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

Saturday, March 2, 2013

week ending Mar 2

Fed balance sheet shrinks in the latest week (Reuters) - The Federal Reserve's balance sheet shrank in the latest week with reduced holdings of federal agency debt and 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 $3.072 trillion on February 27, compared with a record large $3.077 trillion on February 20. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $1.016 trillion compared with $1.033 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was $73.59 billion, down from $74.61 billion the previous week. The Fed's holdings of Treasuries totaled $1.750 trillion as of Wednesday versus $1.736 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $3 million a day compared with an average of $8 million per day the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--February 28, 2013: Federal Reserve statistical release

Some Fed Officials See ‘Diminished’ Downside Risks - Federal Reserve officials saw the pace of economic growth as “modest” at a January meeting, but some saw downside risks to the outlook as “diminished.” The Fed’s Board of Governors kept the discount rate unchanged at 0.75%, according to minutes of its January rate-setting meeting released Tuesday. Ten of 12 regional Fed banks recommended keeping the discount rate–what banks are charged on short-term loans they receive from the Fed–unchanged at the board’s meeting. Directors from the Kansas City Fed voted for an increase to 1.00% while directors from the Boston Fed called for a cut in the discount rate to 0.50%, as they both have previously.

Bernanke: Economy still needs stimulus - Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that the Fed intends to keep its easy-money policies going until the job market improves significantly. In his semi-annual report to Congress, Bernanke also said the Fed will carefully weigh the costs of its bond-buying program, such as inflation and excessive risk-taking by investors that could led to financial instability. But Bernanke said he doesn't see the costs of risk-taking "as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation." Despite stronger job growth recently, he said "the job market remains generally weak." Bernanke's remarks appeared intended in part to settle financial markets that have grown more concerned recently that the Fed will rein in its economic stimulus sooner than expected.

Fed's Lockhart: Continue QE3 Still Approp For Now Given Condtns - Atlanta Federal Reserve Bank President Dennis Lockhart Monday night declared his comfort with the Fed maintaining its current aggressive pace of bond buying to boost economic growth at least into the latter half of 2013, arguing that the large-scale asset purchases remain appropriate for now given conditions in the jobs market. In prepared remarks at the University of Tennessee, Lockhart painted the picture of an economy in which the risks are balanced, with the potential for acceleration should "potholes" such as self-made political crises be avoided, but with a projected growth rate that will only result in a gradual decline in unemployment.  While he does not hold a voting position on the FOMC this year, Lockhart declared that "considering current labor market conditions, I think continuing the asset purchase program to support the recovery and to improve employment conditions remains appropriate for now."And given the outlook and associated risks, I am comfortable with sticking with the current approach at least into the second half of the year," he added.

Fed’s Lockhart: Bond Buying Should Continue at Least Through Summer - The Federal Reserve should continue to buy bonds to stimulate growth through the summer at a minimum, and it may need to consider reducing the size of those purchases later in the year as the job market improves, a top central-bank official said Monday. “Continuing the asset purchase program to support the recovery and to improve employment conditions remains appropriate for now,” Federal Reserve Bank of Atlanta President Dennis Lockhart said. “Given the outlook and associated risks, I am comfortable with sticking with the current approach at least into the second half of the year.” Mr. Lockhart’s comments came from the text of a speech prepared for delivery in Knoxville, Tenn. The official isn’t a voting member of the monetary-policy-setting Federal Open Market Committee.

Fed’s Fisher Says It’s Time to Taper Bond-Buying Program - It was point-counterpoint for the Federal Reserve on Wednesday. After Fed Chairman Ben Bernanke spent Tuesday and Wednesday telling Congress the central bank will press forward for the foreseeable future with its aggressive bid to stimulate growth, Dallas Fed President Richard Fisher argued later Wednesday that the central bank needs to follow a very different path. Mr. Fisher told an audience at Columbia University that it is time for the Fed to start winding down its bond-buying program before it causes damage to an economy that doesn’t need the monetary-policy support it is getting.

Fed’s Evans Says Mistake to Slow Bond Purchases - The Federal Reserve official who was instrumental in getting the central bank to adopt greater guidance on the factors driving the monetary policy outlook warned Thursday against any premature attempts to back off on the current course of stimulus. In a speech in Des Moines, Iowa, Federal Reserve Bank of Chicago President Charles Evans pushed back at the notion that the Fed will soon need to whittle down its open-ended Treasury and mortgage bond-buying effort. Over recent weeks, a number of officials have speculated that an improving economy and the rising risk the Fed’s easy money may create financial imbalances mean the Fed may soon have to start trimming the size of its purchases from the current $85 billion a month. Mr. Evans, a voting member of the monetary policy-setting Federal Open Market Committee, thinks that would be a bad idea.

Fed should not scale back QE plan: Evans -- The Federal Reserve should not scale back its bond-buying program, said Charles Evans, president of the Chicago Fed Bank, on Thursday. In a speech to the CFA Society of Iowa in Des Moines, Evans said that the U.S. should not replicate the mistake made by the Japanese government of trying to end its easy monetary policy too soon. "It is the specter of repeating the Japanese experience that keeps me up at night," Evans said. He dismissed fears that the bond purchases were fermenting asset bubbles as "largely speculative." Another worry was that Washington "might jam the recovery at the line of scrimmage by piling some more unhelpful near-term fiscal restraint on top" of existing fiscal restraint, he said.

Bernanke warns over raising rates early - Raising interest rates too early could jeopardise growth and cause the very financial problems it was intended to prevent, argued US Federal Reserve chairman Ben Bernanke in a speech late on Friday. His comments are likely to reinforce market confidence that Mr Bernanke and the Fed are strongly committed to keeping interest rates low for a long time and sustaining their third round of quantitative easing – known as QE3 – until there is an improvement in the economy. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading – ironically enough – to an even longer period of low long-term rates,” said Mr Bernanke. Speaking at a conference in San Francisco, Mr Bernanke tried to show that today’s low long-term interest rates are a natural consequence of weak economies, and those of the US are mirrored in Canada, Germany and the UK. Crucially, Mr Bernanke argued that central banks have little choice but to keep long-term interest rates low, because if they tried to push up overnight rates it would make a weak economy worse – leading to a need for lower rates for longer. “At the present time the major industrial economies apparently cannot sustain significantly higher real rates of return,” he said. “In that respect, central banks – so long as they are meeting their price stability mandates – have little choice but to take actions that keep nominal long-term rates relatively low.”

Late Night with Ben Bernanke - The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast. The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed. Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

For Fed Presidents, Economics Is Local - The Federal Reserve’s dissenters often are portrayed as ideologically motivated. They are said to oppose the Fed’s stimulus campaign because they are more worried about inflation, or less worried about unemployment, than their peers.But it is fascinating to consider that the four Fed districts whose presidents have dissented most frequently are also the Fed districts that had the fastest economic growth between 2008 and 2011, the most recent year for which data is available.  “Specifically, the four fastest-growing districts since the crisis erupted have been Dallas, Minneapolis, Kansas City and Richmond,” the Citigroup economists Nathan Sheets and Robert A. Sockin wrote in a research note earlier this month. “Presidents from these four districts have cast a historically significant 28 dissents for tighter policy since the fall of 2007, the vast majority of such dissents.” (I first learned about the note from a blog post by Victoria McGrane of The Wall Street Journal.)The Chicago Fed’s district, by contrast, had the weakest growth, and its president, Charles Evans, has twice dissented in favor of doing more. He played a key role in pushing the Fed to undertake the latest expansion of its stimulus campaign.

The Fed to face some challenges as it ultimately exits the unprecedented monetary expansion - The recently released minutes of the last FOMC meeting made some economists and market participants begin contemplating the Fed's exit, its timing, and the implications. This is because the FOMC's discussion sounded a bit more hawkish than many had anticipated. FOMC Minutes: - ... many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. But what will an exit from such extraordinary expansionary policy actually look like? Much of course will depend on the trajectory of the US economy in the next couple of years, but there are two key possibilities. One is that the Fed will simply end purchases and let the securities naturally pay down (due to prepayments on MBS) and mature. However, given the rate at which excess reserves are now being created through asset purchases, it may take too long to "drain" these balances (excess reserves represent the largest component of the monetary base now).

Draining excess reserves and the exit strategy - Questions continue to surround the Fed’s eventual exit from years of quantitative easing. The ultimate fate of what is to become of the 3.5 - 4 trillion dollar portfolio of securities (the expected peak holdings of Fed’s balance sheet) will determine, among other things, long-term interest rates, mortgage rates, corporate and US government borrowing costs, profitability of the banking system, returns on pension and insurance portfolios, and even the value of the dollar. In short, the exit strategy will drive the fixed income markets for years to come. Some argue that the Fed has no need to sell securities and can simply sit on the portfolio as it winds down naturally through maturities and prepayments. The Fed can keep the economy from overheating by simply raising rates on excess reserves. And the fact that bank reserves (deposits at the Fed) will be in the trillions for years to come shouldn't matter they argue. That's because these reserves do not result in excessive lending and therefore are not inflationary. The lack of transmission from excess reserves to lending is visible in the so-called money multiplier (discussed here), which is at historical lows.  In normal times this argument may hold, but these are by no means normal times. By purchasing unprecedented amounts of securities, the Fed “created” trillions of excess reserves. And the central bank may not want to wait until 2020 (see post) for the reserves to decline to more normal levels on their own. Here are some reasons:

Bernanke Says Fed May Never Sell MBS - As we noted Monday, Federal Reserve officials have been considering whether to revise the exit strategy that they’ve devised for their easy money policies. Under the exit strategy the Fed laid out in June 2011, the Fed would one day sell down its holdings of mortgage backed securities over a period of three to five years. Several officials have been wondering whether the Fed should revisit that strategy and consider taking a less aggressive approach to selling when the time comes.

Bernanke Says Fed May Decide Not to Sell Securities - Federal Reserve Chairman Ben S. Bernanke said the central bank may decide to hold bonds on its $3.1 trillion balance sheet to maturity as part of a review of its strategy for an exit from record monetary easing. Bernanke told lawmakers in Washington today that he expects to revisit “sometime soon” an exit plan that policy makers outlined in June 2011. Under that plan, the Fed would cease reinvesting some or all principal payments from its securities, revise its interest- rate outlook, raise the federal funds rate and then start selling housing debt to eliminate it from the central bank’s portfolio in three to five years. “The one thing we could do differently” is “hold some of the securities a little longer,” “We could even let them just run off.” Bernanke is the third policy maker in the last week to voice support for altering the central bank’s exit strategy to delay or eliminate asset sales. Governor Jerome Powell said Feb. 22 that the Fed could refrain from sales to avoid causing market disruptions and having the Fed take losses on the securities as interest rates rise. San Francisco Fed President John Williams told reporters after a Feb. 21 speech in New York that, given the increase in the Fed’s balance sheet, the period of time over which it’s appropriate to sell assets “probably has lengthened.” Telling markets the Fed plans to hold assets for longer would strengthen monetary stimulus and be “beneficial to the economy,”

The 2% Mystery: Why Has QE3 Been Such a Bust? - Back in September the Fed launched its latest, and most ambitious, bond-buying program to date, dubbed QE3. Unlike before, the Fed hasn't committed to buying a specific dollar amount of bonds with QE3; instead, it's committed to buying $85 billion of bonds a month until the labor market improves "substantially". But what's "substantial" and what's not? And what if the Fed loses its nerve before the economy arrives at this mysterious moment of "substantial" improvement?  This latter question has gripped markets after the Fed's January meeting when "a number" of members said it should "taper" its bond purchases even before, you guessed it, there's any substantial improvement in unemployment.  But there's a better question than how long QE3 will last. That's how much QE3 will work. Let's back up for a minute. Whether you want to call it "quantitative easing" (QE) or "bond-buying" or "large-scale asset purchases" (LSAP), the idea here is fairly simple: the Fed is printing money and buying pieces of paper. It's doing this because it can't boost the economy like it normally does by cutting short-term interest rates; those rates are stuck at zero, and can't go lower. Okay, that's not entirely true. The Fed can't cut nominal rates now, but it can cut real ones -- in other words, it can push up inflation, thereby reducing inflation-adjusted borrowing costs.

What Happens When the Fed Really Does Run Out of Ammunition? - Loading the Fed up with bonds creates the danger of big losses for the central bank if interest rates rise (which causes bond prices to fall). In a worst-case scenario, those losses could total half a trillion dollars over three years, according to one estimate. As a result, the January minutes included a carefully worded caveat: “Evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.” Fed Chairman Ben Bernanke remains undaunted, however. In his testimony before Congress on Tuesday he defended his easy-money policy, noting that it has “supported real growth in employment and kept inflation close to our target.” With consumer prices up only 1.6% over the past year, Bernanke declared: “My inflation record is the best of any Federal Reserve chairman in the postwar period – or at least one of the best.” In addition he argued that worries about potential losses on the Fed’s ballooning bond holdings were overstated. Careful portfolio management, he said, would allow the central bank to absorb the losses over time by trying to hold bonds to maturity rather than selling at a loss. “We could exit without ever selling,” Bernanke said. This debate raises profound questions – probably not for the last time – about the effectiveness of the Fed’s easy-money policy. Why hasn’t it worked better? How long can it be continued? And, most important, what will happen when the Fed finally runs out of ammunition and quantitative easing comes to an end?

Bernanke: How are long-term rates likely to evolve over coming years? = From Fed Chairman Ben Bernanke: Long-Term Interest Rates. Excerpts: How are long-term rates likely to evolve over coming years? It is worth pausing to note that, not that long ago, central bankers would have carefully avoided this topic. However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy. In the present context, I would add that transparency may mitigate risks emanating from unexpected rate movements. Thus, let me turn to prospects for long-term rates, starting with the expected path of rates and then turning to deviations from the expected path that may arise.If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years.

The Immorality of the Interest Rate Hawks - Paul Krugman - Business Insider reports on a Bloomberg TV interview with hedge fund legend Stan Druckenmiller that helped crystallize in my mind what, exactly, I find so appalling about people who say that we must tighten monetary policy to avoid bubbles — even in the face of high unemployment and low inflation. Druckenmiller blames Alan Greenspan’s loose-money policies for the whole disaster; that’s a highly dubious proposition, in fact rejected by all the serious studies I’ve seen. But props to Druckenmiller for being explicit about what he thinks should have happened: after the dot-com bubble burst, instead of taking a recession and having the cleanup…they needed an offset. So they created the housing bubble. So, we should have had a recession — or, since we actually had one, a much longer and deeper recession — to “clean up” Wall Street’s excesses; and if Wall Street went on to engage in much bigger excesses, well, boys will be boys, and it’s really that foolish preoccupation with full employment that deserves the blame. Think about that: he’s saying that ordinary workers and families who have nothing to do with financial speculation should suffer severely — because that’s what happens in a recession — in order to curb the irrational exuberance of a handful of incredibly well-paid financial industry types. This is as opposed to, just to make a wild suggestion, actually regulating financial markets the way we used to, giving rise to a half-century without major financial bubbles.

Bullard weighs in on his colleague’s challenge to the ‘Bernanke doctrine’ -- Earlier this month, Fed Governor Jeremy Stein made waves that are still rippling with a speech on the risks of credit bubbles. The policymaker said that the U.S. central bank could use interest rates, as opposed to the more conventional tool of regulation, to cool overheating in junk bonds and other markets. With worries growing that the Fed’s easy-money policies are inflating dangerous bubbles in financial markets, the speech could portend an earlier-than-expected reversal of quantitative easing or raising of ultra low rates. Here’s what St. Louis Fed President James Bullard had to say about Stein’s speech, when he visited New York University last week: “My main takeaway from the speech … was that he pushed back against the Bernanke doctrine. The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macroeconomic concerns, and then we’ll use regulatory policies to try to contain financial excess. And Jeremy Stein’s speech said, in effect, I’m not sure we’re always going to be able to take care of financial excess with the regulatory policy. And in a key line he said, raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see, or you might not be able to attack with the regulatory approach. So I thought this was interesting. And I would certainly think that everybody should take heed of this. This is an argument that, maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years.”

Fed Official Says Fed Bond Is Buying Not Distorting Markets - The Federal Reserve’s massive purchases of Treasury and mortgage securities are not distorting the functioning of financial markets, an official from the Federal Reserve Bank of New York said Friday. “Purchases have gone smoothly so far, and market liquidity seems to be holding up well,” said Simon Potter, who is head of the markets desk for the New York Fed. Mr. Potter is responsible for implementing the monetary policy objectives laid out by the Federal Open Market Committee. While Mr. Potter is not responsible for setting those policies, his efforts to achieve what the central bank wants makes him the Fed’s point man with financial markets.Mr. Potter was addressing the widespread fear that the Fed’s open-ended buying of Treasury and mortgage debt–the Fed buys about $85 billion per month–will become so large it will distort the functioning of the markets. Already, the Fed is a very large presence in the market, as it seeks to buy bonds to lower long-term borrowing costs and promote stronger growth.

The Macroeconomic Effects of Forward Guidance   - NY Fed -  Macroeconomists, and Federal Reserve economists in particular, face the challenge of quantifying the effects of monetary policy on the economy. Considerable research has documented the effects of surprise changes in the short‑term interest rate on a wide range of economic indicators. However, for the past few years, short‑term interest rates have effectively hit the zero lower bound so that the central bank can no longer lower its short‑term policy rate to stimulate demand. Instead, it has resorted to other tools, such as forward guidance or changes to the composition and size of the central bank’s balance sheet (“quantitative easing”). The Fed has used forward guidance extensively since the Federal Open Market Committee (FOMC) meeting on December 16, 2008, when it announced a commitment to low interest rates in the future, aiming to reduce long‑term bond yields and stimulate spending throughout the economy.In this post, we quantify the macroeconomic effects of central bank announcements about future federal funds rates, or forward guidance. We estimate that a commitment to lowering future rates below market expectations can have fairly strong effects on real economic activity with only small effects on inflation.

Bernanke’s legacy: Fed set to lose $500 billion - Economists predict that the US Federal Reserve could lose half a trillion dollars in just three years thanks to policies enacted by the central bank under Chairman Ben Bernanke. A study conducted by investment analysts at New York City’s MSCI Inc. suggests that Mr. Bernanke’s efforts to keep the floundering economy in tact on the heels of a recession have proven to be futile and will continue to collapse. According to Bloomberg News, who contracted MSCI to conduct the study, the potential losses the Fed could see during the next three years are “unprecedented.” MSCI says the market values of Fed holdings are likely to shrink by $547 billion during that span. The group says they concluded as much after using stress-test scenarios designed by the central bank to examine how the value of securities held in the Fed’s portfolio at the end of 2012 will stand up during the next few years. In a situation involving economic contraction and rising inflation, MSCI expects the Fed’s holdings to drop drastically by more than half of a trillion dollars.

Would Congress Care if the Federal Reserve Lost Money? - Brookings - Chairman Ben Bernanke addressed critics today before the Senate Banking Committee, as he delivered the Federal Reserve’s Semiannual Monetary Policy Report.  Bernanke’s testimony comes on the heels of a prominent monetary policy conference last week, in which participants speculated about the political fallout that could ensue once the Federal Reserve begins to unwind the unconventional policies it put in place during and after the Great Recession. Because the Fed could incur losses when it eventually raises interest rates and sells off assets from its ballooned balance sheet, many expect that by the end of the decade the Fed might no longer generate sufficient earnings to return profits to the Treasury.  After a decade of rising profits remitted to Treasury (topping out at nearly $89 billion last year), many wonder whether Fed losses could trigger aggressive push back from Congress. Questions about how legislators might respond to future Fed losses are worth pondering, not least because Bernanke himself raised the prospect of potential Fed losses in his testimony today.  A few thoughts on the political challenges faced by the Fed, after a brief historical detour.

2 charts that show the GOP is all wrong about Bernanke - During Ben Bernanke’s Senate testimony this morning, Republicans again lambasted the Fed chairman for worrying too little about the inflationary potential of his low interest rate/quantitative easing monetary policy. From the WSJ:A testy exchange between Sen. Bob Corker (R-Tenn) and Bernanke. Corker says Bernanke has sparked a global currency war and created “faux” wealth. Bernanke says he’s not engaged in a currency war or targeting the currency. Corker says Bernanke is the biggest monetary ‘dove’ since World War II, proud of it and degrading society. Bernanke shoots back that he’s got the best inflation track record among Fed chairman since World War II. Corker says Bernanke is punishing savers with his low interest rate policies and throwing seniors under the bus. Bernanke says he’s looking out for long-term unemployed and that the stronger recovery he seeks will help savers. Following Corker’s advice, he adds, would throw the economy back into recession. This chart of various inflation measures sure doesn’t make Bernanke look too dovish:Indeed, JPMorgan notes that Bernanke’s preferred PCE inflation measure has averaged 1.99% since he became chairman. Oh, and the Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is a skimpy 1.53%.

Fed Watch: Know Your Fed Chairs - Tennessee Senator Bob Corker (R) went on the offensive during the Q&A period of Federal Reserve Chairman Ben Bernanke's Senate testimony this week. A portion of the transcript, via Business Insider:

    • Sen. Corker: I don't think there's any question that you would be the biggest dove, if you will, since World War II. I think that's something you're rather proud of...Do you all ever talk about the longer term degrading effect of these policies as we try to live for today?
    • Chairman Bernanke: I think one concern we have is the effect of long term unemployment and the people who haven't had jobs for years. That means they're never going to acquire skills for years and be a productive part of our workforce You called me a dove. Well maybe in some respects I am but on the other hand my inflation record is the best of any Federal Reserve chairman in the post-war period, or at least one of the best — about 2 percent average inflation...

It is not clear that Corker knows much about the history of inflation since WWII, so I thought a little chart would be handy:

Is Inflation the Legacy of the Federal Reserve? - In testimony to Congress on February 27, Bernanke bragged that inflation under his and Greenspan's watch was a mere 2% a year. Of course Bernanke ignored a housing boom and bust. He also ignored a a dotcom boon and bust, a global financial crisis, numerous bank bailouts, and a policy of "too big to fail" that is now "even bigger".  A Bloomberg video exposes Bernanke as nothing but a charlatan. Please consider Hockey Stick Inflation. Bernanke brags about a 2% inflation rate as if it is something to brag about. It's not. This is what it looks like over time.If you are looking for "THE" source of inflation, look no further than the Fed, fractional reserve lending, and government policies that benefit those with first access to money (namely the banks and the already wealthy). Bernanke has the gall to brag about his 2% inflation fighting "achievement", ignoring numerous boom-bust cycles, bank bailouts, and income skew.

Personal Consumption Expenditures: Price Index Update - The February Personal Income and Outlays report for January 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 1.20% is a decrease from last month's adjusted 1.43%. The Core PCE index of 1.28% is decrease from the previous month's adjusted 1.39%.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. 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.

Not Enough Inflation - NYT - Yes, we have low inflation: The Commerce Department reported Friday that prices rose just 1.2 percent over the 12 months ending in January. Such slow inflation is not, in and of itself, an argument for the Federal Reserve to expand its economic stimulus campaign. That depends on whether one expects inflation over the next year or two to rise closer to the 2 percent annual pace the Fed considers most healthy. As it happens, most Fed officials do.But the January number does underscore that the Fed failed to do its job over the last two years. It underestimated the stimulus that the economy required then to prevent inflation from sagging below 2 percent now. Indeed, annual price inflation has been less than 2 percent in four of the last five years, according to the Fed’s preferred measure, the personal consumption expenditures index published by the Bureau of Economic Analysis. The chart below shows 12-month inflation measure for personal consumption expenditures (known as P.C.E. inflation) month by month since 2000.

Two Measures of Inflation: New Update -  The BEA's Personal Consumption Expenditures Chain-type Price Index for January shows core inflation below the Federal Reserve's 2% long-term target at 1.28%. The Core Consumer Price Index, also data through January, is significantly higher at 1.93%. The Fed is on record as using PCE as its primary inflation gauge:  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice. The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

More on the adaptive inflation expectations hypothesis - (graphs) My claim is that expected inflation over the next 5 (and 10 and 20) years is very similar to actual inflation over the past year.  I think the data generally fit the crudest most mechanical adaptive expectations hypothesis. This would be interesting for two reasons.  First, the adaptive expectations hypothesis has been treated with utter contempt for roughly 4 decades.  It is considered an example of the sort of thing which economists must utterly reject.  The effort to replace it has lead to a lot of mildly interesting math and highly implausible assumptions.   Second, there is a huge and very vigorous discussion of forward guidance by the Fed Open Market (FOMC) Committee.  It has been argued that even when the Federal Funds rate is essentially zero, the FOMC can stimulate the economy by causing higher expected inflation.  It is generally agreed that the FOMC has been convinced by this argument.  I think this implies that there should be anonalous increases in expected inflation on the dates when the FOMC began to try to cause higher expected inflation -- roughly the announcements of QE 1-4, operation twist and of forward guidance of how long it will keep the Federal Funds rate extremely low. 

Low Interest Rates, Overheating, and Household Indebtedness - In previous posts, I wrote about the opinions of a few Fed officials regarding the role of monetary policy in causing and managing bubbles. In particular, Governor Jeremy Stein expressed a desire for the Fed to use monetary policy to address "overheating." In a recent speech at NYU, James Bullard commented that Jeremy Stein "pushed back against the Bernanke doctrine." "The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macroeconomic concerns, and then we’ll use regulatory policies to try to contain financial excess. And Jeremy Stein’s speech said, in effect, I’m not sure we’re always going to be able to take care of financial excess with the regulatory policy.This is an argument that, maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years.”Now, Scandinavian central bankers are chiming in. Danish central bank Governor Lars Rohde echoes the concern of Bullard and Stein. The role of monetary policy in Denmark is to maintain the fixed exchange rate. Thus, low interest rates in the world's largest economies have required correspondingly low rates in Denmark. The Danish deposit rate has been zero since July, and Rohde worries that this could fuel asset bubbles. In other words, he says that Fed-induced "overheating" is affecting smaller countries like Denmark.

The Economy and Fed Policy: Follow the Demand - SF Fed - The primary reason unemployment remains high is a lack of demand. An aggregate demand shortfall is exactly the kind of problem monetary policy can address. Thus, we need powerful and continuing monetary stimulus to move toward maximum employment and price stability. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to The Forecasters Club in New York, New York, on February 21, 2013.

Chicago Fed Nat'l Activity Index: Slower Slow Growth In January - The Chicago Fed National Activity Index (CFNAI) dropped in January to -0.32 from +0.25 in December, the Chicago Fed reports, although the three-month average (CFNAI-3MO) reading rose to +0.30 from an upwardly revised +0.23 in December. Recession risk, in other words, was minimal last month. Although economic growth slowed in the start of the year, the three-month average of this index in January was well above the -0.70 level. That’s considered to be the tipping point for the onset of recessions. (CFNAI, a weighted average of 85 indicators, is designed as a benchmark of US economic activity broadly defined.) It’s notable that December’s three-month average was revised higher by a substantial amount: +0.23 vs. the initial estimate of -0.11. The revised figure is based on additional data that's been published in recent weeks. The December revision suggests that the disappointing initial estimate of fourth-quarter GDP will also be revised to a higher level in this Thursday's release of the second update of national economic activity. In fact, the consensus forecast currently sees a 0.5% growth rate for GDP in last year's fourth quarter, up from the initial estimate of -0.1%, according to

Chicago Fed: "Economic Growth Moderated in January" - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Growth Moderated in January Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.32 in January from +0.25 in December. Three of the four broad categories of indicators that make up the index decreased from December, and only two of the four categories made positive contributions to the index in January.  The index’s three-month moving average, CFNAI-MA3, increased to +0.30 in January from +0.23 in December. Given the substantial upward revisions for November and December, January’s CFNAI-MA3 marked the third consecutive reading above zero. Additionally, January’s reading suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

Chicago Fed: Economic Activity ''Moderated'' in January -  According to the Chicago Fed's National Activity Index, January economic activity declined from December, now at -0.32, down from December's upwardly revised 0.25 (previously 0.2). The CFNAI headline euphemistically used the term "moderated" to summarize the change. Particularly astonishing in today's report was the dramatic upward revision to the November data from 0.27 to 0.96. This index has been negative (meaning below-trend growth) for eight of the past eleven months. However, the substantial revisions to the previous two months have lifted the 3-month moving average into positive territory for the past three months. Here are the opening paragraphs from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.32 in January from +0.25 in December. Three of the four broad categories of indicators that make up the index decreased from December, and only two of the four categories made positive contributions to the index in January.  The index's three-month moving average, CFNAI-MA3, increased to +0.30 in January from +0.23 in December. Given the substantial upward revisions for November and December, January's CFNAI-MA3 marked the third consecutive reading above zero. Additionally, January's reading suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.   [Download PDF News Release] The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. As we can readily see, the CFNAI-MA3 trend since February of this year has been one of slow economic contraction.

Fourth Quarter GDP Turns Barely Positive -- Last month, the initial release of fourth quarter GDP showed the economy shrinking by .1% during the final three months of the year. As I noted at the time, it’s likely that this number would change as the figure is revised over the following two months.  Today, the first revision was released and, while GDP growth did turn positive, there’s nothing to write home about: Output expanded at an annual rate of just 0.1 percent, which is basically indistinguishable from having no growth at all and is far below the growth needed to get unemployment back to normal. But at least the economy did not shrink, as the Commerce Department had originally estimated last month, when the first report suggested that output contracted by an annual rate of 0.1 percent. The department’s latest estimate for economic output, released Thursday, showed that growth was depressed by declines in military spending (possibly in anticipation of the across-the-board spending cuts set to begin Friday) and the amount that companies restored their stockroom shelves. “The good news with business inventories is that what they take away in one quarter they tend to add to the next,”  “So there’s a good chance that first-quarter numbers will be better than originally thought.”

GDP Q4 Second Estimate at 0.1%, Little Changed from the Advance Estimate - The Second Estimate for Q4 GDP came in at 0.1 percent, a slight improvement from the minus 0.1 percent in the Advance Estimate, but less than generally expected. The consensus was for 0.5 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 -- increased 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 "second" estimate. In the third quarter, real GDP increased 3.1 percent.  The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP declined 0.1 percent. The upward revision to the percent change in real GDP is smaller than the average revision from the advance to second estimate of 0.5 percentage point.  [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). Here is a close-up of GDP alone with a line to illustrate the 3.2 average (arithmetic mean) for the quarterly series since the 1947, with the latest GDP revisions, this number had been at 3.3 for 14 quarters, but slipped to 3.2 as of Q2 of this year. I've also plotted the 10-year moving average, currently at 1.7. The current GDP has now removed us completely from either range.

US Economy Grew at 0.1 Percent Rate in 4th Quarter - The U.S. economy grew at a 0.1 percent annual rate from October through December, the weakest performance in nearly two years. But economists believe a steady housing rebound, stronger hiring and solid spending by consumers and businesses are pushing economic growth higher in the current quarter. The Commerce Department’s second estimate of fourth-quarter growth was only slightly better than its initial estimate that the economy shrank at a rate of 0.1 percent. And it was well below the 3.1 percent growth rate reported for the July-September quarter. The revision to the gross domestic product was due to higher exports and more business investment. GDP is the broadest measure of the economy’s output. Many economists say temporary factors that held back growth in the fourth quarter are probably fading and growth is likely picking up in the January-March quarter.

Q4 GDP Moves from Negative to Positive, but Details Show Recovery Still on Life Support - Today’s second estimate of U.S. GDP for the fourth quarter of 2012 showed growth moving from the -0.1 percent of the preliminary estimate to +0.1. Positive is better than negative, but a look at the details shows that the recovery is extremely weak. The following table shows how much each of the economy’s main sectors contributed to GDP growth in Q4. Consumption, which has been the main driver of growth throughout the recovery, contributed slightly less in Q4 than previously reported. The categories housing and utilities, gasoline and other energy goods, and clothing and footwear all experienced absolute declines. These figures refer to real expenditures, so they reflect more than just the recent decreases in energy prices. The news is perhaps good for environmentalists, who will be glad to see a continuation of the gradual trend toward lower energy-intensity of GDP. It is not so good for anyone who hopes for consumer-led growth to reduce the stubbornly high unemployment rate. The investment component of GDP presented a mixed picture in Q4. The revised figure for fixed investment was actually a little stronger than previously reported, led by purchases of equipment and software. However, that was more than offset by a downward revision of inventory investment. Farm inventories gained slightly, but there was a -1.7 percentage point contribution from nonfarm inventories. One way to interpret falling inventories is that already in the fourth quarter, businesses were becoming pessimistic about the likelihood of increased fiscal drag in 2013, and were, accordingly, selling off goods from their warehouses without restocking. Speaking of fiscal drag, the government sector shrank even faster in Q4 than previously reported. As the following chart shows, both the federal and the state and local components of government purchases resumed their long string of negative contributions, after having briefly turned positive in Q3. Cuts in federal defense spending, which are likely to accelerate in 2013, were the biggest factor. The chart shows government consumption expenditures and gross investment. It does not include interest payments, entitlements, and other transfer payments, which are not GDP components.

Q4 2012 GDP Revised to a Barely Breathing 0.1% - Q4 2012 real GDP grew by just 0.1% after the second revision..  While technically not in contraction, 4th quarter gross domestic product results imply the economy was officially D.O.A.   Trade imports plunged, which helped economic growth.  Exports were also significantly revised upward.  Inventory investment nose dived and was revised downward significantly.   Government spending cliff dove and sucked out -1.38 percentage points from 4th quarter real gross domestic product growth as federal defense spending declined 22.0% from Q3.   Private inventory changes hacked off -1.55 percentage points from Q4 real GDP as businesses shed their inventories.  Even without inventories in the economic growth mix,  the economy is suffering from weak demand.Consumer spending was  breathing in Q4 with a +1.52 percentage point contribution.  Consumer spending, driven by durable goods purchases, seems like a bright spot,  but that's actually low by percentage points, even though consumer spending did increase from Q3.   Real imports contracted more than realized and thus increased Q4 GDP.  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. This next table compares the change in Q4 revisions from the real GDP percentage point contribution spread perspective.

Visualizing GDP: Little Change from the Advance Estimate - 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. That noticeable change in today's 0.1 percent Second Estimate from the -0.1 percent in the Advance Estimate was the revisions to the Next Exports of Goods and Services.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 1.47 of the 0.1 real GDP (down slightly from 1.52 in the Advance Estimate). This is an increase from the 1.12 PCE of the 3.1 GDP in the Third Estimate for Q3.  Here is a close look at the contribution changes from the Advance to Second Estimates. The upward revision to Net Exports stands out.

Negative Q4 GDP Revised To Barely Positive, Misses Expectations -  From -0.1% to +0.1% (on expectations of a 0.5% print): the Q4 GDP revision was the smallest possible to make it seem that the US economy grew in the fourth quarter. A quick look at the components, however, reveals more of the same, with a small drop in the consumption contribution to GDP (from 1.52% to 1.47%), Fixed investment growing modestly, as well as imports, while the negative components remained roughly in line, with Inventories detracting the most from growth in Q4, or 1.55%. If JCP is any indication, expectations of aggressive inventory restocking in Q1 may be very optimistic. One thing is clear - the general GDP trendline is ugly, and we may now see downward revisions to Q1 growth forecasts in the aftermath of today's number.

A Weak GDP Revision & A Healthy Drop In Jobless Claims - The second estimate of fourth-quarter GDP for the US shows that the economy eked out a small gain in the final three months of 2012. The 0.1% increase for Q4 is a slight improvement over the 0.1% decline in the initial report. But as revisions go, this one’s close to insignificant. By contrast, today’s weekly jobless claims update offers more encouraging news. Good thing, too, since claims offer a more-timely read on the macro trend for the near term. The number of people filing for jobless benefits last week dropped 22,000 to a seasonally adjusted 344,000. As a result, claims are close to the cyclical low of 333,000 reached in mid-January 2013. The four-week moving average of claims also dipped last week, showing a modest bit of renewed momentum to the downside. If the weak Q4 GDP report is a harbinger of trouble for the economy in 2013, there are minimal signs of blowback in today's claims report. No one can rule out future turmoil, of course, particularly since the uncertainty of the government's scheduled budget cuts is set to start tomorrow and extend through the weeks (months?) ahead. Or will Congress intervene and soften the automatic cutting?

GDP Revised Up: Crosses Zero! Woo-Hoo! - And the point about that is this: we tend to obsess about whether the economy is growing (good) or shrinking (bad).  But clearly, contracting at 0.1% last quarter, as in the initial GDP report, is hardly different than growing at 0.1%, as in today’s revision.  Crossing zero is a lot less important than growing fast enough to create enough demand to actually nudge down the unemployment rate.For that, you have to grow above trend and trend is probably a bit north of 2% right now.  That’s considerably higher 0.1%, of course, but as I noted when this report first came out, we’re probably doing better than that.  The quarterly numbers are volatile so I like to look at year-over-year; by that measure, GDP is up 1.6% over the past year.  Add in the sequester and other headwinds I worry about here, and it’s hard to envision much progress on jobs, wages, and most people’s incomes in the near term. Once again, and much like the jobs’ reports that keep showing the loss of state and local employment, the GDP report shows that contractionary fiscal policy, which shows up as less government spending, has been pretty relentlessly whacking away at real GDP growth since the Recovery Act faded out.  The figure shows the government sectors’–fed, state, and local–contribution to real GDP growth.  In the most recent quarter, that impact was particularly large, subtracting 1.4 percentage points off of growth.

Vital Signs Chart: Government Cuts Slow Economy - The nation’s economy grew 2.2% in 2012, thanks to spending by consumers and businesses. Government continued to be a drag on growth, although less last year than it was in 2011. For the past year, spending and investment by federal, state and local government subtracted 0.34 percentage point from inflation-adjusted growth of gross domestic product.

The Big Four Economic Indicators: Real Personal Income Less Transfer Payments - 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 (a more timely substitute for Real Manufacturing and Trade Sales)

I've now updated this commentary to include the January Personal Income data, the red line in the chart below. As expected, the January brought the inevitable reversal of the dramatic advance in the November and December data, which was a result of moving income forward to manage the tax risk in anticipation of the Fiscal Cliff. The -4.7% decline in January essentially cancels the 1.4% rise in November and 3% rise in December. The January year-over-year number probably gives us a better sense of the economic reality: Personal Incomes Less Transfer Payments are essentially flat -- up a tiny 0.7%. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. At this point, the average of the Big Four (the gray line in the chart) is showing contraction. But the Personal Income blip, discussed above, is largely responsible for this step back. The February data will be critical for determining the direction of the economy.

U.S. Entered Recession in January Yet Fed Fix Keeps Stocks Pumped - Welcome to the new recession. TrimTabs tracking of real-time wages and salaries shows that the United States has entered into a recession this year. I had been predicting a slowdown after the big bump in December incomes due to the hike in taxes. It has taken a while for us to get a handle on income this year given all the changes in tax rates. But now enough time has passed that I can say I was right. The U.S. economy has slowed enough to enter into recession.  This is how I know we have entered into a recession. After-tax wages and salaries net of inflation have been shrinking year over year since the second week in January. What has been growing dramatically in real time this year is income and employment tax payments. Withheld income and employment taxes have been running about 8.3% higher year over year, comparing the same 33 business days between Tuesday, January 8 and Monday, February 25.  Checking with our favorite official Washington economist, we now know that higher employment taxes accounted for 6% and new soak-the-rich taxes 2% of that 8.3% gain. That means that, before inflation, after-tax wages and salaries grew by only 0.3% for the 135 million Americans that have jobs subject to withholding. Regardless, there is no doubt that the Obama Administration has taxed us into a recession. Congratulations.

If Not For That Pesky Sequester, by Tim Duy: This morning's Wall Street Journal headline on the sequester included this quote: "If they could get this fixed, the economy is poised to take off," Bank of America Corp. Chief Executive Brian Moynihan said in an interview. I believe this is largely correct, albeit "take off" is perhaps a bit strong. The US economy looks to have shaken off some of last year's doldrums, particularly in manufacturing and the housing recovery is set to accelerate further this year. While clearly some external headwinds remain, notably the ongoing economic disaster that is Europe, I tend to think these will have only a second-order impact on the US economy. The immediate concern is obviously the impact of the sequester and earlier tax hikes, especially considering the evolving views of the impact of fiscal policy. That said, while I find the timing of these policy changes unfortunate and believe they place an unnecessary speedbump in the recovery process, their impact should fade as the year progresses.  Also bolstering the outlook is that the Federal Reserve is most likely to continue the large scale asset purchase program throughout much of this year. That was the message of Federal Reserve Chairman Ben Bernanke this week as he minimized concerns that the risks of additional easing outweighed the benefits. I expect a similar message tonight. The initial impact of the sequestration will likely place enough downward pressure on the economy which, when coupled with still low inflation (low enough that additional easing would not be unreasonable), should be enough to keep the hawks at bay.

The Spinning Top Economy - The central insight of the sectoral balances model of the economy is that not all sectors of the economy can net-save at the same time. That means that if all those of us in the private sector in aggregate want to (on net) take in more money than we spend, then some other sector will have to spend more money than it receives. In a simple three sector version, the three sectors are the domestic private sector, the government sector, and the foreign sector. Net financial assets of all sectors in the economy necessarily add up to zero. This is clearly true – in fact, it’s an accounting identity. Interested readers can find a more thorough explanation of sectoral balances and net financial assets here, but the essential point can be seen visually in the chart below.The bottom of the chart is the mirror image of the top of the chart:

Real Dollars and Funny Money - I keep trying to unravel the confusion knotted beneath the surface of our public discourse about money. For example, it seems evident that most people believe that U.S. Dollars are “created” by business entrepreneurs making profits. Until this happens, the understanding seems to be, the number of dollars available for everyone to try to get some share of is like a big lake of money we’re all drinking from, with the biggest drinker of all being the U.S. government.  What we seem to mean by “economic growth” is this lake growing bigger, and we’re constantly measuring it’s depth and volume in terms of something we call “Gross Domestic Product”. The process that makes the money-lake grow is an entrepreneur investing some of the existing dollars in some venture, and then making a profit on that investment thereby creating new dollars that didn’t exist before, which increases the overall size of the lake. Dollars created in this way are “real” dollars because they are created by private business entrepreneurs competing in a free market. The federal government (for some mysterious and perverse reason that we can’t entirely explain) has the authority to “print” dollars any time it sees the need, but dollars created in this fashion are “funny money”—they simply dilute the value of the “real” dollars and enable the federal government to spend money it doesn’t really have. To protect the “soundness” of our lake of money, we should therefore limit at all costs the federal government’s “printing” of dollars, and the most effective way to achieve this goal is to require the federal government to BORROW dollars from the bond market if, in fact, it has to spend more dollars than it collects in taxes. Having imposed this requirement, we must then carefully track the number of dollars the federal government borrows because if that number exceeds a certain percentage of our Gross Domestic Product, we can assume the government will never be able to repay the debt (because the taxes available from GDP are mathematically inadequate) at which point the federal government will be insolvent

America's Tragic Future In One Parabolic Chart - When it comes to forecasting the long-term trajectory of the US economy, things usually get very fuzzy some time after 2020 because, as even the most hardened optimists, the "impartial" Congressional Budget Office have recently admitted, America has at best 3-4 years before everything falls apart due to the unsustainable demographic crunch that will wallop the US entitlement state as demographics suddenly becomes a four letter word. Beyond that, not even the CBO dares to plot a straight line as to what happens should America not get its fiscal house in order.  Which is why were were very surprised to see none other than Morgan Stanley's David Greenlaw and Deutsche Bank's David Hooper release a paper (whose views do "not necessarily reflect those of the institutions with which they are affiliated") titled "Crunch Time: Fiscal Crises and the Role of Monetary Policy" Since we know that most readers are pressed for time, we will cut to the chase: the following chart shows what according to the authors' own simulation of the US economy, and not that of the CBO, rates on the 10 Year will look like through 2037. The second chart shows what US debt-to-GDP will be for the next two and a half decades. The charts need no commentary. Parabola #1 showing the yield on the 10 Year under the authors' simulation:

Debt, Spreads, and Mysterious Omissions - Paul Krugman -- Binyamin Applebaum reports on a new paper by Greenlaw et al alleging that bad things will happen to America, because debt over 80 percent of GDP leads to high interest rates, and is skeptical – but not skeptical enough. I found the paper amazing, and not in a good way. As Applebaum says, Japan poses a big problem for this kind of analysis. So the question is whether Japan is a special case. The argument that it isn’t revolves around the suggestion that what really matters is borrowing in your own currency – in which case the US and the UK are, in terms of borrowing costs, like Japan rather than Greece. That’s certainly what the De Grauwe (pdf) analysis suggests. Even the quickest look at the data suggests that there’s something to this argument; for example, taking data from the paper itself, and dividing the countries into euro and non-euro, we get a scatterplot like this:

On predicting fiscal doomsday -- IT SURE seems like high public debt levels ought to represent a looming economic problem. Why, then, is it so difficult to demonstrate, conclusively, that they are? It could be due to the econometric challenges posed by any macroeconomic issue: sample sizes are small and the possibility of any number of statistical biases throwing things off is large. Or it could be that debt levels simply aren't, in many cases, as bad as everyone seems to think.  A new paper illustrates the trouble economists have when they try to show that debt is scary. In a paper prepared the US Monetary Policy Forum, economists David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin conclude that "countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of...tipping-point dynamics". But their work is remarkably unpersuasive.

Is U.S. Fiscal Policy Near the Tipping Point? - Of the various critiques of the empirical work presented by David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin, Ryan Avent nails it:  I was immediately concerned by the data sample: 20 advanced economies over 12 years. What's particularly distressing is that just over half of the sample countries are members of the euro zone. In choosing to study advanced economies, the authors specifically note the problem of "original sin" in studies of emerging markets—that countries which borrow in foreign currencies are subject to different debt dynamics—only to then use a sample in which most of the chosen economies are unable to print their own money. For more on why this matters – see Paul Krugman. But to be fair, I am intrigued by the author’s dynamic debt modeling and this:  we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

Our Debt, Ourselves - THE significance of America’s national debt is a serious question, but you would not know this from the current political rhetoric, which consists mostly of vague apocalyptic warnings. I want to present a calmer view, by emphasizing six facts about the debt that many Americans may not be aware of.  Roughly half of outstanding debt owed to the public, now $11.7 trillion, is owned by foreigners. This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts.  The Treasury owes dollars, America’s own currency (unlike Greece or Italy, whose debt is denominated in euros). So the Treasury can always make payments when due — unless it is prevented from doing so by political blackmail over the statutory debt limit, which is now due to be reached in May. Notwithstanding the unprecedented credit-rating downgrade by Standard & Poor’s in 2011, no foreign lenders realistically expect us to default. If they did, they would be insisting on higher interest rates, which they aren’t. Of course, if we were stupid enough to default even once, the cost of borrowing would go much higher, for a long time.

Six “Facts” On Our Debt: Corrections to Robert Solow’s Op-Ed - By L. Randall Wray - In yesterday’s NY Times, Nobel winner Robert Solow tackled the US debt debate, proclaiming that while it is a serious issue, many Americans are not aware of the facts. Solow is a “neoclassical synthesis” Keynesian, the type of Keynesian economics that used to be taught in the textbooks. He was also on the wrong side of the “Cambridge controversy,” as the main developer of neoclassical growth theory. Still, he’s often on the “right side” when it comes to macro policy questions. And at least part of what he says about the US national debt is on the right track. But he gets enough confused that it is worthwhile to correct the errors. I’ll list his six main bullet points, and provide my response below each of his points. (You can see his article for his own explanation of each bullet point.)

Bernanke Sets Out Aggressive Goal for Congress - Federal Reserve Chairman Ben Bernanke laid out aggressive long-run markers for lawmakers consumed in budget battles with the White House.  While Mr. Bernanke wants Congress to avert the sequester and a sharp fiscal contraction in the short-run, he said the government should be focused on reducing debt levels in the long run. President Barack Obama has focused recently on stabilizing debt-to-GDP. Mr. Bernanke, in his testimony, effectively said that wasn’t enough.

Treasury’s Wolin Says Standoffs Hurting Economy –Acting U.S. Treasury Secretary Neal Wolin on Monday said that political stand-offs, including the current debate over across-the-board spending cuts, are a threat to the U.S. economy and must come to an end. In one of his first appearances since taking his new role, Mr. Wolin said that the deep, indiscriminate budget slashing set to begin Friday could stall economic momentum. “Shocks are bound to come,” Mr. Wolin said in a speech to the Chicago Council on Global Affairs. “But what we cannot do–what would be a grave and unnecessary mistake–is to deliberately throw sand in the gears of our recovery.

Survey: 95% Of Economists Say U.S. Fiscal Situation Will Drag On Growth - Professional forecasters nearly unanimously agree that planned across-the-board spending cuts and other fiscal shenanigans will hold back the U.S. economy this year. A National Association for Business Economics survey of 49 economists, released Monday, found that 95% say the uncertain U.S. fiscal situation is a drag on the country’s growth prospects. Those worries aren’t limited to the budget slashing set to take place on Friday alone, but also include a possible late-March government shutdown and a spring debate over the debt ceiling. The result is expectations for relatively slow growth.

'Austerity is Already Here' - Federal government spending often falls after recessions and wars, but the current round of cuts in investment and spending on goods and services is unusually deep. Combined with cuts by state and local governments, the drop in government’s contribution to economic growth is the largest in more than 50 years. Government jobs, which have generally increased during and after recessions, have declined 2.3 percent since the most recent one began in late 2007. [source, article] Alternative title: "How to Make a Slow Recovery Even Slower." I'm guessing you already know my opinion of austerity. Cutting the budget during a deep recession and expecting the confidence fairy to undo the harm is (and has proven to be) a very bad idea.

Austerity That Would Make a European Policy Maker Proud - It’s not just the sequester. It’s that those cuts are coming on top of a bunch of other fiscal and economic headwinds. The two figures below come from Mark Zandi and Moody’  The first shows the quarterly impact to real GDP of the cuts from the sequester, whkch amount to about -0.5% this year, assuming it hits and sticks.  The second figure adds in all the other cuts and tax increases blowing back on growth right now. Focusing on 2013, the sequester isn’t even the biggest chunk.  That dubious honor goes to the expiration of the payroll tax break.  Sum them all up, and you’ve got fiscal policy sucking more than a point off of real GDP growth right now, a level of austerity of which our Congress’s coutnerparts in Europe would surely approve.These figures are part of a presentation I’m giving tomorrow on this stuff—here’s a draft of the PowerPoint.  The figures on slide #7 show a couple of other headwinds to consider.  I’ve written before about the recent spike in gas prices—bad timing for sure, but it’s also true that folks are driving less so it might not bite as much as usual.  Still, that’s another subtraction from disposable incomes.

Obama and GOP Shared Austerity Vision Will Deepen Recession - This Real News Network interview with Professor Dr. Heiner Flassbeck of Hamburg University (recently with UNCTAD) provides a cogent overview of why the impact of the sequester and any budget deal will be to weaken an already-struggling economy. I personally enjoy Flassbeck; he’s articulate and manages to get more information into his interviews than most of experts while keeping his remarks accessible to a broad audience.

The Coming Recession: How Fiscal Responsibility is Economic Suicide - Forbes: My colleagues and I have been writing endlessly about the ignorance of reducing government spending in our current economic straits. Unemployment is stagnant at just under 8% and over 12 million Americans are looking for work–and the latter does not count discouraged workers, those taking jobs well below their skill level, or individuals accepting part-time work when they needed full-time (they add another 10 million or so; Bureau of Labor Statistics). Firms are understandably reluctant to expand operations in an environment where households are debt-ridden and the financial sector continues to be marked more by a desire to get rich quick than facilitate the production of goods and services. Faced with short- and long-term problems, we are far from out of the woods. It is in this environment that members of both parties are falling over themselves to show how fiscally “responsible” they are. And we achieved this lofty goal in fourth quarter 2012 by reducing federal government spending by 15%. The result? Real GDP shrank by 0.1% (Bureau of Economic Analysis; consumers were able to keep this from being even worse due to a surge in spending on durables, something that is not sustainable because once you get your new big-screen TV for Christmas, you don’t buy another one for a while). This is a preliminary figure, but it contrasts sharply with third quarter growth of 3.1%. Not coincidentally, during that period federal government spending grew by 9.5%. We are primed for another recession. The only thing wrong with the debt and deficit is that they are too small. We need to be increasing government spending, not reducing it. What in God’s name are our policy makers thinking?

Fix the Debt's Fuzzy Math - Dean Baker -  Believers in arithmetic are in full retreat in the national budget debate, thanks in large part to Pete Peterson’s Fix the Debt gang. The range of acceptable debate goes from yelling that the sky is falling because of the deficit to the more moderate perspective shown by President Obama and Democratic congressional leaders in favor of a gradual and balanced approach to deficit reduction. But stating the simple and obvious truth—that we have a large deficit because the economy collapsed—makes one an extremely nonserious person in Washington. For all the debate, the facts on the deficit are not really debatable. We had a very modest deficit in 2007, before the collapse of the housing bubble sank the economy. The deficit that year was 1.2 percent of GDP, and it was projected to stay near 1.5 percent well into the current decade, even if the Bush tax cuts were not allowed to expire. The debt-to-GDP ratio was actually falling; we could run deficits of this size forever.

Billionaires for Austerity: With Cuts Looming, Wall Street Roots of “Fix the Debt” Campaign Exposed - With $85 billion across-the-board spending cuts, known as "the sequestration," set to take effect this Friday, a new investigation reveals how billionaire investors, such as Peter Peterson, have helped reshape the national debate on the economy, the debt and social spending. Between 2007 and 2011, Peterson personally contributed nearly $500 million to his Peter G. Peterson Foundation to push Congress to cut Social Security, Medicare and Medicaid — while providing tax breaks for corporations and the wealthy. Peterson’s main platform has been the Campaign to Fix the Debt. While the campaign is portrayed as a citizen-led effort, critics say the campaign is a front for business groups. The campaign has direct ties to GE, JPMorgan Chase, Morgan Stanley and Goldman Sachs. Peterson is the former chair and CEO of Lehman Brothers and co-founder of the private equity firm, The Blackstone Group. For more, we speak to John Nichols of The Nation and Lisa Graves of the Center for Media and Democracy. [includes rush transcript]

The Democratic turncoats behind the “Fix the Debt” attack on Medicare & Social Security - Most left-side commenters paint “Fix the Debt” — the well-funded campaign to scare Americans into believing the debt is not only going to destroy us all, but that massive cuts to Medicare, Social Security and Medicaid are the only way to “fix” the “problem” — as a billionaire-led, CEO-led operation to kill (or at least seriously maim) the social programs by delivering one blow after another. But Fix the Debt is also a bipartisan operation. This is about bipartisanship — real bipartisanship, bipartisanship in the bad way. In a recent post about how the American people overwhelmingly want to strengthen Social Security (and the rest of the social programs), I made the following point about “centrism“: People who perform on TV are fond of talking about the “centrist” position, or the “bipartisan consensus” on various economic matters. This presumes a vertical left-right divide with some kind of center between them. The real divide in this country is not Left versus Right — it’s the Rich versus the Rest. It’s the horizontal division between the people taking all the money they can, and those they’re taking it from.Among the rich, there’s a widely-agreed center position — more for us, less for everyone else on the planet.

Fix the Economy, Not the Deficit, by Dean Baker - It’s hard to be happy about the prospect of the sequester ... going into effect at the end of the week. Not only will it will mean substantial cuts to important programs; it will be a further drag on an already weak economy, shaving 0.6 percentage points off our growth rate. ... Of course, it could be worse. Half of the cuts are on the military side. This will help to bring our bloated military sector closer to its pre-September 11 share of the economy, and going forward, the principle that domestic cuts be matched by cuts in defense spending is certainly better than the idea of attacking domestic spending alone. In addition, the most important programs in the budget—Social Security, Medicare, and Medicaid—have been largely spared the ax—an important victory in the 2011 negotiations. While the odds are against a “grand bargain” that couples tax increases with cuts to Medicare, Medicaid, and Social Security, it remains a possibility. However, it’s more likely that President Obama and Congress will agree to some scaled-down version of the sequester... This will have the deficit hawks yelling and screaming, but that would be the best plausible outcome from the standpoint of the economy.

Deficit hawks' 'generational theft' argument is a sham - "Generational theft." The core idea the term expresses is that we're spending so much more on our seniors than our children that future generations are being cheated. An important corollary is that the government debt we incur today will come slamming down upon the shoulders of our children and grandchildren. The generational theft trope has already been receiving a vigorous workout in the press. Earlier this month, the Washington Post gave great play to a study by the Urban Institute stating that the federal government spends $7 on the elderly for every dollar it spends on kids. As we shall see, this is true as far as it goes, but it doesn't go nearly far enough to render an accurate picture of government spending. The National Journal, another influential publication in Washington, picked up the theme last week by observing that because the sequester exempts Social Security and Medicare from budget cuts, the automatic spending reductions it mandates will fall disproportionately on education and other such boons to the young. This will "deepen the budget's generational imbalance."

Recession, Past Policies Continue to Drive Deficits - Federal deficits and debt have risen sharply under President Obama, but the evidence continues to show that the Great Recession, President Bush’s tax cuts, and the wars in Iraq and Afghanistan explain most of the deficits on Obama’s watch — based on the latest update of our periodic analysis.Although some lawmakers and pundits continue to blame record deficits on the President’s policies in general — and his actions to boost the economy and stabilize the financial system in particular — these policies swell budget deficits only briefly; they have no significant impact on the long-term challenge of large deficits and rising debt (see chart).It’s true that longer-term pressures on spending stem chiefly from an aging population and rising health-care costs.  But those pressures aren’t new; policymakers knew about them when they enacted the Bush-era tax cuts and assented to fighting two wars on borrowed money. This update takes into account the latest Congressional Budget Office projections, including a slightly more favorable economic outlook than in our previous version.  It also incorporates January’s American Taxpayer Relief Act (ATRA), which permanently continued the bulk of the Bush tax cuts as well as Alternative Minimum Tax relief. 

Deficit Is Falling Dramatically, But Only 6% Know That - There is no deficit problem. The deficit is down about 50 percent as a share of gross domestic product just since President Bush’s fiscal year 2009 deficit and  is falling at the fastest rate since the end of World War II. Yet the Washington debate is about how and where to cut us back into recession. Why? Congress should just repeal the sequester – we don’t need it. We have 10 years to fix the long-term deficit situation. We should not be stampeded by deficit-scare propaganda and instead take the time to carefully consider the right approach. That way we won’t make the mistakes that Europe is making. Deficit Falling Here is a chart of the deficit as a percent of GDP: (Data sources below)

Only 6% Of Public Knows Deficit Is Declining - Prof Barkley Rosser at Econospeak also asks questions on the freaking out over the fiscal deficit numbers: Yes, here we go again, massive public ignorance post # I forget how many.  This has been floating around out there for awhile but was on Rachel Maddow last night, and here is a link with suitable discussion of relevant facts from Dave Johnson, perhaps important as this silly sequester is about to land on us supposedly driven by the overwhelming need to get the deficit under control,  Deficit Is Falling Dramatically, But Only 6% Know That As it is, apparently 62% think it is rising, while 28% think it is constant.  Among things that the public is wrong about, this one sticks out for being so far off from the facts.  And as is noted, not only is the deficit declining, but it is doing so at a very dramatic rate.  Without doing anything we should be able to stabilize the debt/GDP ratio within about two to three years, although to maintain that down the road, further adjustments would need to be made.  Being an austerian is one thing, but being completely out of touch with reality is quite another.

U.S. has been doing austerity, and it’s been hurting, not helping - If you want to know why the U.S. economy hasn't been recovering from the great recession fast enough, there's one word that will take you a long ways toward the answer: austerity. All the Republican talk of big government blah blah blah is meant to cover up realities like this: Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.  Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity. That's in marked contrast to how we recovered from recessions in the past, as the graph at the top shows. Meanwhile, inflation-adjusted federal, state, and local government consumption and investment has declined by 4.9 percent.

TC Fiscal Policy Rule : We really need to know just how much fiscal to use. So, I proposed a fiscal spending rule to decide the size of the government budget deficit. There are other excellent ways to create rules for fiscal stimulus as well. Carlos has suggested using the unemployment rate to change the level of payroll taxes. The TC rule right now says – it screams – “WE NEED MORE SPENDING”. In fact, using reasonable numbers, the U.S. Government Budget Deficit should be 13.8%! The rule itself is pretty simple. It uses our two biggest concerns of employment and inflation, and sets targets for them. It also accounts for population growth, so we can keep per capita GDP growing. It relates these three things to give an amount of deficit spending required to hit these targets. Here is the rule: 1.8(Uc – Ut) + (It – Ic) + Pop = % (Gt) 1.8 (Current Unemployment – Unemployment Target) + (Inflation target – Current inflation) + Population Growth = Target % Government Deficit The 1.8 multiplier comes from the well known relationship between employment and GDP called Okun’s Law. Unemployment varies by 1.8 times the change in GDP, according to recent regressions. To get unemployment down 1%, GDP needs to increase by 1.8%.

Another Attack of the 90 Percent Zombie - Mark Thoma points me to a post by Miles Kimball titled What Paul Krugman Got Wrong About Italy’s Economy. So I wondered what important features I got wrong — but to my great disappointment all I found was yet another invocation of the Reinhart-Rogoff claim that bad things happen when debt goes about 90 percent of GDP. Look, this is just not an established result. It’s a correlation; but it could just as well reflect a pathway from slow growth to high debt, or from third factors like political and institutional dysfunction to both slow growth and high debt. This last possibility becomes especially persuasive when you look at the full list of advanced countries that have exceeded the supposed 90 percent threshold in the past 50 years: Japan, Italy, Belgium, Greece. That’s it. So yes, Japan and Italy have had high debt and slow growth; do you really want to say that debt was the only reason for slow growth, or that the Japanese slowdown of the 1990s had no role in causing the rise in debt? Do you really want to say that debt is the only reason for Italy’s poor performance? If your answer to either question is no, you have just said that you don’t believe in Reinhart-Rogoff’s results.

Paul Krugman and the 90 Percent Zombie - Dean Baker  - Paul Krugman is engaged in battle with the 90 percent zombie: the claim that economies go to hell when their ratio of debt to GDP exceeds 90 percent.  I have written numerous times as to why this claim is beyond silly. Among other things, government can sell off assets that would substantially reduce their debt. In the old days governments used to sell off the right to collect certain taxes. We do something similar today with patent and copyright monopolies. Anyhow, if we used these routes to get our debt to GDP ratio below 90 percent, would everyone be happy? However, to my mind, the bullet to zombie head in this story is the fact that we can easily change the debt to GDP ratio with some simple and costless debt management. If interest rates rise as projected, we would have the opportunity to buy back trillions of dollars of the debt issued in the current low interest rate environment at sharp discounts. Suppose we bought back $4 trillion in long-term debt at a price of $3 trillion because higher interest rates lowered the price of the outstanding bonds. This would immediately chop 6 percentage points off our debt to GDP ratio. If that pushed us from 92 percent of GDP to 86 percent of GDP, is everything now hunky dory? According to the 90 percent zombie story it would be.

Everybody Listen Up! The Deficit Is Actually Shrinking, Despite Beltway Propaganda - There is no deficit problem. The deficit is down 50 percent as a share of gross domestic product just since President Bush’s fiscal year 2009 deficit and is  falling at the fastest rate since the end of World War II. Yet the Washington debate is about how and where to cut us back into recession. Why?  Congress should just repeal the sequester – we don’t need it. We have 10 years to fix the long-term deficit situation. We should not be stampeded by deficit-scare propaganda and instead take the time to carefully consider the right approach. That way we won’t make the mistakes that Europe is making.  Here is a chart of the deficit as a percent of GDP: (Data sources below)

A Silver Linings Deficit Playbook - Cheer up, America. Yes, it's February. But spring training has begun, the days are growing longer, and—are you ready for this?—the federal budget picture is improving. Yes, improving. After so many years of bad budgetary news, this may be hard to believe. The public mood certainly seems stuck in a rut of despair and dismay. But budget mavens have noticed several significant developments: Despite seemingly unending political battles, Congress and the president have managed to agree on several measures that reduce the projected 10-year deficit considerably. In addition, the Congressional Budget Office has quietly lowered its deficit projections, in part due to changes in the underlying economic forecast and in part due to changing cost estimates for health care and other items. The country also avoided the dreaded Jan. 1 "fiscal cliff" and pushed the even-more-dreaded collision with the national debt ceiling back to at least May. Meanwhile, Republicans are talking far less menacingly about either shutting the government down or precipitating a debt crisis.

Economists Discover that Fed Bond Purchases Affect the Budget - Wow, you've got to give those economists credit. As Neil Irwin tells us, they figured out that the Fed's bond purchases affect the budget. Of course they put it on the negative side, noting that the Fed stands to lose money when it sells off its bonds at a loss later in the decade if interest rates rise as projected. There are two important points that are worth pointing out on this one. First, the Fed does not have to sell off the bonds. It can simply hold its bonds until maturity as those of us who are a few years ahead of mainstream economists pointed out a while back. If the Fed were to go this route it could reach its targets for restricting money supply expansion by raising reserve requirements. This shouldn't be that hard a concept to understand, the option appears in every intro textbook. The other point that should jump out at folks is that the projected drop in bond prices, which is the reason that the Fed is projected to lose money, presents a great opportunity for the government to reduce its debt burden. The idea is that long-term bonds issued at the current low interest rates will sell at sharp discounts later in the decade, if interest rates rise as projected. These discounted prices will give the government the opportunity to reduce its debt by hundreds of billions of dollars -- perhaps more than $1 trillion -- simply by buying these bonds back at lower prices. Such a move would be utterly pointless since it would not change the country's interest burden at all, but since we currently live in a political environment where the debt to GDP ratio is an object of worship, this would be a great way to appease that god. It sure beats big cuts to Social Security and Medicare.

New crisis looms as budget cuts hit US on Friday - Billions of dollars in harsh budget cuts are hitting the U.S. government on Friday, and officials are conceding that last-minute moves by both Democrats and Republicans in Congress to soften the blow are doomed. Economists and lawmakers alike agree that the cuts, the potential shutdown and the country's series of fiscal crises overall are hurting the country's shaky comeback from the Great Recession, and the effects will be felt around the world. Both political parties have said the cuts — of 5 percent to domestic agencies and 8 percent to the military— could inflict major damage to government programs and the economy at large. Obama, speaking to a group of business executives Wednesday night, said the cuts would be a "tumble downward" for the economy, though he acknowledged it could takes weeks before many Americans feel the full impact of the budget shrinking. Domestic agencies would see their budgets frozen almost exactly as they are, which would mean no money for new initiatives such as cybersecurity or for routine increases for programs such as low-income housing.

Obama's Sequester Deal-Changer - Bob Woodward - Misunderstanding, misstatements and all the classic contortions of partisan message management surround the sequester, the term for the $85 billion in ugly and largely irrational federal spending cuts set by law to begin Friday. What is the non-budget wonk to make of this? Who is responsible? What really happened? President Obama blamed Congress. “The sequester is not something that I’ve proposed,” Obama said. “It is something that Congress has proposed.” The White House chief of staff at the time, Jack Lew, who had been budget director during the negotiations that set up the sequester in 2011, backed up the president two days later. The president and Lew had this wrong. My extensive reporting for my book “The Price of Politics” shows that the automatic spending cuts were initiated by the White House and were the brainchild of Lew and White House congressional relations chief Rob Nabors — probably the foremost experts on budget issues in the senior ranks of the federal government. Obama personally approved of the plan for Lew and Nabors to propose the sequester to Senate Majority Leader Harry Reid (D-Nev.). They did so at 2:30 p.m. July 27, 2011, according to interviews with two senior White House aides who were directly involved.

US Inflation Remains Near Zero as Sequester Looms - Friday's report from the Bureau of Labor Statistics showed U.S. inflation near zero for January. Stated as an annual rate using unrounded data, inflation was 0.36 percent, exactly the same as December. Increases in prices for apparel and transportation services helped to offset lower energy prices. According to the textbook prescription, the ideal time to cut government spending and tighten monetary policy is when the economy begins to approach full employment and the first signs of excessive inflation appear. On the other hand, premature tightening when a recovery is still incomplete is procyclical. A procyclical policy makes slumps deeper, recoveries slower, and booms hotter than they would be if the economy were left to its own devices. This week’s news from Washington suggests a turn from countercyclical to procyclical in macroeconomic policy, despite the fact that inflation is near zero, unemployment remains stubbornly high, and GDP is barely growing, if it is growing at all.  As far as fiscal policy is concerned, all eyes are focused on the package of across-the-board spending cuts known as the sequester, which will come into effect on March first if nothing is done. Yes, another midnight deal might modify the sequester, but fiscal policy will be tightened in any event, for the simple reason that both parties want it to be. The only difference between them is that the Republicans want tightening via spending cuts alone, while the Democrats would like the throw some tax increases into the mix.

Lengthy Impasse Looms On Cuts - Lawmakers in both parties anticipate that a looming set of spending cuts will take effect next week and won't be quickly reversed, likely leading to protracted political uncertainty that presents risks both to Congress and President Barack Obama. It had been thought that the cuts, some $85 billion through the rest of the fiscal year, could be averted or quickly replaced with a longer-term deficit-reduction plan. Those expectations have now dissipated. No significant negotiations are known to be under way between the two parties, which are at an impasse over Mr. Obama's demand that any plan to replace the cuts include more tax revenue. The president and congressional Democrats are looking beyond Friday, when the across-the-board cuts, known as sequestration, are due to take effect. Their strategy is to persuade the public that the cuts would harm defense, education and other programs, make air travel difficult and cost jobs, among other effects. They hope public pressure would force Republicans to reverse course and agree to new tax revenue.

The big sequester gamble: How badly will the cuts hurt? - With the ax set to fall on federal spending in five days, the question in Washington is not whether the sequester will hit, but how much it will hurt. Over the past week, President Obama has painted a picture of impending disaster, warning of travel delays, laid-off firefighters and pre-schoolers tossed out of Head Start. Conservatives accuse Obama of exaggerating the impact, and some White House allies worry the slow-moving sequester may fail to live up to the hype. “The good news is, the world doesn’t end March 2. The bad news is, the world doesn’t end March 2,” said Emily Holubowich, a Washington health-care lobbyist who leads a coalition of 3,000 nonprofit groups fighting the cuts. “The worst-case scenario for us is the sequester hits and nothing bad really happens. And Republicans say: See, that wasn’t so bad.”  In the long partisan conflict over government spending, the sequester is where the rubber meets the road. Obama is betting Americans will be outraged by the abrupt and substantial cuts to a wide range of government services, from law enforcement to food safety to public schools. And he is hoping they will rise up to demand what he calls a “balanced approach” to deficit reduction that replaces some cuts with higher taxes.  But if voters react with a shrug, congressional Republicans will have won a major victory in their campaign to shrink the size of government. Instead of cancelling the sequester, the GOP will likely push for more.

Analysis: Cuts unlikely to deliver promised budget savings (Reuters) - On paper, there's one thing to like about the ugly spending cuts due to kick in on Friday: $85 billion in budget savings at a time when Washington continues to bleed red ink. In reality, the so-called "sequester" is likely to yield less than half that much in the short term. In part, that has to do with the complex way the government handles its money. But it also reflects the probability that the spending cuts will hurt the economy, which in turn will lower tax revenue and drive up the costs of social safety-net programs like unemployment insurance. On top of that, federal agencies - especially the Pentagon - will have to pay penalties to suppliers if the sequester forced them to cancel contracts. Add it up, and the actual savings could be a lot less than budget hawks envision. "There is a possibility that we'd save virtually nothing in outlays," said Steve Bell, a former Republican congressional aide now with the Bipartisan Policy Center, a Washington think tank.

White House releases state-by-state breakdown of sequester’s effects - The White House on Sunday detailed how the deep spending cuts set to begin this week would affect programs in every state and the District, as President Obama launched a last-ditch effort to pressure congressional Republicans to compromise on a way to stop the across-the-board cuts.  Seeking to raise alarm among a public that has not paid much attention to the issue, the White House on Sunday released 51 fact sheets describing what would happen over the next seven months if the cuts go into effect. The Washington area would be hit hard. Virginia, Maryland and the District cumulatively would lose $29 million in elementary and high school funding, putting at risk 390 teacher and teacher-aide jobs and affecting 27,000 students. About 2,000 poor children would lose access to early education. In the area of public health, less funding would mean 31,400 fewer HIV tests. And nearly 150,000 civilian Defense Department personnel in the area would be partially furloughed through Sept. 30 — with a total average reduction in pay of $7,500. (Defense Department officials previously explained that the furloughs would probably come in the form of workers being asked to take one day off per week, amounting to a 20 percent cut in pay.)

Will the Sequester Be an Economic Disaster? = My short answer is “no”, and the longer answer follows.  The Transportation Secretary and other government officials have claimed on television that government cutbacks would have catastrophic effect on airline travel, various other government programs, and overall employment if no deal with Congress is reached prior to March 1 when the so-called “sequester” starts. At that time, a series of cuts in government spending will automatically begin according to a schedule laid out over a year ago. Although the set of agency cuts in spending mandated by the sequester is far from the best way to cut federal spending, as I discuss later, a few calculations show that in the aggregate the spending cuts will not have disastrous consequences. The Congressional Budget Office estimates that if the sequester goes into effect, actual federal spending, which lags appropriations, would decline by about $44 billion over the next seven months. Budget authorizations would decrease by about double that amount, to $85 billion, in the fiscal year ending in September. That is a huge amount of money to you and me, but even the authorized cuts are only a little over 2% of the projected federal budget during this fiscal year. Officially, government spending would continue to be cut for several years under the sequester plan, but no one expects the plan to be continued even for a year, let alone for several years.

Sequester, Revenues, and Timing - The blame game continues, as both sides try to position themselves to avoid blame if it turns out as bad as some reports suggest.  There should be no question in anyone’s mind that this was a bipartisan agreement—both R’s and D’s signed on to the deal with lead R’s enthusiastically endorsing it—and squabbles about who thought of it first strike me as about as relevant as who’s idea it was to form a mob and burn the village.  The mob has demonstrably signed on, and as this point, the problem is the burning village. The White House just released state reports providing their guesstimates of the impact.  And while the truth is no one knows how this is going to play out, I strongly suspect it will be rough at both macro and micro levels.Re macro, estimates are that it shaves 0.5% off of GDP growth and loses hundreds of thousands of jobs—that’s off of an economic baseline that’s already too weak.  My guess is that if the sequestration hits and sticks, the unemployment rate will stay about where it is–stuck around 8%. Re micro, the layoffs and furloughs I’m reading about sound real to me, and I suspect their impact will be felt by many people if this drags on for more than a few weeks.  Disappearing Head Start slots and WIC cutbacks are exactly what low-income households don’t need to be struggling with right now, and for anyone who travels a lot, like I do, the TSA and FAA furloughs are…um…worrisome.   Defense contractors, military civilians, the FDA (food inspectors), health researchers…all face furloughs and/or spending cuts.

Approximate Geographic Impact of the Sequester - From Wells Fargo (using Pew Center data), a graphic depicting exposure to Federal spending, and hence sensitivity to the sequester. The Administration released a geographic breakdown on Monday, which WaPo presents here. Additional coverage from WaPo. Here is a reminder of the macroeconomic impact of the sequester, according to Macroeconomic Advisers .  More discussion of the macro impact of the sequester, here. Update: The Pew Center has created an interactive graphic that depicts the geographical impact, by categories (h/t Wonkblog).

How did we get here? the Roots of Deficit Brinkmanship - March 2013 brings yet another in an endless series of budget showdowns in Washington DC. This time, draconian “sequestration” spending cuts that nobody actually favors are going into effect – because Congress and the President enacted them to end a previous showdown. The cuts will slow economic growth, cost hundreds of thousands of jobs, and devastate essential functions such as air traffic control. Let’s remember how this sequester came to be. Between April and August of 2011, Washington DC was consumed by highly-publicized brinkmanship about raising the debt ceiling. At the last minute the President and Congress agreed on a three-part plan. Strict caps on discretionary programs (that is, most of what the government does) were set in place for the next ten years. A Joint Select Committee on Deficit Reduction was created, and charged with proposing $1.2 -$1.5 trillion in further deficit reduction over ten years. Lastly, the law included the current sequester, to take automatic effect if the Joint Committee failed. It did fail, as has  repeatedly happened with many deficit reduction committees convened over the past three decades. In short, DC stepped back from the brink in August of 2011 by scheduling another brink.

Why Obama Refuses to Kill the Sequester -  Yves Smith - The game of chicken both the Republicans and Democrats are playing with the sequester and the budget/deficit talks is striking. One of the truly bizarre elements is that neither side is signaling the faintest interest in dealmaking of any kind. As I indicated the week before last, the lack of any sense of urgency was obvious: Congress had a holiday last week, and there were no real negotiations or even an exchange of proposals, virtually guaranteeing the sequester would take place as scheduled.  A piece in the Wall Street Journal on Saturday gave a good overview of the state of play. The game plan is now that the sequester will be allowed to kick in and will stay in place until one side cries “Uncle,” when the impact on the economy is hurting one side badly enough in the polls to force it to relent. From the Journal: The president and congressional Democrats are looking beyond Friday, when the across-the-board cuts, known as sequestration, are due to take effect. Their strategy is to persuade the public that the cuts would harm defense, education and other programs, make air travel difficult and cost jobs, among other effects. They hope public pressure would force Republicans to reverse course and agree to new tax revenue….Both sides seem remarkably confident in their contradictory views, which suggests that there is more here than meets the eye. Notice how Bowles and Simpson have been hauled out of mothballs, and how the bipartisan plutocratic Fix the Debt messaging has ratcheted up? But unless both sides get lucky and the sequester produces serious bad photo images (airport lines? parents stuck due to the cessation of federally funded daycare? noise about tax refunds arriving later than usual? slashing of support for low income groups, like rental assistance programs and Head Start? ) it likely be at least a month before there is any economic effect (which means at least another three weeks beyond that before a deal is agreed upon).

Why Obama Refuses to Kill the Sequester- Bill Black - We are in the midst of the blame game about the “Sequester.” I wrote last year about the fact that President Obama had twice blocked Republican efforts to remove the Sequester. President Obama went so far as to issue a veto threat to block the second effort. I found contemporaneous reportage on the President’s efforts to preserve the Sequester – and the articles were not critical of those efforts. I found no contemporaneous rebuttal by the administration of these reports. In fairness, the Republicans did “start it” by threatening to cause the U.S. to default on its debts in 2011. Their actions were grotesquely irresponsible and anti-American. It is also true that the Republicans often supported the Sequester. The point I was making was not who should be blamed for the insanity of the Sequester. The answer was always both political parties. I raised the President’s efforts to save the Sequester because they revealed his real preferences. Those of us who teach economics explain to our students that what people say about their preferences is not as reliable as how they act. Their actions reveal their true preferences. President Obama has always known that the Sequester is terrible public policy. He has blasted it as a “manufactured crisis.”

Obama has always planned to slash spending - Jeff Sachs - To hear US President Barack Obama tell it this week, the budget sequestration – automatic spending cuts due to kick in on Friday March 1 – will decimate the government. Each party is blaming the other, as if something new and unexpected was about to begin. Many of the pending cuts are indeed ill-advised, but the surprising truth is that from the start of his presidency Mr Obama has planned a steep decrease in discretionary spending as a share of national income. Each year he has put a budget on the table. Each year that budget has called for a sharp decline in discretionary spending as a share of gross domestic product in 2012 and later years. His rhetoric about increasing public investments in America’s future has always been contrary to the budgets he has presented, though most of his supporters have been unaware of this contradiction. The administration is now vigorously blaming the Republicans for the pending cuts. Yet the level of spending for fiscal year 2013 under the sequestration will be nearly the same as Mr Obama called for in the draft budget he presented in mid-2012. In fact, so deep were the proposed cuts in discretionary spending that the budget narrative made the surprising point that the president’s plan would “bring domestic discretionary spending to its lowest level as a share of the economy since the Eisenhower administration”.

Obama’s Warnings on Automatic Cuts Obscure Bigger Threats Ahead - While President Barack Obama warns of the dire economic impact from across-the-board budget cuts, the nation may face more serious fiscal debates in the months ahead on a potential government shutdown and renegotiation of the debt ceiling. With just three days before the $85 billion in reductions for this year are scheduled to start, Obama and Republicans led by House Speaker John Boehner yesterday traded blame again for the impasse. The president and his Cabinet officers drew a landscape of lost jobs, long lines at airports, delays at ports and cutbacks at popular national parks.Yet most of the impact of the cuts, known as sequestration, wouldn’t be felt until weeks after the deadline, giving both sides more time to strike a deal. Markets haven’t been moved by the political leaders’ concern, as stocks have risen this year and Treasury rates are little changed. “There is a danger that this is over-hyped,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center and a former Senate Republican budget aide. “Unlike a government shutdown, lights aren’t going to go out the next day. On March 2, virtually everything will be going on as before.”

Yes, Sequestration Will Hurt - From Bernanke's Testimony: However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.  Nothing new to readers of this blog, but always good to hear someone in Washington actually making some factual sense.

Bernanke: The sequester could make it harder to reduce the deficit, not easier - Federal Reserve Chairman Ben Bernanke had something to say about sequestration during his testimony before the House Banking Committee on Tuesday. He thinks the looming spending cuts could actually make it harder, not easier, to reduce the deficit. Why? They’ll hurt growth: The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions. The logic here is simple enough. The sequestration cuts will drag down economic growth this year, which will mean that fewer Americans will have jobs and less tax revenue will pour in. Nothing cures deficits like stronger economic growth. And right now, Congress’s policies are standing in the way of stronger growth.

Ron Johnson: John Boehner Would Lose Speakership If He Caves On Taxes To Avert Sequester - Sen. Ron Johnson (R-Wis.) said House Speaker John Boehner (R-Ohio) would lose his speakership if he agrees to new tax revenues to avert the across-the-board spending cuts that are set to kick in on March 1. "I don't quite honestly think that Speaker Boehner would be speaker if that happens," Johnson told Fox News of Boehner caving on taxes as part of a sequester replacement package. "I think he would lose his speakership." Johnson's comments raise questions about Boehner's leadership post for the second time in as many months. Similar claims made during fiscal cliff talks in December, when some accused Boehner of being more concerned with protecting his job as speaker than with brokering a deal. The pressure on Boehner intensified after his proposal to avoid the fiscal cliff was rejected by members of his own party.

The Fever Swamp of the Center, Continued - Paul Krugman 0 I love Jonathan Chait’s phrase “the fever swamp of the center”; it really is true that self-identified centrists are sounding crazier and crazier, as they try to reconcile their fanatical devotion to the proposition that both parties are equally at fault with the distressing reality that Obama actually advocates the policies they claim to want. And today’s WaPo editorial on the sequester takes the fever to a new pitch. The editorial admits that Obama is calling for exactly the polices the WaPo wants, while Republicans are off the deep end in refusing to consider any revenue; but the piece is nonetheless written as a criticism of Obama, because Mr. Obama has presented entitlement reform as something he would do grudgingly, as a favor to the opposition, when he should be explaining to the American people — and to his party — why it is an urgent national need. Oh, Barack, you’re telling me what I want to hear, but you don’t sound as if you mean it! Oh, and I can’t help reacting to this:Interest alone will have risen from $224 billion this year to an astonishing $857 billion 10 years from now, according to the nonpartisan Congressional Budget Office.Is $857 billion really astonishing? The American economy is huge, and interest costs are currently very low, so some perspective might be in order. Let’s look at interest as a percentage of GDP:

As Budget Cuts Loom, Austerity Kills Off Government Jobs - The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war. And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.  The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.  Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

The sequester showdown isn't really about spending cuts - Despite the rhetoric about how damaging the automatic spending cuts mandated to take effect on March 1 will be, the debate on Capitol Hill isn't really about spending cuts at all. In fact, President Obama has already proposed more spending cuts that the sequester would guarantee — including to Social Security and Medicare programs — if the Republicans would just agree to close certain "tax loopholes." Why wouldn't Republicans want greater spending cuts in return for additional revenue? It's because the sequester fight is about protecting current low tax rates on capital gains and dividends and keeping open the carried interest loophole that hedge fund and private equity managers use to reduce their own tax burden. In other words, President Obama would agree to greater spending cuts if only Republicans agree to raise revenue by spreading the tax burden more fairly. A compromise that included both spending cuts and new revenues would obviously reduce the federal deficit by significantly more than the sequester alone. But Republicans have dug in, saying new tax revenues are off the table.

New Spate of Acrimony in Congress as Cuts Loom - With deep federal spending cuts poised to begin Friday, Congress engaged in a new round of finger-pointing, intraparty bickering and frustration on Tuesday, at one point prompting top party leaders to hurl vulgarities at each other. Senate Republicans, who usually find it easy to unite against President Barack Obama, found themselves unable to forge a united front over how to deal with the impeding budget cuts, with some proposing to give more budget power to a White House that most Republicans say they mistrust.  Amid the turmoil, House Speaker John Boehner (R., Ohio) suggested members of the Senate should "get off their a—" to address the so-called sequester. That prompted Senate Majority Leader Harry Reid (D., Nev.)—who says he is used to salty language because his hometown of Searchlight, Nev., had 13 brothels—to return the insult."We should not have to move a third bill before the Senate…begins to do something," Mr. Boehner said. Mr. Reid, noting that the House hadn't passed any bill during the current Congress, said House members were the ones with their behinds on the sidelines.

Sequester Politics: Hard to Believe, but They’re Getting Worse - Just in case you’re not freaked out enough by political dysfunction, take a gander at this little gem cooked up by R’s on the Hill to avoid—well, not avoid, but rejigger—the sequester. Under the Republican plan, Obama would be required to offer a sequester alternative by March 8. Congress would have until March 22 to pass a resolution of disapproval, which would done by a simple majority vote. If that resolution is signed by the president, the original sequestration order would be restored. But the process is subject to a veto, requiring two-thirds to prevail and overrule whatever plan the president comes up with. The President’s proposal must have the same level of cuts as the sequester, and no more than half can come from defense (in the actual sequester, half the cuts are from defense). So, lemme get this straight.  President Obama gets to own the sequester by himself, unless a majority in the Congress doesn’t like what he comes up with.  In that case, they can formally disapprove.  If he then agrees that he doesn’t like his plan either—even though he just came up with it—then we default back to the original sequester.   But if he does still like it, he gets to implement it unless two-thirds of the Congress doesn’t like it either.  In which case…you guessed it…back to the original. You can’t make this stuff up, folks.

How Republicans see the sequester - Ezra Klein  - On Monday, after I admitted that I still didn’t understand the GOP’s position on the sequester, I had a lot of useful conversations with Republicans both in and out of government about their view of the issue. The first fact worth noting is that there’s no Republican “position” on the sequester. There are a set of positions — perhaps it would be more apt to call them theories — that sometimes match up and sometimes don’t. One argument — the most common argument — is that Republicans are simply done raising taxes. Many respondents couldn’t even believe I was asking this question, as the answer was so thunderingly obvious. The GOP’s top priority is resisting further tax increases, and given President Obama’s insistence on new revenues in any sequester replacement, their position on the sequester is exactly what you’d expect if you held that principle as inviolable. There’s no cause for confusion here. In Washington, the Republican hatred of tax increases is treated as less a policy position than a law of nature, like gravity, or the sun rising in the East. This permits it to escape serious scrutiny. But in this case, it deserves some.

GOP Economic Sabotage Strikes Again with Sequestration - As “sequestration” spending cuts seem increasingly likely to take effect tomorrow, and the blame game escalates over responsibility for the fallout, some incorrect revisionist history as well as (silly) pox-on-both-houses punditry merit comment. If sequestration takes effect, it will be because congressional Republicans put draconian spending cuts in play, and have subsequently refused to replace those cuts with more sensible deficit reduction. And should sequestration take effect, this would not be an isolated case of economic policy malpractice: Congressional Republicans have consistently hamstrung efforts that economists overwhelmingly agree would have meaningfully helped lower the unemployment rate and instead advanced policies projected to decelerate near-term growth. My colleague Josh Bivens and I recently chronicled at length the numerous, varying ways Congressional Republicans have deliberately obstructed a stronger economic recovery over the past four years. 1 This economic and budgetary obstructionism, in turn, has been a considerable factor explaining why U.S. economic growth has decelerated since mid-2010 and is currently far too slow to push the economy back to full health in the next few years, already more than five years after the start of the Great Recession. What follows is a not-so-quick history of how we got to this week’s deadline.

The Sequester and the Tea Party Plot - Robert Reich - Imagine a plot to undermine the government of the United States, to destroy much of its capacity to do the public’s business, and to sow distrust among the population. Imagine further that the plotters infiltrate Congress and state governments, reshape their districts to give them disproportionate influence in Washington, and use the media to spread big lies about the government. Finally, imagine they not only paralyze the government but are on the verge of dismantling pieces of it. Far-fetched? Perhaps. But take a look at what’s been happening in Washington and many state capitals since Tea Party fanatics gained effective control of the Republican Party, and you’d be forgiven if you see parallels. Tea Party Republicans are crowing about the “sequestration” cuts beginning today (Friday). Sequestration is only the start. What they set out to do was not simply change Washington but eviscerate the U.S. government — “drown it in the bathtub,” in the words of their guru Grover Norquist – slashing Social Security and Medicare, ending worker protections we’ve had since the 1930s, eroding civil rights and voting rights, terminating programs that have helped the poor for generations, and making it impossible for the government to invest in our future

Bernanke Speaks Economic Sanity to Dr. Strangelove Congress - On the eve of draconian budget cuts known as the sequester comes Federal Reserve Chair Ben Bernanke's semi-annual Congressional testimony along with an accompanying Monetary Policy Report.  Contained within is some economic sanity shared by most economists on what sequestration is really going to do. A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.  Contrast that with the House Financial Services Committee Chair's opening statement.  Chair Hensarling is so off mark, it is like he is on another planet.  Hensarling rails against inflation, when there is none and claims many economists agree (when in fact they do not), that the Federal Reserve is in the outer limits with their policies. Yes, he is referencing the 1950's Science Fiction TV show.  He even claims millions of Americans are not impressed with the Fed's results, as if the Federal Reserve can enact policies, to get people back to work.   It is Congress who are derelict in their duties and only Congress and this administration control policies and laws which could get people back to work and generate jobs.

Ben Bernanke, Hippie, by Paul Krugman - Now, as then, this consensus has seemed impenetrable to counterarguments, no matter how well grounded in evidence. And now, as then, leaders of the consensus continue to be regarded as credible even though they’ve been wrong about everything..., while critics of the consensus are regarded as foolish hippies even though all their predictions — about interest rates, about inflation, about the dire effects of austerity — have come true. So here’s my question: Will it make any difference that Ben Bernanke has now joined the ranks of the hippies? Earlier this week, Mr. Bernanke ... spoke more clearly and forcefully on fiscal policy than ever before... First of all, he pointed out that the budget picture just isn’t very scary... He then argued that given the state of the economy, we’re currently spending too little, not too much... Finally, he suggested that austerity in a depressed economy may well be self-defeating... Regular readers may find these propositions familiar, since they’re pretty much what I and other progressive economists have been saying all along. But we’re irresponsible hippies. Is Ben Bernanke? (Well, he has a beard.)

The Sequester is Not Too Big, It is Too Stupid - The latest chapter in Washington’s never-ending fiscal drama is about to play out in tomorrow’s sequester–a word most Americans should never have had to learn. For all the partisan noise about these automatic spending cuts, it is important to keep in mind that they are both relatively small and very stupid. First, the size. As the chart below shows, the amount of money at issue is modest–at least in federal budget terms. The blue bars represent CBO’s total spending projections for 2013. The red bars (if you can even see them) represent the amount that would be cut as a result of the sequester. To put it in more understandable dollar terms, 2013 defense spending would be cut by about $43 billion, or roughly 7 percent. Non-defense discretionary spending—the money for foreign aid and most federal agencies—would be cut about $29 billion, or roughly 5 percent. Mandatory spending would be cut by $13.9 billion off a base of more than $2 trillion, or 0.7 percent. Truth be told, the overall size of the spending cuts is not a big deal. This, of course, is where stupid comes in. Federal agencies have little or no discretion to target spending cuts by, say, getting rid of obsolete or poorly-run programs. They have to cut them all, the good ones and the bad ones alike. They can’t lay off poorly performing workers, they must furlough everyone.

Congressional Leaders to Meet With Obama as Cuts Take Effect - President Barack Obama summoned congressional leaders to a meeting at the White House March 1, the day $85 billion in spending cuts begin, as both parties say a deal to avert them probably won’t come before the deadline.  Republicans John Boehner, the House speaker, and Mitch McConnell, the Senate minority leader, and Democrats Harry Reid, the Senate majority leader, and Nancy Pelosi, the House minority leader, will attend the meeting. The timing signals that Obama probably won’t spend much effort seeking to avert the cuts before they begin. Instead, Democrats say they expect the public to blame Republicans.

Obama to meet congressional leaders on ways to avoid sequester impact - President Obama will meet with congressional leaders Friday at the White House to discuss a way to avoid the fallout of deep spending cuts.  Among the sequester’s possible impacts, the head of the Federal Aviation Administration warned Wednesday, are major flight delays and the closure of hundreds of air traffic control towers at smaller airports across the country. “Flights to major cities like New York, Chicago and San Francisco could experience delays, in some instances up to 90 minutes during peak hours, because we’ll have fewer controllers on staff,” FAA administrator Michael P. Huerta said in a speech to an American Bar Association forum in Washington. ... Should the cuts occur as scheduled, travelers would begin to notice the impact in mid-April, according to the [National Air Traffic Controllers Association].

White House, Republicans dig in ahead of budget talks (Reuters) - Positions hardened on Wednesday between President Barack Obama and Republican congressional leaders over the budget crisis even as they arranged to hold last-ditch talks to prevent harsh automatic spending cuts beginning this week. Looking resigned to the $85-billion in "sequestration" cuts starting on Friday, government agencies began reducing costs and spelling out to employees how furloughs will work. Expectations were low that a White House meeting on Friday between Obama and congressional leaders, including Republican foes, would produce any deal to avoid the cuts. Public services across the country - from air traffic control to food safety inspections and education - might be disrupted if the cuts go ahead. Put into law in 2011 as part of an earlier fiscal crisis, sequestration is unloved by both parties because of the economic pain it will cause, but the politicians cannot agree how to stop it.

Obama’s Sequester Replacement Plan Would Be Deeply Unpopular - Currently Obama has gotten the political upper hand in the sequester fight by blaming the Republicans for the lack of willingness to compromise. Fortunately for Obama, much of the decision about the sequester has been focused on the possible impact of the cuts, who is to blame, and the lack of negotiation. Lucky for the administration, little attention has been paid to the Obama’s actual plan to replace the the entire sequester past the fact that he technically has one. If the American people started looking at the details of Obama’s plan it would likely become very unpopular. Two of the biggest single elements of Obama’s $1.5 trillion plan are a large cut in Social Security/Veteran benefits and a substantial middle class tax increase. Obama proposed adopting the chained-CPI, which is a slower and less accurate measure of inflation than the government currently uses. Because of a slower inflation measure every year beneficiaries would get slightly less money. Over time this cumulative reduction in Social Security would add up to a substantial cut for many beneficiaries. In addition, a slower measure of inflation would impact where tax brackets are set. It would steadily shift many people into higher brackets. As a result, millions of middle class people would end up paying more in taxes.

The Three Huge Ifs in Obama Sequester Strategy  - The administration seems to be banking on the fact that once the sequester starts it will do real destruction to the economy. This destruction will get the public up in arms. That in turn will make the Republicans fold. This strategy though is predicated on three very big ifs. The first is that the pain of sequester will quickly cause a backlash. The problem here is that while immediate austerity will hurt the economy, many of the impacts of the sequester will take weeks and even months to be felt. For example, the administration is highlighting possible teacher layoffs but the impact won’t be felt until the next school year. Even if there is a backlash, for the strategy to work it also needs voters to overwhelmingly blame the sequester on Republicans. Currently the public would blame the GOP slightly more than Obama, but that may not continue. Part of the problem with the sequester is that austerity during a weak economy is bad and the other part is that undirected across the board cuts are idiotic. Republicans are already talking about giving agencies greater flexibility over the design of the cuts. If the GOP spins this as “Obama is purposely making the sequester worse to play politics” they could easily muddle the waters on blame. The final huge if is that Obama could create a deal that is more popular and politically viable than the sequester. Given the number of failed grand bargain attempts, that seems unlikely. The Democrats plan to temporarily delay the sequester would probably poll well but Obama’s plan to fully replace it probably would not. The American people are not going to like the idea of a middle class tax increases and Social Security benefit cuts being used to give money to a bloated Pentagon.

Progressive Caucus Folds - While still on the caucus roster, three-quarters of the 70-member caucus seem lost in political smog. Those 54 members of the Progressive Caucus haven’t signed the current letter that makes a vital commitment: “we will vote against any and every cut to Medicare, Medicaid, or Social Security benefits — including raising the retirement age or cutting the cost of living adjustments that our constituents earned and need.” More than 10 days ago, Congressmen Alan Grayson and Mark Takano initiated the forthright letter, circulating it among House colleagues. Addressed to President Obama, the letter has enabled members of Congress to take a historic stand: joining together in a public pledge not to vote for any cuts in Social Security, Medicare or Medicaid.

Representative Conyers needs our Support to Kill the Sequestration’s Austerity - William K. Black - We have been strangling the economic recovery through economic incompetence – and worse is in store because President Obama continues to embrace (1) the self-inflicted wound of austerity, (2) austerity primarily through cuts in vital social programs that are already under-funded, and (3) attacking the safety net by reducing Social Security and Medicare benefits.  The latest insanity is the Sequester – the fourth act of austerity in the last 20 months.  The August 2011 budget deal caused large cuts to social spending.  The January 2013 “fiscal cliff” deal increased taxes on the wealthy and ended the moratorium on collecting the full payroll tax.  The Sequester will be the fourth assault on our already weak economic recovery.  We have a jobs crisis in America – not a government spending crisis and the cumulative effect of these four acts of austerity has caused a certainty of weak growth and a serious risk that we will throw our economy back into recession. President Obama and a host of administration spokespersons have condemned the Sequestration, explaining how it will cause catastrophic damage to hundreds of vital government services.  Those of us who teach economics, however, always stress “revealed preferences” – it’s not what you say that matters, it’s what you do that matters.  Obama has revealed his preference by refusing to sponsor, or even support, a clean bill that would kill the sequestration threat to our Nation.  Instead, he has nominated Jacob Lew, the author of the Sequestration provision, as his principal economic advisor.  Lew is one of the strongest proponents of austerity and what he and Obama call the “Grand Bargain” – which would inflict large cuts in social programs and the safety net and some increases in revenues.  Obama has made clear that he hopes this Grand Betrayal (my phrase) will be his legacy.  Obama and Lew do not want to remove the Sequester because they view it as creating the leverage – over progressives – essential to induce them to vote for the Grand Betrayal.

Bill Black: Support Representative Conyers’ Bill to Kill Sequestration’s Stealth Austerity - from naked capitalism  Yves here. It’s worth reading Jon Walker’s piece on the sequester gamesmanship along with Black’s take. It looks like Obama has administered a big self inflicted wound, although between his PR apparatus distancing him from reality, and it taking time for the sequester to hit the economy (as in it won’t generate the sort of quick pain needed to shift the political calculus), it will take a while for him to recognize that.*We have been strangling the economic recovery through economic incompetence – and worse is in store because President Obama continues to embrace (1) the self-inflicted wound of austerity, (2) austerity primarily through cuts in vital social programs that are already under-funded, and (3) attacking the safety net by reducing Social Security and Medicare benefits. The latest insanity is the Sequester – the fourth act of austerity in the last 20 months. The August 2011 budget deal caused large cuts to social spending. The January 2013 “fiscal cliff” deal increased taxes on the wealthy and ended the moratorium on collecting the full payroll tax. The Sequester will be the fourth assault on our already weak economic recovery.  We have a jobs crisis in America – not a government spending crisis and the cumulative effect of these four acts of austerity has caused a certainty of weak growth and a serious risk that we will throw our economy back into recession.

Remember: Sequestration was Obama’s Idea - Black Agenda Report - The Obama administration has been very skillful in framing itself as the good guy in the latest looming fiscal disaster, this time under the heading of “sequestration.” On Friday, across-the-board cuts of $85 billion are set to go into effect, wreaking havoc on most government operations. Social Security, Medicare, Medicaid, CHIP, the Children’s Health Insurance Program and what’s left of welfare are not directly affected, but these so-called “entitlement” programs have, in fact, always been the primary targets of this cascade of manufactured crises. Disaster capitalism is manifesting itself as disaster governance, and President Obama is fully complicit in the corporate-imposed charade. Indeed, Obama is most culpable for infecting the nation with austerity fever.  It was Obama who swallowed whole the corporate argument, previously championed by Republicans, that the national debt was Crisis Number One and that entitlement programs were the root cause. From the moment in January of 2009 when Obama served notice that Social Security and all other entitlements would be put on the chopping block, he became the chief mover and shaker for so-called entitlement reform. He created the model for austerity, through his Simpson-Bowles deficit reduction commission. It was Simpson-Bowles that provided the basis for the massive cuts offered by President Obama in 2011. When the Republicans balked at even a modest tax increase for the rich, it was the White House National Economic Council Director, the corporate deal-maker Gene Sperling, who came up with the sequestration scheme, which was timed to explode right after the 2012 elections. The idea was to make every popular constituency in the country scream – and accept the inevitability of massive entitlement cuts

Colbert: Sequester not a terrible problem, it’s a terrible solution - Thursday night on “The Colbert Report,” host Stephen Colbert took on the sequester, the looming series of forced budget cuts that are going into effect after Congress’ failure to hammer out a budget bill. “Tonight,” said Colbert, “a ticking time bomb goes off in Washington, and for once I am not confusing real life with an episode of ‘Homeland.’” Sequestration is now set to begin, a series of deep spending cuts amounting to about $85 billion per year, half from cuts to the defense budget and half from cuts to other federal programs, amounting to a total of $1.3 trillion over the next 10 years. “Yeah, but it’s not going to be that bad,” Colbert said. “There’s no way America’s going to last 10 years. We got 2 in us, tops.”

Counterparties: Sequestration nation - The sequester, those $85 billion in automatic, immediate spending cuts scheduled to go into effect on Friday, wasn’t even supposed to happen. Instead, the sequester was included in the 2011 Budget Control Act and was only supposed to kick in if both parties failed to make a deal to cut US debt. The cuts were intended to be so “arbitrary and widespread that they would be unpalatable to both sides”. Months later, we’re left with no debt deal, a package of cuts nobody likes, and our nation’s top lawmakers instead debating more pressing matters like who needs to “get off their ass”. The economic consequences of the sequester are the only part of this process that are relatively straightforward. The package of cuts could cut as much as 1.25% from GDP this year, Annie Lowrey reports. The Bipartisan Policy Center says this could cost America 1 million jobs over the next two years. Worse, Ben Bernanke told Congress yesterday that the cuts will hurt growth so much, they could actually make the deficit bigger rather than smaller. The White House, for its part, has been on a campaign to detail how these discretionary spending cuts will hurt first responders, the military, and air traffic controllers. (It’ll also hurt the zoo.) The sequester is already causing immigration officials to release detained immigrants. But Phil Gramm reminds us that the US went through a similar drama in 1986: “The nation survived then. It will now.” Binyamin Appelbaum has a tremendous piece today that places the sequester in historical context.

Automatic Reductions in Spending -- aka Sequestration - CBO - We have received many questions in recent days about the budgetary and economic implications of the automatic reductions in government spending that are scheduled to occur under current law (in technical terms, a sequestration). So, we thought it would be helpful to pull together our answers to some of those questions, incorporating information from our most recent economic and budget projections released earlier this month and from CBO’s recent Congressional testimony:  In fiscal year 2013, by CBO’s estimates, federal revenues will rise and outlays will decline as shares of gross domestic product (GDP), resulting in a federal budget deficit equal to about 5.3 percent of GDP (compared with 7.0 percent last year). The fiscal policies that reduce the deficit will lead to less demand for goods and services, thereby holding down economic growth this year, as CBO reported in The Budget and Economic Outlook: Fiscal Years 2013 to 2023. If not for that fiscal tightening, CBO estimates, economic growth in 2013 would be roughly 1½ percentage points faster than the 1.4 percent real (inflation-adjusted) growth that the agency now projects, under current laws, from the fourth quarter of calendar year 2012 to the fourth quarter of 2013.

As Budget Cuts Loom, Austerity Kills Off Government Jobs - The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war. And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years. The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.  Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Sequester will mean lost jobs and less growth - On Friday, the budget sequester is set to take effect unless Congress takes action to prevent it. If it does go into effect, and at this point that appears likely, what impact will it have on the economy and our ability to recover from the recession? The automatic budget cuts in the sequester will trim $85 billion from the government's budget this year. Some agencies will be able to delay the cuts into future years, so the actual impact may be less than that - the CBO estimates it could fall to $44 billion - but that could still have a negative impact on economic growth at a time when the economic recovery is already recovering at a very slow rate. For example, the private forecasting firm Macroeconomic Advisers estimates that "sequestration would cost roughly 700,000 jobs (including reductions in armed forces)" and add a quarter of a point to the unemployment rate.  "The higher unemployment would linger for several years," the group predicts. Fed Chairman Ben Bernanke had a similar assessment in testimony before the Senate Banking Committee this week. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions."

From the Schoolhouse to the Factory Floor, Girding for Cuts - The owner of a Missouri smokehouse that makes beef jerky is worried about a slowdown in food safety inspections. A Montana school district is drawing up a list of teachers who could face layoffs. Officials at an Arizona border station fear that lines to cross the border could lengthen. And if Olympic National Park in Washington cannot hire enough workers to plow backcountry trails, they may stay closed until the snow melts in July. With some $85 billion in spending cuts — known as sequestration — set to begin at the end of the week, officials in Washington were blaming one another. In the rest of the country, local officials, business owners and people who rely on government services were trying to fathom what it would mean for them.

Dr. Richard Wolff on the Sequester - I watched  Dr. Wolff (Professor emeritus, UMass) on this past week  episode with Bill Moyers.   At the end of this show, Mr. Moyers invited the viewers to submit questions to Dr. Wolf who has agreed to return in a couple of weeks to answer them. Here is he with an interview by Julianna Forlano of Absurdity Today report.  If you are not familiar with Julianna, she does a very funny short news broadcast on the issues of the moment.  I am a subscriber.  It's is worth your time for sure. This is the first part of 4.  It is about 12 minutes.  I want to say, at the end, Dr. Wolff is also pointing out that the cuts do not come all at once. I figure this video is also posted in response to the video rjs linked to in comments to Bev's post. .

Science must be spared Washington’s axe - Scientific discovery improves life and creates wealth like nothing else. But that notion has essentially been on trial in the US for decades. According to the National Science Foundation, federal spending for research and development grew at just 1.3 per cent annually from 1989 to 2009, while gross domestic product rose 2.4 per cent. That is bad news – but may be about to get worse. The US is poised to allow across-the-board cuts to federally funded research from Friday, as part of the automatic budget cutting known as sequestration. This would be a big mistake. It would further weaken the most powerful stimulant of economic growth ever devised. Since the second world war, universities and companies have transformed discoveries into industries: fully 75 per cent of postwar growth is tied to technological innovation, according to the commerce department. Our model is well understood: countries everywhere are pursuing their own innovation-led growth. In the US, the focus on the federal deficit threatens to blind leaders in Washington to an essential truth about our economy: we have a growth problem. The US is climbing out of a recession, but our annual growth rate is only about 2 per cent. To slash America’s R&D capability in the name of fiscal responsibility would be akin to seeking greater efficiency for an aircraft by jettisoning the engines. While R&D accounts for a small share of federal spending, it is disproportionately important in supporting long-term economic growth.

The real problem with the sequester is that it unfairly targets the poor -  Instead, the cuts are concentrated in what's known as "discretionary" programs, because Congress funds them on an annual basis (unlike "entitlement" programs, like social security, which have permanent funding). About half of discretionary spending is for defense; the other half is for a wide range of activities including education, medical and scientific research, law enforcement, environmental protection, international aid programs, and support for low-income individuals and families. Discretionary spending accounts for about 35% of total spending, but it will bear roughly 80% of the cuts under sequestration. Also, sequestration will have an especially big impact on some programs because it will occur nearly halfway through the fiscal year, which began last October 1. Some agencies will have to cut their programs more deeply in the remaining months of the year to hit the required savings target. Millions of Americans will feel the impact. To cite just a few examples, we at the Center on Budget and Policy Priorities estimate that the WIC nutrition program for low-income pregnant women, infants, and young children will have to turn away 600,000 to 775,000 children and new mothers by the end of the fiscal year. We also estimate that more than 100,000 low-income families will likely lose housing assistance that helps them afford rent.

Sequester threatens nation’s weather forecasting - Budget cuts set to take effect on March 1 could seriously compromise the ability of the National Weather Service to provide timely, reliable weather forecasts government officials and industry leaders warn. Programs and staffing to support weather forecasting are set to be slashed. An 8.2 percent across-the-board cut in spending, from the so-called sequester, will trim already financially-depleted programs critical for maintaining and improving the NWS’ weather capabilities. “It’s not going to be pretty,”“The sequester has the potential to wreak havoc with so many different things...” The cuts loom large following a two-year onslaught of extreme weather, including Superstorm Sandy and continuing historic drought conditions in the Heartland. In 2011 and 2012, the U.S. experienced the most and second most number of billion dollar weather disasters on record. “Sequestration substantially increases the risk that the United States will not be a weather-ready nation,” “Communities that experience a heightened risk of severe weather – which affects large portions of the nation in the spring and summer – face the chance of greater danger because the Weather Service will not be operating at 100 percent.”

6 Ways the Sequester Will Mess Up the Environment - Unless Congress takes immediate action, the dreaded sequester will take effect on Friday and automatic spending cuts, amounting to $85 billion, will take effect. In addition to slashing budgets for everything from educational programs to unemployment benefits, the sequester will also gut environmental spending, setting back the minimal progress that has been made on issues like fracking regulation, alternative energy, and conservation. On Sunday the White House released a breakdown of how the sequester will impact each state, and the results showed huge cuts to clean air and water protection with New York and California taking the biggest hits at $12.9 million and $12.4 million, respectively. Read on for a look at the six ways these cuts would hurt (or in the last case possibly help) the environment:

Labor Department’s Layoffs Report Could Become Victim of Sequester - The “sequester” spending cuts could cause hundreds of thousands of layoffs across the U.S., economists say. But, in a twist, the cuts will also impede the government’s ability to count those layoffs. The Labor Department is planning to stop producing its monthly report on mass layoffs in the U.S. labor market if sequester begins as expected Friday, according to an internal agency email. Two other economic reports—one counting green jobs and another on international labor comparisons—would also be cut.

Hospital Executive Bracing For Budget Cuts Says ‘We Need To Deal With Medicare’ - David P. Blom is one of thousands of hospital executives across the country who are bracing for a reduction in Medicare payments as part of a series of federal spending cuts that begin Friday. Blom, 58, is president and chief executive officer of OhioHealth, a not-for-profit health care system that includes 18 hospitals, 23 health and surgery centers, home-health providers and other facilities.  He talked with KHN’s Mary Agnes Carey about how his company is preparing to deal with sequestration. This is an edited transcript of that conversation.Inside the organization, we’ve not really made a big deal of this because we actually budgeted for it. Last year when we did our budget, one of the assumptions was for sequestration to occur. … We’re very cost-efficient as an organization. It was just one other element as we were preparing for this fiscal year. … We do a five-year financial forecast every year, and we take very conservative assumptions on that forecast. So we’ve been thinking about Medicare cuts, Medicaid cuts, employers being a lot more cognizant of their own health care spending as we do our own planning. … Can we live with it? Yes. I think we’re able to live with it because we’ve anticipated it for some time.

IRS Furloughs to Begin After Tax Season - The Internal Revenue Service plans to require five to seven days of unpaid leave for many of it employees through September, but it won’t begin the furloughs until the summer in an effort to avoid disruptions in the April tax filing deadline. “The IRS is projecting between five and seven furlough days beginning sometime this summer,” National Treasury Employees Union President Colleen Kelley said. “We have had informal discussions with the agency about this matter and we will engage in bargaining when the formal notice of furlough is provided.” The IRS is a division of the Treasury Department, and Treasury officials have said the furloughs would be necessary to adjust for the budget cuts, known as the sequester, which begin Friday and run through Sept. 30. It’s possible that some of the IRS’s spending adjustments could begin before the summer, even if the agency delays the furloughs, but no schedule has been released. “If sequestration occurs, we will continue to operate under a hiring freeze, reduce funding for grants and other expenditures, and cut costs in areas such as travel, training, facilities and supplies,” IRS Acting Commissioner Steven Miller wrote employees Thursday. “In addition, we will need to review contract spending to ensure only the most critical and mandatory requirements are fully funded.”

Wave of Immigrants Released Ahead of Automatic Budget Cuts - Federal immigration officials have released hundreds of detainees from detention centers around the country in recent days in a highly unusual effort to save money as automatic budget cuts loom in Washington, officials said Tuesday.The government has not dropped the deportation cases against the immigrants, however. The detainees have been freed on supervised release while their cases continue in court, officials said. But the decision angered many Republicans, including Representative Robert W. Goodlatte of Virginia, who said the releases were a political gambit by the Obama administration that undermined the continuing negotiations over comprehensive immigration reform and jeopardized public safety. “It’s abhorrent that President Obama is releasing criminals into our communities to promote his political agenda on sequestration,” said Mr. Goodlatte, who, as chairman of the Judiciary Committee, is running the House hearings on immigration reform. “By releasing criminal immigrants onto the streets, the administration is needlessly endangering American lives.”

We’re headed for the sequester — but it won’t even do much to reduce the deficit. - This afternoon, the alternatives to the sequester advanced in the Senate by Democrats and Republicans were both defeated. This means that as of now, the sequester is going to happen. Beginning tomorrow, the administration will have to implement across-the-board cuts, affecting all areas of the federal government, including defense and social services. The inevitability of the sequester has inspired some analysts and lawmakers to wonder if this is as bad as it looks. “People focus on the upfront cost and they don’t think through the whole timeline,” Tyler Cowen, a George Mason University economist, told by the New York Times, “You have to cut spending within the next 10 years anyway. It may be time to take some lumps.” Sequestration might be bad policy, the argument goes, but at least it helps with deficit reduction. But there’s a big problem here — that’s not even true. A recent analysis from Reuters makes the case: The nonpartisan CBO estimates gross domestic product will grow by 1.4 percent this year, compared to 2.0 percent if the sequester was not in place. The Bipartisan Policy Center estimates the sequester will lead to 1 million lost jobs in 2013 and 2014. Slower economic growth means the government will collect less tax revenue as businesses and workers earn less than they would otherwise – a fact that Federal Reserve Chairman Ben Bernanke highlighted in congressional testimony on Wednesday.

Pre-Season Is Over: Sequester Politics Opening Day Is Today - What's happened so far on the sequester is the equivalent of spring training in baseball. But everything changes today as the sequester that so far has only been hypothetical and something primarily discussed inside the beltway starts to become real for increasing numbers of voters outside Washington. Polls taken over the past week or so show that only about 25 percent of Americans say they have been following the sequester argument (It's really hard to call it a "debate"). That number will increase rapidly as the sequester spending cuts reduce federal services that people rely on and like and voter emotions change from amusement to annoyance to outrage. This is not speculation: It's exactly what happened during the 1995 and 1996 government shutdowns. Republican intransigence changed to extreme political concern as the shutdowns continued and the federally-provided services that many outside of Washington didn't even realize were federally provided continued to be unavailable to them. The inconvenience changed to anger and then outrage when those who did business with the government realized they couldn't get their invoices processed and proposals reviewed, and there was no way to deliver what had already been ordered.

Stephanie Kelton talks with Chris Hayes on Sequestration - Stephanie Kelton is appearing on UP with Chris Hayes this Sunday, March 3rd. Airtime is 8 a.m. eastern on MSNBC. The topic of discussion is the sequestration and it’s economic impacts.

OTE Live!: Richard Kogan on How Sequestration Is Likely to Play Out - When I want to understand the details of how the automatic cuts known as sequestration are likely to play out, I think “Richard Kogan.” And I’m lucky enough to be able to walk down the hall and cajole him into sharing his deep, institutional knowledge with us.

Goldman Sachs on Sequestration Cuts - In 2011, Congress passed and the President signed the Budget Control Act, which raised the debt limit by $2.1 trillion and cut $2.1 trillion from projected spending over the following ten years. Caps on discretionary spending levels were estimated to reduce spending by $900bn compared with baseline projections that assumed spending would growth with inflation. The remainder of the savings was to be achieved by the congressional “super committee.” To motivate the super committee, and to ensure deficit reduction even if it failed, the legislation established $1.2 trillion in automatic cuts through 2021 by means of sequestration if the super committee could not agree on at least that much in deficit reduction. The super committee failed to agree on a deficit reduction package, leaving sequestration to take effect. The cuts are not that large in the context of the $3.5 trillion federal budget, but sequestration will nevertheless cause real disruptions because the law to implement the cuts is very prescriptive and because they must be phased in relatively quickly once triggered ...We estimate that sequestration will reduce annualized growth in 2013 by 0.6 percentage point (on a Q4/Q4 basis), with the greatest effects in Q2 and Q3. We expect the effect on growth to wane somewhat starting in Q42013, as the rate of reduction in federal spending becomes more gradual. Although sequestration will reduce the level of spending further in 2014, the rate of change will be much more gradual by that point so the effect on growth should be much smaller. ...We expect slightly less of an effect on employment compared to the effect on GDP growth. The Congressional Budget Office estimates that the cuts will reduce employment at the end of 2013 by 750,000, or roughly a 0.5% reduction in employment, similar to the 0.6pp reduction in growth it assumes will result from sequestration in 2013.

The Sequester Begins to Fester -  I’ve come to the end of my rope and can’t write about this anymore.  It’s just too ridiculous to spend time analyzing this part of contemporary fiscal policy–the part where they set fiscal time bombs and then scrum around defusing them…or not–as if it makes sense.  It’s nuts, and I refuse to treat it as some kind of new normal. So, a few random observations and then I’m due back in reality. Economists, including myself, agree on guesstimates about the magnitude of the sequester’s impact–it’s expected to suck about half-a-point off of growth this year and cost 500,000-1 million jobs.   That’s not recessionary but it means more slogging along of the type I bemoaned yesterday. So how come on Larry Kudlow’s show last night it was one against four (about five minutes in) on this widely accepted point re the sequester’s impact on growth?  To be fair, I agree that a) the sky won’t fall today–if the auto-cuts stick, their impact will be a rolling and cumulative, and b) these waters are largely uncharted–it’s hard to know precisely how the cuts will play out.  But unless you’ve got a good reason to think otherwise–and I heard nothing approach reason in the segment–you’ve got to go with the arithmetic, which in this case means subtraction of an estimated $66 billion in (calendar year!) 2013 outlays.

Sequester, We Hardly Knew Ye - I suspect that by early next week, the sequester will be old news. We’ll be on to the next crisis—the impending government shutdown scheduled for just a month from now. And there may be good reason for that—any deal to avoid the shutdown will almost surely replace the effects of the sequester, at least for the rest of this fiscal year. Indeed, when Congress and President Obama decide over the next month how they are going to keep the government running through Sept. 30, lawmakers will have the opportunity to adjust the across-the-board spending cuts any way they want. In fact, much of the debate will be over just how much of the sequestered funds will be restored in that six month spending bill. And that won’t be the end of it. Congress will then have exactly the same argument over the fiscal 2014 budget. Lawmakers are supposed to finish that fiscal blueprint by the end of September, though they almost certainly will not. The point is, the sequester is not written on stone tablets. Like every other budget gimmick Congress invents, this one can be rewritten, waived, and otherwise adjusted. And like every one before it, it probably will be. The result is that many of the dreaded consequences of the sequester will never happen. Or, they’ll be overwhelmed by the effects of a government shutdown. Take, for example, federal employee furloughs. The sequester forces as many as one million workers to take limited time off without pay—on average for about 14 days spread over the next seven months. But those furloughs can’t take start until April 1.

Obama signs ‘sequester’ spending cuts into effect - President Barack Obama signed the spending cuts he lambasted as “dumb” on Friday night, forcing the enactment of the so-called “sequester” as of midnight. According to NBC News, the White House confirmed the authorization of the $85 billion in cuts in quiet fashion, not even sending a photo of Obama signing them into effect after weeks of sniping between his administration and the Republican Party.  The tete-a-tete continued almost literally until the last minute, with the president saying at a press conference Friday morning that the country would have to prepare for rougher financial times in the months to come.

Budget Cuts’ Impact May Be Difficult to See Right Away -  Seventeen months after President Obama signed doomsday budget legislation that was never intended to become law, the sweeping spending reductions in the measure have been imposed.Late Friday night, Mr. Obama formally triggered spending cuts that will reach across the breadth of the federal government after he failed to persuade Congressional Republicans to replace them with a mix of cuts and tax increases.  In a 70-page report to Congress accompanying the order and detailing the reductions — agency by agency and program by program — Jeffrey D. Zients, Mr. Obama’s budget director, called them “deeply destructive to national security, domestic investments and core government functions.”  But even as the cuts become official, some of the immediate impact is difficult to see.  The process of trimming government budgets is slow and cumbersome, involving lengthy notifications to unions about temporary furloughs, reductions in overtime pay and cuts in grant financing to state and local programs. Less federal money will, over time, mean fewer government contracts with private companies. Reduced overtime for airport security checkpoint officers will make lines longer, eventually.

The Dumb Sequester Cuts Are Only For 7 Months - I've actually made this point twice today already, but both times it's been buried in a longer post. So here's a post that just says one thing:Yes, it's a dumb idea for the sequester to make equal, across-the-board cuts to every single agency in the U.S. government. But those dumb cuts are only for this fiscal year, which ends in September. For the following years, the cuts will be made mostly through the normal appropriations process. Congress and the president will have lots of freedom to make the cuts exactly where they want to, and to spare whatever programs they can agree on. Just keep this in mind. It's dumb to cut R&D spending, for example, but it's only being cut for seven months. After that, normal funding will be restored if Congress can figure out someplace else to make the cuts instead. They can even do this in a limited way via the continuing resolution scheduled for a vote later this month. The sequester is dumb, but it's slightly less dumb than people are making it out to be.

What we have here is a failure to communicate -  If you go to, the first thing you’ll see is an invitation to read the president’s plan to replace the sequester. That plan is only a page. “Savings from Superlative CPI” — another way of saying chained-CPI (consumer price index) — is one of the items in bold type. It saves $130 billion over the next decade, mostly by cutting Social Security benefits. And yet there are key Republican legislators — the very Republicans who say they want to strike a deal, and who the White House will need if it’s going to get a deal — who don’t know the president is even willing to consider it.

Sequester will mean lost jobs and less growth - The automatic budget cuts in the sequester will trim $85 billion from the government's budget this year. Some agencies will be able to delay the cuts into future years, so the actual impact may be less than that - the CBO estimates it could fall to $44 billion - but that could still have a negative impact on economic growth at a time when the economic recovery is already recovering at a very slow rate. For example, the private forecasting firm Macroeconomic Advisers estimates that "sequestration would cost roughly 700,000 jobs (including reductions in armed forces)" and add a quarter of a point to the unemployment rate. "The higher unemployment would linger for several years," the group predicts. Fed Chairman Ben Bernanke had a similar assessment in testimony before the Senate Banking Committee this week. "The CBO estimates that ... the automatic spending sequestration that is scheduled to begin on March 1 ... will contribute about 0.6 percentage point to the fiscal drag on economic growth this year," Bernanke said. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions."

Number of the Week: Government Payrolls Shrinking Even Before the Sequester - 21.9 million: The number of government workers in the U.S. in January, the lowest total in seven years. The billions of dollars in federal budget cuts known as the “sequester” began to take effect on Friday after President Barack Obama and Congressional Republicans failed to reach a deal to avoid them. But even before the latest round of cuts, the public sector was getting smaller by at least one critical measure: jobs. Federal spending is still rising. But that is mostly because of the rising cost of entitlement benefits, primarily Social Security and Medicare, as well as interest on the national debt. Spending on most everything else, from defense to scientific research, is falling as a share of economic output—and in many cases falling outright. Inflation-adjusted federal spending, as measured by the Commerce Department in its GDP accounting, has fallen in seven of the past eight quarters.

Paul Krugman: Sequester ‘was designed to be stupid’ - Nobel Prize-winning economist Paul Krugman used some of President Barack Obama’s language on Friday in describing the spending cuts the president signed into effect. While the federal sequester isn’t as bad as the “fiscal cliff” debate that tied up Congress and the White House at the end of 2012, Krugman told MSNBC host Ed Schultz, “it’s bad, and of course, it’s degrading government services. Not only are cuts the wrong thing to be doing right now, but these are especially dumb cuts.”Before making them official, Obama called the cuts “dumb” and “arbitrary” following a meeting with GOP and Democratic party leaders. A report that 700,000 jobs would be lost on account of the spending cuts, Krugman said, was conservative, given the effects of similar cuts across Europe. “This was designed to be stupid,” Krugman said. “The whole point was, this was supposed to be a doomsday device that would force the [Democratic and Republican] parties to reach an agreement. Of course, they didn’t, and here it goes.” While the effect of the spending cuts would take time to manifest, Krugman told Schultz, they would definitely be felt by late 2013.

Obama warns of lengthy fiscal crisis - Barack Obama prepared the US for a lengthy fiscal crisis and a weaker economy, saying it could take months for the White House and Congress to reach a deal to reverse sweeping budget cuts that were ushered in on Friday. The US president spoke from the White House after a summit with congressional leaders ended without any last-minute agreement to stop sequestration – cuts worth $85bn through the end of September and $1.2tn over a decade. On Friday evening Mr Obama signed the official directive to put the cuts into effect, ordering government agencies to reduce their budgets by $85bn between Saturday and October 1. The letter to Congress from the Office of Management and Budget said defence spending would be cut by 7.8 per cent and discretionary spending by 5 per cent. The crisis over sequestration is the latest chapter in a long-running political battle over US fiscal policy, including a brush with a US debt default in August 2011 and January’s agreement to prevent huge tax increases from hitting the US economy. Mr Obama said he hoped Republicans would still come around to his view that new revenue from curbing tax breaks for the wealthy should be part of a package to replace the across-the-board cuts, which he called “dumb” and “arbitrary”.

How Sequestration Could Trigger The Mother Of All Government Shutdown Fights - If the consequences of indiscriminate defense and domestic spending cuts aren’t severe enough at the outset to force Congress and the White House to cut a deal in early March, the fight over sequestration could easily be swallowed by a different — more routine, but more pressing — budget fight. Funding for the federal government expires on March 27, and if Congress doesn’t pass legislation to renew that funding, most government services will grind to a halt. The turbulence of sequestration will turn into the spiral-dive of a government shutdown. These issues might seem wholly distinct. After all, sequestration emerged as a tool to force Congress into an agreement on taxes and entitlement spending, whereas a government shutdown would be the consequence of Congress failing to pass federal appropriations — a different category of spending altogether. But because sequestration largely targets the same category of spending, it stands to reason that Democrats and Republicans will use the imperative of funding the government to press their distinct visions of how to replace sequestration.Thus events of the next several days — particularly the public’s early reaction to sequestration — will determine whether the two issues blend into one, and whether the synthesis redounds to the benefit of one party or the other.

Beyond the Sequester Panic - It’s easy to get cynical about the alarums arising over the state-by-state estimates of sequester impact the White House has released into the hands of anxious and news-hungry local media outlets around the country. And I’m not among those who think the moans emanating from various trees struck by sequester lightning will necessarily convince congressional Republicans to back off and cooperate with Democrats in fixing selected appropriations levels when the continuing resolution runs out next month.  But there’s a long-term effect this rolling fiasco could produce that is worth keeping in mind. The central chimera of American politics at present is that a stable (if slim) majority of voters dislike government spending in the abstract, but resist reductions in almost every identifiable category of government spending one they become concrete. This is why so many Democrats talk tough on the budget deficit even as they contend that austerity policies hurt the economy and that domestic safety-net programs and discretionary investments are essential to the long-term strength of the country. And this is why Republicans are willing repeatedly to bring the country to a standstill to press their repeated demands that Democrats propose “entitlement reforms” even as Republicans pose as the heroes who will ensure there is never a provider claim on Medicare that’s not paid in full.

Sequestering common sense -  The media is going sequester 24-7. Anyone who hasn’t been paying attention to the across-the-board spending cuts about to hit this Friday is about to have little choice. The brouhaha about the austerity bomb is drowning out any attention to what is actually going on in the economy — which is supposedly the point of the whole debate. The stark reality is the economy is still in trouble and Americans are still hurting. The economy contracted last quarter, even before Americans got hit with the end of the payroll tax holiday, which will take $1,000 out of the typical family’s annual paycheck. The Congressional Budget Office projects that growth will inch along at about 1.5 percent this year. That translates into continued mass unemployment — with more than 20 million people in need of full-time work — and falling wages. The richest 1 percent captured an unimaginable 121 percent of all income growth in 2009 and 2010, coming out of the Great Recession. They pocketed all of the growth in income, while 99 percent of Americans actually lost ground. That trend is likely to get worse rather than better. Federal Reserve Governor Janet L. Yellen described the tragic human costs of widespread, long-term unemployment in an important speech this month. Families lose their homes; divorce and depression rise; children are scarred; skills are lost. A young generation is leaving school to sit on the couch.  Yet most of Washington — from the newly reelected Democratic president to the self-described insurgent Tea Party Republicans — is ignoring this reality to focus on cutting deficits.

Key House conservatives say they can support measure to fund government -  Key House conservatives on Wednesday signaled support for a House leadership plan to pass a six-month continuing resolution next week. Enacting the bill would avoid a government shutdown after March 27, when the current stopgap funding bill runs out. The new draft CR would assume $85 billion in spending cuts slated to hit Friday are left in place, but it would not contain policy riders on issues like healthcare reform demanded by conservatives in the past. Rep. Jim Jordan (R-Ohio), a conservative leader who recently stepped down as the head of the Republican Study Committee, said he and other conservatives would support the measure, even if “Obamacare” and the health reform mandate that insurance plans cover contraception are not defunded. “We would hope the religious issue, the Obamacare would be in there,” he said. “The fact is that if we get the CR at the post-sequester level that is a big win.”

Americans still don’t want to cut any actual government programs: This is quickly becoming the world’s least surprising chart. A new survey from the Pew Research Center finds that most Americans like the idea of cutting federal spending in the abstract — they just can’t agree on any specific areas they’d actually like to cut:Foreign aid is far and away the most popular suggestion for the chopping block, but even here, it’s a close call — 48 percent of respondents said cut it, 49 percent said keep it the same or increase it. (Foreign aid makes up less than 1 percent of the federal budget.) In no other spending area is there majority support for cuts. Pew did find a partisan divide. Republicans are more likely than Democrats to support cuts in most areas, save for military spending. But there were only two areas where a majority of Republican respondents were willing to support cuts: unemployment benefits (56 percent) and foreign aid (70 percent). Meanwhile: “There is no program among the 19 included in the survey that even a plurality of Democrats wants to see decreased.” One interesting finding in Pew’s research is that enthusiasm for expanding the Pentagon’s budget has waned since September 11, 2011. But still only one-quarter of respondents said that military spending should be decreased:

CBO: A Switch to Chained CPI Would Boost Taxes - It’s no game changer, given the gridlock in Washington. But a new government estimate suggests that one of the more-popular ideas for reining in entitlement spending could produce more money than previously thought, particularly by generating higher tax revenues. That might make it somewhat more palatable to critics. The idea involves switching to a new inflation calculation known as “chained CPI” for various federal programs. Currently, benefits under Social Security and other programs are adjusted each year based on increases in the cost of living as measured by the Consumer Price Index. A 1.7% boost in benefits was announced in October, for example. Tax-rate brackets also are adjusted each year using the same measure. Republicans and some others—including Democrat Erskine Bowles of fiscal-commission fame–have floated the idea of replacing CPI with “chained CPI,” a slightly different measure that consistently calculates a lower inflation figure and is meant to better capture consumer behavior. The chained measure, for example, attempts to better account for consumers switching to cheaper substitutes if a product’s price jumps. New figures from the Congressional Budget Office show that the idea would raise significantly more money on the tax side, now that the fiscal-cliff deal is done — $124 billion over a decade, compared with about $72 billion in a 2011 estimate.

Mismeasurement of Federal Spending, Investment and Saving - Much of the motivation for deficit reduction, a goal shared by policy makers across the political spectrum, is the belief that deficits consume the nation’s seed corn. That is, deficits represent negative saving. Because saving is presumed to be the key determinant of long-term real economic growth, deficits deplete the supply of saving and thus reduce growth. There are many problems with this analysis. One is that it assumes that all government spending is consumption. In fact, much of it consists of investment. According to the 2013 budget (see Section 21, Page 356), the federal government will invest $550 billion this year in physical capital (buildings, equipment), research and development and human capital (education). This includes grants to state and local governments for these purposes. It is perfectly reasonable to finance long-lived capital projects with borrowing. Because the benefits will accrue over many years, it would be silly to treat things like highways as if they were consumed within a single year for budget purposes. Virtually all homeowners know this and borrow to buy homes. They understand that the flow of housing services they receive on an annual basis compensates for the interest that is paid. Unfortunately, the federal budget is silly in this respect. It treats investment spending the same way every other budgetary item is treated – as if it were consumption with no long-lasting benefits for the nation.

A Two-Pronged Approach to Tax Expenditure Reform - CBPP - As recent comments from House Speaker John Boehner make clear, a central issue in debates over sequestration and other budget issues is whether higher revenues — on top of those in January’s “fiscal cliff” deal — will play any role in reducing deficits. The revenues in that deal came mostly from raising tax rates on high-income households.  Our new report explains why the next stage of deficit reduction should include major reforms to tax deductions, exclusions, and other tax breaks known collectively as “tax expenditures” and examines several specific proposals. Tax expenditures are ripe for reform.  They are very costly, totaling nearly $1.1 trillion in 2011 — more than Social Security or Medicare and Medicaid combined (see graph.)  And many are “upside down,” meaning they give the biggest benefits to high-income taxpayers, who least need a financial incentive to do whatever the tax break is designed to promote (like buy a home or save for retirement). Also, there is strong support on both sides of the aisle for reforming them. During the fiscal cliff talks, in fact, Speaker Boehner suggested raising $800 billion over the next decade — considerably more than the fiscal cliff deal will raise — by limiting tax expenditures.

Carried Interest, an Unjust Privilege for Financiers - NYT  OF the many injustices that permeate America’s byzantine tax code, few are as outrageous as the tax rate on “carried interest” — the profits made by private equity and hedge fund managers, as well as venture capitalists and partners in real estate investment trusts. This huge tax benefit enriches an already privileged sliver of financiers and violates basic standards of fairness and common sense.. Eliminating the carried-interest tax rate should be an easy sell. It should play to Republicans’ supposed hatred of government handouts and to Democrats’ commitment to social justice. But because of the financial lobby’s clout, the loophole most likely won’t be closed. If it isn’t, shame on both parties for giving us another reason to distrust our democracy and our capitalist system. While the tax legislation passed on Jan. 1 increased the top individual-income tax rate to 39.6 percent from 35 percent for couples making more than $450,000 and individuals making more than $400,000, it left carried-interest income taxed at just 20 percent.

Private equity and real estate managers get a "costly and unjust [tax] perk" - Linda Beale - Through a process of Wall Street interpretation of the law and the "Wall Street Rule" (that says that the government tax administration will have great difficulty gainsaying an interpretation of the tax laws that lots of high-powered--read "wealthy"--Wall Street bankers and friends have arrived at for their own benefit), private equity fund and real estate investment partnerships have long operated under the assumption that their managers can earn compensation income as though they were "partners" in the firms they are managing, even though they make no capital contribution whatsoever.  This is the so-called "carried interest" treatment of so-called "service partners" who receive a so-called "profits interest" in various types of investment partnerships for managing the assets. Various commentators, myself included, have long argued that carried interest should be taxed as ordinary compensation income, just like everybody else's compensation for work done.  I would go further.  The Internal Revenue Code provides for capital interests that are received, in a nonrecognition transfer, for contributions of capital to the partnership.  The concept of profits interests is developed in regulations and lower-court case law, both of which could be overturned by a legislative restructuring of the partnership provisions to make clear that there is no such thing as a service partner other than one who has made a contribution of equity and who also works for the partnership and receives a "guaranteed income" payment of compensation.

What if the Outrage over Excessive Welfare Extended to the Tax Code? -- Senator Jeff Sessions (R-AL) has created quite a stir with his estimates that every household below the poverty level receives an average of $168-a-day (or about $61,000-a-year) in government welfare. Sessions’ calculations are extremely controversial and overstate the amount of government assistance for those in poverty. But for the sake of argument, let’s assume he’s right. How would $61,000 in direct government spending and refundable tax credits for the poor stack up against tax subsidies for the rich? It isn’t even close. Indeed, my colleagues at the Tax Policy Center figure that in 2011 households making $1 million and up got that much in average tax benefits from just two deductions–for charitable gifts and state and local taxes. Add a fistful of other preferences–such as deductions for mortgage interest and exclusions such as the one for employer-sponsored health insurance– and top-bracket households got far more in tax benefits than the poor got in means-tested assistance.   If you include preferential rates on investment income, households making $1 million or more got an additional $119,000 in tax benefits, on average, in 2011.

The lastest "golden fleece" award for a corporate subsidy: just another way to "rig the game for 'the haves'" - Linda Beale - Back when William Proxmire was a senator he created something he called The Golden Fleece Award to highlight instances of wasteful government spending. Now, let it be said early on that waste is rather like beauty--its recognition rests in the eye of the beholder.  The Tea Party neocons see waste in most funding for science, whereas most intellectuals, academics and others see that as investment in the future--especially exploratory, speculative science testing the fringes of theory--which serve the public good.  The Golden Fleece awards have been carried forward by Taxpayers for Common Sense, a 501(c)(3) organization that protrays itself as a "non-partisan budget watchdog serving as an independent voice for American taxpayers They picked "Department of Energy for Federal Spending on Small MOdular Reactors."  This is the nuclear-reactor-in-every-basement idea, for which another half billion dollars (in addition to $100 million already provided) in corporate welfare is planned.  The corporations, not the federal government, will own the R&D and licensing rights.  The government is, in other words, getting fleeced. The federal government is in the process of wasting more than half a billion dollars to pay large, profitable companies for what should be their own expenses for research & development (R&D) and licensing related to “small modular reactors” (SMRs), which would be about a third of the size or less of today’s large nuclear reactors.

Who’s Behind the Curtain of Treasury Nominee Jack Lew’s Funny Money – Pam Martens - Have you ever landed a new job with a private employer who bought you a $1.3 million house and paid you a bigger salary than your boss. Did you ever have an employment contract that called for awarding you a bonus of $940,000 if you could somehow advance yourself from shepherding an insolvent bank to a “full time high level position with the U.S. government or regulatory body.” How about getting a deal where your company will leverage your investment in a Cayman Islands fund by chipping in $2 for every $1 you put in and let you keep all the winnings. Did you ever refinance a mortgage loan, take out $352,195 in new cash and not have to pay a legally mandated mortgage recording tax?   I don’t know of anyone in America who has these kinds of skeletons popping out of their closets daily except  the one man that President Obama continues to support for a “full time high level position” on one of the highest perches in America: his nominee, Jack Lew, for U.S. Treasury Secretary.

Jack Lew’s Grotesque Citi Employment Deal and the Institutionalization of Corruption -  Yves Smith - Corruption has now become so routine in Washington that improprieties far worse than Turbo Timmie’s implausible failure to pay taxes on income from his days working as a consultant to the World Bank barely evoke a yawn from the media. Apparently the fourth estate is  so cowed by the prospect of being cut off from information that it dutifully falls in line. Let’s look at the presumed incoming Treasury Secretary, Jack Lew. He’s a die hard neoliberal, played a role in financial deregulation as Clinton economics team member, and a backer of NAFTA. But what is surprising is the limited interest in his personal dealings, which have been examined critically by Pam Martens and Bloomberg’s Jonathan Weil. Recall that Lew is essentially a career elite technocrat, with his major stint out of government being during the Bush Administration, when he first served as the Executive Vice President for Operations at NYU (where his noteworthy accomplishment was busting the bargaining rights of grad students) and then became the chief operating officer for Citigroup’s alternative investment group.  Weill zeroed in one provision of Lew’s employment agreement at Citigroup, that if Lew left for a “high level position with the United States government or regulatory body” his 2006 and 2007 guaranteed incentive and retention awards. The 2008 rider to the letter provided that if Lew left for the same type of “high level position” his restricted stock would vest immediately. Frankly, I think Weil is more riled up about this provision than he ought to be. The bank was giving particularly generous guarantees for joining.  What I find more disturbing is if you read the totality of Lew’s agreement versus Citi’s performance and Lew’s 2008 pay.

Fred Mishkin's "Outside Compensation" List Revealed - So for all those curious who Fred Mishkin has received money from in the past 8 years, here is a partial list:  Federal Reserve Bank of New York, Lexington Partners; Tudor Investment, Brevan Howard, Goldman Sachs, UBS, Bank of Korea; BNP Paribas, Fidelity Investments, Deutsche Bank,, Freeman and Co., Bank America, National Bureau of Economic Research, FDIC, Interamerican Development Bank; 4 hedge funds, BTG Pactual, Gavea Investimentos; Reserve Bank of Australia, Federal Reserve Bank of San Francisco, Einaudi Institute, Bank of Italy; Swiss National Bank; Pension Real Estate Association; Goodwin Proctor, Penn State University, Villanova University, Shroeder’s Investment Management, Premiere, Inc, Muira Global, Bidvest, NRUCF, BTG Asset Management, Futures Industry Association, ACLI, Handelsbanken, National Business Travel Association, Urban Land Institute, Deloitte, CME Group; Barclays Capiital, Treasury Mangement Association, International Monetary Fund; Kairos Investments, Deloitte and Touche, Instituto para el Desarrollo Empreserial de lat Argentina, Handelsbanken, Danske Capital, WIPRO, University of Calgary, Pictet & Cie, Zurich Insurance Company, Central Bank of Chile, and many, many more. The full list is below:

Columbia Business School Dean Glenn Hubbard's Outside "Consulting And Advisory Relationships" - Yesterday we showed you the "outside compensation" list of Columbia's Fred Mishkin.  Today, it's the turn of Columbia Business School dean and Mitt Romney's "go to economist", Glenn Hubbard. Here they are: U.S. Department of Justice, Airgas, Alternative Investment Group, American Century, America’s Health Insurance Plans, ApexBrasil, Association for Corporate Growth, Bank of America, Bank of New York Mellon, Barclays Services Corporation, BNP Paribas, Capital Research, Citigroup, Deutsche Bank, Fidelity, Franklin Resources, Freddie Mac, Goldman Sachs, Intel, JP Morgan Chase, Microsoft, National Rural Utilities Cooperative Finance Corporation, NMS Group, Oracle, Pension Real Estate Association, Real Estate Roundtable, Reynolds American, Royal Bank of Scotland, Visa, Wells Fargo, Nomura Holdings America, Laurus Funds, Ripplewood Holdings

30 years of financial inefficiency - One of my favorite lines from recent economics papers is the following one from this paper by Thomas Phillipon, who in talking about the performance of the financial sector suggests that “the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.” The claim that the financial sector has been ‘functionally inefficient’ was made 30 years ago by James Tobin, and it’s great to have a quantitative basis to make this sort of judgment. Another way to have some sort of handle on the degree to which intermediation has become more expensive is to look at the spread between funding costs and lending rates. To revisit a theme expressed before on this blog, if one takes a long-term perspective, the idea that inflation adjusted interest rates were especially low in the 2000s is simply mistaken, and there were long periods in the post war to 1980 period that saw very low interest rate facing end borrowers (consumers and non financial corporations).  Given the fact that short policy rates—the federal funds rate—were indeed at historical lows in the early 2000s suggests that there have been rising spreads. The figure below—from the latest draft of a paper by JW Mason and I– is the 10-Year Treasury and BAA Corporate Bond rates relative to the 10-Year Ahead Average Federal Funds Rate.

Hidden profits, hidden rents - Evan Soltas has a very good post on the explosive growth of the financial industry since the end of World War II. As a share of GDP, in terms of profits, and in terms of payroll, postwar America has been truly been a golden age for bankers, brokers, and fund managers. In fact, it’s even better than it looks! Soltas begins with a graph: The graph above shows that the financial industry now makes roughly half of all nonfarm corporate profits in the U.S., a share which has risen five-fold since the end of World War II.“Profit” is always something of a sticky subject. We talk about it all the time, like we have any idea what it means. Usually we don’t. There is, for example, the distinction between “accounting profit” and “economic profit”. Accounting profit is what a firm, under generally accepted accounting principles, can claim to be the earnings that accrue to shareholders. Economic profit is revenue that exceeds the true cost, defined as the value of the next-best opportunity, of all inputs. According to theory, in a competitive market, economic profits should be relentlessly pushed toward zero while accounting profits should stay positive but very near the broad market return on capital placed at comparable risk.Suppose there is an industry whose firms about break even in accounting terms, but whose unionized workers, even those without hard-to-find skills, capture salaries much larger than they likely would outside of the industry. Is the industry “profitable”? In an economic sense, it is very profitable. It generates sales that far exceed the opportunity cost of its inputs. But for institutional reasons, those profits are captured by workers rather than accruing to equityholders, and so are missed by accounting measures.

Big banks are as risky as ever, economist warns - CBS video - Anat Admati can foresee the country's economic ruin -- or its salvation. However the chips fall, she'll be able to say "I told you so." In an important new book due out next month, "The Bankers' New Clothes," the Stanford University economist warns that the U.S. banking system is as precarious today as it was before the 2008 housing crash. And given the vulnerability of the country's biggest banks, it won't take the kind of gale-force financial winds that blew down the global economy roughly four years ago to trigger another collapse. "Even without a crisis, it's a system that is living on the edge," Admati said in an interview. The result: Banks often lend too much, leading to periods of wild speculation, or too little, as lenders pass up worthy loans because they can make larger profits on riskier activities. In both cases the economy suffers. Banking is "too highly indebted, and it leaves people subject to all kinds of ups and downs and booms and bust," she added. "There are indications that the financial system is becoming bigger and bigger and more knotted up in the sense of interconnectedness." Admati warns that one explosion could topple the entire system.

Boston Fed’s Rosengren: Banks need a bigger safety cushion -- In a new speech, Eric Rosengren makes two excellent points on the US financial system:

  • 1. Current capital buffers are not “excessive” and indeed “may be to low.”
  • 2. Higher capital standards by themselves may not be enough. Stress tests and resolution plans of just two of the tools that have a role to play.

It is more likely that a requirement that banks have dramatically more equity capital — 20% or 30% or higher — might be enough. But Rosengren probably isn’t suggesting such levels. My additional tools of choice would be more along the line of size caps and restructuring to end Too Big To Fail.

Fed’s Rosengren: Higher Bank Capital Standards May Be Needed - WSJ - It’s possible regulators may need to force the nation’s largest financial institutions to hold even more capital than is now planned in order to limit the threat these potential firms pose to the broader financial system, a top Federal Reserve official said. The warning came from Federal Reserve Bank of Boston President Eric Rosengren, in the text of a speech to be made Monday in Seoul, South Korea. The voting member of the monetary policy setting Federal Open Market Committee was address the ongoing reform of the financial sector, and how regulators are dealing with banks that have been deemed critically important to the functioning of the financial system. Many refer to these banks as too-big-to-fail, and some want to see these companies broken up. Regulators have been working on ways to beef up the capital levels of these firms to make sure they don’t run short when the next shock comes. Mr. Rosengren said the plan to force firms designated as systemically important to hold higher capital has not gone too far. “While the capital buffers should provide significantly greater capital than was held prior to the crisis, the capital buffers do not seem excessive given the losses experienced during the financial crisis at some of our largest institutions,” the official said.

BOC’s Carney: Ring-Fencing Foreign Bank Units Reduces Efficiency = Bank of Canada Governor Mark Carney said Monday that proposals by some advanced nations to “ring-fence” capital and liquidity standards of foreign bank units operating in their jurisdictions could “substantially” reduce the global financial system’s efficiency. Mr. Carney didn’t single out any particular country, but his remarks appear aimed at the Federal Reserve‘s proposals for far-reaching guidelines to change how it regulates foreign banks, subjecting them to many of the same capital and risk-management rules their U.S.-based competitors must follow. They were proposed to prevent efforts by foreign banks such as Deutsche Bank AG and Barclays PLC from eluding tougher rules enacted as part of the 2010 Dodd-Frank financial overhaul law. The proposals have drawn criticism from foreign officials, including Michel Barnier, the European Union’s commissioner of financial market regulation

Mark Carney says G20 bank reforms not enough - While comprehensive financial reforms agreed to by the G20, the world’s biggest industrialized economies, will go “a long way” toward restoring public confidence in banks since the 2008 financial crisis, they won't be sufficient, Bank of Canada governor Mark Carney said today. “Over the past year, the questions of competence have been supplanted by questions of conduct,” Carney said in a speech at Western University in London, Ont. “Several major foreign banks and their employees have been charged with criminal activity, including the manipulation of financial benchmarks, such as LIBOR, money-laundering, unlawful foreclosure and the unauthorized use of client funds," he said. “These abuses have raised fundamental doubts about the core values of financial institutions.” Carney's comments were being closely watched amid continuing weakness in the loonie, which slipped further against the U.S. greenback Monday amid concerns about softness in the Canadian economy and possible border delays caused by a budget deadlock in the U.S.

TBTF Banks Get $83 Billion a Year Taxpayer Subsidy - Bloomberg delved deep and determined U.S. taxpayers are subsidizing the big banks to the tune of $83 billion a year. What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?  How this happens is due to these banks being perceived as too big to fail, giving an implicit U.S. government guarantee to creditors. As a result, Too Big To Fail Banks can borrow at a much lower interest rate than other banks.  Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected. Bloomberg created controversy of course by pointing out bank profits are our dollars so they wrote up a very detailed analysis to explain how they arrived at the $83 billion a year figure:

No Banker Left Behind: How We Give Big Banks $83 Billion A Year In Our Taxes -The country's top five banks - JPMorgan, Bank of America, Citigroup, Wells Fargo and Goldman Sachs - aren't just too big to fail. They're also too big to turn a profit, which is why the profits they report are essentially transfers from us to their shareholders: When we pay our taxes, we give them at least 3 cents on every dollar. More on how we pay these monsters to put us in grave economic danger from that bastion of Marxism, Bloomberg Business. With Ry Cooder telling it like it is. Update: Here's Elizabeth Warren doing it too, grilling Ben Bernanke on the same $83 billion subsidy.

Big Bank Welfare Queens Unprofitable Without Government Subsidies, So Why Don’t We Regulate Them Like Utilities? - Yves Smith - Quite a few readers excitedly sent a link to a Bloomberg editorial, “Why Should Taxpayers Give Big Banks $83 Billion a Year?” which summarizes a study by Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz that the editors used to extrapolate that the five biggest US banks are “barely profitable” if they weren’t able to borrow at artificially cheap rates thanks to the market perception that they are too big too fail. The highly respected Andy Haldane of the Bank of England, in a 2010 paper, “The $100 billion Question” reached a conclusion not quite as dire as Bloomberg’s, but still in the ballpark: So the biggest banks are borderline profitable to unprofitable over the cycle.  Ed Kane of Boston University estimated that in 2009, the cost of systemic risk insurance to the largest banks would have been roughly $300 billion. If we look at the five biggest banks in the Bloomberg list (JP Morgan, Bank of America, Citigroup, Wells Fargo, and Goldman) and look at the proportion of funds they took in the $205 billion TARP Capital Purchase Program plus the additional $20 billion each in equity purchases for Citi and BofA through the Targeted Investment Program, you get that those banks received 57% of the total.* Let be generous and round it down to 50%. You still get an estimated $150 billion in subsides for the five biggest banks. So contra Levine and big bank defenders, doing a more precise tally actually makes matters worse, not better, for the big banks. (video)

Counterparties: Bigger slices, bigger pie - Right now is a lucrative time to be a banker. Profits at US banks rose almost 20% in 2012, to a post financial-crisis high of $22.9 billion. The securities industry, while still unable to match its record-setting 2009 profits, is also doing well, earning $23.9 billion last year, up from $7.7 billion in 2011. Despite America’s persistently high unemployment and tepid growth, its financial employees are doing well. New York State’s Comptroller Thomas DiNapoli, in his annual report on the state’s financial industry, reports that securities firms increased cash bonuses 8% to $20 billion in this bonus cycle. As the WSJ’s Brett Philbin notes, that’s down 42% from the lofty levels of 2006 — but it still comes to more than $122,000 per banker. What’s more, the comptroller’s annual estimate is conservative: it fails to capture many types of deferred pay. For instance, $6.3 million of Citigroup CEO Michael Corbat’s $11.5 million 2012 pay is deferred. Not only have America’s bankers had a good year, they’ve had an excellent two decades. As the Atlantic Wire’s Philip Bump points out, the “last time bankers took home bonuses that were less than the median household income was 1991″.

Warren questions Bernanke on 'too big to fail' - Via Bloomberg comes this snippet from testimony between Senator Warren and Ben Bernanke.  Follow the link as the embed does not seem to work. Partial Transcript via Global Economic Trends
Warren: These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year, simply because people believe government would step in and bail them out. And, I'm just saying, if they're getting it, why aren't they paying for it?
Bernanke: I think we should get rid of it.
Warren: Alright. I'll ask the other question. You were here in July, and you said you commended Dodd-Frank for providing a blueprint to get rid of "Too Big to Fail". We've now understood this problem for nearly five years, so when are we going to get rid of "Too Big to Fail"?
Bernanke: Well, some of the you know uh as we've been discussing, some of these rules take time to develop. Uh, uh. ...."

Bernanke tells Warren ‘too big to fail’ banks ‘will voluntarily reduce their size’ -The Chairman of the Federal Reserve looked mighty uncomfortable Tuesday being grilled by Sen. Elizabeth Warren (D-MA), a former Harvard professor and economics expert who posed one very blunt question to him that many Americans have been asking for years: “When are we going to get rid of too big to fail?” At the Senate banking committee hearing on monetary policy, Warren stressed that small banks are being crushed by interest rates while big banks have made billions from secret, low-interest Federal Reserve loans since the crash of 2008. “So I understand that we’re all trying to get to the end of too big to fail, but my question, Mr. chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion [yearly] subsidy they’re getting?” she asked. His response: “Banks will voluntarily reduce their size” over an undetermined amount of time.

Senator Warren: Why Isn't Wall Street Paying Back Taxpayers For Being 'Too Big To Fail'? - During a Senate Banking committee hearing today, Sen. Elizabeth Warren (D-MA) grilled Federal Reserve Chairman Ben Bernanke on whether Wall Street banks should have to pay back U.S. taxpayers for the implicit funding advantage those banks receive by virtue of being viewed as “too big to fail.” According to a Bloomberg News study, big banks are essentially subsidized by about $83 billion per year because investors anticipate that those banks will be saved by the government if they get in trouble. “These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe the government would step up and bail them out. If they are getting it, why shouldn’t they pay for it?” asked Warren: So I understand that we’re all trying to get to the end of “too big to fail.” But my question, Mr. chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they are getting?…It is working like an insurance policy. Ordinary folks pay for homeowners insurance. Ordinary folks pay for car insurance. And these big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government would step in and bail them out. And I’m just saying, if they are getting it, why shouldn’t they pay for it? BERNANKE: I think we should get rid of it.

Bernanke’s Credibility on ‘Too Big to Fail’ - Simon Johnson - In testimony to the Senate Banking Committee this week, Ben Bernanke made a clear statement acknowledging that very large American banks receive implicit subsidies because the market believes they are too big to fail. This was one of the most forthright public statements on this topic by a top Fed official, and Mr. Bernanke should be congratulated for being honest and direct on this important point. Unfortunately, when it came to discussing how to bring down this subsidy – and addressing the problem of “too big to fail” financial institutions – Mr. Bernanke’s answers were disappointing. Mr. Bernanke was pressed hard on these topics by Senator Elizabeth Warren, a Massachusetts Democrat – you can watch a clip of their exchange. The concerns that Senator Warren expressed are shared by some across the aisle – including Senator David Vitter, a Louisiana Republican, who said at the hearing, “There is growing bipartisan concern across the whole political spectrum about the fact — I believe it’s a fact — that ‘too big to fail’ is alive and well.”

Wall Street’s Been So Obsessed With Elizabeth Warren It Missed The Real Threat In The Senate - Yesterday, Senators Sherrod Brown (D-OH) and David Vitter (R-LA) both gave presentations on the floor of the Senate about ending "too big to fail." Here's part of what Brown said (you can read the full text on his website): Wall Street has been allowed to run wild for years. We simply cannot wait any longer for regulators to act. These institutions are too big to manage, they are too big to regulate, and they are surely still too big to fail. We cannot rely on the financial market to fix itself because the rules of competitive markets and creative destruction do not apply to the Wall Street megabanks. Megabanks’ shareholders and creditors have no incentive to end “too big to fail” – they get paid out when banks are bailed out. Taking the appropriate steps will lead to more mid-sized banks – not a few megabanks – creating competition, increasing lending, and providing incentives for banks to lend the right way.

Sherrod Brown Teams Up With David Vitter To Break Up Big Banks  Multi-trillion dollar financial institutions continue to get richer, exerting more and more control over both America's economy and its political system. The top 20 largest banks' assets are nearly equal to the nation's gross domestic product. Now, Sen. Sherrod Brown (D-Ohio), along with unlikely ally Sen. David Vitter (R-La.), is launching an effort to break up the taxpayer-funded party on Wall Street.  "The best example is that 18 years ago, the largest six banks' combined assets were 16 percent of GDP. Today they're 64-65 percent of GDP," Brown said. "So the large banks are getting bigger and bigger, partly because of the financial crisis, partly because of the advantages they have." The progressive Ohio senator sat down with The Huffington Post in advance of his Thursday speech on the Senate floor to discuss the need to address the "too big to fail" problem and the bipartisan support his work is attracting.

How to (maybe) end too big to fail - This is from a St. Louis Fed write-up of the following Dialogue: St. Louis Fed economist William Emmons led the Dialogue, titled “Robo-signing, the London Whale and Libor Rate-Rigging: Are the Largest Banks Too Complex for Their Own Good?” Joining Emmons for the Q&A that followed were Mary Karr, senior vice president and general counsel of the St. Louis Fed; Steven Manzari, senior vice president of the New York Fed’s Complex Financial Institutions unit; and Julie Stackhouse, senior vice president of Banking Supervision and Regulation at the St. Louis Fed. See the videos and Emmons’ presentation slides at Here's the last part of the write-up on dealing with the too big to fail problem: The Big Banks: Too Complex To Manage?, ... So, how will we deal with the megabanks? Emmons outlined two basic approaches: radical and incremental. The radical approach involves structural changes imposed on the banks themselves or the creation of a different legal definition of what a bank is and what it can do. Radical proposals include:

  • Reduce their complexity and size – Revive the 1933 Glass-Steagall Act (partially repealed by the 1999 Gramm-Leach-Bliley Act) prohibiting combining commercial banking with investment banking or insurance underwriting. Also, reduce their size by placing limits on banks’ assets or deposits. However, Emmons said this proposal likely wouldn’t succeed because combining commercial and investment banking was not the main source of problems; in fact, many of the “too-big-to-fail” institutions that caused problems during the crisis would have been allowed to operate under Glass-Steagall.
  • Create “narrow banks” – Separate payments functions from all other financial activities. Such a bank would take deposits and make payments but not make loans except those that have very little default risk. Emmons said this proposal wouldn’t be successful either because such banks are not likely to be viable. Narrow banks likely would seek to make riskier loans to improve their profitability, while non-narrow banks would seek to enter the payments business in one way or another.

Failure By Design - Did you know the Security and Exchange Commission (SEC) is now collecting 400 gigabytes of market data daily? Midas [Market Information Data Analytics System], which is costing the SEC $2.5 million a year, captures data such as time, price, trade type and order number on every order posted on national stock exchanges, every cancellation and modification, and every trade execution, including some off-exchange trades. Combined it adds up to billions of daily records.  So, what’s my complaint? Midas won’t be able to fill in all of the current holes in SEC’s vision. For example, the SEC won’t be able to see the identities of entities involved in trades and Midas doesn’t look at, for example, futures trades and trades executed outside the system in what are known as “dark pools.” What? The one piece of information that could reveal patterns of insider trading, churning, and a whole host of other securities crimes, is simply not collected. I wonder who would benefit from the SEC not being able to track insider trading, churning, etc.?

Obama's SEC pick wary of zealous Wall Street prosecutions - As Manhattan’s top federal prosecutor during the 1990s, Mary Jo White could have sought the corporate equivalent of the death penalty: indicting Prudential Securities Inc. for fraudulently marketing $8 billion in ruinous energy partnerships to small investors.  Instead, Prudential’s attorneys pressed White, who had earned notice as an aggressive litigator in terrorism and organized crime cases, to consider something less punitive. She ultimately accepted, agreeing to a $330 million fine and placing Prudential on probation, allowing it to avoid criminal charges. “We persuaded them there was an unacceptably high risk that charging Prudential Securities would lead to significant losses for the innocent shareholders,” said Scott Muller, a New York defense attorney who represented Prudential. “What she avoided was inappropriate collateral damage.” How White handled the Prudential case belies her notoriety as a brass-knuckle prosecutor -- a reputation stoked by President Barack Obama last month when he nominated her to be chairman of the U.S. Securities and Exchange Commission.

“Pervasive” Fraud by our “Most Reputable” Banks - William K. Black - A recent study confirmed that control fraud was endemic among our most elite financial institutions.  Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS MarketThe key conclusion of the study is that control fraud was “pervasive” “[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions” (PSW 2013: 29). Finance scholars are not known for their sense of humor, but the irony of calling the world’s largest and most harmful financial control frauds our “most reputable” banks is quite wondrous.  The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of “white-collar” crime.  It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.

U.S. Antitrust Division in Phila. lost many veteran lawyers - Attorney General Eric H. Holder Jr., announced a $100 million-plus cost-savings plan that included shutting four of the seven regional antitrust offices, effective January. That included the Philadelphia office. Don't worry, Holder assured congressional critics. Fewer offices didn't have to mean less prosecution. Antitrust lawyers could relocate to Washington or New York. "Consolidating the staff into larger teams will allow the team to more effectively and efficiently manage larger investigations," division spokeswoman Gina Talamona said at the time. But 14 of the 15 antitrust lawyers assigned to the Philadelphia office are out of the division. Ten have left government. Lawyers have also exited newly shut offices in Dallas, Atlanta, and Cleveland.

Risk is Mispriced Because Money Managers Face no Risk - Steve Roth - Here’s what risk looks like: Having to tell your six-year-old son that you don’t have a birthday present for him because you didn’t have any money left after buying food for the week. Telling your daughter she has to attend the semi-shitty local community college instead of the awesome out-of-state school where she was accepted and is dying to go. Shutting down your small business and taking a shitty wage job because your customers evaporated, due to financial forces utterly beyond your ken and control. Ending up $900,000 in debt for your dead husband’s terminal cancer treatment, because you didn’t have a spare $12,000 a year to spend on health insurance. Being forced from your family home, even from your whole community of decades- or generations-long friends and family, because you made the foolish and irresponsible decision to get married and buy a house in 2006 instead of 2003. Looking your kids in the face as you’re taken to jail for non-appearance, because you failed to send notification to your creditor’s attorney and the court where he’s pursing you of the current correct notice address, the latest place where you’ve managed to put a roof over your kids’ heads. The money managers and financial prestidigitators who “price” “risk” don’t face any risk. If they blow it they’ll be fine, (maybe) just somewhat less prosperous. They and their kids will go to nice schools, live in nice houses, and have good health care. If they blow it, even to the point of blowing up their companies or the whole financial system, they’ll be fine, (maybe) just somewhat less prosperous. Even if their (firms’) behavior was deceptive and fraudulent by any reasonable measure, they face (statistically) approximately zero risk of going to jail.

Occupy the SEC, Frustrated With Regulatory Defiance of Volcker Rule Implementation Requirements, Sues Fed, SEC, CFTC, FDIC and Treasury - Yves Smith - Occupy the SEC has filed suit in the Eastern District of New York over the failure of the relevant financial regulators to issue a Final Rulemaking as stipulated in Dodd Frank. If you read the claim below, you’ll see that the various regulators were given specific dates as to when to complete the rulekmaking. Not only are the out of compliance, they appear to have no intent of finalizing the Volcker Rule.  Occupy the SEC Volcker Rule Lawsuit 2/26/13 by  It is easy to dismiss this sort of undertaking as quixotic or agitprop, but that misses the point. While the issue of widespread apathy is the same, one critical difference is that much of the public still fails to understand the degree to which the ruling classes no longer represent their interests. Oh, they may resent the banks, and they may also hate Congress, but most people deeply need to believe they live in a system that is fair and where business and political leaders (some if not all) still deserve respect and admiration. So efforts like this suit, which in a few short pages sets forth regulators have simply refused to do their job, whether out of intellectual laziness or due to their indulgence of bank stymieing tactics, puts another chink in the official defenses of cronyism. 

Occupy Movement Files Lawsuit Against Every Federal Regulator of Wall Street - The organization is suing every Federal regulator that resides in the pocket of Wall Street – which means they are suing every Federal regulator of Wall Street. And, spunky group that they are, they’re naming individuals too. Here’s the rundown: Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, Martin Gruenberg, Chairman of the FDIC, Elisse Walter, Chair of the SEC, Gary Gensler, Chair of the Commodity Futures Trading Commission, Thomas Curry, Comptroller of the Office of the Comptroller of the Currency, Mary Miller, Under Secretary for Domestic Finance at the Treasury, Neal Wolin, Acting Secretary of the Treasury. Occupy the SEC is serving a valiant public service in bringing this lawsuit. It explains to the court that one of the most critical components of the 2010 Dodd-Frank Act that was supposed to reform Wall Street has yet to be enacted by the regulators and this is in violation of law. The key component is the Volcker Rule, named after former Fed Chairman Paul Volcker, that would prohibit most forms of trading for the house on Wall Street, known officially as proprietary trading. The lawsuit informs the court that Dodd-Frank required that regulators adopt rules relating to this section “within nine months after the completion of a study by FSOC [Financial Stabilization Oversight Council] relating to the Volcker Rule. The FSOC completed that study in January 2011.” The complaint proceeds to explain that the legislative language “is unequivocal in setting this mandatory deadline, which the Defendants and the agencies under their control have missed.”

What do you want? The Volcker Rule! When do you want it? Last summer when you said we’d have it! -   According a press release on Wednesday: Occupy the SEC (OSEC) has filed a lawsuit in the Eastern District of New York against six federal agencies, over those agencies’ delay in promulgating a Final Rulemaking in connection with the “Volcker Rule” The branch of Occupy that’s filing this suit is the same branch that submitted a 325-page comment letter to the agencies on the Volcker Rule back in February 2012 — and no, it wasn’t that it was in really big font or something, though admittedly the note which the press took of the page count was a bit weird. The content of the letter from last year set forth arguments in support of a strong implementation of the rule, complete with penalties. And it was critical of what it referred to as the “lax regulatory posture” of the agencies tasked with turning Dodd-Frank into a reality. The letter also answered a considerable number of the questions posed by the Notice of Proposed Rulemaking (NPR). As Yves Smith of Naked Capitalism noted at the time, most of the comment letters responding to NPRs are from the industry itself and various lobby groups, so it was refreshing to see such a thorough effort on behalf of the 99 per cent — to stick to the strap-line of Occupy for a moment. But that was February 2012. A year has passed, and banks won’t need to comply with the Volcker Rule until July 2014. Occupy the SEC is not amused by the delay. Again from their press release:

Bond Cliff Looms With Slowest Sales Since 2008: Credit Markets - Company bond sales worldwide are on pace for the slowest February since 2008 as the prospect of rising interest rates in the U.S. and persistent recession in Europe quashes the busiest start to a year on record. “Economic conditions don’t warrant necessarily any significant increases in funding,” Kevin Flanagan, chief fixed- income strategist at Morgan Stanley Smith Barney in Purchase, New York, said in a telephone interview. “In terms of balance sheet and liquidity, cash on hand and refunding, the lion’s share of all that balance sheet repair work has been done.”

Gross Says Corporate Bonds Irrationally Priced as Risks Rise - Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said asset-price irrationality is rising after years of record low benchmark interest rates by the Federal Reserve. The level of asset prices signal investors should be cautious and the degree of irrationality is about six on a scale of one to 10 and rising, Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. He noted that Fed Governor Jeremy Stein earlier this month said some credit markets, such as corporate debt, are showing signs of excessive risk-taking, while not posing a threat to financial stability. “Corporate credit and high yield bonds are somewhat exuberantly and irrationally priced,” Gross wrote. “Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile.”

Major Banks Aid in Payday Loans Banned by States - Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.  With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.  While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.  “Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,”

Payday Predators Move to the Internet = Payday loans have to be the poster child for exploiting the poor.  People should never get a payday loan.  Selling blood or begging in the streets is a better option.  The Pew Chartable Trust has been on the warpath to expose these exploitive sorts of financial ripoffs which it turns out are quite the profitable business.  Twelve million Americans take out payday loans each year, spending approximately $7.4 billion annually at 20,000 storefronts and hundreds of websites, plus additional sums at a growing number of banks. The average customer ends up indebted for five months and pays $520 in finance charges. Some of these loans are charging interest rates of 500% and Pew reports the average person taking out a payday loan coughs up $520 in interest and finance charges for just $375 in principle.  Who needs the mob and loans sharks when we have payday loans?  The New York Times reports major banks are enabling these predatory lenders evade new state laws which cap interest rates or ban payday loans altogether. While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

Putting Disclosure to the Test: User Comprehension Requirements - Given the limitations of Disclosure 2.0 and Disclosure 2.5 I described in my last posts, what is to be done? To answer this question, we might first ask what financial product disclosure is attempting to achieve. Although disclosure has several aims, one is consumer comprehension to the degree necessary to enable good decisions. Disclosure rules require particular information to be imparted, often in a specified format. What if the law instead allowed firms to disclose whatever truthful and nonmisleading content they choose in whatever format they choose, but required firms to demonstrate, through field-based testing, consumer comprehension of the key facts about the financial product needed to make a good fact-based decision?   A version of this is required by the FDA for a firm to move a drug from prescription to over-the-counter (OTC). Firms must first do lab-based consumer label comprehension testing à la Disclosure 2.0, but then typically must do actual use studies and postmarketing surveillance to see if real consumers using the product comprehend the key facts about it sufficiently well to use it correctly. The FDA has found that a label that does well in the lab can bomb in the study of actual use. 

US 4Q Bank Earnings Up 37 Pct; Highest in 6 Years — Profits of U.S. banks jumped almost 37 percent from October through December, reaching the highest level in six years as banks continued to step up lending. The figures are fresh evidence of the banking industry’s sustained recovery more than four years after the financial crisis. The Federal Deposit Insurance Corp. reported Tuesday that banks earned $34.7 billion in the quarter, the highest since the fourth quarter of 2006. The agency also says banks posted reduced losses on loans in the fourth quarter and set aside almost 25 percent less to cover potential losses than in the final quarter of 2011. Loans increased 1.7 percent in the fourth quarter. The number of banks on the FDIC’s “problem” list fell to 651 from 694.

U.S. banks in 2012 post highest profits since '06 -FDIC (Reuters) - The U.S. banking industry in 2012 recorded its highest earnings since before the 2007-2009 financial crisis, according to data released on Tuesday by the Federal Deposit Insurance Corp. The FDIC said the industry's full-year earnings were the second-highest on record at $141.3 billion, an increase over 2011 of $22.9 billion, or 19.3 percent. But the head of the agency said growth would probably slow this year, and warned that bank profits could dive if Congress does not reach a federal budget agreement that prevents automatic cuts. Bank earnings peaked in 2006 at $145.2 billion. Much of the earnings growth in 2012 came from banks reducing the amount they set aside in case of losses on loans, the FDIC said. Banks also saw gains on loan sales and higher servicing income. "While there is still room for further income growth, we don't expect the pace of earnings growth to continue at these levels," FDIC Chairman Martin Gruenberg said. The report will likely be seen as a sign that the industry is healing after the financial crisis, although some bigger banks cut jobs last year to cope with persistent pressures such as declines in trading volume. The industry's earnings for the fourth quarter of 2012 totaled $34.7 billion, up $9.3 billion, or 36.9 percent, from the same period in 2011, the FDIC said.

Unofficial Problem Bank list declines to 809 Institutions - Here is the unofficial problem bank list for Feb 22, 2013.  This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808:  The FDIC released its enforcement action activity through January 2013, which led to several changes to the Unofficial Problem Bank List. In all, there were five removals and two additions that leave the list at 809 institutions with assets of $302.8 billion. A year ago, the list held 960 institutions with assets of $389.7 billion. Year-over-year, the institution count has declined by almost 16 percent was assets are down by about 22 percent. During February 2013, the list declined by a net 15 institutions after five additions, one failure, three unassisted mergers, and 16 action terminations. Assets fell by $6.2 billion, but not by enough to get under $300 billion. CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then.

Lawler: A few highlights from the Q4 FDIC Quarterly Banking Profile - From economist Tom Lawler: Yesterday the FDIC released its “Quarterly Banking Profile” for Q4/2012. Some of the “headline highlights” from the report, which reflects the activity at and performance of FDIC-insured financial institutions, were:“Net Income Is More Than a Third Higher Than in Fourth Quarter 2011” despite the fact that “Banks See (Net Interest) Margins Erode,” as net income was “(bolstered by higher noninterest income and lower provisions for loan losses.” The jump in noninterest income was driven “primarily by higher gains on loan sales (up $2.4 billion, or 132.4 percent, over fourth quarter 2011), increased trading revenue (up $1.9 billion, or 75.3 percent), and reduced losses on sales of foreclosed property (down $1.2 billion, or 72 percent).” The higher gains on loans sales were driven by gains on sales of mortgages – partly reflecting higher origination volumes, but mainly reflecting extraordinarily large mortgage origination margins, which in turn partly reflected the unintended consequences of current government policy.  According to the report, the percent of loans and leases that were “noncurrent” last quarter fell to 3.60% -- the lowest rate since the end of 2008 – from 3.68% in the previous quarter and 4.19% in the fourth quarter of 2011. The % of loans secured by one-to-four family residential properties that were noncurrent last quarter was actually up from the fourth quarter of 2011, partly reflecting higher default rates on junior mortgage loans.

Quelle Surprise! Having No Idea What Really Happened in Foreclosure Reviews, OCC Parrots “Independent” Consultant Howlers -  Yves Smith - I was prepared to give the benefit of the doubt to incoming Comptroller of the Currency Thomas Curry.  But it was on Curry’s watch that foreclosure reviews intended to provide abused homeowners with compensation were shut down abruptly. On the one hand, this was never meant to be a serious exercise, but it turned into such a consultant feeding frenzy, with their fees for a bit over a year’s work coming in at $2 billion across 14 servicers, that they were becoming a costly embarrassment. And the GAO was also breathing down the OCC’s neck, first pushing for far more aggressive efforts to reach borrowers who were entitled to reviews, and then working on a report that was expected to find fault with the OCCs’ process.  It looked like large-scale bilking had taken place (not that that is any surprise after all the other misdeeds perpetrated by servicers). So get a load of the latest effort at damage control by the OCC, via the Financial Times: Leading US banks accused of breaking government rules when seizing the homes of delinquent customers may have harmed as few as 4.2 per cent of borrowers, according to people familiar with the matter. The apparently meagre error rate – revealed by the OCC to Congress – may quieten some critics who have argued that the settlement was too small given widespread poor practices in the industry. However, it is also likely to fuel calls for increased public disclosure of documents held by the OCC, which congressional investigators claim may contain details that call the settlement into question.

OCC Offers Lame Defense of Failure of Litigate as More Proof Emerges of its Abject Failure to Supervise Foreclosure Reviews - Yves Smith - Elizabeth Warren’s opening salvo in the Senate Banking Committee, when she asked assembled top officers from various banking regulators when they had last litigated a case against a financial firm, drew blank stares (the SEC, which regularly files civil suits, was able to muster an answer).  Thomas Curry, the Comptroller of the Currency, addressed Warren’s question in a speech on Tuesday. However, his response was partly regulatory bromides, partly artful misdirection, and on the whole, provided more proof that regulators lack the will to regulate. But his speech also unwittingly shows why the problem of insufficiently aggressive regulators is so hard to remedy. This is the key to the failings of the OCC and other bank regulators: “as a prudential supervisor”. That means their overarching concern is the safety and soundness of the institution, as in whether it will go bust. Aside from the not trivial problem that US and other national bank regulators did a piss poor job of their overarching mission in the runup to the crisis, it also means that they will tend to give a pass to behaviors that make the bank money as long as they don’t pose safety and soundness risks, or violate laws too egregiously.

Foreclosure files detail error gap - Some of the country's biggest banks were on pace to find a higher rate of past foreclosure mistakes than regulators disclosed in January when they halted a review in favor of a $9.3 billion settlement for homeowners. The figures show wide discrepancies in how banks performed in the review and raise questions among some observers about how the process was conducted, according to people who have reviewed figures provided to a federal bank regulator. The banks were ordered in 2011 to hire consultants to review foreclosures in search of possible errors that could result in compensation for borrowers. Some 6.5% of files reviewed unveiled errors requiring compensation, officials at the Office of the Comptroller of the Currency said in January. They later revised the error rate to 4.2% after requesting new data, raising the total number reviewed to roughly 100,000 files. But a breakdown of the information provided to the regulator shows that more than 11% of files examined for Wells Fargo and 9% of those for Bank of America had errors that would have required compensation for homeowners, said people who have reviewed the figures. A narrower sample of files—representing cases selected by outside consultants—showed error ratios of 21% for Wells Fargo and 16% for Bank of America, the people said.

Servicers Committed Loan Error Rates of Either 4.2% or 97.2%, Take Your Pick - Anyone paying a smattering of attention justifiably raised a skeptical eyebrow at the Office of the Comptroller of the Currency’s assurances to Congress that the Independent Foreclosure Reviews revealed hardly any borrower harm from servicer malfeasance. First of all, from the reporting we know, OCC just dropped this 4.2% error rate number without supporting information from the loan files. Second, the error rate contrasted wildly with what Yves uncovered in her superlative series on Bank of America reviews. Most critically, if the reviews were finding no borrower harm, there would have been no real reason to ditch them. They would have reinforced the bank-supported view that foreclosure fraud was simply overblown, would have silenced critics, would have reduced bank exposure to payouts from the settlement and probably in future litigation. That’s what makes the bombshell story from the Wall Street Journal of all places, so damaging to the entire cover story, particularly for the OCC. If true, this actually establishes that the agency at least massaged the truth to Congress, if they didn’t outright lie: Some 6.5% of files reviewed unveiled errors requiring compensation, officials at the Office of the Comptroller of the Currency said in January. They later revised the error rate to 4.2% after requesting new data, raising the total number reviewed to roughly 100,000 files. But a breakdown of the information provided to the regulator shows that more than 11% of files examined for Wells Fargo & Co. and 9% of those for Bank of America Corp. had errors that would have required compensation for homeowners, said people who have reviewed the figures. A narrower sample of files—representing cases selected by outside consultants—showed error ratios of 21% for Wells Fargo and 16% for Bank of America, the people said.

Bankers are honorable men - Friends, Americans, countrymen, lend me your ears; I come to bury the homeowner, not to praise him. The evil that borrowers do lives after them. The good is oft interred in credit reports. So let it be with homeowners. The noble bank CEOs who took nearly $450 billion in bailouts from taxpayers in the hope they would help borrowers have told you homeowners were greedy. If so, it were a grievous fault, and grievously hath the homeowner answered it. Here under the leave of the bank CEO and the rest — For bank CEOs are honorable men. So are they all honorable men. Come I to speak of the homeowner’s foreclosure. He was my friend, faithful and just to me, his family and job. But bankers say he was greedy, and bankers are honorable men.

The recession was her fault - Meet Lorraine O. Brown, an individual singled out for actual jail time for her role in the massive mortgage document fraud that plagued this nation. Brown was the President of DocX, a company that created and processed mortgage-related documents, first as a stand-alone unit, and later as a subsidiary of the document processing giant Lender Processing Solutions (LPS). And like Lynndie England, Brown committed a series of legitimate crimes. From 2003 until 2009, DocX routinely forged mortgage documents. Brown directed the scheme, whereby low-wage temporary workers would sign the documents in the name of executives at DocX, who were authorized as signers by mortgage servicers. Then, different temporary workers would attach fake notarizations to the documents, attesting to their veracity. This “Surrogate Signer” program allowed DocX to execute thousands of documents per day, increasing their profit margins. These forged mortgage documents were distributed to county land recording offices and state courts all over the country. After the collapse of the housing bubble, when these documents were put to use in foreclosure or bankruptcy cases, the scheme became apparent when people started comparing multiple mortgage documents with the names of authorized signers like Linda Green, all of which had markedly different handwriting.

Freddie Mac: $4.5 Billion Net Income, No Treasury Draw, REO Declines - From Freddie Mac: Freddie Mac Fourth Quarter 2012 Financial Results -Net income for the fourth quarter of 2012 was $4.5 billion, compared to $2.9 billion for the third quarter of 2012. The increase primarily reflects a shift from a provision for credit losses in the third quarter to a benefit for credit losses in the fourth quarter due to a decrease in the volume of newly delinquent single-family loans and continued improvement in national home prices, as well as a higher income tax benefit primarily driven by the favorable resolution of tax matters with the Internal Revenue Service (IRS). These favorable impacts were partially offset by higher net security impairments....Freddie Mac does not require a draw from Treasury for the fourth quarter of 2012 because the company had positive net worth at December 31, 2012. The company’s $8.8 billion net worth at December 31, 2012 reflects $4.9 billion in net worth at September 30, 2012 and fourth quarter comprehensive income of $5.7 billion, partially offset by the $1.8 billion quarterly dividend payment to Treasury on the company’s senior preferred stock. On Real Estate Owned (REO), Freddie acquired 82,818 properties in 2012, and disposed of 94,296, and the total REO fell to 49,077 at the end of the year.

What Bernanke Didn't Say About Housing - One of the more interesting exchanges at Ben Bernanke's testimony to the Financial Services Committee today was the one between the Federal Reserve chairman and Representative Scott Garrett, a Republican from New Jersey.   Citing Bernanke's assertion that one of the benefits of QE had been the rise in home prices, Garrett said the following: "Previously you have said that the Fed's monetary policy actions earlier this decade, 2003 to 2005, did not contribute to the housing bubble in the U.S. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you said in the past? Or is it a cause of inflating prices of housing? Can you have it both ways?" "Yes," Bernanke said, much to Garrett's surprise. The increase in home prices now is justified by the low level of mortgage rates, he said. On the other hand, those rates averaged 6 percent in the early part of the last decade and "can't explain why house prices rose as much as they did."  What he didn't say was that the percentage of adjustable- rate mortgages soared to a record 37 percent of total mortgage volume in 2005. From mid-2003 to mid-2006, ARM volume averaged 30 percent. The interest rate on ARMs is priced off the Fed's overnight rate. It was this type of loan that witnessed the most egregious underwriting abuses and the highest delinquency and foreclosure rates. Garrett 1, Bernanke 0

Housing Smoke And Mirrors - The consensus opinion on the US Housing Market is that it is in recovery mode. Closer analysis of the data reveals that this recovery is artificial; and that the tools that made the recovery have built in a self-destruct mechanism. The latest data comes from National Delinquency Survey (NDS) released by the Mortgage Bankers Association (MBA).first general conclusion from the survey is that the delinquency rate is falling. The 90+ Day delinquency rate remains flat and elevated however.The general improvement is therefore a function of the Percent of Loans in Foreclosure. This statistic should alert attention to the fact that “something”, ongoing in the foreclosure process, is causing the dramatic improvement in the overall delinquency data. This “something” is the Federal housing stimulus and loan modification programmes, which are being forced through the banking system currently. These programmes have evolved from interest rate reductions, through principal modifications and reductions.

LPS: Mortgage delinquencies decreased in January - LPS released their First Look report for January today. LPS reported that the percent of loans delinquent decreased in January compared to December, and declined about 8% year-over-year. Also the percent of loans in the foreclosure process declined further in January and were down significantly over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 7.03% from 7.17% in December. Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.41% in January from 3.44% in December.   The number of delinquent properties, but not in foreclosure, is down about 11% year-over-year (413,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 21% or 461,000 properties year-over-year.

RealtyTrac: Foreclosure sales uneven across the nation - Foreclosure properties sold during 2012 decreased by 6% from 2011 and down 11% from 2010, RealtyTrac said in its fourth quarter and year-end 2012 foreclosure and short sales report. “Although foreclosure-related sales represent a shrinking share of total sales, primarily because of fewer bank-owned purchases, distressed sales are still a disproportionately high portion of the overall housing market,” said Daren Blomquist, vice president of RealtyTrac.  Pre-foreclosure sales increased 6% from 2011, returning just 1% below the 2010 total of pre-foreclosure sales. Since RealtyTrac began tracking in 2005, 2010 held the highest annual total. Pre-foreclosure homes took an average of 336 days to sell after starting the foreclosure process, and properties sold for an average price of $190,031.  Even though REO sales fell in the nationwide total, numbers still increased in 26 states. 498,122 REOs were sold to third parties, which is down 15% from 2011 and down 19% from 2011. REOs sold for an average of $151,998 and took and average of 178 days to sell.

Increasing the Role for the Private Sector in Housing Finance - Brookings - This paper proposes reforms of the U.S. housing finance system to increase the role of private capital in funding housing, reduce taxpayer exposure to housing risk, sell off the government stakes in the mortgage finance firms of Fannie Mae and Freddie Mac, and charge appropriate premiums for secondary insurance provided by the U.S. government on housing securities. These measures would generate revenues for the federal government, improve the allocation of capital within the U.S. economy, and focus governmental assistance for affordable housing on those most in need. With reform, private firms would securitize qualifying mortgages into mortgage-backed securities (MBS) and pay for a secondary government guarantee, while considerable private capital would take losses ahead of the government. The U.S. government would support homeownership and access to housing financing, but with transparent subsidies rather than implicit guarantees, better protection for taxpayers, and a clear delineation of the roles of the public and private sectors.

Housing: Some Details on the Business Model for Institutional Buyers - Some interesting details on institutional buyers from the California billionaire bets on rentals with Wake home-buying spree [C]ompanies have raised billions from pension funds, private equity firms and other institutional investors to fuel their buying sprees. To date, these companies have focused their attention mainly on markets with large inventories of distressed homes, particularly in Arizona, Florida, Nevada and California.  What’s noteworthy about American Homes 4 Rent’s buying binge in Wake County [North Carolina] is that it isn’t just targeting distressed properties, or even existing homes. About a third of its purchases have been new homes acquired directly from homebuilders....Institutional investors have invested at least $5.4 billion for purchase of single-family rentals nationwide during the past 18 months, according to Barclays, and an additional $8 billion is expected to be invested within the next couple of years. American Homes 4 Rent’s buying spree is being financed in part by a $600 million investment from the Alaska Permanent Fund, a $45 billion fund that invests royalties the state collects from oil companies.

What it Takes to Get a Mortgage These Days - About six months ago I got a job that required relocation. To make a long story short, we just purchased a new home. As part of the process, the lenders required a lot of paperwork. Not a surprise. But some of the paperwork was surprising. For example, they wanted a signed letter explaining a deposit in the amount of 0.05% of the amount of the loan, made prior to the sellers and ourselves agreeing to the sale of the house. One half of one percent. I can understand getting suspicious if we made an unexplained deposit equal to, say, ten percent or so of the amount of the loan, but 5% of 1% of the loan? And it wasn't the only senseless thing we had to provide. I worry about this means - it means the lenders probably aren't concerned about important things that they should be concerned about. That didn't work out so well the last time.

Is the US facing a housing shortage? - Homes available for sale as well as the housing supplies measured in months are now at pre-recession levels, while household formation continues to recover (see post). This development was predicted by William Wheaton back in 2009.  Forbes: - Most striking however is the fact that inventory has contracted to its lowest level since December 1999, more than 13 years ago. The number of available homes, which is not seasonally adjusted, fell 4.9% from December and is 25.3% lower than a year ago. With 1.74 million homes on the market, at the current sales pace, supply will be exhausted in just over four months. It represents the lowest housing supply since April 2005. In a normal market, a healthy supply level is about six months. A number of economists continue to talk about the shadow inventory - the millions of homes that are "about to hit the market" as homeowners have or shortly will fail on their mortgages. Some evidence suggests that in the more depressed housing areas banks are indeed sitting on foreclosed properties, unwilling to sell. But a number of banks have also been aggressively modifying mortgages, reducing principal and interest, and therefore cutting delinquencies. Clearly many more homes will be hitting the markets this year. But it really doesn't make much difference if people who move out of these homes end up buying or renting - they need to live somewhere. And according to the Census Bureau, rental vacancies are near a 10-year low.

Existing Home Inventory up 3.6% year-to-date in late February - Weekly Update: 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 late February - it appears inventory is increasing at a sluggish rate.

LPS: House Price Index increased 0.1% in December, Up 5.8% year-over-year - Notes: I follow several house price indexes (Case-Shiller, CoreLogic, LPS, Zillow, FNC and more). The timing of different house prices indexes can be a little confusing. LPS uses December closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: U.S. Home Prices Up 0.1 Percent for the Month; Up 5.8 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on December 2012 residential real estate transactions. The The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes.  Looking at the year-over-year price change throughout 2012 - in May, the LPS HPI turned positive and was up 0.4% year-over-year, in June the index was up 0.9% year-over-year, 1.8% in July, 2.6% in August, 3.6% in September, 4.3% in October, 5.1% in November, and now 5.8% in December.   These steady increases on a year-over-year basis suggest prices bottomed early in 2012.

Case-Shiller Index Shows Housing Prices Continuing to Climb - Home prices as measured by the S&P/Case-Shiller Home Price Index jumped 6.8% year-over-year last December, closing out 2012 with a strong showing, as they’d risen 5.5% on the same basis the month before. Prices rose in 19 of the 20 metro areas tracked by the index, with only New York City as an outlier. (Gothamites, realize that the NYC data excludes co-op and condominium apartments, tracking instead the price of single-family homes in the metro area). Especially stunning is the fact that except for Chicago (up 2.2%), Cleveland (up 2.9%), and Boston (up 3.6%), all of the metro area gains recorded were greater than 5%. On the high end, Detroit housing prices rose 13.6% year-over-year, while San Francisco zoomed 14.4%, and Phoenix roared up 23%. Nationally, the index (which showed 15 years of house price increases up to its peak early in 2006) is now back to the levels of summer 2003. So is the housing slump over yet? Probably not, as anyone involved in the market can tell you. For one, inventory is historically low in many markets. According to the National Association of Realtors, there are currently only 1.74 million homes on the market across the country, which is the lowest level in nearly seven years, just a 4.2-month supply at the current pace.

Case-Shiller Shows Annual Home Prices Soared for December 2012 - The December 2012 S&P Case Shiller home price index shows a 6.8% price increase from a year ago for over 20 metropolitan housing markets and a 5.9% change for the top 10 housing markets from December 2011.  This is the highest yearly gain since July, 2006.  Not seasonally adjusted home prices are now comparable to August 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.   Phoenix continues to soar, up 23% from a year ago and only, New York City was down, -0.51%.  Atlanta has clearly hit bottom and prices have risen 10.0% from last year.  This is the largest year over year increase on record for the Atlanta index.  Dallas, Denver and Minneapolis also had the highest annual increases since 2001.   Los Angeles is now up 10.2%, which is astounding for prices are clearly not affordable already.  The seasonally adjusted price indexes show, the composite-20 yearly percentage change was 6.9% and the composite-10 yearly percentage change was 6.0% 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.   Housing is highly cyclical.  Spring and early Summer are when most sales occur.  See the bottom of this article for their reasoning. S&P also produces a third national index and is calling March 2012 a bottom for home prices.   S&P is using the not seasonally adjusted national index when they report Q4 home values are up 7.3% from Q4 2011.  Seasonally adjusted the quarterly change from a year ago is 7.4%.   Below is the national index, not seasonally adjusted (blue), which are used as the headline numbers, against the seasonally adjusted one (maroon).

Case-Shiller: Comp 20 House Prices increased 6.8% year-over-year in December - S&P/Case-Shiller released the monthly Home Price Indices for December and Q4 ("December" is a 3 month average of October, November and December). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities), and the quarterly National Index. Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs. From S&P: Home Prices Closed Out a Strong 2012 According to the S&P/Case-Shiller Home Price Indices Data through December 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended the year with strong gains. The national composite posted an increase of 7.3% for 2012. The 10- and 20-City Composites reported annual returns of 5.9% and 6.8% in 2012. Month-over-month, both the 10- and 20-City Composites moved into positive territory with gains of 0.2%; more than reversing last month’s losses.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 30.0% from the peak, and up 0.9% in December (SA). The Composite 10 is up 6.2% from the post bubble low set in March (SA). The Composite 20 index is off 29.2% from the peak, and up 0.9% (SA) in December. The Composite 20 is up 7.0% from the post-bubble low set in March (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 5.9% compared to December 2011. The Composite 20 SA is up 6.8% compared to December 2011. This was the seventh consecutive month with a year-over-year gain since 2010 (when the tax credit boosted prices temporarily). This was the largest year-over-year gain for the Composite 20 index since 2006. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

U.S. House Prices Rose 1.4 Percent in Fourth Quarter 2012 - U.S. house prices rose 1.4 percent from the third quarter to the fourth quarter of 2012 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The HPI is calculated using home sales price information from Fannie Mae and Freddie Mac mortgages. Seasonally adjusted house prices rose 5.5 percent from the fourth quarter of 2011 to the fourth quarter of 2012. FHFA’s seasonally adjusted monthly index for December was up 0.6 percent from November. “The fourth quarter was another strong one for house prices, as it was the third consecutive quarter where U.S. price growth exceeded one percent,” said FHFA Principal Economist Andrew Leventis. “While a significant number of homes remained in the foreclosure pipeline, the actual number of homes available for sale was very low and fell over the course of the quarter.” FHFA’s expanded-data house price index, a metric introduced in August 2011 that adds transaction information from county recorder offices and the Federal Housing Administration to the HPI data sample, rose 1.6 percent over the latest quarter. Over the latest four quarters, that index is also up 5.5 percent.

Case Shiller Home Prices Post Tiny Increase In December Driven By Las Vegas, Los Angeles - As expected earlier, today's December Case Shiller data came and went and nobody cared. Perhaps because it is three months delayed, perhaps because it posted an increase in the NSA top 20 city composite at a time when all the previous data was supposedly contracting due to snow in the winter, to the Sandy endless aftermath, or due to the Fiscal Cliff, or perhaps just because the NSA increase (and remember: Case Shiller itself says one should use not adjusted data for an accurate sense of what is going on) was so tiny (0.16%) that nobody cared. Either way, after two sequential monthly declines, the Top 20 Composite index is back to 145.95, lower than the level hit in September. Even a casual glance at the below the headline data showed that the increase in December house prices were driven mostly by Las Vegas (+1.8) and Los Angeles (+1.14%). Where have we seen this before. Declines were reported in Denver, Washington, Chicago, Detroit, Minneapolis, Charlotte, New York, Cleveland, Portland, Dallas, Seattle. Excluding those, the Case Shiller was up much more.

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 6.8% in December from a year earlier.The broader national index, which is only released four times a year, jumped 7.3% in the fourth quarter from a year earlier. Prices in the 20-city index were 0.2% higher than the prior month even amid the slower winter selling season. Adjusted for seasonal variations, prices were 0.9% higher month-over-month. Nineteen of the 20 cities posted annual increases in December. Just New York notched an annual decline. Even with the slower winter season, nine cities posted monthly increases. On an adjusted basis, no city reported a monthly decline. Economists see clear signs that housing is on the rebound. “Nationally speaking, there is no doubt that prices have turned and this has important effects. Since most people have their wealth tied up in their home, rising home prices makes consumers more confident, more credit worthy and more willing to spend acquired income. Ultimately that has important effects on economic output, one reason that home price fluctuations are watched so closely,”  Read the full S&P/Case-Shiller release.

Real House Prices and Price-to-Rent Ratio - For December, Case-Shiller reported the seventh consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in December suggests that house prices probably bottomed earlier in 2012 (the YoY change lags the turning point for prices). The following table shows the year-over-year increase for each month in 2012 Here are some updates to a few graphs ... 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. The first graph shows the quarterly Case-Shiller National Index SA (through Q4 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through December) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q2 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to October 2003 levels, and the CoreLogic index (NSA) is back to January 2004. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to October 1999 levels, the Composite 20 index is back to October 2000, and the CoreLogic index back to February 2001. In real terms, most of the appreciation in the last decade is gone.

New Home Sales at 437,000 SAAR in January - The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 437 thousand. This was up from a revised 378 thousand SAAR in December (revised up from 369 thousand).   The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in January 2013 were at a seasonally adjusted annual rate of 437,000 ... This is 15.6 percent above the revised December rate of 378,000 and is 28.9 percent above the January 2012 estimate of 339,000."The second graph shows New Home Months of Supply. The months of supply decreased in January to 4.1 months from 4.8 months in December.  The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal).

New Home Sales Surge 15.6% in January 2013 - January New Residential Single Family Home Sales soared 15.6%, or 437,000 annualized sales.  Single family new home sales have not been this high since July 2008.   Housing inventory is at a 4.1 month supply.  Inventories haven't been this low since March 2005.  Beware of this report for most months the change in sales is inside the statistical margin of error and will be revised significantly in the upcoming months.  New single family home sales are now 28.9% above January 2012 levels, but this figure has a ±21.7% margin of error.   A year ago new home sales were 339,000.  Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year.   These figures are seasonally adjusted as well.  The Northeast region saw a 27.6% monthly increase in new single family home sales with an error margin of ±97.9%.   In other words, the error margin is so large, the monthly percentage increase in the Northeast is assuredly wrong for January.  The Midwest region saw a monthly new home sales surge of 11.1% but has a ±42.9% margin of error.  That's almost a 50-50 chance of being right.  Bottom line this report has a lot of statistical noise.  The average home sale price was $286,300, a -5.0% drop from last month's average price of $301,500.   If one thinks about it, these prices are outside the range of what most wages can afford. January's median price dropped -9.4%, from $249,800 to $226,400.  Median means half of new homes were sold below this price and both the average and median sales price for single family homes is not seasonally adjusted.

Analysis: Genuine Improvement in Housing Market -- Wells Fargo Senior Economist Mark Vitner talks with Jim Chesko about reports showing that U.S. new-home sales posted the biggest monthly jump in nearly 20 years in January and consumer confidence rebounded in February to the highest level since last November. Sales of new homes soared 15.6% last month to a seasonally adjusted annual rate of 437,000, the highest since July 2008.

New Home Sales Seasonal Adjustments Go Full Retard - In the government's endless desire to show just how blistering, nay, stupendously amazingful the gargantuantest housing recovery has been, we just got news that New Home Sales in January soared, SOARED, to 437K from an upward revised 378K, slamming expectations of a 380K print (chart). Alas, as so often happens, there was more than meets the eye.  For one: the actual, unadjusted number of homes sold in January was a meager 31K (of which 1,000 houses sold in the $750K+ range): a tiny 4K increase from December, the same as August, and lower than all months from March to July 2012 (chart); the houses for sale rose to the highest since December 2011; the Median Price plunged to $226,400, the lowest since January 2012 and down $23k from December's $249,800. Finally of the 31K houses sold in January, just 12K were actually completed, with 10K under construction and 10K not even started. So who cares: seasonal adjustments happen all the time, and January just happens to be an important inflection point right? Yes.  Which is precisely why we took the December-to-January change in New Home Sales as reported since the peak of the housing bubble, to get an accurate sense of how this inversion has behaved in history. The result is plotted below: the blue bar shows the sequential change in actual data. The red one shows the seasonally adjusted one.

Builders fuel home sale rise - Sales of new homes are surging in the U.S., far outpacing results for less expensive existing homes and creating an unusual disparity in the housing recovery.  The trend partly reflects the small inventory of previously owned homes, now at a 13-year low after investors picked over the long-depressed market. But the strong sales of new homes also show how the nation's home builders have mastered the art of selling, even to cash-poor buyers or those with spotty credit histories. New-home sales jumped 28.9% in January from a year earlier to the highest annual sales pace in four years, according to data released Tuesday by the Commerce Department. Sales of previously owned homes rose 9.1%. The disparate selling pace exists even though a typical new home costs 37% more than one already built, the widest price gap since the figures started being tracked in 1968,  In the past two years, more home builders have offered to pay closing costs and arrange home loans through in-house mortgage operations. They have hosted free credit-counseling sessions for buyers with bad credit scores, and made heavy use of government-backed mortgage programs that allow buyers to get a home with little or no down payment. The result is that for many buyers, it has become far easier to buy a new home than an existing one.

A few Comments on New Home Sales - McBride - 1) January is seasonally the weakest month of the year for new home sales, so January has the largest positive seasonal adjustment. Also this was just one month with a sales rate over 400 thousand - and we shouldn't read too much into one month of data. But this was the highest level since July 2008 and it is clear the housing recovery is ongoing.
2) Although there was a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest significant upside over the next few years (based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years).
3) Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. Note: The key downside risk is too much austerity too quickly, but that is a different post.
Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis for the 367 thousand in 2012. And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to start to close over the next few years. The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through January. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Pending Home Sales index increased in January - From the NAR: January Pending Home Sales Up in All Regions The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 4.5 percent to 105.9 in January from a downwardly revised 101.3 in December and is 9.5 percent above January 2012 when it was 96.7. The data reflect contracts but not closings. The January index is the highest reading since April 2010 when it hit 110.9, just before the deadline for the home buyer tax credit. Aside from spikes induced by the tax credits, the last time there was a higher reading was in February 2007 when it reached 107.9.The PHSI in the Northeast rose 8.2 percent to 84.8 in January and is 10.5 percent higher than January 2012. In the Midwest the index increased 4.5 percent to 105.0 in January and is 17.7 percent above a year ago. Pending home sales in the South rose 5.9 percent to an index of 119.3 in January and are 11.3 percent higher January 2012. In the West the index edged up 0.1 percent in January to 102.1 but is 1.5 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 February and March. Also the NAR economist lowered his forecast for sales in 2013 to 5.0 million.  With limited inventory at the low end, and fewer foreclosures, we might see flat or even declining existing home sales this year.

Construction Spending declined in January -  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).  Private residential is now about even with private non-residential, and residential will probably be the largest category of construction spending in 2013.  Usually private residential construction leads the economy, so this is a good sign going forward. 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. Public construction spending has declined to 2006 levels (not adjusted for inflation).  This has been a drag on the economy for almost 4 years. The Census Bureau reported that overall construction spending decreased in January:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during January 2013 was estimated at a seasonally adjusted annual rate of $883.3 billion, 2.1 percent below the revised December estimate of $902.6 billion. The January figure is 7.1 percent above the January 2012 estimate of $824.7 billion. Private construction spending decreased due to less spending on power and electric, and public construction spending declined too:

January Construction Spending Falls 2.1% -  Construction spending missed expectations falling 2.1 percent month-over-month (MoM) in January. Analysts polled by Bloomberg are looking for construction spending to rise 0.4 percent month-over-month. Last month's reading was revised up to reflect a 1.1 percent MoM rise. Click here to refresh > Construction spending was up 7.1 percent on the year. Private residential constriction was flat from December levels, while public residential construction was down 0.7 percent on the month. Overall residential construction was flat. This comes after data out this month shows that housing supply is already tight. The decline however was led by nonresidential power spending which was down 12.4 percent from last month. Investors watch this number because it offers insights into the housing market and therefore insights into homebuilder stocks. It also gives us an insight into the health of the overall economy because businesses and governments invest in new infrastructure when they are feeling confident about the economy.

Millennials Are Paying Off Debt – But That’s Not Necessarily Good News - A new study suggests that millennials are getting serious about paring down their debt. But a closer look at the numbers shows some troubling signs. Last week, Pew Research released a new study showing adults younger than 35 reducing their debt levels more quickly than older generations. Millennials cut their overall levels of debt by 29% between 2007 and 2010 (from $21,912 to $15,473) while Americans 35 and older only cut theirs by 8% ($32,543 to $30,070). In fact, according to Pew, the share of younger households with debt of any kind fell to 78%, the lowest level since the federal government started collecting that data in 1983. All of that sounds great — until you realize that the biggest contributor to this dynamic is that millenials aren’t taking out mortgages, which generally make up the biggest piece of household debt. From 2007 to 2011, the percentage of young households who own their own homes fell from 40% to 34%. “Young adults don’t have the mortgage, but they also don’t have the house,” says Pew Research senior research associate Richard Fry, who authored the report. “Young adults probably have less debt, but they also have less assets. This is troubling.”

Consumers Ramp Up Mortgage Borrowing as Housing Recovers - Americans borrowed more to buy homes at the end of last year, the latest sign that consumers are shaping up their finances and benefiting from the nascent housing recovery. Household debt rose 0.3% in the fourth quarter from the summer, the Federal Reserve Bank of New York reported Thursday. Americans took out more mortgage loans and stepped up borrowing on auto loans, student loans and credit cards. It was only the second quarterly increase since the third quarter of 2008, when the collapse of Lehman Brothers plunged the economy into financial panic.

Many Experts Who Say Housing is the Best Way to Build Wealth Also Said That During the Housing Bubble - Dean Baker: The Post had a useful article on the growing wealth gap between whites and African Americans. It notes various factors such as higher unemployment rates and smaller inheritances that prevent African Americans from accumulating wealth. However the piece concludes by saying: "Many experts say housing is still the best way for Americans of all races to build wealth. But it is critical for families to have low-cost financing so they can have predictable housing costs going forward and build wealth over time. 'If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,' said Reid Cramer, director of the Asset Building Program at the New America Foundation." It would have been worth pointing out that almost all of these experts also pushed homeownership as a wealth building strategy at the peak of the bubble. Those who followed the advice of these experts were virtually certain to see large losses in home values that would wipe out much or all of their wealth.

Just Released: Press Briefing on Household Debt and Credit -- NY Fed - This morning, New York Fed director of research Jamie McAndrews joined Bank economists to brief the press on economic developments. With this morning’s release of the Quarterly Report on Household Debt and Credit for 2012:Q4, the briefing focused specifically on recent developments in household debt and credit. The first special presentation of the briefing described overall developments in household borrowing. Wilbert van der Klaauw showed that total household debt outstanding rose by $31 billion in 2012:Q4. Household debt has been falling steadily since 2008:Q3, and is now $1.3 trillion below its peak then, so the quarterly increase is noteworthy. In Q4, nonhousing debt continued its recent rise, driven by auto and student loans, and ended the year at its highest level ever—$2.75 trillion. As discussed in an August 2012 post, mortgages have been the big driver of household debt throughout the post-2008 period of household deleveraging. In Q4, housing debt (mortgages and home equity lines of credit, or HELOCs) was roughly flat, as rising mortgage originations offset reduced HELOC balances. Given the dominance of housing-related debt on households’ credit reports, a key question going forward is whether improvements in the housing market translate into sustained increases in housing-related debt. If so, we may be witnessing the end of the period of aggregate household deleveraging. We should be able to see this more clearly over the next several quarters.

Fed: Consumer Debt increased slightly in Q4, "Deleveraging Process Decelerates" - From the NY Fed: Total Consumer Debt Up Slightly as Deleveraging Process Decelerates - In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that in the fourth quarter of 2012 outstanding consumer debt increased slightly ($31 billion), breaking the downward trend observed since the fourth quarter of 2008. The increase was primarily due to a rise in non-housing debt and the stabilization of mortgage debt. Total consumer indebtedness was $11.34 trillion, 0.3% higher than the previous quarter but considerably lower than its peak of $12.68 trillion in the third quarter of 2008. While outstanding mortgage debt remained roughly flat, originations of new mortgages rose to $553 billion, a fifth consecutive quarterly increase. Non-housing debt balances increased for the third straight quarter and now stand at $2.75 trillion, up 1.4% in the fourth quarter. All non-housing components increased; auto loans up $15 billion, student loans up $10 billion and credit cards up $5 billion. Here is the Q4 report: Quarterly Report on Household Debt and Credit

Consumers Increase Debt for First Time in 4 Years - Here are the first signs of light at the end of the Balance Sheet Recession tunnel. According to the NY Fed, consumers took on debt for the first time in 4 years in Q4: In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that in the fourth quarter of 2012 outstanding consumer debt increased slightly ($31 billion), breaking the downward trend observed since the fourth quarter of 2008. The increase was primarily due to a rise in non-housing debt and the stabilization of mortgage debt. Total consumer indebtedness was $11.34 trillion, 0.3 percent higher than the previous quarter but considerably lower than its peak of $12.68 trillion in the third quarter of 2008. While outstanding mortgage debt remained roughly flat, originations of new mortgages rose to $553 billion, a fifth consecutive quarterly increase. Non-housing debt balances increased for the third straight quarter and now stand at $2.75 trillion, up 1.4 percent in the fourth quarter. All non-housing components increased; auto loans up $15 billion, student loans up $10 billion and credit cards up $5 billion.

Median Household Incomes: A Weak Start for 2013 - The traditional source of household income data is the Census Bureau, which publishes annual household income data each September for the previous year.Sentier Research, an organization that focuses on income and demographics, offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research has now released its most recent update, data through January (available here as a PDF file). In the latest press release, Sentier Research spokesman Gordon Green concisely summarizes the recent data. We have witnessed an increase in real median annual household income of more than $850 during the past year. However, most of the increase occurred during the early part of 2012, and since May 2012 household income has been relatively flat. Even though we are technically in an economic recovery, real median annual household income is still having difficulty gaining much traction. As we have noted in our previous reports, we are watching this household income series closely for signs of any sustained directional movement. The first chart below chains the nominal values and real monthly values in January 2013 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for the January 2000 and the peak and post-peak trough in between.

New Study: For the Typical American, the Recovery Ended Last May - On the eve of the sequester, there's more bad news about the economy. Just last month, Berkeley economist Emmanuel Saez reported that during the first two years of the recovery (2009-2011) average market income for the top one percent in the income distribution grew by 11.2 percent while it shrank by 0.4 percent for everyone else. Saez didn't yet have distribution data for 2012 (and likely won't for many months). But he predicted that surging stock prices and re-timing of income to avoid the 2013 tax increases probably meant we'd likely see much bigger gains for the one percent in 2012, while the bottom 99 percent would likely have experienced some gains, too—albeit much more modest ones. That may still prove true. But new data from two former Census officials at Sentier Research, a private firm, indicates that median income, which had finally started sustaining consistent increases in early 2012 after dropping through the first two years of the recovery, halted its upward climb in May. (It is now $51,584.) Since May, there’s been no statistically significant increase in median income. For the typical American worker, then, recovery from the 2007-2009 recession began in the fall of 2011 and was over that following spring. Hope you liked it!

Personal Income declined 3.6% in January, Spending increased 0.2% - The BEA released the Personal Income and Outlays report for January:  Personal income decreased $505.5 billion, or 3.6 percent ... in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent. ...Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in January, the same increase as in December. ... PCE price index -- the price index for PCE increased less than 0.1 percent in January, in contrast to a decrease of less than 0.1 percent in December. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of less than 0.1 percent....Personal saving -- DPI less personal outlays -- was $283.9 billion in January, compared with $797.4 billion in December. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.4 percent in January, compared with 6.4 percent in December.The following graph shows real Personal Consumption Expenditures (PCE) through January (2005 dollars).

Real Disposable Income Down 4%, Reversing Strong Gains in December - The Bureau of Economic Analysis report on Personal Income and Outlays for January shows a 4% decline in real disposable income (the biggest decline in 20 years) following sharp gains in December. Personal Consumption Expenditures (PCE) eked out a .1% month-over-month gain.  Personal income decreased $505.5 billion, or 3.6 percent, and disposable personal income (DPI) decreased $491.4 billion, or 4.0 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent.  In December, personal income increased $353.4 billion, or 2.6 percent, DPI increased $325.7 billion, or 2.7 percent, and PCE increased $14.8 billion, or 0.1 percent, based on revised estimates. Real disposable income decreased 4.0 percent in January, in contrast to an increase of 2.7 percent in December.  Real PCE increased 0.1 percent, the same increase as in December. Private wage and salary disbursements decreased $44.8 billion in January, in contrast to an increase of $49.1 billion in December. Services-producing industries' payrolls decreased $41.5 billion, in contrast to an increase of $39.3 billion.  Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $22.0 billion in January, compared with an increase of $13.3 billion in December.  PCE increased $18.2 billion, compared with an increase of $14.8 billion.Personal saving -- DPI less personal outlays -- was $283.9 billion in January, compared with $797.4 billion in December. The personal saving rate -- personal saving as a percentage of disposable

Incomes suffer biggest drop in TWENTY years, alarming new figures show | Mail Online: U.S. incomes tumbled by 3.6 percent in January marking its biggest drop in the last 20 years while consumer spending rose behind an increase in utility spending linked to a recent cold spell. In the Commerce Department's report on Friday consumer spending increased 0.2 percent after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.Consumer spending accounts for about 70 percent of U.S. economic activity and when adjusted for inflation, it gained 0.1 percent after a similar increase in December.Part of the income decline was payback for a 2.6 percent surge in December as businesses, anxious about those higher taxes, rushed to pay dividends and bonuses before the new year. With income dropping sharply and spending rising, the saving rate - the percentage of disposable income households are socking away - fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

US incomes suffer biggest fall in 20 years - US consumer spending ticked up in January even though incomes slumped by the most in 20 years, indicating Americans were weathering a rise in payroll taxes by dipping into their savings. Household purchases – which make up about two-thirds of the US economy – edged 0.2 per cent higher last month, in line with expectations, following a 0.1 per cent rise in December, the commerce department said. A slowly improving labour and housing market have supported consumer spending gains in recent months. US incomes dropped 3.6 per cent – the biggest fall since January 1993 – after a 2.6 per cent jump in December. This sent the savings rate down to 2.4 per cent in January, the lowest level since November 2007, from 6.4 per cent the month prior. Economists said the drop in incomes was largely a reversal of the early dividend payments made at the end of 2012 by companies to beat the 2 percentage point increase in payroll taxes.

Personal Income Hammered - Drops -3.6% for January 2013 - The January personal income and outlays report is horrific.  Personal Income nose dived -3.6% from December and hasn't seen this big of a monthly drop since January 1993.  That's 20 years ago.  The blame is being laid on the payroll tax holiday expiration and December did see a rise in personal income also not seen since December 2004.  Disposable income is worse.   DPI dropped -4.0%, even when adjusted for inflation.  The below graph shows the monthly percentage change of personal income going back to 1990.   Ouch! Consumer spending increased 0.2% from last month, and when adjusted for inflation was a 0.1% increase, the same as December.   Consumer spending is another term for personal consumption expenditures or PCE.   Real personal consumption expenditures are hugely important to economic growth as consumer spending is about 71% of GDP.   Real means adjusted for inflation.  Graphed below are the monthly changes for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  Personal income plunged -3.6%, dispoable income cliff dove -4.0%.  When adjusted for inflation, actual disposable income decreased -4.0%.   Take away inflation and government payments, personal income decreased -4.5% (see further below).  This should negatively impact consumer spending going forward.  One cannot have a monthly drop of -4.0% in real disposable income and expect strapped Americans to spend more. Below are the real dollar amounts for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  Notice by levels how much lower real disposable income is now.Consumer spending encompasses things like housing, health care, food and gas in addition to cars and smartphones. In other words, most of PCE is most about paying for basic living necessities. Graphed below is the overall real PCE monthly percentage change.  January is the first month for Q1, so the  real PCE flat line doesn't bode well as a first sign of Q1 economic growth.

Consumers Step Up Spending Even as Income Takes a Hit - Friday’s report on personal income and spending revealed more fallout from fiscal budget wrangling in Washington.  After surging in December, personal income fell 3.6% in January, the Bureau of Economic Analysis said. Despite that, consumers didn’t immediately start cutting back: Spending ticked up 0.2%, its same pace as the previous month. The decline in income was expected for two reasons: December’s 2.6% rise was likely given a one-time surge thanks to dividend and bonus payments made before taxes on some earners rose in the new year. More importantly, January also marked the end of the payroll-tax holiday, returning the levy on most wage earners to 6.2% from 4.2%. However,  the BEA noted that after factoring out both those “special factors,” disposable personal income posted a 0.3% increase in January—after posting a 0.3% gain in December.

Consumer Spending in U.S. Climbs Even as Taxes Hurt Incomes - Consumer spending in the U.S. rose in January even as incomes dropped by the most in 20 years, showing households were weathering the payroll-tax increase by socking away less money in the bank. Household purchases, which account for about 70 percent of the economy, climbed 0.2 percent after a 0.1 percent gain the prior month, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 76 economists called for a 0.2 percent advance. Incomes slumped 3.6 percent, sending the saving rate down to the lowest level since November 2007.Employment gains, the rebound in housing and growing demand for autos will probably keep supporting consumer spending in the first quarter as the world’s largest economy picks up from an end-of-year slowdown. Even so, rising gasoline prices and the need to rebuild nest eggs may make it difficult for households to match last quarter’s performance. “It’s going to be touch and go for the consumer for the next few months,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania, who correctly projected the 3.6 percent drop in income. “The consumer is going to be able to support the recovery, but they’re not going to be able to take it” to a higher level, he said.

U.S. incomes fall, spending rises -U.S. incomes fell the most in two decades in January as higher tax rates kicked in, though American consumers opted to cut back on savings. Personal incomes dropped 3.6% in January, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires expected a 2.5% decline. The decline more than reversed big gains in December, when companies accelerated payouts of dividends and bonuses ahead of January tax increases. Many economists expect incomes to resume their slow growth after a bumpy couple of months. Generally, if Americans have less money in their pockets they spend less on goods and services. But personal-consumption expenditures, which measure purchases ranging from cars and clothes to health care and travel, rose 0.2% in January, in line with economists' expectations. Consumers cut back on big-ticket items but spent more on services. When inflation is factored in, consumer spending rose 0.1%. Consumer spending accounts for two-thirds of demand in the economy.

Consumer Taps Out As Income Plunges By Most In 20 Years: Savings Rate Crashes To 2007 Levels - When the US income and spending figures for December came out, the punditry couldn't contain their exuberance following the massive surge in income which as we explained was merely a function of the pulled forward wages and bonuses in December due to fears of what the Fiscal Cliff and the expiration of the payroll tax cut would do to incomes in 2013 (nothing good), as well as a surge in stock dividends to avoid a dividend tax hike resulting in yet another boost in income. The spike in personal income without an offset in spending sent the savings rate to the highest in three years. Today it's payback time as moments ago we learned that the US consumer gave back all the December gains and then much following news that while spending did nothing, and came in as expected at 0.2%, personal income imploded by 3.6% on estimates of a modest 2.4% drop. This was the biggest drop in personal income in 20 years just as the US consumer's confidence was soaring at least according to such manipulated aggregators as UMich. What this also led to was that not only is the stock market back to 2007 levels, but so is the personal saving rate, which crashed from 6.4% to 2.4%, the lowest since November 2007, and leaving Americans with the least purchasing power just as the full impact of a government that is flirting with austerity is starting to be felt.  And just as bad was the material 4% pullback in real disposable personal income or adjusted for inflation.  "Consumers can’t spend what they don’t have, and they don’t much much,” summarized Bloomberg economist Rich Yamarone.

Real Disposable Income Per Capita: The January Effect -  Earlier this morning I posted my latest Big Four update featuring today's release of the January data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The 4 percent month-over-month plunge in incomes is a result of a widespread 2012 year-end tax strategy to take 2013 income early to avoid the anticipated tax hikes. And of course January disposable incomes were reduced by the expiration of the 2% FICA tax reduction. The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 49.2% since then. But the real purchasing power of those dollars is up only 13.9%. Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level.

The Credit Report You Never Knew You Had, And How It Can Victimize You - Yves Smith - Natalie Martin has a post up at Credit Slips about an paper by Ginger Chouinard on a form of credit reporting that has managed to remain beneath the policy radar despite its considerable importance, and how it can do even more harm that the sort we’ve all come to know and hate.This is Martin’s overview: nearly 90% of financial institutions use ChexSystems or similar reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. They had no idea information was being collected on their checking account usage, much less that it could be used to deny them an account in the future, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business… Unlike credit reports, little positive account information is included in an account screening report. The report provides no account details such as where the consumer has had a checking accounts, account opening dates, or voluntary account closure dates. With respect to account usage, the report essentially contains only negative information such as involuntary account closures or returned check information. For example, a consumer may have successfully managed the checking accounts for 20 years. After a job layoff, the consumer may have had his/her checking account closed for a negative balance. The report for this consumer would just show that closure and not the fact that the consumer had been a responsible checking account user for most of his or her financial life.

Consumer Confidence Rebounds -- U.S. consumer confidence rebounded this month as households expect future labor markets and income levels to improve, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence increased to 69.6 in February from a revised 58.4 in January, first reported as 58.6. The confidence index is at its highest level since November 2012. Economists surveyed by Dow Jones Newswires had expected the index to increase but only to 62.0.

Consumer Confidence: Better Than Forecast, But Still at Recession Levels - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through February 14. The 69.6 reading was well above the consensus estimate of 62.0 reported by Today's number is major increase over January's grim reading of 58.4 (a fractional downward revision from 58.6. But in context of this indicator's history, the consumer remains in a recessionary mindset. Here is an excerpt from the Conference Board report: "Consumer Confidence rebounded in February as the shock effect caused by the fiscal cliff uncertainty and payroll tax cuts appears to have abated.  Income expectations, which had turned rather negative last month, have improved modestly." Consumers' assessment of present day conditions improved in February. Those claiming business conditions are "good" rose to 18.1 percent from 16.1 percent, while those stating business conditions are "bad" decreased to 27.8 percent from 28.4 percent. Consumers' appraisal of the labor market was mixed. Those saying jobs are "plentiful" increased to 10.5 percent from 8.5 percent, while those claiming jobs are "hard to get" edged up to 37.0 percent from 36.6 percent.  Consumers were more optimistic about the short-term outlook this month. Those expecting business conditions to improve over the next six months increased to 18.9 percent from 15.6 percent, while those expecting business conditions to worsen declined to 16.5 percent from 20.4 percent. Consumers' outlook for the labor market was more positive. Those anticipating more jobs in the months ahead improved to 16.7 percent from 14.4 percent, while those expecting fewer jobs decreased to 21.5 percent from 26.7 percent.   [press release] The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number reflects a recessionary mindset. It is virtually spot on the 69.4 average confidence of recessionary months

Michigan Consumer Sentiment Beats Expectations - The University of Michigan Consumer Sentiment final number for February came in at 77.6, up from February preliminary 76.3 and the January final reading of 73.8. The consensus was for 76.3. 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 9% below the average reading (arithmetic mean) and 8% below the geometric mean. The current index level is at the 31st percentile of the 422 monthly data points in this series.

Wal-Mart’s Slowness to Stock Shelves Worsens, Sales Slump - Wal-Mart Stores Inc (WMT), already struggling to woo shoppers constrained by higher taxes, is “getting worse” at keeping shelves stocked, the retailer’s U.S. chief told executives, according to minutes of an officers’ meeting obtained by Bloomberg News. “We run out quickly and the new stuff doesn’t come in,” U.S. Chief Executive Officer Bill Simon said, according to the minutes of the Feb. 1 meeting.  Once a paragon of logistics, the world’s largest retailer has been trying to improve its restocking efforts since at least 2011, hiring consultants to walk the aisles and track whether hundreds of items are available. It even reassigned store greeters to replenish merchandise. The restocking challenge emerged as Wal-Mart was returning more merchandise to shelves and reducing staff in many stores. Wal-Mart’s inability to keep its shelves stocked coincides with slowing sales growth. Same-store sales in the U.S. for the 13 weeks ending April 26 will be little changed, Simon said in the company’s Feb. 21 earnings call.

JC Penney Had The Worst Quarter In Retail History - Even those who have gotten used to following the ongoing train wreck that is JC Penney were shocked yesterday when the company's Q4 results came out. The numbers were abysmal, with JC Penney's same-store sales--the level of sales made by stores that have been operating for at least a year--dropping a staggering 32%. On the ensuing conference call, JC Penney's new CEO Ron Johnson took responsibility for the mistakes JC Penney has made, but he discussed the results as if the company were merely in the midst of a big transformation that will soon be complete.

If inflation is zero, why does my paycheck feel like it's shrinking? - Last week we mourned the death of inflation in an obituary, and some of you wrote in to say you saw inflation in your town. One of the comments we got was from Dennis Sedam in Walla Walla, Wash. He had this to say: “Anybody who thinks inflation is dead is living in a dream world and are certainly not living on a fixed income as I am. So how can inflation be at zero percent when so many of us feel like our paychecks don’t go as far as they used to? Mark Thoma  points out that that some people’s individual inflation rate is not zero. The zero percent rate that was released last week is an average based on the Consumer Price Index, or CPI. The CPI is made up of thousands of different goods and services. But not everyone buys the same goods and services. For example, take retiree Dennis Sedam. He was born in 1944, so he probably spends a larger percentage of his income on health care than the average person. So elderly people are going to have a personal rate of inflation that is higher than the national average. And even if you aren’t buying a lot of health care, everything you purchase affects your inflation rate.

Restaurant Performance Index: Expansion in January - From the National Restaurant Association: Restaurant Performance Index Hit Five-Month High in January as Operators’ Optimism Grew Driven by a more optimistic outlook among restaurant operators, the National Restaurant Association's Restaurant Performance Index (RPI) rose to its highest level in five months. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.6 in January, up 1.0 percent from December and its highest level since August 2012. In addition, January represented the first time in four months that the RPI rose above 100, which signifies expansion in the index of key industry indicators.The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 99.7 in January – up 0.6 percent from December’s level. Although restaurant operators reported net positive same-store sales results in January, softness in the customer traffic and labor indicators outweighed the performance, which resulted in a Current Situation Index reading below 100 for the fifth consecutive month.

Gasoline Prices up over 50 Cents per Gallon since December - From CNN: Gas prices jump, but not as high, survey finds Over the past two weeks, prices at the pump have jumped 20 cents, adding to a total rise of nearly 54 cents over the past nine weeks, according to the Lundberg Survey... And now, prices may even start to drop, says publisher Trilby Lundberg.  "I don't mean that gasoline prices cannot go up further from here," she said Sunday. "But the chief causes of the rise are out of the picture." Crude oil prices are now going down, and wholesale prices -- which marketers and retailers pay -- are "starting to tumble," she said. Below is a graph from for nationwide gasoline prices. Nationally prices are up over 50 cents per gallon from the low last December, and up 20 cents over the last two weeks. But it does appear the price increases have slowed.

Weekly Gasoline Update: Prices Rise Again, But at a Slower Pace - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Prices rose again over the past week. Rounded to the penny, the average for Regular and Premium are both up four cents ... less painful than the previous week's 14-cent rise. Regular is up 16.3% and Premium 14.4% since their interim lows in mid-December. As I've repeatedly pointed out, with the expiration of the 2% FICA tax holiday, the relentles rise in gasoline prices is particularly painful to the average household. According to, two states, Hawaii and California and the nation's capital are averaging above $4.00 per gallon. Three states (New York, Connecticut, Illinois and Alaska) are averaging above $3.90.

The Case for a Higher Gasoline Tax - THE average price of gasoline in the United States, $3.78 on Thursday, has been steadily climbing for more than a month and is approaching the three previous post-recession peaks, in May 2011 and in April and September of last year. But if our goal is to get Americans to drive less and use more fuel-efficient vehicles, and to reduce air pollution and the emission of greenhouse gases, gas prices need to be even higher. The current federal gasoline tax, 18.4 cents a gallon, has been essentially stable since 1993; in inflation-adjusted terms, it’s fallen by 40 percent since then.  Instead of penalizing gasoline use, however, the Obama administration chose a familiar and politically easier path: raising fuel-efficiency standards for cars and light trucks. The White House said last year that the gas savings would be comparable to lowering the price of gasoline by $1 a gallon by 2025. But it will have no effect on the 230 million passenger vehicles now on the road. In a paper published online this week in the journal Energy Economics, I and other scientists at the Massachusetts Institute of Technology estimate that the new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline. That is because a gas tax provides immediate, direct incentives for drivers to reduce gasoline use, while the efficiency standards must squeeze the reduction out of new vehicles only. The new standards also encourage more driving, not less.

DOT: Vehicle Miles Driven declined 2.9% in December - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by -2.9% (-7.0 billion vehicle miles) for December 2012 as compared with December 2011. Travel for the month is estimated to be 236.3 billion vehicle miles. Cumulative Travel for 2012 changed by +0.3% (9.1 billion vehicle miles). The Cumulative estimate for the year is 2,938.5 billion vehicle miles of travel. The following graph shows the rolling 12 month total vehicle miles driven.  Traffic was down in all regions, and down 4.6% in the Northeast. The rolling 12 month total is still moving sideways.In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 61 months - over 5 years - and still counting.  The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were up in December compared to December 2011. In December 2012, gasoline averaged of $3.38 per gallon according to the EIA. In 2011, prices in December averaged $3.33 per gallon. 

Vehicle Miles Driven: Population-Adjusted Hits Yet Another Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through December. Travel on all roads and streets changed by -2.9% (-7.0 billion vehicle miles) for December 2012 as compared with December 2011. The 12-month moving average of miles driven increased only 0.34% from December a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) has set yet another post-financial crisis low. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Texas-Area Manufacturing Expanding More Slowly - Business activity among Texas-area manufacturers remains in expansion this month but barely so, according to a report released Monday by the Federal Reserve Bank of Dallas. The bank said its general business activity index fell to 2.2 in February from 5.5 in January. Readings below 0 indicate contraction, and positive numbers indicate expanding activity. The Dallas Fed survey is the third Fed regional survey, and so far the reports show mixed readings on February factory conditions. The report done by the New York Fed was unexpectedly positive, while the Philadelphia Fed survey was surprisingly weak.

Dallas Fed: Regional Manufacturing Activity increases in February but at a Slower Pace - From the Dallas Fed: Texas Manufacturing Activity Increases but at a Slower Pace . The production index, a key measure of state manufacturing conditions, fell from 12.9 to 6.2, suggesting growth continued but at a slower pace. ... The new orders index was positive for the second month in a row, although it fell from 12.2 to 2.8... The general business activity index was positive for the third month in a row, although it dipped from 5.5 to 2.2. Labor market indicators were mixed in February. Hiring slowed with the employment index moving down to 2.0, and about 17 percent of employers reporting hiring and 15 percent noting layoffs. The average workweek index dipped into negative territory with a reading of –3.0, suggesting hours worked declined. Expectations regarding future business conditions continued to reflect optimism. The index of future general business activity edged up from 9.2 to 10.8. The index of future company outlook remained unchanged at 20.1.

Kansas City Fed: Regional Manufacturing contracted in February - This is the last of the regional manufacturing surveys for February, and the results have been mixed. From the Kansas City Fed: Tenth District Manufacturing Survey Contracted Further The Federal Reserve Bank of Kansas City released the February Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity contracted further in February, and factories’ expectations weakened somewhat. “Factory activity fell more sharply in February than in previous months. Some contacts cited disruptions due to bad weather, and many firms noted that possible federal spending cuts were hurting business,” said Wilkerson. However, capital spending plans for later in the year improved considerably.” The month-over-month composite index was -10 in February, down from -2 in January and -1 in December ... Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Manufacturing Activity Rebounded In February; Expectations Rose -  Richmond Fed -  Manufacturing activity in the central Atlantic region rebounded in February after declining in January, according to the Richmond Fed’s latest survey. Looking at the main components of activity, factory shipments and employment returned to positive territory, while the volume of new orders stabilized. Other indicators also suggested additional firmness. Capacity utilization turned positive, while the gauge for delivery times steadied and backlogs contracted at a somewhat slower pace. In addition, inventories grew at a slightly slower rate. In February, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained eighteen points, settling at 6 from January's reading of −12. Among the index's components, shipments rose twenty-one points to 10, the gauge for new orders moved up seventeen points to end at 0, and the jobs index increased thirteen points to 8.  The index for capacity utilization moved higher, adding twenty-nine points to 11, and the index for backlogs of orders gained seven points to end at −12. The delivery times index stabilized, picking up four points to end at 4, while both our gauges for inventories were lower in February. The raw materials inventory index lost seven points to finish at 16, and the finished goods inventories moved down eleven points to end at 12.Hiring activity at District plants was mixed in February. The manufacturing employment index moved up thirteen points to settle at 8, while the average workweek indicator remained weak, tacking on just two points to end at −2. However, the wage index held steady at 11.

Manufacturing Expands for Third Straight Month - Manufacturers showed an optimistic but wary stance in the latest Institute for Supply Management report on manufacturing out Friday. February’s headline number, 54.2, was up from January’s 53.1, and marks a three-month streak of expansion. Readings above 50 indicate growth.  The national report also reflects positive readings in recent weeks from several regional manufacturing surveys. The top takeaways: The brighter outlook was broad-based: Of the 18 manufacturing industries surveyed, 15 reported expansion in February, up from 13 in January.

ISM Manufacturing index increases in February to 54.2 -  The ISM manufacturing index indicated expansion in February. PMI was at 54.2% in February, up from 53.1% in January. The employment index was at 52.6%, down from 54.0%, and the new orders index was at 57.8%, up from 53.3% in January. From the Institute for Supply Management: February 2013 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in February for the third consecutive month, and the overall economy grew for the 45th consecutive month, Here is a long term graph of the ISM manufacturing index. "The PMI™ registered 54.2 percent, an increase of 1.1 percentage points from January's reading of 53.1 percent, indicating expansion in manufacturing for the third consecutive month. This month's reading reflects the highest PMI™ since June 2011, when the index registered 55.8 percent. The New Orders Index registered 57.8 percent, an increase of 4.5 percent over January's reading of 53.3 percent, indicating growth in new orders for the second consecutive month. As was the case in January, all five of the PMI™'s component indexes — new orders, production, employment, supplier deliveries and inventories — registered in positive territory in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in February relative to January."

ISM Manufacturing Index - PMI 54.2% for February 2013 -- The February 2013 ISM Manufacturing Survey shows PMI increased by 1.1 percentage points to 54.2% and is in expansion for the 3rd month in a row.  This is the 5th time in nine months manufacturing PMI has been in expansion and the highest manufacturing PMI since June 2011.  Overall the report is solid manufacturing expansion and a pleasant surprise considering U.S. politics. This month's ISM report comments from manufacturing survey responders are mostly positive, noting business is picking up.   The exception was Chemical products, which reported demand seemed soft and outside of seasonal patterns.   Computers said they are experiencing a slow down from the DoD.  New Orders increased 4.5 percentage points to 57.8%. New Orders inflection point, where contraction turns into expansion for the long term, isn't exactly 50%, it is 52.3% for new orders. The jump for February implies demand is really picking up for manufacturing. A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. The Census reported manufactured January durable goods new orders growth was -5.2%, where factory orders, or all of manufacturing data, will be out March 6th.  The ISM claims the Census and their survey are consistent with each other.  To wit, below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics.  Here we do see a consistent pattern between the two. Below is the ISM table data, reprinted, for a quick view.

ISM Manufacturing Business Activity Index Posts Another Advance - Today the Institute for Supply Management published its February Manufacturing Report. The latest headline PMI at 54.2 percent is a third month of expansion following a month of contraction. The consensus was for 52.4 percent. Here is the key analysis from the report: Manufacturing expanded in February as the PMI™ registered 54.2 percent, an increase of 1.1 percentage points when compared to January's reading of 53.1 percent. This month's reading reflects the highest PMI™ since June 2011, when the index registered 55.8 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 February PMI™ indicates growth for the 45th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the third consecutive month. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January and February (53.7 percent) corresponds to a 3.6 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for February (54.2 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually."  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 Employment Down, Prices Paid Highest In 20 Months, As Construction Spending Plunges. -  The headlines will exclaim ISM Manufacturing beat expectations and reached its highest level since June 2011 (and that is true) but a scratch below the surface shows what really counts. New orders rose as did Production (all good) but the Employment sub-index dropped (what with all these new orders?) and Prices Paid surged to the highest in 20 months. Interestingly New Export Orders improved - though we are unclear (given the PMIs overnight) just who they are exporting to. In other news, the housing recovery is trotting along - apart from the biggest MoM plunge in construction spending in 19 months.

Forecast: Solid Auto Sales in February - From Despite Rising Gas Prices, February Auto Sales Strong at Estimated 15.5 Million SAAR, says ... forecasts that 1,198,538 new cars and trucks will be sold in the U.S. in February for an estimated Seasonally Adjusted Annual Rate (SAAR) this month of 15.5 million light vehicles. The projected sales [NSA] will be a 14.9 percent increase from January 2013, and a 4.3 percent increase from February 2012. “Car sales are persevering despite economic factors on people’s minds like rising gas prices and the implementation of the payroll tax,” says Senior Analyst Jessica Caldwell. “Pent-up demand and widespread access to credit are keeping up car sales momentum.”  The following table shows annual light vehicle sales, and the change from the previous year.  Light vehicle sales have seen double digit growth for three consecutive years.  The 2013 forecast was from, but it appears sales were above expectations in January and February - and the annual forecast will probably be increased.

U.S. Light Vehicle Sales increase to 15.4 million annual rate in February - Based on an estimate from AutoData Corp, light vehicle sales were at a 15.38 million SAAR in February. That is up 7% from February 2012, and up about 1% from the sales rate last month. This was above the consensus forecast of 15.2 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for February (red, light vehicle sales of 15.38 million SAAR from AutoData).

Orders for U.S. Non-Transportation Goods Jump Most in a Year - Orders for U.S. durable goods excluding transportation equipment climbed in January by the most in a year, indicating business investment is holding up. Bookings for equipment meant to last at least three years minus demand for things such as aircraft, which is often volatile, climbed 1.9 percent, exceeding the median forecast of economists surveyed by Bloomberg and the most since December 2011, Commerce Department data showed today in Washington. Total orders dropped more than projected, reflecting the biggest slump in defense bookings in a decade. Total orders slumped 5.2 percent, the first decline since August. The median forecast of 78 economists surveyed by Bloomberg projected a 4.8 percent decrease. Estimates ranged from a decline of 8.3 percent to a gain of 3 percent. Last month’s drop followed a 3.7 percent gain in December that was initially reported as 4.3 percent. Orders excluding volatile transportation equipment, like commercial and military aircraft, climbed for a fifth consecutive month, representing the longest string of gains since an eight-month stretch through March 2006. They were projected to increase 0.2 percent, according to the Bloomberg survey median. Capital goods orders excluding defense and aircraft jumped 6.3 percent in January, the most since December 2011, today’s report showed. They are considered a proxy for business investment in items such as computers, engines and communications gear. Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, decreased 1 percent after being little change in December. Orders for defense equipment slumped 69.5 percent, the most since July 2000. Demand for military aircraft and parts slumped 63.8 percent.

Durable Goods Orders for January Plunge, But Core Goods Bounce Back - The February Advance Report on January 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 January decreased $11.8 billion or 5.2 percent to $217.0 billion, the U.S. Census Bureau announced today. This decrease, down following four consecutive monthly increases, followed a 3.7 percent December increase. Excluding transportation, new orders increased 1.9 percent. Excluding defense, new orders decreased 0.4 percent. Transportation equipment, down three of the last four months, drove the decrease, $14.7 billion or 19.8 percent to $59.7 billion. This was led by defense aircraft and parts, which decreased $5.1 billion. Download full PDF  The latest new orders number at -5.2 percent was well below the consensus of -3.5 percent. Year-over-year new orders are down 3.0 percent. However, if we exclude both transportation and defense, "core" durable goods were up an astonishing 10.2 percent. Year-over-year core goods are up 4.5 percent. This is a dramatic reversal of -4.0% MoM and -9.9% YoY as of last December's revised data. The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two.

Capital Goods "Split Decision" Points To Uncertain Economy - As expected, the January Durable Goods was a big miss to expectations, printing at -5.2% on an anticipated plunge in aircraft orders, worse than the expected -4.8%, and a plunge from the downward revised 4.3% in December. However, where there was a glimmer of hope, was the ex-transportation number, which rose modestly from 1.0% to 1.9%, on expectations of a 0.2% flat print. More curious, was the schizophrenic split in Capital Goods Nondefense ex aircraft, notably the Orders, which soared 6.3% on expectations of a 0.0% print, and up from a revised -0.3% in December, versus a drop in Shipments of -1.0%, down from 0.2% previously. As Bloomberg's Joe Brusueals called it, a "classic split decision" reflecting fiscal drag via reduced defense spending, modest gains in core economy.  Bloomberg economist Rich Yamarone added that the decline in shipments of nondefense capital goods ex-aircraft was "not a promising start" for 1Q business investment. We agree, as uncertainty in the US economy is back on the table and adding to European uncertainty.

Durable Goods Slammed on Defense New Orders for January 2013 - The Durable Goods, advance report shows new orrders declined by -5.2% for January 2013.  But that's not the real story as Defense new orders plunged the most since January 2009.  Without defense, durable goods new orders the January decline would have been just -0.4%.  The total durable goods decline was $11.8 billion with transportation dropping by $14.7 billion, a -19.8% plunge from December.  Defense aircraft & parts new orders dropped by $5.1 billion as 43% of this month's decline in durable goods new orders can be attributed to the drop in defense aircraft new orders. Below are four graphs of just defense durable goods new orders.   The current new order level of spending is $7.326 billion, a level not seen since January 2009 and a monthly -59.9% decline.    That said, December 2012's increase in defense new orders was a 65.2% gain, so the two together even out defense new orders.  The first graph is by volume of defense new orders. Here is the monthly percentage change in defense new orders and once can see the December gain against this month's fall below.The third graph is defense aircraft new orders.  The plunge is dramatic, -63.8%.  That said, December saw a 58.5% increase, so flipping out over aircraft new orders generally is a bad idea. One needs to see a pattern for months, if not years to raise alarm bells.  After some analysis, there isn't anything that unusual here after all.  The final graph is defense capital goods new orders, which plunged -69.5%.  This is the figure some in the press have been reporting and flipping out on.  It's true this is the largest monthly percentage drop since July 2000.  It's also true that December 2012 showed a 107.3% increase, a figure not seen since right after 9/11, October 2001 in new orders.  Due to December's dramatic rise, it's no surprise and nothing to get alarmed about for this month's defense capital goods plunge.  The plunge in defense aircraft & parts new orders is clearly the culprit, but generally speaking aircraft and parts is the most volatile new order category for not every day someone orders up a new civilian jet or fighter bomber.

The ''Real'' Goods on the Latest Durable Goods Data - Earlier today I posted an update on the February Advance Report on January 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.

The hollow promise of the iEconomy - In the battle between David Einhorn and Apple over the latter's $137 billion cash hoard lies a deeper lesson about the outlook for the economy. Mr Einhorn, an activist investor, says Apple clings to its money out of a “Depression mentality.” Perhaps. But the more mundane explanation is that Apple, like many of the world's big companies today only more so, is generating more cash from its existing product line than it can usefully plough it back into new projects.  And that's a problem. Apple is the most creative, innovative and envied technology company of our time, yet investors clearly doubt its ability to keep churning out hits at current margins, valuing it at just 10 times this year's earnings, a ratio more appropriate for a mature value company. 

Weekly U.S. Unemployment Aid Claims Drop to 344K -- The number of Americans seeking unemployment aid fell 22,000 last week to a seasonally adjusted 344,000, evidence that the job market may be picking up. The Labor Department says the four-week average of applications dropped 6,750 to 355,000, the first drop in three weeks. Weekly applications are a proxy for layoffs. When they decline, it suggests companies are cutting fewer workers and may be more willing to hire. The four-week average has steadily declined since November. Since then, it has fallen almost 11 percent. At the same time, employers have added an average of 200,000 jobs per month from November through January. That’s up from about 150,000 in the previous three months.

Workers fear sequester will cost jobs - Workers and management at one of the biggest naval shipyards in the US joined Tuesday to express concern over the potential damage from the latest budget standoff in Washington. As Barack Obama used the Newport News yard in Virginia as a backdrop for his latest attempt to bounce Republicans in Congress into a deal over the sequester, employees said they were concerned that the failure to reach a deal would lead to layoffs. The personal stories, detailing the consequences for families of unemployment or even a cut in hours, suggest the confrontation over the sequester – $86bn of budget cuts that kick in Friday if there is no deal in Congress – is already having an impact, creating fear among workers and uncertainty among businesses. Obama, in his speech in front of thousands of shipyard workers, said the consequences of failing to agree a deal could be devastating. Republicans argue that Obama is exaggerating and is guilty of scare-mongering. 

Ben Bernanke's Unemployment Prediction: Above 6 Percent For 3 More Years: (Reuters) - The U.S. jobless rate is unlikely to reach more normal levels for several years, Federal Reserve Chairman Ben Bernanke said on Wednesday as he again defended the central bank's forceful easing of monetary policy. Appearing before a congressional panel for a second straight day, Bernanke downplayed signs of internal divisions at the Fed, saying the policy of quantitative easing, or QE, has the support of a "significant majority" of top central bank officials. One lawmaker asked Bernanke when the economy might produce enough jobs to bring the unemployment rate, currently at 7.9 percent, down to 6 percent - the top of the Fed's long-term forecast range. "A reasonable guess for 6 percent would be around 2016, about three more years," Bernanke told the House of Representatives Financial Services Committee.

Weekly Initial Unemployment Claims decrease to 344,000 From the BEAReal gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.1 percent in the fourth quarter of 2012 ... In the advance estimate, real GDP declined 0.1 percent. The DOL reports: In the week ending February 23, the advance figure for seasonally adjusted initial claims was 344,000, a decrease of 22,000 from the previous week's revised figure of 366,000. The 4-week moving average was 355,000, a decrease of 6,750 from the previous week's revised average of 361,750. The previous week was revised up from 362,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

The weak labor market is about more than just the unemployment rate - Since 2007, the real median income of American families has dropped by over $5,000 per family, while the BLS reports that the average employed person spends 8.3 hours per day working, up from 7.6 hours per day in 2007. In other words, American employees are working more and earning less.Meanwhile, median household wealth has dropped. According to the Federal Reserve’s Survey of Consumer Finances, American families have experienced a significant drop in net worth since the start of the crisis. This drop illustrates the lower returns earned on investment income, lower wages, a fall in housing prices, and reductions in ancillary benefits like retirement plans and health insurance since the start of the Great Recession.For workers at either end of the income distribution, the movements have been even more extreme. Workers in the lowest quintile are far more likely to be working longer hours than their middle quintile counterparts, though wages have held constant. For workers in the highest quintile, income has fallen most drastically, but hours worked have remained approximately the same.

US has 13 million more people since 2007 — and 3.2 million fewer jobs - Some economic perspective on the labor market from JPMorgan economist James Glassman: It’s going to be a while, perhaps the balance of this decade for the US economy to recover to its natural, fully-employed state. Businesses have replaced or recovered 63 percent of the nonfarm payroll jobs that were lost during the recession and the job count is only 3,200,000 shy of the December 2007 peak number of jobs. Household employment is even better. It has recovered 79 percent of the losses and is only 1,600,000 shy of the all-time peak employment count. Nonetheless, the US population has increased by 13,700,000 since the December 2007 business cycle peak and the labor force by 3,700,000 even though a massive number of discouraged workers temporarily dropped out. So, another 5 to 7 million new jobs would need to be created at this moment just to return the economy to a fully-employed state. Of course, that is above and beyond the 1,500,000 new jobs needed every year going forward to accommodate new job seekers. From that perspective, the job market is in the fourth inning of recovery.

Soldiers Deployed Overseas Far More Likely to Be Unemployed When They Come Home - New veterans—those who left US military service recently—have higher unemployment rates than both older veterans and civilians, according to a new research paper from the Chicago Fed. Even taking into account the age and education level of new veterans, "neither demographics nor simply being a new veteran by themselves can account for the rise in relative unemployment rates for new veterans," the paper says. First, the significant gap in unemployment between recent veterans and others: Recent veterans have fared relatively poorly in the labor market during and after the Great Recession. As figure 1 shows, veterans who had recently served in the military had higher unemployment rates than older veterans and nonveterans over this period. The three-month moving average of unemployment peaked for recent veterans at 13.9 percent of the labor force. The unemployment peak for nonveterans was 9.2 percent, while the peak for older veterans was 7.9 percent. And, perhaps most notably, the Fed's hypothesis that overseas deployment itself (rather than macroeconomic conditions at home) is the cause of this phenomenon: Being a new veteran when the percentage of service members deployed overseas rises by 1 percentage point predicts a 7 percentage point increase in the probability of being unemployed. Thus, once we control for all factors, extended wartime deployments, not the effects of the Great Recession, appear to account for the relatively high unemployment rates among recent veterans.

Death of the Yuppie - Saddled with tens of thousands of dollars of debt, unemployed or working part-time for not much more than minimum wage: the struggling recent college graduate has—thanks to Occupy Wall Street—become a new iconic figure on the American cultural landscape. To many it seems that an implicit promise has been broken: work hard, get an education and you will ascend to the middle class. Middle class is a famously flexible term in the United States, but here it seems to mean something close to what Barbara Ehrenreich and John Ehrenreich first labeled the “professional-managerial class” (PMC) in 1977. This class of college-educated professionals is distinct from— and often at odds with—both the traditional working class and the old middle class of small business owners, not to mention wealthy business owners.  Today, the PMC as a distinct class seems to be endangered. At the top end, exorbitant compensation and bonuses have turned managers into corporate owners. At the bottom, journalists have been laid off, recent PhDs have gone to work as part-time, temporary adjuncts rather than tenure-track professors, and those now iconic recent graduates have taken to the streets. In the middle, lawyers and doctors are more and more likely to work for corporations rather than in private practices. Once independent professionals, they are now employees.

A lost generation (cont’d)? - For some time, I’ve been writing about how the Great Recession and its tepid recovery have hit young adults hardest. I’m not dismissing the distress of older age groups. Almost anyone who has lost a job in this harsh economy has faced a long, uncertain struggle to find a new one. Americans on the edge of retirement have often reeled from large income and savings losses. It’s rough for almost everyone. But the young seem to have been hurt disproportionately. Getting a job isn’t easy; for those who do, the pay may disappoint.  It’s not surprising that Americans under 35 have suffered the largest income decline of any age group in the past decade, according to Census Bureau statistics. From 2001 to 2011, their median household incomes fell 13 percent, or $6,816. (The median is the exact halfway point in any distribution; figures are in inflation-adjusted 2011 dollars.) Other working-age groups did slightly better: The drop for households 35 to 44 was 9 percent, or $6,137; the cut for households 45 to 64 was 11 percent, or $7,426. Interestingly, households 65 and over had higher incomes. Their median income rose 13 percent, or $3,810, over the decade.  A new report from the nonpartisan Pew Research Center confirms this picture. More than other groups, the young have “deleveraged” — reduced old debt and not taken on new. From 2007 to 2010, the debt of households younger than 35 fell 29 percent, compared with a decline of only 8 percent for older (35-plus) households. The chief consequences have been a sharp drop in large credit-financed purchases: Vehicle ownership fell from 73 percent of Americans under 25 in 2007 to 66 percent in 2011; homeownership dropped from 40 percent of households under 35 in 2007 to 34 percent in 2011.

Guestworkers, Hard To Turn Off Flow: Demographics force US to confront immigration reform, but guestworkers pose challenges - Immigration reform as proposed in the United States consists of enacting policies that provide inducements and punishments to dent significantly, even eliminate, fresh inflows of undocumented, or illegal, immigrants, who are overwhelmingly unskilled, and thus reduce their existing stock of 11 million. There are serious reasons to doubt that amnesty will work better than in 1986, under the Immigration and Reform and Control Act, when only half of 6 million undocumented workers took advantage of that program. Proposals emerging separately from a bipartisan group of eight senators and President Barack Obama, as relayed in his State of the Union address as well as calculated leaks, suggest that a guestworker program will be included as a way of eliminating the fresh inflows of illegal immigrants. But that too will not succeed. Proponents contend that the guestworker program will have two favorable consequences for illegal immigration: First, the guests would be “temporary,” the idea being that one could turn the program off and even return the workers to Mexico and other homelands. Yet, expectations among the workers and likely even their employers, co-workers and communities are that attachments will form and the temporary workers will tend to become permanent. Second, regardless, the political leaders assume that the guestworkers will reduce, perhaps even eliminate, the illegal inflows. Both scenarios are implausible and almost certain to fail.

Thoughts on Immigration Policy - Dean Baker  - Noah Smith of Noapinion takes me to task for being anti-immigration. I’m not sure I fit that description, but let me put together a few things that I have said in different places. First of all, there is the immediate issue of what we do with the undocumented workers who are already here. I don’t see much ambiguity on this one; they should be allowed to normalize their status and become citizens. These people are here as a matter of government policy even if they are working in violation of the law. The government may often be less competent than we would like, but if the policy was to prevent foreigners without proper documents from working in the United States, then we would not have many millions of foreigners working without proper documents. We shouldn’t blame people who came here (like many of our parents or grandparents) to try to secure a better life for themselves and their children. If we want to punish someone for this violation of the law we can always throw their employers behind bars. The question is really how we structure immigration policy going forward. Noah argues the merits for having an open door for high-skilled immigrants. I am 100 percent for this policy, although I may draw the line in a somewhat different place than Noah. I absolutely want to see more foreign doctors, dentists, lawyers and other professionals in the United States.

How the recession turned middle-class jobs into low-wage jobs - The U.S. job market is slowly improving, and most economists expect that gradual recovery to continue this year. Yet one of the most disturbing trends of the recession is still very far from being reversed. America’s middle-class jobs have been decimated since 2007, replaced largely by low-wage jobs. A recent presentation from the Federal Reserve Bank of San Francisco lays out the situation clearly. The vast majority of job losses during the recession were in middle-income occupations, and they’ve largely been replaced by low-wage jobs since 2010: Mid-wage occupations, paying between $13.83 and $21.13 per hour, made up about 60 percent of the job losses during the recession. But those mid-wage jobs have made up just 27 percent of the jobs gained during the recovery. By contrast, low-wage occupations paying less than $13.83 per hour have utterly dominated the recovery, with 58 percent of the job gains since 2010. (This data all comes from an earlier report (pdf) from the National Employment Law Project.) That’s put downward pressure on wages: “[M]any middle-class workers have lost their jobs and, if they have been able to secure new employment at all, find themselves earning far lower wages post-recession,” the San Francisco Fed notes. ”[O]n average over the next 25 years, these workers will earn 11% less than similar workers who retained their jobs through the recession.”

Leading Economists Vote on Raising the Minimum Wage - The panelists are evenly split on whether an increase to $9 would make it “noticeably harder for low-skilled workers to find employment.” A 4:1 majority thinks that weighing the costs and benefits, “this would be a desirable policy.” I note how many who commented bring up the EITC, suggesting that an increase in that support might be better than a minimum-wage increase. I note further that they apparently haven’t read the very good reasoning and research suggesting that the two together very effectively address the problems of each. But Paul Krugman has. And his surprise helps explain why the others haven’t thought about this: Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right

Economists think minimum wage is worth it - The IGM Forum, which is run by the University of Chicago’s Booth School of Business, polled top economists on the minimum wage. The first question they asked was whether raising the minimum wage could make it harder for some low-wage workers to find jobs. The responses were mixed, as the following chart shows. The second question was whether they thought increasing the minimum wage was worth it given the possible downsides. They do.

Minimum Wage Would Be $21.72 If It Kept Pace With Increases In Productivity: Study: The minimum wage should have reached $21.72 an hour in 2012 if it kept up with increases in worker productivity, according to a March study by the Center for Economic and Policy Research. While advancements in technology have increased the amount of goods and services that can be produced in a set amount of time, wages have remained relatively flat, the study points out. Even if the minimum wage kept up with inflation since it peaked in real value in the late 1960s, low-wage workers should be earning a minimum of $10.52 an hour, according to the study. Between the end of World War II and the late 1960s, productivity and wages grew steadily. Since the minimum wage peaked in 1968, increases in productivity have outpaced the minimum wage growth. The current minimum wage stands at $7.25 an hour. In 2011, more than 66 percent of Americans surveyed by the Public Religion Research Institute supported raising this figure to $10.

Boosting Growth: The Spending and Debt Responses to Minimum Wage Hikes - Aaronson, et al, have a recent AER paper on the consumption patterns of households with minimum wage recipients following minimum wage increases. Immediately following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles. Furthermore, we find that the high spending levels are financed through increases in collateralized debt. Our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock.

Robots Don't Commit Suicide (and Other Robot Advantages) - Robots don't eat, drink, demand coffee breaks, or protest working conditions. And they certainly don't commit suicide.  Following a wave of suicides in China, one at Foxconn where a worker twice attempted to kill himself and succeeded the second time, Foxconn suspended hiring, deciding to use more robotsElectronics manufacturer Foxconn has halted recruitment in China, which it claims is due to plans to further automate processes, amid speculation of a reduction in production demand by its key client Apple. In fact, the recruitment freezes among Foxconn this time is due to its long pronounced plans to install million robots to replace human, Chinese newspaper Beijing News reported on Wednesday, citing unidentified employees. Foxconn chairman Terry Gou had ordered all factories in China earlier this year to beef up automated manufacturing processes by using more robots. According to the report, if any factories plan to conduct large-scale recruitment, it will need his personal approval.  In June 2011, Gou announced the company would deploy one million robots across factory assembly lines within three years.

A World Without Work - IMAGINE, as 19th-century utopians often did, a society rich enough that fewer and fewer people need to work — a society where leisure becomes universally accessible, where part-time jobs replace the regimented workweek, and where living standards keep rising even though more people have left the work force altogether.  Yet the decline of work isn’t actually some wild Marxist scenario. It’s a basic reality of 21st-century American life, one that predates the financial crash and promises to continue apace even as normal economic growth returns. This decline isn’t unemployment in the usual sense, where people look for work and can’t find it. It’s a kind of post-employment, in which people drop out of the work force and find ways to live, more or less permanently, without a steady job. So instead of spreading from the top down, leisure time — wanted or unwanted — is expanding from the bottom up. Long hours are increasingly the province of the rich.  Of course, nobody is hailing this trend as the sign of civilizational progress. Instead, the decline in blue-collar work is often portrayed in near-apocalyptic terms — on the left as the economy’s failure to supply good-paying jobs, and on the right as a depressing sign that government dependency is killing the American work ethic.  But it’s worth linking today’s trends to the older dream of a post-work utopia, because there are ways in which the decline in work-force participation is actually being made possible by material progress.

Boeing’s ‘Angry Nerds’ Reject Contract as Dreamliner Crisis Continues - Seven thousand technical workers at Boeing narrowly rejected the aircraft company’s final contract offer on Tuesday and authorized a strike. The possible strike comes as Boeing struggles to fix problems with its new Dreamliner 787, which was grounded by aviation authorities around the world in mid-January after batteries malfunctioned on two planes, smoking and catching fire. The techs who voted down the contract are intimately involved in solving the battery problem, said Ray Goforth, executive director of the union—a fact which could give them leverage. “All commercial aircraft production will halt if they go on strike,” he said. No date has been set for a walkout, and the union is asking Boeing to meet again with a federal mediator. The workers are members of the Society of Professional Engineering Employees in Aerospace, SPEEA, whose unofficial slogan is, “No nerds, no birds.”

The Wage Theft Epidemic - Even as the ranks of low-wage workers have swelled since the recession, Democratic and Republican legislatures in more than a dozen states have quietly slashed funding for the agencies that enforce minimum wage law. Budget cuts are no surprise in an era of austerity. Yet the effect of these cuts on wage-and-hour investigative units—charged with examining and settling wage disputes—has seriously compromised an essential line of defense for already vulnerable low-wage earners, according to experts. State labor officials and researchers around the country tell In These Times that low-wage workers facing abusive employers increasingly have nowhere to turn.  The victims of nonpayment of owed wages—referred to as “wage theft”—are most frequently workers at the bottom of the income scale. The U.S. Department of Labor, which significantly expanded its investigative force under former Labor Secretary Hilda Solis, can take wage theft cases, but it is less familiar with local particulars and is prohibited from investigating many employers covered by state laws. Most private attorneys are unwilling to take wage theft cases, since they involve comparatively small sums of money.

The Titanic Wealth Gap Between Blacks and Whites - According to a recent study from the Institute on Assets and Social Policy at Brandeis University, in which researchers followed 1,700 working-age households from 1984 to 2009, "the total wealth gap between white and African-American families" has nearly tripled, "increasing from $85,000 in 1984 to $236,500 in 2009." And more than 25 percent of the gap is attributable to homeownership and other policies associated with housing. Indeed, the disproportionate influence of housing on black wealth is reflected in this staggering statistic: "Overall, half the collective wealth of African-American families was stripped away during the Great Recession."

Study shows wealth gap between whites and African-Americans tripled in 25 years - The wealth gap between white and African-American households almost tripled within the past 25 years according to a study released on Wednesday by Brandeis University. The study, (PDF) conducted by the university’s Institute on Assets and Social Policy, tracked 1,700 working-age households between 1984 and 2009 and concluded that the disparity between white and black families went from $85,000 to $236,500 during that period. According to the study, there was “little evidence” that commonly-held perceptions about personal choices and behaviors held true when it came to measuring the ability to accumulate wealth.

What Explains the Racial Wealth Gap? - White families build wealth faster than black households, a phenomenon economists call the “racial wealth gap.” What explains this growing divide? The biggest drivers, new research shows, are home ownership and income levels. Tracking 1,700 working-age households from 1984 to 2009, researchers found that, among households whose wealth grew over the period, the number of years owning a home accounted for nearly 30% of the difference in the relative growth in wealth between white and black families. Family income accounted for another 20% of the widening gulf in wealth. Other factors include college education, inheritances and unemployment. All told, these five factors accounted for 65% of the increasing wealth gap, researchers said. The findings are the latest evidence that barriers in workplaces, schools and communities — rather than personal attributes and cultural factors — may be making it harder for blacks to accumulate wealth than whites over time. Wealth, the sum of assets like homes, cars, stocks and bank and retirement accounts, minus debt, is a key gauge of economic well being — and can be passed on to future generations. The housing bubble’s collapse in 2006 and the recession from late 2007 to mid-2009 helped push this wealth gap between whites and blacks to unprecedented levels. In 1984, the median net worth of white families — the level at which 50% had less wealth and 50% had more — was $90,851 compared with just $5,781 for black families, a gap of $85,070. By 2009, this gap had ballooned to $236,500.

The Only Ones Who Recovered from the Recession are the Top 1% -  A study shows the top 1% of America's rich captured 121% of the income gains for the two years after the 2007-2009 recession was declared over.  U.C. Berkeley Economist Emmanuel Saez released his study Striking it Richer:  The Evolution of Top Incomes in the United States early this month to much press.   It truly is astounding.   Gone is America's strong middle class where work was rewarded.  Replaced is a growing elitist class, where the ticket to enter is $$366,623 a year.   Saez's findings: From 2009 to 2011, average real income per family grew modestly by 1.7% but the gains were very uneven. Top 1% incomes grew by 11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1% captured 121% of the income gains in the first two years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% income will likely surge, due to booming stock-prices, as well as re-timing of income to avoid the higher 2013 top tax rates. Bottom 99% will likely grow much more modestly than top 1% incomes from 2011 to 2012. We took the liberty of creating some graphs from Saez's calculations.  In the first graph below is the bottom 99% real income growth, the gains in real income by the top 1% and then the average real income growth for selected periods between 1993 tol 2011.  We can compare this recession to the Clinton era as well as the recession of 2001.  What this graph amplifies is the rich are getting richer while the rest of us are simply getting poorer or going nowhere with income.   Saez uses a special research CPI to compute real income, the same series used in labor productivity.  Real means adjusted for inflation.

Republicans Must Bridge the Income Gap - Sheila Bair - LAST month Emmanuel Saez, a celebrated economist at the University of California, Berkeley, issued another depressing report on income inequality. Among other things, Mr. Saez examined how real family incomes changed in the United States from 2009 to 2011, the first two years of the recovery. The richest 1 percent of Americans, he found, saw their incomes grow, on average, by more than 11 percent. As for the other 99 percent? You guessed it: incomes shrank by nearly half a percent.  The phenomenon is hardly new. The yawning gap between rich and poor has been growing since the 1970s and reached a 90-year peak in 2007, just before the financial crisis. The Great Recession narrowed the gap a bit, but now, once again, the richest Americans are vacuuming up what wealth is out there, a trend that Mr. Saez expects to continue.  I am a capitalist and a lifelong Republican. I believe that, in a meritocracy, some level of income inequality is both inevitable and desirable. But I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich.  This is not a situation that any freethinking Republican should accept.

Dependents of the State - NYT - Conservatives champion an ethos of hard work and self-reliance, and insist — heroically ignoring the evidence — that people’s life chances are determined by the exercise of those virtues. Liberals, meanwhile, counter the accusation that their policies encourage dependence by calling the social welfare system a “safety net,” there only to provide a “leg up” to people who have “fallen on hard times.” Unlike gay marriage or abortion, issues that divide left from right, everyone, no matter where they lie on the American political spectrum, loathes and fears state dependence. If dependence isn’t a moral failing to be punished, it’s an addictive substance off which people must be weaned. Like so many politically important notions, the concept of “state dependence” purports to do no more than describe the way things are, but contains within it a powerful and suspect moral judgment. What is it for one thing to depend on another? Put most simply, X depends on Y when it’s the case that X wouldn’t exist if Y didn’t exist. More subtly, X depends on Y when it’s the case that X wouldn’t be in the state it is in without Y’s being in the state it is in. Americans who collect food stamps, Medicaid, unemployment insurance or welfare checks are said to be dependent on the state because the lives they lead would be different (indeed, worse) if the state did not provide these services — at least without their working harder and longer. Despite the symbolic resonance of Ronald Reagan’s fictitious “welfare queen,” most of the people who rely on means-tested social services either cannot work, have been recently laid off thanks to the economic downturn, or are already working in poorly paid, immiserating jobs. Of the 32 million American children currently being raised in low-income families — families who cannot afford to meet their basic needs — nearly half have parents who are in full-time, year-round jobs.

About 30% of Benefit Recipients Are Disabled - Nearly a third of Americans getting government assistance say they are disabled, new research shows. The U.S. Census Bureau on Tuesday said roughly 46 million Americans — 20% of the U.S. population not in places like prison, nursing homes or the army — got some kind of government assistance in 2011. Of these 46 million people, 30.4% reported being disabled in one or more ways. Almost 20% of beneficiaries of programs like the Supplemental Security Income and Supplemental Nutrition Assistance Program (a.k.a. food stamps) had major difficulty walking or climbing stairs, while around 15% had difficulty going outside the home to shop or visit a doctor’s office. Fourteen percent had trouble with memory, concentration and making decisions. The Census report is the first of its kind, making past comparisons difficult. Changes in how the government collects data on different social-assistance programs in recent years also make comparisons invalid. Still, a glance at disability rates among recipients of specific programs and previous Census research drawing on other data suggest “the level of disability within these programs is remaining fairly constant,” The information in Tuesday’s report comes from a survey that asks questions about difficulty hearing, seeing, walking and climbing stairs, remembering and concentrating, dressing and bathing, and going outside to do errands. If respondents say “yes” to any question, they are considered to have a disability.

How Obama Can Fight Hunger Now - If the sequester cuts takes effect, 600,000 low-income pregnant women and children up to age 5 will be cut from the Women, Infants & Children (WIC) program, which currently provides them with a monthly package of nutritious food. SNAP (food stamp) benefits are also scheduled to be cut in order to pay for—if you can believe it—a 2010 deal that improved the nutritional quality of school lunches. After November 1, SNAP benefits will average approximately $1.30 per person per meal. Finally, during the last Congress, both the House Agricultural Committee and the full Senate voted to cut the SNAP program—by $16 billion and $4.5 billion, respectively—so more cuts might be on the horizon. That’s why a new report from Joel Berg, executive director of the New York City Coalition Against Hunger (NYCCAH) and a Senior Fellow at the Center for American Progress, is so timely. How President Obama Can Reverse America’s Worsening Hunger Metrics is a practical guide to executive actions Obama can take now “to significantly reduce child hunger, as well as US hunger in general,” according to Berg. In 2008, then-candidate Obama pledged to end childhood hunger by 2015. This report offers ways he can move in that direction without relying on Congress.

State Unemployment and the Allocation of Federal Stimulus Spending - Ny Fed - Fiscal stimulus, in the form of large discretionary increases in federal spending and tax reductions, is often triggered by a strong and persistent rise in the national unemployment rate. The most recent example was the $860 billion (6 percent of GDP) stimulus contained in the 2009 American Recovery and Reinvestment Act (ARRA), adopted in the context of rising unemployment rates. The spending components of the program were varied, including federal transfers to state governments to support education and social services, assistance to unemployed and disadvantaged individuals, and funds for capital construction projects. The majority of the stimulus funds were allocated to state governments and, since the program was motivated by high and rising aggregate unemployment, a reasonable expectation would have been that states with high unemployment rates would receive large allocations. Our analysis of the distribution of ARRA funds across states shows that the expanded assistance to unemployed workers was indeed highly correlated with state unemployment rates. It turned out, however, that most other state allocations had little association—positive or negative—with state unemployment rates. The ultimate distribution instead seemed to reflect a number of practical considerations involved in implementing such a vast spending program. In this post, we outline what in our view were the key considerations that governed the distribution of the stimulus spending across states, and we use the example of one component of that spending—highway infrastructure investment—to illustrate how the stimulus funds got to the states.

States with “High Rate” Income Taxes are Still Outperforming No-Tax States - Lawmakers in about a dozen states are giving serious consideration to either cutting or eliminating their state personal income taxes. In each case, these proposals are being touted as a way to boost economic growth. One claim often made during these debates is that the nine states without personal income taxes are outperforming the rest of the country, and that their growth can be easily replicated in any state that dares to abandon its income tax. Some have also claimed that the nine states with the highest top income tax rates are experiencing below-average growth.  But these talking points, which have been widely disseminated by the American Legislative Exchange Council (ALEC), Americans for Prosperity, and The Wall Street Journal’s editorial board, are based on an analysis by supply-side economist Arthur Laffer that is extremely flawed. That analysis was first debunked by ITEP in early 2012. In its rebuttal, ITEP explained why Laffer’s simplistic state-by-state comparisons cannot reliably tease out the impact of tax policy on state economies. But ITEP also showed that even if one were to accept Laffer’s methodology as somehow valid, his core finding is simply not true. In reality, the residents of the states that levy income taxes—including residents of those states with the highest top tax rates—are experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax. This report updates ITEP’s 2012 findings in light of new available data and explains in more detail the problems with Laffer’s analysis.

Spending Cuts Threaten State Recoveries, Governors Say - Bloomberg: Federal budget cuts will probably push the U.S. back into recession by damaging states’ economies recovering from the worst fiscal crisis since the Great Depression, governors said. President Barack Obama and Congress need to find a way to prevent $85 billion in across-the-board spending cuts from taking effect starting on March 1, said Republican and Democratic governors who are in Washington this weekend for a meeting of the National Governors Association. The cuts, known as sequestration, will lead to dismissal of teachers and firefighters, and reduce projected spending by $1.2 trillion over the next nine years, with half in defense spending and half from domestic spending. Governors said the threat of cuts has already damaged their economies, which they said will worsen if the president and lawmakers can’t agree. “I don’t think there is any doubt about it” that the required reductions “could put us right back where we were,” Jack Markell, the Democratic governor of Delaware and the chairman of the National Governors Association, said on “Fox News Sunday.” The cuts would have “a real big impact on the economy and jobs,” he said.

Long Beach Has $1.164 Billion In Unfunded Personnel Costs - Unfunded benefits for city workers have topped $1 billion to date and could explode to nearly $4.5 billion within 30 years if down payments and changes to personnel compensation are not made. That was the stark and unsettling news given to the Long Beach City Council by Finance Director John Gross during a recent study session examining the city’s unfunded liabilities, which include pensions, sick leave, retiree health subsidies and workers’ compensation. Gross described these liabilities as services the city has already received or committed to but had not yet paid for. Much of the city’s unfunded debt goes back years, even decades. They are promises made without consideration for how they will be fulfilled. And left unchecked, these costs could threaten the city’s credit rating and ability to provide future services.

Is Detroit gearing up for a "managed bankruptcy?" And what does that even mean? - It appears that officials might be laying the groundwork for a so-called “managed bankruptcy” in Detroit—though it’s something they hope won’t actually happen. A process for going through Chapter 9 municipal bankruptcy is laid out in the state’s new emergency manager law that kicks in next month. And it could happen even if Governor Snyder appoints an emergency manager for Detroit. Both state and city officials used to say that bankruptcy was completely off the table for Detroit. But the governor now acknowledges that bankruptcy might be the only way to cut down on Detroit’s long-term debt—estimated at more than $14 billion. Snyder told reporters last week he’s hopeful just the threat of a bankruptcy can be used to motivate Detroit’s creditors to take a haircut—allowing the city to dump much of its debt without ever setting foot in bankruptcy court.

Among Philly teachers, anger and dismay at contract offer - Patrick Naughton is an enthusiastic social studies teacher and the dean of students at Robeson High School in West Philadelphia, but the first thing he did Wednesday morning was look for a new job. Naughton had read about the Philadelphia School District's initial contract offer to its teachers union - a 13 percent pay cut for those making over $55,000, an end to seniority-based positions, and smaller provisos such as an end to a guaranteed adequate supply of textbooks - and felt a great sense of urgency. Details of the district's opening proposal to the Philadelphia Federation of Teachers - whose contract expires in August - range from a pay cut of 13 percent, and a 13 percent contribution to benefits, for those who make $55,000, to an end to the seniority-based system of filling teacher vacancies.

Families Saving Less for College - Families of college-bound students remain optimistic — perhaps too optimistic — about their ability to cover tuition costs, according to a new survey of more than 1,600 parents with children under 18. The survey, conducted by Ipsos Public Affairs on behalf of student-aid company Sallie Mae in August, was released Tuesday. The parents who have set savings goals — just 50% of respondents, down from 60% in 2010 — plan to sock away about $39,000 per child, or about one-third of future college costs. That’s in line with what parents actually do pay, according to a prior Sallie Mae report. However, at their current pace of savings, most families will hit just half that savings amount. (The good news is that most families ramp up savings as their children near high school.) Not only did fewer families save for college last year, but they also saved less. Parents who saved have socked away almost $12,000 total last year, a sharp drop from over $20,000 reported in 2010. That might explain why only 55% of those who are saving for college said this year that they feel confident about being able to cover the costs. (The Wall Street Journal’s “Price of Admission” series explores this issue). High-income parents, those earning $100,000 or more, saved much more money than those earning less: almost $20,000, on average. But savers who earned less than $35,000 annually put 6% of their income away for college, a higher proportion than high-income parents, who saved 3%.

Only Half of First-Time College Students Graduate in 6 Years - As we’ve covered here many times before, there is an abundance of evidence showing that going to college is worth it. But that’s really only true if you go to college and then graduate, and the United States is doing a terrible job of helping enrolled college students complete their educations. A new report from the National Student Clearinghouse Research Center digs deeper into these graduation rates. It finds that of the 1.9 million students enrolled for the first time in all degree-granting institutions in fall 2006, just over half of them (54.1 percent) had graduated within six years. Another 16.1 percent were still enrolled in some sort of postsecondary program after six years, and 29.8 percent had dropped out altogether. As you can see, many of the students who ultimately graduated did so at a different institution than the one where they had originally enrolled. Of the whole cohort of 2006 matriculants, 42 percent graduated where they had first enrolled, and another 9.1 percent graduated from a place to which they had transferred.

Tuition increase approved for 90,000 college students - Students at the University of Louisiana in Lafayette and Southeastern Louisiana University in Hammond will likely see their tuition rise starting this fall. The University of Louisiana Board of Supervisors on Tuesday approved a 10 percent tuition hike at all nine of its campuses. Before the increase can take effect, though, it also has to be approved by the state Board of Regents higher education policy board. The UL System is the largest college and university system in Louisiana with 90,000 students at the University of New Orleans, ULL, Southeastern and six other campuses around the state. The move comes just days after Gov. Bobby Jindal released a $24.7 billion state budget proposal for the fiscal year that begins July 1. Jindal’s budget relies on $75 million in tuition increases to help offset about $209 million in cuts from Louisiana’s colleges, universities and hospitals.

Education Tax Credits Rival Pell Grant Program in Size: Reforms Proposed  - Tax-based aid for higher education quadrupled between 2000 and 2010 and will continue to be a large part of the financial aid story – at least through 2017 when the American Opportunity Tax Credit is scheduled to expire. As part of a series of reports on federal financial aid, the Center for Law and Social Policy is urging a full review of who receives tax benefits for education, how those benefits compare with the better-known Pell grants, and whether Congress should reform higher education benefits. It proposes some important ideas for better targeting those subsidies to students who need them the most. Since the enactment of the Hope and Lifetime Learning Credits in 1997, education tax benefits have grown from less than $1 billion  to over $34 billion in FY2012. Most of that growth comes from the AOTC, which replaced the Hope credit in 2009 (figure 1).

Thomas Edison State College Pioneers Alternative Paths - In September, Jennifer Hunt of Brown County, Ind., was awarded a bachelor’s degree from Thomas Edison State College in New Jersey without ever taking aThomas Edison course. She was one of about 300 of last year’s 3,200 graduates who managed to patch together their degree requirements with a mix of credits — from other institutions, standardized exams, online courses, workplace or military training programs and portfolio assessments.  Years ago Ms. Hunt had finished enough advanced work to enter the University of Texas at Austin with sophomore standing. But after a year, homesick, she returned to Virginia. Then she married and eventually moved to Indiana. She had 10 children, whom she home-schools, and worked in her husband’s business.  About a year ago, at 39, she resolved to complete a degree. In a kind of a higher-education sprint, she took a number of college equivalency exams, earning 54 credits in 14 weeks.

Student-Loan Delinquencies Soar - WSJ  - The number of young borrowers who have fallen behind on their student loan payments has soared over the past four years, the Federal Reserve Bank of New York said in a report released Thursday. According to the report, 35% of people under 30 who have student loans were at least 90 days late on their payments at the end of last year, up from 26% in 2008 and 21% at the end of 2004.  The new figures, which exclude borrowers who are still in school or aren't yet required to make payments, show that young Americans are having a tougher time repaying college loans as debt loads increase and job prospects remain shaky.  Amplifying the burden: a growing number of young adults have become student borrowers. All told, 43% of 25-year-olds had student debt in the fourth quarter of 2012, up from about 33% in the fourth quarter of 2008.  Concerns about higher debt loads and rising delinquencies are leading government officials and families to focus more on the payoff from a college degree. Meanwhile, colleges and universities are facing increased pressure to limit tuition increases. Some are even freezing or cutting their charges. The high delinquency rate is very worrisome, said Wilbert van der Klaauw, an economist with the New York Fed, noting that higher education has traditionally produced a sizable financial payoff. "We hope the returns to these educational investments are going to be there" as the labor market rebounds, he added.  The amount of U.S. student-loan debt increased 11% last year to $966 billion and is up 51% since 2008, according to the report. Student-loan debt climbed even as other types of borrowing fell. While 40% of student-loan borrowers owe less than $10,000, a growing number have higher loan balances. Nearly 47% of borrowers owe between $10,000 and $50,000, up from 38% in the fourth quarter of 2005. The share of borrowers with balances of $100,000 or more has also jumped, to 3.7% from 1.7% during this period.

Delinquencies On Student Loans Surpass Those On Credit Card Debt - (charts) Those who have been following our year-long series exposing the student debt bubble are by now well aware that this latest $1 trillion+ reincarnation of subprime will have a very unhappy ending. Which is why today's release of the quarterly Fed report on household debt and credit will hold few surprises for them. There is however, one data point which is notable: as of December 31, 2012, the soaring delinquency rate on student loans (first reported here, and subsequently confirmed by the Fed itself), has surpassed that of credit card debt.

Grading Student Loans - NY Fed - Student loans support the education of millions of students nationwide, yet much is unknown about the student loan market. Relevant data are limited and, for the most part, anecdotal. Also, sources tend to focus on recent college graduates and do not reveal much information about the indebtedness of parents, graduate students, and those who drop out of school.  To inform the public and policymakers, we devote this post to some new findings obtained from the FRBNY Consumer Credit Panel, a unique and nationally representative data set sourced from Equifax credit reports. The FRBNY Consumer Credit Panel has made possible our Quarterly Report on Household Debt and Credit, first issued in the second quarter of 2010. We will examine the overall student loan debt market as of third-quarter 2011, giving particular attention to changes from the second to the third quarter and highlighting new findings by age group as well.

Student Loan Bubble Data - The New York Fed has posted a new analysis of student loan debt.  Depending on how you read the data, student loan borrowers are either in serious trouble, or are no worse off than consumers with credit card debt or car loans.  The bad news is that only 39% of borrowers are paying down their student loan debt. The rest are either in deferment, income-based repayment (which permits paying less than the interest coming due), or default.  On the other hand, only 14% of borrowers are contractually delinquent in payments. The NY Fed bloggers have yet another way to slice the delinquency data: of those borrowers who appear to be in repayment, rather than in deferment or income-based repayment, about 27% are delinquent. As for the total debt, it grew to $870 billion as of September 30, exceeding total credit card debt and exceeding total auto loan debt.  The median loan amount is $12,800, which does not seem so unmanageable, but the average is $23,300, meaning a small percentage of borrowers have large amounts of debt. Borrowers like the law students we worry about, with $100,000 of debt or more, are a very small percentage of the student loan population, about 3% of borrowers.  On the other hand, many of those with small balances are college drop-outs, who also struggle. The bubble aspects of student loan debt are suggested by two statistics.  First, 40% of all borrowers are under 30, and they hold 33% of all the debt and 25% of past due loans.  Given that this group includes every student who has just signed up for her first loan, the future of student loan debt is clearly worrisome.

CalPERS may 'turn on the spigot' for rate increases - CalPERS last week gave some 1,575 local governments a small increase in their annual pension costs, one of the last rates kept low by unusual actuarial policies adopted after a $100 billion investment loss five years ago. As a slowly improving economy bolsters government budgets, CalPERS is considering changes in investment and actuarial policies that could “turn on the spigot” over the next few years, requiring employers to put more money into the pension fund. CalPERS funding levels are low, around 70 percent. Officials fear another big investment loss could require unworkable rate hikes to get to 100 percent funding. So a risk-based investment policy is being considered to cut losses in future downturns. The level of the big CalPERS state worker fund is projected to drop to 60 percent in 50 years, even if earnings average 7.5 percent. Proposed actuarial changes would boost funding levels, avoid conflicting debt reports and make employer rates more predictable.

Why the Corporate Pension Gap Is Soaring - When United Parcel Service said last month that it was taking a noncash charge of $3 billion tied to its pension plan, the package-delivery giant blamed what might seem like an unrelated event: the downgrade last summer of several big banks by Moody's Investors Service. But the connection between the two incidents illustrates the complexities of calculating pension liabilities—and how little power companies have in keeping them under control. Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management. The firm estimates that companies now hold only $81 of every $100 promised to pensioners. In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve.

No Country For Old People - A top-heavy workforce with fewer replacement workers is further saddled by credit card debt, according to “In the Red: Older Americans and Credit Card Debt” from AARP and Demos. It finds middle-income Americans age 50 and older carry more credit card debt, on average, than younger people. More worrisome, it’s a reversal of the trend Dēmos found in its 2008 survey. But the report notes some good news. The 2009 Credit Card Accountability, Responsibility and Disclosure (CARD) Act appears to have influenced the way consumers manage their credit card debt by helping them to pay down balances faster and avoid late fees and over-the-limit fees. This suggests that credit card debt among older Americans is primarily a reflection of difficult economic times, not a lack of personal financial responsibility. The Employee Benefit Research Institute (EBRI) weighs in with two reports of concern for older Americans. The first finds their debt levels have spiked. Specifically, American families headed by individuals age 75 or older had increases in the incidence of debt, the average amount of debt held, and the percentage with debt payments greater than 40% of their income in 2010, the latest year in which numbers were available.

The false-alarmists behind this shrinking population panic - Dean Baker - The retirement of the baby boom cohorts means that the country's labor force is likely to be growing far more slowly in the decades ahead than it did in prior decades. The United States is not alone in facing this situation. The rate of growth of the workforce has slowed or even turned negative in almost every wealthy country. Japan leads the way, with a workforce that has been shrinking in size for more than a decade. Slower population growth is affecting the developing world as well. Latin America and much of Asia are seeing much slower population growth than in prior decades. In China, the one-child policy adopted in the late 1970s has virtually ended the growth in its labor force. According to many media pundits, this picture of stagnant or declining labor forces is cause for panic. After all, it means that countries will be seeing an increase in the ratio of retirees to workers. Countries around the world will be suffering from labor shortages. And with even developing countries experiencing slower population growth, there will be nowhere to turn to make up the shortfall. The only part of this picture that should, in fact, be scary is the failure of people involved in economic policy debates to have even a basic understanding of economics and arithmetic. There is no reason why the prospect of a stagnant or declining workforce should concern the vast majority of people. Rather, from the standpoint of addressing global warming and other environmental problems, this is great news.

Dean Baker on Social Security and Obama - Via Truthout Dean Baker points to continuing insistent of President Obama to keep Social Security 'on the table'. Dean Baker has a take on some numbers surrounding the politics and stories politicans offer:  While most of the DC insiders probably don't understand the chained CPI, everyone else should recognize that this technical fix amounts to a serious cut in benefits. It reduces benefits compared to the current schedule by 0.3 percent annually. This adds up through time. After someone has been getting benefits for 10 years, the cut in annual benefits is 3 percent. After 20 years, people would be seeing a benefit that is 6 percent lower, and after 30 years their benefit would be reduced by 9 percent. (AARP has a nice calculator which shows how much retirees can expect to lose from the chained CPI.)We can debate whether the chained CPI benefit cut should be viewed as "large," but there is no debate that chained CPI cut is a bigger hit to the typical retiree than the ending of the Bush tax cuts were to the typical high-end earner. Social Security provides more than half of the income for almost 70 percent of retirees. This means that the 3 percent cut in Social Security benefits amounts to a reduction in their income of more than 1.5 percent. By contrast, if a wealthy couple has an income of $500,000 a year, as a result of President Obama's tax hikes, they would be paying an addition three percentage points in taxes, or $3,000, on the income above $400,000. That comes to just 0.6 percent of their income.

California controller pegs state retiree medical costs at $64 billion - California faces a $63.84 billion obligation to cover state retirees' medical expenses over the next three decades, according to state Controller John Chiang.The figure, which captures unfunded retiree health care costs from mid-2012 through mid-2042, is up nearly 3 percent in the last year.For the most part, the state pays those expenses as they come up. The bill for the current fiscal year will hit an estimated $1.8 billion, about $100 million more than in 2011-12.Chiang wants the government to set money aside and invest it for retiree medical obligations.

Less than one-half of U.S. adults covered by employer-sponsored health insurance --Less than one-half of adults in the United States received health insurance through their employer in 2012, but the market showed signs of stabilizing after three years of decline, according to a poll. The Gallup survey said employer-sponsored insurance, long a pillar of the $2.8-trillion U.S. health-care system, covered just under 45 per cent of U.S. adults last year, down from about 49 per cent in 2008, when the economy was engulfed by recession. The biggest losses occurred among people earning less than $90,000 per year and among minorities. But the 2012 data showed little change from 2011 as the economic recovery gained momentum. Meanwhile, over the same five-year period, the number of Americans receiving government-sponsored health coverage — including Medicare, Medicaid and veterans' programs — topped the 25 per cent mark from about 23 per cent in 2008

The Limited Reach of Employer-Based Health Insurance - It's common to describe the U.S. as having employer-based health insurance, and while that statement is broadly true, it doesn't capture the limitations of this approach. Hubert Janicki of the U.S. Census Bureau lays out some of the basic trends and patterns in "Employer-Based Health Insurance: 2010," a February 2013 report. Here are a few facts:The share of the U.S. population over the age of 15 covered by employment-based health insurance (either by their own employer or as a dependent) has been falling, dropping from 64.4% in 1997 to 56.5% in 2010.Of the employed, 70.2% have employment based health insurance in 2010, down from 76.2% back in 2002. Of the employed, 18% have no health insurance in 2010, compared with 14.5% of the employed back  in 2002. In other words, employer-provided health insurance has long fallen short of universal coverage, and it's been getting skimpier over the last decade or so. For example, those with lower incomes and those working for smaller firms are less likely to have employer-based health insurance.

Medicaid game-changer: feds approve putting entire expansion population on exchange - The feds have given Arkansas permission to pursue a plan that would provide private health insurance to anyone between 0-138 percent of the federal poverty level, giving coverage to more than 200,000 of the currently uninsured. The government would pay for the entirety of the premium, though consumers might be subject to some co-pays.  Beebe brought questions and ideas from legislators to his meeting with Sebelius and "basically they've agreed to give us about everything we've asked for," he said. "What that really amounts to is take the Medicaid population that would be expanded...and use those federal Medicaid dollars and purchase insurance through the exchange. So they would buy private insurance through the exchange for the entire population, and [the feds have] given us permission to do that." This isn't "partial expansion." The full pool of folks that would gain coverage under full expansion of Medicaid would still get it. But Arkansas is the first state to publicly get a deal that accomplishes this not via the Medicaid program but via the exchange (Florida will be allowed to send some Medicaid recipients to private insurance through their managed care system).

Arkansas Medicaid expansion: Mike Beebe strikes a good deal for Arkansas health care providers. - Arkansas governor Mike Beebe, a Democrat in a state that's become extremely conservative in national politics, struck a deal with the Department of Health and Human Services yesterday that could pave the way for future further Medicaid expansions in red states. The basic arrangement is that Arkansas will take the federal money on offer to drastically expand its Medicaid program, and use it not to expand Medicaid but instead to offer coverage to low-income Arkansas via the Obamacare exchange process. As David Ramsey writes, this arrangement "would potentially be a windfall for insurance companies, as well as hospitals, who would likely see higher reimbursements from private insurance on the exchange." It also might even be a good deal for low-income Arkansans! Medicaid is helpful to the people who get it, but it's a pretty low-quality program in terms of the benefits. The Arkansas arrangement will likely lead to higher out-of-pocket costs via copays, but a higher standard of care than you'd get under a traditional Medicaid arrangement.

Did the Obama administration just bail out a bunch of GOP governors on Medicaid expansion? - Health and Human Services has given Arkansas permission to take federal dollars for Medicaid expansion and use the money to buy private coverage through the new PPACA healthcare exchanges. Avik Roy thinks the decision “moves us one step closer to the Swiss model” where everyone buys private insurance, though about a third of citizens receive a sliding-scale, means-tested subsidy to do so. Roy, from his recent piece on the free-market future of US healthcare: Medicaid recipients face a strong disincentive to seek work, because entry-level jobs can force them to give up their health coverage in exchange for modestly higher income. The exchanges would allow these workers to climb up the income ladder while maintaining their insurance. One likely result would be better healthcare access and better heath outcomes, though the plan would cost more money initially. Coverage on the exchanges could be as much as 50% more expensive than coverage through Medicaid, according to the CBO.  On the other the hand, Arkansas’s surgeon general says co-pays may be used to “discourage emergency room trips, but not applied to preventive health care, such as immunizations, mammograms or annual check-ups.”

Medicare Needs Fixing, but Not Right Now -- What’s the rush? For all the white-knuckled wrangling over spending cuts set to start on Friday, the fundamental partisan argument over how to fix the government’s finances is not about the immediate future. It is about the much longer term: how will the nation pay for the care of older Americans as the vast baby boom generation retires? Will the government keep Medicare spending in check by asking older Americans to shoulder more costs? Should we raise taxes instead?  Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.  More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem. The growth of the nation’s spending slowed sharply over the last four years. This year, it is expected to increase only 3.8 percent, according to the Centers for Medicare and Medicaid Services, the slowest pace in four decades and slower than the rate of nominal economic growth.

HHS gets specific on ACA’s essential benefits: One of the most controversial issues about the ACA has been the definition of an essential benefit. There has been plenty of discussion about what “essential” really means. What services should be considered basic or “essential?” What treatments should be covered? Surgery? Doctor visits? Mental health services? What copays and deductibles would be acceptable? Will there be a limit to what you will have to pay out of your pocket AFTER you pay your premium? These are pretty important questions and some were answered in the ACA. But until the Final Regulation was issued this week, the Act itself provided relatively little guidance about what “essential” means, other than to outline the following ten broad categories of services:

  • ambulatory patient services
  • emergency services
  • hospitalization
  • maternity and newborn care
  • mental health and substance abuse disorder services, including behavioral health treatment
  • prescription drugs
  • rehabilitative and habilitative services and devices
  • laboratory services
  • preventive and wellness services and chronic disease management
  • pediatric services, including oral and vision care

In Massachusetts We Trust - Some employers are complaining about the $2,000 per-employee-per-year penalty they will pay beginning next year when the main provisions of the Affordable Care Act go into effect. The Congressional Budget Office also warned about the astonishing increase in marginal tax rates that middle-income Americans will experience, because the additional income earned by a family will be considered by the Internal Revenue Service as available for additional health insurance payments. One might guess that large changes like these would shock the nation’s labor markets, especially the markets for less-skilled workers for whom $2,000 is a significant sum, not to mention the costs of health insurance. The United States Department of Health and Human Services rejects these concerns, saying that the experience in Massachusetts suggests “that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market,” The Washington Examiner reported. The Urban Institute also thinks the Massachusetts results will accurately model the national market.

Accounting for the Cost of US Healthcare - I read Steven Brill’s healthcare piece recently and wanted to get a better high-level view of where dollars in the healthcare system are spent. I find aggregate data more informative than anecdotes about hospital bill line items so I was happy to come across this report from MGI. It has a ton of  helpful graphs including the first one below that roughly estimates the size of various segments of the healthcare market. It shows the total size of various segments in 2006 as well as a breakdown of “Estimated Spending Accounting for [country] Wealth”).  Here’s what I took away from some of their graphs:

  • Outpatient care made up almost half of healthcare spending. Also, in the report they point out that outpatient care is also growing faster than the other segments.
  • If you look at the second graph, you can see one reason why outpatient care is growing – the margins are substantially larger (estimated to be ~35% for outpatient versus 2% for inpatient).
  • Finally, for the third graph, you can see that the biggest component of spending within outpatient is physician visits, for which MGI says the increase mostly reflects price increases (and some mix shift to more expensive items) rather than volume increases. Of the 8% inpatient grew annually, they attribute only a quarter of that to volume growth. So the idea that price increases are driving a nontrivial part of some of the biggest components of healthcare spending rings true based on some data and evidence from this report.

Don’t let doctors’ incomes derail healthcare-cost reform - Felix Salmon -- Sarah Kliff and Matt Yglesias both have good summaries of Steve Brill’s monster Time article on healthcare costs. Both of them correctly point out that the heart of the piece is about negotiating power: who has it (Medicare); who doesn’t have it (the uninsured); and how the lack of negotiating power on the healthcare-consumer side inevitably leads to sky-high costs. Yglesias says that the natural conclusion from this is that either Medicare should cover everybody — which would massively increase Medicare costs while massively decreasing overall healthcare costs — or else that rates should be set by the government, even if the bills are paid privately. He also says that Brill “rejects both of these ideas”. Weirdly, Brill’s rejection of these ideas comes when he explains that if we reduced the age that people were eligible for Medicare, then that would save a lot of money. He then continues: If that logic applies to 64-year-olds, then it would seem to apply even more readily to healthier 40-year-olds or 18-year-olds. This is the single-payer approach favored by liberals and used by most developed countries. Then again, however much hospitals might survive or struggle under that scenario, no doctor could hope for anything approaching the income he or she deserves (and that will make future doctors want to practice) if 100% of their patients yielded anything close to the low rates Medicare pays.

Charts of the Day: Doctor Pay in America and Other Countries - In Steven Brill's monster healthcare article in Time this week, he argues that hospital executives are overpaid but doctors aren't. If we paid Medicare rates for all medical services, he says, "no doctor could hope for anything approaching the income he or she deserves." Felix Salmon pushes back:  Brill never supports or clarifies this assertion: he never says how much money doctors deserve, how much they actually make, or how high physician salaries would need to be in order to make future doctors want to practice. That last one, in particular, seems very unconvincing to me: the world is full of highly-qualified doctors who would love to be able to practice in the U.S. for much less than the current going rate.  It’s a bit weird, the degree to which Brill cares so greatly about keeping doctors’ salaries high: he certainly doesn’t think the same way about teachers. You'd really like to see some data on this score, wouldn't you? Well, here it is. The two charts below are from an OECD report that compares the average remuneration of GPs and specialists in a selected set of countries. The data is from 2004, and the figures are in PPP-adjusted dollars:

Shocked, Shocked, Over Hospital Bills -- Capt. Louis Renault’s famous line in the movie “Casablanca” comes to mind as I behold the reaction to the journalist Steven Brill’s 36-page report “Bitter Pill: Why Medical Bills Are Killing Us,” published in a special issue of Time last week. Americans are shocked, just shocked. But what they should have known for years is that in most states, hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals – is often protected by state Certificate of Need laws that bestow on them monopolistic power by keeping new potential competitors at bay. Mr. Brill vividly illustrates the harsh financial mauling that the hospitals covered in his report – all nonprofits – visit on uninsured middle-class Americans stricken with serious illness. Often these people operate small businesses or are entrepreneurs in start-ups and cannot afford anything other than skimpy health insurance with strict upper limits on coverage. When they fall ill and require hospitalization, they become easy marks for what I think of as “extreme billing.”

Jeff Sessions, Wonk McCarthyite, by Jon Chait: Senator Jeff Sessions announced yesterday that he had uncovered a staggering new fact. Obamacare, according to a new report from the General Accounting Office, would add $6.2 trillion to the deficit over the next 75 years. The report would be out the next day. We’d all see. Conservatives were right all along! Obamacare is turning America into Greece!Well, the report is out, and conservatives are afire with rage. National Review, the Daily Caller, the Heritage Foundation, and many others are all reporting the new bombshell. But the report turns out to be following directions to assume that all of the efforts in the law to control health-care cost inflation fail or are repealed, and the portions that provide coverage are kept in place.So, yeah. If Congress keeps the parts of the law that cost the government money, and repeals the parts that save money, the law will increase deficits. Alternatively, if the government repeals the parts that cost money and keeps the parts that save money, it will reduce the deficit by more than we’re projecting.... This is what Sessions asked the GAO to do. He wanted a report describing what would happen if all the costs of Obamacare stayed intact but all the revenues and savings measures didn't. To the surprise of no one, under those conditions the deficit would go up.

Overcoming Obstacles to Better Health Care - AMERICANS spend far more on health care than people in other countries and we have little to show for it.   Unfortunately, no single change will transform our health care delivery system into one that we can afford. We are going to have to try lots of new approaches that depart from standard practices.  I have several suggestions that I think would help, including giving some high-quality health care providers the opportunity to practice in a world without malpractice lawsuits. To me, the ideal health care delivery system would include:

  • ¶ A fee for health rather than fee for service model. Doctors and hospitals should be paid for keeping their patients well. Paying them for doing more tests and surgeries creates bad incentives.
  • ¶ A scientific, evidence-based approach to everything it does. Although this sounds unobjectionable, as soon as we get into some details you can see that it is easier to say than to do. For example, consider setting guidelines for when to use expensive imaging technology such as M.R.I. and CT scans.  Not only are such tests expensive, but they can lead to more, sometimes pointless, expensive procedures.

New insight into how people choose insurance plans - Economists often talk about “moral hazard,” the idea that people’s behavior changes in the presence of insurance. In finance, for instance, investors may take more risks if they know they will be bailed out, the subject of ongoing political controversy.  When it comes to health insurance, the existence of moral hazard is a more matter-of-fact issue: When people get health insurance, they use more medical care, as shown by research including a recent randomized study on the impact of Medicaid, which MIT economist Amy Finkelstein helped lead.  But a new paper co-authored by Finkelstein suggests that forecasting the likely spending reduction associated with high deductibles requires a fine-grained approach, to account for the differing ways consumers respond to incentives in the health-care market. The research indicates that consumers select insurance plans based not only on their overall wellness level — with people in worse health opting for more robust coverage — but also on their own anticipated response to having insurance.

Why your boss is dumping your wife - Companies have a new solution to rising health-insurance costs: Break up their employees’ marriages. By denying coverage to spouses, employers not only save the annual premiums, but also the new fees that went into effect as part of the Affordable Care Act. This year, companies have to pay $1 or $2 “per life” covered on their plans, a sum that jumps to $65 in 2014. And health law guidelines proposed recently mandate coverage of employees’ dependent children (up to age 26), but husbands and wives are optional. “The question about whether it’s obligatory to cover the family of the employee is being thought through more than ever before,” says Helen Darling, president of the National Business Group on Health.  While surcharges for spousal coverage are more common, last year, 6% of large employers excluded spouses, up from 5% in 2010, as did 4% of huge companies with at least 20,000 employees, twice as many as in 2010, according to human resources firm Mercer. These “spousal carve-outs,” or “working spouse provisions,” generally prohibit only people who could get coverage through their own job from enrolling in their spouse’s plan.

50 Signs That The U.S. Health Care System Is About To Collapse - The U.S. health care system is a giant money making scam that is designed to drain as much money as possible out of all of us before we die.  In the United States today, the health care industry is completely dominated by government bureaucrats, health insurance companies and pharmaceutical corporations. At this point, our health care system is a complete and total disaster.  Health care costs continue to go up rapidly, the level of care that we are receiving continues to go down, and every move that our politicians make just seems to make all of our health care problems even worse. At the same time, hospital administrators, pharmaceutical corporations and health insurance company executives are absolutely swimming in huge mountains of cash.  Unfortunately, this gigantic money making scam has become so large that it threatens to collapse both the U.S. health care system and the entire U.S. economy.

Don’t let Catholics run hospitals - Imagine if you lived in a town where the only hospital was owned by the Jehovah’s Witnesses, and you were in a car accident, and they refuse to do blood transfusions  If you need a blood transfusion, they say, don’t worry, the ambulance will take you to a different hospital…50 miles away. You, unfortunately, are in shock, you’ve got a gusher pouring blood into your body cavity, and this is not an option. You get to die. We would not tolerate this situation. That hospital would have a change of ownership as fast as the public could drive it, and if anyone did die because of that kind of criminal neglect and refusal to follow standard medical procedure, a malpractice suit would be the least of their worries. Someone would be going to jail. So why are Catholics allowed to buy up and impose Catholic dogma on hospitals? Is it because their ignorant dogma does the greatest harm to women (especially those slutty ones who have sex) and bizarre rules about reproduction don’t directly harm men? But Catholics are buying up hospitals all over the country. They’ve got declining attendance, they’re closing churches, they’re having trouble recruiting priests, but they’ve still got buckets of money, and they’re using that money to impose control in another way — by taking over your health care.

Trends in End-Of-Life Care - When talking about ways of curbing health care spending, someone always brings up the costs of acute care at the very end of life. Could we save significant money by not spending so much on people who are the verge of dying? To what extent are we already changing the patterns of end-of-life care?  We spend about 25-30% of Medicare spending on patients who are in their last year of life, according to Gerald F. Riley and James D. Lubitz in their 2010 study, "Long-term trends in Medicare payments in the last year of life". They also find that this number hasn't changed much over the last 30 years--that is, health care spending during the last year of life is rising at about the same pace as other Medicare spending-- and that the percentage isn't much affected by adjusting for changes in age or gender of the elderly.  On their estimates, Medicare spending on those who die in a given year is much higher than on those who survive the year: in 2006, Medicare spending in 2006 on those who died in that year was $38,975, while Medicare spending in 2006 on those who survived the year was $5,993.

Study: Pessimists live longer than optimists : Older people who look on the darker side of life tend to live longer than optimists, who in turn face an increased risk of illness and mortality, a new study by a German research institute found Thursday. Researchers in Germany and Switzerland found that older people who believe their life satisfaction will be above average in future face a 10-percent higher mortality risk or are more likely to develop physical health problems, the DIW think-tank said. “It is possible that a pessimistic outlook leads elderly people to look after themselves and their health better and take greater precautions against risks,” said one of the researchers, Frieder Lang. “It seems that older people who have a low expectation of how contented they will be in future lead longer and healthier lives than those who believe their future is rosy,” DIW said.

BPA may affect the developing brain by disrupting gene regulation - Environmental exposure to bisphenol A (BPA), a widespread chemical found in plastics and resins, may suppress a gene vital to nerve cell function and to the development of the central nervous system, according to a study led by researchers at Duke Medicine.  Exposure to BPA may disrupt development of the central nervous system by slowing down the removal of chloride from neurons. As an organism matures and the brain develops, chloride levels inside nerve cells drop. However, when exposed to BPA, the chloride is removed more slowly from neurons. Researchers also found female neurons to be more susceptible to the effects of BPA.  The researchers published their findings - which were observed in cortical neurons of mice, rats and humans - in the journal Proceedings of the National Academy of Sciences on Feb. 25, 2013. "Our study found that BPA may impair the development of the central nervous system, and raises the question as to whether exposure could predispose animals and humans to neurodevelopmental disorders,"

The Extraordinary Science of Addictive Junk FoodThis 14 page article is adapted from “Salt Sugar Fat: How the Food Giants Hooked Us,” which will be published by Random House this month. As he spoke, Mudd clicked through a deck of slides — 114 in all — projected on a large screen behind him. The figures were staggering. More than half of American adults were now considered overweight, with nearly one-quarter of the adult population — 40 million people — clinically defined as obese. Among children, the rates had more than doubled since 1980, and the number of kids considered obese had shot past 12 million. (This was still only 1999; the nation’s obesity rates would climb much higher.) Food manufacturers were now being blamed for the problem from all sides — academia, the Centers for Disease Control and Prevention, the American Heart Association and the American Cancer Society. The secretary of agriculture, over whom the industry had long held sway, had recently called obesity a “national epidemic.”

'Behind The Brands' Oxfam Report Evaluates Social, Environmental Impacts Of World's Largest Food Companies - Oxfam America, an organization that aims to reduce poverty and injustice worldwide, has released a new report and launched a website that measures how the 10 largest food companies worldwide perform on food justice issues. The "Behind The Brands" report evaluates the companies according to seven criteria: women, small-scale farmers, farm workers, water, land, climate change and transparency.  The 10 companies Oxfam scores are: Associated British Foods, Coca Cola, Danone, General Mills, Kellogg, Mars, Mondelez, Nestlé, Pepsico and Unilever. These companies combined together make $1 billion per day, according to Oxfam. The report doesn't paint a very encouraging portrait of the global food system. The companies were scored from 1 to 10 in the seven aforementioned categories, for a possible total of 70 points. No company received higher than a score of 7 in any category, and three companies -- Associated British Food, Kellogg and Mondelez -- never scored higher than a 4. The highest overall score went to Nestle, with 38 points (54 percent). The lowest overall score went to Associated British Food with 13 points (19 percent).

Mapping future food inflation - Food production in the emerging world will increasingly imitate the scale and industrialisation employed in the developed world (with or without the scandals, we wonder). As that happens, real prices (in relation to incomes) will fall and, in some areas, prices might fall in nominal terms as well. But that’s all on a global level. Certain regions will experience significant food inflation, and others could even see deflation. Savouri argues that it will depend on efforts in individual countries (our emphasis): Many currently underdeveloped economies, notably China, will rapidly and significantly industrialise their food-supply chains. Some however look certain to fail to do so sufficiently to stem urbanisation. Most alarming in this respect are the nations of the Indian Sub-continent. I also hold concerns for a range of other nations from Venezuela to South Africa, both proving that possessing commodity riches is no guarantee of a successful economic future.And there’s even a ‘heat-map’ to illustrate his predictions:

Dairy Industry Wants to Sneak Aspartame into Milk - It’s possible that your milk may start containing aspartame and you’ll never know it. Two major dairy organizations are petitioning the Food and Drug Administration (FDA) to allow them to use aspartame and other artificial sweeteners in their milks and dairy products without having to state the ingredients on the label. Aspartame is an artificial, non-saccharide sweetener that is used in many food and drink products instead of sugar. Aspartame is most notorious for making diet soda calorie free, yet so addictively sweet. According to, the International Dairy Foods Association (IDFA) and the National Milk Producers Federation (NMPF) want to be able to add artificial sweeteners to their products in order to provide lower-calorie options, especially for children in schools. The FDA notice that was just released stated that this move would help curb childhood obesity as children are more inclined to drink flavored milk and the artificial sweetener version would have fewer calories. Currently the flavored dairy products use what is called “nutritive sweeteners;” Often sugar and high fructose corn syrup are the “nutritive sweeteners” being used.

Tobacco Firms Save $1 Billion With Kitty Litter in Cigars - Bloomberg: A dozen tobacco companies have gained from a legal loophole that helped them avoid as much as $1.1 billion in U.S. taxes.Their secret: Using fillers such as the clay found in cat litter or stuffing the products with more tobacco to tip the scales in their favor. The heavier weight let the companies sidestep a 2,653 percent increase in a federal excise tax, taking advantage of a 2009 law that spared so-called big cigars. There were 22 companies producing small cigars in the year before the law created the new tax structure, according to data from the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau. Twelve of those companies, none of which the government would name, either switched to or increased production of large cigars in the year following the law, the bureau found. “It shows what length the tobacco companies will go to avoid taxes and regulation that were designed to improve public health without regard to their customers,” Danny McGoldrick, vice president of research at the Campaign for Tobacco Free Kids in Washington, said in a telephone interview. “They should equalize the tax to stop the shenanigans.”

One Nation, Under Monsanto - Waters are polluted with toxic waste spills, oil spills, chemical fertilizer run-off with resulting red tides and dead zones, acid discharges from mining with resulting destructive algae such as prymnesium parvum, from toxic chemicals used in fracking and with methane that fracking releases into wells and aquifers, resulting in warnings to homeowners near to fracking operations to open their windows when showering. The soil’s fertility is damaged, and crops require large quantities of chemical fertilizers. The soil is polluted with an endless array of toxic substances and now with glyphosate, the main element in Monsanto’s Roundup herbicide with which GMO crops are sprayed. Glyphosate now shows up in wells, streams and in rain. Air is polluted with a variety of substances, and there are many large cities in which there are days when the young, the elderly, and those suffering with asthma are warned to remain indoors. All of these costs are costs imposed on society and ordinary people by corporations that banked profits by not having to take the costs into account. This is the way in which unregulated capitalism works. Our food itself is polluted with antibiotics, growth hormones, pesticides, and glyphosate. Glyphosate might be the most dangerous development to date. Some scientists believe that glyphosate has the potential to wipe out our main grain crops and now that Obama’s Secretary of Agriculture, Thomas Vilsack, has approved genetically modified Roundup Ready alfalfa, maintaining sustainable animal herds for milk and meat could become impossible.

2.1 Million Chickens Slaughtered in Mexico to Guard Against Bird Flu: Mexican authorities have slaughtered 2.1 million chickens exposed to the bird flu, which has spread to 18 farms in the central state of Guanajuato, government officials said Monday. Agriculture Secretary Enrique Martinez said at a press conference that since the outbreak was detected 519,000 egg-producing chickens have been slaughtered, along with 900,000 birds being fattened for their meat and 722,265 reproducing birds. He said that the losses do not affect the national inventory of chickens, which totals 140 million laying birds and 300 million chickens being fattened for market. Martinez also said that the outbreak is being controlled and is on the way to being resolved in the affected zone, "a complex task since it deals with a very pathogenic virus that requires great efforts to prevent its spread."

Oceana Study Reveals Sea Food Fraud Nationwide - From 2010 to 2012, Oceana conducted one of the largest seafood fraud investigations in the world to date, collecting more than 1,200 seafood samples from 674 retail outlets in 21 states to determine if they were honestly labeled. DNA testing found that one-third (33 percent) of the 1,215 samples analyzed nationwide were mislabeled, according to U.S. Food and Drug Administration (FDA) guidelines. Of the most commonly collected fish types, samples sold as snapper and tuna had the highest mislabeling rates (87 and 59 percent, respectively), with the majority of the samples identified by DNA analysis as something other than what was found on the label. In fact, only seven of the 120 samples of red snapper purchased nationwide were actually red snapper. The other 113 samples were another fish. Our findings demonstrate that a comprehensive and transparent traceability system — one that tracks fish from boat to plate — must be established at the national level. At the same time, increased inspection and testing of our seafood, specifically for mislabeling, and stronger federal and state

World's Sea Life Is 'Facing Major Shock', Marine Scientists Warn. -Life in the world's oceans faces far greater change and risk of large-scale extinctions than at any previous time in human history, a team of the world's leading marine scientists has warned.The researchers from Australia, the US, Canada, Germany, Panama, Norway and the UK have compared events which drove massive extinctions of sea life in the past with what is observed to be taking place in the seas and oceans globally today. Three of the five largest extinctions of the past 500 million years were associated with global warming and acidification of the oceans — trends which also apply today, the scientists say in a new article in the journal Trends in Ecology and Evolution.Other extinctions were driven by loss of oxygen from seawaters [anoxia], pollution, habitat loss and pressure from human hunting and fishing — or a combination of these factors."Currently, the Earth is again in a period of increased extinctions and extinction risks, this time mainly caused by human factors," the scientists stated. While the data is harder to collect at sea than on land, the evidence points strongly to similar pressures now being felt by sea life as for land animals and plants...

Biofuels Policy Helping Destroy U.S. Grasslands At Fastest Rate Since 1930s, Boosting Threat of Dust-Bowlification - The ramp up in biofuel production has thus far been a major misfire in the fight against climate change. By driving up the price of corn and other biofuel sources, standards passed in the United States and Europe requiring a certain level of biofuel use have encouraged producers to dedicate more corn to ethanol production and less to food supplies. Meanwhile, production of biofuel crops is displacing production of food crops on available land, and encouraging deforestation in the developing world. All of which in turn intensifies the problem of global food insecurity. Thanks to a new study from South Dakota State University, we can add another negative from biofuel policy: Accelerated destruction of grasslands in America’s Western Corn Belt (WCB) region — North Dakota, South Dakota, Nebraska, Minnesota, and Iowa. According to Christopher Wright and Michael Wimberly, the study’s authors, conversion of grassland to corn and soy production between 2006 and 2011 has proceeded at a pace comparable to deforestation rates in Brazil, Malaysia, and Indonesia. In Iowa alone, the losses are approaching 12 million hectares (almost 30 million acres) of tallgrass prairie.

Cellulosic biofuels begin to flow but in lower volumes than foreseen by statutory targets - Several companies combined to produce about 20,000 gallons of fuels using cellulosic biomass (e.g., wood waste, sugarcane bagasse) from commercial-scale facilities in late 2012. EIA estimates this output could grow to more than 5 million gallons in 2013, as operations ramp up at several plants. Additionally, several more plants with proposed aggregate nameplate capacity of around 250 million gallons could begin production by 2015 (see map). Although cellulosic biofuels volumes are expected to grow significantly relative to current levels, they will likely remain well below the targets envisioned in the Energy Independence and Security Act of 2007. That law set a target level of 500 million gallons of cellulosic biofuels for 2012 and 1 billion gallons for 2013, growing to 16 billion gallons by 2022. The projects identified on the map above were designed to produce ethanol or drop-in biofuels (i.e., fuels that are direct replacements for petroleum-based gasoline or distillate fuels) as well as steam. Using technology known as combined heat and power, this steam can both be consumed internally as a process-heat source and used to generate power. The power can also be used internally to operate pumps and other electrical equipment or sold to the electrical grid, giving these projects the potential to consume no fossil fuels.

Utah, a Nature Lover’s Haven, Is Plagued by Dirty Air - Utah has long been known as an outdoor lover’s utopia. The skiing and mountain biking are among the best anywhere. But lately, the Wasatch Front, the corridor of cities and towns where most Utahans live, has acquired a reputation for a less enviable attribute: bad air. For the last few years, the area has been grappling with one of the nation’s most vexing pollution problems, where atmospheric inversions during the winter months lead to a thick fog of dirty air cloaking the region. “Obviously, this is not acceptable,” said Bryce Bird, the director of Utah’s Division of Air Quality. “The public is fed up with it. The concern for them is that it is not being addressed fast enough.” According to the division, Salt Lake County has experienced 22 days this winter in which pollution levels exceeded federal air quality standards, compared with just one last year. The air pollution has gotten so bad at times that it has prompted warnings from local doctors, spawned protests at the State Capitol and led to a variety of legislative proposals in the hopes of confronting the problem before it gets worse.

Texas and Montana Lost 3.7 Million Acres of Land in Farms Last Year  - An annual USDA report which keeps tabs on the total amount of land being used for farming was released earlier this month. This year’s report revealed some large swings in acreage farmed from 2011 to 2012, primarily attributed to discontinued livestock ranching operations in the two states of Texas and Montana. Weather, water, drought, and high feed costs led to the loss of 3.7 million acres of land farmed in those two states. In 2012, 3 million fewer acres were farmed, to total 914 million acres. That net number is a result of losses of 4.1 million acres in some states and gains of 1.1 million acres in other states. The states which gained farmland acres were Georgia, New Mexico, Oklahoma, Oregon, Pennsylvania, and Virginia.  There are 2.2 million farms in the U.S. The USDA’s definition of a farm is “any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the year”. The total number of farms decreased by 11,630 last year and the average farm size increased by 1 acre, to 421 acres.

The harsh lives of the forgotten rural poor - It's hard to imagine a time in which it's been tougher to live in the countryside. It's not just a question of the usual complaints: that access to services – transport, hospitals, schools, even mobile phone coverage or broadband – is patchy. It's not just the fact that the countryside is suddenly vulnerable to all sorts of diseases: to ash dieback, to bovine TB and the Schmallenberg virus. It's that there's acute poverty in rural areas and it's a poverty that is seemingly invisible. At least one-quarter of all farming families live on or below the official poverty line and, as the Observer reports today, many endured a rough 2012. The levels of borrowing that farmers require in order to run their businesses is mind-boggling; it's not uncommon for farmers to have debts well into six figures. The cost of animal feed seems to rise exponentially each year (an almost 40% increase in the two years I've been breeding pigs). The weather means many of us grew nothing other than a bumper crop of slugs last year, while the paperwork required for livestock is byzantine.

Thin Snowpack in West Signals Summer of Drought - After enduring last summer’s destructive drought, farmers, ranchers and officials across the parched Western states had hoped that plentiful winter snows would replenish the ground and refill their rivers, breaking the grip of one of the worst dry spells in American history. No such luck. Lakes are half full and mountain snows are thin, omens of another summer of drought and wildfire. Complicating matters, many of the worst-hit states have even less water on hand than a year ago, raising the specter of shortages and rationing that could inflict another year of losses on struggling farms. Reservoir levels have fallen sharply in Arizona, Colorado, New Mexico and Nevada. The soil is drier than normal. And while a few recent snowstorms have cheered skiers, the snowpack is so thin in parts of Colorado that the government has declared an “extreme drought” around the ski havens of Vail and Aspen. “We’re worse off than we were a year ago,” said Brian Fuchs, a climatologist at the National Drought Mitigation Center. This week’s blizzard brought a measure of relief to the Plains when it dumped more than a foot of snow. But it did not change the basic calculus for forecasters and officials in the drought-scarred West. Ranchers are straining to find hay — it is scarce and expensive — to feed cattle. And farmers are fretting about whether they will have enough water to irrigate their fields.

Water: Lake Powell may dry up within a few decades - Some of the West’s biggest reservoirs could dry up completely as the region gets warmer and drier in coming decades, and major increases in storage capacity probably won’t help address regional water shortages, according to a new study authored by researchers with Colorado State University, Princeton and the U.S. Forest Service. In the Colorado River Basin, “Lakes Powell and Mead are projected to drop to zero and only occasionally thereafter add rather small amounts of storage before emptying again,” the scientists concluded, adding that smaller upstream reservoirs might still be useful. The report, published by the U.S. Forest Service Rocky Mountain Research Station, combined climate projections with socio-economic scenarios of population growth and water use to determine future water supply and demand, to assess the likelihood of future water shortages region by region. After analyzing the data, the researchers concluded that most of the Southwest, parts of California and the southern and central Great Plains will be the most vulnerable areas in the nation to water shortages during the next 60 years. Climate change will substantially increase water demand and cause decreases in water supply in those regions of the United States, even as cities, farms and thermoelectric facilities become more efficient in their water usage.

It’s Not Too Late to Change the Course of the Vanishing Colorado River - In 1922 the conservationist Aldo Leopold canoed through a lush, verdant delta full of green lagoons, darting fish and squawking waterfowl. But Leopold’s “milk and honey wilderness,” where the Colorado River empties into Mexico’s Gulf of California, ceased to exist decades ago. In its stead, a cracked, barren mudflat stretches for miles. “This amazing place does not exist anymore,” said Sandra Postel, director of the Global Water Policy Project and freshwater fellow of the National Geographic Society. “A lot was lost.” Ten major dams — from the Hoover Dam, erected in 1936, to the Glen Canyon Dam, completed in 1966 — block the flow of the Colorado River. Countless towns and industries siphon water from the river and its many tributaries as it meanders to the sea. Today the Colorado River joins the likes of the Indus, the Rio Grande, the Nile and other major world rivers that are so over-tapped they no longer reach the sea for long stretches of time. “This is one of America’s iconic rivers,” Postel said. “I don’t think this country would be the one we know today without the Colorado.”

In California, What Price Water? — On a calm day, a steady rain just about masks the sound of Pacific Ocean water being drawn into the intake valve from Agua Hedionda Lagoon.  At the moment, the seawater is being diverted from the ocean to cool an aging natural-gas power plant. But in three years, if all goes as planned, the saltwater pulled in at that entryway will emerge as part of the regional water supply after treatment in what the project’s developers call the newest and largest seawater desalination plant in the Western Hemisphere.  Large-scale ocean desalination, a technology that was part of President John F. Kennedy’s vision of the future half a century ago, has stubbornly remained futuristic in North America, even as sizable plants have been installed in water-poor regions like the Middle East and Singapore.  The industry’s hope is that the $1 billion Carlsbad plant, whose builders broke ground at the end of the year, will show that desalination is not an energy-sucking, environmentally damaging, expensive white elephant, as its critics contend, but a reliable, affordable technology, a basic item on the menu of water sources the country will need. Proposals for more than a dozen other seawater desalination plants, including at least two as big as Carlsbad — one at Huntington Beach, 60 miles north of here, and one at Camp Pendleton, the Marine Corps base — are pending along shorelines from the San Francisco Bay Area southward. Several of these are clustered on the midcoast around Monterey and Carmel.

The Coming Water Wars - This is how much water we have, depicted graphically: What this shows is the relative size of our water supply if it were all gathered together into a ball and superimposed on the globe. The large blob, centered over the western US, is all water (oceans, icecaps, glaciers, lakes, rivers, groundwater, and water in the atmosphere). It's a sphere about 860 miles in diameter, or roughly the distance from Salt Lake City to Topeka. The smaller sphere, over Kentucky, is the fresh water in the ground and in lakes, rivers, and swamps. Now examine the image closely. See that last, tiny dot over Georgia? It's the fresh water in lakes and rivers. Looked at another way, that ball of all the water in the world represents a total volume of about 332.5 million cubic miles. But of this, 321 million mi3, or 96.5%, is saline – great for fish, but undrinkable without the help of nature or some serious hardware. That still leaves a good bit of fresh water, some 11.6 million mi3, to play with. Unfortunately, the bulk of that is locked up in icecaps, glaciers, and permanent snow, or is too far underground to be accessible with today's technology. (The numbers come from the USGS; obviously, they are estimates and they change a bit every year, but they are accurate enough for our purposes.)

The hottest summer on record: Experts react - Data analysis from the Australian Bureau of Meteorology has confirmed last summer was the hottest on record, with January the hottest month recorded since 1910, when records began.Average temperatures across the country came in at 28.6°C, more than one degree above normal, according to the Bureau, exceeding the previous record set in the summer of 1997-98 by more than 0.1°C. The heatwave seen in the first three weeks of January was widespread, with 14 of the 112 locations used in long-term climate monitoring experiencing their hottest day on record during the summer– the largest number in any single summer. Record temperatures were also set in two capital cities; Sydney with 45.8°C and Hobart with 41.8°C. Summer rainfall was at its lowest since 2004-05 and Victoria had its driest summer since 1984-85 and South Australia since 1985-86.

(Mis)Understanding Sea-Level Rise (SLR) and Climate Impacts - One of the most important and threatening risks of climate change is sea-level rise (SLR). The mechanisms are well understood, and the direction of changes in sea-level is highly certain – it is rising and the rate of rise will accelerate. There remain plenty of uncertainties (i.e., a range of possible outcomes) about the timing and rate of rise that have to do with how fast we continue to put greenhouse gases in the atmosphere, the responses of (especially) ice sheets in Greenland and Antarctica, and the sensitivity of the climate. Even little changes can have big consequences. As we saw with Superstorm Sandy, where extremely severe weather was combined with a very high tide, on top of sea levels that have risen six to nine inches over the past century, even a little bit of sea-level rise around the world has the potential to cause hundreds of billions of dollars of damages and the displacement of millions of people. The Pacific Institute, among many other organizations, has been working to understand and evaluate the nature of the threat of sea-level rise and the risks posed to coastal populations, property, and ecosystems.  That early report can be found here.

Global warming may cause extremes by slowing planetary waves |(Reuters) - Global warming may have caused extreme events such as a 2011 drought in the United States and a 2003 heatwave in Europe by slowing vast, wave-like weather flows in the northern hemisphere, scientists said on Tuesday. The study of meandering air systems that encircle the planet adds to understanding of extremes that have killed thousands of people and driven up food prices in the past decade. Such planetary air flows, which suck warm air from the tropics when they swing north and draw cold air from the Arctic when they swing south, seem to be have slowed more often in recent summers and left some regions sweltering, they said. "During several recent extreme weather events these planetary waves almost freeze in their tracks for weeks," wrote Vladimir Petoukhov, lead author of the study at the Potsdam Institute for Climate Impact Research in Germany. "So instead of bringing in cool air after having brought warm air in before, the heat just stays," he said in a statement of the findings in the U.S. journal Proceedings of the National Academy of Sciences. A difference in temperatures between the Arctic and areas to the south is usually the main driver of the wave flows, which typically stretch 2,500 and 4,000 km (1,550-2,500 miles) from crest to crest. But a build-up of greenhouse gases in the atmosphere, blamed on human activities led by use of fossil fuels, is heating the Arctic faster than other regions and slowing the mechanism that drives the waves, the study suggested.

Study uncovers massive global yawn over global warming - This has to be bad news for environmental activists everywhere: a massive international study, conducted in 33 countries over 17 years, shows that people just don’t care a lot about the environment. According to a report on the studyin Science World Report: People were five times more likely to point to the economy over the environment as an issue and when asked about climate change, people said they saw the issue more as a national problem than a personal concern, the study found. The results are from coordinated surveys conducted by the International Social Survey Program in 33 countries from 1993 through 2010. …In 15 countries, the economy ranked as the highest in concern, followed by health care in eight, education in six, poverty in two and terrorism and crime in one each. Immigration and the environment, in contrast, didn’t make the top of the list in any country over the 17-year period while these surveys were conducted. In fact, the United States ranked the environment as sixth in the list.

Who Pays For The Greening Of Germany? - Germany is discovering that virtue comes at a price. The country, one of the most industrialised on the planet, is undertaking an energy revolution. Under what's called the "Energiewende", the economy is being re-engineered to cope with the closing of all its nuclear power stations and the ramping up of wind and solar power to fill the gap. At the moment, renewable sources provide about a quarter of Germany's electricity supply but the aim is to raise it to 80% by 2050 - truly a green revolution. But who pays for this boldness? An argument has erupted because electricity bills for ordinary households have jumped. There's a debate over whether big industry should pick up more of the bill for the green switch. It's a debate that will get hotter in this election year.

Four Reasons why the US has no Offshore Wind Turbines - Offshore wind farms in Europe are incredibly popular and the offshore wind sector is providing an increasing amount of electricity to power grids. In comparison, in the US not a single wind turbine has been deployed off shore. Here we look at the four main reasons why the offshore wind energy sector in the US is struggling to grow, or even begin.

  • 1.    Environmental opposition – Europeans are generally behind the development of offshore wind farms, and little opposition is raised when new ones are proposed, or installed. In the US however, environmentalists throw up strong opposition to potential offshore wind farms.
  • 2.    Government support – Congress did provide the wind energy sector with a much needed life support by renewing the Production Tax Credit (PTC),. Unfortunately this is still not enough to make wind competitive with fossil fuels, which receive hugely lucrative subsidies.
  • 3.    Lacking vital equipment - In order to secure the 450 tonne, 400+ foot tall turbine towers into the ocean floor a huge ship is needed, but as Chris van Beek, the president of Deepwater, mentioned, “at this point, there is not an existing vessel in the US that can do this job.”
  • 4.    State government v Federal government – For offshore wind farms to be developed, a license must be gained for the site, and a contract drawn up with an electric utility which agrees to purchase the energy produced at a fixed rate for a set period of time. In Europe the governments can award both, and do so together as part of a package.

Forget The Tar Sands: How Canadian Hydropower Can Help America - Our neighbor to the north has an energy source that our nation has yet to fully utilize — and it’s not tar sands. Canadian hydropower has contributed to America’s clean energy economy, and has the potential to provide our nation with more clean energy.  An event Monday titled, Power Partnerships: How Canada-U.S. Hydroelectric Partnerships Reinforce America’s Clean Energy Economy, brought together representatives from public utilities, think tanks, and government officials. Canadian hydropower has been supplying baseload power to the U.S. electric grid for over 40 years. In 2010, the U.S. imported 43.8 terawatt-hours of electricity from Canada, of which about 80 percent is from hydropower. Though Canadian electricity imports make up just one percent of total U.S. annual electricity generation, hydropower imports make up about 10 percent of all U.S. renewable electricity consumption.

Utility settles with EPA, agrees to stop burning coal at three sites - The utility giant American Electric Power (AEP) will stop burning coal at three power plants by 2015 under a settlement agreement with the Environmental Protection Agency (EPA), several states and a handful of environmental and civil groups. The Sierra Club said Monday that 2,011 megawatts of coal-generated electricity will come offline at facilities in Indiana, Kentucky and Ohio. AEP agreed to install 200 megawatts of wind and solar energy by 2015 in Michigan and Indiana to partially offset the loss of coal-fired power. It also will add pollution-control technology to a power plant in southern Indiana — though AEP would need to shut parts of the plant down beginning in 2025 if it cannot sufficiently lower sulfur dioxide emissions. The settlement modifies a 2007 agreement between AEP, EPA and the other parties. EPA originally sued the utility in 1999 for allegedly violating the Clean Air Act, saying AEP failed to obtain permits and skirted reviews that could have pushed it to install technology that reduced air pollution when it upgraded several power plants. The agreement reflects the ongoing effort to curtail coal use in the name of public health.

Debate grows over carbon tax, despite long odds -  A tax on carbon emissions may not be on anyone’s short list of legislation likely to emerge from the gridlocked Congress, but that’s not dampening the debate over the merits of the idea. The National Association of Manufacturers and left-leaning think tank The Brookings Institution locked horns on Tuesday, with each issuing new analyses on carbon taxes that came to very different conclusions. NAM says a carbon tax would cripple American businesses and not accomplish its goals. Brookings says the tax would be an efficient way to boost federal revenues, drive down greenhouse gas emissions and enable Washington to cut high corporate tax rates. And Sen. David Vitter (R-La.), ranking member of the Senate environment committee, wants to make sure the White House isn’t interested. In a letter Tuesday, Vitter asked to President Barack Obama to reaffirm his opposition to a carbon tax — and to come out against newly proposed legislation from Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) that would put a fee on carbon.

Energy debates confuse price with true costs - Here are some examples from the coal industry. West Virginia University researchers found that citizens living in coal mining towns have a one-third greater incidence of high blood pressure, two-thirds higher risk for developing chronic obstructive pulmonary disease (COPD), and more than two-thirds higher risk of developing kidney disease. The birth defect rate in areas where mountain top coal removal is done was 235 per 10,000 live births, compared to 144 in non-mining areas, according to a separate study done in 2011 by Washington State University. This is a cost paid by these victims so that the price the rest of us pay for coal-fired electricity is kept low.

Obama has the power to act on global warming - The test of President Obama’s seriousness about addressing climate change is not his pending decision on the much-debated Keystone XL pipeline. It’s whether he effectively consigns coal-fired power plants — one of the biggest sources of carbon emissions — to the ashcan of history. Few doubt that the president understood and accepted the scientific consensus about humankind’s impact on the climate. His dramatic toughening of automobile fuel-economy standards, announced last year, was a major step that will eventually produce great benefits. But it has been unclear whether he is prepared to take similarly bold action to mitigate the other big source of atmospheric carbon dioxide: emissions from power plants. “If Congress won’t act soon to protect future generations, I will,” Obama vowed in his State of the Union speech. That’s what I’d call unequivocal.

The Right Way to Curb Power Plant Emissions - ELECTRIC power plants spew about 40 percent of the carbon dioxide pollution in the United States, but, amazingly, there are no federal limits on utility emissions of this potent greenhouse gas. The Obama administration plans to remedy this situation by drafting rules that would curtail these discharges from existing plants. The president should make sure they are tough. Nothing he can do will cut greenhouse gases more. By accomplishing this under the executive authority Congress granted him in the Clean Air Act, the president will be stepping in where recent Congresses have refused to go. He did the same thing last August, when he toughened auto emissions standards that will result in a new car fleet that averages 54.5 miles per gallon by 2025, and again last spring, when he proposed rules, restricting carbon dioxide emissions, that will effectively prevent the building of new coal-burning power plants. Now President Obama should require existing power plants to reduce their emissions by at least one-quarter by 2020. These plants emitted 2.2 billion tons of carbon dioxide in 2011, according to the Environmental Protection Agency, so a 25 percent cut would result in a reduction of more than 500 million tons. This would reduce lung-related illness and premature deaths, slow the accumulation of climate-changing gases in the atmosphere and demonstrate to the rest of the world that the United States was serious about taking on global warming.

Environmentalists Need to Make Being Green Keynesian -  Yves Smith - Jonathan Harris of the Global Development and Environment Institute has a new post at Triple Crisis, Green Keynesianism: Beyond Standard Growth Paradigms, in which he argues that pro-growth policies need to find a way to deal with environmental/resource constraints. On the one hand, a lot of NC readers will find that argument to be welcome, if a bit overdue, since quite a few members have been arguing that growth-oriented economic policies need to acknowledge environmental constraints. Having read Harris’ well-intended post, I’m increasingly convinced that environmentalists have it backwards. If you read Harris’ list, you’ll see his pro-environment recommendations are weak tea. For instance, he argues for green energy investments and “large scale building retrofit”. I know from the paper industry, and I suspect it is true for a lot of other industries, that retrofitting old, environmentally unfriendly plant is costly and not very effective, while building new and clean is actually pretty cheap once you’ve figured out how to do it. (One really important exception is water distribution, where municipal systems lose a huge percentage of potable water due to leaks, and patching and selective rebuilds would make a big difference. I hope readers will flag other big exceptions).

One of America’s First Nuclear Plants Leaking Radioactive Waste - Hanford, Washington, was, along with Oak Ridge, Tennessee, one of the two Manhattan Project nuclear plants that provided fissile material for the bombs dropped on Japan that ended World War Two. The past is coming back to haunt the site, as last week Washington governor Jay Inslee characterized news about a major leak of highly toxic sludge from a single-wall storage tank at the Hanford Nuclear Reservation as a “perfect radioactive storm." The Hanford Nuclear Reservation currently houses 149 single-wall nuclear waste storage tanks, along with 28 newer tanks with double walls. They contain residue from decades of refining plutonium for nuclear weapons, roughly 56 million gallons of highly radioactive waste in aged and corroded underground storage tanks. Since World War II, Hanford Nuclear Reservation facilities have leached roughly one million gallons of radioactive waste has leached into the surrounding soil and groundwater beside the Columbia River, with specialists estimating that the newly discovered leak may be adding an additional 150-300 gallons a year, though no one knows when it began. In 1989 the Department of Energy assumed responsibility for safely disposing of this waste, which threatens to leak into the bordering Columbia River and affect downstream industry, habitat and human health.

American Chernobyl - Nuclear waste has been leaking into the Columbia River for my entire life, and I recently turned 60. So when I read the BBC News story about new leaks from radioactive waste tanks on the Hanford Nuclear Reservation, I wondered what was new about it. Reviewing the BBC article, what’s new is what’s left out of the story–the fact that enormous amounts of waste are already in the groundwater and contaminating the salmon and public water supplies of the communities all along the river on its way to the Pacific Ocean. According to the Washington State Department of Ecology, the Hanford Nuclear Reservation contains 60% of the highly radioactive and chemical waste in the United States, and one million gallons of that waste has already leaked into the groundwater. That groundwater is moving into the Columbia River, where one million people live downstream in communities that rely on the river as the source for their municipal water supply.American Scientist has the details. Prior to Chernobyl, Hanford was the most contaminated site on earth.

Nuclear Expert: “The Melted Core Cracked The Containment Vessel, There Really Is No Containment” At Fukushima Reactors  - Steven Starr - Director of the Clinical Laboratory Science Program at the University of Missouri/Senior Scientist at Physicians for Social Responsibility - said: The Japanese basically lied about what happened with the reactors for months. They said they were trying to prevent a meltdown, when in fact they knew within the first couple of days Reactors 1, 2, and 3 at Fukushima Daiichi had melted down, and they actually melted through the steel containment vessels.So there was a worst case scenario that they were trying to hide, they even knew that at that time enormous amounts of radiation were released over Japan and some of it even went over Tokyo [...] The melted core cracked the containment vessel, there really is no containment. So as soon as they pump the water in it leaks out again.

Survey: No nuclear plants meet new safety standards - None of Japan’s 16 nuclear power plants has satisfied the government's proposed new safety standards, making them ineligible to be restarted in the near future, according to an Asahi Shimbun survey. For nine of the plants, operators even said they cannot tell when they can meet the new requirements being drafted by the Nuclear Regulation Authority. The Asahi Shimbun contacted 10 electric utilities to check the progress in safety precautions they have made since the accident at the Fukushima No. 1 nuclear power plant in March 2011. The 16 plants do not include the Fukushima No. 1 plant.

Recycling Radioactive Metals Disputed - In something of a stealth maneuver during the 2012 holiday season, the U.S. Department of Energy set about to give every American a little more radiation exposure, and for some a lot, by allowing manufacturers to use radioactive metals in their consumer products – such as zippers, spoons, jewelry, belt buckles, toys, pots, pans, furnishings, bicycles, jungle gyms, medical implants, or any other metal or partly-metal product. The Energy Dept. announced its plan “to delegate authority to manage radiological clearance and release of scrap metal from radiological areas to each Under Secretary for sites under his or her cognizance. …  Translated from the bureaucratese, this is a proposal to lift a ban on recycling radioactive metals left over from American bomb-making and other nuclear activities and allow them to be used commercially with “stringent” but largely unenforceable criteria for their use. The initial ban was ordered in 2000, by then Secretary of Energy Bill Richardson

Nuclear Waste in the Age of Climate Change - In the icy deadlock of the partisan Congress, there’s a new thaw around an old problem: what to do with the nation’s nuclear waste. It’s a worrisome question. For more than 50 years, the nation’s nuclear-power plants, which produce about 20 percent of U.S. electricity, have been generating radioactive spent fuel—the toxic stuff left over after the power is produced. At 121 current and retired power plants in 39 states, nuclear waste continues to accumulate, a state of affairs that came under renewed scrutiny in 2011 when an earthquake struck Japan’s Fukushima Daiichi nuclear-power plant, igniting a radioactive inferno. Scientists determined long ago that the best place to store nuclear waste was not on- site at power plants but underground in an earthquake-proof repository where it can be kept for millions of years. Congress decreed in a 1987 law where that repository should be: Yucca Mountain, about 100 miles northwest of Las Vegas. But Nevada lawmakers—who derided the law as the “Screw Nevada Act”—vowed to keep nuclear waste out of their home state. So, the project has stayed dormant, and President Obama has said that Yucca is “not an option” for a dump.Because Yucca Mountain is not on the table as long as Harry Reid, the Senate majority leader from Nevada, retains his post, experts have come up with another solution: creation of an interim storage site, a government-run “halfway house,” where the waste could be moved from power plants and sit for up to a century awaiting construction of a final resting place.

Fracking Bubble? Report Warns Shale Gas And Oil Won't Solve Energy Crunch - Governments and financial analysts who think unconventional fossil fuels such as bitumen, shale gas and shale oil can usher in an era of prosperity and energy plenty are dangerously deluded, concludes a groundbreaking report by one of Canada’s top energy analysts. In a meticulous 181 page study for the Post Carbon Institute, geologist David Hughes concludes that the U.S. “is highly unlikely to achieve energy independence unless energy consumption declines substantially.” Exuberant projections by the media and energy pundits that claim that hydraulic fracturing and horizontal drilling “can provide endless growth heralding a new era of ‘energy independence,’ in which the U.S. will become a substantial net exporter of energy, are entirely unwarranted based on the fundamentals,” adds Hughes in a companion article for the science journal Nature. Moreover it is unlikely that difficult and challenging hydrocarbons such as shale oil can even replace the rate of depletion for conventional light oil and natural gas. Since 1990, says Hughes, the number of operating wells in the U.S. has increased by 90 per cent while the average productivity of those wells has declined by 38 per cent.

Conference to Explore the Economic Impacts of Enhanced Domestic Energy Production from Shale Gas and Oil Extraction - Chicago Fed - Leaders from both specific markets and regions are looking at the opportunities and challenges associated with the so-called energy production revolution ushered in by the new means to access natural gas and other fuels. Indeed, many from potential energy-producing regions are assessing the trade-offs between economic growth associated with expanded gas and oil production and the risks to the environment that this production may pose. For those from other regions, an energy boom based on shale gas and oil extraction may present opportunities in many different arenas. For instance, some regions will especially benefit from lower consumer prices for home heating and cooling. Similarly, switching to natural gas from diesel in the long-haul trucking industry to take advantage of low natural gas prices may help bring about lower delivery costs for a wide spectrum of household and business goods. Additionally, several parties in regions historically reliant on manufacturing, such as the Midwest, are hoping that low energy prices will bring about new development and jobs in energy-consuming manufacturing sectors, such as chemicals and plastics. Furthermore, greater energy production and chemical manufacturing may lead to more supply chain linkages, which can be developed by regional and local economies.

Gas Boom Projected to Grow for Decades - U.S. natural-gas production will accelerate over the next three decades, new research indicates, providing the strongest evidence yet that the energy boom remaking America will last for a generation. The most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that. A report on the Texas field, to be released Thursday, was reviewed by The Wall Street Journal. The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43.The study examined 15,000 wells drilled in the Barnett Shale formation in northern Texas, mostly over the past decade. It is among the first to study the geology and economics of shale drilling, Looking at data from actual wells rather than relying on estimates and extrapolations, the study broadly confirms conclusions by the energy industry and the U.S. government, which in December forecast rising gas production.The study does show that many of the wells drilled in the Barnett have been poor performers. And while the gas-bearing rock covers 8,000 square miles in and around Fort Worth, Texas, the study suggests it can be economically developed in an area only half that size. Some of the energy companies that spent enormous sums to lease thousands of acres in far-flung parts of the Barnett may be sitting on acreage of little value.

The shale phenomenon: fabulous miracle with a fatal flaw - In 2000, the experts were unanimous: American oil and gas production was in terminal decline. By 2015, it was said, we’d need 10 supertankers a day, carrying 12 million barrels of crude, plus 10 billion cubic feet of liquefied natural gas. Since 2005, however, this scarcity meme has been toppled. Domestic oil and gas production has grown 35 percent in seven years. Natural gas production is at record highs, and oil production has climbed almost 2 million barrels a day, faster here than anywhere on the planet. The combination of horizontal drilling, hydraulic fracturing, 3D seismic surveys, and other gee-wizardry has produced a near-miracle, which has left experts confounded, politicians exuberant, and journalists suffering from hyperbole.Meanwhile, the oil and gas industry has launched its own euphoric ad campaign, assuring TV viewers that we have a “century’s worth of gas,” an unfounded contention, but one that President Obama seems eager to spread. To make sense of the shale gale, we must celebrate what industry has accomplished. Then we must grasp how such a fabulous miracle may ultimately prove fleeting.

The questionable logic of U.S. natural gas exports - With U.S. natural gas production having risen more than 25 percent from its nadir in 2005, natural gas producers are pushing for an end to limits on U.S. natural gas exports. The growth in supplies comes primarily from previously inaccessible shale deposits deep in the Earth, a development that has convinced many people that the country is now entering a new era of natural gas abundance. Trouble is, the United States remains an importer of natural gas. Through November 2012 the country imported 12.5 percent of its natural gas consumption for the year, mostly from Canada. That's down from an average of 15.7 percent for the previous 20-year period. But it's not exactly energy independence. So worried are industrial consumers of natural gas about exports pushing up prices and thus their production costs that they've formed an alliance to fight the loosening of export restrictions. The alliance includes utilities dependent on natural gas to fuel electricity generation, chemical companies that use it as a feedstock for making myriad industrial chemicals, and heavy industrial users such Alcoa and Nucor who use natural gas to fire their metal-making operations. The members of the alliance have reason to worry since Europeans are paying close to $12 per thousand cubic feet for liquefied natural gas and the Japanese are paying more than $17. Compare that to the U.S. domestic pipeline price for natural gas of just $3.27 as of last Friday (Henry Hub spot price).

American energy and economics: Better out than in | The Economist: ON AMERICA’S Gulf coast, massive industrial facilities stand idle. Miles of twisting stainless-steel pipes and huge storage tanks gleam uselessly in the sun. They are a reminder of the hundreds of billions of dollars that America has invested in terminals for handling imports of liquefied natural gas (LNG). Thanks to the boom in domestic shale gas, those imports are no longer needed. America produces nearly as much gas as it consumes, and will soon produce far more. So the obvious thing to do with those idle terminals is to re-engineer them to handle exports. Instead of receiving shiploads of liquefied gas and re-gasifying it, they should be taking American gas, liquefying it and loading it onto tankers. Converting these plants will not be cheap—each one will cost at least $5 billion. But the potential rewards are much larger.In America gas sells for around $3.40 per million British thermal units (mBTU). In Europe it costs around $12. In gas-poor Asia, spot cargoes change hands for as much as $20 per mBTU. Since it costs roughly $5 per mBTU to liquefy the stuff, ship it and turn it back into gas, America could be making a fortune from gas exports. To the extent that such exports displaced dirty coal, they would also help curb global warming.

Canada could face massive hurdles in move to build $50B methane superhighway - It is, by any reckoning, a methane superhighway in the making. If Canada’s move into the global liquefied natural gas industry goes according to plan, more than 9.5 billion cubic feet per day of fresh production, blasted out from brittle shale rock deep in the B.C. and Alberta wilderness, will rush through steel pipes en route to British Columbia’s coastline. Beginning in 2016 and continuing thereafter, a portion of that volume — equivalent to 65% of Canada’s total gas production in 2011 — will be condensed and frozen to -160 degrees Celsius, then loaded on to cryogenic tankers bound for power plants and burner tips in Japan, China, South Korea and India. At least $17-billion of large-diameter pipeline projects tied to proposed export developments are in the works. The total is more than one-third of an estimated $50-billion in LNG-related infrastructure needed over the next five to 10 years to support export plans.

Heavy foreign content of LNG model puts Canada at risk - Two years after the earthquake, tsunami and nuclear meltdown in Japan that prompted a hard look at natural-gas rich British Columbia as an alternative energy supplier to Asia, plans for a liquefied natural gas hub on the north coast are progressing at great speed. Five terminals have been proposed, and more could be on the way. The resource, now estimated at 1,200 trillion cubic feet, is massive; it’s located closer to Asia than other suppliers such as the U.S. Gulf Coast or East Africa; and because average temperatures are cooler, plants are more productive than in warmer parts of the world, Betsy Spomer, senior vice-president, global business development, at BG Group, said in an interview Monday. B.C. has done a lot to encourage the development of B.C. gas resources by virtue of reasonable royalties regime, deep well credits, many things But as plans get closer to reality, proposals for fiscal terms are surfacing at the provincial and federal level, and they could douse the enthusiasm shown so far.

Canada, pushed to role of ‘junior partner’, rises to Keystone challenge - As the proposed Keystone XL pipeline prepares to cross the next big test in the United States — an updated environmental impact statement is due any day — Canada is increasing its efforts to influence the outcome. Alberta Premier Alison Redford was in Washington on the weekend to talk to state governors, with the hope they will in turn be advocates with the administration and with policy makers. On Tuesday, USA Today published an op-ed from the Alberta premier. It was a move to speak directly to Americans about Alberta, the home of the oil sands, and its efforts to be a global leader in both energy development and environmental management. The Canadian Association of Petroleum Producers is doubling down with its own rounds in Washington this week. The oil lobby group is being accompanied by several oil sands CEOs in meetings on Capitol Hill.

State Department Report: Keystone XL Is Environmentally Sound - The State Department released an environmental impact assessment on the Keystone XL pipeline Friday afternoon, concluding that the project is environmentally sound and “is unlikely to have a substantial impact on the rate of development in the oil sands, or on the amount of heavy crude oil refined in the Gulf Coast area.” A 45-day comment period will now begin for the public to weigh in on the project. The State Department will respond to the comments, before finalizing the environmental impact statement, and “conduct a separate analysis of whether the project is in the national interest, a question on which eight other agencies will offer input over 90 days.” Obama is unlikely to make a final decision until “mid-summer at the earliest.” From the report:  Based on information and analysis about the North American crude transport infrastructure (particularly the proven ability of rail to transport substantial quantities of crude oil profitably under current market conditions, and to add capacity relatively rapidly) and the global crude oil market, the draft Supplemental EIS concludes that approval or denial of the proposed Project is unlikely to have a substantial impact on the rate of development in the oil sands, or on the amount of heavy crude oil refined in the Gulf Coast area. [...] Spills associated with the proposed Project that enter the environment are expected to be rare and relatively small. The study found that “The annual CO2e emissions from the proposed Project is equivalent to CO2e emissions from approximately 626,000 passenger vehicles operating for one year or 398,000 homes using electricity for one year.” It also suggests that “America can meet its energy needs over the next decade without” the project by relying on the “growth in rail transport of oil from western Canada and the Bakken Formation on the Great Plains and other pipelines.”

Chevron's Nigeria relief well 'to take 100 days' Chevron is expected to take around 100 days to drill a relief well at the site of a deadly blowout incident off Nigeria last month, an informed source told Upstream.

Ahead of Trial, Talk of a BP Settlement in 2010 Oil Spill - With a major civil trial scheduled to start Monday in New Orleans against BP over damages related to the explosion of an offshore drilling rig in 2010, federal officials and those from the five affected Gulf Coast states are trying to pull together to strike an 11th-hour settlement in the case.  A lawyer briefed on those talks said that the Justice Department and the five states — Alabama, Florida, Louisiana, Mississippi and Texas — had reportedly prepared an offer to resolve the two biggest issues central to a series of trials against BP, the first of which starts Monday.  One of those issues is the fines that the company would pay for violations of the Clean Water Act related to the four million gallons of oil spilled after the explosion of the Deepwater Horizon rig, which BP had leased from Transocean. The other point of dispute is how much the company will have to pay in penalties under a different environmental statute for damage caused by the oil to the area: beaches, marshes, wildlife and fisheries.  The Wall Street Journal reported late Friday that federal and state officials were preparing a $16 billion settlement offer that would cover both the Clean Water Act fines and environmental penalties related to the spill. “The ball is on BP’s side of the table,”

BP Heads Into Spill Trial With Initial Court Victory - BP heads into a sprawling trial Monday over who is liable for the biggest offshore oil spill in U.S. history with an early victory, after a judge ruled some documents related to its criminal conviction can’t be used. In November, BP reached a deal with the U.S. Justice Department, agreeing to pay $4 billion to resolve the criminal case stemming from the spill. Prosecutors also indicted three BP workers. U.K.-based BP, owner of the Macondo well that blew up in the Gulf of Mexico in 2010, claimed criminal allegations against the company, as well as the indictments, were “hearsay” and couldn’t be used in next week’s civil trial. U.S. District Judge Carl Barbier in New Orleans, while agreeing with the company, declined to rule on whether BP’s guilty plea would be barred as well. BP, which settled many spill claims last March in an $8.5 billion civil pact, said it will fight those that remain “vigorously,” including making the argument that some business profit and tax revenue losses were made up for by the economic boon of an influx of cleanup workers.

Oil Companies Pocketing Billions of Dollars in Free Drilling | The House Committee on Natural Resources -  A new report, released today by Rep. Ed Markey (D-Mass.), shows how more than 100 oil and gas companies are drilling in U.S. waters in the Gulf of Mexico without paying royalties to the American people. Nearly 40 percent of these active royalty-free leases are fully or partially owned by foreign governments. The report shows for the first time how much each of these companies is making in free drilling from the U.S. taxpayers.The royalty breaks enjoyed by these companies have already cost $11 billion in forgone revenue, and are expected to cost more than $15.5 billion over the next decade – exceeding previous estimates by the Interior Department -- and may ultimately reach a total of $40 billion as oil and gas production rises, according to previously undisclosed Interior Department data obtained by the Democratic staff of the Natural Resources Committee.

U.S. Oil Demand Fell to 18-Year Low for January, API Says - Bloomberg: U.S. January oil demand fell to the lowest level for the month in 18 years as a weak economy reduced consumption, the American Petroleum Institute reported. Total petroleum deliveries, a measure of demand, dropped 1.7 percent from a year earlier to 18 million barrels a day, the industry-funded group said in a monthly report today. Total consumption fell 2 percent in 2012, the API said last month. The U.S. jobless rate increased to 7.9 percent from 7.8 percent in January. “The January numbers reprise last year’s theme of weak demand,” John Felmy, chief economist at the API, said in the report. “This isn’t surprising given an economy that’s still treading water.” January petroleum demand fell 2.4 percent from December, according to the API. Gasoline deliveries were 8.38 million barrels a day, up 2.4 percent from a year earlier and down 2.3 percent from December.

U.S. crude oil production tops 7 million barrels per day, highest since December 1992 - U.S. crude oil production exceeded an average 7 million barrels per day (bbl/d) in November and December 2012, the highest volume since December 1992. The end-of-year data were reported on February 27 in EIA's Petroleum Supply MonthlyIncreasing oil production in North Dakota and onshore Texas drove the increase in U.S. crude oil production over the last several months (although crude oil production in North Dakota took a dip in November, before increasing again in December). Much of the increase in crude oil production is coming from shale and other tight (very low permeability) formations.  Initial estimates for production in November were below 7 million bbl/d, but revisions based on additional data indicate that production exceeded 7 million bbl/d in November 2012. That was followed by December production estimated to be more than 7 million bbl/d.

Lower highs: The real trajectory of U.S. oil production - The way the oil industry is touting gains in U.S. crude oil  production, you would think that production was soaring to new all-time highs. But the facts say otherwise. Below is a monthly production history through December 2012. Production remains well below the peak achieved in 1970 and below a secondary peak—a lower high, if you will—which resulted from the ramp up of production in Alaska. But, as the graph shows, after that it was relentlessly downhill until just recently. It is true that a new form of hydraulic fracturing—high-volume slick-water hydraulic fracturing—has made available sources of oil not previously accessible. But is it also true that the industry’s hyperbole doesn’t square with the evidence. The U.S. Energy Information Administration’s (EIA) latest estimate of technically recoverable oil from so-called tight oil deposits—the ones suitable for hydraulic fracturing—is 33 billion barrels (see below). It sounds like a lot. But, in fact, it would only supply the United States for about 6½ years. Not bad; but not a world-changing number, especially when you consider that all oil goes onto the worldwide market where that amount would last a little over a year. The EIA projects that U.S. oil production will peak later this decade—a little below the previous secondary peak in 1985. That would result in a tertiary peak, or yet another lower high. The extra supply in the meantime means that America will be spending less on imported oil. But the modest turnaround in America’s oil fortunes won’t solve the larger problem of worldwide oil depletion which, despite American gains, has kept worldwide oil production on a bumpy plateau since 2005.

Non-OPEC Liquid Fuel Production Flat in 2011-2012 - In trying to understand the flatness of global liquid fuel production in 2012, the first question to ask is whether this is due to the behavior of OPEC (a semi-coherent grouping of countries which sometimes restrain production to maintain oil prices), or the rest of the world (which are usually presumed to produce all the oil they economically can at current prices).The overall split between OPEC and non-OPEC is as follows:This is based on EIA data for all-liquids through October 2012.  However, it's more illuminating to look at the data in a different way.  The next chart shows the two streams on shifted scales.  The non-OPEC is on the left scale, while the OPEC is on the right scale.  This allows us to more easily see the changes, and compare the changes with each other. Doing so makes it clear that non-OPEC production pretty much reached a new plateau in mid 2010 and hasn't increased since.  In other words, the post great-recession recovery ended then, and (if we discount the single month of October) hasn't resumed since. By contrast, OPEC production has mostly increased since the recovery began in early 2009, with two exceptions: the sharp fall associated with the loss of Libyan production in early 2011 (since made up), and then a less dramatic fall in late 2012.

National Breakdown of Recent Oil Supply Flatness - In trying to understand why global oil supply has flattened out lately (in 2012 for the whole world, and since late 2010 for non-OPEC supply), I found it helpful to make the above graph which shows the top ten countries, and bottom ten countries, for change in oil supply between the second half of 2010, and May-October 2012 (the last six months available from the EIA). Basically, the big increases have come from the US tight oil boom (with an assist from Canada), and also from the reasonably stable countries in OPEC, which have been increasing production (principally Saudi Arabia, Iraq, UAE, and Kuwait).  Meanwhile, the decreases have been coming from ongoing exhaustion-related declines in the North Sea (UK and Norway), together with a variety of political problems around the globe (sanctions on Iran, instability in Sudan, Libya, and Syria). So, the question of how much supplies go up or down in 2013 is likely to turn on how much the forces of entropy and political chaos affecting oil producing countries weigh against the profit motive acting to bring more supplies from stable countries.

US oil imports from Middle East increase - The US was more reliant on the Middle East for its oil imports last year, underscoring the critical importance of the politically unstable region for the country despite the growing energy independence its shale gas revolution is bringing. That domestic production boom has triggered intense debate over whether the US would still guard the world’s critical sea lanes, such as the Strait of Hormuz in two decades’ time – or whether China, whose dependence on Middle Eastern crude imports is rapidly rising, would replace it. However, recent oil import trends from the Gulf region suggest why the US might continue to play a critical security role in the region. While domestic production increased the most in 150 years last year, Washington will confirm later this week that oil imports from the Gulf region continued to rise. By the end of November the US had already imported more than 450m barrels of crude from Saudi Arabia, more than it imported from Riyadh in the whole of 2009, 2010 or 2011, according to figures from the US energy department. For the first time since 2003, Saudi imports accounted for more than 15 per cent of total US oil imports. The Gulf as a whole accounted for more than 25 per cent, a nine-year high. Other Gulf exporters are also seeing unusually strong US demand. By the end of November, Kuwait had shipped more oil to the US than in any year since 1998. Analysts are expecting annual figures to be released later this week to confirm the trend seen up to November.

Peak Oil, The Shale Boom and our Energy Future: Interview with Dave Summers -  Yves Smith - This where we stand, and it’s a fairly bleak view: Peak oil is almost here, and nothing new (with the possible but unlikely exception of Iraq) is coming online anytime soon and while the clock is ticking – forward movement on developing renewable energy resources has been sadly inadequate. In the meantime, the idea that shale reservoirs will lead the US to energy independence will soon enough be recognized as unrealistic hype. There are no easy solutions, no viable quick fixes, and no magic fluids. Yet the future isn’t all doom and gloom – certain energy technologies do show promise. We had a chance to speak with well known energy expert Dave Summers where we cut through the media noise and take a realistic look at what our energy future holds. Dr. Dave Summers – scientist, prolific writer and author of Waterjetting Technology, is the co-founder of The Oil Drum and currently writes at the popular energy blog Bit Tooth Energy. From a family of nine generations of coal miners, Summers’ patented waterjetting technology enables the high-speed drilling of small holes through the earth among other applications. In an exclusive interview with, Dr. Summers discusses:

• Why new drilling techniques aren’t enough to put peak oil off
• Why the shale revolution will not lead to energy independence
• Why the potential of nuclear energy isn’t being realized
• Why ‘plan B’ for Keystone isn’t beneficial to the US
• Why we should be worried about the South China Sea and the Middle East
• How low natural gas prices cannot be sustained
• Why Europe’s shale future is still indeterminate
• Why the coal industry’s days aren’t necessarily numbered
• Why geothermal energy has the greatest potential
• How media manipulation figures in to the climate debate
• Why nuclear fusion remains a fantasy in our lifetimes and beyond

Exclusive - Iran Said to Deploy Aging Foreign Tankers, Avoiding Sanctions - Iran is using old tankers, saved from the scrapyard by foreign middlemen, to ship out oil to China in ways that avoid Western sanctions, say officials involved with sanctions who showed Reuters corroborating documents.The officials, from states involved in imposing sanctions to pressure Iran to curb its nuclear program, said the tankers - worth little more than scrap value - were a new way for Iran to keep its oil exports flowing by exploiting the legal limitations on Western powers' ability to make sanctions stick worldwide. Officials showed Reuters shipping documents to support their allegation that eight ships, each of which can carry close to a day's worth of Iran's pre-sanctions exports, have loaded Iranian oil at sea. Publicly available tracking and other data are consistent with those documents and allegations. "The tankers have been used for Iranian crude," one official said. "They are part of Iran's sanctions-busting strategy." Dimitris Cambis, the Greek businessman who last year bought the ships - eight very large crude carriers, or VLCCs - to carry Middle East crude to Asia, flatly denied doing any business with Tehran or running clandestine shipments of its oil to China.

Oil minister: Iran could revise its oil export policy - -Iran's oil minister Rostam Qasemi said Iran could revise its oil exporting policies, IRNA reported. "Since Iran possesses enough of technical knowledge to build its own oil refineries, and can produce high value products, it can reconsider its crude oil and condensates export strategy," Qasemi said. Iran plans to use its refineries for making other petroleum products and establishing their export, instead of crude oil. The minister added that new oil refineries will be built in the country. "Iran is able to fully satisfy its domestic need in oil, and it has also become a major exporter of petroleum products," Qasemi said.Qasemi also said that currently Iran is able to use domestic resources for its refineries by about 60 percent, however in the future it plans cover the refineries-related work by 100 percent. "Right now we have a refinery that is able to refine 10,000 barrels of oil by the private sector. Building of three more 5,000-ton refineries is on agenda," he said.

Revealed: Iran’s ‘Plan B’ for a nuclear bomb - The Telegraph can disclose details of activity at a heavily-guarded Iranian facility from which international inspectors have been barred for 18 months.  The images, taken earlier this month, show that Iran has activated the Arak heavy-water production plant.  Heavy water is needed to operate a nuclear reactor that can produce plutonium, which could then be used to make a bomb.  The images show signs of activity at the Arak plant, including a cloud of steam that indicates heavy-water production.

Be Careful: Russia is Back to Stay in the Middle East - Russia is back. President Vladimir Putin wants the world to acknowledge that Russia remains a global power. He is making his stand in Syria. The Soviet Union acquired the Tardus Naval Port in Syria in 1971 without any real purpose for it. With their ships welcomed in Algeria, Cuba or Vietnam, Tardus was too insignificant to be developed. After the collapse of the Soviet Union, Russia lacked the funds to spend on the base and no reason to invest in it. The Russian return to the Middle East brought them first to where the Soviet Union had had its closest ties. Libya had been a major buyer of arms and many of the military officers had studied in the Soviet Union. Russia was no longer a global power, but it could be used by the Libyans as a counter force to block domination by the United States and Europeans. When Gaddafi fell, Tardus became Russia’s only presence in the region. That and the discovery of vast gas deposits just offshore have transformed the once insignificant port into a strategic necessity.

China's energy consumption rises - China's energy consumption totaled 3.62 billion tonnes of standard coal equivalent in 2012, up 3.9 percent year on year, the National Bureau of Statistics (NBS) said. Consumption of coal, crude oil, natural gas and electricity rose 2.5 percent, 6.0 percent, 10.2 percent and 5.5 percent from a year earlier, respectively, reported Xinhua. Energy consumption for every 10,000 yuan ($1,601.98) of China's GDP fell 3.6 percent year on year, according to a report released by the NBS.

Peak oil down to war, depression and geopolitical shifts -  At the present time the world's existing oil fields are believed to be losing some three to four million barrels per day of production each year due to normal depletion, which must be replaced by new oil fields just to stay even. Another factor is political restrictions on access to oil. These may simply be government mismanagement of state oil companies, insurgencies and even full-scale wars preventing access to oil deposits. It does not matter, if the oil is not getting to the world's fuel tanks fast enough to support continued economic growth - then we have a problem. Yet another constraint is the steadily increasing cost of oil, which has been increasing at about 7 percent a year. At every increase, additional consumers of oil are being priced out of the market. It is conceivable that global oil production could peak simply because a sufficient number of consumers can no longer afford to purchase it. A little-known fact of world oil production is that the major exporters are using an increasing share of their production for themselves. Global exports are down by some two million barrels per day in recent years. Given the incessant increase in the amount of oil that China and to lesser extent India are importing, it is starting to look as if there will be little or no oil available for other countries to import in another decade or so.

China Overheating? Biggest Weekly Cash Drain in History; Questions Surface Over Chinese Growth Numbers - In December I suggested the modest bounce in China PMI would not last. It didn't. The allegedly sustainable recovery in China is already in question.  The HSBC Flash China Manufacturing PMI™ shows manufacturing conditions barely above contraction.  Key points

  • Flash China Manufacturing PMI™ at 50.4 (52.3 in January). 4-month low.
  • Flash China Manufacturing Output Index at 50.9 (53.1 in January). 4-month low

Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The Chinese economy is still on track for a gradual recovery. Despite the moderation of February’s flash PMI, the index recorded the fourth consecutive reading above the 50 critical line. The underlying strength of Chinese growth recovery remains intact, as indicated by the still expanding employment and the recent pick-up of credit growth."

China’s Slower Manufacturing Casts Shadow Over Recovery: Economy - Bloomberg: China’s manufacturing is expanding at the slowest pace in four months, a private survey showed, underscoring the headwinds faced by policy makers in the world’s second-biggest economy. The preliminary reading of a Purchasing Managers’ Index was 50.4 in February, according to a statement from HSBC Holdings Plc and Markit Economics today. That compares with the 52.3 final reading for January and the 52.2 median estimate of 11 analysts surveyed by Bloomberg News. A number above 50 indicates expansion. Today’s report may damp optimism that an economic rebound is gaining traction following a seven-quarter slowdown and the weakest annual expansion in 13 years. The benchmark Shanghai Composite Index last week dropped the most since May 2011 on concern the government will expand restrictions on the property market to curb home-price gains.

China’s manufacturing growth slows -- China's manufacturing sector grew more slowly in February, according to a survey that suggests the country's recovery could be slackening. The official purchasing managers' index dipped to 50.1 from 50.4 in January, data on Friday showed. It was the fifth consecutive month above the midpoint of 50, which indicates an expansion in industrial activity, but the decline in the index means that the pace of expansion has likely slowed. China's economy bottomed out in the third quarter last year and has accelerated since then, propelled by a surge in lending and a pick-up in government spending. But concerns about a rebound in inflation and high property prices have led Beijing to tap the brakes in recent weeks, and this shift in policy stance appears to have had an impact on the PMI. "The recovery remains fragile and could falter as monetary policy conditions are tightened," said Liu Ligang, an economist with ANZ. The breakdown of the PMI showed that the output index edged down to 50.2 in February from 50.3 in January. The new orders index -- an important leading indicator for future activity -- fell sharply to 50.1 from 51.6 a month earlier. China's central bank last week drained Rmb910bn ($146bn) from the economy, a record weekly cash withdrawal in open market operations, to counteract a huge jump in credit issuance by the country's financial institutions in January.

China’s Manufacturing Expands at Below-Forecast Pace: Economy - Bloomberg: Two Chinese manufacturing indexes showed a slower-than-estimated pace of expansion, a signal the nation’s economic recovery may be losing steam. The official Purchasing Managers’ Index was 50.1 in February, the weakest in five months and down from 50.4 in January, a report from the National Bureau of Statistics and China Federation of Logistics and Purchasing showed today in Beijing. A separate gauge from HSBC Holdings Plc and Markit Economics dropped to a four-month low of 50.4 from 52.3. Readings above 50 indicate expansion.Contractions at small and mid-sized manufacturers in the official survey underscore the headwinds China’s new government will face when it takes power this month after the annual session of parliament. Li Keqiang, set to become premier, faces the task of sustaining a rebound in growth without triggering a resurgence in inflation and banks’ bad debts.

Analysis: China central bank takes lead in economic reform push - (Reuters) - China's readiness to bend retirement rules to keep arch-reformer Zhou Xiaochuan at the helm of the central bank signals clearly that new Communist Party chiefs want to speed economic reform in the country's most critical development phase in three decades. Central bank insiders interviewed by Reuters say the People's Bank of China (PBOC) is the country's most potent force for reform in the face of powerful vested interests, echoing sources with leadership ties who last week said Zhou would keep his job despite reaching the mandatory retirement age of 65. Keeping Zhou ensures that the PBOC will remain a trusted instrument through which China's leaders can enact financial reforms designed to boost free markets and private enterprise, rebalance the economy, reinvigorate growth and ultimately heal a socially divisive rift between the country's rich and poor.

China to tighten shadow banking rules -  China will rein in its shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities, according to people briefed on the new rules. The Chinese shadow banking system – credit flows beyond traditional bank loans – has quadrupled in size since 2008 to about Rmb20tn ($3.2tn), or 40 per cent of economic output. These flows were crucial in reviving the country’s growth last year. But banking analysts and rating agencies have warned that they pose an increasingly serious risk to Chinese economic stability.

China ratings firm warns of global 'currency crisis' -  Rising sovereign debt levels in advanced economies are spawning a crisis that threatens to topple the dollar and other reserve currencies, AFP reports citing a Chinese credit ratings agency. Dagong Global Credit Rating said developed economies were spawning a "currency crisis" by trying to prop up their economies through loose monetary policies following the 2008-2009 financial meltdown. Dagong says it is an independent private company but its chairman has previously advised the Chinese government, which has the world's largest foreign exchange reserves. "In this stage, the world will more actively look for a new currency other than the US dollar, euro, Japanese yen and British pound to replace the current international currency system," the report said. The document did not mention the Chinese yuan as an alternative, but clearly suggested that China's economic fundamentals and rising global influence mean the country is poised to play a leading role.

China well-prepared for currency war: official - China is fully prepared for a looming currency war should it, though "avoidable," really happen, said China's central bank deputy governor Yi Gang late Friday. A currency war could be avoided, Yi said, if policymakers in major countries observed the consensus, reached at the recent G20 meeting, that monetary policy should primarily serve as a tool for domestic economy. "China is fully prepared," Yi said. "In terms of both monetary policies and other mechanism arrangement, China will take into full account the quantitative easing policies implemented by central banks of foreign countries."

As Goes China, So Goes The World And Definitely Australia - While China depends on only one nation for 15% or more of its exports (US 17.3%), Bloomberg's Michael McDonough notes that an incredible 35 nations depend of China for at least 15% of the exports; up from just 4 in 2001. Most are emerging markets or major commodity producers with the shift being driven by China's demand for raw materials, fueled by its investment-led growth model and the stimulus package following the global financial crisis. This gross dependence leaves the world's economy increasingly susceptible to shifts in the Chinese business cycle - most notably Australia which relies on China for a massive 30% of its export demand. This is almost double the next largest developed nation of Japan (which relies on China for 18.5% of its exports) though tensions between the two nations has led to an almost 10% decline in Chinese imports of Japanese goods since September. As we have noted, China has become a key source of FDI in Africa in recent years and 12 of the 20 most-China-dependent economies are from that continent; but as China attempts to transition from investment toward consumption, demand for commodities may slow and downside risk grows for these dependent commodity-producing nations.

CASH GRAB: Inactive bank accounts to be seized - HOUSEHOLDS face losing up to $109 million from their family savings as the Federal government moves to seize cash from inactive bank accounts. After legislation was rushed through parliament, the government will from May 31 be able to transfer all money from accounts that have not been used for three years into their own revenues.This will mean that accounts with anything from $1 upwards that have not had any deposit or withdrawals in the past three years will be transferred to the Australian Securities and Investment Commission. The law is forecast to raise $109 million this year as inactive accounts for three years or more are raided by Treasury.

Sandstorm pushes Beijing pollution levels off the charts -  Beijing and other parts of northern China were stung by hazardous air pollution levels Thursday as strong winds blew a sandstorm through the region. Air in the capital turned a yellowish hue as sand from China's arid northwest blew in, turning the sky into a noxious soup of smog and dust. At 6 a.m. local time, the U.S. Embassy's air quality index showed a reading of 516 for particles less than 2.5 micrometers in diameter. Known as PM2.5, such particles are considered particularly dangerous because they can lodge deeply in the lungs. On the American air pollution index, the air at that time and throughout much of the morning was classified as "beyond index." The developers of the U.S Embassy's air monitoring station had planned for an index capped at 500. The World Health Organization suggests that 24-hour exposure to PM2.5 should be limited to levels of 25 on that scale.

Atmospheric Warfare: Japan Warns Its Citizens To Hide From China's Toxic Smog  - In addition to currency, trade, and disputed islands, Japan can add one more form of covert warfare it is now engaged in with China: atmospheric. We first wrote about the relentless exports of Beijing's toxic smog, which has been migrating in an eastern direction, over the East China Asia, and parking right over downtown Tokyo, nearly a month ago,  but only now has Japan formally responded to what can only be classified as Chinese atmospheric sabotage. According to Japan Times, "Authorities will urge residents to stay indoors if the level of toxic smog spreading to Japan from China is expected to exceed twice the maximum limit set by the central government, officials said." And with Chinese smog overnight already literally off the charts virtually every day, one wonders just what is this great economic reflationary miracle Japan intends on conducting, with everyone ordered to stay indoors or better yet, not breathe? The good news, is that as explained previously, China's inbound toxic air should promptly fix Japan's untenable "top-heavy" demographic situation.

Japan seen nominating "deflation basher" as BOJ head: sources (Reuters) - Japan's prime minister is likely to nominate an advocate of aggressive monetary easing - Asian Development Bank President Haruhiko Kuroda - as the next central bank governor to step up his fight to finally rid the country of deflation. Shinzo Abe won a big election victory in December promising to revive the fortunes of an economy stuck in the doldrums for most of the past two decades. He has repeatedly called for a more aggressive central bank willing to take radical steps. The yen fell on the nomination news to a 33-month low and the yield on five-year government bonds hit a record low as markets moved to factor in bolder monetary policy. "Kuroda is a fan of a weaker yen and of deflation bashing,"

Japan Seeks Ticket to Growth From New Central-Bank Chief - Supporters of the BOJ's traditionally cautious approach said Japan risks runaway inflation, profligate government spending and even a Greek-style sovereign-debt crisis, should the central bank ramp up the amount of money it pumps into the country's $5 trillion economy. Japan's deeper structural problems—including an aging and shrinking population, as well as too-tight regulations in many industries—hold back an economic rebound and limit the effectiveness of monetary policy, according to this view, which is held by Mr. Shirakawa, among others. The candidates under consideration all back increased easing, and mark a break from past BOJ governors who believed monetary policy had very limited power, Mr. Abe's advisers said. Whoever is chosen, many say, likely will steer the BOJ toward a hand-in-glove relationship with government leaders. "......."After the election, Mr. Abe demanded the BOJ set a firm 2% inflation target to stimulate growth, as well as pledge "unlimited easing'' to get there. "

Yen Depreciation and the Scope for Expenditure Switching - With Haruhiko Kuroda ascending to head the Bank of Japan [1], it is likely that monetary policy will remain fairly expansionary. Even without direct intervention in foreign exchange markets, the yen will likely continue to weaken as expectations of inflation rise. What is the likely impact of trade flows? Figure 1 depicts the Japanese net exports to GDP ratio and the real value of the yen.  While net exports are clearly declining, it’s important to keep in mind that Japanese GDP is also declining, from already low levels. Hence the stakes are high. An expansionary monetary policy (as described in this post) can affect output by way of reducing real debt loads, and relaxing collateral constraints in financial accelerator model, as well as other channels. Those channels are in addition to the exchange rate channel that most are focused on.

Japan adopts $142bn stimulation budget, its second largest - Japan’s parliament has passed a 13.1 trillion yen ($142 billion) additional budget, part of a wider stimulus package announced by Prime Minister Shinzo Abe's cabinet in January to boost the national economy and fight deflation. The budget is the second largest in the country’s history. The extra money is destined for economy-boosting measures such as creating more jobs, upgrading Japan's ageing infrastructure, and rebuilding the areas that suffered from the March 2011 earthquake and tsunami. Shinzo Abe’s Liberal Democratic Party came to power last December with a promise to revive the world's third-largest economy that was in a deep recession, shrinking for a third consecutive quarter between October and December, due mostly to low export demand. Another measure directed to bolster economic growth is intervening to weaken the yen. The yen has fallen in value over 20% since November, and slid this Monday to its lowest against the dollar since 2010 on eurozone concerns and speculation about who will be named the new chief of the Bank of Japan.

Educating Indonesia - Participants in Indonesia Mengajar, a programme funded by private corporations and run by prominent university educator Anies Baswedan, are given army survival training before being deployed. But they are not soldiers; they are educated professionals sent to remote corners of the archipelago to teach as volunteers in some of Indonesia's most impoverished schools. The volunteer teachers must deal with one of the worst education systems in the world. Indonesia recently ranked last in a landmark education report that measured literacy, test results, graduation rates and other key benchmarks in 50 nations. Only a third of Indonesian students - in a country where 57 million attend school - complete basic schooling and the education system is plagued by poor teaching and corruption. Indonesian educators and commentators have slammed the country's school system for placing more emphasis on rote learning than creative thinking. A culture of teaching anchored in obedience as well as a rigid approach to religious studies and assigned reading have been described as major problems. Education experts say less than half of the country's teachers possess even the minimum qualifications to teach properly and teacher absenteeism hovers at around 20 percent. Many teachers in the public school system work outside of the classroom to improve their incomes.

How Mexico Got Back in the Game -  India, people ask you about China, and, in China, people ask you about India: Which country will become the more dominant economic power in the 21st century? I now have the answer: Mexico.  Impossible, you say? Well, yes, Mexico with only about 110 million people could never rival China or India in total economic clout. But here’s what I’ve learned from this visit to Mexico’s industrial/innovation center in Monterrey. Everything you’ve read about Mexico is true: drug cartels, crime syndicates, government corruption and weak rule of law hobble the nation. But that’s half the story. The reality is that Mexico today is more like a crazy blend of the movies “No Country for Old Men” and “The Social Network.”  Something happened here. It’s as if Mexicans subconsciously decided that their drug-related violence is a condition to be lived with and combated but not something to define them any longer. Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil. Mexico has also greatly increased the number of engineers and skilled laborers graduating from its schools. Put all that together with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia and attracting more global investment than ever in autos, aerospace and household goods.

Where's Yer White People Now? On 'Saving' Egypt - I'd like to ask the current Egyptian leadership--especially the Muslim Brotherhood--something similar: Where's yer IMF white people now brandishing $4.8 billion? Daily reports emanating from Egypt talk about an economy teetering on the brink of collapse. The Week points out something I hadn't recognized before but is surely true: Given that the government uses Egyptian pounds to fund food and energy subsidies, the currency's further depreciation will only make it more difficult to fund the purchase of these (usually imported) goods. So...The pound had steadily declined since Mubarak was pushed from power with the country's grim economic outlook straining its foreign reserves. Billions in hard currency have been spent by the central bank trying to protect the country directly, as well as on wheat and fuel imports that the government subsidizes for domestic consumers. But notice my use of the word "had." Of late, the pound's decline is no longer "steady." Since about Jan. 13, the pound's decline against the dollar has been precipitous.That's particularly dangerous for Egypt, since so many dollar-dominated commodities are subsidized by an Egyptian government that receives most of its revenue in pounds. In other words, every bushel of wheat or barrel of oil that the government purchases is far more expensive in domestic terms, which in turn further depletes the government's foreign currency reserves, makes investors even more nervous about the chances of a pound collapse, and so puts more pressure on the pound. The very definition of a vicious cycle.

Economic crisis ‘balkanized’ global finance - The economic crises in the United States and Europe wiped out decades of progress in expanding the world financial system, depressing the flow of investments and loans across borders and potentially setting the stage for an epoch of entrenched low growth, according to a new study on global finance patterns. The McKinsey Global Institute report combines databases from the International Monetary Fund, global central banks and other sources to try to sum up what has been lost in the aftermath of the 2008 Lehman Bros. failure and subsequent crisis in the euro zone. The top findings: The amount of investments and loans flowing across international borders has collapsed. The overall value of financial assets compared to the size of the world economy is way down. And, in a sign of how government policy has struggled with mixed results to revive growth, the composition of world financial holdings has shifted away from equity investments like stocks and toward government debt. Five years after the crisis, the report’s authors say, it remained unclear whether world financial markets would recover the depth and strength they exhibited in the decades before 2007, a historic year when $11.8 trillion in investments and loans traded hands across borders, and total financial assets in the world equaled 355 percent of world economic output.

‘Transatlantic Partnership’ intended to duplicate secret Trans-Pacific Partnership - Neoliberalism knows no borders, so perhaps it should not come as a bolt out of the blue that the United States and European Union are set to negotiate a “Transatlantic Trade and Investment Partnership.” It might be thought that the Obama administration would have its hands full with the ongoing, top-secret Trans-Pacific Partnership talks, but it seems that much can be done in the absence of any pesky oversight. It might be thought that European Union officials would have their hands full with their series of financial crises, but it appears this is an irresistible opportunity to safeguard austerity.This dystopia is sponsored by the usual corporate organizations. The trans-Atlantic trade agreement evaded all radar until U.S. President Barack Obama’s announcement in his State of the Union address but had been in the works for more than a year. To the applause of business groups on both sides of the Atlantic.

ECB Should Join ‘Currency War’ to Weaken Euro, Montebourg Says -- The European Central Bank should weaken the euro, confronting the new “currency war” head on to help address economic stagnation in the region, French Industry Minister Arnaud Montebourg said today. Calling for a more activist and “political” management of the currency shared by 17 European nations, Montebourg said at a press conference in Paris that he wants “the European Central Bank to do its job.” “The euro is too strong and doesn’t correspond to economic fundamentals,” he said. The ECB “should prepare to confront a new currency war in which the weakening of currencies becomes a political tool.” Montebourg’s recommendations run contrary to a pledge this month by finance ministers and central bankers from G-20 nations that they won’t target exchange rates for competitive purposes. The group refrained from singling out Japan for weakening its currency, after the Asian nation came under fire ahead of the meeting for a drop in the yen.

Austerity Europe - Paul Krugman - Some readers have been asking me for the data source for Paul De Grauwe’s measure of austerity. I’m working on it. Meanwhile, however — and partly for my own reference — I discovered that I can do a similar exercise over a somewhat longer time horizon, which I’m posting in large part as a note to myself. Now, measuring austerity is tricky. You can’t just use budget surpluses or deficits, because these are affected by the state of the economy. You can — and I often have — use “cyclically adjusted” budget balances, which are supposed to take account of this effect. This is better; however, these numbers depend on estimates of potential output, which themselves seem to be affected by business cycle developments. So the best measure, arguably, would look directly at policy changes. And it turns out that the IMF Fiscal Monitor provides us with those estimates, as a share of potential GDP, for selected countries from 2009 to 2012 (Table 15). What I’ve done is to plot those estimates (horizontal axis) against changes in real GDP from 2008 to 2012 (vertical axis). Here it is:

The Euro depression - According to the European commission recent forecasts, the Euro area will see negative growth rates again in 2013 and growth rates as low as 1.4 in 2014. This means an average growth of 0.16% in the period 2012-2014, assuming we do not end up revising downwards our views on 2014 - which is very likely. And this comes after Europe has gone through its worst recorded recession during the 2008-2010 years. This is now worse than a double-dip (great) recession. What is really frustrating (maybe we should call it depressing, to match the economic situation) is the complacency with which some European politicians look at what is happening. When Olli Rehn (EU commissioner for economic and monetary affairs) commented on these negative forecasts produced by the EU commission, he called them disappointing but then he just said that current policies are finally paying off. (austerity is not even mentioned as a possible factor), so the best we can do is to continue the policy agenda "to ensure the sustainability of public finances". There is no learning here, it does not matter how strong the facts are.

EU Doesn't Like Its Forecasts, So It Removes Them From Its Site - With constantly revised forecasts for the EU, the European Commission decides the safe safe thing to do is Eliminate Forecasts for 2015.  Via Google Translate from El Economista ...This morning you could see the data for 2012, 2103, 2014 and 2015, but now can only see the figures from 2011 to 2014 and there is no trace of the catastrophic 2015 numbers (see the screenshots attached below). Although there is no official communication in one way or another, hypothetically could be a real blunder produced after being released by mistake, or any type of computer failure, a former forecasts for 2012 under the 2015 column.'s say, that would have mistakenly announced as 2015 forecast estimates released earlier this year to last year. Those European Commission forecasts envisage a general improvement in economic scenario for 2014. However, estimates for 2015, this morning hidden behind an interactive graphic , pointed for a few hours, before being erased-a brutal relapse. In fact, Germany would grow 2% in 2014 to only 0.8% in 2015, would UK from 1.9% to 0.3%, France 1.2% and Spain 0.2% from 0.8% to -1.4%.

Why the Euro Crisis Isn’t Over - Seventeen years ago, Bernard Connolly foretold the misery that awaited the European Union in a book called "The Rotten Heart of Europe,"  and he was promptly fired. As far as Mr. Connolly is concerned, Europe's heart is still rotting away. The European political class, he says, believes that the crisis "hit its high point" last summer, "because that was when there was an imminent danger, from their point of view, that their wonderful dream would disappear." But from the perspective "of real live people, and families and firms and economies," he says, the situation "is just getting worse and worse." Last week, the EU reported that the euro-zone economy shrank by 0.9% in the fourth quarter of 2012. For the full year, gross domestic product fell 0.5% in the euro zone. Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays "something like 10% of German GDP a year, every year, forever" to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, " 'Well, we'll chuck the whole lot of you out.' Now, that's not a very pleasant prospect." He's thinking specifically, in the chuck-'em-out scenario, about the rise of neo-fascists like the Golden Dawn faction in Greece.

‘Citizen tide’ of protests swamps Spain -  Spaniards furious at hardship and corruption scandals in the financial crisis massed in cities across the country on Saturday in a "citizens' tide" of protests. Tens of thousands converged in Madrid, Barcelona and other cities to the din of drums and whistles and yells of "Resign!" directed at Prime Minister Mariano Rajoy and his government. "We have come because of it all -- unemployment, corrupt politicians, the young people who have no future -- it's a combination of everything," said Luis Mora, 55, a construction worker in Madrid. He joined a multitude of nurses, doctors, teachers, firemen, miners with lamps on their helmets and numerous other groups. The grouping of civil associations that called the protests chose February 23 for the anniversary of an attempted coup in 1981 by officers who tried to restore military rule six years after the death of the dictator Francisco Franco. The protestors' manifesto said the demonstrations targeted the "coup of the financial markets" which they largely blame for the crisis brought on by the collapse of the housing market.

I Have Seen The Scariest Chart In Europe — And It Very Much Resembles This One  -- Grillo is a comedian-turned-politician who is doing shockingly well the Italian elections (coming up this Sunday and Monday) by running on an aggressive anti-bank, euro-skeptic platform. He's capitalizing on the deep frustration that exists in Italy due to the weak economy, and the perception that the current government is too corrupt and cozy with banks. His support spans the political spectrum, though he seems to be drawing a bit more heavily from the left. Were he to gain a sizable block in the upcoming parliament, he represents a pretty serious threat. to the current efforts at reform (the Brussels approved government is eager to liberalize the economy, reduce the deficit, reform the labor market, and so on). Financial markets have loved the efforts made over the past year or so, even if the public and the real economy have not. Italian media is in a polling blackout, so there isn't much data made public on the actual numerical state of the race. Today we got to see one of these private tracking polls. Here's what we'll say about it. It resembles this Google Trends chart, which shows search volume for the four main candidates: Berlusconi (conservative), Mario Monti (center), Pier Luigi (center left), Bepe Grillo.

Austerity, Italian Style, by Paul Krugman -Two months ago, when Mario Monti stepped down as Italy’s prime minister, The Economist opined that “The coming election campaign will be, above all, a test of the maturity and realism of Italian voters.” The mature, realistic action, presumably, would have been to return Mr. Monti — who was essentially imposed on Italy by its creditors — to office, this time with an actual democratic mandate. Well, it’s not looking good. Mr. Monti’s party appears likely to come in fourth; not only is he running well behind the essentially comical Silvio Berlusconi, he’s running behind an actual comedian, Beppe Grillo, whose lack of a coherent platform hasn’t stopped him from becoming a powerful political force.   But without trying to defend the politics of bunga bunga, let me ask the obvious question: What good, exactly, has what currently passes for mature realism done in Italy or for that matter Europe as a whole?  For Mr. Monti was, in effect, the proconsul installed by Germany to enforce fiscal austerity on an already ailing economy... And  because austerity policies haven’t been offset by expansionary policies elsewhere, the European economy as a whole is back in recession...

Italy Senate "Ungovernable"; No Coalition Possible - La Republica confirms what we long thought highly likely: The Italian Senate is Ungovernable. A Senate majority takes 158 seats and no party has more than 123 at the moment. The current results look like this: Senate Seat Projections

  • Bersani 104
  • Berlusconi 123
  • Grillo 57
  • Monti 17
There are 315 total seats and the total above is only 301. Although 14 seats remain, not even a Monti-Bersani coalition in addition to those 14 seats would bring Bersani's total to 158. Curiously, it appears Bersani received a plurality of the Senate popular vote with 32% compared to Berlusconi's 30.2%. Grillo weighs in with 23.9%, and Monti at 9.1%. If 123-104 in favor of  Berlusconi over Bersani sounds strange, it is not unlike a presidential election in the US where one candidate wins the popular vote and another candidate wins the election based on  state-by-state electoral votes.

Beppe Grillo's Five Star Movement On Verge of Being Largest Political Party in Italy; Italy Stock Market Futures Plunge 3.5% - As the vote totals wind down, Beppe Grillo is the symbolic winner in the election. His MoVimento 5 Stelle (MS5 - Five Star Movement) is on the verge of becoming the largest party in Italy by popular vote. As of 4:00 PM... The center-left coalition of four political parties has 29.7% of the vote, but Bersani's party, Partito Democratico (Pd), has 25.5% of the vote. Beppe Grillo has no coalition. His MoVimento 5 Stelle (M5S) party is in a dead tie with 25.5% of the vote. The center-right coalition of nine political parties received 29.0% of the vote, but Berlusconi's party, Il Popolo della libertà (Pdl), received 21.4% of the vote. On an Actual Party (Not Coalition Basis)

  • Pier Luigi Bersani - Partito Democratico (Pd) - 25.5%
  • Beppe Grillo - MoVimento 5 Stelle (M5S) 25.5%
  • Silvio Berlusconi - Il Popolo della libertà (Pdl) - 21.4%

Those totals are as of 4:00 Central. I have been watching the totals for a half hour. M5S has been inching up steadily. A half hour ago M5S was down by .5%. Momentum suggests M5S will overtake Partito Democratico (Pd).

Final vote results confirm Italy deadlock - Investors took fright at the prospect of prolonged political instability in Italy following a resounding electoral rebuff to austerity measures, with a spike in bond yields and sharp sell-off in equities. Official results of the parliamentary elections released on Tuesday confirm that the eurozone’s third largest economy is heading for months of political deadlock. Yields on 10-year Italian debt shot up by 44 basis points to 4.92 per cent, before falling back to 4.7 per cent as markets digested election results that leave little hope of any party mustering a governing majority. The spread over Bunds rose to 347 basis points and then dropped to 335bp. Italy’s political class was left reeling after the upstart anti-establishment Five Star Movement, founded only three years ago by the comedian-blogger Beppe Grillo, garnered 25.55 per cent of the votes, the largest share for any single party. But the nation was torn three ways between Mr Grillo and his band of political novices, Pier Luigi Bersani’s centre-left coalition and Silvio Berlusconi’s centre-right alliance, raising the prospect of a second election within months.

Italy Vote Brings Political Gridlock - —In a national election meant to push Italy further down a path of economic reform, voters delivered political gridlock that could once again rattle Europe's financial stability. Markets fell in response to returns. Yields on 10-year Italian bonds jumped 0.45 percentage point in mid-morning trading to 4.81%, their highest level this year. Spanish yields were higher by nearly 0.2 percentage point, and bonds of Portugal and Greece were hit as well.  A majority of voters endorsed parties that had promised to tone down or even reverse the financial sacrifices Italy has promised its European partners, giving surprise lifts to both the center-right coalition of former premier Silvio Berlusconi and a party of protest led by a former comedian.Early Tuesday, the left-wing coalition led by the Democratic Party's Pier Luigi Bersani appeared to have gained a razor-thin victory in the lower house of parliament over the center-right coalition headed by Mr. Berlusconi—29.6% to 29.2%, final data from the Interior Ministry showed. By leading the vote count in the lower house, the Democratic Party will automatically get the majority of 340 out 630 seats and, therefore, will likely receive the mandate to form a government. The Senate, however, appeared headed for political impasse. The Democratic Party was the leading vote-getter in the upper house as well, by less than one percentage point. But its 31.6% result fails to provide its coalition with a majority to pass legislation. If a new government isn't able to guarantee clear parliamentary support, Italians could return to the polls within months.

Little Clarity in Italian Vote, Aside from Anger - Italian voters delivered a rousing anti-austerity message and a strong rebuke to the existing political order in national elections on Monday, plunging the country into political paralysis after results failed to produce a clear winner.  Analysts said that the best-case scenario would be a shaky coalition government, which would once again expose Italy and the euro zone to turmoil if markets question its commitment to measures that have kept the budget deficit within a tolerable 3 percent of gross domestic product. News of the stalemate sent tremors through the financial world, sending the Dow Jones industrial average down more than 200 points.  Although analysts blamed the large protest vote on Italy’s political morass and troubled electoral system, the results were also seen as a rejection of the rapid deficit-reduction strategy set by the European Commission and European Central Bank — from a country too big to fail and too big to bail out.  “No doubt Italy has an imperfect political culture, but this election I think is the logical consequence of pursuing policies that have dramatically worsened the economic and social picture in Italy,”

Counterparties: Italy’s protest vote - The votes in the Italian election are in — and it’s not likely that Italy will be able to form a government.The FT writes that Italy is facing a second election, after voters delivered a “resounding rebuff to austerity policies.” Fabrizio Goria, who’s been tweeting up a storm throughout the election, put it this way: “So, Italians said FU to Merkel, isn’t it?” Joe Weisenthal thinks Monti’s demise is emblematic of Italy’s turn against “elite Europe”.This has been an election which featured an ex-prime minister who’s about to face trial for allegedly having sex with an underage night-club dancer and who was sentenced to four years in prison for tax evasion; a comedian running on an “antisystem” message; and Mario Monti, the country’s current prime minister, whose campaign a rival compared to a coma, and whose alliance is set to finish in fourth place.Polls showed Silvio Berlusconi’s center-right party leading in the Senate vote over Pier Luigi Bersani’s center-left coalition. (Bersani’s party was ahead in the house). Comedian-turned-politico Beppe Grillo, beloved by Italy’s 40-somethings, was expected to win 64 seats in the Senate — the largest vote haul of any individual party. The Bersani and Berlusconi coalitions, by contrast, will both get only 116 or so seats each — nowhere near the 158 seats needed for a majority. Because a government needs to have a majority in both houses to pass laws, the split Senate vote could make the country ungovernable and lead to another election. If you’re confused already, Reuters has a quick explainer on how the Italian election works.

What is Happening Here in Italy - I guess I have to report. The election left a mess with no clear majority in the Senate (the prime minister must have the confidence of both the Senate and the chamber of deputies which are elected in completely different ways).  What will happen is up to comedian & blogger Beppe Grillio.  Yes a blogger (Italy's number one blogger in traffic) has real power.  The news is that he appears willing to vote confidence in Luigi Bersani the ex communist leader of the alliance which has an absolute majority in the chamber of deputies.  Following his thought is tricky, because he shouts a lot. He leads a protest movement and voting for him was a way to tell the politicians to go to hell.  Now they have to deal with him so they are in hell (OK it's probably not good for the country but I sure am enjoying it).  The hints that he will vote confidence in Bersani is that he praised the experience" in Sicily where his followers support a center left governor.  He said that his vote (and that of his followers) will depend on the content of bills -- that is he will accept no discipline (of course) but won't always vote no.  He mentioned two issues.  One no supertrains (in Italy environmentalists hate the project for a high speed rail line).  Two a guaranteed minimum income for all citizens (welfare on steroids and normal in normal European countreis).  The first will happen because supertrains cost money. My current guess is that there will be a Bersani government for a while, the Grillo will revolt (it's what he does) and bring it down.  It is possible that they will work together long enough to rewrite the electoral law so the subsequent election is actually decisive.  I think it is also reasonably possible that they will do something about Silvio Berlusconi's domination of TV.  They hate him, but very serious people don't change established economic facts or take on huge firms.  Grillo might force the ex communists to reduce the immense power of Italy's richest and most shameless capitalist.

Big Winner in Italian Election? The Five Star Movement - Italy's two major political parties are stunned by the results of this week's elections: the dramatic surge of the anti-establishment Movimento Cinque Stelle (The Five Star Movement). The actual outcome of the Italian election remains in doubt, but there's no question who the big winner was: comedian-turned-political activist Beppe Grillo and the Five Star Movement (M5S). Last year, the Five Star Movement barely registered in polls of likely Italian voters. With results now in, the Five Star Movement, took over 25% of the vote - more than the two major parties. The Five Star Movement's anti-austerity, anti-establishment message struck a chord with millions of Italians. The 'Five Stars' of the movement are the party's core principles:

Publicly owned water
Sustainable transportation
Sustainable development
Free and open internet access

Europe back in focus as Italy braces for a deadlocked parliament - All of a sudden Europe matters. As discussed last week (see post), Italy's election was creating risks of a "weak and fragmented coalition" that could slow down or even reverse the pace of much needed reforms. And now we are indeed looking at a deadlocked parliament, with little ability to form a coalition in the upper house. Reuters: - A huge protest vote by Italians enraged by economic hardship and political corruption pushed the country towards deadlock after an election on Monday, with projections suggested the center left could have a slim lead in the race for the lower house of parliament.  But no party or likely coalition appeared likely to be able to form a majority in the upper house or Senate, creating a deadlocked parliament - the opposite of the stable result that Italy desperately needs to tackle a deep recession, rising unemployment and a massive public debt.  Such an outcome has the potential to revive fears over the euro zone debt crisis, with prospects of a long period of uncertainty in the zone's third largest economy. Of course people were quite surprised about the comeback of Berlusconi (discussed here back in December). It takes a crook to promise to pay the electorate for voting him in, but that's exactly what Berlusconi did. He tapped into the "electoral rebellion", and although he did not win, he certainly injected himself into whatever coalition that may end up being formed.

Italian election: stalemate threat sends shivers through the eurozone - European leaders – particularly those in the single currency zone – are eyeing the cliffhanger Italian election with anxiety, worried that an ungovernable stalemate in Rome could paralyse the outgoing prime minister Mario Monti's austerity programme and renew doubts about the euro's stability following months of relative calm. Following the fall of the last Silvio Berlusconi government in 2011 and the establishment of the technocratic Monti administration, last Sunday's election had been keenly awaited as an exercise in clearing the air. Instead it looks likely to have muddied the waters. Early results point towards a highly unstable outcome, suggesting a possible further six months of uncertainty and perhaps another election. "Wait and see if a stable government can be formed," said Martin Schulz, the German social democrat who heads the European parliament. Monti, along with his fellow Italian technocrat Mario Draghi, president of the European Central Bank (ECB), have played key roles in restoring relative calm in the eurozone since last summer. Draghi does not have to face the voters; Monti received a drubbing in both chambers in Rome.

Euro debt crisis looms again as Italians defy EU austerity demands - The eurozone’s debt crisis strategy was in chaos on Monday night after anti-austerity parties appeared on track to win a majority of seats in the Italian parliament, vastly complicating efforts to forge a government able to carry through EU-imposed reforms. In an earthquake result, the Five Star protest movement of comedian Beppe Grillo looked likely to emerge as the biggest single party in the lower house. The scourge of bankers and corrupt elites, Mr Grillo has campaigned for a return to the lira and a restructuring of Italy’s €1.9 trillion (£1.64 trillion) public debt. The conservative bloc of ex-premier Silvio Berlusconi looked poised to win the senate, coming back from the political grave with vows to rip up the EU’s austerity plans and push through tax cuts to pull Italy out of deep slump. “The majority of Italians have clearly voted against the Brussels consensus. That is a damning indictment,” said Mats Persson from Open Europe. A euphoric rally on European bond and stock markets early on Monday gave way to abrupt selling as it became clear that Italy would be left with a hung parliament and no consensus over fundamental policies, leaving the country almost ungovernable. The yield spread of 10-year Italian bonds over German Bunds jumped 30 basis points to 290 in late trading.

Italy's election leaves country -- and eurozone -- on financial high-wire - Brilliant minds across the financial world are still trying to work out the implications of the Italian election result. For the time being, the best answer is that it is probably too soon to tell. After Tuesday's falls, a little stability has returned to markets, possibly because everyone is still trying to work out what to think. Credit ratings agency Moody's has warned the election result is negative for Italy -- and also negative for other indebted eurozone states. It fears political uncertainty will continue and warns of a "deterioration in the country's economic prospects or difficulties in implementing reform," the agency said. For the rest of the eurozone, the result risks "reigniting the euro debt crisis." Madrid must be looking to Italy with trepidation. If investors decide that Italy is looking risky again and back off from buying its debt, then Spain will be drawn into the firing line too.

Elite Italian Media Also Throwing Hissy Fits About Beppe Grillo and “Populism” - Yves Smith - It is also critical to understand why Grillo and Berlusconi are so upsetting to the orthodoxy. It isn’t just that Berlusconi is corrupt or that Grillo is an utter wild card. It is that Italy has a controlled press, which puts a whole ‘nother filter through which political figures are seen. As reader Lidia explained: Middle-class Italians who aren’t politically-connected have sided with Berlusca against the left and center-left. They are incredibly suspicious of Grillo, even many “youngsters” of thirty and forty, because they are unused to Free Discussion on the Internet. They don’t get democracy and they don’t get the Internet; someone must always be “behind” it, sponsoring it. The idea of having an independent voice is so unusual as to be shunned.Political discussion is officially restricted to the (party-run) newspapers which are publically financed. [Berlusconi himself was an upstart challenging this system when he started out years ago buying up the first small private TV channels and expanding them into his media empire.] The remaining publically-managed airwaves are neatly divided up with each significant left/center-left party essentially running one of the channels. You cannot even publish a local shopper or a parish newsletter without an officially-LICENSED “journalist” as political control/cover. It’s illegal to do so. When I asked a leftist why anyone just couldn’t print up a newsletter, he responded—aghast—”but then there’d be no CONTROL!”.

Italy's banks take hit on election results --Italian banks are taking a huge hit at the outset of Tuesday's trading session in Milan following election results that produced a hung parliament with no clear political majority in the upper house. Large banks such as UniCredit SpA , Intesa Sanpaolo SpA and Banca Monte dei Paschi di siena SpA all failed to open at the beginning of the trading session. When they did open they were trading down at levels ranging from -7% and -10%. "Political instability is taking a toll on government bonds, which Italian financial companies are stuffed with, so they are the ones which suffer most," The yield on 10-year Italian bonds surged 46 basis points to 4.82% on Tuesday, according to data from Tradeweb, after the inconclusive set of election results triggered fears of renewed political instability for the country.

Why Italy’s Election Has Caused Global Markets to Crater - NEP’s William Black appears on Daily Ticker with Henry Blodget. The election in Italy moved markets around the world. Blodget gets an explanation from Bill why Italy has such an impact. You can view the episode at this link.

The rise of Europe’s far-right voices - Al Jazeera. Assessing key nationalist political parties across the continent, including Italy, which is voting for a new parliament.Good data, terrible interactive (works better with Chrome)

ECB Should Pledge to Not Do Anything Stupid, by Tim Duy: Market participants were rattled today by the election news out of Italy, as it looks like the economically-challenged nation is now politically adrift. But what exactly might worry investors? I pulled this quote from Bloomberg: “We don’t want to see more chaos out of Europe,” . “Any question about whether or not Italy would be committed to austerity measures after the elections gets investors concerned.” Why should we be concerned that Italy backslides on its commitment to austerity? After all, evidence of the economic damage wrought by such policies continues to mount. If anything, a reversal of recent austerity should be welcome.  I suspect, however, that it is not the austerity that worries market participants. It is the fear that European Central Bank head Mario Draghi will threaten to pull his pledge to do whatever is takes to save the Euro in the face of Italian intransigence. The fear that European policymakers are about to partake in another grand game of chicken that once again will bring the sustainability of the single currency back into question. In short, I think that market participants fear tight monetary policy much more than loose fiscal policy.

The euro crisis: Far from over | The Economist - PAUL KRUGMAN quips: This is the way the euro ends: not with the banks but with bunga-bunga. As he says, the market gyrations spurred by Italy's discomfiting election are not a sign of the single currency's imminent demise, but they are a clear warning that Europe's crisis is anything but over.  There are quite simply too many ways for things to go wrong and so few ways for things to go right. An exit from recession remains elusive—unsurprisingly, given the continent wide commitment to budget cuts and too-tight monetary policy. And recession is exerting consistent and intense pressure on governments across many different countries. For the crisis to remain in check, political systems in every country must withstand that pressure. Because when they don't, there are spillover effects; Italy's mess is generating a rise in Spanish bond yields. Today's market jitters are the creaks and groans of a shaky euro-zone infrastructure straining under the heavy weight of macroeconomic weakness. Ideally, Europe's leaders would work to shore up that infrastructure and lesson the economic load. Instead, they seem determined to make us all wait and watch, to see if the flimsy structure will stand or collapse. Maybe it will stand. But it only takes the failure of one little strut to bring the whole thing down. And there are so many little struts.

Italy’s Political Mess: Why the Euro Debt Crisis Never Ended - Over the last few months, Europe seemed to be proving its doubters wrong. Thanks to a timely intervention by European Central Bank President Mario Draghi in mid-2012, yields on Spanish and Italian bonds, which had been spiking towards levels that threatened to topple them into costly bailouts, had receded to more tolerable levels and calm was restored to jittery financial markets.  I was one of the naysayers. Many of us warned that without major structural changes to strengthen the monetary union, intensive reforms within euro zone countries and an entirely different approach to tackling the crisis (not just austerity, austerity and more austerity), the debt crisis was impossible to resolve. Had Europe really escaped the jaws of death, without the dramatic reforms so many economists thought were necessary? In recent weeks I was wondering if my analysis had gone badly awry. Ah, but then, there’s Italy. The political upheaval in the euro zone’s third-largest economy in the wake of this week’s national election shows us just how troubled the euro zone really is, and how dangerous its debt crisis remains to the global economy.

Everything You Need to Know About the Italian Election Threatening the World Economy - Just when we thought we were out, the euro crisis pulls us back in. This time, it's Italy and its inconclusive elections that are rocking financial markets. More specifically, it's the strong showing of comedian-cum-blogger-cum-candidate Beppe Grillo together with the umpteenth political resurrection of the reflexively corrupt Silvio Berlusconi that have stock indices slumping around the globe. Both are anti-austerity, and, to varying degrees, anti-euro -- a toxic brew that threatens to make bond markets queasy (though not because austerity or the euro are good for Italy). Basically, the euro crisis was a financial crisis. Now it's a political crisis. And that could create another financial crisis.

EU Chiefs Tell Italy There’s No Alternative to Austerity -  European Union leaders piled pressure on Italy’s rival factions to form a unity government committed to budget rigor after a deadlocked election stirred fears of an quagmire that would re-ignite the euro debt crisis. In a message that resonated in Rome, EU President Herman Van Rompuy warned in Tallinn, Estonia, that backsliding on budget discipline and economic reforms would shatter market confidence in the 17-nation currency union’s crisis management. “Every time we turn a corner, we must keep in mind that just around that corner lies the danger of complacency,” Van Rompuy told Estonia’s parliament yesterday. “There is no way back. And this we simply cannot afford.” Italy’s stalemate shook European bond markets, with investors moving money from crisis-hit Spain, Portugal, Greece and Italy itself to the perceived haven of Germany. Ten-year Italian yields rose by the most in 14 months, rising 41 basis points to 4.9 percent; the risk premium against German debt jumped 51 basis points to 343 basis points. As leaders of Italy’s two rival blocs, Democratic Party chief Pier Luigi Bersani and former Prime Minister Silvio Berlusconi, weighed their options, European officials alternated between pleading with them to craft a stable government and fretting that they won’t manage to.

Germans and Eurocrats Throw Hissy Fits Over Italian Elections - Yves Smith - It’s unlikely that the destabilizing of the political calculus in Europe resulting from impressive showing of anti-austerity candidates in Italy will end prettily or nicely. However, Europe had already put itself in the position of having only bad choices. So the question is who suffers, and the public in periphery countries are starting to rebel against being broken on the rack while Eurocrats and pampered German and French bankers feel no pain.  Needless to say, the fact that 57% of Italians who went to the polls Monday have figured out that austerity is not working has been met with condemnation and consternation from Brussels and Germany. The astonishing part about their hectoring is it reflects a real inability to grasp some basic elements of the equation. First, of course, is that austerity is a failed experiment. Even the IMF, which has favored this formula for decades, has been forced to ‘fess up. But the other two thirds of the Troika are so politically and emotionally wedded to tightening the fiscal noose on the periphery countries that they’ve simply dismissed the IMF’s analysis as inconvenient. But the second is that the Eurozone really does not have much leverage over Italy. On the surface, that isn’t obvious, since Italy has €420 billion in financing scheduled for this year, so a rate spike would be painful and costly. But as Ambrose Evans-Pritchard pointed out in the Telegraph: Yet Italy is big enough to bring down the eurozone if mishandled. It is also the one Club Med country with enough fundamental strengths to leave EMU and devalue, if it concludes that would be the least painful way to restore 35pc of lost competitiveness against Germany since the launch of the euro.

France seeks extra 6 billion euros in taxes in 2014 – minister (Reuters) – The French government will have to raise an extra 6 billion euros in taxes next year to make up for a shortfall in its finances, the budget minister said on Monday. President Francois Hollande had said that he wants the government to focus on trimming back spending rather than raising new taxes after already hitting taxpayers with billions in new levies since coming to power last year. But with the economy proving weaker than expected this year, the government is already seeking more wiggle room on its strained finance by asking the European Union for an extra year to meet its deficit-cutting targets. Budget Minister Jerome Cahuzac said that the government faced a hole of up to 6 billion euros ($7.90 billion) in its 2014 budget because of exceptional, temporary taxes being raised this year that will not be there next year.

France to pause austerity, cut spending next year instead: Hollande (Reuters) - France will not introduce any further austerity measures this year but instead focus on spending cuts in 2014 to bring its deficit down to three percent of GDP that year, French President Francois Hollande said on Saturday. The Europe-wide economic slowdown has forced France to delay its target of cutting the state deficit to three percent of GDP this year and the government has said it does not want to impose too much austerity on an economy near recession. "It would be wrong to take measures that put another brake on consumption and investment," Hollande said at the annual Paris farm show on Saturday. "There is no need to add more austerity in 2013. A lot has already been asked of the taxpayer." He added that while government efforts to reduce the deficit had until now consisted of more tax increases than spending cuts, that trend would be reversed in 2014.

France Unemployment Highest Since 1997 - In the easy to see coming category French unemployment level hits 15-year high. Unemployment numbers in France rose by 43,000 in January to 3.16 million, an increase of 10.7 percent from last year, the labour ministry revealed on Tuesday. The figure is at its highest since January 1997, when it reached 3.19 million.    Rising unemployment is a setback for Socialist President Francois Hollande, who has pledged to curb the unemployment rate from the current level of more than 10 percent to a single-digit figure by December.But mounting economic problems have already forced Hollande to abandon a goal to reduce the fiscal deficit to 3 percent in line with European Union norms after slashing this year's growth forecast.His government is struggling with weak growth, poor competitiveness, thousands of layoffs and general economic gloom. This is going to be a bleak year for Europe, with France leading the way.

French consumer recession is likely driven by job losses - Recent retail numbers from France are showing an ongoing consumer recession in spite of signs of improvement in confidence elsewhere in the EU. In fact the EU economic sentiment numbers today beat expectations to the upside -  nothing to write home about, but there are signs of stabilization (for now). French Retail PMI on the other hand shows highly stressed consumers generating the sharpest fall in retail sales in six months. French retail PMI materially dragged down the Eurozone's overall PMI.  Markit: - The French retail sector was caught in a deepening downturn during February. Sales fell sharply on both a monthly and annual basis, while there was a survey-record shortfall versus previously set plans. Retailers’ gross margins continued to be squeezed by a combination of higher purchasing costs and strong competitive pressures.Job losses in France are likely the culprit, as French jobless claims hit a 15-year high last month. Reuters: - The number of people out of work in France shot up again in January after a smaller rise in December,The number of jobseekers in mainland France jumped by 43,900 or 1.4 percent, signalling a return to the rapid pace of increase seen over 19 straight months to December - although half of the rise was due to a change in methodology in January.

A Tale of Two Adjustments - Paul Krugman - A commenter on my last euro post asks a good question: didn’t Germany once have a problem of excessive unit labor costs, which it cured with a protracted squeeze? And in that case, why is it so terrible if Spain is asked to do the same thing? The answer is basically quantitative. I’d make three points:

  • 1. Thanks to the giant housing bubble, Spanish costs got much further out of line than Germany’s ever did, so the required adjustment is much bigger.
  • 2. Germany got to do its adjustment in the face of a relatively strong European economy; Spain is being asked to adjust in the face of a depressed Europe sliding back into recession.
  • 3. In part because of this difference in overall macro conditions, but also because Germany doesn’t have a housing boom and is actually engaging in a bit of austerity on its own, the burden of adjustment this time around is falling much more on deflation by the overvalued country.

Here’s a figure that illustrates that point. According to Eurostat data, German unit labor costs peaked in 2003, Spanish costs in 2009. So here’s what the adjustments looked like in each episode, with blue lines representing the earlier case and red lines the later:

The Netherlands is not immune - A string of gloomy figures from the national statistics office CBS on Thursday show the Dutch economy is still in crisis. The jobless rate in January hit 7.5%, the CBS said, a rise of 0.3 percentage point on December. Over the past three months, an average of 19,000 people have joined the ranks of the unemployed. The northern provinces were particularly hard hit, the CBS said. The jobless rate among the under-25s continues to grow. The youth unemployment rate has now risen to 15%, up from 13% in December. And: House prices have also continued to decline, dropping nearly 10% in January compared with the previous year.  There is more: Spain and Ireland are the only two countries in Europe where house prices have fallen more sharply than in the Netherlands over the past four years, according to Dutch national statistics agency CBS.

A Taxpayer Revolt Against Bank Bailouts In The Eurozone - Bank bailouts in the Eurozone, like bank bailouts elsewhere, have made owners of otherwise worthless bank debt whole through a circuitous process where, in the end, taxpayers transferred their money to investors. Even in Greece, investors were coddled. Even Proton Bank that had siphoned off $1 billion in a scheme of fraud, embezzlement, and money laundering was bailed out at taxpayer expense [European Bailout Fund For Greek Money Laundering And Fraud]. By contrast, private-sector holders of Greek government debt, such as hedge funds who’d bought this crap for cents on the euro, got ugly haircuts of over 70%. Public-sector holders, like the ECB, got off scot-free. It wasn't fair. But fairness had nothing to do with it. These were bailouts! That’s how it was done. Until now.A government finally drew the line on one of its big banks, instead of flailing about to justify why taxpayers had to bail out bondholders who’d benefitted from the yields that had compensated them for the risks. Why tolerate a situation where the capital “at risk” wasn’t at risk?

Spain's banking system bleeding contained for now - Spain's banking system continues to struggle, with Bankia reporting more losses and tapping the government's bailout vehicle. The Guardian: - Spain's answer to RBS – Bankia – published the worst results ever seen by a Spanish corporation, racking up 2012 losses of €19.2 bn (£16.6bn) as the nationalised bank drowned in a sea of toxic real estate left over from the country's burst housing bubble.  The figures confirmed the dire fortunes of a bank formed out of a merger of seven of Spain's ailing savings banks in 2010 as the government made a futile attempt to save them from disaster. Client flight during 2012 helped bring a 13% fall in total deposits.  Bankia became the focus of Spain's banking crisis last year after auditors refused to sign off on the accounts presented by company president Rodrigo Rato, a former finance minister from prime minister Mariano Rajoy's People's party (PP) and one-time head of the International Monetary Fund. It is now taking €18bn in bailout funds from the country's Frob bank restructuring fund, which had to borrow the money from the eurozone's bailout fund as part of a €40bn rescue of several struggling banks.

More than 80 pct of Greeks are having difficulties repaying loans - At least eight in every 10 citizens who have taken out a loan are having trouble with repayment, while the problem is greater among households with children and those from the lower social strata, according to a survey conducted by Public Issue for the 2012 period. Over three in four households (78 percent) said they are having problems in paying their installments to banks, while [an additional] 6 percent say they are totally unable to do so. This total of 84 percent is far higher than the respective rate of 60 percent in 2009, before the country entered the fiscal streamlining process. Ninety percent of corporate loans are facing servicing problems while 86 percent of consumer loans are not paid on time.

Swiss Red Cross cuts blood supply to broke Greece - The Swiss Red Cross is slashing its supply of donor blood to Greece because the financially stricken country has failed to pay its bills on time, the head of the group's transfusion service said Tuesday. Rudolf Schwabe confirmed Swiss media reports that Greece had run up debts of several million Swiss francs (dollars) in the past. While those debts have since been repaid, the nonprofit SRC has decided to halve its blood shipments to Greece in the coming years in order to limit its financial risk, he said. Greece's international creditors have demanded the government cut spending on pharmaceutical products as part of bailout agreements. The Swiss blood sent to Greece comes from unused emergency stockpiles and is designated for humanitarian use. In the past, the SRC charged Greece 5 million Swiss francs ($5.4 million) to cover its costs for supplying 28,000 blood packets a year.

Greeks Panic As Drug Firms Slash Medicine Supplies By 90% On Bad Debts -  Greece is facing a serious shortage of medicines amid claims that pharmaceutical multinationals have halted shipments to the country because of the economic crisis and, as The Guardian reports, concerns that the drugs will be exported by middlemen because prices are higher in other European countries. Rubbing further salt into the Greek (un-medicated) wound, the Red Cross slashed its supply of donor blood to Greece because it had not paid its bills on time. Pharmacies in Greece describe chaotic scenes as clients desperately search from shop to shop for much-needed drugs. Greece's Pharmaceutical Association said "around 300 drugs are in very short supply,"  Everyone is really frightened." The fear for the multinationals remains that wholesalers can legally sell to other nations at higher prices and a "combination of Greece's low medicine prices and unpaid debt by the state." Lines form early and 'get very aggressive' one pharmacy exclaimed, "We have reached a tragic point." Via The Guardian, Greece is facing a serious shortage of medicines amid claims that pharmaceutical multinationals have halted shipments to the country because of the economic crisis and concerns that the drugs will be exported by middlemen because prices are higher in other European countries. Hundreds of drugs are in short supply and the situation is getting worse, according to the Greek drug regulator. The government has drawn up a list of more than 50 pharmaceutical companies it accuses of halting or planning to halt supplies because of low prices in the country.

European Woes - Real GDP has declined in all of the European countries shown below for the last quarter of 2012; and, all countries except Germany remain below the level of real GDP five years ago. German real GDP declined after relatively solid growth over the past several years.  Real GDP in Spain and Italy is now actually lower than it was at the depths of the recession in 2009-2010.  Real private consumption expenditures have collapsed in Italy, Spain, and the Netherlands–about 6% below where they were in 2008. Capital formation has also seen a disheartening decline in all countries except the UK. While Germany had seen a comeback in gross capital formation, getting back to its 2008 pre-recession level in the middle of 2011, German capital formation is now 10% below that level.Despite contracting output across the Eurozone economies, there are no signs of (increased) turmoil in labor markets. The unemployment rate for Germany, Italy, and the UK maintained a slow downward trend. Spain’s unemployment rate decreased for the first time since the peak of the cycle. France and the Netherlands maintained a slow upward trend.

European Unemployment up in Jan - The figures just came out today.  So Eurozone unemployment is now almost 12% on an average basis, and still climbing.

Euro-Area Unemployment Climbs to Record on Recession - The euro-area jobless rate rose to a record in January as austerity measures taken to counter the debt crisis deepened the currency bloc’s recession. Unemployment in the 17-nation euro area rose to 11.9 percent from a revised 11.8 percent in December, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. The figure is higher than the 11.8 percent median estimate of 33 economists in a Bloomberg News survey. “The situation is very serious,” . “There’s no support any more from Germany. It’s more or less a sideways movement which I expect to continue. Other economies like Italy, Spain and Portugal are very bad at the moment, so in the end the unemployment rate can only climb.” The euro-area economy recorded its worst performance in four years in the fourth quarter with a contraction of 0.6 percent. Gross domestic product will decline again in the first three months before returning to growth in the second quarter, according to the median of 21 economists’ estimates in a separate Bloomberg survey. The European Commission forecasts unemployment rates of 12.2 percent and 12.1 percent for this year and next. .

Italy behind rise in eurozone jobless to record - Italy's voters gave their verdict on the austerity medicine they've been forced to take when they went to the polls earlier this week. By Friday, one of the reasons behind the protest was highlighted when the country's unemployment hit its highest level in at least two decades. Official figures Friday showed that unemployment in the country in January rose to 11.7 percent from the previous month's 11.3 percent. January's figure was the highest since the current way of measuring unemployment was introduced in 1992. The unexpectedly large monthly spike was one of the key backdrops to the election results earlier this week that reignited concerns over Europe's dormant debt crisis. No party, or coalition of parties, emerged with enough votes to govern alone, triggering uncertainty in the markets about the future course of Italian economic policy. The rise in the Italian rate, which comes as the country is stuck in an 18-month recession and after a wave of economic reforms and tight budgetary controls introduced to control the country's debt, was also the main reason why unemployment across the 17 European Union countries that use the euro rose to a record 11.9 percent during January from the previous month's 11.8 percent.

The sad record of fiscal austerity - At the Toronto summit of the Group of 20 leading economies in June 2010, high-income countries turned to fiscal austerity. The emerging sovereign debt crises in Greece, Ireland and Portugal were one of the reasons for this. Policy makers were terrified by the risk that their countries would turn into Greece.  Was this both necessary and wise? No. The eurozone was at the centre of the sovereign debt crisis frightening the world.  That view, in turn, persuaded those not yet subject to market pressure to tighten pre-emptively. That was very much the position of the UK’s coalition government. The idea that being Greece was around the corner gained traction in the US, too, notably among Republicans. Today’s battle over sequestration is partly a product of that concern. A leading and, in my view, persuasive proponent of a contrary view is the Belgian economist, Paul de Grauwe, now at the LSE. He has argued that eurozone countries’ debt crises resulted from European Central Bank policy failures. Because of its refusal to act as lender of last resort to governments, they suffered liquidity risk – borrowing costs rose because buyers of bonds lacked confidence they would be able to resell easily at all times. That, not insolvency, was the immediate peril. Today, argues Professor de Grauwe in a co-authored paper, the decision in principle of the ECB to buy up the debt of governments in trouble, through the so-called “outright monetary transactions” (OMT), allows one to test his hypothesis. He notes that the chief determinant of the reduction in spreads over German Bunds since the second quarter of 2012, when OMT was announced, was the initial spread (see charts). In brief, “the decline in the spreads was strongest in the countries where the fear factor had been the strongest”.

Disastrous Predictions and Predictable Disasters - Paul Krugman  -- Joe Weisenthal is wrong. He writes that the unfolding economic disaster in Europe is what everyone predicted. Not so. It’s what he predicted, it’s what I predicted, but it’s not at all what many people were predicting. And the people who got it completely wrong happen to be the people still running European economic policy.As Jonathan Portes points out, it is now more than two years since Olli Rehn declared that Europe’s recovery in the real economy has taken hold and is becoming self-sustaining. Rehn is still in place at the European Commission, and is still telling us that austerity will work any day now. And he’s not alone. The economics team at the OECD that told us in May 2010 not just that Europe needed fiscal austerity, but that the Fed needed to raise rates 350 basis points by the end of the year to head off inflation is still issuing reports. And then there’s Cameron/Osborne.

Prisoner’s Dilemma Everywhere: Tobin Tax In The EU? - Trade of shares is going to be taxed by some countries inside the EU. The usual counter argument is that this will simply cause trading to move outside the tax zone to, in this case, the U.K. and the U.S. To try to get around this, the countries involved require that the tax be paid wherever the trade takes place: The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed. But who is going to report the trade? The EU authorities are relying on a prisoner’s dilemma to do the monitoring for them: There is every chance that markets from other countries will not be very cooperative, meaning that to learn if a German bank traded in New York the authorities might have to rely on the bank to report it to them. But then there would be the risk that the tax authorities would learn of it otherwise, perhaps through an audit or from a report by an Italian bank that happened to be on the other side of that trade.

Memo to Europe: What About T-Bills? - In my column on Friday, I looked at the proposed European transaction tax from a stock market perspective, and found it to be reasonable.  A friend who is a tax lawyer says — rightly — that I should have considered bonds, particularly short-term Treasury securities. He has a point. The proposed tax would be applied to all trades in stocks, bonds and derivatives that were engaged in by European financial institutions, or in European markets. That encompasses about everything. For stocks and bonds that tax would be one-tenth of 1 percent of the value of the bond. There would be no tax when the bond is sold at issuance, but there would be a tax whenever it changes hands after that.The trouble is that Treasury bills these days yield almost nothing. The current rate on one-month bills is a little under 0.1 percent. A tax of 0.1 percent would wipe out the yield entirely. Treasury bills are prized for their liquidity, meaning that if you need cash you can sell one at any moment. Who would buy it in the secondary market with this tax?  The tax would apply to any bank anywhere trading German government securities. Their yields are — believe it or not — a tad bit lower than American yields. It seems to me that there will need to be some exceptions made.

Europeans, Republicans Dreaming Up New Ways to Destroy Global Economy - Richard Field at Trust Your Instincts flags a Reuters report that that Eurozone regulators are strongly considering a proposal to make not just investors in Cyprus banks pay for part of their bailout, but bank depositors as well. Cyprus is a tax haven, and deposits in the banks there come to some 70 billion euros, more than 3 1/2 times the tiny country's 18 billion euro gross domestic product. One proposal under consideration would be to hold all deposits over 100,000 euros in escrow -- for up to 30 years! Another proposal, says Reuters, would "impose a retroactive tax on all deposits over 100,000 euros..." If either of these options looks like it is close to being approved, it is likely to cause a run on banks in Cyprus. As Field argues, if one of these plans is established, depositors will likely wonder if it could be applied to other debtor countries like Spain or Italy, causing even more turmoil. (Note: 100,000 euros is the maximum that can be covered by deposit insurance programs similar to the FDIC in the U.S.) While European leaders seem to want to blunder into a new way of creating a euro crisis, the evidence continues that their preferred austerity policies are failing. The European Commission has announced that the eurozone will remain in recession throughout 2013, according to a separate report by Reuters. Previously, the Commission had predicted that the recession would end this year.

Global PMI Summary - On the first workday of a new month, global PMI manufacturing surveys are released around the world. That gives us an early read on the state of manufacturing. As the nearby table from BofAML shows, out of the 22 countries that have reported so far, the message is not good. A reading above 50 reflects expansion while below 50 indicates contraction. In this regard, there were 12 countries in negative territory and 10 in positive. Europe remains a disaster with the divide between core and periphery now starting to be matched by the divide (which we recently discussed) between France and Germany. The UK's plunge from expansion to contraction (just beating Italy's weakness) was its largest drop in 8 months (seemingly once again confirming that you can't print real economic growth) as Holland and Norway also fell notably. While still theoretically in expansion, China also slid raising concerns over the global growth meme that we see highlighted in stock prices this morning.

Deficits Expected to Grow Among Developed Countries in 2013 - Developed countries will continue to face the threat of debt downgrades in 2013 as deficits increase in the sluggish global economy, the OECD said Wednesday. Borrowing needs among the world’s advanced countries will reach $10.9 trillion in 2013, up from $10.8 trillion in 2012, according to a broad budget outlook from the Organization of Economic Cooperation and Development, a Paris-based group for 34 developed nations. That would be a smaller rise than in recent years, a possible sign that government budgets are stabilizing, the report said. Still, with sovereign debts at already extremely high levels, credit-rating firms are expected to “continue to pressure governments in 2013,” said the group.

Debt among advanced economies now tops 1,000% of GDP - The OECD: “Debt as a share of GDP has surged in the OECD since the mid-1990s. Average total economy financial liabilities have gone beyond 1,000% of GDP during the recent crisis. The degree of total economy indebtedness differs strongly across countries, largely reflecting the relative importance of the financial sector. The size of the financial sector varies considerably, being markedly higher in countries which host financial centres.”

Britain's credit rating downgraded from AAA to Aa1 - The Government’s economic strategy has been dealt a serious blow after a leading credit ratings agency downgraded UK debt on its expectation that growth will "remain sluggish over the next few years". Moody’s announced on Friday night that it had cut the Government’s bond rating one notch from ‘Aaa’ – the highest possible level – to ‘Aa1’. The move is a significant setback for Chancellor George Osborne, who has faced criticism that his strategy for dealing with UK’s huge debt burden is failing to deliver. Moody’s pointed to “continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which [it] now expects will extend into the second half of the decade”. The credit ratings agency also noted that the Government's debt reduction programme faced significant "challenges" and that the UK's huge debts are unlikely to "reverse before 2016". Moody’s said that despite considerable structural economic strengths, growth is expected to be sluggish due to a combination of weaker global economic activity and the drag on the UK economy “from the ongoing domestic public- and private-sector deleveraging process.”

How The End Of Empire Comes, Not With A Bang, But With A Whimper - When Moody's downgraded the UK's sovereign credit rating last week it was something of an anti-climax. The ratings agencies long ago lost what little credibility they ever had. Being downgraded by Moody's is like being called a moron by a moron; ask anyone who has ever set foot in a bond dealing room - the ratings agencies are always behind the curve. The UK has been on the skids, credit-wise, for years. Britain's debt to GDP has gone through the roof. We, and generations to come, will be left with the reckoning. Nobody believes that bonds are an objective reflection of economic reality. The game is rigged, and everybody knows it. But the Moody's downgrade should serve as a piercing smoke alarm to anybody still naive enough to be holding these instruments of value destruction. Get out now while the going is good.

Britain will take years to earn back AAA rating, says Ken Clarke - It will take years for Britain to get its AAA credit rating back, a senior Tory Cabinet minister has admitted, as City experts warned that the pound is looking “vulnerable”. Kenneth Clarke, the former chancellor and now minister without portfolio, said losing the rating was not surprising, but it could take some time to regain in the current economic climate. There is a fear that the pound could fall against major currencies and Britain might have to pay higher interest rates, after Moody’s, the credit ratings agency, downgraded the UK. The rating is an indicator of how creditworthy Britain is considered by the rest of the world. Experts from Fidelity Worldwide Investment, one of the world’s biggest investment fund managers which has also been a major Tory donor, suggested that George Osborne had only himself to blame for the loss. An analyst said that the Coalition’s “inflexible application” of austerity was responsible for the “lack of growth” that caused the loss of Britain’s rating. They added that the Chancellor may have to ease back on the cuts. Analysts from IHS Global Insight warned separately that the pound looked vulnerable. A falling pound would be helpful for British businesses trying to export goods, but it would raise the cost of spending abroad for anyone taking holidays or buying foreign products. It could also add to inflation at a time when there is already a squeeze on the cost of living.

It’s the Denominator, Stupid! - This weekend’s news was the downgrade of the UK by Moody’s. Chancellor Osborne took this as a sign that austerity should be strengthened even more, probably because he had little choice.  And yet, if only somebody in Downing Street bothered going through the text, they would have read this: The key interrelated drivers of today’s action are:
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

Thus, Moody’s analysts clearly state the direction of causality: sluggish growth jeopardizes fiscal consolidation. They do not say it explicitly, but it is hard not to conclude that sustainability of public finances is therefore best served through growth than through austerity.

Surprise fall in UK manufacturing hits pound - A shock contraction in Britain's manufacturing sector saw the pound slide by more than a cent against the dollar on Friday, as tough conditions both at home and abroad indicated that the sector will drag down growth in the first quarter.The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) fell to 47.9 from 50.5 in January, well below the 50 level that divides growth from contraction, as employment levels in the sector fell at the fastest pace in more than three years. The pound sank by almost a cent against the euro to €1.152 and one-and-a-half cents against the dollar to $1.5012 on the back of the news, which economists described as "very disappointing". Chris Williamson, chief economist at Markit, said the data represented a "major set-back to hopes that the UK economy can return to growth in the first quarter and avoid a triple-dip recession".

Austerity obstructs real economic reform - A former editor of The Economist used to advise young reporters to “simplify, then exaggerate”. This is exactly what happened to the debate on reform in Europe. You might want to add “distort” as a third element. The simplification consisted of the notion that there is a link between some vague idea of reform and economic success, as measured in GDP per capita. No such link exists. The richest countries in the world include those with both liberal and regulated labour markets. Per capita GDP in the highly regulated French economy has been higher than in the deregulated UK. The relatively solid performance of a largely unreformed France does not obviate the need for reforms. But it shows that the relationship is much more subtle than the dogmatists acknowledge. The exaggeration consists of overstating the actual impact of reforms when they take place. Has financial liberalisation really increased long-run economic growth, or may it merely have given us a housing bubble? Has German labour market reform really increased long-term productivity or were other factors at work? This distortion has become even worse recently, as reform has been conflated with austerity. Whenever you hear a European official applauding Mr Monti’s “reforms”, what they are really praising is his fiscal consolidation. In other words, they applaud the many of his policies that reduced economic growth, and not the few that might have a chance to increase it one day.

Negative interest rates idea floated by Bank's Paul Tucker - Bank of England deputy governor Paul Tucker has said negative interest rates should be considered. A negative interest rate would mean the central bank charges banks to hold their money and could encourage them to lend out more of their funds. Speaking to MPs on the Treasury Committee, Mr Tucker said: "This would be an extraordinary thing to do and it needs to be thought through carefully." He said it was one of a number of ideas that he had put up for consideration. "I hope we will think about whether there are constraints to setting negative interest rates," Mr Tucker told MPs. Any discussion of negative rates would have to take into account the likely detrimental impact on savers, who have already seen the income from their savings fall since the financial crisis.

Paul Tucker: Bank chief raises the prospect of a base rate BELOW zero in bid to kickstart spending  - Negative interest rates could become a reality in an ‘extraordinary’ move by the Bank of England to kick-start the economy, one of its senior officials revealed yesterday.Deputy governor Paul Tucker said a reduction of the base rate to below zero should be considered four years after it was cut to a record low of 0.5 per cent.But the very suggestion that million of savers should suffer fresh hits to their hard earned nest eggs caused outrage last night. Critics said prudent savers and pensioners have been punished enough by rates kept deliberately low to help support borrowers and the wider economy.If the base rate did become negative, it would mean major banks would have to pay the Bank of England to hold their money. The idea is that this would encourage them to lend more to stimulate both business and house buying. But already low saving accounts rates would be slashed to virtually zero – meaning their value would be outstripped by the rate of inflation.Mr Tucker also said the Bank stood ready to turn on the printing presses for a fourth time and add to the £375billion of emergency funds it has already pumped into the economy through three rounds of quantitative easing.

Don’t worry: the Bank of England will never allow negative interest rates - Could the Bank of England really be prepared to cut interest rates until they were negative, as the deputy governor Paul Tucker has suggested? To be clear, that means depositors would have to pay to place their money with the central bank. And the answer to the question is "no". First, in case savers were worried, there would be no prospect of banks themselves moving to negative interest rates. Depositors would withdraw their cash and stick it under the mattress, where it would earn a better income, causing such enormous funding problems for the lenders that it would never even be a consideration. The idea of negative interest rates is to incentivise banks to take their money out of the central bank and lend it to small businesses. In essence it’s already happening, as rates of 0.5pc are scant compensation for inflation at 2.7pc. But the incentive becomes more apparent when nominal sum starts shrinking as well. However, the Bank has decided to stop at 0.5pc because cutting rates any further would bankrupt several of Britain’s smaller building societies, which need deposit income to survive. The Bank has done two studies on the subject and come to the same conclusion both times.

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