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

Saturday, May 25, 2013

week ending May 25

Fed Balance Sheet Nears $3.4 Trillion --The Federal Reserve's balance sheet expanded this week, hitting a record high as the central bank continues its bond-buying program. The Fed's asset holdings in the week ended Wednesday increased by $44.44 billion from a week earlier to $3.399 trillion, the central bank said in a weekly report released Thursday. Holdings of U.S. Treasury securities increased by $12.65 billion in the past week to $1.877 trillion, while mortgage- backed securities rose by $28.29 million to $1.179 trillion. The Fed is buying an average of $85 billion a month in Treasury and mortgage bonds as part of a program to stimulate economic growth. But the pace of those purchases could change in the coming months. Minutes of a policy meeting earlier this month, released separately, showed some Fed officials were prepared to start pulling back the program as early as June if the recovery continues. The Fed's portfolio has more than tripled since the financial crisis due to programs intended to keep interest rates low. Meanwhile, the report showed total borrowing from the Fed's discount lending window was $67 million on Wednesday, up from $49 million a week earlier.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, May 23, 2013

Fed’s Evans: No Signs of Turning Off Stimulus - Even though there are signs of recovery in the U.S. economy, there are no signs the Federal Reserve will turn off its monetary stimulus anytime soon, Federal Reserve Bank of Chicago President Charles Evans said Monday. “The U.S. economy seems to be performing quite well,” Mr. Evans in a speech in Chicago Monday morning. Nevertheless, he said he is still “nervous” because has seen episodes of temporary recovery quickly change to downturns. Mr. Evans said he expects self-sustaining growth in the U.S. economy by 2014, but is not convinced current signs point to an economy that’s fully picked up. The economy is showing roughly 1% year-over-year inflation and, although Mr. Evans said he thinks this is a “transitory” dip in inflation, it signals a still tenuous recovery. “I think our policy is working right now,” he said. “We want to jumpstart this recovery and will continue to do it until there’s substantial progress in the labor market outlook.”  Earlier this month, Mr. Evans said he would like to see inflation closer to 2%, but that he expects it to stay below that level for several more years, estimating 1.5% inflation for some time. In an interview on Bloomberg television on May 9, Mr. Evans said, “It’s way too early” to think of making policy changes to deal with inflation lower than the Fed desires.

Fed’s Bullard: Adjustable Bond Buying Best Fit for Policy - The Federal Reserve should press forward with its bond-buying campaign, but be willing to change its size to reflect shifting economic currents, a U.S. central bank official said Tuesday.Federal Reserve Bank of St. Louis President James Bullard argued the best course of action for his institution is to “continue with the present quantitative-easing program, adjusting the rate of purchases appropriately in view of incoming data on both real economic performance and inflation.” Mr. Bullard was referring to the central bank’s ongoing and open-ended program of buying Treasury and mortgage bonds.The policy maker’s comments came from materials that were prepared for delivery at a lecture at the Goethe University Frankfurt. The central banker currently holds one of the rotating voting slots available to regional Fed bank presidents on the monetary-policy-setting Federal Open Market Committee.Mr. Bullard’s preference for a flexible course of bond buying reflects his long-standing view that while the Fed finds itself in unusual times, it should try to use its bond buying as it once changed interest rates, before it cut its overnight target rate to zero and could lower it no further.

Fed’s Dudley: Still Unclear Whether Next Move Will Be Cutting or Boosting Bond Purchases - A key Federal Reserve official signaled on Tuesday his openness to slowing the pace of central bank bond buying at some point.  Federal Reserve Bank of New York President William Dudley, also warned it remains possible the Fed may in fact have to increase its purchases if the economy needs that support. Mr. Dudley is a close ally of Fed Chairman Ben Bernanke.  Mr. Dudley’s comments suggest Mr. Bernanke may not deliver the clear message they currently hope to hear. The uncertainty that surrounds the job market and inflation outlook means “I cannot be sure which way–up or down–the next change will be” in the Fed’s bond buying stimulus effort. “We might adjust the pace of purchases up or down” depending on what happens with the economy, he said. That said, the official suggested that the most likely direction for the Fed will be to slow its bond buying. “At some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook,” Mr. Dudley said. When that happens “it will be appropriate to reduce the pace” of the bond buying.

Fisher Says Fed Can Begin to Slow Mortgage Security Purchases - Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is on better footing and the central bank can begin to taper part of the program that allowed it to recover. “The question now is: do we now dial that speed of purchases of $85 billion a month, back,” or do we increase it, Fisher said today at a community forum in Nacogdoches, Texas. “The answer to that question depends on the state of the economy. My personal view is that housing has recovered sufficiently so that we can turn down the rate of purchase of mortgage-backed securities.” Fisher, who doesn’t vote on policy again until 2014, has been among the most vocal supporters of phasing out the Fed’s $40 billion monthly mortgage-backed securities purchases, saying it risks disrupting the market. He said today that the Fed shouldn’t go “cold turkey” and stop the purchases altogether. “We’re coming out of a massive shock,” Fisher said. “The patient made it through the ER, barely.” “Now, the question is getting off the table and starting to walk and then- when he will be able to run,” he said. “I don’t think he will be able to run unless he has an incentive to do so.” The economy will probably be expanding at a 2.5 percent pace at the end of the year, Fisher said.

Fed Watch: And Then There is Bernanke - So many voices, so many views. Looking through the noise, I think there is strong interest in tapering QE now that we have a string of job reports pointing to substantial and sustainable improvement in labor markets, but, given the fiscal contraction, little willingness to pull the trigger on tapering until we see another two or three similar reports. On net, I think disinflation concerns will move to the back-burner as long as inflation expectations are stable.  Still, at the same time, the Fed wants to keep its options open, as they are very much cognizant that past efforts to pull back on easing have been premature. Hence the talk that future moves could be up or down, which is really just plain confusing because why would the Fed even begin tapering if they thought there was a reasonable chance of having to reverse course the next month? It is even more confusing given that some officials seem to care about inflation, but others labor markets. The former says more purchases, arguably the latter says less. And I am not sure they have a consensus view of what would be the pace of tapering even if they all could agree on the forecast and relevant indicators. No wonder communications is a problem.

Ben Bernanke’s unenviable choice - One has to pity Ben Bernanke during the remainder of his tenure as head of the Federal Reserve, which is due to terminate in January 2014. For his bold experimentation with unorthodox monetary policy has not worked out quite the way he had anticipated. And this puts him in a position where he has an unenviable policy choice to make in the sense that he will be damned if he exits QE3 too quickly and damned if he does not. The Fed’s open-ended decision in September 2012 to buy US$85 billion a month in US Treasury bonds and mortgage backed securities has led to the mother of all US asset price rallies. This has to raise the question as to whether Bernanke’s monetary policy largesse has not created asset price bubbles and whether it has not caused financial markets to take on excessive risk. While asset markets appear to be on fire, the same might not be said of the US economy. The economy is limping along at barely 2% growth, which leaves unemployment stuck at around 7.5% and which leaves an army of discouraged workers who remain outside the labor market. Meanwhile, there is the real prospect that the US economy might slow further under the full weight of tax increases and public spending cuts resulting from the compromise to avoid the fiscal cliff and from the public spending sequester.

Bernanke says no change for now - In testimony before Congress today, Bernanke explained why the Fed's large-scale asset purchases are continuing. Inflation as measured by the CPI or PCE deflator has been about 1% over the last year, while the most recent report put the unemployment rate at 7.5%. Bernanke observed: With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools....Bernanke claimed that the tools the Fed has been using (forward guidance and large-scale asset purchases) have been having desirable effects: Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment.

Minutes of the Federal Open Market Committee - FRB

Parsing Fed Minutes: Debating When to Pull Back – Hilsenrath - Federal Reserve minutes from its April 30-May 1 policy meeting suggested it is heading toward some difficult debates on when to pull back its bond buying program. Below are key passages in the minutes and how to read them:

  • 1) “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.”  WHAT IT MEANS: The Fed will debate at its June 18-19 meeting whether to reduce its $85-billion per month bond-buying program, but officials don’t appear near a consensus on the matter. Fed chairman Ben Bernanke suggested in testimony to Congress earlier in the day that he wanted to avoid moving prematurely toward pulling back.
  • 2) “Several participants pointed to the improvement in interest-sensitive sectors, such as consumer durables and housing, over the recent period as evidence that the purchases were having positive results for the economy.” WHAT IT MEANS: The Fed talks about the costs and benefits of its policies. So far, they think the bond buying program is still helping the economy.

180 Seconds After The FOMC Release, Hilsenrath Parses Fed Minutes - What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.

Bernanke’s Dilemma: No Good Moves Left - There’s a term in chess called zugzwang, which describes the point in a game when it’s your turn to move but every move you could make would worsen your situation. That’s pretty much what the chessboard looked like for Federal Reserve chairman Ben Bernanke when he testified before Congress this morning. What everyone most wants to know is when the Fed is going to start tapering off its bond-buying program (called Quantitative Easing), which has flooded the banking system with money for the past five years and kept interest rates abnormally low. And that was something Bernanke couldn’t answer. In his testimony, the Fed chairman gave a carefully hedged commitment that the central bank would continue buying bonds – currently $85 billion a month – until the economy is stronger. And he repeated last December’s official statement that the Fed intends “to maintain highly accommodative monetary policy as long as needed to support continued progress toward maximum employment and price stability.” When asked at what point the bond-buying policy might change, Bernanke was more evasive, saying that the Fed might need a few more meetings to make that decision.

We're Now Seeing The 'Iraq' Of Monetary Policy - This is a new term we haven't seen before. Mike O'Rourke of JonesTrading says that we're now seeing the "Iraq" of monetary policy, meaning the Fed has entered into an extraordinary situation, from which it has no good plan to self-extricate. The Iraq of Monetary Policy. Is there a plausible exit strategy to avoid endless entanglement? This is one of the key questions of the Powell Doctrine that leaders are supposed to ask before entering a combat engagement. Today, NY Fed President and FOMC Vice Chair Bill Dudley gave a speech noting that the Fed’s exit strategy is “stale.” One might go a step further and say the Fed has painted itself into a corner. Dudley is a member of the BYD (Bernanke, Yellen, Dudley), the unofficial ruling triumvirate of the FOMC. Dudley was speaking about monetary policy at the zero bound at the Japan Society. The key highlight of Dudley's speech today for the market was that “Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be.” Someone, please let us know when the outlook is certain. In other "exit" news, POLITICO reported yesterday that Ben Bernanke held a private meeting with some GOP Congressmen, including Darrell Issa, who demanded to learn more about the size of the Fed's bond portfolio.

Analyzing Federal Reserve Asset Purchases: From whom does the Fed buy? --To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the policies. Several papers provide evidence that these programs do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. We exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households, with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.

What happens after QE? - The big concern is what happens after QE, with a common opinion being that when Bernanke the puppet master removes his hand then the puppet will sag. When Quantitative Easing purchased Treasuries and MBS, the prices of substitute securities certainly increased. But because most institutions and people that own investment bonds don't think of them as substitutes for consumption, it did little to inflate the price of consumer goods. Perhaps QE would have gotten deeper into the economy if the Fed had purchased assets that most households own, like used cars and used appliances. But I digress. Just because the Fed stops buying securities doesn't mean that the money that they created to buy those securities suddenly disappears. That money is still out there, and will only slowly dissipate as the bonds mature or amortize.  Ending QE changes the flow, but not the stock.  But many people really want to believe the puppet master controls the economy rather than 300 million consumers. Fortunately there have been three rounds of QE, so we can see what happened to the economy between QE1 and QE2, and between QE2 and QE3, when the Fed wasn't creating money to buy securities.

FOMC Minutes: Exit Strategy Discussion - From the Fed: Minutes of the Federal Open Market Committee, April 30-May 1, 2013. A few excerpts on the exit strategy:  After the policy vote, participants began a review of the exit strategy principles that were published in the minutes of the Committee's June 2011 meeting. Those principles, which the Committee issued to clarify how it intended to normalize the stance and conduct of monetary policy when doing so eventually became appropriate, included broad principles along with some details about the timing and sequence of specific steps the Committee expected to take. The participants' discussion touched on various aspects of the exit strategy principles and policy normalization more generally, including the size and composition of the SOMA portfolio in the longer run, the use of a range of reserve-draining tools, the approach to sales of securities, the eventual framework for policy implementation, and the relationship between the principles and the economic thresholds in the Committee's forward guidance on the federal funds rate. The broad principles adopted almost two years ago appeared generally still valid, but developments since then--including the change in the size and composition of SOMA asset holdings--suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments. Also, because normalization still appeared to be well in the future, the Committee might wish to wait and acquire additional experience to inform its plans.

Dudley Says Decision on Taper Will Require 3-4 Months - Federal Reserve Bank of New York President William C. Dudley said policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus. “I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out,” Dudley said in an interview with Michael McKee airing today on Bloomberg Television. “Three or four months from now I think you’re going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not.” Dudley’s remarks underscore that Fed officials have yet to reach consensus on when or how to dial back their $85 billion monthly bond-purchase program designed to spur growth and lower unemployment. Philadelphia Fed President Charles Plosser has called for reducing stimulus at the Fed’s next meeting in June, while St. Louis’s James Bullard said yesterday the purchases should continue.

Fed Winddown Strategy Will Test Economy's Reaction and Adjustment Federal Reserve Chairman Ben Bernanke made clear Wednesday in testimony to the Joint Economic Committee that the exit from the Fed’s $85 billion-a-month bond buying program will be much different than past Fed exits. The Federal Reserve building When the Fed ended a buying program in 2011, it shut it off all at once. When it shut off another bond buying program in 2009 and 2010, it did it in predetermined, predictable and “tapered” steps. When the Fed raised short-term interest rates from 2003 to 2006, it raised them in gradual and very predictable steps. This time, when the Fed shuts off bond buying, it won’t be abrupt and it won’t be predictable. The term “tapering” — which implies a predictable gradual process — probably doesn’t describe the plan very well any more, and you’re unlikely to hear Fed officials describing it like that. Instead, the Fed will take a step and then see what happens. Officials also want to avoid the market blowup that happened in 1994, when it took one step and the market assumed that meant a succession of additional steps. “A step to reduce the flow of purchases would not be an automatic, mechanistic process to end the program,” Mr. Bernanke said. In other words, if the Fed takes a step to reduce the program and the economy falters, it could sit still for a while or even dial purchases back up.

PIMCO's Gross says Fed likely to ease stimulus in September: CNBC - - Bill Gross, co-chief investment officer of bond giant PIMCO, said on Wednesday the U.S. Federal Reserve will likely begin tapering its monetary stimulus in September and that bond investors might have already anticipated the move. "I think we're looking at a potential tapering in the next few months and probably around September," Gross, who is also a founder of PIMCO, told cable television network CNBC.Gross, whose Pacific Investment Management Co had $2.04 trillion in assets at the end of March, said the rise in the benchmark 10-year U.S. Treasury yield has led him to suspect investors have already anticipated a pullback. The yield on the 10-year Treasury was 2.03 percent at the close of trading on Wednesday, up 65 basis points from its intraday record low of 1.38 percent on July 25 of last year. Rising yields indicate falling prices.

Goldman: "Our View Is That Tapering Is Announced At The December FOMC Meeting" - "The most notable statement made by Bernanke during the Q&A session was that the FOMC could potentially cut the pace of QE purchases "in the next few meetings," although this was predicated on a continued improvement in the outlook for the economy and confidence in the sustainability of that improvement. He also stated that the purchase pace will depend on incoming data and that the FOMC could either raise or lower the pace of purchases in the future. Our view continues to be that the December meeting and subsequent press conference is the most likely time that the Committee would announce QE tapering, although September is a possibility if the economy picks up more than we expect in coming months."

Bernanke Says Premature Tightening Would Endanger Recover - -- Federal Reserve Chairman Ben S. Bernanke said raising interest rates or reducing asset purchases too soon would endanger the recovery as the economy remains hampered by high unemployment and government spending cuts. “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington. Bernanke lamented the human and economic costs of an unemployment rate at 7.5 percent nearly four years into the recovery from the deepest recession since the Great Depression, and he said the Fed’s record easing is providing “significant benefits.” His comments echoed remarks by William C. Dudley, president of the Federal Reserve Bank of New York, who said in an interview that it would take three to four months before policy makers will know whether a sustainable recovery is in place.

Fed Watch: Bernanke Saves the Day - There was some initial consternation yesterday after Federal Reserve Chairman Ben Bernanke gave the clarity we were hoping to see. From Reuters: "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said. "Next few meetings" sounds like September at the eariliest. Indeed, September or December are the most likely meetings given both have an associated press conference.  For financial market participants, I would say this was a mixed message. Bernanke is dovish if you expect the Fed to move in June, hawkish if December at the earliest. But imagine the message that would have been delivered to financial markets had Bernanke not spoken ahead of the minutes of the April FOMC meeting: A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.It seems to me that the threat of an imminent policy change would have been taken very poorly had Bernanke not already spoken yesterday morning. So, in a sense, Bernanke saved traders from an even more tumultuous day. Expect Bernanke to use the June press conference to lay the ground work for a reduction in the pace of purchases as early as September.

Fed’s Williams: Bond Purchases Could Move Up Even After Tapering Starts - Federal Reserve policymakers have flexibility to ratchet up or down the pace of their bond buying program even if they should opt to begin a tapering at some point, Federal Reserve Bank of San Francisco President John Williams said Wednesday. “We can adjust it down some, watch how things progress from there, and then adjust it again one way or the other,” Mr. Williams said in an interview Wednesday with Bloomberg and posted on its website Thursday. Should the Fed opt to begin cutting back on the asset purchases, “it doesn’t mean we’re now in some autopilot of moving in the same direction,” he said. “You could even imagine a scenario where we would adjust it downward based on good data and then adjust it back” if the economy softened, said Mr. Williams, who is not this year a voting member of the Fed’s policy setting committee.

More Fed - It Never Ends, by Tim Duy --  Bloomberg is carrying an interview with San Francisco President John Williams. Williams reiterates the possibility that future policy moves may be up or down: “Even if we do adjust downward our purchases, it doesn’t mean we’re now in some autopilot of moving in the same direction,” Williams, 50, said in an interview yesterday in San Francisco. “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back” if the economy weakened. Yes, the Fed can change policy in any direction. But I reiterate what I said earlier: I simply do not believe that they believe that such changes will be likely. First, I don't think they will want to reduce the pace of purchases until they are sure they do not need to reverse course in the next meeting. Second, I think they will want to end asset purchases well ahead of hitting the 6.5% unemployment threshold. And I don't think they can do that if they are fooling around with the pace of purchases over the next year.  That said, we will hear many officials repeat this same line. Why?  The Fed is trying very hard to ensure that market participants do not overreact to any one policy shift, with the most likely overreaction being to tank Treasury prices and spike yields. The Fed believes that the way to prevent this is to continuously remind everyone that any subsequent moves might be up or down, so don't assume a downward move in the pace of purchases implies anything about the next meeting.

In Bid for Clarity, Fed Delivers Opacity - WSJ - The Federal Reserve is having some trouble explaining itself. Fed Chairman Ben Bernanke told Congress on Wednesday that the central bank could start reducing its $85 billion-per-month bond-buying program at one of its "next few meetings" and cautioned that he was reluctant to move aggressively or prematurely. That straightforward message, however, has been muddled by a number of other signals sent by the Fed and Mr. Bernanke himself in recent weeks: A policy statement in early May suggested the Fed's next move could be either up or down; minutes released Wednesday of the Fed's most recent policy meeting ended May 1 said some might want to reduce the program as early as June; Mr. Bernanke's prepared congressional testimony Wednesday also implied he was reluctant to move at all. As the Fed has tried to explain its thinking, investors have sometimes been caught scratching their heads. Wednesday's stock-market moves put that dynamic into sharp relief. Stock prices soared in the morning when Mr. Bernanke initially sounded reluctant to start reducing the size of the monthly bond purchases, dropped when he sounded like he was entertaining the idea, and then fell further when the Fed's May meeting minutes showed a variety of views on the timing. "This is not easy and requires good communication," Mr. Bernanke said during the Wednesday congressional hearing, when asked to comment on the market turmoil the Fed could cause if it someday sells its bond portfolio.

The Fed Has Painted Itself in a Corner - Bernanke managed to shoot global markets in the head the day before yesterday, and then, as has become typical when investors throw brickbats at what the Fed has said, various mouthpieces go about talking the markets back up.   But looking at the Fed’s problem from 50,000 feet, it appears that the the monetary authority appears to have set boundary conditions for its QE exit that it can’t meet.

    • 1. The Fed is committed to communicating interest rate increases well in advance so as to give investors time to adjust exposures. This policy dates from 1994, when an unexpected mere 25 basis point rise kicked off a derivatives meltdown, producing more losses than the 1987 stock market crash.
    • 2. The Fed designed QE by setting fixed amounts of purchases, and not by seeking to achieve certain levels for particular interest rates, or for MBS, spreads. This gives the Fed much less control in how it exits QE. As Marshall Auerback pointed out when QE was implemented, the central bank can’t control both the rate it achieves and the amount of its purchases. Choosing the latter meant it lost the opportunity to target the former..
  • In other words, the Fed wants a gradual exit, 6 but the interaction of 1 and 2 means it can’t achieve that. And on top of that, we have:
    • 3. By moving to influence longer-term interest rates and mortgage spreads, the central bank has come to have a bigger impact on more asset classes than it did in the past. So it has managed to set up a badly designed program with far greater consequences than anything it has done in the past. For instance,  mortgage rates rose considerably after the Bernanke remarks. That’s not exactly positive for the housing recovery, such as it is.

Reserve Balance Misconceptions - Mark Thoma, writing in the Fiscal Times, has called for the Federal Reserve to take “bold, creative moves” to alleviate unemployment.   Thoma’s suggestions contain nothing novel, and I suspect Thoma is fully aware that what our economy really needs is a fiscal expansion from the federal government.  But perhaps these tired calls for additional central bank string-pushing deserve some sympathy.  Many have concluded that the attempt to get Congress and the White House to act to increase government spending are futile, since the elected branches of our government seem unwilling to do what needs to be done out of some combination of incompetence, iniquity, ignorance, ideology and insanity. But Thoma’s argument contains a few puzzling passages that repeat and reinforce some common misconceptions about the relationships among spending, bank lending and bank reserves; and it is worth spending a few words to challenge these misconceptions once again, because to the extent that they still have wide currency they stand in the way of a clear grasp of the nature and limits of monetary policy options.

Sen. Sanders Again Targets Regional Fed Boards - One of Wall Street’s toughest Capitol Hill critics is again trying to keep bankers off the boards of directors for regional Federal Reserve banks, calling the practice a “clear conflict of interest.” Sen. Bernie Sanders (I, Vt.) said Wednesday he was reintroducing a measure that would prohibit bankers from serving on the boards of the 12 regional Fed banks. It would also prevent Fed employees or board members from owning stock or investing in any of the banks and financial firms the Fed oversees in its role as a regulator. Mr. Sanders, questioning Fed Chairman Ben Bernanke about the issue Wednesday morning, said he considered it an “absurdity” that bankers sit on regional Fed boards. “We have had absurd situations where Jamie Dimon, the CEO of the largest financial institution in America, sat on the New York Fed, whose job is supposedly to regulate Wall Street. And many of us think that is the fox guarding the hen house,” Mr. Sanders told Mr. Bernanke. Each of the Fed’s 12 regional banks have their own nine-person boards of directors made up of six directors selected by the banks in that district, and three chosen by the Fed in Washington. Mr. Sanders and other lawmakers have raised concern about this arrangement, noting that it could exacerbate banks’ ability to influence regulators.

Quantitative Easing: Like “trying to kill James Bond with a shark” - This line by Matt McOsker, in a comment on one of my recent posts, now reigns as the best line of the year in my personal pantheon.QE’s only direct effect is on the financial sector. It only affects the real sector — where people work to produce, buy, and sell real goods, and produce surplus in the process — through second- and third- (+) order carry-on effects of quite uncertain and contestable mechanism and efficacy. I’m with Steve Randy Waldman: if you want to kill James Bond, just shoot him with a gun, already!

As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market... And Will Own All By 2018 - What may come as a surprise to most, is that as of this week's H.4.1 update, the amount of ten-year equivalents held by the Fed increased to $1.583 trillion from $1.576 trillion in the prior week, which reduces the amount available to the private sector to $3.637 trillion from $3.668 trillion in the prior week. And also, thanks to maturities, and purchase by the Fed from the secondary market, there were $5.219 trillion ten-year equivalents outstanding, down from $5.244 trillion in the prior week. What this means simply is that as of this moment, the Fed has, in its possession, a record 30.32% of all outstanding ten year equivalents, or said in plain English: duration-adjusted government bonds. It also means that the amount of bonds left in the hands of the private sector has dropped to a record low 69.68% from 69.95% in the prior week. Finally, the above means that with every passing week, the Fed's creeping takeover of the US bond market absorbs just under 0.3% of all TSY bonds outstanding: a pace which means the Fed will own 45% of all in 2014, 60% in 2015, 75% in 2016 and 90% or so by the end of 2017 (and ifthe US budget deficit is indeed contracting, these targets will be hit far sooner). By the end of 2018 there would be no privately held US treasury paper.

The Unemployed Need Bold, Creative Moves from the Fed - The Federal Reserve has increased the size of its balance sheet nearly four-fold since the onset of the financial crisis, from around $870 billion in 2007 to $3.35 trillion today. This has caused people like Peter Schiff to predict that we are headed for a severe outbreak of inflation. An inflation problem is just round the corner we’ve been told again and again since 2008, yet inflation remains below the Fed’s two percent target, long-run inflation expectations are well-anchored, and there is little evidence in recent data that inflation is or will be a problem.  Why is inflation so low?  Presently, demand is weak because of the recession and that is one of the reasons the inflation rate is below the Fed’s two percent target. But that is not the only reason inflation is too low at a time when economic conditions call for more aggressive monetary policy. Stimulating demand and creating inflation has not been as easy as the Fed thought it would be even with the dramatic increase in the size of its balance sheet, and the Fed has been unwilling to take the additional bold and creative steps needed to bring inflation up to –– or in the short-run even above –– its target level.

Helicopter money as a policy option - Since the crisis central banks have implemented a variety of non-standard monetary policies aiming at stabilising nominal demand in the presence of major disruptions in financial markets. These policies had different intermediate objectives: market making, controlling long term interest rates or asset prices, support of credit via subsidies. Their effects on the real economy, however, are uncertain. Notwithstanding this uncertainty the Bank of Japan has recently engaged in bold action, announcing that it will double the monetary base and its holding of government bonds in the next two years.

  • Some think that quantitative easing will fuel the next financial bubble and that exiting will create financial instability (see Stein 2013).
  • Others think that more should be done to sustain the real economy.

Adair Turner has recently put a different option on the table (Turner 2013): “helicopter money” or permanent money creation. This is an idea that was discussed in the thirties in the US as a response to the great recession (see Friedman 1948 and Simon 1936) and more recently by Bernanke in relation to the zero lower bound problem in Japan (Bernanke 2003). As Bernanke has suggested it can be implemented via transfers to households and businesses via a tax cut coupled with incremental purchases of government debt, so that the tax cut is in effect financed by money creation.

How about a massive tax cut financed by the Fed? - One criticism of the Fed’s quantitative easing program is that it’s supposedly only helping wealthier Americans. The central banks bond buying pushes up the prices of financial assets, which rich folks happen to own a lot of. Now this criticism seemingly assumes no positive impact on jobs or wages from QE. I think most middle-class Americans would rather have the US economy right now than the EU’s.But if you’re really worried that the Fed’s actions are creating an unequal benefit, Adair Turner, former head of the UK’s Financial Services Authority, and monetary economist Michael Woodford offer a twist: Fed-financed tax cuts. It’s an idea that Ben Bernanke actually spoke about in a 2003 speech in Tokyo  Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.  Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ’s purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.

Fed's Dudley: "Lessons at the Zero Bound: The Japanese and U.S. Experience" As president of the NY Fed, William Dudley is a key member of the FOMC. He clearly supports QE ...From NY Fed President William Dudley: Lessons at the Zero Bound: The Japanese and U.S. Experience. A few excerpts:  In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.  Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

Fed’s Dudley Agrees: QE is Not About the Reserves, or “Printing Money” - In my post The Fed is not “Printing Money.” It’s Retiring Bonds and Issuing Reserves, I said: …when the Fed gives the banks reserves and retires bonds, it’s taking on market risk/reward, replacing it with absolutely nonvolatile, risk/reward-free assets (at least in nominal terms). It’s removing leverage and volatility from the banking system.The banking system doesn’t “take money” out of total reserves, or reduce those reserves, to fund loans. And now I find this in a speech today at the Japan Society by FRBNY President and CEO William Dudley:…asset purchases work primarily through the asset side of the balance sheet by transferring duration risk from the private sector to the central bank’s balance sheet.  This pushes down risk premia, and prompts private sector investors to move into riskier assets.  As a result, financial market conditions ease, supporting wealth and aggregate demand.  The fact that such purchases increase the amount of reserves in the banking system and the size of the monetary base is a byproduct — not the goal — of these actions. Or to put it another way: when you increase M in MV = PY, the most likely result — the result you have to assume by default absent some convincing story about real-economy incentives, causes, and effects —  is a purely arithmetic decline in V (cf. Dudley’s “byproduct”), with zero effect on P or Y.

Can we imagine a world in which “expansionary” open market operations are in fact contractionary? -- John Cochrane discusses Andy Kessler: The usual thinking is that bank reserves are “special.” They are connected to GDP in a way that Treasuries are not. In the conventional monetary view, MV = PY. Bank reserves, through a multiplier, control M. The bank or credit channel view says that bank reserves control lending and lending affects PY. The red M&Ms, though superficially identical, have more calories. In Andy’s view (my interpretation), that is turned around now. Now, Treasuries supply more “liquidity” needs than bank reserves, and (more importantly) the supply of treasuries is more connected to nominal GDP than is the supply of bank reserves. Part of this inversion of roles is supply. In place of the usual $50 billion, we have $3 trillion or so bank reserves. Bank reserves can only be used by banks, so they don’t do much good for the rest of us. Now, they just sit as bank assets in place of mortgages or treasuries and don’t make a difference to anything. More treasuries, according to Andy, we can do something with.

How The Great Moderation Destroyed the Fed’s Credibility - Much ado is made of the Fed’s “credibility,” which is dog-whistle-speak for its ability, willingness, and decided inclination to jump all over any (expected or imagined) whiff of that horrifying threat — inflation! — especially the most terrifying bogeyman, “wage inflation.”  You won’t, on the other hand, find “credibility” discussed when people speak of the Fed’s inevitably weak-kneed inclination to raise inflation (expectations).  So after thirty years of diligently establishing its reputation for credibility, the Fed has no credibility. They announce on December 12 that they’ll allow inflation to go as high as 2.5% (shock! awe!). And what happens to inflation expectations?  Yes, it was a limp-wristed “promise”: they would only allow that irresponsibly dangerous hyperinflationary jump to 2.5% if unemployment remained above 6.5%. So after three decades of diligently protecting responsible creditors from the manifest evils of inflation, and imposing responsibility on feckless, impatient entrepreneurial, risk-taking borrowers, nobody believes for an internet minute that the Fed can or will address the unemployment side of their mandate — that it has the wherewithal to do so, or the inclination if it did.

China Starts Unit to Diversify Reserves From U.S. Debt, WSJ Says - China’s State Administration of Foreign Exchange has set up an operation in New York to make alternative investments in the U.S., the Wall Street Journal reported, citing people it didn’t identify. The new operation, which will focus on private equity, real estate and other assets, is an effort by China’s foreign-exchange reserves manager to diversify away from U.S. government debt, the newspaper reported. SAFE has sought to vary its portfolio in the past year by buying European assets and Japanese stocks, the newspaper reported, citing the unnamed people. Officials in recent weeks met with Wall Street banks about potential investment opportunities, according to the report. It’s not clear if any deals have been signed, the publication said. The agency, which also regulates the Chinese currency, didn’t immediately reply to faxed questions today from Bloomberg News seeking comment on the report.

Thanks To QE Bernanke Has Injected Foreign Banks With Over $1 Trillion In Cash For First Time Ever - It was our expectation that while if not slowing down its rate of money-creation (i.e., reserve-production) - something that won't happen for a long time as it would crash the stock market - the Fed's reserves would at least revert to being accumulated at US-based banks. No such luck. In fact as the latest H.8 report demonstrates, as of the most recently weekly data, the Fed's policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise.

Falling inflation complicates the Fed’s QE exit plan - The Chairman’s warning that the FOMC might reduce the pace of its asset purchases “in the next few meetings” has clearly spooked the markets, especially those (like Japanese equities) where bullish positions had become very crowded. The Fed’s main message at present is that it will “increase or reduce the pace of its asset purchases…as the outlook for the labor market or inflation changes”. This seems deliberately designed to inject some uncertainty into market psychology, and thereby prevent an excessive risk taking. Mr Bernanke said that he takes the risk to financial stability “very seriously”. But the overall tone of the Chairman’s written evidence yesterday strongly suggested that the Fed is still a long way from contemplating any significant change in monetary policy. After all, tapering QE would only imply that the pace at which policy is being eased is being reduced. An outright tightening of policy still seems to be several years away. Nevertheless, there is great attention on when this tapering might start. Will it be in September, or December, or even later? In judging this, the market seems exclusively focused on the labour market, but note that the Fed’s formula requires a focus on inflation as well. Both parts of the twin mandate continue to matter, especially now that inflation has fallen well below the Fed’s 2 per cent target.

Measure it however you like: inflation has been low and falling - The chart above is from Credit Suisse economists, who add: Comparing YoY rates from March 2012 to March 2013, we see that inflation has slowed in a wide range of components:

    • – autos (2.4% to 0.8%),
    • – furnishings and durable household goods (0.5% to -1.2%),
    • – “other” durable goods, including jewelry (2.1% to -0.7%),
    • – clothing (5.0% to 1.3%), pharmaceuticals (3.6% to 0.6%),
    • – transportation services (2.3% to 0.9%),
    • – recreation services (2.8% to 1.9%),
    • – food services and accommodations (3.2% to 2.2%), finance and insurance (2.6% to 0.1%), and
    • – miscellaneous “other” services (2.7% to 2.1%).

(They are referring to PCE components, and we broke up them out for readability.) Our earlier post on the core CPI-PCE gap is here, and since then the gap shrunk a bit after April’s CPI release. See also the Cleveland Fed’s explanation.One reason given for the gap is that core PCE includes the costs of certain “imputed” items, including bundled financial services. Were it not for these items, recorded inflation would be higher. (Good explanations are here and here.)

The case for 4% inflation - Many central banks have adopted a common policy – an inflation target near 2%. These central banks include the Fed (which calls it a ‘long run goal’), the ECB (which targets inflation ‘below, but close to 2%’) and the central banks of most other advanced economies. A number of economists, such as Blanchard et al. (2010), have suggested a higher inflation target – typically 4%. Yet this idea is anathema to central bankers. According to Ben Bernanke (2010a), the Federal Open Market Committee unanimously opposes an increase in its inflation goal, which ‘would likely entail much greater costs than benefits’. I examine the case for a 4% inflation target in a recent essay (Ball 2013) and reach the opposite conclusions to those of Chairman Bernanke:

The Four Percent Solution - Paul Krugman -- Larry Ball makes the case that we would be a lot better off with a 4 percent inflation target rather than the 2 percent that is now central bank orthodoxy. Intellectually, this position is hardly outlandish; indeed, Ball’s case is very similar to the case Olivier Blanchard made three years ago, just stated more forcefully and with more evidence.The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen. Ball estimates that if we had come into this crisis with an underlying inflation rate of 4 percent, average unemployment over the past three years would have been two percentage points lower. That’s huge — it amounts to millions of jobs and trillions of dollars of extra output. My view would be that the costs of this crisis are so large — and the difficulties we’ve had in responding so grotesque — that even if they were once-in-75-year events, that should be enough to warrant different policies.

Statement by Bernanke before the Joint Economic Committee - The Economic Outlook

Economic Outlook: Moving in the Right Direction – SF Fed - The economy and the labor market have improved substantially since the Federal Reserve started its current $85 billion monthly asset purchase program last September. However, it will take further gains to demonstrate that the “substantial improvement” test for ending Fed asset purchases has been met. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the Portland Awards Luncheon on May 16, 2013.

Fed’s Evans Says Economy Has Been ‘Improving Quite a Lot’ - Federal Reserve Bank of Chicago President Charles Evans said the U.S. economy has improved “quite a lot” as the central bank maintains record stimulus and expressed confidence policy makers have tools needed to monitor markets for excesses. “I’m optimistic that the labor market has been doing much, much better and that unemployment is going to continue to go down,” Evans said in a speech in Chicago today. “Currently we have the appropriate monetary policy in place.” .The policy-setting Federal Open Market Committee said May 1 that it will keep buying $85 billion in bonds per month as it seeks to bolster growth and reduce joblessness. The U.S. central bank also said it would increase or decrease the pace of purchases in response to the labor market and inflation. The question now is “how much confidence we have that the improvements that have been made will continue and be sustained,” said Evans, who holds a vote on the FOMC this year.

Bernanke: "Economic Prospects for the Long Run" - This is a from commencement speech today by Fed Chairman Ben Bernanke: Economic Prospects for the Long Run . What does the future hold for the working lives of today's graduates? The economic implications of the first two waves of innovation, from the steam engine to the Boeing 747, were enormous. These waves vastly expanded the range of available products and the efficiency with which they could be produced. Indeed, according to the best available data, output per person in the United States increased by approximately 30 times between 1700 and 1970 or so, growth that has resulted in multiple transformations of our economy and society.1 History suggests that economic prospects during the coming decades depend on whether the most recent revolution, the IT revolution, has economic effects of similar scale and scope as the previous two. But will it?  I must report that not everyone thinks so. Indeed, some knowledgeable observers have recently made the case that the IT revolution, as important as it surely is, likely will not generate the transformative economic effects that flowed from the earlier technological revolutions.2 As a result, these observers argue, economic growth and change in coming decades likely will be noticeably slower than the pace to which Americans have become accustomed. Such an outcome would have important social and political--as well as economic--consequences for our country and the world.

Inequality and Economic Growth: Paul Krugman and Tony Atkinson -  Note: The video starts around the 43 minute mark

Research Notes: Fiscal Drag and Upward Revisions to Q2 GDP - Some brief excerpts from two research notes released this week. The fiscal drag is hitting hard right now and is expected to fade towards the end of the year. Right now it looks like Q2 is tracking close to 2% GDP growth. From economist Alec Phillips at Goldman Sachs:  Earlier this year, we expected fiscal policy to weigh on growth most heavily in Q2 and Q3, when sequestration, other federal spending reductions, and the recent tax increases looked likely to have their greatest combined effect. It now looks like the fiscal drag will be somewhat more spread out than we anticipated. The main reason is the 15% (annualized) drop in federal spending in Q4, followed by the 8% drop in Q1. This reduces the amount of fiscal drag from federal spending cuts we think is still in the pipeline, though it doesn't eliminate it. The chart below shows the drag on growth ...From Ethan Harris at Merrill Lynch:  Despite significant fiscal tightening, the US economy continues to grow at a trendlike pace. Last fall we had expected growth to be weak in both 1Q and 2Q. As the better data came in, we assumed the shock was hitting with longer lags and we moved the “soft patch” to 2Q and 3Q. This week we are “marking to market” our 2Q forecast: we now see growth of 1.8%, up from 1.3% and roughly in line with the consensus. We have not changed our forecast for coming quarters. The economy has shown a lot more resilience than we had thought, but the full impact of the fiscal shock has not arrived yet and some kind of soft patch still appears likely.

Chicago Fed: "Economic Activity Slower in April" - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Slower in April - Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.53 in April from –0.23 in March. Three of the four broad categories of indicators that make up the index decreased from March, and none of the categories made a positive contribution to the index in April. The index’s three-month moving average, CFNAI-MA3, ticked up to –0.04 in April from –0.05 in March. April’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed: Economic Activity Was Slower in April - According to the Chicago Fed's National Activity Index, April economic activity slowed from March, now at -0.53, down from March's -0.23. This index has been negative (meaning below-trend growth) for eleven of the past fourteen 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 –0.53 in April from –0.23 in March. Three of the four broad categories of indicators that make up the index decreased from March, and none of the categories made a positive contribution to the index in April.  The CFNAI Diffusion Index increased to –0.03 in April from –0.04 in March. Thirty-two of the 85 individual indicators made positive contributions to the CFNAI in April, while 53 made negative contributions. Forty-four indicators improved from March to April, while 41 indicators deteriorated. Of the indicators that improved, eighteen made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. 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.

Chicago Fed: Slower Slow Growth In April… Again - The US economy slowed in April for the second time in as many months, “led by declines in production-related indicators, according to today’s release of the Chicago Fed National Activity Index, a weighted average of 85 economic data sets. But the deterioration has yet to make a conspicuous dent in the three-month moving average (CFNAI-MA3), which remained virtually unchanged at -0.04 last month vs. a revised -0.05 for March. The three-month average offers "a more consistent picture of national economic growth," the Chicago Fed advises. By that standard, the US economy is still expanding at a pace that’s only slightly below its historical trend as of last month. Based on the guidelines published for this index, today’s update also shows that recession risk was low in April. A CFNAI-MA3 value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun," according to the Chicago Fed. By that measure, last month remained convincingly in the growth camp. A similar analysis was dispatched in last week’s update of The Capital Spectator Economic Trend & Momentum indices.

"We Are Experiencing More Than Just A 'Soft Patch"- The most recent release of the Chicago Fed National Activity Index (CFNAI) is the last of the components released each month that comprises the Economic and Employment Composite indexes. The April data for the CFNAI was not good with the manufacturing component confirming what we had already seen in most of the regional Federal Reserve manufacturing surveys. The overall CFNAI index plunged from to a negative 0.53 from a negative 0.23 in March. In both months, manufacturing production fell, down 0.4 percent in April following a 0.3 percent decline in March. However, as opposed to recent media headlines boasting of the strength of consumer spending and housing, the consumer & housing sector was the second largest drag on national activity in April dropping from negative 0.15 in March to negative 0.17 in April. Employment also did not confirm the recent BLS report, which we suspected would be the case, as the employment component has fallen from a positive 0.35 in February to a positive 0.1 in March to ZERO in April. This is certainly not a trend that supports the much hoped for job growth in the near future. Let's take a look at the two composite indexes to see what they are telling us about the economy and the most likely direction of the data in the months ahead.

Four Reasons Housing Recovery Isn’t Yet Boosting Economy -  Pimco strategists outline four primary blockages that could restrain the housing sector’s ability to play the traditional role boosting the economy during a recovery.First, construction is coming back, but the industry’s muscles have atrophied a bit. It could take a while for the housing-construction industries to rebuild lost muscle mass. While builders started construction on 780,000 units last year, an increase of 28% from the year before, construction still needs to double to keep up with population and household growth. Second, banks have to be willing to expand credit beyond today’s conservative standards. New regulations will keep lenders cautious. Ironically, rising rates could help, because that will dry up the gravy train of refinances that have kept mortgage lenders well fed over the past two years. With less refinance business, banks will have greater incentives to compete for business, easing up their standards. Third, consumers also have to feel confident enough to borrow. Because government spending cuts will further crimp spending, especially among “already stretched lower- and middle-income consumers,” the Pimco analysts argue that “any tangible impact from reduced savings will likely come from earners in the top 40%, who are also more likely to be homeowners and hold over 70% of consumer credit.” Fourth, mortgage-equity withdrawal—the process by which homeowners take cash out of their homes—isn’t likely to play the same role that it did during the past decade in fueling consumer spending. This is true both because lending standards are more conservative today, and also because equity extraction was an aberration during the heyday of the housing boom.

The future impact of US defense spending - Just something to ponder the day after Obama’s speech… Defense spending has already been a negative influence on GDP of late, and the majority of the sequestration cuts scheduled for 2013 are in defense. Economists from Barclays have also taken a look at how defense spending changed in the aftermath of prior wars, and then placed the more recent trends in that historical context. The charts mostly speak for themselves…… and here is commentary from the note: Although sequester went into effect on March 1, the Department of Defense will only furlough about 700,000 workers once a week beginning in July through the end of the fiscal year, giving affected workers 11 unpaid days off through end-September. Thus although we project that higher payroll and income taxes will dampen consumption in 1H 2013, we apply the impact of the sequester budget cuts evenly in Q2-Q4 and expect sequester to be a headwind to growth throughout the rest of 2013. As Figure 3 shows, national defense was a significant drag on growth in the years immediately following the Korean War, Vietnam War, and Cold War. The gradual phase-out of US military involvement in Vietnam after 1968 and the “peace dividend” of the 1990s may have meant that the immediate drag on growth was smaller, but it also meant the impact was longer lived.

Just Released: The New York Fed Staff Forecast—May 2013 - Here, we discuss the New York Fed staff forecast for real GDP growth, the unemployment rate, and inflation in 2013 and 2014.   The forecast anticipates moderate economic expansion over the next two years. Real GDP growth in 2013 is expected to be around 2½ percent, slightly below the rate in 2013:Q1 as well as below our year-ago projection of about 3 percent. A major factor behind the projected sluggishness over the rest of this year is fiscal policy. The combination of sequestration and the tax increases associated with the agreement to avert the “fiscal cliff” is anticipated to exert a significant drag on GDP growth of more than 1 percentage point. In 2014, the fiscal drag is expected to be smaller than in 2013. With a smaller fiscal drag, an expected further lessening of other headwinds—for example, the European sovereign debt crisis and the deleveraging of household balance sheets—and further improvement in labor market and financial conditions, we project real growth in 2014 of around 3¼ percent.  With the overall economy expected to grow rather sluggishly for the remainder of 2013, the staff projects the unemployment rate to be near the April level over the rest of the year, averaging about 7¼ percent in the fourth quarter. As stronger growth is anticipated for 2014, we project a more substantial decline in unemployment, to about 6½ percent in the fourth quarter, which would be roughly similar to its behavior at this stage of “long” economic expansions (as discussed in this post).

After Slow 2013, NY Fed Sees Growth Picking Up Next Year - Economists at the Federal Reserve Bank of New York expect slower, trend-like growth this year due to the drag created by government taxation and spending policies, and project things will speed up next year. The forecasts came as part of a report report posted on the bank’s website Thursday. The staff forecast is to be presented to the New York Fed’s Economic Advisory Panel. The projections were largely consistent with what other parts of the Fed have been forecasting. The New York Fed economists said U.S. gross domestic product is likely to rise by 2.5% this year, a lower rate than was once expected, before picking up to 3.25% next year. A year ago, the New York Fed economists had expected growth this year at 3%. “A major factor behind the projected sluggishness over the rest of this year is fiscal policy,” the New York Fed economists wrote. “The combination of sequestration and the tax increases associated with the agreement to avert the ‘fiscal cliff’ is anticipated to exert a significant drag on GDP growth of more than 1 percentage point,” they said. Things get better next year. Reduced drag from government spending, coupled with more settled conditions in Europe, a slowdown in U.S. households’ effort to trim debt, as well as an improving job market, should all make growth pick up in 2014, the report said. The forecast doesn’t expect much further progress on the employment front this year. The unemployment rate is expected to hang around its current level of 7.5% for much of 2013, and average 7.25% in the last three months of the year, before easing to 6.5% during the closing quarter of next year. The analysts expect inflation to be weak this year, but trend back to the Fed’s target of 2% next year.

Fed Sent $15 Billion to Treasury in First Quarter - The Federal Reserve sent $15.291 billion it made in interest in the first quarter of the year on long-term bonds to the Treasury Department, down around 35% from a year ago, the Fed said in its quarterly financial report. The central bank’s bond buying program, part of the Fed’s policies meant to spur the weak U.S. recovery, have so far yielded profits. But Fed and International Monetary Fund economists have said as the economy recovers and interest rates on long-term bonds rise, the massive amount of debt accumulated by the Fed could create losses. That could become a political liability as lawmakers start to pressure the Fed on monetary policy. Fed board Chairman Ben Bernanke has said yearly remittances have roughly tripled in recent years, with payments to the Treasury totaling approximately $290 billion between 2009 and 2012. “However, if the economy continues to strengthen, as we anticipate, and policy accommodation is accordingly reduced, these remittances would likely decline in coming years,” Mr. Bernanke said in the bank’s recent monetary policy report.

Lew asks Congress for debt increase, says it’s 'not open to debate'- Treasury Secretary Jack Lew on Friday urged congressional leaders to raise the debt limit and insisted that the White House is not going to negotiate over the increase because lawmakers have "no choice." "We will not negotiate over the debt limit," Lew wrote. "The creditworthiness of the United States is non-negotiable. The question of whether the country must pay obligations it has already incurred is not open to debate." Lew said that while President Obama is willing to discuss plans to reduce the nation's deficit with Congress, those talks must be kept separate from any effort to raise the nation's debt cap. The letter comes as the debt limit is set to take effect on Sunday, after being suspended for three months by Congress. The last time the nation approached its $16.4 trillion borrowing limit, lawmakers agreed to suspend the borrowing cap, and then to automatically raise it to cover borrowing subject to the limit that occurred during that three-month stretch. The end result is that come Sunday, the Treasury will find itself immediately up against its expanded cap, and will need to begin employing "extraordinary measures" to free up space beneath the limit to stay current on its obligations.

Treasury Says Debt Limit at $16.699 Trillion After Suspension The U.S. debt ceiling as of yesterday was $16.699 trillion, the first number released by the Treasury Department since the limit was suspended in early February. The U.S. Congress voted at the end of January to suspend the limit, which was then $16.394 trillion, through May 18 before President Barack Obama signed it into law in early February. The Treasury can continue borrowing for several months by shifting money among government accounts. Treasury Secretary Jacob J. Lew said last week that those so-called extraordinary measures and a one-time payment from Fannie Mae will allow the U.S. to stay under the debt limit at least until September. As of yesterday, the total amount of debt subject to the limit was $25 million under the ceiling, according to the Treasury’s figures. The cap increased to account for deficits that accrued during the suspension period.

We hit the debt limit again. Shall we take the bad or good way out? -- On Sunday, the US hit the debt limit, triggering the Treasury to engage in “extraordinary measures” to keep the government paying its bills. The ensuing debate could go one of two ways. We saw the bad way in August 2011. Congress held the debt limit for ransom in exchange for deficit reduction. Markets went haywire. US debt was downgraded for the first time. The Left got some tax hikes. The Right got some discretionary spending cuts. Serious budgetary issues, such as entitlements, went unaddressed. There is a good way.  The US could back its obligations without fear of default.  Markets could rise with confidence that the political process works. The US could reform entitlements, the real driver of our deficit ten years out. It’s within reach. So how do we get there? AEI scholars have written extensively about how to approach the debt limit. Their recommendations include reforming the debt limit itself and undertaking entitlement and tax reform. A selection of AEI’s work on the issue is below.

Lew taps government retiree pension fund to avert default - Treasury Secretary Jacob Lew said late Monday he will begin tapping into two government employee retirement funds to buy more time before the U.S. Treasury is faced with the prospect of defaulting on the national debt. In a letter to congressional leaders, Lew said that he would tap the civil service retirement and disability fund and a similar fund that covers retired postal workers. The law allows him to remove investments from these funds to clear room for more borrowing until Congress votes to raise the debt limit Under the law, any investments diverted from the pension funds must be replaced with interest once Congress approves raising the debt limit. Lew has said the various bookkeeping measures he is allowed to employ should provide enough maneuvering room to keep the government from defaulting on its debt until after Labor Day. Other estimates say Lew may be able to forestall a default until as late as November. In January, Congress voted to temporarily suspend the debt limit but that suspension ended Sunday. Before the suspension, the debt limit stood at $16.4 trillion. The government has borrowed $300 billion since the suspension took effect. On Sunday, the debt limit reset at the higher level of $16.7 trillion.

Moody's could downgrade U.S. debt in 2013: report - Moody Investors Service could downgrade U.S. debt this year if policymakers do not adress rising debt ratios, according to Bloomberg News on Monday. While Moody's released a report on Monday saying that new budget projections from the Congressional Budget Office were "credit positive," Steven Hess, a senior vice-president at Moody's told Bloomberg that Washington needs to do more from a policy standpoint. "The fact that it showed much lower debt levels going forward, we view as a positive development," Hess told Bloomberg. "More needs to be done on the policy front to address this rising debt ratio."

Is the cost of servicing US debt really ready to explode? - Phil Gramm and Steven McMillin are certainly correct in worrying about the potential downside of the large and growing national debt. But in their Wall Street Journal op-ed today, they make the following claim: “Once the Federal Reserve’s easy-money policy comes to an end and interest rates return to their post-World War II norms, the cost of servicing this debt will explode.” In other words, it sounds like some sort of debt crisis is pretty much just around the corner. Thoughts:

  • 1. This is an argument for doing what exactly? Getting the debt on a downward trajectory toward historical levels over a couple of decades? Yes. Balancing the budget ASAP even it means tax hikes or slashing government research spending? No.
  • 2. Concern about what may happen to rates when the Fed winds down its bond buying may be overstated. A recent analysis by JP Morgan concludes “tapering Fed asset purchases from $85bn down to $0bn should cause 10-year yields to increase by 25-30bp.”  That’s not so much.
  • 3. Higher yields would likely be accompanied by higher growth which would make servicing the debt easier. Rates are low — both here and globally — because economic growth is weak. The reason debt servicing is such a problem for, say, Italy is due to a collapse in growth.

IMF says Washington cutting budget deficits too quickly -- The International Monetary Fund on Monday said the United States was getting carried away with a government austerity drive, offering some of the institution’s bluntest criticism yet of Washington’s rush to cut its budget deficit. Despite high unemployment, Washington is on track to slash its budget shortfall this year by the most in nearly a half century. “We think this is too much,” Carlo Cottarelli, head of the IMF’s fiscal affairs division, told a conference. The IMF has advised European governments embroiled in a debt crisis to shrink their deficits aggressively to win back the confidence of lenders who doubt their ability to pay back loans. But there is very little risk of similar turmoil will ensnare the United States anytime soon, Cottarelli said. Interest rates remain low in the United States, even when factoring in inflation, a sign that lenders still trust the U.S. government to make good on its debts. “There is no need for the U.S. to move so quickly,” he said. Cottarelli said a slower pace of fiscal consolidation should be accompanied by a long-term plan to keep the budget sustainable as America’s population ages and demands more government services like health care and pensions.

Where Are The Deficit Celebrations? - Paul Krugman - For three years and more Beltway politics has been all about the deficit. Urgent action was needed to avert crisis. A Grand Bargain absolutely had to be reached. Fix the Debt, now now now!  So where are the celebrations now that the debt issue looks, if not solved, at least greatly mitigated? And it’s not just recovering revenues: health costs, the biggest driver of long-run spending, have slowed dramatically. What we’re getting from the deficit scolds, however, are at best grudging admissions that things may look a bit less dire — if not expressions of regret that the public seems insufficiently alarmed. Jamelle Bouie gets at a large part of it by noting what was obvious all along: for many deficit scolds, it was never really about the debt, it was about using deficits as a way to attack the social safety net. Deficits may have come down, but not the way they were supposed to — hey, we were supposed to be kicking 65 and 66 year-olds off Medicare, not doing something so goody-goody as managing costs better. There is, however, a secondary factor: think about the personal career incentives of the professional deficit scolds. You’re Bowles/Simpson, with a lucrative and ego-satisfying business of going around the country delivering ominous talks about The Deficit; you’re an employee of one of the many Pete Peterson front groups; and now, all of a sudden, the deficit is receding, and you had nothing to do with it. It’s a disaster!

Stop celebrating our falling deficits: It’s time to stop celebrating last week’s Congressional Budget Office report. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong. ... The CBO is saying that the federal government will be pulling demand out of the economy in 2013, 2014 and 2015. It will then start adding demand back in again — meaning we’ll be increasing the deficit — from 2016 through 2023, and presumably beyond. That is literally the opposite of what we should want. Textbook economics says the government should add demand when the economy is weak and pull back when the economy is strong. The economy — and particularly the labor market — will remain weaker than we’d like in 2013, 2014 and 2015. That’s when the government should be helping, or at least making sure not to hurt too fast. It should be much stronger from 2016 to 2023. That’s when the government should be backing off. ...

Why are our Bridges Falling? The Economics of the Infrastructure Deficit - So why are we sending 21st century highway traffic across Elvis Presley era Interstate bridges? The answer is simple: We are not spending enough to stay even with our infrastructure deficit. Our bridges, roads, dams, electric grid, sewers, and water treatment plants are wearing out faster than we are replacing them. And that is happening, in large part, because of our misguided obsession with the federal fiscal deficit. A good starting point to understand what is going on is to ask why we are concerned with the budget deficit in the first place. The cliché is that we do not want to be the first generation to leave our children a national balance sheet with a thinner margin between assets and liabilities than we inherited from our parents. The trouble is, the federal budget deficit is not the only thing that shapes the national balance sheet. Infrastructure is also a part of the equation. The infrastructure deficit is the difference between what the country invests each year in new bridges, sewers, and power lines and the rate at which the old ones fall apart. If investment in infrastructure exceeds depreciation, the country is that much richer at the end of the year. If depreciation exceeds investment, it is poorer, as surely as if the Treasury sells bonds and uses the proceeds for the most shortsighted spending programs you can think of.If you have any doubt that the infrastructure deficit is real, try taking a look at the Report Card for America’s Infrastructure published every four years by the American Society of Civil Engineers (ASCE). The Report Card assigns grades of “A” through “F” to various infrastructure categories. The 2013 report begins on an optimistic note: the cumulative GPA for our infrastructure is up. Good news! It is up! Up to D-! That is Capital-D-Minus, as in totally pathetic. We are UP to totally pathetic!

Projected Medicare/Medicaid Spending Has Fallen by $900 Billion - Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period). That date’s important because it was in late 2010 — and based on CBO’s August 2010 projections — when fiscal commission co-chairs Erskine Bowles and Alan Simpson issued their original budget proposal, which called for over $300 billion in Medicare cuts and nearly $60 billion in Medicaid savings through 2020. The original Bowles-Simpson proposal is often considered an appropriate benchmark for evaluating other deficit-reduction plans. The figure below compares CBO’s Medicare and Medicaid projections from August 2010 with the projections that CBO released last week.  (The note to the figure explains adjustments that we have made to provide comparability.)  Medicaid spending is $311 billion lower, and Medicare outlays have come down by $590 billion — far more than the savings that Bowles-Simpson recommended.

CBO - US Economy Set to Soar On Obamacare? - The Congressional Budget Office put conservative economic thinkers on their ass this week. In this Report (pdf), the CBO concluded that the US budget deficit is about to collapse to insignificance. The improvement in the deficit outlook is so large that it has lead liberal thinkers to start calling for more stimulus spending. If it were not for the three scandals brewing for Obama (Benghazigate, IRSgate and APgate) I think there would be calls to spend some more government money. The CBO assessment of the deficit profile relies on every trick in the book. The assumption is that all of the variables that weigh on the deficit will be improving over the next few years. Tax collections will remain at historically high levels. Government spending will decline as the economy improves. Fannie Mae and Freddie Mac will be kicking $95Bn into the coffers. Social Security will cost less than previously thought, the same favorable result is assumed for both Medicare and Medicaid. And of course, there will be no wars or military incursions that have to be paid for. But, by far, the biggest driver of the reduced deficits will come from a robust economic recovery that is set to occur. This is the CBO forecast for top line GDP growth:

Self-Defeating Austerity and the Improved US Fiscal Outlook - Last week, Tyler Cowen of the blog Marginal Revolution asked “Have we seen self-defeating austerity in the United States?” Cowen declines to take a clear stand on the question, but his main point is that the well-known fiscal cuts of 2012 and 2013 have, in fact, reduced the US budget deficit. Ergo, goes the implication, austerity was not self-defeating. The problem is that the case for self-defeating austerity—described in a blog post by Paul Krugman and a paper [pdf] by Brad DeLong and Lawrence Summers to which Cowen provides links—focuses on the long-run fiscal impact. Both accounts concede that austerity reduces the deficit in the short run. Their argument is that in the current environment of near-zero interest rates, fiscal deficits are unusually cheap to finance and monetary policy is not going to move to offset much (if any) of the effects of fiscal policy on the economy. Under these conditions, it is indeed possible that austerity today may reduce future tax revenues by so much that the national debt ends up larger than it would have been without austerity.

Suicide by Sequester: US Feels Pinch of Erratic Spending Cuts - Spiegel - The pain of the sequester has been bearable thus far, but that will soon change. This summer, thousands of Americans will suffer due to cuts triggered by the entrenched budgetary battle in Washington -- and the damage could last for generations. A sequester is a compulsory budget cut, the kind of idea only politicians could come up with. With the country deeply in debt and President Barack Obama and the Republicans unable to agree on how to make long-term budgetary cuts, the two factions cobbled together a ticking time bomb of austerity, set to go off in 2013. The idea was that these cuts would be so absurd that one side or the other would have to back off and yield ground in order to prevent the bomb from going off. That's what the president thought would happen. That's what the Republicans thought would happen. It didn't. The grace period expired on March 1 with no agreement reached, and since then the government has been cutting programs at random, lawn-mower style -- $85 billion (€66 billion) in spending cuts have to be made by the end of September, an amount roughly equal to the entire federal budget of Austria. In other words, within the space of half a year, the US needs to slash the equivalent of Austria from its budget. Hundreds of thousands of jobs are at stake. And if politicians in Washington still haven't reached an agreement by that point, the cuts will continue. The country is in danger of existing in a perpetual sequester, with another $1.2 trillion in budget reductions needed by 2021.

Chart of the Day: Sequester Cuts Are Starting to Bite - The number of people who are feeling the effect of the sequester continues to rise. It's now up to 37 percent, and unsurprisingly, that's affecting what people think of it: More Americans continue to disapprove than approve of sequestration, now by 56-35 percent — again, a view influenced by experience of the cuts. Eight in 10 of those who report serious harm oppose the cuts, as do about two-thirds of those slightly harmed. But the majority, which has felt no impacts, divides exactly evenly — 46 percent favor the cuts, vs. 46 percent opposed. Further, this poll, produced for ABC by Langer Research Associates, finds that 39 percent overall “strongly” disapprove of the cuts — but that soars to 66 percent of those who say they’ve been harmed in a major way.

House GOP Budget Cuts Plan Moves Forward: -- Republicans controlling the House pressed ahead Tuesday with slashing cuts to domestic programs far deeper than the cuts departments like Education, Interior and State are facing under an already painful round of automatic austerity. Veterans Affairs, Homeland Security and the Pentagon would be spared under the plan approved by the House Appropriations Committee on a party-line vote, but legislation responsible for federal firefighting efforts and Indian health care would absorb a cut of 18 percent below legislation adopted in March. At issue are deep agency budget cuts required under automatic across-the-board reductions that are the result of Washington being unable to agree of alternative ways to curb the deficit. This year, the cuts are being applied to domestic agencies and the Pentagon both; Tuesday's plan is for the 2014 budget year beginning Oct. 1 and restores cuts to the military while making cuts to domestic programs favored by Democrats even deeper. The plan lacks specifics but focuses the biggest cuts on a huge domestic spending bill that funds aid to local school districts, health research and enforcement of labor laws.

Congress: From "Starving the Beast" to Starving Real People - A time-honored tactic of conservative lawmakers is to “starve the beast” by defunding government programs. In the case of food stamps—the quintessential whipping boy for budget hawks—they’re going a step further by trying to starve actual people. The House of Representatives and Senate have proposed the United States “tighten our belts” by slashing billions of dollars from poor people’s food budgets. The main mechanism for shrinking the Supplemental Nutrition Assistance Program (SNAP) funding is the removal of “categorical eligibility.” Under the House farm bill budget, which cuts $20.5 billion in SNAP over 10 years, benefits would be eliminated for “nearly 2 million low-income people, mostly working families with children and senior citizens,” according to the Center on Budget and Policy Priorities (CBPP). (The Senate bill also cuts SNAP but only by about $4 billion over 10 years). In addition, the cuts would devastate poor students, because SNAP eligibility has enabled 210,000 low-income children to qualify for free school meals. That means more hunger pangs for kids in the cafeteria, and an emptier refrigerator waiting for them at home. Meanwhile, their working-poor parents may find themselves buying cheaper, less nutritious food to stretch budgets, or turning to the local food pantry, or facing cruel trade-offs like delaying rent payments to pay for groceries or leaving a health problem untreated.

Dispute Over Budget Deepens a Rift Within the G.O.P. — Senate Republicans are locked in a widening internal dispute over future budget negotiations, splitting along generational and ideological lines on the party’s approach to the central issue that drove the conservative surge in the Obama era: how to deal with the federal debt.  In full view of C-Span cameras trained on the floor this week, Senators John McCain of Arizona and Susan Collins of Maine jousted with a new generation of conservatives — Marco Rubio of Florida, Ted Cruz of Texas, Mike Lee of Utah and Rand Paul of Kentucky — over the party’s refusal to allow the Senate to open budget talks with the House despite Senate Republicans’ long call for Democrats to produce a budget.  It was the Old Guard versus the Tea Party, but with real ramifications, as Congress careens toward another debt limit and spending crisis this fall with seemingly no one at the steering wheel. The newer members say negotiations should go forward only with a binding precondition that a budget deal cannot raise the government’s statutory borrowing limit.  “I have tremendous respect for this institution,” Mr. Rubio said in an interview on Friday. “But I’m not all that interested in the way things have always been done around here.”  Republicans made the failure of Senate Democrats to pass a budget a central talking point in the 2012 campaign, going so far this year as to pass legislation withholding Congressional pay if budgets were not approved this spring. Now, some Republicans say the fact that members of their own party are standing in the way of a House-Senate conference committee undermines their fiscal message.

Are There Reasonable Approaches to Fiscal Consolidation? - According to the CBO, under the President’s budget, the deficit hovers around 2% of GDP, and debt-to-GDP stabilizes through 2023 at levels lower than today’s. Hence, were the President’s budget to be implemented, the budget would be on a path to medium run stabilization. This point is illustrated in Figures 1 and 2 from the CBO report.  Now, it’s clear that with the Congress we have, it is highly unlikely that the President’s budget would be implemented. On the other hand, these scores (recalling that the Ryan House budget plans have never been “scored”, except by Heritage CDA) indicate that stabilization of debt-to-GDP ratios do not require draconian cuts to entitlements and discretionary spending. Over the longer term, health care costs will push upward expenditures, and hence deficits (although by how much is now debatable [1] [2]) This is not a new concern; it was a concern back in 2001. But then, the outgoing (Clinton) Administration had hoped that a conservative fiscal policy could build up assets to support entitlement spending. Instead, the new administration in 2001 implemented tax cuts (and some discretionary spending in the form of Operation Iraqi Freedom), which resulted in a shifting forward the onset of the deficit. This is shown in Figure 5-5 from the 2010 Economic Report of the President:

Michael Kinsley Gets It Wrong On "Austerians" - While I was on vacation, the Internet exploded over a column by Michael Kinsley beefing with Paul Krugman and his follow-up response. The biggest problem with his attempt to reclaim the word “austerians” from its detractors is that he doesn’t provide a working definition, an argument, or even specific people or proposals for what he has in mind. He apparently takes “austerian” to mean “anti-Krugman,” and since Kinsley and others feels that they don’t line up with Krugman, they must all be austerians. This leads into the second biggest problem with Kinsley’s posts: he concludes that everyone is basically on the same page. It’s just a matter of how you weigh your priorities and concerns. Kinsley writes that “Krugman now says that what he is against is ‘premature’ fiscal austerity. So is everybody. They just disagree on what is ‘premature.’” Also that “[y]ou can be a right-wing Austerian, a left-wing Austerian, a right-wing Keynesian, or a left-wing Keynesian. And (as I also noted last week) the differences are not so great.” (My underlines.) This is wrong. I’ll quickly summarize three different approaches to the deficit, trying hard to not make straw men of them. There’s (1) Team Keynesian, which thinks that the government should increase the short-term deficit, full-stop. Extend the payroll tax cut for two years. Invest in an infrastructure bank. Mail people checks. Get to the point where the Federal Reserve has traction again on the economy before worrying about the debt.

As rich gain optimism, lawmakers lose economic urgency - Washington has all but abandoned efforts to help the economy recover faster — and lawmakers don’t seem worried that voters will punish them for it.There are no serious negotiations underway between the White House and congressional leaders on legislation to spur growth, and no bipartisan “gangs” of senators are huddling to craft a compromise job-creation package. Yet economic growth remains slow by historical standards, and 11.5 million Americans are still looking for work. More than 4 million people have been unemployed for longer than six months. A Washington Post-ABC News poll found in April that two-thirds of Americans said jobs were difficult to find in their communities. But lawmakers appear to feel little electoral pressure to address those concerns. They disagree vehemently over what actions would make a difference, and lately they’ve been distracted by other issues and scandals. There also is mounting evidence that the political donor class — wealthier Americans — is feeling a stock-market-fueled surge of optimism about the economy. It all adds up to inaction.

Despite sequester, high-level federal executives slated to get bonuses — An elite group of federal employees is set to receive cash bonuses despite this year’s automatic budget cuts, according to a report that a Senate subcommittee issued Friday. The report revealed that members of the government’s highly paid Senior Executive Service _ who make up less than 1 percent of the federal workforce _ had received more than $340 million in bonuses from 2008 through 2011. The bonuses came on top of annual salaries that ranged from $119,000 to $179,000. In a process known as sequestration, $85 billion in across-the-board federal spending cuts took effect March 1, forcing the government to slash services and furlough workers. A month later, the Obama administration froze bonuses for the vast majority of federal workers. But by law, agencies still must pay bonuses to Senior Executive Service employees who meet certain performance criteria, the report said. Missouri Sen. Claire McCaskill, a Democrat, introduced a bill Friday that would eliminate bonuses for members of the Senior Executive Service during sequestration. “The idea that some of the highest-paid federal government employees could be getting bonuses while others are being furloughed is outrageous,” McCaskill said

The IRS controversy isn’t about taxes. It’s about disclosure. -  At some level, the scandal around the IRS’s targeting of conservative 501(c)4 groups has nothing to do with taxes. That may sound weird – 501(c)4 is a section of the Internal Revenue Code, the entire 501(c) section exists to list groups that are exempt from some federal taxes, the IRS is the tax man, etc.  But there’s no universe in which the groups in question are going to pay taxes. Think about it. Let’s say they instead register as 527 groups, enabling them to make unlimited independent expenditures. Those organizations don’t have to pay taxes on contributions they receive either. Or maybe they want to be super-PACs (which are 527s, technically, for tax purposes), which can spend unlimited amounts to openly support candidates. They don’t pay taxes on contributions either. What’s more, neither super-PACs nor other 527s have to tell their donors that they may be required to pay gift tax on some of their donations. 501(c)4s, on the other hand, have to make that disclosure according to the Congressional Research Service. So why are these groups so eager to keep their 501(c)4 status if it, if anything, puts them at a disadvantage tax-wise? It’s simple: disclosure. 501(c)4s can accept unlimited donations and don’t have to tell a soul from whence they came. 527s, including super-PACs, have to file quarterly reports disclosing donors. That’s why so many super-PACs have attached 501(c)4s, which can collect unlimited donations and then donate them in turn to the super-PAC, as Fred Wertheimer explained to me last week.

Who Will Stick Up For the IRS? - I actually feel kind of sorry for the IRS. Frankly, their job seems almost impossible. Think about it: they have to process over a hundred million claims a year, several million of which are highly complex. That means they need a huge number of people. And these people need to be fairly smart, because this isn't simple work. But it is boring work. In other words, the IRS needs tens of thousands of people who are (a) smart, (b) willing to do really tedious work, (c) for moderate wages, (d) while working for a soul-crushing bureaucracy, and (e) being loathed by all right-thinking people. Does this sound to you like a recipe for disaster? Me too. Frankly, the biggest surprise about the tea party targeting scandal isn't that it happened, but that there haven't been a lot more like it. After all, it wouldn't take much. Nobody ever lost an election by demagoguing the IRS, which means they're always under a high-powered microscope from ambitious politicians.

Apple avoided billions in US taxes, Congressional panel says - Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found. Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.  Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California.  Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction.

The Real Story About Apple’s Taxes - Because Apple is so profitable, the dollars involved will certainly attract attention (this is a Senate committee after all, so that is the point). The report alleges Apple reduced its U.S. corporate income tax by an average of $10 billion-a-year for the past four years. Since the corporate levy generated only about $240 billion in 2012, $10 billion foregone from one company is a very big number indeed. But while it added a few interesting twists, Apple cut its taxes  with the same tools multinationals have been using for years to minimize their worldwide tax liability. And if there is a scandal, I suppose it is the very ordinariness of these transactions. Apple’s tax avoidance shop, it seems, is a lot less innovative than its phone designers.   The tactics are complicated but the strategy is simple: A company designs its business to locate as much income as possible in those countries where taxes are low. At the same time, it allocates as many costs as possible to those high-tax jurisdictions (like the U.S.) where deductions are especially valuable. A deduction is worth 35 cents on the dollar in the U.S. but only one-third as much in Ireland, where the corporate rate is only 12.5 percent.   To achieve these twin goals, Apple mostly relied on the three golden goodies of international tax avoidance: deferral, transfer pricing, and check-the-box.

Apple Avoids Paying $17 Million In Taxes Every Day Through A Ballsy But Genius Tax Avoidance Scheme - Apple CEO Tim Cook charmed the Senate today, testifying on the company's tax avoidance practices. The most interesting part of the story wasn't on the Senate floor, however. The report published by the Permanent Subcommittee on Investigations detailing Apple's strategies is a great read on its own. The report gives an inside look on Apple's absolutely genius tax avoidance strategies. Apple uses a variety of offshore structures and arrangements to shift billions of dollars from the United States to Ireland. The U.S. corporate tax rate is 35%, while Apple said it has negotiated a special corporate tax rate in Ireland of less than 2%*. (The 2% rate statement has proven controversial, see below for details) Apple has found the secret to not paying taxes. You just avoid taxes by not declaring a tax residency for the company that oversees the entirety of your international income. First, let's look at Apple's main offshore holding company:

Why public companies should have public tax returns - Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple’s tax strategies is Pulitzer-worthy stuff. The first discrepancy I’d love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were “nearly $6 billion” in FY2012, for “a US federal cash effective tax rate of approximately 30.5%”. (Those numbers imply taxable income of about $19.6 billion.) The Senate report, by contrast, looks at the 2011 calendar year, and reproduces Apple figures showing $3.884 billion in current federal taxes, plus holding on to $2.998 billion in deferred federal taxes, for a total of $6.882 billion; that means an effective tax rate of 20.1%. (Again, working backwards, the implied total taxable income increases here to $34.2 billion.) The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the 1099 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.

Global Capital and the Nation State -- Robert Reich - As global capital becomes ever more powerful, giant corporations are holding governments and citizens up for ransom — eliciting subsidies and tax breaks from countries concerned about their nation’s “competitiveness” — while sheltering their profits in the lowest-tax jurisdictions they can find. Major advanced countries — and their citizens — need a comprehensive tax agreement that won’t allow global corporations to get away with this. Google, Amazon, Starbucks, every other major corporation, and every big Wall Street bank, are sheltering as much of their U.S. profits abroad as they can, while telling Washington that lower corporate taxes are necessary in order to keep the U.S. “competitive.” Baloney. The fact is, global corporations have no allegiance to any country; their only objective is to make as much money as possible — and play off one country against another to keep their taxes down and subsidies up, thereby shifting more of the tax burden to ordinary people whose wages are already shrinking because companies are playing workers off against each other.

A Journey Through Oligarch Valley - If you've ever driven between San Francisco and Los Angeles on Interstate-5, you know the Central Valley as a place where you set the cruise control to 90 mph and gun through as fast as possible. The highway runs in an absolute straight line for 250 sleep-inducing miles, bisecting an endless plane of farmland, orchards, arid dirt, howling winds and spooky rural desolation. Probably the only things you notice are the gas stations and the In-N-Out burger joints are, as well as the periodic regions marked by the foul smell of cow shit that signal the high-density feedlots and slaughter yards that provide that tasty In-N-Out ground beef. But the region is about a lot more than just shitburgers, migrant workers and toxic pesticides. This stretch of the Central Valley should really be called Oligarch Valley. It ain't Park Avenue, so you won't see any huge mansions. But just about all the land running along the highway and as far as you can see to the horizon is owned by a small clique of billionaires and oligarchs, many of whom trace their roots back to the landholdings of America's most notorious industrialist vampires: the Union Pacific Railroad octopus, John D. Rockefeller's Standard Oil, the family of belligerent Los Angeles Times publisher Harry Chandler... Some of these illustrious farmers come from old Southern plantation families that had diversified their agricultural operations into California over a century ago using the next best thing to slave labor: migrant workers.

In an attempt to avoid more controversy, banks are pegging LIBOR to CD rates - As predicted back in October (see discussion), dollar LIBOR is now being priced (roughly) off certificate of deposit (CD) rates. Imagine being a bank's treasurer responsible for submitting LIBOR quotes to the BBA. If you can't justify how you obtained your rate and someone accuses you of LIBOR manipulation (see post), it could cost you your job and more. The sources of LIBOR rates were supposed to be quotes on interbank loans. But unsecured interbank lending volumes have been suppressed since the financial crisis. In fact current levels are similar to what they were in the 80s (see chart below). And most of the activity is in the overnight markets with very little transacted at maturities of one month or greater. (Note: some confuse the sources of LIBOR rates, such as interbank lending, with products that price using LIBOR rates, such as interest rate swaps. Here we are discussing the sources.)With little to go by in the way of actual quotes, setting these rates becomes a real headache for banks. By pricing LIBOR off something that's highly transparent, like CD rates, makes the quotes easier to justify. After all, a CD rate is where a bank is willing to borrow money for a fixed term - which is what LIBOR is supposed to be. That's why LIBOR has settled on a fixed spread to CD rates - the 3-month LIBOR is now roughly 7 basis points above the 3-month CD rate (note that the CD average here includes retail quotes - larger term deposits yield more and the spread to LIBOR is even narrower).

VIDEO: Elizabeth Warren Grills Treasury Secretary on Too Big to Fail - At a Senate banking committee hearing Tuesday, Sen. Elizabeth Warren (D-Mass.) grilled Treasury Secretary Jack Lew on too-big-to-fail banks—financial institutions that are so large that their failure would endanger the entire financial system. "How big do the biggest banks have to get before we consider breaking them up?” she asked. Too big to fail is far from over. The largest financial institutions are still ballooning in size. In the past few years, banks have been beset by one scandal after another—from money laundering, to rate-fixing, to foreclosure fraud, and have mostly received wrist-slaps as punishment—probably because, as Attorney General Eric Holder recently warned, prosecuting too-big-to-fail banks for bad behavior might spook the entire financial system. Warren noted that as the 2010 Dodd-Frank financial reform law was being crafted, an amendment was proposed that would have broken up the banks, but it didn't pass—in large part, she reminded Lew, because the Treasury Department (then under Treasury Secretary Timothy Geithner) was against it. "Have you changed your position," Warren demanded, referring to the Treasury department. "Or are you still opposed to capping the size of banks?" Lew responded that "ending too big to fail is our policy and we're aiming to do it." But Warren wouldn't let him weasel out of the question with generalities. "I want to focus you in here," she pushed. "My question is about capping the size of largest financial institutions." Lew refused to commit. "Our job right now is to implement…Dodd-Frank," he said. "I think this is not the time to be enacting big changes."

Can two senators end ‘too big to fail’? - Last month, an unlikely pair of senators — Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican — introduced a non-binding resolution calling for the end of the implicit subsidies that “too big to fail” (TBTF) banks enjoy. The Senate voted 99-0 in support of the measure. This month, they have pushed their ideas into actual legislation: They introduced a bill called the “Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013.” This bipartisan legislation would help eliminate the government subsidies that put taxpayers at risk and also give the largest US banks an advantage over their smaller competitors. Just how much of a subsidy are the banks receiving? An International Montetary Fund Working Paper quantified it as creating an 80 percent basis point advantage to TBTF banks. A 2012 FDIC study found similar advantages. The implicit government guarantee that these banks would not be allowed to fail allowed them to obtain credit at a more advantageous rate. Bloomberg calculated that this amounted to a taxpayer subsidy of $83 billion a year to the 10 largest U.S. banks, ranked by assets — and $64 billion to the five largest. At the request of Brown and Vitter, the Government Accounting Office is trying to more precisely quantify the annual subsidy to megabanks from the U.S. government.

Sheila Bair: Dodd-Frank really did end taxpayer bailouts - Sheila Bair, the hard-charging former director of the Federal Deposit Insurance Corporation, stands at the center of three of the biggest debates in Dodd-Frank implementation. As someone who knows the FDIC — which is actually the agency that takes down failing banks — she’s in an unusually good position to know whether the law’s resolution authority will work. These are the new powers the FDIC has in Dodd-Frank to impose losses and fail a financial firm (it’s what Barney Frank called “death panels” for financial megabanks). Bair has also been a vocal advocate for higher leverage requirements, which has animated the debate over the recent Brown-Vitter bill. And she was recently critical of the efforts by the House Financial Services Committee to repeal parts of Dodd-Frank that push swaps out of bank holding companies, even though she original opposed a stricter version of that language back in 2010. We talked about all three of these topics; our discussion is slightly edited for clarity.

Gretchen Morgenson on Bill Moyers: Why Too Big to Fail Still Lives - (video) This Bill Moyers segment gives a welcome view of Gretchen Morgenson recapping the sorry state of the “too big to fail” problem. She’s more of a believer than yours truly on the Brown Vitter bill as a potential solution, although correctly pessimistic as to the odds of its passing.

FSOC Annual Report Shows Continued Interest in Austerity Bargain Over Reducing Financial System - David Dayen - With Jack Lew now installed at Treasury, I decided to take a look at the annual report of the Financial Stability Oversight Council (FSOC), the Dodd-Frank creation that’s supposed to monitor systemic risk. We already know the leanings of the not-so-new regime at Treasury: they think Dodd-Frank worked to secure a more stable financial system, an opinion reiterated Tuesday at a Senate Banking Committee hearing. Senator Sherrod Brown, co-author of Brown-Vitter, thought he found a nut by saying that the FSOC annual report identified “risk-taking at large interconnected banks” as a threat to economic stability. He didn’t mention that this comes on page 146 of a 149-page report. And it’s not really taken all that seriously. The report asserts that the “synthetic uplift” from credit rating agencies on TBTF banks has declined, and then explains all of the reasons why Dodd-Frank ended TBTF. Under separate questioning yesterday from Elizabeth Warren, Lew said that “Our job right now is to implement … Dodd-Frank … I think this is not the time to be enacting big changes.”  So what is the FSOC concerned about with the financial system? Some perfectly reasonable issues, like fire sales in the wholesale funding markets, particularly money market funds. But on this, as with most issues here, the FSOC covers their posterior by listing “concrete steps” they’ve taken to defuse the issue, when in reality little has been done.

Volcker: Multiple Bank Regulators Is ‘Recipe for Getting Nothing Done’ - Paul Volcker, the former chairman of the Federal Reserve, says the U.S. has too many agencies charged with the supervision and regulation of banks.“It’s a recipe for getting nothing done,” he said at a forum at George Washington University.“This really is a disaster,” Mr. Volcker said in an on-stage interview conducted by Donald Kohn, a former Fed vice chairman. Mr. Volcker said he was particularly frustrated that three years after the passage of the Dodd-Frank law, regulators still haven’t agreed on a way to implement a still-controversial provision, known as “The Volcker Rule,” which is designed to force commercial banks to stay away from trading for their own accounts.“We passed a law, like it or not,” he said. “And three years later, we’ve got no rule.” He attributed the delay both to formidable task of getting all the relevant agencies and commissioners to agree on new rules and to the aggressiveness of bank lobbyists

How a Big-Bank Failure Could Unfold - Defenders of big banks are adamant that we have fixed the problem of too big to fail. Organizations such as the Bipartisan Policy Center and the law firm Davis Polk & Wardwell assert that the critical breakthrough was the introduction of new orderly liquidation powers under the 2010 Dodd-Frank financial reform legislation, enabling the Federal Deposit Insurance Corporation to handle the resolution or managed failure of very large financial companies. This is the core of their argument that no financial reforms or higher capital requirements are needed. This discussion can get a little abstract, so to understand the details – and why the bank advocates’ position is wrong – consider what could happen if there were a hypothetical problem at a major international financial conglomerate such as Deutsche Bank or Citigroup. Deutsche Bank is not currently in obvious trouble, but during the financial stress and instability at the end of 2008, the Taunus Corporation, the American subsidiary of Deutsche Bank, looked very vulnerable to the financial storm building around it. Although the bank had more than $396 billion in assets, making it one the top 10 bank-holding companies in the United States, it had equity of negative $1.4 billion on an accounting basis (i.e., its assets were worth less than its liabilities). A large fraction of Taunus’s liabilities, perhaps $294 billion, consisted of short-term dollar borrowing, in the form of uninsured deposits at its essentially unregulated branch and agency network, along with what is known as repo and commercial paper borrowing.

Banks’ Lobbyists Help in Drafting Financial Bills - Bank lobbyists are not leaving it to lawmakers to draft legislation that softens financial regulations. Instead, the lobbyists are helping to write it themselves.One bill that sailed through the House Financial Services Committee this month — over the objections of the Treasury Department — was essentially Citigroup’s, according to e-mails reviewed by The New York Times. The bill would exempt broad swathes of trades from new regulation. In a sign of Wall Street’s resurgent influence in Washington, Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill. Two crucial paragraphs, prepared by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word. (Lawmakers changed two words to make them plural.)  The lobbying campaign shows how, three years after Congress passed the most comprehensive overhaul of regulation since the Depression, Wall Street is finding Washington a friendlier place. The cordial relations now include a growing number of Democrats in both the House and the Senate, whose support the banks need if they want to roll back parts of the 2010 financial overhaul, known as Dodd-Frank. This legislative push is a second front, with Wall Street’s other battle being waged against regulators who are drafting detailed rules allowing them to enforce the law.

Is EVERY Market Rigged? - CNN reports: The European Commission raided the offices of Shell, BP and Norway’s Statoil this week as part of an investigation into suspected attempts to manipulate global oil prices spanning more than a decade. None of the companies have been accused of wrongdoing, but the controversy has brought back memories of the Libor rate-rigging scandal that rocked the financial world last year. A review ordered by the British government last year in the wake of the Libor revelations cited clear” parallels between the work of the oil-price-reporting agencies and Libor. “[T]hey are both widely used benchmarks that are compiled by private organizations and that are subject to minimal regulation and oversight by regulatory authorities,” the review, led by former financial regulator Martin Wheatley, said in August . “To that extent they are also likely to be vulnerable to similar issues with regards to the motivation and opportunity for manipulation and distortion.” USA Today notes: The Commission … said, however, that its probe covers a wide range of oil products — crude oil, biofuels, and refined oil products, which include gasoline, heating oil, petrochemicals and others.

Banks Win Big as Regulators Refuse to Rein in $700 Trillion Derivatives Market - Paul Jay of the Real News Network interviews William R. Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at Real News Network. (partial transcript)

ICE Joins CME Warning of Splits in Global Derivatives Rules - Top executives of the two largest U.S. derivatives exchanges say regulators must take further steps to align Dodd-Frank Act rules with those of foreign counterparts to avoid oversight splits that could harm markets. The Commodity Futures Trading Commission and overseas agencies have a few months to improve coordination before differences hurt business, IntercontinentalExchange Inc. (ICE) Chairman and Chief Executive Officer Jeffrey Sprecher said at a House Agriculture Committee hearing where testified alongside CME Group (CME) Inc. Executive Chairman Terry Duffy.“Global financial reform efforts are not being harmonized and substantial differences remain between regulatory regimes,” Sprecher said at today’s hearing in Washington. “It is crucial to understand that if countries erect barriers, markets and market participants will be damaged.” The CFTC and Securities and Exchange Commission are leading U.S. efforts to revamp oversight of the $633 trillion global swaps market after unregulated trades helped fuel the 2008 credit crisis.

Naming Names in the Dodd Frank Mess - As we trudge through the swamp of disappointment that defines Dodd-Frank implementation, the liberal commentariat has lately seized upon a new meme; Wall Street lobbyists are responsible for gutting Dodd-Frank behind closed doors. Big-pocketed firms deploy phalanxes of clever lawyers and influence peddlers that easily outpace reformers, ensuring that the regulations ultimately written are sufficiently defanged to allow the financial industry to conduct its business with few, if any, restrictions. The lobbyists, and mostly the lobbyists alone, bear responsibility.Witness the most recent rollback of Dodd-Frank, a compromise on derivatives regulations by the Commodity Futures Trading Commission (CFTC). The New York Times’ Ben Protess makes the culprit clear in his Page 1 report: “Under pressure from Wall Street lobbyists, federal regulators have agreed to soften a rule intended to rein in the banking industry’s domination of a risky market.” But this gets things backward. Concessions aren’t made without a regulator willing to sit across the table from Mr. Wall Street Lobbyist and agree to his suggestions. Indeed, in the case of the derivatives regulations, one Democratic commissioner on the CFTC, Mark Wetjen, basically forced through the weaker rules by himself. The importance of actually naming the source of the problem is even more magnified here, because Wetjen is in line to replace Chair Gary Gensler and run the CFTC. With 63 percent of Dodd-Frank rules still unwritten by regulators, a bank-friendly chairman overseeing derivatives would surely erode at an already-diluted law.

Systemic Malfunctioning of the Labor and Financial Markets - (video & partial transcript) Paul Jay of the Real News Network interviews Heiner Flassbeck, who served as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, known as UNCTAD. He was a vice minister at the Federal Ministry of Finance in Bonn in 1998 and ’99. He’s now a professor of economics at Hamburg University. I’m going excerpt a bit more heavily than usual, and focus on the financial markets instead of the labor markets. And focus especially on the surreal parts:

No Arrests on Wall Street, But Over 7,700 Americans Have Been Arrested Protesting Big Banks - As Senator Elizabeth Warren (D-MA) has said, the nation’s biggest banks have essentially gained “too big for trial” status, and the federal government has failed to prosecute any executive at a Big Bank for financial fraud. While Wall Street has escaped prosecutions, thousands of Americans have been arrested in the course of protests against the banks. As of May 2013, that number is 7,736 — according to the website Occupy Arrests, which tracks arrests. On Monday, dozens of homeowners who have faced abuses by Big Banks rallied outside the Department of Justice (DOJ) in Washington, D.C. They demanded that the agency finally prosecute Wall Street banks who have become, as Senator Elizabeth Warren (D-MA) has said, “too big for trial.” The march, consisting of well over a hundred demonstrators, started at Washington, D.C.’s Freedom Plaza. The marchers came from as far as Portland, Oregon, and large contingents came from cities plagued with foreclosures, such as Atlanta and New York City.

Jon Stewart rips Obama for aggressive investigation of whistle-blowers instead of bankers - On his show Thursday night, The Daily Show host Jon Stewart blasted the Obama administration for aggressively investigating whistle-blowers who talked to the press. He noted that while federal prosecutors had come down hard on hackers and “potheads,” the Obama administration tip-toed around potentially criminal bankers who caused the financial collapse. Watch video, via Comedy Central, below:

Counterparties: Borrow as fast as you can - American companies have gotten the message from the market: borrow as much as you can, as fast as you can. So far this year, $315 billion of investment grade bonds and $124 billion of junk bonds were issued, according to Thomson Reuters data, respective increases of 36% and 17% over the same period last year. The massive syndicated loan market is up 13% to $654 billion over the same period. Those numbers don’t include the blazingly hot convertible-bond market, or foreign issues like Petrobras’s monster $11 billion bond last week. Even as debt issuance booms, however, Reuters’ Mike Dolan reports that finding an actual bond in the wild isn’t necessarily easy. “JPMorgan estimates that the world’s central banks and commercial banks… hold some $24 trillion worth of bonds — or 55% of the entire $44 trillion universe of government, asset-backed and corporate bonds”. Sober Look says that low rates have pushed companies to borrow, even if they don’t have a use for the capital — debt and cash are piling up on American balance sheets. John Kay attributes growing cash piles to a decline in truly capital-intensive US businesses, like heavy manufacturing. Soaring debt issuance, he thinks, is “more likely related to financial engineering, or the acquisition of existing assets, than to new investment”.

Is there a stock-market bubble? - With the stock market setting new highs on a nearly daily basis, even as the real economy just slogs along, there seems to be one question on everyone’s mind: are we in the middle of yet another market bubble? For a growing chorus of money managers and market analysts, the answer is yes: the market is a house of cards, held up by easy money and investor delusion, and we are rushing all too blithely toward an inevitable crash. Given that we’ve recently lived through two huge asset bubbles, it’s easy to see why they’re worried. But in this case the delusion is theirs. The bubble believers make their case with a blizzard of charts and historical analogies, all illustrating the same point: the future will look much like the past, and that means we’re headed for trouble. Smithers & Company, a London market-research firm, says that, according to a number of market indicators, stocks are, by historical standards, forty to fifty per cent overvalued. The bears admit that corporate profits are high, which makes the market’s price-to-earnings ratio look quite normal, but they insist that this isn’t sustainable. They think that earnings will return to historical norms, and that, when they do, stock prices will be hit hard. Today, after-tax corporate profits are more than ten per cent of G.D.P., while their historical average is closer to six per cent. That’s a vast gap, and it’s why bears believe that the market is, in the words of the high-profile money manager John Hussman, “overvalued, overbought, overbullish.”

Internal Wall Street pitchbook shows that you, the clients, are suckers - Do you despise Wall Street sufficiently yet? How about now? An internal document, known as the “Golden Pitchbook” to senior brokers at John Thomas Financial, has been leaked and it is very, very sexist. Sexism ain't the half of it. It's basically a manual on how to sell stocks modeled on how the biggest bastards of the used car industry might sell used cars, and is a fine demonstration of how similar the two worlds are. A part of the pitch book known colloquially at the firm as "Don't Pitch the Bitch" demonstrates how to push a client to hurry up and buy some stock without getting his wife involved: “(Prospect) if you want to call me back so you can ask your wife if you can buy the stock, I will call my wife and see if I can sell you the stock, come on! You make business decisions daily without your wife.” There's also tips on how to bully clients into buying a stock by claiming that time is running out on this hot deal, or by implying that the client is just a small fish and you're practically doing them a favor by letting them buy from you at all, what with all the bajillionaires you usually work with. Nearly all of it, in fact, it based on bullying the client.

Ian Fraser: The beauty and insanity of HFT - What has become of our markets? Nanex, the market analysis firm, has animated a half second of trading activity in Johnson & Johnson stock. The animation is both intoxicating and mindblowing, not only because of the sheer quantity of trades, each of which is made by computer algorithms (i.e. without human intervention) in such a miniscule timespan, but also because of the tremendous scope that high-frequency trading creates for what Nanex calls “abusive behaviour” — including arbitrage and market manipulation — and systemic risk. The video illustrates an actual half second of trading in J&J stock from May 2nd, 2013, slowed down so it takes five minutes to watch. In the video each box represents a stock exchange. As Time magazine explained in an article last year (“Wall Street’s Doomsday Machine“) high frequency trading has nothing to do with the efficient allocation of capital, and everything to do with socially-useless proprietary trading that runs counter to the interests of long-term investors:-

Financial markets are at risk of a ‘big data’ crash - Regulators and investors are struggling to meet the challenges posed by high-frequency trading. This ultra-fast, computerised segment of finance now accounts for most trades. HFT also contributed to the “flash crash”, the sudden, vertiginous fall in the Dow Jones Industrial Average in May 2010, according to US regulators. However, the HFT of today is very different from that of three years ago. This is because of “big data”. The term describes data sets that are so large or complex (or both) that they cannot be efficiently managed with standard software. Financial markets are significant producers of big data: trades, quotes, earnings statements, consumer research reports, official statistical releases, polls, news articles, etc. Companies that have relied on the first generation of HFT, where unsophisticated speed exploits price discrepancies, have had a tough few years. Profits from ultra-fast trading firms were 74 per cent lower in 2012 compared with 2009, according to Rosenblatt Securities. Being fast is not enough. We have argued that HFT companies increasingly rely on “strategic sequential trading”. This consists of algorithms that analyse financial big data in an attempt to recognise the footprints left by specific market participants. For example, if a mutual fund tends to execute large orders in the first second of every minute before the market closes, algorithms able to detect that pattern will anticipate what the fund is going to do for the rest of the session, and make the same trade. The fund will keep making the trade, with higher prices, and the “algo” traders cash in. This new form of HFT can go wrong, such as in the so-called “hash crash” of April 23 2013 – the market drop caused by a bogus tweet about a terrorist attack on Barack Obama, sent from the Associated Press twitter feed. Unlike the crash of May 2010, this was not an incident caused by rapid sales triggering more sales. It was not a speed crash; it was a big data crash. Unless regulators understand the difference, they run the risk that new rules may address an old, expired challenge.

Fed Paper Urges Trading Revamp - WSJ  - A Federal Reserve official has called for fundamental changes in financial markets to slow trading and allow investors to better compete with the ultrafast computer programs used by some participants. A paper due to be presented Tuesday by the Federal Reserve Bank of Chicago proposes altering the structure that allows a nonstop stream of trades and instead execute orders every half-second. The proposal is expected to ignite controversy among some traders and exchanges, which have invested heavily in the technology to profit from ultrafast trading. The paper said high-frequency trading has inflated transaction costs, with limited benefits for liquidity and pricing. "Within the last 10 years, financial markets have decided to abandon the premise that financial markets should be oriented toward human beings," said John McPartland, a senior policy adviser at the Chicago Fed and the paper's author, in an interview. He said the proposal would help make security and derivatives markets fairer to mutual funds and individual investors, and scale back a torrent of pricing information that his research said adds millions of dollars a year in data-management costs.

Corporate cash balances still growing - and so is debt - Corporate treasurers' risk tolerance remains low as they prefer to hold record amounts of cash on their balance sheets. This is taking place at the time when companies have issued record amounts of debt to take advantage of ridiculously low rates. Increasingly however the proceeds of those bond sales and other borrowings sit in cash. The difference between total and net debt in the chart below is cash (above).Markets are betting that some of this cash will ultimately turn into stock buybacks or dividends. Shareholders are certainly demanding it. Over time that will leave some of these firms more leveraged, and unless they "grow into" this debt, more vulnerable to downturns.

A fresh spike in shareholder activism? -- Maybe.  Nomura carries out an annual survey on individual investors’ voting intentions and this year’s results suggest 43.8 per cent of respondents plan to exercise their rights — a a 5.1 percentage point jump from 2012. That compares with a record activism reading of 45.1 per cent in 2010, but it’s also worth noting that those investors saying they would not use their voting rights dropped from 30.6 per cent to 25.8 per cent. So engagement is clearly on the rise. What are they likely to vote on? Directors pay, of course (34.5 per cent) – and retirement bungs (37 per cent). A couple of charts from Nomura’s Kengo Nishiyama. Click to enlarge…

Rating agencies under fire again - After coming under fire for their blessing of risky mortgage backed securities in the lead-up to the financial crisis, credit rating agencies are again facing criticism – this time for misjudging the impact of the rebound in the US housing market. Rising house prices in almost all US cities mean that many mortgage-backed securities once judged close to worthless may now be fit for an investment grade credit rating that would allow traditional investors such as pension or mutual funds to buy them. However a growing number of investors who do not rely on such ratings said that the agencies such as Standard & Poor’s, Moody’s and Fitch Ratings have not kept up with improving fundamentals. One of the best hedge fund trades of the past three years has been sorting through the rubble of bonds backed by subprime mortgages issued in the boom years of 2005 to 2007, before the US housing crash caused valuations to plummet. Bank of America Merrill Lynch estimates that around 10 per cent of the $900bn market for thousands of mortgage backed securities not insured by the government are judged as investment grade.

Mortgage-Bond Yields Guiding Home-Loan Rates Increase - Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates climbed to the highest in almost a year as Federal Reserve Chairman Ben S. Bernanke told Congress the central bank may cut the pace of bond purchases in the “next few meetings.”  Fannie Mae’s 3 percent, 30-year securities jumped 0.19 percentage point to 2.67 percent as of 4:59 p.m. in New York, the highest since May 29, 2012, according to data compiled by Bloomberg. The yields have risen from the record-low 1.97 percent reached in October after the Fed announced it would start buying $40 billion of government-backed housing debt a month to begin its third round of bond purchases known as quantitative easing. The central bank’s bond buying has pushed down mortgage rates, helping property prices rally after a five-year housing slump and boosting homeowner refinancing that’s aided consumers and banks. Minutes of the Fed’s last meeting also released today helped fuel speculation that it may pull back on the program.

Fed Study Rebuts Banks on Swipe Fees - WSJ  -- A Federal Reserve study on debit-card transactions undercuts complaints from the banking industry that a government cap on the fees large lenders charge merchants would result in a drop in the payments for all banks. Small banks and credit unions last year were able to charge slightly more than double the average fee of large lenders for debit-card transactions in which the customer has to sign a receipt, the Fed study found. The Fed said the central bank's exemption for lenders with less than $10 billion in assets "is working as intended" because small banks and credit unions have been able to maintain the fees they charge to merchants. The cap on swipe fees, which went into effect on Oct. 1, 2011, was part of the Dodd-Frank financial-overhaul law. Banking industry representatives questioned the study, noting the rule is less than three years old and that anecdotal evidence from lenders suggests it is driving down the swipe fees.

Fed's action won't influence deposit growth -  We continue to receive emails pointing to what some have called "a broken monetary transmission" in the US. On the surface the argument looks compelling. The Fed's securities purchase program is expanding the monetary base - the amount of dollars in the system. In theory some of those extra dollars should encourage the banking system to extend more credit than it normally would, ultimately growing the broad money supply (M2 for example). But that's not how things turned out.The argument goes that the banking system is broken and is unable to grow credit - which is being manifested as tepid growth in the broad money stock. Is that what's really going on here? A closer look reveals that the slow growth in M2 is driven primarily by the leveling off in the amount of deposits in the US banking system (in the chart below the monthly fluctuations reflect the payroll cycle). But is this leveling off in deposits that unusual? How does it compare to changes in total deposit balances across US banks over longer periods? It turns out that the growth of deposits in the United States has actually been fairly steady - roughly 6.8% per year over the long run. The chart below shows a fit to 40 years of weekly deposit data. While deposit growth fluctuated over time, it has maintained a steady growth trajectory. Recessions, market booms, Fed's policy, reserve requirements, etc. have had a relatively minor impact on deposit expansion in the long run (movement of money into equities and property in the early 90s had a bit of an inflection). And based on this fit, we are currently right about where we should be in terms of the overall deposit levels.

Delinquency rate for business loans falls to lowest level ever in Q1, while charge-off rate falls to 6-year low - In a positive sign of improvement in credit conditions for America’s small and medium-sized companies, the chart above displays the significant decreases over the last three years in the delinquency rates and charge-off rates for business loans at all U.S. commercial banks, according to data released today by the Federal Reserve, updated for the first quarter of this year. The delinquency rate for business loans fell during the January-March period of this year for the 14th straight quarter to 1.07%, the lowest quarterly rate since the Fed started tracking these data back in 1987, and the charge-off rate fell to 0.32%, the lowest rate since the first quarter of 2007 – almost a year before the recession started in December 2007.

Unofficial Problem Bank list declines to 770 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for May 17, 2013.  Changes and comments from surferdude808:  As anticipated, the OCC released its enforcement action activity through mid-April 2013 this Friday. What we did not anticipate was an early week failed-bank closure of another Capitol Bancorp's banking subsidiaries after two were closed last Friday. Along with the failure, there were two other removals and two additions to the Unofficial Problem List this week. After changes, the list has 770 institutions with assets of $284.1 billion. A year ago, the list held 928 institutions with assets of $361.9 billion.

Banks slow to pay out mortgage relief funds - Banks have paid less than half the $5.7 billion in cash owed to troubled homeowners under nearly 30 settlements brokered by the government since 2008, delaying help to the millions of victims of discrimination and shoddy lending that epitomized the housing crisis, according to a Washington Post analysis of government data.When the settlements were announced, with great fanfare, government officials hailed them as the long-promised reckoning with the financial industry. Regulators found that some banks had saddled borrowers with unaffordable mortgages or assigned higher rates to minorities even when they qualified for a better deal. Some banks were accused of having employees “robo-sign” foreclosure documents without reading them or having proper documentation. But consumer advocates and lawmakers have grown increasingly frustrated by the delays in releasing the settlement funds, which they say are making it difficult for some borrowers to recover financially.

N.Y. AG Revising Foreclosure Settlement Complaint Against B of A, Wells - New York Attorney General Eric Schneiderman is revising his allegations of foreclosure settlement violations by Wells Fargo (WFC) and Bank of America (BAC), resetting the clock on his plans to sue the banks over 339 alleged servicing violations. Under the national mortgage settlement agreement, Schneiderman must give the other settlement parties 21 days before pursuing litigation. Schneiderman asserted during his May 6 press conference that his office was ready to bring a case, making the re-submission something of a do-over. The cause of the revisions is unclear, as is the question of whether complaints will be resubmitted for each of the cases. A spokeswoman for the office was checking on this late Friday afternoon. The attorney general "temporarily suspended" his complaints earlier this week, according to the office of Iowa's Attorney General, who is on the monitoring committee for the national foreclosure settlement. Iowa declined to comment on why New York's original grievance was retracted. "We are sending the [mortgage settlement] monitoring committee more information which we believe will help them in their analysis of their enforcement action," a spokeswoman for Schneiderman told American Banker. "We expect to have that to them by the middle of next week.."

Foreclosure Fraud Failures Come To A Head In Justice Dept. Protest - Using tactics and rhetoric familiar from 2011’s Occupy Wall Street demonstration, a group of activists and foreclosed homeowners marched on the Justice building in downtown Washington, D.C. According to tweets and photographs from activists on the scene, protesters moved past a police barricade and attempted to establish a sit-in, at which point police began arresting homeowners and activists. Despite agreeing to various settlements since 2008 requiring a total of $5.7 billion in payments to homeowners, “banks have paid less than half” that amount to date, according to the Washington Post: Critics point to the 2011 agreement the Office of the Comptroller of the Currency (OCC) and the Fed struck with more than a dozen mortgage servicers as a prime example of the dysfunction. […]After 12 months, no homeowners had received a dime. But the eight consultants managing the process on behalf of the banks were paid nearly $2 billion. […] Problems are also emerging in the largest mortgage settlement — a $25 billion deal between state and federal authorities and five banks accused of using forged paperwork to quickly foreclose on struggling homeowners. The banks agreed to pay $1.5 billion directly to borrowers. No checks have been sent, though the first are likely to go out later this month.

Monitor Checking Into Violations of Mortgage Settlement - The monitor of a $25 billion national mortgage settlement with the five largest mortgage servicers said Tuesday he’s looking into potential violations of the agreement.At the same time Wells Fargo Bank of America and J.P. Morgan Chase said they had completed their obligation under the settlement. The monitor, Joseph A. Smith, Jr., must analyze the data submitted by the banks before formally declaring they have fulfilled the terms of the settlement.Smith said Tuesday he will issue his report on the banks’ compliance in June. He noted that part of his report will include a review of how the banks complied with servicing standards outlined in the terms of the settlement, which was reached last year between the five companies and 49 states attorneys general. “I know there are areas in which the banks still have work to do,” Smith said in a statement. “It is important to the integrity of this process that these compliance reports are thorough and accurate, and I will release them when I am confident they are complete.”The announcement that Smith is looking into potential violations comes a week after New York State Attorney General Eric Schneiderman said he would sue BofA and Wells over complaints they did not provide fair and timely service to homeowners seeking relief.

Eighty people at new encampment by Department of Justice - Over eighty homeowners facing eviction occupied the front lawn of the Department of Justice on Monday, May 20. Earlier in the day, heavily armed police blocked the roads. Approximately seventeen people were arrested and there were reports of police tazing activists. This evening the atmosphere at the encampment is calm. Following a call distributed through social media, pizza donated by multiple supporters was provided to the occupiers. Jail support actions are planned for Tuesday.

Homeowners Jailed for Demanding Wall Street Prosecutions -- A two-day long housing protest outside the Department of Justice this week has resulted in nearly 30 arrests and several instances of law enforcement unnecessarily using tasers on activists, according to eye-witnesses. The action – which was organized by a coalition of housing advocacy groups, including the Home Defenders League and Occupy Our Homes – called for Attorney General Eric Holder to begin prosecutions against the bankers who created the foreclosure crisis. "Everyone here is fed up with Holder acknowledging big banks did really bad stuff but [saying] they're too big to jail," says Greg Basta, deputy director of New York Communities for Change, who helped organize the event. Holder has previously suggested that prosecuting large banks would be difficult because it could destabilize the economy. The attorney general recently tried to walk those comments back – but the conspicuous lack of criminal prosecutions of bankers tells another story, one that Rolling Stone's Matt Taibbi has written about extensively.

Foreclosure Victims Protesting Wall Street Impunity Outside DOJ Arrested, Tasered Hundreds of foreclosed homeowners and housing rights activists rallied outside the Justice Department on Monday, May 20, to demand that Attorney General Eric Holder prosecute the Wall Street bankers responsible for the financial collapse and foreclosure crisis. The protest lasted overnight and into Tuesday morning. Overall, 27 peaceful protesters were violently arrested - 17 on Monday and ten on Tuesday morning - and at least two of them were Tasered by officers from the Department of Homeland Security (DHS). Video footage taken Tuesday morning shows three police officers subduing and then Tasering Carmen Pittman, an Atlanta homeowner who fought tirelessly to save her grandmother's house from foreclosure in 2011. When asked for their names, those who were arrested identified themselves with the names of Wall Street bankers who, they believe, should be arrested. The action was organized by the Home Defenders League. "Five years after Wall Street crashed the economy, not one banker has been prosecuted for the reckless and fraudulent practices that cost millions of Americans their jobs, threw our cities and schools into crisis, and left families and communities ravaged by a foreclosure crisis and epidemic of underwater mortgages," the organizers said in a statement. Their demands include "meaningful relief for homeowners and prosecutions for the criminals at the top." People came from all around the country to participate.

Wells Fargo Forecloses On Homeowner For Making Early Mortgage Payments - As Occupy Our Homes demonstrates at the Department of Justice the fraudclosure crisis continues unabated. A Florida family man who not only made his mortgage payments on time but made payments early faces foreclosure by Wells Fargo. The explanation for initiating the foreclosure proceedings by Wells Fargo is nothing short of amazing and offers a sad commentary on how little has changed despite the 2008 financial crisis and supposed reforms like Dodd-Frank. Etienne Syldor said he’s worked his whole life for a home in Orlando for his wife and three children. At times, he said he has worked multiple jobs to make sure he never missed a mortgage payment. Last year, Wells Fargo offered him mortgage modification, and he was told if he made four monthly payments during a trial period, the modification would be permanent.  Court records confirm that Syldor made his payments.  Despite the payments Wells Fargo began foreclosure proceedings on Syldor. Wells Fargo, bank representative Veronica Clemons sent a statement: “For some loans, completing trial payments is a significant step toward a permanent modification; however, in this instance, the loan was part of a mortgage-backed security and in a protected pool, with specific payment guidelines. We are working with Mr. Syldor to explain the guidelines and explore options that may help.” The bank told Eyewitness News Syldor didn’t follow the modification guidelines because he paid early and sometimes his payments were sent one on top of the other.

3 big banks nearly halt foreclosure sales after U.S. tweaks orders - Sales of homes in foreclosure by Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. ground nearly to a halt after regulators revised their orders on treatment of troubled borrowers during the 60 days before they lose their homes.The banks said they paused the sales on May 6 to make sure that their late-stage foreclosure procedures were in accordance with the guidelines. The banks said they paused the sales on May 6 to make sure that their late-stage foreclosure procedures were in accordance with the guidelines. The banks wouldn't say exactly which issues had been under scrutiny.Bank of America Corp., by contrast, continued foreclosure sales at a normal pace, apparently confident its procedures met the revised restrictions.“We manage our mortgage servicing operations in compliance with all laws, regulations and standards for sound business practices,” BofA said Friday in a statement.The halted foreclosures are the latest complication stemming from a settlement between 13 large mortgage servicers and their federal overseers. Banks and regulators also have struggled to distribute billions of dollars in aid to borrowers equitably as required under the settlement.

Federal COA Rulings Could Make 5 Years Of Non-Judicial Fannie/Freddie Foreclosures Unconstitutional -- Yesterday’s ruling from the 6th Circuit Court of Appeals, the 4th Circuit Court of Appeals from March and last month’s ruling from U.S. District Judge Robert Holmes Bell from the Western District of Michigan saying that because Fannie Mae and Freddie Mac were chartered by congress and because they are now under government control due to their government bailout, they are exempt from all forms of state and local taxes.  So courts are saying is that Fannie Mae and Freddie Mac are entities of the United States government and are entitled to any exemptions to any state and local taxes.  These exemptions were the heart of multiple lawsuits filed by multiple counties in Michigan including Oakland County.  Every mortgage assignment filed with Register of Deeds offices across the Michigan assigning mortgages to or from Fannie Mae and Freddie Mac claims a tax exemption as a “government entity” under Michigan Statutes MCL 207.526(h)(i) and MCL 505 (h)(i).  The argument is that although chartered by congress and are now under the oversight of the U.S. Treasury since 2008 (FHFA answers to The U.S. Treasury), Fannie Mae and Freddie Mac were privatized by congress nearly a generation ago and are no different than Ally Financial, Citibank or General Motors who received TARP bailouts.  The courts disagreed saying that because Fannie Mae and Freddie Mac were chartered by congress and their respective charters say they are exempt from all state and local taxes and because of this are “government entities”.

LPS: Mortgage Delinquency Rate falls below 6.5% in April, Lowest since July 2008 - According to the First Look report for April to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10% year-over-year. Also the percent of loans in the foreclosure process declined further in April and were down almost 25% 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 6.21% from 6.59% in March. Note: the normal rate for delinquencies is around 4.5% to 5%.The percent of loans in the foreclosure process declined to 3.17% in April from 3.37% in March.   The number of delinquent properties, but not in foreclosure, is down about 11% year-over-year (375,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 25% or 543,000 properties year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but declining fairly quickly.

Freddie Mac: "Mortgage Rates Continue Upward Trend" - From Freddie Mac today: Mortgage Rates Continue Upward Trend Freddie Mac today released the results of its Primary Mortgage Market Survey(R) (PMMS®), showing fixed mortgage rates trending higher for the third consecutive week and putting pressure on refinance momentum. ... 30-year fixed-rate mortgage (FRM) averaged 3.59 percent with an average 0.7 point for the week ending May 23, 2013, up from last week when it averaged 3.51 percent. Last year at this time, the 30-year FRM averaged 3.78 percent.  15-year FRM this week averaged 2.77 percent with an average 0.7 point, up from last week when it averaged 2.69 percent. A year ago at this time, the 15-year FRM averaged 3.04 percent. This graph shows the the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®.   Not much of an increase recently ... but it will slow refinance activity.

MBA: Mortgage Applications Decrease in Weekly Survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 12 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.  “The refinance index has fallen almost 19 percent over the past two weeks and is back to its lowest level since late March. Purchase activity declined over the week but is still running about 10 percent above last year’s pace at this time.” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.78 percent from 3.67 percent, with points decreasing to 0.39 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. There has been a sustained refinance boom for over a year. However the index is down almost 20% over the last two weeks, and this is the lowest level since March.  The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is up about 10% from a year ago

Mortgage Applications Have Biggest May Collapse Since Financial Crisis - It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates, has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma (here, here, and here) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began. But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today

Existing Home Inventory is up 17.7% year-to-date on May 20th - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.   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 Realtor (NAR) data is monthly and released with a lag (the most recent data was for March).  However Ben at Housing Tracker (Department of Numbers) has provided 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 (to normalize the data). In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. 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.

Zillow: House Prices up over 5% year-over-year in March, Case-Shiller expected to show 9.8% YoY increase - From Zillow: Annual U.S. Home Value Appreciation Exceeds 5 Percent for Sixth Straight Month in April U.S. home values continued to climb in April, increasing 0.5 percent from March to $158,300, according to the April Zillow Real Estate Market Reports. Home values were up 5.2 percent year-over-year, marking the sixth consecutive month of annual home value appreciation at or above 5 percent. The last time national home values were at this level was in June 2004. A majority (55 percent) of the 365 metros covered saw home values climb in April from March. Of the 30 largest metro areas covered, Sacramento experienced the largest monthly increase, with home values rising 3.4 percent. Other large metro areas with notable monthly increases include Las Vegas (3 percent) and San Francisco (2.8 percent). The Case-Shiller house price indexes for March will be released Tuesday, May 28th. Zillow has started forecasting the Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.Zillow: March Case-Shiller Composites To Show Annual Appreciation Above 9% [W]e predict that ... Case-Shiller data (March 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) increased 9.8 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) increased 9.3 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from February to March will be 0.9 percent for both the 20-City Composite and the 10-City Composite Home Price Indices (SA).

Sales of Existing U.S. Homes Climb to 2009 High: Economy - Sales of previously owned U.S. homes climbed in April to the highest level in more than three years even as the market remained constrained by a lack of inventory and strict borrowing rules. Purchases of existing houses increased 0.6 percent to an annual rate of 4.97 million, the most since November 2009, the National Association of Realtors reported today in Washington. The median price rose 11 percent compared with April 2012, the fifth consecutive month that property values advanced more than 10 percent year over year. The fewest number of homes for sale in more than a decade, lingering lender aversion to housing debt and conservative appraisals are probably preventing the market from making bigger strides. Federal Reserve Chairman Ben S. Bernanke today said policy makers are aware that a jump in interest rates may derail the expansion, a signal central bankers will continue to hold borrowing costs down.

Existing Home Sales in April: 4.97 million SAAR, 5.2 months of supply - The NAR reports: April Existing-Home Sales Up but Constrained Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April from an upwardly revised 4.94 million in March. Resale activity is 9.7 percent above the 4.53 million-unit level in April 2012. Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, compared with 4.7 months in March. Listed inventory is 13.6 percent below a year ago, when there was a 6.6-month supply, with current availability tighter in the lower price ranges.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in April 2013 (4.97 million SAAR) were 0.6% higher than last month, and were 9.7% above the April 2012 rate.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.16 million in April up from 1.93 million in March.   Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer (so some of this increase was seasonal). The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

April home sales highest for the month in six years, median sales price highest in nearly five years - Some highlights of today’s report on April existing-home sales from the National Association of Realtors (NAR):

  • 1. For the month of April, existing-home sales (at 4.97 million on a seasonally adjusted annual rate) were at the highest level for any month since November 2009, three and-a-half years ago, and were the highest for the month of April in six years – since 2007.
  • 2. Compared to a year ago, home sales increased in April by 9.7%, which was the 22nd consecutive month of a year-over-year increase in home sales.
  • 3. The median sales price for homes sold in April was $192,800, which was 11% above a year ago, and the highest median price since August 2008, nearly five years ago.  It was also the 14th consecutive month of a year-over-year increase in the median home price, which hasn’t happened since the period from April 2005 to May 2006.
  • 4. Distressed sales accounted for 18% of April sales, down from 21% in March and 28% in April 2012.
  • 5. Close to half (44%) of homes sold in April were on the market fewer than 30 days, while only 8% were on the market for a year or longer.

Existing Home Sales: A few comments - The most important number in the existing home sales report was inventory, and the NAR reported that inventory increased 11.9% in April from March, and is only down 13.6% from April 2012.  This fits with the weekly data I've been posting. This is the lowest level of inventory for the month of April since 2001, but this is also the smallest year-over-year decline since July 2011. The key points are: 1) inventory is very low, but 2) the inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow. Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year. Another key point: The NAR reported total sales were up 9.7% from April 2012, but conventional sales are probably up close to 25% from April 2012, and distressed sales down.  

What Could Possibly Go Wrong Here? -- You know it's getting frothy when... "We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the [real estate] market." As CNNMoney reports, in order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures - like tapping their retirement accounts - to fund the deals. As one adviser noted, "our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets." but as with every bubble there is always the greater fool to rely on - "They bought a lot of stuff cheap last year, but now they're paying market value," said Jack McCabe, a Florida-based real estate consultant. "Sometimes they're overpaying... There's no way they can get an 8% return buying at today's market prices." The problem, of course, is amateur investors sometimes spend all their free cash on their purchases, as "a whole lot of the people in the markets are not experts."  If the real estate market turns south again, that could leave a lot of investors in dire financial condition for their golden years.

Housing Recovery Still Has Room to Run - The roof is not caving in on the housing sector. While the 16.5% plunge in April housing starts last week was stunningly large, the details of the data indicated the housing recovery will continue for the rest of this year. First, the drop in April starts was mainly in multiunit projects, which tend to be volatile. The 37.8% drop in apartment starts last month followed a 22.5% gain in March and a 12.5% advance in February. Second, the dearth of building in past years means a tight supply in new single-family homes. According to Commerce Department data, only 153,000 homes were on the market in March, an inventory that would last only 4.4 months under current sales activity. (Housing starts data cover not only new homes put up for sale but also projects contracted by owners or built by the owners themselves.) Finally, builders are no longer price-takers, as was the case during the Great Recession when cash-strapped developers had to slash prices to move new homes that were competing with cheaper, almost-new foreclosed houses. Demand for housing has recovered, thanks to better job prospects and ultra-cheap mortgage rates. While it is not as frothy as during the housing boom, the market is healthy enough to boost home prices, enabling more builders to make a profit and finance new projects.

Counterparties: How far can homes run? - America got more great news on housing today. In April, existing home sales — which exclude newly built homes — hit their highest level in more than three years. We’ve heard the larger story of America’s housing recovery before, on splashy magazine covers, from the Fed minutes, and consistently from the folks at Case-Shiller. Beyond the headline figures, there are other bits of good news for housing:

  • Homes are selling faster: Homes are now sitting on the market for a median of 46 days. That’s down from a median of 83 days last year, the National Association of Realtors said.
  • Fewer struggling homeowners: From March to April, mortgage delinquency rates hit their lowest level since July 2008, according to Lender Processing Services. On top of that, the total share of loans in foreclosure fell to 3.2% in April from 4.2% a year previously. “Just 15 months ago, distressed sales accounted for 35% of all existing home sales,” says Capital Economics’ Paul Dingle. In April, that number, which comprises foreclosures and short sales, had fallen to 18%.
  • People are buying home construction goods: Matt Phillips noticed some good news in Home Depot’s earnings earlier this week. The company’s sales to professional contractors eclipsed sales to consumers in the first quarter for the first time since the crisis. These sales, Phillips says, are even more sensitive to the housing recovery than a typical consumer splurging on, say, a power drill.

Why Housing Won't Drive the Recovery - Housing is good but not great, and unlikely to fulfill Wall Street's expectations that it will be a leading force in a robust recovery, according to a group that is one of the industry's most prominent voices. Despite data points that in some cases are at multiyear highs, Robert Shiller, Karl Case and David Blitzer believe there are multiple headwinds that will keep a lid on housing gains. Among the obstacles are a low level of new housing starts, an unexpectedly slow migration of so-called shadow inventory onto the market, and continued difficulty for buyers to secure financing. "You've got a lot of breathless commentary in the media," said Shiller, a Yale University economist. "All this talk that we're in this great recovery—we probably are in the short run, the longer run doesn't look so terrific to me."

New Home Sales at 454,000 SAAR in April - The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 454 thousand. This was up from 444 thousand SAAR in March (March sales were revised up from 417 thousand). January sales were revised up from 445 thousand to 458 thousand, and February sales were revised up from 411 thousand to 429 thousand. Very strong upward revisions.  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 April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent above the revised March rate of 444,000 and is 29.0 percent above the April 2012 estimate of 352,000."The second graph shows New Home Months of Supply. The months of supply was unchanged in April at 4.1 months.  The all time record was 12.1 months of supply in January 2009.This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale is at a record low. The combined total of completed and under construction is also just above the record low. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

New Home Sales Increase 2.3%, Prices Skyrocket for April 2013 - April New Residential Single Family Home Sales increased 2.3% to 454,000 in annualized sales.   New Single Family Housing inventory is at a 4.1 month supply.  New single family home sales are now 29.0% above April 2012 levels, but this figure has a ±20.7% margin of error.   A year ago new home annualized sales were 352,000.  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.  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 homes available for sale increased 3.3% from last month.  The average home sale price was $330,800, a 15.4% jump from last month's average price of $286,700.   These prices are clearly outside the range of what most wages can afford.  From April 2012, the average home sale price has increased 14.9%, which implies prices might be starting to really soar. March's median new home price also jumped by 8.3% to $271,600.  From April 2012, the median new home sales price has also increased by 14.9%. 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.  These are price jumps of just one month's time, which is incredible if one thinks about the potential new home cost increases over a year.

Spot The Bubble: Average New Home Price Soars By Most Ever In One Month To All Time High - Curious why in yesterday's FOMC minutes the following line "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant" received special attention? Here is the reason: as the chart below shows, according to the census bureau, the average new home sale price just hit a new all time high, rising by a record 15.4% to a record $330,800. In a country in which real disposable consumer income is flat at best and in reality declining, it only makes sense that the average new home price just hit a level not seen since the prior credit-bubble fueled housing peak.

Don’t Get Too Excited About Record New-Home Prices - Today’s Census numbers show that sales of new homes — a key economic driver across multiple industries — are steadily recovering. But more striking is the pace at which prices of new homes are recovering. Both the average and median sale price of a new home hit their highest level since the Census started collecting this data set in 1963, a sign that builders are making most of their money these days on price, rather than on sales volume. Record-setting though they are, these numbers should be taken, however, with a grain of salt. They don’t mean new home prices are back to their lofty, boom-era peaks — although in some markets, particularly land-constrained coastal markets (think Italianate mansions  in San Francisco or new condos in New York), home are prices are certainly inspiring déjà-vu for the go-go days. Instead, they reflect a changing mix of homes being purchased. Builders are selling fewer cheap, starter homes, and more of what are called first- and second-move up homes, which are typically a little more expensive, and often bought by people with growing families and bigger space needs. A quick look at the price class data from the Census highlights this point. From 2003 through the end of 2006, the two lowest price classes — homes selling for less than $150,000 and homes selling for $150,000-$199,999 — never accounted for less 35% of the 12-month moving average of new homes sold. For most of the boom, in fact, homes that cost less than $200,000 accounted for more than 40% of all new homes sold.

A few comments on New Home Sales - Obviously the new home sales report this morning was solid with sales above expectations and significant upward revisions to prior months. I try not to react too much to the month to month ups and downs; the key points right now are that sales are increasing and will probably continue to increase for some time.  Now that we have four months of data for 2013, one way to look at the growth rate is to use the "not seasonally adjusted" (NSA) year-to-date data.  According to the Census Bureau, there were 153 thousand new homes sold in 2013 through April, up about 26.4% from the 121 thousand sold during the same period in 2012. That is a very solid increase in sales, and this was the highest sales for these months since 2008. 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 from the 369 thousand in 2012.  Although there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests 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 - substantially higher than the current sales rate. 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.

Update: The Two Bottoms for Housing - By request, I've updated the graphs in this post with the most recent data. Last year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices. For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. When I posted that graph, the bottom wasn't obvious to everyone. Now it is, and here is another update to that graph.The arrows point to some of the earlier peaks and troughs for these three measures. The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly. For the recent housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units. We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. These measure are very important and are probably the best leading indicators for the economy. But this says nothing about house prices.   The second graph compares RI as a percent of GDP with the real (adjusted for inflation) CoreLogic house price index through February.

The Housing UnRecovery Is Here: Architectural Billings Plunge Most Since 2008 -  Not only is this 'housing recovery' being built without the use of Lumber (as we explained here), but Architects are no longer useful either. The last two months - as homebuilder stocks surge and house prices spike - has seen Architectural billings plunge by the most since November 2008. The current level of activity is at its lowest since June 2012 - hardly indicative of the rampaging rapacious demand for homes that we are spoon-fed day after day...

Lumber Prices decline Sharply over last month - Just over a month ago I mentioned that lumber prices were nearing the housing bubble highs. Since then prices have declined sharply, with prices off about 20% from the recent highs. Some of the decline could be related to additional supply coming on the market, and some due to less buying from China (several sources are reporting that China has pulled back significantly on buying North American lumber).On additional supply, two months ago the WSJ had an article about some producers increasing supply:  Georgia-Pacific, the largest U.S. producer of plywood ... plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.  This graph shows two measures of lumber prices (not plywood): 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures. Lumber prices are now 20% off the recent highs

The Housing Unrecovery Is Here: Lumber Enters Bear Market - Despite the incessant belief that this must be too-much-new-supply-driven (as opposed to a lack of demand for new home construction), Lumber futures (after hitting limit down once again today) have now officially entered bear-market territory. Front-month lumber prices are down 23% from their highs in mid-March and given the 2-month lead that correlates so well to the market, it seems things are a little ahead of themselves in 'housing recovery' land.

AIA: Architecture Billings Index indicates decreased demand for design services in April -   From AIA: Architecture Billings Index Reverts into Negative Territory for First Time in Nine Months After indicating increasing demand for design services for the better part of a year, the Architecture Billings Index has reversed course in April. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI score was 48.6, down from a mark of 51.9 in March. This score reflects a decrease in demand for design services (any score above 50 indicates an increase in billings) and is the lowest mark since July 2012. The new projects inquiry index was 58.5, down from the reading of 60.1 the previous month. This graph shows the Architecture Billings Index since 1996. The index was at 48.6 in April, down from 51.9 in March. Anything below 50 indicates contraction in demand for architects' services.  This decline followed eight consecutive months of expansion. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.

What's in millennials' wallets? Fewer credit cards - "I just hear so many horror stories about people being in debt," said Ratliff, 21, who studies psychology at Ohio State University. "When you have a credit card, you feel like you have a lot of money when you don't." Ratliff is like many young adults, emerging data show. His generation, dubbed millennials by academics and marketers, grew up during the boom and bust cycles of the U.S. economy over the last decade and a half — crises that appear to have reshaped their attitudes toward spending and debt. Millennials, who range from teenagers to people in their early 30s, are more financially cautious than the stereotype of the spendthrift twentysomething, several studies suggest. Many embrace thrift. Some experts say their habits echo those of another generation, those who came of age during the Great Depression and forged lifelong habits of scrimping and saving — along with a suspicion of financial risk. "Both generations had a childhood memory of wealth and then saw that wealth yanked out from under them" in or around their teenage years, said Morley Winograd, who has co-written several books on the millennial generation. Though the pain was much more severe during the Depression, "Both generations are very conservative spenders,"

U.S. Gas Prices Up 11 Cents Over Past 2 Weeks — The average U.S. price of a gallon of gasoline has jumped 11 cents over the past two weeks. The Lundberg Survey of fuel prices released Sunday says the price of a gallon of regular is $3.66. Midgrade costs an average of $3.84 a gallon, and premium is $3.98. Diesel held steady at $3.93 gallon. Of the cities surveyed in the lower 48 states, Tucson, Ariz., has the nation’s lowest average price for gas at $3.18. Minneapolis has the highest at $4.27. In California, the lowest average price was $3.94 in Fresno. The highest was in San Francisco at $4.07. The average statewide for a gallon of regular was $4.03, up 18 cents.

Weekly Gasoline Update: Regular Is Up 7 Cents, Premium 4 cents - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for Regular increased seven cents and Premium four cents. This is the third week of price gains after nine weeks of declines, which followed eleven weeks of price rises. Since their interim high in late February, Regular is down 11 cents and Premium 16 cents.  According to, eight states are averaging above $4.00 per gallon, up from four last week. Six states are in the 3.90-4.00 range, up from two last week.

DOT: Vehicle Miles Driven decreased 1.5% in March - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by -1.5% (-3.7 billion vehicle miles) for March 2013 as compared with March 2012. Travel for the month is estimated to be 248.8 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways.Currently miles driven has been below the previous peak for 64 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 down in March compared to March 2012. In March 2013, gasoline averaged of $3.78 per gallon according to the EIA. In 2012, prices in March averaged $3.91 per gallon. But even with the year-over-year decline in gasoline prices, miles driven decreased.

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 March. Travel on all roads and streets changed by -1.5% (-3.7 billion vehicle miles) for March 2013 as compared with March 2012. Cumulative Travel for 2013 changed by -0.8% (-5.6 billion vehicle miles) from 2012. The 12-month moving average of miles driven changed by -0.2% from March a year ago (PDF report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data and have hit new post-financial crisis lows. 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. The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The most recent decline has lasted for 63 months and counting — a new record, but the trough to date was in November 2011, 48 months from the all-time high.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.

Passenger Trains Bump Along With Fixes Outrunning Funding - U.S. investigators looking into the May 17 Connecticut commuter-rail crash haven’t yet found a clear cause.  The fact a broken rail became the most immediate suspect speaks to years of deferred maintenance that have left trouble spots throughout a Washington-Boston network that carries more than 700,000 people a day and dates to the 1800s.  Tracks maintained by the intercity passenger railroad and states along the most densely populated part of the U.S. carry half of U.S. rail traffic. Amtrak now accounts for 76 percent of the air and rail trips between New York and Washington, up from 37 percent in 2000, according to the Northeast Corridor Commission, a body Congress created in 2008 to assess the system’s most critical infrastructure needs.  Between New York and Boston, the share has increased from 20 percent to 54 percent. “One cracked rail is making it extremely inconvenient for thousands and thousands of commuters,” said Robert Puentes, senior fellow at the Brookings Institution’s Metropolitan Policy Program in Washington. “That has a drag on the overall metropolitan region. This is an infrastructure that needs to be brought up to a state of good repair.”

US Auto Factories Cutting Back On Summer Downtime - — The Detroit automakers are largely forgoing the traditional two-week summer break at their factories and speeding up production to meet buyers' growing demand for new cars and trucks. Ford Motor Co. said Wednesday that 21 of its North American factories will shut for only one week this summer. That includes the Chicago plant that makes the Ford Explorer SUV and the Mexican plant that makes the Fusion sedan. General Motors will idle its factories only for short periods, while Chrysler plans a two-week break at just four of its ten North American assembly plants. Both GM and Chrysler are rolling out critical new models. The three Detroit carmakers traditionally shut factories for 14 days around July 4 to do maintenance and change the machinery for new models. But they don't have that luxury this year. U.S. demand for new cars and trucks has been strong, up 7 percent through April, led by soaring demand for full-size pickup trucks as home construction rebounds. And after closing more than two dozen factories during the recession, U.S. automakers need to use their remaining capacity to its fullest.

Kansas City Fed: Regional Manufacturing expanded in May - From the Kansas City Fed: Tenth District Manufacturing Survey Improved Somewhat The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today; the survey revealed that Tenth District manufacturing activity improved somewhat, rising above zero for the first time in seven months, and producers’ expectations for future activity also increased. The month-over-month composite index was 2 in May, up from -5 in both April and March. ... Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged. The last regional surveys for May will be released next Tuesday (Dallas and Richmond), and the ISM index for May will be released on Monday, June 1st. Based on the regional surveys released so far, and the Markit Flash PMI released this morning, I expect a fairly weak reading for the ISM index (perhaps at or below 50).

Early Look at U.S. Manufacturing Indicates Moderate Expansion - U.S. factory sector appears to be slowing slightly, according to an early reading of May activity released Thursday. The flash purchasing managers’ index compiled by data provider Markit fell to 51.9 in May from a final April reading of 52.1. Markit said the flash PMI reading, which is based on about 85% of the usual number of monthly replies, is the lowest since October 2012 and is “consistent with a moderate improvement in overall manufacturing business conditions.” A reading above 50 mark indicates expansion. The Markit subindexes generally were positive but slower for factory activity this month. The flash output index fell to 52.8 this month from a final 53.7 in April. The new orders index improved to 52.8 from 51.5 but the exports index fell to 49.4 from 51.8. The employment index slowed to 52.2 from 53.2. “The overall rate of job creation was modest and the weakest since last October,” the report said.

U.S. Durable Goods Orders Rise 3.3 Percent in April — U.S. orders for long-lasting manufactured goods rebounded in April, buoyed by more demand for aircraft and stronger business investment. The gains suggest economic growth may be holding steady this spring. Orders for durable goods, items expected to last at least three years, rose 3.3 percent last month from March, the Commerce Department said Friday. That followed a 5.9 decline in March. A measure of business investment plans increased 1.2 percent. And the government revised the March figure to show a 0.9 percent gain, instead of a slight decrease. Companies ordered more machinery and electronic products last month, typically signs of confidence. More spending by businesses could ease fears that manufacturing could drag on the economy later this year. Factories had been seeing fewer orders at the start of the year, in part because slower global growth had reduced demand for U.S. exports. Economists had also worried that across-the-board federal spending cuts and higher taxes might prompt businesses to cut back on orders.

Durable Goods Rise More Than Expected In April - New orders for durable goods rebounded with a 3.3% gain in April after a sharp drop in March, the Census Bureau reports. That's more than double the expected gain, according to the median forecast from economists, as compiled by Bloomberg. Business investment (capital goods orders less aircraft and defense) also increased last month, posting a 1.2% advance. The bigger story in today's release is that both series appear to be stabilizing, based on year-over-year comparisons. Is this a sign that the long stretch of decelerating growth for new orders has finally run its course?  Last month is certainly an improvement vs. March. For the first time since October 2012, both headline orders and new business investment advanced. The April gains are modest, but the fact that new orders gained on a broad basis is encouraging. There are also signs that the year-over-year pace for orders overall may be stabilizing. It's too soon to say for sure, but the possibility that somewhat better days on this front may be coming is a bit more plausible today. By contrast, reviewing this series has been a dark affair for the past year or so, with the annual rate fading for some time, including dips into negative territory in recent updates.

Durable Goods Orders increased 3.3% in April - From the Department of Commerce: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders April 2013 New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent. This was above expectations of a 1.1% increase. This report is difficult to predict and very noisy month-to-month.

Durable Goods Orders in April Bounced Back Partially from the March Plunge - The May Advance Report on April 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 April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.  Transportation equipment, also up two of the last three months, led the increase, $5.1 billion or 8.1 percent to $67.6 billion. This was led by nondefense aircraft and parts, which increased $1.9 billion. Download full PDF  The latest new orders number at 3.3 percent was above the consensus of 1.6 percent. Year-over-year new orders are up 2.4 percent. This is a welcome improvement over the previous month's -5.9 percent MoM and -0.8 percent YoY. If we exclude transportation, "core" durable goods were up 1.3 percent MoM. Year-over-year core goods up a fractional 0.9 percent. If we exclude both transportation and defense, durable goods were down 0.5 percent MoM but up 1.4 percent YoY. 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.

Analysis: Not All Good News in Durables Report - The reading on durable goods orders surprised to the upside but Bob Brusca, chief economist at Fact & Opinion Economics, tells the Journal’s Mathew Passy that he sees manufacturing slowing down.

Hard to See Pattern in Durables Goods Report - On Friday, the Commerce Department said new orders increased 3.3% in April, better than economists had expected. But the gain followed a 5.9% plunge in March. Compared to a year ago, new bookings are up only 0.7%. The volatility is vexing. Peter D’Antonio, economist at Citigroup, had this take on durable goods orders, “Here’s the string of data: December +5.1%, January -6.4%, February +6.4%, March -5.9%, and April +3.3%. Where is the trend in this?” The problem is that durable goods, especially aircraft, carry large sticker prices, so the dollar value of new orders are quite volatile. Consequently, the durable goods report is more revealing in its details, not the top-line number per se. And what the details suggest is no change in Federal Reserve policy any time soon. Most important is the trend in business investment on equipment. This sector was weak in the first quarter, and economists expect a pick-up this quarter to lift overall gross domestic product growth. The latest news, however, was mixed. New orders for nondefense capital goods excluding aircraft increased 1.2% in April, but shipments fell 1.5%. The report caused economists at Goldman Sachs to trim their second-quarter GDP expectations to 2.0% from 2.1%.

Spot The Trend In US Durable Goods And CapEx Spending - Today's headline Durable Goods number came, largely as expected, solidly positive. After all, following last month's revised -5.9% sequential collapse, there was only one it could go. However, even so the broad number was largely driven by the usual volatile series: transportation and defense spending. On the other hand, the picture om pure Capital Spending land was mixed, with Cap Goods orders non-defense ex aircraft beating expectations of a 0.5% print at 1.2%, while Shipments missed, dropping from +0.5% to -1.5% and missing expectations of a -0.5% print. There is one big caveat: as usual, April always has been a big down month on a not seasonally adjusted basis. Which means the headline scanning algos were more focused on the ARIMA X 12 adjustments than the underlying data. So in order to crystalize the underlying trends, we have present the four key data series in a simple year over year basis. The trend is very clear.

The ’’Real’’ Goods on the Latest Durable Goods Data - Earlier today I posted an update on the May Advance Report on April 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. Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods. Now we'll leave Transportation in the series and exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders. Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

Vital Signs Chart: Car-Loan Delinquencies Tick Up - Some Americans are falling behind on their car loans. The share of auto loans outstanding with payments overdue by 30 days hit 2.36% in the first quarter, up slightly from 2.33% a year earlier. A surge in loans to car buyers with lower credit scores has raised concerns among regulators, but delinquency rates remain far below their prerecession level of 2.60% in the first quarter of 2006.

ATA Trucking Index decreases slightly in April -- From ATA: ATA Truck Tonnage Index Fell 0.2% in April - The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 0.2% in April after rising 0.9% in March. (The 0.9% gain in March was unchanged from what ATA reported on April 23, 2013.) In April, the SA index equaled 123.2 (2000=100) versus 123.5 in March. The highest level on record was December 2011 at 124.3. Compared with April 2012, the SA index was up 4.3%, which is the largest year-over-year gain since January of this year (4.7%). Year-to-date, compared with the same period in 2012, the tonnage index is up 4%.  Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

Air Cargo Volume Points to Continued Economic Weakness - Here’s a nice alternative indicator from our friend Martin over at Macronomics. He provides us with Nomura’s air cargo indicator and some more color on the current reading: A regular economic activity and deflationary indicator we have been tracking has been Air Cargo. It is according to Nomura a leading indicator of chemical volume growth and economic activity: “Over the past 13 years’ monthly data, there has been an 84% correlation between air cargo volume growth and global industrial production (IP) growth, with an air cargo lead of one to two months (second graph). In turn, this has translated into a clear relationship between air cargo and chemical industry volume growth” Our air cargo indicator of industrial activity came in at -7.4% (y-o-y) in April, following -3.8% in March and -7.8% in February. As a readily available barometer of global chemicals activity, air cargo volume growth is a useful indicator for chemicals volume growth.” Air cargo volume growth vs global industrial production growth, y-o-y, % – source Nomura:

The Philly Fed ADS Business Conditions Index - The Philly Fed's Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed's National Activity Index, which is updated monthly (more about the comparison below). Named for the three economists who devised it, the index, as described on its home page, "is designed to track real business conditions at high frequency." The index is based on six underlying data series:

  • Weekly initial jobless claims
  • Monthly payroll employment
  • Industrial production
  • Personal income less transfer payments
  • Manufacturing and trade sales
  • Quarterly real GDP

The first chart shows the complete data series, which stretches back to 1960. I've highlighted recessions and the current level of this daily index through its latest data point.

Caterpillar North America Sales Collapse Suggests US Economy Back To 2010 Levels - While we have wondered on numerous occasions previously if the collapse in lumber prices is the far more accurate indicator of end demand for housing (as confirmed by the recent collapse in multi-family housing starts), perhaps an even better indicator of trends in housing (and by implication the broader economy) is private sector intermediate end demand, such as Caterpillar North America sales, which unlike government data, are far less subject to political intervention, interpolation, guesswork, seasonal adjustments and otherwise, general manipulation. And even though we have previously reported on the woes ailing the world's largest seller of bulldozers, excavators and wheel loaders, such focus was primarily targeted in the offshore markets, and especially China (the abysmal European market needs no mention). So maybe the time has come to shift attention to the US, where as Caterpillar just reported, not only are all foreign markets still trending at several impacted levels, but where US machine retail sales just saw the biggest tumble in three years, falling 18% Y/Y: the most since early 2010.

Telecom’s Big Players Hold Back the Future - Susan Crawford, a professor at Benjamin N. Cardozo School of Law, has written a book, “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” that offers a calm but chilling state-of-play on the information age in the United States. She is on a permanent campaign, speaking at schools, conferences and companies — she was at Google last week — and in front of Congress, asserting that the status quo has been great for providers but an expensive mess for everyone else. Ms. Crawford argues that the airwaves, the cable systems and even access to the Internet itself have been overtaken by monopolists who resist innovation and chronically overcharge consumers. The 1996 Telecommunications Act, which was meant to lay down track to foster competition in a new age, allowed cable companies and telecoms to simply divide markets and merge their way to monopoly. If you are looking for the answer to why much of the developed world has cheap, reliable connections to the Internet while America seems just one step ahead of the dial-up era, her office — or her book — would be a good place to find out.

US Unemployment Aid Applications Fall to 340K -  The number of Americans applying for unemployment benefits fell by 23,000 last week, further evidence that the job market is slowly returning to health. Applications for unemployment aid declined to a seasonally adjusted 340,000 in the week ending May 18, the Labor Department said Thursday. That’s down from 363,000 the previous week and a level consistent with solid job gains. The less volatile four-week average ticked down just 500 to 339,500. That’s close to the five-year low of 338,000 reached during the first week of May. The four-week average is 9 percent lower than in November. Unemployment claims are a proxy for layoffs. The decline in claims has coincided with steady job growth over the past six months. Since November, employers have added an average 208,000 jobs a month. That’s up from just 138,000 jobs a month during the previous six months. Still, much of the improvement has come from fewer layoffs, not robust hiring. Employers laid off just 1.7 million workers in March, only slightly above the 12-year low reached in January. Overall hiring, however, remains far below pre-recession levels.

Weekly Initial Unemployment Claims decline to 340,000 - The DOL reports: In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week's revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week's revised average of 340,000. The previous week was revised up from 360,000. The following graph shows the 4-week moving average of weekly claims since January 2000.The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 339,500.Claims were slightly below the 345,000 consensus forecast.

Vital Signs Chart: Fewer Collecting Unemployment - Dependence on unemployment insurance is easing. The number of Americans claiming unemployment benefits fell 112,000 in the week ended May 11, to 2,912,000, the lowest level in five years. The drop suggests some workers are finding their footing in the slowly improving job market. Yet the ranks of those receiving benefits remain above the roughly 2.5 million average in 2006.

What’s Holding Back Hiring? - Nearly four years after the recession officially ended, the unemployment rate remains elevated, at 7.5%. The share of the population that’s working or looking for work is at a 30-year low. More than 2.5 million fewer Americans are working today than when the recession began.  Various papers have attributed the slow pace of job growth to the weak housing market, the downturn in specific industries and the long-run decline in the share of the population that’s working. Others, however, have argued that there is little evidence for structural problems, and have said weak hiring is due to something much simpler: the slow pace of overall economic growth. In one recent paper, economists said the improvement in the job market during the recovery has been consistent with a long-documented relationship between unemployment and economic growth known as Okun’s Law. In a new paper published by the NBER, University of Wisconsin economist (and blogger) Menzie Chinn and French economists Laurent Ferrara and Valerie Mignon also look at the relationship between economic growth and the job market. But rather than focus on unemployment, they focus on employment — an approach that allows them to avoid the nettlesome question of who should count as unemployed. Mr. Chinn and his colleagues find that slow growth accounts for the majority of the continued jobs gap — but not all of it. The U.S. has about 1.2 million fewer jobs than it should based on long-run trends. The authors are careful not to say the entire gap is due to structural factors — some of it may be due to short-term issues, or to flaws in their economic model — but their findings do suggest the weak recovery alone doesn’t explain the weak job market.

Obama Says Job Market May ’Stall’ Due to Budget Cuts - President Barack Obama told a group of Democratic donors in Atlanta that the economy and job market could falter as a result of the automatic spending cuts that went into effect March 1. “Because of some policies in Washington, like the sequester, growth may end up slowing,” Obama said at a luncheon for the Democratic Senatorial Campaign Committee. “We may see once again the job market stall.” Earlier, at the commencement ceremony, Obama gave the labor market a more positive rendering. He told the graduates “you’re graduating into a job market that’s improving.” American employers added more workers than forecast in April, sending the unemployment rate down to a four-year low of 7.5 percent. More Americans than projected filed claims for jobless benefits last week and manufacturing in the Philadelphia region unexpectedly shrank in May, signs that a slowdown in growth is rippling through the U.S. economy.

As Job Flow Slows, Americans Get Stuck in Place - Peter Orszag - Most Americans believe that the job market has grown more turbulent, with people changing employers ever more often. In reality, the opposite is happening. This, in turn, largely explains why fewer Americans than ever are moving across state lines. And as intergenerational income mobility also declines, U.S. families may be in for a new era of restricted opportunity. Consider the evidence on job changes. After analyzing combined data from four employment surveys conducted from 1998 to 2010, Henry Hyatt and James Spletzer of the U.S. Census Bureau concluded that “rates of job creation, job destruction, hiring and separation declined dramatically, and the rate of job-to-job flows fell by about half.” Meanwhile, the interstate migration rate has shrunk to less than half its average from the late 1940s to the early 1970s, according to calculations by economists Raven Molloy and Christopher Smith of the Federal Reserve and Abigail Wozniak of the University of Notre Dame. They also found that changing demographics and the state of the housing market cannot explain much of the decline. (The authors did find, somewhat surprisingly, that interstate mobility rates have fallen more for renters than for homeowners, and also a bit more for college graduates than for others.)

Merrill Lynch on Labor Force Participation Rate - Last week I summarized some recent research on the labor force participation rate. The following piece from Michelle Meyer at Merrill Lynch argues the LFPR will likely move sideways over the next few years. Changes in the participation rate have important implications for the number of jobs needed to lower the unemployment rate. An excerpt from Michelle Meyer's piece: The future trajectory of the labor force participation rate (LFPR) is very important in gauging the trend in the unemployment rate and risks to wage inflation. In order to forecast the labor force participation rate, we must understand the drivers behind its recent sharp movements – to what extent is a long-term trend related to demographics (aging population) versus secular or cyclical dynamics? We can isolate the effect of demographics on the LFPR by looking at the participation rates by age cohort. The aggregate LFPR is equal to the summation of each individual age cohort's LFPR weighted by its share of the population. ... This suggests that half of the 2.7pp decline in the LFPR since the onset of the recession can be explained simply from the aging population. In other words, holding all else equal – meaning no business cycle dynamics – the LFPR would be at 64.6% today compared to the actual rate of 63.3%. The remaining 1.4pp drop is due to some combination of secular and short-term cyclical factors.

Labor Force Participation Rate Sensitivity - This morning I posted some comments from Michelle Meyer at Merrill Lynch on the likely path of the labor force participation rate. She wrote:  [W]e forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015. The following table is an estimate of the unemployment rate in December 2013 and December 2014 assuming the LFPR stays close to the current level of 63.3% (I looked at 63.0%, 63.3% and 63.6%).  The current unemployment rate is 7.5%. I also looked at three rates of payroll job growth, 167 thousand per month, 185 thousand per month and 200 thousand per month. I think it is possible that employment growth will pick up later this year, and if that happens, the unemployment rate will fall further in 2014. Caveat: The payroll estimate is for the establishment survey, and the unemployment rate and participation rate are from the household survey - and this is just a rough estimate.

In one chart: we have a demand problem, not a skills problem - The large increase since 2007 in the unemployment and underemployment rate of young college grads, along with the large increase in the share of employed young college graduates working in jobs that do not require a college degree, underscores that today’s unemployment crisis did not arise because workers lack the right education or skills. Rather, it stems from weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring. The figure below, from this report on the labor market prospects of the Class of 2013, gives unemployment and underemployment rates for college graduates under age 25 who are not enrolled in further schooling. The unemployment rate of this group over the last year averaged 8.8 percent, but the underemployment rate was more than twice that, at 18.3 percent. In other words, in addition to the substantial share who are officially unemployed, a large swath of these young, highly educated workers either have a job but cannot attain the hours they need, or want a job but have given up looking for work.

Creating Good Jobs is the Defining Issue of Our Time - What is the single biggest economic problem facing people early in this century? It is not the budget deficit or national debt. It is the eroding and disappearing of good jobs. People with good jobs – jobs that provide decent pay and benefits and the flexibility to be able to take care of one’s family – are the fuel of the economy and the basis for broadly shared prosperity. Good jobs, and the things that go with them – a good education, affordable health care, and a secure retirement – are the very definition of a successful economy. The public gets it. When asked to identify “the single biggest problem facing this country today,” 40 percent answered “jobs and the economy.” Number two was “budget deficit/national debt,” at 6 percent. Four years after the official end of the Great Recession, the real economy – not corporate profits or the stock market – remains stalled. The proportion of Americans working is the lowest in 30 years, or basically since women started entering the work force in large numbers. Most of the jobs that have been created since the recession pay low wages. Long-term unemployment also is at levels well above anything since the Great Depression. And income for all but the richesthas gone down. So why does Washington and elite discussion remain focused on the debt and deficit? And what will it take to move the politics of the nation to take on what the public correctly understands is the central economic issue?

Your Humble Blogger Appears on RT’s Truthseeker -  Yves Smith - Readers, hope you’ll enjoy this segment. But be warned, the presentation style is a bit manic. We discuss how outsourcing and offshoring are more about transferring income from low-level workers to middle and senior level managers than cost savings.

US Employment: Employer Behavior - Once again, I'm going to turn to the new employment graph started by the Macroblog website, this time focusing on employer behavior.  And for that, I'll be looking at JOLTS data.  This is a relatively new data set -- in only goes back to the beginning of the 2000s.  This means we don't have the ability to do any historical comparisons.  However, it does give us an objective reading on what employers are doing in the jobs market, which in turn gives us an idea to what they're thinking. Let's start with a graph of layoffs:Total layoffs are now at levels below the last expansion.  This tells us that employers aren't adding to the unemployment rate at a high rate. Here's the definition used by the BLS for this data: a job opening is [a] specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position. Put another way, if an employer is looking to add to his workforce, he will advertise a job opening to fill.   This number -- like most employment numbers -- cratered during the recession.  But, it's been slowly bouncing back to levels seen during the last expansion.  However, note that during 2012 the data series appeared to stall between the 3.6 and 3.8 million level.  This was also during the period when employment growth seemed to stall at moderate levels. Let's turn now to total hires:

Black Unemployment Is Still Shamefully High - This year, Washington's political class hasn't merely given up on trying to fix U.S. unemployment; it's given up on even discussing the subject. This is shameful, and not simply because the jobless rate is still two or so percentage points higher nationwide than it should be, or because the long-term unemployed have been left out to dry. No, it's shameful because many communities across the country are still simply being ravaged by the lack of work.  Particularly the black community. Even in good times, the unemployment rate tends to be roughly twice as high for blacks as whites, if not worse. Nationwide, black workers today are facing 13.2 percent joblessness. In some large states, the rate is far worse, as shown in the graph below, which was recently posted by the Economic Policy Institute. In Michigan, it was 18.7 percent by the end of 2012. In New Jersey, Illinois, North Carolina, California, and Ohio, the rate was above 15 percent.

Conservative economists push immigration reform - - Conservatives rallying in favor of comprehensive immigration reform are keeping up their pressure on Congress.  In a letter being released Thursday, more than 110 economists urged Hill leadership to enact comprehensive immigration reform, portraying it as a necessity to improve the country’s fiscal outlook. “Immigration reform’s positive impact on population growth, labor force growth, housing, and other markets will lead to more rapid economic growth,” the letter says. “This, in turn, translates into a positive impact on the federal budget. “  The effort was spearheaded by the American Action Forum. Signers include the organization’s president, former Congressional Budget Office director Douglas Holtz-Eakin; Glenn Hubbard, chairman of the White House Council of Economic Advisers under George W. Bush; former Reagan economist Arthur Laffer; and Edward Prescott, who won the Nobel Prize in economics in 2004. The full Senate will dig into the immigration debate in earnest next month, after the Judiciary Committee passed the Gang of Eight legislation on a 13-5 vote Tuesday.

A Nation of the Non-productive? - Noni Mausa - Rulers, soldiers, servants — of course, no nation can consist entirely of rulers and their servants (excepting small niche nations whose living is made off of niche jobs like banking, gambling, religion, and other intangibles.) However, it seems that the trend in the US over the past 30 years has been to offshore as many of Adam Smith’s “productive” jobs as possible, or cut their pay and power stateside. Meanwhile, the US has maintained the huge military and has built up the servant class. Well, is this a problem? Every creature has its niche, so maybe it could be a good thing for America to become the largest unproductive niche nation on the planet. It works for other, admittedly much smaller, nations. Could it work for the US? The hazards here depend on internal and external pressures. Externally, being able to reliably utilize the productivity of the rest of the world, as and when needed, at prices the US is happy with, is in large part a function of the huge military. Maybe this is a stable strategy, but the more you depend on a single strategy like this, the more likely a single unforeseen event can hammer a wedge in the spokes. If one American outrage, however objectively minor, induced oil producing nations to stop selling to US customers, what happens to the huge military, and the domestic servant economy? Internally, reducing the bulk of the population to dependent soldiers or servants is no way to build a resilient, tough and responsive nation. Whether they revolt or not, such a social structure cannot be counted on to respond optimally to new situations and threats.

Raising the Minimum Wage Will Reduce Income Inequality - A minimum wage of $7.25 is not enough to live on. Full-time minimum-wage workers today earn about $15,000 a year. In 1968, they earned about $20,000 per year in today's dollars. While certainly not enough for a life of luxury, it is enough for a family of three to stay above the poverty line – which can't be said for today's minimum-wage workers. Many of these workers have to rely on public assistance such as food stamps or the earned income tax credit, because their wages are simply too low. Programs like the EITC are important protections against poverty, but we shouldn't let them act as subsidies to low-wage employers, who currently pay lower wages because the American taxpayer will make up the difference. We need to re-establish the basic labor standard that if you work full time, you'll earn at least enough to get by. If we raised the federal minimum wage to $10 per hour, nearly 30 million American workers would get a raise, nine million of whom are parents. And contrary to popular misconception, most of these workers are not teenagers working part time: 88 percent are at least 20 years old, and 55 percent work full time.

The Uprising of the Second Tier in a Time of Late Capitalism - David Dayen - Over the past year or so, low-wage workers have staged wildcat strikes, walking off the job for a day or two. It started at Walmart, America’s low-wage giant, the largest private employer in the US and the company that the Federal Open Market Committee looks to when making macroeconomic policy decisions. Workers in dozens of stores walked out last October and November, demanding better pay and working conditions, stable hours and above all, respect. This has predictably spread to other parts of the low-wage sector. Fast food and retail workers have been systematically striking, one city at a time, under the banner of a $15 per hour living wage. Workers in New York City, Chicago, Detroit, St. Louis and Milwaukee have walked off the job in the one-day wildcat strikes. SEIU and a variety of community groups have been behind the stoppages. It would be natural to expect chronic one-day strikes like this at the beginnings of union formation. This is exactly how voiceless workers in the 1880s and 1890s began to mass their collective power. That doesn’t mean it will succeed, but it means it’s following a very similar script. Yesterday’s action in Washington involved the 2 million workers paid, directly or indirectly, by the federal government, who make $12 an hour or less. The federal government is actually the largest low-wage job creator in America, higher than Walmart, McDonald’s or anyone else. The Demos report detailing this is very thorough and has already spurred a House Democratic investigation (believe it or not, Steny Hoyer’s going to show up at it):

Vital Signs Chart: 16% of Work Force Foreign Born - Immigrants are becoming a bigger part of America’s labor force. The share of workers in the labor force born outside the U.S. hit 16.1% last year, from 15.9% in 2011 and 15.5% in 2009 — having dipped during the recession. The increase is encouraging because the U.S. economy will require more workers as a growing number of baby boomers retire.

Legal Experts Debate U.S. Retailers’ Risks of Signing Bangladesh Accord - American retailers remain sharply opposed to joining an international plan to improve safety conditions at garment factories in Bangladesh as their European counterparts and consumer and labor groups dismiss the companies’ concerns about legal liability.  A few shareholders at Gap’s annual meeting this week questioned the company’s refusal to sign on to a plan that commits retailers to help finance safety upgrades in Bangladesh, where 1,127 workers died when the Rana Plaza factory building collapsed on April 24.  Whether the new accord would subject retailers to substantial legal risks has been debated since nearly three dozen European retailers embraced the plan last week while almost all major American companies shunned it. The plan, called the Accord on Factory and Building Safety in Bangladesh, was forged by retailers, union leaders and government officials overseas.

Employee Abuse Runs Rampant In America -- Corporate culture, HR hound dogs who hunt the squeaky wheel, bullying, abuse and politics abound for working America today.  For those who still have a job, America has turned into a survivor game.  No longer are workers respected and treated as human beings.   Even those most educated and skilled are treated like pond scum  There is even a name for it, bosshole and 20% of all workers claim their manager actually sabotaged their job.  Absolute power corrupts absolutely and the corporate structure of feudal lords all loyal to the CEO king have resulted in a toxic work environment for most.  Bullying in the workplace is common and 37% of all workers have experienced it.  Over 50% of employers admitted to incidents of workplace bullying with 25% of all HR employees admitting to being bullied themselves.  How did America go from the great middle class where people were empowered and respected in their jobs to this?  The Workplace Bullying Institute documents just how widespread employee abuse is in America. One of the more interesting pieces on the WBI site describes who gets targeted for workplace abuse.  It's not what you think.  The people most targeted are the ones most capable.  Believing your exceptional, perfect work will get the abuse to stop is therefore a myth.  WBI research findings from our year 2000 study and conversations with thousands of targets have confirmed that targets appear to be the veteran and most skilled person in the workgroup.

How the Obama Administration Talks to Black America - The first lady went to Bowie State and addressed the graduating class. Her speech was a mix of black history and a salute to the graduates. There was also this: But today, more than 150 years after the Emancipation Proclamation, too many of our young people just can't be bothered. Today, instead of walking miles every day to school, they're sitting on couches for hours playing video games, watching TV. Instead of dreaming of being a teacher or a lawyer or a business leader, they're fantasizing about being a baller or a rapper. And then this: If the school in your neighborhood isn't any good, don't just accept it. Get in there, fix it. Talk to the parents. Talk to the teachers. Get business and community leaders involved as well, because we all have a stake in building schools worthy of our children's promise. ...And as my husband has said often, please stand up and reject the slander that says a black child with a book is trying to act white. Reject that.  There's a lot wrong here. At the most basic level, there's nothing any more wrong with aspiring to be a rapper than there is with aspiring to be a painter, or an actor, or a sculptor. Hip-hop has produced some of the most penetrating art of our time, and inspired much more. My path to this space began with me aspiring to be rapper. Hip-hop taught me to love literature. I am not alone. Perhaps you should not aspire to be a rapper because it generally does not provide a stable income. By that standard you should not aspire to be a writer, either.

SNAP Rolls: They’re Elevated for a Reason - So I’m driving into work the other day, and since 8-10 hours of this stuff isn’t enough for me, I’m listening to wonk radio where this guy is going on about the SNAP, or Food Stamps, program.  He’s a knowledgeable guy making a lot of sense, until he goes off and says something to the effect of: unemployment’s coming down, so the SNAP roles should be coming down too. It’s not an unreasonable thought, and it probably resonated with lots of listeners.  The notion that the SNAP rolls are “too high” has also become a bit of a conservative meme. But it’s wrong in at least two ways.  First, because the labor force participation rate has been dropping, in part due to people dropping of out the labor force due to lack of opportunity, the unemployment rate is a less reliable measure of labor slack right now (it’s artificially low because of the dropouts).  A better indicator of the weakness of the recovery and the continued need for nutritional support for low-income households is the employment rate—the share of the population employed.  And that’s been flat-lining for a while, meaning that job growth has just kept up with population growth.  Under those conditions, you’d expect elevated SNAP rolls.

Food Stamps Get Licked by Cuts -- This week, the Senate and House agriculture committees sent bills that would guide farming policy for the next five years to both legislative chambers for a vote. The vast majority of the legislation's outlined spending goes to a program that has proven a rich target for a Washington drunk on spending cuts—the food stamp program. The House bill would cut $20 billion over five years from the program’s $80 billion-a-year budget. The Senate's version would trim $4.4 billion from food stamps. The House bill gets most of its cuts by getting rid of program that allowed states to streamline the ways they provide assistance to the poor; the Senate bill would make changes to the program that would cut some people off food stamps.* In true bureaucratic fashion, the program has an unwieldy name: “Categorical Eligibility.” Conservative lawmakers call it “automatic eligibility” to make it sound as though people who aren’t poor are finding food stamp cards in their mailboxes. In reality, the federal government is allowing states to be more generous than required, if they want to be. For most anti-poverty programs—like the one that used to be called welfare, subsidies for housing, childcare assistance, and heating assistance—states have a lot of leeway in deciding who qualifies. Eligibility is determined by how low a family’s income is and whether they have any assets, like a car worth more than $2,000.

Who Would Jesus Starve? -  Meet two-term Teabagger Congressman Stephen Fincher, easily the most insane one from Tennessee next to abortion advocate Scott Desjarlais. Today, on the floor of the US House of Representatives, Fincher stood up on his hind legs and quoted a Bible verse from Thessalonians that he'd offered as support that we should let poor people starve. Fincher, you see, was responding to Juan Vargas (D-CA) who'd quoted his own Bible verse from Matthew that essentially said Jesus was committed to feeding the poor (Both quotes from the Bible are egregious sins against the mandate separating Church and State but at least Vargas gets brownie points for getting Jesus' priorities right).  Last March, Fincher became one of a growing number of "fiscal conservatives" led by Rick Scott who wants welfare recipients to be drug-tested before they receive any money. This farmer/gospel singer-turned Congressman is leading the fight in the House in which foaming-at-the-mouth right wing ideologues who have no problem with endless tax cuts for the top 1% want to take away virtually the only thing keeping body and soul together for many poor families and households who can't find work: SNAP benefits. In fact, they're looking for $20,000,000,000 in SNAP cuts over the next decade while the Blue Dogs of the Senate are looking for a "mere" $4 billion in cuts, meaning they have no problem with letting only some needy people starve.

The 1 Percent Are Only Half the Problem - -Most recent discussion about economic inequality in the United States has focused on the top 1 percent of the nation’s income distribution, a group whose incomes average $1 million (with a bottom threshold of about $367,000). “We are the 99 percent,” declared the Occupy protesters, unexpectedly popularizing research findings by two economists, Thomas Piketty and Emmanuel Saez, that had previously drawn attention mainly from academics. But the gap between the 1 percent and the 99 percent is only half the story. Granted, it’s an important half. Since 1979, the one-percenters have doubled their share of the nation’s collective income from about 10 percent to about 20 percent. And between 2009, when the Great Recession ended, and 2011, the one-percenters saw their average income rise by 11 percent even as the 99-percenters saw theirs fall slightly.  This dismal litany invites the conclusion that if we would just put a tight enough choke chain on the 1 percent, then we’d solve the problem of income inequality. But alas, that isn’t true, because it wouldn’t address the other half of the story: the rise of the educated class. Since 1979 the income gap between people with college or graduate degrees and people whose education ended in high school has grown. Broadly speaking, this is a gap between working-class families in the middle 20 percent (with incomes roughly between $39,000 and $62,000) and affluent-to-rich families (say, the top 10 percent, with incomes exceeding $111,000). This skills-based gap is the inequality most Americans see in their everyday lives.

Why Suburban Poverty is Less Visible and More Insidious - We've been talking today – both at Atlantic Cities and across town with our Washington, D.C. neighbors the Brookings Institution – about the suburbanization of poverty in America, a geographic trend particularly notable for two reasons: It confounds our long-entrenched stereotypes of suburbia as the home of the American dream, and it creates a dramatic mismatch between the social services infrastructure we began building during the War on Poverty and the poor people who now live nowhere near it. Primarily, it looks different because so many of the people experiencing it don't live in densely populated inner-city neighborhoods, where they have, if nothing else, community. Poor people who live in high-rise apartments and dense urban blocks have neighbors who can pool childcare, or point each other to social services, or share rides to work. They have access to public transit, because transit follows density, too. There is a land-use component to the shape of poverty (and the kinds of solutions we can build to address it): Poor people who are spread out from each other, and from the kinds of services that grow up to serve concentrated poverty, have the least resources of all

Do Big Cities Help College Graduates Find Better Jobs? - Although the unemployment rate of workers with a college degree has remained well below average since the Great Recession, there is growing concern that college graduates are increasingly underemployed—that is, working in a job that does not require a college degree or the skills acquired through their chosen field of study. Our recent New York Fed staff report indicates that one important factor affecting the ability of workers to find jobs that match their skills is where they look for a job. In particular, we show that looking for a job in big cities, which have larger and thicker local labor markets (that is, bigger markets with many buyers and sellers), can give workers a better chance to find a job that fits their skills.

U.S. Cities Growing Faster Than Suburbs - America’s biggest cities are continuing to outgrow their suburbs as the economy’s plodding recovery makes it harder for city dwellers to move to greener pastures.  The nation’s 51 largest metropolitan areas — those with populations over one million — saw their city populations grow 1.12% between July 2011 and July 2012, up from 1.03% a year earlier and an average of 0.42% between 2000 and 2010, according to an analysis of Census data by demographer William Frey of the Brookings Institution in Washington. By contrast, these cities’ suburbs grew just 0.97% last year, higher than 2011’s 0.96% but far below the average of 1.38% in the previous decade. In the New York-Northern New Jersey metro area, New York City — the nation’s largest, with over 8 million people — saw its population grow 0.8% between July 2011 and July 2012, much faster than the 0.3% growth of its suburbs. Between 2000 and 2010, the New York metro area’s suburbs generally grew faster than New York City. Fewer people “are moving out of the big urban cores because the recession [and sluggish recovery have] tended to freeze people in place,”  The Chicago metro area exemplifies the trend: Chicago’s population grew 0.4% between July 2011 and July 2012, while its suburbs grew only 0.2%. In the 2000s, Chicago’s population dropped 0.5% on average, while its suburbs gained 0.9%.

Philly Fed: State Coincident Indexes increased in 45 States in April From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2013. In the past month, the indexes increased in 45 states, decreased in four states, and remained stable in one (Minnesota), for a one-month diffusion index of 82. Over the past three months, the indexes increased in 47 states, decreased in two (Wisconsin and Wyoming), and remained stable in one (Alaska), for a three-month diffusion index of 90. Note: These are coincident indexes constructed from state employment data. From the Philly Fed: The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In April, 46 states had increasing activity, the ninth consecutive month with 45 or more states showing increases.  Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.  The map is mostly green again and suggests that the recovery is geographically widespread

Ongoing disaster evident in too many states - Earlier this month, the national jobs report was released, revealing the ongoing disaster resulting from a persistently weak economic recovery. The release of state employment data from the Bureau of Labor Statistics helps identify the states that face the most grave economic challenges more than five years after the beginning of the Great Recession. Between January 2013 and April 2013, twelve states and the District of Columbia experienced decline in overall employment. Earlier signs of weakness in the Northeast and Midwest were further realized over the three-month period from January 2013 to April 2013, with the Midwest job market stagnant at 0.0 percent, and the Northeast at 0.3 percent. Both the South and West experienced growth of 0.5 percent during this period. Utah’s growth of 1.7 percent leads the nation, with Texas’ job growth of 1.0 percent the only other state at or above 1 percent growth. In April 2013, there were four states—Nevada, Illinois, Mississippi and California—with unemployment rates of 9.0 or more (down from seven states in March). The number of states in which the unemployment rate is now less than 5.0 percent increased to nine, led by Nebraska and North Dakota, each with rates less than 4.0 percent.

Prisoner unemployment is rising in California - Prison labor, once best known for making license plates, has grown to 57 factories doing such work as modular building construction, toner cartridge recycling, shoemaking and juice packaging, according to its latest annual report. Convicts supply closed-captioning for television and transcribe movies into Braille… Yet even with workers paid 35 to 95 cents an hour, business is off. Sales are exclusively to state and local governments, almost all under budget pressure. The biggest customer, the Corrections Department, has 43,000 fewer inmates since 2006, many shifted to county jails to ease crowding. Revenue slipped 18 percent to $173 million in the fiscal year that ended in June, from almost $210 million five years earlier. “We are statutorily required to be self-sufficient,” said Eric Reslock, a spokesman for the California Prison Industry Authority. Some work programs have been scaled back and all are being reviewed, he said.

N.J. Revenue May Fall $937 Million Short, Analyst Says - New Jersey revenue may miss Governor Chris Christie’s targets by as much as $937 million over the next 13 months as collections from online gambling and energy taxes fall short, the legislature’s chief fiscal analyst said. Revenue from Internet wagers through fiscal 2014 may be $30 million, or $150 million less than Christie’s $180 million projection, David Rosen of the nonpartisan Office of Legislative Services told lawmakers today. Energy taxes will fall short by $348 million after Hurricane Sandy led to service disruptions and less consumption, he said. Christie, a 50-year-old Republican seeking re-election in November, told reporters in Lavallette today that his administration will cut its forecast for energy taxes by about $150 million. Christie’s and Rosen’s latest budget projections differ by about $800 million, the governor said.

America’s future early education system - At some point, the United States is likely to have universal publicly-funded early education for children aged one to four. But while we led the way in establishing universal elementary and secondary schooling and in expanding access to college, on early education we lag well behind some other rich nations. We should pick up the pace. Universal early education will have two significant benefits. First, many Americans with prekindergarten children want to combine family with paid work.1 But because good-quality out-of-home care can be prohibitively expensive, too many parents settle for care that is mediocre or poor.2 Others simply forgo employment.3 Denmark and Sweden offer a good model. Beginning in the 1960s, these countries introduced and then steadily expanded paid parental leave and publicly-funded childcare and preschool. Today, Danish and Swedish parents can take a paid year off work following the birth of a child. After that, parents can put the child in a public or licensed private early education center. The quality tends to be high, as early education teachers get training and pay comparable to elementary school teachers. Parents pay a fee, but the cost is capped at less than 10% of a household’s income.4

‘We May Have To Close Schools’: Five Districts That Are Grappling With Sequestration’s Budget Cuts - While many public schools will be able to stave off some of the harshest impacts of sequestration with other sources of revenue, those that serve military families and Native American communities are in a much more difficult situation. That’s because they rely heavily on federal Impact Aid. That money goes to schools on or near military bases and Native American reservations that don’t collect as much in tax revenues as other public schools to help fill the gap.  Sequestration will reduce the $1.2 billion these schools normally receive by more than $60 million. According to analysis by the Center for American Progress, there are nearly 150 schools in the country relying on more than $1 million in aid. Some could see cuts in the millions of dollars. The National Association of Federally Impacted Schools, which works closely with these communities, is conducting a survey of school districts grappling with this reduction in funding. While the full results won’t be ready for another month, the preliminary report, shared with ThinkProgress, shows that many are already facing drastic choices. One school warned that “we may have to close schools” and another cautioned that “closure is always a possibility.” Six of the nine schools it talked to will have to consider closing schools if sequestration continues past next year.

Chicago Teachers and Parents Launch Three Day March Against 54 School Closings _Real News video - In Chicago, hundreds of teachers, parents, and students have launched three days of marches to mark a final protest against plans to shutter 54 public schools. The march route includes the targeted schools, which are almost all in low-income black and Latino neighborhoods in Chicago's south and west sides. The protests will culminate with a mass demonstration and civil disobedience in downtown Chicago Monday, and direct action is also expected to escalate for Wednesday's scheduled final Board of Education vote over the fate of the schools. Brandon Johnson is an organizer with the Chicago Teachers Union, which led the protests.

Chicago Teachers Union begins 3-day citywide march -  Hundreds of teachers, parents and students took to Chicago's streets Saturday, the first of three days of marches to protest Mayor Rahm Emanuel's plan to close dozens of city school. The show of force was meant to add weight to a pair of lawsuits filed in recent days. Police-escorted processions snaked through numerous neighborhoods, with protesters stopping at schools, chanting and holding signs with slogans such as "Quality Schools For All Kids." "It's extremely important that we continue our fight for education justice," Chicago Teachers Union President Karen Lewis said outside an elementary school on the city's West Side. "It's extraordinarily important to have schools in communities because even if they're not where you want them to be at this moment, you have to plan for the future." The Chicago Board of Education is set to vote on the plan to close 54 schools in the coming days. Parents say the closures also threaten student safety, as children may have to cross gang boundaries to get to new schools.

Chicago Just Carried Out The Biggest Round Of School Closings In American History - The Chicago school system, the nation's third largest, is in big financial trouble, with a billion dollar deficit coming up, falling enrollment, and a recent massive teacher strike over a contract dispute. Now, MSNBC reports, after a heavily protested meeting where multiple people had to be thrown out, the Chicago Board Of Education voted 4-2 to close 49 schools and one high school program in the largest round of school closures that a single American city has ever attempted. At one point, a man wearing a shirt from the Chicago Teachers Union stood up and walked out mid meeting saying "This is a farce. If you care about children, you should leave now." Opponents object to the closures because they say it disproportionately affects black students, that it will disrupt their educations, and that some students might have to cross gang territory. Supporters say this is necessary just to keep the system solvent, and to try to fix the schools that remain.

Public Spending Per Student Drops - U.S. public-education spending per student fell in 2011 for the first time in more than three decades, according to new U.S. Census Bureau data issued Tuesday. Spending for elementary and high schools across the 50 states and Washington, D.C. averaged $10,560 per pupil in the fiscal year ended June 30, 2011. That was down 0.4% from 2010, the first drop since the bureau began collecting the data on an annual basis in 1977, the agency said Tuesday. However, when you adjust the figures for inflation, this isn’t the first drop on record. By that measure, spending per pupil dropped once in 1995 and hit its highest level in 2009. In inflation-adjusted terms, spending per pupil was down 4% in 2011 from the peak. Overall, the nation’s pre-kindergarten-through-12th grade schools spent $595.1 billion on about 48 million students in 2011, with $522.1 billion going toward daily operating expenses, the data show. That was a decline of 1.1% from 2010, the second year in a row that total spending dropped.

Vital Signs Chart: Public School Spending Stalls - Public-school spending stalled in the 2011 fiscal year. Spending per student on public elementary-school and secondary-school systems fell 0.4% to $10,560, after rising steadily for years. If adjusted for inflation, the drop-off is steeper. States vary widely in their spending: New York spent just over $19,000 per pupil in 2011, while Mississippi and Utah each spent under $8,000.

2-Year Colleges Getting a Falling Share of Spending - Community colleges have received a declining share of government spending on higher education over the last decade even as their student bodies have become poorer and more heavily African-American and Latino, according to a report to be released Thursday. “Many community colleges end up receiving minimal federal support,” said Richard D. Kahlenberg, a senior fellow at the Century Foundation, which is publishing the report. “The kids with the greatest needs receive the fewest resources.” The report argues that colleges have become increasingly separate and unequal, evoking the Supreme Court’s landmark Brown v. Board of Education decision in 1954, which barred racial segregation in elementary and secondary schools. Higher education today, the report says, is stratified between four-year colleges with high graduation rates that serve largely affluent students and community colleges with often dismal graduation rates that serve mostly low-income students.In 2009, community colleges spent $9,300 per student on educational resources, virtually unchanged from 1999 once inflation was taken into account. Public research universities spent $16,700, up 11 percent from 1999, and private research universities spent $41,000, an increase of 31 percent.

The Changing Face of Community Colleges - Students at community colleges increasingly come from low-income families, as I mention in an article for Thursday’s newspaper about a new report. The trends, in their simplest terms: The ethnic breakdown has also changed, as the report, which is being published by The Century Foundation, explains: Between 1994 and 2006, the white share of the community college population plummeted from 73 percent to 58 percent, while black and Hispanic representation grew from 21 percent to 33 percent, in part reflecting growing diversity in the population as a whole.  Community colleges get much less media attention than four-year colleges — and I’ll plead guilty to that charge, too — but they will play an enormous role in shaping the economy. They enroll more than 40 percent of college students nationwide. They also tend to have distressingly low graduation rates, which means they represent a pool of potential college graduates. As we have written before, the unemployment rate for college graduates is below 4 percent. For everyone else, it is above 7.5 percent. The full report on community colleges, from the Century Foundation, is now online.

Community college underfunding.: Media discussions of "college" or "college costs" tend to get very confused because media people overwhelmingly attended (and expect their children to attend) highly selective institutions of higher education. The big gap is between people who went to very selective private schools (Yale! Princeton!) and those who went to very selective public schools (Michigan! UVA!) while the large majority of Americans who go to much less selective institutions tends to get ignored. In particular, we hear very little about community colleges even though these are the schools that tend to serve the marginal student and where higher education as a ladder of opportunity for low-income people will either succeed or fail.But here's a striking fact. If you've been paying any attention at all over the past decade, you've heard a lot about states cutting back on their funding of higher education. What you hear less about is that high-end public institutions of higher learning—the "public research universities" in the chart above—have responded to these funding cuts by drastically increasing per student spending in failed effort to keep up with the prestigious private universities who've been ramping up spending in an even more dramatic way. Consequently, tuition hikes have compensated for over 100 percent of of the funding cutbacks. The schools that have truly faced sharp resource constraints are the community colleges that you don't hear about. Their aggregate spending is essentially flat, meaning that due to the magic of Baumol's Cost Disease they've had to respond to funding cutbacks by reducing service levels even while raising tuition. What makes it especially egregious is that these institutions started off spending less to begin with. Community college students have the greatest level of need, but they receive the least resources and they're increasingly pressed but tend to get overlooked in media accounts of funding arguments that instead focus on exclusive schools with a much more affluent client base.

Breaking down the higher ed wage premium - The wage premium for higher education is high and growing. This is well known. Perhaps less appreciated though is that the average premium can vary greatly by college major and by whether or not the person gets an advanced degree. Luckily for us, there is a very nice piece from the Cleveland Fed on these questions. Here's a graph from the paper of the overall premium (clic the pic for an even more educational image): Median wages for BA/BS and higher have gone from 140% of high school only wages to 180% of high school only wages from 1977 to 2010. Note that the premium for "some college" has stayed fairly flat over the same time period. So, "go to college, young person", right? Well there is the big issue of whether higher education creates human capital or just serves as a signal of innate ability (phone call for Robin Hanson). And there's also the issues of "what major" and "what degree". Here's another graph from that Cleveland Fed piece (clic the pic for an even more self-serving image):

Only 27 percent of college grads have a job related to their major - Here’s some interesting new data from Jaison Abel and Richard Dietz of the Federal Reserve Bank of New York. The vast majority of U.S. college grads, they find, work in jobs that aren’t strictly related to their degrees: There are two different things going on in this chart. First, a significant number of college grads appear to be underemployed: In 2010, only 62 percent of U.S. college graduates had a job that required a college degree. Second, the authors estimated that just 27 percent of college grads had a job that was closely related to their major. It’s not clear that this is a big labor-market problem, though — it could just mean that many jobs don’t really require a specific field of study. (You can find Abel and Dietz’s longer paper here, and note that they are excluding people with graduate degrees in this second chart — so no doctors, lawyers, college professors, etc.) There’s an important twist here, too. The chances of finding a job related to your degree or major go up a few points if you move to a big city:

America’s Top Colleges Have A Rich-Kid Problem - In case you ever wondered just how much wealthy students dominate America's top colleges, here's a nice illustration from a new report by the Century Foundation.  At the most selective schools in the country,* 70 percent of students come from the wealthiest quarter of U.S. families.  Just 14 percent come from the poorest half.  If you think higher education should be a ladder for upward mobility, then you should regard these numbers as a disgrace. As we've written before at The Atlantic, elite colleges do a consistently poor job recruiting the intelligent but low-income high school students who could benefit most from a top-notch education. Part of their problem, as Josh Freedman explained for us recently, is that it's expensive. Low-income undergrads need financial aid, and many institutions either don't have the resources, or would simply prefer to deploy them elsewhere. Others have the money and are willing to use it, but aren't sufficiently aggressive about reaching out to a population of students who often don't realize they have the academic skills to attend a great school or that aid would cover most of their expenses.

The $7,000 Computer Science Degree — and the Future of Higher Education - While a new report puts the average debt load of new college grads at a stomach-churning $35,200, the Georgia Institute of Technology is rolling out an alternative program experts say offers a beacon of hope for both students and employers: A three-year master’s degree in computer science that can be earned entirely online — and that will cost less than $7,000.   The school is partnering with Udacity, a for-profit provider of MOOC (massive open online course) education, and AT&T, which is contributing $2 million and will provide connectivity tools and services. “We believe this program can establish corporate acceptance of high-quality and 100 percent online degrees as being on par with degrees received in traditional on-campus settings,” a statement from the school says. This isn’t academia’s first foray into offerings that promise some combination of low cost and high tech education, of course, but it’s the first one that industry observers say has the potential to shake up the status quo. “Georgia Tech’s announcement probably is a game changer that will have other top-tier universities that offer degrees in computer science scrambling to compete,”

Dear Class of ’13: You’ve been scammed - No one else is going to tell you this, so I might as well. You sit here today, $30,000 or $40,000 in debt, as the latest victims of what may well be the biggest conspiracy in U.S. history. It is a conspiracy so big and powerful that Dan Brown won’t even touch it. It’s a conspiracy so insidious that you will rarely hear its name. Move over, Illuminati. Stand down, Wall Street. Area 51? Pah. It’s nothing. The biggest conspiracy of all? The College-Industrial Complex. If you turn to the pages of any newspaper, you will read a lot of hand-wringing about this. You will hear attacks on “predatory” student-loan companies and “predatory ... for-profit colleges.” You will hear about cutbacks in Pell Grants and federal aid and proposals to lower the interest rate on subsidized federal loans. But all of these comments ignore one basic problem. It’s the cost, stupid.

Class Of 2013 Student Debt Reaches New Heights - In what is now an annual ritual, a new crop of college graduates has been crowned the most indebted class in American history.Students in the class of 2013 graduated with an average debt load of $30,000, according to an analysis by Mark Kantrowitz, publisher of Adjusted for inflation, that's roughly double the average amount of debt students graduated with 20 years ago.A separate study released Thursday by Fidelity Investments painted a bleaker picture. The class of 2013 carried an average of $35,200, Fidelty's study found, which includes credit card debt and money owed to family members. Half of all graduates with debt said in the survey that they were surprised at how much they accumulated. "The number of graduates reporting surprise by the level of student debt they have accumulated is a big concern and shows that there is a considerable need for families to better understand the total cost of college," Keith Bernhardt, vice president of college planning at Fidelity Investments, said in a statement. Outstanding student loan balances increased to a total of $986 billion as of March 31, the New York Fed reported. Total student debt nearly tripled over the past 8 years.

Class of 2013 has largest debt ever - This year's graduating class will be leaving college with a massive debt, but that crown will soon pass on to the class of 2014. The average student loan debt for borrowers who are graduating in 2013? A hefty $30,000. But the Wall Street Journal reported Saturday that they aren't likely to hold the "most indebted ever" title for much longer because rising tuition and the cost of student loans will see them pass it on to the class of 2014 — just like the class of 2013 inherited it from the class of 2012. One silver lining — despite heftier debts, job prospects for the current graduating class are looking better as the economy begins to turn around, the Journal reports. According to the Federal Reserve Bank of New York, the total outstanding student loan debt was $986 billion at the end of the first quarter of 2013, a jump of 2.1 percent from the previous quarter and nearly 50 percent from the same quarter in 2009.

Student loan defaults rising despite a way out - Although levels of household debt have steadily receded in the U.S. since the housing bubble burst, Americans are conspicuously falling behind in one area -- student loans. The number of people who are at least 90 days late on student loan payments has jumped 3.2 percent in only two years, rising from 8.5 percent in 2011 to 11.7 percent today, according to a recent study by the New York Federal Reserve. And the true picture for borrowers is even worse. That delinquency rate counts all student loans, including those currently in deferment or in grace periods and therefore temporarily not in the repayment cycle. Excluding those loans, the actual delinquency rate is more than 30 percent, the New York Fed found in a separate study. In 2004 it was under 20 percent. For the 2011-12 school year, students and their families borrowed $76 billion to pay for college, according to the Pew Research Center. That's just one year. Currently, Americans owe a total of nearly $1 trillion in student debt. From 2004 to 2012, the number of people getting student loans and their average debt have both increased by 70 percent. Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt. Currently, nearly 40 million people owe an average of $26,000 after graduation.

Delinquent Student Loans Hit Record, 30% Of 20-24 Year Olds Are Unemployed And Not In School - Almost a year ago we shared a calculation according to which "Over $120 Billion In Federal Student Loans In Default", suggesting that the next credit crisis has already arrived. Since then the topic of the student loan bubble has become a household topic. Sadly, that does not mean it has gotten any better. In fact, according to the latest Education Department data it has gotten as bad as it has ever been. As Bloomberg reports, not only have overdue student loans reached an all-time high but the number of young people aged 20-24 out of school and unemployed is at a record high: not quite astronomic by European standards, but hardly a ringing endorsement of an economy set to transition labor tasks to the next generation, especially with the employment of those 55 and older at all time highs.

Nobel winner: Cut student loan rates: A proposal by Sen. Elizabeth Warren, D-Mass., to reduce interest rates on student loans has one big economic backer: Nobel Prize laureate Joseph Stiglitz. Warren's proposal would tie the interest rate on Stafford student loans to the Federal Reserve's discount rate, currently, 0.75%. Government-subsidized Stafford loans have a 3.4% interest rate, and are scheduled to rise to 6.8% this summer, unless Congress decrees otherwise. College graduation has become a big factor in whether students succeed later in life, Stiglitz says. "The life chances of a young American are more dependent on the income and education of their parents than in other industrial countries." While the national unemployment rate was 7.5% in April, the unemployment rate for college graduates was 3.9%, according to the Bureau of Labor Statistics. High-school grads with no college have an unemployment rate of 9%. "Students are being squeezed," says Stiglitz, who won the 2001 Nobel Prize in economics. "Incomes are down, and tuition is going up." Those who go to public colleges are getting hit the hardest, he says, because of state budget cuts.

How Student Loans Became a $120 Billion Government Bonanza - Business has been good for the federal government when it comes to student loans.Over the past five years, student loans have generated profits of $120 billion for the Department of Education.And the latest projections from the Congressional Budget Office (CBO) put the take from student loans for the 2013 fiscal year at $48.6 billion - helped along by a change in 2010 that eliminated the middleman and made the Education Department the direct lender for all government-backed loans.It means the government will reap more in profits from student loans this year than any of the nation's largest corporations. Last year, for example, the most profitable company was ExxonMobil which reported income of $44.9 billion.  The money is rolling in partly because the Education Department has stepped up efforts to collect on delinquent loans, but mostly because the U.S. government can borrow money far more cheaply than the students to whom it is giving the loans. The government's student loans now carry an interest rate of 3.4%, which has proved plenty lucrative.But unless Congress acts soon, the interest rate on government student loans will double to 6.8% as of July 1. (The temporary 3.4% rate was supposed to expire last July, but last year Congress extended it for one year.) Meanwhile, 10-year Treasuries go for about 2%, and 30-year Treasuries for about 3%.

Senator Introduces Bill To Allow Holders Of Student Debt To Refinance -- On Sunday, Sen. Kirsten Gillibrand (D-NY) announced a new bill that would let holders of student debt refinance their loans for cheaper interest rates, as Shahien Nasiripour reports at the Huffington Post: The plan sponsored by Sen. Kirsten Gillibrand (D-N.Y.) would force the U.S. Secretary of Education to automatically refinance most government loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally-backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments. “At a time when corporations, homeowners and even local governments are refinancing at historically low interest rates and saving millions of dollars, students and families who take out loans to pay for college are getting left behind,” Gillibrand said. “Ensuring that our graduates are not saddled with unmanageable debt by keeping interest rates low is just common sense.”

Senior poverty is much worse than you think - One frequent knock on the official poverty rate is that it generally excluded income from some government programs like food stamps and the Earned Income Tax Credit, but included income from others, like Temporary Assistance for Needy Families (TANF) and Social Security. That means people who, if those benefits were treated as cash, wouldn’t be counted as impoverished, still get counted as such.It’s a fair enough point, and the Census Bureau responded by creating a Supplemental Poverty Measure (SPM) that takes such programs into account and, perhaps more importantly, breaks down the way that each government program affects the poverty rate. That measure showed that the government program that keeps the most people out of poverty is Social Security. In 2011, the SPM found a poverty rate of 16.1 percent. Without Social Security, that would have been 24.4 percent. So good news for seniors, right? Not really. While the SPM takes transfer payments into account, it does the same with out-of-pocket medical costs. If you’re an unmarried senior with no dependents, make $15,000 a year, and spend $10,000 of it on medical care, under the official poverty measure you’d most likely not count as poor, as $15,000 is above the 2012 poverty threshold for a single senior ($11,011).But under the SPM, you’d count as poor as $15,000 – $10,000 = $5,000, which is below the relevant SPM threshold. And despite having Medicare, many seniors struggle with out-of-pocket medical bills. As my colleague Michelle Singletary pointed out over the weekend, the Employee Benefit Research Institute has found Medicare only pays for about 60 percent of seniors’ total health costs. Sarah has written about how out-of-pocket costs tend to pile up particularly at the end of seniors’ lives.

Another reason for NOT cutting Social Security benefits--seniors poorer than you think - Linda Beale - As everybody knows, a constant refrain of the far-right GOP establishment is a desire to cut taxes for the wealthy while cutting benefits for the poor.   The ideological right talks about benefits for the poor as "welfare" but never talks about the tax expenditures for the wealthy--which amount to much more of an income redistribution, from middle class to wealthy--as "welfare".  They should, because that's what it is.  The tax preference for capital gains, a "privileged" tax rate, favors the very wealthy who own most of the financial assets, who itemize and who have much of their income in the form of capital gains (now, after the Democrats' weak-handed agreement to extend almost all of the absurd Bush tax cuts, also used for corporate dividends), just as the overly generous estate tax exemption levels and rates favor the very wealthy, who are the only ones EVER subject to the estate tax at all.  (For some interesting stats on the very wealthy around the world, you might find the charts and information here interesting.) The ideological right also talks about benefits for the elderly--which they have paid for throughout their working lives under earned benefit provisions in place since FDR--as "entitlements", a generally derogatory term meant to engender hostility from middle class hardworking folk (based on the "those welfare bums are not like me" idea).  What the right fails to point out is how important Social Security earned benefits are as the very underpinnings of a decent standard of living at later stages of life, paid for as much as possible by hardworking folk.  It is in fact a decent standard of living when you are older and less able to take care of yourself, when you depend more on community and on what you have managed to put aside during your prime, that is at stake. 

Should U.S. Pay Workers to Delay Social Security? -- Among the ideas to “save” Social Security is to induce older workers to use less of it. Social Security already rewards workers for delayed retirement by increasing benefits with each passing year (and legislation in 1983 gradually raises the normal retirement age to 67 for people born after 1959). Four researchers looked into the idea of offering workers lump-sum payments to retire later. Their results suggest this approach could push more people to delay retirement without raising costs or cutting benefits.How would a lump sum payment work? According to the paper, under actuarially fair calculations, “an individual who opted to work to age 66 instead of claiming benefits at age 65 would then receive a lump sum worth of about 1.2 times her age-65 benefit, plus the age-65 benefit stream for life.” The lump sum would be the expected present value of the delayed retirement payment and “would be cost-neutral to the system, on average.” At the same time, older workers would still pay taxes into the system.

Employers Eye Bare-Bones Health Plans Under New Law - Employers are increasingly recognizing they may be able to avoid certain penalties under the federal health law by offering very limited plans that can lack key benefits such as hospital coverage. Benefits advisers and insurance brokers—bucking a commonly held expectation that the law would broadly enrich benefits—are pitching these low-benefit plans around the country. They cover minimal requirements such as preventive services, but often little more. Some of the plans wouldn't cover surgery, X-rays or prenatal care at all. Others will be paired with limited packages to cover additional services, for instance, $100 a day for a hospital visit.  Federal officials say this type of plan, in concept, would appear to qualify as acceptable minimum coverage under the law, and let most employers avoid an across-the-workforce $2,000-per-worker penalty for firms that offer nothing. Employers could still face other penalties they anticipate would be far less costly. It is unclear how many employers will adopt the strategy, but a handful of companies have signed on and an industry is sprouting around the tactic. More than a dozen brokers and benefit-administrators in 10 states said they were discussing the strategy with their clients. "There had to be a way out" of the penalty for employers with low-wage workers, said Todd Dorton, a consultant and broker for Gallagher Benefit Services Inc., who has enrolled several employers in the limited plans.  Pan-American Life Insurance Group Inc. has promoted a package including bare-bones plans, according to brokers in California, Kansas and other states and company documents. Carlo Mulvenna, an executive at New Orleans-based Pan-American, confirmed the firm is developing these types of products, and said it would adjust them as regulators clarify the law.

Obamacare Is Creating Uncertainty! Better Ditch It - Dean Baker - As the January 1, 2014 date, when the main body of President Obama's health care plan takes effect, comes closer Republicans are getting ever more frantic. After all, the risk to the country is enormous. The program will extend health care insurance to tens of millions of people and provide real security to tens of millions more.  Now that is really scary. This is why the Republicans are pulling out all the stops to sink the plan now before it's too late. Robert Samuelson carries the torch today in his column "the fog of Obamacare," the point of which is that it is all so confusing. As evidence he cites polls showing that people don't know what the main provisions of the bill are or when they take effect or even if the bill was passed into law. Samuelson tells us that employers are also confused about their responsibilities. He knows this because he talked to the heads of four employer consulting companies. He tells readers that many of these companies "are only now coming to grips with the ACA, because they’d assumed that the Supreme Court would invalidate it or that a Republican White House would repeal it."  So employers rely on consultants who had not paid attention to the ACA because they thought the Supreme Court would repeal it or that Romney would win the election? Now that is scary.

Obamacare Will Be A Debacle — For Republicans - Paul Krugman -The Affordable Care Act, aka Obamacare, is a policy Rube Goldberg device — instead of doing the simple, obvious thing, which would just be to insure everyone, it basically relies on a combination of regulations and subsidies to rope, coddle, and nudge us into a rough approximation of a single-payer system. There were reasons for this, of course, mainly political: a complete displacement of the existing system would have been both too destructive of powerful interests and too radical for voters. Still, the question is whether this cobbled-together system will work, and there have been many conservatives rubbing their hands with glee over the prospect of failure. Whoops. We won’t really know how Obamacare works until it has been in operation for a while; but we do know that essentially the same system has been running in Massachusetts since 2006, and is doing pretty well. The question, then, is whether other states that don’t have MA’s initial advantages — especially an already low uninsurance rate and an already operating system of community rating — can make this thing work. The big fear has been of sharply rising premiums as insurers are required to cover people with preexisting conditions. And the biggest test case was always going to be California. Well, the preliminary numbers for CA are in — and they’re looking very good, with costs coming in below expectations. At this point, it looks as if this thing is indeed going to work.

States’ Policies on Health Care Exclude Poorest - The refusal by about half the states to expand Medicaid will leave millions of poor people ineligible for government-subsidized health insurance under President Obama’s health care law even as many others with higher incomes receive federal subsidies to buy insurance.Starting next month, the administration and its allies will conduct a nationwide campaign encouraging Americans to take advantage of new high-quality affordable insurance options. But those options will be unavailable to some of the neediest people in states like Texas, Florida, Kansas, Alabama, Louisiana, Mississippi and Georgia, which are refusing to expand Medicaid. More than half of all people without health insurance live in states that are not planning to expand Medicaid. People in those states who have incomes from the poverty level up to four times that amount ($11,490 to $45,960 a year for an individual) can get federal tax credits to subsidize the purchase of private health insurance. But many people below the poverty line will be unable to get tax credits, Medicaid or other help with health insurance.

California exchange granted secrecy - A California law that created an agency to oversee national health care reforms granted it broad authority to conceal spending on the contractors that will perform most of its functions, potentially shielding the public from seeing how hundreds of millions of dollars are spent. The degree of secrecy afforded Covered California appears unique among states attempting to establish their own health insurance exchanges under President Barack Obama's signature health law. An Associated Press review of the 16 other states that have opted for state-run marketplaces shows the California agency was given powers that are the most restrictive in what information is required to be made public. It's routine in government to keep bids secret until contracts are awarded, so one vendor does not get an unfair advantage over others. After a bid is awarded, contracts generally become fully public. In setting up the California exchange, lawmakers gave it the authority to keep all contracts private for a year and the amounts paid secret indefinitely. According to agency documents, Covered California plans to spend nearly $458 million on outside vendors by the end of 2014, covering lawyers, consultants, public relations advisers and other functions.

Massachusetts Employees Will Keep Their Health Plans - Massachusetts and a few neighboring states are likely to experience the Affordable Care Act a lot differently than the rest of America. Massachusetts is often held up as a window into America’s health insurance future, because it embarked on what came to be called the Romneycare reform six years ago. Like the Affordable Care Act provisions going into effect nationwide next year, Romneycare aimed to increase the fraction of the population with health insurance by imposing mandates on employers and employees and by subsidizing health insurance plans for middle-class families without employer plans. Because the subsidized plans are available for only low- and middle-income families whose employers do not offer affordable health benefits, some analysts fear employers around the nation will drop their health benefits as the Affordable Care Act goes into full effect, resulting in millions of people losing the opportunity to get health insurance through an employer. But some people say they believe this fear is likely to be unfounded, because the propensity of Massachusetts employees to receive employer-sponsored health insurance was hardly different after Romneycare went into effect than it was in the years before.

ObamaCare Rollout: How not to attract “the young invincibles” - Rahm’s little brother Zeke has an Opinion piece in the Journal on ObamaCare. First, the state of play on the health insurance exchanges: Setting up the exchanges will pose a host of technological challenges, such as digitally linking an individual’s IRS information (which determines a subsidy level) to the insurance offerings in the individual’s home area and to employment data [and DHS data for citizenship and credit reporting data] Bugs in the computer software are bound to pop up, and the quality of the user experience will undoubtedly need improvement. … But glitches will be ironed out within a few years, and certainly by 2016 browsing your health-insurance exchange will be very much like browsing Amazon and other online shopping sites. That’s their story and they’re sticking to it.* So now to “the young invincibles,” who are key to the success of ObamaCare: Insurance companies worry that young people, especially young men, already think they are invincible, and they are bewildered about the health-care reform in general and exchanges in particular. They may tune out, forego purchasing health insurance and opt to pay a penalty instead when their taxes come due. The consequence would be a disproportionate number of older and sicker people purchasing insurance, which will raise insurance premiums and, in turn, discourage more people from enrolling. This reluctance to enroll would damage a key aspect of reform. Insurance companies are spooked by this possibility, so they are already raising premiums to protect themselves from potential losses. Yet this step can help create the very problem that they are trying to avoid. If premiums are high—or even just perceived to be high—young people will be more likely to avoid buying insurance, which could start the negative, downward spiral of exchanges full of the sick and elderly with not enough healthy people paying premiums.

Labor Health Care Plans May Suffer as Part of Obamacare Implementation - It appears one of the surprise losers during the implementation of the Affordable Care Act maybe some of the labor unions that most strongly supported the law. From the HillMany UFCW members have what are known as multi-employer or Taft-Hartley plans. According to the administration’s analysis of the Affordable Care Act, the law does not provide tax subsidies for the roughly 20 million people covered by the plans. Union officials argue that interpretation could force their members to change their insurance and accept more expensive and perhaps worse coverage in the state-run exchanges. Hansen said that his members often negotiate with their employers to receive better healthcare services instead of higher wages. Those bargaining gains could be wiped away because some employers won’t have the incentive to keep their workers’ multi-employer plans without tax subsidies. Being able to provide members with a quality union run insurance plan is one of the biggest benefits these unions have. It is often one of their best tools for recruiting new members. If low income people using these union plans don’t qualify for subsidies it would put them at a huge structural disadvantage compared to the option of simply dropping coverage and forcing workers to buy commercial plans on the exchanges. On the exchanges they would qualify for subsidies.  However, these exchange plans would likely be of a much lower quality.

Fears of Widespread “Rate Shock” Unfounded - CBPP  - A House subcommittee is putting health reform in the hot seat again today, when it holds a hearing on the “looming premium rate shock” that health insurers have warned about.  But widespread rate shock isn’t looming.  In at least a few states where insurers have already proposed their 2014 premium rates, the doomsday predictions of skyrocketing premiums have not materialized. Yes, a relatively small number of people with coverage in the existing individual insurance market can expect premium increases in 2014, particularly if they are young and healthy, are not eligible for new federal subsidies or expanded Medicaid coverage, and have a relatively skimpy plan today.  But others will pay less, and still others will be able to get better benefits for about the same premiums. Moreover, health reform means that uninsured people and those who have health problems will no longer be shut out or priced out of the individual insurance market.  Millions of people will be eligible for new federal subsidies to help them pay their premiums and cost-sharing charges, which will offset supposed rate shock for many people.

Debating Doctors’ Compensation -- Two themes run through the comments on previous blog posts that touched on the payment of the providers of health care. The first is that American doctors are paid too much. The second is that they are paid too little. Could both propositions be right? Let us explore the issue by looking at some numbers. Figure 1, below, presents data on the median compensation reported by the American Medical Group Association for 2011. (The report shows data for many more specialties than can be shown in the chart.)The American Medical Group Association is the national association of more than 130,000 doctors practicing in large medical specialty groups. Its data are very close to the median compensation data for doctors reported by the professional group-practice administrations represented by the national Medical Group Management Association. As is regularly reported by the trade journal Modern Healthcare, data on median or average doctors compensation can vary significantly, depending on who does the survey, the sample they survey and the response rates they achieve (you can see this by clicking on the chart to the right of the headline on this page). I personally view the American Group Medical Association and the Medical Group Management Group data as the most reliable.

Here’s why hospitals set high prices - Bayonne Hopsital Center in Northern New Jersey tends to charge higher prices than any other hospital in the country, according to the new data trove that Medicare made public earlier this month. For example, while the average hospital charges $23,518 to treat congestive heart failure, Bayonne charges $121,080.Medicare does not pay the really high prices that Bayonne–or any other hospitals, for that matter–charge. For congestive heart failure, for example, Medicare paid the hospital an average of $7,170. That’s less than 6 percent of what the hospital billed. Why do hospitals like Bayonne set absurdly high prices, ones that insurers and Medicare will never actually pay?  Bayonne, Creswell, Meier and McGinty found another reason that may compel hospitals to set the high prices they know they won’t get paid. “Until a recent ruling by the Internal Revenue Service, for instance, a hospital could use the higher prices when calculating the amount of charity care it was providing, ‘There is a method to the madness, though it is still madness,’ Mr. Anderson said.” Charity care is incredibly important to facilities like Bayonne Hospital Center, which needs to demonstrate that it provides a high level of “community benefit” in order to maintain its status as a nonprofit hospital. The higher prices that a hospital charges, the bigger amount of charity care its providing.

The Health Toll Of Immigration - Becoming an American can be bad for your health. A growing body of mortality research on immigrants has shown that the longer they live in this country, the worse their rates of heart disease, high blood pressure and diabetes. And while their American-born children may have more money, they tend to live shorter lives than the parents. The pattern goes against any notion that moving to America improves every aspect of life. It also demonstrates that at least in terms of health, worries about assimilation for the country’s 11 million illegal immigrants are mistaken. In fact, it is happening all too quickly. “There’s something about life in the United States that is not conducive to good health across generations,” said Robert A. Hummer, a social demographer at the University of Texas at Austin. For Hispanics, now the nation’s largest immigrant group, the foreign-born live about three years longer than their American-born counterparts, several studies have found. Why does life in the United States — despite its sophisticated health care system and high per capita wages — lead to worse health? New research is showing that the immigrant advantage wears off with the adoption of American behaviors — smoking, drinking, high-calorie diets and sedentary lifestyles.

“Children Are Dying” - Special report: Because of nationwide shortages, Washington hospitals are rationing, hoarding, and bartering critical nutrients premature babies and other patients need to survive. There are 300 drug, vitamin, and trace-element shortages in the US, the highest number ever recorded. Doctors are reporting conditions normally seen only in developing countries, and there have been deaths. How could this be allowed to happen? Experts call the nutrient shortage a public-health crisis and a national emergency—and are astounded that the government and manufacturers have let the situation become so dire. “Children are dying,” says Steve Plogsted, a clinical pharmacist who chairs the drug-shortage task force of the American Society for Parenteral and Enteral Nutrition (ASPEN). “They’re not getting any calcium or any zinc. Or they’re not getting any phosphorous, and that can lead to heart standstill. I know of a neonate who had seven days without phosphorous, and her little heart stopped.”  “I’ve never seen anything like this in my entire career, and I’ve been a pharmacist for 40-some years,” says Michael Cohen, president of the nonprofit Institute for Safe Medication Practices (ISMP) and a 2005 MacArthur Foundation fellow. “This should never be allowed to happen.”

More US babies die day they are born than any industrialized country, report shows: The US is a worse place for newborns than 68 other countries, including Egypt, Turkey and Peru, according to a report released Tuesday by Save the Children. A million babies every year die on the same say they were born globally, including more than 11,000 American newborns, the report estimates. Most of them could be saved with fairly cheap interventions, the group says. “The birth of a child should be a time of wonder and celebration. But for millions of mothers and babies in developing countries, it is a dance with death,” the report reads. “A baby’s first day is the most dangerous day of life—in the United States and countries rich and poor,” it adds. “The United States has the highest first-day death rate in the industrialized world. An estimated 11,300 newborn babies die each year in the United States on the day they are born. This is 50 percent more first-day deaths than all other industrialized countries combined.”

China's Bird Flu Goes Airborne - As if China was not suffering enough from a slumping economy, the South China Morning Post now reports that the H7N9 'bird flu' virus that has infected 131 people (and killed 36) so far can be transmitted not only by close contact but by airborne exposure. Domestic reports suggest the virus appears to be brought under control largely through restrictions at bird markets but the team at the University of Hong Kong has also found that pigs can be infected (cue 'when pigs can fly' pun). The findings suggest that there may be many more cases that have been detected or reported since "people may be transmitting the virus before they know they've even got it."

Toxic Rice Causes Concern In China – video - A number of rice mills in the Chinese province of Hunan have been been closed down after dangerous levels of cadmium were found in samples, according to reports, Meanwhile, some rice products have been recalled and others impounded. It is the latest in a string of food scares on the mainland and has created a fresh wave of public concern, as John Sudworth reports

On The Front Lines Of Food Safety - With piles of fresh strawberries beckoning consumers at markets and stores this season, an alliance of a major retailer, fruit growers and farm workers has begun a program to promote healthy produce and improve working conditions. The initiative, unfolding along neatly planted rows of berries at the Andrew & Williamson Fresh Produce’s Sierra Farm here, is an effort to prevent the types of bacterial outbreaks of salmonella, listeria or E.coli that have sickened consumers who ate contaminated cantaloupes, spinach or other produce.  One of the workers, Valentin Esteban, is on the front lines of the new effort, having gone through a training program that helps him avoid practices that lead to possible bacterial contamination that could undermine the safety and quality of the strawberries he picks.  In exchange, Andrew & Williamson is providing Mr. Esteban better pay and working conditions than many migrant farmworkers receive, a base pay of $9.05 an hour versus the $8 average in the area.

Gradually Improving Productivity - Here's something interesting I found while perusing the USDA's website data. The productivity of an acre of land was flat until the 1940's, even though tractors were invented around the turn of the 19th century and became the norm in the 1920's. I wouldn't have predicted productivity to continue to improve in recent decades, since most of the obvious technology was invented long ago, and because I thought we would near some theoretical limit on how much grain can be squeezed from an acre. Yet up to the 40's we got 15 bushels of wheat per acre, by 1980 we got 31 bushels per acre, and in 2010 we got 43 bushels per acre. In the short run the productivity per acre planted is volatile, probably due to weather and how much marginal land is farmed that year, but I'mreally surprised it isn't more volatile. Notice that the improvement isn't a percentage increase which would cause yield to increase at an impossible to maintain geometric rate in the long run, but in a linear improvement of the number of bushels.

Soybeans Touch Six-Month High on Lack of Supply Before Harvest -  Soybeans touched a six-month high in Chicago on signs demand will increase in China, the world’s biggest importer of the oilseed, even as U.S. supplies shrink before the next harvest. China’s soybean imports will start increasing sizably from this month and jump 17 percent in the season beginning Aug. 1 to 68 million metric tons, Hamburg-based researcher Oil World said May 21. U.S. supplies before the next harvest will shrink to 125 million bushels, the smallest since 2004, the Department of Agriculture estimates.

Food Stamp Cuts Backed By Farm Subsidy Beneficiaries: House Agriculture Committee Republicans who vocally supported billions in cuts to federal food assistance are big-time recipients of government help in the form of farm subsidies. Reps. Stephen Fincher (R-Tenn.) and Doug LaMalfa (R-Calif.) both cited the Bible last week to argue that while individual Christians have a responsibility to feed the poor, the federal government does not. "We're all here on this committee making decisions about other people's money," Fincher said. LaMalfa said that while it's nice for politicians to boast about how they've helped their constituents, "That's all someone else's money." Yet both men's farms have received millions in federal assistance, according to the Environmental Working Group, a nonprofit that advocates for more conservation and fewer subsidies.  LaMalfa's family rice farm has received more than $5 million in commodity subsidies since 1995, according to the group's analysis of data from the U.S. Agriculture Department. Fincher's farm has received more than $3 million in that time. Last year alone, Fincher's farm received $70,574 and LaMalfa's got $188,570.

Study examines the agricultural sector's impact on greenhouse gas emissions - Global greenhouse gas emissions from the agricultural sector totalled 4.69 billion tonnes of carbon dioxide (CO2) equivalent in 2010, which is the most recent year for which data are available.This marks an increase of 13 per cent over 1990 emissions according to a new Worldwatch Institute study.The study shows growth in agricultural production between 1990 and 2010 outpaced growth in emissions by a factor of 1.6, demonstrating increased energy efficiency in the agriculture sector.While emission rose worldwide between 1990 and 2010, emissions in Europe fell by 48.1 per cent and this significant reduction is thought to parallel the decline in its beef production between 1990 and 2010, but it may also reflect increased use of grains and oils in cattle feed instead of grasses. Laura Reynolds, Worldwatch food and agriculture researcher and the study’s author, says: “Adding oils or oilseeds to feed can help with digestion and reduce methane emissions. But a shift from a grass-based to a grain- and oilseeds-based diet often accompanies a shift from pastures to concentrated feedlots, which has a range of negative consequences such as water pollution and high fossil fuel consumption.

America's Frogs and Toads Disappearing Fast - - Frogs, toads and salamanders have been in trouble for decades, but a new U.S. government study shows just how quickly many amphibians are disappearing from ponds and creeks across the United States. The average rate of decline for U.S. amphibians is about 3.7 percent a year, which may sound small but compounds over time, scientists with the U.S. Geological Survey reported on Wednesday in the peer-reviewed online journal PLOS One. Biologists recognized an international amphibian crisis in 1989, when scientists' compared their disparate tales of vanishing species in locations around the world. A global assessment in 2004 suggested nearly one-third of the amphibians species in the world, and the United States specifically, were declining. The new USGS study is the first to present detailed monitoring data on how various populations of U.S. frogs, toads and salamanders are faring in an analysis of nine years of information collected from 34 sites across 48 species. The news is not good: Even the best-off species of U.S. amphibians have seen an average annual decline of 2.7 percent in the number of animals; those considered at highest risk have an average annual decline of 11.6 percent, which means that if declines continue on their current path, they would vanish in six years from half the patches they now occupy.

Scientists: Frog and toad declines signal of ‘collapse of the world’s ecosystems’ -A study released Wednesday said that North American frogs, toads and other amphibious animals are disappearing so quickly that they are on track to be extinct from their natural habitats by 2033. According to the Denver Post, the study — which was conducted by the U.S. Geological Survey — said that these types of animal populations are disappearing at a rate of 3.7 percent per year, although certain threatened species are expected to be extinct from their natural habitats within 6 years. The researchers found that amphibian species are even rapidly declining in protected areas. Biologist Erin Muths of Ft. Collins, Colorado told the Post, “Even in what we consider pristine areas, we are seeing amphibian decline. If anything is doing poorly in an area we think is protected, that says something about our level of protection and about what may be happening outside those areas.” The USGS study did not delve into the causes of the species’ shrinking numbers, but a report published by Oregon State University in 2011 titled “Catastrophic amphibian declines have multiple causes, no simple solution” said that a plethora of factors could be to blame.

Wells Dry, Fertile Plains Turn to Dust - Vast stretches of Texas farmland lying over the aquifer no longer support irrigation. In west-central Kansas, up to a fifth of the irrigated farmland along a 100-mile swath of the aquifer has already gone dry. In many other places, there no longer is enough water to supply farmers’ peak needs during Kansas’ scorching summers. And when the groundwater runs out, it is gone for good. Refilling the aquifer would require hundreds, if not thousands, of years of rains. This is in many ways a slow-motion crisis — decades in the making, imminent for some, years or decades away for others, hitting one farm but leaving an adjacent one untouched. But across the rolling plains and tarmac-flat farmland near the Kansas-Colorado border, the effects of depletion are evident everywhere. Highway bridges span arid stream beds. Most of the creeks and rivers that once veined the land have dried up as 60 years of pumping have pulled groundwater levels down by scores and even hundreds of feet. On some farms, big center-pivot irrigators — the spindly rigs that create the emerald circles of cropland familiar to anyone flying over the region — now are watering only a half-circle. On others, they sit idle altogether. Two years of extreme drought, during which farmers relied almost completely on groundwater, have brought the seriousness of the problem home. In 2011 and 2012, the Kansas Geological Survey reports, the average water level in the state’s portion of the aquifer dropped 4.25 feet — nearly a third of the total decline since 1996.

Stressed Ecosystems Leaving Humanity High and Dry - Everyone knows water is life. Far too few understand the role of trees, plants and other living things in ensuring we have clean, fresh water. This dangerous ignorance results in destruction of wetlands that once cleaned water and prevented destructive and costly flooding, scientists and activists warn. Around the world, politicians and others in power have made and continue to make decisions based on short-term economic interests without considering the long-term impact on the natural environment, said Anik Bhaduri, executive officer of the Global Water System Project (GWSP). “Humans are changing the character of the world water system in significant ways with inadequate knowledge of the system and the consequences of changes being imposed,” Bhaduri told IPS. The list of human impacts on the world’s water – of which only 0.03percent is available as freshwater – is long and the scale of those impacts daunting. “We have accelerated major processes like erosion, applied massive quantities of nitrogen that leaks from soil to ground and surface waters and, sometimes, literally siphoned all water from rivers, emptying them for human uses before they reach the ocean,” Bhaduri said.

UN secretary general warns the world is on track to run out of drinkable water- Ban Ki-moon has warned the world is on course to run out of freshwater unless greater efforts are made to improve water security. Speaking on the UN’s International Day of Biological Diversity, Ban said there was a “mutually reinforcing” relationship between biodiversity and water that should be harnessed. “We live in an increasingly water insecure world where demand often outstrips supply and where water quality often fails to meet minimum standards. Under current trends, future demands for water will not be met,” Ban said. Water, food, energy and climate are all linked. Most forms of energy generation require water, variable weather is making agriculture harder while extreme weather events are hindering natural water storage.

US tornado: devastated city’s storm shelter programme was put on hold - Engineering Evil: The devastated city of Moore developed a plan to help residents build storm shelters but it was put “on hold” as local authorities battled for scarce federal dollars and through a maze of regulations, city authorities said. Three months before the tornadoes that killed dozens across Oklahoma and leveled Moore, city officials released a frustrated statement explaining why residents could still not apply for money to build safe rooms. The city said that regulations put in place by the Federal Emergency Management Agency (FEMA) were a “constantly moving target”, which changed during their application process and were slowing down progress. Aside from the federal regulations, city authorities said that funds for storm shelter programmes were scarce because of a lack of federal government disaster declarations which provided extra resources.

Taxpayers Billed Nearly $100 Billion for Extreme Weather in 2012 - With all the debate on the federal budget in Congress, climate change rarely gets mentioned as a deficit driver. Yet dealing with climate disruption was one of the largest non-defense discretionary budget items in 2012. Indeed, as the Natural Resources Defense Council (NRDC) shows in Who Pays for Climate Change?, when all federal spending on last year’s droughts, storms, floods, and forest fires are added up, the U.S. Climate Disruption Budget was nearly $100 billion, equivalent to 16 percent of total non-defense discretionary spending in the federal budget—larger than any official spending category.  That means that federal spending to deal with extreme weather made worse by climate change far exceeded total spending aimed at solving the problem. In fact, it was eight times the U.S. Environmental Protection Agency’s total budget and eight times total spending on energy.  Overall the insurance industry estimates that 2012 was the second costliest year in U.S. history for climate-related disasters, with more than $139 billion in damages. But private insurers themselves only covered about 25% of these costs ($33 billion), leaving the federal government and its public insurance enterprises to pay for the majority of the remaining claims. As a result, the U.S. government paid more than three times as much as private insurers did for climate-related disasters in 2012.

Extreme Weather Possibly Increasing Power Outages? -  I'm reading up on the economics of power outages at the moment, and I stumbled across the graph above in this National Wildlife Federation analysis.  It shows the number of power outages caused by non-weather related factors, and weather related factors (from 1992-2010 in the US).  There has been a material increase in both categories, but much more so in the weather related problems.  The NWF say: Power outages and disturbances are estimated to cost the U.S. economy between $25 and $180 billion annually and severe weather is a factor in more than half of the outages in recent years. Indeed, major power outages caused by weather have increased from about 5 to 20 each year in the mid 1990s to about 50 to 100 each year during the last five years, with significant year-to-year variability. These major weather-related outages are almost always caused by an interruption in electricity distribution, rather than in electricity generation. Changes in extreme weather, power transmission infrastructure and maintenance practices, and demographic trends may all be contributing to more frequent power outages. Strong winds are a major contributor in around 80 percent of major weather related power outages. Since the early 1990s, insured damages from wind storms have increased by a factor of 4 to 5, today costing the United States an average of $174 million a year. There has not been a trend in the annual number of catastrophic wind events over this time period, suggesting that either the wind events are becoming more severe or more property has been developed in places vulnerable to wind damage.

Weather Service systems crumbling as extreme weather escalates: As painfully obvious from the recent events in Oklahoma, tornado season is in full gear. Meanwhile, hurricane season is a week away. Yet budget woes and multiple system failures at the National Weather Service in the past week, not to mention staffing shortages, are raising concerns that its ability to warn the public of hazardous weather could crack at any time. In the past 5 days alone, a telecommunications outage near Chicago made it difficult for NWS forecasters to issue warnings, a major weather satellite failed, the website for the entire NWS Southern Region went down, and a NWS official in tornado alley declined to launch a weather balloon citing budget concerns. These problems are symptomatic of insufficient funding and dated infrastructure, advocates for more generous NWS budgets say. What follows is an overview of the problems NWS has encountered, just since Sunday.

Rebuilding The Coastline, But At What Cost? - When a handful of retired homeowners from Osborn Island in New Jersey gathered last month to discuss post-Hurricane Sandy rebuilding and environmental protection, L. Stanton Hales Jr., a conservationist, could not have been clearer about the risks they faced. “I said, look people, you built on a marsh island, it’s oxidizing under your feet — it’s shrinking — and that exacerbates the sea level rise,” said Dr. Hales, director of the Barnegat Bay Partnership, an estuary program financed by the Environmental Protection Agency. “Do you really want to throw good money after bad?” Their answer? Yes. Nearly seven months after Hurricane Sandy decimated the northeastern coastline, destroying houses and infrastructure and dumping 11 billion gallons of untreated and partially treated sewage into rivers, bays, canals and even some streets, coastal communities have been racing against the clock to prepare for Memorial Day.

Ocean Warming Means A New Paradigm For The World’s Fisheries - Fishing is a profession often passed down from one generation to the next. Many lobstermen in Maine fish the same bottom their fathers and grandfathers fished, and the same holds true of fishermen father offshore as well. Yet increasingly, anecdotal evidence has suggested that the old faithful fishing spots are no longer quite so reliable.In northern regions these shifts could lead to conflicts over fishing rights and access to traditional fishing grounds. In the tropics, the problem could be more dire. As our oceans warm, species may not be able to adapt at all, leaving tropical oceans with severely depleted fish stocks and some of the most vulnerable human populations with a distinct shortage of a vital protein source. Much of this scarcity of native species can be attributed to overfishing, a practice now largely halted in U.S. waters thanks to strict new science-based management tactics implemented as a result of a 2006 reauthorization of the law that governs our fisheries. But increasingly, both scientists and fishermen have been eying climate change as a reason some fish are showing up in new places and the catch fishermen are accustomed to finding have been surprisingly slow to rebuild.

Bangladesh’s internal migrations: Ebb and flow - By the middle of the 21st century, Bangladesh, whose landmass could be fit 58 times into Brazil’s, will be home to 195m people—that is, Brazil’s population today. In short, this is not the sort of country where anyone would look to find a declining population. Yet one needn’t look far. Barisal, to the south of Dhaka, is home to a population that is just starting to shrink. The city of Barisal lies in the river delta of the Padma, as the main branch of the Ganges is called as it flows through lower Bangladesh and into the Bay of Bengal.   Famous for its fertile soil, Barisal division was once known as the “The crop-house of Bengal”. So why are the people of Barisal pouring out? The square answer is nobody has a clue (though to judge by the variety of donor-project proposals that cite the phenomenon there would seem to be an overabundance of plausible answers). But there has been little serious analysis to disentangle the many economic and environmental causes of what looks like the busiest route of internal migration anywhere in Bangladesh. One of the prime suspects behind Barisal division’s outpouring is the increase in its soil salinity. The government’s own maps show that 29% of Barisal division’s arable land was classified as “salt-affected” in 2010, up from 20% in 1973. The salinisation has been quicker and more land is affected than in any of Bangladesh’s other coastal areas. Rising sea levels are believed to have contributed to the trend, aggravating the effects of intensive agriculture.

Climate disasters displace millions of people worldwide - infographic - More than 32 million people fled their homes last year because of disasters such as floods, storms and earthquakes – 98% of displacement related to climate change. Asia and west and central Africa bore the brunt. Some 1.3 million people were displaced in rich countries, with the US particularly affected. Floods in India and Nigeria accounted for 41% of displacement, according to the International Displacement Monitoring Centre and Norwegian Refugee Council

Climate Warnings, Growing Louder - NYTimes Editorial: The news that atmospheric concentrations of carbon dioxide, the most important global warming gas, have hit 400 parts per million for the first time in millions of years increases the pressure on President Obama to deliver on his pledges to limit this country’s greenhouse gas emissions.  America cannot solve a global problem by itself. But as Mr. Obama rightly observed in his inaugural address, the United States, as both major polluter and world leader, has a deep obligation to help shield the international community from rising sea levels, floods, droughts and other devastating consequences of a warming planet. In his State of the Union speech, he promised to take executive action if Congress failed to pass climate legislation.  Which is just what he will have to do. The prospects for broad-based Congressional action putting a price on carbon emissions are nil. The House is run by people who care little for environmental issues generally, and Senate Republicans who once favored a pricing strategy, like John McCain and Lindsey Graham, have long since slunk away. Hence the need for executive action. Yet we are now four months into Mr. Obama’s second term, and there is no visible sign of a coherent strategy.

Carbon dioxide levels in atmosphere pass 400 milestone, again -  The ratio of carbon dioxide reached 400 parts per million Sunday in readings taken by the two top monitors of greenhouse gases. The National Oceanic and Atmospheric Administration revised its Sunday reading to 400.06, following a Sunday reading of 400.15 by the Scripps Institution of Oceanography. Both measures came from the top of Mauna Loa volcano in Hawaii, and are considered an important bellwether for the status of Earth's atmosphere. Readings have exceeded that milestone in the Arctic but had not reached the level in the temperate latitudes in the middle of the Pacific Ocean, far from pollution sources. The last time readings vied for the 400 parts per million level, nearly two weeks ago, NOAA revised its measure slightly downward. Monday's report represents revised figures for Sunday and are unlikely to change. Although the benchmark has taken on symbolic weight amid warnings about man-made climate change, the rate of change in the composition of Earth's atmosphere is more cause for concern -- no period in Earth's history has exhibited so rapid a run-up in carbon dioxide content. The last time Earth's atmosphere contained 400 parts per million of carbon dioxide was more than 2.5 million years ago, during the Pleistocene Epoch. Scientists estimate that average temperatures during that time rose as much as 18 degrees Fahrenheit.

Study: Climate change slowed over last decade but may speed up again - A global warming “pause” over the past decade may invalidate the harshest climate change predictions for the next 50 to 100 years, a study said Sunday — though levels remain in the danger zone. Writing in the journal Nature Geoscience, an international team of climate scientists said a slower rate of warming increase observed from 2000 to 2009 suggested a “lower range of values” to be taken into account by policy makers. While the last decade was the hottest since records began in 1880, the rate of increase showed a stabilisation despite ever-rising levels of Earth-warming greenhouse gases in the atmosphere. Scientists have alternatively explained the flatter curve by oceanic heat capture, a decline in solar activity or an increase in volcanic aerosols that reflect the Sun’s rays. Because of the hiatus, warming in the next 50 to 100 years “is likely to lie within the range of current climate models, but not at the high end of this range,”

Slower warming 'may give climate reprieve' › News in Science (ABC Science): A recent slowdown in global warming means the harshest climate change predictions are less likely in the immediate decades, say an international team of scientists.Others argue the conclusions need to be taken with a 'large grain of salt'.Dr Alexander Otto of Oxford University, and colleagues from the UK, US, Canada, Australia, France, Germany, Switzerland and Norway, report their findings in the journal Nature Geoscience today.They say a slower rate of warming increase observed from 2000 to 2009 suggested a "lower range of values" to be taken into account by policy makers in the next 50 to 100 years.But, say Otto and team, warming is still on track, to breach a goal set by governments around the world of limiting the increase in temperatures to below 2°C above pre-industrial times, unless tough action is taken to limit rising greenhouse gas emissions."The most extreme rates of warming simulated by the current generation of climate models over 50- to 100-year timescales are looking less likely," they write.

Study: Human Disaster Looms if Global Temps Rise 4ºC - New research from Europe predicts a 4ºC global temperature rise is well within the range of possibility this century, and that even if the worst predictions of climate change disasters do not materialize the cost of this global change will mean "human disaster" for the planet. As The Guardian's Fiona Harvey reports, the study--which appears in the journal Nature Geoscience — shows that as the world's oceans reach their capacity to absorb much of the world's carbon pollution, the increased temperature rise to the atmosphere will create "catastrophe across large swaths of the Earth, causing droughts, storms, floods and heatwaves, and drastic effects on agricultural productivity leading to secondary effects such as mass migration." Climate research—which studies the complex interplay between global temperatures, the oceans, the atmosphere, and the world's regional biospheres—is not a science with either a winner or a single answer. Ultimately, the science is one of deeply informed speculation—derived from complex computer modeling and close examination of the historic climate record—that seeks to unpack the complexity of the Earth's life-supporting dynamics.

The Odds of Disaster: An Economist's Warning on Global Warming - There is a remarkable record of CO2 concentrations preserved in tiny bubbles in Antarctic ice cores going back 800,000 years. These measurements are less accurate than modern Keeling-style instrumental readings, but they are plenty accurate enough to see the big picture clearly. All throughout the past 800,000 years, which encompasses several ice ages and interglacial warming periods, CO2 levels fluctuated in a relatively narrow band between about 180 ppm (during the colder ice ages) to 280 ppm (during the warmer interglacial periods). For about the last 10,000 years we have been living in a warm interglacial period, with CO2 concentrations at about 280 ppm. Then, beginning with the industrial revolution about 1750, CO2 concentrations gradually moved up to Keeling's accurately measured 1958 level of 315 ppm. Since then, as we have seen, CO2 concentrations have grown rapidly to the current 2013 level of 400 ppm. So, the current CO2 concentration of 400 ppm is some 40 percent higher than anything that has been attained in the last 800,000 years.The point here is that we are undertaking a colossal planet-wide experiment of injecting CO2 into the atmosphere that goes extraordinarily further and faster than anything within the range of natural CO2 fluctuations for tens of millions of years. The result is a great deal of uncertainty about the possible outcomes of this experiment. The higher the concentrations of CO2, the further outside the range of normal fluctuations is the planet, and the more unsure are we about the consequences.

Widely Visible Symbols Of Human Folly - Why do we do it? Sure, we discount the future, and consensus is that's genetic, but it's not just our own future we discount. In fact it's not even the one we discount most: that would be our children's future. We don't just take what we need, we take all we can, and leave them with the consequences. After us the deluge. Even though love and protection for our children, and their children, is supposed to be at least as hard-wired into our genes as discounting the future is. Science even suggests that our main subconscious aim in life is simply to propagate our genes. Go forth, multiply and go away. So, assuming this love for our children thing is valid, why is it that we burden the children we apparently love so much with these endless heaps of waste left over from our activities, many of which have nothing to do with our survival as such? At best it's a strange way of showing our love, at worst it looks more like the exact opposite of love. If mere survival was the goal, we could take it a lot easier, put on an extra sweater, walk to the store, that basic sort of thing, and build our communities to fit that kind of lifestyle. We don't. We do the opposite. The more energy we have access to, the more we feel the urge to burn. And we produce children to help us do it, and raise them accordingly. There seems to be a pattern here. We make sure every next generation is even more dependent on burning even more energy, and less capable of doing without. Not because we don't understand this can only end in tears and blood and piles of corpses; we do. All the evidence says we simply can't help ourselves. So wearing that extra sweater is useless; we'd just come up with something like keeping it on in summer and jacking up the airco, so at least we can keep burning that oil and gas and electricity, in increasing amounts.

Carbon storage in Arctic tundra shows ecosystem resiliency -“We expected that because of the long-term warming, we would have lost carbon stored in the soil to the atmosphere,” said Schimel. The gradual warming, he explained, would accelerate decomposition on the upper layers of what would have previously been frozen or near-frozen earth, releasing the greenhouse gas into the air. Because high latitudes contain nearly half of all global soil carbon in their ancient permafrost –– permanently frozen soil –– even a few degrees’ rise in temperature could be enough to release massive quantities, turning a carbon repository into a carbon emitter. To test their hypothesis, the researchers visited the longest-running climate warming study in the tundra, the U.S. Arctic Long-Term Ecological Research site at Toolik Lake in northern Alaska. This ecosystem-warming greenhouse experiment was started in 1989 to observe the effects of sustained warming on the Arctic environment.   What they weren’t expecting was that two decades of slow and steady warming had not changed the amounts of carbon in the soil, despite changes in vegetation and even the soil food web.  The answer to that mystery, according to Sistla, might be found in the finer workings of the ecosystem: Increased plant growth appears to have facilitated stabilizing feedbacks to soil carbon loss. Their research is published in the recent edition of the journal Nature.

James Hansen: accelerating Greenland ice loss will cause North Atlantic cooling, worse storms - Greenland ice melting at an expanding pace may begin cooling the North Atlantic and increasing the severity of storms by 2075, said James Hansen, the former NASA scientist who raised concerns about global warming in the 1980s.  “If we stay on this path where the rate of mass loss from Greenland doubles every 10 years, we would get to a situation by about 2075 or 2080 where the mass loss is so fast that it causes the whole North Atlantic to be colder,” Hansen said in London. The findings are from computer models using current rates of ice melt and will be detailed in a paper that Hansen plans to finish writing in the summer, he said in an interview. Inflows of cold, fresh water from Greenland would slow deep currents that carry cold water south, cooling the North Atlantic as tropical waters get warmer, Hansen said. That would increase a “temperature gradient” that’s conducive to stronger storms. “It could happen sooner” than 2075, Hansen said. “If you look at how fast the mass loss is increasing, it looks like the doubling time is between five and 10 years,” he said.

Widespread Greenland Melting To Become The Norm In Next Two Decades - When 97 percent of Greenland’s ice experienced at least some melting in July 2012, scientists wondered if it was a one-time phenomenon. Now a new study in Geophysical Research Letters indicates it is a sign of things to come and by 2025, there is a 50-50 chance of it happening annually. It’s not clear what the effects of such melting will be: the majority of Greenland’s ice loss, which has accelerated significantly over the past decade, comes from glaciers shedding more ice into the sea, and moving faster toward the sea, not from melting snow and ice at higher elevations of the ice sheet. Nevertheless, such widespread melting indicates an overall warming in the region that could threaten the ice more generally, adding significantly to the threat of sea level rise. The 2025 projection is based on two factors, according to lead author Dan McGrath, a glaciologist at the University of Colorado, Boulder. The first is a series of temperature measurements going back to 1950 at the Summit research station, at the highest — and on average, the coldest — point on the Greenland ice sheet. The mercury has been rising more or less steadily there for that entire time, with the fastest increase, of about .22° F per year, coming since 1992. “That’s six times faster than the global average,”

Russia abandoning its North Pole research station due to thin ice breaking up - Russia has ordered an "urgent" evacuation of its drifting ice station known as North Pole-40 that sits on top Arctic sea ice, because of disintegrating sea ice that is posing dangerous conditions to reseachers. This is one more indication that the thickness of the ice is now getting very thin at places it was not before, a metric not fully captured in the extent and area data.  Barents Observer reports:  The scientific research station was placed on the ice floe in October 2012 and was planned to stay there until September. Now the floe has already started to break apart and the crew has to be evacuated as soon as possible.  Russia’s Minister of Nature Resources and Ecology Sergey Donskoy has ordered that a plan for evacuation should be ready within three days, the Ministry’s web site reads.  “A collapse of the station’s ice floe poses a threat to its continued work, the lives of the crew, the environment close to the Canadian Economic Zone and to equipment and supplies,” a note from the minister reads.

Timeline of climate modeling - Steve Easterbrook offers this quick timeline on climatology.   In particular, the movies and animations at the end, including the IPSL one, are very interesting and a lot of fun. See  Timeline of climate modeling

The Four Charts That Really Matter -The troposphere is a low thermal inertia part of the overall energy system of the planet and contains only a fraction of the overall energy.  It seems however, that there is an undue preoccupation with focusing on this part of the system-- probably because we as humans happen to live in it, and also because it is easy to measure. And since the troposphere can be fickle and far more subject to short-term noise from natural variability, it makes the most sense to look at the parts of the system such as the oceans and cryosphere that have greater thermal inertia and are hardest to change from short-term noise. When doing this, and comparing it to the constant upward trend in CO2 emissions, the following four charts become the most salient in terms of understanding what is really happening:

Obama's Arctic strategy sets off a climate time bomb - One week ago, the Obama administration launched its National Strategy for the Arctic Region, outlining the government's strategic priorities over the next 10 years. The release of the strategy came about a week after the Office of Science and Technology Policy within the Executive Office of the President at the White House Complex hosted a briefing with international Arctic scientists. Despite giving lip service to the values of environmental conservation, the new document focuses on how the US can manage the exploitation of the region's vast untapped oil, gas and mineral resources in cooperation with other Arctic powers.  At the heart of the White House's new Arctic strategy is an elementary but devastating contradiction between what President Obama, in the document's preamble, describes as seeking "to make the most of the emerging economic opportunities in the region" due to the rapid loss of Arctic summer sea ice, and recognising "the need to protect and conserve this unique, valuable, and changing environment." Despite repeated references to "preservation" and "conservation," the strategy fails to outline any specific steps that would be explored to mitigate or prevent the disappearance of the Arctic sea ice due to intensifying global warming. Instead, the document from the outset aims to:  "... position the United States to respond effectively to challenges and emerging opportunities arising from significant increases in Arctic activity due to the diminishment of sea ice and the emergence of a new Arctic environment."

Climate change: After activism - Martin Wolf got my weekend off to a dreadful start. I read his latest FT column (Why the World Faces Climate Chaos) on Friday, and it's been on my mind ever since. Wolf is hardly the first to lay out the reasons why climate change is such a diabolical policy problem. But if, like me, you have been distracted lately, his brutally frank assessment of why 'humanity has yawned and decided to let the dangers mount' is bracing indeed. Wolf's column reinforces the pessimism I have felt for some time about the likelihood that coordinated international political action will have any meaningful impact on the climate change problem. It's been twenty years since the Kyoto Protocol, and in diplomatic terms, we have very little to show for the last two decades. Wolf's second point is equally important: nothing will come of making demands on people. The green movement has been all about sacrifice; about lowering our expectation for our own material well-being and that of our children. As a result, 'Most people believe today that a low-carbon economy would be one of universal privation', says Wolf. But people around the world understandably want a better life for them and their children, not a more constrained one. So what's needed, says Wolf, is a 'politically sellable vision of a prosperous low-carbon economy.' I sympathise with both points, but Wolf's column leads me to wonder what he would have ordinary citizens do.

No Solution Yet As Climate Threshold Crossed - A key threshold measuring the march of global warming was crossed recently, when the concentration of carbon dioxide in the atmosphere topped 400 parts per million. On 10 May scientists announced that 400.03ppm had been measured at a climate-observing station in Hawaii that is often used as a benchmark. The global average is expected to cross the 400ppm mark in the next year. This means that there in for every one million molecules in the Earth’s atmosphere, there are 400 molecules of carbon dioxide.CO2 concentration in the air is linked to the Earth’s temperature. The widely believed relationship is that the 450ppm level should not be crossed if global warming is to be below 2 degrees Celsius compared to pre-industrial revolution level of around 1750. In fact more recently, some prominent scientists like James Hansen have found that crossing 350ppm is already dangerous. In line with this, the existing CO2 in the atmosphere should be reduced – though how this can be done is really unclear.

Global inaction shows that the climate sceptics have already won - Humanity has decided to yawn and let the real and present dangers of climate change mount. That was the argument I made in last week’s column. Nothing in the responses to it undermined that conclusion. If anything, they reinforced it. Judged by the world’s inaction, climate sceptics have won. That makes their sense of grievance more remarkable. For the rest of us, the question that remains is whether anything can still be done and, if so, what? In considering this issue, a rational person should surely recognise the extent of the consensus of climate scientists on the hypothesis of man-made warming. An analysis of abstracts of 11,944 peer-reviewed scientific papers, published between 1991 and 2011 and written by 29,083 authors, concludes that 98.4 per cent of authors who took a position endorsed man-made (anthropogenic) global warming, 1.2 per cent rejected it and 0.4 per cent were uncertain. Similar ratios emerged from alternative analyses of the data. A possible response is to insist that all these scientists are wrong. That is, of course, conceivable. Scientists have been wrong in the past. Yet to single out this branch of science for rejection, merely because its conclusions are so uncomfortable, is irrational, albeit comprehensible.  This leads to a second line of attack, which is to insist that these scientists are corrupted by the money and fame. To this my response is: really? Is it plausible that a whole generation of scientists has invented and defended an obvious hoax for (modest) material gains, knowing that they will be found out? It is more plausible that scientists who reject the typical view do so for just such reasons, since powerful interests oppose the climate consensus, and the academics on their side of the debate are far fewer.

Martin Wolf's climate change column - - Further to the thread I started on Monday about Martin Wolf's pessimistic column, I've had an email from economist John Quiggin which goes directly to the source of Wolf's (and my) pessimism. For Wolf, the problem is that the case for acting against climate change is always based around privation of some sort: we must make do with less; we must lower our expectations about our standards of living, which are based on unsustainable levels of energy use. I agree with Wolf that this message is simply not going to sell, particularly to a developing world which wants the same luxury, dignity, longevity and good health that we in the developed world enjoy. Quiggin has sent me a link to a recent AFR column of his making the case that it is possible to fight climate change while continuing to improve our living standards. According to Quiggin, Nicholas Stern's 2006 report to the British government makes the task look quite manageable: Even the sharpest critics among economists only suggested that Stern’s estimates were at the optimistic end of a plausible range, the upper end of which might be 5 per cent of national income, or around two years of economic growth. That is, by 2050, a low-carbon economy might have the material living standards that would otherwise have been reached by 2048. This is, on the face of it, a striking conclusion. We use energy in nearly everything we do, and it is, therefore, widely assumed that a modern economy is dependent on cheap energy. Yet mainstream economists, even those most critical of Kyoto, are unanimous in the view that we could greatly reduce emissions of carbon dioxide while continuing to improve living standards at much the same rate as in the past.

Chu On Climate: ‘If We Don’t Change What We’re doing, We’re Going To Be Fundamentally In Really Deep Trouble’ - Last week Dr. Steven Chu gave an interview to Stanford where he is returning as a physics professor. The Nobel laureate was asked “What’s the No. 1 problem on your list?” His answer: Climate change. We’re heading into an era where if we don’t change what we’re doing, we’re going to be fundamentally in really deep trouble. We’re already in trouble. So we have to transition to better solutions.We’re not too far away from producing a lot of renewable energy, and doing it cheaply. Solar power is going to become cheaper and cheaper – costs have plummeted three-fold in six years, partly because of the dropping price of modules and electronics. Wind energy is within 15 percent of the cost of new natural gas energy, and the DOE predicts that that cost will cross over within one or two decades, so we need to start to plan the transition system that can conduct more wind energy. But right now, we’re not prepared. As technology continues to race forward – battery technology has advanced faster in the past five years than what I’ve seen in the [previous] 15 years – we need policy to guide and anticipate development. It takes decades to change things like infrastructure, and so people have to think about that today. Otherwise, progress slows down, and we emit more carbon and get into more trouble environmentally.

CBO: Carbon tax an option to avoid 'catastrophic' outcomes - The Congressional Budget Office (CBO) noted Wednesday that a carbon tax could generate “significant” revenues for the United States and avert “catastrophic” effects of climate change.  CBO said in a new report that there are many uncertainties about how to design and implement a carbon tax, but waiting too long to curb greenhouse gas emissions would have clear results. ... Last month, a Senate Finance Committee report suggested the carbon tax was one of many policy tools available to tax-writing panels.  While championed by some climate policy wonks and even some conservative groups looking to fill the Treasury Department’s piggy bank, the concept hasn't gained much traction in Capitol Hill. Republicans and some centrist Democrats have rejected the idea of a carbon tax, saying it would impose burdensome costs on the economy. The GOP-controlled House would block a carbon tax measure, and Republicans would likely be able to filibuster a bill in the Senate. Democrats, though, say the benefits of reducing medical costs from improved public health and stunting climate change would offset any negative economic effects from a carbon tax.  For its part, the White House has ruled out pursuing a carbon tax.

What’s the best way to pass a climate bill? Fix the economy first. - Wondering why Congress doesn’t pass more environmental legislation? The poor economy probably has a lot to do with it. A new study finds that U.S. senators are far less likely to take green votes when the unemployment rate in their state is high. That’s plausible enough. Recent research by Matthew Kahn and Matthew Kotchen found that public support for action on climate change tends to drop when unemployment rises. If people are worried about losing their jobs, it’s a lot harder to focus on how high the oceans will rise decades from now. But no one had really looked at whether this phenomenon affects members of Congress as well. And it appears to. Grant Jacobsen of the University of Oregon took a look at the voting records of 296 senators between 1976 and 2008. He then checked the local unemployment rate in each senator’s state, and matched them up to the “green scores” that were given to each senator by the League of Conservation Voters.The result? “A one point increase in the [state] unemployment rate leads to a statistically significant 0.48 point decline in the LCV score of the average senator.”

Energy and Economic Growth: Interview with Mark Thoma - Mark Thoma is a macroeconomist and time-series econometrician at the University of Oregon. His research focuses on how monetary policy affects the economy, and he has also worked on political business cycle models. Mark is currently a fellow at The Century Foundation, a columnist at The Fiscal Times, an analyst at CBS MoneyWatch, and he blogs daily at Economist’s View. In an exclusive interview with, Thoma discusses:
•    What we can expect from gas prices this summer and beyond
•    Why clean energy won’t see an dramatic investment rival, for now
•    How political feasibility, not economic feasibility, drives the ethanol mandate
•    Why the ethanol mandate might eventually be nixed
•    How we weigh the free market against government intervention
•    Why there is little momentum for a US-wide carbon market
•    What we learned from the global financial crisis
•    Why our best hope for strong economic growth is in exports

U.S., EU Said to Be in Talks With China to End Solar Spat - The Obama administration is engaged in preliminary talks with the European Union and China to settle a dispute over trade in solar-energy equipment and avoid a conflict among the world’s largest economies, according to people familiar with the discussions. The effort is focused on setting a quota on Chinese exports and a minimum price for solar-energy equipment, in exchange for suspending U.S. duties on the goods, according to two people familiar with the U.S. position who asked not to be identified to discuss private deliberations. “After expressing our intentions to the White House, we are very encouraged that these long-needed negotiations appear ready to proceed,” said John Smirnow, vice president of trade and competitiveness for the Solar Energy Industries Association. “It’s time for everyone to work together toward a fair resolution of these cases.” Representatives from the Washington-based solar group and the Singapore-based Asia Photovoltaic Industry Association met last week in China to discuss the trade disputes, Smirnow said. A policy resolution by the groups urged the U.S., China, EU and other nations to enter multilateral talks to quell rifts over solar-energy goods, he said yesterday in a statement.

The Hairy Building that Produces Clean Energy - The Söder Torn is one of the tallest buildings on the island of Södermalm, and a land mark in the city of Stockholm. Completed in 1997 it is actually several stories shorter than its architect, Henning Larsen, had originally planned, but a new retrofit aims to rectify this. Belatchew, a firm of architects based in Stockholm, has proposed adding an additional 14 floors to the tower to bring it closer to Larsen’s vision; but more importantly, they have also suggested that the tower be covered in millions of piezo-electric straws which could collect energy from movements in the air and convert it into clean energy for the building. The tower, now nicknamed “the Strawscaper” would be turned into a renewable energy, urban powerplant. The piezo-electric straws would sway around and vibrate in the wind, and the kinetic energy would be converted into usable electricity.

China emissions cap proposal hailed as climate breakthrough : Renew Economy: China, the world’s biggest polluter, is proposing to set a cap on greenhouse gas emissions as early as 2016 in a move that is being hailed as a potentially transformative step in the fight against climate change. According to news reports from China, the powerful National Development and Reform Commission (NDRC) has proposed setting absolute caps that would divorce the growth on emissions from growth in the economy, and will also set a peak in its overall emissions in 2025, five years earlier than planned. China has already pledged to cut its emissions intensity – the amount of Co2 it emits per economic unit – by up to 45 per cent by 2020. The significance of an absolute cap is that it promises to reign in emissions even if the economy grows faster than expected. Furthermore, Point Carbon reports, at a recent NDRC meeting, its vice director Xie Zhenhua said China should set long-term emission targets for 2030 and 2050 in a bid to decarbonise its economy. China, like Australia is heavily dependent on carbon-intensive coal to generate electricity – just over 82 per cent. But it has also proposed a cap on coal consumption of 4 billion tonnes.

China gives environmental approval to country's biggest hydro dam (Reuters) - China's environment ministry has given the go-ahead for the construction of what will become the country's tallest hydroelectric dam despite acknowledging it will have an impact on plants and rare fish. The dam, with a height of 314 meters (1,030 feet), will serve the Shuangjiangkou hydropower project on the Dadu River in southwestern Sichuan province. To be built over 10 years by a subsidiary of state power firm Guodian Group, it is expected to cost 24.68 billion yuan ($4.02 billion) in investment. The ministry, in a statement issued late on Tuesday, said an environmental impact assessment had acknowledged that the project would have a negative impact on rare fish and flora and affect protected local nature reserves. Developers, it said, had pledged to take "counter-measures" to mitigate the effects. The project still requires the formal go-ahead from the State Council, China's cabinet..

Big Wind’s trail of wings -- One eagle was found lying lifeless with a hole in its neck that exposed the bone. Another was found starving and near death with limbs that appeared to be twisted off. Struck down by wind turbines, these eagles were victims of a federal crime. The government prosecutes individuals and companies that kill birds in violation of federal law, yet a recent Associated Press investigation revealed that the Obama administration has never taken legal action against a wind energy company for killing birds, even though wind turbines kill more than 573,000 birds annually. As federal wildlife officials turn a blind eye to the wind industry’s slaughter, they exercise strict enforcement when others run afoul of the law. For example, in 2011 the Department of Justice (DOJ) charged Continental Resources with violating the Migratory Bird Treaty Act because a bird called the Say’s Phoebe died in one of Continental’s oil pits. The DOJ harassed Continental over the death of a single bird that wasn’t even endangered, yet the administration refuses to prosecute wind farms that maim and kill hundreds of thousands of birds each year. In another case of blatant bias, PacifiCorp paid more than $10.5 million in 2009 for electrocuting 232 eagles along power lines at the substations of its coal plants in Wyoming. But when PacifiCorp killed at least 20 eagles at wind farms in Wyoming, the company heard nary a peep from the Obama administration.

Germany warns EU solar tariffs would be ‘grave mistake’ - Germany’s vice-chancellor and economy minister put Berlin on a collision course with Brussels by warning that imposing anti-dumping duties on solar panels from China would be a “grave mistake”. Philipp Rösler’s statement came as Germany’s leading manufacturing industry organisation also called for urgent negotiations with China to head off the threatened import duties, which are expected to be announced formally by the European Commission in early June. The comments risk undermining Karel De Gucht, the trade commissioner, as he faces off against Beijing in the EU’s largest ever trade case, based on the €21bn of solar products China exported to Europe in 2011. Mr De Gucht has recommended that such products face duties averaging 47 per cent after concluding that Chinese manufacturers illegally dumped their products, or sold them below cost, in Europe. In an interview with the Welt am Sonntag newspa per, Mr Rösler said that “punitive duties are the wrong instrument” to deal with the dispute. “German industry is quite rightly very concerned” about the threatened action, he said, and its potential for retaliatory action by China affecting German exports.

Germany Faces Tough Decisions as It Dismantles Nuclear Plants -  The issue is nuclear waste and its safe disposal. Germany will have to build a storage facility deep underground that can survive the ravages of wars, revolutions and even another ice age. Indeed, the remains of the nuclear age will have to be kept in a final repository for 1 million years -- longer than the human race has existed. That is, at least, the aim of the draft legislation that prompted such reverential rhetoric from politicians in the opposition and the government when it was presented last month in Berlin. Under the direction of German Environment Minister Peter Altmaier, a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), the bill lays out a plan for determining the location of a final repository for the highly radioactive waste from Germany's nuclear power plants. Currently, politicians are still haggling over the details of the proposed law, which Altmaier says will remove "the last contentious issue surrounding the peaceful use of nuclear energy." What the representatives of the people would rather not talk about, though, is the decommissioning of Germany's nuclear power plants. They were once the cathedrals of industrial progress. But now their cooling towers and domes have become widely visible symbols of human folly. According to the latest calculations by the German Environment Ministry, the operation and decommissioning of the country's reactors will produce 173,442 cubic meters (over 6.1 million cubic feet) of low to medium-level radioactive waste that has to be stored underground. On top of that, there are 107,430 cubic meters of radioactive detritus from government institutions. The dismantling of Germany's nuclear power plants will be one of the greatest tasks of the century as the country moves to phase out atomic energy. It will take at least until 2080 to complete the job. But what happens if energy utility companies who own the facilities go bust before the work is done?

Coal Miners Try to Unload Australian Port Assets -  Coal miners in Australia are auctioning port assets worth tens of millions of dollars, an unthinkable prospect as recently as 18 months ago, when they were scrambling to secure berths.Australia exports more than 80% of its coal output, and miners signed long-term deals with port operators to lock in space at export terminals when coal prices were high. Now, these contracts are weighing on profits as companies face delays to new projects and battle falling coal prices.Miners such as Glencore and Yancoal Australia Ltd. are putting excess port capacity on the block, signaling a lack of confidence that coal prices will rebound soon. But slack demand for coal and rising supply from Russia and Indonesia suggest the auctions will likely attract few bidders. "We have a situation where we have substantial growth in [Australian] port capacity, and not the tonnage to fill it,"

What's at Stake with Natural-Gas Exports? - Last week the Department of Energy gave approval to the Freeport LNG export terminal. Combined with an earlier approval at Sabine Pass, the US has now committed the first 2.4 billion cubic feet of natural gas it produces each day over the next 20 years to foreign consumers – because under these LNG contracts exporters will be able to offer higher prices than any domestic user, regardless of the price of gas that results. These two terminals alone will divert enough energy to replace a half million barrels a day of oil.  You may find these facts surprising, even implausible. I don’t blame you. You have been massively misled. All informed participants know – and almost all conceal – that the primary purpose of building export infrastructure like the Keystone Pipeline or LNG terminals is to raise energy prices in North America. What is mystifying is why almost all of America’s political class is willing to support a set of policy decisions whose outcomes will be to impoverish most Americans and weaken the nation.

BLM’s New Draft Fracking Rules Give Industry a Free Pass, But Were They Written By ExxonMobil? - DeSmogBlog notes that the Bureau of Land Management’s recently-released rules governing fracking on federal lands ”will adopt the American Legislative Exchange Council (ALEC) model bill written by ExxonMobil for fracking chemical fluid disclosure on U.S. public.” It uses a voluntary online chemical disclosure database that has “truck-sized” loopholes, most notably that it’s voluntary — editors. By Frances Beinecke via NRDC. From Pennsylvania to Texas to Colorado, residents see wastewater pits leak, smell chemicals in the air, or read the scientific research showing that fracking can contaminate water supplies and pose a host of other threats. No one should have to live with these dangers: we all want to keep our drinking water safe from dangerous chemicals and reckless industrial activity.   And yet the federal government just released draft rules for fracking that fail to protect people from harm. Instead the rules protect the oil and gas industry from having to follow strong public health and environmental standards.

BLM Fracking Rule Violates New Executive Order on Open Data - Today, the U.S. Department of the Interior’s Bureau of Land Management (BLM) released its revised proposed rule for natural gas drilling (commonly referred to as fracking) on federal and tribal lands. The much-anticipated rule violates President Obama’s recently issued executive order that requires new government information to be made available to the public in open, machine-readable formats. The executive order and accompanying policy must have been in development for months, and agencies, including BLM, should have been fully aware of the new policy. But instead of establishing a modern example of government information collection and sharing, BLM’s proposed rule would allow drilling companies to report the chemicals used in fracking to a third-party, industry-funded website, called, which does not provide data in machine-readable formats. only allows users to download PDF files of reports on fracked wells. Because PDF files are not machine-readable, the site makes it very difficult for the public to use and analyze data on wells and chemicals that the government requires companies to collect and make available.

S&P looks at shale impact on industries Standard & Poor's has a new report out on the impact of shale energy on various industrial sectors. S&P says in a press release: "A report released by Standard & Poor's Ratings Services, titled 'Game Changer: Industry Winners And Losers From The U.S. Shale Revolution,' looks at the effects of the shale boom--whether they be positive, negative, or mixed--on a variety of industries. " ... The surge in shale energy production across a broadening swath of the U.S. is not only spurring the growth of the oil and gas sector and the economy as a whole, but is also affecting the economics, financial performance, and credit metrics of over 20 other industries," noted David Wood, a managing director in Standard & Poor's Corporate Ratings group. "Barring any major environmental accidents related to onshore shale drilling, which could slow or reverse industry growth, we expect the U.S. to approach energy self-sufficiency toward the end of this decade." People who do not subscribe to S&P reports will need to pay for a copy of the shale study. To read the full press release, including contact information, go here.

Groups criticize Environmental Defense Fund on fracking support - Environmental groups that oppose shale fracking have sent a letter to the Environmental Defense Fund saying they disapprove of the group supporting the Center for Sustainable Shale Development. The letter in part reads: "Those of us concerned with charting a rational and sustainable energy policy for the United States were disheartened to see the Environmental Defense Fund lend its name and support to an entity called the Center for Sustainable Shale Development (CSSD). The very use of the word sustainable in the name is misleading, because there is nothing sustainable about shale oil or shale gas. These are fossil fuels, and their extraction and consumption will inevitably degrade our environment and contribute to climate change. Hydraulic fracturing, the method used to extract them, will permanently remove huge quantities of water from the hydrological cycle, pollute the air, contaminate drinking water, and release high levels of methane into the atmosphere. It should be eminently clear to everyone that an economy based on fossil fuels is unsustainable." … The whole letter can be found here

Fracking could ruin German beer industry, brewers tell Angela Merkel - German brewers have warned Chancellor Angela Merkel that any law allowing the controversial drilling technique known as fracking could damage the country’s cherished beer industry. The Brauer-Bund beer association is worried that fracking for shale gas, which involves pumping water and chemicals at high pressure into the ground, could pollute water used for brewing and break a 500-year-old industry rule on water purity. Germany, home to Munich’s annual Oktoberfest – the world’s biggest folk festival which attracts around 7m visitors – has a proud tradition of brewing and beer drinking. Under the “Reinheitsgebot”, or German purity law, brewers have to produce beer using only malt, hops, yeast and water. “The water has to be pure and more than half Germany’s brewers have their own wells which are situated outside areas that could be protected under the government’s current planned legislation on fracking,” said a Brauer-Bund spokesman.

Frackalypse Now - by Mark Fiore for DeSmogBlog - YouTube: Gas fracking companies revealed in a private PR conference that they're using military psychological warfare tactics (Psyops) on U.S. soil, and described citizens concerned about fracking's threat to health, water and the climate as "an insurgency."  With apologies to Francis Ford Coppola, welcome to Frackalypse Now. For more information, visit

Gas protestors stand their ground despite shots being fired - THREE shots have reportedly been fired at the Tara protest against coal seam gas this morning.  Since Monday, people who live on rural residential blocks with few services have blockaded gas workers from leaving their camp near Chinchilla on the western Darling Downs.  Stop CSG Tara president Dayne Pratzky said the protesters had "no idea who fired the shots".  "It was unbelievable - one minute we're standing around blockading QGC's machinery, and the next minute we're lying face down in the dirt wondering who's shooting at us," he said.

A Black Mound of Canadian Oil Waste Is Rising Over Detroit — Assumption Park gives residents of this city lovely views of the Ambassador Bridge and the Detroit skyline. Lately they’ve been treated to another sight: a three-story pile of petroleum coke covering an entire city block on the other side of the Detroit River. Detroit’s ever-growing black mountain is the unloved, unwanted and long overlooked byproduct of Canada’s oil sands boom. And no one knows quite what to do about it, except Koch Carbon, which owns it. The company is controlled by Charles and David Koch, wealthy industrialists who back a number of conservative and libertarian causes including activist groups that challenge the science behind climate change. The company sells the high-sulfur, high-carbon waste, usually overseas, where it is burned as fuel. The coke comes from a refinery alongside the river owned by Marathon Petroleum, which has been there since 1930. But it began refining exports from the Canadian oil sands — and producing the waste that is sold to Koch — only in November. Detroit’s pile will not be the only one. Canada’s efforts to sell more products derived from oil sands to the United States, which include transporting it through the proposed Keystone XL pipeline, have pulled more coking south to American refineries, creating more waste product here.

The Arctic: The Final Energy Frontier - The Arctic is expected to become more important in the coming decades as climate change makes natural resources and transport routes more accessible. Satellite data collected since 1979 shows that both the thickness of the ice in the Arctic and range of sea ice have decreased substantially, especially during the summer months. The melting of the ice facilitates natural resource exploration in the high north. U.S. Geological Survey estimates from 2008 suggest that 13 percent of the world's undiscovered oil and 30 percent of undiscovered natural gas reserves are located in the Arctic Circle. Reflecting the growing interest in the region, the Arctic Council granted six new countries (China, India, Italy, Japan, South Korea and Singapore) observer status during a May 15 ministerial meeting in Kiruna, Sweden.

Oil groups hit by US class action on benchmark manipulation - BP, Royal Dutch Shell and Statoil have been named in the first lawsuit to be filed after a European Commission antitrust investigation into alleged manipulation of oil prices and benchmarks. The oil majors were named as defendants in a class action filed in New York this week by Prime International Trading, a Chicago-based commodity trading house, which also claims damages against unknown defendants. Prime International alleges in the lawsuit that the defendants intentionally manipulated and conspired to fix the price of Brent Crude oil, the global benchmark, and the price of futures contracts. “As major producers and market participants in the Brent Crude oil market, including contributors of Brent Crude oil prices to Platts, defendants had and continue to have market power and the ability to influence prices in the Brent Crude oil market,” the claimant alleges in legal documents. “By purposefully reporting inaccurate, misleading and false Brent Crude oil trade information to Platts, defendants manipulated and restrained trade in both the physical (spot) Brent Crude oil market and the Brent Crude oil futures market.”

April Saudi Oil Production - The above graph summarizes the data on Saudi oil production (and oil rig count on the right scale).  The feature of most current interest is the large production cut that was implemented in the last months of 2012 (more background here).  It appears that in April there was a noticeable uptick in production of around 100-150kbd.  That is nowhere near enough to offset the cut in late 2012, but since it shows up in both sources with data available for April, it's most likely a robust feature of the data.

The Coming Deluge of Oil | Green Energy News: It came without warning: A flood of oil. Just a few years ago we were talking about peak oil, the slow, painful demise of crude. Now there's talk about a shock wave of new oil supply from North America that's about to slam into global markets. We're in the early stages of a new oil boom here in North America. The tar sands of Canada started the rumble. Now it's set to be the shale oil from North Dakota, South Dakota and Montana that will make the U.S., in five years or less, the largest oil producer in world, even greater than Saudi Arabia. By 2018, according to the International Energy Agency (IEA), there'll be more oil produced than cars can burn. The estimated potential reserves in the Bakken and underlying Three Forks formations range between 4.4 and 11.4 billion barrels of crude, according to a recent assessment from the U.S. Geological Survey. This latest review doubled the reserves from an estimate done in 2008. Further, the estimate only covers the United States, but the oil-bearing rock formation extends into southern Saskatchewan, Canada, so more oil is likely In just a few years, the U.S. could be totally energy independent and even have enough oil left over to sell abroad, if laws allow and the infrastructure is available to move the oil from well to refinery and refinery to market. With this growth anticipated, more pressure will be on President Obama to approve the Keystone pipeline. There's no question this will be good for the U.S. economy. Money earned on domestic turf can be easily recycled back through the economy increasing growth. Don't be surprised if budget deficits dry up and unemployment plummets.

Will the International Energy Agency's oil forecast be wrong again? - Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61.So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005.Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near all-time highs as measured by the average daily price. And, world oil production (crude plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward.

The New Abnormal - Kunstler - We've been softened up and made extra-stupid on a 60-year-long diet of TV and kreme-filled donuts.  Instead of a "master race," our political fantasies revolve around a master wish - to get something for nothing. Want to feel good about yourself? Smoke some crank. Want to become economically secure? Buy a Powerball ticket or drive to the local casino. Want political esteem? Plug a flag pin into your lapel. Want status? Borrow free money from the Federal Reserve at zero interest and arbitrage it into massive earnings for your primary dealer bank. All these behaviors are the consequence of a culture that elevated advertising to such a high social good, it ended up drowning in its own manufactured bullshit. A subset of our master wish has been on vivid display in recent months, namely the idea that God has blessed the USA with a limitless supply of new oil that will allow us to keep driving to WalMart forever. This propaganda from an oil industry desperate for capital investment has been swallowed whole by people in authority who ought to know better, just as that same class of people in Germany of 1934 should have known better about what they were bargaining for in economic well-being with the Nazi agenda. In our case, the propaganda drumbeat is being led by formerly respectable news organizations. The New York Times, National Public Radio, Bloomberg News, Forbes, and The Atlantic Magazine are media giants that have lately spread the "good news" that America will soon be 1) "energy independent," 2) the world's leading oil exporter (greater than Saudi Arabia is now!), and the "go-to nation" for cheap manufacturing. All of these claims are false, by the way. The American way-of-life was designed to run on $20-a-barrel oil, not $90-a-barrel oil, and "new technology" has not changed that. The unfortunate and, to some extent, mendacious memes about the wonders of "new technology" have only snookered the public into a false sense of security about a future that will disappoint them badly and probably provoke an extreme political reaction as the reality of our predicament sweeps through daily life.

Chile’s Economy Slows Sharply, As Hit From Copper Price Fall Dazes - The decline of copper prices this year has started to undermine the economy of Chile, the world’s leading source of the red metal. The Andean nation Monday reported annual gross domestic product growth of 4.1% in the first quarter, less than the 4.5% expected.  Even adjusted for the Easter holiday, which fell in March this year and April last year, growth was still 4.7%, pretty good relative to most other parts of the world. But it was a full percentage point below Chile’s 5.7% expansion in the last quarter of 2012. Moreover, its seasonally adjusted quarterly growth was just 0.5%, making for an annualized rise of about 2%. No one expects Chile’s economy to downshift to that extent this year after growing 5.6% in 2012. But it’s now highly likely to grow closer to the bottom end of the central bank’s 4.5% to 5.5% forecast range. The main reason is copper, the price of which is down about 9% this year on worries that lackluster global growth and especially the cooling of China’s sizzling economy and fixed investment boom will continue to hurt industrial metals prices. Copper alone accounts for about 15% of Chile’s GDP, some three-fifths of export receipts and 20% of government revenues.

Chinese Military Renews Cyber-Attacks, Focusing on US Electrical Grid - In February the US government named and shamed Chinese hackers who had been attacking, and stealing secret data from US companies. A report compiled by Mandiant, a private security company that helps companies and government agencies defend themselves from hackers, listed the organisations that had stolen numerous government documents, and items of intellectual property over the past five years. Following the report, Unit 61398, a cyber-division of China’s People’s Liberation Army, with its white, 12 story office building on the edge of Shanghai, became the symbol of Chinese cyber-power. Three months have since passed in relative peace, but now the Chinese hackers are back. Related Article: Offshore Drill Rigs at Threat from Computer Viruses Mandiant has announced that Unit 61398 has begun to increase the number of attacks, focussing more on companies that have direct access to the US electrical grid. Using different IP addresses and different servers they have managed to install most of the hacking tools within the companies computer systems that they were using previously. Mandiant believes that they are already operating at 60% to 70% of the level they were working at before.

China Manufacturing Slips Back Into Contraction The HSBC Flash China Manufacturing PMI™ shows China Manufacturing Slips Back Into Contraction. Key Points:

  • Flash China Manufacturing PMI™ at 49.6 (50.4 in April). Seven-month low.
  • Flash China Manufacturing Output Index at 51.0 (51.1 in April). Three-month low.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery. Moreover, the further signs of labour market slackness call for more policy support. Beijing still has fiscal ammunition to do so."

China Manufacturing Unexpectedly Contracts in Test for Premier - China’s manufacturing is contracting in May for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter. The preliminary reading of 49.6 for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compares with a final 50.4 for April and the 50.4 median estimate in a Bloomberg News survey. A reading above 50 indicates expansion. A separate Markit index for euro-area services and factory output increased more than forecast.  Investors soured on China’s outlook in a Bloomberg global poll this month, with the share of respondents who see the economy deteriorating doubling from January.  “It’s a big probability now that China’s GDP growth rate in the second quarter will be lower than in the first quarter,” he said, referring to gross domestic product.

Chinese Economy Enters Contraction With First Sub-50 PMI Print Since October - For the first time since October 2012, HSBC's China PMI (Flash) printed at a sub-50 level (49.6) missing expectations (50.4) quite notably. This is the worst two-month drop in 17 months. This is problematic for the PBoC who are being arbitraged left, right, and center and know that any stimulus will merely serve to exacerbate the problems they face (as we noted here that China simply cannot function with 'moderate' growth). Every one of the main index's 11 sub-indices is signaling 'problems' - from slower rates of output, slower new orders, employment dropping at a faster rate, stocks rising, and output prices falling. As HSBC notes, "The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery." Of course, none of this should come as any surprise to ZH readers - as we noted here, Chinese power consumption grew at its slowest rate since May 2009.

China factory activity shrinks for first time in seven months: flash PMI : (Reuters) - China's factory activity shrank for the first time in seven months in May as new orders fell, a preliminary manufacturing survey showed, entrenching fears that its economic recovery has stalled and that a sharper cooldown may be imminent. The flash HSBC Purchasing Managers' Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October and sending Asian financial markets sharply lower. The final HSBC PMI stood at 50.4 in April. The lack of vigor in the world's second-biggest economy implies its ability to meet the government's 7.5 percent growth target this year is increasingly difficult, analysts said, albeit it is still possible. The soft data also sharpens Beijing's policy dilemma over whether to act to stabilize activity, or tolerate an orderly slowdown while focusing on reducing the country's dependence on exports and investment for growth, changes that would bring longer-term benefits. Yao Wei, an economist at Societe Generale in Hong Kong, said the debate favors policy inaction from Beijing for now, as long as economic growth remains above 7 percent. "We don't think it will trigger any cyclical policy move as long as the job market is fine," she said.

Beijing Plans to Reduce the State’s Role in the Economy - — The Chinese government is planning for private businesses and market forces to play a larger role in its economy, in a major policy shift intended to improve living conditions for the middle class and to make China an even stronger competitor on the global stage. In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, the country’s new prime minister, Li Keqiang, said this month that the central government would reduce the state’s role in economic matters in the hope of unleashing the creative energies of a nation with the world’s second-largest economy after that of the United States. On Friday, the Chinese government issued a set of policy proposals that seemed to show that Mr. Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in investment decisions and setting prices. Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear. But analysts see such announcements as the strongest signs yet that top policy makers are serious about revamping the nation’s growth model.

Who’s Rebalancing - The two largest surplus economies have lately decided to take radically different paths.  China expressed concern for the imbalances lying behind its large current account surplus, and pledged since at least 2009 to re-balance its growth model towards higher domestic demand.  With  timely synchronization, we learn that wages in Bavaria will increase  by 5.6% over the next two years,  maybe triggering a more generalized increase. Or maybe not. While in China they increased 17% in the year 2012. Even taking into account differences in inflation and in growth, the difference is revealing. China is actually playing the game it committed to. Not only it tries to reduce its dependence on foreign demand; but, domestically, it is trying to boost consumption and to curb investment. In the meantime Germany is stuck with its small-country syndrome: export-led growth and restraints to domestic demand (both public and private). In spite of recent troubles, austerity remains the course Europe is following (with disastrous results). It is telling that even when partially acknowledging that austerity did not bring the fruits she hoped for, Angela Merkel can only suggest, as an alternative, structural reforms to boost competitiveness. Expanding domestic demand has not, is not, and will not be an option for the German government.

INET Hong Kong: The RMB and the Future of Asian Finance - conference panel discussion - video

Vital Signs Chart: Weaker Australian Dollar - Australia’s currency is falling. One Australian dollar buys 97 cents, down from roughly $1.04 at the start of the year. China’s slowing demand for commodities has investors fretting over Australia’s mining boom and selling the currency. The Reserve Bank of Australia’s recent decision to lower interest rates also makes the currency less attractive by lowering returns on fixed-income investments.

Are Covert Operations Underway In The Global Currency Wars? - In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.

Atypical Global Recovery underway - The Global Leading Economic Indicator (GLEI) rose for the month of March, but is following an atypical growth pattern coming out of recession, with a slope far shallower than the normal expected rebound. Also noteworthy this month is that the percentage of countries with rising LEI’s seems to have stalled-out at 69%. This is concerning at this stage of the recovery and only 5 months with the LEI above zero.The sluggish LEI growth from this most recent trough is evident when compared to the prior 15 contractions on the chart below, where we see we are way below the average LEI recovery 18 months after the trough. But the real outlier event is that it took the LEI 14 months to break above zero, versus the average 6 months. The only other time that took longer to break above zero from the trough was in 1984 when the LEI took a whopping 24 months to get from trough to zero.

So Far, the Battery Charger Is Working in Japan - In 1990, Japan began more than 20 years of stagnation and deflation. Invest in Japan? For most foreigners, it was wiser to avoid it. At the end of 1989, the Topix, a k a the Tokyo Stock Price index, reached 2,881. Now it’s less than half that. It’s possible, at least, that those lost decades are finally over. Japanese markets have become turbocharged again, and are beginning to move markets worldwide. This year alone, the Topix has risen more than 22 percent in dollar terms, far exceeding the gain of the Dow Jones industrial average and nearly every other major stock market. The yen has weakened sharply, trading at more than 100 to the dollar for the first time in four years. That exchange rate should make many Japanese companies more profitable and more competitive. It may also inject inflation into the Japanese economy, encouraging consumers to spend and companies to invest. “What is happening in Japan is revolutionary,” said Mohamed El-Erian, the chief executive of Pimco, one of the world’s largest bond managers. “Nothing they’ve done since the Second World War comes close in terms of economic experimentation,” he said.

Japan’s New Optimism Has Name: Abenomics - A humbled Sony — once a titan of Japan Inc. — recently sprang back into the black for the first year in five years, courtesy of a plunging yen. Honda, another corporate icon, triumphantly announced a return to Formula One racing, rejoining an exclusive club of high-performance carmakers after having slinked away when cash ran low. Even some of Japan’s wary consumers are beginning to indulge. At the plush Takashimaya department store in Tokyo’s financial district, a clerk reported that $20,000 watches had become hot sellers. And a cut-rate sushi chain, which flourished in difficult times, just started a line of upscale restaurants for customers newly able to afford “petite extravagances.” The reason for the exuberance? Early — and some say deceptive — signs that new Prime Minister Shinzo Abe’s economic shock therapy, called Abenomics, might just be working. His plan, one of the world’s most audacious experiments in economic policy in recent memory, combines a flood of cheap cash (doubling the money supply in two years), traditional fiscal stimulus and deregulation of Japan’s notoriously ingrown corporate culture. The hope is that this will yank Japan from a debilitating deflationary spiral of lower prices and diminished expectations, stirring what Keynes called the “animal spirits” of investors and consumers. And so it has. The stock market has soared more than 60 percent over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports. 

BOJ may seek ways to calm bond market, policy on hold - The Bank of Japan is expected to stand pat on monetary policy this week despite jitters over the recent volatility in bond markets, hoping it can prevent a renewed spike in yields by fine-tuning market operations. The central bank may front-load bond purchases or offer funds via market operations more frequently if the bond market turbulence persists, which are technical steps that can be taken by its bureaucrats without approval by the nine-member board. It is expected to hold off on easing policy through further increases in asset purchases, having already pledged in April to double its bond holdings in two years to expand the supply of money at an annual pace of 60 trillion ($583 billion) to 70 trillion yen. The recent bond selloff, which sent the 10-year yield to a one-year high of 0.92 percent last week, has highlighted the dilemma the central bank faces as it attempts to generate inflation in a country mired in price falls for 15 years.

BOJ Prepared to Adjust Bond Purchases After Yield Jump: Economy - The Bank of Japan pledged to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policy makers’ campaign to revive the world’s third-largest economy. BOJ Governor Haruhiko Kuroda told reporters in Tokyo that the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy. He spoke after the BOJ board affirmed its plan to double the monetary base in two years as it seeks to end 15 years of entrenched deflation. The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus, with companies including steelmaker JFE Holdings pulling bond sales amid the tumult. The prospects of a growth rebound and the emergence of inflation has contributed to sending the rate on 10-year bonds up more than a quarter percentage point in two weeks.

BoJ holds amid signs of economy ‘picking up’ - The Bank of Japan kept its monetary settings on hold on Wednesday, judging that the huge stimulus unveiled in April will be enough to spur price gains in the world’s third-largest economy. In its statement, the central bank said its decision to stand pat – which was widely anticipated by investors – came amid signs of “positive movements” in economic activity in Japan, supported by the bank’s pledge in April to double the country’s monetary base within two years to achieve a 2 per cent rate of inflation. The world’s third-largest economy has “started picking up,” the BoJ said, noting an improvement in exports and “resilience” in business investment in the non-manufacturing sector. While deflation was likely to linger “for the time being,” it said, prices should begin to rise in tandem with the revival of domestic and overseas economies. Since Shinzo Abe took power in Japan at the end of last year, the central bank has been under extraordinary pressure to take more aggressive action to overcome 15 years of falling prices. Under new governor Haruhiko Kuroda, appointed two months ago, the BoJ has embraced what it calls a “new phase” of “quantitative and qualitative easing,” promising to buy huge amounts of government bonds of longer maturities to drive interest rates lower. However, consumer prices have yet to react significantly. The year-on-year change in core CPI in Tokyo, considered a leading indicator for the rest of the country, stood at minus 0.3 per cent in April, flat on the month before. Meantime, the BoJ’s undertaking to buy bonds equivalent to about three-quarters of issuance this year has shaken investors, with yields rising across the board.

Abenomics in Review: Yen, Inflation, Exports, Imports - With the Yen collapsing vs. all other currencies, inquiring minds may be wondering how prime minister Shinzo Abe's inflation policy is working out in practice. Let's start with a look at the Yen. In the last year, the Yen has fallen from 124.79 to 97.56. That is a decline of 21.82%. Recall that Abe's policy is an attempt to raise inflation and spur exports. On May 19, Reuters reported Japan's Amari: core core CPI showing signs of turning positive due to BOJJapanese Economics Minister Akira Amari said on Monday that core-core consumer prices, which exclude fresh food and energy, are showing signs of turning positive due to the Bank of Japan's aggressive monetary easing. Amari, speaking to reporters, also said the government still judges Japan to be in mild deflation as other measures of consumer prices are still falling when compared to the same period a year ago. Consumer prices are still falling in spite of a 21% plunge in the currency. OK, but what about exports and imports? Please consider Japan Exports Disappoint, Full Benefits of Weak Yen Yet to Show Japan's exports rose less than expected in April from a year earlier due to weak demand from Europe and China, highlighting the challenges confronting the world's third-biggest economy as policymakers try to engineer a sustained revival.The 3.8 percent annual increase in exports in April was below the median estimate for a 5.9 percent rise and followed a 1.1 percent increase in the year to March.The result also underscores the limitations of a weak yen in bolstering the trade sector, especially as external headwinds crimp demand for exports.

Japan the Model, by Paul Krugman - A generation ago, Japan was widely admired — and feared — as an economic paragon. ... Then Japan fell into a seemingly endless slump, and most of the world lost interest. The main exceptions were a relative handful of economists... If one big, wealthy, politically stable country could stumble so badly, they wondered, couldn’t much the same thing happen to other such countries? Sure enough, it both could and did. These days we are, in economic terms, all Japanese. In a sense, the really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism. It would be easy for Japanese officials to make the same excuses for inaction that we hear all around the North Atlantic: they are hamstrung by a rapidly aging population; the economy is weighed down by structural problems...; debt is too high (far higher, as a share of the economy, than that of Greece). And in the past, Japanese officials have, indeed, been very fond of making such excuses. So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good..., with surprisingly rapid Japanese economic growth in the first quarter of this year... You never want to make too much of one quarter’s numbers, but that’s the kind of thing we want to see.

Abe’s Resurgent Japan Hurt by Lack of Business Spending - As Japan’s cherry trees bloomed and the stock market soared, Kohetsu Watanabe flew to a blossom-viewing party in Tokyo hosted by Prime Minister Shinzo Abe to tell the premier personally how bad things really are. When the head of machine-parts maker Daikyo Seiki Co. shook hands with Abe at the 12,000-guest event in Shinjuku Gyoen park, he says he begged the premier to help small- and medium-sized companies that make up 70 percent of Japan’s industry.“Stocks and the yen may have come back, but the state of the real economy is very different,” said Watanabe, 49, who has no plans to raise wages for his 17 employees and hasn’t paid a bonus since 2008. “It’s impossible for me to be optimistic.”

Japan panel warns of dangers if debt not addressed (Reuters) - A Japanese government panel warns there is "absolutely no guarantee" that domestic investors will keep financing the country's massive public debt, citing the risk of a spike in bond yields that could crimp long-term growth prospects, draft report seen by Reuters shows. The warning from the advisory panel to Finance Minister Taro Aso comes at a critical time - when the government bond market has seen volatile price falls, underscoring a delicate balancing act for Prime Minister Shinzo Abe's government. Abe has unleashed huge fiscal and monetary stimulus to spur short-term growth, sending stock prices .N225 soaring. But at the same time, he is trying to convince investors that over the longer term Japan will tackle a public debt that, at more than twice the nation's annual economic output, is the biggest in the developed world. Whether Japan can begin to get its fiscal house in order will be key to determining if the early boost to confidence from so-called "Abenomics" can translate into balanced and sustainable growth for the world's third-biggest economy.

Japan’s Latest Challenge: Rising Bond Yields = Some facts about the impact of Japan’s aggressive stimulus program to inject $1.4 trillion into the economy over the next two years:

  • Real GDP up: 3.5% in Q1, beating expectations (which hasn’t happened much there for a long while…)
  • Equities up: the Nikkei is up 88% from its 2012 low; bank stocks have about doubled;
  • Yen down about 16% against the dollar; 26% from its 2012 high;
  • Government bond yields up (?!): the 10-year JGB (Japanese government bond), while still below 1%, has doubled since the stimulus was announced in early April.

It’s that last one that should catch your attention.  It’s unusual, potentially problematic, and bears close watching.  As Bloomberg noted today: The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus, with companies…pulling bond sales amid the tumult. The prospects of a growth rebound and the emergence of inflation has contributed to sending the rate on 10-year bonds up more than a quarter percentage point in two weeks.

Bank of Japan moves as bond yield spikes -THE Bank of Japan (BoJ) has unleashed a torrent of liquidity to quell government bond yields amid concern that higher long-term interest rates could squeeze mortgage payers and crimp spending. The central bank on Thursday announced a Y2 trillion ($A20.08 billion) fund-supplying operation after the yield on the benchmark 10-year Japanese government bond hit 1.0 per cent, its highest level in over a year. The BoJ is active in supplying finance to banks and other potential buyers in the bond markets every day, but the scale of Thursday's operation was large by recent standards. The bank's financial operations division said in a statement the operation to provide fixed-rate short-term loans to financial institutions was to respond to "the unreasonable increase in the volatility of long-term rates".

Japan Market Crash: A Slow Leak in the “Central Bank Bubble” - There’s a truism in investing that the last one into a market is the first one out. And that certainly seems to be the case today, with Japan’s Nikkei index crashing off the back of two things: First, hints from the Federal Reserve that the U.S. economy is improving enough to justify a slow pull-back from the central bank’s market-goosing asset buying program known as “quantitative easing;” and second, that the Chinese economy is slowing down even more than we thought. For some time now, I’ve been writing that the global equity markets have been inflated by central banks — and that this was a bubble that would eventually pop once people realized that monetary policy, rather than the real economy, was behind the boom. Well, folks, that time may be here. Behavioral economist Peter Atwater, whose firm Financial Insyghts focuses on the market implications of consumer sentiment, certainly thinks so. “I would offer that Abenomics” — i.e. Japanese prime minister Shinzo Abe’s plan to goose his nation’s economy with a combination of monetary policy and fiscal and structural reforms — “was the ‘subprime’ of policy-making,”

Veteran fears ‘beginning of the end’ for Japan as bond market buckles - Global markets face a witches’ brew of new risks as Japan’s monetary adventure wobbles, China slows further and the US Fed prepares to shut the spigot of dollar liquidity. Yields on 10-year Japanese bonds (JGBs) have doubled in a month and spiked dramatically to 1pc on Thursday, triggering a 7.3pc crash in the Nikkei stock index. It was the biggest one-day fall since the tsunami two years ago, comparable with wild moves seen at the height of the Asian crisis in 1998. The contagion effect set off a retreat from stocks across the world, though Wall Street later pared losses. The iTraxx Crossover or “fear gauge” for corporate bonds jumped 25 points to 392. The Bank of Japan (BoJ) intervened with $20bn (£13bn) to drive down yields again but the failure to ensure an orderly debt market has started to rattle investors. Banks, pension funds and insurers appear to be dumping JGBs for fear of being caught on the wrong side of a bond rout.  Richard Koo from Nomura, an expert on Japan’s Lost Decade, said the sell-off in recent days has shown that the BoJ may not be able to hold down yields “no matter how many bonds it buys”. This could lead to a “loss of faith in the Japanese government” and the “beginning of the end” for its economy, if handled badly.

Japan says trade deficit widened to $8.6 billion in April as weak yen pushed imports higher - Japan's trade deficit widened to a larger-than-expected 879.9 billion yen ($8.6 billion) in April as its weakening currency accentuated surging import costs. Exports rose 3.8 percent from the same month a year earlier to 5.78 trillion yen ($56.3 billion), while imports jumped 9.4 percent to 6.66 trillion yen ($64.9 billion), according to preliminary figures reported by the Finance Ministry on Wednesday. Japan's trade deficit stood at 362.4 billion yen in March, just over half the size of February's gap. The yen has slid in value by over 20 percent against the U.S. dollar and euro, in turn pushing up other currencies in relative value. Its decline, due to expectations among market speculators and also monetary policies that are injecting huge sums of cash into the economy, is expected to lead to a recovery in exports. Stronger growth in the U.S. and some other major markets has also helped boost demand for Japanese products. But a weaker currency also raises costs for imports of crude oil, gas and other commodities for this resource-scarce nation. In April, the cost of oil imports slipped as crude oil prices moderated, but the value of imports of liquefied natural gas jumped 18 percent from a year earlier. Japan's demand for natural gas has ballooned since most of its nuclear power plants remain closed following the March 2011 accident at the Fukushima Dai-ichi plant, and the deterioration in the trade balance is adding to pressure from the pro-nuclear government to restart more plants. Japan's trade deficit ballooned to a record $83.4 billion in the fiscal year that ended in March, as imports climbed and a surge in exports to the U.S. failed to offset the impact from territorial tensions with China and weak demand from crisis-stricken Europe

BoJ Ignores Worst April Trade Deficit Ever - Suggests "Economy Has Started Picking Up" - Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

US business keen to promote ‘fast track’ trade deals - A political clash looms as US lawmakers debate whether to give Barack Obama authority to pass planned trade deals with the EU and 11 Pacific nations swiftly through Congress. Members and staff of the Senate finance committee and the House ways and means committee have been discussing a bill that would for the first time since 2007 provide so-called “fast track” status to trade agreements reached by the White House. Such legislation, also known as trade promotion authority (TPA), prevents lawmakers from delaying or amending deals, setting them on course for an up-and-down vote in both the House and the Senate within a defined time period. This would be a particularly important win for Mr Obama as he presses ahead with his aggressive second-term trade agenda, which just this year has included launching talks with the EU and accepting Japan’s entry into the Trans-Pacific Partnership negotiations. But securing TPA will not be easy – and the debate on Capitol Hill will be an early test of US political appetite for the EU-US and TPP deals themselves, as well as a sign of the popularity of Mr Obama’s push for trade liberalisation. One Senate aide familiar with the talks said staff and members had been meeting frequently on TPA recently and hope a bipartisan bill covering all trade deals “for as long as possible” can be introduced next month.

Chile’s Recent Lead Negotiator on Trans-Pacific Partnership Warns It Could Be a “Threat to Our Countries” - An important article in the Latin American press peculiarly has not gotten the attention it deserves. Or perhaps not so peculiarly, given the Obama administration’s intention to keep the Trans-Pacific Partnership negotiations as far out of the public eye as possible.   A not flattering bit of sunlight on the TPP negotiations comes from an unexpected source. Rodrigo Contreras, the lead negotiator on the TPP from Chile, resigned suddenly two months ago. It’s widely believed that he left his post voluntarily. He’s held in high esteem not just in Chile but among his fellow trade negotiators. His departure left people on the trade beat scratching their heads. It now appears probable that the reason for his resignation was that he saw where the TPP was likely to go and didn’t want his name attached to it. Contreras wrote an article in Spanish that ran last week Peru’s magazine Caretas that described the promise, and more important, the dangers of the TPP. He argued that many of its major thrusts, if they are not checked and modified, are detrimental to less advanced economies. He also argues that the Latin American countries have enough votes that if they act together, they can influence the direction of the negotiations.  I’m including the Spanish original plus a translation courtesy Global Trade Watch. I strongly urge you to read Contreras’ article in full.

It's a "Trade" Pact not "Free-Trade" Pact  -  I found the phrase "free-trade" three times in my reading of this NYT article on the European Parliament's efforts to limit the scope of a deal. As the discussion makes clear most of the issues raised in the discussion have little to do with tariffs or quotas, the items that usually hold center place in free trade. Rather, the pact has to do with a range of regulatory issues, in many cases seeking to impose rules that might not pass muster if they had to go through the conventional political process. These regulatory rules have nothing to do with free trade. For example, the United States is likely to push for stronger patent and copyright protections,the opposite of free trade. Apparently the Obama administration is also intending to use the pact to derail an EU effort to impose a financial transactions tax on banks, according to the article. Again, this has zero to do with free trade, it is about protecting big banks from the same sort of taxation imposed on other industries. So, the question is, why does the NYT feel the need to use the term "free-trade" in this piece? What information has it provided readers that they would be missing if it just referred to the deal as a "trade" pact?

Redeeming Bangladesh - A multistoried structure cobbled together without much oversight, groaning under its own weight, a source of livelihood but a risk to health and safety – sounds like the garment factory building in Bangladesh, whose recent collapse led to the deaths of more than 1,100 workers. But it’s also a pretty good description of the current system of private regulation labeled “corporate social responsibility” that promises far more to factory workers around the world than it actually delivers.  In the wake of horrific workplace accidents, including a number of fires, in Bangladesh, attention turned to the behavior of brand-name companies, like celebrities being investigated after servants die at their mansion. No fingerprints on the murder weapon, just bits of paper documenting business connections that activists dug out of the rubble.  Next came much who-did-what-when analysis, including attention to local officials’ statements that Wal-Mart had worked to block a push for increased fire safety last year, in contrast to its more recent decision to increase safety inspections. Several European company commitments to push for improved safety standards could be counterposed with the Walt Disney Company’s decision to leave the country. But while famous multinationals are vivid characters in the story, they aren’t determining the plot. Increasingly competitive globalization and increased emphasis on flexible, low-cost outsourcing limits their room for maneuver (though not their earnest efforts to improve their image).

Pakistan turns off air-conditioners and tells civil servants to ditch socks : Pakistan has told its civil servants not to wear socks as the country turns off air-conditioners amid soaring temperatures to deal with chronic power cuts. The government has turned off all air-conditioning in its offices as the country endures blackouts of up to 20 hours a day in some places. "There shall be no more use of air-conditioners in public offices till such time that substantial improvement in the energy situation takes place," a cabinet directive said. As part of a new dress code, moccasins or sandals must be worn without socks. The power shortages have sparked violent protests and crippled key industries, costing hundreds of thousands of jobs in a country already beset by high unemployment, a failing economy, widespread poverty and a Taliban insurgency. The "load-shedding" means many families cannot pump water, let alone run air-conditioners, with disastrous knock-on effects on health and domestic life.

A Theoretical Framework for Kenya's Central Bank Macroeconometric Model | Brookings Institution: This paper presents the theoretical framework for the Central Bank of Kenya (CBK) macroeconometric model. In addition, it highlights the theoretical base for the model’s main behavioral equations. The justification for the model relates to its usefulness in aiding the policymaking process at the CBK. It is expected that the model will support the Monetary Policy Committee (MPC) and Research Department in further understanding how the economy works through the complex interactions of various economic agents. The conduct of monetary policy requires fairly accurate analyses and forecasts backed up by sound economic theory and a rationale ensuring that effective monetary policy is formulated and implemented. In this regard, the model will provide consistent short-term forecasts of key macroeconomic variables such as economic growth and inflation. In addition, the model will be helpful in evaluating the impact of various shocks and policies on the economy. The MPC may also use the model as an instrument to help in structuring its communication with the public on the rationale behind its decisions.

Misreading the Global Economy– In April 2010, the International Monetary Fund’s World Economic Outlook offered an optimistic assessment of the global economy, describing a multi-speed recovery strong enough to support roughly 4.5% annual GDP growth for the foreseeable future – a higher pace than during the bubble years of 2000-2007. But, since then, the IMF has steadily pared its economic projections. Indeed, this year’s expected GDP growth rate of 3.3% – which was revised downward in the most recent WEO – will probably not be met.  Persistent optimism reflects a serious misdiagnosis of the global economy’s troubles. Most notably, economic projections have vastly underestimated the severity of the eurozone crisis, as well as its impact on the rest of the world. And recovery prospects continue to depend on the emerging economies, even as they experience a sharp slowdown. The WEO’s prediction of a strengthening recovery this year continues the misdiagnosis.

In Brazil, Industry Suffers While Inflation Hits the Roof - Brazil’s battered economy, bruised by uncompetitive manufacturing and an inflation rate that flirts month-by-month with government tolerance levels, may be heading for the dreaded condition known as stagflation. “I don’t think Brazil is going to reach even 3.0% growth this year, or next,” . “Slow growth could end up being the hallmark of the Rousseff administration.” President Dilma Rousseff took office at the beginning of 2011 for a term extending through 2014. Economic growth in 2011 was a disappointing 2.7%, but then fell to just 0.9% last year. Meanwhile, inflation has accelerated to 6.5%, the ceiling of the government’s 2.5%-to-6.5% target range. Just as disappointing as the rate of growth is its quality. “We’re living the paradox of heavy demand and stagnant production,” “Demand is being met by imports. Brazil’s growth is coming in the services sector only.” Brazil’s industrial sector shrank in 2012 by 0.8% and 2013 is looking even worse. Industrial production in March was down 3.3% against the same month a year earlier.

Brazil Faces Budget Dilemma in Face of Stagflation - Brazil’s government faces an intractable budget dilemma this year–how to meet surplus targets against a background of stalled growth and persistent inflation. The government Wednesday complied with an annual budget ritual, temporarily freezing a portion of 2013 spending in order to meet surplus targets. But the spending freeze could undermine the tender buds of nascent economic recovery. On the other hand, a reversal to free-boot spending might pump up the country’s already worrisome inflation rate. “Brazil is living a paradox, with high levels of demand but manufacturing in the doldrums,” says Michal Gartenkraut, a partner in Sao Paulo’s Rosenberg consulting group. Mr. Gartenkraut is forecasting mediocre growth this year of just 2.5%, better than last year’s 0.9% but well below the government’s 3.5% projection. But expected 6% to 7% expansion in consumer demand, he adds, will make it hard to pull down current 12-month inflation of 6.5% by the end of the year. Brazil’s government on Wednesday tried to have it both ways. The budget freeze of 28 billion Brazilian reals ($13.8 billion) is the smallest in three years. Finance Minister Guido Mantega said the freeze was targeted at government operating costs, not investments. “The government can increase investments to stimulate the economy,” he said at a news conference. “We’re not carrying out an inflationary [fiscal] policy.”

BRICS risk 'sudden stop' as dollar rally builds - The stock of capital flowing into emerging markets has doubled from $4 trillion to $8 trillion since the Lehman Crisis, chasing a catch-up growth story that looks tired and has largely sputtered out in Brazil, Russia and South Africa. Much of the money has gone into debt, with falling economic returns. This is the next shoe to drop in the festering saga of global imbalances. All it will take is a gear-shift by the US Federal Reserve and the inevitable dollar surge that follows. It was the Volcker Fed that set off Latin America's defaults in the early 1980s. It was the mighty dollar that set off Mexico's Tequila crisis, and then the East Asian chain-reaction in the 1990s. "Every emerging market blow-up that I have seen was preceded by a rise in the dollar," said Albert Edwards for Societe Generale. "Investors overlook how vulnerable these countries are to a dollar shock. The whole process of excess liquidity and foreign reserve build-up goes into reverse. It acts like monetary tightening and turns into a vicious circle. Markets look for the weak link with the worst current account deficit, and then the dominoes start to fall," he said.

Canada Jobs Grant: Harper Government Buying Ads To Promote Program That Doesn't Yet Exist - The Harper government is spending hundreds of thousands of dollars advertising a program that does not yet exist. Prime-time ads began airing this week during NHL playoff games — currently the priciest advertising real estate on the dial — that tout a new federal Canada Jobs Grant for training workers. The trouble is, the freshly announced program is at present little more than a concept that has yet to be negotiated with provincial governments, and requires buy-in from employers as well. The concept requires that Ottawa, the province and the employer kick in up to $5,000 each toward the training of a worker.

Pessimism and priorities in advanced economies -We’ve been combing through an interesting new Pew report on attitudes towards a number of economy-related issues. Among the dominant themes are that people in advanced economies are more likely to report increasing inequality in the past five years, while respondents in emerging and developing economies had more faith in their prospects for economic mobility than their developed-country counterparts. Indeed one of the starkest divergences between the two groups is in expectations that the next generation will have it better: These responses can probably be interpreted in different ways, but the report notes that “there is particularly strong faith in economic mobility in China (82%), Brazil (79%), Chile (76%) and Malaysia (72%), all emerging markets that, with the exception of Brazil, have experienced relatively robust economic growth in recent years.” An unsurprising correlation, though cultural influences surely also play a role in how people choose to answer the question. Note also the severe pessimism in Japan, France, and pretty much all of Western Europe, and then have a look at this chart: The last Pew survey on European attitudes was surprising for how many respondents believed rising prices to be a problem despite the official statistics showing inflation to be low and falling.

IMF Rethinking Role in Managing Sovereign Debt in Crises - The International Monetary Fund is rethinking its role in how sovereign debt is managed in crises, concerned that recent developments in sovereign debt markets threaten the effectiveness of its bailout programs. As the world’s emergency lender, the fund can influence how and when a country’s debt is restructured in the face of potential default. Cutting the value of government bonds is one of the last options available to ensure a country isn’t drowned by its obligations. But the Greek debt restructuring–the largest in history–and a recent court ruling on Argentine bonds that could give minority boldholders outsized leverage in future debt negotiations is forcing the IMF to think reasserting its role over sovereign debt management. In a new paper published Thursday, the IMF began exploring ways the fund might change its lending policies “to encourage a more efficient and fair approach to debt restructuring,” said Hugh Bredenkamp, deputy director of the IMF’s Strategy and Policy Review Department. In the Greek bailout, fund economists knew early on that Greek sovereign debt needed to be restructured. But since euro zone officials feared that could create chaos in other neighboring countries, the fund didn’t require a restructuring as part of its financing program until the European Union created a bailout fund that would prevent such financial contagion. The delayed restructuring meant the ultimate costs of the Greek program rose and the burden was shifted from private investors to European taxpayers.

The IMF is Not/Not - NOT- Reviving Its Sovereign Bankruptcy Proposal - For all the hopers, dreamers, and scaredy-cats out there--Relax. The long-awaited IMF overview paper on sovereign debt restructuring is here, the first since 2005. And it does not revive the Sovereign Debt Restructuring Mechanism (SDRM) proposal, which died in 2003 at the hands of the United States and the big emerging markets (or more politely, "failed to command the majority needed ... due to the members' reluctance to surrender ... sovereignty"). The new paper takes great pains to establish that the core political reality has not changed, even though SDRM would have solved many of the problems with sovereign debt restructuring that have arisen in the interim. O well. Within its crystal-clear political constraints, the Fund goes on a measured march across sovereign debt restructurings from 2005 to 2012, or from Argentina to Greece, through Belize, Jamaica, St. Kitts and Nevis. I came away thinking that the paper was not particularly radical, generally constructive, and refreshingly precise.  But it does point to potential changes. Perhaps the most drastic of these (previewed in the FT yesterday) could be to condition programs on an early debt rescheduling, to lock in the creditors while the official sector debates the liquidity/solvency diagnosis. In a solvency case, more creditors would stick around to share the pain. It is effectively what happened in Latin America in the 1980s--except that it was not planned that way, took many years, and caused a huge amount of pain. Thirty years later, the Fund reacts to Europe's recent habit of letting public money finance private exits: by the time officials decide to administer haircuts to creditors, the barbershop has cleared out.

Iceland’s post-Crisis economy: A myth or a miracle? - When the Global Crisis struck in September 2008, Iceland was the first country to really suffer. Its three major banks collapsed in the same week in October 2008, and it became the first developed country to request assistance from the IMF in 30 years. GDP fell 65% in euro terms, many companies went bankrupt and others moved abroad. At the time, a third of the population considered emigration as a good option (Danielsson 2008). Since then, Iceland’s economic recovery has been hailed as a miracle, especially by foreign commentators. It is therefore baffling to many that the Icelanders just voted out the government responsible for the post-Crisis recovery, returning the parties responsible for the pre-Crisis boom and bust to power. What’s going on?

New Iceland government freezes EU talks till referendum (Reuters) - Iceland's centre-right Progressive and Independence parties agreed on a coalition government on Wednesday and said they would freeze talks on entering the European Union until a referendum on whether or not to continue the process. Both parties made big gains in elections last month where voters, fed up with years of austerity and rising debts, handed the incumbent Social Democrats the worst defeat of any ruling party since independence from Denmark in 1944. As expected, progressive leader Sigmundur Gunnlaugsson will become prime minister in the new government, becoming one of Iceland's youngest leaders at 38.

Why Is Europe So Messed Up? - The big news of the past week had nothing to do with the I.R.S. or Benghazi. It was the confirmation that, while the American economy continues to recover from the disastrous financial bust of 2008 and 2009, Europe remains mired in a seemingly endless slump. On this side of the pond, the Congressional Budget Office announced that, with the economy expanding, tax revenues rising, and federal spending being restrained, the budget deficit is set to fall to about four per cent of Gross Domestic Product this year, and to 3.4 per cent next year.  In Europe, things are going from bad to worse. New figures show that in the seventeen-member euro zone, G.D.P. has been contracting for six quarters in a row. The unemployment rate across the zone is 12.1 per cent, and an economic disaster that was once confined to the periphery of the continent is now striking at its core. France and Italy are both mired in recession, and even the mighty German economy is faltering badly. Why the sharp divergence between the United States and Europe? When the Great Recession struck, U.S. policymakers did what mainstream textbooks recommend: they introduced monetary and fiscal-stimulus programs, which helped offset the retrenchments and job losses in the private sector. In Europe, austerity has been the order of the day, and it still is. Nearly five years after the financial crisis, governments are still trimming spending and cutting benefits in a vain attempt to bring down their budget deficits.

Thousands rally in Rome against cuts - Thousands of protesters, led by trade unionists, have rallied in the Italian capital Rome against the policies of the new coalition government. Wielding red flags and placards, they urged the centre-left Prime Minister, Enrico Letta, to scrap austerity measures and focus on job creation. Public trust in his fragile coalition with the centre-right is dropping, opinion polls suggest. The country is experiencing its longest recession in more than 40 years. National debt is now about 127% of annual economic output, second only to Greece in the eurozone. National debt is now about 127% of annual economic output, second only to Greece in the eurozone. Unemployment is at a record high of 11.5% - 38% for the under-25s. Before taking office, Mr Letta vowed to make job creation his priority, but critics are unhappy that he has focused on property tax reform. Soon after being appointed, Mr Letta met other eurozone leaders to convey growing public unrest over austerity measures in Italy. But the new prime minister has to maintain a delicate balance between the policies of his own supporters and those of the centre-right, led by Mr Berlusconi.

Italy coalition: Thousands rally in Rome against cuts - About 100,000 protesters, led by trade unionists, have rallied in the Italian capital Rome against the policies of the new coalition government. Wielding red flags and placards, they urged the centre-left Prime Minister, Enrico Letta, to scrap austerity measures and focus on job creation. Public trust in his fragile coalition with the centre-right is dropping, opinion polls suggest. The country is experiencing its longest recession in more than 40 years. National debt is now about 127% of annual economic output, second only to Greece in the eurozone. Unemployment is at a record high of 11.5% - 38% for the under-25s. An estimated 100,000 people, including many of the young jobless, took part in the protest march, but there were some noteworthy absentees - the leaders of the left-wing Democratic Party, the party of Prime Minister Enrico Letta. The head of the metal worker's union, Maurizio Landini, taunted the party leadership, accusing them of being afraid of coming out on to the streets. Mr Letta is faced with an almost impossible task - creating new jobs at a moment when the Italian economy is suffering one of its most serious recessions since the economic boom in the 1950s and 60s. Former Prime Minister Silvio Berlusconi almost daily threatens to withdraw his support from the fragile coalition.

Millions falling into poverty in recession-racked Italy: report (Reuters) - Millions of Italians cannot afford to heat their homes properly or eat meat as their country is racked by recession and soaring unemployment, said a report which found the number of people considered seriously deprived had doubled in the past two years. The findings from national statistics institute ISTAT underline the scale of the challenge faced by the new coalition government of Enrico Letta, which has vowed to stimulate growth and tackle a youth jobless rate of almost 40 percent. A recession that has lasted almost two years has taken a heavy toll on ordinary Italians who are increasingly digging into their savings, ISTAT said in its annual report. Italy has the highest level in Europe of young people who are neither in education nor employment, at 23.9 percent, the study showed. In Italy's impoverished south, one in three people aged 15-29 fell into this group. The number of people living in families considered to be seriously deprived has doubled in the past two years to 8.6 million, or about 14 percent of the population, ISTAT said. Families who meet more than four of nine poverty indicators are considered seriously deprived. These include not being able to heat their home adequately, which affected one in five people in 2012 according to the report, twice as many as in 2010.

Support for 15-M protest movement grows, says new opinon poll -- Two years after the 15-M protest movement blossomed, public sympathy for the protest organization continues to grow, according to a poll conducted for EL PAÍS. The survey by Metroscopia shows that Spaniards believe that 15-M, which sprouted in 2011, was a spontaneous movement that continues to have solid public backing as a peaceful protest drive. Of the 14,000 people interviewed, 63 percent said they support the movement — a figure similar to that of two years ago and somewhat higher than that of 2012, a few months after the Popular Party (PP) landslide election victory. Support for the protests was higher among Socialist voters that those who support the PP, and among younger respondents. Socialist dichotomy The 87-percent support among Socialist supporters gives a clear idea of the dichotomy between the party’s own institutions and those issues its members feel more comfortable protesting about, such as the causes of the ongoing crisis.

Bankia compensation qualms signal loss of faith in Spain’s banks - (Reuters) - Many duped savers at Spanish lender Bankia are shunning a state-supervised compensation scheme in favor of expensive lawsuits, prolonging a mis-selling scandal and complicating efforts to restore faith in the banking system. The disputes over mis-selling at Bankia and other nationalized banks have created a major headache for the government as it tries to take the next step in their rescue, imposing large losses on holders of junior debt. It set up the arbitration process to try to end daily protests by some of those debt holders - elderly savers who say they were mis-sold complex debt products as safe, high-interest deposit accounts. But many people caught up in Bankia's rescue see it as a trick to stop them getting their money back. "We are not going to enter the arbitration process because we think it's a swindle," said 66-year-old Carlos Peral at a recent protest outside a Bankia branch in a Madrid. All the demonstrators Reuters spoke to were seeking legal action. Peral and his wife, both blind, have 80,000 euros ($103,300)of life savings tied up in Bankia preference shares, a form of hybrid debt due to be converted under the rescue by May 24 into ordinary shares worth around 38 percent less

Spanish debt at record high - The public debt of recession-hit Spain soared to a new record in March, hitting 923 billion euros (1.2 trillion dollars), or 87.8 per cent of gross domestic product (GDP), the central bank said Monday. The debt of Spain‘s central, regional and municipal administrations has been growing without interruption since September 2012, reaching 913 billion euros in February. Prime Minister Mariano Rajoy‘s government is struggling to reduce a budget deficit that amounted to nearly 7 per cent of GDP in 2012. The European Union expects Spain‘s economy to contract by 1.5 per cent this year.

Spain’s banks need €10bn more provisions - Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain. According to recent data, Spanish banks rolled over more than €200bn of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The €10bn estimate is the first official assessment of the likely impact of the central bank’s new approach towards these refinanced loans. The Bank of Spain believes that the risks emanating from this practice, known as “extend and pretend”, have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.  “Our banks will need more provisions,” a senior official at the Bank of Spain told the Financial Times. “The provisions will affect their results, but the question is by how much. We cannot know for sure but we think the impact will be between €5bn and €10bn [in provisions] across the system.”

Spain’s Bad Bank Begins 15-Year Suicide With Bull Sale - Spain’s Sareb, set up last year to acquire 90 billion euros ($116 billion) of soured real estate assets at a discount from rescued lenders, is preparing its first sale, known as ‘Project Bull,’ to test the beleaguered property market’s ability to attract investors. Sareb has hired KPMG LLP to market a pool of homes located in the south and east of Spain, in Andalusia and Valencia, as well as unfinished buildings, according to four people with knowledge of the auction. Bids are due by July 18 on the real estate, which could be worth about 200 million euros, said the people, who asked not to be named because it’s private.

Economist Interactive Global House Price Index - Very cool interactive guide to the world’s housing markets from the Economist. Their global house-price index lets you see Prices in real terms, versus average income, or against rents. Note: If you find these sorts of things interesting, it can become a black hole, where you can lose hours . .

Europe's 'Status Quo Pandering' Risks "Radicalization Of An Entire Generation" - It will come as no surprise to ZH readers that the topic of youth unemployment is critical in Europe but as Der Speigel reports, while the German government's efforts remain largely symbolic, Southern European leaders pander to older voters by defending the status quo and are failing in their fight against the potential for social unrest. One graduate noted, "None of my friends believes that we have a future or will be able to live a normal life," as a lost generation is taking shape in Europe. And European governments seem clueless; instead of launching effective education and training programs to prepare Southern European youth for a professional life after the crisis, the Continent's political elites preferred to wage old ideological battles. In this way, Europe wasted valuable time, at least until governments were shaken early this month by news of a very worrisome record: Unemployment among 15- to 24-year-olds has climbed above 60 percent in Greece. Suddenly Europe is scrambling to address the problem making it an 'obseesion'. There are strong words coming out of Europe's capitals today, but they have not been followed by any action to date.

Jobless Youth: Europe’s Hollow Efforts to Save a Lost Generation - Stylia Kampani did everything right, and she still doesn't know what the future holds for her. The 23-year-old studied international relations in her native Greece and spent a year at the University of Bremen in northern Germany. She completed an internship at the foreign ministry in Athens and worked for the Greek Embassy in Berlin. Now she is doing an unpaid internship with the prestigious Athens daily newspaper Kathimerini. And what happens after that? "Good question," says Kampani. "I don't know." "None of my friends believes that we have a future or will be able to live a normal life," says Kampani. "That wasn't quite the case four years ago."  Four years ago -- that was before the euro crisis began. Since then, the Greek government has approved a series of austerity programs, which have been especially hard on young people. The unemployment rate among Greeks under 25 has been above 50 percent for months. The situation is similarly dramatic in Spain, Portugal and Italy. According to Eurostat, the European Union's statistics office, the rate of unemployment among young adults in the EU has climbed to 23.5 percent. A lost generation is taking shape in Europe. And European governments seem clueless when they hear the things people like Athenian university graduate Alexandros are saying: "We don't want to leave Greece, but the constant uncertainty makes us tired and depressed."

The Great Jobs Disaster - In the desperate search for evidence that the global recession has bottomed out and the recovery has arrived, the story told by the long-term trend in unemployment levels and rates is being missed.Early this year, the International Labour Organisation (ILO) had noted that the global unemployment rate was close to 6 per cent, implying that 197 million people were unemployed, even ignoring the 39 million who had dropped out of the workforce, discouraged by persistent failure in job search. But that aggregate figure concealed a picture that was far worse in the advanced economies where the crisis had originated and spread. There were at least 12 advanced economies where the unemployment rate was 8 per cent or more, and seven in which the rate was 10 per cent or more. In fact the rate varied widely, peaking at 25 per cent or close to that in Spain and Greece. That is the level unemployment had touched in the US at the bottom of the Great Depression. What is more, during the years in which the world had ostensibly put the crisis behind it, unemployment has risen in many.There are three countries (Spain, Greece and Ireland) in which the unemployment rate has risen by 10 percentage points (pp) or more between 2007 and 2012, and another three (Cyprus, Portugal and Estonia) where the increase between those dates was between 5 and 10 pp (Chart 4).Finally, in 14 out of the 35 advanced economies covered by the IMF’s World Economic Outlook dated April 2013, the unemployment rate in 2012 was at its highest since 2007. In terms of jobs, in many countries the crisis is intensifying, not retreating.

Paradise Lost! Have We Learned Anything? - Cyprus has been invariably called a paradise; a paradise for tourists, a paradise for lawyers and accountants, a paradise for bankers and civil servants, a paradise for Russian oligarchs, even a paradise for money launderers; a paradise nevertheless. No more. Virtually overnight, billions of euros have been lost to the bail-in imposed by the Eurogroup on Cyprus’ two largest banks to save one of them, barely. Lifetime fortunes were wiped out at the stroke of a pen. These losses are on top of all the losses we suffered as the economy went into a nosedive two years ago, following the loss of access to capital markets to successive downgrading, the loss of life and infrastructure to the Mari explosion, and the loss four billion euros in bank assets to the haircut of the Greek debt. Globally, there are not many other such great and sudden losses of wealth that are worthy of the pithy title of John Milton’s1667 poem “Paradise Lost.” Like a new Adam and Eve our bankers succumbed to the temptation of the high returns of the supposedly “riskless” Greek bonds and the easy profits of unlimited global expansion. They enjoyed, and still do, the fruits of their sins while we are stuck with the cost of their profligacy and imprudence, having been unceremoniously expelled from the leagues of the nouveau riche, in the way the human race was expelled from the Garden of Eden.

Greece Isn’t Turning the Corner - Judging from the markets and English-speaking news media this week, Greece’s damaged economy has finally turned the corner. I doubt it. The Financial Times and Wall Street Journal ran prominent pieces about bullish investors plowing back into Greek markets. On May 15, the Greek government’s borrowing costs on 10-year bonds fell by one percentage point, to the lowest level in three years. Against this euphoria, the Greek statistics agency Elstat says the Greek economy contracted 5.3 percent in the first quarter of 2013 compared with a year earlier. This is the 19th consecutive quarter in which it has shrunk. There will be a recovery someday, so is this it? Certainly, there have been positive signs. Early last week, the euro area’s finance ministers agreed to release 7.5 billion euros ($9.6 billion) of bailout funds to Greece -- 4.2 billion euros at the weekend, and the remaining 3.3 billion euros in June, provided that Greece first completes a number of measures. The following day, Fitch Ratings upgraded Greece to B- from CCC. That is still six levels below investment grade, yet the improvement inspired one of the biggest sovereign-bond market rallies we have seen in Greece since the beginning of the crisis. Prime Minister Antonis Samaras even said Greece plans to re-enter the bond markets in the first half of next year.

Greek youth unemployment close to 75pc in some areas - Telegraph: Greek youth unemployment is close to hitting 75pc in some parts of the country, official data showed on Wednesday, highlighting a huge disparity between Europe’s northern and southern states.  Western Macedonia in Greece had the highest level of youth unemployment in the European Union, with the number of 16 to 24 year-olds out of work jumping to 72.5pc in 2012 from 52.8pc in 2011, according to Eurostat. Total youth unemployment in Greece stood at 55.3pc last year, more than double the EU average of 22.9pc. The region, located in northern Greece, has been hit hard by the economic crisis, with total unemployment rising from 12.1pc in 2007 to almost 30pc in 2012 due to de-industrialisation and the migration of labour intensive industries to neighbouring countries, where wage demands are lower. According to a report by the European Commission in December, more than a fifth of firms stopped trading in the region between 2008 and 2011. Spanish regions had the highest overall unemployment rates, with the number of people out of work in Andalucia, Spain's most populous region, climbing to 34.6pc last year, from 30.4pc in 2011. .

It’s all been for nothing – that is, if we ignore the millions of jobs lost etc -The fiscal austerity imposed on the southern European nations such as Greece and Spain has been imposed by the Troika with two justifications. First, that the private sectors in these nations would increase spending as the public sector cut spending because they would no longer fear the future tax hikes associates with rising deficits (the Ricardian argument). The evidence is clear – they haven’t. The second argument was that massive cost cutting (the so-called internal devaluation) would improve the competitiveness of the peripheral nations, close the gap with Germany and instigate an export bonanza. It was all about re-balancing we were told. The evidence for that argument is clear – it was a lie. The massive impoverishment of these nations and the millions of jobs that have been lost and the destruction of a future for around 60 per cent of their youth (who want to work) has all been for nothing much. As was obvious when they started.

Greek Debt Unchanged Since 2010; EU to Give Greece Still More Time; More Time Is Useless - Greece was supposed to get it's debt to GDP ratio to 100% by 2012, then 100% by 2013, then 110% by 2014. Now Jeroen Dijsselbloem, president of the Eurogroup finance ministers, says Greece May Get Still More Time to meet fiscal targets. And the alleged level of debt sustainability keeps rising all the while. The euro zone may give Greece more time to meet fiscal targets agreed under its international bailout, the chairman of the euro zone finance ministers said in an interview published today. "The Commission΄s approach regarding fiscal consolidation is more flexible, giving certain countries more time to meet their targets. I believe that this will be the case for Greece if needed," Jeroen Dijsselbloem told Kathimerini newspaper. Greece΄s European partners agreed last year to extend the maturities and reduce the interest on the nation΄s bailout funds to help cut its debt mountain to a more sustainable level of 124 percent of GDP in 2020, from an estimated 173 percent this year.

Sovereign debt concerns in 2013 - Interest rates on government debt for a number of European countries-- notably Greece, Portugal, Ireland, Italy, and Spain-- shot up considerably during 2010-2012. Those yields have fallen significantly from their peaks, though these five countries still face higher borrowing costs than most other countries in Europe.Europe has now been in an economic recession for a year and a half, with Eurostat reporting that the 17 EU countries had an average drop of real GDP of 0.6% in 2012. But real GDP in the 5 countries just mentioned fell 2.5%, while in the other 12 it grew by 0.2% during 2012.It's not hard to see a connection between the earlier fiscal problems and the current economic woes. The conservative spin is that a lack of fiscal restraint in 2004-2006 in countries like Greece and Portugal left them vulnerable to the subsequent sovereign debt scares, with the recession of 2007-2009 then putting enough new pressure on government budgets to push these countries into unsustainable debt burdens. Skyrocketing sovereign debt yields, in addition to the stresses all this placed on the banking system, meant tighter credit for every borrower, and this credit crunch was a key factor that pushed the countries back into recession. The liberal spin is that too much fiscal constraint in 2011-2012 constituted a new contractionary shock, and that fiscal austerity is a key factor in Europe's double-dip recession.

Money isn’t “easy”– A rant - I only have time to complain about some themes I keep coming across when reading the press and speaking to people out in the real world.  No links.

  • 1.  There is no reason at all for the ECB to look around for transmission mechanisms to boost the eurozone economy.  Europe is in recession because the ECB WANTS IT TO BE IN RECESSION.  Yes, the ECB doesn’t know that it wants a recession, but the NGDP growth it is producing will inevitably produce a recession in the eurozone.  OK, they aren’t even targeting NGDP, but the highly flawed CPI including oil and VAT that they are trying to hold well below 2% will inevitably produce the sort of slow NGDP growth that will inevitably produce recession.
  • 2.  The ECB is not at the zero bound.  Over the past few years they’ve been repeatedly steering eurozone inflation through conventional policies of raising and lowering the short term interest rate.  If they had a broken transmission mechanism they would not have been raising rates during 2011.
  • 3.  And even if they were out of room to cut rates, they are not out of paper and ink.  There is no need to look for wacky UK-style proposals to stimulate bank lending–that’s what got us into this mess in the first place.  They need to do monetary stimulus, WHICH HAS NOTHING TO DO WITH BANK LENDING. 

Europeans' Biggest Problem - The European Commission's Eurobarometer survey monitors public opinion on a variety of political and economic issues across European Union member states. One question on the Eurobarometer survey asks: Personally, what are the two most important issues you are facing at the moment?  This question was only asked in May 2012. For the EU as a whole, by far the most common response was rising prices/inflation. In fact, 45% of people in 2012 said that inflation was one of the top two most important issues they were facing. The pie graph below shows, for the EU as a whole, the responses people chose. Only 15% of people chose the financial situation of their household as a top issue. Health and social security also had a mere 15%. I was stunned that three times as many people consider inflation a top issue as consider health and social security a top issue. In the graphs below, the results are broken down by country. First I show the percent of respondents in each country who choose inflation as a top-two issue. Then for a few countries, I show the percent who choose inflation and the percent who choose unemployment. In twelve countries (including Austria, France, and Germany), at least half of respondents say that inflation is a top-two issue. Sweden is a major outlier-- only 5% think that inflation is a top-two issue. The next lowest is Greece, at 26%. Sweden and Greece did have the lowest inflation in the EU in May 2012, but really just about ALL countries in the EU had (and still have) low or reasonable inflation.

The euro crisis: Der Elefant im Raum - TYLER COWEN writes on the euro-zone economy: Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment? Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome? The former scenario implies that monetary policy should be potent. The latter scenario implies that the helicopter drop will be for naught and the fiscal policy multiplier also will be low, on the upside at the very least (fiscal cuts still might cause a lot of damage on the downside). I call this the liquidity leak, rather than the liquidity trap. Karl Smith gives the correct response: What Tyler calls a liquidity leak, I call markets at work. The ECB provides enough stimulus to get all of the Eurozone going but it all leaks to Germany. Fine. The German market heats up. German wages and rents rise. Retired German doctors start considering the virtues of a flat in Lisbon overlooking the harbor.  This is the way things are supposed to work. The idea that a more competitive and efficient Germany should not command higher wages and rents is bizarre; and is only called inflation because the Eurozone, in its heart-of-hearts, doesn’t actually believe its one monetary union where the richer parts are distinguished principally by the fact that they have more money.

Excess German Savings, not Thrift, Caused the European Crisis - Pettis - One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings. By coincidence there was recently a very interesting debate on the subject involving several economists, and it is pretty clear from the debate that even accounting identities can lead to confusion. The difference between household and national savings matters because of the impact of national savings on a country’s current account, as I discuss in a recent piece in Foreign Policy. In it I argue that we often and mistakenly think of nations as if they were simply very large households. Because we know that the more a household saves out of current income, the better prepared it is for the future and the more likely to get rich, we assume the same must be true for a country. But countries are not households. What a country needs to get wealthier is not more savings but rather more productive investment. Domestic savings matter, of course, but only because they are one of the ways, and probably the safest, to fund domestic investment (although perhaps because they are the safest, investment funded by domestic savings can also be misallocated for much longer periods of time than investment funded by external financing).

Foreign Borrowing in the Euro Area Periphery: The End Is Near - NY Fed - Current account deficits in euro area periphery countries have now largely disappeared. This represents a substantial adjustment. Only two years ago, deficits stood at nearly 10 percent of GDP in Greece and Portugal and 5 percent in Spain and Italy (see chart below). This sharp narrowing means that spending has been brought in line with income, largely righting an imbalance that had left these countries dependent on heavy foreign borrowing. However, adjustment has come at a sizable cost to growth, with lower domestic spending only partly offset by higher export sales. Downward pressure on domestic spending should abate now that the periphery countries have been weaned from foreign borrowing. The risk, though, is that foreign creditors might demand that the countries pay down (rather than merely service) accumulated external debts, forcing them to reduce spending below incomes.

Monetising the… ECB: The latest insult to be added to Greece’s multiplying injuries - Last week another installment of the cruel theatre of the absurd, also known as the ‘Greek Rescue’ (and more recently re-released as ‘Greece’s success story’), was delivered silently: Not for the first time, the bankrupt Greek state borrowed from one arm of the Eurozone to give to another, with massive interest to boot. To be precise, the Greek government borrowed €4.2 billion from the European Stability Mechanism (ESM) in order to repay the… European Central Bank (ECB) €5.6 billion, leaving the ECB with a profit of €2 billion plus from this hideous transaction. In other words, the Greek government bonds that matured last week, owned by the ECB, had a face value of €5.6 billion but cost the ECB only €3.6 billion. Which means that, last week, the Greek government handed over to the ECB €2 billion plus 55.6% interest for two years in addition to the monies that the ECB spent in order to purchase these bonds. If this is not usury, I know not what is.

Macroeconomic Machismo - Paul Krugman - Atrios, weighing in on the Kinsley Kontroversy, suggests that the evident urge to make Someone Suffer — Someone Else, of course — reflects sadism. But I don’t think that’s right. Lack of compassion, sure; an inability to imagine what it must be like for someone less fortunate than oneself and one’s friends, definitely. But I think that the linked Scott Lemieux post, which equates the austerian fixation on stagflation with the neocon fixation on Munich, is much closer to the mark. It was obvious during the runup to the Iraq war that what was going on in the minds of many hawks — and not just the neocons — was not so much a deep desire to drop lots of bombs and kill lots of people (although they were OK with that) as a deep desire to be seen as people who were willing to Do What Has to be Done. Men who have never risked, well, anything relished the chance to look in the mirror and see Winston Churchill looking back.  Actually, I suspect that even the torture thing had less to do with sadism than with the desire to look tough. And the austerian impulse is pretty much the same thing, except that in this case the mild-mannered pundits want to look in the mirror and see Paul Volcker.

Economists warn against German euro exit - “Even a believable rumour that Germany would exit the euro would result in a massive capital flight from the countries of southern Europe to Germany.” The southern European banking system would then collapse, bringing down entire economies with them, Schmieding said. The consequences for Germany would be severe. The crisis countries could no longer pay back their debt and Germany’s important export markets would drop off. On top of that German taxpayers would be burdened with immense costs, he said.On the other hand if you add up the expected growth advantages of euro membership between 2013 and 2025 there would be a profit of nearly €1.2 trillion – or about half Germany’s gross domestic product in a year.

Beppe Grillo Supports "Referendum on the Euro Within a year" - Via google translate from Corriere Della Sera, Beppe Grillo is in favor of a "Referendum on the Euro Within a year"  "Europe needs to be rethought. We consider just one year of information and then hold a referendum to say yes or no to the euro and yes or no to Europe. " Beppe Grillo to ride a strong theme of the last election campaign the 5 Star Movement. "Europe on the euro and the British teach us democracy. No party can claim the right to decide for 60 million people. " "I want to go to Europe and re-discuss a Plan B to be in five years, "added the leader M5S, explaining:" When we do, then we are ready for a referendum and we decide whether to stay in the euro or not."

France Must Lead Breakup of Euro  Many observers concede that the euro was a mistake but think there’s no going back. They reckon that dissolving the monetary union would lead to economic chaos, first in Europe, and then around the world. European leaders are afraid that backtracking on the euro project would also be a lethal blow to the larger cause of European integration and could be the beginning of the end of the EU and the single market. These fears give rise to what we regard as the disastrous strategy of defending the euro at all costs. Although a controlled segmentation of the euro system through the exit of the most competitive countries would actually be the most effective way to help the deficit countries, it could still be seen as a decision by the strong to abandon the weak. Europe’s history makes it difficult for Germany’s leaders to initiate such a move. The deficit countries, struggling with recession and internal political divisions, and trying to get better terms for assistance from the rest of the EU, might be afraid of worsening their negotiating position by taking the lead. EU institutions, such as the European Commission and the ECB, couldn’t propose the solution we advocate.French leadership in advancing this idea might work -- and could be the only thing that will. France has played the leading role in EU integration for more than 50 years. The euro is very much a French product.

France Private Sector Implosion Continues - Here's some news that caught my eye earlier today: The Markit Flash France PMI® shows French private sector output continues to fall at marked rate in May.  Key points:

  • Flash France Composite Output Index unchanged at 44.3
  • Flash France Services Activity Index unchanged at 44.3
  • Flash France Manufacturing PMI rises to 45.5 (44.4 in April), 9-month high
  • Flash France Manufacturing Output Index up to 44.3 (44.1 in April), 9-month high

Summary: The downturn in French private sector output continued in May. Unmoved from April’s reading, the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 44.3. Although remaining above the levels registered in Q1, the latest reading was indicative of a marked rate of contraction in overall activity.

Eurozone's struggling economies mired in recession - The eurozone is stuck in recession — its longest since the euro was founded in 1999. The latest figures from the European Union's statistics office show that the economy of the 17 EU countries that use the euro shrank for a sixth straight quarter, slumping by 0.2 percent in the January-March period from the previous three months. Initially it was just the countries at the forefront of the eurozone's debt crisis, such as Greece and Portugal, that were contracting. But the malaise is now spreading to the so-called core countries. Wednesday's figures showed Germany, Europe's largest economy, grew by a less-than-anticipated quarterly rate of 0.1 percent while France entered its third recession since 2008. Whatever problems the big economies are experiencing, they pale in comparison with the countries that have either been bailed out or are trying to avoid a financial rescue. Here is a look at how they are doing:

Shrinking eurozone output points to recession in second quarter - The eurozone is likely to remain in recession in the second quarter, a business survey showed on Thursday, with output in both France and Germany, the two biggest economies, still shrinking. The initial reading of the Markit eurozone Purchasing Managers’ Composite index for both the manufacturing and services sectors rose to 47.7 in May from 46.9 in April. That beat market expectations for the indicator but remained firmly short of the 50.0 level separating growth from contraction.  While country-specific readings for Germany showed it was at best stagnating, with a reading of 49.9, up from 49.2 in April, the broad-based downturn in France remained fierce. The French composite manufacturing and services index was unchanged at 44.3 in May. The data will feed into a debate on whether the European Central Bank is doing enough to help stimulate a recovery in a region beset by record unemployment and stuck in the longest recession since the euro was created. “The ECB’s quarter-point cut in interest rates seems to have done little to inspire confidence that the economy will start to pick up again,” Chris Williamson, chief economist at Markit, said. The data group said there were signs of companies cutting prices in an effort to stimulate sales with the largest drop in manufacturing output prices since January 2010 recorded in the survey of about 5,000 eurozone businesses.

The Eurozone's economy could surprise to the upside - This may be an unpopular suggestion, but those with a contrarian view of the world will surely appreciate the logic here. The chart below from Goldman shows the consensus economic forecast for 2013 GDP growth of the large Eurozone nations. Again, this is not the actual GDP, but a forecast over time.  It shows that the "herd" of forecasters following each other in the realization of how dire the recession has been across the area. But keep in mind that these are some of the same forecasters that 18 months ago were calling for a "shallow" downturn in these nations (see discussion). Many weren't even talking about a possible recession. And now they are continually downgrading their predictions - after the fact?  Today we got the latest PMI numbers from the Eurozone. France is clearly struggling and Germany's growth has been slower than many had hoped - due primarily to global economic weakness. But take a look at the rest of the Eurozone. While still in contraction mode, it shows an improving trend.

Harvard Economist: 'The Crisis Isn't Over in the US or Europe' - In a SPIEGEL interview, Harvard economist Carmen Reinhart argues governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price.

In Europe, a Fed President Urges Quantitative Easing - — A top official of the Federal Reserve on Tuesday urged the European Central Bank to take more aggressive action to restart growth, warning that the euro area risked becoming mired in the same kind of economic stagnation that has plagued Japan for two decades, with far-reaching implications for the global economy. James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the Fed’s policy-setting open markets committee, said Europe’s central bank should consider quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates. The public comments were highly unusual. While central bankers from different countries frequently confer in private and offer advice and criticism to their peers behind closed doors, it is rare for any official to go public with even the mildest criticism of another central bank. But with official interest rates in almost every advanced economy already close to zero, Mr. Bullard said, central bankers must reach for stronger tools to avoid getting trapped in economic doldrums. “The lesson of Japan is that once you get stuck, it’s very hard to get out,” “One way to get stuck would be not to take aggressive action.”

Fed’s Bullard: ECB May Have to Consider New Stimulus Measures - The risk of a disorderly breakup of the euro zone has diminished in the past year but the European Central Bank may need to consider new stimulus measures if the prospects for the 17-nation economy don’t improve, a top Federal Reserve official said Friday. James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview that ECB chief Mario Draghi‘s pledge in July 2012 to do “whatever it takes” to keep the euro together successfully calmed febrile financial markets. Mr. Bullard, touring Europe in 2012 before Mr. Draghi made his commitment, at the time remarked on European policy makers’ “chaotic” response to the sovereign debt crisis roiling the currency union and said the risk of a euro collapse had edged up. That risk has now receded, he said Friday. “I was skeptical initially that it would work but it has actually been very effective. The OMT program has calmed European markets dramatically and that is having a good impact on the U.S.,” Mr. Bullard said, referring to the ECB’s program of outright monetary transactions, a pledge to buy the bonds of any government that requests its help and agrees to undertake reforms. Mr. Bullard said, in what he admitted was “unsolicited advice,” that ECB officials should be prepared to deploy more of the central bank’s firepower if the continent’s economic prospects deteriorate further. He noted that the OMT’s healing effect on financial markets “is no substitute” for concrete monetary stimulus.

Large depositors not protected in new EU draft law-- European Union lawmakers on Monday voted in favor of a draft law that would protect small bank depositors from losses in further bank rescues, but could see customers with more than 100,000 euros in savings being hurt. The Parliament's economics committee voted for a "bail-in" scheme to be up and running by 2016, but that shareholders and bondholders should come first in line to take losses in future bank bailouts. The committee also stressed that taxpayers' money should be used as a last resort and only used when necessary to prevent "significant adverse effects on financial stability" or "to protect the public interest." The proposal follows a controversial bailout agreement earlier this year in Cyprus, where large depositors were hit hard by a move to save the country from bankruptcy. The draft law will need approval from all 27 member states and the Council before it can become law.

European Leaders Saying No to Austerity - Austerity is out after the euro-area recession extended to a sixth quarter. Stimulus isn’t yet in. That was the something-for-everyone message from European leaders at a summit in Brussels yesterday. All touted a previously announced 6 billion-euro ($7.7 billion), seven-year initiative to fight youth unemployment, now at 24 percent. National governments won’t put up more cash, German Chancellor Angela Merkel said. “It’s not a matter of money,” Merkel told reporters after the summit. “It’s a matter of looking at how to spend this money most productively.” The 17-nation euro area’s nonstop contraction since the third quarter of 2011 has left the European Central Bank to try to mitigate the damage by cutting interest rates and exploring unconventional ways of channeling money to needy companies, especially in the south. The euro economy will shrink 0.4 percent in 2013, the European Commission said this month, shaving a prior forecast for a 0.3 percent drop. It was the commission’s fifth consecutive downgrade since November 2011, as unemployment soared in the south and the effects of the debt crisis crept north, to Germany and the Netherlands.

Austerity in the Eurozone and the UK: Kill or Cure? - Austerity has failed. It has failed in the UK and it has failed in the eurozone. Its failure was predictable and, by some at least, predicted. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but in the long term, as well: the costs of investments unmade, of businesses not started, of skills atrophied and of hopes destroyed. This is not, as many seem to believe, a debate about the short term versus the long term. It is a debate about both the short and the long term, because what we do in the short term shapes the long term. What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark would become still darker. Austerity cannot kill the economy. But it can inflict a great deal of unnecessary suffering and waste. Austerity is a treatment that aggravates the illness. Austerity came to Europe in the first half of 2010, with the onset of the Greek crisis, the arrival of the coalition government in the UK and, above all, the Toronto summit of the group of twenty leading countries, in June. The latter reversed the expansionary policies launched at the previous summits, which had halted and then reverse the economic contraction of 2008-09. It declared, prematurely, that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013.”This attempt at austerity – which I define as a reduction in the structural or cyclically adjusted fiscal balance – was duly and unwisely made. The cuts in these structural deficits between 2010 and 2013 will be 11.8 per cent of potential GDP in Greece, 6.1 per cent in Portugal, 3.5 per cent in Spain, and 3.4 per cent in Italy.

Berlin plans to streamline EU but avoid wholesale treaty change - Berlin is drawing up plans for treaty changes to streamline decision-making in the eurozone, while stopping short of any wholesale renegotiation that would allow the UK to repatriate powers from Brussels. Although Angela Merkel, German chancellor, has expressed her desire to keep the UK inside the EU, the move being discussed in Berlin would thwart a plan by David Cameron, UK prime minister, to piggyback on eurozone reforms to renegotiate the British relationship with Brussels. Mr Cameron had hoped to exploit renewed interest in Berlin for wholesale EU treaty changes as a way to renegotiate the UK’s membership terms. But Berlin’s strategy for a new, narrowly focused treaty could force the UK premier into a repeat of the dilemma he faced in December 2011, when Mr Cameron rejected the fiscal compact treaty but most other EU countries went along without him. Senior German officials acknowledged that they were isolated on treaty change, which is fraught with political landmines in several countries – particularly France, which would probably require a national referendum if major changes were made to EU law. The timing of treaty changes remains a matter of debate but it could come as early as next year, after elections to the European parliament in May.

Republic of Ireland calls for international tax action - A Republic of Ireland politician says the international community must work together to stop large multinational firms using cross-border tax loopholes. "They play the tax codes one against the other," Enterprise Minister Richard Bruton told national broadcaster RTE. "That is tax planning and I think we do need international cooperation through the OECD to deal with the aggressive nature of that." It comes as EU leaders meet in Brussels to discuss tackling tax avoidance. UK Prime Minister David Cameron and others will be looking at ways of cracking down on those who do not pay their fair share of tax. Mr Cameron will urge EU leaders to back global action against tax evasion and "aggressive" tax avoidance that is causing nations "staggering" losses.

Carney Warns Europe Faces Decade of Stagnation Without Key Reforms - Europe faces a decade of stagnation without “sustained and significant reforms,” Mark Carney, the incoming governor of the Bank of England, warned Tuesday. Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures. It’s been almost six years since the global financial crisis, but Europe remains mired in recession, fiscal austerity, low confidence and tight credit conditions restraining economic activity, he said. “Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada. He noted how Japan had struggled for more than two decades since that Asian nation was beset by its own financial crisis. Japan recently embarked on a “bold policy experiment” to end the “debilitating legacy and its success or failure will have a major impact on the outlook over coming years,” he said. Mr. Carney, who also heads the Basel-based Financial Stability Board tasked by G-20 leaders with spearheading financial sector reform, said a key lesson from Europe’s experience is the critical role that a sound financial system plays in the transmission of monetary policy.

Old-fashioned Austerity - Paul Krugman -- Matthew Yglesias piles on Michael Kinsley too, and makes a point I’ve also tried to make in the past: if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment. Yglesias makes his point with the case of Iceland, which has indeed restored relatively full employment while continuing to suffer somewhat reduced real income. But there’s an even better example from the historical record: Britain after World War II. In fact, when people used to refer to Austerity Britain, they were referring to the half-dozen years after the war when Britain had very high public debt, much reduced overseas assets, and in general found its economic situation much straitened. So what was the British economy like? Well, there was rationing, which people hated. There were exchange controls. There was financial repression. All very terrible things, unacceptable by modern standards, right? But there was full employment! Here’s a chart from here, mysteriously missing the year labels, but you can see the war clearly: And here’s UK public debt as a percentage of GDP over the same period:

Let's quit EU say 46 per cent of voters in poll - Asked the exact question Conservatives want to put the public in the 2017 referendum – “Do you think that the UK should remain a member of the EU” – 46 per cent opt to come out, a higher figure than in other recent surveys. Just 30 per cent say they want to remain. In a further boost for the eurosceptic cause, 44 per cent want an “in/out” referendum immediately, although 29 per cent are prepared to wait until 2017, David Cameron's preferred option.  The headline figure using ICM’s “Wisdom Index” method – which asks voters to predict the result of the next general election rather than which party they support – puts Labour just three points ahead of the Tories, the party’s narrowest lead since the index was launched last year.

Jobless ‘outnumber workers in some British neighbourhoods’ - More than half the working-age population is dependent on benefits in some parts of Britain, a study by the Centre for Social Justice revealed today. An examination by the think-tank found there were at least six areas of the country where the number of working-age people on benefits was higher than the number in work. According to Signed on, written off, this included parts of Birmingham, Blackburn with Darwen in Lancashire, Wirral in Merseyside, Tendring in Essex, northeast Lincolnshire and Denbighshire in Wales. The report highlighted almost 70 neighbourhoods in Liverpool where the proportion of those claiming out-of-work benefits was 30% or higher, the most in the country. This was followed by Birmingham (49 neighbourhoods), Hull (45 neighbourhoods), Manchester (40 neighbourhoods), Leeds (37 neighbourhoods) and Knowsley (31 neighbourhoods). Overall, around 6.8 million people in the UK are living in a home where no one has a job, and almost a fifth of UK children, 1.8 million, are growing up in a workless household.

UK Economy: Has High Inflation Damaged the Economy? - What are the costs of a higher average rate of inflation? With CPI inflation staying persistently above target over much of the last six years, to what extent has this undermined UK macro performance? Or has a little extra inflation and an ultra-loose monetary policy (0.5% base rates and £375bn of quantitative easing) been a price worth paying to avoid an ever deeper recession and depression?  "The high retail price inflation seen in recent years has outpaced earnings and eaten into household spending power. Ongoing relatively high inflation will continue to impact consumer spending, especially with unemployment unlikely to fall quickly. The effect on consumer spending will vary between different demographic groups and product sectors, causing companies to revisit their offerings." Here is the link to the Ernst and Young report - click here Ernst & Young's Chief UK Economist, Mark Gregory, discusses the implications for business of inflation from the Ernst & Young special report on inflation