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

Saturday, February 2, 2013

week ending Feb 2

U.S. Fed balance sheet shrinks in the latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week with reduced holdings of mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.991 trillion on Jan. 30, compared with a record-large $2.994 trillion on Jan. 23. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $965.78 billion compared with $983.17 billion the previous week. The Fed's holdings of Treasuries totaled $1.710 trillion as of Wednesday versus $1.697 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was $75.11 billion, which was unchanged on the week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $5 million a day, which was also unchanged from the prior week

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 31, 2013

Thresholds for QE - At the last meeting, the FOMC set "thresholds" for raising the Fed Funds rate. From the December FOMC statement"[The FOMC] anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."An interesting question is if the FOMC will set thresholds for reducing or ending the current $85 billion per month in asset purchases (aka Quantitative Easing or QE). Goldman Sachs chief economist Jan Hatzius discussed this possibility last week:  "The rationale for QE thresholds is similar to that for funds rate thresholds, namely that they would help the financial markets understand the Fed's reaction function with respect to changes in the economic outlook. If the committee adopted such an approach, the most likely thresholds would be 7.25% for the unemployment rate, 2.5% for the 1-2 year PCE inflation outlook, and "well anchored" inflation expectations. Boston Fed President Eric Rosengren discussed this in a speech last year"My own personal assessment is that we should continue to forcefully pursue asset purchases at least until the national unemployment rate falls below 7.25 percent and then assess the situation.I think of this number as a threshold, not as a trigger – and the distinction is important. I think of a trigger as a set of conditions that necessarily imply a change in policy. A threshold, unlike a trigger, does not necessarily precipitate a change in policy."

Debate at the Fed on When to Slow Its Asset Buying - NYT - The Federal Reserve has left little doubt about its plans for the next few months, and thus little mystery about the statement it will release Wednesday after the latest meeting of its policy-making committee. The economy remains weak. The Fed will keep buying bonds to hold down borrowing costs. Inside the central bank, however, debate is once again shifting from whether the Fed should do more to stimulate the economy to when it should start doing less. Proponents of strong action to reduce unemployment won a series of victories last year, culminating in December when the Fed announced that it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent. The rate was 7.8 percent in December. To accelerate that process, the Fed also said it would increase its holdings of Treasury securities and mortgage-backed securities by $85 billion each month until it sees clear signs of strength in the job market. The Fed is expected to affirm both policies on Wednesday. The looming question is how much longer the asset purchases will continue.

Bernanke Seen Buying $1.14 Trillion in Assets in 2014 - Federal Reserve Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to median estimates in a Bloomberg survey of economists. Bernanke will push on with purchases of $40 billion a month of mortgage bonds and $45 billion a month of Treasuries, according to the survey of 44 economists, even as some Fed officials warn his unprecedented balance-sheet expansion will impair efforts to tighten policy when necessary. “To get to the point where Bernanke would be comfortable letting up, you have to have a good solid string of economic reports that you’re just not going to get” this year. The Federal Open Market Committee will renew its commitment to asset buying during a two-day meeting starting today after determining the benefits from the program exceed any risk of inflation or financial instability, according to economists surveyed Jan. 24-25. Bernanke has said the policy will continue until there are “substantial” gains in employment.

FOMC Statement: "Economic activity paused because of transitory factors" - Pretty much the same as last month. The FOMC argues "economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors". FOMC Statement: Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

Fed Statement Following January Meeting - The following is the full Fed statement following the January meeting.

Parsing the Fed: How the Statement Changed -  The Federal Reserve releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank’s economic outlook and the actions it plans to take. Much of the statement remains the same from meeting to meeting. Fed watchers closely parse changes between statements to see how the Fed’s views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language. This is the January statement compared with December. Analysis of changes below the statement.

Video: Jon Hilsenrath Parses the Fed’s January Statement - The Federal Reserve has continued to buy bonds, even as policy makers offered a mixed review of the economy. Jon Hilsenrath joins the News Hub Special live from the Treasury.

Fed keeps stimulus in place as U.S. economy "paused" (Reuters) - The Federal Reserve on Wednesday left in place its monthly $85 billion bond-buying stimulus plan, arguing the support was needed to lower unemployment even as it indicated a recent stall in U.S. economic growth was likely temporary. The U.S. central bank predicted that the nation's job market would continue to improve at a modest pace, and repeated a pledge to keep purchasing securities until the outlook for employment "improves substantially." "Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors," the Fed said after a two-day meeting. A report on Wednesday showed the U.S. economy unexpectedly contracted in the fourth quarter as inventory investment slowed and government spending plunged. Analysts said superstorm Sandy, which slammed into a large swath of the U.S. East Coast in late October, also disrupted the recovery. The Fed has kept overnight interest rates near zero since late 2008 and tripled its balance sheet to about $3 trillion through purchases of securities, which are aimed at pushing longer-term borrowing costs lower.

Fed Maintains $85 Billion Pace of Purchases as Growth Pauses - The Federal Reserve will keep purchasing securities at the rate of $85 billion a month after the economy paused because of temporary forces including bad weather. “Growth in economic activity paused in recent months in large part because of weather-related disruptions and other transitory factors,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.” Chairman Ben S. Bernanke has unleashed the power of the central bank to buy unlimited amounts of Treasury and mortgage- backed securities in a bid to end a four-year long period of unemployment above 7.5 percent and bolster an economy that shrank 0.1 percent in the fourth quarter. “There is no hint that they are giving any thought of backing off current policy and their current stance,”

Fed Holds Steady on Strategy - Cites ‘Pause’ in Growth - The Federal Reserve, noting that economic growth had “paused” in recent months, said Wednesday that it would continue its efforts to stimulate the economy for as long as it deemed necessary. The Fed attributed the pause in growth to the impact of Hurricane Sandy and other “transitory factors,” and it said that there were some signs of increased strength in areas including consumer spending and housing. It affirmed the stimulus program it announced in December, saying that it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent and expand its holdings of Treasury securities and mortgage-backed securities by $85 billion each month. “The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” the central bank said in a statement released after the conclusion of a two-day meeting of its policy-making committee.

Fed Watch: Unsurprisingly, the Fed Stands Pat -  There is nothing like a Fed meeting to prod me back to the keyboard. Alas, the outcome of this meeting was not entirely unexpected. Policy remains unchanged, with only minimal changes to the FOMC statement. The Fed followed the path of all analysts not of the Zero Hedge variety and largely dismissed the unexpected decline in 4Q12 GDP: Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. "Transitory" = "don't panic." We can try to read something in the change of this sentence: The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. It sounds a little more optimistic, as though they are more comfortable they have policy about right. This, in turn, would suggest that no one at the FOMC is really thinking about accelerating the pace of asset purchases. Of course, I don't think anyone was expecting that anyway.  There was no indication of setting thresholds for the end of large scale asset purchases. Such discussions are likely in their infancy; for now, all we know is that the end will come before the unemployment rate hits the 6.5% threshold. 7.25%, as suggested by Boston Federal Reserve President Eric Rosengren? Or a sustained period of substantial nonfarm payroll growth, as suggested by Chicago Federal Reserve President Charles Evans? Of course, these two thresholds may be effectively equivalent.

No Change in Fed Policy Despite Negative GDP Growth - The Federal Reserve announced today that monetary policy will remain on its present course of extraordinarily low interest rates and bond purchases -- also known as quantitative easing -- of $85 billion per month.  How long will the low interest rate and bond purchase policies continue? There was no change in the Fed's previous announcement that it will continue to target a near-zero interest rate until unemployment falls below 6.5 percent or inflation expectations drift more than half a percent above the Fed's 2 percent target.  The conditions for ending the central bank's monthly bond purchases remain vague. Many analysts thought the Fed might be more specific today about when it plans to end the bond purchases. But for now all we know is that the interest rates will remain low "for a considerable time after the asset purchase program ends and the economic recovery strengthens;" that is, bond purchases will end before the interest rate is increased. But the precise conditions that will lead to the end of the bond buying program have been left unspecified. The Fed does not like uncertainty about its policies, so the likely reason for the lack of firm guidance on this point is disagreement among the board members about the exit conditions for this program. However, the latest GDP report showing that the economy shrank an annualized 1 percent in the final three months of 2012 indicates that we have not yet reached the acceleration in the recovery the Fed wants to see before it ends its bond purchases.

Fed waits for job market to perk up (Reuters) - The Federal Reserve's ultra-loose monetary policy is a root cause of the "currency wars" that some see as a looming threat to the world economy, but don't expect the U.S. central bank to signal a shift back to normal any time soon. The Fed, whose policy-setting Federal Open Market Committee concludes a two-day meeting on Wednesday, said just last month that it expects to keep short-term interest rates exceptionally low until the U.S. unemployment rate falls to 6.5 percent, inflation permitting. That goal is still distant. Figures on Friday are likely to show that the jobless rate was unchanged in January at 7.8 percent, while the economy created 155,000 jobs, the same as in December, according to economists polled by Reuters. So it would be a huge surprise if the Fed were to do anything other than reaffirm last month's decision to anchor short-term interest rates in a range of zero to 0.25 percent and to keep buying $85 billion of bonds each month to hold down long-term rates. The only question mark is whether the FOMC vote will be unanimous now that Richmond Fed President Jeffrey Lacker, who opposes the current round of bond-buying, has rotated off the panel, 

Are jobless recoveries the Fed's fault? - Matt O'Brien hypothesizes that the "jobless recoveries" of recent decades have been caused by the Fed. Specifically, he thinks that the Fed has been practicing "opportunistic disinflation", allowing recessions to lower inflation, and then "stabilizing" inflation at a new, lower level after each recession by raising interest rates too soon. Here is the case: Through the 1980s, postwar recessions happened when the Fed decided to raise rates to head off inflation, and recoveries happened when the Fed decided things had tamed down enough to lower rates. But now recessions happen when bubbles burst...and the Fed hasn't been able to cut interest rates enough to generate strong post-crash recoveries. Or maybe it hasn't wanted to...  Why have interest rates and inflation mostly been falling for the past 30 years? In other words if the Fed has been de facto, and later de jure, targeting inflation for most of this period (and it has), why has inflation been on a down trend (and it has)?

As Growth Lags, Some Press the Fed to Do Still More - NYT— In the five months since the Federal Reserve started a campaign to increase growth and reduce unemployment, the economy has slowed and unemployment has increased. The Labor Department said on Friday that the jobless rate rose to 7.9 percent last month, up from 7.8 percent in December, in the latest evidence that the economy still is not growing fast enough to repair the damage of a recession that ended in 2009. Some economists found the disappointing data an indication the Fed had reached the limit of its powers, or at least of prudent action. But there is evidence that the Fed is not trying as hard as it could to stimulate growth: it is allowing inflation to fall well below the 2 percent pace it considers most healthy. Inflation, unlike job creation, is something the Fed can control with some precision. Higher inflation could accelerate economic growth and job creation by encouraging people to spend more and make riskier investments. Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade.

Misunderstanding QE - Yesterday I had a long conversation with someone with serious monetarist leanings, who tried hard to convince me that QE raises long bond yields. His argument was that government bond yields have nothing to do with central bank policy rates and can therefore be separately influenced via asset purchases. So Bernanke cuts the federal funds rate to near-zero, causing real interest rates on cash deposits and near-cash instruments to fall below zero, while using QE to induce expectations of higher inflation and thereby force up bond yields: @frances_coppola @wonkmonk_ He depresses Fed Funds to ZLB, and when using QE raises short term bond rates. Two separate interest rates. — Ben Jackman (@btjaus) January 27, 2013.. And to support his argument, he produced this chart: Now, this does indeed appear to show QE causing bond yields to rise, not fall. And I admit this did make wonder briefly whether what we have all been told about QE - that it works by depressing real interest rates along the yield curve, thus encouraging diversification into riskier assets - was actually correct. But I didn't wonder about this for more about than 5 minutes. You see this chart is not quite what it seems. Seeking Alpha (whose chart it is) has been somewhat selective in their choice of start and finish dates. Here's a more extended version of the same chart:

Fed Risks Losses From Bonds - WSJ - The Federal Reserve could be charting a course that leaves the highly profitable central bank with no extra income to hand over to the U.S. Treasury for several years. That is the conclusion of five Fed staff economists who examined how the central bank's bond-buying programs will affect its profitability over the long run. Right now the Fed is earning large returns on its bond portfolio and sending most of its profits to the Treasury. Several years from now, when the economy is stronger, the Fed is expected to sell bonds and raise short-term interest rates to tighten credit and restrain inflation. The group found the Fed might have to sell bonds at a loss and incur higher expenses on interest it pays to banks on the reserves they hold at the Fed.That, in turn, could become a political headache for the Fed, and might even weigh on some officials today as they decide whether to continue these programs, which are aimed at driving down borrowing costs and spurring economic growth and hiring.

China tells U.S. to slow money printing presses (Reuters) - A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar. Asked whether he was worried about the dollar, the chairman of China's sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: "I am a little bit worried." Jin said he was confident that the Obama administration and Congress would ultimately solve the debate over the so-called fiscal cliff, "but of course the printing machine will have to slow down for people to have full confidence in the dollar". China is the biggest purchaser of U.S. Treasury bonds, using its enormous foreign currency reserves primarily to buy U.S. securities as a long-term investment. "There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place," Li said. Speaking at the same session, French Finance Minister Pierre Moscovici voiced concern that the euro was becoming overvalued as a result of quantitative easing and other stimulus actions taken by other nations' central banks. "Certainly, the level of the euro is high and creates some problem," he said, attributing the single currency's recent gains partly to the return of confidence created by the European Central Bank and euro zone governments in starting to overcome Europe's debt crisis.

Former Fed Advisor Urges Fed To Buy More, "A Lot More" ... $30 Trillion More -  While we can only hope the following screed posted in an otherwise serious BusinessWeek, by David Kemper, CEO of Commerce Bankshare, and more importantly, a former president of the Federal Advisory Council of the Federal Reserve and thus indicative of the kind of "advice" the Fed receives, is a joke we have a very nagging feeling that the text below is actually serious. Which is why instead of Friday humor, we have decided to err on the side of caution and call this segment Friday tragicomedy. Because with a statement such as the following: "Why not expand the Fed balance sheet exponentially, from its current $3 trillion to $33 trillion... Would $30 trillion in extra buying power be inflationary when our entire current GDP is only about $15 trillion? Maybe, maybe not—but we need a game-changer here. First let’s celebrate the Fed’s record profits and its contribution to reducing our deficit. Then let’s seize the moment to do something truly grand: eliminate that stubborn deficit. We have the tools, and I, for one, say let’s give it a try."... it shows that the idiotic trillion dollar coin, Sheila Bair's farcical suggestion to let every American borrow $10 million from the Fed at zero rates, or even our suggestion from a year ago that the government build a Death Star, may appear as sheer genius in comparison to what else the Fed may be considering, and implement, before all this is said and done.

How should central banks think about the financial system? - MOST of what we call money is actually short-term debt created by private financial firms, like bank deposits, rather than anything directly controlled by the government through monetary policy, like currency. Moreover, banks and other intermediaries create (and destroy) this money whenever they extend (and withdraw) credit. Informed observers have known these basic facts for decades, but the models used by mainstream academics and forecasters never bothered to incorporate them. Instead, most macroeconomists followed the lead of Paul Samuelson and erroneously concluded that the financial sector was merely a “veil” between savers and borrowers. As a result, the history of macroeconomics has been like a performance of Hamlet without the Prince. Since the crisis, a few scholars have been trying to understand and describe how the economy really works.* Last week’s issue has some of the story. I recently elaborated on a few of the insights from Hyun Song Shin’s research into the microfoundations of banks, particularly his finding that financial firms systematically take more risk as asset prices rise. An important takeaway from that research is that the vulnerability of the system cannot be measured by price indicators like credit spreads or volatility. Instead, analysts should focus on quantities like the amount of assets on intermediary balance sheets and the liquidity and maturity mismatches between those assets and the liabilities used to fund them.

The Fed Is More Out of It Than You Thought It Was -The Federal Reserve recently released the transcripts of the meetings of its Board of Governors in 2007, covering a time when the first rumblings of the financial crisis were beginning to appear. By the end of 2008, everything would have changed: The Federal Reserve expanded its lending powers to backstop the financial sector. The “Great Moderation” legacy of the Alan Greenspan era came to an end, with interest rates pushed down toward zero, while unemployment increased and inflation slowed. As of 2007, the Fed was unprepared for what was to come, though not mainly for the reason most commentators are highlighting. The initial reporting on the transcripts has focused on whether or not the Fed saw the financial crisis coming, and most find that the Fed did not. But the Fed also missed something much more important. For all the attention the financial crisis gets in the story of the latest recession, it isn’t that important to understanding our current weak economy. The reason that more than 12 million people are unemployed, that workers no longer quit their jobs or get raises, and that economic prospects are dim for the foreseeable future, has to do with the financial health of consumers, not the health of Wall Street. Looking at the December 2007 transcripts, the Federal Reserve was concerned about a “credit-crunch” scenario generating a financial crisis, an event that did happen.

Monetary Alchemy, Fiscal Science - The austerity-versus-stimulus debate has been thoroughly hashed out.   On the one hand, proponents of austerity correctly point out that the long-term consequences of permanently expansionary macroeconomic policy [both fiscal and monetary] are unsustainable deficits, debts, and inflation.    On the other hand, proponents of stimulus correctly point out that in the aftermath of a recession, when unemployment is high and inflation low, the immediate consequences of contractionary macroeconomic policy are continued unemployment, slow growth, and debt/GDP ratios that go up rather than down.  Procyclicalists, both in the US and Europe, represent the worst of both worlds:  they push in the direction of expansion during booms such as 2003-07 and in the direction of contraction during recessions such as 2008-2012, thereby exacerbating both the upswings and downswings.  Countercyclicalists have it right:  working in the direction of fiscal and monetary discipline during booms and ease during recessions.  Less thoroughly aired recently is the question whether — given recent conditions - monetary or fiscal expansion is the more effective instrument.

Personal Consumption Expenditures: Price Index Update - The January Personal Income and Outlays report for December was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The latest Headline PCE price index year-over-year (YoY) rate of 1.35% is a decrease from last month's adjusted 1.42%. The Core PCE index of 1.32% is decrease from the previous month's adjusted 1.44%. On the chart below I've highlighted 2 to 2.5 percent range. Two percent has generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place. I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  For a long-term perspective, here are the same two metrics spanning five decades.

Debt Sustainability, Growth, Interest Rates, and Inflation: Some Charts for Discussion and Some Inconvenient Truths for MMT - In a series of posts[1] [2] [3] [4] [5] over the last couple of months, fellow Economonitor blogger L. Randall Wray and I have been exploring the conditions under which the government’s debt can be said to be sustainable. Wray writes from the point of view of Modern Monetary Theory (MMT), while I adopt a more eclectic and skeptical approach. A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.) It seems well established that the the central bank can hold R down to any desired level, if it wants to, by buying a sufficient quantity of government securities. The “should” part of the question concerns whether the degree of monetization necessary to hold R below G would have undesirable inflationary side effects.

Crazy Ideas - I know my crackpot ideas are unlikely to achieve much beyond a few subscribers to my newsletter, but increasingly I become convinced that the solution to all economic problems is "give free money to people." We give lots of free money to people, actually. We just tend to give it to banksters. I saw some panicked stuff today about ZOMG THE FED BALANCE SHEET IS $3 TRILLION or something similar, which essentially means the Fed has created 3 trillion bucks out of nothing and purchased financial assets with it. That isn't precisely a gift, but it boosts asset prices, and most of us don't own many financial assets. Rich people do. So Fed action of this type benefits the wealthy, with the vague hope it improves the broader macroeconomy. Unless gastritis broke my calculator, 3 trillion fedbucks translates to about 10 grand in free money for each of us. I think I advocated the "mail every SS # holder a 10 grand check" at some point. Would be happy to hear from the Very Serious People why this would be worse policy. It's impossible to imagine it wouldn't be welfare enhancing. Tell me why if I'm wrong.

Corporate Economists Have Rosier View of 2013 - Corporate economists are becoming more optimistic about 2013, in a new survey predicting the U.S. economy will expand at a fairly robust pace this year despite continued uncertainty in Washington. According to the National Association for Business Economics Industry survey, released Monday, 50% of those polled say the economy will advance at a 2.1% pace or better over the next four quarters. That is up from just 36% forecasting that level of growth last October. “The economy continues to soldier on,” said Timothy Gill, chairman of the NABE Industry Survey Committee and economist at the National Electrical Manufacturers Association. “While the panel was nearly unanimous in its view that the economy will expand over the next four quarters, it was split as to the degree of growth expected.”

Caterpillar Sees Fewer Downsides to Economic Growth in 2013 - Caterpillar Inc. is an industrial bellwether that investors watch closely for signals about how the world economy is performing. As is its custom, the company released a detailed economic outlook for the coming year along with its earnings. Risks appear to be abating, as the company just outlined two potential downsides: “Economic policies became more pro-growth in 2012, and, as a result, recent economic data has been more favorable. Overall, we expect policies to become even more stimulative, so upside to our outlook is possible. As in the past, we are concerned that central banks will reverse policies too early once better economic growth becomes apparent. A downside risk is Eurozone growth lagging behind the rest of the world. As the disparity becomes more evident, concern about the Eurozone economy and its currency could return.” But though risks are decreasing, the company doesn’t expect strong growth this year: “World economic conditions, while improving, are still relatively weak. Indicators improved in many countries in late 2012, suggesting better prospects for economic growth in 2013. In the large economies, we expect some improvement in the United States and China, and a continuation of economic uncertainty in Europe. Overall, we expect the world economy will begin the year with weak growth and improve as 2013 unfolds. We anticipate overall world economic growth of at least 2.5 percent — a small improvement from our estimate of 2.3 percent for 2012.”

Financial Market Outlook for 2013 - This is a real estate recovery restricted to just a few people, and it tells you a lot about the failure of the Federal Reserve’s approach to use monetary policy to revive the economy from the worst recession since the 1930s. First, it helps to remember that in many depressed markets home values fell from, as an example, $200,000 to $50,000, so a headline that trumpets the doubling of home values to $100,000 doesn’t mean much to most people. Homeowners who bought anywhere from 2005 onward were likely still underwater in their mortgage even if values came back to $100,000. The great bulk of homeowners who might be anxious to sell still have not been able to reach break even in this market. Then there is the question of the mysterious disappearance of inventory. In 2011, most major metropolitan markets had an overhang of houses and condominiums available for sale, and the great bulk of these were owned by banks who had repossessed the properties. Suddenly, in 2012 such properties were taken off the market. The number of houses available for sale dropped 68% in San Francisco, 61% in Los Angeles, 39% in Boston, and 28% in Las Vegas. The average decline in inventory across the US was 33%.

U.S. Economy Shrinks 0.1%, 1st Time in 3 1/2 Years — The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter. The surprise contraction could raise fears about the economy’s ability to handle tax increases that took effect in January and looming spending cuts. Still, the weakness may be because of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth. And those volatile categories offset faster growth in consumer spending, business investment and housing — the economy’s core drivers of growth. Another positive aspect of the report: For all of 2012, the economy expanded 2.2 percent, better than 2011′s growth of 1.8 percent.

Real GDP decreased 0.1% Annualized in Q4 -- From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.  Personal consumption expenditures (PCE) increased at a 2.2% annualized rate, and residential investment increased 15.3%, equipment and software increased 12.4%. That is a solid increase in fixed investment. "Change in private inventories" subtracted 1.27 percentage points from GDP in Q4, and the Federal government subtracted 1.25 percentage points (mostly a sharp decrease in defense spending). This was below expectations, but the internals were decent with PCE and private investment increasing

GDP Q3 Third Estimate at -0.1%, A Shocking Slip into Contraction - The Advance Estimate for Q4 GDP came in at minus 0.1 percent, A shocking surprise to the downside. The WSJ survey of fifty economists I posted yesterday called for a 1.6% print. The consensus I generally feature was for a 1.0 percent GDP, with's on estimate near zero at 0.1 percent.  Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.  The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.  The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.  [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

GDP falling again - The BEA released today its estimate of 2012 fourth-quarter real GDP, which declined slightly from the third quarter. How scary is that? The biggest drags came from a drawdown in inventories and decline in government spending. The former could reflect business concerns about the future, though the preliminary inventory estimates often see substantial revision. And the drop in defense spending relative to Q3 was in part an echo effect of the temporary surge in Q3 spending that came in prior to uncertainties about fiscal cliff negotiations. Taking these two factors out, real private demand grew at a 2.5% annual rate during the fourth quarter.  Weak exports suggest that Europe's problems are starting to take a toll on U.S. businesses, but there's some counterbalancing good news coming from increases in nonresidential fixed investment and new home construction. The upturn in house prices suggests the latter will continue. Private consumption spending was also solid in Q4. However, the Conference Board's index of consumer confidence declined in January, and the recent payroll tax increases hit consumers with a new headwind going into Q1. The new GDP estimates did not have much of an effect on our Econbrowser Recession Indicator Index. This now stands at 8.2%, up only slightly from the previous quarter. For purposes of calculating this number, we allow one quarter for data revision and trend recognition, so the latest value, although it uses today's released GDP numbers, is actually an assessment of where the economy was as of the end of the third quarter of 2012. The index would have to rise above 67% before our algorithm would declare that the U.S. had entered a new recession.

Falling Government Spending and Inventories Push Growth Negative in Quarter, by Dean Baker: A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter. Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters. Consumption grew at a 2.2 percent annual rate, driven mostly by 13.9 percent growth in durable goods purchases, primarily cars. This number was inflated due to the effects of Sandy, which destroyed many cars, forcing people to buy new ones. Growth in this category will be substantially weaker and possibly negative in the next quarter. On the other side, housing and utilities subtracted 0.47 percentage points from growth in the quarter. This is likely a global warming effect with warmer than normal weather leading to less use of heating in the quarter. (There was a comparable falloff in the 4th quarter of 2011 when we also had unusually warm weather.)Over the last year, nominal spending is up by just 1.8 percent, far less than the rate of growth of GDP, and well below the projections from the Congressional Budget Office (CBO). It seems increasingly likely that we are on a slower health care cost trajectory. The deficit picture will look very different when CBO incorporates this slower growth trend into its projections.

Economy Contracted Unexpectedly in Fourth Quarter - The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses.  Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending....The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, [Michael Feroli, chief United States economist at JPMorgan] said.

GDP Contracted -0.1% for Q4 2012! - Q4 2012 real GDP contracted by -0.1%.  Inventory investment nose dived, but was not the lone culprit for economic contraction.    Exports plunged and took -0.81 real GDP percentage points along with it.  Government spending cliff dove and hacked off -1.33 percentage points from 4th quarter real gross domestic product growth as federal defense spending declined 22.2% from Q3.  Private inventory changes subtracted -1.27 percentage points from Q4 real GDP change and as a result of all this the economy went from expansion into contraction.    A recession is defined as two consecutive quarters of negative GDP change.  We're halfway there. Consumer spending was really barely breathing in Q4 with a +1.52 percentage point contribution.  Consumer spending seems like a bright spot,  but that's actually low by percentage points, even though consumer spending did increase from Q3..   Real imports also contracted and thus increased Q4 GDP.   Be warned for imports are almost always revised upward in the next GDP revision estimate.    As a reminder, GDP is made up of: Y = C + I + G + (X _ M)  where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q3 to Q4 GDP major components. GDP percentage point component contributions are calculated individually

Initial GDP Report Shows Economy Contracting In Final Quarter Of 2012 -- Going into today’s release of the initial estimates of Gross Domestic Product for the final quarter of 2012, analysts were expecting a bad number. The economic factors that had led to a fairly decent third quarter were exceedingly temporary, and there was plenty of evidence that the economy was slowing in the final months of the year at least in part due to uncertainty over the impending fiscal cliff. Additionally, Hurricane Sandy hitting the New York/New Jersey region in late October was likely to have at least somewhat of a negative impact on the economy. So, people were prepared for a bad number today. What nobody was prepared for, though, was an indication that the economy may have actually slightly contracted: The United States economy unexpectedly reversed course in the final quarter of 2012 and contracted at a 0.1 percent rate, the Commerce Department said Wednesday, its worst performance since the aftermath of the financial crisis in 2009. The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending.

Shrinkage: US Economy Declined By -0.1% In Q4 - A stunner out of the BEA which just reported a Q4 GDP of -0.1% that was leaps and bounds below the 1.1% estimate, and a plunge from Q3's 3.1%. The factors: Private Inventories, Exports and Government Expenditures all of which contracted, by -1.27%, -0.81%, and -1.33%. The silver lining was in Personal Consumption Expenditures which added 1.52% to the negative print, most of it however driven by a surge in spending ahead of the fiscal cliff. Ironically, this was the biggest government-driven detraction from growth since Q1 2011, when GDP led to a -1.49% cut in the GDP, same in Q4 when government spending on defense fell the most since 1972. The solution is simple: print moar drones. Enter Mali. And since everything is now AMZN-ing, we can't wait for the spin that the GDP's margins were actually better than expected, leading to a 200 point surge in the DJIA.

Today’s teachable GDP moment: Slower government spending => slower GDP growth - Today’s GDP report was unexpectedly disappointing, but the economy is likely not entering recession. The downward drag on GDP growth that pushed into negative territory was mostly exerted by changes in private inventories (which are volatile and unlikely to provide a consistent drag on GDP going forward) and a large reduction in defense spending that is also unlikely to be repeated. The large drag imposed by this defense cutback, however, illustrated the valuable point that fiscal contraction is contractionary: When government spending drops, the economy suffers.  The rest of the economy is simply not growing strong enough to make up for losses in demand due to government spending cuts. And while the defense drag this quarter was extraordinarily large, the trend has been steadily declining public support to the economy for some time now. The downward trend in government spending can be illustrated by taking a look at current government expenditures, relative to potential gross domestic product. We look at expenditures as a percent of potential GDP because it does not allow a decline in actual GDP (or a slowdown in its growth) to make this ratio look bigger. What we’re looking for is a policy-induced rise (or failure to rise) in the importance

Comments on Q4 GDP and Investment - The Q4 GDP report was negative, with a 0.1% annualized decline in real GDP, and lower than the expected 1.0% annualized increase. Final demand increased in Q4 as personal consumption expenditures (PCE) increased at a 2.2% annual rate (up from 1.6% in Q3), and residential investment increased at a 15.3% annual rate (up from 13.5% in Q3).   Investment in equipment and software rebounded in Q4 (increased at 12.4% annualized rate), and investment in non-residential structures was slightly negative.  The slight decline in GDP was related to changes in private inventories (subtracted 1.27 percentage points), less Federal Government spending (subtracted 1.25 percentage points), and a negative contribution from trade (subtracted 0.25 percentage points). Overall this was a weak report, but with some underlying positives (the increase in PCE and private fixed investment).  I expect the payroll tax increase to slow PCE growth in the first half of 2013 - and for additional government austerity - but I think the economy will continue to grow this year.The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories.

GDP Takeaways: Isn’t as Bad as It Looks - The U.S. gross domestic product contracted at an annual rate of 0.1% in the final three months of 2012, significantly worse than economists’ already-muted expectations. It isn’t as bad as it looks. No one likes to see a “minus” sign in front of a major economic indicator, and the first contraction in GDP since the recession ended in 2009 is sure to raise fears that the recovery is again stalling out. But the details of the report aren’t nearly as bad as the headline. The biggest driver was a slowdown in the rate at which businesses restocked their inventories, which on its own shaved 1.27 percentage points off fourth-quarter growth. Lower inventory growth counts as a negative to GDP, but it can often translate into faster growth the next quarter as businesses restock depleted shelves. Falling government spending and lower exports were the other big negatives, but indicators of private-sector domestic activity were much stronger. The research firm Capital Economics calls the report, “the best-looking contraction in U.S. GDP you’ll ever see.”

The Economy Just Shrank, But This Is the Best Negative GDP Report You Will Ever Read - The economy surprisingly shrank by the smallest of margins -- a tenth of a percent -- in the last three months of 2012, as volatile defense spending took a tremendous 22 percent hit and companies pulled back on inventories. As the president might say, let me be clear: This is bad economic report. The economy is still weak, unemployment is still high, consumer and corporate nerves are still frayed, and growth Just. Stopped. On the bright side, this is probably the best bad economic report you will ever, ever read. And here's why. Underneath the headline figure of negative-0.1 percent, the news about the private sector is sturdy, even -- dare I say it? -- promising. Compared to the previous three months, personal consumption accelerated last quarter. Personal consumption of durable goods? That's growing faster, too. Services? Growing faster. Equipment and software investment? Growing faster. And the all-important category of residential spending (houses)? Clearly accelerating. You probably want to see that news in graphs for yourself, so here are two. First up, a look at percent-growth of three important categories of the economy: Personal consumption, which is a super-category, durable goods (which is one of its key components), and residential investment, which is clutch if we're going to have anything approximating a housing recovery. As you can see, the fourth quarter of 2012 doesn't exactly look like a nightmare ...

On the Negative GDP Report - Jeez, I knew we were growing too slowly but I didn’t think we were contracting.  And I still don’t—not in any way that’s likely to stick through revisions and incoming data. Today’s GDP report for the last quarter of 2012 had the economy contracting at an annual rate of 0.1%, which implies a quarterly rate of -0.02%, which implies zero growth.  Of the two main factors that drove the number down last quarter—a decline in spending on military equipment and slowing inventory accumulation, both of which sucked over a point from growth—the latter is highly volatile (it’s a change of a change) and subject to significant revisions. Over the year in 2012–q4/q4–real GDP rose 1.5%, and over 2012 on average compared to last year, GDP was up 2.2%.  Eyeballing the year-over-year series in the figure below reveals that we’ve been slogging along at about trend for a while now. Those are not great numbers by a long shot implying growth that’s too slow to bring down the still highly elevated unemployment rate.  And the role of diminished government spending—austerity at time when we need a fiscal push—is a useful reminder that it’s not nature that has us stuck in this slog, it’s policy.  One would hope this report would remind Congress what a terrible idea it would to allow the sequester—$85 billion in spending cuts in 2013—to take effect in March.  For Congress is now applying medieval techniques, bleeding the patient while ignoring the indicators both here and abroad as to how that’s working.

Government Expenditures Plus Transfer Payments Equals 30.7% of GDP; GDP Shocking Downward Surprise; Don't Worry It's Transitory - Inquiring minds are digging into the 4th Quarter and 2012 Annual GDP Advance Estimate. Heading into the report, the WSJ Economists' GDP Forecasts were +1.6% for Q4 2012 and +1.7% in Q1 2013. The GDP report was a shocker, coming in at an annual rate of negative 0.1%.  Rick Davis at Consumer Metrics had some choice comments via email (also in the preceding link).  We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in "real time." The first quarter of 2008 was a classic example, initially being reported in "real time" as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the "Great Recession." We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions. It is hard to look at these new numbers without at least some cynical thoughts about the reported numbers for the prior quarter. We were frankly astonished when the final numbers for the third quarter came in at a 3.09% "full recovery" growth rate, driven largely by unexplained increases in Federal spending, particularly in the Department of Defense (DOD) -- the timing of which was completely controlled by an Administration in serious need of positive pre-election economic headlines. The annualized rates of growth for defense spending rose to over 15% in 3Q-2012, only to magically reverse to a -15% annualized contraction rate in 4Q-2012 -- after the polls had closed.

Counterparties: The non-industrious military complex - America’s economy defied expectations and shrank 0.1% in the fourth quarter — analysts expected 1.1% growth. And it’s all the military’s fault. Or at least, the fault of declining defense spending. Brad Plumer runs through just how significant the fall off was: Government defense expenditures plunged by a staggering 22.2% between October and December… The Pentagon spent significantly less on just about everything except military pay. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27% pace.While Plumer notes that military spending often falls from the third quarter to the fourth, T Rowe Price’s chief economist Alan Levenson pointed out in a note to clients that the decline was the single largest decrease on record. Dylan Matthews has a great chart showing just how out of synch defense spending (and inventories) were from the rest of the economy. On a more granular level, this graph from Reuters shows capital expenditures at Lockheed Martin and Northrup Grumman, everyone’s favorite cluster bomb assemblers and  drone manufacturers, falling off a cliff. The stimulative effects of defense spending are nothing new. Just think WWII or, more recently, the Washington, DC area, where the economy has grown about three times faster than the rest of the country since the financial crisis. Last fall more than a few economists cut their fourth quarter forecasts despite upward government revisions to third quarter growth. Back then, the surge in third quarter defense spending didn’t look sustainable.

Guess What? Austerity Doesn't Work in the US Either --- From the BEA:  Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE. Let's look at a chart that shows the percentage change in GDP and the contributions to that change:

Why Did Economists Get GDP Wrong? - Gross domestic product was expected to be weak in the fourth quarter, but no top economist thought that the change from the prior period would be negative. What did they miss? Basically, economists correctly predicted the negative aspects of the report—but they underestimated how negative they’d be. Stephen Stanley of Pierpont Securities summed up the big drags: “Inventory accumulation slowed from $60 billion in [the third quarter] all the way to $20 billion in [the fourth] (I had $33 billion). This subtracted 1.3 percentage points from growth (I had projected a 1.0 percentage point drag). Second, federal defense spending unwound the [third-quarter] spike with a vengeance. Defense outlays sank at a 22% annualized clip in [the fourth quarter], driving a 15% drop in overall federal outlays in real terms. This component also subtracted 1.3 percentage points from GDP growth in [the fourth quarter], about 0.4 percentage points more than I had anticipated.” It is interesting, though, that none of the 24 economists surveyed for the Dow Jones consensus estimate forecast a negative print. The median expectation was for 1% growth in the fourth quarter with estimates ranging from 0.3% to 2%. Part of that may be because negative prints during a recovery are rare, and the details of today’s report suggest that it’s unlikely to be repeated in the current quarter. But economists also are notoriously bad at seeing negative quarters coming. In September 2008 the U.S. was finishing its first quarter of contraction in the Great Recession, but the Wall Street Journal’s survey of economists was expecting 1.2% growth. Just three of the 50 respondents that month expected a negative print when the official data were released a month later.

Economists React: ‘Best Looking Contraction’ in GDP - Economists and others weigh in on the GDP report showing a 0.1% contraction to overall growth.

  • –We advise fading the headline number given distortions in the data. Growth was dragged down by a sharp contraction in government defense spending and inventory accumulation, which combined subtracted 2.6 percentage point from growth. Outside of these two very volatile components, underlying growth improved with a solid gain in business investment. We believe today’s report suggests upside risk to our forecast of 1.0% for Q1 GDP. … The economy is not exactly robust, but it is certainly not contracting as today’s data would otherwise suggest. --Michelle Meyer, Bank of America Merrill Lynch Global Research
  • – Frankly, this is the best looking contraction in GDP you’ll ever see. Stripping out defense and inventories, GDP growth accelerated to 2.6%, from 1.8%. Admittedly, if you strip out enough of the falling components, then obviously what’s left went up. But in this case these are one-offs. If this really was the start of a new recession, like the ones in 2001 and 2008, then we would expect to see GDP excluding defense and inventories falling too. Instead, the growth rate is accelerating. –Paul Ashworth, Capital Economics

Unusual Quarter of Contraction Doesn’t Mean Recession - A one quarter contraction of economic output doesn’t mean the economy is formally in recession, but it is unusual for such contractions to happen in the middle of economic expansions. In fact, it has only happened one time in the past fifty years, in the fourth quarter of 1977, when the economy contracted at a 0.1% annual rate after registering a 7.4% growth rate in the third quarter of that year, according to Commerce Department data. Back then, the economy quickly bounced back, expanding at a double digit rate in the first half of 1978 before cooling off again. There was another blip in the third quarter of 1959, when the economy contracted at a 0.5% rate, after registering a 10.5% growth rate in the previous quarter. On a number of occasions, including in 2011, 2006 and 2002, output has come close to zero but hasn’t contracted.

US GDP Shrinks, But Stocks Near All-Time Highs? - The partisan wuss Krugman and his various acolytes have long argued that the United States is "doing better" than Europe for the main reason that, instead of starting processes of fiscal consolidation, the Americans have the fiscal and monetary spigots wide open. On the other hand, there are those of us who believe the US is embarking on a path to ruin. Instead of moving away from debt-fuelled, import-driven domestic consumption, it is indulging in it. Even more ridiculously, they are cheering gains in home prices. Lots of borrowing, importing and spending beyond their means; throw in rising home prices and it's akin to rehash of 2007. Do you buy this analogy? Consider too that stock indices are nearing record highs--Dow Jones Industrial Average, Standard & Poor's--take your pick. If it makes Krugman shut the hell up for a while--he yaks far too much anyway--the shrinking US economy belies the false optimism that it has turned the corner during the Bushbama years. What a joke. Actually, Krugman, Europe and the US are both contracting. The only difference is that the Europeans are making structural adjustments that should pay dividends in the future instead of taking on trillions more in debt in the (delusional) hope that they will return to trend growth of 3% or better. Dear Rick Santelli: the US is not Europe now; it's rather worse for not even bothering to address necessary structural adjustments. Contraction plus massive debt versus contraction plus deficit control; I'll take the latter, thank you. Keep dreaming, white boys.

Why Today’s GDP Report Isn’t As Bad As It Looks - According to initial estimates from the Commerce Department the American economy actually shrank in the fourth quarter of 2012. Yes, you read that right — not the sluggish growth we’ve been used to since the end of the 2008-2009 recession, but an honest-to-goodness contraction of 0.1%. Predictably, political pundits on the right had a field day – can you blame them? — using the data as evidence of the failure of the “Obama economy.” On Wall Street however, the markets have more or less been shrugging off the news, with the Dow down a slight 0.07% in morning trading. So what’s the deal? In short, if you take a deeper look into the report, it’s not as bad as the headline number suggests. The biggest factors driving the contraction were a big drop in defense spending, which as The Washington Post explains is most likely related to the Defense Department preparing for the large cuts to its budget which were supposed to go into effect January 1, but have been postponed for a couple months as part of the fiscal cliff deal. (This should also provide an object lesson in the effects of government spending cuts on near-term GDP growth.) The other main factor dragging down the headline number was a decline in business inventories, which is likely just a reaction to firms working off inventory buildups from the previous two quarters.

Visualizing GDP: Some Anomalies in the Q4 Advance Estimate Negative Print - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. The major changes that contributed to today's minus 0.1 percent Advance Estimate from the 3.1 percent Q3 were primarily seen in the general decline in private inventories, a sharp decline in exported goods, and a substantial drop in national defense spending. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column).  Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.52 of the -0.1 real GDP. This is an increase from the 1.12 PCE of the 3.1 GDP in the Third Estimate for Q3. Here is a more detailed look at the contribution changes between across the four quarters of 2012. As for the negative 1.27 contribution from private inventories, let's look at this component over the last twelve quarters. It is highly volatile and, in my view, not very useful in forecasting GDP trends: The decline in defense spending, no doubt a disturbing development for militant conservatives, was not surprising given the war drawdown. This trend will likely continue with the probable beginning of sequestration in Q1. The falloff in goods exports (a minus 0.80 contribution) is a definite anomaly resulting primarily from the drought in the US. It is the first negative contribution of goods exports since the end of the last recession.

Will the 'Real' GDP Please Stand Up? (The Deflator Makes Big a Difference) - How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index. The charts below show quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at I've calculated the latest GDP in all versions to two decimal places to help highlight the differences. I have a note at the bottom showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP. With this in mind, consider: The BEA puts the latest compounded annual percentage change in the GDP deflator (i.e., the inflation rate) at 0.60%. That is far below the Q3 2.7% (2.72%) to two decimals, which gives us a higher GDP number. If I make the same calculation using the compounded annual percentage change for seasonally adjusted quarterly CPI, I get an inflation rate of 2.05%, 1.45% percent higher, which thus would produce a lower real GDP, as illustrated in the CPI chart below.

GDP Gap Stuck at 6% -- - Dean Baker gets it right with respect to the latest news on GDP:  A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter. Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters. Inventory changes often turn out to be transitory events while I have faith that those military Keynesians in the Republican Party will push for more defense spending pork. But let’s be clear about what is going on with the GDP gap. While it did fall from 7.5% in mid 2009 to around 6% at the end of 2010, it has been basically stuck at 6% ever since. So recent GDP growth has been insufficient. Dean also rightfully turns on our fiscal policy prospects:

Don’t Expect Consumer Spending To Be the Engine of Economic Growth It Once Was - Can American consumers continue to serve as the engine of U.S. and global economic growth as they did during recent decades? Several powerful trends suggest not, at least for a while. Instead, new sources of demand, both domestic and foreign, are needed if we are to maintain healthy rates of growth. Unfortunately, this won’t be easy because consumer spending constitutes the largest part of our economy, and replacements for it—more investment, more government spending or more exports—either can’t be increased rapidly or might create unwanted consequences of their own. It is no exaggeration to say that consumer spending was the dominant source of economic growth in the United States during recent decades. For example:

  • During the 10 years ending in the last prerecession quarter (third quarter of 2007), inflation-adjusted personal consumption expenditures (PCE) grew at a continuously compounded annual rate of 3.47 percent, while overall inflation-adjusted annual growth of gross domestic product (GDP) averaged only 2.91 percent.
  • During that period, the remainder of the economy—consisting of investment (I), government purchases of goods and services (G), and net exports (NX)—grew at only a 1.70 percent inflation-adjusted annual rate.
  • Expressed in terms of its contribution to average quarterly real GDP growth during the decade ending in the third quarter of 2007, PCE accounted for 81.3 percent, while the other components (I, G and NX) contributed only 18.7 percent.

Fiscal Policies Matter! GDP Down Income and Savings Up in Anticipation of The Tax Hikes - The advance estimate of Q4 Real GDP released on Wednesday showed that US output contracted by 0.1 percent in the final quarter of 2012. The effect of fiscal policies as well as weakness of the European economy and the rest of the world can clearly be seen in the negative aspects of the report.  The overall decline was due to a reduction in  exports (-5.7%) and a rundown in inventories as well as a large decline in government spending (-6.6%) caused by a 22.2% cut in defense. The negative headline number hides overall positive growth in domestic fundamentals. Consumption expenditures on durables increased at a faster pace than in Q3, and both residential and non-residential fixed investment recorded the highest combined growth since the second quarter of 2010. There are signs that spending on services and non-durables are slowing down, which will be a cause of concern if the trend continues into 2013. Fiscal policies matter. The expected end of the payroll tax holiday had a large effect on personal income and savings toward the end of the year. In the final two months of 2012, real disposable personal income increased by 1.3% and 2.8% in November and December. This is in stark comparison to the .14% growth in the first 10 months of the year. The run-up in income can almost entirely be attributed to companies shifting dividend payments forward. The result lead to a jump in the savings rate, up to 6.5%, but no apparent change in personal consumption expenditures.

The 2012Q4 GDP Release: Upside and Downside Risks - Defense spending subtracted considerably; more to come if the sequester occurs. Uncertainty weighs—perhaps. Trade volumes decline. But final sales continue upward. And confusion about demand side analysis persists.  Jim has already covered the main points from the release, and further assessment is in today's NYT. Here are some additional observations. Defense spending accounted (in a mechanical sense) for 1.28 ppts of the -0.1 ppts growth (SAAR) recorded in Q4.  Defense spending on goods and services declined 42.36 billion (Ch.05$), or $46.8 billion, at an annualized basis going from Q3 to Q4. This was a 22.15% (SAAR) (25.04% in log terms).  In an interesting comment, JEC chair-designate Brady stated:"This stunning contraction can’t be blamed simply on defense spending ahead of sequestration or uncertainty over the fiscal cliff. It’s a case of acceleration. Defense spending was accelerated into the third quarter of last year which artificially boosted the economic growth ahead of the November election to 3.1%. As a result, the fourth quarter sagged into a 0.1% decline. Sequester is not to blame - defense spending in the last two quarters averaged about the same as defense spending in the first half of the year. As Figure 1 illustrates, defense spending accounted for only 0.64 ppts of growth in Q3, while the drop in Q4 was 1.28 ppts. The decline is clearly larger than the prior increase

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

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

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee."  Here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators.  I've now updated this commentary to include the January data for Nonfarm Employment, the blue line in the chart below.

Oil Creeping Higher -- At What Price Does It Start to Choke Growth? - The daily oil chart shows that oil has been in a rally since early December.  Currently, prices are above the 200 day EMA.  All three shorter EMAs have moved through the 200 day EMA, and all shorter EMAs are rising.  Volume is supportive.  While the CMF is very bullish, the MACD is weakening a bit. A move through the 98 price level makes 100 the next logical price target. So -- at what price does oil start to choke off recovery?  Brent just crossed the 115 level, which could slow growth in the EU.

Paul Krugman vs. Joseph Stiglitz - Given today’s report of economic contraction, it’s worth tuning in to a recent debate between liberal economists Joseph Stiglitz and Paul Krugman. While they agree on most things, the two have been at odds over whether economic inequality is holding back the recovery. Stiglitz says it is, and Krugman, while agreeing the inequality is unfortunate, says it is not. Stiglitz gives four reasons why he believes "inequality is squelching our economy." First, "our middle class is too weak to support the consumer spending that has historically driven our economic growth"; second, the "hollowing out" of the middle class means that many Americans cannot afford an education for themselves and their children; third, the loss of middle income is "holding back tax receipts"; and fourth, inequality is "associated with more frequent and more severe boom-and-bust cycles."  Krugman remarks that of these four, only the first and the third bear directly on what might now be holding back the recovery. The other two are about future growth. Krugman is right on this point, and he is also right to find the argument about tax receipts unconvincing. If inequality is limiting tax receipts, it is because of loopholes that the wealthy enjoy. It’s not because of inequality itself. But on the point about consumer spending—which Stiglitz says is the "most immediate"—I think Stiglitz is right and Krugman wrong.

Fiscal Cliff Didn’t Hold Back Business Spending - Corporate executives warned Washington late last year they were delaying investment plans amid rising uncertainty over the fiscal cliff, raising risks for the economy. Turns out they did nothing of the sort. In its first analysis of U.S. gross domestic product in the fourth quarter of 2012, out today, the government said the economy surprisingly shrank at an annualized rate of 0.1% between October and December, partly due to a massive one-time drop in defense spending. However, details reveal a bright spot: Business investment in equipment and software — seen as a proxy for corporate spending — soared 12.4% in the fourth quarter, the third-biggest jump since the economic recovery started in the middle of 2009. The fourth-quarter leap more than makes up for the previous quarter’s 2.6% drop and contributed 0.86 percentage point to the nation’s growth late last year — making it one of the biggest positive drivers of the economy. So what happened? U.S. companies may very well have worried that failure to deal with the cliff would trigger another recession, hurting consumer spending and corporate profits. And there’s little doubt it’s harder for an executive to invest in new computers and employees when she doesn’t know what her firm’s tax rates are. Business investment in structures, such as buildings, did fall 1.1% in the fourth quarter and flatten in the third quarter.

Government is hurting the economy — by spending too little: You’ve heard this before: The government is holding the economy back. And it’s true. The newly released numbers for economic growth in the fourth quarter, which show the economy shrinking at an 0.1 percent annual rate, prove that. But exactly what the government is doing to hold the economy back might surprise you. Typically, when people say the government is hurting the recovery, they mean that deficits are too high and uncertainty over future policy is scaring businesses. But there’s little evidence of that. The main reason to worry about deficits is that they’ll hike interest rates, as government borrowing crowds out private borrowing, and that makes it harder for businesses to grow and individuals to invest. But interest rates are about as low as they’ve ever been. After accounting for inflation, the federal government has been able to borrow at an unprecedented negative inflation-adjusted rate — so, the market is, essentially, paying us to keep their money safe — since 2011.

Our Incredible Shrinking Government - Paul Krugman  - Most analysts are, rightly, shrugging off the surprise report of an actual decline in 4th quarter GDP. It will probably be revised away, and in any case it’s the result of one-off factors: a drop in inventories and a quirky sharp decline in defense spending. Still, the report does highlight the role that shrinking government purchases of goods and services are playing in holding the economy back. And yes, I mean shrinking, not just growing more slowly than I’d like. Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline. Here’s a comparison, using the BEA numbers, of the relevant numbers in the current business cycle and during the Bush-era recession and aftermath: By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity. How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower. So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.

$7.66T Of Fiscal And Monetary Stimulus - The U.S. Government took some enormous steps and continues to take enormous steps to right the economy. In his 2013 outlook, KKR's Henry McVey points to the $7.66 trillion worth of stimulus as a reason to be bullish on real assets like real estate and commodities. From McVey: The United States is running an explicit reflationary policy of holding nominal interest rates below nominal GDP. Though this relationship was slightly more stretched back in the late 1970s, it is again near record levels. We are also dealing with far more liquidity injections by the U.S. government than in the past. In the U.S. alone, monetary and fiscal stimulus as a percentage of GDP has breached the 40% threshold, nearly 5 times what was put into the system after the great depression (Exhibit 52). Moreover, the latest round of quantitative easing is tied to unemployment, which we do not see changing quickly, given that new business formation is still running 35% below the historical average. Here's a breakdown of all that stimulus.

"We Are Going To Kill The Dollar" Says Obama Senior Official; When, How, Asks Mish - Infowars posted an interesting clip of a Kyle Bass interview regarding the fate of the US dollar. Let's take a look at the video.  Here's the article reference: Senior Obama Official: “We Are Going To Kill The Dollar”. Kyle Bass ..." So the government's idea now is we are going to export our way out of this. When I asked a senior member of the Obama administration last week, 'how are we going to grow exports if we do not allow nominal wage deflation?', and he just said we're going to kill the dollar. It's a dead answer but that's where we're headed".  That video clip makes good copy. But how realistic is it?   I do not doubt the conversation took place. However, I have to wonder about how serious the person was who said it, and I also have to wonder about how much influence that person has.  Let's assume the person who made it can actually influence policy. Is that enough? The answer is no, it isn't. QE is up to the Fed, not administration officials. Moreover, the QE point is moot, because if QE alone could destroy the dollar, the dollar would already be destroyed.  Spending money in large enough size could indeed sink the dollar, but that takes an act of Congress.

US Ends 2012 With 103.8% Debt To GDP - Previously, when calculating debt/GDP metrics for the US, we naturally assumed some GDP growth in Q4. Following today's GDP data we now know what Q4 GDP is. We also know that, at least on a preliminary basis, it posted a decline on an annualized basis. This means that we now have an official print for US Debt/GDP as of December 31, 2012. The numerator, or debt: $16.432 trillion, or the debt ceiling, which as we know was breached on the same day, and which has yet to be formally raised. The denominator, or GDP: $15.829 trillion. This means that the formal debt/GDP is now 103.8% and growing fast.

Modern Monetary Theory, Bears 2.0 Style - video from naked capitalism - The Bears, images of bears in human garb that debate the issues of the day in computer-generated voices, have become something of a staple of the Web. A Bears-style video on MMT was posted earlier this month. While I like the innovation of a Sharon Stone-ish head and her smashed up interlocutor, and I think this video is well done, I have my doubts as to whether this approach is an effective way to educate people about MMT. Even though the video is meant for “dummiez” it uses terms like “currency issuer” and “currency user” all too freely. The most potentially persuasive section to a non-convert or an agnostic are the charts that show how government deficits almost exactly mirror private savings over long periods of time. That does not come until well into the video. I suspect MMT people, rather than preaching to possible converts, which can be alienating, would do better taking a Socratic approach. Making people see via teasing out their pre-exsiting beliefs that what they believe about money is counterfactual or contradictory would probably provide for a better foundation for getting them to consider new ideas than the the head-on approach of telling them that that what they believe is is wrong.

Safe Assets and Financial Crises - Mark Thoma has shared a link to a new working paper by Gary Gorton and Guillermo Ordoñez called "The Supply and Demand for Safe Assets." The paper brings to mind a once-confidential document written by economists in the Clinton Administration called "Life After Debt" which was recently made public by the team at NPR's Planet Money. The report notes: In the year 2000, the U.S. Treasury began actively buying back the public debt; we should all appreciate the tremendous achievement this represents for the Nation as a whole... We must realize however, that a sharp reduction in Federal debt and the possible accumulation of a Federal asset raises at least three important issues. First, investors looking for an asset free of credit risk can no longer count on an abundant supply of U.S. Treasury securities, and Treasury securities may no longer provide a reliable benchmark for other interest rates. Second, the Federal Reserve may have to change the mechanisms by which it conducts monetary policy. Third, continued surpluses after the public debt has been paid off will require the Federal. government to acquire assets; either directly or though the Social Security Trust Fund. This raises issues about what kinds of assets might be acquired, and the best way to manage this task.” Gorton and Ordoñez's paper is relevant to the first of these issues. The Clinton Administration report elaborates on this issue, saying: US Treasuries are considered free of default risk by investors the world over...The remarkable liquidity of Treasuries is also a result of the full faith and credit of the United States Government.  Holding a liquid asset is valuable because it affords an assurance of convertibility, and thus fast and easy access to capital.  Private investors, the Federal Reserve and many foreign central banks have used Treasuries to fulfill their need for a riskless, performing asset with liquidity second only to currency.

Why is There Still a Shortage Safe Assets?  -- JP  Koning wants to know why many of us continue to talk about a safe asset shortage five years after the financial crisis started. Shouldn't this problem corrected itself many years ago? He has asked this questions many times and most recently framed it this way: Why do we *need* more safe assets? Why don't we just let the existing ones rise in value, thereby providing safety? If we wanted to express our desire for safety by buying fire extinguishers, then I'd agree that we need to produce more safe assets. After all, only some sort of increase in the supply of extinguishers will be able to meet that demand. But things are different if we express our demand for safety by turning to financial markets. The great thing about t-bonds is that unlike fire extinguishers, we don't need to fabricate more of them to meet our demands for safety... we just need a higher real value on the stock of existing t-bonds. This can be entirely met by shifts in prices. Where is the problem that needs to be rectified? This is a great question. Why haven't financial markets--the nimblest, most flexible markets of all--pushed treasury values to levels that would cause the market for safe assets to clear? Shouldn't arbitrage in these markets fixed this problem long ago? Let me begin my answer by recalling why the ongoing shortage of safe assets is such a big deal.

It's not a collateral shortage, it's a scarcity of collateral - Today we focus on the new age of collateral-based finance and the presentation given by Manmohan Singh (speaking in an independent capacity rather than as a representative of the IMF). The key takeaway from Singh’s presentation: it’s not a shortage of safe assets plaguing the system, but a scarcity of assets that’s the problem. And there is a big if subtle difference between the two. In Singh’s mind, collateral is money-like. It has its own velocity as well as its own multiplier effect. The issue, consequently, is not a shortage of assets per se, but rather the declining reuse rate of assets that already exist. Referring to one of the best collateral charts FT Alphaville has ever seen on the subject, Singh noted how the level of pledged collateral that banks can use in their own name generally contracted over time (with only a few exceptions):

First time in a while: 10 year Treasuries pierce 2 per cent - In case you missed the moment earlier on Monday, here’s the yield on US 10 year paper breaking through 2 per cent – albeit momentarily. At pixel the reading stood at 1.99… We haven’t seen that since April last year… Thank durable goods orders coming in better than expected in December in the US. In explaining the move, newswires were also citing a statement from Fitch saying the chances of the rating agency stripping the US of its triple-A status in the near term had receded following the temporary suspension of the debt limit. Yes, can-kicking is now “bad” news as far as safe havens go.

Ratings and Rates - Paul Krugman - The interest rate on U.S. long term debt is up a bit, briefly breaking above 2 percent today. So, is this reflecting worries about US debt sustainability? Of course not — and by now it seems that even financial reporters get it. The main cause of the slight uptick, according to news reports, was a better-than-expected durable goods number, which brings marginally closer the day when the Fed might finally start raising rates. In other words, it was economic optimism, not pessimism, behind the rate rise. And according to the FT Alphaville post linked above, a second reason may have been a statement by Fitch that a US downgrade is less likely. That’s right, reduced fears of a downgrade lead to higher, not lower, US borrowing costs. Why? Because scare talk from the rating agencies feeds the deficit scolds, making destructive austerity more likely, and therefore pushing back the date when the Fed might raise rates. You might say that the only thing we have to fear from the rating agencies is fear itself — not market fear, because the bond markets don’t seem to care, but political fear, the instinctive tendency to overreact to talk of bond vigilantes.All of which is just a bit more evidence that everything the Very Serious People have been saying about confidence and the bond markets is wrong.

No, the 90 Percent Debt Threshold Hasn't Been Proven - The deficit hawks at the Washington Post editorial board are worried. They are worried that the deficit is falling and the debt-to-GDP ratio is leveling off as a result of the numerous cuts and tax increases implemented over the past two years. Liberals know this and are starting to push back, either claiming that the deficit is coming down too quickly or arguing that the main medium-term deficit issues are taken care of and we should focus more on unemployment and other non-budget issues while implementing Obamacare reforms well. The CBPP has been leading the charge on this, noting various levels at which debt as a percent of GDP would level off in the following graphic:  The editorial focuses on the debt-to-GDP ratio leveling out too close to a 90 percent threshold. The writers also claim that there is a well-defined and well-established 90 percent threshold over which our economy will suffer. They write, "The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." This 90 percent threshold was proposed by Carmen Reinhart and Kenneth Rogoff in their 2010 article "Growth in a Time of Debt" (GITD). But economists don't "regard" the 90 percent mark as definitive; in fact, this study and its claim have never even been peer reviewed by an economics journal. [1]

Debt stabilization does not require $1.4 trillion, $1.5 trillion, or any other single number - There is a rapidly-forming consensus that policymakers should commit to specific levels of deficit reduction over the next 10 years. At a press conference earlier this month, President Obama endorsed a specific 10-year savings target of $1.5 trillion, arguing that two years ago there was a consensus that “we need[ed] about $4 trillion to stabilize our debt and our deficit, which means we need about $1.5 trillion more.” This is consistent with the Center on Budget and Policy Priorities’ recommendation that $1.4 trillion in deficit reduction (including interest savings) over the next 10 years be targeted to stabilize the debt ratio (federal debt as a share of total gross domestic product). Various commentators such as Martin Wolf of the Financial Times and Paul Krugman of the New York Times have noted that this amount of deficit reduction is modest, and consequently suggest that policymakers instead focus on the more pressing priority of job creation and rapidly lowering unemployment. But the case for turning to job creation is even stronger than perhaps they realize: this analysis shows that the debt ratio can be stabilized with less than $1.4 trillion. And more importantly, there actually isn’t a single minimum target necessary; if coupled with near-term stimulus, the debt ratio could be stabilized without any deficit reduction whatsoever. As my colleagues Josh Bivens and Andrew Fieldhouse have noted in recent posts, targeting a specific deficit savings number—let alone one this large—is a mistake because both the timing and composition of any deficit reduction should be conditioned on the actual state of the economy, not rosy assumptions that the economy will have automatically rebounded to full employment four years from now.

Why the U.S. Government Never, Ever Has to Pay Back All Its Debt - How will our children, grandchildren, and sundry other friends and relatives too young to see an R-rated movie unaccompanied ever pay back the entire debt the government is piling up now? Easy. They won't. The U.S. government is never completely debt-free. There's only one thing you need to know about the government. It's not a household. The government, unlike us, doesn't need to pay back its debts before it dies, because it doesn't die (barring secession or a sneak attack from across the world's longest unprotected border -- a most unworthwhile initiative). In other words, the government can just roll over its debts in perpetuity. That's the point Michael Kinsley misses when he says we "can't borrow forever," in an otherwise fine column trying to convince unemployment and deficit hawks that they actually agree on a "barbell" approach -- stimulus now, austerity later -- to fiscal policy. We can, and in fact have, borrowed forever. And that doesn't mean our debt burden will go up forever either. As you can see in the chart below, the government dramatically decreased its debt-to-GDP ratio in the three decades following World War II, despite mostly running deficits during the time.

One Investment that Can Reduce Our Long-Term Debt: Suppose we could enhance our long-run growth prospects, reduce our long-term unemployment problem, and reduce our expected future debt at the same time. Would that be a policy worth pursuing?  Infrastructure spending in an economy such as ours, one with high and persistent unemployment and considerable infrastructure needs, has these features. It puts people to work on projects that promote economic growth – economic growth is one of the best ways to reduce the long-run debt burden – and money spent on infrastructure maintenance and repair saves us money in the long-run. How can spending more now, which increases the deficit, decrease our long-run debt burden? Consider spending on infrastructure maintenance and repair first, and think about a similar situation for households and firms. When a household hits hard times due to unexpected expenses, it’s possible to delay routine maintenance on things such as the car that is needed to get to work each day. The same is true for a business. When times are tough, maintenance on the production line, the trucks needed to deliver goods, and so on can be put off. But it cannot be delayed forever, and the household or business may need to borrow money to pay for the maintenance and repairs even if debt burdens are already relatively high.

Why Government Spending Is Not Out of Control - Bruce Bartlett - It is a standard talking point of Republicans and deficit hawks of all political stripes that federal spending is out of control; that major surgery is needed, especially on entitlement programs such as Social Security and Medicare, to get the budget on a sustainable course. In fact, our long-term deficit situation is not nearly as severe as even many budget experts believe. The problem is that they are looking at recent history and near-term projections that are overly impacted by one-time factors related to the economic crisis and massive Republican tax cuts that lowered revenues far below normal. Taking a longer-term view, such as that in a recent Treasury Department report, shows that our longer-term fiscal problem is in fact quite manageable. As the chart below illustrates, federal spending ballooned in fiscal year 2009 mainly because of what economists call “automatic stabilizers” – programs already in law such as unemployment compensation that rises whenever a recession occurs. Spending rose from 20.7 percent of the gross domestic product in fiscal year 2008 to 25 percent in 2009.

Bruce Bartlett: It's All About The Interest - CG&G alum Bruce Bartlett has an important column about federal spending in The Fiscal Times that does what Bruce does best: Say it straight with no BS. What Bruce shows -- convincingly -- is that, contrary to those that say federal "spending" is the long-term problem, the real problem is spending in just one area -- interest payments on the national debt. Spending on virtually every other area of the budget is flat over the long term while interest starts to rise precipitously in 2020 and keeps rising over the next 60 years. This isn't to say that interest payments on the national debt don't constitute federal spending because that obviously isn't true. But, as Bruce points out, the deficit for the non-interest part of the budget -- the "primary deficit" -- is only 1.7 percent of GDP over the long run and that makes it far less scary than the deficit scolds want us to believe. Although Bruce doesn't mention it in his article, this situation argues persuasively for the government to convert its debt from short- to long-term so that the current low interest rates can be locked in for as long as possible. Doing that obviously depends on market conditions as well as inside-the-beltway desires, but any shift toward the longer end of the yield curve could be the most important deficit reduction effort the government will make over the next 20 years.

It’s about growth, not the deficit - If you care about deficits, you should want our economy to grow faster. If you care about lifting up the poor and reducing unemployment, you should want our economy to grow faster. And if you are a committed capitalist and hope to make more money, you should want our economy to grow faster. The moment’s highest priority should be speeding economic growth and ending the waste, human and economic, left by the Great Recession. But you would never know this because the conversation in our nation’s capital is being held hostage by a ludicrous cycle of phony fiscal deadlines driven by a misplaced belief that the only thing we have to fear is the budget deficit.Let’s call a halt to this madness. If we don’t move the economy to a better place, none of the fiscal projections will matter. The economic downturn ballooned the deficit. Growth will move the numbers in the right direction.

'Trillion Dollar Deficits are Sustainable for Now – Unfortunately' -- John Makin and Daniel Hanson of the conservative American Economic Institute talk sense on the deficit. Now if we could just get them over their inflation fears -- the source of the "unfortunately" part of the title -- we might be able to get somewhere in addressing our biggest problem right now, high and persistent unemployment, and enhance our long-tern growth prospects at the same time: Trillion dollar deficits are sustainable for now – unfortunately, by John H. Makin and Daniel Hanson, Commentary, FT: An abrupt spending sequester at a rate of about $110bn per year ($1.1tn over 10 years) scheduled to begin March 1 could cause a US recession, coming as it does on top of tax increases worth about 1.5 per cent of GDP enacted in January. The April deadline for a continuing resolution to fund federal spending could lead to a fight that shuts down the government, placing a further drag on growth. These ad hoc measures, aimed at creation of an artificial crisis, will fail to produce prompt, sustainable progress towards reduction of “unsustainable” deficits because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised... Trillion-dollar federal budget deficits have continued to be sustainable because the federal government is able to finance them at interest rates of half a per cent or less. Two per cent inflation means that the real inflation-adjusted cost of deficit finance averages −1.5 per cent...

Very Serious People Completely Missing The Boat On The Budget (Yet Again) On Monday's Washington Post editorial page we have two of Washington's more self-important Very Serious People bloviating yet again on how the Most Important Thing that Obama must do if he is to be well regarded in history is to cut Social Security.  I am talking about WaPo ed page editor, Fred Hiatt (who gave this bum this job anyway?) and of course my favorite non-economist posing as one, Robert J. Samuelson.  Hiatt thinks the two big issues of the first term were the stimulus and health care, but is clearly upset that while Obama had apparently signaled early in his term that he was willing to cut SS benefits, he is not willing to do so now, which clearly Hiatt views as inimical to Obama's ultimate historical standing.  RJS discusses whether or not the 21st century will be another "American century," but finds the biggest threat to this to be that the US is in with Europe and Japan in that "Their welfare states are overwhelmed. Aging societies face a collision between promised benefits and acceptable taxes."  Acceptable taxes?  Gag me with a spoon. As it is, both studiously ignore the much more reasonable column on the same page by E.J. Dionne who cites both Martin Wolf and Bruce Bartlett on how it is "madness" to be so worked up about the deficit.  The problem can be largely resolved if growth and jobs are able to be gotten back and a premature rush to sharply cut the deficit can lead to a failure to do that. 

Someone Else Who Wants Us to Remain in Deficit Crisis Mode - Suzy Khimm has a nice write-up of a Peterson Foundation piece that looks to me like another example of why we must all stay in crisis mode on the deficit or why won’t “cut deeply enough” or make the “hard choices” that the “serious people” know we must. Your first hint that there’s from fear mongering going on here comes from the image you see when you click on the link to the study—the Capitol building perched on the edge of an abyss, with chunks of the building already falling into the depths. While our approach at CBPP has been to point out what’s needed to stabilize the debt over the next decade—and stress that the extent of further-out-in-time budget pressures depend on health care costs and the impact of new policies to curb them—the basic approach taken here is to get people worried enough about post-2022 projections that they’re willing to pass “entitlement reforms” now. That is both unwise and unnecessary.  First, as mentioned, we need to see the trajectory of health costs that have slowed in recent years.  If that sticks, the forecasts will be improved.

The folly of DC's desperate deficit fearmongers - The news that the UK, with negative growth in the fourth quarter of 2012, faces the prospect of a triple-dip recession, should be the final blow to the intellectual credibility of deficit hawks. You just can't get more wrong than this flat-earth bunch of economic policy-makers.  They're pretty much batting zero. They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the eurozone and, especially, the UK. By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set – preferably, something that doesn't involve numbers, or people. But that's not what is happening. The people who got it all wrong are still calling the shots in the UK, the IMF, the European Central Bank, and Washington. The idea that job security would have any relationship to performance is completely alien in the world of economic policy. With few exceptions, these people enjoy a level of job security that would make even the most powerful unions green with envy.

Krugman schools ‘Morning Joe’ on austerity: ‘How many times’ do I have to be right? - Nobel prize-winning economist Paul Krugman on Monday attempted to give the panelists on MSNBC’s Morning Joe a lesson about why austerity and drastic spending cuts were the wrong solution in tough economic times. “Our track record is actually not bad, we’ve tended to reduce our debt at least relative to GDP when the economy was strong,” Krugman told host Joe Scarborough. “We tend to increase when the economy is week, but that’s what you should do. So this is not a hard call. I mean, as long as we have four million people who have been unemployed for more than a year, this is not a time to be worrying about reducing the budget deficit. Give me something that looks more like a normal employment situation and I’ll become a deficit hawk, but not now.”“If you spend a lot of your time talking about the debt and the entitlements are the big problem, the message that actually what we need to is promote jobs gets lost. And in fact, we spent the last two and a half years focused entirely on arguing about the long-term deficit and entitlements and doing nothing for employment right now. That balance has got to shift.”

10 People Who Disagree With Joe Scarborough - MSNBC host and POLITICO columnist Joe Scarborough has a piece up today titled Paul Krugman vs. The World. It's about Paul Krugman's ostensibly contrarian views on the deficit and the national debt. Here's how it's teased on the POLITICO homepage. The article says: Paul Krugman favors running deeper deficits, but folks like the chief of the Council on Foreign Relations, Erskine Bowles, Scarborough himself, Mika Brzezinski, Steven Rattner, and former Joint Chief chairman Michael Mullen all disagree with Krugman. Note that zero of the above people are "economists" let alone mainstream economists. But actually there are plenty of economists and economically-literate minds who think that, to varying degrees, the deficit is not what we should be worrying about. For Joe Scarborough's sake, here's a list of people. With each we've linked to comments they've made about their (lack of) worry about the deficit.

Joe Scarborough's Attack on Stimulus - Dean Baker - Most people know that the deficit whiners live largely in a fact free zone, but every now and then it is worth trying to throw a few in their direction in the quest for intelligent life. The immediate motivation is Joe Scarborough's latest tirade after having Paul Krugman as a guest on his show. Scarborough is of the view that if stimulus was the answer the economy would have already recovered by now. In this context, we miight ask what the stimulus was designed to do relative to the size of the problem. The best evidence here is the assessment of the Congressional Budget Office (CBO) from March of 2009. The reason this analysis is useful is that it is a look at what the economy was expected to do and the impact of stimulus at the time it was passed. CBO was looking at the actual stimulus as passed. It also in an independent agency with no motive to cook the books.  Here's the picture that CBO drew compared to what actually happened. There are two points which should jump out at anyone. First, even as late as March of 2009 CBO hugely underestimated the severity of the downturn. The actual drop in employment from 2008 to 2009 was 5.5 million. The predicted drop was just 3.8 million. In other words, CBO underestimated the initial hit from the downturn by 1.7 million jobs, even after it was already well underway. If anyone wants to blame the greater severity of the donwturn on the stimulus they would have a hard story to tell. Most of the hit was before a dollar of the stimulus was spent. Employment in March of 2009 was 5.4 million before its year ago level.

Incestuous Amplification, Economics Edition - Paul Krugman - Which brings me to the fiscal debate, characterized by the particular form of incestuous amplification Greg Sargent calls the Beltway Deficit Feedback Loop. I’ve already blogged about my Morning Joe appearance and Scarborough’s reaction, which was to insist that almost no mainstream economists share my view that deficit fear is vastly overblown. As Joe Weisenthal points out, the reality is that among those who have expressed views very similar to mine are the chief economist of Goldman Sachs; the former Treasury secretary and head of the National Economic Council; the former deputy chairman of the Federal Reserve; and the economics editor of the Financial Times. The point isn’t that these people are necessarily right (although they are), it is that Scarborough’s attempt at argument through authority is easily refuted by even a casual stroll through recent economic punditry. But these people aren’t part of the in-group, and if they do make it into the in-group’s conversation at all, it’s only by blurring their message sufficiently that the in-group doesn’t understand it. And at this point, of course, all the Very Serious People have committed their reputations so thoroughly to the official doctrine that they almost literally can’t hear any contrary evidence.

Krugman on U.S. Fiscal Policy, Economy - Nobel Prize-winning economist Paul Krugman of Princeton University talks about U.S. fiscal policy, Federal Reserve monetary policy and his prescription for economic recovery. Krugman speaks with Trish Regan and Adam Johnson on Bloomberg Television’s “Street Smart.” David Walker, chief executive officer of Comeback America Initiative and a former U.S. comptroller general, also speaks.

Memo To Deficit Scolds: I Hear What You're Saying - Paul Krugman -  I just think it’s kinda dumb.  Neil Irwin has a very good piece on economists versus pundits on the deficit, which is however marred by a half-hearted attempt to squeeze the issue into a standard views-differ-on-shape-of-planet framework — neither side understands the other’s concerns, they’re talking past each other, etc.. Actually, I understand perfectly well where the deficit scolds are coming from; I just don’t think it makes any sense, for reasons I’ve explained at length, and which Irwin mostly lays out as well. (Missing from his analysis is the sheer difficulty of telling a story about how we get in trouble even if investors get worried about our debt). There’s no comparable level of understanding on the other side; indeed, Joe Scarborough and, as far as I can tell, Bowles/Simpson/Peterson etc. are under the delusion that my views are way out of the economics mainstream, whereas the truth, as Irwin says, is that very similar if less colorfully expressed views are held by many and probably most economists in the business world, major policy institutions like the Fed and the IMF, and so on.

Jobs Deficit: Austerity Politics Threaten Obama’s Economy - Lawmakers were stunned Wednesday to learn that the U.S. economy officially dove toward a double-dip recession at the end of 2012, contracting for the first time in three and a half years amid steep declines in government spending and sluggish exports. Policymakers were similarly stunned in Europe when reductions in government spending led to continued economic malaise, leading top economists there to question the logic behind austerity recommendations. European austerity programs are a major driver of the slowdown in U.S. exports, and several economists have argued that reductions in government spending, here and abroad, are almost solely responsible for the suddenly tanking economy.  Congress is still driving headlong into the forced austerity known as sequestration, scheduled to take effect in March, which requires across-the-board spending cuts at the Pentagon and among domestic policy programs.  "Today's GDP numbers show the toll that political conflict over fiscal policy is taking on U.S. economic growth,"

Another look at Spending and Revenues - This is more or less relevant to Beverly's post from earlier today. How many times have you heard Boehner, McConnell, Ryan or one of the legion of right-wing talking heads say, "We don't have a revenue problem, we have a spending problem?"  I refuted that lie repeatedly in this AB post and at the included links.   But this is one of those zombie ideas that simply will not stay in the grave.   Therefore, some prominent voices have found it necessary to sing out again against the lie. I will add my humble quavery baritone to the chorus. Here in Graph 1 is Kevin Drum demonstrating how Real Government Expenditures per Capita have changed under the last three presidents. 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. By using real [inflation adjusted] and per capita numbers, Drum has introduced a couple of denominators.  Real expenses per cap is a rational way to display the data, but not the only way. So lest someone cry out about that ol' devil denominator, let's have a different look.Via Paul Krugman we get Graph 2 and Graph 3, from FRED, showing total Government expenditures and Federal Government expenditures, respectively, on log scales.In Graph 4, we get one more longer range look, using Krugman's data series, this time on a linear scale.  Also presented is the difference between the two, which is the amount of spending by state and local governments.

When and what kind of deficit reduction matters most: The danger of aggressive 10-year deficit targets in the current budget debate  - In the aftermath of the American Taxpayer Relief Act of 2012 (i.e., the lame-duck budget deal, ATRA for short), many in Washington have urged 10-year deficit reduction targets that are trillions more than the $600 billion reduction already locked in by ATRA. While many of these calls for increased deficit reductions have been inchoate (as noted here), others have been more reasonably grounded. Yet, we think that nearly all demands for specific, ambitious 10-year deficit reduction targets are likely to be terribly counterproductive in the current debate. The primary reason for this is simple: Without a sharp focus on when and what kind of deficit reduction should happen, these calls can easily lead policymakers to embrace measures that will surely hamper economic recovery. And this recovery should be the primary focus of these policymakers. The output gap in 2012—essentially the difference between actual economic output and output that would have been produced had all productive resources in the economy been put to work—will likely register just shy of $1 trillion, or 5.6 percent of the economy. This is $1 trillion in national income that the country is forfeiting each year simply due to the continued weakness in aggregate demand—weakness that would likely be exacerbated by any aggressive deficit reduction in the next few years. This depressed state of the economy makes the timing and composition of any proposed deficit reduction crucial. And yet these crucial details are generally not a primary focus in 10-year deficit reduction targets that are dominating the debate.

Political Power Needs to Be Used - New York Times Editorial - If ever there were a moment for Democrats to press their political advantage, this is it. Their message on many of the biggest national issues — taxes, guns, education spending, financial regulation — has widespread support, and they have increased their numbers in both houses of Congress. But after years of being out-yelled by strident right-wing ideologues, too many in the Democratic Party still have a case of nerves, afraid of bold action and forthright principles.  That’s particularly evident in the Senate, which the party controls. Last week, Democrats had a rare opportunity to change the Senate’s rules by majority vote and reduce the routine abuse of the filibuster by Republicans, which has allowed a minority to slow progress to a crawl. But there weren’t enough Democrats to support real reform, so a disappointing half-measure was approved. The reason was fear: Fear that they might return to the minority one day, fear that a weakened filibuster might hurt them, fear that Republicans might change the rules to the disadvantage of Democrats if they regain a majority.

Bill to Increase Debt Limit Heads to Senate Vote - The Democratic-led Senate Thursday took up must-do legislation to permit the government to borrow hundreds of billions of dollars more to meet its obligations, putting off one Washington showdown even as others loom in coming weeks. The measure would suspend the $16.4 trillion limit on federal borrowing through May 18, allowing about $450 billion in new debt to be added to the federal ledger, according to an estimate by the Bipartisan Policy Center. The Republican-controlled House passed the legislation last week. A successful Senate vote would send the measure to President Barack Obama, who is expected to sign it into law immediately. Without the bill, the government would default on its obligations by as early as mid-February. "Failure to pass this bill will set off an unpredictable financial panic that would plunge not only the United States, but much of the world, back into recession," said Sen. Max Baucus, D-Mont. "Every single American would feel the economic impact."

Ryan Says Balanced Budget Needs Spending Cuts, Not More Revenue - Reduced spending for entitlement programs such as Medicare is needed to eliminate deficits within 10 years, said U.S. House Budget Committee Chairman Paul Ryan. “Our goal is to get cuts in reforms that put us on a path to balancing our budget within a decade,” Ryan, a Wisconsin Republican, said today on NBC’s “Meet the Press” program. “Spending is the problem, revenues aren’t the problem.” The House voted Jan. 23 to temporarily suspend the nation’s borrowing limit, removing the debt ceiling for now as a tool for seeking deeper spending cuts. The measure, passed 285-144, would lift the government’s $16.4 trillion borrowing limit until May 19. White House spokesman Jay Carney last week said the administration still prefers a long-term extension of the nation’s debt ceiling. Still, President Barack Obama “would not stand in the way” if Congress passes the proposal, Carney said at a briefing. The legislation is slated to be taken up by the Senate, where Majority Leader Harry Reid said lawmakers will pass the bill unchanged and send it to the White House.

Paul Ryan Says Sequester Likely To Take Place - When the Republican party agreed last week to a push back on the debt ceiling discussion by three months to May 19, virtually without a fight in a move that may presage what is set to become a quarterly can kicking exercise on the US credit card max, some were curious what the quo to this particular quid may be. Earlier today on Meet the press Paul Ryan explained: the pound of spending flesh demanded by the GOP in exchange for caving on yet another key GOP hurdle is, as our readers have known for over two weeks, the Sequester, which is set to hit on March 1 and possibly the stop-gap government funding on March 27, after which various government agencies will start shutting down. Both programs are set to kick in automatically as incremental spending cuts, chopping away even more basis points from the 2013 US GDP, unless the GOP votes affirmatively to extend them in what would then be seen as a move that destroys any last trace of leverage and credibility that GOP may have had

2013 Sequestration Likely To Happen Despite Ominous GDP Report - Lawmakers and economists urged Congress to reconsider the massive spending cuts set to begin in March in light of Wednesday's alarming news that the nation's gross domestic product shrank for the first time in more than three years. But in a testament to beltway inertia, Congress seemed more likely than not to hit the fiscal snooze button. Rep. Chris Van Hollen (D-Md.) said Wednesday's report from the Bureau of Economic Analysis was further proof that implementing "big austerity measures now will hurt the recovery." But the ranking member of the House Budget Committee added that the findings may not be enough to persuade lawmakers to replace the looming sequester, or a decade's worth of automatic cuts to defense and domestic spending. "The question is how far over the ledge do we go before people take action," Van Hollen said in an interview. He said he hoped sequestration wouldn't be triggered. "But that may be required to bring some sense to the process. If you look at this report, there is no doubt that the spending slowdown contributed to the contraction and that was before the sequester. That was just in anticipation to the sequester."

US faces fresh financial shock - The $1.2tn in automatic spending cuts that Barack Obama once promised to avert are looking increasingly likely to occur because of entrenched politics in Washington, threatening a shock to confidence in the US economy. Economists have long assumed that the so-called sequester – a budgetary mechanism passed in 2011 that takes effect on March 1 and slashes the Pentagon’s budget by $600bn over 10 years while cutting discretionary spending for government programmes by another $600bn – would be replaced or reversed by Congress. Many saw a recent move by Republicans on Capitol Hill to extend the US borrowing authority as a sign of greater co-operation with the White House. But conservative lawmakers have recently made it clear that they were simply gearing up for another fight, and are prepared to take a hard line on the $1.2tn in cuts even amid objections from military hawks.  “I think the sequester is going to happen,” said Paul Ryan, the influential Republican congressman on NBC’s “Meet the Press”. While he and other Republicans are expressing regret that defence will take the brunt of the hit, a fact that the Obama administration has warned threatens national security, he and other Republicans say the reduction in spending is paramount.  “While I would prefer to see the specific spending cuts configured differently . . . I’m not convinced that we’ll be able to agree with the president and the Democrats in the Senate on how those shifts should occur,” Pat Toomey, the Republican senator from Pennsylvania, told the FT. “[Sequestration] is a much better outcome than suspending or eliminating the sequestration, so if that’s what has to happen, so be it,” he said.

Failures - Paul Krugman - I hear that Paul Ryan declared it a proven fact that Keynesian economics has failed — and was, of course, not challenged on that assertion. Consider it, if you like, more evidence of the right-wing bubble. Outside that bubble, a fair number of people have noticed that Keynesian economics has performed spectacularly in the crisis — it successfully predicted that deficits wouldn’t drive up interest rates, that monetary expansion wouldn’t be inflationary, that austerity policies in Britain and elsewhere would hit economic growth. And no, don’t tell me that Keynesians predicted that the Obama stimulus would produce full employment; serious Keynesians, like me, were more or less frantically warning back in early 2009 that the stimulus was too small.  Meanwhile, you know what has actually failed? Ryan’s Paulite/Randite monetary economics. You may recall that two years ago Ryan led the charge of Republicans demanding that Ben Bernanke stop his expansionary policies, issuing dire warnings about rising interest rates and soaring inflation. What actually happened:

"No Budget No Pay" Is 3rd GOP Budget Misstep In A Row - It now looks like the Senate on Wednesday will pass the "no budget no pay" version of the debt ceiling increase that has already been adopted by the House.This will be the third GOP budget miscalculation, misstep and mistake in a row. The first was the fiscal cliff, which turned out to be a political debacle for congressional Republicans in general and House Speaker John Boehner (OH) in particular. Boehner's Plan B disaster will go down in U.S. political history as one of the most ill-conceived efforts by any speaker on any issue. The ultimate result was that the House GOP was forced to do something it told its base it would never do -- allow an increase in taxes to be considered and enacted. It also had to kill the so-called Hastert rule (nothing comes to the House floor unless a majority of the majority are in favor of it) to do it. The second was the empty GOP threat to use the federal debt ceiling to get the White House to agree to spending cuts. The dollar-for-dollar formula that for months Boehner had been saying was a nonnegotiable demand was completely dropped when the administration refused to negotiate.

Is Washington cutting the wrong kind of spending? - Here’s how the budget caps in the Budget Control Act will affect nondefense discretionary spending (via analyst Michael Linden at the Center for American Progress): From 1962 through 2011 nondefense discretionary spending has averaged 3.9 percent of GDP and has never slipped under 3.2 percent. Furthermore, spending will continue to decline in each subsequent year. In 2022, however, nondefense discretionary spending is projected to dip below 2.8 percent of GDP, putting it at more than 30 percent under the past half-century’s average. And here’s what happens what you add in the sequester: If fully implemented, the sequester will reduce the nondefense discretionary part of the federal budget by $331 billion from 2013 through 2022, a cut of an additional 5 percent from the already-lower capped levels. The result: reducing nondefense discretionary spending even further from the already projected historic lows. Instead of totaling 3.2 percent of GDP in 2017, nondefense discretionary spending would total less than 3 percent of GDP and would be on its way down to 2.6 percent by 2022. This is less than two-thirds of what was previously its lowest level. And yet despite the cuts to both defense and nondefense discretionary spending as a share of the economy, the Congressional Budget Office still forecasts total spending at a historically high 22.3% of GDP in 2022.

The Idiocy of Sequestration : Another budget crisis is almost upon us! This time it’s not the dread fiscal cliff or the debt ceiling, but rather the “sequester”—the extremely crude cutting mechanism that essentially nobody favors but that seems likely to happen anyway. It’ll drag down the economy, impair the functioning of the government across the board, and do nothing to improve America’s fiscal sustainability over the long run. Here’s what you need to know. What is it? Sequestration is broad, automatic, across-the-board cuts to most categories of government spending. These are scheduled to take effect on March 1. Social Security, Medicaid, targeted anti-poverty programs, military pay, and the operational cost of ongoing wars are exempted. Benefits for Medicare patients won’t be touched, but payment rates to providers will. Everything else is getting the ax. And it’s not a small ax. The military's 2013 budget will be cut by just over 7.3 percent, and domestic discretionary programs will be cut by over 5 percent.* It all goes back to the bipartisan disaster of the 2011 debt-ceiling talks. What emerged was the sequester.

Congress Passes Debt Bill as a $1 Trillion Ax Looms - The Senate gave final approval on Thursday to legislation suspending the statutory debt ceiling until May, officially turning Congress’s attention to the next budget showdown: $1 trillion in across-the-board military and domestic spending cuts set to begin on March 1.The 64-to-34 vote ended for now a clash that had threatened the full faith and credit of the United States government. But the next budget fight is just four weeks away. House Republican leaders insist that the across-the-board cuts, known as sequestration, are coming, even as senators in both parties scramble for short- and long-term remedies. Senate Democratic leaders hope to present legislation next week at a party retreat that would mix revenues and spending cuts to replace the first three months of indiscriminate cuts while longer-term negotiations continue.

Extraordinary Actions will keep the US government running at least through mid July - Last week's vote by the US House of Representatives has pushed out the budget debate into late spring, avoiding a repeat of August 2011 - for now. Reuters: - Wednesday's vote by the Republican-controlled U.S. House of Representatives to extend the government's borrowing power until May 19 temporarily removed a hazard - a potential default within the next month - that only existed because Republicans created it. They initiated Wednesday's vote after taking a beating in public opinion polls for engaging in budget brinkmanship over the "fiscal cliff," a series of budget deadlines that came together at the end of 2012, So how much time does the government have before the risk of "potential default" returns? After May 19th the Treasury will begin taking the so-called "Extraordinary Actions" (EA), including tapping federal pensions, and other ugly temporary measures. According to JPMorgan, "these include suspending investments of the TSP G-fund and the Exchange Stabilization fund, suspending issuance of new securities to the CSRDF, and redemption of a limited amount of these securities, suspending of issuance of new SLGS, and replacing Treasuries subject to the debt limit with debt issued by the Federal Financing Bank." These are estimated to be "between $150-$200bn", providing some additional room as they did in the summer of 2011. Based on the expected treasury issuance after May 19th (assuming we had no debt ceiling) it is possible to estimate at what point the Extraordinary Actions "juice" will run out.

Ryan: No Shutting Down Government If We Don’t Get Spending Cuts - House Republicans will not seek to shut down the government if Democrats don’t agree to cut spending when funding expires at the end of March, Rep. Paul Ryan (R-WI) said Sunday on NBC’s Meet The Press. At the same time, Ryan predicted that the sequester’s across-the-board spending cuts to domestic programs and defense are unlikely to be avoided. Ryan, the House Budget chairman, signaled that even though Republicans will push hard for spending cuts, they are “more than happy” to continue spending at levels written into law if the alternative is a government shutdown. “We’re not interested in shutting the government down,” Ryan said. There are two looming budget deadlines. The sequester — part of the August 2011 debt limit deal that tried to force the parties to reduce the deficit — kicks in March 1. The continuing resolution on the budget, which keeps the government funded, expires on March 27. “I think the sequester’s going to happen, because that $1.2 trillion in spending cuts, we can’t lose those spending cuts,” Ryan said. As for the expiration of the continuing budget resolution, some congressional Republicans have threatened to shut down the government by not approving a new one. But Ryan said that is not the course to take

How Democrats Will Win the Budget Debate : Republicans have been complaining for years that Senate Democrats aren’t writing and voting on formal budget plans. Democrats’ stated reasoning for this has been that there’s no point in passing a budget resolution that’s dead on arrival in the House of Representatives, especially when budget policy is actually made in high-stakes negotiations between House leaders and the Obama administration. But their real reason for the budget negligence was more political. Democrats have shied away from voting for budgets that either contain large tax increases or large budget deficits and have been divided among themselves over how best to proceed. The GOP believes that forcing Democrats to go on the record with a budget will be a political bonanza. A year ago it might have been. But Senate Democrats have a new top budget officer in town—Patty Murray of Washington state—who’s substantially more liberal and also more politically adept than her predecessor. With Kent Conrad, D-North Dakota, now retired and Murray in the chair of the Budget Committee, Democrats are eager to play “compare the budgets.” They believe they can win the budget politics as soundly as they won the 2012 elections.

Government Contracts and Money Velocity - an adjunct to fiscal policy - Fiscal Policy is used by governments as a way of expanding or contracting an economy. Such a policy occurs during the business cycle, whereby a fiscal expansion is enacted when the economy is slowing, and a fiscal contraction is enacted when the economy is in danger of overheating. Traditionally, Fiscal Policy requires legislation to be passed to increase or decrease spending, or to increase or decrease tax rates. Fiscal Policy is problematic in that it becomes a political issue, rather than an economic one. One solution to this is to ensure that government contracts - the money that governments pay the private sector for providing various goods and services - are given variable payment dates. Usually, when one business purchases goods and/or services from another business, payment for these goods and services is often delayed for a time. One example of this delay would be an invoice that is payable 30 days from the end of the month of the invoice. In this case, an invoice dated 15th May would be due on 30th June. Such invoicing arrangements are common in the private sector. One advantage that this system brings the buyer is the chance to build up liquidity - by delaying payment for a time, the company has an increased cash flow. This invoicing system, therefore, affects Money Velocity - the speed at which money travels through an economy. Increased money velocity is linked with economic expansion and inflation, while reduced money velocity is linked with economic contraction and deflation.

Companies Ignored Cliff Chatter, but Taxes, Spending Cuts Will Have Real Bite - Monday’s U.S. durable-goods report suggests that — despite all the chatter about uncertainty and the fiscal cliff — business executives ignored their misgivings about Washington and went ahead with capital-expenditure plans. New orders for all durable goods jumped 4.6% in December, more than doubling expectations. Bookings for core nondefense-capital goods excluding volatile aircraft bookings edged up 0.2%, after 3.0% gains each in October and November. Shipments of core “capex” goods also increased in each month of the fourth quarter, suggesting business investment in equipment bounced back last quarter. “The one major worry was that business leaders, fearing for the future, would not invest. That hardly seems to have been the case,” Not all the news from the durable-goods sector was strong. Inventories hardly budged in the last three months. That suggests inventory accumulation probably offset some of the gain in business spending within the gross domestic product accounts. The Commerce Department will report fourth-quarter GDP Wednesday, and economists expect real GDP grew by only 1.0% last quarter, a steep downshift from the 3.1% pace of the third quarter. Not surprisingly, the outlook for business spending will depend on future demand. The hitch is that the U.S. government sector looms as a big drag of total U.S. demand–whether because consumers are paying more in taxes or because federal-department budgets are on the chopping block.

Harry Reid Picking Winners In Fiscal Cliff Deal - Buried deep in the bowels of the much-heralded last-minute fiscal-cliff deal, that saved us from a fate worse than death and raised taxes on 77% of Americans, was a quiet little provision, inserted at the last minute, that sharply slashed Medicare payments to brain-tumor radiation provider Elekta by 58% while leaving its main competitor Varian's payments unchanged. As the WSJ reports, the provision was put through by none other than Harry Reid - who has a 'deep relationship' with Varian (the winner). Whether crony capitalism is alive-and-well is up for debate - as Varian suggests this 'levels the playing field' but it is the fact that Varian beefed up its outside lobbyists to 18 (from 10) and the provision was not added until the last day suggests this stinks. Once again, it appears, our government is picking winners - and losers (with Elekta as a foreign company unable to participate financially in American elections). As the WSJ notes, the insert looks like the kind of provision helping a specific company or industry that lawmakers have repeatedly vowed to halt. Nonetheless, even in the budget bill tackling the so-called fiscal cliff, lawmakers found time to craft such provisions.

Chairman Camp Agrees: Too Many Choices Burden our Tax System - Last week’s draft plan by House Ways & Means Committee Chair Dave Camp (R-MI) to reform the taxation of financial products includes two key changes that would simplify rules, reduce manipulation, minimize compliance burdens, and improve tax administration. The first would require investors to use the “mark-to-market” method of accounting for all derivatives, other than business hedges. The second would require them to use average basis to calculate gains and losses from the sale of stock or mutual fund shares, and not first-in-first-out (FIFO), specific identification, or any other method. Camp has proposed a unified approach to the taxation of derivatives: the mark-to-market method of accounting. Derivatives are contracts that are valued by reference to other assets or indices. They include swaps, forward contracts, futures, options, structured notes, security lending, and many other arrangements. The current taxation of derivatives is complicated and inconsistent. There are different rules for different derivatives, for different uses of the same derivative, and for different taxpayers.  Investors often use these tax differences to manipulate the character, timing, or source of their income to reduce their tax liability.For tax purposes, Camp would treat each derivative (other than business hedges) as if it were sold at the end of each year, and require any gains or losses to be recognized annually. Returns would be taxed as ordinary income.

Dell's Multiple Restructurings Aid It in Tax Avoidance - Six years ago, Dell Inc. announced a $12 billion restructuring with huge tax consequences not just for Dell, but also for tax policy. If the deal works as intended, American multinationals can copy it to escape the corporate income tax on profits earned in the United States. What Dell did was remake itself in a way that lets it escape taxes on profits earned in the United States by running them through a Netherlands entity and newly formed subsidiaries in Singapore and the Cayman Islands. Dell later quietly dropped the Singapore and Cayman Islands entities in what appears to be a pattern of remaking its corporate structure every few years. This nuanced timing pattern may have great significance as a tool for tax avoidance because IRS corporate audit practices were established on the assumption that companies tend to have stable structures. The IRS rarely audits newly formed entities. You probably are unaware of this restructuring, even if you are a Dell shareholder or a Wall Street analyst who follows the company. That's because Dell mentioned it in just a single sentence in an SEC filing and, as best I can tell, nowhere else. Dell's restructuring is important because its founder plans to force out other shareholders by selling the Texas computer maker to a private equity group for a reported $15 billion, complicating open IRS audits. 

Geithner Finally Leaves Treasury, Blurts a Whole Series of Lies on His Way Out - I can’t emphasize enough how satisfying it is to see Timothy Geithner finally leave government. True, it would have been more enjoyable to see him leave in handcuffs, but I take my satisfaction where I can get it. The unfortunate part about high level government officials who are utter failures leaving government is that when they leave, journalists still fawn over them. Timmy got plenty of interviews from major media outlets but the longest, and thus most nauseating, came from the Wall Street Journal. Reading it is like watching a horror movie where everyone knows what’s about to happen to the character and are trying to warn him/her through the screen. Except in this horror movie I’m throwing my hands in the air and saying “that lie was debunked years ago!” I don’t have the patience to go through each and every lie told in this interview, but I’d like to hit on the major ones.

Geithner's Legacy: The "0.2%" Hold $7.8 Trillion, Or 69% Of All Assets; And $212 Trillion Of Derivative Liabilities - As of this morning Tim Geithner is no longer Treasury Secretary. And while Tim Geithner's reign of clueless pandering to the banks has left the US will absolutely disastrous consequences, an outcome that will become clear in time, the most ruinous of his policies is making the banks which were too big to fail to begin with, so big they can neither fail nor be sued, as the recent fiasco surrounding the exit of Assistant attorney general Lanny Breuer showed. Just how big are these banks? Dallas Fed's Disk Fisher explains: 'As the most recent weekly H.8 statement shows, there was $11.25 trillion in total assets at domestically chartered commercial banks. Which means that just 12 banks now control some $7.76 trillion."

Dean Baker: Timothy Geithner Saved Wall Street, Not the Economy - We do know there was a major effort at the time to exaggerate the dangers to the financial system in order to pressure Congress to pass the TARP. For example, Federal Reserve Board Chairman Ben Bernacke highlighted the claim that the commercial paper market was shutting down. Since most major companies finance their ongoing operations by issuing commercial paper, this raised the threat of a full-fledged economic collapse because even healthy companies would not be able to get the cash needed to pay their bills. What Bernanke neglected to mention was that he personally had the ability to sustain the commercial paper market through direct lending from the Fed. He opted to go this route by announcing the creation of a Fed special lending facility to support the commercial paper market the weekend after Congress voted to approve the TARP. It is quite likely that Bernanke could have taken whatever steps were necessary himself to keep the financial system from collapsing even without the TARP. The amount of money dispersed through the Fed was many times larger than the TARP, much of which was never even lent out. The TARP was primarily about providing political cover and saying that the government stood behind the big banks.

Larry Summers Says the Clinton Administration Didn’t Have Access to Government Economic Data - Okay, that is not exactly what he said, but if Chrystia Freeland's account of Summers' comments at Davos is to be believed Summers is badly misinformed about the state of the U.S. economy in 1993, when he was one of the top advisers in the Clinton administration. According to Freeland, Summers said: "In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right." This is not what the data say. Here's the story on real wages and productivity.

Wrangles continue over bank failure plans - Ever since the 2008 collapse of Lehman Brothers, global banking regulators have been searching for a better way to handle failures that cross international lines. Meeting as the Financial Stability Board, central bankers and regulators from the biggest economies and financial centres agreed to force all of the “global systemically important financial institutions” to write recovery and resolution plans, essentially guidebooks aimed at helping regulators stabilise or wind them down in a crisis. But crafting these plans, often called “living wills”, has proved harder than expected and the FSB has had to postpone its original end-2012 deadline to later this year. The group is meeting on Monday to discuss resolution, among other thorny issues. In Washington and London, though, where policy makers were scarred by the damaging failure of Lehman Brothers and the hefty bailout of AIG, there has been more progress. The largest international banks have been required to submit living wills for the first time. Many of them made what they thought was a reasonable assumption: countries would co-operate to ensure a safe outcome. In other words, faced with a teetering Deutsche in New York, the Federal Reserve and Federal Deposit Insurance Corporation would not shoot first but leave it to their counterparts in Germany to pull the trigger. Banks in the US similarly assumed that it would be their home country regulator who took charge, rather than officials in London or Frankfurt. But as banks were preparing their updated plans, the Fed and FDIC told them to change their approach. They could not rely on regulatory co-ordination. Instead they are being forced to spell out what sorts of legal filings, notices and applications they would need to submit in each jurisdiction to ensure co-operation among regulators, and describe countries’ legislation that is already in place that would facilitate co-ordination.

Banks' risk measurements rarely off by more than a factor of ten - Banks are opaque, or so I hear, and so the only way many people can stand to be around them is if they can have some sort of number to serve as a flashlight into all that opacity. One of the big numbers is Basel III risk-weighted assets, which are intended to, as the name says, measure how much stuff a bank holds, weighted by the riskiness of the stuff. RWAs are related to another popular number – they are in many cases calculated based on value-at-risk models – and they determine capital requirements: the more risky assets you have, the more long-term loss-absorbing funding you need to have, to insulate you from loss if the risks come true. All numbers deceive, though, and many people have noted that RWAs vary wildly across banks, with some banks reporting much lower RWAs per total account assets than others without any obvious decrease in risk. And since RWAs are based in large part on internal models, there is some suggestion that banks optimize their models to reduce RWAs. So risk-weighted assets don’t have any obvious correlation with (1) risk or (2) assets.

Fed’s Dudley Says Short-Term Markets Still Risky - Short-term funding markets continue to present a major risk to the global finance and among the reform options regulators may consider are efforts to restrain the size of the market or providing access to the banking safety net, a top U.S. central bank official said Friday. “The status quo is unacceptable,” Federal Reserve Bank of New York President William Dudley said. “Worthwhile as the steps taken thus far are, we have not come close to fixing all the institutional flaws in our wholesale-funding markets,” he said. The tri-party repo market, where dealers borrow and lend securities, as well as the money-fund industry “are both still exposed to ‘runs’,” he said. Even with the reforms that have thus far been put in place, “one could argue that the risks have increased compared to prior to the crisis,” he added.

NY Fed President Wants To Subsidize Shadow Banking More, Or Get Rid Of It, One Or The Other - One reason that it’s silly to get worked up about banks gambling with your deposits is that they’re mostly not. Your deposits have a tendency to be structurally senior, insured, at regulated subs, etc.; nothing all that bad will happen to them. Banks are gambling with your money market funds, and with the securities-lending proceeds from your mutual funds. Which are not insured, or particularly regulated, but which fund something like $1.9 trillion of securities dealers’ inventory through tri-party repo, as well as providing some $6 trillionish in other collateralized funding for dealer and hedge fund inventories. And this is really much worse, crisis-wise. Since deposits are insured, runs on them are rare. Runs on repo probably caused the financial crisis. Maybe. NY Fed President William Dudley gave a pretty good speech about this stuff today; you should read it, or read some summaries here or here. The most fun parts for me had to do with the tri-party repo market.  First of all, if you’re following that market you may be aware that the Fed is moving to get rid of “the unwind,” in which

  • by day, cash investors deposit their cash at JPMorgan and BoNY and JPM/BoNY lend cash to securities dealers, but
  • by night, those cash investors lend the cash directly to the dealers in the freaky unregulated shadow banking market.

The perpetualisation of debt -- FT Alphaville has just returned from the Danish Institute for International Studies’ conference on central banking in Copenhagen.The theme was “central banks at a crossroads” — which we thought was particularly apt — and discussions ranged from collateral-backed finance and shadow banking to central bank independence. Indeed, many thanks to the DIIS for having us. But one presentation, we would have to say, stood out more than most; that of Anat Admati, George G.C. Parker professor of finance and economics at Stanford Graduate School of Business, who’s out with a new book this month entitled “The Bankers’ New Clothes“. In her (controversial, to say the least) book and presentation, Admati tackles the thorny subject of bank resolution. She applies one simple recommendation: that banks should stop depending on leverage and debt for the funding of their businesses. More so, that banks should stop believing that the conventional rules of corporate finance somehow don’t apply to them.

Libor Lies Revealed in Rigging of $300 Trillion Benchmark - Tan Chi Min, Danziger’s boss in Tokyo, told him to make sure the next day’s submission in yen would increase, Bloomberg Markets magazine will report in its March issue. “We need to bump it way up high, highest among all if possible,” Tan wrote in an instant message to Danziger. Danziger input the rate himself. There were no rules at RBS and other banks prohibiting derivatives traders, who stood to benefit from where Libor was set, from submitting the rate -- a flaw exploited by some traders to boost their bonuses. The next morning, RBS said it would have to pay 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its submission that day, inflating that day’s rate by one-fifth of a basis point, or 0.002 percent. On a $50 billion portfolio of interest-rate swaps, RBS could have gained as much as $250,000. Events like those that took place on RBS’s trading floor are at the heart of what is emerging as the biggest and longest-running scandal in banking history. Even in an era of financial deception -- of firms peddling bad mortgages, hedge-fund managers trading on inside information and banks laundering money for drug cartels and terrorists—the manipulation of Libor stands out for its breadth and audacity. Details are only now revealing just how far-reaching the scam was.

RBS in for another round of bonus awkwardness, with added Libor angle - Soon, it appears, we’ll have another big Libor settlement to write about — this one from RBS. Both the FT and the WSJ are tipping the fines to be in the order of £500m. The FT says it could be more than £400m to the US authorities and about £100m to the FSA; the WSJ doesn’t mention how it might breakdown between the US and UK, but says the settlement “could be completed within the next two weeks”.  Also, yikes! RBS (or specifically, an Asian unit of RBS) might have to plead guilty to some criminal charges if the US prosecutors have their way, says the WSJ. Shockingly RBS does not like this. But… RBS may not have any choice:  While RBS executives are resisting such a plea, it is unclear what leverage they have, as the Justice Department has the power to file criminal charges without the bank’s blessing. Glad we’re all clear that the Justice Department doesn’t need RBS’s blessing for this.  Anyway, the story goes on to say that, now that the US authorities have experimented on UBS and found that pursuing criminal sanctions against its Japanese unit didn’t destroy the bank, they’re feeling emboldened to pursue criminal charges against an Asian unit of RBS’s:  Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank. That has emboldened officials to pursue similar actions against banks like RBS, according to a person familiar with the matter.

When banks face criminal charges - Once again the question raises itself: what is the point of filing criminal charges against a bank — not a bank’s executives or employees, but the bank itself? The WSJ today says that the US wants RBS to plead guilty to such charges, in addition to paying the inevitable fine over Libor fixing. But only, it seems, insofar as such an admission wouldn’t have any visible practical consequences: As part of UBS’s settlement last month, the Swiss bank’s Japanese unit pleaded guilty to wire fraud, a felony. Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank. That has emboldened officials to pursue similar actions against banks like RBS. Does “banks like RBS”, here, mean all of the banks which are going to settle Libor-rigging charges in the future? If so, it almost certainly includes US banks. And that in turn means that shareholders in such banks should be worried about potentially owning stock in a self-admitted criminal enterprise. On the other hand, maybe shareholders care only about the share price, and can take solace in the fact that Justice only seems to want to file criminal charges insofar as there’s a “lack of a negative reaction in the markets”.

The US Justice Department’s Libor prosecution of RBS is too little, too late - Most ambitious financial regulators know there is one rule to establishing their names: reel in a really, really big fish on Wall Street, and make them pay, either through convictions, penalties, or sheer humiliation. The Royal Bank of Scotland is not this fish. Not only is RBS almost entirely unknown to the American populace, but its alleged crime – fixing inter-bank interest rates years ago – has failed to garner any outrage or surprise from consumers, no matter how appalling the offense. Yet RBS – and the London inter-bank lending rate (Libor) – is the hinge on which US regulators have recently staked both their reputation and enormous governmental prosecutorial resources. The Wall Street Journal is reporting that regulators are pressuring RBS to accept criminal charges in its fixing of Libor, the same way UBS did. As the Journal points out, it's not clear why "pressure" is necessary. Obviously, outside of Washington's bizarro world, RBS does not need to give its permission to be prosecuted for wrongdoing by the US government. But here's the real problem: the outmoded, cosy system of prosecution, which has regulators still bound by old handshake agreements.

Lanny Breuer Now Blames 94 US Attorneys for Immunizing Banksters By Marcy Wheeler. Remarkably, on the same day two Senators (one of them named in the article) reminded Eric Holder that Lanny Breuer said this, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand.The WaPo managed to ask no direct questions about this quote–or some of the obviously spiked cases against big banks–in this sloppy fellation of Lanny Breuer. Granted it does ask about the Frontline show itself (though, refreshing as it was, Frontline focused on just one aspect of the mortgage fraud that Lanny’s department ignored; it’s pretty clear WaPo’s Sari Horwitz doesn’t even begin to understand that, though). In a “Frontline” program on PBS last week, Breuer and the Justice Department were harshly criticized for not bringing criminal prosecutions against any Wall Street executives in connection with the 2008 financial collapse. Curiously, rather than admit he consults with regulators and experts before he charges banksters, rather than repeat his theory that all it takes to deter CEOs (as opposed to little people) is to chat them up,

Banks Don’t Commit Fraud; Banksters Commit Fraud: Response to Yglesias - The often interesting Matthew Yglesias wonders “Are Banks Too Big To Prosecute?” Here’s his thesis. Sure, Megabanks committed tons of fraud. But we cannot prosecute banks for the fraud because that would bring them down. And the bigger they are, the more fraud they perpetrated, but the bigger the insolvency hole if we investigated them. So best to bail them out and look the other way. But here’s the deal. Banks don’t commit fraud. Banksters commit fraud. This is what all the gun nuts are teaching us. Guns never kill people. Insane people kill people. Guns are just a tool that allows the insane to kill massive numbers in schools, shopping malls and offices. Back to Iglesias. His argument would appear to be this. We wouldn’t want to punish a bank for fraud because “Had you secured criminal convictions against these megabanks, you’d have had to nationalize them and assume their liabilities or else face an economic catastrophe.”Ergo, do not prosecute illegal activities at the megabanks. Here’s the deal. Banks don’t commit fraud; they are used as weapons for fraud by the top bank management to commit fraud. Those in the top management of the megabanks are the ones who are committing the fraud. The banks are just assault rifles, harmless when left in the locked closet. They become dangerous only at the hands of the Hanks, Bobs, Jamies, and Lloyds. So who do you prosecute? The weapon or the one who pulls the trigger, spraying bullets all over the shopping mall?

Yglesias pours the Geithner, Holder, Breuer (GHB) banksters immunity doctrine in our drinksWilliam K. Black - It’s early, but Salon has published on January 30, 2013 either the funniest or saddest column of the year to date: “Are Banks Too Big To Prosecute?”  The column is attributed to Matthew Yglesias, a blogger who studied philosophy as an undergraduate.  It could be a brilliantly ironic satire of the Geithner, Holder and Breuer doctrine of immunity for banksters (which I am dubbing “GHB” for short).   GHB is the “roofie” that the Obama administration gave us so the banksters could screw us repeatedly with impunity.  Alternatively, and far more likely, Yglesias has written the saddest and most immoral apologia for elite white-collar crime that has yet made it into electronic bits.  It takes a rerouted beginning student of philosophy, posing as a commentator on finance, to replace what should be a discussion that includes virtue ethics with a virtue-free, criminology-free, and economics-free apologia for the felons who became wealthy by costing the Nation $20 trillion and 10 million jobs.  Matthew Yglesias wrote a similar column on April 14, 2011 embracing the Geithner immunity doctrine.   He titled it: “The Fraud Free Financial Crisis” – and it proves our family’s rule that it is impossible to compete with unintentional self-parody.  In 2011, Yglesias thought we might be experiencing the first “Virgin Financial Crisis” – conceived without sin.

Don’t End Up Like Bill Black - This video is a parody of the Frontline Untouchables interview that aired recently on PBS

Prosecuting the financial crisis: Just who should we be blaming anyway? -  WHY have so few gone to jail for the financial crisis? The boom and bust in S&L lending in the 1980s ended with nearly one thousand people sent to jail for financial fraud—and that experience was quite mild compared to the recent cycle. A few days ago, America’s public television channel ran a special documentary programme about this curious phenomenon called “The Untouchables.” (You can watch the whole thing here*) The government’s prosecutors argued that it is very difficult to prove fraudulent intent beyond a reasonable doubt. They said that it is more rewarding from the perspective of the public interest to reach negotiated settlements rather than go to trial and lose. After all, America’s Justice Department failed to convict two Bear Stearns hedge fund managers of lying to investors about their exposure to subprime losses, despite initial expectations that the case would be easy. The Securities and Exchange Commission, which had opened a civil lawsuit against the duo, decided to avoid a trial and settled with the accused on terms dismissed by the presiding judge as “chump change.” Most subsequent civil suits launched by the SEC have been targeted at firms rather than individuals, which means that shareholders were the ones who had to pay, rather than anyone who may have been directly responsible. This track record has led others, including several featured in the programme, to wonder whether prosecutors have been sufficiently vigorous and whether they have the right priorities.

Speak the Truth to Power: Back Bill Black - video - America needs its financial sector cleaned up and Bill Black tirelessly presses for this to happen!

'The Real, and Simple, Equation That Killed Wall Street'- I'm sympathetic to the argument that excess leverage was a problem in the financial crisis, but I don't see it the primal cause of the recession. Instead, leverage iss a magnifier that makes things much, much worse when problems occur: The Real, and Simple, Equation That Killed Wall Street, by Chris Arnade, Scientific American: ...It ... is the overly simple narrative that many in the media have spun about the last financial crisis. Smart meddling kids armed with math hoodwinked us all. One article, from the March 2009 Wired magazine, even pinpointed an equation and a mathematician. The article “Recipe for Disaster: The Formula That Killed Wall Street,” accused the Gaussian Copula Function. It was not the first piece that made this type of argument, but it was the most aggressive. ... This theme plays on the fallacy that danger always comes from complexity. ...The reality is much simpler and less sexy. Wall Street killed itself in a time-honored fashion: Cheap money, excessive borrowing, and greed. And yes, there is an equation one can point to and blame. This equation, however, requires nothing more than middle school algebra to understand and is taught to every new Wall Street employee. It is leveraged return.

Exclusive: JPMorgan bet against itself in “Whale” trade  (Reuters) - There is a new twist in the London Whale trading scandal that cost JPMorgan Chase $6.2 billion in trading losses last year. Some of the firm's own traders bet against the very derivatives positions placed by its chief investment office, said three people familiar with the matter. The U.S. Senate Permanent Committee on Investigations, which launched an inquiry into the trading loss last fall, is looking into the how different divisions of the bank wound up on opposite sides of the same trade, said one of the people familiar with the matter. The committee is expected to release a report on its investigation in the next few weeks. The people familiar with the situation did not comment on the dollar value of the opposing trades placed by JPMorgan Chase & Co's (JPM.N) investment bank traders, which was much smaller than the total positions put on by the CIO. The intra-bank trading was not mentioned in a 129-page report JPMorgan released on January 16, which chronicled some of the bank's risk management failures. The scandal has led to a number of management changes at JPMorgan and has sullied CEO Jamie Dimon's image as a hands-on risk manager.

At the S.E.C., a Chance to Get Tougher on Settlements - MARY JO WHITE will have a long to-do list at the Securities and Exchange Commission. By nominating Ms. White, a former federal prosecutor, to head the S.E.C. last week, President Obama appeared to send a message that Washington was finally going to get tough with financial wrongdoers. Tough enforcement has been pretty much AWOL on his watch. Maybe Ms. White can change that with a new, aggressive approach. Here’s a good place to start: The S.E.C. routinely lets companies and individuals settle cases against them without admitting or denying its findings. This lets bad actors pretend that they’ve done nothing wrong. It also makes it harder for investors to mount successful lawsuits against them. Regulators say this is the best approach. The practice, they contend, helps the S.E.C. and other agencies avoid costly, time-consuming litigation that would tax already-stretched resources. Quick settlements, rather than long trials, mean victims get restitution faster. And there’s always the possibility that the S.E.C. might lose in court. But these no-admission settlements can be little more than a wrist slap — and certainly do not qualify as punishment. Most financial penalties end up being paid for by the company’s shareholders or its insurance policies. That’s not much of a deterrent.

New SEC chief thinks the government should bring cases "to a point" (Matt Taibbi) A few more things about Mary Jo White, the former prosecutor and corporate lawyer recently chosen by Barack Obama to head the SEC.  Last week, I wrote about White's involvement in the notorious Gary Aguirre episode, wherein the former U.S. Attorney and then-partner at the hotshot white-shoe defense firm Debevoise and Plimpton helped squelch then-SEC investigator Aguirre's insider trading case against future Morgan Stanley CEO John Mack.  White, who was representing Morgan Stanley in this affair, went over Aguirre's head to talk directly to then-SEC enforcement chief Linda Thomsen about "reviewing" the case. After Aguirre was fired and the case against Mack went away, the official responsible for terminating the case, Aguirre's boss Paul Berger, was given a lucrative, multimillion-dollar job with Debevoise and Plimpton, closing the circle in what looks like a classic case of revolving-door corruption.  White describes the results of her informal queries about Berger as a hire candidate. "I got some feedback," she says, "that Paul Berger was considered very aggressive by the defense bar, the defense enforcement bar." White is saying that lawyers who represent Wall Street banks think of Berger as being kind of a hard-ass. She is immediately asked if it is considered a good thing for an SEC official to be "aggressive":  Later, she is again asked about this "aggressiveness" question, and her answers provide outstanding insight into the thinking of Wall Street's hired legal guns – what White describes as "the defense enforcement bar." In this exchange, White is essentially saying that she had to weigh how much Berger's negative reputation for "aggressiveness" among her little community of bought-off banker lawyers might hurt her firm.

Jacob Lew, Mary Jo White and Dunbar's Number - Simon Johnson - Jacob J. Lew, the president’s nominee for Treasury secretary, and Mary Jo White, the nominee for chairwoman of the Securities and Exchange Commission, are making financial reformers nervous. The issue is not so much their track record, because neither has worked directly on financial-sector policy issues; it is much more about whom they know. Specifically, how many people do they know and trust outside the financial sector, away from the sphere of influence of the very large banks? More pointedly, when it comes to thinking about financial-sector policy, who exactly is in their inner circle? Nobody knows a huge number of people, at least not well. In the language of anthropology and biology, the limit to a person’s social network is known as Dunbar’s Number – which is 147.5, although people often round it to 150. Our brains do not support the interactions required by larger social groups. More precisely, the predicted size for most human groups, based mostly on the characteristics of our brains, is 100.2 to 231.1 people.  And what applies to ordinary mortals most definitely applies to the people elected or appointed to run the country. Whenever the world gets complicated – for example, because the financial sector has turned nasty – policy makers need trusted sources and established confidants in order to figure out which way is up and what needs to be done. If most financial experts you know work at, for example, Citigroup, then you are more likely to see the financial world through their eyes. What is good for Citi (and its executives) will, in your mind, become close to what is good for the United States.

Validity of Consumer Bureau at Stake in Legal Challenge - A law firm sued by the U.S. Consumer Financial Protection Bureau over its treatment of struggling homeowners may be the first to contest the validity of Richard Cordray’s status as the agency’s director after a federal court’s ruling on presidential appointees. Gary Kurtz, a lawyer representing the Gordon Law Firm of Los Angeles, said he sent a letter to the bureau Jan. 29 asking for a negotiated settlement of the six-month-old case in light of a federal court ruling that invalidated so-called recess appointments similar to Cordray’s. “I want to give them an opportunity to resolve this without court intervention,” Kurtz said in a telephone interview. “Resolving this informally would preferable.” Absent a settlement with Gordon, the bureau risks a court challenge that could become a test case for its authority in the wake of recess-appointment ruling. In its July 17 complaint, the CFPB said Gordon took up-front fees to help homeowners facing foreclosure, then did “little or nothing” for them. Moira Vahey,a CFPB spokeswoman, said the agency “is moving forward with the case as planned.”

LBO leverage creeping up, credit not reaching smaller firms - In another sign of increasing risk appetite, leveraged buyout (LBO) deals are completed at increasingly higher leverage (from S&P data published by Fortune). We are not at the heydays of the pre-crisis LBOs yet, but the leverage is creeping up. So far however, the amount of subordinated debt remains relatively low.Even middle market deals are seeing increased leverage, particularly in Q4 of last year. Some readers have pointed out that PitchBook data (below) seems to contradict what was compiled by S&P. The explanation is that PitchBook collects a great deal of small transaction data which includes companies too small to be tracked by S&P.

Pay Still High at Bailed-Out Companies, Report Says - Top executives at firms that received taxpayer bailouts during the financial crisis continue to receive generous government-approved compensation packages, a Treasury watchdog said in a report released on Monday. The report comes from the special inspector general for the Troubled Asset Relief Program, the bank bailout law passed at the end of the George W. Bush administration. The watchdog, commonly called Sigtarp, found that 68 out of 69 executives at Ally Financial, the American International Group and General Motors received annual compensation of $1 million or more, with the Treasury’s signoff. All but one of the top executives at the failed insurer A.I.G. — which required more than $180 billion in emergency taxpayer financing — received pay packages worth more than $2 million. And 16 top executives at the three firms earned combined pay of more than $100 million.

Report: Treasury approved excessive pay for executives at bailed-out AIG, GM and Ally — A government report Monday criticized the U.S. Treasury Department for approving “excessive” salaries and raises at firms that received taxpayer-funded bailouts during the financial crisis. The Special Inspector General for the Troubled Asset Relief Program said Treasury approved all 18 requests it received last year to raise pay for executives at American International Group Inc., General Motors Corp. and Ally Financial Inc. Of those requests, 14 were for $100,000 or more; the largest raise was $1 million.Treasury also allowed pay packages totaling $5 million or more for nearly a quarter of the executives at those firms, the report says. Also noted: A $200,000 raise was approved for an executive of Ally’s mortgage-lending subsidiary Residential Capital LLC just weeks before ResCap filed for bankruptcy protection. Ally was GM’s financial arm until it was taken over by the government in the bailout. “We ... expect Treasury to look out for taxpayers who funded the bailout of these companies by holding the line on excessive pay,” said Christy Romero, the special inspector general for TARP. “Treasury cannot look out for taxpayers’ interests if it continues to rely to a great extent on the pay proposed by companies that have historically pushed back on pay limits.”

How To Make A Million Dollars An Hour? (video) A recent government report criticizes the US Treasury Department for approving salary raises for executives at the companies the taxpayers had to bail out. AIG, General Motors and Ally Financial - all of these corporate giants benefited from the taxpayer bailout and all of them got big boosts in pay packages. Les Leopold a journalist and author joins us to speak more on why are they allowed to enjoy big bonuses on the taxpayer's dime.

Wall Street executives fret about talent drain (Reuters) - As the titans of Wall Street banks gathered to network, gossip and consider the future of their beleaguered industry in Davos over the past week, one common worry emerged: who is going to take over when we leave? Some of the most ambitious minds in finance are leaving the industry after years of losses, scandals, bad press - and perhaps most importantly new regulations that have curbed some previously free-wheeling ways. The issue, executives say, is not pay, but how much scope there is to innovate and build businesses, which is why more bankers and traders are leaving the big Wall Street firms for Silicon Valley, joining private investment partnerships like hedge funds and private equity funds, or going into energy and other industries.

NYT Cleans Up Bank of America’s Books - The NYT told us that Bank of America made $5.7 billion from "trading" last year.  The NYT knows that it just turned out that the price of assets rose by $5.7 billion between the time when Bank of America acquired them and when they passed them on to their clients? That sounds like some pretty good luck for BoA. After all, we would expect that roughly half of the time when BoA buys an asset for a client and when it actually passes the asset on to the client the price would fall. If the net in this story came to a plus $5.7 billion that would seem like a remarkable streak of good luck for BoA. Let's try an alternative hypothesis. Let's imagine that BoA was trading on its account, deliberately trying to find assets that would rise in price. If BoA has well-informed people doing its buying and selling, then it might not be too hard to believe that it could clear $5.7 billion on this sort of trading. Of course trading on its own account would likely violate the law. This is exactly what the Volcker Rule intended to prevent. So it would be very helpful if people thought that BoA made this $5.7 billion from market-making.

So, why that mysterious $114 billion bank deposits withdrawal in early January? It’s with some trepidation that I post something on actual finance, but the $114 billion withdrawal story struck me as strange at the time, and then… it vanished, as mysteriously as it had appeared. I don’t like patterns like that, or loose ends like that. So I’m putting the the mystery before the NC commentariat, in the hopes that they’ve got better answers, I’ll start with the Russia Today AFP story on January 25, because that’s where most of the blog coverage began: US Federal Reserve is reporting a major deposit withdrawal from the nation’s bank accounts. The financial system has not seen such a massive fund outflow since 9/11 attacks[*]. ­The first week of January 2013 has seen $114 billion withdrawn from 25 of the US’ biggest banks, pushing deposits down to $5.37 trillion, according to the US Fed. Financial analysts suggest it could be down to the Transaction Account Guarantee [TAG] insurance program coming to an end on December 31 last year and clients moving their money that is no longer insured by the government. Bloomberg, in its January 23 story, had concurred on the TAG theory: “Customers may be moving money no longer insured by the U.S., drawing down year-end balances and investing in advancing equity markets…. What you are seeing now is probably TAG money,”  Unfortunately, the TAG theory seems not to be correct. From the Businessweek coverage on January 23** But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. … Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move

Bank 'Stress Tests' to Be Released Over 2 Days - The Federal Reserve said Monday that it will release the results of the latest "stress tests" for the nation's 19 largest banks over two separate days in March....The Fed said it will release on March 7 scores assessing how banks would hold up under deteriorating economic and financial-market conditions. On March 14, the Fed will reveal whether the 19 banks will be permitted to repurchase stock or pay dividends.... Unlike previous years, banks whose dividend or share-buyback plans would cause them to fail the central bank's test will essentially be allowed a mulligan, giving them the chance to pare back or alter their plan to meet Fed thresholds before the official results are released.

US banks in stress-test ‘global shock’ - The six largest US banks had their trading positions compared to a “global market shock” as part of the latest round of government-mandated stress tests. The tests included a doubling of German sovereign debt spreads and a 56 per cent drop in the price of benchmark oil. The US Federal Reserve’s annual exam calls for banks to test their balance sheets to ensure they would be adequately capitalised to withstand a “severely adverse” economic scenario. For Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, the stress tests included a one-off instantaneous shock to their trading positions and counterparty exposures that mimic market movements last seen during the height of the financial crisis in the second half of 2008. On Monday, the Fed made public for the first time the assumptions the six banks had to use when stress-testing their portfolios. They included a 42 per cent slide in Brazil’s main equity index and a fall in the price of triple A-rated corporate bonds from advanced economies equivalent to spreads widening by 168 basis points. Spreads on credit default swaps of double A-rated large financial groups based in core eurozone countries doubled, according to the Fed’s guidelines. Spreads on A-rated bonds of core eurozone banks tripled.

Fed Releases Global Shock Stress Test Scenario for Big Banks - The Federal Reserve released “adverse and severely adverse” global financial market scenarios that will be used to gauge the strength of six large banks, as part of the central bank’s annual stress tests that will be finalized in March. Six banks -- Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley and Wells Fargo & Co. -- will have their portfolios tested to measure how they would do if the economy and financial markets experienced a severe downturn. The scenarios for the economy were released in November. The U.S. central bank started stress tests in 2009 to restore confidence in the financial system after the worst crisis since the Great Depression brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc. Regulators have since complemented the tests with a capital-planning requirement to improve boards’ management of risk and dividend and stock- buyback decisions. “Supervisory stress test results will include data such as capital ratios, revenue, and loss estimates under a severely adverse scenario,” the Fed said today in a release in Washington. The parameters will include “a severely adverse scenario provided by the Federal Reserve, and reflect the capital actions the companies plan to undertake.”

Big, Rich, and Wobbly: Wall Street Banks Are Still Sicker Than You Think - Mohamed A. El-Erian - As analysts pour over the details of the recent earnings announcements by U.S banks, one thing is clear: The banking system has largely overcome a complex set of self-inflicted injuries. What is less clear is how banks will navigate what lies ahead. Banks fueled the worst of the 2008 global financial crisis with a combination of three crippling, self-created problems: too little capital, too many doubtful assets and a risk-taking culture gone mad. Many were on the verge of bankruptcy, and the global economy was staring at a depression. With exceptional public sector support from the Federal Reserve and other government agencies averting the immediate threat of large sequential failures, banks set on the road of balance sheet rehabilitation. They were pushed along the way by markets and regulators, both of which forced the banking system to de-risk, to change harmful incentives and to correct misalignments. And they responded while increasing sector concentration risks, with some large banks getting even larger.

Critical Warning No. 7: Banks crash economy again - Nobody trusts Wall Street banks anymore. They lack credibility. No principles. No sense of honor. Cannot be trusted. Greed dominates. They lost their moral compass. Lack a conscience. Care nothing about what happens to America. Wall Street is run by myopic narcissists who care only about short-term profits and bonuses for insiders, even shareholder returns are incidental. They’re blind, cannot see how they their behavior will repeat 2008, sabotaging the economy again. New Critical Warning No. 7: Banks repeating build-up to new meltdown Read Frank Partnoy and Jesse Eisinger’s new Atlantic column: “What’s Inside America’s Banks?” They warn: “Some four years after the 2008 financial crisis, public trust in banks is as low as ever.” This is one of the best analyses of how self-destructive banks are ... created their own crash in 2008 ... why banks were clueless back then and still are ... why nothing’s changed ... why it’s certain to happen again ... with losses and consequences more damaging than in 2000 and 2008 combined. Listen: “Sophisticated investors describe big banks as ‘black boxes’ that may still be concealing enormous risks — the sort that could again take down the economy.”

Doubt Is Cast on Firms Hired to Help Banks - Federal authorities are scrutinizing private consultants hired to clean up financial misdeeds like money laundering and foreclosure abuses, taking aim at an industry that is paid billions of dollars by the same banks it is expected to police. The consultants operate with scant supervision and produce mixed results, according to government documents and interviews with prosecutors and regulators. In one case, the consulting firms enabled the wrongdoing. The deficiencies, officials say, can leave consumers vulnerable and allow tainted money to flow through the financial system. “How can you be independent if you’re hired by the entity you’re reviewing?” Senator Jack Reed, Democrat of Rhode Island, who sits on the Senate Banking Committee, said. The pitfalls were exposed last month when federal regulators halted a broad effort to help millions of homeowners in foreclosure. The regulators reached an $8.5 billion settlement with banks, scuttling a flawed foreclosure review run by eight consulting firms. In the end, borrowers hurt by shoddy practices are likely to receive less money than they deserve, regulators said.

Unofficial Problem Bank list declines to 825 Institutions - Here is the unofficial problem bank list for Jan 25, 2012.  Changes and comments from surferdude808:  As anticipated, the FDIC released its enforcement actions through December 2012, which led to several changes to the Unofficial Problem Bank List. For the week, there were six removals and five additions leaving the list at 825 institutions with assets of $308.9 billion. A year ago, the list held 958 institutions with assets of $389.0 billion. For the month, the list was down by 13 and $4.1 billion in assets after two failures, four unassisted mergers, 15 action terminations, one voluntary liquidation, and nine additions.

Bank of America Foreclosure Reviews: Why the Cover-Up Happened (Part IIIA) - Yves Smith As we described in earlier posts in this series (Executive Summary and Part II), OCC/Federal Reserve foreclosure reviews meant to provide compensation to abused homeowners were abruptly shut down at the beginning of January as the result of a settlement with ten major servicers. Whistleblowers from the biggest, Bank of America, provide compelling evidence that the bank and its independent consultant, Promontory Financial Group, went to considerable lengths to suppress any findings of harm to homeowners.  These whistleblowers, who reviewed over 1600 files and tested hundreds more in the attenuated start up period, saw abundant evidence of serious damage to borrowers. Their estimates vary because they performed different tests and thus focused on different records and issues. When asked to estimate the percentage of harm and serious harm they found, the lowest estimate of harm was 30% and the majority estimated harm at or over 90%. Their estimates of serious harm ranged from 10% to 80%.  We found four basic problems: The reviews showed that Bank of America engaged in certain types of abuses systematically  The review process itself lacked integrity due to Promontory delegating most of its work to Bank of America, and that work in turn depended on records that were often incomplete and unreliable. Chaotic implementation of the project itself only made a bad situation worse  Bank of America strove to suppress and minimize evidence of damage to borrowers Promontory had multiple conflicts of interest and little to no relevant expertise. We discuss the second major finding below

Bank of America Foreclosure Reviews: Why the Cover-Up Happened (Part IIIB) - Yves Smith - This post is the second half of Part III in our Bank of America foreclosure review whistleblower series. Part III focuses on how the confusion and high cost of the foreclosure reviews weren’t simply the result of overly ambitious targets and poor design, oversight, and implementation of the reviews. These reviews never could have been done properly due to significant gaps and inaccuracies in the borrower records at Bank of America. That meant the only possible course of action was a cover-up.  Here we’ll discuss:“Garbage in-garbage out” problem of unintegrated, unreliable records. “Fire, aim, ready” approach to launching the tests The foreclosure review revealed one of the root problems of the foreclosure crisis: unreliable, difficult to use, and in too many cases incomplete records.  Let’s start by understanding the difficulty of the task even if everything had been in good order. We’ve taken this snapshot from the Excel training model for the E and F tests, which were on fees (see here to access the full model on ScribD or scroll down to the embedded version later in this post). This shows the top part of the computer screen reviewers would use to perform their work.

Bank of America Foreclosure Reviews: How the Cover-Up Happened (Part IV) - Yves Smith -As we described in earlier posts in this series (Executive Summary, Part II, Part IIIA and Part IIIB), OCC/Federal Reserve foreclosure reviews meant to provide compensation to abused homeowners were abruptly shut down at the beginning of January as the result of a settlement with ten major servicers. Whistleblowers from the biggest, Bank of America, provide compelling evidence that the bank and its independent consultant, Promontory Financial Group, went to considerable lengths to suppress any findings of borrower harm.  These whistleblowers, who reviewed over 1600 files and tested hundreds more in the attenuated start up period, saw abundant evidence of serious damage to borrowers. Their estimates vary because they performed different tests and thus focused on different records and issues. When asked to estimate the percentage of harm and serious harm they found, the lowest estimate of harm was 30% and the majority estimated harm at or over 90%. Their estimates of serious harm ranged from 10% to 80%. We found four basic problems:

    • The reviews showed that Bank of America engaged in certain types of abuses systematically
    • The review process itself lacked integrity due to Promontory delegating most of its work to Bank of America, and that work in turn depended on records that were often incomplete and unreliable. Chaotic implementation of the project itself only made a bad situation worse
    • Bank of America strove to suppress and minimize evidence of damage to borrowers
    • Promontory had multiple conflicts of interest and little to no relevant expertise
We discuss the third major finding below.

Elizabeth Warren, Elijah Cummings, Maxine Waters Call For More Transparency On Failed Foreclosure Reviews - Three influential lawmakers on Thursday called for bank regulators to disclose more details of the $8.5 billion foreclosure abuse settlement reached earlier this month and to reveal what happened during the case-by-case review program it abruptly replaced. In a letter to the Office of the Comptroller of the Currency and the Federal Reserve, Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) wrote that "additional transparency" was necessary to ensure the confidence necessary "to speed recovery in the housing markets." They asked regulators to turn over the results of the performance reviews of the independent contractors hired to examine the loan files, as well as detailed information about the reviews' preliminary results, to determine the extent of the harm to the 500,000 people who applied to the program. In a separate letter, Rep. Maxine Waters (D-Calif.) called the sudden end of the foreclosure reviews "troubling" and asked that an independent monitor be named to oversee the new deal. Under the foreclosure settlement, announced Jan. 7, 11 large mortgage companies, including the biggest banks -- JPMorgan Chase, Wells Fargo and Bank of America -- agreed to distribute $3.3 billion in cash payments to homeowners who received a foreclosure notice between 2009 and 2010. The lenders pledged an additional $5.2 billion to loan modifications and other programs meant to prevent future foreclosures.

Quelle Surprise! Prosecutors Get Tough on Mortgage Fraud….At an Itty Bitty Bank - Yves Smith - One of the things that has been galling is watching various officials tasked to protect the public from financial services miscreants is to have them prattle meaningless statistics about how the number of actions of various sorts that they’ve taken is up relative to the previous incumbents. That’s tantamount to a MASH unit tallying up what a great job they did in improving the vaccination rate while not even looking at a huge rise in the mortality rate and questioning whether their response was adequate.  A particularly offensive example of prosecutorial belt-notching is the prosecution of Abacus Bank. Ever heard of Abacus Bank? No, and there’s really no good reason you should have. It has $272 million in total assets. That is no typo. Now that does not mean that fraud, even at a little bank, should not be prosecuted. But the District Attorney for New York, Cyrus Vance, decided to perp walk some former employees of this bank and hold a news conference about the prosecution. Drake Bennett at Bloomberg took note of the peculiar case today: Abacus, like many banks, had sold its loans to Fannie Mae (FNMA), taking the proceeds and lending them back out to earn more interest. The huge government-backed company in turn bundled those mortgages into securities it sold to investors. Abacus lied about applicants, Vance charged, because otherwise its loans wouldn’t have met Fannie Mae’s income requirements, and the bank depended on Fannie’s money for a significant chunk of its profit

Mirabile Dictu! Finally, Someone (Amar Bhide) Questions Benefits of Mortgage Securitization -  Yves Smith -- A major intellectual blind spot in academia and among policy makers is the belief that making markets more liquid is always and ever a good thing. That bias may come from Arrow-Debreu, in that too many economists seem to think that “completing markets” (as in moving towards the unattainable A-D fantasy of having markets in everything, including whether you will be late to your doctor’s appointment three weeks from Tuesday) is desirable.* Or it may come from the fact that financial economists would have little to do if, say, the only actively traded markets were commodities futures, currencies, government bonds, and money market instruments.  Amar Bhide, now a professor at the Fletcher School and a former McKinsey consultant and later proprietary trader, questions the policy bias towards more liquidity in financial markets. Officials (and of course intermediaries) favor it because they lower funding costs. Isn’t cheaper money always better? Bhide argues that it can come with hidden costs, and those costs are sometime substantial. Bhide’s concern is hardly theoretical. The short term orientation of the executives of public companies, their ability to pay themselves egregious amounts of money, too often independent of actual performance, their underinvestment in their businesses and relentless emphasis on labor cost reduction and headcount cutting are the direct result of anonymous, impersonal equity markets.

Predatory borrowing - From Luigi Zingales: the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens. …The authors provide some interesting evidence in this context. They show, for example, that the misrepresentation is correlated with higher defaults down the line: delinquent payments on misreported loans are more than 60% higher than on loans that are otherwise similar. Thus, the errors do not seem to be random, but purposeful. What the authors do not find is also interesting. The degree of misrepresentation seems to be unrelated to the incentives provided to the top management and to the quality of risk-management practices inside these firms. In fact, all reputable intermediaries in their sample exhibit a significant degree of misrepresentation. Thus, the problem does not seem to be limited to a few bad apples, but is pervasive. Here is more, and here are comments from Arnold Kling, who has extensive experience in this area:  I cannot tell whether the borrowers defrauded the lenders or the lenders defrauded the investors who bought the loans. I always presume that it is the borrower instigating the fraud. However, Zingales says that the bankers should be prosecuted. He makes it sound as if the lenders would record a loan internally as backed by an investment property and report it to investors as an owner-occupied home. That would require a much more complex conspiratorial action on the part of the lender, and until I learn otherwise, I will doubt that it happened.

Yet Another Cost of Doing Business Fine: Lender Processing Services Settles with 46 Attorneys General for $127 Million - Yves Smith All you need to know to get confirmation that Lender Processing Services got a great gift is to look at what its stock did on the day of the announcement of its $127 million settlement with 46 chump state attorneys general, on a day when the market was down generally: New York’s attorney general Eric Schneiderman had the temerity to tout the settlement: “Lender Processing Services, Inc., LPS Default Solutions and DocX cut corners in order to maximize their profits,” said New York Attorney General Schneiderman. “My office will pursue any company that generates false or robo-signed documents that are used to foreclose on New York homeowners.” The proposed consent judgment resolves allegations that the Jacksonville-based company “robo-signed” documents and engaged in other improper conduct related to mortgage loan default servicing. LPS Default Solutions and DocX primarily provide technological support to banks and mortgage loan servicers. Among other things, the settlement prohibits signature by unauthorized persons or those without first-hand knowledge of the facts attested to in filed documents, enhances oversight of the default services provided, and requires review of all third-party fees to ensure that the fees have been earned and are reasonable and accurate.

Fannie Mae, Freddie Mac Mortgage Serious Delinquency rates mostly unchanged in December - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in December to 3.29% from 3.30% in November. The serious delinquency rate is down from 3.91% in December 2011, and this is the lowest level since March 2009.  The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate was unchanged in December at 3.25%. Freddie's rate is down from 3.58% in December 2011, and this is the lowest level since August 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

LPS: Fewer Delinquencies in 2012, Highest level of Mortgage Originations since 2007 - LPS released their Mortgage Monitor report for December today. According to LPS, 7.17% of mortgages were delinquent in December, up from 7.12% in November, and down from 7.89% in December 2011.  LPS reports that 3.44% of mortgages were in the foreclosure process, down from 3.51% in November, and down from 4.20% in December 2011.  This gives a total of 10.61% delinquent or in foreclosure. It breaks down as:
• 2,031,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,545,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,716,000 loans in foreclosure process.
For a total of ​​5,292,000 loans delinquent or in foreclosure in December. This is down from 6,192,000 in December 2011. This following graph from LPS shows the total delinquent and in-foreclosure rates since 1995.Even though delinquencies were up slightly in December, it was mostly seasonal. From LPS: The December Mortgage Monitor report released by Lender Processing Services and covering performance data for the full 2012 calendar year, found that while mortgage delinquency rates remained at elevated levels, they have shown steady improvement, ending the year 32 percent lower than the January 2010 peak. The second graph from LPS shows negative equity. From LPS:  [T]his month’s Mortgage Monitor also found that 2012’s appreciation in home prices has helped to improve the U.S. equity situation and create even more refinance opportunities:
• Overall, negative equity is down 35 percent since the beginning of the year.
• Nearly 4 million loans that were below conforming loan-to-value (LTV) thresholds for refinancing last year would meet those standards today.
• An additional 3.4 million loans that are on the cusp of conforming loan-to-value thresholds stand to benefit, if the home price situation continues to improve.

Existing Home Inventory up 3.7% in late January - One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'll be tracking inventory weekly for the next few months. 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 - through January - it appears inventory is increasing at a more normal rate.

HVS: Q4 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q4 2012 this morning.  This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.  This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend.The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate decreased slightly to 65.4%, and down from 65.5% in Q3. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range. The HVS homeowner vacancy rate was unchanged at 1.9% in Q4. This is the lowest level since 2005 for this report. The homeowner vacancy rate has peaked and is now declining, although it isn't really clear what this means. Are these homes becoming rentals? Anyway - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers. The rental vacancy rate was increased in Q4 to 8.7%, from 8.6% in Q3.

A New Housing Boom? Don’t Count on It, by Robert Shiller - We're beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy.  On the one hand, there were sharp price increases in 2012, with the S.&P./Case-Shiller 20-City Index, which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market. (Our November data come out on Tuesday.)  But some of these changes were seasonal. Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.  After screening out these effects, a number of indicators are up, including data for housing starts and permits as well as the National Association of Home Builders/Wells Fargo Index of traffic of prospective homebuyers, which has made a spectacular rebound since last spring.  What might explain this picture? It’s hard to pin down, because nothing drastically different occurred in the economy from March to September.  But that isn’t unusual — we hardly ever know the real causes of major changes in speculative prices. Yet we do know that any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years.

Home Prices Jump 5.5% as Spring Season Nears - Home prices rose 5.5% in the 12 months ending last November, a strong showing following a 4.3% year-over-year increase reading the month before, according to the S&P/Case-Shiller Home Price Index. The gain was nationwide, with 19 of the 20 cities tracked in the index showing year-over-year price gains. Leaders were Phoenix (up 22.%); San Francisco (up 12.7%), Detroit (up 11.9%); Minneapolis (up 11.1%); and Las Vegas (up 10%). The only metropolitan area to show a year-over-year decline was New York, down 1.2%. However, now that spring — traditionally the kickoff for the annual home selling season — is around the corner, the larger question is “what will prices and momentum look like going forward?” Robert Shiller, co-creator of the index, argued in an essay in last week’s New York Times that “there is too much uncertainty to justify any aggressive speculative moves right now.” Yet a range of indicators, in addition to the Case-Shiller index, are suggesting that many Americans are jumping into the market, some wanting to own their own residences, others largely for investment purposes. And Karl Case, economics professor emeritus at Wellesley College and co-creator with Shiller of the closely watched index, was reported by Floyd Norris of the New York Times as “looking at an investment property.” Perhaps most notable, the National Association of Realtors reports that the December pending home sales index  — a measure of actual contracts signed — was at 101.7 in December, up from 95.1 a year ago.

Case-Shiller: House Prices increased 5.5% year-over-year in November - S&P/Case-Shiller released the monthly Home Price Indices for November (a 3 month average of September, October and November). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). From S&P: Home Prices Extend Gains According to the S&P/Case-Shiller Home Price Indices Data through November 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices ... showed home prices rose 4.5% for the 10-City Composite and 5.5% for the 20-City Composite in the 12 months ending in November 2012. “The November monthly figures were stronger than October, with 10 cities seeing rising prices versus seven the month before.” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. Phoenix and San Francisco were both up 1.4% in November followed by Minneapolis up 1.0%. On the down side, Chicago was again amongst the weakest with a drop of 1.3% for November. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 30.7% from the peak, and up 0.5% in November (SA). The Composite 10 is up 5.3% from the post bubble low set in March (SA). The Composite 20 index is off 29.8% from the peak, and up 0.6% (SA) in November. The Composite 20 is up 6.0% from the post-bubble low set in March (SA). The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  Prices increased (SA) in 18 of the 20 Case-Shiller cities in November seasonally adjusted (also 10 of 20 cities increased NSA). Prices in Las Vegas are off 57.6% from the peak, and prices in Dallas only off 3.8% from the peak. Note that the red column (cumulative decline through November 2012) is above previous declines for all cities.

Case-Shiller Index Shows Home Prices Increased 5.5% From a Year Ago in November 2012 - The November 2012 S&P Case Shiller home price index shows a 5.5% price increase from a year ago for over 20 metropolitan housing markets and a 4.5% change for the top 10 housing markets from November 2011. Not seasonally adjusted home prices are now comparable to September 2003 levels for the composite-20 and October 2003 for the composite-10. Below is the yearly percent change in the composite-10 and composite-20 Case-Shiller Indices, not seasonally adjusted. Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data. We see Phoenix soaring, up 22.8% from a year ago and only, New York City down -1.2%. Atlanta has clearly hit bottom and prices have risen 7.7% from last year. The seasonally adjusted price indexes show, the composite-20 yearly percentage change was 5.6% and the composite-10 yearly percentage change was 4.6% and the difference between these figures and the not seasonally adjusted ones is rounding error.  S&P reports the not seasonally adjusted data for their headlines. For the month, the not seasonally adjusted composite-20 percentage change was -0.1% whereas the seasonally adjusted change for the composite-20 was +0.6%. The monthly not seasonally adjusted composite-10 percentage change was -0.2%, whereas the seasonally adjusted composite-10 showed a 0.5% increase. This is the start of winter and the end of the buying season, so no surprise the seasonally adjusted and not seasonally adjusted figures do not match.

Case-Shiller Home Price Index Posts Second Consecutive Monthly Decline, Average Home Prices Back To Fall 2003 Levels - The Case-Shiller Home Price Index is unique among other economic data indicators for recommending that analysts focus solely on its Non-seasonal adjusted data series, as this is what the report uses in its own headline figures. It adds that "for analytical purposes, S&P Dow Jones Indices publishes a seasonally adjusted data set covered in the headline indices" - a far cry from the BLS, whose Arima X 12 models are the basis of the data "moves" on a monthly basis: moves which are based not so much in the underlying data but on the seasonal adjustment and fudging the government employees apply to it. And it is the unadjusted Case Shiller data that showed that in November, the 20 City Composite index posted its second consecutive monthly price decline in a row. Yes: on a year over year basis home prices did rise some 5.5%, but on the other hand, "average home prices across the United States are back to their autumn 2003 levels for both the 10-City and 20-City Composites." And while the price decline into the year end is somewhat seasonal, it certainly does not fit with all the other economic data released by the government showing a housing picture so bright not even the tiniest drops in prices were allowed.

A Look at Case-Shiller, by Metro Area - Home prices continued their winning streak of year-over-year gains, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 5.5% in November from a year earlier. Prices were 0.1% lower than the prior month, but that was mainly due to a slower winter selling season. Adjusted for seasonal variations, prices were 0.6% higher month-over-month. Nineteen of the 20 cities posted annual increases in November. Just New York notched an annual decline. Even with the slower winter season, 10 cities posted monthly increases. On an adjusted basis, only New York reported a monthly decline. Economists see the report as a sign of the housing market gaining strength. “The house price rally still has a long way to go. The most important driver will be the dwindling supply of new homes. Thanks to a combination of an extended period of underconstruction … and a fewer foreclosures, the inventory-to-sales ratio fell in December to the lowest level since May 2005,”  Read the full S&P/Case-Shiller release

Comment on House Prices, Real House Prices, and Price-to-Rent Ratio - There is a clear seasonal pattern for house prices, and earlier this year I predicted that the Case-Shiller indexes would turn negative month-to-month in October on a Not Seasonally Adjusted (NSA) basis.  That is the normal seasonal pattern.  Also I expected smaller month-to-month declines this winter than for the same months last year. Sure enough, Case-Shiller reported that the Composite 20 index NSA declined slightly in October, and also declined slightly again in November (a 0.1% decline).  In November 2011, the index declined 1.3% on a month-to-month basis, so this is a significant change. Over the winter the key will be to watch the year-over-year change in house prices and to compare to the NSA lows in early 2012. I think the house price indexes have already bottomed, and will be up over 6% or so year-over-year when prices reach the usual seasonal bottom in early 2013.This graph shows the month-to-month change in the CoreLogic and NSA Case-Shiller Composite 20 index over the last several years (both through November). The CoreLogic index turned negative month-to-month in the September report, and then turned slightly positive in November (CoreLogic is a 3 month weighted average, with the most recent month weighted the most). Case-Shiller NSA turned negative month-to-month in the October report (also a three month average, but not weighted), but was only slightly negative in November. The following table shows the year-over-year increase for each month this year. Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.

US house prices lift. But for how long? - Earlier this week, the 20-city Case-Shiller house price index was released for the month of November 2012, which revealed a seasonally-adjusted 0.6% rise in values and a 5.6% increase over the year (see next chart). The annual rise in home values was the biggest since January 2008, and combined with the recent increase in new home construction, suggests that a housing recovery is now well and truly underway in the US (see next chart). However, there are reasons to suggest that the housing recovery might not be sustainable. As noted recently, the University of Michigan Consumer Sentiment Index has registered big falls over recent months and represents the lowest consumer sentiment reading since December 2011 (see next chart). The result was supported by this week’s release of the alternative Conference Board Consumer Confidence Index, which fell for the third month in a row to 58.6 from 66.7 in December, and is now in territory typically associated with past recessions (see next chart).

House price rebound cruising for a fall -  When flipping property is a big topic of conversation, we should have learnt by now to be nervous that a housing market is cruising for a fall. The new flippers of US housing are not the individual speculators of the boom years, who boasted of making tens of thousands of dollars for a few weeks “work”, and they wouldn’t call their plans anything so gauche. These investors, who have poured into the US housing market since its nadir, are hedge funds and private equity vehicles, and recently (belatedly) individual entrepreneurs. They may be planning to hold the property for a while and harvest rental income in the interim, but decent returns are predicated on a sale, and usually a quick one. That makes them flippers – and it means that the recent run of strong housing market data may be more chimeric than real. According to this week’s readout on the Case-Shiller house price index, prices of single-family homes were up 5.5 per cent in November, compared to the same month in 2011. It was the fastest rise since August 2006, and it came on the heels of data showing the inventory of homes on the market has fallen to an 11-year low. What housing bulls – and the flippers – hope is that we are now into a self-reinforcing upward spiral, where rising prices boost buyer confidence and erase some of the negative equity that is holding back homeowners from being able to move. In a broader sense, the wealth effect should put a little more bounce in the step of the American consumer, and boost the economic recovery more generally. The risk is that the flippers represent an overhang of inventory that will keep a lid on prices, as they trickle their properties out into the market, potentially for years to come.

Pending Home Sales index declines in December - From the NAR: Pending Home Sales Down in December but Remain on Uptrend The Pending Home Sales Index,* a forward-looking indicator based on contract signings, fell 4.3 percent to 101.7 in December from 106.3 in November but is 6.9 percent higher than December 2011 when it was 95.1. The data reflect contracts but not closings...Lawrence Yun , NAR chief economist, said there is an uneven uptrend. "The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis," Yun said shortages of available inventory are limiting sales in some areas. "Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options," The PHSI in the Northeast fell 5.4 percent to 78.8 in December but is 8.4 percent higher than December 2011. In the Midwest the index rose 0.9 percent to 104.8 in December and is 14.4 percent above a year ago. Pending home sales in the South declined 4.5 percent to an index of 111.5 in December but are 10.1 percent higher December 2011. In the West the index fell 8.2 percent in December to 101.0 and is 5.3 percent below a year ago.  Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in January and February.

Pending Home Sales Decrease by -4.3% for December 2012 - Pending Home Sales declined in December by -4.3%, annualized, according to the National Association of Realtors. Pending home sales have increased 6.9% from a year ago. November's pending home sales was revised down to 1.6% monthly increase. The above graph shows pending home sales are really around 2003 levels, ignoring the housing bubble itself and the first time home buyer tax credits of 2009. The deadline for using the first time home buyer tax credits was April 2010, which resulted in a 111.3 pending home sales index. The index now stands at 101.7, where the baseline index of 100 is 2001. The PHSI are contracts which have not yet closed and why pending home sales are considered a future housing indicator. The PHSI represents future actual sales, about 45 to 60 days from signing. From the NAR: NAR's Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity. The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years.

Inventory and the Low Equity/No Equity Homeowner - Pending Home Sales index for December 2012 was released this morning. The data itself was mixed — down 4.3% from November (SA) but up 6.9% year over year. The index is a measure of housing contract activity, based on signed real estate contracts (existing single-family homes, condos and co-ops). The spin from the NAR is always amusing, and this report is no different. How the NAR framed this, and what it might mean going forward, is rather interesting. NAR chief economist Lawrence Yun made the following statement: “The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis.1 Yun is onto something, but he doesn’t seem to really understand what it is. Supply limitation is an important factor, but why supply is limited is an even more important factor. Understanding the inputs into this directional vector is significant if we want to discern where housing may be heading this year. Said differently, the factors underlying the limited supply matter much more than the supply itself. On the negative side:

-- 20% of home owners with mortgages are underwater
- 20% of home owners with mortgages have little or no equity.

Construction Spending increased in December, Public spending lowest since 2006 - There are a few key themes:
1) Private residential construction is usually the largest category for construction spending, but there was a huge collapse in spending following the housing bubble (as expected).  This is now the largest category once again.  Usually private residential construction leads the economy, so this is a good sign going forward.
2) Private non-residential construction spending usually lags the economy.  There was some increase this time, mostly related to energy and power - but the key sectors of office, retail and hotels are still at very low levels.
3) Public construction spending has declined to 2006 levels (not adjusted for inflation).  This has been a drag on the economy for 3+ years.
The Census Bureau reported that overall construction spending increased in December: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during December 2012 was estimated at a seasonally adjusted annual rate of $885.0 billion, 0.9 percent above the revised November estimate of $876.9 billion. The December figure is 7.8 percent above the December 2011 estimate of $820.6 billion. The value of construction in 2012 was $850.2 billion, 9.2 percent above the $778.2 billion spent in 2011. Spending on private construction was at a seasonally adjusted annual rate of $614.9 billion, 2.0 percent above the revised November estimate of $602.9 billion. In December, the estimated seasonally adjusted annual rate of public construction spending was $270.1 billion, 1.4 percent below the revised November estimate of $274.1 billion.This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Housing Spillover Effects - People frequently ask how a sector that currently accounts for 2.5% of the US economy can be so important. First, residential investment has large swings during the business cycle, and will probably increase sharply over the next few years. Second, there are spillover effects from housing - meaning housing has a much larger impact on overall economic activity than just "residential investment". We are starting to see some signs of spillover from Kate Linebaugh and James Hagerty at the WSJ: From Power Tools to Carpets, Housing Recovery Signs Mount Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold... executives at companies exposed to housing are growing more optimistic. Improvement in the sector could help broad tracts of the economy by creating jobs, improving consumer confidence and boosting property-tax receipts for municipalities. Construction typically is a big job creator during expansions, though the industry has been slow to staff up during the current recovery.  "People will be fixing up homes to put them up for sale—buying new air conditioners, painting, fixing roofs. As the new-home market picks up, that really feeds into [gross domestic product]."

Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Price Inflation Higher than Fed Admits - In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices "Really" Fallen. The reader specifically wanted an update on inflation as measured by the HPI-CPI (a measure of the CPI where actual home prices instead of rent is the largest CPI component). Here is some background on the request: The CPI does not track hope prices per se, rather the CPI uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices.The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices.OER has the single largest weight of any component in the CPI, at 23.957%.  Let's play "What if the BLS used actual home prices instead of OER in calculating the CPI?"

Consumer Confidence Hits Lowest Level Since November 2011 - Smaller paychecks and a darker view of labor markets brought U.S. consumer confidence this month to its lowest reading since November 2011, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence fell further to 58.6 in January from a revised 66.7 in December, first reported as 65.1. The January decline was the third consecutive fall and brought confidence to its lowest reading since November 2011. Economists surveyed by Dow Jones Newswires had expected the index to fall only to 64.0.

US Consumer Confidence Plunges on Higher Taxes - U.S. consumer confidence plunged in January to its lowest level in more than a year, reflecting higher Social Security taxes that left Americans with less take-home pay. The Conference Board said Tuesday that its consumer confidence index dropped to 58.6 in January. That’s down from a reading of 66.7 in December and the lowest since November 2011. Conference Board economist Lynn Franco said the tax increase was a key reason confidence tumbled and made Americans less optimistic about the next six months. Congress and the White House reached a deal on Jan. 1 to prevent income taxes from rising on most Americans. But they allowed a temporary cut in Social Security taxes to expire. For a worker earning $50,000 a year, take-home pay will shrink this year by about $1,000. The survey was conducted through Jan. 17, at which point most people began to realize their paychecks were lighter.

Consumer Confidence Takes Another Stunning Plunge - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through January 17. The 58.6 reading was well off the consensus estimate of 58.6 reported by Today's number is a steep decline from the interim high of 73.1 in October. The higher preliminary reading for December of 65.1 was revised up to 66.7. Here is an excerpt from the Conference Board report: "Consumer Confidence posted another sharp decline in January, erasing all of the gains made through 2012. Consumers are more pessimistic about the economic outlook and, in particular, their financial situation. The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock."  Those claiming business conditions are "good" declined to 16.7 percent from 17.2 percent, while those stating business conditions are "bad" increased to 27.4 percent from 26.3 percent. Consumers' assessment of the labor market has also grown more negative. Those saying jobs are "plentiful" declined to 8.6 percent from 10.8 percent, while those claiming jobs are "hard to get" increased to 37.7 percent from 36.1 percent.  Consumers' optimism about the short-term outlook continued to deteriorate in January. Those expecting business conditions to improve over the next six months declined to 15.4 percent from 18.1 percent. However, those expecting business conditions to worsen declined slightly to 20.6 percent from 21.1 percent.  Consumers' outlook for the labor market was more pessimistic. Those anticipating more jobs in the months ahead declined to 14.3 percent from 17.9 percent, while those expecting fewer jobs remained virtually unchanged at 27.0 percent. The proportion of consumers expecting their incomes to decline rose to 22.9 percent from 19.1 percent, while those anticipating an increase declined to 13.6 percent from 15.6 percent.   [press release]

Consumer Confidence Crashes To 2011 Levels After Biggest Plunge Since August 2011 Debt Ceiling Debacle - It would appear that the hike in taxes on 77% of Americans that was heralded as a success, has dented confidence just a little. As the efficient stock market moves to all-time nominal highs in many cases, Consumer Confidence just fell off a cliff. The conference board printed at the worst level in 13 months - so all those 2012 gains are gone - and fell month-over-month by the most since the August 2011 fiscal cliff debacle. For every income levels (except those earning under $15k) confidence plunged with the $35k-$50k bracket crashing the most. It would appear that the driver of 70% of the US economy is not buying the new normal being fed to us daily by any and every media outlet possible. No matter how much the market is held up by mysterious runs in FX markets or volatility compression, it would appear that - just as we have been noting - the underlying macro fundamentals will eventually be priced in, as this does not bode well for retail sales

What's wrong with this picture? - January US consumer confidence from the Conference Board came in materially below consensus today. Reuters: - Consumer confidence dropped in January to its lowest level in more than a year as Americans were more pessimistic about the economic outlook and their financial prospects, according to a private sector report released on Tuesday.  The Conference Board, an industry group, said its index of consumer attitudes fell to 58.6 from an upwardly revised 66.7 in December, falling short of economists' expectations for 64. It was the lowest level since November 2011. At the same time US equity markets continue to march higher. In fact the divergence between consumer sentiment and the stock market has become quite pronounced and is unlikely to be sustainable over the longer term. Ultimately, weak sentiment will result in lower sales.

Vital Signs Chart: Americans Feeling Gloomier - Americans are feeling bleaker about the economy. The Conference Board’s Consumer-confidence index fell sharply in January to 58.6. That is the lowest level since November 2011, when a political fight over the U.S. debt limit led to a drop in confidence. The latest decline was chalked up to the recent increase in the payroll tax and dimmer views of the job market.

Consumers Confidence Bounces Back, RBC Reports - U.S. consumers feel more confident as February begins, although the potential negative impact of fiscal issues has them concerned about the economic outlook, according to data released Thursday. The Royal Bank of Canada said its consumer outlook index for February increased to 49.5 from 48.0 in January. The latest index is the highest since September. The RBC current conditions index increased to 41.4 for February from 38.6 in January and is now at its highest level since January 2008. The expectations index increased to 58.0 from 56.0.

Michigan Consumer Sentiment Beats Expectations - The University of Michigan Consumer Sentiment final number for January came in at 73.8, reversing the dip to 71.3 in the preliminary reading and rising slightly above the December final of 72.9. The consensus was for 71.4. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 13% below the average reading (arithmetic mean) and 12% below the geometric mean. The current index level is at the 24th percentile of the 421 monthly data points in this series. The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number of 73.8 puts us 4.5 above the average recession mindset and 13.9 below the non-recession average. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Personal Income Surges In December On "Special Payments" - Disposable personal income (DPI) in December surged by 2.7% compared with November's level, although the gain "was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," the government advises. By contrast, personal consumption expenditures increased a modest 0.2% last month, or about half the rate in November. The temporary special payments that dramatically raised the growth rate of DPI last month makes it difficult to analyze the data as it relates to the business cycle. We'll know more in a month on this front when the data normalizes. As for personal consumption, the December gain was sluggish, but the increase marks the 9th rise in 2012 vs. three monthly declines for PCE last year. Looking at the year-over-year changes for DPI and PCE shows continued growth. The sharp annual increase for DPI at 2012's close is suspect, due to the special payments last month. PCE, meanwhile, advanced 3.6% for the year through December, or roughly in line with the annual pace in recent months. Consumer spending, in short, continues to grow but at an unspectacular rate. For now, the income and spending numbers continue to support the case for expecting modest growth. The question is how far last month's unusually strong DPI will retreat back to a "normal" range in the January report? As for the implications on spending, the optimistic outlook is that the large injection of income into households last month will smooth over some of the rough edges when it comes to consumption in this year's first quarter.

Personal Income increased 2.6% in December, Spending increased 0.2% - Note: Personal income jumped in December as many high income earners accelerated income into 2012 to avoid higher 2013 taxes. This pushed up personal income sharply, and also increased the savings rate. This will be reversed in the January report, and there will be a large decline in personal income on a month-to-month basis. The BEA released the Personal Income and Outlays report for December:  Personal income increased $352.4 billion, or 2.6 percent ... in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2 percent...Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in December, compared with an increase of 0.6 percent in November. ... The price index for PCE decreased less than 0.1 percent in December, compared with a decrease of 0.2 percent in November. The PCE price index, excluding food and energy, increased less than 0.1 percent in December, the same increase as in November...Personal saving -- DPI less personal outlays -- was $436.7 billion in November, compared with $404.6 billion in October. The personal saving rate -- personal saving as a percentage of disposable personal income -- was $805.2 billion in December, compared with $495.0 billion in November. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 6.5 percent in December, compared with 4.1 percent in November. The following graph shows real Personal Consumption Expenditures (PCE) through December (2005 dollars).This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.   PCE for both October and November was revised up slightly.

Analysis: Dividends, Bonuses Ahead of Tax Increase Boosts Income - Americans decided to stash away a big bump in income during December. Personal income rose 2.6% in December, the largest increase in eight years, while the personal savings rate jumped to 6.5%, the highest rate in nearly four years. Separately, first-time claims for jobless benefits rose sharply last week, increasing by 38,000 to a seasonally adjusted 368,000. Wells Fargo economist Michael Brown discusses the data with Jim Chesko.

U.S. Consumer Spending Up Slight 0.2% - U.S. consumers increased their spending at a slower pace in December, while their income grew by the largest amount in eight years. Income surged because companies rushed to pay dividends before income taxes increased on high-earners. The Commerce Department says consumer spending rose 0.2 percent last month, down from a 0.4 percent increase in November. Income jumped 2.6 percent in December from November. Companies accelerated dividend payments to beat the January rise in income tax rates. It was the biggest gain since December 2004. Consumer spending, which accounts for about 70 percent of economic activity, is expected to slow this year because Social Security taxes increased, leaving Americans with less take-home pay.

Savings Rate Soars To Highest Since May 2009 On December Surge In Comp And Dividends Ahead Of Fiscal Cliff -  One look at the headline December data and one would get the impression that millions of Americans had started dealing meth out of some New Mexico RV, as personal income exploded by the most in 8 years, soaring some 2.6% in December to $13.936 billion. And since the surge in income, which was expected to rise some 0.8%, was hardly matched by a comparable boost to spending which missed expectations of 0.3%, rising just 0.2% - somewhat paradoxical considering the biggest boost to the otherwise negative Q4 GDP print was precisely this: spending and consumption, meant that the personal saving rate (which is merely a function of income less spending) soared to 6.5% or the highest since May 2009 - superficially an indication that consumers are hunkering down in expectation of something very bad. Breaking Bad jokes aside, just how did the US consumer see their personal income soar as much as it did? it was "boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates." In other words, it was all a forward pull in comp in December to avoid the tax hikes from the January 1 Fiscal Cliff.Sure enough, of the $352 billion increase in personal income, some $268 billion, or 76% was due to Personal Dividend Income which exploded by some 34.3% to $1.05 trillion as companies dividended income like crazy to avoid what they expected would be a huge increase in the dividend income tax.

Vital Signs Chart: Temporary Surge in Saving - Americans saved more in December. The personal saving rate –what consumers have left after spending and taxes — rose to a seasonally adjusted 6.5% in December, the highest level since May 2009. The rate appeared linked to a spike in corporations’ dividends at year-end. Many high-earning households apparently socked away the payments and didn’t spend them.

GDP Report: What Did Consumers Do With $41 Billion in Accelerated Income -- Yesterday, the Bureau of Economic Analysis (BEA) released its report for the fourth quarter gross domestic product (GDP), representing the output of goods and services produced in the U.S. and the most keenly watched measure of the vitality of the U.S. economy. The BEA data, which is subject to revision, showed a decrease of 0.1 percent in the annual GDP rate, versus an increase of 3.1 percent in the third quarter of 2012. Most economists were shocked by the decline, which was impacted by a 22.2 percent decrease in the government’s spending on national defense versus its third quarter increase in spending on that segment by 12.9 percent. But the most worrisome part of the report is the revelation that the BEA assumed an additional $41.4 billion went into the pockets of American workers in the fourth quarter; and yet we still saw a shrinkage in GDP. According to the BEA, real disposable personal income increased 6.8 percent in the fourth quarter, following a meager increase of 0.5 percent in the third. The dramatic upturn in real disposable personal income was aided by a one-time event: the payment of accelerated and special dividends, as well as some acceleration in wages and bonuses. Companies made those early payments in the fourth quarter of 2012 rather than the first quarter of 2013 to allow workers to avoid the higher individual income taxes that were coming along in 2013.

December Income Surge Sets Up January Collapse - What December bringeth, January will taketh away. Personal income jumped as expected last month, although the size of the gain, 2.6%, was much bigger than economists had expected. But the windfall was all about the tax code, not a sign of economic strength. Companies paid out dividends and bonuses in December to beat the higher tax rates that kicked in 2013. The one-time nature of the income swing was illustrated by the fact that households decided to stash away rather than spend the bonuses and dividends. The saving rate jumped to 6.5% last month while consumer spending increased just 0.2%, as forecast. Expect a big drop in income in January thanks to the absence of the bonuses and dividends that would normally have been paid. Additionally, disposable income is taking a hit because of the end of the payroll tax holiday. How will consumer respond to falling incomes? Those who can will tap into the savings socked away in December. But many others will have to rein in their spending. Weekly retail sales already look weak. The big test of spending resilience–or retrenchment–will be Friday’s report of vehicle sales. Economists expect sales ran at an annual rate of 15.2 million this month, not much different than the 15.3 million sold in December. A bigger drop may indicate consumers are responding to fiscal tightening by rethinking their spending plans.

Interesting Anecdote, by Tim Duy: Looking at the Reuters report on the latest consumer confidence numbers, this caught my attention:"The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock," Lynn Franco, director of economic indicators at The Conference Board, said in a statement. One of the more interesting anecdotes I picked up last week was from a businessman who said that after his firm issued the first paychecks of the year, virtually every employee came to the payroll office and asked why their paychecks were lower, evidently unaware that the payroll tax cut had expired. If the expiration does come as a surprise to a large proportion of the workforce, perhaps consumer spending in the first quarter will be somewhat softer than current estimates. Something to watch for.

U.S. Retail Sales Growth Expected to Pull Back in 2013 - U.S. retail sales are expected to rise 3.4% this year, the slowest rate since 2010, as consumers lower spending because of a tax bite to their paychecks and bickering among policymakers over fiscal matters, according to the industry’s biggest trade group. The National Retail Federation‘s projection for 2013 is below its preliminary 4.2% growth rate for 2012 and the 5.8% rate in 2011. It expects many of the issues that affected retail sales during a lackluster holiday season–worries about the economy’s direction and increasing online competition–to persist early this year. The forecast excludes automobiles, gasoline stations and restaurants. Debates about the health of the economy and fiscal policy are “having a real impact on household budgets and consumer spending,” said Matthew Shay, chief executive of the trade organization.

Payroll Tax Cuts May Boost the Economy More than You Think - Just as Congress allowed the 2011-12 payroll tax cut to expire, new research by the Federal Reserve Bank of New York suggests that such tax breaks may significantly boost consumer spending. As a result, raising workers’ take-home pay this way might play a bigger role than many thought in reversing economic slumps. The study by the New York Fed staff was based on two surveys of about 200 workers. The first (in February and March, 2011—just after the tax cut kicked in) asked what they planned to do with their extra take-home pay. The second (in December, 2011) asked the same workers what they actually did with it. The results: While workers on average said they planned on spending only about 14 percent of added income, they reported months later they actually had spent 36 percent.   One especially interesting finding: High-income workers were more likely to spend the extra cash than their lower-paid counterparts. This contradicts the widely-held theory that cash-strapped low-income households will spend a tax cut while high-income workers will save those extra dollars. If these results turn out to be correct, they suggest that payroll tax cuts may do a better job stimulating demand than many economists think.

CPI Unchanged in December; Five-Year Inflation Rate Hits 45-Year Low - Instead of looking at monthly CPI data, let’s look at five-year averages. As the following chart shows, 5-year inflation has fallen to an annual rate of just 1.9 percent, its lowest since the Vietnam War started heating things up in the 1960s. The main monthly and annual indicators were also well-behaved in December. A decrease in gasoline prices left the headline CPI unchanged for the month, and up just 1.7 percent from its December 2011 level. Year-on-year inflation for 2011 was a full percentage point higher, at 2.6 percent. Core inflation, including food and energy prices, was also moderate, up just 0.1 percent for the month and 1.9 percent for the full year. Looking ahead, markets expect continued calm on the inflation front. As I noted in a post last week, 10-year inflation expectations, as measured by the Cleveland Fed, have been hovering near record lows. One might think that lower expected inflation would mean an increased probability of deflation, but that does not appear to be the case, at least not as measured by the Atlanta Fed.  Their latest estimate shows just a 6 percent probability that the CPI for April 2017 will be lower than the CPI for April 2012. That is 10 percentage points below the peak estimate of deflation risk reached in the middle of last year.

Weekly Gasoline Update: Prices on the Rise - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. After a four weeks of little Gasoline prices at the pump rose last week. Rounded to the penny, the average for Regular and Premium rose four cents. With the expiration of the 2% FICA tax holiday, many households will be especially sensitive to price increases. According to, Hawaii, as usual, has the highest gasoline price, averaging $4.08, up two cents from last week. New York is second at $3.72, up three cents from last week. At the other end of the price range, three states have average prices under $3.00, with the cheapest at $2.73. From lowest to highest they are: Wyoming, Colorado and Montana. Two weeks ago there were 10 states in the under $3.00 cohort.

U.S. ISM Manufacturing Index Annual Revisions - The Institute for Supply Management’s December factory index was revised down to 53.1 from 53.9, according to annual revisions issued today. The November index was revised down to 52.2 from 52.7. The association revises the seasonal adjustments for its monthly index every January. The following table details the newly revised indexes:

ISM Revisions Show Weaker Business Tone at End of 2012 = Revisions to seasonal factors have shifted down slightly the readings of business activity at the end of 2012, according to data released Monday by the Institute for Supply Management. As typically happens at the start of a new year, the ISM revised the seasonal factors for the data contained in its closely watched manufacturing and nonmanufacturing surveys. The most recent revisions go back through 2009. The revised data show lower readings for overall business activity in December in both sides of the U.S. economy. The purchasing managers' index for manufacturing now stands at 50.2 from the originally reported 50.7. The ISM also revised down the December indexes covering new orders, employment and supplier deliveries but the production index was unchanged. The nonmanufacturing PMI now stands at 55.7 in December, from 56.1 first reported. The December new orders and employment indexes are now lower than first reported, but the business activity index--which covers production--is now slightly higher. Economists and investors look at the ISM surveys to get a reading of business activity. The revised data suggest both the factory and nonmanufacturing sectors ended 2012 slightly slower than previously thought.

Why Is Productivity Slowing Down? -- Nearly all the world’s advanced economies are grappling with a productivity problem. Starting a decade ago, the rate of growth in multifactor productivity — a measure that takes into account labor as well as capital used to produce goods and services — started skidding across the industrialized world. In the U.S., it went from annual growth of 0.70% in 1990s to 0.39% in the 2000s. Others fell even harder. Norway went from 1.87% growth in the 1990s to 1.03% in the 2000s, Britain from 0.83% to -0.01%. Productivity growth is crucial to a healthy economy. Living standards can only go up when countries figure out how to get more goods and services from a given amount of labor and capital. Slower growth means it takes that much longer to make headway. The exact cause of the slowdown is a puzzle, says Mark L.J. Wright, a senior economist at the Federal Reserve Bank of Chicago who co-wrote a recent Chicago Fed Letter on the phenomenon. It’s normal for productivity to slip when economies go into recession, he says, as happened world-wide during the first decade of this century. That’s because companies often hold on to workers and capital equipment even as business dries up — hoping to keep their best talent and machinery intact for the eventually upturn.

Durable Goods Orders Post A Surprisingly Strong December Gain - Durable goods orders increased by a surprisingly strong 4.6% in December, closing out the year with the highest monthly gain since September. The increase was nearly three times above the consensus forecast of 1.6%, based on Econoday's estimates. Much of the gain was due to a sharp rise in aircraft orders, a volatile component that often trips up many short-term predictions for this series. Excluding transportation, new orders for durable goods still advanced, but by a considerably lesser 1.3% pace. Business investment (capital goods orders less defense and aircraft), by contrast, increased a tepid 0.2%, which suggests that corporate America's appetite for laying out large sums of money for plant and equipment remains sluggish. Nonetheless, it's hard not to notice that that new orders in the last three months have been growing. That's a notable change from the summer. Stepping back and looking at the broad trend, however, still looks discouraging. The year-over-year change in new orders is treading water at best. The two-year deceleration has left the trend meandering in flat-line territory. It's unclear if this is just a pause before persistent declines infect the numbers vs. a respite in advance of stronger year-over-year comparisons in 2013.

Durable-Goods Demand Points to U.S. Factory Pickup: Economy -  Orders for durable goods in the U.S. rose in December for an unprecedented fourth consecutive month, indicating manufacturing will keep improving in 2013.Bookings for goods meant to last at least three years advanced 4.6 percent, exceeding the highest forecast of economists surveyed by Bloomberg, after a 0.7 percent gain in November, a Commerce Department report showed today in Washington. Other figures signaled sales of existing homes may cool, restrained by a lack of inventory. American manufacturers from General Electric Co. (GE) to DuPont Co. (DD) are among those benefitting from a pickup in global growth that will probably keep assembly lines busy. Increasing demand for communications gear and machinery also points to gains in U.S. business spending that show company chiefs are looking beyond the federal debate on ways to trim the budget deficit. 

Durable Goods Orders for December Smash Expectations, But Core Goods Plunge - The January Advance Report on December Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders:  New orders for manufactured durable goods in December increased $10.0 billion or 4.6 percent to $230.7 billion, the U.S. Census Bureau announced today. This increase, up seven of the last eight months, followed a 0.7 percent November increase. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 1.2 percent.  Transportation equipment, up following two consecutive monthly decreases, had the largest increase, $8.1 billion or 11.9 percent to $75.9 billion. Download full PDF The latest new orders number at 4.6 percent was dramatically above the consensus of 1.6 percent. Year-over-year new orders are up 5.3 percent. However, If we exclude both transportation and defense, "core" durable goods orders declined 3.9 percent. Year-over-year core goods are down a depressing 9.8 percent.The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

December Core Capital Goods Plunge 4.3% Y/Y As Durables Headline Boosted By Boeing Orders - Yet another government data release, yet another epic case of baffle with BS. As expected (and as pretweeted by us) The headline Durable goods orders was a massive 4.6% increase M/M, rising to $230.7 billion from $220.7 billion, the biggest beat to expectations of a 2.0% headline print since December 2011. A key reason for this was the ridiculous 56.4% explosion in Nondefense aircraft and part from $5.1 billion to $7.9 billion, while Nondefense aircraft soared by 10.1% to $14 billion. Excluding this incredibly volatile data set, the headline number would have been a miss, and will likely be revised lower next month, because the primary driver of the boost was Boeing, which said it had received 183 orders in December, compared to 124 in November. One wonders how many of these fully cancelable orders were for the Dreamliner. Ah details. And more details: the only consistent series that matters for a credible Capital Expenditure picture without monthly aberations, is the orders of Non-defense Capital Goods excluding Aircraft category, which rose by a whopping 0.2% month over month. But more importantly, looking at this on a Year over Year basis, as this is a seasonal series and looking at it on a sequential basis makes zero sense, we just experienced a whopping -4.3%, negating the transitory 1.5% Y/Y bounce posted in November, and resuming the downward glideslope in the key corporate CapEx indicator.

A Quick Note on the Durable Goods Report From Yesterday - Yesterday we learned that US durable goods increased by 4.6% -- a good number.  Ex transportation and an defense expenditures, we still saw increases.  The report noted we've seen increases in seven of the last eight months.  This is technically true.  However, consider the following charts: On the 5 year chart, we see more of a general plateau in orders over the last year.  And while yesterday's spike in orders could be the harbinger of a new upswing in orders, consider we're seen similar upswings twice in the last few 12-14 months, only to be disappointed.  Also ask yourself -- who would account for the increase in orders?  Japan, the UK and the EU are all in a recession or operating at very slow rates.  That leaves China, which is still growing but may not be large enough to sustain a continued increase. Consider the lat year's worth of data: Yes, there have been increases.  But you could also make an argument that orders have coalesced around the 220-224 level with the exception of the 08/12 drop.  

The "Real" Goods on the Durable Goods Report: Earlier today I posted an update on the January Advance Report on December Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data. Here is the first chart, repeated this time ex Transportation. Now we'll exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.

Chicago Fed Reports Rising Midwest Manufacturing - An index of manufacturing output in the Midwest rose in December for the second month in a row. The Midwest Manufacturing Index, released Monday by the Federal Reserve Bank of Chicago, increased 0.7% in December to a seasonally adjusted 94.7. That comes after rising a revised 2.0% in November. The overall index is up 6.2% from December 2011. Of the four sectors that make up the index, two showed improvement. Regional auto production numbers rose 1.5% and regional steel output moved up 0.7%. Regional resource output fell slightly, moving down 0.1%, and regional machinery production dipped 0.3%.

Dallas Fed: Regional Manufacturing Activity "Strengthens" in January - From the Dallas Fed: Texas Manufacturing Activity Strengthens in January - Texas factory activity rose sharply in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 3.5 to 12.9, which is consistent with faster growth.  Other measures of current manufacturing activity also indicated stronger growth in January. The new orders index jumped 13 points to 12.2, its highest reading since March 2011. The capacity utilization index shot up from 2.1 to 14.0, implying utilization rates increased faster than last month. The shipments index rose 9 points to 21.9, indicating shipments quickened in January.  The general business activity index increased from 2.5 to 5.5, its best reading since March. The company outlook index also rose sharply to 12.6, largely due to a drop in the share of firms reporting a worsened outlook from 10 percent in December to 6 percent in January. This was the strongest regional manufacturing report for January and above expectations of a reading of 4.0 for the general business activity index. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Dallas Fed Reports Expanding Texas-Area Manufacturing - Business activity among Texas-area manufacturers is still in expansion this month, lifted by new orders and more output, according to a report released Monday by the Federal Reserve Bank of Dallas. The bank said its general business activity index rose to 5.5 in January from a revised 2.5 in December, first reported as 6.8. Readings below 0 indicate contraction, and positive numbers indicate expanding activity. Along with the January numbers, the Dallas Fed revised its historical data to reflect new seasonal factors. The Dallas Fed’s report is the last of five regional Fed factory reports and was the most upbeat of all the reports.

Chicago PMI Soars By Most Since October 2009, Biggest Beat Since September 2011 - Remember when the Chicago PMI was revised much lower in December, pushing it from 51.6 to some 48.9, as part of its annual revision. Well, the baffle with BS show must go on. Moments ago the PMI printed at a number that makes a complete mockery of all the regional Fed diffusion indices and the various confidence data, not to mention all other manufacturing data, miraculously soaring from 50.0 to 55.6, the highest print since April, the biggest monthly jump since October 2009 and a 5 sigma beat to expectations of 51.6: the biggest such beat in absolute terms since September 2011.

Manufacturing in U.S. Grew More Than Forecast in January - Manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to improve. The Institute for Supply Management’s manufacturing index climbed to 53.1 last month from December’s 50.2, the Tempe, Arizona-based group’s report showed today. Readings above 50 signal expansion. The figure exceeded the highest estimate in a Bloomberg survey of 86 economists. The median forecast was 50.7.Stocks extended gains after the report showed gains in orders, production and factory employment after a fourth-quarter acceleration in consumer purchases and a rebound in business spending. The housing recovery and stabilization in overseas markets indicate factories may keep adding to growth in the world’s largest economy this year. “Manufacturing is on the mend,” “Things are getting better as we begin the year.”

ISM Manufacturing index increases in January to 53.1, Consumer Sentiment improves - The ISM manufacturing index indicated expansion in January. PMI was at 53.1% in January, up from 50.2% in December. The employment index was at 54.0%, up from 51.9%, and the new orders index was at 53.3%, up from 49.7% in December. From the Institute for Supply Management: January 2013 Manufacturing ISM Report On Business®  Here is a long term graph of the ISM manufacturing index. "The PMI™ registered 53.1 percent, an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent, indicating expansion in manufacturing for the second consecutive month. The New Orders Index registered 53.3 percent, an increase of 3.6 percent over December's seasonally adjusted reading of 49.7 percent, indicating growth in new orders. Manufacturing is starting out the year on a positive note, with all five of the PMI™'s component indexes — new orders, production, employment, supplier deliveries and inventories — registering above 50 percent in January."  This was above expectations of 50.7% and suggests manufacturing expanded in January.

ISM Manufacturing Business Activity Index Makes a Strong Advance -  Today the Institute for Supply Management published its January Manufacturing Report. The latest headline PMI at 53.1 percent is showing a strong return to expansion after two months of hovering near the flatline. The consensus was for 50.5 percent. Here is the key analysis from the report: Manufacturing expanded in January as the PMI™ registered 53.1 percent, an increase of 2.9 percentage points when compared to December's seasonally adjusted reading of 50.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.  A PMI™ in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the January PMI™ indicates growth for the 44th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the second consecutive month. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the PMI™ for January (53.1 percent) corresponds to a 3.4 percent increase in real gross domestic product (GDP) on an annualized basis."  The chart below shows the Manufacturing series, which stretches back to 1948. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

ISM Beats Expectations On Surge In Inventories - While the baffle with BS theme was strong earlier, when the UMich consumer confidence soared, rejecting the plunge in the consumer confidence tracked by the Conference Board, contrary to our expectations, the manufacturing ISM did not do a "China", which last night was reported to have grown and ungrown at the same time, did not drop to disprove yesterday's Chicago PMI and instead soared to 53.1 from 50.2, well above the expectations of a 50.7 print, and above the highest Wall Street estimate. This was the biggest beat of expectations in 16 months, and was driven by virtually every series rising except for Exports and Deliveries, but mostly by a surge in Inventories, which soared from 43 to 51.

A quick note about the ISM manufacturing report - As you can probably tell from my recent posts, I am in a quandary as to whether the increase in payroll taxes plus other government austerity measures are enough to put this country into an actual recession. If anything, my outlook is getting gloomier.  The shame is that, left to itself, it looks like the economy wants to keep growing. Today's ISM manufacturing report of 53.4 is very potent evidence of that. The index has been reported since 1948. Since that time, only once - for the first six months or so of the 1973-74 recession - has the index ever recorded a reading above 53 during a recession.  Interestingly, or ominously, that recession occurred when a strongly growing US economy ran into the brick wall of the Arab oil embargo. So if a recession is starting, you can blame it squarely on ridiculous contractionary austerity coming from Washington, DC.

Ford Leads U.S. Automakers as January Sales Gain -  Ford Motor Co. (F), General Motors Co. (GM) and Chrysler Group LLC reported January vehicle sales gains that topped estimates, as the U.S. auto market begins a fourth consecutive year of growth with buyers returning to showrooms. Ford’s deliveries of cars and light trucks climbed 22 percent while GM and Chrysler sales each rose 16 percent, according to company statements. The average estimates of 11 analysts surveyed by Bloomberg was for increases of 17 percent by Ford, 15 percent for Chrysler and 13 percent for GM. Toyota Motor Corp. (7203)’s sales rose 27 percent, exceeding the average of eight estimates for a 22 percent gain.The U.S. automakers will join Toyota and Honda Motor Co. among automakers benefiting from about 500,000 more returning customers whose leases expire this year compared with 2012, according to researcher The phenomenon shows the auto market, a bright spot in the U.S. economy, still has further room to recover from the recession that ended in 2009.

U.S. Light Vehicle Sales at 15.3 million annual rate in January - Based on an estimate from AutoData Corp, light vehicle sales were at a 15.29 million SAAR in January. That is up 10% from January 2012, and down slightly from the sales rate last month. This was at the consensus forecast of 15.3 million SAAR (seasonally adjusted annual rate).    This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for January (red, light vehicle sales of 15.29 million SAAR from AutoData).This is a solid start to the new year.    After three consecutive years of double digit auto sales growth, the growth rate will probably slow in 2013 - but this will still be another positive year for the auto industry. Even if sales average this rate all year, sales would be up about 6% from 2012. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate.

Outsourcing, Insourcing and Automation - One problem that economists always have in analyzing the economy is separating cyclical effects, which are temporary, from structural effects, which have long-term implications.  If the central problem is a lack of aggregate demand, then the vast bulk of the unemployed are jobless through no fault of their own. This macroeconomic problem requires a more expansive monetary and fiscal policy. But if the problem is structural, increasing aggregate demand is unlikely to reduce unemployment and is more likely to raise the rate of inflation. Structural unemployment is much more difficult to deal with. Workers may require extensive retraining because the businesses and industries that employed them no longer exist, and their skills no longer have the value they once did. The distinction between cyclical unemployment and structural unemployment is further complicated by something called hysteresis, which, basically, is the process whereby cyclical unemployment is converted into structural unemployment. The longer someone is out of work, the less likely that person is to find a job. Skills deteriorate, younger workers tend to be hired for available vacancies, jobs move to new geographical locations and so on.Another factor that contributes to structural unemployment is automation — the replacement of human labor with machinery, computers and robots.

Obama’s Jobs Council Disbands - President Barack Obama’s jobs council is disbanding Thursday, two years after the president tapped top executives from General Electric, American Express, Boeing and other companies along with labor leaders and academics to advise him on steps to spur employment and economic growth. For a president who has had a shaky relationship with the business comminuty–and particularly Wall Street–the council gave him some political cover from Republicans and business leaders who criticized his administration for enacting tough new regulations. In recent months, however, the council had become a political thorn as Republicans accused Mr. Obama of ignoring it. The website for the President’s Council on Jobs and Competitiveness, as it’s formally called, shows it met four times since its inception – the last time on Jan. 17, 2012 — and held 18 “listening and action sessions” around the country with businesses and local leaders.

At least 100 batteries failed on 787 fleet - Boeing had numerous reliability issues with the main batteries on its 787 Dreamliner long before the two battery incidents this month grounded the entire fleet. More than 100 of the lithium-ion batteries have failed and had to be returned to the Japanese manufacturer, according to a person inside the 787 program with direct knowledge. “We have had at least 100, possibly approaching 150, bad batteries so far,” the person said. “It’s common.” The frequency of battery failures reflects issues with the design of the electrical system around the battery, said the person on the 787 program. Most of the batteries were returned because they had run down so far that a low-voltage cutout was activated. At that stage, the batteries, which cost about $16,000 each, are essentially dead and cannot be recharged.

Delays by Congress hasten risk that USPS mail delivery could stop - The U.S. Postal Service, set to run out of operating cash in October, still can't get Congress to act with any urgency to help solve its problems. Competing Senate and House proposals to help resolve Postal Service finances expired when the old Congress left Jan. 3, and two senators who have pushed for a postal overhaul retired. The post office now must persuade lawmakers focused on broader fights on the deficit and spending to pass a law to let the agency cut costs and plug losses. "We have a just-in-time Congress that waits until the very last minute before doing things, and I think that will be the likely scenario with regard to postal reform," The post office's fortunes continue to worsen, with the latest estimate pegging losses at $25 million a day. Mail volume is down 26 percent from its 2006 peak. To pay its bills and keep the mail moving, it has had to skip $11.1 billion of required payments over the past two years for future retirees' health costs. It exhausted its $15 billion borrowing authority last September. The service says it will run out of money in October even after ignoring this year's retiree health obligation. If it can't pay employees or buy fuel for trucks, Americans looking for their bills, magazines and catalogs could find empty mailboxes.

Latest Postage Stamp Price Hike Buys The US Postal Service Two Weeks Of Extra Time - The US Postal Service may be a woefully overstaffed anachronism of a bygone era, with a painfully mismatched cost and revenue structure, which last year reported a massive, and record, $15.9 billion annual loss for the last Fiscal year, but that doesn't mean it is going away without a fight. As of yesterday, the USPS valiantly hiked the price of first-class mail by another 2.6%, to 46 cents, up from the 45 cents which in turn was hiked a year previously. Alas, somehow we doubt this latest increase in pricing which is supposed to keep up with inflation, will do much for the long-term viability of the government service which employes some 500,000, and which has warned would run out of cash by October 2013 for two simple reasons: the ongoing collapse in mail volume sent via the USPS (with free or more effective alternative widely adopted), and a cost structure that unlike the revenue side, has managed to stay leaps and bound ahead of inflation courtesy of some rather vocal labor unions.

Kolko: Here are the “Missing” Construction Jobs - CR Note: This is from Trulia chief economist Jed Kolko: Construction jobs are a big part of how housing recovery lifts the broader economy. But the construction rebound, so far, appears to be jobless. “Residential construction” jobs, as reported by BLS, were up just 1% in December 2012 from their lowest level since the housing bubble burst – even though new home starts in December 2012 were twice as high as their low point in 2009. Who is building all these new homes? If starts are now twice their lowest level, why aren’t residential building jobs also twice their lowest level, instead of up just 1%? The answer: this is the wrong way to look at construction jobs. The amount of construction activity this month depends not only on this month’s construction starts but also on construction starts in previous months. That’s because single-family construction takes 4-6 months between start and completion, and multi-unit-building construction takes 10-14 months, on average. Therefore, construction starts indicate what will happen to construction activity in the coming months – not necessarily where it is today. And, in this recovery, multi-unit buildings are an unusually high share of overall construction activity, so the typical new unit is under construction for longer, making starts an even-worse-than-usual proxy for current construction activity. Instead of starts, units “under construction” – also reported monthly by the Census – is the right measure of construction activity to compare with jobs. This changes the picture dramatically: while monthly starts in December 2012 were up 100% (that is, have doubled) since the bottom, monthly units under construction were up 32% from the bottom.

ADP: Private Employment increased 192,000 in January - From ADP: Private sector employment increased by 192,000 jobs from December to January, according to the January ADP National Employment Report®, which is produced by ADP® ... in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The December 2012 report, which reported job gains of 215,000, was revised downward by 30,000 to 185,000 jobs. Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is slowly, but steadily, improving. Monthly job gains appear to have accelerated from near 150,000 to closer to 175,000. Construction is finally kicking into gear and more than offsetting the weakness in manufacturing. The recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years, but the gains are encouraging nonetheless.”  This was above the consensus forecast for 172,000 private sector jobs added in the ADP report.

ADP: January Payrolls Climb The Most In 11 Months - Private payrolls increased by 192,000 in January, according to this morning's ADP Employment Report. That's a bit stronger than December's 185,000 gain and it's the best monthly pop in nearly a year. Today's release tells us that jobs creation remains at a stable, if not slightly better pace relative to the trend in recent months. In turn, that sets us up for thinking positively about Friday's January payrolls report from the Labor Department. Meanwhile, it seems that the economy's capacity for moderate growth appears to be intact in the new year, at least as far as jobs are concerned via ADP's analysis. “The job market is slowly, but steadily, improving," says Mark Zandi, chief economist of Moody’s Analytics, in a press release that accompanied today's report. "Monthly job gains appear to have accelerated from near 150,000 to closer to 175,000. Construction is finally kicking into gear and more than offsetting the weakness in manufacturing. The recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years, but the gains are encouraging nonetheless.”

ADP Employment Report - 192,000 Private Sector Jobs for January 2013 - ADP's proprietary private payrolls jobs report shows a gained of 192,000 private sector jobs for January 2013. ADP December's reported 215,000 job gains were significantly revised downward by 30,000 to 185 thousand. Graphed below are the reported private sector jobs from ADP. This report does not include government, or public jobs.  Below are the month job gains or losses for the five areas ADP covers, manufacturing (maroon), construction (blue), professional & business (red), trade, transportation & utilities (green) and financial services (orange).  Yet again manufacturing was hammered with a loss of 3,000 more jobs. Trade/transportation/utilities showed the strong growth for the second month in a row with 33,000 jobs. Financial activities payrolls increased by 12,000 and Professional/business services jobs grew by 40,000. Construction is recovering and this month ADP reports a gain of 15,000 jobs in private construction.  ADP reports payrolls by business size and this month large businesses lost jobs. Small business, 1 to 49 employees, added 115,000 jobs, medium defined as 50-499 employees, added 79,000 and large business subtracted -2,000 to their payrolls. If we take the breakdown further, all jobs lost were in businesses with greater than 1,000 workers, a total of 9,000 jobs. Large business in the service sector are responsible as they alone lost 14,000 jobs.  Below is the graph of ADP private sector job creation breakdown of large businesses (bright red), median business (blue) and small business (maroon), by the above three levels. For large business jobs, the scale is on the right of the graph. Medium and Small businesses' scale is on the left.

Weekly Initial Unemployment Claims increase to 368,000 - The DOL reports: In the week ending January 26, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 38,000 from the previous week's unrevised figure of 330,000. The 4-week moving average was 352,000, an increase of 250 from the previous week's unrevised average of 351,750. 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 increased slightly to 352,000. Weekly claims were above the 350,000 consensus forecast, however the 4-week average is near the levels of early 2008

Weekly Unemployment Claims Rise Above Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 368,000 new claims number was a larger than forecast 38,000 increase from the previous week. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose from 351,750 to 352,000. Here is the official statement from the Department of Labor: In the week ending January 26, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 38,000 from the previous week's unrevised figure of 330,000. The 4-week moving average was 352,000, an increase of 250 from the previous week's unrevised average of 351,750. The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 19, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 19 was 3,197,000, an increase of 22,000 from the preceding week's revised level of 3,175,000. The 4-week moving average was 3,192,250, a decrease of 9,750 from the preceding week's revised average of 3,202,000. Today's seasonally adjusted number was above the consensus estimate of 345K, but's own estimate was closer to the mark with their 365K forecast.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.

January Employment Report: 157,000 Jobs, 7.9% Unemployment Rate - From the BLSTotal nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent...The change in total nonfarm payroll employment for November was revised from +161,000 to +247,000, and the change for December was revised from +155,000 to +196,000 [Benchmark revision:] The total nonfarm employment level for March 2012 was revised upward by 422,000 (424,000 on a not seasonally adjusted basis). The headline number was below expectations of 185,000. However employment for November and December were revised up sharply. The second graph shows the unemployment rate. The unemployment rate increased slightly to 7.9% from 7.8% in December. The unemployment rate is from the household report and the household report showed only a small increase in employment. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was unchanged at 63.6% in January (blue line. This is the percentage of the working age population in the labor force. The fourth graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring. This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

The employment situation - (7 graphs) This was another tepid employment report not much different than the reports in 2012. Payroll employment rose 168,000 and the household survey showed a gain of only 17,000 Private payrolls expanded 168,000 while government employment fell 9,000. Perhaps more importantly the year over year change in employment is showing significant signs of weakness, Both the household survey and payroll data show that the year over year gain in employment has peaked. Moreover, this weakness is appearing despite the fact that the annual benchmark revisions showed stronger employment growth in 2012 than originally reported. The revisions also significantly changed the pattern of hours worked in 2012. Originally, hours worked fell well below trend in mid-2012 and were strengthening back to trend at year-end. Now it appears that hours worked were not as weak as originally reported. But with the average workweek unchanged in January, the January hours worked fell 0.2%. On the other hand the apparent bottoming of average hourly earnings growth is still intact and was actually strengthening in January. The growth in average weekly earnings fell back to only 1.2% versus 1.7% in December and the low of 1.0% in October. It is going to be very hard for consumer to absorb the increase in payroll and income taxes in early 2013. Prospects for consumer spending in early 2013 do not appear promising.

Golly Gee, It's Another Mediocre Employment Report...From the BLS: Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today. Retail trade, construction, health care, and wholesale trade added jobs over the month. The number of unemployed persons, at 12.3 million, was little changed in January. The unemployment rate was 7.9 percent and has been at or near that level since September 2012. (See table A-1.) (See the note and tables B and C for information about annual population adjustments to the household survey estimates.) Just like the last few months, we've added some jobs, but nowhere near enough to make a meaningful dent in long-term unemployment. Here's a chart from the report: The unemployment rate has stalled at right below 8% for the last five months. Put another way, we're treading water. Here is the hours worked and wage data: In January, the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. The manufacturing workweek edged down by 0.1 hour to 40.6 hours, and factory overtime was unchanged at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged down by 0.1 hour to 33.6 hours. (See tables B-2 and B-7.) Average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $23.78. Over the year, average hourly earnings have risen by 2.1 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees increased by 5 cents to $19.97.

157K New Jobs, Unemployment Rate Rises to 7.9% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bold bracketed text added by me: Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today [an increase from 7.8 percent last month]. Retail trade, construction, health care, and wholesale trade added jobs over the month.  Today's nonfarm number is lower than the consensus, which was for 193K new nonfarm jobs, and the unemployment rate is higher than the 7.7% expectation. There was, however, some positive news in the 2012 annual revisions to the Establishment Survey Data. We saw significant upward revisions for the last three months of the year. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.0% — down from 3.1% last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

Employment/Population Ratios -  The BLS is out with a new employment report this morning.  The headline unemployment rate ticked up to 7.9%, but my preferred employment indicators are the employment/population ratios by gender for ages 25-54.  That ratio for men is as above.  Basically, the recovery stalled out in 2012 - we ended the year much where we started. For women we get this: The "recovery" here is barely visible at all - there is a little tick up in the middle of 2012, but it now seems to be eroding again. Clearly, the labor market still sucks for a lot of people.

U.S. Economy Adds 157,000 Jobs; Revisions in Data Show a Stronger Labor Market - The labor market continued its dogged march forward in January, with the federal government announcing that the U.S. economy added 157,000 jobs in January, and that the unemployment rate basically held steady at 7.9%. This was slightly below the 165,000 figure economists were predicting. But the big news in today’s report were the revisions of previous month’s estimates. The jobs gain in November of 2012, previously reported as +161,000, was revised upwards to +247,000, and the December 2012 figure was revised from +155,000 to +196,000. This addition of 133,000 jobs, plus upward revisions of total employment by 422,000 — both related to the incorporation of new Census population estimates — means that in 2012, the U.S. economy added 181,000 jobs per month rather than the 153,000 we had previously thought. It also means the rolling, three-month average of monthly job gains is 200,000 per month — a marked improvement from the kind of job growth we saw in the middle of 2012. The unemployment rate, which is estimated at 7.9%, is more difficult to accurately compare to last year’s estimates because of the revision in population estimates that occurs each January when new Census data is incorporated into the process.

January's Employment News - Today we received the first jobs report of 2013, pending any future revisions. Every month, Matt McDonald at Hamilton Place Strategies produces a cheat sheet summarizing the key statistics and trends. Click on the image for a larger version.

Private Payrolls Rise A Modest 166k In January - Private payrolls expanded by a less-than-expected 166,000 in January on a seasonally adjusted basis, the Labor Department reports. Last month's level of jobs creation represents a considerable slowdown from December's upwardly revised 202,000 rise. The annual pace of growth has also slipped, with a 1.9% gain in private payrolls for last month vs. the year-earlier level. For comparison, private payrolls gained 2.0% on the year through December. Overall, today's employment report reminds that the labor market continues to expand slowly. The trend isn't impressive, at least not relative to what's needed to boost the economy to a substantially higher level of growth. But today's jobs report is still far from fatal as it relates to assessing the business cycle. As always, the question is whether the sluggish growth rate for payrolls can persist? The annual trend through January has clearly decelerated, but only marginally. The current 1.9% increase looks modest next to the recent highs of 2.5% from a year ago. But a 1.9% year-over-year growth rate for private payrolls—if we can keep it—is hardly the end of the world. Indeed, a 2% annual pace, give or take, was the upper range for a period before the Great Recession hit. That was also a time when worries about labor shortages were openly discussed. Same rate of increase, different macro context.

U.S. Gains 157K Jobs, Jobless Rate Rises to 7.9% - U.S. employers added 157,000 jobs in January and hiring was stronger over the past two years than previously thought, providing reassurance that the job market held steady while economic growth sputtered. The mostly upbeat Labor Department report Friday included one negative sign: the unemployment rate rose to 7.9 percent from 7.8 percent in December. The unemployment rate is calculated from a survey of households, while job gains come from a survey of employers. The hiring picture over the past two years looked better after the department’s annual revisions. Those showed employers added an average of roughly 180,000 jobs per month in 2012 and 2011, up from previous estimates of about 150,000. And hiring was stronger at the end of last year, averaging 200,000 new jobs in the final three months.

January Jobs Report: First Impressions - Payrolls were up by 157,000 and the unemployment rate ticked up to 7.9% in January, according to today’s release from the Bureau of Labor Statistics. Revisions to the payroll survey added 127,000 jobs to the counts for November (up 247K) and December (196K) such that over the past three months, payrolls were up an average of 200,000 per month, compared with about 150,000 over the three prior months.  Revisions for the year 2012 show that the job market added about 335,000 more jobs than in the pre-revised data.  Whether this acceleration sticks in coming months bears close watching. The better jobs performance in the last quarter of 2012 goes against the sharp slowdown in GDP growth as reported earlier this week (down 0.1%).  I expect that GDP figure will be revised up in forthcoming reports. Unemployment remains around 8%, and, in fact, has been in a range from 7.8% to 8.2% since March of last year.  Average hourly earnings were up 2.1% over past year, a bit ahead of inflation, so real wages are up a bit.  The share of the unemployed who are “long-termers”—jobless for at least half-a-year—has also come down a bit to about 38% in January; it was 43% a year ago. On the other hand, the weekly earnings of middle- and lower-wage workers (blue collar in manufacturing; non-managers in services) are up only 1.2% over the past year, before accounting for inflation.  The retail sector added 33,000 jobs and construction was up 28,000 in January and 30,000 in December.  Since reaching their low point in early 2011, jobs in construction have bounced back and are up almost 300,000 since then, with 80,000 of those jobs added over the past three months.  Some of this may have to do with repairing the damage from hurricane Sandy.   In a continuation of a longer-term trend, government employment was down 9,000 driven by losses at the federal and local levels.

Strong Job Growth and Upward Revisions Contrast Sharply with Reported GDP Decrease - Wednesday’s data release from the Bureau of Economic Analysis surprised us with a reported decrease of 0.1 percent in GDP for Q4 2012. Now, just two days later, a report from the Bureau of Labor Statistics shows robust job growth throughout the last quarter and continuing into January. The two offer sharply contrasting indications of the strength of the economy in the last three months of the year. The payroll jobs data from the survey of business establishments are subject to both monthly and annual revisions. Monthly revisions reflect the fact that when the numbers are first released, early in the following month, not all firms have submitted their payroll information. As more firms report in, data for the previous month and the month before that are revised. In addition, the data are subject to an annual benchmarking process based on unemployment insurance records. The BLS releases data based on the new benchmarks each January, including revisions of monthly jobs figures for the entire previous year. The following chart shows both the previously reported and the revised data. For all of 2012, the economy added 2,170,000 nonfarm payroll jobs, 324,000 more than previously reported. The revised job gain for Q4 was 603,000. That was more than the quarterly average for the year and 150,000 higher than previously reported. In short, the payroll jobs numbers suggest that the economy was strengthening, not weakening, in the last quarter.

Mixed Messages in the Employment Report -  Nonfarm payrolls grew by 157k in January, a little below consensus expectations, but upward revisions pushed the November and December numbers to 247k and 196k, respectively. The twelve-month moving average is now 168k: The unemployment rate edged up, even after adjusting for the population control effect: Consider the combination - solid if not spectacular job growth plus a stagnant unemployment rates equals a growing economy and the Fed on hold. At least, that is the message of the Evan's rule with regards to the federal funds rate. Moreover, it is anticipated that some version of the Evan's rule will also apply to the tapering off of asset purchases. So not only is the lift-off from the zero bound delayed, but so too is the end of asset purchases. Something for both equity and bond traders. What's not to like?  On a softer note, the employment numbers in the household report are not as rosy as those of the establishment report: Something to keep an eye on as a possible precursor to softening in the establishment numbers in future months. Was there anything here that might prompt the Fed to rethink policy? It's a bit of a stretch at this point, but note that wage growth continued to accelerate:

Another Ho-Hum Jobs Report - Going in the release of today’s January jobs report, the consensus was that we’d see another fair to middling report, with job growth somewhere in the neighborhood of 150,000 net jobs created. As it turns out that’s exactly what we got: American employers added 157,000 jobs in January compared with a revised 196,000 jobs the previous month, the Labor Department reported on Friday. The unemployment rate was little changed at 7.9 percent, about where it has been stuck since September. On the bright side, revised government data showed that the economy added 335,000 more jobs than originally estimated during all of 2012, including an additional 150,000 in the last quarter of the year. That was on top of the previously reported fourth-quarter job growth of 603,000 and 2012 growth of 2.2 million. The higher revisions, in particular, encouraged traders on Wall Street, sending the Dow Jones industrial average over the 14,000-point mark for the first time since 2007. Still, job growth has been modest compared with previous recoveries, and economists saw little in January’s report to suggest that hiring would pick up soon.

Don’t Dismiss Rise in Unemployment - The U.S. unemployment rate ticked up to 7.9% in January and a broader rate that includes discouraged workers was flat at 14.4%, but trying to compare those numbers to previous estimates is particularly difficult this month. Every January the Labor Department readjusts the numbers it uses to calculate the size of the U.S. population. That makes it difficult to compare month-to-month moves in the factors that underpin the unemployment rate. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

Last Hurrah for Jobs? Establishment Survey +157,000 Jobs; Household Survey +17,000 Jobs; Unemployment Rate +.1 to 7.9%; Unemployment +126,000 - The establishment survey reported a gain of  157,000 job this month. However, for the third consecutive month, the household survey is much weaker than the headline number.  The household survey shows a gain of a mere 17,000 jobs. Last month the household survey gained only 28,000 jobs. The unemployment rate rose to 7.9%. As measured by the household survey (the basis for the reported unemployment number) the number of unemployed rose by 126,000. December BLS Jobs Report at a Glance:

  • Payrolls +157,000 - Establishment Survey
  • US Employment +17,000 - Household Survey
  • US Unemployment +126,000 - Household Survey
  • Involuntary Part-Time Work +55,000 - Household Survey
  • Baseline Unemployment Rate +.01 at 7.9% - Household Survey
  • U-6 unemployment +.00 to 14.4% - Household Survey
  • The Civilian Labor Force +143,000 - Household Survey
  • Not in Labor Force  +169,000 - Household Survey
  • Participation Rate +.00 to 63.6 - Household Survey

Visualizing The BLS' Establishment Survey Revisions - As part of today's non-farm payroll release, the BLS also issued its revision to the Establishment Survey as a result of updated population estimates, which, as the name implies, adjusted monthly data to the Establishment Survey which is the actual headline print that moves the market, not the data in the household survey which is what the unemployment rate is based on. In short: of the 12 monthly revisions, there were just 2 months in which the post-revision data was adjusted downward, July and August, with all other months supposedly adding jobs to the cumulative total, which as of December stood at 134,668 jobs as revised, compared to 134,021 pre-revision. So for those curious how the sequential change in jobs would have looked on a pre vs post-revision basis, we summarize the 2012 data in the chart below. In short: the revision would have added a total 335,000 jobs to the Establishment Survey headlines over the 2012 NFP headlines. The point of the chart is to show just how variable the actual monthly swing is based on exit assumptions, yet this is precisely the data that the kneejerk collocated algos trade on.

The BLS Jobs Report Covering January 2013: Terrible Month, Great Report - The short form: Yearly revisions increased the number of jobs created in 2012 by 647,000. These revisions make some comparisons difficult between December 2012 and January 2013 and obscure that January is an absolutely dreadful month for jobs and employment in real terms. After Christmas, the economy sheds large numbers of jobs that are not picked back up until later in the spring. The result is that while the adjusted numbers show gains, these numbers mark a trend basically bridging a chasm. The bottom of that chasm is where the economy now is. The number of employed dropped by nearly 1.5 million in the Household survey. The larger business survey documented just over 2.8 million jobs lost in January. These losses resulted in a real unemployment rate of 13.6% (versus a real trend rate of 12.6%) whereas real un- and under employment hit 18.9% (versus 17.4% trend) affecting nearly 31 million Americans. Blue collar workers lost ground in January in wages and hours, and in 2012 they also lost ground to inflation, low as it was. Average earnings for all private employees in 2012 increased about 2%, but this was probably all or nearly all wiped out by inflation. The CPI will come out later in the month. With that to the report.The January jobs report is perhaps the most complicated of the year. There are year end revisions to both of the report’s two surveys: the business or Establishment survey covering jobs and the Household survey covering employment (people). The business or jobs survey updates its numbers based on a much more complete tally for the month of March using unemployment insurance records. Tables for both seasonally adjusted and unadjusted data are revised. Revisions for unadjusted data go back to April 2011 and adjusted to January 2008. Based on changes in the March benchmark data, seasonally adjusted total nonfarm jobs in 2012 (the official jobs number) increased by 647,000 more than was previously reported: 134.021 million > 134.668 million

Analysis: Jobs Report Makes 2012 Look Better - The January jobs report showed the unemployment level ticked up a tenth to 7.9% and the economy added 157,000 jobs. The Wall Street Journal’s Mike Weinstein discussed the data with Joel Naroff of Naroff Economic Advisors.

Comparing Jobs in Recessions and Recoveries - For the 28th straight month, the country added jobs: 157,000 nonfarm payroll jobs in January, to be more precise. But employment still has a long way to go before returning to its prerecession level. The chart above shows economic job changes in this last recession and recovery compared with other recent ones; the red line represents the current cycle. Since the downturn began in December 2007, the economy has had a net decline of about 2.3 percent in its nonfarm payroll jobs. And that does not account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession. Getting the economy to 5 percent unemployment within two years — a return to the rate that prevailed when the recession began — would require job growth of closer to 284,984 a month.There are now 12.3 million workers looking for work who cannot find it. The tally of those who are underemployed — that is, adding in those workers who are part-time but want to be employed full-time, and workers who want to work but are not looking — is an even larger 21.4 million.

Employment Report Comments and more Graphs - First, here is a table of the change in payroll employment on an annual basis including the benchmark revision released today. For private employment, 2011 was the best year this decade (2012 was the 3rd best year), but public payrolls have seen a four year decline: The headline number for January (157 thousand jobs added) was below expectations, and the unemployment rate was higher than expected.  However the revisions (benchmark and new seasonal factors) were positive.  The unemployment rate is from the household survey, and the household survey was weak - but that survey is very volatile.   Hopefully employment growth will pick up some in 2013, although austerity probably means another year of sluggish growth.  Below are a several more graphs ... The first graph below shows the employment-population ratio for the 25 to 54 age group. This has been moving sideways lately, and that shows the labor market is still weak.Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. The number of part time workers increased in January to 7.97 million from 7.92 million in December.These workers are included in the alternate measure of labor underutilization (U-6) that was unchanged at 14.4% in December.  This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.71 million workers who have been unemployed for more than 26 weeks and still want a job. This was down slightly from 4.77 million in December, and is at the lowest level since June 2009. This is generally trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US.

The inherently complex payrolls report - This month’s payrolls report is one only a statistician could love. The official press release contains three whole pages on the subject of revisions and rebenchmarking, on top of the box on the front page: the very clear message is that we’re starting a new year, and that it’s a very bad idea to compare the January numbers to the December numbers. That said, no one would have been particularly surprised by these numbers even if they were directly comparable: they’re basically exactly in line with what we’ve been seeing for months. Payrolls growth is constant, unemployment is flat: nothing’s getting better, nothing’s getting worse. And if you exclude some of the more volatile categories, that trend is even stronger. The good news in the report is about levels rather than changes: the total number of Americans on payrolls is now 134,825,000, while last month we were told that it was just 134,021,000. That means the number of Americans with a job is 800,000 higher than we thought last month, even if the unemployment rate, at 7.9%, is no closer than it was in September to the Fed’s 6.5% target. Frankly, the payrolls report should be of interest mostly to statisticians and econometricians. The error bar for the number of jobs added is large, but the amount of data in there is enormous: the jobs report is an amazingly useful resource for people who want to study the state of the US economy over time. The problem is that it’s also the earliest indication that the markets get of how the economy is doing each month, and as a result it moves markets more than any other scheduled data release in the world, with the possible exception of FOMC announcements. In our short-attention-span world, where anything that moves markets must be news, it’s far too easy to get distracted by monthly noise — especially when people like me feel the need to weigh in every month.

4 Ways Persistently High Unemployment Could Ossify – Brad Plumer has a post today on rough projections that we will not reach full employment until 2022. Here are four ways that failing to address the unemployment problem today could lead to long-lasting (and potentially permanent) reductions in human capital, employment, and social welfare:

  1. Unemployed workers lose opportunity to maintain and update skills
  2. If for incentive or human capital reasons, employers may prefer workers with long horizons, then it will quite hard for middle aged workers to find new jobs
  3. In high unemployment environment, it may be hard for workers to signal their quality by holding jobs and being promoted. Resulting inefficiencies in sorting workers may reduce the overall demand for labor.
  4. Lack of good times may reduce labor force participation today, which tends to lower future labor market participation.

Note: these are from slide 17 of the presentation on hysteresis that I posted yesterday.

The unemployment crisis behind the jobs report - Friday brought a relatively good employment report. The economy added fewer jobs than economists had hoped for, but they were of good quality: most of them came from private companies, rather than the government. Construction did extremely well, as new houses are being built. Further math showed that the economy actually added more jobs than we thought it had in November and December. It is tempting to call this a recovery. A number of economic indicators show that the economy is at least moving forward, rather than back. As much as the numbers move forward, though, there is some sadness embedded in them: we still have an joblessness crisis. And as long as the actual numbers appear to get "better", then it will not be treated like a crisis, but more like an inconvenience. Note this glum start to the Bureau of Labor Statistics' news release today:"The number of unemployed persons, at 12.3 million, was little changed in January." Further down, something even more glum: "In January, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged at 4.7m and accounted for 38.1% of the unemployed." Those figures tell the truth more than any other numbers do. Let's leave the jobs report behind and look at the jobs picture.

A Quarter Of Jobs In America Pay Below The Federal Poverty Line - Over two years ago (and reiterated last year) Zero Hedge first wrote on what was and is an undisputed transition within the US labor force: a shift from full-time to temp, or part-time labor, with virtually no contractual or welfare benefits, and where workers are lucky to get minimum wage. This is because in the "New Normal" where copious amounts of structural slack are pervasive due precisely to the Fed's constant flawed micromanagement of the economy, the US has now become an "employers' market." Furthermore, we were the first to make the critical distinction that it is absolutely not all about the quantity of jobs, but much more importantly, the quality of the new jobs being created. However, just like 99% of the general public, and all of the mainstream media, has an inborn genetic disorder preventing it from grasping the distinction between nominal and real, so these two critical aspects of the US jobs market languished unperturbed. Until now, two years later, when we are happy to see that the mainstream media has finally caught up with what our readers knew in December 2010.

Old People Gotta Work Now - You can't find a steady job. If you can, you can barely afford to rent, much less buy. Football and cake will both kill you. Retirement is a pipe dream. What does this all add up to? The fact that these days, turning 65 means "Here is your Wal-Mart greeter training packet. Please familiarize yourself with its contents." From a new US Census report:In 1990, 12.1 percent of the population 65 years and older was in the labor force, compared with 75.6 percent for 16- to 64-year-olds during that time. By 2010, the labor force participation rate of those 65 years and older had increased to 16.1 percent, a 4.0 percentage point change. For 16- to 64-year-olds, the national labor force participation rate was 74.0 percent in 2010 (1.6 percentage points lower than in 1990). Within the 65 and over population, 65- to 69-year-olds saw the largest change, increasing from 21.8 percent in 1990 to 30.8 percent in 2010, a 9.0 percentage point increase, compared with a 5.0 percentage point increase for 70- to 74-year-olds and a 1.0 percentage point increase for people 75 years and older.

Break the Silence on the Unemployment Problem - This slow recovery has left unemployment tragically high in most parts of the country. In the San Francisco Bay Area where I live we are relatively lucky. In San Francisco the unemployment rate is 6.7%. The rate is 7.8 % in the country as a whole, and 9.8 % in the state as a whole. In the nearby central valley—cities like Yuba City, Modesto, Merced, Fresno—it’s about 15%, and down south in El Centro California it’s 27%.  The numbers would all be worse if they included the unusually large number of people who have dropped out of the labor force and are no longer counted as unemployed.  If they counted, the national unemployment rate would be 9.1 percent. Another way to think about this is to look at the fraction of working age adults who are employed. Though this number usually rises during recoveries, it is actually smaller now than when the recovery began. So I am worried when people stop talking about today’s very high unemployment rates as if they were normal.  It is not a good sign that the inaugural address was silent on the subject, not even including the word unemployment.

Why Employment In The U.S. Isn't Coming Back - It is impossible to understand job creation without understanding value creation and labor/overhead costs. People hire other people when their labor creates more value than it costs to hire them. When labor costs are high, the value created must also be high; it makes no sense to hire someone if doing so generates a loss. When labor is cheap, the bar of value creation is lowered, and so the risk of hiring a worker is also lower: they don't have to add much value to be worth their wage. This is why you see many low-value jobs in developing-world countries.  If overhead costs - the cost-basis of doing business in the U.S. - keep rising faster than gross profits (out of which overhead is paid), then the owners have little choice: they can either close the business before they are personally bankrupted, cut everyone's pay or lay off some employees and somehow raise the productivity of the remaining workers to maintain enough value creation to survive. This is the U.S. economy in a nutshell.

The Rise of the Permanent Temp Economy - Politicians across the political spectrum herald “job creation,” but frightfully few of them talk about what kinds of jobs are being created. Yet this clearly matters: According to the Census Bureau, one-third of adults who live in poverty are working but do not earn enough to support themselves and their families. A quarter of jobs in America pay below the federal poverty line for a family of four ($23,050). Not only are many jobs low-wage, they are also temporary and insecure. Over the last three years, the temp industry added more jobs in the United States than any other, according to the American Staffing Association, the trade group representing temp recruitment agencies, outsourcing specialists and the like. Low-wage, temporary jobs have become so widespread that they threaten to become the norm. But for some reason this isn’t causing a scandal. At least in the business press, we are more likely to hear plaudits for “lean and mean” companies than angst about the changing nature of work for ordinary Americans.

Labor Sees Bright Spots in Membership Trends - The American labor movement received some bitter news last week when the Bureau of Labor Statistics released its annual report on union membership – it showed a 398,000 overall decline in union membership, with the percentage of workers in unions dropping to 11.3 percent, the lowest rate in nearly a century. But some union leaders saw some important silver linings in the gloomy report — especially the surprisingly strong growth in labor’s ranks in California. The bureau reported a jump of 110,000 in the number of union members in California, to 2.49 million (meaning that in the 49 other states, the overall loss was 508,000 members). “There is a significant organizing consciousness among unions in California that I haven’t seen in other parts of the country,” said Kent Wong, director of the Labor Center at the University of California, Los Angeles. “And a major factor in California’s success is there has been a very aggressive attempt on the part of many unions to organizing immigrant workers.” The jump in union membership in California is tied to the one other bright spot for unions in the bureau’s report. While union membership among whites fell by 547,000 last year (to 11.3 million), union membership among Latinos jumped by 156,000 last year (to 1.98 million) while increasing for Asian-Americans by 45,000 (to 668,000) — although the percentage of Asian-American workers in unions actually dropped, to 9.6 percent, as the overall number of Asian-Americans employed jumped sharply.

US unions’ continued decline masks new forms of worker activism - America's long and steady march toward a fully disposable workforce continues apace, the Bureau of Labor Statistics reported this week. Union membership is at its lowest point in nearly a century, with just 11.3% of all workers – the same level it was in 1916. To put this in proper historical perspective, union members are as rare today as they were at a time when being one could get you shot to death in a mining camp by the Colorado national guard.  But if labor markets are adapting to the reality of a mostly union-free America, so too is labor activism. Last year, two of the highest profile labor actions in the country – one-day "flash" strikes at fast food restaurants in New York City, and at Walmart stores nationwide – were coordinated by groups that are not traditional unions: New York Communities for Change and OUR Walmart (though both received union support). And both strikes were carried out without the traditional aim of formal union recognition.

Kansas lobbyist admits No Rights At Work is about union busting (video): A senior lobbyist from the Kansas Chamber of Commerce admits that so-called "Right-to-Work" and "Paycheck Protection" bills are really just meant to bust unions and strip workers of their rights. Two days later, Michigan Gov. Rick Snyder admitted the No Rights At Work bill he rammed through the Legislature has nothing to do with creating jobs. But you knew that.

The Decline of Unions is Your Problem, Too - Last week came news that the share of America’s workforce that’s unionized hit a 97-year low. A mere 11.3% of workers now belong to a union, and a great chunk of those are in the shrinking public sector. In the private sector, unionization fell to an abysmal 6.6%, down from a peak of 35% during the 1950s.Most Americans yawned at this news. On one level that’s understandable. After all, most Americans aren’t in a union. It’s a vicious cycle: as unions decline, fewer people see their fates as bound up with unions, which just accelerates the decline.But on another level, America’s non-reaction is striking. We remain in the wake of the Great Recession. Inequality and wealth concentration are at levels not seen since just before the Great Depression. This would seem as ripe a time in modern memory for a revival of organized labor. Instead, a basic assumption now shapes most Americans’ mindset about labor: the belief that the death of unions isn’t my problem because I’m not in a union. That assumption is wrong in two critical ways.

Exposed: How Whole Foods and the Biggest Organic Foods Distributor Are Screwing Workers  Whole Foods Market (WFM) CEO John Mackey has done a brilliant job of creating the illusion that his empire is all about abundance, bounty and the good life. But there’s nothing bountiful or good about the way the second-largest non-unionized food retailer exploits workers.  United Natural Foods Incorporated (UNFI), the largest multi-billion dollar wholesale distributor of organic and “natural” foods in the U.S., is currently under investigation for 45 violations of federal labor law, including physically threatening immigrant workers in California who were trying to form a union.  The company recently fired its underpaid and overworked unionized workers at its Auburn, Wash., distribution center for going on strike, and illegally hired non-union replacement workers.  What happens when companies like WFM and UNFI, which have carefully cultivated their public progressive images, start acting like Walmart? When union-busting and labor exploitation are accepted as “business-as-usual” in the green economy, it makes us all look bad. It discredits organics and Fair Trade by creating the impression that consumers don’t really care how their healthy organic food was produced. That the entire industry cares only about profits. Ethics and workers be damned.

Four Important Ways Immigration Reform Could Benefit America's Economy - A bipartisan group of senators introduced a comprehensive immigration reform plan today that would reshape the nation’s outdated economic laws by putting 11 million undocumented immigrants on a path to citizenship while boosting border security. Addressing immigration is a key issue for the American economy, which could see a major boost thanks to comprehensive reforms that will boost wages, job creation, and overall economic growth for the entire country. Here are four areas of the economy that immigration reform will help:

    • Jobs and growth: Raúl Hinojosa-Ojeda estimated that modern immigration reform that included a path to citizenship would increase the nation’s gross domestic product by $1.5 trillion over the next decade, as well as increased consumer spending that would support 750,000 to 900,000 additional jobs in the United States, according to the Center for American Progress.
    • Wages: Immigration reform would also boost wages for both immigrant and native workers. Newly-legalized, less-skilled workers would see an average wage boost of $4,405 each year, while high-skilled workers would see wage increases of more than $6,100. New businesses: Nearly a quarter of the businesses started between 2006 and 2012 had at least one immigrant founder, and businesses owned by Latinos and Asians employ 4.7 million workers a year, according to the Immigration Policy Center.
    • State economies: Anti-immigration laws passed at the state level have had harmful effects on key industries in those states, farmers have reported worker shortages after their states passed such laws, with one farmer estimating that he lost $300,000 in produce in 2011.

The Economics of Immigration: Who Wins, Who Loses and Why - Washington’s focus has shifted to immigration reform this week as a bipartisan group of Senators put forward a comprehensive plan on Monday and President Obama followed with a proposal of his own yesterday. The debate thus far has been anchored around the bipartisan Senate proposal, the President’s support for a “path to citizenship,” and House Republican’s opposition to it. The opposition to the plan so far has centered around concerns about such a deal inviting a new influx of undocumented workers, or its rewarding those who have violated the law. These are important discussions to have, but with the economy here at home still so fragile, many are wondering what sort of effect immigration has on the American economy. Here’s a look at four big questions concerning the economics of immigration:

The Economics of Immigration - Jared Bernstein - Dylan Matthews, a major-general in supreme-commander Ezra Klein’s Wonkbook army, has an interesting piece with some nice graphs up on the economics of immigration. It cites research that paints quite a sunny picture of the impacts on our economy and domestic workers. I agree with much of what’s in Dylan’s piece. I’m particularly interested in the impact of immigrant flows on macroeconomic growth. Economists are well aware that slowing labor force growth is a factor in slower growth predictions in the future, but faster immigrant flows can improve that outlook. But what about the near term impact of immigrant competition in a job market that’s already too weak? Here I think Dylan’s piece is too sunny. Let me explain. First, we should be clear that a path to citizenship for immigrants already here will, if anything, put upward pressure of the wages of domestic workers with whom immigrants compete. As long as those folks are stuck in the shadows, they can and will be exploited. A path to citizenship therefore has the potential to take a pretty vicious form of competition out of the market.

Why Are Domestic Workers Ignored in Immigration Reform? -  Eight senators released a broad proposal for immigration reform yesterday. One detail nestled within it was highlighted by Seth Freed Wessler at Colorlines: the proposal includes special treatment for agricultural workers and DREAMers. For farm workers, the proposal states: [I]ndividuals who have been working without legal status in the United States agricultural industry have been performing very important and difficult work to maintain America’s food supply while earning subsistence wages. Due to the utmost importance in our nation maintaining the safety of its food supply, agricultural workers who commit to the long term stability of our nation’s agricultural industries will be treated differently than the rest of the undocumented population because of the role they play in ensuring that Americans have safe and secure agricultural products to sell and consume. These individuals will earn a path to citizenship through a different process under our new agricultural worker program. This could be seen as a cynical move to hand select the low-wage workers who perform jobs that many believe other Americans won’t yet that are such a huge and important part of our economy.But that very description could apply just as well to another group of workers who are also often undocumented: domestic workers. In its recent report on the domestic workforce, the National Domestic Workers Alliance reports that 46 percent are foreign born and 35 percent are non-citizens. While federal researchers haven’t asked about documentation status, the interviews conducted for the report, it notes, “verif[y] that substantial numbers of domestic workers are undocumented immigrants.” It found that of the over 2,000 nannies, caregivers and housecleaners it spoke with, 36 percent were undocumented immigrants.

Immigration, yes. Indentured serfdom, no - The outlines of a bipartisan plan for immigration reform have been announced by a group of senators. While most of its provisions are reasonable — a path to citizenship for most illegal immigrants, increased skilled immigration and increased law enforcement — one provision stinks to high heaven and should be rejected by Americans of left, right and center. That provision is a massive, special-interest-driven expansion of indentured servitude in the United States, in the form of a new “guest-worker program.” (President Obama, while hailing the plan in general on Tuesday, has not weighed in on the specifics of the guest-worker program.) Indentured servitude or contract labor, like slavery, is a form of unfree labor. Unfortunately, the U.S., having abolished slavery, still has pockets of indentured servant labor. Whether relatively well-paid, like many highly educated H-1B workers, or poorly paid, like many H-2A agricultural workers, indentured servants are, in effect, indentured serfs. Because their presence in the U.S. is dependent on their employment by a particular employer, they cannot quit and are motivated to appease their employer, no matter how brutally they are exploited. If they protest maltreatment, they can be fired and forced to return to their home countries

America’s Baby Bust - Here in America, white, college-educated women—a good proxy for the middle class—have a fertility rate of 1.6. America has its very own one-child policy. And we have chosen it for ourselves. Forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate. The fertility rate is the number of children an average woman bears over the course of her life. The replacement rate is 2.1. If the average woman has more children than that, population grows. Fewer, and it contracts. Today, America's total fertility rate is 1.93, according to the latest figures from the Centers for Disease Control and Prevention; it hasn't been above the replacement rate in a sustained way since the early 1970s.The nation's falling fertility rate underlies many of our most difficult problems. Once a country's fertility rate falls consistently below replacement, its age profile begins to shift. You get more old people than young people. And eventually, as the bloated cohort of old people dies off, population begins to contract. This dual problem—a population that is disproportionately old and shrinking overall—has enormous economic, political and cultural consequences.

Disability Rolls and the Makers/Takers/Fakers Nonsense - Had a rousing debate on the Kudlow show last night with Larry and Jimmy Pethokoukis (aka Jimmy P) haranguing me about makers/takers.  Jimmy went on a rant about all the fakers on the Social Security Disability rolls, prompting me to inject some facts from my CBPP colleague Kathy Ruffing about the factors actually responsible for most of the increase in the DI rolls.  I said I’d post the info, so here it is. [Kathy’s paper, here, provides an excellent overview of all the key issues, with extensive evidence.] As Kathy points out, the number on the DI rolls has doubled since 1995 while the working-aged population has only grown by about a fifth.  Sounds bad, right? Not necessarily.  What if the population was aging, with a larger share in their high-disability years, while more women were working and thus eligible for the program?  In fact, about half of the increase since 1990 is due to those factors as shown in the figure below, comparing the rates of the insured population on DI, unadjusted and adjusted for age and gender.

What We Have Less Of - Paul Krugman - Matthew Yglesias asks a very good question — but I have a pretty good answer. Yglesias asks, if the middle class is under pressure, what exactly is it that ordinary American families have less of (or rather, had less of before the Great Recession struck). After all, people do seem to have more stuff. But one important answer is, they have less time — specifically less family time. Here’s one estimate (pdf): Now, you might be tempted to say that something like this was bound to happen along with social changes that led to more women in the paid working force. But the sharp increase in total hours worked per family didn’t have to happen; more female labor force participation could have been offset by shorter working hours. In fact, that’s exactly what did happen in Europe; at this point major European nations, France in particular, have fully matched the US in employment rates for both male and female prime-age adults: But the Europeans have steadily reduced working hours as labor force participation rises, so that they have not seen an equivalent loss of family time. From the Total Economy Database:

From Welfare Queens to Disabled Deadbeats - Paul Krugman - If you want to understand the trouble Republicans are in, one good place to start is with the obsession the right has lately developed with the rising disability rolls. The growing number of Americans receiving disability payments has, for many on the right, become a symbol of our economic and moral decay; we’re becoming a nation of malingerers. As Jared Bernstein points out, there’s a factual problem here: a large part of the rise in the disability rolls reflects simple demographics, because aging baby boomers are a lot more likely to have real ailments than those same workers did when they were in their 20s and 30s. The Social Security Administration does a formal adjustment for this reality, and as Jared says, it looks like this: It looks a lot less dramatic, doesn’t it?  And as for the rest of what’s going on, CBO — which also concludes (pdf) that a lot of it is demographics — adds this description of policy changes: In 1984, lawmakers enacted the Disability Benefits Reform Act, That legislation, in addition to reversing several of the cost-containment measures enacted as part of the 1980 Social Security Disability Amendments, shifted the criteria for DI eligibility from a list of specific impairments to a more general consideration of a person’s medical condition and ability to work.

Nearly Half Of Americans Are One Financial Shock Away From Poverty - A new report from the Corporation for Enterprise Development shows that many Americans are just one financial hit away from poverty. According to the report, nearly half of Americans lack enough savings to keep themselves out of poverty for more than three months in the event of a financial shock such as a lost job or medical emergency: Almost half (43.9%) of U.S. households are living on the edge of financial collapse with almost no savings to fall back on in the event of a job loss, health crisis or other income-depleting emergency, according to a report released today by the Corporation for Enterprise Development (CFED). The 2013 Assets & Opportunity Scorecard defines these families as “liquid asset poor,” which means they lack adequate savings to cover basic expenses at the federal poverty level for just three months if they suffer a loss of stable income. Included in this group are a majority of Americans who live below the official income poverty line of $23,050 for a family of four, as well as many who would consider themselves middle class. One quarter (25.7%) of households earning $55,465-$90,000 a year have less than three months of savings. An even more dire picture of American finances has been painted by several other recent surveys. For instance, the Consumer Federation of America and the Consumer Planner Board of Standards found last year that nearly 40 percent of American households live paycheck to paycheck.

The Hidden Prosperity of the Poor - A concept promulgated by the right — the notion of the hidden prosperity of the poor — underpins the conservative take on the ongoing debate over rising inequality. The political right uses this concept to undermine the argument made by liberals that the increasingly unequal distribution of income poses a danger to the social fabric as well as to the American economy. The conservative counterargument – that life for the poor and the middle class is better than it seems – goes like this: Even with stagnant or modestly growing incomes, the poor and middle class benefit from the fact that a stable or declining share of income is now required for basic necessities, leaving more money for discretionary spending. According to this theory, consumption inequality – the disparity between the amount of money spent on goods and services by the rich, the middle class and the poor — remains relatively unchanged, even while income inequality worsens.In its definition of consumption, the Bureau of Labor Statistics includes “expenditures for food, housing, transportation, apparel, medical care, entertainment, and miscellaneous items.” In an e-mail to The Times, Mark Perry, an economist at the University of Michigan-Flint, goes further to make the conservative case:

The Uneven Progress of Equal Opportunity - Five years into the 21st century, the data reveal a surprisingly high level of job segregation in which African-American men, white women and especially African-American women only rarely worked in the same occupation in the same workplace as white men. In order to create a completely integrated private-sector workplace, more than half of all private sector workers would need to change jobs. In most workplaces, the face of authority looks predictable. As the authors put it, “White men are often in positions in management over everyone; white women tend to supervise other women, black men to supervise black men and black women tend to supervise black women.” In this world, remarkable successes like the election of an African-American president coexist with continuing failures, especially in domains where disadvantages based on race, gender and class coincide and collide.

Rising Inequality: Don't Blame the Robots - Dean Baker -  Economists generally agree about the facts on rising inequality. There are, however, enormous disagreements on the causes. The prevailing view within the profession attributes the rise in inequality primarily to technological change.  The basic story is that computerization and other technological breakthroughs of the last three decades have displaced large numbers of relatively good paying jobs in manufacturing and elsewhere.  This loss of middle class jobs has forced formerly well-paid workers to crowd into occupations further down the wage scale, like retail trade and restaurant work. This has driven down wages for these workers in particular, and the occupations more generally. The result: the middle and bottom of the income distribution have seen relative declines in their wages because the demand for labor has simply not kept pace with the supply. And yet, even though the trends in occupation growth were completely different, we saw very much the same pattern of wage inequality in the 2000s as in the 1990s. This suggests that higher demand for workers in high-wage occupations is not the explanation for wage inequality.

America’s Moving: Hello Texas, Bye-Bye Wyoming - If America’s moving patterns can be considered an accurate economic indicator, then Atlas Van Lines, one of the nation’s largest movers, has some good news: The U.S. economy is rebounding. Atlas Van Lines has been collecting data on the origins and destinations of interstate moves for 10 years. According to its 2012 study, there are more “balanced” states in the Midwest than in recent times. (For a state to be considered balanced, nearly as many people have to move into the state as leave.) That hasn’t been the case for the last few years as more people have left Midwestern states in search of jobs. Jack Griffin, president of Atlas World Group, told the San Francisco Chronicle that the shift from more people leaving Midwestern states “is a promising sign that the economy could be stabilizing.” GRAPHIC: Tracking the Recovery, One Van at a Time Southwestern and Mid-Atlantic coastal states are still popular destinations: Texas and New Mexico continue to attract new residents, as well as Virginia and North Carolina.

Billions for job piracy even as states cut budgets - According to Center on Budget and Policy Priority data cited by Louise Story, in 2011 the states enacted $156 billion of austerity measures, between budget cuts and tax hikes. Despite their budgetary woes, however, this did not stop them from throwing billions of dollars a year into the worst kind of corporate subsidy, relocation incentives that move existing facilities from one state to another without creating any new jobs. A new report from Good Jobs First documents their widespread use, which is far more common than most people would imagine. For example, Continental Tire moved its North American headquarters and 320 jobs from Charlotte to Lancaster County, South Carolina, in 2009. Georgia gave Ohio-based NCR Corp. (formerly National Cash Register) $109 million to relocate that same year. In 2010, Hamilton Beach received at least $2 million to move from Memphis to Olive Branch, Mississippi, while in 2009 McKesson received $4 million from Mississippi in addition to local incentives to move from Memphis to neighboring DeSoto County. Rhode Island, in a widely publicized move, gave Boston Red Sox pitcher Curt Schilling's video game company 38 Studios a $75 million loan to move from Massachusetts in 2009, only to see the  firm go bankrupt in 2012. There are many more examples in the report, but you get the idea.

Report: States Force Jobless to Pay Needless Fees - Jobless Americans are paying millions in unnecessary fees to collect unemployment benefits because of state policies encouraging them to get the money through bank-issued payment cards, according to a new report from a consumer group. People are using the fee-heavy cards instead of getting their payments deposited directly to their bank accounts. That’s because states issue bank cards automatically, require complicated paperwork or phone calls to set up direct deposit and fail to explain the card fees, according to a report issued Tuesday by the National Consumer Law Center, a nonprofit group that seeks to protect low-income Americans from unfair financial-services products.  Until the past decade, states distributed unemployment compensation by mailing out paper checks. Some also allowed direct deposit. The system worked well for people who had bank accounts and could deposit the check without paying a fee. Banks including JPMorgan Chase & Co., U.S. Bancorp and Bank of America Corp. seized on government payments as a business opportunity. They pitched card programs to states as a win-win: States would save millions in overhead costs because the cards would be issued for free.  However, most of the people being hit with fees already have bank accounts. The bank-state partnerships effectively shifted the cost of distributing payments from governments to individuals. The money needed to cover those costs is deducted from people’s unemployment benefits in the form of fees.

What Would We Do if We Wanted to Attack Inequality Instead of Deficits? - Jim Tankersley has a piece in the WaPo suggesting that President Obama’s actual policy agenda doesn’t meet his aspirations when it comes to reducing inequality and poverty.  I raised a similar concern here, though my focus was more on the budget constraints than the specific policies. Tankersley suggests that the President’s current econ team is more interested in policies that reduce deficits, like tax reform, than those that strike at market-driven inequalities. But what’s missing from his piece, at least IMHO, is a discussion of what such measures would look like.  I’ll just tick some things off the top of my head, but every one of these ideas deserves a lot more ink not to mention more attention from those who would flap gums about a stronger middle class.

  • –Full employment, and if markets won’t provide jobs, there’s tons of work for folks to do fixing our public infrastructure (e.g., FAST!)
    –Manufacturing policy, both offence (forward looking investments in areas where markets will be short) and defense (fight back against non-tariff barriers like currency manipulation)
    –Better access to pre-K and college (attendance and completion) for economically disadvantaged
    –Unions (e.g., a level playing field to organize)
    –Minimum wage, labor standards (overtime rules, correct worker classification, paid sick leave)
    –Work supports (e.g., EITC, child care subsidies)
    –Guaranteed health insurance coverage
    –Better financial oversight, tax on financial transactions (the goal here must be to reduce the economic “rents” claimed by this over-sized sector)

Thinking About State Taxation - I’ve been diving a bit more deeply into the question of taxation at the state level.  In earlier posts, I’ve highlighted the excellent work by CTJ on the regressivity of state taxes, especially in states that rely more on sales versus income taxes.Well, if there’s a regressive idea out there, be assured some supply-side, trickle-downer will pursue it.  And so here’s my CBPP colleague Liz McNichol on the recent push to replace state income and corporate tax revenue with sales taxes. Proponents claim that eliminating income taxes and expanding the sales tax would make tax systems simpler, fairer, and more business-friendly, with no net revenue loss.  In reality, they would tilt state taxes against middle- and lower-income households and likely undercut the state’s ability to maintain public services.  Specifically, they would:

  • Raise taxes on lower- and middle income families while businesses and high-income households would pay less. 
  • Require huge sales tax hikes…Sales tax rates would have to be markedly higher than they are now to make up for the revenue lost from eliminating income taxes.
  • Create an unsustainable spiral of rising rates and widening exemptions. A large expansion of the sales tax would spark furious efforts to exempt many purchases from the tax.  But if a state granted such exemptions, it would have to compensate by raising the sales tax rate even higher.
  • Fail to boost state economies. Replacing income taxes with an expanded sales tax would do little or nothing to improve a state’s business climate or economic performance.  On the contrary, the resulting high sales tax could hurt in-state businesses as residents shift purchases to neighboring states or the Internet.
  • Make state revenues much less stable. By making a single tax a state’s sole significant revenue source — rather than the mix of sources now utilized — these proposals would deprive a state of a balanced revenue portfolio and jeopardize its ability to collect enough revenue for future needs.

'Fundamentally Unfair': How States Tax The Richest 1 Percent At Half The Rate Of The Poor = The poorest Americans are subject to a tax rate at the state and local level that is twice as high as the tax rate paid by the wealthiest earners thanks to “fundamentally unfair” state tax laws, according to a new report from the Institute on Taxation and Economic Policy (ITEP). Middle-class taxpayers also pay higher effective rates than the wealthy. When state, local, property, and sales taxes are taken into account, the poorest 20 percent of Americans pay an average effective tax rate of 11.1 percent, the report found. The middle 20 percent pays a 9.4 percent rate, while the rate for the top 1 percent is just 5.6 percent. The lack of progressive income taxes and an over-reliance on consumption taxes are the primary culprit, the report says.

Back from the Brink - Earlier this month, California Governor Jerry Brown strode to a podium in Sacramento and said something that, a few years ago, seemed as unlikely as a UFO landing atop the state Capitol: The initial projection for the state budget showed a balance. In fact, for the 2013-2014 fiscal year, there’s a surplus of $851 million. The nonpartisan Legislative Analyst’s Office, which just a couple months earlier estimated a deficit of $1.9 billion, concurred with the governor: Revenues matched expenditures in the initial outlook for the first time since before the Great Recession. This was a surprise, to say the least. After all, in 2009, California carried a deficit as high as $42 billion. Marathon all-nighters in the legislature and unsatisfying 11th hour deals were commonplace. At one point the state paid obligations with IOUs because it ran out of money. How could this bastion of dysfunctional governance deliver a balanced budget?Actually the answer is quite simple. Progressive Democratic activists identified the straitjacket of rules that had the state tied up in knots, and devised a systematic plan to change them. Through massive organizing, they transformed the electorate and sidelined Republican obstructionists. Now, with surplus money on hand, they’re getting ready to fight a new battle over the next few years: whether to focus on budget balancing and debt reduction, or to continue to boldly invest in California’s future. National Democrats, mired in a series of endless fiscal showdowns in Washington, ought to pay attention: California suggests a way to overcome continual hostage-taking and government-by-crisis.

Coastal City Resilience in the Face of Climate Change: The Case of NYU's Langone Medical Center - There is a full page ad on the back page of the B-Section of the NY Times today celebrating that NYU's Langone Medical Center is back in business after suffering bad damage caused by Hurricane Sandy in late October 2012.    Note that only 3 months have past.   Hurricane Sandy didn't destroy NYC.  This wasn't Pearl Harbor.   This is urban resilience in the face of climate change.  When I argued this point in my 2010 Climatopolis book, people thought I was overly optimistic about our individual and collective ability to adapt to evolving (but predictable) threats.  Unlike terrorists, we have a general understanding of how climate change will attack our cities.  NYU will invest in precautions so that future floods cause much less damage.  This is learning experience and forming rational expectations about the future is how adaptation will play out.    To be a pessimist about adaptation requires embracing a strong view of behavioral economics and to assume that those facing the threat have no financial resources to help them cope.

More Police, Fewer Prisons, Less Crime - The New York times as a good piece on prisons, police and crime: “The United States today is the only country I know of that spends more on prisons than police,” said Lawrence W. Sherman, an American criminologist on the faculties of the University of Maryland and Cambridge University in Britain. “In England and Wales, the spending on police is twice as high as on corrections. In Australia it’s more than three times higher. In Japan it’s seven times higher. Only in the United States is it lower, and only in our recent history.” …Dr. Ludwig and Philip J. Cook, a Duke University economist, calculate that nationwide, money diverted from prison to policing would buy at least four times as much reduction in crime. They suggest shrinking the prison population by a quarter and using the savings to hire another 100,000 police officers. My work on policing in Washington, DC (with Jon Klick) also strongly suggests that more police pass the cost benefit test; we suggest that doubling the police force would not be unreasonable.

Populism, Republican Style - Paul Krugman - The recent speech by Bobby Jindal, Louisiana’s governor, has drawn a fair bit of attention. Conservatives would have you believe that it marks the start of real GOP reform; but the reality, as Andy Rosenthal says, is that Jindal wants to change the jingle in the commercial without changing the product. And if you want a clear demonstration of that point, compare Jindal’s words and deeds. Here’s what he just said: We must not be the party that simply protects the well off so they can keep their toys. We have to be the party that shows all Americans how they can thrive. We are the party whose ideas will help the middle class, and help more folks join the middle class. We are a populist party and need to make that clear. And here’s what he recently did: Louisiana Governor Bobby Jindal (R) recently rolled out a plan to replace his state’s personal income and corporate taxes with an increased sales tax. Such a move would shift taxes from the rich to the poor, who are disproportionately hit by the sales tax. According to an analysis by the Institute on Taxation and Economic Policy, Jindal’s plan will raise taxes on the bottom 80 percent of Louisianians, while cutting them for the richest 1 percent:

Red state tax "reform" and "economic growth" -- Linda Beale - So a recent blog post was titled  "WSJ: States Embrace Tax Reform to Drive Economic Growth". This is not an atypical way of titling items on tax prof blog.  The observant reader will notice a slight bias in the title.  The Wall Street Journal article is actually titled "The State Tax Reformers: more governors look to repeal their income taxes" (Jan 29 2013 updated).  The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax--for example, in the Republican strongholds of Nebraska and Louisiana.  The Journal article then goes on to opine (and it is indeed opinion) that "this swap makes sense" because "income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth" whereas "sales taxes ... hit consumption, which is the result of that wealth creation."  This is the typical "free market" pitch favoring capital income (and the rich) over labor income (and everybody else).   Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax.

Illinois credit downgraded to worst in U.S. - The State of Illinois takes a big financial hit after its credit rating dropped to the lowest in the nation. MOREAdditional Links The downgrade has the state treasurer Dan Rutherford pointing the blame at Illinois' governor and general assembly. The warning came Saturday from State Treasurer Dan Rutherford. "We are now looking at a dire situation," Rutherford said. The standard and poor's downgrade from A to A-minus puts Illinois last on the list behind California and means a higher cost to borrow money.

What Is Middle Class in Manhattan? - DRIVE through almost any neighborhood around the country, and class divisions are as clear as the gate around one community or the grittiness of another. From the footprint of the house to the gleam on the car in the driveway, it is not hard to guess the economic status of the people who live there.Manhattan, however, is not like most places. Its 1.6 million residents hide in a forest of tall buildings, and even the city’s elite take the subway. Sure, there are obvious brand-name buildings and tony ZIP codes where the price of entry clearly demands a certain amount of wealth, but middle-class neighborhoods do not really exist in Manhattan — probably the only place in the United States where a $5.5 million condo with a teak closet and mother-of-pearl wall tile shares a block with a public housing project.

Class-Divided Cities: Los Angeles Edition - This is the second post in a series exploring the growing class divides across America's largest cities and metros. It examines the residential locations of today’s three major classes: the shrinking middle of blue-collar workers; the rising ranks of the knowledge, professional, and creative class; and the even larger and faster-growing ranks of lower-paid service workers, using detailed data from the American Community Survey. For a detailed description of methodology, see the first post in the series, on New York. The map above charts the geography of class for the city of Los Angeles; the second map, below, includes the pattern for the entire L.A. metro area. The creative class lives in the areas that are shaded in purple, the red areas are primarily service class, and the blue are working class. Each colored space on the map is a Census tract, a small area within a city or county that can be even smaller than a neighborhood. The maps are interactive: Click on a tract to see how its percentages for each of the three major classes.

Poor Become More Concentrated in Northern Cities - The Great Recession boosted the number of poor, bound them more closely together, and left them concentrated in the cities of the Northern U.S., in the report released Thursday from the Federal Reserve Bank of Cleveland said. According to the researchers who wrote the report, the rise in overall poverty as well as its increased concentration is “a distinct cause for concern because the disadvantages to an individual from being poor are thought to be either muted or amplified depending on the poverty in their neighborhood.” “Neighborhoods with many poor residents typically have less access to job opportunities, face higher crime rates, and incur a range of other social problems,. The report said that between 2000 and 2010 the total poverty rate of the U.S. rose from 11.3% to 15.3%. The government’s official poverty threshold is a family of four earning just over $22,000 a year. The cause of the shift is no surprise. The recession and its aftermath have been hard on all manner of households. Meanwhile, the downturn and weak rebound have taken place against the longer running trend of the nation’s richest citizens controlling a greater share of national wealth.

Developer pitches $1B commonwealth for Belle Isle -- As the broken city thinks big and radically about its future, a developer is stepping forward with a revolutionary idea: Sell the city's Belle Isle park for $1 billion to private investors who will transform it into a free-market utopia.The 982-acre island would then be developed into a U.S. commonwealth or city-state of 35,000 people with its own laws, customs and currency.City officials are likely to reject the plan. But on Jan. 21, supporters including Mackinac Center for Public Policy senior economist David Littmann, retired Chrysler President Hal Sperlich and Clark Durant, co-founder of Detroit's Cornerstone Schools, will present the Commonwealth of Belle Isle plan to a select group of movers and shakers at the tony Detroit Athletic Club.

Stuck in Reverse, Detroit Edges Closer to Bankruptcy - General Motors and Chrysler, which along with Ford gave the Motor City its identity, survived near-death experiences after filing for bankruptcy during the financial crisis. Now, Detroit itself is edging closer to a similar precipice, only unlike the automakers, its chances of getting a federal bailout are almost nonexistent. The story of Detroit's decline is decades old: Its tax revenue and population have shrunk and labor costs have remained out of whack. But the city's budget problems have deepened to such an extent that it could run out of cash in a matter of weeks or months and ultimately be forced into what would be the largest-ever Chapter 9 municipal bankruptcy filing in the United States. Frustrated by the lack of concrete progress, Michigan Governor Rick Snyder, a Republican, last month appointed a team to scour the city's books. The audit could result in a state takeover of Detroit's finances through the appointment of an emergency financial manager. Such a manager, who would seize control of the city's checkbook, could then propose federal bankruptcy court as the best option.

Creationism spreading in schools, thanks to vouchers - MSNBC - Over the past few months, I’ve learned creationist vouchers aren’t just a Louisiana problem—they’re an American problem. School vouchers are, as James Gill recently wrote in the New Orleans Times-Picayune, “the answer to a creationist’s prayer.” Liberty Christian School, in Anderson, Indiana, has field trips to the Creation Museum and students learn from the creationist A Beka curriculum. Kingsway Mansfield Christian School, in Ohio, teaches science through the creationist Answers in Genesis website, run by the founder of the Creation Museum.  All three of these schools, and more than 300 schools like them, are receiving taxpayer money. So far, I have documented 310 schools, in nine states and the District of Columbia that are teaching creationism, and receiving tens of millions of dollars in public money through school voucher programs. There is no doubt that there are hundreds more creationist voucher schools that have yet to be identified. The more than 300 schools I have already found are those that have publicly stated on their websites that they teach creationism or use creationist curricula.

Arizona Bills Require Public School Students To Recite Loyalty Oaths - Public high school students in Arizona will have to “recite an oath supporting the U.S. Constitution” to receive a graduation diploma, if a new bill introduced in the new session of the state legislature is passed and signed into law. The measure, House Bill 2467, was offered by Rep. Bob Thorpe (R), a freshman tea party members who also backs a bill preventing state enforcement of federally enacted gun safety laws. Here is the text of HB 2467: As written, the bill does not exempt atheist students or those of different faiths from the requirement, though Thorpe has pledged to amend the measure. “In that we had a tight deadline for dropping our bills, I was not able to update the language,” he wrote in an e-mail to the Arizona Republic. “Even though I want to encourage all of our students to understand and respect our Constitution and constitutional form of government, I do not want to create a requirement that students or parents may feel uncomfortable with.”

Chicago Mother Fined Over $3,000 For Son's Behavior At Noble Network Charter School - A Chicago mother claims that the charter school her son attends -- and is known for raking in thousands of dollars each year in discipline-related fines -- is forcing her to pay them over $3,000 for her son's behavior. In a recent HuffPost Live interview, Marsha Godard said her son's school, a Noble Network of Charter Schools school, is saying she is on the hook for fines due to demerits such as having untied shoes or being even a half-minute late to class. "I'm trying to put food on the table, I'm trying to put clothes and shoes on our feet so I don't have money to pay fines when education is supposed to be free." The Noble Network, a charter school program championed by Mayor Rahm Emanuel, has drawn the ire of students and parents alike for collecting nearly $390,000 in disciplinary fines from low-income, largely African-American and Latino students and their families over just a three-year period. In 2011, the network collected nearly $190,000 in disciplinary "fees." Noble currently operates a dozen schools in Chicago. According to a report released last year, the school charges students $5 for a pattern of minor infractions -- such as chewing gum -- and as much as $280 for two required behavior classes for those who rack up more than 25 detentions in a year.

Vocabulary instruction failing U.S. students: Vocabulary instruction in the early years is not challenging enough to prepare students for long-term reading comprehension, argues a study led by a Michigan State University education researcher. The study, which appears in Elementary School Journal, analyzed commonly used reading curricula in U.S. kindergarten classrooms. It found that, generally, the programs do not teach enough vocabulary words; the words aren’t challenging enough; and not enough focus is given to make sure students understand the meaning of the words. ----- The research comes on the heels of a National Assessment of Educational Progress report that showed poor and minority students struggle with vocabulary achievement. Low vocabulary scores were associated with low reading comprehension scores on the NAEP test. Wright said low-income children may start school with 10,000 fewer words than other students and are then exposed to reading programs that teach as few as two vocabulary words per week. She said more than 10 vocabulary words should be taught every week – not just in reading class but across all subject areas including math, science and social studies.

Head Start is Failing Its Test - I am predisposed to favor programs that would help disadvantaged children early in life. Thus, I was delighted when Head Start announced some years back that it was going to carry out a randomized control trial--that is, to assign some preschool children randomly to Head Start and others not--so that it would be possible to do a statistically meaningful test of how well Head Start worked.  But as the evidence has built up, Head Start is failing its test. The latest evidence appears in the "Third Grade Follow-up to the Head Start Impact Study: Final Report," which was released in December. Basically, the report shows that Head Start provides short-term gains to preschool children, but those gains have faded to essentially nothing by third grade. To appreciate how depressing this conclusion is, you need to appreciate the high quality of the study. It's based on a nationally representative sample of more than 5,000 3 and 4 year-olds from low-income families who were eligible for Head Start. These children were randomly either assigned to Head Start, or not. Data collection started in 2002, and so by 2008, data was available on how the children were performing in third grade. The study didn't just look at test scores: it considered a range of data on how Head Start might affect aspects of cognitive development, social-emotional development, health status and services, and even parenting practices.

Four US states considering laws that challenge teaching of evolution - Four US states are considering new legislation about teaching science in schools, allowing pupils to to be taught religious versions of how life on earth developed in what critics say would establish a backdoor way of questioning the theory of evolution. Fresh legislation has been put forward in Colorado, Missouri and Montana. In Oklahoma, there are two bills before the state legislature that include potentially creationist language. A watchdog group, the National Center for Science Education, said that the proposed laws were framed around the concept of "academic freedom". It argues that religious motives are disguised by the language of encouraging more open debate in school classrooms. However, the areas of the curriculum highlighted in the bills tend to focus on the teaching of evolution or other areas of science that clash with traditionally religious interpretations of the world. "There is a religious agenda here," In Oklahoma, one bill has been pre-filed with the state senate and another with the state house. The Senate bill would oblige the state to help teachers "find more effective ways to represent the science curriculum where it addresses scientific controversies". The House bill specifically mentions "biological evolution, the chemical origins of life, global warming and human cloning" as areas that "some teachers are unsure" about teaching. In Montana, a bill put forward by local social conservative state congressman, Clayton Fiscus, also lists things like "random mutation, natural selection, DNA and fossil discoveries" as controversial topics that need more critical teaching. Meanwhile, in Missouri, a bill introduced in mid-January lists "biological and chemical evolution" as topics that teachers should debate over including looking at the "scientific weaknesses" of the long-established theories.

Teacher boycott of standardized test in Seattle spreads - A boycott of Washington state’s mandated standardized test by teachers at a Seattle school is spreading to other schools and winning support across the country, including from the two largest teachers’ unions, parents, students, researchers and educators. The decision by teachers at Garfield High School to boycott the state’s Measures of Academy Progress because, they say, the exams don’t evaluate learning and are a waste of time is fueling a growing debate about the misuse of standardized tests in public education. The Garfield teachers have now been joined by some teachers at a few other schools in Seattle, including the alternative Orca K-8 school. Colleagues at other schools have sent letters of support, as have groups including the Garfield PTSA, the Seattle Student Senate and a group of more than 60 researchers, educators and education activists, including Diane Ravitch and Jonathan Kozol.

Obama Administration Considers Joining Publishers In Fight To Stamp Out Fair Use At Universities - In 2011, we wrote about an important copyright case involving three publishers suing Georgia State University for daring to have "e-reserves" that allow professors to make certain works available to students electronically via the university library. The publisher-plaintiffs are suing over the way instructors (and possibly others on campus) share course readings like academic articles and excerpts from academic books. They are objecting both to readings posted on course websites (i.e., uploaded by instructors and accessible only to students registered for a course) and readings shared via "e-reserves" (i.e., shared online through university libraries, usually also with access restricted to students registered for the course). The publishers claim that sharing copies of readings with students is not usually a fair use, that faculty can't really be trusted to make their own calls about what is or is not fair use, and that permissions fees should be paid for most of these uses.  Thankfully, last year, we wrote about how the district court issued an astounding 350-page ruling that basically said that most of these electronic reserves were clearly fair use. Of course, no matter what happened, the other side was going to appeal. We're getting closer to the appeals court hearing the case, but something interesting popped up last week. In a somewhat surprising move, the Justice Department jumped in and asked the court for some more time for the filing of amicus briefs from concerned third parties, because it was considering weighing in on the case. The Justice Department?  In digging into this, we've heard from a few sources that it's actually the US Copyright Office that has asked the DOJ to weigh in on the side of the publishers and against the interests of public univerisities and students. Yes, the same Copyright Office that just promoted a former RIAA VP to second in command. I'm sure that's just a coincidence.

Almost Half Of All Working College Graduates Are Overqualified For Their Jobs -  While the rich have gotten richer from State bailouts and subsidies the 99% rest of the country have slid into wage slavery. A slavery predicated on workers taking on suffocating debt just to be educated. Education in most countries is partially or fully paid for by the government as it is seen as an investment in the future. But America is a little different. As Chairman Greenspan liked to point out heavily indebted workers don’t strike or make demands and the powers that be would rather destroy the middle class than dare have to pay out higher wages. But there was always some vain hope and constantly repeated mantra from parents and the media that taking out epic amounts of debt to go to college was always worth it – not so much: Nearly half of working Americans with college degrees are in jobs for which they’re overqualified… Earnings in 2011 averaged $59,415 for people with any earnings ages 25 and older whose highest degree was a bachelor’s degree, and $32,493 for people with a high school diploma but no college, the Census data show. Vedder, whose study is based on 2010 Labor Department data, says the problem is the stock of college graduates in the workforce (41.7 million) in 2010 was larger than the number of jobs requiring a college degree (28.6 million).That, he says, helps explain why 15% of taxi drivers in 2010 had bachelor’s degrees vs. 1% in 1970. Among retail sales clerks, 25% had a bachelor’s degree in 2010. Less than 5% did in 1970.“There are going to be an awful lot of disappointed people because a lot of them are going to end up as janitors,” Vedder says. In 2010, 5% of janitors, 115,520 workers, had bachelor’s degrees, his data show.

College Is (Still) Worth It - Every week I hear from recent college graduates who question the value of their higher educations. They are indebted, un- or underemployed, and horribly discouraged. But they would most likely be much, much worse off if they hadn’t gone to college. That’s partly because their opportunities as the economy recovers will expand exponentially. But even today, they are faring much better than their less educated brethren. According to Friday’s Labor Department report, the unemployment rate for college graduates was just 3.7 percent in January. That is less than half the rate for those with no more than a high school diploma (8.1 percent). As I’ve noted before, the wage premium for those with a bachelor’s degree compared to those without one is also growing, particularly when you factor in the fact that college-educated people are more likely to be employed at any given time than less educated workers.

College is Not Inoculation - Just working up some numbers for testimony next week on education and jobs and wanted to share this graph of real weekly earnings for full-time workers with a bachelor’s degree, 25 and up. I think there’s a strain of debate on these issues that argues once someone has a college degree, they’re immune from the challenges of today’s job market.  Then there’s a related strain that says there’s jobs out there, but only “skilled” workers. Well, clearly the earnings of these full-time-working adults with BAs haven’t been doing so great, falling not just in the recession as you might expect, but over the 2000s expansion as well.  And if there’s currently excess demand given the supply of college-educated workers, you sure don’t see it in these wage data.

Why Has Competition to Get into Top Colleges Become Much Tougher? Becker - With the worldwide boom in higher education and in the demand by business and governments for college graduates, the Korean and Japanese emphasis on hard work in secondary school has spread to other nations. For example, since enrollments in Chinese universities have increased manifold since 1995, the competition to get into the top schools, such as Beijing University, is fierce, even though the number of Chinese universities has also expanded rapidly. As a result, many Chinese parents are spending increasing amounts on the secondary education of their children, including private schooling and extra tutoring. Although secondary school students work very hard in Japan, Korea, and many other countries, they tend to relax and take it much easier at universities.  So even at the best universities there, homework is not that extensive and much time is left for play. The American education system had traditionally followed an approach that is the opposite of the Japan-Korean approach to education. High schools, even the better ones, did not give much homework, and relatively little money was spent on private tutoring. Of course, much learning occurred in the better high schools, but at a leisurely pace, with considerable time for athletics, theatre, school newspapers, and other school activities, and also for parties, watching television programs, listening to music, and other out of school pursuits. But once at a good university students had to buckle down to hard work, or at least much harder work than in high school.

Competition to Get Into the Best Colleges—Posner - It makes sense, as Becker points out, that increased earnings of graduates of top colleges will attract more applicants to those colleges, enabling the colleges to be more selective. Furthermore, as colleges stopped discriminating against Jews and Asians, who tend to be the best students, the quality of the applicant pool rose. In addition, colleges want to have wealthy alumni, and if the financial return to IQ rises because of the increased complexity and sophistication of the economy, high IQ students become increasingly attractive as future alumni and therefore potential donors.  Another causal factor may be the correlation between parental income and kids’ IQs. Obviously not all wealthy people are smart and have smart children, but in general there is a positive correlation between income and IQ and between parental IQ and children’s IQ. As the advantages of attending a top college became more apparent, well-to-do parents began investing more in tutoring for their kids and in sending their kids to top (and very expensive) private schools, and this further increased the quality of the college applicant pool.  But this does not explain the relation between having attended a top college and having a higher income than students with similar intellectual promise who attended a lower-ranked college. 

Money Issues Drive Down Law Schools’ Applications - Law school applications are headed for a 30-year low, reflecting increased concern over soaring tuition, crushing student debt and diminishing prospects of lucrative employment upon graduation. As of this month, there were 30,000 applicants to law schools for the fall, a 20 percent decrease from the same time last year and a 38 percent decline from 2010, according to the Law School Admission Council. Of some 200 law schools nationwide, only 4 have seen increases in applications this year. In 2004 there were 100,000 applicants to law schools; this year there are likely to be 54,000. Such startling numbers have plunged law school administrations into soul-searching debate about the future of legal education and the profession over all. “Thirty years ago if you were looking to get on the escalator to upward mobility, you went to business or law school. Today, the law school escalator is broken.” Responding to the new environment, schools are planning cutbacks and accepting students they would not have admitted before. A few schools, like the Vermont Law School, have started layoffs and buyouts of professors. Others, like at the University of Illinois, have offered across-the-board tuition discounts to keep up enrollments. Brian Leiter of the University of Chicago Law School, who runs a blog on the topic, said he expected as many as 10 schools to close over the coming decade, and half to three-quarters of all schools to reduce class size, faculty and staff.

Endowment Returns Fail to Keep Pace with College Spending - Bloomberg: U.S. university endowments are losing ground as returns on investment fail to keep pace with school spending needs, according to Commonfund and the National Association of College and University Business Officers.  Endowments lost on average 0.3 percent in the year ended June 30 after gaining 19.2 percent a year earlier, driven by an 11.8 percent slide in international equities, the groups said in a report released today. More than a third of the schools also reported receiving less in donations than a year earlier.Most endowments, which are still recovering from 2009 losses in the wake of the global credit crisis, shrank in size after accounting for new contributions and transfers to help pay for university operations, according to the annual study. Harvard University, the world’s wealthiest school, reported a 4.1 percent drop in its endowment value to $30.4 billion, while Yale University’s fell less than 1 percent to $19.3 billion, according to the survey.

Is college education really expanding ? - Matt Yglesias is really churning out lots of material. Often, it’s useful and insightful, but, inevitably quality control is imperfect. Arguably, there’s still a net benefit from the increase in output, provided readers apply their own filters. Nevertheless, I got a bit miffed by this post, which makes a mess of a topic, I’ve covered quite a few times, namely the question of whether US middle class living standards are declining as regards services like higher education. As I’ve pointed out, the number of places in most Ivy League colleges has barely changed since the 1950s, and many top state universities have been static or contracting since the 1970s. In addition, the class bias in admissions has increased. College graduation rates have increased modestly since the 1970s, but an increasing proportion of post-school education is at lower-tier state universities as well community colleges offering only associated degrees.[1] Yglesias says “Colleges charge much higher prices today than they did 40 years ago but many more people have college degrees” and backs this up with the following graph

College Degree, No Class Time Required - David Lando plans to start working toward a diploma from the University of Wisconsin this fall, but he doesn't intend to set foot on campus or even take a single online course offered by the school's well-regarded faculty. Instead, he will sit through hours of testing at his home computer in Milwaukee under a new program that promises to award a bachelor's degree based on knowledge—not just class time or credits. Colleges and universities are rushing to offer free online classes known as "massive open online courses," or MOOCs. But so far, no one has figured out a way to stitch these classes together into a bachelor's degree.  Now, educators in Wisconsin are offering a possible solution by decoupling the learning part of education from student assessment and degree-granting.

FICO Labs: U.S. Student Loan Delinquencies Climbing Fast, Showing No Signs of Slowing - Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying. The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent. While the delinquency rate is climbing, the average amount of student loan debt is increasing even faster. In 2005, the average U.S. student loan debt was $17,233. By 2012, it had ballooned to more than $27,253 - an increase of 58 percent in seven years. By contrast, the average credit card balance and the average balance on car loans owed by U.S. consumers actually decreased during the same period.

Third of student-loan debt belongs to subprime borrowers - The number of student loans held by subprime borrowers is growing, and more of those loans are souring, the latest signs that a weak job market and rising debt loads are squeezing recent graduates. In all, 33% of all subprime student loans in repayment were 90 days or more past due in March 2012, up from 24% in 2007, according to a Wednesday report by TransUnion LLC. Meanwhile, the Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007. "If you become subprime, it's more likely that you will not pay your debt,"  The high debt loads could weigh on consumer spending and the economy. If the defaults continue to increase, "the taxpayer is going to be on the hook for losses," he added.

Student Debt Is More Subprime Than Ever - To the litany of disastrous news about our nation's huge student debt burden, we can add this: more and more of that debt is being held by the borrowers least able to pay it back. A new report says that subprime student loans—the least likely to be repaid—are rising. From the WSJ: In all, 33% of all subprime student loans in repayment were 90 days or more past due in March 2012, up from 24% in 2007, according to a Wednesday report by TransUnion LLC. Meanwhile, the Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007. Student loan delinquency in general has been rising. Greater amounts of subprime student loans will no doubt magnify the problem. Not to worry, though: only slightly less than half of Americans are "one emergency away from financial ruin." And hey, when has America ever been burned by subprime loans?

Risky Student Debt Is Starting to Sour - The number of student loans held by subprime borrowers is growing, and more of those loans are souring, the latest signs that a weak job market and rising debt loads are squeezing recent graduates. In all, 33% of all subprime student loans in repayment were 90 days or more past due in March 2012, up from 24% in 2007, according to a Wednesday report by TransUnion LLC. Meanwhile, the Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007. "If you become subprime, it's more likely that you will not pay your debt," 

Student Loan Bubble Update: "This Situation Is Simply Unsustainable" -  The last time we looked at the most underreported debt crisis sweeping the land, which is nothing short of the second coming of subprime, namely the student loan bubble, we posted "the scariest chart of the quarter" in which the Fed had finally caught up with our prior data showing that student loan delinquency had soared to some 11% from the 9% reported in the previous quarter, even as the Fed disclosed it had issued some $42 billion in Federal student loans in the same quarter, and a cumulative $956 billion, a number which as of December 31 is certainly over $1 trillion. This number was lower than the one we had shown previously, or a default rate of some 13.4%, sourced by the DOE. As it turns out both we and the Fed were optimistic.  According to just released data from Fair Issac: Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying. The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent

Ford worldwide pension deficit jumps to $18.7 billion - Ford Motor Co.'s pension deficit widened in 2012 by 21 percent and the Dearborn automaker vowed Tuesday to boost contributions to its under-funded pensions by $5 billion in 2013. Despite the fact that Ford pumped $3.4 billion into its worldwide pension plans in 2012 — over the $1.1 billion it infused in 2011 — the automaker's pension plans underfunding widened. Ford said its pensions are now underfunded by $18.7 billion, up from $15.4 billion. Its U.S. plans are underfunded by $9.7 billion, up from $9.4 billion. Low interest rates means companies must recalculate the "discount rate" in determining pension funding. Ford dropped its discount rate by 0.8 percent, accounting for the pension plan underfunding boost.

Pa. budget chief says pension reforms essential — Pennsylvania Gov. Tom Corbett will "very likely" propose cutting future pension benefits for current school employees and state workers in the state budget plan he will present to lawmakers next week, his chief budget adviser said Monday. Budget Secretary Charles Zogby, all but confirming a cost-cutting approach that the administration first floated last fall despite questions about its legality, said decisive steps must be taken to rein in taxpayers' fast-growing share of pension costs. "We've got to pay for our obligations and we need to look at a rebalancing of our pension obligations ... if we're going to meet our needs without inflicting deep cuts elsewhere in the budget,"

Pensions Bet Big With Private Equity —On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses. The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state. It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market. The $114 billion Texas fund has hit the trend particularly hard. It now boasts some of the splashiest bets in the industry, having committed about $30 billion to private equity, real estate and other so-called alternatives since early 2008. That makes it the biggest such investor among the 10 largest U.S. public pensions, according to data provider Preqin Ltd. Those funds have an average alternatives allocation of 21%.

Retirement Becomes a Distant Dream For Growing Numbers of Americans -   The report finds that of respondents aged 45 to 60, the percent that plans to delay retirement has gone up 20 percent in two years. This and previous research by Levanon and Cheng made the following findings:

  • In the mid-1990s, roughly 12 percent of workers were 55 and older, compared with 21 percent in 2011. Before the end of this decade more than one in four workers will be 55 or older;
  • Business owners were more likely to delay their retirement than employees;
  • Workers in highly paid occupations, such as managers and professionals, were more likely to delay retirement than workers in lesser paid occupations;
  • Public administration workers, many of whom have defined-benefit pension plans, tended not to delay retirement at all.
  • Workers in households that experienced labor loss/compensation cuts and significant declines in home prices were much more likely to plan to delay retirement.

Two Thirds Of Americans Aged 45-60 Plan To Delay Retirement - With today's jobs number due out shortly, it is worth pointing out some of the key trends that we have observed in the underlying data stripped of month-to-month seasonal variance, which expose the "quality" side of the US non-recovery, instead of the far more manageable "quantity" side. First and foremost, as we showed over two years ago, and as the mainstream is gradually picking up, the US labor force is increasingly transitioning to one of part-time, and temp workers, which has key implications for wages, worker leverage, and overall job prospects, all of which logically are negative. But perhaps an even more disturbing trends is the conversion of America into a gerontocratic worker society, where the bulk of jobs are handed out to those 55 and over, which puts all young workers, not to mention college graduates, at a major disadvantage relative to far more experienced older workers, who are willing to work for less as they scramble to compensate for retirement shortfalls, and which prevents the natural rotation of the US labor force from older to younger.

Can baby boomers ever retire? -- With the average Baby Boomer a half-million dollars short on retirement savings, the prospects for actually retiring look slim. So what do we do about it? Baby Boomers, forget about retirement. We'll be working for the rest of our lives. OK, that may be an exaggeration, but not by much. We have not saved enough money. And worse, many of us will still be up to our eyeballs in debt when we do retire. We're just one medical emergency away from bankruptcy.According to Boomers and Retirement, a new survey by TD Ameritrade, the average Baby Boomer is about a half-million dollars short on retirement savings. And 74% of Boomers in the survey say they will have to rely heavily on Social Security in retirement. (The average Social Security check, by the way, is $1,230 a month.)

Americans Rip Up Retirement Plans -Nearly two-thirds of Americans between the ages of 45 and 60 say they plan to delay retirement, according to a report to be released Friday by the Conference Board. That was a steep jump from just two years earlier, when the group found that 42% of respondents expected to put off retirement. The increase was driven by the financial losses, layoffs and income stagnation sustained during the last few years of recession and recovery, said Gad Levanon, director of macroeconomic research at the organization and a co-author of the report, which is based on a 2012 survey of 15,000 individuals. The labor force has been getting older for decades for reasons that range from longer life spans and better health to companies' replacement of defined-benefit pensions with higher-risk 401(k) plans. But the stark increase in workers expecting to stay on the job—now 62%—was a surprise, Mr. Levanon said. After all, the stock market has largely earned back its losses, home prices are rising, and the unemployment rate is creeping down, all of which suggests workers should be feeling more secure. Many middle-aged Americans, though, drew down their savings during those lean years and now find that leaving the work force on their original timeline is no longer viable, he said.

$6.6 Trillion Retirement Saving Shortfall Shows Failure of 401(k)'s -  Last week the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the the fact that 1/4 of Americans with 401(k)'s have used them to meet current income needs. Among people in their forties, the share rises to 1/3,  an astounding figure considering how close this group is to retirement. In the wake of the Great Recession and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts. As the Post delicately puts it, Many employers have embraced 401(k) and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan. In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers. A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages, points well made by commenter "Sean2020."  Moreover, as I reported before, 49% of private sector worker have neither a 401(k) or a defined benefit pension plan. Thus, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).

Understanding Social Security Benefit Adequacy: Why Benefit Growth Should Be Slowed - Many federal policy makers are aware that the Social Security program faces a substantial financing shortfall requiring correction. This would involve either increasing program taxes or slowing the growth of benefits – most likely both, given the size to which the shortfall has already grown in addition to the fact that neither party enjoys sufficient political power to impose its preferred solution on the other. Social Security tax increases and benefit growth restraints are both politically unattractive; but at least one or the other is necessary to balance the program’s books if we intend to maintain Social Security as a self-financing program. Tax increases have obvious downsides that I have written about elsewhere and are not the subject of this article. The consequences of slowing benefit growth also concern many policy makers – specifically, whether Social Security can continue to offer adequate income protections if current benefit growth schedules are slowed. As it turns out, however, it is not only possible to preserve Social Security benefit adequacy while slowing benefit growth, it is actually necessary if policy makers wish to avoid forcing participants into sub-optimal outcomes. This is good news, suggesting that Social Security cost restraints may embody a rare “win-win” policy opportunity. By slowing benefit growth, lawmakers can not only improve system finances, but the treatment of individual participants as well.

Americans shocked to learn that there isn’t actually a Social Security crisis - The Washington Post’s WonkBlog has a scoop: People don’t want to cut Social Security! The post concerns a recent survey that is actually pretty useful, in that it supports what should already be common sense: People have been led to believe that Social Security faces a crisis in funding. When you tell people some proposals for fixing it, they a) overwhelmingly choose to fund it more generously and b) decide that the program actually does not face any sort of crisis at all. A marketing firm hired by the National Academy of Social Insurance surveyed a random sampling of Americans and discovered that what people want is to raise taxes on rich (and regular!) people in order to fund more Social Security benefits, which is a good idea because the program is currently pretty stingy by international standards and Americans don’t actually have pensions anymore.

Social Security: Just the Facts on Finances, Benefits, and Public Opinion - Are you interested in learning more about Social Security: Just the Facts? (If you have not seen the video, click to watch below.) This page provides more information and lists additional resources for exploring each topic.

The Health-Care Law and Retirement Savings - Because of its definition of affordability, beginning next year the Affordable Care Act may affect retirement savings. Employer contributions to employee pension plans are exempt from payroll and personal income taxes at the time that they are made, because the employer contributions are not officially considered part of the employee’s wages or salary (employer health insurance contributions are treated much the same way). The contributions are taxed when withdrawn (typically when the worker has retired), at a rate determined by the retiree’s personal income tax situation. Employees are sometimes advised to save for retirement in this way in part because the interest, dividends and capital gains accrue without repeated taxation. In addition, people sometimes expect their tax brackets to be lower when retired than they are when they are working. These well-understood tax benefits of pension plans will change a year from now if the act is implemented as planned. Under the act, wages and salaries of people receiving health insurance in the law’s new “insurance exchanges” will be subject to an additional implicit tax, because wages and salaries will determine how much a person has to pay for health insurance.

Turning Class War Into Generational War - Dean Baker - Bloomberg made a serious effort to turn class war into generational war using a column by Evan Soltas that was cleverly titled “Don't Let Class Warfare Turn Into Generational Warfare.” The basic story in the piece is that the baby boomers are skipping into retirement leaving the generations that follow with a huge tab in the form of their Social Security and Medicare benefits. First, the idea that baby boomers have not paid for their retirement is driven entirely by the Medicare side of the equation. Standard calculations of the net tax payments for Social Security show that most baby boomers will pay more in taxes than they receive in benefits.  The imbalance on the Medicare side stems from the fact that we pay twice as much per person for our health care as the average for people in other wealthy countries. This is not the result of us getting better care; we don’t generally have better outcomes than people in other countries.  This means that our doctors get paid much higher salaries (our autoworkers and retail clerks don’t), we pay far more for our drugs, our medical equipment and everything else in our health care system.  This is a story of class war: rich people getting richer from the inefficiency and corruption in the health care system. Soltas and Bloomberg are turning reality on its head in trying to make it a question of generational warfare.

Panel: City retirees’ health insurance too costly - A panel appointed by Mayor Rahm Emanuel to review taxpayer-subsidized health insurance for retired government workers suggested the city could drop coverage to help erase a financial shortfall. The option is the most severe of many the group offered Monday as part of a list that gives Emanuel potential leverage to force compromise from wary unions during talks about painful fixes of Chicago's severely underfunded employee pension systems.Whatever course the city chooses, the report states, the numbers "very strongly suggest that continuing the existing financial arrangement is not a viable course of action."Last year the city spent nearly $109 million on health care for nearly 37,000 retired workers and their spouses and children, according to the report. Enrollment is expected to grow to more than 47,000 in the next 10 years, which would balloon costs to $541 million, it states.To soften that financial blow, the report offers options to cut current subsidies by $17.5 million to $69 million, most of which would trigger higher costs for most retired workers that range from $16 to $749 a month. The panel also suggested an option for a two-year complete phaseout of city subsidies for most retirees.

Boom in North Dakota Weighs Heavily on Health Care -  The patients come with burns from hot water, with hands and fingers crushed by steel tongs, with injuries from chains that have whipsawed them off their feet. Ambulances carry mangled, bloodied bodies from accidents on roads packed with trucks and heavy-footed drivers.The furious pace of oil exploration that has made North Dakota one of the healthiest economies in the country has had the opposite effect on the region’s health care providers. Swamped by uninsured laborers flocking to dangerous jobs, medical facilities in the area are sinking under skyrocketing debt, a flood of gruesome injuries and bloated business costs from the inflated economy. Over all, ambulance calls in the region increased by about 59 percent from 2006 to 2011, according to Thomas R. Nehring, the director of emergency medical services for the North Dakota Health Department. The number of traumatic injuries reported in the oil patch increased 200 percent from 2007 through the first half of last year, he said.

Louisiana Will Eliminate Health Benefits For HIV Patients, Poor Children, And First Time Moms This Week - Last week, Louisiana’s poor and terminally ill residents won a surprising victory when Gov. Bobby Jindal (R) announced that his state would not stop providing hospice care to its Medicaid beneficiaries. Unfortunately, that’s about the only piece of good news for low-income Louisianans’ health coverage, as the state is still set to implement massive cuts for Medicaid programs that  “provide behavioral health services for at-risk children, offer case management visits for low-income HIV patients and pay for at-home visits by nurses who teach poor, first-time mothers how to care for their newborns” this Friday. While Jindal administration officials argue that the cuts could be mitigated by Medicare and private managed care programs, the reality is that many of these specialty services are simply unavailable — or unaffordable — outside of Medicaid: Health and Hospitals Secretary Bruce Greenstein said he targeted programs that were duplicative, costly and optional under the state’s participation in the state-federal Medicaid program. Greenstein said in many instances, people can get the care they’re losing through other government-funded programs. But he acknowledged that won’t happen in every case, meaning some people will simply lose the services or receive reduced services. [...]

Texas Obamacare Bill Would Give Tax Breaks To Companies That Don't Cover Contraception - Texas may consider rewarding companies for violating a key Obamacare provision. State Rep. Jonathan Stickland (R) introduced a bill in the Texas House of Representatives on Thursday that would give tax breaks to companies that don't cover emergency contraception such as the morning-after pill, the Austin American-Statesman reports. Under Obamacare, company health insurance plans are required to fully cover employees' contraception costs, and companies must pay a federal fine if they do not. The Texas bill, if it becomes law, could help wipe out the financial disincentive for some companies to not cover emergency contraception. The state tax break would be up to the total amount that companies pay in state taxes or the total amount of the federal fine, according to the Austin American-Statesman. Obamacare's contraception mandate has faced a number of court challenges. A federal judge ruled in November that Hobby Lobby must cover employees' contraception costs after the company filed a lawsuit requesting an exemption, claiming that the contraception mandate violated their religious freedom. Federal judges have dismissed several several similar lawsuits. The Supreme Court declined to block the contraception mandate in December.

Politics is protecting Medicaid over Medicare - You read that right, and it’s the opposite of what usually happens. Usually Medicare is relatively more protected because its beneficiaries vote heavily. Meanwhile, Medicaid is cut to the bone because its beneficiaries don’t. But Sam Baker explains why the political fortunes have flipped, at least for now. The push to prioritize Medicaid over Medicare is a result of the Supreme Court’s decision last year upholding the Affordable Care Act as constitutional. The decision gave states the ability to opt out of the law’s Medicaid expansion, which was set to provide about half of the law’s coverage expansion before the court’s ruling. The federal government will initially cover the entire cost of the expansion, but some Republican governors don’t entirely trust Congress to follow through on those funding commitments. The White House is taking its Medicaid cuts — some of which would have shifted costs to the states — off the table to send a message to governors.Governors who accept the expansion “should do so with the understanding that the rug will not be pulled out from them,” Sperling said Thursday.

An Agenda for Medicare Reforms - What's to be done about Medicare? The Kaiser Family Foundation has usefully pulled together a list of possible "Policy Options to Sustain Medicare for the Future." I especially liked that the report is fairly exhaustive in listing about 130 options (depending on how one counts options, suboptions, and sub-suboptions), and fairly honest in admitting that no realistic cost estimates for many of those options. Here, I'll start with a quick reminder of where Medicare is currently headed, and then list just 12 of the choices--those that in the KFF tally would reduce Medicare costs or raise Medicare taxes by at least $4 billion per year over the next  few years. Medicare spending is taking off for two reasons: as the baby boomer retire, a rising proportion of Americans will become eligible, and continually rising health care costs will push up costs still further. The first figure shows projections for the rising number of Medicare enrollees and Medicare spending as a share of GDP. The second figure shows Medicare spending projected as a rising share of the overall federal budget.

The future of YOUR health insurance premiums - Today, many Americans are asking, “Will my premiums go up in 2014?” There is no simple answer. According to Families USA, the Affordable Care Act (ACA) will have a positive effect on the typical family’s budget. Using an economic model that can factor in all provisions of the Act, Family’s USA estimates that by 2019, when the law is fully implemented, “the average household will be $1,571 better off.” Even high-income families will save: thanks to rules that limit co-pays, and reward providers for becoming more efficient, “those earning $100,000 to $250,000″ will spend $779 less on medical care.” But these are “averages.” They don’t tell you whether your premiums will rise or fall. The answer will depend on: your income, your age, your gender, whether a past illness or injury has been labeled a pre-existing condition, who you work for, and what type of insurance you have now:

Health Care Thoughts: PPACA Health Exchange Oops - On March 1, 2013 employers were supposed to notify employees in writing of information relating to the health insurance exchanges, including a 1) description of services, 2) employee eligibility for a premium tax credit IF the employee purchases an exchange insurance product, and 3) the downside of the employee purchasing through the exchange. On January 24th the Department of Labor announced the suspension of the notice rule, because there is very little guidance currently available, as the feds are behind on implementation actions and exchanges are still in a confused infancy. It is possible the DOL will require the notices to be issued in late summer or fall, ahead of an October (?) startup. I am now putting the probability of a major delay of exchange start ups at 30%.

Riddle: How Many Doctors Will It Take to Implement One Affordable Care Act?: If you saw the recent Wall Street Journal article on the development of Smartphone apps to detect skin cancer, you may already be wondering about specialty physician over-supply.  The University of Pittsburgh Medical Center study discussed in that article did not particularly endorse the three apps studied that used algorithms to analyze moles -- quite the opposite.  They need work.  Though the study did not like the fourth app as well -- the one with the astonishingly accurate results that used a system that forwarded data and images to board-certified dermatologists for remote review at a cost of $5 per mole -- you could tell Christopher Weaver at the Wall Street Journal was intrigued. I am as well.   Australia's teledermatologists have fractured the traditional dermatology appointment, much like the app, reserving specialized visual work for the dermatologogist and leaving lab sampling to hands-on primary care providers.  This means that dermatological care for some Australians is provided, in part, remotely.

IRS: Cheapest Obamacare Plan Will Be $20,000 Per Family - In a final regulation issued Wednesday, the Internal Revenue Service (IRS) assumed that under Obamacare the cheapest health insurance plan available in 2016 for a family will cost $20,000 for the year. Under Obamacare, Americans will be required to buy health insurance or pay a penalty to the IRS. The IRS's assumption that the cheapest plan for a family will cost $20,000 per year is found in examples the IRS gives to help people understand how to calculate the penalty they will need to pay the government if they do not buy a mandated health plan. The examples point to families of four and families of five, both of which the IRS expects in its assumptions to pay a minimum of $20,000 per year for a bronze plan. “The annual national average bronze plan premium for a family of 5 (2 adults, 3 children) is $20,000,” the regulation says. Bronze will be the lowest tier health-insurance plan available under Obamacare--after Silver, Gold, and Platinum. Under the law, the penalty for not buying health insurance is supposed to be capped at either the annual average Bronze premium, 2.5 percent of taxable income, or $2,085.00 per family in 2016.

IRS Anticipates Cheapest ObamaCare Family Plan Will be $20,000 in 2016 - Yves Smith - Aiee! CNS News found this tidbit contained in IRS final regulations published on January 31. Now admittedly these are examples for the purposes of illustrating how to make various calculations under the new regulations, but the assumptions are pretty clear. The cheapest type of plan in ObamaCare is a bronze plan, and bronze family plans for 4 and 5 person families are assumed to cost $20,000 in 2016. First see this section on p. 53: Now we see how affordable coverage thresholds relate to income in these examples, and notice the plan cost assumptions:

  • Example 1. Unmarried employee with no dependents. Taxpayer A is an unmarried individual with no dependents. In November 2015, A is eligible to enroll in self-only coverage under a plan offered by A’s employer for calendar year 2016. If A enrolls in the coverage, A is required to pay $5,000 of the total annual premium. In 2016, A’s household income is $60,000. Under paragraph (e)(3)(ii)(A) of this section, A's required contribution is $5,000, the portion of the annual premium A pays for selfonly coverage. Under paragraph (e)(1) of this section, A lacks affordable coverage for 2016 because A’s required contribution ($5,000) is greater than 8 percent of A’s household income ($4,800).
  • Example 2. Married employee with dependents. Taxpayers B and C are married and file a joint return for 2016. B and C have two children, D and E. In November 2015, B is eligible to enroll in self-only coverage under a plan offered by B’s employer for calendar year 2016 at a cost of $5,000 to B. C, D, and E are eligible to enroll in family coverage under the same plan for 2016 at a cost of $20,000 to B. B, C, D, and E’s household income is $90,000. Under paragraph (e)(3)(ii)(A) of this section, B's required contribution is B's share of the cost for self-only coverage, $5,000. Under paragraph (e)(1) of this section, B has affordable coverage for 2016 because B’s required contribution ($5,000) does not exceed 8 percent of B’s household income ($7,200). Under paragraph (e)(3)(ii)(B) of this section, the required contribution for C, D, and E is B's share of the cost for family coverage, $20,000. Under paragraph (e)(1) of this section, C, D, and E lack affordable coverage for 2016 because their required contribution ($20,000) exceeds 8 percent of their household income ($7,200).

A ‘dark money’ push behind Obamacare? - Columbia Journalism Review - This morning, Politico published a fascinating story about a new campaign to support implementation of the Affordable Care Act that will be underwritten by outside funders. The leaders of the initiative include both former White House and Obama campaign officials, and leading executives from the health insurance industry.Politico’s Kenneth Vogel and Jennifer Haberkorn describe the effort this way: Organizing for Action, the successor to President Barack Obama’s presidential campaign, and Enroll America, a group led by two former Obama staffers that features several insurance company bigwigs on its board, are planning to unleash the same grass-roots mobilization and sophisticated micro-targeting tactics seen in the 2012 campaign. Instead of getting people to vote, they’re trying to get people to buy insurance. If the coalition is successful, 30 million uninsured Americans will get health coverage and the now-unpopular law that Obama’s team pushed through Congress and defended at the Supreme Court could go down in history alongside lauded national institutions such as Medicare and Social Security. But if large numbers of younger and healthier Americans don’t sign up for coverage this fall alongside the older and sicker ones, the whole thing won’t work.

Measuring the 'Quality' of Health Care - It is, to be sure, challenging to measure the quality of any human-service sectors, be it health care, education, the administration of the law or even corporate management. That is why anecdotes and word of mouth remain important signals that attract or repel individuals from particular products or institutions. The large and growing cadre of clinicians and measurement scientists engaged in measuring quality in health care can find inspiration in aviation. They persist, and they have registered much more progress in recent decades than might be imagined — much more, for example, than has been achieved in other human-services sectors, notably education, not to mention what we call the administration of “justice.” To appreciate the challenge posed by health care, let us review the huge terrain within which quality in health care can be monitored, an issue I touched upon two years ago in connection with “pay for performance.”

We’re # last! - If you ask young Americans how good their health is, they’ll tell you it’s great. The U.S. ranks #1 among 17 affluent, western countries in that regard, in the percentage of people aged 5 to 34 who rate their health as good. Unfortunately, when doctors look at people’s actual health, at indicators such as obesity, diabetes, and simply the chance that someone will die before his or her next birthday, the U.S. ranks last: young Americans are #17 out of 17 in real health. The National Research Council and the National Institute of Medicine – the nation’s go-to sources for the best scientific assessments we have – recently issued a report entitled U.S. Health in International Perspective: Shorter Lives, Poorer Health. Although the press conveyed the punch line – “Younger Americans die earlier and live in poorer health than their counterparts in other developed countries” – your humble correspondent has looked through much of the 350+ pages and is here to report: It’s even worse than that.The study’s findings signal how much the U.S. has slipped behind the rest of the advanced world in the last 40 years. And it exposes the disconnection between Americans’ pride and Americans’ reality.

Focus on Mental Health Laws to Curb Violence Is Unfair, Some Say  -- In their fervor to take action against gun violence after the shooting in Newtown, Conn., a growing number of state and national politicians are promoting a focus on mental illness as a way to help prevent further killings.  Legislation to revise existing mental health laws is under consideration in at least a half-dozen states, including Colorado, Oregon and Ohio. A New York bill requiring mental health practitioners to warn the authorities about potentially dangerous patients was signed into law on Jan. 15. In Washington, President Obama has ordered “a national dialogue” on mental health, and a variety of bills addressing mental health issues are percolating on Capitol Hill.  But critics say that this focus unfairly singles out people with serious mental illness, who studies indicate are involved in only about 4 percent of violent crimes and are 11 or more times as likely than the general population to be the victims of violent crime.

Will Your Waiter Give You the Flu? -Fifteen minutes before Victoria Bruton's lunch shift at a busy Philadelphia dining joint, she began to feel dizzy and hot. "I had gone to my boss and asked if I could leave because I wasn't feeling well," Bruton, now 41, remembers of her first case of what she assumed to be the flu. "They asked that I finish the shift. And frankly, I couldn't afford not to." The sole source of income for her two daughters, Bruton powered through the shift—and spent the next two days confined to a sickbed.  Like most of the country, Philadelphia doesn't require restaurants to pay sick leave for its food handlers, though long-time food workers like Bruton, advocacy organizations, and lawmakers are currently fighting for a law to do so in Pennsylvania. Councilmen in Portland, Oregon are also currently debating a similar initiative. But these two proposals are the exception rather than the norm: According to a study from the Food Chain Workers Alliance, 79 percent of food workers in the United States don't have paid sick leave or don't know if they do. And it's not just flu that sick servers can spread—a study out this week from the Centers for Disease Control and Prevention suggests that the food industry's labor practices may be contributing to some of the nation's most common foodborne illness outbreaks, and moreso than previously thought.

Not Everyone is Living Longer - On the Wall Street Journal op-ed page, Donald Boudreaux and Mark Perry argue that the middle class is doing better than we liberals think. They haul out all of the usual arguments, some of which are valid (you need to count healthcare benefits as part of income) and some of which aren't (the average is being pulled down by immigrants). But then there's this: No single measure of well-being is more informative or important than life expectancy. Happily, 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. These longer life spans aren't just enjoyed by "privileged" Americans.  Harold Meyerson is agog: "Clearly, they missed the recent study in Health Affairs which found that the life expectancy of white working class men fell by three years from 1990 to 2008, and that of white working class women by five years." This is actually the figure for high school dropouts, not the entire working class. At the other extreme of the educational spectrum, whites with more than a college degree, life expectancies have risen by five years for men and three years for women. The chart on the right shows the difference, with men in light colors and women in darker colors. Longer life spans, it turns out, really do depend on just how privileged you are.

Life expectancy is going down for many - Given my interest in life expectancy, and my desire to overcome the myth that its “meteoric rise” requires trimming benefits for the elderly, I simply cannot believe I missed this study from Health Affairs last summer. “Differences In Life Expectancy Due To Race And Educational Differences Are Widening, And Many May Not Catch Up“: In this article we update estimates of the impact of race and education on past and present life expectancy, examine trends in disparities from 1990 through 2008, and place observed disparities in the context of a rapidly aging society that is emerging at a time of optimism about the next revolution in longevity. We found that in 2008 US adult men and women with fewer than twelve years of education had life expectancies not much better than those of all adults in the 1950s and 1960s. When race and education are combined, the disparity is even more striking. In 2008 white US men and women with 16 years or more of schooling had life expectancies far greater than black Americans with fewer than 12 years of education—14.2 years more for white men than black men, and 10.3 years more for white women than black women. These gaps have widened over time and have led to at least two “Americas,” if not multiple others, in terms of life expectancy, demarcated by level of education and racial-group membership.

Suicide is a gender issue that can no longer be ignored - Each time suicide reaches the headlines our attention is directed at particular groups – middle-aged men, people in deprived areas or in certain professions. This is splitting hairs. The latest statistics underline the message that Calm (the campaign against living miserably) has maintained for years; gender runs through UK suicide statistics like letters in a stick of rock. The highest suicide rate is among men aged 30-44, in men aged 45 to 59 suicide has increased significantly between 2007 and 2011, and in 2011 more men under 35 died from suicide in the UK than road accidents, murder and HIV/Aids combined. Even in the 60+ age group, men were three times more likely to take their lives than women. Recent University of Liverpool research indicated that the economic downturn was likely to add 1,000 suicides over and above what we could expect; with around 800 more men and 200 women killing themselves as a direct result of the recession. The research proposed that the government needed to look at interventions and policies that will sustain and support jobs. Other research by the Samaritans has focused on older men, concluding that these men, at the lower end of the socio-economic scale, were emotionally illiterate, which explained their high suicide rate. But surely the big question is why is suicide three to four times more likely in men of any age group?

Bad pharma: Drug research riddled with half truths, omissions, lies - Before we get going, we need to establish one thing beyond any doubt: Industry-funded trials are more likely than independently funded trials to produce a positive, flattering result. This is our core premise, and one of the most well-documented phenomena in the growing field of “research about research.” It has also become much easier to study in recent years because the rules on declaring industry funding have become a little clearer. We can begin with some recent work. In 2010, three researchers from Harvard and Toronto found all the trials looking at five major classes of drug — antidepressants, ulcer drugs and so on — and then measured two key features: were they positive, and were they funded by industry? They found over 500 trials in total: 85 percent of the industry-funded studies were positive, but only 50 percent of the government-funded trials were. That’s a very significant difference. In 2007, researchers looked at every published trial that set out to explore the benefit of a statin.This study found 192 trials in total, either comparing one statin against another, or comparing a statin against a different kind of treatment. Once the researchers controlled for other factors (we’ll delve into what this means later), they found that industry-funded trials were 20 times more likely to give results favoring the test drug. Again, that’s a very big difference.

In Hard Times, an Instinct to Pack on Pounds - When times are tough, people make like bears getting ready to hibernate: they eat more and prefer higher calorie foods. That’s the implication of a new paper reporting that, in an experiment involving M&Ms, people faced with messages about hard times ate way more than people surrounded by neutral messages. The paper actually describes three experiments  exploring how humans adjust their eating when unconsciously “primed” with words such as adversity, struggle and survival. Researchers found that the perception of hard times prompts people to live more for the moment, let tomorrow take care of itself, and stoke up against an uncertain future. Consistent with this, people in the study who were primed for adversity ate 70% more M&Ms when told they contained high-calorie chocolate, compared to similarly primed volunteers told they were eating low-calorie chocolate. (All were given identical M&Ms.) mIn another trial, volunteers primed for hardship were offered a choice between a cupcake and a salad. Those given $1 were much more likely to pick the salad than were those given no money, suggesting that “providing people with resources, even a small amount,”’ can reduce myopic behavior.

The Conundrum of Food Waste - Each year, 1.3 billion tons of food — about one third of all the food produced globally –- ends up wasted even as hundreds of millions of people go hungry. This week, two United Nations agencies opened a global campaign to address that conundrum, calling for changes in the way that food is harvested, transported, processed, sold and consumed. The Think, Eat, Save initiative, organized by the United Nations Environment Program and the Food and Agriculture Organization with partners, underlines the disparities between food production and consumption patterns in developed and developing countries.Robert van Otterdijk, the team leader for the F.A.O.’s Save Food program, said that a 2011 study by his group found that just a quarter of the food lost annually would suffice to feed the world’s hungry.“The biggest major finding was the striking difference between food waste and food losses in different parts of the word,” he said. Developing regions tend to suffer food losses in the production process through poor harvesting techniques, spoilage or improper storage, for example — what Mr. van Otterdijk calls “unintentional” loss.

Mexican farm labor markets tighten up, with possible implications for U.S. farmers and farm workers - The agricultural labor supply in Mexico may be shrinking, a development that is likely to raise wages for farm laborers in both Mexico and the United States. If this is truly a long-term trend, rather than a short-term response to economic recession or disruption because of recent violence, then it would have several implications.  It could cause some difficulties for U.S. farm owners, and it could somewhat hinder efforts to encourage increased consumption of fruits and vegetables at low prices.  On the positive side, it could help smooth U.S. immigration policy debates, and it would help alleviate hardship for the immigrant workers who play such a central role in the American food system.An article in the most recent issue of Applied Economics Perspectives and Policy is titled "The End of Farm Labor Abundance."  Here is the abstract: An analysis of nationally representative panel data from rural Mexico, with observations in years 2002, 2007, and 2010, suggests that the same shift out of farm work that characterized U.S. labor history is well underway in Mexico. Meanwhile, the demand for agricultural labor in Mexico is rising. In the future, U.S. agriculture will compete with Mexican farms for a dwindling supply of farm labor. Since U.S. domestic workers are unwilling to do farm work and the United States can feasibly import farm workers from only a few countries in close geographic proximity, the agricultural industry will eventually need to adjust production to use less labor.

Mexico City's Mile-Deep Aquifer Tapping Suggests U.S. Is Polluting Water It May Someday Need -- Mexico City plans to draw drinking water from a mile-deep aquifer, according to a report in the Los Angeles Times. The Mexican effort challenges a key tenet of U.S. clean water policy: that water far underground can be intentionally polluted because it will never be used. U.S. environmental regulators have long assumed that reservoirs located thousands of feet underground will be too expensive to tap. So even as population increases, temperatures rise, and traditional water supplies dry up, American scientists and policy-makers often exempt these deep aquifers from clean water protections and allow energy and mining companies to inject pollutants directly into them. As ProPublica has reported in an ongoing investigation about America's management of its underground water, the U.S. Environmental Protection Agency has issued more than 1,500 permits for companies to pollute such aquifers in some of the driest regions. Frequently, the reason was that the water lies too deep to be worth protecting. But Mexico City's plans to tap its newly discovered aquifer suggest that America is poisoning wells it might need in the future.

The Surprising Connection Between Food and Fracking - In a recent Nation piece, the wonderful Elizabeth Royte teased out the direct links between hydraulic fracturing, or fracking, and the food supply. In short, extracting natural gas from rock formations by bombarding them with chemical-spiked fluid leaves behind fouled water—and that fouled water can make it into the crops and animals we eat. But there's another, emerging food/fracking connection that few are aware of. US agriculture is highly reliant on synthetic nitrogen fertilizer, and nitrogen fertilizer is synthesized in a process fueled by natural gas. As more and more of the US natural gas supply comes from fracking, more and more of the nitrogen fertilizer farmers use will come from fracked natural gas. If Big Ag becomes hooked on cheap fracked gas to meet its fertilizer needs, then the fossil fuel industry will have gained a powerful ally in its effort to steamroll regulation and fight back opposition to fracking projects.  The potential for the growth of fracked nitrogen (known as "N") fertilizer is immense. During the 2000s, when conventional US natural gas sources were drying up and prices were spiking, the US fertilizer industry largely went offshore, moving operations to places like Trinidad and Tobago, where conventional natural gas was still relatively plentiful. (I told that story in a 2010 Grist piece.) This chart from a 2009 USDA doc illustrates how rapidly the US shifted away from domestically produced nitrogen in the 2000s.

PNAS Study: Population Growth Will be Constrained by the Limits of Trading Virtual Water (Food)  - A new study has been released by the Proceedings of the National Academy of Sciences (PNAS), which calls into question the unsustainable global food export system based upon unsustainable export volumes of virtual water. The first sentence sums it up: Population growth is in general constrained by food production, which in turn depends on the access to water resources. … Most of the water we use is to produce the food we eat. With the world’s population that has doubled every 40 years, there is a growing concern that water limitations will soon impede humanity to meet its food requirements. The study refers to a global water unbalance and challenges the long-term sustainability of the food trade system as a whole, based upon current food export rates. It projects that growing demographic requirements of water-rich nations will result in less exports to water-poor regions.Water-rich regions are likely to soon reduce the amount of virtual water they export, thus leaving import-dependent regions without enough water to sustain their populations.

New Bipartisan Poll Reveals Strong Support for Cleaner Gasoline and Vehicles - American Lung Association: — An overwhelming majority of voters supports the U.S. Environmental Protection Agency (EPA) setting stricter standards on gasoline and tighter emissions standards for cars, SUVs and trucks according to the American Lung Association's latest survey.This bipartisan telephone survey of 800 registered voters, conducted during January 13-16, 2013, finds that nearly two-thirds of voters surveyed across the country support strengthening standards that limit sulfur in gasoline and tighten the limits on tailpipe emissions from new vehicles. These revised standards would reduce pollution from cars, trucks and SUVs, would protect public health and would create jobs by encouraging innovation. "Voters clearly want clean air," . "Implementing these standards on gasoline would remove as much pollution as taking 33 million cars off the road. If we can remove that much pollution, we can prevent tens of thousands of asthma attacks and save thousands of lives every year." This survey finds voter support of stronger air pollution standards reaches across partisan, gender, racial, and geographic lines.

Big Cities' Heat Can Change Temperatures a Continent Away - (Reuters) - The energy big cities burn - mostly coal and oil to power buildings, cars and other devices - produces excess heat that can get into atmospheric currents and influence temperatures thousands of miles (km) away, a new study found. The so-called waste heat that leaks out of buildings, vehicles and other sources in major Northern Hemisphere cities makes winters warmer across huge swaths of northern Asia and northern North America, according to a report published on Sunday in the journal Nature Climate Change. That is different from what has long been known as the urban-heat island effect, where city buildings, roads and sidewalks hold on to the day's warmth and make the urban area hotter than the surrounding countryside. Instead, the researchers wrote, the excess heat given off by burning fossil fuels appears to change air circulation patterns and then hitch a ride on air and ocean currents, including the jet stream. The burning of fossil fuels also sends climate-warming carbon dioxide into the atmosphere, contributing to global warming. 

In 2013, Drought Is Worsening In Midwest And Plains States, Despite U.S. Winter Weather: - Dry weather continues to plague the drought-stricken U.S. Plains and western Midwest with only light showers and snowfall expected this week, an agricultural meteorologist said on Monday. "The Plains and the northwest Midwest will still struggle with drought, there's not a whole lot of relief seen," said John Dee, meteorologist for Global Weather Monitoring.Without rain or heavy snow before spring, millions of acres of wheat could be ruined while corn and soybean seedings could be threatened in the western Midwest, meteorologists and other crop experts have said. A climatology report issued last Thursday said there were no signs of improvement for Kansas or neighboring farm states. Roughly 57.64 percent of the contiguous United States was in at least "moderate" drought as of Jan. 22, an improvement from 58.87 percent a week earlier, according to last Thursday's Drought Monitor report by a consortium of federal and state climatology experts. But the worst level of drought, dubbed "exceptional," expanded slightly to 6.36 percent from 6.31 percent of the country.

Coral reefs going through ‘extremely alarming’ decline in the Caribbean - Coral reefs in the Caribbean are producing less than half of the key ingredient that makes their calcium skeleton compared to pre-industrial times, scientists said on Tuesday, describing the findings as “extremely alarming.” The amount of new calcium carbonate being added by coral reefs is at least half, and in some places 70 percent lower, than it was thousands of years ago. Biologists have long sounded the alarm for reef-building corals, on which nearly half a billion people depend for their livelihood from fishing and tourism.Previous research has estimated that coral cover is declining by as much as two percent per year in parts of the Indian Ocean and the Pacific. In the Caribbean, cover has shrunk by around 80 percent on average since the mid-1970s.

New Research Finds that Most Monthly Heat Records Today are Due to Global Warming -- A new paper published in Climatic Change examines the increased frequency of record-breaking monthly temperature records over the past 130 years, finding that these records are now five times more likely to occur due to global warming, with much more to come. "...worldwide, the number of local record-breaking monthly temperature extremes is now on average five times larger than expected in a climate with no long-term warming. This implies that on average there is an 80% chance that a new monthly heat record is due to climatic change ... Under a medium global warming scenario, by the 2040s we predict the number of monthly heat records globally to be more than 12 times as high as in a climate with no long-term warming."

Global warming less extreme than feared? New estimates from a Norwegian project on climate calculations: Policymakers are attempting to contain global warming at less than 2°C. New estimates from a Norwegian project on climate calculations indicate this target may be more attainable than many experts have feared.Climate sensitivity is a measure of how much the global mean temperature is expected to rise if we continue increasing our emissions of greenhouse gases into the atmosphere. CO2 is the primary greenhouse gas emitted by human activity. A simple way to measure climate sensitivity is to calculate how much the mean air temperature will rise if we were to double the level of overall CO2 emissions compared to the world's pre-industrialised level around the year 1750. If we continue to emit greenhouse gases at our current rate, we risk doubling that atmospheric CO2 level in roughly 2050. A number of factors affect the formation of climate development. The complexity of the climate system is further compounded by a phenomenon known as feedback mechanisms, i.e. how factors such as clouds, evaporation, snow and ice mutually affect one another. Uncertainties about the overall results of feedback mechanisms make it very difficult to predict just how much of the rise in Earth's mean surface temperature is due to humanmade emissions. According to the Intergovernmental Panel on Climate Change (IPCC) the climate sensitivity to doubled atmospheric CO2 levels is probably between 2°C and 4.5°C, with the most probable being 3°C of warming. In the Norwegian project, however, researchers have arrived at an estimate of 1.9°C as the most likely level of warming.

The Global Warming Standstill - In yesterday's post, I mentioned the Anthropocene, which Paul Voosen described like this—  Geology had long relegated humanity to the sidelines, but in recent history, the human fingerprint on the Earth had grown too deep to be ignored, he said. We had created our own geological time. The world had left the Holocene behind and entered an epoch of humanity. In other words, humanity has now so fucked up the world that it is human actions which largely determine basic environmental factors like the climate and the oceans. This point becomes clearer when we consider this chart, which has led to the type of confused discussion which humans are prone to. (And read here to untangle some of the latest confusion.)  And here is the bone of contention, from that NASA document. Global Warming Standstill — The 5-year running mean of global temperature [red line in Figure 1] has been flat for the past decade. It should be noted that the "standstill" temperature is at a much higher level than existed at any year in the prior decade except for the single year 1998, which had the strongest El Niño of the century.  However, the standstill has led to a widespread assertion that "global warming has stopped". Examination of this matter requires consideration of the principal climate forcing mechanisms that can drive climate change and the effects of stochastic (unforced) climate variability. There are three main factors which have caused this "standstill"

Author of climate change report: ‘I got it wrong on climate change – it’s far, far worse’ - Lord Stern, author of the government-commissioned review on climate change that became the reference work for politicians and green campaigners, now says he underestimated the risks, and should have been more “blunt” about the threat posed to the economy by rising temperatures. In an interview at the World Economic Forum in Davos, Stern, who is now a crossbench peer, said: “Looking back, I underestimated the risks. The planet and the atmosphere seem to be absorbing less carbon than we expected, and emissions are rising pretty strongly. Some of the effects are coming through more quickly than we thought then.” The Stern review, published in 2006, pointed to a 75% chance that global temperatures would rise by between two and three degrees above the long-term average; he now believes we are “on track for something like four “. Had he known the way the situation would evolve, he says, “I think I would have been a bit more blunt. I would have been much more strong about the risks of a four- or five-degree rise.”

Major climate changes looming - Within the lifetimes of today's children, scientists say, the climate could reach a state unknown in civilization. In that time, global carbon dioxide emissions from burning fossil fuels are on track to exceed the limits that scientists believe could prevent catastrophic warming. CO{-2} levels are higher than they have been in 15 million years. The Arctic, melting rapidly and probably irreversibly, has reached a state that the Vikings would not recognize. "We are poised right at the edge of some very major changes on Earth," "We really are a geological force that's changing the planet." The Arctic melt is occurring as the planet is just 1.4 degrees Fahrenheit (0.8 degree Celsius) warmer than it was in preindustrial times. At current trends, the Earth could warm by 4 degrees Celsius in 50 years, according to a November World Bank report. The coolest summer months would be much warmer than today's hottest summer months, the report said. "The last time Earth was 4 degrees warmer than it is now was about 14 million years ago," Barnosky said.

Weather and Climate Summit - Day 3, Dr. Jennifer Francis - - Topic: Wacky Weather and Disappearing Arctic Sea Ice: Are They Connected?

Alley: ‘We Have High Confidence That Warming Will Shrink Greenland, By Enough To Matter A Lot To Coastal Planners’ - Given the non-trivial complexity of the issue and that Greenland has been contributing more than 2:1 that of Antarctica to global sea level in the recent 19 years (1992-2010)[iv], let’s not consider Greenland of neglible policy relevance until that ratio is 1:1 if not reversed, say, 0.5:1. Greenland, currently the leading contender with surface melting dominating its mass budget[v], the positive feedback with surface melting and ice reflectivity doubling Greenland’s surface melt since year 2000[vi]. Professor Richard Alley weighs in again: “We have high confidence that warming will shrink Greenland, by enough to matter a lot to coastal planners.” That’s not to say that Antarctica couldn’t take over from Greenland the position of number 1 global sea level contributor in the foreseeable future. Nor should one be surprised if it did, given that Antarctica contains a factor of 10 more ice than Greenland[vii],[viii]. And it is probable that the planetary energy imbalance[ix] caused by elevated greenhouse gasses, expressed primarily through massive oceanic heat uptake[x], is delivering enough erosive power to destabilize the 3.3 m of sea level[xi] in the marine-based West Antarctic ice sheet. Yet, for today, consider also that climate change if increasing Antarctic precipitation a few percent can tip its mass balance toward the positive, lessening its sea level contribution[xii] even while its glaciers retreat. Irrespective of sea level forcing, through its ice mass budget Greenland plays an important role to North Atlantic climate through ocean thermohaline circulation, even being suggested as the Achilles heel of the global climate system[xiii].

New Arctic Death Spiral Feedback: Melt Ponds Cause Sea Ice To Melt More Rapidly - The Arctic sea ice has not only declined over the past decade but has also become distinctly thinner and younger. Researchers are now observing mainly thin, first-year ice floes which are extensively covered with melt ponds in the summer months where once metre-thick, multi-year ice used to float. Sea ice physicists at the Alfred Wegener Institute, Helmholtz Centre for Polar and Marine Research (AWI), have now measured the light transmission through the Arctic sea ice for the first time on a large scale, enabling them to quantify consequences of this change. They come to the conclusion that in places where melt water collects on the ice, far more sunlight and therefore energy is able to penetrate the ice than is the case for white ice without ponds. The consequence is that the ice is absorbing more solar heat, is melting faster, and more light is available for the ecosystems in and below the ice. The researchers have now published these new findings in the scientific journal Geophysical Research Letters.

Ozone hole over Antarctica causing circumpolar winds to speed up and move polewards - High above Antarctica, the atmosphere is slowly recovering from the decades-long barrage of manmade chemicals that ate a hole in the protective ozone layer.  But the legacy of that destruction lingers. Scientists have linked the ozone hole that forms each Antarctic spring high above Earth to changes in the fierce band of westerly winds that swirls around Antarctica. Those winds, closer to the continent's surface, have grown stronger and moved poleward over the past several decades.  And now a new study suggests that the ozone hole has an even broader reach. It finds evidence those shifting winds are speeding circulation patterns in polar waters. That shift is important because it may already be weakening the Southern Ocean's ability to absorb carbon dioxide from the atmosphere and slow the march of manmade climate change.  Even a small change in the Southern Ocean carbon sink could have a noticeable impact, because the region's waters takes in about 40% of the total carbon absorbed by the world's seas.  "The models were indicating there could be some change in ocean circulation (caused by ozone depletion), but there was a lot of debate about whether what the models were saying was actually happening,"

NOAA: Coastal effects of climate change threaten 50 percent of Americans - - Land that roughly 50 percent of Americans call home is under threat from the coastal effects of climate change, a study published Tuesday (PDF) by the National Oceanic and Atmospheric Administration (NOAA) warns. “An increase in the intensity of extreme weather events such as storms like Sandy and Katrina, coupled with sea-level rise and the effects of increased human development along the coasts, could affect the sustainability of many existing coastal communities and natural resources,” report co-author Virginia Burkett, of the U.S. Geological Survey, said in an advisory. The study warns that approximately 50 percent of Americans live in coastal watershed communities — a number that is projected to grow — that face increasing flood risks due to storm surges, extreme weather and rising sea levels as the climate grows more unpredictable. These risks are compounded by changes to coastal ecosystems brought about by human activity, causing “toxic algal blooms” and depleted fish stocks, loss of wetlands and dying coral reefs.

Manmade Carbon Pollution Has Already Put Us On Track For 69 Feet Of Sea Level Rise - The bad news is that we’re all but certain to end up with a coastline at least this flooded (20 meters or 69 feet):The “good” news is that this might take 1000 to 2000 years (or longer), and the choices we make now can affect the rate of rise and whether we blow past 69 feet to beyond 200 feet. Glaciologist Jason Box makes this point in a Climate Desk interview with Chris Mooney, “Humans Have Already Set in Motion 69 Feet of Sea Level Rise“: So what can we do? For Box, any bit of policy helps. “The more we can cool climate, the slower Greenland’s loss will be,” he explained. Cutting greenhouse gases slows the planet’s heating, and with it, the pace of ice sheet losses. This shouldn’t be a surprise to anyone who follows the scientific literature. Just last year the National Science Foundation (NSF) reported on research “led by Kenneth Miller of Rutgers University” that examined “rock and soil cores taken in Virginia, New Zealand and the Eniwetok Atoll in the north Pacific Ocean”: “The natural state of the Earth with present carbon dioxide levels is one with sea levels about 70 feet higher than now,” he said. And that was only slightly less worrisome than a 2009 paper in Science that found the last time CO2 levels were this high, it was 5° to 10°F warmer and seas were 75 to 120 feet higher.

Climate change refugees lack legal protection - Millions of people worldwide are fleeing their homes because of environmental disasters. But the conditions in which the refugees have to take up residence in neighboring countries isn't regulated by international law.  In recent years, the world has experienced a rise in the number of natural disasters, which could be attributed to climate change. As a result, more and more people are fleeing from the consequences of climate change, experts say. It is estimated that there are between 100,000 and 200,000 Somalis who have fled to refugee camps in neighboring Kenya because of changing climactic conditions. They weren't only driven away from their country by war, but also by drought and famine. Many of the families involved, now just barely surviving in refugee camps, once lived as nomads. The animals that secured their livelihoods died of hunger, leaving them with no perspective and nowhere to turn. But more problematic is their future plight. The international community is yet to come up with effective strategies to deal with refugees of this type.

Counterparties: Less is more green - America is producing less of something, and for once, that’s good news: US carbon emissions are at their lowest level since 1994. A decrease in emissions is definitely welcome, given the undeniable reality of global warming. And America did a bit more than just cut emissions. As a report from Bloomberg’s New Energy Finance details, the US invested $44 billion in renewables in 2012. That’s an 11% decline from the year before, but there’s still more money going into renewable energy than into any other energy source. Overall, US clean energy capacity is largely stagnant, while energy use has declined 6.4% since 2007. America cut its carbon output without any help from federal legislation, and despite a largely symbolic energy secretary. Economics is taking the place of legislation: energy production from natural gas, wind, and solar is getting cheaper, and saving energy is easier than ever. New Energy Finance notes that gas consumption has dropped 5.7% since 2007, and buildings use 40% less energy per square foot than they did in 1980. US manufacturing is doing well (take a look at the latest ISM and GM sales numbers), so you can’t simply chalk up America’s carbon reduction to structural changes in the economy. America is also burning less coal, which is terrific. Coal isn’t just carbon intensive: mining it destroys mountains, burning it is terrible for human health, and the ash is converted into a particularly toxic slurry. A more mixed development is America’s increasing reliance on natural gas. That means lower emissions  compared to coal or oil, but fracking has plenty of environmental problems that we know about, and likely still more to be uncovered.

A Dose of Reality for Energy Policy - Bruce Everett  offers a healthy double-helping of reality in his essay entitled "Back to Basics on Energy Policy: For the past 40 years, political leaders have promised that government can plan and engineer a fundamental transformation of our energy industry They were wrong."  He begins: "In June 1973, President Richard Nixon addressed the emerging energy crisis, saying that “the answer to our long-term needs lies in developing new forms of energy.” He asked Congress for a five-year, $10 billion budget to “ensure the development of technologies vital to meeting our future energy needs.” With this speech, the federal government set out to engineer a fundamental transformation of our energy supply. All seven subsequent presidents have endorsed Nixon’s goal, and during the past 40 years, the federal government has spent about $150 billion (in 2012 dollars) on energy R&D, offered $35 billion in loan guarantees, and imposed numerous expensive energy mandates in an effort to develop new energy sources. During this time, many talented and dedicated people have worked hard, done some excellent science, and learned a great deal. Yet federal energy technology policy has failed to reshape the U.S. energy market in any meaningful way."

India to meet domestic mitigation goal of reducing emissions by 2020: PM - Prime Minister Dr. Manmohan Singh on Thursday said India is committed to meeting its domestic mitigation goal of reducing the emissions intensity of our GDP by 20-25 percent by 2020. Addressing at the Inaugural Session of Delhi Sustainable Development Summit here, Dr. Singh said: "Our country is committed to meeting its domestic mitigation goal of reducing the emissions intensity of our GDP by 20-25 percent by year 2020 compared with 2005 levels. We have already taken several major steps on the path of low carbon growth. Now is the time for the richer industrialized countries to show that they too are willing to move decisively along this path." "If they fail to do that in the commitments they will make under the Kyoto Protocol and other agreements, then it will be difficult to persuade governments, industry and the general public in India and other developing countries to step up the pace at which they are moving on this path," he added.

Belgium to build 'battery island' to store wind farm energy — RT: Belgium plans to build a horseshoe-shaped artificial island off its North Sea coast to store energy generated by its wind farms. The project will also double as attraction for sea birds (and possibly flocks of tourists).The island is planned to be built over the course of five years about three to four kilometers off the coast near the village of Wenduine in the province of West Flanders. It will be about three kilometers in diameter, and will have a giant water reservoir occupying most of its territory.Energy will be stored by pumping seawater out of the reservoir. It is then recovered when needed by guiding the water back in through a hydropower plant at the heel of the 'horseshoe.'Pumping water uphill is the most widely used approach to storing this energy, and is a technique that has been used since the late 19th century. However, those reservoirs are usually built inland in a mountainous areas and store freshwater. The Yanbaru Seawater Pumped Storage Power Station – launched in 1999 in Okinawa, Japan – was the first facility to use seawater for this purpose. A notable exception is tidal power plants, where extra seawater may be pumped up during the high tide and released during the low tide to boost the plant’s efficiency.

13 gigawatts of New Wind power in US in 2012, Renewables Half of all New Energy -  The US put in 13 gigawatts of new wind energy capacity in 2012, 5 of it in December alone, according to a Bloomberg study. The Office of Energy Projects report was a bit more conservative, but confirmed the general trend.  h/t Grist Wind alone now accounts for 6% of US electricity generation! Even the government figures showed that about half of all new energy generation in the US came from renewables in 2012, mostly wind turbines. The US also put in about 1.5 gigawatts of new solar power last year. In some markets, such as Texas, installing wind turbines for electricity generation is now actually cheaper than building natural gas plants! Reflecting this trend toward wind grid parity, more new wind capacity was added to the US electrical grid than natural gas, which was itself no mean shakes. Gas puts out less carbon dioxide than coal, but fracturing it from underground rock formations may release so much methane (a very potent greenhouse gas) that it is a wash with coal. Both coal and gas plants need to be mothballed as quickly as possible. The bad news is that the US still generated 5 billion metric tons of carbon dioxide in 2012, the highest per capita in the OECD nations! Specially bad news is that 1.4 gigawatts of new, dirty coal power was brought online in 2012 in the US. That should be illegal! Coal is poisoning us and our world! Carbon dioxide in the quantities we are producing it is a toxin for the world. Not to mention that we are being mercury-poisoned by dirty coal emissions!

Expensive takeovers haunt miners as writedowns near US$50-billion - The world’s biggest mining and steel companies have wiped about US$50-billion off project valuations in the past year and the purge is poised to continue this earnings season as managers reassess expensive takeovers. Anglo American Plc, Vale SA and Rio Tinto Group led the writedowns as declining metal prices, rising project costs and slowing demand forced reviews. Glencore International Plc may write down some nickel and copper assets acquired through its takeover of Xstrata Plc, Liberum Capital Ltd. has said. BHP Billiton Ltd. may trim aluminum operation valuations, according to Goldman Sachs Group Inc. and Sanford C. Bernstein Ltd. .Executives and shareholders are paying the price for a US$1.1-trillion M&A binge over a decade. Failed deals in aluminum and coal caused US$14-billion in writedowns at Rio and cost Chief Executive Officer Tom Albanese his job this month. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which slashed US$4-billion off the value of its Minas- Rio iron-ore project in Brazil Tuesday. She leaves in April.

PROMETHEUS TRAP (1): U.S. frustrated with Japan’s initial response to Fukushima - Between late on March 14, 2011, and early the next morning, a top secret diplomatic cable arrived at the Foreign Ministry. Sent three days after the accident at the Fukushima No. 1 nuclear power plant, the document detailed the major concerns that Adm. Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, had voiced to Japan's ambassador to the United States, Ichiro Fujisaki. At the time, the Japanese government had still not decided to use Self-Defense Force helicopters to dump water into the crippled nuclear plant. Fujisaki, 65, sent the cable electronically under the highest level of confidentiality. Information included on the cable indicated which government agencies had the necessary clearance to read it and how long the document was to be kept. When it was printed, watermarks on the document identified the government agency it was intended for as well as the document number. Because civil servants can face criminal charges for disclosing state secrets, no government source would publicly admit the cable existed.

U.S. To Bury Its 70,000 Tonnes Of Nuclear Waste - Oak Ridge National Laboratory has released a recent study which has determined that if and when the US ever decides to actually pursue the technology to recycle nuclear waste, it will take 20 years to develop. Based on this knowledge they have suggested that the current stockpile of spent nuclear fuel should be buried without any thought as to its retrieval in the future. Officials from Oak Ridge involved in the report said that, “based on the technical assessment, about 68,450 metric tons or about 98 percent of the total current inventory by mass, can proceed to permanent disposal without the need to ensure retrievability for reuse or research purposes.” The remaining two percent will be used for research into recycling and storage technologies. The Blue Ribbon Commission on America’s Nuclear Future, co-chaired by Steven Chu, also believes that the means to recycle nuclear waste is too far off for any consideration at the moment.No currently available or reasonably foreseeable reactor and fuel cycle technology developments—including advances in reprocessing and recycling technologies—have the potential to fundamentally alter the waste management challenges the nation confronts over at least the next several decades, if not longer.”

Pennsylvania Fracking Wastewater Likely to Overwhelm Ohio Injection Wells - The total amount of fracking wastewater from natural gas production in Pennsylvania’s Marcellus shale region has increased by about 570 percent since 2004, as a result of increased shale gas production, according to a study released yesterday by researchers at Duke and Kent State universities. Though hydraulically fractured natural gas wells in the Marcellus shale region produce only about 35 percent as much wastewater, per unit of gas recovered, as conventional wells, according to the new analysis, the volume of toxic fracking wastewater from Pennsylvania is growing and threatening to overwhelm existing injection wells in Ohio and other states. “It’s a double-edged sword. On one hand, shale gas production generates less wastewater per unit. On the other hand, because of the massive size of the Marcellus resource, the overall volume of water that now has to be transported and treated is immense. It threatens to overwhelm the region’s wastewater-disposal infrastructure capacity,”

BP tried to manipulate gas market, alleges trader - BP faces new embarrassment in America with a court case brought by one of its former traders, who claims the company was trying to manipulate the natural gas liquids market. Drew Sickinger, who joined BP's Houston office in 2009, says the company "created a pretext" for disciplining him late last year and then unfairly dismissing him. Filed this week in a Texan court, a lawsuit for breach of contract includes allegations that BP was trying to rig the markets "by establishing a dominant and controlling position". The court papers do not explain the basis for the rigging claims, which were immediately denied by BP. But the case is highly unwelcome for an oil company fined $300m in 2007 after trading irregularities in the propane gas market and which is still facing legal action over the Deepwater Horizon rig blowout of 2010. BP said it never publicly discussed personnel issues or employment issues but denied it had been engaged in any illegal trading.

Chevron Corp. stands off with LNG buyers over pricing - Chevron Corp. is taking a hard line with Asian utilities and other potential buyers seeking cheaper prices on exports of liquefied natural gas from Canada’s West Coast, warning that unless sales are indexed to oil prices “the projects won’t get built.” Chevron, via its Canadian subsidiary, joins Apache Canada Ltd. as a 50-50 partner in developing the Kitimat scheme, assuming the operator role in a project that has faced delays because of difficulties securing long-term sales contracts with buyers in Pacific markets.North American gas producers are scrambling to build export capacity to escape a crippling supply glut that has battered share prices and hastened asset sales. At the same time, energy-hungry Asian utilities have begun pushing for LNG sales deals linked to distressed North American gas prices, which have plunged as record volumes of shale gas swamped markets. Sales of LNG in Asia-Pacific markets typically fetch a premium because they are linked to a higher-priced basket of crude oil blends

NRDC: New video explains the climate threat from the Keystone XL tar sands pipeline - A new video [see below] released by NRDC and explains how the Keystone XL tar sands pipeline is a lynchpin enabling the climate intensive tar sands industry to grow unimpeded.  The video also discusses cutting edge research from Oil Change International showing how tar sands oil causes more carbon pollution than originally estimated.  Recently, four energy experts and climate scientists from Canada and the U.S. traveled to Washington, DC, with an urgent message:  if we are to truly respond to climate change which is causing extreme life-threatening weather, we must reject the Keystone XL tar sands pipeline.  Watch the video and join tens of thousands of others on February 17 for the Forward on Climate rally in Washington, DC.  Join us and send a message to the Obama administration to move forward on climate action. President Obama promised that “we will respond to the threat of climate change.”  As my colleague Dan Lashof said, delivering on that promise means setting carbon pollution standards for existing power plants and rejecting the Keystone XL tar sands pipeline.

Kerry unlikely to block Keystone XL, experts say - Now that the Nebraska Gov. Dave Heineman has approved an alternate route through his state, the controversial Keystone XL pipeline may have another hurdle to deal with in the form of climate hawk John Kerry who has been nominated to be next U.S. Secretary of State. Critics of the pipeline, a massive $7 billion plan pitched by Calgary-based TransCanada Corp. to ship oilsands bitumen from Alberta to refineries on the U.S. Gulf coast, are concerned about the project's environmental footprint. Kerry has been a staunch advocate in the fight against climate change throughout his political career, and environmentalists are emboldened because he's now in a position to put a halt to the project. But proponents of the project say they remain confident that Keystone XL will be approved. “As head of the State Department he’s still charged with taking input from his department and arriving at a decision in the best interest of the nation,”

Confirmation Of Climate Hawk Kerry As Secretary Of State May Doom Dirty Keystone XL Pipeline -The Senate confirmed John Kerry as a Secretary of State by a vote of 94 to 3. I believe this is a turning point in the fight to stop the Keystone XL pipeline. Once again, I do not think that a man who had dedicated his Senate career to fighting catastrophic climate change would start his term as Secretary approving the expansion of one of the dirtiest sources of fossil fuels in the world. Keystone is a gateway to a huge pool of carbon-intensive fuel most of which must be left in the ground — along with most of the world’s coal and unconventional oil and gas – if humanity is to avoid multiple devastating impacts that may be beyond adaptation. How precisely could Kerry lobby other countries to join an international climate treaty — perhaps his primary goal as Secretary — after enabling the accelerated exploitation of the tar sands? Yes, you can say that the United States already has no standing to cajole other countries into climate commitments when we’ve expanded oil and gas drilling as well as coal exports. But none of those were Kerry’s decision, whereas Keystone is.

Dirty blizzard buried Deepwater Horizon oil - Missing oil from the Deepwater Horizon spill may have ended up at the bottom of the Gulf of Mexico. The Deepwater Horizon spill in 2010 spewed more than 600 million litres of oil into the Gulf of Mexico. While microbes processed the vast majority within months, US government assessments failed to account for the fate of about one-quarter of the spilled oil. Some scientists attending the Gulf of Mexico Oil Spill and Ecosystem Science Conference in New Orleans, Louisiana this week are now saying that as much as one-third of the oil may have been mixed with deep ocean sediments through a phenomenon dubbed the dirthy bathtub, and dragged to the bottom by another process called the dirty blizzard. The oily sediments risk causing significant damage to ecosystems, they say, and might even affect commercial fisheries in the future.

What's driving the rally in crude oil? - US crude oil prices have been moving up for nearly two months now. There are a number of possible explanations for this strength in crude, including ongoing Mideast unrest, expectations of higher demand from China, and of course the QE-driven "risk-on" trade.MarketWatch: - Those include improving economic data, rising Mideast tensions, changing U.S. oil market fundamentals — with greater oil-export capacity out of Cushing, Okla., and the closure of a New Jersey refinery — and an increasing number of speculative hedge-fund net “long” market positions, or bets that oil prices will rise, he said.But two recent developments make this rally particularly unusual.
1. US crude oil market is very well supplied. Inventories are materially above their the 5-year range.
2. While some economists are talking about improved GDP growth in the US, the data so far is showing something quite different.
Near-term growth expectations in the US remain modest, particularly given the expiry of the payroll tax cut. Normally, slow economic growth and record supplies should limit a rally in energy prices. But these are not normal times and two other economic factors have taken center stage.
1. US monetary base hit a record last week as the Fed's asset purchase program goes into full swing. This is contributing to the "risk-on" trade.
2. And the US dollar has weakened in response, creating a positive backdrop for commodities.

Reserves challenge clouds Shell’s growth ambitions - Anglo-Dutch oil company Royal Dutch Shell is struggling to replace its oil and gas reserves as it pushes ahead with plans to produce more, invest more, and pay a higher dividend. The company pledged a net $33 billion capital spending for next year, some of which will go into controversial places such as Nigeria – where a Dutch court this week found Shell’s local subsidiary partly responsible for pollution, and into the Arctic where it suffered a series of accidents last year that have raised new questions about the safety of offshore drilling. The world number two among international oil heavyweights said it would keep investing despite headwinds and an uncertain economic outlook in some markets.   Shell has a strong flow of new projects coming onstream in coming years to support the higher dividend. It expects to increase its total output to about 4 million barrels of oil and gas equivalent (boe) per day by 2017-18 from 3.3 million now.

Britain Excited by Potential Oil and Gas Boom in the North Sea - Over the years the estimates of untapped reserves in the North Sea have increased, and just recently the British Secretary of State for Energy and Climate Change, Ed Davey, announced to a parliamentary oil and natural gas group that oil and gas will be able to meet 70% of the country’s energy demands up until 2040. Davey said that, “with 20 billion barrels or more still to be drawn from the U.K.'s North Sea fields, having an indigenous source helps prevent over-reliance on imports from more volatile parts of the world.”To take advantage of the ever increasing reserves, Britain will approve 28 new oil and natural gas offshore projects.

Pakistan to build $1.5bn Iran pipeline - Pakistan has decided to go ahead with a controversial $1.5bn pipeline to import Iranian gas, a senior government official has said, in a move that risks alienating the US. “A decision has been made that we can’t delay this project for any longer. This is Pakistan’s essential lifeline. We are going ahead with this project,” the official told the Financial Times on Thursday. Asif Ali Zardari, Pakistan’s president, unexpectedly cancelled a trip to Iran at the last minute in December, amid concerns in Islamabad over stiff US opposition to a project considered essential for tackling mounting energy shortages. Some Pakistani officials had expected Mr Zardari to consent to the project during the trip. The plan would see Pakistan build a pipeline connecting its national gas supply grid in the southern Sindh province to the Iranian border in southwest Baluchistan. Iranian officials say they have already built the pipeline on their side of the border to within 100km of Pakistan. The US has opposed the pipeline on the grounds it would inject foreign exchange into the Iranian economy at a time when western countries have imposed a number of ever tighter sanctions in an effort to prevent Tehran from advancing its nuclear weapons programme.

Libya not to reveal oil sales details this year - Libya will not reveal the details of its oil sales this year, National Oil Corporation (NOC) officials said this week, stepping back from pledges to deliver greater transparency after the corruption of the pre-revolutionary regime Oil producers commonly keep the details of crude deals secret, yet Libyan officials promised to publish the details of oil deals after over 40 years of secrecy under deposed leader Muammar Gaddafi. The state firm revealed who would buy Libya's oil in 2012 and began releasing information on prices and volumes of oil shipments on its website — but this lasted just two months, ending in 2011. Libya's NOC chairman, Nuri Berruien, said any secrecy clauses were introduced at the request of clients, not the NOC, and that most of last year's buyers would continue to purchase its oil. The state firm would resume publishing details on its yearly activities, he said.

Saudi Aramco plans record rig count this year -sources - Saudi Aramco plans use a record number of rigs this year, more than 170, to search for unconventional gas while drilling for oil needed to maintain the world's biggest spare capacity cushion, three industry sources in Saudi Arabia said. The world's biggest oil producer is to deploy an additional 30 rigs this year, taking its total to over 170, the sources said, to search for gas to meet rapidly rising demand at home while maintaining its oil production capacity at 12.5 million barrels per day (bpd) as flows from some older fields decline. "The rigs will be for gas exploration and development and oil development," Saudi oil officials say they do not see any need to raise the country's oil production capacity beyond the current 12.5 million bpd as they have never come close to testing those levels and see oil production rising elsewhere. Saudi Arabia has rarely needed to pump more than 10 million bpd, even while making up for supply losses from Libya and Iran over the last two years. A surge in North American and Iraqi production has also taken pressure off Riyadh to spend billions of dollars more on boosting its capacity further.

Opec believed to overstate oil reserves by 70%, reserves depleted sooner: Analysts at a New York-based research firm believe that the Organisation of the Petroleum Exporting Countries’ (Opec’s) global oil reserve statements could be inflated by as much as 70%. Global oil prices are expected to dramatically spike from the end of the decade as a result of depletion, and continue to dramatically rise into the future as a result of oil-producing countries being unable to replace reserves fast enough, research specialist Lux Research analysts told Mining Weekly Online on Thursday. Researchers said the known oil reserves of Opec members would be depleted much sooner than thought, owing to many of the member countries producing much more oil than what they could sustain over the long term. Oil, gas and mining analyst Rick Nariani said Opec’s stated reserves skyrocketed from 878-billion barrels to 1.2-trillion barrels throughout the 1980s and 1990s, without any new significant discoveries being made. With cumulative oil production of 449-billion, the true reserves for Opec could be as low as 428.94-billion, which would result in global price shocks by 2020. He explained certain Opec members were deliberately increasing their stated oil reserves to flout Opec regulations, which allowed oil-producing countries to only produce oil at a rate calculated as a certain percentage of its total reserves.

2012 Liquid Fuel Supply - We now have December data for global liquid fuel production, which allows us to see the whole year. What has been striking about 2012 is that oil production has been remarkably flat, with no significant rise across the year (there was a small 0.25mbd/yr trend overall, but that was not statistically significant). This is in contrast to 2009-2012 when production has generally increased, except for the interruption of the Arab Spring, particularly the loss of Libyan production in early 2011.  Instead, 2012 looks more like 2005-2007 when production was pretty much flat, occasioning a huge spike in global oil prices.If this new 2012 production plateau continues, I would expect prices to rise again.  They have otherwise been on a gentle slide since the situation in Libya stabilized in mid 2011:

Does 2013 Herald an Oil Supply Crisis? - We are only a few weeks into the New Year and already the shape of the next 11 months is starting to form. To start, the U.S. Department of Energy sees two good years in front of us, with increases in domestic tight oil (also known as "shale oil") production and falling demand in Europe offsetting what now looks like a million barrel per day increase in global demand in each of the next two years. Demand for oil in the U.S., which has been falling pretty steadily in recent years, is forecast to increase a bit in 2013. The Paris-based International Energy Agency, however, is not so sure about the next two years. The Agency recently started talking about coming “tightness” in the oil markets as economic growth in China gives indications of starting to revive, increasing its demand for oil. If you want a really pessimistic forecast, you might be impressed by the Goldman Sachs chief commodity strategist who told a conference in Frankfurt that he would not be surprised to see oil prices reach $150 a barrel this summer from the current $112.

In Race for Burmese Energy, China has a Commanding Lead - Since Burma’s junta in March 2001 allowed a nominally civilian government led by President Thein Sein, who had previously served as a general and then prime minister under the junta, Western governments and energy companies have been flocking to the previously isolated country.   “Many multinational petroleum companies including Shell, BP, BG ConocoPhillips, Chevron and many others showed great enthusiasm to invest and keen interest to conduct upstream petroleum exploration in Myanmar’s petroleum sector.” Why might China have an edge in Burma? For a start, as recently as last August the U.S. State Department’s “Background Notes, “U.S. Relations With Burma,” Bureau of East Asian and Pacific Affairs Fact Sheet noted, “The United States continues to maintain a ban on all imports from Burma…” a number of which were only lifted prior to Obama’s visit. Besides the U.S., the EU and Canada also imposed economic sanctions on Burma, leaving among the major economies only China, India and South Korea to make significant investments in the country. China is the biggest foreign investor in Burma with pledges that exceeded $14 billion in the financial year ending in March 2011, according to official data, which is underwriting several multi-billion dollar pipeline projects among other things.

China consumes nearly as much coal as the rest of the world combined - Coal consumption in China grew more than 9% in 2011, continuing its upward trend for the 12th consecutive year, according to newly released international data. China's coal use grew by 325 million tons in 2011, accounting for 87% of the 374 million ton global increase in coal use. Of the 2.9 billion tons of global coal demand growth since 2000, China accounted for 2.3 billion tons (82%). China now accounts for 47% of global coal consumption—almost as much as the entire rest of the world combined. Robust coal demand growth in China is the result of a more than 200% increase in Chinese electric generation since 2000, fueled primarily by coal. China's coal demand growth averaged 9% per year from 2000 to 2010, more than double the global growth rate of 4% and significantly higher than global growth excluding China, which averaged only 1%.

Wind Energy Surpasses Nuclear as China's 3rd Largest Source of Electrical Power: Wind energy is now China’s third largest source of electricity, according to a report from People’s Daily Online. Wind power generation in China totalled 100.4 billion kilowatt-hours (kWh) in 2012, a 0.5% year-on-year increase and surpassing nuclear power generation, according to data presented over the weekend by the China Wind Energy Association (CWEA). Ambitious state renewable power targets and government support for wind energy manufacturers have fueled rapid development and growth of wind power capacity in China. China had 60.83 GW of installed wind power capacity online as of year-end 2012, according to CWEA. A national target calls for 100 GW of installed capacity by the end of 2015. The 2% total for 2012 indicates just how fast and far China has progressed in realizing the strategic renewable power goals set out in its latest Five-Year Plan, and just how much it continues to rely on thermal coal and large-scale hydro power to meet its fast-growing demand for electrical power.

Beijing is left fighting for breath as pollution goes off the scale - Sixteen of the world's 20 most polluted cities are in China. Now, after years of denials, officials admit they have a problem with smog - rather than 'fog'.  The smog was so thick that more than 50 flights were cancelled at Beijing Capital International Airport, causing chaos ahead of Chinese New Year, when city-dwellers travel to see relatives. Despite warnings from the authorities not to venture outside, we decided to don our pollution masks and take a quick trip to the shops. The warnings are increasingly common but are not observed by most residents who cannot afford – or stand – to spend days confined to their homes. Our masks are white Totobobo masks, from Japan, and we each have one tailor-cut to fit our face. On the street in the Sanlitun shopping district, we spotted a salesman with a big box of masks doing a brisk trade. There is a limited number of  official suppliers selling pollution masks that are recognised as being of high quality, and as most are running out of supplies, the trade in lower-quality fakes is booming. A trip out in the smog is rare for our family: my partner and I usually don’t let our children go out when the readings are very high. But “very high” is also a relative term. We have become aficionados of the China Air Quality mobile phone app, which displays data collected by the US Embassy in the Chinese capital.

Toxic Smog in Beijing Fueling Auto Sales for GM, VW - Bloomberg: With toxic smog engulfing Beijing and much of the rest of the country for weeks now, China is considering tighter vehicle curbs and emissions standards that match Europe’s. That could benefit General Motors Co. (GM), Volkswagen AG (VOW), and Hyundai Motor Co. in a market where sales are forecast to top 20 million units this year, according to industry researcher Intelligence Automotive Asia. The new rules are likely to spur many drivers to buy new cars, and unlike most domestic automakers, overseas companies can produce vehicles that comply with stricter global standards for emissions. “All foreign car and truck makers are capable of meeting very advanced emission standards and will have no problems,” said Ashvin Chotai, managing director of Intelligence Automotive Asia in London. “So it would put Chinese brands at a disadvantage.” Volkswagen is “well prepared” for stricter vehicle standards and has reduced the fuel consumption and emissions of its fleets by 20 percent since 2005 

China's Toxic Sky - Since the beginning of this year, the levels of air pollution in Beijing have been dangerously high, with thick clouds of smog chasing people indoors, disrupting air travel, and affecting the health of millions. The past two weeks have been especially bad -- at one point the pollution level measured 40 times recommended safety levels. Authorities are taking short-term measures to combat the current crisis, shutting down some factories and limiting government auto usage. However, long-term solutions seem distant, as China's use of coal continues to rise, and the government remains slow to acknowledge and address the problems. * Starting with photo #2, a four-part set of these images is interactive, allowing you to click the photo and 'clear the air', viewing a difference over time. [31 photos]

China's Pollution: The Birth Defect Angle -  Last week I mentioned the effects that China's latest pollution emergency was having on Chinese citizens and foreigners living there. Some related notes that have come in, about a problem increasingly recognized inside China as a national emergency. From a reader in the United States: I work in international adoption. One of the biggest changes in the last ten years is the precipitous drop in the number of infants with no identified medical needs available for adoption from China. This is a hugely contentious topic within the adoption community, and I'll spare you most of it. However, along with the disappearance of children with no identified medical needs, we have seen a huge increase in the number of children with identified medical needs. Every month, I place children (from 9 months to 14 years) who have cleft lip and/or cleft palate; missing fingers, hands, toes, parts of arms or legs; malformed internal organs; genetic disorders; etc. While any country with a population as large as China's will have some number of children born with birth defects, there are persistent rumors that the horrendous pollution in China has led to a huge increase such births in China. This, combined with the one-child policy, has led to orphanages being filled with special needs children, some of whom have very complex and difficult medical needs. In addition, children remaining in families often have less obvious medical issues that affect their ability to live full lives.

Air pollution from China reaches Japan, other parts of Asia - AJW by The Asahi Shimbun: Traces of China's air pollution have reached southwestern Japan, alarming residents and leading government officials to consider international cooperation to deal with the problem. Beijing has been suffering severe air pollution this winter, with thick smog blanketing the capital and concentrations of PM 2.5 pollutants exceeding hazardous levels on more than 15 days in January. Experts say China has failed to regulate air pollutants such as vehicle emissions, which have grown amid the country's rapid economic development. PM 2.5 stands for particulate matter with a diameter of 2.5 micrometers or less, which can reach deep into the lungs and blood vessels and cause asthma, heart disease and an increased risk of death. In Nagasaki Prefecture, PM 2.5 concentrations at four locations, including Sasebo and Isahaya, averaged 41 micrograms per cubic meter on Jan. 31, based on data available by 3 p.m. It exceeded the standard daily average of 35 micrograms set by the Basic Environment Law.

In China, Politically Connected Firms Have Higher Worker Death Rates - The body of the last miner was pulled from a shaft of Xiangshui Coal Mine in Guizhou province on a chilly Monday in November. The rescue workers had been searching for two days after a violent coal and gas explosion underground, which instantly killed 18 of the 28 miners on site. The final death toll was 23. The local newspapers, as usual, did not print any of their names. Coal mining in China is widely considered one of the world’s deadliest jobs. Government statistics record that in the first nine and a half months of last year, 1,146 Chinese coal miners died in work-related accidents, about four deaths per day—and most analysts assume official numbers represent significant underreporting. (For comparison, 17 American coal miners died in work-related accidents in 2011, according to the U.S. Department of Labor.) Still, not all Chinese coal mines are equally dangerous. Following the Xiangshui tragedy, Guizhou’s Deputy Governor Sun Guoqiang told local reporters, with surprising candor, that state-run mines are more deadly than private mines—because state-run firms can rely on connections and official favors to evade safety regulations. He called the situation “grave.”

Chinese hacked us, says New York Times - Hackers with possible ties to the Chinese military have repeatedly attacked the New York Times' computer systems over the past four months, possibly in retaliation for a series of stories that the paper ran exposing vast wealth accumulated by the family of outgoing premier Wen Jiabao, the newspaper has reported. The hackersgained entry to the newspaper's internal systems and accessed the personal computers of 53 employees including David Barboza, its Shanghai bureau chief and author of the Wen exposé, and Jim Yardley, a former Beijing bureau chief. An investigation by Mandiant, a cyber-security company hired by the New York Times, concluded that the hacks were likely part of an elaborate spy campaign with links to the country's military. The company traced the source of the attacks to university computers that the "Chinese military had used to attack United States Military contractors in the past", the Times said. Although the hackers gained passwords for every Times employee, Mandiant found that they only sought information that was related to the Wen story. The Times said it worked with telecommunications company AT&T and the FBI to trace the hackers after AT&T noticed suspicious activity on the paper's computer networks on 25 October, one day after the article appeared in print. A later analysis concluded that hackers initially broke into Times computers on 13 September when reporting for the Wen story was in its final pre-publishing stages.

Why China Is Holding All That Debt - What does it mean that China is making a lot of noise about the Federal Reserve’s loose monetary policy? Via Reuters: A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar. Asked whether he was worried about the dollar, the chairman of China’s sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: “I am a little bit worried.” “There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place,” Li said. At first glance, this seems like pretty absurd stuff. Are we really expected to believe that China didn’t know that the Federal Reserve could just print up a shit-tonne of money for whatever reason it likes? Are we really expected to believe that China didn’t know that given a severe economic recession that Ben Bernanke would throw trillions and trillions of dollars new money at the problem? On the surface, it would seem like the Chinese government has shot itself in the foot by holding trillions and trillions of dollars and debt instruments denominated in a currency that can be easily depreciated. If they wanted hard assets, they should have bought hard assets.

China Hits Key Demographic Ceiling As Working-Age Population Now Declining - The meme of the moment remains China's 'rotation' to urbanization as the new growth engine, but as SocGen's Wei Yao notes, while this shift from farmers to manufacturers has raised productivity, urban population growth is set to decelerate rapidly in the current decade. Yao comments that the impact of urbanization has been "misunderstood and overstated by the market" as it is now official that China’s working-age population has peaked and is starting to decline. China’s National Bureau Statistics announced that the share of population aged between 15 and 60 years old declined for the first time in 2012 by 0.6ppt to 69.2%. This slower labor growth brings China ever closer to the so-called "Lewis Turning Point"  at which excess labor in the agriculture sector is fully absorbed into modern sectors - leading to no or negligible productivity improvements. The bottom line is that hopes for "new urbanization" appear overdone, given the demographic (and productivity) headwinds and China's focus should shift to social safety nets and not torrid physical construction.

China approaching the turning point - CHEAP Chinese labour makes the world go around. It supplies developed markets with cheap goods which, to some extent, make up for stagnating wages. It also keeps the Chinese economic model humming by providing the foundation for growth. But how long can it last? IMF economists Mitali Das and Papa N’Diaye, in a new working paper, reckon only about another decade. When an economy first becomes industrialised it grows very fast by importing foreign technology and employing capital and plentiful, cheap, unskilled labour from the farm. But after a while the extra agricultural labour is put to work and wages start to rise. This makes firms less profitable and they have to come up with their own technology to keep growing. This shift is known as the Lewis Turning Point, named after Nobel-Prize winner Sir Arthur Lewis. According to the IMF economists China is not there, yet. But the glut of labour peaked in 2010 and, as the population ages, it’s all down-hill from here. They estimated that if things stay as they are, China will reach the Lewis Turning Point between 2020 and 2025.

What to make of the contradictory China manufacturing PMIs - So, the official Chinese PMI is down a bit and the HSBC/Markit PMI is up a lot. It seems like only yesterday we were puzzling over the conflicting signals sent by the two different versions of this leading indicator… Actually, it was getting on for a year ago. And back then, the HSBC/Markit Economics one was showing decelerating growth while the official survey was showing the opposite. We explored the differences between the two surveys at the time here, but the short version is that the HSBC one represents more coastal, private sector and export-oriented manufacturers than the official one, which is more representative of the big state-owned enterprises. There’s also the version that says: they’re just a leading indicator and they only represent changes in growth, not absolute rates of change, so let’s not get too hung up on small changes anyway, okay? Well, sure. But it’s hard not to wonder (at least if you’re a China PMI tragic) why the two surveys, after moving in the same direction for the last several months or so, are now sending contrasting signals again. Both are still above the 50 mark of trend growth, but where the official one fell to 50.4 in January from 50.6 in December, the HSBC/Markit PMI is soaring upwards to 52.3 from 51.5 the previous month:

As China Builds, Cambodia's Forests Fall - China's demand for natural resources is being felt in a big way in Cambodia. Illegal logging and economic land concessions are threatening Cambodia's dwindling forests, which now echo the sound of chainsaws. Prey Lang forest — an eight-hour journey north and east of the capital, Phnom Penh — is one of the forests where illegal loggers see money signs on the trees. "It's just like in the United States in the 1960s, when every single redwood tree was a target for illegal logger[s]," says Suwanna Gauntlett, head of the Phnom Penh office of Wildlife Alliance. "It's the same thing in Cambodia. It's a natural resource worth a lot of money."And many people with money — particularly China's growing middle class — are eager to spend it on luxury hardwood furniture, says Tracy Farrell of Conservation International.

China’s brokerages turn shadow banks - Chinese securities brokerages have emerged as a crucial new link in the country’s shadow banking industry, a development that underscores how financial risks are spreading more widely in China. People familiar with brokerages say they got started in shadow financing around the middle of last year, taking control of funds that banks wanted to remove from their balance sheets. New industry data confirm this development and reveal a dramatic increase in such activity in the fourth quarter. For 2012 as a whole, shadow financing via brokerages appears to have increased almost 600 per cent. Western rating agencies have warned that a rapid rise in off-balance-sheet banking activity is a threat to China’s financial stability. But Chinese regulators have countered by saying the risks are manageable. With the country’s financial system long dominated by state-run banks, they also view shadow lending as a byproduct of their attempts to unleash more market forces in the allocation of capital in China. The Chinese securities association said last week that brokerages now manage almost Rmb2tn ($320bn) of so-called entrusted funds – funds that banks have transferred to brokerages so they are off their balance sheets – seven times more than at the start of 2012.

Tripling in Debt to $1.7 Trillion Drags on Economy - Chinese companies are spending more than ever to service debt after their borrowing almost tripled over five years, prompting strategists to warn of rising default risk and a threat to economic growth. Total short- and long-term borrowing by 3,895 publicly traded non-financial companies rose to almost $1.7 trillion in their latest filings, from $604 billion at the end of 2007, data compiled by Bloomberg show. Financing costs, including interest, on all forms of debt climbed to the highest level as a percentage of gross domestic product last year, according to Sanford C. Bernstein & Co. Bernstein says that means less cash for investment to fuel the world’s second-largest economy, while Royal Bank of Scotland Group Plc says the threat of defaults will hold back interest- rate liberalization. The average 10-year yield for top-rated company bonds is near a 13-month high at 5.27 percent, compared with the 2.6 percent yield in a Bank of America Merrill Lynch global corporate index. “There’s just a lot more debt in China today than there was really ever in the past, relative to nominal GDP,”

China Averts $482 Billion in Local Bank Defaults via Massive Rollover Scheme; Extend-and-Pretend Chinese Style -- The Chinese banking system is insolvent. Of course, the entire global banking system is insolvent, but today's spotlight is on China. Please consider China averts local government defaults. Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012, an indication of the immense challenge facing China in working down its debt load. Local governments borrowed heavily from banks to fuel China’s stimulus programme during the global financial crisis and are now struggling to generate the revenue to pay them back, a shortfall that could cast a shadow over Chinese economic growth.  Banks extended at least Rmb 3tn ($482bn) – and perhaps more – of the roughly Rmb 4tn in loans plus interest that local governments were to have paid them by the end of last year, according to Financial Times calculations based on official data. Since details on refinancing and interest rates are lacking, the reported $482 billion is undoubtedly on the low side. The key point is that massive rollovers were needed to stave off defaults.

As China’s banking regulator warns of dangerous pileup of bad loans, bank shareholders shrug - According to Chinese media reports, Shang Fulin, the chairman of the Chinese Banking Regulatory Commission, raised concerns at a mid-January meeting that over half of the 67 trillion yuan of loans held by Chinese financing institutions have been made to risky borrowers such as local government financing vehicles, property developers and industries with overcapacity. Shang added that such loans need to be “heavily fortified” and require “classified policies.” Back in 2009-2010, to mitigate the effects of the global crisis, Beijing officials encouraged banks to lend money to local governments and real estate developers to fund make-work projects that were either unnecessary or not yet needed, leading to a pileup of municipal debts. Schemes such as this replica of Manhattan in a city near Beijing and this huge theme park in Tibet became commonplace. The credit boom also encouraged developers to build too many apartment complexes and shopping malls. But despite the CBRC admitting that such projects are risky and that Chinese financial institutions were exposed to that risk, investors shrugged off the warning. The Hong Kong-traded shares of ICBC, China’s biggest bank, rose 0.5% today.

Homeless, jobless forced to take refuge under Golden Arches - Japan’s long-moribund economy has spawned a new breed of jobless and homeless people dubbed “makudo nanmin,” or refugees at McDonald’s. Mostly in their 30s and 40s, they typically spend the night at a McDonald’s restaurant or other late-night establishments. “It takes 1,000 yen ($11) or so if I sleep at an Internet cafe,” a 37-year-old woman said. “I can stay at a McDonald’s for 100 yen over a cup of coffee.”Many of the makudo nanmin graduated from school during the employment ice age from the mid-1990s to the mid-2000s, joined the labor market as temporary workers and eventually lost their jobs. The hamburger chain they grew up with has become a place where these economically disadvantaged young people take a temporary rest amid constant worries about their futures. They are most conspicuous in Osaka, which attracts young job-seekers with its lower cost of living compared with Tokyo. About 45 percent of workers in Osaka Prefecture are hired as temporary employees, and are vulnerable to job cuts when the economy stalls. The figure is far higher than the national average.

Japan okays $1-trillion budget for 2013 - Japan’s cabinet on Tuesday endorsed a record-high 92.6 trillion yen ($1.02 trillion) general budget for the coming fiscal year that would increase defence spending for the first time in 11 years and boost public works projects. The 4.75 trillion yen ($52.5 billion) in proposed defence spending, up 0.8 per cent from last year, is partly aimed at beefing up Japan’s coastal and marine surveillance around islands also claimed by China and Taiwan. Prime Minister Shinzo Abe has pledged to do whatever it takes to get the economy out of recession and restore sustainable growth, through both strong stimulus spending and monetary easing. Including a supplementary budget to help cover costs through March 31, the government has set its spending plans through March 2014, Chief Cabinet Secretary Yoshihide Suga told reporters. Read more:

Japanese budget seems optimistic - The Japanese Parliament reconvened today. Details of their proposed budget for the fiscal year starting 1st April have been released. Total expenditures are expected to be Yen 92.6 Tn, with new government bond sales to amount to Yen 42.9 Tn and with tax revenues of Yen 43.1 Tn. The numbers do not add up, suggesting that further revenue receipts will come in. According to the budget, it will be the 1st time in 4 years that tax revenues exceed funds raised through the sale of bonds. The Japanese have assumed that the economy will grow by +2.5% next fiscal year, up from +1.7% previously, resulting in higher revenue generation. Nominal growth is expected to be +2.7%, up from +1.9% previously – no 2.0% inflation predicted there. Indeed, CPI is expected to rise to just +0.5% in the next fiscal year, though the 1st positive figure since 2008. GDP has been reduced to +1.0%, down from +2.2% previously, for the current fiscal year. The government intends to increase income tax and inheritance taxes on the wealthy. I believe, as do most analysts, that the governments growth targets are optimistic and, as a result, their assumption for tax revenues. Indeed, I believe that the eventual outcome is likely to be (materially?) worse. The government’s aspirations of a primary budget surplus in fiscal 2020 – well, lets just say thats optimistic, as well. Japan intends to sell its 1st inflation linked bond in almost 5 years;

Yi Warns on Currency Wars as Yuan Close to ‘Equilibrium’ - China’s foreign-exchange regulator urged Group of 20 nations to improve collaboration to avoid any so-called currency wars while signaling he’s comfortable with the value of the yuan. On a global level, there needs to be “better communication and coordination” on foreign exchange among the G-20, Yi Gang, who is also a deputy governor of China’s central bank, said in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland, on Jan. 26. “Right now, it is pretty much close to the equilibrium level,” he said, referring to the Chinese currency’s exchange rate. Japanese Economy Minister Akira Amari said in Davos that his nation is trying to defeat deflation rather than weaken the yen, after Prime Minister Shinzo Abe’s push for laxer monetary policy sparked a slide in the currency. His comments on Jan. 26 followed a week in which German and Canadian policy makers joined a worldwide chorus highlighting a recent plunge in the yen as a worry.

Vital Signs Chart: Dollar Surging Against the Yen - The dollar is surging against the yen. One U.S. dollar buys 90.87 yen, the highest level since June 2010. The dollar has risen 13% against the Japanese currency over the past three months. The yen has fallen on expectations of more action by Japan’s central bank to ease monetary policy, as government leaders move to fight deflation and stimulate growth.

Currency Wars Heating Up As Taiwan, Korea And China Fire Warning Shots - While the overnight session has been relatively quiet, the overarching theme has been a simple one: currency warfare, as more of the world wakes up to what the BOJ is doing and doesn't like it. The latest entrants in global warfare: Taiwan, whose central bank overnight said it would step in the FX market if needed, then Thailand, whose currency was weakened on market adjustment according to Prasarn, and of course South Korea, where the BOK said that global currency war spreads protectionism. Last but not least was China which brought out the big guns after the PBOC deputy governor Yi Gang "warned on currency wars." To wit: "Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows,” Yi, who is also head of China’s foreign-exchange regulator, told reporters. “Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?” “A currency war, a series of tit-for-tat competitive devaluations, would trigger trade protection measures that would damage global trade and therefore growth globally,”  “That would not be good for any country with a stake in the global economy.” Which brings us to the fundamental question - if everyone eases, has anyone eased? And is there such a thing as a free lunch when central banks simply finance global deficits while eating their soaring stock market cake too? The answer, of course, is no, but we will cross that bridge soon enough.

South Korea Declares Int'l Currency War on Japan - Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency: South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.

Bank Indonesia Steps Up Intervention to Narrow Rupiah Price Gap - Bloomberg: Indonesia’s central bank stepped up intervention in the past two weeks to support the rupiah after an offshore fixing for the currency sank to the biggest discount to the onshore spot rate in almost 16 months. Bank Indonesia acted to boost dollar supply in the market and revive confidence in the rupiah, which lost 0.4 percent this month to extend a six-quarter slide, and narrow the gap between local and overseas prices, said Hendar, executive director for monetary policy. The monetary authority sees room to adjust foreign-exchange rules to temper excess dollar demand and stabilize the rupiah, he said, without elaborating.“We are increasing the supply of dollars in the currency market to restore market confidence,” Hendar, who goes by only one name, said in a telephone interview from Jakarta yesterday. “This is in line with our effort to not have a dual foreign- exchange market. We are leaning toward seeing a narrower gap between the rupiah’s onshore and offshore levels.” The difference between rupiah quotes within Indonesia and those outside reached 2.6 percent on Jan. 11, the widest since Sept. 22, 2011.

Currency Wars in the Era of Unconventional Monetary Policies - Interpreting Monetary Policy’s Impact on Exchange Rates (and Economic Activity) Over a week ago, the Bundesbank President Jen Weidmann warned against the politicization of Japanese monetary policy, the BoJ was pressured for more expansionary policy. [1] Nouriel Roubini warned that a currency war could lead be self-defeating as each country’s laxer monetary policy merely resulted in higher commodity prices. [2] I have been wondering exactly how expansionary monetary policy can influence exchange rates in an era of unconventional monetary policy. And even if it can’t affect exchange rates, is that a reason for not pursuing expansionary policy. Several months ago, the Economist noted that the usual determinants of (advanced country) exchange rates no longer seemed to affect currency values in the traditional fashion ( Currencies: The weak shall inherit the earth):...Other things being equal, the increase in money supply that a bout of quantitative easing brings should make that currency worth less to other people, and thus lower the exchange rate. Other things, though, are not always or even often equal, as the history of currencies and unconventional monetary policy over the past few years makes clear. In Japan’s case, a drop in the value of the yen in response to the new round of QE would be against the run of play. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started.

Behind The Disingeneous Finger-pointing At Japan – bad macro policy in Europe - Japan has been put in the stocks by bien-pensant global political opinion. At the head of those throwing rotten fruit at the Japanese government, Bundesbank President and ECB board member Jens Weidmann. He has accused Prime Minister Abe of attacking the independence of the Japanese central bank and politicising the exchange rate, warning darkly of the danger of a round of competitive currency devaluation. This is wrong on a whole number of counts and says much more about the failure of the ECB to do enough to resuscitate the European economy than it does about the supposed errors of Mr. Abe’s ways. What has caused this ire? The Bank of Japan has announced that it is doubling its inflation target to 2% with immediate effect and to this end has committed to an open-ended program of monthly asset purchases. Alongside this the government has decided on a(nother) fiscal stimulus programme representing some 2.5% of GDP.

Protectionism During Recessions: Is This Time Different? - Recessions are a time of economic uncertainty and retrenchment.  In the absence of a clear path to recovery and the cooperation of other states, countries turn inward and their governments pursue policies to ameliorate the effects of the economic downturn. One set of policy instruments mobilized during recessions is trade protectionism, or the raising of trade barriers that provide a defense against competition from foreign goods and that secure advantageous market access for domestic firms. This brief essay examines the link between protectionism and recessions, with particular attention to the current global recession and the role of international institutions, governments, and firms. One of the notable features of this particular recession is that that dreaded specter of protectionism did not materialize, and in this sense, the current global recession is different in its impact on trade policy and global trade more broadly. This essay also considers how future IPE scholarship, especially in the examination of policy substitutes and of firm-level preferences and behavior, may further advance our understanding of trade policy during economic downturns.

India's fiscal deficit widens to $76 billion in April-December — India's fiscal deficit widened to Rs.4.07 lakh crore (around $76 billion) in the first three quarters of the current financial year, government data showed Thursday. The deficit during April-December period is almost 79 percent of the budgetary estimate of Rs.5.14 lakh crore for the entire financial year ending March 31, 2013. In the union budget for 2012-13 presented in March last year, the then finance minister and now President Pranab Mukherjee had pegged the total budget deficit at Rs.5.14 lakh crore, or 5.1 percent of the country's gross domestic product (GDP). Considering the trend so far it would be difficult to meet the 5.1 percent fiscal deficit target.

Bill Gates is naive, data is not objective - by mathbabe - In his recent essay in the Wall Street Journal, Bill Gates proposed to “fix the world’s biggest problems” through “good measurement and a commitment to follow the data.” Sounds great! Unfortunately it’s not so simple. Gates describes a positive feedback loop when good data is collected and acted on. It’s hard to argue against this: given perfect data-collection procedures with relevant data, specific models do tend to improve, according to their chosen metrics of success. In fact this is almost tautological.As I’ll explain, however, rather than focusing on how individual models improve with more data, we need to worry more about which models and which data have been chosen in the first place, why that process is successful when it is, and – most importantly – who gets to decide what data is collected and what models are trained.

Cultural vouchers in Brazil - This old idea from Alan Peacock will be implemented: Despite the economic crisis, Brazil announced Thursday it planned to give workers here a 50-real ($25) monthly stipend for cultural expenses like movies, books or museums. “In all developed countries, culture plays a key role in the economy,” Culture Minister Marta Suplicy said in an interview on national television. She recalled that popular former president Luiz Inacio Lula da Silva created “Bolsa Familia” (Family Grant), the program of conditional cash transfers to the poor which his successor, President Dilma Rousseff, expanded. “Now we are creating food for the soul; Why would the poor not be able to access culture?” the minister said. Suplicy said the new incentive, approved by Congress and endorsed by Rousseff late last month, is expected to be introduced some time this year. Here is a bit more,

Canadian Housing Bubble: The Most Overvalued Market in the World - While the mainstream media is only now beginning to acknowledge a dip in real-estate price evaluations in Canada. We have been raising the flag about this for over a year. According The Ecconomist, Canada’s housing market is the most over-valued in the world when analyzing its rents and income to price. “Overvaluation is especially marked in Canada, particularly with respect to rents (78%) but also in relation to income (34%). Mark Carney, the country’s central-bank governor, who is soon to jump ship to join the Bank of England, where he takes over from Sir Mervyn King in July, may have shown good market timing with his move to London as well as a deft hand in negotiating his lavish remuneration.” Any analyst who believes this is only a soft correction and that prices will eventually go back up is not on the right track. Here’s why.

What is going on with the Bank of Canada's balance sheet? - From zerohedge: Mark Carney Leaves Canada With 'Stealth QE' Rising At Fastest Pace Since 2009: As Mark Carney steps aside from his role at the Bank of Canada to undertake all manner of easy money in the UK, we thought a reflection on the 'stealth' QE that he has been engaged with, very much under the radar, in the US' neighbor-to-the-north was worthwhile. It seems quietly and with little aplomb, Carney's BoC has grown its balance sheet by over 21% YoY - the most since 2009. If that was not enough to make someone nervous, the quantity of Canadian government bonds on the BoC's balance sheet has grown at a remarkable 46% YoY! All of this has taken place during a time when 'supposedly' the Canadian economy has been reasonably strong and foreign demand for debt high. With Canada's CAD267bn debt due in 2013, we suspect this 'stealth' QE will continue to rise. Sure enough, something is going on. [Updated - maybe Operation Twist?] Here is the asset side:

Prediction: Canada will slip back into recession in 2013 - There are  many reasons Canadians might feel hopeful about 2013. Unemployment is low and falling. As other nations groan under the weight of collapsed banks, ours deliver healthy earnings. Our federal government is fiscally better poised to cope with our aging population. Don’t be fooled. The worst is yet to come. Recent anemic growth achieved recently across the developed world—including Canada—rests on a precarious foundation. The forces undermining it are so numerous that at least one of them is likely to tip Canada into a mild recession this year. The imbalances that sparked the 2008 crisis remain largely unaddressed. Western governments at the time undertook bold fiscal and monetary steps that averted what otherwise might have become debilitating financial panics. Central banks printed money with abandon while governments shovelled it into failed banks and ran up massive deficits. All this was predicated on the philosophy that immediate growth must be achieved by any means necessary. The result has been to transfer debt from private balance sheets to public ones, says Saumil Parikh, a managing director at bond giant Pacific Investment Management Co. The cost is that we’re “endangering future economic growth to deliver outcomes today.”

IMF hits Argentina with first-ever censure of a country - The International Monetary Fund has censured Argentina for failing to supply accurate economic data, the first time the global crisis lender has taken such an action against a member. The IMF Executive Board found that Argentina's efforts to meet its demands for better GDP and inflation data have "not been sufficient. As a result, the Fund has issued a declaration of censure against Argentina." The censure decision opened the way to Argentina possibly losing its voting rights at the IMF, or even losing it membership, AFP reported. But the Executive Board put off that decision and gave Buenos Aires another eight months to resolve the problem before it takes further action. The Argentine government has until September 29 to meet its requirements, and IMF Managing Director Christine Lagarde will then have to report on the issue to the board by November 13. "The Fund stands ready to continue its dialogue with the Argentine authorities to improve the quality" of the official data, the board said in a statement.

Visa policies and multilateral resistance to migration - Migration policy is a hot topic, but our empirical understanding of its is somewhat wanting. This column introduces new estimation techniques for identifying the impact of immigration policies. When policies are imposed on potential migrants, not only is migration affected between the migrant’s origin country and the hoped-for destination, such policies also affect migration to alternative destinations. These effects on alternative destinations constitute an externality that is not typically taken into account by migration researchers. Disregarding multilateral resistance to migration leads to an underestimation of the effect of bilateral migration policies, generating potentially severe policy mistakes.

The multiplier and the rate of return on aid - Critics of “austerity” are often weak or a bit mumbly on what is the relevant alternative or counterfactual.  When it comes to the U.S., the relevant alternative is borrowing more, but in many cases, such as in the European periphery, the alternative is/was more aid. So, in these cases, a multiplier of one means that a dollar of aid — the alternative to the fiscal consolidation — is worth a dollar.  I find that easy to believe.  It’s not really a claim about fiscal policy or Keynesian economics. A multiplier of 1.4 means that a dollar of aid brings $1.40 in benefits.  Imagine receiving aid, and not just benefiting from the dollar, but avoiding a fire sale of your assets or investing the money wisely or maybe just avoiding a civil collapse.  That’s more of a stretch, but also not outside the realm of the possible. As the IMF becomes more critical of austerity, the IMF therefore should believe in higher rates of return to aid.  But does it?

The Handmaiden of Capitalism v. the ‘Swamp’ Denizen of Detroit -- William K. Black Heidi Moore is the finance editor for The Guardian. She has also worked for the Wall Street Journal and Marketplace. Two of my columns have discussed the economic myths that Moore embraces to champion austerity. My first column cited her pro-austerity columns as an example of one of the central problems we face globally. Many prominent individuals who consider themselves progressives embrace austerity. Indeed, many socialists in Spain and Greece designed and inflicted austerity – producing Great Depression-level unemployment in both Nations. Much of the German left’s leadership supports austerity. The Guardian considers itself a progressive newspaper, but its financial editor is an austerian whose non-ironic, self-selected tag is “Handmaiden to Capitalism.” (Derivative of Forbes’ self-description: “Capitalist Tool.”) I entitled the column: “Deprogramming Progressives Indoctrinated into Supporting Austerity.” My column quoted extensively from Moore’s arguments in favor of austerity and explained why her arguments, e.g., that a Nation with a sovereign currency is just like a household in terms of budgets and that cuts in U.S. federal spending were an essential response to the Great Recession were examples of harmful economic myths. I didn’t believe that I could convince Moore to give up her passionate embrace of austerity. She has continued to push for austerity as she watched it devastate the Eurozone, so I knew I had no chance of changing her views any time soon. My second column focused on a January 4, 2013 Moore column on the so-called “fiscal cliff”, austerity, and the platinum coin. I entitled it: “The Most Embarrassing Financial Column of 2013.”

NEP’s William Black in Davos - William Black’s Speech at the 2013 Public Eye Awards in Davos Switzerland.

Analysis: In Davos, world seeks U.S. engagement - From Syria to Mali, from Iran to the South China Sea, the United States' reluctance to be drawn into conflicts far from its shores was a leitmotiv of geopolitical debate at this year's World Economic Forum in Davos. The absence of top Obama administration officials from the annual brainstorming and networking event in the Swiss mountains symbolized to some a perceived pullback from global leadership, even though it was Inauguration Week in Washington. Leaders of Russia, Germany, Britain, Italy, South Africa, Jordan and many other nations made the journey. U.S. bankers, business leaders and academics were out in force, but the most senior U.S. government officials were a Treasury undersecretary, an assistant secretary of state and the outgoing U.S. Trade Representative. Delegates debated whether and when China would overtake America as the number one economy and global power -- estimates ranging from the early 2020s to never -- and what troubles were brewing while Washington remains in hands-off mode. The ground rules of many Davos panels preclude identifying the speakers. One minister, shielded by that anonymity, lamented the dangers of "a world without American leadership". Without U.S. involvement, one session was told, Syria would become a "Somalia on the Mediterranean", with Middle East states waging a proxy war via sectarian factions, some of which would export militant violence to the neighbors and to Europe.

Video: Chrystia Freeland Interviews Larry Summers

You keep using that word. I do not think it means what you think it means. This year’s Davos was all about tail risk — or, more to the point, the absence thereof. The ECB’s Mario Draghi said — more than once — that he had “removed the tail risk from the euro”. His colleague Ignazio Visco went almost as far, saying that only a few tail risks remain. The EU’s Olli Rehn talked about how there’s “no tail risk” any more. The IMF’s Zhu Min said that “In Europe, the tail risk has been moved off the table”, which was exactly the same language also used by Ray Dalio. Bank of America CEO Brian Moynihan said that “euro tail risk is now sorted”. The FT editorialized about the best policy response when “the tail risk of renewed financial chaos is reduced”. Even Nouriel Roubini declared that tail risks have declined in the past six months, although they haven’t gone away. And that was just the on-the-record comments: off the record, many more people, including at least one official US representative, were saying the same thing. It was enough for both incoming Bank of England chief Mark Carney and UBS’s Alex Weber to start cracking jokes about how tail risks had been reduced on Wednesday and downright eliminated by Friday. As Stephanie Flanders says, Davos wouldn’t be Davos if people weren’t constantly talking about the need to avoid complacency — but for once, this year, “there seemed a genuine risk of it breaking out”.

A perilous journey to full recovery - Martin Wolf - “We have avoided collapse, but we need to guard against any relapse. 2013 will be a make-or-break year.” These were the words of Christine Lagarde, managing director of the International Monetary Fund, at the World Economic Forum last week. She was right. The business people, policymakers and pundits in Davos breathed a sigh of relief. For the first time since 2007, the focus of the discussion was not upon financial calamity. Yet the fact that the economies of the high-income countries have not fallen off their rickety bridge does not guarantee a swift return to growth. That may well come. But it is not yet ensured.  Confidence has improved. One indicator is the spread between the London interbank offered rate (Libor) and the overnight indexed swap rate (OIS), which offers a measure of the risk of default in the lending of banks to one another. These spreads have fallen to just 10 basis points in euros and 16 in US dollars. Stock markets have also recovered strongly from troughs in March 2009, particularly in the US. Spreads between the yields on sovereign bonds of vulnerable eurozone sovereigns and those on German Bunds have fallen substantially: in Italy, the spread fell from 5.3 percentage points in late July 2012 to 2.6 percentage points on January 25 2013; in Spain, it fell from 6.4 to 3.4 percentage points. As confidence in sovereigns has improved, so has that in banks. (See charts.)

Grand Mal Economic Seizures - Brad DeLong - Industrial market economies have been suffering from periodic financial crises, followed by high unemployment, at least since the Panic of 1825 nearly caused the Bank of England to collapse. Such episodes are bad for everybody – workers who lose their jobs, entrepreneurs and equity holders who lose their profits, governments that lose their tax revenue, and bondholders who suffer the consequences of bankruptcy – and we have had nearly two centuries to figure out how to deal with them. So why have governments and central banks failed? There are three reasons why the authorities might fail to restore full employment rapidly after a downturn.

  • (I) For starters, unanchored inflation expectations and structural difficulties might mean that efforts to boost demand show up almost entirely in faster price growth and only minimally in higher employment. That was the problem in the 1970’s, but it is not the problem now.
  • (II) The second reason might be that even with anchored inflation expectations (and thus price stability), policymakers do not know how to keep them anchored while boosting the flow of spending in the economy.
  • (III) So we remain far short of full employment for the third reason. The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly.

Quelle Surprise! IMF Always Prescribes the Same Austerity Hairshirt - Yves Smith - A new paper by Mark Weisbrot and Helene Jorgensen of CEPR have managed to unearth a dirty little secret: the IMF doesn’t just prescribe broadly similar policies in its Article IV consultations, it looks like its hands out the same medicine. We’ve used the metaphor of breaking countries on the rack, but cutting them to fit a Procrustean bed might be more apt.  Their new paper describes the scope of their review: The IMF makes policy recommendations to European countries through its Article IV consultations and resulting papers. These are the bilateral part of the IMF’s surveillance responsibility…The IMF’s Article IV consultations provide recommendations on a broad range of issues including fiscal, monetary, and exchange rate policy; health care and pensions; labor market policy (including wages, unemployment compensation, and employment protections); and numerous other policy issues. This paper examines the policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011 Part of what they found is unsurprising: the IMF loves telling client states to shrink spending and government overall, and they are particularly keen on cutting social safety nets. But their advice is even more cookie-cutter than you might anticipate

Roubini: Five reasons to be gloomy about the world economy in 2013 -  Painful deleveraging—less spending and more saving to reduce debt and leverage—remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just the Eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the Eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries. With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks—the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank—have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government.

Why the Elites Are Losing Sleep -  Davos remains, as Foreign Policy Group CEO David Rothkopf put it, “the factory in which conventional wisdom is manufactured.” And so it is in that spirit that we offer this year’s best takeaways, factory-direct. We are now in historically uncharted territory in terms of how much central bankers are doing, in lieu of real political action, to try to boost the global economy. They are buying up trillions of dollars’ worth of bonds and buoying world markets in the process. Apart from a few worried Germans, nobody was talking about this last year. Now everyone is fretting about how the Fed, the European Central Bank (until recently), the Bank of Japan and even Chinese authorities have distorted the prices of assets from stocks to bonds to real estate, quite possibly laying the foundation for a market crash or, in the longer term, hyperinflation. “Central bankers can buy time, but they can’t fix the world’s underlying economic problems,” said UBS chairman and former Bundesbank head Axel Weber, who worries that easy money and low interest rates are covering up the fact that most rich countries still need to pay down debt and create a lot more jobs. “We’re buying short-term fixes at the expense of future generations.”

Too early to celebrate ECB's balance sheet reduction - The ECB has been receiving praise for shrinking the Eurosystem balance sheet since last summer. MarketWatch: - The euro notched an 11-month high versus the dollar Friday, as European banks prepared to pay back a larger-than-expected chunk of cheap, three-year loans provided by the European Central Bank. Most of the reduction is from the MRO and LTRO loan repayments by EMU periphery banks. These were funds borrowed by banks to replace lost sources of funding, including massive losses of deposits. But before congratulating Mr. Draghi on this achievement, it is important to note that the ECB has simply swapped a portion of its on-balance sheet exposure for an unlimited off-balance sheet commitment via the Outright Monetary Transactions program. Consider Spain for example. Fundamentals of the stretched financial system, collapsing property values, and record unemployment have hardly changed. There is certainly no fundamental justification for the spectacular collapse in sovereign yields (chart below), except for the fact that the ECB is committed to buy unlimited amounts of this paper should Spain request it. Just because off-balance sheet exposure is not visible doesn't make it any less real.

A declining but distorted euro M3 -- The release of December’s euroland M3 and lending data on Monday got a bit more attention than usual following last week’s larger-than-expected LTRO repayments. Could, we wondered, there be further evidence of the regions financial markets are healing? The picture was mixed, with a number of likely distortions confusing things, but on the whole it was probably a bit more positive than negative. But, first, let’s sum up: year-on-year growth in the the broad money supply measure, known as M3, dropped to 3.3 per cent from 3.8 per cent in November, quite a bit below the consensus of 3.9 per cent from analysts polled by Reuters. On the loans side, it wasn’t great news. There was a sharp and worrying drop in loans to non-financial corporates across the region (although lending varied very much by country, with a core/periphery split). Kit Juckes at Soc Gen argues that with the eurozone’s core problems as far from being solved as ever, exacerbated by a rising cost of credit, the current calm in the markets can only be temporary (our emphasis): Loans to non-financial companies fell Eur 51bn, a record monthly fall, and the annual percentage fall is 2.3%. This is a potent reminder that even if the Euro Zone crisis is ‘solved’, deep-seated problems remain. The ECB has indicated a clear reluctance to ease policy further, and as LTRO loans are repaid, we are seeing higher Euro rates and de facto tighter ECB monetary policy.

Eurozone banking union is deeply flawed - Largely ignored by public opinion, the European Commission has drafted a new directive on bank resolution which creates the legal basis for future bank bailouts in the EU. While paying lip service to the principle of shareholder liability and creditor burden-sharing, the current draft falls woefully short of protecting European taxpayers and might cost them hundreds of billions of euros. Further lobbying by banks is likely to make things only worse. The new banking union plans may thus turn out to be another large step towards the transfer of distressed private debt on to public balance sheets – something which pleases the capital markets and may help to explain their new confidence.The European Central Bank has already provided extra refinancing credit to the tune of €900bn to commercial banks in countries worst hit during the crisis, as measured by its payment system known as Target. These banks have in turn provided the ECB with low-quality collateral with arguably insufficient risk deductions. The ECB is now in the same position as private investors. It is guaranteeing the survival of banks loaded with toxic real estate loans and government credit. So the tranquillity is artificial. Ultimately, the ECB undermines the allocative function of the capital market by shifting the liability from market agents to governments.

Euro periphery draws back €100bn - Almost €100bn of private funds flowed back into the eurozone’s periphery late last year after action by the European Central Bank encouraged reinvestment in the crisis-hit countries. The scale of the net inflows, equivalent to about 9 per cent of the economic output of Spain, Italy, Portugal, Ireland and Greece according to calculations by ING, the Dutch bank, highlight the revival in investor confidence in Europe’s monetary union after Mario Draghi, ECB president, pledged to preserve its integrity. The return of capital has encouraged policy makers to believe the eurozone crisis is over, with Mr Draghi this month pointing to “positive contagion” in the region. The euro has also moved sharply higher. Adding to evidence of a turn in sentiment, figures from the US Commodity Futures Trading Commission showed traders were last week more bullish on the euro than they have been in 18 months. Net long positions on the euro reached their strongest level since the summer of 2011. However, the private inflows into the bloc’s periphery remain modest compared with far larger outflows earlier in 2012, when many financial markets feared a eurozone break-up. Total net private inflows into the periphery countries totalled €93bn in the last four months of 2012, according to ING. In contrast, the first eight months had seen €406bn flow out of the five countries, equivalent to almost 20 per cent of gross domestic product in the periphery economies. In 2011, outflows from the periphery totalled €300bn.

Austerity measures in crisis countries – updates from the Eurozone periphery - The current issue of the online journal Intereconomics features stories about the politics of adjustmentin Greece, Ireland, Spain, Italy, and Portugal. Aidan Regan and I contributed the article about Ireland. Each paper outlines the measures that have been taken in recent years, and the major challenges each country now faces. All five countries share many common features of course, including the difficulty of keeping on track with deficit reduction targets in the context of no growth and truly awful unemployment figures. But the challenges discussed by authors are quite varied too: in Greece, for example, it’s governance problems that are highlighted; in Portugal and Italy, productive capacity and export performance; in Spain, problems over sustaining the revenue base of the state. In Ireland’s case, we outline the ongoing problems involved in trying to reduce the large government deficit. We also note that the legacy of the financial crisis complicates Ireland’s recovery strategy. The government has staked a great deal on getting some relief on a portion of the deficit and debt issues that arise from recapitalizing the banks. What the government is looking for at the moment is not a debt restructuring or a default by this or any other name, but a rescheduling of a portion of the costs of unwinding the full liabilities of the now-defunct Anglo Irish Bank.

France 'totally bankrupt', says labour minister Michel Sapin - France's labour minister sent the country into a state of shock on Monday after he described the nation as “totally bankrupt”.  Michel Sapin made the gaffe in a radio interview, which left French President Francois Hollande battling to undo the potential reputational damage. “There is a state but it is a totally bankrupt state,” Mr Sapin said. “That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.”  Pierre Moscovici, the finance minister, said the comments by Mr Sapin were “inappropriate”.

Hard Times: Dijon France Sells Half of Prized Wine Collection to Help Those Appealing for Social Aid - Fresh on the heels of France's labour minister stating "France is a Totally Bankrupt State" comes news the city of Dijon needs to sell its prized wine collection to help those "appealing for social aid." Please consider L’austérité à la française: city sells prized winesThe city of Dijon has just sold off half of its prized municipal wine cellar to help fund local social spending – including a bottle of 1999 Burgundy knocked down at auction for €4,800 to a Chinese buyer. In total, the capital of the Burgundy region raised €151,620 from the “historic sale” of 3,500 bottles that were part of a collection built up since the 1960s, it announced in a statement on Monday.

Could 87% of the French Really Want A Strongman To Reestablish Order? - Americans are cynical when it comes to politicians.  But the French—with their economy spiraling deeper into a crisis that started five years ago—expressed disdain for their political class, as they call it, in another way: with a desire for authoritarian leadership, a “real leader” who would “reestablish order.” The survey, “France 2013: the New Divisions,” conducted by Ipsos and others for Le Monde (PDF of PowerPoint) caused a bout of soul-searching and political maneuvering. Explanations and rationalizations flew about, as frustrations were boiling over on all sides: unemployment above 10%; heavily contested plant shutdowns and layoffs, particularly in the auto sector; a fiscally inspired exodus with hostile rhetoric [“Trench Warfare” Or “Civil War” Over Confiscatory Taxes In France], and on and on. The cultural and economic “decline” of France set the scene: 51% of the respondents thought that in the coming years, the decline of France was “inevitable.” Among those who supported the right-wing National Front (FN), 77% thought so. By comparison, supporters of President François Hollande’s Socialist Party (PS) were outright gung-ho: only 41% considered it “inevitable”—still chilling.  According to the survey, it has been going on for ten years, a period during which mostly conservative presidents occupied the Elysée, a period that also coincided largely with the euro in French wallets. A sobering 63% thought that “French cultural influence” had declined over that period; and a stunning 90% believed “French economic power” had declined.

Berlusconi defends ‘good’ Mussolini - Silvio Berlusconi, Italy’s former prime minister, has triggered outrage with comments defending fascist wartime leader Benito Mussolini at a ceremony commemorating victims of the Nazi Holocaust. Speaking at the margins of the event in Milan on Sunday, Berlusconi said Mussolini had been wrong to follow Nazi Germany's lead in passing anti-Jewish laws but that he had in other respects been a good leader. "It's difficult now to put yourself in the shoes of people who were making decisions at that time," said Berlusconi, who is campaigning for next month's election at the head of a coalition that includes far-right politicians whose roots go back to Italy's old fascist party. "Obviously the government of that time, out of fear that German power might lead to complete victory, preferred to ally itself with Hitler's Germany rather than opposing it," he said. "As part of this alliance, there were impositions, including combatting and exterminating Jews," he told reporters. "The racial laws were the worst fault of Mussolini as a leader, who in so many other ways did well," he said, referring to laws passed by Mussolini's fascist government in 1938.

Analysis: Scandal of Italy’s Monte Paschi means questions for Draghi(Reuters) - Just as he prepares to take responsibility for regulating the banking system of the entire euro zone, Mario Draghi faces questions dating back to his leadership of the Bank of Italy over its oversight of the world's oldest bank. Turmoil at Italy's third largest lender, 540-year-old Banca Monte dei Paschi di Siena, has rocked the Italian financial establishment and raised questions in the middle of an election campaign for the government and the Bank of Italy. Monte dei Paschi is accused of having overpaid for a 9 billion euro purchase of a rival in 2007, and also of having made risky derivatives trades in 2006-2009 aimed at massaging accounts, which will book it a loss of 720 million euros. A source close to a judicial investigation has told Reuters that authorities are investigating whether bribes were paid at the time the bank bought rival lender Antonveneta. Authorities are also examining whether laws were broken in the risky trades. Whether mistakes, wrongdoing or some mixture of the two were the undoing of the bank, questions are being asked of its regulator, the Bank of Italy, which Draghi left in 2011 to become head of the European Central Bank.

Scandal at world’s oldest bank upends Italian elections - A scandal engulfing the world’s oldest bank has emerged as a potential game changer in Italy’s national election, threatening to drag down the leading party in the polls and give a critical boost to Silvio Berlusconi’s bid to regain office. Monte dei Paschi di Siena was founded in 1472, 20 years before Columbus discovered America, but its centuries-old reputation has been severely tarnished by a still-unraveling scandal over derivatives deals worth hundreds of millions of euros and hidden by the bank until brought to light in recent days. The derivative deals could cost the 540-year-old bank losses of up to 720 million euros ($970 million). What makes it so politically damaging is the banks ties to the center-left Democratic Party. The bank – located in Siena, a Tuscan city which for decades has been dominated by the Democratic Party – is owned in large part by a "foundation" run by local powerbrokers including Democratic Party officials. As revelations about the bank's obfuscation of its losses have come out, so too have accusations that party representatives in the city – including a succession of mayors and members of the bank’s board – should have had more oversight over Monte dei Paschi’s financial deals.

Italy says banking system untouched by troubled lender - Italy's finance ministry on Tuesday said the crisis surrounding Banca Monte dei Paschi di Siena had no effect on the rest of the banking system, after the government gave the go-ahead for a 3.9-billion-euro ($5.3-billion) bailout for the troubled lender. "The bank overall has a solid capital situation," the ministry said in a statement after a meeting of the government's financial stability committee. "The tensions that have affected it do not affect the banking system as a whole," it said. Banca Monte dei Paschi di Siena, the world's oldest surviving bank and Italy's third biggest, has been forced to resort to public aid to reinforce its core capital after being hit by the eurozone crisis. The poor management of the bank and the giant loans from the government required to save it have come under intense scrutiny in austerity-hit Italy in recent days and there is an investigation under way over a particularly suspicious derivatives deal. The aid has been dubbed "Monti bonds" after Prime Minister Mario Monti, although the bank's perilous financial situation dates back several years.

Here’s Who Stood to Gain from MPS Golden Dividends - The inquiry into the Monte dei Paschi di Siena (MPS) bank continues to expand. Investigations got off to a spectacular start last May with blanket searches relating to the €9 billion cash acquisition of Antonveneta and how MPS financed the deal, commencing with the somewhat mysterious Fresh 2008 bonds. Recently, the inquiry overlapped with a second investigation in Siena and Milan into derivatives subscribed by MPS and a few weeks ago, the case moved to Florence. The point of contact is the €960 million securities issue, half of which was swallowed up by MPS’s own foundation, the Fondazione MPS, the other half going to institutional investors, as was reported at the time. However, the investors’ identities were never revealed, despite the financial product’s troubled career. The €220 million profit posted in 2009 by MPS thanks to Nomura’s “Operation Alexandria” derivatives permitted the bank to pay the hefty 10% dividend to Fresh bond subscribers for just under €100 million. It is still unclear whether Operation Alexandria was undertaken for the specific purpose of funding the dividend but, clearly, payment would have been impossible without this accountancy window-dressing. That year, MPS managed to pay out a meagre €186,000 in dividends, and only to savings shares, all of them owned by the Fondazione MPS, at €0.01 per share. Payment of the dividend triggered a clause that obliged the bank to remunerate the Fresh bonds as well.

Italy risks political crisis as MPS bank scandal turns ‘explosive’ - Italian magistrates investigating losses at Banca Monte dei Paschi say the mushrooming scandal has taken a dramatic turn, with political fallout that threatens to rock the country’s elections next month and upset eurozone plans for a banking union. “The situation is explosive,” said Tito Salerno, head of the prosecuting team in Siena, describing the fast-moving events at Italy’s third-largest bank as extremely grave. The Milan bourse tumbled 3.4pc and yields on 10-year Italian bonds spiked 15 basis points to 4.31pc as the political scandal widened. Monte dei Paschi (MPS), the world’s oldest bank dating back to 1472, is under investigation for covering up losses on derivatives and paying over the odds for its €9bn (£7.8bn) purchase of Banca AntonVeneta in 2007. Italy’s press alleges that the inquiry has unearthed a network of bribes and kickbacks, a claim denied by the bank. The lender has lost €6.4bn since early 2011 and the damage is mounting. Italy’s weekly news magazine Panorama reports MPS could face another €500m losses from its “Chianti Classico” venture into property loans, a claim also denied.

What lies inside Bárcenas’ boxes?  - On January 16 Swiss officials reported they had found accounts containing 22 million euros registered to Luis Bárcenas, the former treasurer of the ruling Popular Party (PP). Appointed by PP leader Mariano Rajoy in 2008, Bárcenas was forced to resign a year later for his possible role in another major corruption scandal, known as the Gürtel case. Bárcenas has denied any wrongdoing, saying he was holding the money for investors.Then, on January 21, Jorge Trías, a former PP member of parliament, published an article in EL PAÍS accusing Bárcenas of regularly handing out envelopes containing as much as 10,000 euros in cash to other high-ranking PP officials. "Outside of whatever the prosecutors and judges do," wrote Trías, "the Popular Party must explain in complete detail what means it has used to finance itself." Last week, Spanish daily El Mundo published an article suggesting that many of the officials who received kickbacks signed receipts for the payments. And Bárcenas has also claimed that, after years of holding the Swiss accounts without declaring their contents to Spanish tax authorities, he registered and paid reduced taxes on half the amount in 2012 thanks to a fiscal amnesty passed by the PP - which by then had been elected to run the government.

Envelopes of Cash: Corruption Charges Put Madrid on Defensive -  For weeks, Spanish newspapers have published new details about one of the country's biggest ever corruption scandals, called "Gürtel affair," named in German after businessman Francisco Correa, whose last name means "belt". For years Correa allegedly bribed PP officials with money and gifts in return for public contracts The general outline of the affair was known, but not the fact that the former treasurer of the People's Party, Luis Bárcenas, had amassed up to €22 million ($30 million) from dubious sources in accounts with Dresdner Bank in Geneva. The judge on the Spanish National Court only learned of this as a result of legal assistance from Switzerland. Even the conservative newspaper El Mundo could no longer refrain from delving into the scandal. For as long as Bárcenas managed the PP's finances, El Mundo writes, the politician handed party officials envelopes filled with banknotes worth between €5,000 and 15,000 every month. A former member of parliament for the PP confirmed this practice. Although accepting additional pay is not prohibited if a person declares it on his tax return, the conservatives are nonetheless worried. Bárcenas may have recorded the source of the funds in his notebooks (anonymous donations to political parties have been banned since 2007), as well as to whom the money was passed and why.

Looking for Mister Goodpain, by Paul Krugman In recent columns, I’ve argued that worries about the deficit are, in fact, greatly exaggerated — and have documented the increasingly desperate efforts of the deficit scolds to keep fear alive. Today,... I’d like to talk about a different but related kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity — the austerians — made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity.  And let nobody accuse the austerians of lacking a sense of romance; in fact, they’ve spent years looking for Mr. Goodpain.  The search began with a passionate fling between the austerians and the Republic of Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. Ireland, said Jean-Claude Trichet of the European Central Bank, was the role model for all of Europe’s debtor nations. After Ireland came Britain, where the Tory-led government — to the sound of hosannas from many pundits — turned to austerity in mid-2010, influenced in part by its belief that Irish policies were a smashing success. What actually happened was an economic stall. Before the turn to austerity, Britain was recovering more or less in tandem with the United States. Since then, the U.S. economy has continued to grow, although more slowly than we’d like — but Britain’s economy has been dead in the water.

Spain Bucks the Happiness Trend - Market and real economic divergence continues apace in the European periphery and, much like Italy, Spain is again showing worrying signs that further fiscal tightening is creating far more severe negative consequences than “expected”. The deterioration in the economy is once again leading to a re-assessment of targets: European Union budget enforcer Olli Rehn signaled he might seek to ease Spain’s targets for cutting its budget deficit in a retreat from the demands that helped drive the economy into recession. But it isn’t just the national government that is struggling under re-newed economic retrenchment. Regional governments are also in economic trouble and requesting life-lines from the state: The regional government of Catalonia on Tuesday formally requested 9 billion euros ($12 billion) from a rescue fund created by Spain to save its financially beleaguered regions. In Spain as a whole the economic data continues to be very poor with the latest retail sales data being yet another example: It was one of the most miserable Christmases on record for retailers in Spain as sales plunged last month in the midst of one of the worst consumer crises the recession-hit country has ever seen. With sales tax hikes biting, unemployment growing and many workers and pensioners watching the real values of their income fall, Spaniards kept their wallets tightly closed, helping to produce a 10.7% fall in sales in December compared with the same month in 2011.

Spain's Rajoy tries stimulus as recession deepens (Reuters) - Prime Minister Mariano Rajoy promised Spain a small dose of economic stimulus on Wednesday, leavening a strict diet of austerity for the first time as figures showed the country's recession had deepened. Economic output fell 0.7 percent in the fourth quarter of last year from the third, its steepest contraction in a year as households hit by state spending cuts and stubbornly high unemployment slashed spending. The data from statistics institute INE suggests that, notwithstanding improved conditions in the debt market, the government faces an uphill battle to put public finances back on a sustainable footing as the economic outlook remains gloomy. "The bleak GDP data is a reminder of the growing disconnect between market sentiment and economic reality in Spain and southern Europe," Nicholas Spiro of Spiro Sovereign Strategy said. Reflecting the scale of the task, Rajoy told parliament he was planning a package of stimulus measures that would include tax breaks for entrepreneurs.

Catalonia asks Spain for further 9bn euros bailout The independence-minded region of Catalonia has asked the Spanish central government for an extra 9bn euros (£7.7bn) in bailout money. Catalonia's regional government said it needed the money to pay down debts and meet deficit reduction targets. It adds to the 5bn euros the debt-stricken region initially requested from Spain in August last year. The move comes just a month after Catalonia's new leaders pledged to hold a referendum on independence. Catalonia is prosperous and accounts for around a fifth of Spain's GDP, but faces debt repayments totalling 13.6bn euros this year alone. The regional government said it would spend 7.7bn euros to pay down debt and the rest on meeting deficit reduction targets set by the Spanish government.

500,000 People Sign Petition Asking Prime Minister Rajoy to Resign - The indignation of citizens over payouts and graft in Spain is highlighted by a flood of protests on Spanish social networks. A campaign on, a platform with 25 million registered has collected a record 500,000 signatures calling for the resignation of Prime Minister Marinao Rajoy. Via Google translate from El Pais, please consider 500,000 People Sign Petition Asking Prime Minister Rajoy to ResignThe indignation of the public by publication in the country of the secret papers of the PP extesoreros, reflecting payments to the party leadership, is flooding social networks with messages calling responsibilities to Prime Minister Mariano Rajoy. appear together under tags like # Rajoydimisión or # quesevayantodos , in addition to the proposal for this diary # lospapelesdebárcena s. This wave of criticism also translates into hundreds of thousands of citizens (over 500,000 in just over a day) have signed a petition asking for "the resignation of the leadership of the PP", including Rajoy, and "all who have received payments in black money ". "I wish we lived in a democracy and could revoke the government for not fulfilling its election and alleged corruption cases like this," explains Pablo Gallego , petition drives the platform . This 24 year old from Cadiz that their initiative is collecting 40,000 signatures per hour, a pace that, if continued throughout the day, could mean reaching one million accessions this Saturday.

Greek transport workers, doctors strike over austerity (Reuters) - Greek train and ferry services stopped and hospital staffing was cut to a minimum on Thursday as transport workers and doctors protested against spending cuts imposed to meet the country's bailout terms. As the economy enters a sixth successive year of recession, demonstrations and strikes have surged again over the latest round of measures. Public transport in Athens was disrupted as bus, trolley bus and railway workers stopped work while ships and ferries stayed docked at ports after seamen began a 48-hour strike. Hundreds of doctors, medical staff, teachers and municipal workers rallied in central Athens to protest against "dangerous" measures that they say have drained the nation's health system of supplies and staff. They later marched to parliament chanting "We will strike until we win!" and holding up banners reading "We'll kick the troika out," referring to the country's lenders, the European Union, International Monetary Fund and European Central Bank. Greece's main public sector union ADEDY also called a work stoppage. "Belt-tightening is killing the people and destroying the national health system,"

Thousands of Portuguese teachers protest big cut - Thousands of teachers from around Portugal are marching in downtown Lisbon to protest proposed spending cuts they say will slash euro 1 billion (1.3 billion) from the education budget, AP reported. Unions said the government plans to privatize many public schools and cut around 50,000 sector jobs. Union spokesman Mario Nogueira said the plans revealed in a recent document from the International Monetary Fund would 'mean the end of a free and inclusive public school system.' Portugal, which is headed for a third straight year of recession, needed an euro 78 billion lifeline in May 2011 to avert bankruptcy and has a jobless rate of 16.3 percent. Austerity measures have triggered many strikes and protests.

German Retail Sales Plunge In December - Germany released retail sales data for the month of December this morning, and the numbers came in much worse than expected. Sales fell 1.7 percent in December from the previous month. Economists were expecting a smaller loss of 0.1 percent after sales expanded 0.6 percent in November. Year-over-year, December retail sales were down 4.7 percent – well below the 1.5 percent decline predicted by economists and last month's -0.6 percent figure. Deutsche Bank economists Oliver Rakau and Stefan Schneider suggest that the recent uptick in consumer confidence could see these retail sales figures revised up: 

Europe "Fixed" Facade Crumbling As German Retail Sales Implode - Remember all those soaring German confidence indices that said ignore the negative GDP print and focus on a future so bright, ze Germans've got to wear Zeiss? Appears the confidence may have been a tad massaged upwards because following a spate of weak corporate results out of Europe's growth dynamo, the German HDE retail association said Christmas sales for November and December were down some 0.7% from the prior year. Specifically German retail sales plunged -1.7% from November on expectations of a modest -0.1% decline, while on a year over year basis December imploded a whopping -4.7% vs expectations of -1.5%. Did the Germans blame the weather of lack of government spending, or maybe say to only focus on the positive aspects of the report (if any)? No. They were not girlie men about it.  In now traditional news, Greek retail sales in November followed suit and plunged just a tad more than in Germany imploding by some -16.8% in November. Remember: once they hit 0 they can only go up. But the biggest news certainly was Germany, whose economy continues to deteriorate and is probably what spurred Buba president Jens Weidmann to say that ongoing bailouts could threaten the strongest members.

French Retail Sales Drop 10th Month Accompanied by Sharper Drop in Employment; Italy Retail Sales Drop 23rd Month; Eurozone Sales Collapse 15th Month; Wholesale Prices Soar - Is the worst over for the Eurozone? That's what the ECB and heads of state said at the recent economic summit in Davos. I offer some economic reality.  The Markit Eurozone Retail PMI® shows Eurozone retail sales downturn extends to fifteenth month in January  Key points:

  • Rate of decline remains sharp despite easing since December
  • Sales growth resumes in Germany
  • Wholesale prices rise at fastest rate in ten months

Summary: Markit’s Eurozone retail PMI® data for the opening month of 2013 signalled a fifteenth consecutive month-on-month decline in sales values, even after accounting for the post-festive slump in trading and a resumption of growth among German retailers. The three largest Eurozone economies are covered by the retail PMI surveys. The German Retail PMI hit a seven-month high and rose above 50.0, signalling a return to growth following December’s contraction. French retailers meanwhile saw another solid fall in sales at a rate broadly similar to that seen in the final month of 2012 (adjusted for seasonal influences). French retail sales have declined for a survey-record ten successive months. In Italy, retail sales fell for the twenty-third consecutive month, and the rate of decline remained severe despite easing since December.

Court: Iceland doesn’t need to repay UK and Dutch depositors - Iceland was entitled to refuse to pay immediate deposit guarantees to savers with failed online bank Icesave in Britain and the Netherlands, a European court said Monday. The ruling is the latest twist in a bitter dispute which has clouded negotiations on Iceland’s ambitions to become a member of the European Union. The Court of the European Free Trade Association (EFTA), which covers economic and trading relations between non-EU countries that are a part of the European Economic Area (EEA) single market and their European Union partners, was ruling on Reykjavik’s response to the collapse of the Icelandic banking sector in 2008-9.

Iceland's 'Icesave' Deposit Victory Slams Door On European Deposit Insurance Hopes - In yet another victory for not bowing to the great-and-good of modern orthodoxy, Iceland has won a court ruling that enables it to repay billions of Euros (in failed bank deposits to the UK and Holland) on its own terms. Icesave collapsed in 2008 and left thousands of depositors, who had chased higher yielding deposits, with losses. The Dutch and British governments demanded prompt payment; Iceland denied, preferring (rationally) to repay what they could from the then-bankrupt entity. As RTE notes, Icelanders in referenda twice voted against repayment schemes drawn up by their government to satisfy the British and Dutch claims, leaving the estate of Landsbanki to pay back the funds, which it has steadily done, instead of the taxpayers of Iceland being force per se to fund this shortfall. The implication being: Bank deposit insurance schemes in the European Economic Area are NOT backed by government liability, neither explicitly nor implicitly - which could well reignite concerns of the much-hoped-for Europe-wide deposit-guarantees

Iceland’s Lessons on How to Fix a Bank Crisis -  I did, however, notice a small interview with Icelandic President, Olafur Ragnar Grimsson, which was quite interesting. There are two  reasons why this is such an interesting interview. Firstly, Mr Grimsson raises some very good points about the effect a large financial services industry on the rest of the economy. He also asks the important question as to why exactly a private bank should be treated differently from any other private enterprise even if has some strategic importance and why exactly national citizens should suffer due to poor business practices. In that regard, Iceland, much like Sweden, has become a model of what should be done after a banking crisis. In short, the aim of the game is to save the banks, but not the bankers. There is, however, one small problem with Mr Grimsson’s points. He appears to be doing some fairly large historical revisionism in the account of what actually happened. The Icelandic government was not ‘wise’ in it’s implementation of a non-orthodox approach at all. It actually attempted to keep some of the banking system alive, including giving them money along with ‘un-lawful’ loans and part of the IMF program that came later was used save a number of building societies.

Europe’s robust financial-transactions tax - The details of Europe’s new financial transactions tax won’t be made public for a few weeks, but the FT’s Alex Barker has seen a draft, and it looks impressively robust. The tax is being implemented by 11 countries, including most importantly Germany and France, and it’s going to be levied at two levels: 0.1% on securities trades, and 0.01% on derivatives trades. It’s also going to be very difficult to dodge: any trader whose institutional headquarters is in one of the 11 countries will have to pay the tax, as will all transactions taking place in those countries, and all transactions involving securities issued in those countries. The tax will have two main purposes. The first is to raise substantial tax revenues on the order of $45 billion per year; the second is to discourage financial speculation. I’m hopeful on the former, but less so on the latter.

EU wants power to sack journalists - A European Union report has urged tight press regulation and demanded that Brussels officials are given control of national media supervisors with new powers to enforce fines or the sacking of journalists.  The “high level” recommendations that will be used to draft future EU legislation also attack David Cameron for failing to automatically implement proposals by the Lord Justice Leveson inquiry for a state regulation of British press. A "high level" EU panel, that includes Latvia’s former president and a former German justice minister, was ordered by Neelie Kroes, European Commission vice-president, last year to report on "media freedom and pluralism". It has concluded that it is time to introduce new rules to rein in the press. “All EU countries should have independent media councils,” the report concluded.“Media councils should have real enforcement powers, such as the imposition of fines, orders for printed or broadcast apologies, or removal of journalistic status.”  “The national media councils should follow a set of European-wide standards and be monitored by the Commission to ensure that they comply with European values,” the report said. 

Proposed EU data protection reform could start a “trade war,” US official says - As we reported over a year ago, justice commissioner Viviane Reding of the European Commission proposed a “comprehensive reform” to existing data protection law, which would regulate how online service companies are allowed to keep information on their customers. Right now, anyone who cares about European tech issues has their eye on this ongoing legislation as it makes its way through various Brussels bodies. The legislation is not expected to take effect until 2016. And by all accounts, lobbying pressure from American government representatives and their corporate allies is intensifying at an unprecedented level as the draft amendments for data protection reform make their way through various committees pushing to strengthen what the European Commission has proposed. One economic officer in the US Foreign Service even commented this week (Google Translate) that the current reform draft could "instigate a trade war" with the US.

Morgan Stanley Warns About Euro Crisis - One of the most interesting stories to emerge out of what has been a pretty wild January for global markets is the rapid rise in European rates. That rise has Morgan Stanley rates strategist Laurence Mutkin worried about a resurgence of the European sovereign debt crisis that everyone says is over, and according to Mutkin, ECB President Mario Draghi faces a critical moment in the coming weeks. As sentiment has ramped up around the globe and investors have staged massive inflows into equity funds and other risky assets, "safe-haven" plays like German bonds and short-term debt have sold off. Draghi helped spur this rise in rates, along with that in the euro, when he announced at the central bank's most recent policy meeting that the decision against lowering benchmark interest rates was unanimous among the ECB Board of Governors. On top of everything, European banks are now beginning to repay loans extended to them by the ECB during the depths of the euro crisis. This has provided further impetus for the upward trajectory in EONIA rates as banks return to interbank lending markets to fund themselves.

BofA shifts derivatives to UK - Bank of America has begun moving more than $50bn of derivatives business out of its Dublin-based operation and into its UK subsidiary, according to people close to the operation. The move, part of the group’s global drive to rationalise its operations, has been encouraged by regulators but will also allow BofA to benefit from tax breaks stemming from the accumulated losses in its UK business. Bank of America, the world’s number 10 bank by assets, is currently one of the biggest banks in Ireland. Although its domestic Irish operations are small, it has traditionally routed a large chunk of its European operations – corporate lending and cash management as well as the derivatives book – through the Dublin subsidiary. BofA inherited the operation, MLIB, when it acquired Merrill Lynch at the height of the financial crisis. But bankers said Irish officials had made it clear they were uncomfortable with such a large book of business being Dublin-based, theoretically posing a risk to Irish taxpayers. At the same time UK regulators were keen to have closer control of Bank of America’s European business, whose operational management is in London. In the boom years many banks flocked to low-tax Ireland, routing Europe-wide business through Dublin. That tax advantage is now diminishing, as the UK cuts its corporate tax rate, with a further reduction to 23 per cent due in April. 

'Catastrophic' EU exit would leave City defenceless against regulatory attack - European regulators have the means to shut down key parts of London’s financial centre at a stroke if Britain left the European Union and would not hesitate to do so, leading central bank experts have warned. Membership of the EU single market is the UK’s only legal defence against an onslaught of regulations aimed at forcing banks and fund managers to decamp to the eurozone, they say. “It would be catastrophic and suicidal for Britain to leave. The UK would lose the protection it currently enjoys as the eurozone’s major financial centre,” said Athanasios Orphanides, a former member of the European Central Bank’s governing council. Mr Orphanides said the ECB is already clamping down on payments, clearing and settlement systems conducted in euros outside its jurisdiction, a move deemed necessary to head off future crises. “The only thing stopping regulation that would shift all such activities from London to the eurozone is the legal protection the City enjoys in the EU,” he told The Daily Telegraph. While Britain is in a “very strong” position now as an EU member outside the eurozone, this would evaporate the moment the UK tears up its membership card. “The UK would be the big loser. I don’t believe it will happen because Britain has the best technocrats in the world, and the British people are rational,” he said.

Banks mis-sold more than 90pc of rate swaps - The FSA has accused Britain's largest banks of selling small businesses "absurdly complex products" and said that lenders will have to compensate thousands of customers. More than 90pc of the complex interest rate derivatives sold by banks to small businesses could have been mis-sold, according to the findings of a review by the Financial Services Authority.  The FSA said that its analysis of 173 sales of interest rate hedging products to SMEs by Britain’s four largest banks found that 90pc “did not comply with one or more of our regulatory requirements” as it launched full review.   Martin Wheatley, chief executive designate of the Financial Conduct Authority, accused lenders of selling businesses “absurdly complex products” and said many customers could now expect compensation from their banks. The swaps were presented as a "no-cost" form of insurance to protect small businesses against a rise in interest rates, but the unregulated instruments turned into significant liabilities. Falling base rates were meant to help small businesses but with these products they generated charges that devoured savings and destroyed some once-sound family firms. They typically locked firms into rates of between 5pc and 6pc over base rates and as base rates fell, the charges kicked in.

Mis-sold swaps may cost UK banks billions  (Reuters) - British banks face another round of compensation claims that could total billions of pounds after the regulator found they had widely mis-sold complex interest-rate hedging products to small businesses. The interest-rate swaps are the latest in a series of costly banking scandals that include insurance on loans and mortgages that was also mis-sold, rigged global benchmark rates and breaches of anti-money laundering rules. Britain's financial watchdog said on Thursday it found that in the 173 interest-rate swap test cases it examined, more than 90 percent did not comply with at least one or more regulatory requirements. A significant proportion will result in compensation being due, the Financial Services Authority (FSA) said. Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest-rate hedging products, said the final bill for banks could be as high as 10 billion pounds ($16 billion).

Lawson urges full nationalisation of RBS - Nigel Lawson, former Tory chancellor, has urged George Osborne to fully nationalise the Royal Bank of Scotland, attacking the banking industry’s bonus culture and what he says are its overrated “star” traders. Lord Lawson said there was a case for paying no bonuses at RBS this year following the Libor scandal, which is expected to cost the bank a fine of at least £500m. The 80-year-old peer, who sits on the parliamentary commission on banking standards, told the Financial Times that lenders should stop worrying about “losing star performers” if bonuses were cut. “These are not particularly impressive individuals,” he said in an interview. Lord Lawson said the youthful energy needed to be a trader was not in short supply: “They’re all of them easily replaced, particularly in today’s labour market.”

When formal monetary policy targets are useful - Stephanie Flanders makes a very perceptive point in a post today. She says:“Does the chancellor want to set a new target for the Bank of England? The answer is no. But does he want have a debate about it? The answer is an emphatic yes - for political reasons as well as economic ones.”Essentially the more it is debated what the Bank of England can do to get a recovery, the less it appears as if the Chancellor is responsible for the current state of the economy. I think in practical political terms this is correct. However it should not be so: the Chancellor and the Treasury set the MPC mandate. There are three key points here.First, the inflation target matters. Some commentators suggest that the MPC in effect has the ability to set its own target, and that the formal inflation target is no constraint. I think this is completely wrong. As Adam Posen recently said (22nd January) to the Treasury Select Committee  “anyone who was on the committee basically took the equivalent, in my opinion, of an oath of office. They were serving on the committee under the terms of the given inflation target.”   My conversations with other MPC members are fully consistent with this view.

Pension deficits rise by £150 billion in 2012 - Pension deficits increased by £150 billion last year to reach a total of £550 billion, according to research published by professional benefits firm, Xafinity. The research showed a gradual increase in deficits, peaking in July just short of £600 billion before dropping. However, deficits again increased by £100 billion in the last quarter of 2012. Xafinity corporate solutions director Hugh Creasy said 2013 would be an equally difficult year, with careful consideration of assumptions needed. He added: "While discount rates for the more mature schemes may be falling to around the 4.5% mark, the discount rate of around 5% can be justified for many. "An increase of just 0.5% may not sound much, but this would slash the liability measure by 15% – enough to remove the deficit on the balance sheet and wipe out pension charges in the profit and loss account.

Britain's Economy Is a Disaster and Nobody Is Entirely Sure Why - Britain's economy is a riddle wrapped in a mystery inside an enigma, but this much is clear: it's a disaster. After its Olympics-fueled growth, such as it was, lifted it out of recession in the third quarter of 2012, Britain might be headed back after its economy fell 0.3 percent at the end of the year -- the fourth time in five quarters its GDP has contracted. Britain's now verging on a triple-dip recession, which is just another way of saying a depression. But it's not so simple. Britain is stuck in its worst GDP slump in a century, but not so for jobs. As you can see in the chart below from Jonathan Portes, the director of the National Institute of Economic and Social Research, Britain's stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression. GDP is still more than 3 percent below its 2008 peak, and it hasn't done anything to catchup in years. At this pace, there will be no recovery in our time, or any other time.

If the UK’s economy is so lousy, how come its job market is doing so well? - Which is more trustworthy: the UK’s GDP data … or its employment numbers? On the one hand we have GDP, which fell 0.3% in the fourth quarter of 2012, leading to fears of a triple-dip recession. But the UK also added an impressive 513,000 jobs in 2012, and unemployment has been falling steadily for over a year. So either the economy is atrophying and jobs growth is merely an outlier—or people are getting jobs, collecting wages and then doing something with their money that the macro data aren’t capturing. Fraser Nelson of the Spectator takes a crack at reconciling the data: One answer is immigration: foreign-born workers account for 60 per cent of the rise in working-age employment under Osborne. Data earlier this week suggested that people are also having to accept lower salaries, and more part-time or temporary work. So the quality of jobs is going down, but the number is going up.

The Austerity Delusion? -The continued dismal performance of the UK economy is entirely consistent with the predictions of those of us who have argued consistently for the last two years that premature fiscal consolidation would be severely contractionary in the short term, and risked doing significant long-term economic and social damage. As has been widely reported, this analysis is now generally shared by most serious economists, including most notably the Chief Economist of the IMF, Olivier Blanchard, probably the most distinguished empirical macroeconomist working on policy issues at present. It is obviously impossible to argue that an economy that has grown less than 1 percent in the period since the fiscal consolidation was introduced, compared to the approximately 6 percent that the government forecast at the time, is performing acceptably. So some commentators who supported the government's programme - or indeed, argued that it did not go far enough - are taking a different approach, arguing that economic weakness cannot be attributed to austerity because, in fact, there is no austerity.

Economy: Osborne's depression | Editorial - Three words sum up Friday's news about Britain's economy: dismal, depressing and inevitable. Dismal, because it confirms that national income shrank at the end of last year, and makes it odds-on that we are already into our third recession since the financial crisis began. This is the "triple dip" that pundits have been warning of; although it was only three months ago that Britain emerged from its second recession. But the GDP report is also depressing, as it underlines just how listless our economy is. National income did not grow at all last year and astonishingly remains nearly 4% smaller than it was when Lehman Brothers collapsed. The US on the other hand has made back all the output it lost in the subprime crisis – and then some. Given that the Bank of England's Mervyn King has warned of yet another five years of pain, there must surely come a time when politicians and economists stop hiding behind euphemisms and neologisms and call this episode in Britain's economic history what it is: a depression. And naturally, there is an air of inevitability about all this. It is, quite simply, the price of sticking rigidly to an historic austerity plan. As George Osborne prepared his swingeing spending cuts, back in June 2010, this paper warned that he was "putting his ideological shrink-the-stateism ahead of sound economic management". Two and a half years on, that seems a serviceable assessment. This chancellor took a modest recovery bequeathed him by Alistair Darling (whose performance in No 11 grows all the more remarkable in retrospect) – and snuffed it out. And in doing so, he has learned the hard way the lesson that critics of austerity were urging on him at the outset: that without growth there can be no hope of bringing down the public debt. The government's Office for Budget Responsibility now admits that Mr Osborne will fail his own target of bringing down debt by the end of this parliament.

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