — 252 percent — but still far short of administrators and non-teaching personnel (see chart above). Notably, that hiring trend has been just as prominent over the past two decades. From 1992 to 2009, students’ numbers increased 17 percent whereas administrators and other non-teaching staff rose 46 percent. And during that time, some states actually lost students yet kept hiring more non-teachers. Of course, those hiring patterns might be warranted if students’ academic gains kept pace. Academic outcomes, however, have not experienced similar growth. Public high school graduation rates peaked around 1970, and government data show reading scores on the National Assessment of Educational Progress (NAEP) fell slightly between 1992 and 2008. Math scores on the NAEP Long-Term Trend were stagnant during the same period.

Why Gloomy Pundits and Politicians Are Wrong About America's Education System - Here's what everybody knows about education in the United States. It's broken. It's failing our poorest students and codding the richest. Americans are falling desperately behind the rest of the developed world. But here's what a new study from the Economic Policy Institute tells us about America's education system: Every one of those common assumptions is simplistic, misguided, or downright wrong. When you break down student performance by social class, a more complicated, yet more hopeful, picture emerges, highlighted by two pieces of good news. First, our most disadvantaged students have improved their math scores faster than most comparable countries. Second, our most advantaged students are world-class readers. Why break down international test scores by social class? In just about every country, poor students do worse than rich students. America's yawning income inequality means our international test sample has a higher share of low-income students, and their scores depress our national average. An apples-to-apples comparison of Americans students to their international peers requires us to control for social class and compare the performances of kids from similarly advantaged and disadvantaged homes.

The enormous profits of STM scholarly publishers - The following paragraph is a synopsis of recent STM scholarly publisher profits - and increasing profits.  PhD Dissertation (in progress).  All are in the for-profit sector, and the profits are enormous. As reported in the Economist (2011): “ Elsevier, the biggest publisher of journals with almost 2,000 titles, cruised through the recession. Last year it made £724m ($1.1 billion) on revenues of £2 billion—an operating-profit margin of 36%”. Springer’s Science + Business Media (2010) reported a return on sales (operating profit) of 33.9% or € 294 million on revenue of € 866 million, an increase of 4% over the profit of the previous year. In the first quarter of 2012, John Wiley & Sons (2011) reported profit of $106 million for their scientific, medical, technical and scholarly division on revenue of $253 million, a profit rate of 42%. This represents an increase in the profit rate of 13% over the previous year. The operating profit rate for the academic division of Informa.plc (2011, p. 4) for the first half of 2011 was 32.4%, or £47 million on revenue of £145 million, an increase of 3.3% over the profit of the previous year. 

Helping Degree Seekers Finish What They Start - There is a paradox in American higher education: of the millions of students who apply to and enter postsecondary degree programs, only about half end up graduating within six years. In an article in Thursday’s paper, my colleague Tamar Lewin and I look at a number of policy recommendations that experts are making to increase the country’s postsecondary completion rates, making sure that more students are not only going to college and can afford it, but also that they finish it. Here’s a fuller look at a new report from a high-powered group of education, social justice and economic experts that suggests reforming financial aid to help improve the country’s stagnating completion rates. Titled “The American Dream 2.0,” the report argues that completion has become a pressing economic issue. For one, it says, the country needs a better-educated work force, and ensuring that more students finish their degrees is one path to ensuring that businesses have skilled employees to hire.  Moreover, many students who enter a degree program but do not complete it still end up heavily in debt — taking on a hefty part of the cost of higher education without getting its full benefits.

That claim that students whose parents pay for more of college get worse grades - Theodore Vasiloudis writes: I came upon this article by Laura Hamilton, an assistant professor in the University of California at Merced, that claims that “The more money that parents provide for higher education, the lower the grades their children earn.” I can’t help but feel that there something wrong with the basis of the study or a confounding factor causing this apparent correlation, and since you often comment on studies on your blog I thought you might find this study interesting. My reply: I have to admit that the description above made me suspicious of the study before I even looked at it. On first thought, I’d expect the effect of parent’s financial contributions to be positive (as they free the student from the need to get a job during college), but not negative. Hamilton argues that “parental investments create a disincentive for student achievement,” which may be—but I’m generally suspicious of arguments in which the rebound is bigger than the main effect. So I clicked through to the study and indeed found a problem, and it’s the one you might expect if you follow this sort of thing. Hamilton regresses college grades on the amount parents spent on college, and finds a negative correlation: more parental spending is associated with lower grades.

City, State balance sheets face $11 billion in unfunded retirement - Recent changes to federal code could saddle the state and its schools and municipalities with over $11 billion in unfunded PERS and TRS liability. If the new rules do not change by the middle of 2015 CBJ and the Juneau School District will have to record unfunded retirement liability on their balance sheets. “It is a big number,” Brian Bartholomew, City and Borough of Juneau finance director said at the Assembly Finance Committee on Wednesday. “It is probably several hundred million. It is not $800 million or $900 million but probably around $200 million.” Bartholomew said it is uncertain whether the CBJ or state of Alaska will be on the hook to pay. Alaska’s unfunded liabilities total $6.9 billion for its Public Employee Retirement System and $4.2 billion for the Alaska Teachers Retirement System.

Illinois Democrats still eye borrowing to pay down $9 billion in overdue bills - Despite repeated failures, Democrats again are considering a multibillion-dollar loan to pay down the state's backlog of past-due bills, now hovering at a near-record $9 billion. Republicans continue to resist the short-term loan idea as a way for Illinois to pay down stacks of invoices overdue by as much as four months to businesses, charities and local governments performing some of the state's most essential services. The first big obstacle is one matter that everyone agrees on: The borrowing idea won't be considered until lawmakers come up with a solution to an even bigger problem — the state's $96 billion pension deficit. Attempts to solve that crisis broke down earlier this month, meaning the issue could remain on center stage through the legislative session that ends May 31. "It all depends on solving the pension situation because that eats up 20 percent of our budget and counting," Topinka said in an interview with The Associated Press. "We do have to solve that problem because all other issues rest upon that solution."

State pension plans underfunded by over $16 Billion — Minnesota's public pension plans for government employees are underfunded by $16.7 billion — a deficit that's $4 billion larger than it was when lawmakers took steps to fix the problem in 2010. The underfunded pensions aren't a reason for alarm, experts say, but they say it is a problem that 11 of the state's 12 public pension plans open to new members don't have enough money coming in to cover promised benefits. Plans for state troopers, public safety workers, and local police and firefighters are among those with the largest gaps. Lawmakers will consider changes to those plans this year.

How Long Do You Have Left to Live at Age 65? - We have a project we're working on behind the scenes here at Political Calculations, where we keep having to work backward in time to figure out when an average American man or woman who has reached Age 65 in a given year was born, and then forward in time to project the year to which they can reasonably expect to live if they have the same average remaining life expectancy of a man or woman who reached Age 65 in the year that they did!  So rather than keeping doing the math, we've constructed a couple of visual aids to make it quicker to get our answers. First, we've tapped the U.S. Centers for Disease Control's data for remaining life expectancy for people who reached Age 65 in each year from 1950 through 2009:  And then, using that data, for the birth years that correspond to the year in which the American men or women turned 65, we worked out the year to which these individuals can reasonably expect to live given the CDC's remaining life expectancy estimates, which we've presented in our second chart below.

Actuaries Confirm That Latest Scare Talk on Social Security Is Off-Base - We’ve debunked the claim in a recent New York Times op-ed that Social Security’s official long-term financial projections are based on outdated and inaccurate assumptions and thus are too optimistic.  The Social Security actuaries, who develop those projections, have issued their own analysis that responds to the Times piece, explaining why it is off-base. Here are two key points from the actuaries’ analysis, which reinforces our earlier post:

  • The op-ed’s claim that the projections don’t reflect recent trends in smoking and obesity is simply incorrect. The actuaries carefully weigh these and many other factors that will affect future mortality.   In fact, both smoking and obesity are already reflected in historical data and the actuaries’ projection methods. .
  • Social Security’s finances depend on many complex factors, not just the one factor — mortality — that the op-ed examined. Future fertility, immigration, economic growth, and many other variables also influence the program’s outlook.

You Know Nothing Of Our Work - Paul Krugman  - Some readers may have noticed a recent op-ed by King and Soneji alleging that Social Security projections understate life expectancy and are therefore far too optimistic. This claim will, I’m sure, become part of what all the serious people think they know. But the Social Security actuaries have replied (pdf), offering among other things one of the best examples I’ve ever seen of a brutally polite intellectual takedown: King and Soneji developed their own projection methodology for mortality and made a series of assertions in their op-ed about the methods used by the Office of the Chief Actuary. As with all new entrants into this field of analysis, their work may ultimately provide value in the continuing evolution of our methods. However, the assertions in their op-ed require some response and clarification. Oh, snap. (Or since we’re talking about social insurance, SNAP). So yes, the Social Security Administration knows about obesity and smoking, and incorporates this into its projections. More broadly, SSA has not failed to anticipate rising life expectancy; on the contrary, it has if anything been slightly over-optimistic.

Social Security Data Mining - Q: "Mrs. Rustbelt, the sweet young lady I married, decided to investigate future benefits from Social Security, even though she is only "39." I am her designated data entry clerk, so we sit down and establish an account and log-in for her. Near the end of the set-up process the software tells us she has to answer some multiple choice questions about her personal data. Ok. I was stunned when the questions popped up. None of them had anything to do with Social Security, and were clearly mined from IRS and credit bureau data.  She had been profiled by SSA with data the SSA had no need to know. Anyone have any experience or insights on this?" A: From what I have read on the "Social Security News" blog, SSA recently set up an online benefit estimate program combining earnings information SSA routinely gets from IRS (from SF-941 payroll tax forms) and information gathered by Experian, one of the private big three credit rating companies. I'm not happy that the current SSA Commissioner has done this. SSA has never before used privately gathered information from any source. The deal is that the SS Act authorizes SSA to gather specific information for "program purposes only." SSA shouldn't gather or transmit to others any information it has without specific written authorization to do so (under the Privacy Act.) BUT, this administration or the previous one could have asked Congresss for a change in the law to permit this practice. It would almost certainly slip under the radar, as it did for me until I read about it on "SS News."

Fiscal cliff giveaway to big biotech firm exposes deficit hypocrisy - How do you fix Medicare? By ending this kind of shitJust two weeks after pleading guilty in a major federal fraud case, Amgen, the world’s largest biotechnology firm, scored a largely unnoticed coup on Capitol Hill: Lawmakers inserted a paragraph into the “fiscal cliff” bill that did not mention the company by name but strongly favored one of its drugs. The language buried in Section 632 of the law delays a set of Medicare price restraints on a class of drugs that includes Sensipar, a lucrative Amgen pill used by kidney dialysis patients.The provision gives Amgen an additional two years to sell Sensipar without government controls. The news was so welcome that the company’s chief executive quickly relayed it to investment analysts. But it is projected to cost Medicare up to $500 million over that period. As if the fact that Amgen has pleaded guilty to defrauding the federal government and still has this much influence in Washington wasn't bad enough, the New York Times article points out that Amgen has already secured a two year delay before government controls kick in, meaning it now has a cushy four years to bilk Medicare and the American taxpayer. They got this through their "deep financial and political ties" to influential senators including Minority Leader Mitch McConnell and Democrat members of the Finance Committee

Walmart Explores Offering Private Health Insurance for Small Businesses; In Praise of Walmart - Mish - Once again I am here to sing the praises of Walmart. Over the years I have done so on many occasions. Many misguided souls take the other side. They blame Walmart for ruining mom and pop grocery stores, mom and pop hardware stores, etc.  Not me, I praise cheaper prices. Moreover, it's what consumers voted for with there hard-earned dollars. If anyone wants to pay more for stuff, all they have to do is shop at a mom and pop hardware store, grocery store, or pharmacy. Most don't because they want a bargain.  Today, I have good news. Walmart-style competition may be on the way in the healthcare business. The Orlando Business Journal writes Wal-Mart exploring private health insurance exchange for small bizWal-Mart is exploring the idea of building a private health insurance exchange tailored to offer cheaper health insurance to small businesses, a vice president told Orlando Business Journal Jan. 11.

'Brave, Honest Conservatives' and Social Insurance -- Brad DeLong: ... How long will it be before the likes of Veronique de Rugy stop denouncing Social Security, Medicare, Unemployment Insurance, etc. as programs that have turned us into "a nation of takers", and stop denouncing these programs beneficiaries as "moochers"? It is in some ways very odd. It used to be that critics of the welfare state pointed to high net marginal tax rates and argued that they had high deadweight losses. Sometimes they had a point. Then, after bipartisan reforms, we got to a point where there were few high net marginal tax rates large enough to induce large deadweight losses. And then, in the blink of an eye, the problem became not public-finance deadweight losses but, rather, the moocher class, the nation of takers, etc. ... Paul Krugman on Paul Ryan's (ahem) defense of Social Security and Medicare: If you’re a Randian conservative, as Ryan claims to be, then you should consider Social Security and Medicare every bit as much a part of the moocher conspiracy as Medicaid and food stamps. But he knows that Social Security and Medicare are popular, so he pretends that his radical philosophy has nothing bad to say about these programs, and that we can massively downsize government on the backs of the undeserving poor. But remember, he’s a Brave, Honest Conservative. Everyone says so.

What Is Social Insurance?-  Indeed, these words, spoken by President Obama during Monday’s inaugural address, represent one of the few times when anyone, including the president, has even attempted to defend our major social insurance and safety net programs. The usual posture among the type of centrist Democrats who make it into the administration is some combination of (a) simply attacking, as self-evidently evil, anyone who proposes benefit cuts and (b) saying in serious tones that we will have to cut spending one way or another.Unsurprisingly, most Americans are split between various misconceptions of what Social Security and Medicare are. Many, particularly right-wing politicians and their media mouthpieces, see them as pure tax-and-transfer programs: they gather money from one set of people and give it to another set of people. This feeds easily into the makers-vs.-takers line, with payroll taxes on workers going to fund benefits for non-workers. From this point of view, they are bad bad bad bad bad and should be cut.

Healthcare Reform; Socialism or Fascism? - Whole Foods CEO John Mackey in 2009 originally called President Obama's healthcare plan a form of Socialism while writing an op-ed for the Wall Street Journal: "The problem with socialism is that eventually you run out of other people's money."  Mackey joins other CEO's (Papa Johns, Olive Garden, Applebees, etc.) (Raising the Cost of Pizza 10 to 14 cents); who refuse to understand the need for healthcare reform, support a commercial healthcare insurance and industry solution even though both have done little to voluntarily rein in costs, are willing to penalize their employees for the PPACA, and ignore the results of doing nothing and associated increased costs. Since Hillarycare (1994), the industry has ignored increasing costs and has not provided solutions to mitigate them. As shown in Figure 1 annual healthcare cost has grown much faster than inflation. Figure 4 shows the increase in House hold expenditures since 1994 when Hillarycare was considered.Recently during an NPR interview, John Mackey changed his opinion calling the PPACA fascism instead of Socialism: "Technically speaking, it's more like fascism. Socialism is where the government owns the means of production. In fascism, the government doesn't own the means of production, but they do control it — and that's what's happening with our health care programs and these reforms." Obamacare Is Fascist, Not Socialist

Insurers To White House: Delay ObamaCare Or Risk "Chaos"-  With eight months left until million of Americans are supposed to begin shopping at online markets created by the Obamacare 'tax' law, the insurance industry is concerned at the government's lack of readiness. Bloomberg reports that Jim Donelon, the head of the National Association of Insurance Commissioners, suggested that President Obama may need to delay the implementation of the health-care overhaul or "risk chaos" when the subsidized plans go on sale later this year. While it is clear that the administration has shown no sign of seeking a delay, Donelon notes that " rush into implementation before it's ready would not be in the President's best interest."

Health insurers propose double-digit rate hikes - While premiums for many small-group plans in Illinois are expected to rise 5 percent to 7 percent this year, some consumers will be socked by double-digit rate hikes. Four carriers have notified the state Department of Insurance of premium increases of as much as 25 percent on plans that cover more than 129,000 people, according to regulatory filings since mid-November. More than 60 percent of those people are insured by Humana Insurance Co., which plans to raise rates nearly 12 percent on 37 individual and small group plans in Illinois. Such a rate hike is much higher than the increases of 5 percent to 7 percent that were forecast in November for most local group plans, according to two national human resources consulting firms. Insurance premiums in general rose less than 6 percent in 2012.

Billion-Dollar Hospital Bonuses Not Seen Improving Health - The chief executive officer of an HCA-owned (HCA) hospital recently went undercover, wearing a two-day- old beard and a baseball cap to pose as a patient entering his hospital. His goal: spot service flaws and get them fixed. The covert mission was part of a bid to win some of the almost $1 billion in government payments for hospitals with top ranked service. Across the U.S., the program is encouraging tidier rooms and quieter hallways at the more than 3,000 hospitals that participate in “patient experience” surveys. As welcome as those improvements may be, numerous studies based on earlier attempts to tie bonuses to performance suggest such incentives may do little to improve care. Rewarding hospitals based on patient’s experience could also have unforeseen repercussions, doctors and economists say. Such incentives, for example, may harm patients most in need of care by discouraging hospitals from treating the elderly and the mentally ill, they say. Hospitals also have concerns.

Female smoking death risk ‘has soared’ - Women smoking nowadays are far more likely to die as a result of their habit than they were in the 1960s, according to a new study. Changing habits such as starting earlier and smoking more cigarettes have been blamed on dramatically increased risks of lung cancer. The trends, reported in the New England Journal of Medicine, show death rates in women have caught up with men. The study looked at data from more than two million women in the US. The first generation of women smokers started during the 1950s and 60s. In those early years, women who smoked were nearly three times more likely to die from lung cancer as people who had never smoked. Looking at medical records from women between 2000-2010 showed they were 25 times more likely to die from lung cancer than their non-smoking friends. It follows a similar pattern in men, who reached a similar level in the 1980s.

Maker Aware of 40% Failure in Hip Implant - An internal analysis conducted by Johnson & Johnson in 2011 not long after it recalled a troubled hip implant estimated that the all-metal device would fail within five years in nearly 40 percent of patients who received it, newly disclosed court records show. Johnson & Johnson never released those projections for the device, the Articular Surface Replacement, or A.S.R., which the company recalled in mid-2010. But at the same time that the medical products giant was performing that analysis, it was publicly playing down similar findings from a British implant registry about the device’s early failure rate. The company’s analysis also suggests that the implant is likely to fail prematurely over the next few years in thousands more patients in addition to those who have already had painful and costly procedures to replace it. The internal Johnson & Johnson analysis is among hundreds of internal company documents expected to become public as the first of over 10,000 lawsuits by patients who got an A.S.R. prepares to go to trial this week. The episode represents one of the biggest medical device failures in recent decades and the forthcoming trial is expected to shed light on what officials of Johnson & Johnson’s DePuy Orthopaedics division knew about the device’s problem before its recall and the actions they took or did not take.

Antibiotic-resistant diseases pose ‘apocalyptic’ threat, top expert  - Britain's most senior medical adviser has warned MPs that the rise in drug-resistant diseases could trigger a national emergency comparable to a catastrophic terrorist attack, pandemic flu or major coastal flooding. Dame Sally Davies, the chief medical officer, said the threat from infections that are resistant to frontline antibiotics was so serious that the issue should be added to the government's national risk register of civil emergencies.She described what she called an "apocalyptic scenario" where people going for simple operations in 20 years' time die of routine infections "because we have run out of antibiotics".The register was established in 2008 to advise the public and businesses on national emergencies that Britain could face in the next five years. The highest priority risks on the latest register include a deadly flu outbreak, catastrophic terrorist attacks, and major flooding on the scale of 1953, the last occasion on which a national emergency was declared in the UK.

Medical Experts Warn The Rise Of Resistant Bacteria Will Cause 'Antibiotic Apocalypse' -- England’s chief medical officer is warning that the rising numbers of drug-resistant diseases will eventually lead to an “antibiotic apocalypse” — a not-too-distant future when there aren’t any cures for common infections — and more antibiotic research should be a top global health priority.  Professor Dame Sally Davies told members of Parliament on Wednesday that the world must begin addressing antibiotic resistance, since the treatments for common diseases like gonorrhea, E. coli, and penicillin are losing their effectiveness and new drugs aren’t being developed quickly enough to replace them. The emergence of “superbugs” that can’t be cured with modern medicine could soon undermine advances in disease research and treatment. Davies compared the issue of resistant viruses to the gravity of the world’s climate change crisis: Davies said rapidly evolving resistance to antibiotics among bacteria is one of the greatest threats to modern health. “Antibiotics are losing their effectiveness at a rate that is both alarming and irreversible – similar to global warming,” she said. “Bacteria are adapting and finding ways to survive the effects of antibiotics, ultimately becoming resistant so they no longer work.” The warning comes six months after a similar call by Margaret Chan, head of the World Health Organisation, who said the world faced the “end of modern medicine as we know it” as a result of the “global crisis in antibiotics”.

Expert warning: Resistance to antibiotics to be apocalyptic - The chief medical officer for Britain's Department of Health has issued a warning that resistance to bacteria is a more urgent threat to humanity than global warming, with bacteria becoming resistant to current antibiotics at an alarming rate, and there are almost no new antibiotics in the pipeline. Professor Dame Sally Davies spoke to British members of parliament on a science and technology committee and told them the increasing resistance of bacteria could soon make even a routine operation a deadly option because of the possibility of an infection that would have no effective treatment. She said that the real "apocalyptic scenario" was that within a couple of decades people will die from infections because we will have "run out of antibiotics" and there are no wonder drugs in the pipeline. She added that it is a serious global problem and antibiotics are not being used effectively. The development of antibiotics in the 1940s was one of the greatest advances in medicine, but they are becoming increasingly ineffective as bacteria become resistant to them. Prof. Davies said there is only one effective antibiotic left for gonorrhea and 80% of cases are resistant to tetracycline. Tuberculosis is becoming increasingly resistant and there are around 150,000 deaths globally from multi-antibiotic resistant tuberculosis each year. Staphylococcal and urinary tract infections are now resistant to penicillin, and MRSA (methicillin-resistant staphylococcus aureus) is increasingly prevalent, especially in health care facilities.

Semen Quality of Young Men in South-East Spain Down by 38 Percent in the Last Decade: The first comparative study on the evolution of sperm quality in young Spanish men over ten years, headed by researchers at the University of Murcia, reveals that spermatozoid concentration in men between 18 and 23 years in the regions of Murcia and Almeria has dropped by an annual average of 2%. The journal Andrology has published a multidisciplinary and international study, headed by the Department of Preventative Medicine and Public Health of the University of Murcia (UMU), which demonstrates that "total sperm count and concentration has declined amongst young men in the south-east of Spain in the last decade." More specifically, the decrease amounts to 38%.

Mercury treaty adopted in Geneva by 140 countries - Delegations from some 140 countries have agreed to adopt a ground-breaking treaty limiting the use of health-hazardous mercury, the Swiss foreign ministry said. The world’s first legally binding treaty on mercury, reached after a week of thorny talks, will aim to reduce global emission levels of the toxic heavy metal also known as quicksilver, which poses risks to human health and the environment. “The new treaty aims to reduce the production and the use of mercury, especially in the production of products and in industrial processes,” the Swiss foreign ministry said in a statement.

Global agreement to reduce mercury emissions portends health benefits -  It’s a highly toxic element that travels the world in mysterious ways, respects neither manmade nor natural boundaries and rapidly accumulates in people and the food they eat. Mercury’s risks for human and environmental health have slowly but steadily come to light over the centuries, leading to ad hoc phase-outs of mercury-filled thermometers, dental amalgam and the felt-hat-shaping compound that caused brain damage in 19th century milliners, giving rise to the term “mad as a hatter.” U.S. and European governments have invoked strict regulations in recent decades to reduce mercury emissions. But fresh research by the United Nations Environmental Program and U.S. and European scientists has documented a concurrent rise in mercury emissions in Asia, Africa and the Arctic Ocean region, underscoring that mercury is a global problem in need of a collaborative solution. A legally binding agreement to reduce emissions that was reached this past weekend at U.N.-sponsored talks in Geneva drew little notice or fanfare, probably because it still faces the rigors of ratification in 140-plus countries that will take another two to four years. Still, getting so many states with competing economic agendas and disparate means to commit to the plan was no small feat--and not a minute too soon, in the view of environmental advocates spooked by mounting evidence of mercury’s dangers.

Global mercury treaty will take decades to work -This crackdown certainly has a few cracks in it. Activists have criticised loopholes in a new treaty, signed by 140 countries, that will control mercury pollution. But at least the Minamata Convention on Mercury does commit countries to reducing their mercury emissions. The convention, named for a Japanese city that suffered severe mercury pollution, aims to control global mercury levels. Products like batteries and thermometers that contain mercury will be phased out by 2020, while major sources like coal-fired power stations will have to obey new and stricter rules. Mercury is a powerful neurotoxin that accumulates as methylmercury in the environment and in the bodies of marine animals. It causes developmental problems and physical deformities in humans, is lethal in acute cases, and affects animals' ability to reproduce. The World Health Organization says it is not possible to estimate how many people are killed or injured by mercury globally, mostly because there is not enough data on exposure, but the harm done to heavily exposed populations is significant.

We’re in contact with uncontrolled chemicals - In testimony before a Senate subcommittee, Ken Cook spoke passionately about 10 Americans who were found to have more than 200 synthetic chemicals in their blood. The list included flame retardants, lead, stain removers, and pesticides the federal government had banned three decades ago. "Their chemical exposures did not come from the air they breathed, the water they drank, or the food they ate," said Cook, president of the Environmental Working Group, a national advocacy group. How did he know? The 10 Americans were newborns. "Babies are coming into this world pre-polluted with toxic chemicals," he said. More than 80,000 chemicals are in use today, and most have not been independently tested for safety, regulatory officials say. Yet we come in contact with many every day - most notably, the bisphenol A in can linings and hard plastics, the flame retardants in couches, the nonstick coatings on cookware, the phthalates in personal care products, and the nonylphenols in detergents, shampoos, and paints. These five groups of chemicals were selected by Sonya Lunder, senior scientist with the Environmental Working Group, as ones that people should be aware of and try to avoid.

Is Genetically Engineered Salmon Safe? - Frankenfish could be on your dinner plate by the end of the year.  On December 21, at the very end of the last business day before Christmas week, the US Food and Drug Administration (FDA) quietly released its environmental  assessment that found "no significant impact" from the controversial AquaBounty AquaAdvantage transgenic salmon. We're now in a 60 day comment period that ends on February 25, at which time the FDA is widely  expected to initiate formal approval.  What is the rationale behind genetically engineered salmon? Why have scientists  spliced genes from an eel-like creature called the ocean pout into the genome of the Atlantic salmon? These genes crank out growth hormone year-round, resulting in a fish that grows faster, cutting the time to reach market weight almost in half. This could mean  cost savings for fish farmers, leading to higher profits for the salmon farming industry and (they  promise) lower prices for consumers.  But there are massively disturbing ethical, environmental, and health concerns that make the introduction of Frankenfish highly controversial.

Ethanol, distillers grains exports hit lowest level of 2012: Exports of U.S. ethanol and distillers grains hit the lowest level of the year in November, down 25 percent and 16 percent respectively, compared to October. Shipments of exported denatured and undenatured (non-beverage) ethanol totaled 40.4 million gallons in November while the total for distillers grains was 518,396 metric tons, according to government data released Jan. 11. “November exports of both ethanol and distillers grains reflect the difficult operating environment following last summer’s historic drought,” said Geoff Cooper, vice president of research and analysis for the Renewable Fuels Association. “Still, year-to-date exports tallied 683.7 (million gallons of ethanol) through November, indicating an annualized total of 745.8 (million gallons) for the 2012 calendar year.” 2011 was a record year for ethanol exports, with more than 1.19 billion gallons of U.S. ethanol exported. In 2010, 396 million gallons of U.S. ethanol were exported. In 2012, ethanol imports to the U.S. have risen. Since August, ethanol imports have topped exports, putting the net export number at a negative. In November, RFA calculated that net exports of ethanol were at negative 42.8 million gallons. (See the chart.)

Should Congress end ethanol subsidies? Yes: For more than two decades, special interests have persuaded Congress to mandate Americans buy ethanol whether they want to or not. As a result, 40 percent of the U.S. corn crop is now used for ethanol rather than food. The ethanol mandate means that ordinary Americans pay more for a poorer quality automobile fuel and more for groceries. Ethanol proponents claim these costs will bring us environmental benefits and energy security. They are wrong. A good first question about a mandate is "how good can a product be if you have to force people to buy it?" The answer: not very good. Ethanol is vastly inferior to gasoline. Consider these glaring drawbacks: It attracts water, so it cannot be transported in regular gas and oil pipelines, reduces lubricants' effectiveness and shortens engine lives. It is caustic, corroding engine parts and dislodging contaminants from fuel tanks. While ethanol doesn't make gasoline cleaner, the more intensive farming and water needs of ethanol-refining harm the environment. Moreover, mandates for ethanol don't enhance national security because production of corn-based ethanol - the main type of ethanol in use in America - requires roughly as much energy as the ethanol contains.

Court Overturns E.P.A.’s Biofuels Mandate - A federal appeals court threw out a federal rule on renewable fuels on Friday, saying that a quota set by the Environmental Protection Agency for incorporating liquids made from woody crops and wastes into car and truck fuels was based on wishful thinking rather than realistic estimates of what could be achieved. The ruling by the United States Court of Appeals for the District of Columbia involved a case brought by the American Petroleum Institute, whose members were bound by the 2012 cellulosic biofuels quota being challenged. Production of advanced biofuels for use in gasoline is a cherished goal of the Obama administration and a major long-term hope for reducing emissions of greenhouse gases. But production of the “cellulosic” fuel, made from woody material, has been slow to start up, making it virtually impossible to come by. That has presented the refiners, the ones required to buy the cellulosic fuel, with a quandary. From 2010 through 2012, the E.P.A. has required gradually higher levels of cellulosic fuel to be incorporated into motor fuel each year, for a total of 20 million gallons to date. But actual production has been near zero.

Regulators Discover a Hidden Viral Gene in Commercial GMO Crops - In the course of analysis to identify potential allergens in GMO crops, the European Food Safety Authority (EFSA) has belatedly discovered that the most common genetic regulatory sequence in commercial GMOs also encodes a significant fragment of a viral gene (Podevin and du Jardin 2012). This finding has serious ramifications for crop biotechnology and its regulation, but possibly even greater ones for consumers and farmers. This is because there are clear indications that this viral gene (called Gene VI) might not be safe for human consumption. It also may disturb the normal functioning of crops, including their natural pest resistance. What Podevin and du Jardin discovered is that of the 86 different transgenic events (unique insertions of foreign DNA) commercialized to-date in the United States 54 contain portions of Gene VI within them. They include any with a widely used gene regulatory sequence called the CaMV 35S promoter (from the cauliflower mosaic virus; CaMV). Among the affected transgenic events are some of the most widely grown GMOs, including Roundup Ready soybeans (40-3-2) and MON810 maize. They include the controversial NK603 maize recently reported as causing tumors in rats (Seralini et al. 2012).

The Price of Water 2012: 18 Percent Rise Since 2010, 7 Percent Over Last Year in 30 Major U.S. Cities - Reflecting economic circumstances for water utilities in countless American cities and towns, single-family residential water prices in 30 major U.S. cities have gone up an average of 7.3 percent during the last year and 17.9 percent since 2010, when Circle of Blue began collecting pricing data. The median increase was 7.8 percent over the last year.  Circle of Blue began tracking water rates in 2010 for the same 30 U.S. cities: the 20 largest in the nation, plus 10 regionally representative cities. From 2010 to 2011, the first year an annual comparison was possible, prices rose an average of 9.4 percent, with a median increase of 8.6 percent. These figures are based on “medium consumption,” which is defined as a family of four using 378 liters (100 gallons) per person per day — roughly the national average for daily per capita domestic water use, as calculated by the U.S. Geological Survey. After seeing no increase from 2010 to 2011, Chicago residents have this past year faced the steepest rate increase: 24.9 percent across all consumption levels. The city is raising funds to replace 1,450 kilometers (900 miles) of its water distribution network, part of a $US 1.4 billion investment in its water and sewer systems.

Climate Prediction Center - United States Seasonal Drought Outlook: During the upcoming three months, a much drier pattern is expected across the southern third of the Nation (from central California to the eastern Gulf Coast). This limits the prospects for further drought improvements during the latter end of the wet season in California, Nevada, and western Arizona, and in fact increases the probabilities for drought development and deterioration in the tri-State area. This also marks a change from recent wet conditions in the southern Plains and western Gulf Coast as drought development and persistence is forecast for Texas by the end of April. Similarly, drought development and persistence is possible in the eastern Gulf Coast States, but less likely further north. In contrast, enhanced probabilities of surplus precipitation and subnormal temperatures across the northern U.S. (from the northern Rockies eastward to the upper Midwest and into the western Corn Belt) increase the odds for drought improvement. Some improvement is possible across the middle Mississippi Valley and the Piedmont, the latter area from wetness forecast for the rest of the month.

Munich Re Says World Crop Insurance Costs Top Record on Drought - Global crop insurance claims were the highest ever last year after drought cut yields in the U.S., historically the biggest grower of corn and soybeans. Claims worldwide were worth about $23 billion in 2012, with $15 billion going to growers in the U.S., said Karl Murr, who heads the agriculture unit at Munich Re, the world’s biggest reinsurance company. About 85 percent of farmland is insured in the U.S., compared with 20 percent globally. U.S. corn and soybean harvests slid to a six-year low in the past season after the most severe dry spell since 1956. “Drought was by far the single most important cause of losses in 2012,” Murr said yesterday in an e-mailed response to Bloomberg questions. “With the U.S. representing about 50 percent of worldwide crop insured values, they obviously took the lion’s share of payouts in 2012, dwarfing loss payouts in Europe, including eastern Europe.” Corn and soybean prices rallied to records last year on the Chicago Board of Trade as yield prospects declined and rising demand depleted world stockpiles. As of Jan. 21, U.S. farmers had collected about $12.35 billion in insurance claims since the marketing year began, surpassing the $10.84 billion at the same time a year earlier, according to the U.S. Department of Agriculture’s Risk Management Agency.

Hurricane Sandy, drought cost U.S. $100 billion - The U.S. had the world's top two costliest natural disasters in 2012, according to a report released Thursday by global reinsurance firm Aon Benfield, based in London. The largest global disasters of 2012 were Hurricane Sandy (with a cost of $65 billion) and the year-long Midwest/Plains drought ($35 billion), according to the company's Annual Global Climate and Catastrophe Report, which was prepared by Aon Benfield's Impact Forecasting division. The $35 billion figure is one of the first estimates of the U.S. drought cost, which "comes from a combination of anticipated losses sustained by the agricultural sector and other factors such as business interruption," says Aon Benfield meteorologist and senior scientist Steve Bowen. Sandy and the drought accounted for nearly half of the world's economic losses but, owing to higher levels of insurance coverage in the U.S., 67% of insured losses globally, the report states. Total economic losses include the entire cost of an event, while insured losses are the amount of economic losses that are covered by insurance, says Bowen.

Goldman bankers get rich betting on food prices as millions starve - Goldman Sachs made more than a quarter of a billion pounds last year by speculating on food staples, reigniting the controversy over banks profiting from the global food crisis. Less than a week after the Bank of England Governor, Sir Mervyn King, slapped Goldman Sachs on the wrist for attempting to save its UK employees millions of pounds in tax by delaying bonus payments, the investment bank faces fresh accusations that it is contributing to rising food prices. Goldman made about $400m (£251m) in 2012 from investing its clients' money in a range of "soft commodities", from wheat and maize to coffee and sugar, according to an analysis for The Independent by the World Development Movement (WDM). This contributed to the 68 per cent jump in profits for 2012 Goldman announced last week, allowing it to push up the average pay and bonus package of its bankers to £250,000. The extent of Goldman's food speculation can be revealed after the UN warned that the world could face a major hunger crisis in 2013, after failed harvests in the US and Ukraine. Food prices surged last summer, with cereal prices hitting a record high in September.

Great Lakes Map Shows Greatest Ecosystem Stress in Lakes Erie and Ontario  -A first-of-its-kind map that pulls together numerical data on nearly three dozen factors that affect the Great Lakes ecosystem shows that the lakes with the most urban and agricultural development in their watersheds are also those with the greatest environmental stress.Lakes Erie and Ontario, the easternmost lakes, are challenged by high coastal population densities, an industrial legacy and phosphorous pollution from agricultural runoff. They are also downstream from wind currents that drop nitrogen generated by industries and power plants into their waters. But the map’s patches of high-stress red and yellow should not be misinterpreted. The color scale is a relative measure that compares the combined stress of the 34 environmental indicators in a particular area to the stress level of the lake system as a whole. “Red does not mean the sky is falling,”  It means that conditions are worse there than other areas. The study comes at an auspicious time for the watershed that holds one of every five gallons of fresh water on the planet’s surface. For the last decade, water levels in three lakes — Huron, Michigan and Superior — have been lower than average, which exacerbates other problems with invasive species, port operations and water temperatures, says Nick Schroeck, executive director of the Great Lakes Environmental Law Center who was not part of the study.

The Location of the US Forest Carbon Sink - According to the draft US National Climate Assessment (Chapter 7 of big pdf), US forests currently absorb about 13% of US carbon emissions.  The distribution of this sink (in tonnes of carbon/hectare/year) is as shown above.  Clearly the hilly regions of the eastern half of the country are critical, with the Pacific northwest being the second most important region. The authors project that US forests will become a net source of carbon by mid century due to increases in drought, disease, etc, more than offsetting the benefits of a longer growing season and carbon fertilization.This may be true - however, I imagine we will also create increasingly large financial incentives to manage forests for carbon storage and this may result in more intensive management of a lot of forests with species explicitly selected for that purpose, and for the changing climate.  So I'm not sure this is beyond our control.  Forests in the western US are at greatest risk - there is already a lot of wildfire and increasing insect outbreaks there and much more of the west is likely to desertify under climate change.

Syrian fighting is preventing food aid getting through to 1m people, says UN - The United Nations warned on Tuesday it was unable to deliver food to up to 1 million hungry and desperate Syrians because of spiralling violence across the country and a lack of fuel. The UN World Food Programme (WFP) said nearly 2.5 million people – most of them internally displaced by the fighting – needed emergency food aid. But WFP is only able to reach 1.5 million as the situation on the ground worsens, it said. "Food needs are growing in Syria," said Elisabeth Brys, a WFP spokeswoman. It was increasingly difficult "to reach the hardest-hit places" after almost two years of continuous fighting, upheaval and civil war, she said. WFP has used the Syrian Arab Red Crescent and a few local non-governmental organisations to distribute food inside the country. But these efforts were being hampered by a "lack of capacity", as well as by the escalating violence between the government and rebels, Brys said.

Toxic Water: Across Much of China, Huge Harvests Irrigated with Industrial and Agricultural Runoff - The horizon gleams with a golden hue from the wheat fields that spread in all directions here in Shandong, a prime food-growing province on the lower reaches of the Yellow River. As hundreds of farmers spread the wheat like massive carpets to dry on country roads, combine machines are busy harvesting the grain. The same afternoon that the wheat harvest is finished, farmers will already be planting corn and other crops. This is how China feeds 1.4 billion citizens and millions of livestock. The seeds of the economic miracle that have lifted China to the world’s second-largest economy are in the farm fields and tumbledown villages that each year grow the nearly 600 million metric tons of food that sustain public trust in the country’s dramatic transition. Yet the ample harvest also comes with significant public health risks, as a farmer here explains. Damp with sweat, dust, and chaff, he pulls a plastic hose into a water pump that is powered by a truck with a belt-drive. The moment the engines roar, the ingenious makeshift machine fills the hose with turbid water from the nearby canal where a pharmaceutical factory has just dumped its rancid effluent. “There’s no water source except for this dirty water,” the farmer says. “We have to use it.”

Mackerel struck off sustainable fish list - Mackerel has been struck off a list of sustainable fish as conversationists warn that overfishing is leading to depleting stocks. The oily fish once championed by celebrity chefs as a healthy and ethical option should now only be eaten occasionally and where possible from local sources, according to The Marine Conservation Society (MCS). The conservation group has removed mackerel from its “fish to eat” list, recommending herring and sardine as alternatives. Mackerel populations in the Atlantic have shifted northwest towards Iceland and the Faroe Islands, where they are being heavily fished, experts explained.

There Go The Pacific Bluefins - The bluefin tuna is considered one of the more valuable fish in the world, said the report from PRI's The World.  Gee whiz! — I wonder why? To answer that question, we can consult Bloomberg's Tuna Sold at Record Price Is Overfished, Study Says, and the study it cites (pdf). This story has a priceless quote in it. The number of Pacific bluefin tuna, a fish that fetched a record 155.4 million yen ($1.78 million) in a Tokyo auction last week, dropped 96.4 percent due to decades of overfishing, the Pew Environment Group said.  The bluefin’s numbers have plummeted because of inadequate fishing regulations in the species’ western Pacific spawning area, Amanda Nickson, Pew’s director for global tuna conservation, said today in a phone interview. The stock assessment by the International Scientific Committee for Tuna and Tuna-Like Species in the North Pacific Ocean, a joint U.S.- Japan research group, is “shocking,” said Nickson... “You have this incredibly valuable, sought-after fish where the first one of the year can be sold for over $1.7 million, yet it’s been allowed to become depleted to this truly frightening point,” Nickson said. “That is just not a situation that can continue.”  You're right about that, Amanda! — in every sense, this is just not a situation that can continue. I couldn't find that 96.4% number the Pew report on the Japanese study came up with, but let's look at the spawining stock biomass (SSB) for Pacific Bluefins, and 4 model projections of future biomass and future total catch.

Tuna's Last Stand - In early January, scientists released  jaw-dropping data showing that bluefin tuna in the North Pacific will soon be “functionally extinct.” A favorite of Japanese sushi lovers, Pacific bluefin is now so overfished, they said, that only 4 percent of its population remains. Earlier this month, a single bluefin sold for $1.7 million at Tokyo’s Tsukiji fish market. Tuna, America’s favorite fish, is in decline around the world, sending prices up and boats on longer voyages to chase the lucrative fish. But one corner of the Western Pacific holds the last healthy tuna stock on the planet, and a group of eight Pacific Islands is determined to keep it that way. The eight island-nations control 5.5 million square miles of tuna grounds worth an estimated $5 billion. These waters attract legal and illegal fishers from as far away as Taiwan. Skipjack tuna from this region ends up in cans on America’s grocery store shelves. The challenge is enforcement. One of the island-nations, Palau, has only one patrol boat to protect nearly a quarter-million square miles of ocean from illegal fishing. Listen to the story of Palau’s struggle to protect its tuna, from PRI’s The World.

Sky-High Radiation Found in Fukushima Fish - the latest discovery revealing the ongoing and devastating effects of the Fukushima nuclear disaster of 2011, a fish contaminated with over 2,500 times the legal amount of radiation has been caught off the coast of the Fukushima Daiichi nuclear power plant in Japan, officials announced Friday.Plant operator TEPCO stated that the radioactive element caesium was detected in a murasoi fish at levels "equivalent to 254,000 becquerels per kilogramme -- or 2,540 times more than the government seafood limit," Agence France-Press reports. Radioactive contamination has remained consistent in the after-life of the crippled nuclear plant. In October, a group of scientists discovered that the plant was likely still leaking radiation into the sea, with up to 40% of bottom feeding fish near the site of the nuclear disaster still showing elevated levels of radiation. "The fact that many fish are just as contaminated today with caesium 134 and caesium 137 as they were more than one year ago implies that caesium is still being released to the food chain," Ken Buesseler, senior scientist at Woods Hole Oceanographic Institution of the United States reported at that time. "The (radioactivity) numbers aren't going down. Oceans usually cause the concentrations to decrease if the spigot is turned off," he added. "There has to be somewhere they're picking up the cesium."

Meet Mike, The Most Radioactive Fish Ever From Fukushima - Almost two years after the awful nuclear disaster occurred, a fish caught near Fukushima on Friday January 18th had a record-breaking level of radioactive contamination over 2500x the legal limit. TEPCO measured 'Mike the Murasoi' at 254,000 becquerels per kilogram (with the limit for edible seafood at 100 becquerels). As Le Monde reports, the previous record (caught on August 21st 2012) was a mere 25,800 becquerels/kg. As further precautions, TEPCO is installing new nets 20km around the Fukushima Daichi site to avoid highly contaminated fish gettig too far and being consumed by other species. While Mike's family are no doubt distraught (at him being caught and being so radioactive), it appears (somewhat disappointingly) that there is no apparent third eye, lazer fins, legs, or other 'expected' 'blinky' malformations.

E.P.A. Extends Deadline for Navajo Plant's Pollution Controls - In a bid to clean up one of the nation’s dirtiest coal-fired power plants without causing economic harm to the Navajo Nation that surrounds it, the Environmental Protection Agency indicated on Friday that it would give the plant’s owners five extra years, until 2023, to install expensive state-of-the art emissions reduction equipment. The agency expressed its willingness to extend the deadline by releasing a proposed rule. The Navajo Generating Station near Page, Ariz., not far from the Grand Canyon, has long been a priority for environmentalists concerned about the health impacts from the pollution it generates and the ensuing haze that settles over the the majestic park. But the 2,200-megawatt plant has powerful defenders. Its electricity has helped light Los Angeles and pump Colorado River water to communities around Arizona. The plant, which first generated electricity 39 years ago, and the Kayenta coal mine that feeds it provide about 1,000 local jobs. The vast majority of these are held by Native Americans. Unemployment rates are well above 50 percent in and around the reservation.  “There’s an economic reality and imperative here,” he said in an interview. “I am committed to ensuring that we were not the reason the facility closes,” he said. “I wanted it to remain open while the tribes develop a plan for a more sustainable future.”

Bundle up, forecasters warn, as arctic blast hits eastern U.S. - First, Superstorm Sandy leveled his home and devastated most of his neighborhood in the New York City borough of Staten Island. Now, an arctic blast that forecasters warn can have deadly consequences is gripping the region. Late Thursday, a gas-powered heater and a tent were the only defense Youssef had against the biting cold as he handed out jackets and sweaters at a makeshift supply depot he established to help his Midland Beach neighbors who, in some cases, are still struggling to get the power back on. "A lot of people have been coming, so we give them jackets, we give them sweaters," he told CNN affiliate NY1. "Yeah, we are trying. We are trying our best to help them." But even as he helped his neighbors, he wondered how long he could keep the heater running at the tent where some of his neighbors were seeking shelter. Gas, he said, is expensive. Exposure to subfreezing temperatures has left at least three people dead in Wisconsin, Minnesota and Illinois, authorities said.

Extreme weather is the new normal: Environment Canada - Environment Canada says warming trends across the country will mean more severe blasts of rain, wind, snow and heat from Mother Nature. Bob Robichaud, a warning preparedness meteorologist, says 2012 was the 16th year in a row that saw higher than normal temperatures across Canada. Over the last 10 years, just four of 40 seasons were cooler than normal. "So that certainly is a trend there," Robichaud said from Halifax where he also works with the Canadian Hurricane Centre. "The climate change experts are saying that we're going to get heavier rainfall events and more frequent non-tropical type storms. So in that respect, we have to be ready for it." Over the last year, Canada saw intense heat waves, extreme flooding in B.C. and an especially active hurricane season that culminated in Superstorm Sandy. The massive Atlantic hurricane collided with another weather system, churned a path of destruction through seaside New Jersey and left wreckage and lost business costs estimated at more than US$65 billion. Read it on Global News: Global News | Extreme weather is the new normal: Environment Canada

Andes glaciers are vanishing at unprecedented rates: The glaciers of the Andes Mountains have retreated at an unprecedented rate in the past three decades, with more ice lost than at any other time in the last 400 years. That's according to a new review of research that combines on-the-ground observations with aerial and satellite photos, historical records and dates from cores of ice extracted from the glaciers. The retreat is worse in the Andes than the average glacier loss around the world, the researchers report Tuesday in the journal The Cryosphere. ----- The Andes Mountains of South America are home to 99 percent of tropical glaciers ­— permanent rivers of ice at high enough elevations not to be affected by the types of balmy temperatures usually associated with the tropics. But these glaciers are particularly sensitive to climate change, because there is little seasonality in temperatures in the tropics, Rabatel said. "Glaciers of the tropical Andes react strongly and more rapidly than other glaciers The looming loss of the glaciers is a major problem for the people living in arid regions west of the Andes, Rabatel said. "The supply of water from high-altitude glacierized mountain chains is important for agricultural and domestic consumption, as well as for hydropower," on Earth to any changes in climate conditions," he said.

Andean glaciers melting at ‘unprecedented’ rates -- Climate change has shrunk Andean glaciers between 30 and 50% since the 1970s and could melt many of them away altogether in coming years, according to a study published on Tuesday in the journal The Cryosphere. Andean glaciers, a vital source of fresh water for tens of millions of South Americans, are retreating at their fastest rates in more than 300 years, according to the most comprehensive review of Andean ice loss so far. The study included data on about half of all Andean glaciers in South America, and blamed the ice loss on an average temperature rise of 0.7 degree Celsius over the past 70 years. "Glacier retreat in the tropical Andes over the last three decades is unprecedented," The researchers also warned that future warming could totally wipe out the smaller glaciers found at lower altitudes that store and release fresh water for downstream communities. "This is a serious concern because a large proportion of the population lives in arid regions to the west of the Andes," said Rabatel.

Study: South American Glaciers In Historic Retreat - One of the more dramatic effects of global warming is shrinking glaciers around the globe. 10 to 20 percent of glacier ice in the European Alps, for example, has been lost in less than two decades, and half the volume of the mountain range’s glacier ice has melted away since 1850. Thinning and melting rates in Alaskan glaciers more than doubled over the last decade, African glaciers have declined by 60 to 70 percent since the 1900s, and most Pacific glaciers are also receding. Summer ice coverage in the Arctic could disappear entirely within a decade, and Glacier National Park may not have any glaciers by 2030. This isn’t just destructive to wildlife and ecosystems. Given their locations, glaciers can serve as crucial supplies of fresh water for various human populations — and as they shrink year after year, those supplies tighten. The latest example comes from a new report by The Cryosphere, which documents the shrinkage of glaciers in the Andes mountain range of South America. The glaciers have shrunk by at least a third, and possibly as much as half, since the 1970s alone. And the worst loss has been seen in the smaller, lower altitude glaciers which supply fresh water for many of the continent’s residents, according to a round-up of the report by Reuters:

New PIOMAS vid - 800 frames, 30 minutes of work per frame, but Andy Lee Robinson did it.  He updated his PIOMAS 3D video to include all of 2012:

Permafrost thawing emitting methane in Alaska, Siberia, Canada - video 

Methane hydrates: a volatile time bomb in the Arctic - The risk with climate change is not with the direct effect of humans on the greenhouse capacity of Earth’s atmosphere. The major risk is that the relatively modest human perturbation will unleash much greater forces. The likelihood of this risk is intimately tied to the developments over the next decade in the Arctic. Accelerating ice loss and warming of the Arctic is disturbing evidence that dangerous climate change is already with us. As I have argued earlier, now that we have realised this our efforts should be directed at managing the situation in the Arctic and avoiding the spread of dangerous climate change elsewhere. The Arctic is a core component of the earth system. Six of the 14 climate change tipping points of the earth system are located in the Arctic region. Whereas the term tipping point was initially introduced to the climate change debate in a metaphoric manner, it has since been formalised and introduced in the context of systems exhibiting rapid, climate-driven change, such as the Arctic. Tipping points have been defined in the context of earth system science as the critical point in forcing at which the future state of the system is qualitatively altered.Tipping elements are defined, accordingly, as the structural components of the system directly responsible for triggering abrupt changes once a tipping point is passed. This is because they can be switched into a qualitatively different state by small perturbations.

Arctic News: High methane levels persist in January 2013: Below a combination of images produced by Dr. Leonid Yurganov, comparing methane levels between January 1-10, 2012 (below left), and January 1-10, 2013 (below right). The 2013 image shows worryingly high levels of methane between Norway and Svalbard, an area where hydrate destabilization is known to have occurred over the past few years. Even more worrying is the combination of images below. Methane levels came down January 11-20, 2012, but for the same period in 2013, they have risen.Below a NOAA image with temperature anomalies for January 7, 2013, when a huge area of the Arctic experienced anomalies of over 20 degrees Celsius, including a large area close to Svalbard. Temperatures change daily, as the wind changes direction and as sea currents keep the water moving around the Arctic Ocean. For an area close to Svalbard, the recent 30-day temperature anomalies is over 20 degrees Celsius, as shown on the NOAA image below, and this indicates persistently high temperature anomalies for that area. Below, a NOAA image showing sea surface temperature anomalies up to 5 degrees Celsius close to Svalbard.

UN: methane released from melting ice could push climate past tipping point - The United Nations sounded a stark warning on the threat to the climate from methane in the thawing permafrost as governments met for the second day of climate change negotiations in Doha, Qatar.  Thawing permafrost releases methane, a powerful greenhouse gas, but this has not yet been included in models of the future climate. Permafrost covers nearly a quarter of the northern hemisphere at present and is estimated to contain 1,700 gigatonnes of carbon – twice the amount currently in the atmosphere. As it thaws, it could push global warming past one of the key "tipping points" that scientists believe could lead to runaway climate change.  The UN Environment Programme (UNEP) called for the effect to be studied in detail by the Intergovernmental Panel on Climate Change (IPCC), the body of top climate scientists convened by the UN to provide governments with the most up-to-date and comprehensive knowledge on climate change. The next IPCC report will be published in several parts from next year.

Climate Change to Profoundly Affect U.S. Midwest in Coming Decades: — In the coming decades, climate change will lead to more frequent and more intense Midwest heat waves while degrading air and water quality and threatening public health. Intense rainstorms and floods will become more common, and existing risks to the Great Lakes will be exacerbated. Those are some of the conclusions contained in the Midwest chapter of a draft report released last week by the federal government that assesses the key impacts of climate change on every region in the country and analyzes its likely effects on human health, water, energy, transportation, agriculture, forests, ecosystems and biodiversity.In the Midwest, extreme rainfall events and floods have become more common over the last century, and those trends are expected to continue, causing erosion, declining water quality and negative impacts on transportation, agriculture, human health and infrastructure, according to the report. In agriculture, longer growing seasons and rising carbon dioxide levels are likely to increase the yields of some Midwest crops over the next few decades, according to the report, though those gains will be increasingly offset by the more frequent occurrence of heat waves, droughts and floods. In the long term, combined stresses associated with climate change are expected to decrease agricultural productivity in the Midwest.

The Closing Door of Climate Targets: Robust evidence from a range of climate–carbon cycle models shows that the maximum warming relative to pre-industrial times caused by the emissions of carbon dioxide is nearly proportional to the total amount of emitted anthropogenic carbon (1, 2). This proportionality is a reasonable approximation for simulations covering many emissions scenarios for the time frame 1750 to 2500 (1). This linear relationship is remarkable given the different complexities of the models and the wide range of emissions scenarios considered. It has direct implications for the possibility of achieving internationally agreed climate targets such as those mentioned in the Copenhagen Accord and the Cancun Agreements (3, 4). Here I explain some of the implications of the linear relationship between peak warming and total cumulative carbon emissions.  Read the Full Text

The Climate Change Endgame - WHETHER in Davos or almost anywhere else that leaders are discussing the world’s problems, they are missing by far the biggest issue: the rapidly deteriorating global environment and its ability to support civilization.  The situation is pretty much an endgame. Unless pressing issues of the biology of the planet and of climate change generated by greenhouse gas emissions are addressed with immediacy and at appropriate scale, the matters that occupy Davos discussions will be seen in retrospect as largely irrelevant.  This week, in Bonn, out of sight and out of mind, international negotiators will design the biodiversity and ecosystem equivalent to the Intergovernmental Panel on Climate Change. A full eight years have passed since President Jacques Chirac of France acted as host at a meeting in Paris to create this “Intergovernmental Platform on Biodiversity and Ecosystem Services.” Progress has been painfully slow. Only now is the “platform” and its work program — to assess status, trends and possible solutions — being designed. In the meantime, rates of extinction and endangerment of species have soared. Ecosystem destruction is massive and accelerating. Institutional responsiveness seems lethargic to a reptilian degree.

Time Is Not On Our Side - What if we actually achieve the target of limiting global warming to a 2 degree Celsius increase? We are unlikely to meet this goal -- it's looking much worse than that -- but what if we did?: ... It is abundantly clear that the target of a 2-degree Celsius limit to climate change was mostly derived from what seemed convenient and doable without any reference to what it really means environmentally. Two degrees is actually too much for ecosystems. Tropical coral reefs are extremely vulnerable to even brief periods of warming. .. A 2-degree world will be one without coral reefs (on which millions of human beings depend for their well-being)..., there undoubtedly will be massive extinctions and widespread ecosystem collapse. The difficulty of trying to buffer and manage change will increase exponentially with only small increments of warming. In addition, the last time the planet was 2 degrees warmer, the oceans were four to six (perhaps eight) meters higher. We may not know how fast that will happen (although it is already occurring more rapidly than initially estimated), but the end point in sea-level rise is not in question. A major portion of humanity lives in coastal areas and small island states that will go under water. ... More than a 2-degree increase should be unimaginable. Yet to stop at 2 degrees, global emissions have to peak in 2016. ...

Curbing climate change will cost $700 bln a year - report - The world must spend an extra $700 billion a year to curb its addiction to fossil fuels blamed for worsening floods and heat waves and rising sea levels, a study issued by the World Economic Forum (WEF) showed on Monday. As government and business leaders prepare to meet at the forum in Davos, Switzerland this week, the world's nations are divided over who should pay for lowering emissions of greenhouse gases blamed for a growing number of extreme weather events. Recessions in Western economies since the global financial crisis have slowed carbon emission growth but also left governments with scarcer state funds to channel into green technologies. The Green Growth Action Alliance, which compiled the study on behalf of the WEF, said the extra spending was needed to promote other forms of energy generation and greater efficiency in sectors including building, industry and transport. The $700 billion, part of which would promote cleaner energies such as wind, solar or hydro-power, would be on top of about $5 trillion projected to be spent each year on infrastructure under a scenario of business as usual until 2020.

‘Population Bomb’ scientist: ‘Nobody’ has the right to ‘as many children as they want’ - A Stanford professor and author of The Population Bomb recently published a paper in a scientific journal re-emphasizing climate change and population growth pose existential threats to humanity and in an interview with Raw Story said that giving people the right to have as many children as they want is “a bad idea.” “The only criticism we’ve had on the paper is that it’s too optimistic,” said Paul Ehrlich, Bing professor of population studies at Stanford University and president of the Center for Conservation Biology. “You can’t negotiate with nature.” The study, published the Proceedings of the Royal Society B journal earlier this month says that climate change is “driven by overpopulation, overconsumption of natural resources and the use of unnecessarily environmentally damaging technologies and socio-economic-political arrangements to service Homo sapiens‘ aggregate consumption.”

David Attenborough - Humans are plague on Earth - The television presenter said that humans are threatening their own existence and that of other species by using up the world’s resources. He said the only way to save the planet from famine and species extinction is to limit human population growth. “We are a plague on the Earth. It’s coming home to roost over the next 50 years or so. It’s not just climate change; it’s sheer space, places to grow food for this enormous horde. Either we limit our population growth or the natural world will do it for us, and the natural world is doing it for us right now,” he told the Radio Times. Sir David, who is a patron of the Optimum Population Trust, has spoken out before about the “frightening explosion in human numbers” and the need for investment in sex education and other voluntary means of limiting population in developing countries. “We keep putting on programmes about famine in Ethiopia; that’s what’s happening. Too many people there. They can’t support themselves — and it’s not an inhuman thing to say. It’s the case. Until humanity manages to sort itself out and get a coordinated view about the planet it’s going to get worse and worse.”

Mitigation Versus Adaptation in Climate Change - Today I will take a stab at dispelling what I think is widespread confusion over what constitutes mitigating climate change, as against adapting to it.  Both are necessary, of course, but effective policy depends on understanding which is which. Begin with the following stylized fact: reducing the severity of future climate change is essentially about keeping fossil fuels in the ground.  It is true that there are some benefits from tweaking carbon exchange (the carbon cycle that operates across the atmosphere and terrestrial and marine ecosystems)—for instance, by planting a forest—but the impacts are relatively small (not big enough to do most of the job) and of uncertain duration.  And someday there might be a feasible method for pulling the carbon out of the fuels we burn and re-sequestering it for near-eternity.  But for now these options are of limited value.  As Carbon Tracker noted last year, about 80% of hydrocarbon reserves have to be foregone if we are to achieve a reasonable likelihood of limiting warming to 2º C. This gives us a rough and ready definition of mitigation: reducing the extraction of fossil fuels.  Everything else is adaptation.

Preparing the bay for rising sea levels – SF Gate: The lobster claw-shaped estuary defines and occasionally redefines the southeastern edge of Marin County, a shoreline area dotted with expensive homes, shops and restaurants. During the king tides near the turn of the year, when sea levels reach their zenith, water overwhelms the banks and marshes, flooding parts of Shoreline Highway and other roads. That susceptibility makes Richardson Bay a canary in the coal mine of Bay Area sea level rise. As global warming threatens to transform today's high tides into tomorrow's low ebb, those inconvenient floods could turn into tragedies. But the estuary's vulnerability also makes it an ideal site to try bold approaches to shoreline protection. The oldest continually operating tidal gauge in the Americas descends into the shores along Crissy Field in San Francisco, tethered beneath a breakwater that doubles as a nest for Elegant Terns. Over the last century, the gauge has tracked a gradual 8-inch rise in coastal waters. But by 2050, as global warming melts ice caps and swells the seas, the gauge's readings could leap almost 1 1/2 feet, scientists say. For Bay Area residents, it will be one of the most obvious effects of a changing climate. Not just Richardson Bay, but land equivalent in area to six San Franciscos could regularly flood, inundating vast swaths of the region's airports, high-tech campuses and the homes of more than 100,000 residents.

Solutions lag as sea quickly rises -  Denise Tortorello, a real estate agent in Point Pleasant, N.J., said she can't tell yet where property values are headed since Hurricane Sandy demolished a string of beach towns built on a slender strip of barrier islands in the Atlantic. Just south in Mantoloking, second homes sell for up to $10 million. Many were destroyed, along with roads, sewer lines, gas lines, power lines. "They're replacing everything," Tortorello said. "The general consensus is, 'It's not going to happen again. It was the 100-year flood.' " But Sandy is the future, climate scientists say. As carbon dioxide emissions exceed worst-case scenarios, rising sea levels and storm surges will reshape every U.S. coastline, from San Francisco to Houston to New York. It is only beginning to dawn on Americans, half of whom live on the coast, that their future is a battle against the sea. In the impulse to rebuild from Sandy, much of it financed by the federal government, big questions need to be answered. What to protect, and how? Where to retreat? Where to stand fast?

Seeking Clues About Sea Level From Fossil Beaches - Suddenly, the lead car screeched to a halt. Paul J. Hearty, a geologist from North Carolina, leapt out and seized a white object on the side of the road: a fossilized seashell. He beamed. In minutes, the team had collected dozens more. Using satellite gear, they determined they were seven miles inland and 64 feet above South Africa’s modern coastline. For the leader of the team, Maureen E. Raymo of Columbia University, the find was an important clue as she tries to determine just how high the oceans might rise in a warmer world. The question has taken on new urgency in the aftermath of Hurricane Sandy, which caused coastal flooding that scientists say was almost certainly worsened by the modest rise of sea level over the past century. That kind of storm tide, the experts say, could become routine along American coastlines by late in this century if the ocean rises as fast as they expect.  In previous research, scientists have determined that when the earth warms by only a couple of degrees Fahrenheit, enough polar ice melts, over time, to raise the global sea level by about 25 to 30 feet. But in the coming century, the earth is expected to warm more than that, perhaps four or five degrees, because of human emissions of greenhouse gases.

Make climate change a priority - By Jim Yong Kim, president of the World Bank -  The signs of global warming are becoming more obvious and more frequent. A glut of extreme weather conditions is appearing globally. And the average temperature in the United States last year was the highest ever recorded. As economic leaders gathered in Davos this week for the World Economic Forum, much of the conversation was about finances. But climate change should also be at the top of our agendas, because global warming imperils all of the development gains we have made.  If there is no action soon, the future will become bleak. The World Bank Group released a reportin November that concluded that the world could warm by 7.2 degrees Fahrenheit (4 degrees Celsius) by the end of this century if concerted action is not taken now.  A world that warm means seas would rise 1.5 to 3 feet, putting at risk hundreds of millions of city dwellers globally. It would mean that storms once dubbed “once in a century” would become common, perhaps occurring every year. And it would mean that much of the United States, from Los Angeles to Kansas to the nation’s capital, would feel like an unbearable oven in the summer.

Obama must atone for his carbon omissions - With its references to raging storms, icy currents and gathering clouds, the weather featured heavily in Barack Obama’s first inaugural address. He even promised to do something about it – “to roll back the spectre of global warming”. And he tried. Of his three big first-term reforms, including healthcare and Wall Street, only cap and trade failed. It still damaged his party in the midterm elections. Realists say it would be suicidal to try it again. But inaugurations are meant to lift our gaze to the horizons. Overhauling immigration and curbing gun violence are worthy goals. But neither compares to the health of the planet. Mr Obama has in fact been “thinking long and hard about climate change” since the election, according to a senior administration official. Most of his advisers are counselling modesty. Here are three reasons why the US president should risk vituperation – and even ridicule – by aiming high. First, kids will lie down with leopards before Washington turns bipartisan again. No matter what Mr Obama does – whether it is a plan to subsidise hula hoops or a long walk in the woods with Iran’s Ayatollah Khamenei – he will be opposed by a majority of Republicans. He should risk his capital on something game-changing. Second, the reality of global warming is starker today than four years ago – in most respects, alarmingly so. The last report by the Intergovernmental Panel on Climate Change came out in 2007. Subsequent temperature rises, the speed of the retreat of summer Arctic ice coverage and the increase in extreme weather events makes clear that its forecasts were conservative rather than alarmist. In spite of La Niña, the weather phenomenon that cools temperatures in the Pacific, 12 of the 14 hottest years on record since 1880 have been in this century. Each of the past 36 years has exceeded the 20th century average.

What Can Obama Do about Climate Change? - Climate change appears to have climbed to the summit of policy promises yesterday when President Obama vowed in his second inaugural address to confront carbon emissions, because anything less would "betray our children." He lingered on the issue in a speech filled with snap references to national priorities, devoting more time to the interwoven policies of climate, energy and environmental hazards than to war, deficits and immigration. It was a promise for action that stood in dramatic contrast to his near-silence on the politically difficult issue in the months preceding the November election. "We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations," Obama said to cheers. "Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms."

Obama And The Environment: What He Can Do - "Obama can do a million things," says Robert F. Kennedy Jr., an environmental lawyer and founder of Waterkeeper Alliance. "He can force coal to pay its true cost, end subsidies to carbon cronies, and deploy a compelling mix of moral and economic arguments." The temptation is to focus on issues that inflame the public, like the Keystone XL pipeline, but the president would do better to take a wider perspective. Keystone, for one, would pump only 830,000 barrels of oil from tar sands a day, about a third of the 2.3 million barrels of oil Canada already sends us, and a mere fraction of our heavily subsidized 19-million-barrel-a-day habit. We spoke to scientists, economists, and policy advisers, who recommended the most impactful environmental measures, ones that can be achieved over the course of the next four years. Here's their nine-point plan to protect the planet.

"Northeast Faces Stark Choice on Climate Pollution" -  From an op-ed in the New York TimesEIGHT years ago, a bipartisan coalition of Northeast and mid-Atlantic governors joined forces to reduce pollution from electric power plants. They agreed to cap overall emissions of carbon dioxide, the major pollutant driving global warming, and require the more than 200 power plants in the region to buy permits to emit the greenhouse gas. The governors reasoned that plant operators would have an incentive to clean up their emissions if they had to pay for the carbon dioxide they discharged. Over the first three years of the Regional Greenhouse Gas Initiative, average annual emissions were indeed 23 percent less than in the previous three years, and auctions of allowances — or permits to pollute — raised $952 million, much of which has been invested in clean energy programs.  But the future effectiveness of this market-based cap-and-trade system, the first but not the only one of its kind in the nation, is now in question. The nine states in the initiative are preparing to reset the emissions cap — or the total amount of carbon dioxide that power plants can emit — and some of the proposals would allow power plants to increase the amount of carbon dioxide they dump into the atmosphere.

Why transformation of the U.S. electricity system is critical - By most accounts, the U.S. is not on track to achieve the greenhouse gas reductions scientists and other experts say are needed to mitigate climate change, abate the frequency and severity of super-storms like Sandy, and protect our populated, shrinking coastlines. In fact, the Energy Information Administration’s 2013 Annual Energy Outlook early release forecasts U.S. greenhouse gas emissions in 2040 well above 1990 levels -- rather than approaching the 80 percent below 1990 levels by 2050 called for by climate experts. A critical lever for addressing the United States’ contribution to global greenhouse gas emissions is transformation of the electricity sector. The U.S. electricity system is responsible for about 40 percent of the nation’s greenhouse gas emissions. And while climate is a major driver of change facing the electricity system, it is by no means the only one. Grid security, grid resilience (especially in the wake of multiple natural disasters that have left millions without power for extended periods), economic development and the increasing empowerment of customers enabled by rapidly developing technology are all equally relevant drivers of change.

Shedding Some Light on the Solar Debate - I have always considered there are only two key rationales for investing in solar energy: for economic benefit (through subsidies or not), or for altruism. But the solar industry has seen a break in the clouds to start this year, and although it has been in part due to chasing profits, it has also been due to a third reason which has been hidden from me in plain view…that of necessity.  So let us take a look at some recent developments in the solar industry to assess its progress on the path to enlightenment, or to see whether it is still stuck in the shadows.  The horrific levels of smog seen in China in the last week have starkly underscored the need for the largest emerging market to clean up its act (and reduce its 70% reliance on coal). Air pollution in Beijing last weekend reached a record – almost 12 times the recommended level by Chinese standards (and 25 times by US standards). The most worrying takeaway from all of this was that Beijing wasn’t even one of the worst ten Chinese cities on the air-quality index on that day.

Patents crucial in charge toward new-energy cars - With a worldwide push for sustainable, clean transportation, patents are vital to survival in the global new-energy vehicle industry, China Intellectual Property News reported. China had filed more than 2,000 patent applications - 8 percent of the world total - for new-energy cars by the end of last year to share the third place with Germany and South Korea, according to the statistics from Thomson Reuters. Japan ranks the first with nearly 9,000 patents, followed by the United States with 4,000, accounting for a respective 60 percent and 22 percent of the world total. Since China lags behind in patents, it is trying to narrow the gap in other aspects of the industry, said Zhao Yuhai, a senior official from the Ministry of Science and Technology. "With internationally advanced expertise and research technologies for new-energy vehicles, China has formulated 62 national and industry standards and established testing systems and a complete commercial operation model," Zhao noted.

Wind Beats Out Natural Gas To Become Top Source Of New Electricity Capacity For 2012 -- Through June of 2012, renewable energy was right behind natural gas in terms of the most new energy generating capacity being installed in the United States, with wind making up most of the renewables push. And now Business Insider has flagged the numbers for the remainder of the year. Last week, they reported that wind ultimately pulled ahead of natural gas to become the leading installer of new capacity in 2012, at 10,689 total megawatts. Those numbers came from the Federal Energy Regulatory Commission’s report on the trends and highlights in U.S. energy for the past year. According to FERC’s update, natural gas installed 8,746 megawatts of new capacity, coal installed 4,510 new megawatts, and solar came in fourth with 1,476 new megawatts. Here’s the relevant table from the report, conveniently highlighted by Business Insider:

Wind power delivers too much to ignore - THE location of the British Isles at Europe's wild and windy western fringe does not always seem like a blessing. But in one important respect it is: the UK has the greatest potential for wind power, both onshore and offshore, of any European country. Onshore wind power has expanded steadily across the UK in recent years and is a key plank of the country's commitment to greening its electricity supply. But as the turbines have gone up across the countryside, so has the level of opposition. Wind power has become a deeply divisive issue in British politics. The issue exploded last year when 106 members of parliament, mostly Conservatives representing rural constituencies, signed a letter to Conservative Prime Minister David Cameron. They urged him to cut subsidies for the onshore wind industry, describing wind technology as "inefficient and intermittent". Two of the anti-wind campaigners' main concerns are the impact of turbines on the beauty of the countryside and the opposition of local people. It is absolutely right that these be taken into account. But they need to be balanced against the bulk of public opinion, which strongly supports the increased use of wind turbines

New Technology Could Drastically Reduce Cost of Offshore Wind Power - A new technology for anchoring offshore structures to the seabed could drastically reduce the cost, and increase the speed of installation for offshore wind farms; making the offshore wind a far more attractive source for renewable energy. The new technology, designed by Universal Foundation, will be tested in the North Sea where it will be used to support 120 metre meteorology masts which will be used to provide data for the deployment of future wind farms in the area. What resembles an upside down, giant steel bucket will be lowered down to the seabed where it will then sink down into the seabed, and through the power of suction, become stuck fast, forming a rock solid foundation. If successful in this preliminary installation, then the technology could be used as the base for thousands of giant offshore wind turbines which are planned to be erected in UK waters as part of the largest offshore wind project in the world, capable of supplying around 26 million homes with electricity by 2030.

Brazil risks disruptions to power generation - Brazil's economy is gradually improving. DB for example is projecting a 0.8% quarter over quarter GDP growth, which looks sustainable over the longer term.However, there are risks to this recovery. One of those risks has to do with Brazil's reliance on hydroelectric power - which is generally a good thing. The Globe and Mail: - Brazil has long boasted about having one of the world’s cleanest energy grids due to its heavy use of hydro power, but a recent threat to its water supply is sending the country to the brink of energy rationing, raising concerns that Brazil will turn to more carbon-intensive energy sources to fuel its growing thirst for energy. But it also means dependence on rainfall to fill the water reservoirs. And water levels have been significantly below normal. The Globe and Mail: - Below-normal rains since November have depleted reservoirs at hydroelectric facilities to critical levels while consumption hits its seasonal peak.  The current situation has brought back memories of Brazil’s 2001 energy crisis, when factories and residences were forced to slash consumption amid country-wide blackouts. Indeed, levels are below what they were during the 2001 energy crisis while power usage is 40% higher

China and Australia top list of 'carbon bomb' projects- China and Australia top a global list of planned oil, gas and coal projects that will act as "carbon bombs" and push the planet towards catastrophic climate change, a Greenpeace report warned on Tuesday. The Point of No Return study, by consultancy firm Ecofys for Greenpeace, calculated that the 14 giant fossil fuel projects would produce 6.3 gigatonnes of CO2 a year in 2020 – as much as the entire United States emits annually. The largest contributors will be China's five north-western provinces, which aim to increase coal production by 620m tonnes by 2015, generating an additional 1.4bn tonnes of greenhouse gases a year. Australia's burgeoning coal export industry, already the largest in the world, is in second place due to its potential growth to 408m tonnes of shipped resource a year by 2025, resulting in an annual 760m tonnes of CO2. Meanwhile, controversial exploitation of oil and gas reserves in the Arctic could release 520m tonnes of CO2 a year, with further major emissions set to flow from other new fossil fuel frontiers, such as tar sands oil in Canada and shale gas in the US.

US Fracking Rigs Quickly Moving Away from Diesel to Natural Gas - More and more fracking drill rigs are converting to run on natural gas in preference to diesel, with the biggest affirmation of this being Apache Corp’s (NYSE:APA) announcement to power an entire fracking job with engines that run on natural gas. Lyle Jensen, the CEO of American Power Group has said that his company received orders to convert 60 drilling rigs from Most US rigs still run on diesel, but the number converting to natural gas is growing, mostly due to the facts that natural gas is cheaper and releases fewer emissions. Caterpillar (NYSE:CAT), Halliburton (NYSE:HAL), and Schlumberger (NYSE:SLB) all worked to convert Apache’s rig to run on natural gas, which has led to an estimated saving of 40% on fuel costs.

Fracking Fight Intensifies in Tompkins County - Bringing the region’s concerns over hydraulic fracturing to fever pitch, the Tompkins County Legislature slammed the state last week for purportedly failing to be transparent as it moves to regulate ‘fracking’ in New York.  In 2008, the state’s Department of Environmental Conservation was charged with reviewing the environmental and health impacts of fracking: the practice of injecting chemicals and water into the ground to extract natural gas. Although it has yet to complete the environmental review, the DEC is no longer accepting public comments on proposals to regulate fracking in the state — a move that the Tompkins County Legislature characterized as “seriously flawed,” in a press release published Jan. 14. The Legislature, sending its letter to the DEC “under protest,” said that the department failed to let it publicly consider and vote on the proposal to regulate fracking before it was released. In addition, the Legislature said the DEC was “completely illogical” in proposing regulations that are based on an incomplete review of fracking’s effects on the environment.

US Company Uses Fracking Technique to Extract Uranium - The US is obsessed with achieving energy independence and reducing its reliance on foreign oil, yet Amir Adnani, the CEO of Uranium Energy Corp. (UEC) in Texas, has stated that “the U.S. is more reliant upon foreign sources of uranium than on foreign sources of oil.” Russia has been its biggest supplier for the past 20 years, but this year the $8 billion Megatons to Megawatts Program, which extracted uranium from old nuclear weapons, comes to an end. Other countries such as Kazakhstan, Canada, and Australia can supply the US with its needs, but China’s huge expansion plans in the nuclear sector mean that it will soon compete with the US for the limited uranium supplies. UEC has announced that they can produce uranium in the US via a technique that is almost identical to fracking. Wells are drilled into layers of highly porous rock that contain uranium and ground water. Oxygenated water is then injected into the well which dissolves the uranium. The end mixture is then pumped out of the ground, where it is sent to the Hobson plant in Texas to be processed and dried. Despite the support that shale gas activities receive in Texas, the residents are against this form of fracking. Whereas shale gas fracking takes place around 2 miles below the ground and well away from drinking water aquifers, fracking for uranium takes place between 400 and 800 feet below the ground, precisely where those aquifers exist.

Rift Widens Over Mining of Uranium in Virginia - A fight over whether to drill beneath the oak hedgerows, an undertaking that would yield 1,000 jobs and a bounty of tax revenue in addition to nuclear fuel, has divided the region. The bitterness is reflected in competing lawn signs that read “No Uranium Mining” and, on the other side of the road, “Stop whining. Start mining.”  Now, after years of government reports and hundreds of thousands of dollars in political donations that included a trip to France for state lawmakers, the issue has reached the crucible of Virginia’s General Assembly.  Bills introduced last week would lift a moratorium on uranium mining at the site here, known as Coles Hill. Political supporters say that the mining would bring economic benefits and that risks from radioactive wastes, or tailings, can be safely managed. Opponents fear the contamination of drinking water in case of an accident, and a stigma from uranium that would deter people and businesses from moving to the area.  The politics of the issue do not divide neatly along party lines. Opponents include most state lawmakers from the region, all of whom are Republicans. A prominent supporter is the minority leader of the State Senate, Richard L. Saslaw, a Democrat, who lives in the northern suburbs. Asked about buried uranium tailings that remain a risk for hundreds of years, Mr. Saslaw, who is known for unguarded statements, said in a radio interview, “I’m not going to be here.”

Stop the Coal Trains  - You might have heard the talk: Coal interests are pushing to make the Pacific Northwest a 24-hour conveyor belt linking coal mines in Montana and Wyoming with Asian markets clamoring for cheap, dirty power. The most urgent fight is currently taking place just north of Bellingham at Cherry Point, the site of a proposed coal-export terminal that would be the largest in North America. Why should someone in Seattle care about a coal terminal 100 miles north of the city? Because coal combustion is the leading human-caused increase of CO2 in the atmosphere, which is largely responsible for global warming. Because shipping dirty coal to China while piously shutting down the last coal-fired power plant in Washington State (as the state is doing) would simultaneously mock and cheapen our forward-thinking, tree-humping pledge to cut greenhouse gas emissions 50 percent by 2050. And because there is not just one but five coal terminals—five!—currently proposed in the Northwest, each of which could bring 1.5-mile-long coal trains rumbling through our region daily, blocking traffic, interfering with other business at Seattle's port, and leaving clouds of coal dust in their wake.

Governor Inslee Calls Coal Exports ‘The Largest Decision We Will Be Making As A State From A Carbon Pollution Standpoint’ - Newly-minted Washington Governor Jay Inslee has been lauded for his impassioned views on environmental issues from climate change to renewable energy. In his first press conference as governor last week, Inslee addressed another aspect of the climate change fight in the Pacific Northwest:  proposed coal export terminals that would allow for the shipping of 150 million of tons of coal every year from public lands in Wyoming and Montana’s Powder River Basin abroad. In response to a question about whether or not federal government analyses of the terminals should take into account the carbon emissions that will come from the burning of the coal exported through the terminals, Inslee said: It is clear that there are ramifications ultimately if we burn the enormous amounts of Powder River Basin coal that are exported through our ports… It is an enormous number of tons of carbon dioxide that will be released into the atmosphere, it doesn’t matter where it’s burned, it ends up in Puget Sound.  That is a physical fact. The challenge is to figure out, frankly, for our state from a policy standpoint is where you sort of draw the line in evaluating those impacts from any carbon-based system.  I think that’s a challenge for us. I will say that from what I know, this is the largest decision we will be making as a state from a carbon pollution standpoint certainly during my lifetime, and nothing comes even close to it.  So I’m going to be giving some thought to this.

Nebraska Governor Appoves Alternative Route Of Keystone XL Pipeline: Will Buffett/Obama Give The Green Light? - One of the more contentious issues in the past year for America's environmentalists was the (successful) blocking of the Keystone XL pipeline over fears that it would contaminate the Ohallala aquifier in the Sandhill region of Nebraska, a major source of groundwater, and an issue over which none other than the president was quite vocal just about a year ago when he killed the idea. At least that was the pre-spun, socially accepted reason (for the real one read below). It is now time to revisit the fate of this critical pipeline following today's news that the Nebraska governor has approved a new route for the pipeline, one which avoids the most sensitive area in the Sandhills.  And now it will be up to Obama, whose second inauguration speech had a dedicated segment to clean energy, to kill or let it go through. Since the decision will once again be about politics, the outcome is all but certain, but at least it will provide yet another theatrical sideshow to add to all the others emanating from DC these days. After all it is all about distraction.

Keystone XL Pipeline: John Kerry Has Investments In Canadian Energy Companies  - John Kerry's expected cakewalk to the U.S. State Department has delighted American environmentalists due to his stance on climate change, but the longtime senator owns stock in two Canadian oil companies that have pushed for approval of TransCanada's Keystone XL pipeline. Federal financial disclosure records show Kerry has investments of as much as US$750,000 in Suncor, a Calgary-based energy company whose CEO has urged the U.S. to greenlight TransCanada's controversial project. The longtime Massachusetts senator, one of the wealthiest lawmakers on Capitol Hill with an estimated net worth of $193 million, also has as much as $31,000 invested in Cenovus Energy, another Calgary firm.

State Department delays Keystone pipeline decision - - The Obama administration has delayed a decision on TransCanada Corp's rerouted Keystone XL oil pipeline until after March, even though Nebraska's governor on Tuesday approved a plan for part of the line running through his state. "We don't anticipate being able to conclude our own review before the end of the first quarter of this year," said Victoria Nuland, a spokeswoman at the State Department, which had previously said it would make a decision by that deadline. She said the department would take into consideration approval of the line by Nebraska Gov. Dave Heineman.

Senators who signed pro Keystone XL dripping with dirty oil money -- $27.5 million dirty dollars -- In the ongoing saga that is the Keystone XL tar sands pipeline, it’s clear that supporters of the dangerous project are getting anxious.  Perhaps they’re seeing the writing on the wall that this project is nowhere near a sure thing, thanks to the massive resistance to the pipeline, the scientists throwing their weight in opposition to it, and the new studies out showing even greater negative effects if built.  Or perhaps they’re looking ahead to the wave of people planning to descend upon DC in opposition to the pipeline and in favor of strong climate action on the 17th of February. In the latest attempt to influence the Obama administration, supporters of the project in the Senate have sent a new letter urging the President to approve the problematic pipeline.  Why would these tar sands pipeline supporters send another letter to the White House?  Well, as usual, one possible answer lies in their political contributions.  Sometimes, facts paint the picture quite starkly.  Consider the following, taken from our Dirty Energy Money database*:

  • Total lifetime contributions from dirty energy money interests to Senators signing the bill from dirty energy money interests: $27.5 million
  • Average lifetime contributions from dirty energy money interests to Senators signing the letter: $551,051
  • Average lifetime contributions from dirty energy money interests to Senators NOT signing the letter: $162,720

Delta expansion projects threaten farms and wildlife - On this stormy late-October day, nothing is gone. Yet. Turbaned men harvest pumpkins on a nearby farm. Thousands of migratory snow geese occupy plowed and puddled fields. But the pumpkins and the fields and the geese are about to disappear as work begins on one of the largest construction projects in Canadian history.  For over there, the second-largest shopping complex in Canada is about to be built. Exceeded in size only by West Edmonton Mall, the TFN’s gargantuan, Coast Salish–themed Tsawwassen Mills/Tsawwassen Commons megamall will feature hundreds of stores and hectares of parking space. Goodbye, farmland; hello, Toys “R” Us. But that is, to Steves’s mind, the least of it. For directly below and to the west of Delta’s 41B Street overpass is the real story: the proposed $10-billion Terminal 2 expansion at the Roberts Bank Superport, which now consists of two terminals, the Westshore coal facility and the Deltaport container operation.

Pipeline spat set to boil over at energy board - Canada’s bid to join the multibillion-dollar global liquefied natural gas industry could hinge on a comparatively cheap 100 kilometres of new pipeline. A long-simmering regulatory feud between Spectra Energy Corp. and TransCanada Corp. subsidiary Nova Gas Transmission Ltd. (NGTL) over infrastructure development in the remote northeast corner of British Columbia is set to boil over before the National Energy Board as the energy regulator weighs whether to approve a $330-million addition to TransCanada’s B.C. pipeline system. The proposed Komie North extension, part of a broader B.C. expansion campaign by TransCanada, is designed with an initial capacity of one billion cubic feet of gas per day and slated to begin commercial service by 2014. Spectra has fought the application, arguing that TransCanada is sparing shippers from paying the true cost of additions to its sprawling, 24,000-kilometre Nova system. The corporate spat, which has carried on quietly amid more noisy clashes over plans to export Alberta oil overseas, is a window into a larger turf war underway as pipeline companies vie for new business associated with plans to export frozen natural gas to higher-priced markets overseas.

What happened to all of Canada’s energy visionaries?  - An outsider peering into the Canadian energy scene today would see a closely knit community dominated by 10 or so powerful companies, highly profitable in good times, in which compensation is generous and there is work to be done for generations. And yet in the span of only a year, the much-touted chief executives of three of those corporate titans resigned abruptly, leaving boards to scramble over what to do. In a late Friday afternoon announcement on Jan. 11, Encana Corp. said Randy Eresman would retire effective immediately. Talisman Energy Inc. ousted CEO John Manzoni on Sept. 10. Nexen Inc. took out CEO Marvin Romanow on Jan. 9, 2012. Nexen appointed an interim CEO and quickly became the target of a takeover by China’s CNOOC Ltd. Talisman and Encana put directors in the CEO seat and are now seen as takeover candidates. To be sure, each company struggled with unique circumstances and the market lost confidence in their leaders’ ability to fix them. The corporate coups also suggest a broader theme: Canada’s biggest-spending industry is struggling with a leadership crisis related to an inability to see and adjust to new market conditions and formulate and sell a vision for the future.

The Tar Sands' Long Shadow (pdf) Over the last few years, Canada’s federal government has systematically tried to kill clean energy and climate change policies in other countries in order to promote the interests of oil companies. Its efforts are assisted by the Government of Alberta, and both governments draw some of their arguments straight from tar sands companies themselves. By now, it’s common knowledge that the Government of Canada is a laggard on climate change action, thanks to its weak target and the lack of any real plan to meet it. Similarly, the Government of Alberta’s multi-million dollar public relations campaign in support of the tar sands has received quite a bit of media scrutiny. But this report isn’t just about op-eds and advertisements. The governments of Canada and Alberta are also engaged in something much more serious: a concerted effort to weaken climate policies outside our borders, with the aim of ensuring that no doors are closed to Canada’s highly polluting tar sands. In other words, Canada is not just exporting dirty oil anymore; we’re also exporting dirty policies.

Toshiba creating nuclear reactor for mining Canada Tar Sands - Toshiba Corp. has reportedly designed a nuclear reactor and intends to market it to natural resource developers for mining Tar Sands in Canada and other places.  Nikkei reported this week that the company had completed design of a small 10,000kw reactor and had asked the U.S. Nuclear Regulatory Commission for approval to begin construction in the United States, but the process had been delayed in connection with a meltdown at Japan’s Fukushima Daiichi nuclear power plant in 2011. The company also planned to seek approval from Canadian authorities. Sources told The Daily Yomiruri that one natural resource developer had hopes of using the reactor in Alberta by 2020.  “To ensure the reactor’s safety, Toshiba reportedly plans to construct a nuclear reactor building underground, while the building itself will be equipped with an earthquake-absorbing structure,” according to the paper.  The reactor would be used to inject steam about 300 meters underground into the oil sands. A separate pipe would then extract the sand as slurry. Toshiba’s planned reactor would not need to be refueled for up to 30 years. Additional uses could included turning saltwater into freshwater and powering small communities in frontier areas like northern Alaska.

Toshiba Nuclear Reactor For Oil Sands To Be Operational By 2020: Reports - Toshiba Corporation has developed a small nuclear reactor to power oilsands extraction in Alberta and hopes to have it operational by 2020, according to news reports from Japan. The Daily Yomiuri reports Toshiba is building the reactor at the request of an unnamed oilsands company. The reactor would generate between one per cent and 5 per cent as much energy as produced by a typical nuclear power plant, and would not need refueling for 30 years. It would be used to heat water in order to create the steam used to extract bitumen from the oil sands. Toshiba has completed design work on the reactor and has filed for approval with the U.S. Nuclear Regulatory Commission, reported. The company is expected to seek approval from Canadian authorities as well. The New Energy and Fuel blog speculates that the company has been at work on the reactor for a long time, given the relatively short amount of time in which it expects to have the reactor online.

Drillers explore ‘groundbreaking’ shallow fracking technique - Traditional vertical drilling for gas and oil could lessen in favor of state-of-the-art horizontal drilling and hydraulic fracturing of rock layers, perhaps as shallow as 1,000 feet underground and not far from drinking water aquifers. At least one Western Pennsylvania company is fracking rock about 3,000 feet down in Westmoreland County, slurping oil out of formations about half as deep as the heavily tapped, gas-rich Marcellus shale. If the technique catches on — industry experts suggest shallow fracking is inevitable — it could be a boon to smaller drillers. It could reshape state law and increase concern about the safety of drinking water, experts say. “What we‘re doing is unique. It is amazing. ... It is groundbreaking,” said Ben Wallace, chief operating officer at Penneco Oil Co. in Delmont. “Traditional well drilling doesn‘t work under (today‘s) price structure. It‘s done.” The basic technology behind shallow fracking has been available for at least 20 years — coal mines use it to vent methane — but it‘s more affordable than before. Improved technology helped lower the cost, and the state‘s shale gas boom attracted dozens of drilling support companies to the region, providing a much larger available workforce for fracking.

U.S. Oil-Production Rise Is Fastest Ever - WSJ - U.S. oil production grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013. Daily crude output averaged 6.4 million barrels a day last year, up a record 779,000 barrels a day from 2011 and hitting a 15-year high, according to the American Petroleum Institute, a trade group.  It is the biggest annual jump in production since Edwin Drake drilled the first commercial oil well in Titusville, Pa., two years before the Civil War began. The U.S. Energy Information Administration predicts 2013 will be an even bigger year, with average daily production expected to jump by 900,000 barrels a day. The surge comes thanks to a relatively recent combination of technologies—horizontal drilling and hydraulic fracturing, or fracking, which involves pumping water, chemicals and sand at high pressures to break apart underground rock formations.  Together, they have unlocked deposits of oil and gas trapped in formations previously thought to be unreachable.

WTI Crude Poised for Longest Run of Weekly Gains Since 2009 - Oil headed for a seventh weekly advance in New York, the longest run of gains in almost four years, amid signs of global economic growth and following a drop in crude stockpiles at Cushing, the U.S. storage hub.  West Texas Intermediate crude advanced as much as 0.3 percent as German business confidence rose for a third month in January. Inventories at Cushing, Oklahoma, the delivery point for WTI, decreased for the first time since November, according to the Energy Department. The U.K., German and Dutch governments yesterday urged their citizens to leave the Libyan city of Benghazi, citing a threat to Westerners.  Crude for March delivery was at $96.33 a barrel, up 38 cents, in electronic trading on the New York Mercantile Exchange at 9:30 a.m. London time. Futures climbed 0.8 percent to $95.95 yesterday and are up 0.8 percent this week. A seventh weekly gain would be the longest rising streak since April 2009. The average volume of all futures traded today was 17 percent below the 100-day average.

Gregor Macdonald: What The End Of Cheap Oil Means - For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil's apex, suddenly we find that "growth" is a lot harder to come by. Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand. McDonald begins: "I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again."

Trillions of dollars worth of oil found in Australian outback - Up to 233 billion barrels of oil has been discovered in the Australian outback that could be worth trillions of dollars, in a find that could turn the region into a new Saudi Arabia. The discovery in central Australia was reported by Linc Energy to the stock exchange and was based on two consultants reports, though it is not yet known how commercially viable it will be to access the oil. The reports estimated the company’s 16 million acres of land in the Arckaringa Basin in South Australia contain between 133 billion and 233 billion barrels of shale oil trapped in the region’s rocks. It is likely however that just 3.5 billion barrels, worth almost $359 billion (£227 billion) at today’s oil price, will be able to be recovered. The find was likened to the Bakken and Eagle Ford shale oil projects in the US, which have resulted in massive outflows and have led to predictions that the US could overtake Saudi Arabia as the world’s largest oil producer as soon as this year.

Australia to rival Saudi Arabia in oil reserves? - An Australian company claims it has found an untapped shale oil field with estimated reserves that could potentially put the country next to remarkably oil-rich Saudi Arabia. Still, extracting the discovered treasure poses a huge technical challenge. ­Brisbane-based company Linc Energy has presented two estimates by respected independent consultants claiming that drilling and seismic exploration they do in South Australia has brought the prize they have been dreaming of for years – a potentially huge untapped shale oil deposit. DeGolyer and MacNaughton petroleum industry consulting firm evaluated potential shale oil reserves at Arckaringa Basin around the town of Coober Pedy at 103 billion barrels of oil equivalent (BOE), while Gustavson Associates consulting firm put it as high as 233 billion BOE. That is practically comparable to the proven 263 billion barrel reserves of oil heavyweight Saudi Arabia. The risked mean estimate given by DeGolyer and MacNaughton put it at a much more moderate 3.5 billion BOE.

Energy Industry Doesn't Understand Algeria Attack - The attack on BP-operated Amenas gas facilities in the Algerian Sahara was a spectacular lesson for the energy industry: No amount of high-tech security is invulnerable to Sahelian militants. Billions will now be spent on securing Western energy interests across the region and investment will take a hit at a time when the big news was that the industry’s junior players—particularly American and Canadian—were growing ever so bold and willing to take risks in unstable regions. Their markets may not be able to sustain this bravery much longer. An exodus—or relocation—of Western energy industry workers got underway immediately, not only in Algeria. Not only will security costs rise; so will insurance premiums along with the cost of relocating personnel. Projects will be delayed, and production will take a small hit, but this will be only temporary.

Will Oil Majors Pull out of Algeria after its Security Reputation is Shattered? - The hostage situation in Algeria’s In Amenas oil field could spell doom for the country’s oil and natural gas industry. Since the end of the civil war in the late 1990’s Algeria has grown into an important supplier of gasoline-rich crude oil to the global market, attracting billions of dollars of investment, partly because of its tight, military style security. Feeling safe, oil majors began to operate in remote and challenging areas of the country, such as along the borders of Mali and Libya; In Amenas is one such location. This recent attack against In Amenas is the first on Algerian assets, and could change the perceptions of oil companies as to the safety of working in the country. BP, Statoil, and Cepsa have all started to evacuate their workers, even though some work in fields hundreds of miles away from In Amenas. If this starts to affect oil production then the government, heavily reliant on revenues from its oil and gas exports, could suffer.

Graphic: Out of Africa – Did the Colonial Powers ever Really Leave? - Africa may have achieved independence, but the old colonial ties are still important as France’s decision to send troops to Mali to fight Islamist extremists shows. The old colonial powers in Africa may no longer be the rulers, but they still exert influence and have strong economic and political links. David McDonald, professor of the Global Development Studies at Queen’s University, says, “The French and the English were much more strategic in terms of recognizing that they wanted to maintain neo-colonial linkages with their former colonies. So it was shedding the direct authoritarian power at the barrel of a gun and replacing that with independence, but an independence that was, and is still to some extent, extremely dependent on the political and economic will of the former colonial masters.” – The National Post’s Rubab Abid and Richard Johnson look at the former colonies and former colonial powers who still dabble inside the continent they once owned.

Powder Keg in the Pacific  - Once upon a time, former Chinese leader Deng Xiaoping suggested that Asia’s Pacific powers and wannabes should “put aside differences and jointly develop resources.”  That was, of course, when China itself was still something of a wannabe and no one was talking about it becoming the world’s largest economy.  Now, it’s the rising power on planet Earth, achieving a more-than-century-old dream of returning to national greatness -- as well as an eye-blistering, health-endangering level of industrial and car pollution that has its own name, “airpocalypse.” Problem is the idea of regional cooperation turns out to have been the real dream and now, it seems, everyone in the Pacific basin has woken up. “Jointly develop”?  What an ephemeral thought at a time when the urge to power up ever more cars and factories (sending yet more pollution, not to speak of greenhouse gases, into Asian and planetary skies) has merged with advances in drilling technology for “extreme energy.”  Together, they have made a series of previously unremarkable islets in the Pacific -- which just happen to have prospective oil and natural gas reserves under them -- look too valuable to resist claiming. So China, Japan, and various other Asian countries are insisting those bits of land are theirs and theirs alone.  Toss in that hideous imponderable national pride and, as TomDispatch regular Michael Klare points out today, you have the potential for one of the dumber, more destructive face-offs in recent history.  With its usual fabulous timing, the U.S., already heavily garrisoning parts of Asia, has jumped in with both feet, only exacerbating tensions in the region, while promising to bring more of its own weaponry to bear, and sell more of that weaponry to its allies.

Chinidia On Track to Consume All the World’s Oil Exports in 18 Years? - Over at the OilDrum blogsite is a recent discussion on trends in petroleum consumption.   A well regarded commentator at the site, westexas, says the following: At the 2005 to 2011 rate of decline in the GNE/CNI ratio, in only 18 years the Chinidia region alone (China + India) would theoretically consume 100% of GNE (Gross Net Exports of petroleum worldwide). Also in the post is this chart.  So the trend is pretty clear that in the US at least, vehicle miles are declining.  Could be due to gas prices.  Could be due to our ongoing employment recession.  Or both.  However, in China, India and much of Latin America, growth in petroleum demand is increasing which is supporting the current gasoline price levels.  As for the Chinidia observation by Westexas, obviously something has to give long before that 18 year projection can come true.

China to cap total energy use at 4 bln T coal equivalent by 2015  (Reuters) - China will aim to limit total annual primary energy consumption to 4 billion tonnes of coal equivalent by 2015 as it tries to improve efficiency and reduce emissions of greenhouse gases and pollution, the government said. China, the world's biggest energy consuming country, has promised to cut energy intensity -- the amount used per unit of GDP growth -- by 16 percent over the 2011-2015 period as it tries to address crucial issues such as pollution, waste and a growing dependence on overseas oil and gas supplies. But the government, in its five-year energy plan published late on Wednesday, said the gross energy target will not be binding and analysts said Beijing's priority in the next few years will remain economic growth. "I can hardly imagine they would sacrifice growth just for this. It is very unlikely," said Wei Yao, China economist at Societe Generale in Hong Kong. Curbing energy use, especially coal, will help prevent a repeat of the smog that enveloped Beijing earlier this month. The pollution was the worst on record and triggered widespread public anger and rare media criticism. Environmentalists and analysts highlight lax enforcement of pollution laws, an addiction to coal and a slew of incentives for local officials to promote growth at all costs as some of the causes of heavy pollution. In the plan, China said it would aim to reduce the share of coal in total energy consumption to around 65 percent, and raise the share of natural gas to 7.5 percent.

Pettis: Nine Things to Watch in 2013; Unwarranted Outbreak of Optimism in China and Europe; The Great Rebalancing -- Michael Pettis at China Financial Markets believes optimism regarding China and Europe is unwarranted. Via email, he states the case while giving nine key things to watch in 2013. Many countries before China have managed one or more decades of miraculous growth, and in every case, perhaps not surprisingly, they developed significant domestic imbalances that were only subsequently resolved during difficult adjustment periods.  Very few, however, have managed the subsequent adjustment process in such a way that their early economic promises were fulfilled. Beijing must now manage China’s own adjustment, and this adjustment must come soon if we are not to run into a serious debt problem. How Beijing does so is key to China’s longer-term economic success, and it is much too early in the process to get overly enthusiastic. Certainly last year gives a taste of what we might expect. The next year or two are also going to be very important in determining the success of the great European experiment and, even more, the viability of the euro as it currently exists. At this point, unless the peripheral countries unite in their demands and force changes in growth policies, the future of the euro lies largely in German hands. If Germany decides to save the euro by expanding its economy sufficiently to allow the peripheral European countries to grow while cutting their debt levels, the euro can be saved. If not, I don’t really see how peripheral Europe can manage many more years of grinding away at debt through high unemployment (which anyway doesn’t seem to improve debt ratios).

WB predicts 8.4% growth for China - Developing countries, led by China and Brazil, will see greater progress in their economic recoveries, as high-income countries continue to struggle in the wake of the global financial crisis of several years ago, according to a World Bank report. According to the bank's latest Global Economic Prospects report published on Wednesday, its growth prospect for the global economy in 2013 was slashed to 2.4 percent from a June 2012 estimate of 3 percent. But China's growth will pick up from an estimated 7.9 percent in 2012 to 8.4 percent this year, said Kaushik Basu, its chief economist at a news briefing in Washington on Tuesday. The 2013 prediction was lowered from a previous 8.6 percent. "China is growing at a phenomenal rate... but you can't grow at 10 percent for more than a couple of decades," Basu said. He Fan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said the global economic climate will remain challenging for China in the long term. He expected that the United States and Japan will fare better this year, but the continuing crisis in the European Union, China's largest trading partner, will continue to undermine the global recovery.

The NYT is Upset that Wages in China Are Rising - Wow this is really getting incredible, yet another piece about how China is going to be suffering because it has a declining labor force. The big problem seems to be that we may not be able to count on cheap tee-shirts from China. The prescription is that Chinese people should have more kids so that we can have more cheap labor. The downside is that it will take 20 years before the kids born today will be able to join the labor force.  That is only a slight caricature of the blogpost by the usually insightful Vikas Bajaj. The obsession with the declining labor force in China, and the nearly universal conviction that it is bad, displays a seriously confused view of economics. In terms of being able to support a rising population of dependents, it is important to keep productivity growth in this picture. China's economy had been growing at the rate of 10 percent a year. Even if this slows to 7 percent as many predict, it will allow workers to enjoy much higher after tax income even if an increasing portion of their wage is diverted to supporting China's elderly population.

A Place That Makes New York Real Estate Look Cheap - Think it’s expensive to buy a home in New York? Try moving to China. That chart comes from the International Monetary Fund (and was brought to my attention by Torsten Slok, the chief international economist at Deutsche Bank). It shows the ratio of house prices to annual household income: that is, how many years’ worth of income it would take to buy the typical house in a given city. As you can see, the median house price in New York was equal to 6.2 years’ worth of the median pretax household income in 2011. The most comparable data we have for an array of Chinese cities — shown in red above — suggests that homes in New York are a steal compared to those in urban parts of the Middle Kingdom. The Chinese data show that in Shanghai it would cost 15.9 times the typical household income to buy a standard home. In Beijing, the ratio is even higher, at 22.3. Real estate prices are so high in China, Mr. Slok explains, because people have few options for parking their savings. The savings rate is phenomenally high in China.  So people have been investing their savings in a local sector that has had big returns — real estate — chasing home prices ever higher.

In China, Signs One-Child Policy May be Coming to an End - China could be considering relaxing its harsh one-child policy because of women like Hu Yanqin, who lives in a village at the edge of the Gobi desert.When Hu married a construction worker seven years ago, she knew she was going to have only one child, although the area where she lives, the Jiuquan region in northwestern Gansu province, is one of the rare places in China where those living in rural areas have been free to have two children since 1985.Advocates of reforming China's one-child policy use Hu and millions like her as evidence that relaxing the law will not lead to a surge of births in the world's most populous nation. Jiuquan has a birth rate of 8 to 9 per 1,000 people, lower than the national average of about 12 births per 1,000 people. The policy, implemented since 1980 alongside reforms that have led to rapid economic expansion, is increasingly being seen as an impediment to growth and the harbinger of social problems.

China Economic Paradigm Nearing End Game -Yves Smith - Skeptics of China’s economic model have looked like hopeless gloomsters for years. Even though they are correct when they point out negatives, such as the fact that no large economy has ever had 50% of GDP coming from investments and exports for a sustained basis or has managed the transition from being export driven to consumption driven gracefully (the US’s and Japan’s deflations are prime examples) seemed irrelevant as China was able to maintain attractive growth rates in the wake of the financial crisis by providing massive stimulus (aka more investment). Even worrying signs, like the fact that it takes more and more debt to produce incremental growth (the ratio was worse for China in 2009 at 6:1 than the US on the eve of the crisis, at 4 or 5 to 1, and it’s deteriorated since then) and oft reported on spectacle of cities full of high end housing that sit vacant, haven’t dented the widespread faith in the ability of Chinese leaders to navigate, at worst, a soft landing if the world economy ratchets down into a lower level of growth thanks to austerity in Europe and the US. GMO, in a compelling analysis (EC_FeedingtheDragon (1).pdf), not only confirms the skeptics’ case but provides reasons why the Chinese growth model faces an end game. While it may not be nigh, it seems to be closer than most people think. While this new report provides useful (and scary) updates about established China bugaboos, such as the ginormous investment in real estate, the role of local government lending vehicles in funding these boondogles ventures, it fingers other culprits that may be new to many readers.

China Flash PMI at 2-Year High; Don't Expect Too Much More - China manufacturing PMI is at a 24 month high. At 51.9, it's not all that much to get terribly excited about, nor is it all that unexpected. Nonetheless, conditions show a temporary rise following a lengthy bout of contraction. The HSBC Flash China Manufacturing PMI™ shows Operating conditions improve at the quickest pace in two years. Key points:
Flash China Manufacturing PMI™ at 51.9 (51.5 in December). 24-month high.
Flash China Manufacturing Output Index at 52.2 (51.9 in December). 22-month high.
Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "At 51.9, January’s HSBC China manufacturing PMI rose for the fifth consecutive month to the highest level in two-years, heralding a good start to the New Year. Thanks to the continuous gains in new business, manufacturers accelerated production by additional hiring and more purchases. Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China's ongoing recovery in the coming months."

China Taps Forex Stash for Globalization Cash -: — Securing U.S. dollars for overseas investments is getting easier now that the State Administration of Foreign Exchange (SAFE) has opened a direct channel for funneling some of China's US$ 3 trillion in forex cash to the lending arms of state-run banks. The service launched last summer reflects a government initiative to widen the scope of forex investments announced last year by People's Bank of China Governor Zhou Xiaochuan, whose agency oversees SAFE. "SAFE is providing U.S. dollar liquidity to the market," a source close to the agency said. The new SAFE Co-Financing office is designed to "let the foreign exchange market play a positive role in supporting national economic and social development," an agency statement said. "We have consistently introduced new, innovative ways to use foreign exchange reserves, supported financial institutions that serve the real economy's development and (China's) overseas outreach strategy, and established entrusted foreign reserves loan offices at foreign exchange reserves management institutions, while seeking innovative ways to spend foreign exchange," SAFE said.

Chinese Yuan V.S. SDR – Who Will Be the Heavyweight Campion of The World? - A reserve currency has never lasted forever and the US Dollar is no exception, especially considering its seriously grave trade and debt imbalances. A country can only go so far with its imbalances, and today the US is the largest debtor nation in the history of the world. The fate of the US surely lies on its creditors, who also produce what the US consumes. China, Japan and OPEC countries are the main holders of the US debt. However, the US Fed also stepped in to purchase US debt as a lender of last resort to prevent a further banking crisis. Yet, anyone who uses their “credit card” to finance their debt is doomed to fail, even if this someone is the US government. Who will emerge as the superpower currency after the fall of the US dollar? Today, the US Dollar is the reserve currency of the world. You need it, for instance, to buy oil, a vital component of any economy. Since other countries like China cannot print US dollars at their leisure, they have to get it from somewhere. They get it from trade with the US. The US buys products in Asia and the rest of the world with US dollars, and in turn these same dollar surpluses are used to buy oil and US bonds, creating a much needed artificial demand for US dollars. A major issue with being the reserve currency is the “Triffin dilemma“ which was first introduced by Robert Triffin in the 1960′s, who pointed out that the country that holds the reserve currency must be willing to supply the world with an extra supply of its currency which naturally creates a trade deficit. This is exactly the dilemma that the US is facing today. A trade deficit can be a long-term problem, as foreigners must finance the perpetual debt. As of 2011, the US had a trade deficit of $558 billion, and that number is growing. Some have even argued that the trade deficit accounted for 50% of the overall US national debt.

Markets, Not China, Will Determine RMB Adoption - I think this is a point we often forget when discussing "China's rise": while its government can tinker with several important factors that will affect RMB adoption alike its convertibility, its interest rate and even its pace of appreciation, markets will ultimately determine the pace at which the rest of the world climbs aboard the yuan bandwagon alike, say, Indonesia and Nigeria. There is an interesting article in the FT by Mike Rees of StanChart that presents a much-needed viewpoint from one of the world's largest commercial banks on this matter. Compared to that of, say, economists or political scientists, they are not interested so much in using econometric models to extrapolate the currency's potential for widespread adoption but rather in its adoption by more and more market participants at the present time. First, you need to consider the volume of trade denominated in it among freely transacting buyers and sellers in commodities trade:  The exponential growth of the renminbi as a trading currency – and of the offshore renminbi market – continues to stun observers. Three years in, despite global headwinds, and the scarcity of arbitrage opportunities as onshore and offshore rates have converged, renminbi redenomination shows no sign of faltering. Trade in renminbi in 2012 is on track for $425bn, up almost 30 per cent on 2011. Second, also consider the relaxation of foreign investment quotas and what they mean for the currency: Deregulation, too, is picking up pace. This year, China quadrupled to Rmb270bn the quota under which eligible institutions invest in China’s stock market. And last month, the first foreign bank was granted approval for a renminbi denominated cross-border loan quota on behalf of a multinational client.

U.S. as a Capital Importer - For a few years now, one of my mental images of the world economy is that the U.S. economy is by far the major importer of capital, while the major exporters of capital are China, Germany, and Japan. While that mental image remains true, the situation isn't as extreme as a few years back. Here's are the pie graph for 2005, from the Global Financial Stability Report of the IMF. That year, the U.S. economy absorbed nearly two-thirds of all global capital imports. Japan was the major exporter of capital that hear, followed by China and Germany, with Saudi Arabia and Russia also playing large roles.Now here's the comparable graph for 2011. The U.S. economy is now absorbing only about one-third of all global capital imports. Germany has become the world's largest capital exporter, edging out  China, and then followed by Saudi Arabia and Japan

Japan records largest ever trade deficit - Japan’s trade deficit nearly tripled in 2012 to Y6.93tn ($77bn), an unprecedented shortfall for the traditional export powerhouse as it faces criticism that it is weakening the yen to favour Toyota and other Japanese manufacturers. The sharp expansion of the deficit, from Y2.56tn in 2011, in part reflected falling sales of Japanese goods abroad, a problem that has been traced to a strong yen, the weak economy in Europe and anti-Japanese boycotts by consumers in China. It was only the third year since 1980 that export sales failed to cover the cost of imports. Japan is better known for the large and persistent trade surpluses that in decades past were a source of both national pride and political friction, particularly with the US. A desire to restore the competitiveness of Japan’s export industries is widely seen as underlying recent moves by Tokyo to loosen monetary policy. The yen, which had appreciated steadily since the onset of the global financial crisis more than five years ago, has fallen back about 10 per cent against the dollar since early November, as traders anticipated a more accommodative stance by the Bank of Japan. The monetary shift was crystallised on Tuesday when the BoJ set a target of 2 per cent inflation, but has alarmed some of Japan’s trading partners. Germany, the UK and China have warned that efforts to weaken the yen could lead to a spiral of competitive devaluations among major economies – a so-called currency war. Yet Japan has also received support for its policy from economists and some central bankers, who argue – as Japanese officials do – that the benefits of a revived Japanese economy would outweigh the costs of a stronger yen.

The Japan That Can't Export? Its 2013 Trade Deficit - Japan used to epitomize the Asian Exporting Nation, feared around the world for its superior-quality and in-demand products. Those glory days, however, are rapidly receding like the hairline of HRH Prince William the Bald. Most recently, the news was that Japan had a "record" trade deficit in 2013. It actually isn't as dire as the headline sounds since Japan's postwar deficits haven't been remotely American-sized to begin with. Against that scale, a $78B annual trade deficit isn't all that large. But, by Japanese standards, it may be alarming nonetheless as headwinds in generating and sustaining an economic recovery. Importantly, these are headwinds that won't be going away any time soon as the WSJ describes:

  1. Territorial conflicts with China over a bunch of lousy, largely uninhabitable rocks hurting sales of Japanese-branded products in the PRC;
  2. Increased imports of energy after shutting down virtually all of its nuclear reactors in the wake of Fukushima;
  3. Continued economic malaise in Western consumer markets;
  4. A still historically strong yen despite its recent weakening to around 90 yen to the dollar.

Let Elderly People 'Hurry Up and Die' - Japan's new government is barely a month old, and already one of its most senior members has insulted tens of millions of voters by suggesting that the elderly are an unnecessary drain on the country's finances. Taro Aso said on Monday that the elderly should be allowed to "hurry up and die" to relieve pressure on the state to pay for their medical care. "Heaven forbid if you are forced to live on when you want to die. I would wake up feeling increasingly bad knowing that [treatment] was all being paid for by the government," he said during a meeting of the national council on social security reforms. "The problem won't be solved unless you let them hurry up and die."Aso's comments are likely to cause offence in Japan, where almost a quarter of the 128 million population is aged over 60. The proportion is forecast to rise to 40% over the next 50 years.To compound the insult, he referred to elderly patients who are no longer able to feed themselves as "tube people". The health and welfare ministry, he added, was "well aware that it costs several tens of millions of yen" a month to treat a single patient in the final stages of life.

Japan Learned to Love Deflation in Wage Malaise Facing BOJ - A decade and a half after Japan slumped into deflation, the central bank is set to signal its strongest effort yet to reverse the trend. The biggest challenge may be that the nation has come to rely on falling prices. More than 80 percent of respondents in a Bank of Japan survey released this month who noticed rising prices last year said it was bad. More than a third of those who said prices fell were happy about it. Even so, the BOJ next week will adopt the government’s desired 2 percent inflation target, according to 21 of 23 economists surveyed by Bloomberg News.  Japan last had 2 percent annual inflation in 1997, when Toyota Motor Corp. unveiled the Prius hybrid and the yen sank as as low as 130 per dollar. Prices have fallen in 10 of 15 years since, according to data compiled by Bloomberg.  While deflation helps savers, younger generations are hit by stagnant wages and diminished incentives for borrowing.

Japanese PM Shinzo Abe hails 'monetary regime change' -Japan's prime minister Shinzo Abe declared a "monetary regime change" on Tuesday as the central bank bowed to government pressure, setting a 2pc inflation target aimed at helping the country emerge from its prolonged bout of deflation. "This opens a passageway toward bold monetary easing," Mr Abe told reporters after the Bank of Japan (BoJ) and government jointly announced the inflation target and plans for "open-ended" central bank asset purchases similar to the strategy followed by the US Federal Reserve. Bank of Japan governor Masaaki Shirakawa vowed to achieve the inflation benchmark "as soon as possible," but said that bold efforts were also needed from the government in order to achieve the target. Mr Shirakawa told a news conference that the two BoJ board members, Takehiro Sato and Takahide Kiuchi, who dissented on setting the 2pc target argued that it far exceeded the pace of price growth that could be deemed sustainable in Japan, and that efforts must first be made to boost Japan's growth potential. He also said that the Japanese government understood and had incentives to respect the bank's independence.

Yen Set for 11th Weekly Drop as CPI Adds to Easing Case - The yen headed for a record stretch of weekly losses against the dollar as data showing a decline in Japanese consumer prices added to the case for further monetary stimulus from the central bank.  The Bank of Japan (8301) announced open-ended easing and a 2 percent inflation target this week. The Japanese currency remained weaker after touching a 2 1/2-year low as Governor Masaaki Shirakawa said he will make “considerable efforts” to reach the price target. The Dollar Index rose before U.S. data forecast to show home sales increased. “The market’s looking for any excuse to sell the yen at the moment,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk management company. “The weakness in the yen has got quite a long way to go. It’s very hard to find economic fundamentals that justify buying the currency.”  The Japanese currency slid 0.2 percent to 90.55 per dollar at 6:39 a.m. in London from yesterday, after earlier touching 90.69, the weakest since June 21, 2010. It was set for an 11th weekly loss, the longest losing streak in data compiled by Bloomberg going back to 1971.

BOJ’s New Easing Could Be Mixed Blessing for Rest of Asia - The Bank of Japan‘s more stimulatory stance could be a mixed blessing for Asia, potentially providing productive investment flows into the region but also providing fuel for future asset and debt bubbles. Under immense pressure from the government, Japan’s central bank pledged Tuesday to keep an extremely loose policy stance for as long as necessary to meet a new 2% inflation target, which replaces its looser “goal” of a 1% rise in prices. The BOJ also will increase its asset purchases by a net 10 trillion yen ($112 billion) in 2014, on top of the Y101 trillion in assets it’s expected to have purchased by the end of 2013. Combined with massive quantitative easing programs by the U.S. Federal Reserve Board and the Bank of England, and set against a backdrop of historically low interest rates in developed countries, the BOJ decision highlights the magnitude of potential capital flows into emerging Asia.

Welcome to the global currency war- Mark your calendars. Today is the day the global currency war broke out into the open. This after the Bank of Japan announced it would ramp up its monetary policy stimulus efforts -- on an unlimited basis -- until it achieves a 2% inflation target. Now, all three major central banks have committed to open ended easing. As central banks ramp up one last time, the end game for all this -- given the fiscal austerity, budget fights, and policy turmoil just ahead -- is higher inflation combined with economic stagnation. This is the dreaded "stagflation" outcome that is the bane of central bankers, especially the aggressive, overconfident ones that are in charge right now. Here's why. Russian officials warned that other countries may follow Japan's efforts to weaken the yen -- something that reverberated after the outgoing head of the Eurogroup of finance ministers and the Prime Minister of Luxembourg said the euro was "dangerously high." Officials and Norway and Sweden also expressed concern. Other officials, from the head of the Bank of England to policymakers in Korea and Australia, have all recently voiced their concern about what's happening. It's no wonder that export-oriented German factories are suffering from a drop in output.

Don’t worry about currency wars - Bundesbank president Jens Weidmann gave a speech yesterday in which he warned of “increased politicisation of exchange rates” and a potential “devaluation competition” between currency zones. The speech was timely: it came as the Bank of Japan doubled its inflation target to 2%, adding fuel to the strong trend of the past six months, where the euro has been appreciating while the yen has been getting significantly weaker. It’s easy to see what Weidmann is worried about here: according to UniCredit economist Marco Valli, a 10% rise in the euro’s value will reduce eurozone GDP growth by 0.8%. On top of that, Weidmann is certainly right that the Bank of Japan has become increasingly politicized, and it’s less independent than it used to be. But it’s worth having a bit of perspective, here. Firstly the euro is still much more competitive, against the yen, than it was before the crisis. Here’s the five-year chart, which shows that if there’s any competitive devaluing going on, then Europe did it first.

Currency war talk’s overblown: IMF chief economist - Talk of a global currency war in the wake of the Bank of Japan’s new policy steps is inappropriate, the chief economist of the International Monetary Fund said Wednesday. The Bank of Japan’s recent decision to commit to open-ended asset purchases has led to renewed talk of “beggar thy neighbor” currency policies. The Japanese yen has been in retreat of late, losing ground to both the U.S. dollar  and the euro. Asked for comment, the IMF’s Olivier Blanchard replied: “This increasing talk of currency wars is very much overblown.” See related MarketWatch blog re comments by the chief of Germany’s Bundesbank. Countries must adopt the right measures to ensure their own economies get back to health, and if the IMF thinks the policies are appropriate, then the exchange-rate implications have been taken under consideration, Blanchard said. There has been “no sea change” in capital flows to emerging markets as the biggest global economies try to recover, he noted.

Beggar Thy Currency Or Thy Self? - Mohamed El-Erian - Not many countries nowadays seek a strong exchange rate; a few, including systemically important ones, are already actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy. Japan is the latest country to say enough is enough. Having seen its currency appreciate dramatically in recent years, Prime Minister Shinzo Abe’s new government is taking steps to alter the country’s exchange-rate dynamic – and is succeeding. In just over two months, the yen has weakened by more than 10% against the dollar and close to 20% against the euro. European leaders have already expressed reservations about Japan’s moves. The US auto industry is up in arms. And, a few days ago, Jens Weidmann, the president of the Bundesbank, publicly warned that the world risks a harmful and ultimately futile round of competitive exchange-rate depreciations – or, more bluntly, a “currency war” (a term used previously by Brazil to express similar concerns). Of course, Japan is not the first country to go down this path. Several advanced and emerging economies preceded it, and I suspect that quite a few will follow it.

Weidmann warns of currency war risk - The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany’s Bundesbank warned on Monday. Jens Weidmann, whose institution’s own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was “perhaps right” in forecasting an end to the era of central bank independence. “It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” Mr Weidmann said in a speech in Frankfurt. “Whether intended or not, one consequence could be the increased politicisation of the exchange rate,” he said, according to a text of his speech provided by the Bundesbank. “Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.” Both the Bundesbank and later the ECB were founded on mandates that gave them wide powers and freedom from political interference in return for focusing solely on keeping inflation in check. Some observers argue that the ECB now faces a challenge if other central banks ditch their own inflation targets and act to lower exchange rates against the euro, making exports from the embattled eurozone economies less competitive.

Central bankers should be brought to heel by elected parliaments - Intellectual fashion is changing. Central bankers around the world no longer command the charisma of a high priesthood. Nor should they after stoking a global bubble and then tightening just as the money supply was collapsing in mid-2008. The onus is falling on them to justify why monetary independence is self-evidently a good thing, and why central bankers should operate beyond democratic control. The humbling of the Bank of Japan (BoJ) this week is just the start, as Bundesbank chief Jens Weidmann warned. “It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” he said. One could say that “alarming infringements” are in the eye of the beholder. The European Central Bank that he serves is itself a political operator of unbounded power.

Central Bank Independence - Two articles on today’s Financial Times  puzzle me. The first (Weidmann warns of currency war risk) offers yet another example of how economic analysis sometimes leaves the way to ideological beliefs. The Bundesbank’s president argues (as he already did in the past) that giving up inflation targeting hampers central bank independence. How? Why? He does not bother explaining. What I think he has in mind is that once the objective of the central bank goes beyond strict inflation targeting, monetary policy needs an arbitrage between often conflicting objectives (typically unemployment and inflation). It is the essence of the dual mandate. This of course moves monetary policy out of the realm of technocratic choice, and makes it a political institution. There seems to be an inherent confusion in Weidmann, and in many others, between policy coordination and the subjugation of central banks to dreadful, intrinsically vicious governments. To simplify things, central banks cannot, with the monetary instrument alone, reach two objectives (a trivial instrument assignment problem). Thus, monetary policy should be coordinated with fiscal policy in order to obtain both price stability and unemployment reduction. Does this mean that the central bank and the government should be the same? Does it even mean that they should give equal weight to inflation and unemployment? I really cannot see any reason why it should. Abandoning pure inflation targeting would simply imply for central bankers to step off their ivory tower, and engage in joint policy making with the government. This is what happens in the United States, where the Fed and the treasury cooperate and coordinate in order to minimize unemployment and inflation. Sometimes they succeed, sometimes they don’t, but certainly nobody would argue that the Fed is not independent.

Denial, panic and doubt in Davos -- Davos has been through some violent mood swings these past five years. First there was denial. Then there was panic. Then there was hope that the worst was over. Now there is nagging concern that this downturn simply won't come to an end. Each year the consultancy firm PwC conducts a survey of the great and good of the business world. The message this year is that the improvement in sentiment seen in 2011 and 2012 has stalled. As far as business confidence is concerned there is a global double-dip recession. It's not hard to see why. Everywhere executives look there are problems: real or prospective. In Europe, it is the impact of austerity programmes on growth and the frightening levels of joblessness. In India, it is inflation. In the United States, it is the fiscal cliff. In Japan, it is the prospect of a global currency war triggered by Tokyo's attempts to drive down the value of the yen. David Cameron has done his bit to add to the uncertain mood. Announcing that Britain will have an in-out referendum on membership of the European Union in 2017 ensures four years in which foreign companies will be hesitant about investing in Britain.

Davos aka Banksters, politicians, CEOs party and plot our demise - The concept of Davos is fantastic. Party at taxpayer expense, drink, surround yourself with sycophants of all ranks (including CNBS), and plot the demise of the average citizen in countries across the globe at a supranational level. And if anyone dares state the obvious that people really should listen to their own citizens and shareholders and taxpayers and not plan the demise of those very same groups while partying with people that don't have any allegiance to us, such "troublemakers" are labeled "conspiracy nuts."A sane person must ask how is this even possible without these elitist criminals being fired or arrested? Selling out one's own citizens used to be labeled treason. Screwing up corporate deals and books and bets in the tens of millions of dollars (let alone tens of billions) used to be grounds for being fired and indicted for fraud, convicted, and sued into oblivious at the same time. And yet we, the taxpayer, through the FDIC and pensions and taxpayers funds (including TARP) are paying for these shindigs? According to CNN, "the World Economic Forum brings together business, political and intellectual leaders of society." Oh really? Something tells me we could find the same caliber of leaders in any maximum security prison, and those people would have more integrity than the Davos crew, but the inmates just didn't have the right connections to escape justice or get an invite.

Why the World Economic Forum and Goldman Sachs are Capitalism’s Worst Enemies Bill Black: It is fitting that Goldman Sachs is the recipient of this year’s “Public Eye” designation, but it is even more fitting that it is being announced during the World Economic Forum (WEF) at Davos. Goldman Sachs exemplifies the travesty that WEF has created. It is not the worst of the worst. It is representative of the financial world of systemically dangerous institutions (SDIs) that are spreading crony capitalism through the West. The SDIs are the so-called “too big to fail (or prosecute)” banks.The ability of the SDIs to commit fraud with impunity from the criminal laws is a defining element of crony capitalism. The impunity and implicit national subsidies to SDIs combine to make “free markets” an oxymoron. The SDIs’ economic power translates easily into dominant political power. Crony capitalism cripples markets and democracy. The ability of the SDIs’ senior officers to commit massive frauds with impunity from the criminal laws makes “control fraud” a “sure thing.” Control fraud will make the largest banks’ senior officers exceptionally wealthy very quickly – but it will also cause severe harm to the public (and often the bank). Control fraud occurs when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” It is important to remember, however, that other forms of control fraud maim and kill hundreds of thousands and cause grave environmental damage. We must always remember the infant formula scandal in China where 300,000 infants were hospitalized with kidney stones due to consumer frauds that drove every honest manufacturer out of business.

Lagarde: Women promoted to ‘basket case’ jobs - Women are often promoted to jobs at organisations which have become a “lost cause”, according to Christine Lagarde, the managing director of the International Monetary Fund. Her warning will add to concerns that women frequently face what has been called the “glass cliff”, where they are seen as more likely than men to be promoted to riskier leadership roles - which are trickier to survive. However, Ms Lagarde struck a more optimistic note on the likely outcome. “Women generally get the job when it’s … a basket case, a lost cause - and they turn it around,” she said. She held back from making any mention of her own appointment to head the global lender and watchdog, at a time when the world economy is mired in crises. The French-born lawyer was speaking at a session at the World Economic Forum’s annual meeting, where she argued the economic case for increasing women’s participation in work.

Girls and women 'hit the hardest' by global recession - Women and girls were hit the hardest by the global recession, according to child rights and development organisations. "The world is failing girls and women," a report by Plan International and the Overseas Development Institute said. A shrinking economy sent girls' infant mortality soaring, and more females were abused or starved, they said. This could erode gains made in recent years towards reaching the Millennium Development Goals, they added. "The improvements made during the last five years are very fragile," Nigel Chapman, chief executive of child rights organisation Plan International, told BBC News. "It is shocking, because I don't think anyone's really noticing it."

U.N. Agency Warns of Rising Unemployment -  More than 197 million people worldwide are jobless, and an additional 39 million have simply given up looking for work, a United Nations agency said on Monday, warning that government budget-balancing was hurting employment and would probably lead to more job losses soon. Enlarge This Image Luca Bruno/Associated Press Perusing job postings in Milan. More than 197 million people worldwide are unemployed. With global growth stalling five years after the financial crisis upended much of the world economy, the number of jobless is expected to rise by 5.1 million this year, to more than 202 million, the International Labor Organization said in a special report. And it predicted there would be a further three million newly jobless people next year. High unemployment rates in the developed world — 7.8 percent in the United States, 11.8 percent in the euro zone — weigh on demand and hold back economic growth. Global gross domestic product will probably expand about 3.6 percent this year, the International Monetary Fund said in October, below its previous forecast.The International Labor Organization found that macroeconomic imbalances “have been passed on to the labor market to a significant degree.” With aggregate demand weakening, employment “has been further hit by fiscal austerity programs in a number of countries, which often involved direct cutbacks in employment and wages, directly impacting labor markets.” More troubling, it said, was that while governments had sought to counter the effects of the financial crisis with fiscal stimulus, later austerity measures in some countries appeared to be reinforcing the downturn.

Grim outlook for global unemployment - - The global jobless queue will stretch to more than 200m people this year, the International Labour Organization said in its annual report on Tuesday, repeating a warning it has made at the start of each of the last six years. The UN jobs watchdog estimates unemployment will rise by 5.1m this year to more than 202m, and by another 3m in 2014, following a rise of 4.2m in 2012. If those predictions are right, global unemployment will hit a record. But the ILO has revised its jobless figures down each year as the number of those giving up the job hunt altogether swells, meaning they are no longer classed as unemployed. A Reuters analysis of previous ILO reports shows that estimates of unemployment made in each of the last six years have subsequently been cut. The original 2007 joblessness figure of 189.9m is now put at 169m – 11 per cent lower. Figures for 2008-2010 have also fallen by 10-15m from the original estimates. Most of the drop is due to people giving up looking for work, said Jose Manuel Salazar-Xirinachs, head of director of labour market analysis at the Geneva-based ILO. “These are people who, because of the seriousness of the crisis, because of long-term unemployment, have given up hope, have decided to not search for work any more, and therefore they are not counted as unemployed but more as discouraged,” he said.

Global Unemployment Expected To Surpass 200 Million - After dropping for the past two years, global unemployment is on the rise again according to the International Labor Organization, a UN jobs watchdog. 2013 is expected to top 200 million unemployed for the first time with the epicenter in the advanced economies as 28 million jobs have been lost since the onset of the crisis. Critically, for the globalists, they unsurprisingly note that macro imbalances have been passed on to the labor market to a significant degree. Moreover, some 39 million 'discouraged' people have dropped out of the labor market as job prospects proved unattainable, opening a 67 million global jobs gap since 2007. However, regions that have managed to prevent a further increase in unemployment have experienced a worsening in job quality, as vulnerable employment and the number of workers living below or very near the poverty line increased. "These are people who,... have given up hope, ...and therefore they are not counted as unemployed but more as discouraged."

Wealth-Income Ratios in the Long Run - Thomas Piketty and Gabriel Zucman have been building up an intriguing set of estimates of wealth/income ratios, both over time and across countries. The U.S. wealth/income measures look quite mainstream by European standards, both in the last few decades and when looking back to 1870. The graphs that follow are from an October 2012 presentation called  "Capital is Back:Wealth-Income Ratios in Rich Countries 1870-2010." .  For starters, here's the wealth/income ratio for nine countries from 1970-2010. To help make sense of the graph, let's pick out a few of the countries. The line that peaks far above other countries in the middle of the figure, at around 700% in 1990, is Japan at the height of its stock market and property bubble. The country with the highest wealth/income level in 2010 was Spain, presumably driven by a property-market price bubble in that country. The line of black squares, marching higher in recent years, is Italy. In short, a high wealth/income ratio can be a danger signal of possible bubbles in asset markets. Meanwhile, fundamentally healthy economies like Germany (dark triangles) and Canada (light triangles) have seen a rise in wealth/income ratios, but are at the bottom of the range of this group of countries. The U.S. (hollow triangles) is in the middle of the pack. If you look closely, you can see a rise in the U.S. wealth/income ratio in the late 1990s for the dot-com bubble, and again in the mid-2000s for the housing price bubble, but the 2010 value for the U.S. is near the bottom of the range.

Global Shipbuilding Outlook – 45% of Shipyards Have No Orders Post 2012  - Global shipbuilding industry has been going through a downturn for the last four years. The downturn has been felt more in the commercial shipbuilding industry where demand tends to be driven by fixed asset investments and growth in global trade. Global commercial ship orders were down 48% YoY in the first nine months of 2012 and order backlog fell to half of the level in first half of 2008. At this point all lead sector indicators such as freight rates, ship prices, used ship transactions, and used ship prices suggest that commercial shipbuilding demand is unlikely to recover much in 2013 as the sector continues to suffer from oversupply, a weak financing market, and low freight rates. Nevertheless, strength in selective segments such as LNG and offshore should continue to support order flow at big Korean yards although a sustained recovery might take some more time. Ship prices have fallen 35-40% from the peak and the Clarkson newbuilding price index (down 8% this year) is now back to levels seen in early 2004. The continued weakness in freight rates, financial markets, declining ship prices, and expectations of further fuel efficiency improvements for “ecoships” have customers waiting on the sidelines as far as placing new orders is concerned. By ship type we expect demand for tankers and bulk carriers to take 1-2 years to show a meaningful recovery whereas containerships and LNG carriers, where demand and supply balance is slightly more favorable, could see modest recovery in 2013.

The Strange Case Of Diverging Spanish Exports And What It Means For Europe - As we have been warning for over half a year, and as conventional wisdom has finally caught on, the economy most impacted in Europe by the recent surge in the EUR exchange rate (not because of an improvement in the economy but due to wholesale engineering of asset prices by central banks) is the one that has so far been able to keep it all together - Germany, the same country where Angela Merkel last night suffered an embarrassing last minute loss which may be a harbinger of things to come should Germany slide deeper into recession. This, as also noted repeatedly before, is part of the grand paradox in Europe: unlike every other central bank in the world, the ECB's interventions achieve only one thing: to push the EUR higher, in the process stabilizing secondary market indicators (bond prices, the DAX, swap spreads) but destabilizing EUR-denominated exports. And while the adverse impact on core exporting countries from ECB intervention is by know understood by everyone (and this is ignoring the impact of potential inflation as a result of fund flows to the few safe regions in Europe), few appreciate just how big the EUR impact on the periphery is as well. The chart below from the Spanish economy ministry showing the recent stunning divergence of Spanish exports, should explain why a low EUR is good for not only Germany, but certainly the PIIGS, in this case Spain. And vice versa.

Spain's Banking Unions Announce Strikes - Workers at three of Spain's bailed-out banks will stage strikes in coming weeks as they fight mass layoffs, unions said on Monday, spreading industrial unrest to a sector where walkouts have so far been rare. While the banks, crippled by a property bubble that burst five years ago, have hogged headlines, employees have so far mostly kept a low profile even as protests become a way of life elsewhere in Spain. But about 20,000 layoffs planned for 2013, almost 10 percent of the total, could reduce the workforce to levels last seen in 1975, data from the unions showed. Alarmed at the scale of cuts, employees from across the industry will demonstrate on January 23, while workers from Bankia, Banco de Valencia and NovaGalicia Banco will strike on February 6 and hold partial strikes before then. Protests are snowballing and becoming more visible, as bankers take to the street and join judges, doctors, bus drivers and garbage workers as strikes become almost a daily occurrence across recession-bound Spain.

Ex-treasurer of Spain's PP had €22m in Swiss bank - The Irish Times -The beleaguered government of Mariano Rajoy has been embarrassed by revelations that its party’s former treasurer had a bank account in Switzerland containing up to €22 million. Luis Bárcenas held the treasury post in the conservative Partido Popular (PP) from 2008 until 2009, when he resigned because of an investigation into his part in a massive fraud network. He stepped down from the party in 2010. The inquiry into that case continues and information a Spanish judge has requested from Swiss authorities shows details of an account held under the politician’s name which coincides with the time he was managing the PP’s finances. The data shows Mr Bárcenas kept an average of €15 million in the account, which was open between 2005 and 2009. In 2007 it contained just over €22 million. The PP’s deputy leader, María Dolores de Cospedal, hinted yesterday at the concern within the party’s leadership. “Of course this will cause outrage, how can it not? I’m outraged by it,” she said. However, she sought to distant the government from Mr Bárcenas by highlighting that he was no longer in the PP.

Former PP treasurer “handed out envelopes with cash” to party officials - Despite strenuous efforts by the ruling Popular Party (PP) to distance itself from Luis Bárcenas, who is in trouble with the law over corruption allegations, the party’s former treasurer continues to maintain an office in the PP headquarters in Madrid even after having left the group, party sources said Friday.Bárcenas is implicated in the Gürtel kickbacks-for-contracts scandal, which first broke in 2008. Under an ongoing investigation into the corruption ring, it emerged earlier this week that Bárcenas had a bank account in Switzerland in which he had deposited as much as 22 million euros. He also took advantage of a tax amnesty in place last year to declare 10 million euros, which had previously been kept hidden from the tax authorities. The PP sources said that despite stepping down as a senator and leaving the party in April 2010, Bárcenas has continued to appear in its Madrid headquarters, seeking help from PP officials to find a solution to the legal quagmire in which he finds himself. He was last seen in the building – located in Génova Street in the center of Madrid – as recently as Wednesday of this week.Bárcenas, who was treasurer of the PP for 20 years, faces possible charges of money-laundering and tax evasion.

Party accounts scandal rocks Spanish PM - Mariano Rajoy, Spain’s prime minister, has ordered an investigation into his own party’s accounts as he scrambles to distance himself from allegations that its former treasurer presided over a system of paying cash kickbacks to top officials. Spain’s ruling Popular party has been rocked by the allegations of cash payments to party members, which follow prosecutors revealing that Luis Bárcenas, former treasurer of the party, amassed a fortune of as much as €22m in a Swiss bank account, prompting protests outside the PP’s central Madrid headquarters. The escalating scandal threatens to damage the credibility of the Rajoy government at a time when it is pushing through a series of swingeing public spending cuts as unemployment stands at 25 per cent, and anger mounts at successive corruption cases within Spain’s political and business elite. A recent poll conducted for the El País newspaper found 96 per cent of Spaniards believed political corruption in the country was “very high”.

Socialist Party to lodge criminal complaint over illicit PP bonuses - Socialist Party leader Alfredo Pérez Rubalcaba announced on Sunday that his opposition group will file a criminal complaint before the High Court asking for an investigation into the alleged payments of bonuses from secret accounts held by the Popular Party (PP) to its officials. In the wake of the discovery that the PP’s former treasurer, Luis Bárcenas, had 22 million euros in a Swiss account, Rubalcaba also said that he will call for a parliamentary investigation into the matter and demanded that both Prime Minister Mariano Rajoy and Finance Minister Cristóbal Montoro appear before Congress. For her part, PP secretary general María Dolores de Cospedal on Sunday went on the counterattack against the Socialists, saying that many past politicians in Castilla-La Mancha, when it was governed by the opposition party, made a lot of money then. The scandal inside the party is expected to come to a head on Monday when Rajoy presides over the PP national executive committee meeting.

Bank of Spain Says Recession Deepened After Latest Cuts - Spain’s recession deepened in the last quarter of 2012 after Prime Minister Mariano Rajoy’s government approved its fifth austerity package in a year to reduce the second-largest budget deficit in the euro area. Gross domestic product shrank for a sixth quarter, contracting 0.6 percent from the previous three months, when it slipped 0.3 percent, the Bank of Spain said in an estimate in its monthly bulletin today. Fourth-quarter GDP matched the median forecast in a Bloomberg News survey of 26 economists. Output may have contracted 1.3 percent in 2012 as budget cuts weighed on economic activity, the Madrid-based Bank of Spain said. While it’s not yet clear if Spain will meet its 2012 deficit target set by the European Union, satisfying this year’s goal “will require a very ambitious additional fiscal effort from the central government and the regions,” it said.

Spanish Q4 GDP Declines At Fastest Pace Since 2009 - With the most recent Spanish economic data in retail sales, house prices, manufacturing, and bad loans all confirming depression-level activity, or lack thereof, there was just two major metrics still missing: GDP and employment. Today we got Q4 GDP, which declined 1.7% Y/Y, and 0.6% from Q3. This was the worst year over year deterioration in the overall economy since Q4 2009 when the country was reeling from the Lehman bankruptcy global aftershock. We just need to get the unemployment number, which will be well north of 26%, for the picture of how the country with the ECB-backstopped and thus soaring bond curve is truly doing.

Spain’s Lost Generation Spends Salad Days Toiling in U.K. - Carlos Hernandez Sonseca studied six years for a bachelor’s degree and couldn’t find a job near his home outside Madrid when he graduated in 2011. Last year, he took an increasingly well-worn path to the U.K. The 27-year-old journalist now washes and chops vegetables eight hours a day at the Vital Ingredient salad bar in London’s financial district, making 260 pounds ($418) before taxes in a 40-hour week. Thirteen other Spaniards are among a workforce of 17, said manager Francisco “Chico” Baumle, a Brazilian. U.K. fast-food jobs and other low-wage roles have been dominated by Poles and others who arrived after the European Union expanded eastward in 2004. Now they’re joined by young Spaniards who can’t find work at home, where unemployment hit 25 percent last year. In the financial year to April, 30,370 Spaniards registered to work in the U.K., up 25 percent from the previous year, and more than double the 2009-10 levels, according to data from the Department for Work and Pensions. “We are a lost generation, for sure,” Hernandez Sonseca said. “Spain has nothing to offer us, so we go abroad and we work as salad makers and kitchen porters. They are losing money and they are losing skilled people.”

Spain's Catalonia misses 2012 public deficit target -  Catalonia posted Tuesday a 2012 public deficit equal to 2.3 percent of its gross domestic product, surpassing the 1.5 percent target set by Madrid for Spain's 17 autonomous regions. The slippage puts at risk the 2012 deficit target the whole country agreed with its European partners. Spain, the fourth largest economy in the euro zone, was supposed to keep the 2012 figure to within 6.3 percent of gross domestic product. The government of Catalonia, which manages an economy as large as Portugals and is responsible for healthcare and education, has imposed sharp spending cuts to social services to rein in its public deficit. The industrialised northeastern region reduced its spending by 7.2 percent in 2012 over the previous year if interest payments on its massive debt pile are excluded, the Catalan government said in a statement. Catalonia, whose capital is Barcelona, paid 1.732 billion euros on debt interest payments last year, a 16.5 percent rise over the previous year.

IMF sees up to 9.5-billion euro Greek funding gap - The International Monetary Fund has estimated that Greece faced a financing gap of between 5.5-billion and 9.5-billion euros for 2015 and 2016 and said it had assurances from Europe it would deliver the aid in the final years of the bailout. It was the first time the IMF had estimated a range of possible financing needs for Greece's international bailout program beyond 2014. The European Commission said in December the money needed for Greece over the twoyear period encompassing 2015 and 2016 would amount to 5.6-billion euros. Greece, the epicenter of the European debt crisis, has received tens of billions of euros in emergency loans from its euro zone partners and the IMF since mid-2010 to stave off bankruptcy. Its economy is likely to shrink for the sixth consecutive year in 2013.

Is There a Big Inflation Mystery in Greece?, by Tim Duy: Tyler Cowen confuses me: The rates of price inflation in Greece have been running in the range of 0.8% to 2%...It’s funny how many people pretend to understand what is going on here. If Greece were seeing a stronger bout of price deflation, the situation would be much clearer. This seems to me to be a case of trying to find a problem where none exists. Greece consumer prices excluding energy: What part of the deflation is not clear? Seems like any inflation is being driven by energy costs: So what going on in the energy sector? Stories like this: Greeks cutting back on household expenses are turning from oil to wood to heat their homes, but in turn are filling the night air with potentially hazardous pollutants, health care officials have warned.The coalition government, under pressure from the EU-IMF-ECB Troika to impose more austerity measures, has pushed the price of heating oil to about 1.50 euros per litre by raising the tax on heating oil by 40 percent. Besides being a revenue-raiser, the government said the tax was meant to deter people from putting the oil in their cars instead of more expensive diesel.

New pay cuts trigger transport strikes in Greece, protesters defy court order to resume work - Striking subway workers in Athens defied a court order to return to their jobs and continued their protest for a sixth day on Tuesday, as demonstrations against new pay cuts escalated in the Greek capital. Traffic slowed to a crawl along the city's main streets as workers at the state-run city bus, trolley and tram systems joined the subway strike with four- and five-hour work stoppages. Monday night's court ruling against the metro workers' union, declaring their strike illegal, allows the government to activate emergency powers to force the strikers back to work. But the union would not back down, and said it would continue to strike on Wednesday. The workers have been protesting a change to the public sector's pay scales by the cash-strapped government which effectively results in new salary cuts for many

Greece to Use Emergency Decree Order to Stop Athens Metro Strike - Greece’s government will invoke emergency powers to order striking public-transit workers in Athens back to work, Development Minister Kostis Hatzidakis said. The city’s metro was shut for an eighth day today as workers continued a strike, declared illegal by a Greek court on Jan. 21, to protest changes that would align their pay structure with that of other public employees. Athens bus and light-rail workers also held work stoppages in the past week. “Neither the government nor society can be held hostage by unionists,” Hatzidakis said in comments broadcast by state-run NET TV after a meeting with Prime Minister Antonis Samaras. The government had no other option than to proceed with the decree after transit workers decided “repeatedly not to respect the absolutely clear decisions by the Greek justice system.”

Athens' striking subway workers defy court order   — Striking subway workers in Athens defied a court order to return to their jobs and continued their protest for a sixth day on Tuesday, as demonstrations against new pay cuts escalated in the Greek capital. Traffic slowed to a crawl along the city's main streets as workers at the state-run city bus, trolley and tram systems joined the subway strike with four- and five-hour work stoppages. Monday night's court ruling against the metro workers' union, declaring their strike illegal, allows the government to activate emergency powers to force the strikers back to work.But the union would not back down, and said it would continue to strike on Wednesday.The workers have been protesting a change to the public sector's pay scales by the cash-strapped government which effectively results in new salary cuts for many.

Greece Law-and-Order Problem Escalates; Bomb Explodes at Athens Mall; AK-47 Shots Hit Ruling Party Headquarters; Worst Not Over - Since December, radical groups staged coordinated arson attacks at the homes of five Greek journalists and fire-bombed the brother of a government spokesman. Six days ago, nine shots hit the New Democracy part office, one of them in an office occasionally used by Prime Minister Antonis Samaras. In a disturbing trend of increasing violence, a Bomb exploded at Athens mall earlier today.  “This homemade bomb did not only target a specific building. It took aim at democratic stability, social peace and prospects for economic recovery,” the citizens’ protection ministry said in a statement reflecting concerns that the same self-styled anarchist and far-left groups, held responsible for violence at anti-bailout demonstrations, were behind the latest wave of attacks.The Wall Street Journal reports Shots Hit Offices of Ruling Party in Athens Unidentified gunmen fired shots at the offices of Greece's ruling conservative party early Monday, police said. One of the shots fired, from a semiautomatic rifle, pierced the window of an office occasionally used by Prime Minister Antonis Samaras, head of the center-right New Democracy party.

Racing To The Revolution: Spain Vs Greek Youth Unemployment -- Spanish and Greek youth unemployment surged to yet another new record as joblessness among the under-25 cohort is now above 55% for both of these troubled nations. "We haven't seen the bottom yet," one analyst notes as the BBC notes that the youth unemployment in these nations is more than double the euro-area average. As we have noted many times, this ludicrous state of affairs (in nations that proclaim the worst is past) is by far the most-concerning for European stability. Even Frau Merkel opined this morning in Davos that:  Yet, there is nothing being done. Across the 27-nation bloc, there are 5.8 million people aged under-25 that remain long-term unemployed. This has always and forever led to extreme events and social unrest, as we warned here (must read). As the year warms up, which nation will 'spring' first?

Monti is not the right man to lead Italy - The financial crisis has faded in Italy but the economic crisis has been growing. There has hardly been a day without news of the credit crunch worsening, and a fall in employment, consumption, production and business confidence. Once again, a European government has misjudged the predictable impact of austerity. Having shown almost no growth for a decade, the Italian economy is lingering in a long and deep recession. Like the other countries on the eurozone’s southern rim, Italy faces three options. The first is to stay in the euro and take on alone the burden of full adjustment. By this I mean both economic adjustment, in terms of unit labour costs and inflation; and fiscal adjustment. The second is to stay in the eurozone, contingent on shared adjustment between creditor and debtor nations. The third is to leave the euro. Successive Italian governments have tried a fourth option – stay in the euro, focus on short-term fiscal adjustment only and wait. Mario Monti, Italy’s prime minister, did not stand up to Angela Merkel. He did not tell the German chancellor that his country’s continued engagement with the single currency would have to depend on a proper banking union with full resolution and deposit insurance capacity; a eurozone bond; and more expansionist economic policies by Berlin. In his interview with the Financial Times last week, Mariano Rajoy, the Spanish prime minister, demanded symmetrical adjustment – again, rather late, since Germany is already planning an austerity budget for 2014. In view of all political decisions already taken, the option of symmetrical adjustment is slowly receding.

Is Italy the next domino? - Something that did however catch my eye was the latest reports from Italy: Istat and the Bank of Italy gave more evidence of how hard the recession is hitting the Italian economy on Monday with reports highlighting big drops in industrial production and business confidence. Istat said production fell 7.6% in November compared to the same month in 2011 and 1% with respect to October. The national statistics agency said the seasonally adjusted figure was the 15th consecutive year-on-year drop in industrial output. It added that production was down 6.6% in the first 11 months of 2012 compared to the same period in 2011. The central bank said business confidence continued to be low, with the number of firms reporting an improvement at the end of 2012 3.8%, half that in September. Some 57.5% said sentiment was down compared to 50.6% in September. The bank of Italy has more: The Bank of Italy slashed its forecast for the country’s shrinking economy on Friday, as tight credit conditions and a gloomy international backdrop darken the domestic outlook ahead of national elections in February.The central bank said it now expects gross domestic product to slump by 1.0 percent this year rather than the 0.2 percent contraction it forecast in July.

Italian PM Under Fire; Italy's 3rd Largest Bank Hid Derivative Losses: ECB Says "Matter for the Italian Authorities" (To Sweep Under the Rug) - When Mario Draghi (now ECB President), had oversight of the Italian bank system as Bank of Italy Governor, the Italian bank Monte dei Paschi di Siena (Italy's third largest bank) hid information on the derivatives transactions between 2006 and 2009.  Mario Draghi ought to be under fire, but he says it's a "Matter for the Italian Authorities". The Mish translation is "It's a Matter for the Italian Authorities, to Sweep Under the Rug".  With that backdrop, let's take a look at the other Super-Mario (Mario Monti) who is Under Fire Over bank CrisisMario Monti, Italy’s prime minister, was forced to offer to recall parliament on Thursday amid questions about his government’s handling of the financial crisis at Monte dei Paschi di Siena and the role of the central bank. Shares in Italy’s third-largest bank by assets, which has requested a second state bailout in four years, have fallen more than 22 per cent in the past few days since revelations five days ago of derivatives transactions that may force the 500-year-old bank to restate hundreds of millions of euros of losses.  Supervision of the struggling institution by the Bank of Italy while Mario Draghi, European Central Bank president, was governor has come under attack as an increasingly fierce political outcry erupts in the run-up to national elections next month.

Monte Paschi Shares Plunge on Derivative Loss Fears - Shares in Banca Monte dei Paschi di Siena, Italy's third-biggest lender, fell more than 5 percent for the second day in a row on Wednesday on worries of mounting losses on some financial derivative positions which it took in 2008 and 2009. The price had already dropped 5.7 percent on Tuesday after reports that it is expected to book a loss of at least 220 million euros ($292 million) on one particular derivatives deal related to its debt holdings done three years ago. That deal, called Alexandria and designed by Japanese bank Nomura, is one of several troubled structured transactions the bank is reviewing to assess their impact on its accounts, Monte dei Paschi said on Tuesday. At least one other derivative trade, a 2008 deal with Deutsche Bank, is also thought to be under scrutiny, analysts and banking sources say.

Counterparties: The fruits of piety - The world’s oldest bank is facing a very modern problem: almost $1 billion in derivatives losses which have only recently been discovered by management. Monte dei Paschi di Siena (or Mountain of Piety of Siena, and MPS for short), founded in 1472 and Italy’s third-largest lender, says it may lose a total of $956 million on three derivatives trades. The trades, put on between 2006 and 2009, were referred to as “Alexandria”, “Santorini”, and “Nota Italia”. Reuters’ Silvia Aloisi and Stephen Jewkes report that Alexandria was closed out in 2012, while the Santorini trade was liquidated in 2009. The Nota Italia trade was restructured and remains open. If you want to  understand the Santorini deal, the place to go is this Bloomberg story, by Elisa Martinuzzi and Nick Dunbar; it seems to have started with a complex equity derivative, and snowballed from there.MPS received a $2.5 billion bailout last June. Now it is likely to request an additional $5.2 billion in state-backed bonds next week to shore up its capital position. The political fallout from the disclosure of the losses has been quick: the current head of the Italian banking association, a former MPS executive, has resigned. Italian prime minister Mario Monti is being sharply criticized — as is ECB chief Mario Draghi, who was responsible for regulating MPS at the time of the trades,  as head of the Bank of Italy. The central bank says that it only found out about the existence of the trades “following the discovery of documents kept hidden from the supervisory authority and brought to light by the new management of MPS”.

Merkel’s Party Loses Lower Saxony Election Even as FDP Surges - German Chancellor Angela Merkel’s party lost control of Lower Saxony state as the Social Democrats and Greens took a single seat majority, buoying the opposition parties eight months before federal elections. The state election director, Ulrike Sachs, said the SPD and Greens took 69 seats in state parliament in Hanover in yesterday’s election, compared with 68 seats for Merkel’s Christian Democrats and the Free Democrats. A surge in support for the FDP, junior coalition partner to Merkel’s party nationally and regionally, wasn’t enough to allow CDU state Prime Minister David McAllister to remain in power. The SPD candidate, Hanover Mayor Stephan Weil, said he can set up a government with the Greens. The Lower Saxony vote is a blow to Merkel as she prepares to seek a third term in national elections in September with the FDP. While her CDU has record poll support nationally, backing for the FDP collapsed shortly into her second term and hasn’t recovered. The result bolsters Merkel’s SPD challenger, Peer Steinbrueck, who needs to exploit the FDP’s weakness if he is to have any hope of deposing Merkel as chancellor.

Defeat in German regional elections dents poll hopes of Merkel and heir - From outside Germany, Angela Merkel has long looked invincible. She has come to symbolise Germany's political scene as Margaret Thatcher once did Britain's. But on Monday morning she saw her centre-right coalition narrowly ousted by the opposition centre-left in a regional election that shifts the balance of power in Germany and could have profound implications for her chances of re-election in September. She told a press conference in Berlin that the result in Lower Saxony was "emotionally difficult" to deal with after the "rollercoaster" expectation that the Christian Democrat and liberal Free Democrat (FDP) coalition led by the half-Scottish David McAllister would narrowly succeed. It is a blow to her hopes for a boost as she fights for a third term in office, and as the 12th consecutive defeat for her party at state level it will give the centre-left a majority in the upper house, allowing the opposition to block major legislation or initiate laws that could make Merkel's life extremely difficult.

E.U. States Get Blessing for Financial Trading Tax - NYT - Eleven euro zone countries won approval on Tuesday for a tax on financial transactions aimed at shifting more responsibility for the region's crisis onto banks despite fears it could drive business out of Europe. European Union finance ministers gave their approval at a meeting in Brussels, allowing the states - Germany and France plus Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia - to pursue the contested scheme. The levy, based on an idea proposed by U.S. economist James Tobin more than 40 years ago but little considered since, is symbolically important in showing that politicians, who have fumbled their way through five years of financial crisis, are getting to grips with the banks often blamed for causing it.

Portugal and Ireland ask eurozone to extend rescue loan dates - Portugal and Ireland have received the support of eurozone finance ministers to extend the life of bailout loans to help them to borrow normally, Irish Finance Minister Michael Noonan said on Tuesday. Meanwhile credit rating agency Standard & Poor's said on Tuesday that it was maintaining its notation for Portugal at speculative investment grade mainly because of uncertainty about the outlook for growth. When Greece's rescue programme was revised last year it had the repayment dates of its loans pushed back, with eurozone officials saying at the time that Ireland and Portugal could also benefit. Portuguese Finance Minister Vitor Gaspar made such a proposal at the meeting of eurozone finance ministers on Monday, which Ireland supported, Noonan said. "We had the approval of the 17" eurozone ministers, he said. They were expected to raise the subject at meeting of all 27 EU finance ministers on Tuesday, and could formally receive the green light in March.

Cyprus’s now-certain default - Many congratulations to Stephen Fidler, who has managed to get some actual news in Davos: EU economics commissioner Olli Rehn went on the record telling him that Cyprus is going to have to restructure its debt — just two weeks after ruling such a thing out. That might come as little surprise, given that Cypriot banks were loaded up to the gills with Greek debt, and Greek debt suffered a 70% haircut. Cyprus is tiny, and could never afford the €17 billion needed to bail out the banks and the government — especially since that would bring the country’s debt load up to more than 140% of GDP. Still, after the EU forced Greece to default, it drew a line in the sand: no more sovereign defaults, it said, since Greece was “unique and exceptional”. So this does go to show that you can’t really trust Europe’s promises. What’s more, Cyprus’s now-certain restructuring is going to be significantly messier than Greece’s was. Greece’s debt restructuring was essentially unstoppable for one main reason: most of its debt was issued under domestic law, rather than foreign law. A tweak to domestic law, and suddenly the vast majority of Greece’s creditors were bailed in to any deal, whether they voted for it or not. Cyprus, in contrast, doesn’t have that luxury: its bonds are mostly issued under foreign law. And that means any restructuring is going to be much more difficult.

Europe on the skids? - chart series - GDP data for 2012 Q4 is scheduled to be released mid-February, here is the schedule. Recent news and notes from the blogs suggests that the German economy has slowed and may continue to do so, promoting fears of a slip back into recession territory. In terms of labor market outcomes, Germany remains the only country significantly above its employment levels compared to the 2008 peak. Spain continues its freefall, while most other countries have climbed back to roughly the same employment level of four years ago. Moreover, unemployment rates in many of the countries (Germany still falling and the U.K. moving sideways) in the EU have begun to drift upwards. While the U.S. had a larger percentage increase in the unemployment rate than any country except Spain over the past 4 years, it has now seen a decline in unemployment rates similar to that of Germany.  Labor force participation rates for most countries have been inching upward. Employment to population ratios have seen very little change for most countries: Germany continues to rise and Spain fall. For  comparison, we include the U.S. in the employment to population rate graph. In this dimension, only Spain has suffered worse than the U.S.–there is not yet much evidence that the employment to population ratio in the U.S. shows signs of improvement.

Yahoo, Dell Swell Netherlands $13 Trillion Tax Haven -  Inside Reindert Dooves’s home, a 17th- century, three-story converted warehouse along the Zaan canal in suburban Amsterdam, a 21st-century Internet giant is avoiding taxes.  The bookkeeper’s home office doubles as the headquarters for a Yahoo! Inc. (YHOO) offshore unit. Through this sun-filled, white- walled room, Yahoo has taken advantage of the law to quietly funnel hundreds of millions of dollars in global profits to island subsidiaries, cutting its worldwide tax bill.  The Yahoo arrangement illustrates that the Netherlands, in the heart of a continent better known for social welfare than corporate welfare, has emerged as one of the most important tax havens for multinational companies. Now, as a deficit-strapped Europe raises retirement ages and taxes on the working class, the Netherlands’ role as a $13 trillion relay station on the global tax-avoiding network is prompting a backlash.  The Dutch Parliament is scheduled to debate the fairness of its tax system today. Lawmakers from several parties, including members of the country’s governing coalition, say they want to remove a stain on the nation’s reputation.

Dutch lawmakers fed up about Netherlands role as a $13 trillion tax haven - Jesse Drucker has another in-depth exposé of the Netherlands' shady role in helping many large multinationals avoid tax, free-riding on the benefits of societies elsewhere and then sticking everyone else with the bill.It's an excellent story, and it's great to see that quite a lot of people in the Netherlands are ashamed of the role their country is playing. "The Netherlands’ role as a $13 trillion relay station on the global tax-avoiding network is prompting a backlash. The Dutch Parliament is scheduled to debate the fairness of its tax system today. Lawmakers from several parties, including members of the country’s governing coalition, say they want to remove a stain on the nation’s reputation. “We should not be a tax haven,” said Ed Groot, a parliament member from the Labour Party, which along with the People’s Party for Freedom and Democracy took power in November. Both ruling parties are “fed up with these so called PO Box companies,” he said. “If they go somewhere else we are not sorry at all because they spoil the name of Holland. Otherwise you can wait for retaliation measures and this we don’t want."

German hope, French despair - Eurozone Flash PMI for January came out overnight and the news was relatively good overall, although it must be noted that contraction continues across the zone. The January flash PMI data suggest that the Eurozone economic downturn has eased at the start of 2013. While official data are likely to confirm that the region contracted at a stronger rate in the final quarter of last year, the outlook has since brightened with January seeing the smallest drop in business activity since last March. “Forward-looking indicators – such as business confidence and the new orders-to-inventory ratio – also suggest that the rate of decline will continue to slow in the coming months, and a return to growth looks to be on the cards during the first half of 2013. So Germany up led by services, but France continues to slide down as austerity bites and everywhere else still deep in the mire but slightly less so:January’s Flash PMI data signal a very disappointing start to 2013 and add to concerns that the French economy is sliding towards recession. Sickly performances from both the manufacturing and service sectors resulted in the steepest drop in overall output for almost four years, while the pace of job losses gathered pace.

Sarkozy's plans 'to dodge new 75% French tax rate by moving to London - Nicolas Sarkozy is preparing to move to London to set up a billion pounds plus investment fund, it was claimed today. If the move goes ahead, the controversial Frenchman will become the latest to escape a potential top tax rate of 75 per cent in his home country. He and his former supermodel third wife Carla Bruni-Sarkozy would be likely to settle in an affluent district like South Kensington – so becoming the most high profile Gallic celebrity couple in the city. But the former president is under investigation for corruption in France, and if he does cross the Channel there will be outrage. Details of the planned move were uncovered during a raid by fraud police on Sarkozy’s Paris mansion last June. It came within weeks of Mr Sarkozy losing his immunity against prosecution after being defeated by Socialist rival Francois Hollande in the May presidential election.

Sarkozy, Under Investigation in France for Fraud, Plans to "Dodge New 75% French Tax Rate by Moving to London and Setting Up £1bn Private Equity Fund" - Had former French president Nicolas Sarkozy won reelection, he certainly would not be under investigation for illegally funding his campaign, nor there would be an investigation regarding his involvement in fraudulent arms sales to Pakistan. Perhaps Sarkozy wants to escape such charges, or perhaps he wants to move for tax reasons, but regardless of why, the latest political scandal is Sarkozy's plans 'to dodge new 75% French tax rate by moving to London with wife Carla and setting up £1bn private equity fund' Nicolas Sarkozy is preparing to move to London to set up a billion pounds plus investment fund, it was claimed today. If the move goes ahead, the controversial Frenchman will become the latest to escape a potential top tax rate of 75 per cent in his home country.. But the former president is under investigation for corruption in France, and if he does cross the Channel there will be outrage. Details of the planned move were uncovered during a raid by fraud police on Sarkozy’s Paris mansion last June.

Cameron to Promise Referendum by 2017 on U.K. Leaving EU - Bloomberg: Prime Minister David Cameron will tomorrow promise a referendum on whether Britain should leave the European Union, allowing U.K. voters to decide on breaking up the 27-nation bloc. Promising to make the case to remain in the EU once he has negotiated a return of some powers to Britain, Cameron will say the democratic consent for the status quo in Europe is “wafer thin.” He will pledge to put the question to a popular vote by the end of 2017, if re-elected in two years. “It is time for the British people to have their say,” Cameron will say in a speech in central London, according to extracts released by his office “It is time to settle this European question in British politics.” Cameron is responding to pressure from lawmakers in his Conservative Party for looser ties with the EU or an outright departure from the political union. European leaders have rejected his calls to renegotiate membership terms. His Liberal Democrat coalition partners and the opposition Labour Party also reject the plans and the U.S. has expressed concern.

Counterparties: David Cameron’s perplexing ploy - David Cameron is definitely up to something. The weird thing is that no one, himself included, seems to know exactly what. The UK Prime Minister promised, today, to give Britons a referendum on their EU membership by 2017 — if his Conservative party gets re-elected. It’s a perplexing ploy for many reasons. The more the anti-Continental UK press talks about a British exit, or Brexit (yes, this is a thing now), the more the public wants to stay in the EU. 40% now favor the status quo, which was established with 67% approval in 1976. That’s up from 30% in November, 2012. Cameron’s own party isn’t fully on board, never a good sign in a parliamentary system, and particularly in one led by a coalition government. The referendum might not even happen: the Tories have to win the next election first, and at the moment Cameron’s party has an approval rating of just 32%. Open Europe Blog has a great round-up of reactions from European politicians, who are blasting Cameron with an array of metaphors. French Foreign Minister Laurent Fabius described Cameron as someone who joined a soccer team, only to decide “let’s play rugby.” Less charitably, former EU trade commissioner Peter Mandelson called the speech “schizophrenic.” And France is ready to just call the UK’s bluff and let them leave. In the end, it’s very likely that Britain is simply bluffing, and all it will have to show from doing so is fewer allies.

ERBS awaits hefty fines for Libor rigging - It sounds like such fun. A Royal Bank of Scotland trader quips "hahaha" in a series of jovial electronic exchanges as he goes about his work. But it will soon become clear that however much fun the trader felt he was having, the repercussions for the bailed-out bank will be anything but when it is hit with a staggering £500m or so in fines for manipulating Libor. Ever since Barclays was fined £290m in June for rigging the benchmark interest rate, Stephen Hester, the RBS chief executive, has been softening the ground for the bailed-out bank to suffer a similar – or worse – humiliation by regulators on both sides on Atlantic. Hester's counterpart at Barclays, Bob Diamond, was forced out within days of the Libor fine being announced in June but the RBS chief executive will be hoping to secure the support of regulators even though the fixing of Libor appears to have carried on for two years after he was parachuted in during October 2008. But top managers at the RBS investment bank, including its chief executive, John Hourican, who it has since emerged was planning to leave after reshaping the business – may quit to take responsibility for the disregard shown for the market even though they are not personally culpable. The head of global trading, Peter Rading – whose controversial redevelopment of his home in London emerged last week – resigned on Friday for personal reasons and although the timing could prove helpful for RBS, there is no suggestion he was involved.

Rate swap scandal: mis-selling bill to top £1.5bn - The cost of compensating businesses for the mis-selling of complex derivative products is to double to more than £1.5bn across the UK's major banks. The Sunday Telegraph can reveal that at least one of the "Big Four" banks – HSBC, Royal Bank of Scotland, Lloyds and Barclays – is poised to increase its provision for the sale of interest rate swaps to small and medium-sized firms by more than twofold. Another of the four is understood to be ready to treble the amount it has set aside for its involvement in the scandal, first revealed by The Sunday Telegraph in March 2012. One senior banking source said he thought that it was possible that all four banks would have to at least double the combined £720m they have so far set aside to cover the cost of swaps mis-selling.

When National Interest and Party Advantage Conflict -  I would not be the first to observe that there is a potential conflict between George Osborne’s role as Chancellor and his deep involvement in Conservative Party election strategy. The fact that this is often said does not mean it is real - it could just be a story told by those commentators who are themselves fixated by the battle between political parties. However there are two major areas where the Conservative part of the coalition government seem to be putting perceived election advantage ahead of prospects for the UK economy: immigration and Europe. Jonathan Portes has clearly described the contradictions between an economic philosophy that stresses the importance of deregulation and a flexible labour market, and tight restrictions on the ability of firms to hire who they want if they happen not to be UK residents. In addition, making it difficult and risky for foreign students to study in the UK directly hits the exports of the education sector, which I have talked about before. Now perhaps immigration control is so deeply embedded in conservative philosophy that it trumps economic liberalism, or helping increase UK’s exports. Or alternatively, immigration is seen as a vote winner and so any damage that this will do to the UK economy can be set aside.

'King Stands by Inflation Targeting' - I don't get this argument from Bank of England governor Mervyn King: The governor of the Bank of England... Sir Mervyn King ... dismissed suggestions made by his designated successor, Mark Carney, now governor of the Bank of Canada, for the Bank to ease monetary policy further by abandoning its inflation target if meaningful growth continues to elude the UK. Mr Carney succeeds him at the start of July. ... With the UK government pursuing fiscal consolidation, monetary policy has been the mainstay of policy makers’ strategy to boost economic output... But the governor, speaking in Belfast, warned against over-reliance on monetary easing. “In many countries, including the UK, fiscal policy is constrained by the size of government indebtedness, and monetary policy has come to be seen as the only game in town,” Sir Mervyn said. “Relying on monetary policy alone, however, is not a panacea.” That says nothing at all about whether monetary policy should be easier, tighter, or is currently just right. Actually, he does offer this:.  “It cannot be for a central bank to design a programme of such supply initiatives, but in economic terms there has never been a better time for supply-side reform,” he said.

Sir Mervyn takes a walk on the supply side - Judging by the acres of commentary, this week’s big economic news is set to be the preliminary estimate for fourth-quarter gross domestic product out on Friday.I should be all of a quiver over whether it will be +0.1 per cent growth over the third quarter or –0.1 per cent, or another number that is likely to be revised. But I am not. In contrast, I am fascinated by the latest development in the important UK economic debate. On Tuesday evening, Sir Mervyn King completed his slow conversion from being an activist on what economists call the “demand side” to a “supply side” pessimist. Where the Bank of England governor once saw monetary policy as a simple tool to reinvigorate spending and bring the level of output back to its previous trend, his speech indicates he now sees the pre-crisis period as infected by unsustainably overexposed bank lending and “unsustainable paths of consumption”. Forget fiscal policy and the government’s many growth plans – Britain’s most important economic debate focuses on whether Sir Mervyn is right. He might be a lame duck with only five months of his term left to run, and his views on the remit of monetary policy are far less interesting than those of Mark Carney, his successor. But his four-year volte-face represents the crushing of hope and bitter experience of the UK’s post-crisis period. If he is right, the weakness Britons see all about them reflects a deterioration in the UK’s ability to produce goods and services. If he is wrong, it is little more than a soft patch for the economy.

UK AAA rating under threat as government deficit increases - Public sector borrowing in December was once again higher than in the same month last year, meaning the government has almost no chance of meeting its deficit reduction targets for the 2012-13 tax year. As the economy continues to struggle, once again tax receipts were lower than the money spent by the government. Public sector net borrowing excluding financial sector interventions which is the government's chosen model of calculating the public finances increased again. The UK is already on negative watch with the three main ratings agencies, Fitch, Moody's and Standard & Poor's and further slipping from austerity targets coupled with low growth is likely to mean that at least one of the agencies cuts the UK's credit rating. Howard Archer, Chief UK & European Economist at IHS Global Insight said: "Overall, the December public finance data do little to dilute high and mounting expectations that at least one of the credit rating agencies will strip the UK of its AAA rating within the next few months."

Back down on austerity, Osborne urged as Britain slips towards triple-dip - George Osborne is facing pressure to sacrifice inflation targets to kickstart growth, with official figures this week expected to show Britain sliding towards an unprecedented triple-dip recession. The Ernst and Young Item Club forecasting group joins those calling on the government to abandon the 2% inflation target, forcing the Bank of England to take more drastic action to lift the economy out of its slump. "The target has passed its sell-by date," said Item's Peter Spencer, who forecasts growth of 0.9% in 2013. "The government could probably muddle through to the election with Plan A, but could do much better." The Office for National Statistics will publish its first estimate of GDP growth for the final quarter of 2012 on Friday and many experts, including at the Bank, expect it to show that the economy contracted. A second negative quarter, from January to March, would mark the onset of Britain's third recession in five years. Many of the coalition's critics would like to see the chancellor reverse some spending cuts. "We think the case for immediate stimulus is now extremely strong. We have had more than two years with nonexistent growth, where the economy has failed to bounce back," said Nicola Smith, chief economist at the TUC. Compass, the leftwing thinktank, today publishes its "Plan B+1", calling for policies, including green investment, to rebuild the economy. Adam Posen, director of the Peterson Institute for International Economics and until last year a member of the Bank's monetary policy committee, said Osborne "boxed himself into position" by pinning his reputation on austerity. "It's inexcusable for the chancellor not to take reality into account when making fiscal policy. When you've implemented everything, and it's had the opposite effect, and it's been a bad effect, you have an ethical and public responsibility to change policy."

U.K. Economy Shrinks - The U.K. economy shrank in the final quarter of 2012, leaving Britain at risk of entering its third recession since 2008. In its preliminary estimate, the Office for National Statistics said gross domestic product contracted 0.3% between October and December compared with the third quarter. On an annual basis economic output was flat. "At the moment it remains too early to tell if the economy will triple-dip, but today's numbers have greatly increased the risk of a new recession and a downgrading of the U.K.'s triple-A credit rating," said Chris Williamson, chief economist at data providers Markit.

U.K. Economy Shrinks More Than Forecast - Britain’s economy shrank more than forecast in the fourth quarter as the boost from the Olympic Games unwound and oil and gas output plunged, leaving the country on the brink of an unprecedented triple-dip recession.  Gross domestic product dropped 0.3 percent from the three months through September, when it grew 0.9 percent, the Office for National Statistics said today in London. That compares with the median of 38 estimates in a Bloomberg News survey for a decline of 0.1 percent.  The pound fell as the drop highlighted the challenge Prime Minister David Cameron’s government faces to secure momentum in the economy more than three years after it emerged from the deepest recession since World War II. While jobless benefit claims have fallen to a 1 1/2-year low, a budget-deficit squeeze may keep weighing on growth while heavy snow this month has raised the possibility of a further quarterly contraction.  “The talk around the U.K. economy is now all going to be about, are we in a triple dip, which is not great for confidence. If we continue to see weak data, more stimulus becomes a possibility.”

UK GDP shrank by 0.3% in fourth quarter - Austerity is not working, say the unions, following news that the economy shrank by 0.3% in the final quarter of 2012. TUC General Secretary Frances O'Grady said: Today's figures confirm our worst fears that the Chancellor's austerity plan has pushed the UK economy to the brink of an unprecedented triple-dip recession. We are now mid-way through the coalition's term of office and its economic strategy has been a complete disaster. The economy has grown by just 1%, real wages have fallen, and the manufacturing and construction sectors have shrunk. We remain as dependent on the City as we did before the financial crash. The Chancellor now has all the evidence he needs to change course and focus instead on investment and growth. If he refuses to listen he could do even more permanent damage to the economy. The latest GDP figures show that in the ten quarters since the election, manufacturing has contracted by 0.4 per cent and the construction sector has shrunk by nine per cent.

GDP disappointing - but not surprising = Given the information we had on industrial production in October and November, there has to be some relief that the quarterly fall in gross domestic product (GDP) was not even larger. As it was GDP fell by 0.3%, while industrial production dropped by a hefty 1.8%. Construction industry output rose modestly, by 0.3%, for the first time in a long while, in spite of an assumption by the Office for National Statistics that there was a non-seasonally adjusted slump in the sector's output of 16% in December. Service sector output was flat. The big picture is that these preliminary figures show that the economy showed no growth in 2012 (actually marginally better than the Office for Budget Responsibility's December estimate of a 0.1% fall) and was broadly flat in the fourth quarter compared with a year earlier. Those employment figures, showing a 552,000 rise over the past 12 months, look even harder to explain in the context of zero growth. Taking out North Sea oil from the picture doesn't help much either. Though this reduces the Q4 fall to 0.1%, it still leaves 2012 growth at a modest 0.2%, and growth in the fourth quarter compared with a year earlier at 0.4%. More here.

Britain heading towards a triple dip recession as economy shrinks 0.3% -Britain is tumbling towards a historic triple dip recession, official figures revealed today. The economy shrank by 0.3 per cent in the last three months of 2012 as the boost from the Olympics fizzled out. The fall was worse than feared by many in the City and a hefty blow to Chancellor George Osborne’s economic strategy. Economists stressed that 2008-2012 was now the weakest four years of GDP performance in peacetime since the 1830s. With the cold snap increasing the likelihood of another drop at the start of this year, there were growing fears of the first triple dip recession since records began in 1955. Amid the gloom, Boris Johnson called for the Chancellor to inject billions of pounds into London housing and transport infrastructure to inspire a boom and ignite recovery. Mr Osborne today said Britain is facing “a very difficult economic situation” but is so far still vowing to stick by his austerity plans to deal with the debt crisis.

UK Headed for Triple Dip Recession? - There is much talk of a triple dip recession in the UK. It depends on how you define it. If you call a recession two consecutive quarters of decline in GDP, with any quarter of positive growth ending the recession, then answer is yes. Here is a chart from the Telegraph article UK heads for triple dip as GDP contracts 0.3pc to consider. The blue rectangles are mine. I see two recessions not three. With 9 quarters in between recessions, one might ask "Is this even a double-dip setup?" I suggest yes, but there is no clear agreed-upon definition of how many quarters can be between recessions to call it a double-dip. From the Telegraph ... The official figures were the fourth quarter of negative growth in the last five and mean that the UK flatlined for last year as a whole – posting zero growth.The economy is smaller than it was in September 2011 and still 3.3pc below its pre-crisis peak

Britain is experiencing “worse slump than during Great Depression”   Britain's recent economic performance is the worst since records began in the pre-Victorian era, experts said today, apart from the two immediate post-war slumps. Ministers today admitted Britain is facing "very, very grave difficulties" after figures showed the economy did not grow at all in 2012. Both George Osborne, the Chancellor, and Danny Alexander, the Chief Secretary to the Treasury, said they do not underestimate the scale of the challenge but insisted the Goverment is on a "path of repairing our public finances". Despite their optimism, City analysts warned that the economy is still "in crisis", more than four years after the financial crash of autumn 2008. Economists from the Royal Bank of Scotland said the last four years have produced the worst economic performance in a non post-war period since records started being collected in the 1830s.

The Wages of Austerity, Yet Again: “Britain's economy flirts with "triple dip" recession” » From Reuters:The country's gross domestic product fell 0.3 percent in the fourth quarter, the Office for National Statistics said on Friday, sharper than a 0.1 percent decline forecast by analysts. The news is a blow for Britain's Conservative-led government, which a day earlier defended its austerity program against criticism from the International Monetary Fund. It needs solid growth to meet its budget targets, keep a triple-A debt rating and bolster its chances of winning a 2015 election.  Liberal Democrat leader Nick Clegg, has said the government of which he is part had cut investment spending too rapidly. It’s not as if observers hadn’t warned about the effect of contractionary fiscal policy. From the July 2012 IMF Article IV: Deeper budget-neutral reallocations could also support recovery. Such reallocations within the current overall fiscal stance could include greater investment spending funded by property tax reform or spending cuts on items with low multipliers. Automatic stabilizers should continue to operate freely. It will also be important to shield the poorest from the impact of consolidation.

How Inequality Puts a Break on U.S., U.K. Growth - It may not be a coincidence that the U.K. is struggling to grow even as the country’s income and wealth inequality becomes progressively worse. The Gini coefficient, which measures income inequality, rose sharply during the 1980s, stabilized until the financial crisis and has been on the rise again. The top 10%, 1% and 0.1% of income earners have been taking an ever bigger slice of the pie (and those higher up the distribution have been taking progressively bigger slices) to where they’re doing better relative to the rest than at any point since at least the Second World War. That, by the way, is even more true of the U.S. So what does inequality have to do with the U.K.’s drab recovery of modest expansion punctuated with frequent reversals? For example, the most recent GDP data, for the fourth quarter of 2012, show the economy contracted by 0.3% on the previous quarter. The debate, which has been rippling around the blogosphere for a while now, has picked up some momentum. One perspective economists take is the impact on aggregate demand. The rich save more than the relatively poor–there are limits to how many meals a billionaire can eat, how many haircuts he’s willing to sit for and how many suits he can wear. These savings have a depressing effect on total demand, which is why the economy is struggling to grow.

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