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

Saturday, June 1, 2013

week ending June 1

Fed balance sheet shrinks in latest week (Reuters) - The Federal Reserve's balance sheet shrank in the latest week on lower holdings of mortgage-backed securities and agency debt, Fed data released on Thursday showed. The Fed's balance sheet, which is a broad gauge of its lending to the financial system, stood at $3.342 trillion on May 29, compared to $3.356 trillion on May 22. The Fed's holdings of Treasuries rose to $1.884 trillion as of Wednesday, May 29, from $1.877 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $10 million a day during the week versus $23 million a day the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) slipped to $1.165 trillion from $1.179 trillion. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $70.89 billion compared with $72.05 billion the previous week.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, May 30, 2013: Federal Reserve statistical release

Fed Wrestles With Market Expectations About Pace of QE -- Managing market expectations is one of the Fed’s most challenging tasks. If market expectations get out of sync with what the Fed plans to deliver, it could be the source of unpleasant volatility. Fed officials have been struggling of late managing expectations about its plans for the $85-billion-a-month bond-buying program, known as “quantitative easing.” At their policy meeting in May, Federal Reserve officials expressed anxiety about shifting market expectations for the Fed’s $85 billion-per-month bond buying program. “A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then,” according to the minutes of the meeting released last week.As our former college, Greg Ip, now at The Economist notes, “Because markets are forward-looking, bond yields respond to what investors expect the Fed to buy, not just what it does buy. So if the Fed signals QE will continue at a slower pace than investors expected, it will ultimately buy less than expected and yields should go up.” That’s what happened last week.

The Fed's tricky messaging: Tapering is not tightening - The Federal Reserve is famous for its verbal acrobatics, but it is now facing a particularly high hurdle: convincing the markets that doing less actually means doing more.  Since September, the central bank has been buying $85 billion in bonds every month, aiming to lower long-term interest rates and boost economic growth.  There are signs that it is working – the Dow is at a record high and the housing market is bumping – and the Fed has promised to keep the money flowing until there is “substantial improvement” in the job market. It looks like we’re getting close to that point. Job growth has averaged 200,000 a month for the past six months, and the unemployment rate has dropped a three-tenths of a percent since the program started. Fed officials are now starting to think about how to end the program – and opening a whole new can of worms in the process.  But the Fed is worried that as soon as it slows down its bond-buying, the markets will act as if the shop is closed for business, negating the benefits of any stimulus the central bank is still providing. Bernanke has tried to dispel that notion by framing a reduction in purchases as simply a slowdown of the rate of Fed stimulus, rather than actually doing less to stimulate the economy. Tapering, Fed leaders want the world to understand, is not tightening.

QE: Because Nobody’s Got Any Better Ideas - QE: What you’d call a bit of a controversial policy. Asset prices have shot up recovering pre-crisis highs. Meanwhile the real economy – especially those bits that affect the poor and the young – remain deep in a pit of despair. I don’t agree with Frances Coppola on this, but she’s got some good posts accusing QE of making things worse , especially in the UK. (there’s also this excellent subsite for discussion on the topic). And of course we have the insistence – from the reasonable to the reliably demented that this is all a bubble and that the next hard landing will be worse. But I come not to bury QE, but to praise it. Or at least point out that it’s probably better than doing nothing, and that “nothing” seems to be a pretty good description of the other politically-acceptable alternatives globally.First, let’s deal with the “QE distorts prices and changes the behaviour of investors”. This is like complaining that “cars carry people to different places”. It’s not an objection, it’s a description of the WHOLE DAMN POINT of the exercise. A case in point: the recovery of the housing market has been driven by investor demand. And it’s the big institutions – the WSJ link points to 20,000 homes snapped up by Blackstone. This is what happens when the search for income, driven out of Treasuries by low yields turns into activity. This is FoBOR at work (Forced Buyers Of Risk to use Dan Davies‘ term)

Kansas City Fed Wanted to Raise Discount Rate - Federal Reserve officials said they view the pace of economic expansion as “moderate” and voted to maintain its primary credit rate. The Fed’s Board of Governors kept its primary discount rate at 0.75%, according to minutes from meetings on April 8 and April 29, which were released Tuesday. The rate is what banks are charged on short-term loans they receive from the Fed. Eleven of 12 regional banks recommended keeping the discount rate unchanged. Directors from the Kansas City Fed voted to raise the rate to 1.0%, as they have done previously. Directors from the Boston Fed have called for the bank to lower the rate to 0.50% in recent months, but since March have voted with the 10 other regional Fed banks to re-establish the existing rate. Regional Fed bank directors send their request for the discount rate every two weeks, but the Board of Governors makes the final decision. In general, the directors said the economic expansion is “moderate,” with further improvements in the housing sector, modest job growth and a still-elevated unemployment rate. Against that backdrop, most directors recommended maintaining the current primary credit rate.

Fed’s Rosengren Open to ‘Modest’ Cut in Bond Buys in a ‘Few’ Months - A Federal Reserve official who has strongly supported the central bank’s bond-buying stimulus efforts is willing to see the purchases pared back sometime soon if the economy continues to recover at its current pace. “It may be undesirable to abruptly stop purchases, so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy,” Federal Reserve Bank of Boston President Eric Rosengren said in a speech Wednesday. The official noted that he expects the recovery to continue, which suggests Mr. Rosengren, who is also a voting member of the monetary policy-setting Federal Open Market Committee, is joining with other key officials in the expectation the Fed is nearing the day when it can dial down its purchases of Treasury and mortgage bond debt. Mr. Rosengren spoke in the wake of testimony last week by Fed Chairman Ben Bernanke, who also signaled a willingness to reduce the pace of what are now $85 billion in monthly bond purchases. While a number of Fed officials have been hinted that they are gravitating to the view the Fed can soon begin to do less to aid the economy, Mr. Bernanke’s words hit financial markets hard, driving down bond prices and driving up yields, as investors brace for a reduction in the level of central bank stimulus. The Fed’s bond-buying stimulus has aimed to keep yields low to help stimulate growth. Fed officials who have spoken on the matter generally support slowing bond purchases as a prelude to stopping them outright. A number of officials, like New York Fed President William Dudley, have said the central bank could easily increase the asset buying again if the economy warranted that action.

Fed Watch: September Looking Good - Boston Federal Reserve President Eric Rosengren, considered to be on the dovish side of the Federal Reserve, had this to say about the outlook for monetary policy: However, I would also say that it may be undesirable to abruptly stop purchases, so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy – consistent, by the way, with my forecast, which is somewhat more optimistic than that of many private forecasters.  A "few more months" I interpret as June, July, and August, which puts the beginning of tapering at the September FOMC meeting. I think that Fed speakers are sending pretty clear signals to prepare for a September policy change.  Some big names on Wall Street don't agree. Vincent Reinhart at Morgan Stanley believes the data will push the Fed back to December. The view at Goldman Sachs is reportedly similar. To be sure, the data might cut in that direction, but I think that the bar to tapering might be lower than believed by those looking for a shift in December. We may believe the Federal Reserve's dual mandate argues for a longer period of QE at its current pace, but I am thinking that for the Federal Reserve, the dual mandate has more to do with the lift-off date from ZIRP than the end of QE. They have tended to argue for more or less QE on the basis of "stronger and sustainable" improvement in labor markets, and, given the obvious shift in tone among Fed speakers, I think we have reached that benchmark. At this point, they are just looking for a little more confirmation, in their minds erring on the side of being "too easy."  Bottom Line: I think the Federal Reserve is leaning toward a September policy shift. While it is as always data dependent, I think the data will need to be pretty weak to push the Fed to December.

There's a problem with the transmission.... In my last post, I pointed out that QE does not work when the transmission mechanism for monetary policy is impaired because of a damaged and risk-averse financial sector. This caused some confusion among those who think that throwing money at banks automatically makes them lend, so I attempted to explain it on twitter. Predictably, I ended up in an extended discussion first with David Beckworth and then with Andrew Lilico, in the course of which it became clear - to me, at any rate - that not only does QE fail when damaged banks aren't lending normally, but it actually impairs the transmission mechanism itself. This might explain why QE seems to become less effective the more of it you do. It's like hard water. It gradually clogs up its own pipes.  To explain this, let me first go through the money creation process in our fiat money system and the ways in which QE influences that process.

What will happen to markets when QE ends? - Davies - Last week’s market reaction to Fed Chairman Bernanke’s suggestion that the FOMC might begin to taper back QE “within a few meetings” represented a trial run for what might happen when central bankers really do remove the punch bowl at some point in the future. The largest reaction came in the most leveraged markets (notably the Nikkei, which fell by 6.5 per cent), but there were simultaneous across-the-board declines in global bonds and equities. When the Fed ended QE1 and QE2, there were declines in the S&P 500 index of 15 per cent and 23 per cent respectively. These events, however, proved to be only minor fluctuations in the great bull market, which quickly resumed when the central banks announced new asset purchases. Many analysts [1] believe that QE has caused a major bubble to appear in asset prices, the full extent of which will be unveiled only when the central banks start to shrink their balance sheets. Others reply that the rise in both bond and equity prices has been justified by economic fundamentals.This is probably the most important debate in the financial markets today, with enormous ramifications for both policy makers and investors. Bubbles are notoriously difficult to identify in real time, and it is wise not to be too dogmatic about this. However, I would like to comment on three elements of the debate.

Looking forward to the end of QE - - Good piece in the FT online today by Gavyn Davies on what wil happen to markets when QE (quantitative easing) ends. As we have witnessed last week, comments on the potential end to QE can generate significant volatility in financial markets. But there is something in this debate that still confuses me and it has to do with the interpretation that some make of the end of QE. QE will end one day, this must be the assumption of anyone who understands monetary policy. The day the recovery is strong enough, when central banks feel that the economy is close enough to full employment we will see a normalization of monetary policy conditions. From an expansionary stance we will move towards a more neutral stance. This has always been the case in the past although we used to think only in terms of interest rates and not QE. One way to see how this will happen is the chart below (which I am borrowing from a recent Brad DeLong blog post). This is a plot of long-term (10 years) and short-term (3 months) interest rates for the US. The pattern that we see after each of the last recessions is that short-term rates deviate from long-term rates as a sign that monetary policy is hitting the accelerator (the yield curve becomes steep). A few years after the recession is over, short-term rates are raised and they reach a level similar to long-term rates. After that we see the two continuing at similar levels until the next recession comes.

What would the Fed's policy "step down" look like? - A number of economists are trying to read into the meaning of Bernanke's statement last week. The comment that put a damper on the relentless equities rally and sent prices of treasuries lower. In particular the comment "we could take a step down in our pace of purchases" at the next FOMC meeting is causing angst in the investor community (see post). But what would such "tapering" in monetary expansion look like? The most likely outcome is a shift from $85 billion of purchases a month to something like $60 billion. Here is the impact such a policy would have on the central bank's portfolio of securities.

Will the Expected End of QE Lead to a Bond Meltdown? - Yesterday, bonds fell sharply due to stronger-than-expected housing price and consumer confidence reports. That reflects the belief that the economy is mending, and as a result, the Fed will deliver on its promise to dial back and then end QE. Ten year Treasury yields rose to the 2.10%-2.11% level. Various commentators claim that rates will zoom higher either right over that point or at 2.25%. Russ Certo of Brean Capital claim’s there’s a “technical vacuum” at 2.11% that will lead 10 year rates to gap up to 2.25%. And Bruce Krasting wrote over the long weekend about an apparently widespread concern among investors, that convexity in mortgage-backed securities market could produce a nasty feedback loop, or convexity vortex, at 10-year Treasury yields of around 2.25%.  The guts of his argument, starting with a quote from a hedgie buddy: Some familiar with it say the vortex is 19 bps away..2.2% on ten year treasury, 3% on the CMM..if breaks, MBS holders subject to extension and duration risk. Would now have to increase convexity hedging. Would lead to price gaps and significant selling. With shortage of treasuries due to bernank and co. and low liquidity, could be very disruptive.Krasting did say this source was a perma bond bear, so he consulted a perma bond bull, who remarked: I don’t disagree – I would guess we have a huge concentration of mortgages that would go out of the money at 2.25% 10yr UST, slowing prepays, extending servicer portfolios, bringing on longer duration UST selling ……So we have bulls and bears agreeing. Must be true, right? Maybe not. First remember we’ve had some dire bond market calls in the past produce some short term perturbations but none of the expected follow-through. The freakout over the S&P downgrade of US Treasuries saw the bonds increase in price shortly after the event took place. Reader AU, commenting on the Krasting post, recalled November-December 2010. The QE2 FOMC meeting coincided with the midterm elections, and bond prices fell in the following weeks. There were similar concerns that convexity would beget more selling, but after the correction, prices settled down.

Debating Helicopter Money - Vox has published an excellent summary account of a debate between Adair Turner and Michael Woodford (skilfully moderated by Lucrezia Reichlin) on helicopter money. My line on helicopter money has been that it is formally equivalent to fiscal expansion coupled with an increase in the central bank’s inflation target (or whatever nominal target it uses), and so adds nothing new to current policy discussions.  I think the Woodford/Turner debate confirms that basic point, but as this may not be obvious from the discussion (it was a debate), let me try to make the argument here.   Turner calls his proposal ‘Outright Money Financing’ (OMF), so let’s use that term to avoid confusion with other versions of helicopter money. Under OMF, the central bank would decide to permanently print a certain amount of extra money, which the government would spend in a way of its choosing. The alternative that Woodford proposes is that the government spends more money by issuing debt, but the central bank buys that debt by printing more money (Quantitative Easing), gives any interest it receives straight back to the government, and promises to ‘never’ sell the debt. (If it reaches maturity, it uses the proceeds to buy more.) Let’s call this Indirect Money Financing (IMF). If everyone realises what is going on in each case, and policymakers stick to their plans, the two policies have the same impact.

Steve Keen: Is QE Quantitatively Irrelevant? - Yves here. Some readers still equate quantitative easing with “printing money”, and Keen’s post explains what (little) QE actually does and does not accomplish.  America is a land of contention, and one of the most contentious topics here (I’m in Seattle as I write) is the impact of the Federal Reserve’s policy of “Quantitative Easing” – otherwise known as ‘QE’. The Federal Reserve has committed to spending $85 billion every month buying a wide range of bonds from banks, until such time as the US unemployment rate falls below 6.5 per cent.The Fed has implemented this policy because it believes it is the best way to stimulate demand in a depressed economy. Its critics oppose it because they believe this massive amount of ‘money printing’ must inevitably lead to ruinous inflation. I reckon they’re both wrong, and in a seriously wonky post I’ll try to explain why, using my modelling program Minsky.

At Least One Reason Why People Shouldn't Hate QE - Atlanta Fed's macroblog - You might not expect me to endorse an article titled "The 7 Reasons Why People Hate QE." I won't disappoint that expectation, but I will say that I do endorse, and appreciate, the civil spirit in which the author of the piece, Eric Parnell, offers his criticism. We here at macroblog, like our colleagues in the Federal Reserve System more generally, pride ourselves on striving for unfailing civility, and it is a pleasure to engage skeptics who share (and exhibit) the same disposition. Let me instead appropriate some of Mr. Parnell's language. It is worthwhile to explore some of the reasons that people do not like QE from someone who does not share this opposing sentiment. In particular, let me focus on the first of seven reasons offered in the Parnell post:First, a primary objection I have with QE is that it results in a government policy making and regulatory institution in the U.S. Federal Reserve directly determining how private sector capital is being allocated... in recent years, the Fed has dramatically expanded its policy scope into areas that are normally the territory of fiscal policy. This has included specifically targeting selected areas of the economy such as the U.S. housing market including the aggressive purchase of mortgage backed securities (MBS) since the outbreak of the financial crisis.  This statement seems to presume that monetary policy does not normally have differential impacts across distinct sectors of the economy. I think this presumption is erroneous.

Here’s Why the Titans of Finance and Economics Are Wrong -  There is zero correlation between the Fed printing and the money supply. If you don’t believe this, you owe it to yourself to study up on monetary policy until you do. This is an issue that brings them out of the bunker like no other in economics. But if you are an investor, trader or economist, understanding—and I mean really understanding, not just recycling things you overheard on a trading desk or recall from Econ 101—the mechanics of monetary policy should be at the top of your checklist. With the US, Japan, the UK and maybe soon Europe all with their pedals to the monetary metal, more hinges on understanding this now than ever before. And, as we saw recently, even many of the Titans of finance and economics have it wrong. “Wrong? You’re saying they’re wrong? They have tons of money. They have long track records. I mean, they’ve seen it all. How can you say that? That’s just arrogant. Besides, did I mention they have tons of money?”

Fed Watch: More Uncertainty? - I was reading this Business Insider report on an analyst's mea culpa on a bad trade when this jumped out: Last week, we advised investors to add to their 7s/30s and 10s/30s yield curve steepening positions with the view that Chairman Bernanke would calm expectations for tapering by September this year – helping keep rates and volatility low. These curves have since flattened back to the levels at which we suggested investors enter steepeners. Given the uncertainty Bernanke injected into the market, we suggest investors pare down positions to more sustainable levels. At the same time, we keep to our core steepening view. I find it curious the analyst believes that Federal Reserve Chairman Ben Bernanke increased uncertainty. I think it was just the opposite. Prior to Bernanke's remarks, opinion on policy was scattered among some looking for the Fed to scale back asset purchases as early as June and as late as 2014. Bernake narrowed that range to September as a likely date, and cleared the way for New York Federal Reserve President WIlliam Dudley and Boston Federal Reserve President Eric Rosengren to point us at September as well. Overall, it looks like more, not less, certainty.  Perhaps market participants are unhappy with the path Bernanke laid out, but that path is more obvious than it was a week ago.

Inflation, deflation and QE - Inflation is dead. Well, in the US, anyway:What is curious is that the US is doing QE. Lots of it. Which is supposed to raise inflation, isn't it? Then there is Japan. Japan recently embarked on an extensive QE programme designed to raise inflation to 2%. Here's the path of Japanese inflation:  It's very easy to see where QE started. It's when inflation fell off a cliff. Well, ok, it might have done that anyway, I suppose. Correlation doesn't equal causation, and all that. But it is curious.  Japan has, of course, done QE before. A look at the inflation path for the period 2001-2006, when Japan was doing QE, doesn't suggest a close relationship between QE and inflation. The initial impact seems to have been deflation, though again we could do with a counterfactual. But for the rest of the period QE seems to have had little impact on inflation. In fact a researcher at the IMF concluded that QE's effect on inflation was small. The UK does appear to buck the trend, since it experienced above-target inflation ever since commencing its QE programme, still the largest in the world relative to GDP although it is currently suspended. Though it is interesting that throughout 2012, when the Bank of England was doing QE, CPI was falling - it picked up in November 2012 when QE stopped: But this isn't quite what it appears. The UK's CPI was pushed up by tax rises, student tuition fee increases (what on EARTH are they doing in measures of CPI anyway?) and above-inflation rises in near-monopoly privatised utilities which are subject to government price controls. Yes, really. Government not only allowed those above-inflation rises, it encouraged them in the name of investment - though why it thinks utilities should invest for the future now when it isn't doing so itself is a mystery.

The 4% Inflation Target: Two Other Points - I’m a little late to this 4%-inflation-target party set off by the economist Lawrence Ball (whose work shows up here more than random chance would predict) and picked up by Paul K. I have a few things to add to the discussion, but first, a very brief recap of this simple, sensible argument.  Ball contends that when the central bank maintains a 2% target, the economy is over-exposed to zero-lower-bound (zlb) risk when we hit a downturn.  Since the real interest rate (r) is the nominal rate (nom) minus inflation (inf), or r=nom-inf, then, as Ball points out, since nom can’t go below zero, the real rate can’t fall below -inf.  In this way, the problem with “…low inflation is that it raises the lower bound on the real interest rate.”That’s only a danger if the real rate needs to go below –inf, so one important question here is “how likely is that?”  The answer, according to Ball and others, is “more likely than a lot of people think,” and there’s a lot of analysis showing this to clearly be the case in the great recession we’re still slogging our way out of.Thus, the danger is not just inflation that’s “too low” such that it invokes zlb risk.  It’s low inflation in tandem with a recession deep enough that we need real interest rates to go well below zero.  One lesson to take from this research is that low inflation and asset bubbles are a particularly toxic combination, and they’re increasingly common.

PCE Price Index Update: Sorry Fed, The Disinflationary Trend Continues -  The May Personal Income and Outlays report for April was published today by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 0.74% is a decrease from last month's adjusted 1.01%. The Core PCE index of 1.05% is decrease from the previous month's adjusted 1.17%. The continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for ten of the last 13 months since its interim high of 1.96% in March of 2012 and is now approaching half that YoY rate. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.  I've calculated the index data to two decimal points to highlight the change more accurately. For a long-term perspective, here are the same two metrics spanning five decades. 

With All Eyes on Fed, Prices Barely Rise - Inflation is slowing in the U.S. and elsewhere, despite central banks' historic easy-money programs that some have argued could push prices much higher. A key gauge of inflation fell in April to its lowest level on record, a reduction that could take pressure off the Federal Reserve to wind down an $85 billion-a-month bond-buying program despite other signs of a strengthening economy. Core prices, which exclude volatile food and energy costs, rose 1.1% in April from a year earlier, the Commerce Department said Friday. That matched the smallest increase in underlying prices since the agency began tracking them in 1960. Overall prices rose even less—just 0.7% in April from a year earlier. A strengthening economy should boost inflation over time as consumers demand pay raises and firms gain latitude to boost prices. But considerable slack across the economy—due to high unemployment and weak demand—have kept inflation tame during the four-year recovery.It isn't clear how Fed officials will respond to the drop in price pressures. Minutes of the Fed's latest policy meeting show officials believed the drop in inflation pressures was temporary and expected price measures to move back toward the central bank's 2% target. But the latest readings could allow the Fed to keep its foot on the accelerator longer. Core inflation reached its current level three other times during the current recovery, in late 2010 and early 2011, a period that coincided with the Fed's launch of an earlier bond-buying program

Behind the Numbers: PCE Inflation Update, April 2013 - Dallas Fed - The headline, or all-items, PCE price index fell at an annualized rate of 3 percent in April on the heels of a 1.4 percent annualized rate of decline in March. A steep decline in the price index for gasoline and other motor fuel—8.1 percent at a monthly rate or about 64 percent annualized—was the biggest drag on the headline index. Gasoline and other motor fuel contributed about –3.5 annualized percentage points to April’s headline rate, in the sense that an index of all items except gasoline and motor fuel would have increased at an annualized rate of about 0.5 percent. As we expected in last month’s Inflation Update, the 12-month headline inflation rate has now dipped below 1 percent, falling to 0.7 percent in April from 1.0 percent a month earlier. The six-month headline rate fell to an annualized –0.1 percent from 0.7 percent in March. Similar to last month, while gasoline was the main culprit behind the decline in the headline index, it must have many accomplices since our Dallas Fed trimmed mean inflation rate—which excludes all extreme price swings—posted a –0.1 percent annualized rate in April. A monthly change that annualizes to just a tenth of a percent is, for all practical purposes, effectively zero (before annualizing, the trimmed mean inflation rate for April was –0.01 percent); even so, April’s reading is the first negative trimmed mean rate we’ve seen in the history of the series, which begins in 1977.

Two Measures of Inflation: Core PCE at Its All-Time Low - The BEA's Personal Consumption Expenditures Chain-type Price Index for April shows core inflation well below the Federal Reserve's 2% long-term target at 1.05%, the lowest Core PCE ever recorded; the previous all-time low was 1.06% in March 1963, fifty years ago. The Core Consumer Price Index release earlier this month, also data through April, is significantly higher at 1.72%. The Fed is on record as using PCE as its primary inflation gauge. Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of "core" inflation (less food and energy). Why the emphasis on core?   The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low, until today's 1.05%. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us clues as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that in the past the less volatile Core PCE has been their metric of choice. On the other hand, the disinflationary trend of late give PCE additional significance as support for a sustained policy of quantitative easing. The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

Fed Not Constrained Amid Tame Inflation - Inflation is getting tamer, a development that will surely fuel the debate over the Federal Reserve‘s bond-buying. “Core” prices, a closely watched measure of inflation that excludes food and energy costs, were essentially unchanged in April, the Commerce Department said Friday. Core prices rose less than 0.1% from March. It was the first time since December that the index failed to budge. Overall prices–including volatile food and energy costs–slipped by 0.3% in April from the prior month. It was the second consecutive month that overall prices fell. Friday’s report–coupled with recent data suggesting a mild slowdown in hiring–will factor into the debate within the Fed about whether and when to rein in the central bank’s $85 billion-a-month bond-buying program. On Thursday, the Labor Department reported that initial jobless claims–a measure of layoffs–have, on average, risen over the past month. That could point to a continued slowdown in hiring. Those favoring a pullback by the Fed have argued, in part, that the Fed’s policies could lead to higher inflation. But the latest data suggest that’s not happening yet.

Little Cause for Inflation Worries - Periodically I am asked whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy. Based on the Bureau of Economic Analysis data released Friday morning, this answer is still emphatically no. The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)  When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

A Failure to Act: Fed Policy and Interest Rates - Is the Fed responsible for the pernicious low-interest rate environment? Yes, but not for the reasons you think. I explain why in a new National Review article: While this absolves the Fed of direct responsibility for the low-interest-rate environment, it does not absolve it for its indirect influence. Through its control of the monetary base, the Fed can shape expectations of the future path of current-dollar or nominal spending. Thus, for every spike in broad money demand, the Fed could have responded in a systematic manner to prevent the spike from depressing both spending and interest rates. In other words, the Fed could have adopted a monetary-policy rule that would have committed it to maintaining stable growth of total-dollar spending no matter what happened to money demand. A promise from the Fed to do “whatever it takes” to maintain stable nominal-spending growth would have done much by itself to prevent the money-demand spikes from emerging at all. Why hold a greater number of safe, liquid assets if you believe the Fed will keep the dollar value of the economy stable?

Rate Stories - Paul Krugman - I’ve been getting some questions about the recent rise in long-term interest rates. Those rates are still at levels that would have seemed absurdly low not long ago — but they are up significantly from a few months ago. So when long-term interest rates rise, there are three main stories you hear. One is that the bond vigilantes have arrived, and are selling US debt because they now believe in the horror stories. Another is that the Fed has changed, that it may be ready to snatch away the punch bowl sooner than previously believed. And the third is that the economy is looking stronger than expected, which means that the Fed, although just as soft-hearted as before, will nonetheless start raising rates sooner than previously believed. All three of these stories would imply falling bond prices, that is, rising interest rates. But they have different implications for other markets, in particular for stocks and the dollar. Debt fears — basically, a run on America — should send stocks and the dollar down along with bonds. A perceived tougher Fed should send stocks down but the dollar up. And a better recovery should send both stocks up (because of higher expected profits) and drive the dollar higher. OK, there are possible complications; you can manage, just, to tell stories that don’t quite work as I’ve described. But these are surely what you should have in mind in your first pass at the issue. Here it is in a table:

“Public” Debt and Safe Assets: A View from Space - The meaning of “public debt” depends on the accounting/balance-sheet view you’re adopting. Each is a perfectly valid accounting construct; each depicts the situation differently. Some views may be more useful than others in sussing out how things work/are working.

  • 1. The view from the Treasury balance sheet, with 1. government trust funds (Social Security, etc.) and 2. the Fed viewed as external entities. Generally referred to as “gross public debt.” The treasury bonds/bills held by those external entities are liabilities of Treasury. It must pay interest, and eventually principal, to those entities.
  • 2. The view from the “unified” balance sheet. Generally called “debt held by the public.” This consolidates the Treasury and trust-fund balances (viz: the “unified budget“) into a single “government” balance sheet. Treasury’s debt/liability to those funds is internal to government (one department just owes another), so they vanish from this consolidated view.
  • 3. The view from a fully consolidated “government” balance sheet, including Treasury, the trust funds, and the Fed. Debt consists of bonds/bills held by parties external to that “government.” There is no common name for this construct, and you rarely if ever see the situation depicted this way.
  • 4. The view including GSEs (Fannie/Freddie). The Fed is buying $40 billion/month in mortgage-backed securities from these entities. They owe the Fed money, just like Treasury owes money to the trust funds. Those entities are quite arguably part of “government” (Treasury will always cover their liabilities, though perhaps using Fed machinations as the vehicle), so it’s not crazy to view this as another instance of “government owing money to itself.”

First Quarter GDP Revised Slightly Downward - The first revision to the first quarter GDP report released last month came out this morning and it showed a slight revision downward, but otherwise actually had some positive news:— A drop in government spending dragged more on the U.S. economy than initially thought in the first three months of the year, although consumer spending looked relatively resilient to Washington’s austerity drive. Other reports on Thursday showed the number of new jobless claims rose modestly last week while contracts on previously owned homes climbed to a three-year high in April.  Gross domestic product, a measure of the country’s total economic output, expanded at a 2.4 percent annual rate during the first quarter, down a tenth of a point from an initial estimate, the Commerce Department said. Government spending tumbled at a 4.9 percent annual rate, which was faster than the 4.1 percent rate initially estimated. Also holding back growth during the quarter, businesses outside the farm sector stocked their shelves at a slower pace. The one bit of positive news is the fact that there was an increase of real final sales of domestic product from 1.5% in the “advance” report issued last month to 1.8% in the report released today. That didn’t impact the bottom line number, but it is an indication that the economy was relatively solid in the 1st quarter and that we’re unlikely to see a major change in the numbers when the final report comes out at the end of June. Of greater interest will be the numbers for the 2nd quarter and the question of whether or not the sequester has had a significant impact on the economy. The fact that the first quarter saw declines in government spending during a period that mostly covered the period before the sequester took place suggests that government agencies were already planning for the sequester by cutting back spending earlier in the year.

GDP Q1 Second Estimate at 2.4%: A Small Downward Revision from 2.5% - The Second Estimate for Q1 GDP came in at 2.4 percent, a slight downward revision from the 2.5 percent Advance Estimate. Both and had forecast no change. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent....  The "second" estimate of the third-quarter percent change in GDP is 0.1 percentage point, or $3.9 billion, less than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to exports, and to state and local government spending that were partly offset by a downward revision to imports and an upward revision to personal consumption expenditures. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

BEA Revises 1st Quarter 2013 GDP Growth Down Slightly To 2.38% Annual Rate -  In their second estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.38% annualized rate, only 0.12% lower than the 2.50% growth rate previously published.Nearly all of the revisions in the details of the report were similarly modest. Consumer spending on goods is now reported to have been slightly better, while consumer spending on services was essentially unchanged. Aggregate consumer spending is now reported to have provided the entire net growth of the economy. The biggest changes in the report came from inventories (which are still growing, but at a much slower rate), and foreign trade -- where both exports and imports weakened. For this set of revisions the BEA assumed annualized net aggregate inflation of 1.18%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 2.10% (annualized). As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low "deflater" (nearly a full percent below the CPI-U) boosted the published headline rate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been a much more modest 1.49%. Finally, real per capita disposable income was revised lower yet again. In fact, real per capita disposable income contracted during the quarter at an astonishing -9.03% annualized rate, taking it to a level below where it was two years ago. And the personal savings rate was adjusted down once more -- this time to 2.3%. Among the notable items in the report:

GDP Revised Down Slightly to 2.4% for Q1 2013 - Q1 2013 real GDP was revised downward slightly to 2.4% from 2.5%.   This is still an improvement, from the fourth quarter 0.4% GDP showing a stagnant economy.   Consumer spending was the biggest improvement while increased imports posed a major economic drag.  Government spending declines continue to be an economic damper.  The revision shows more consumer spending than originally reported, less investment, less imports, less exports and government expenditures were less than previously estimated.  Generally speaking a 2.4% GDP implies moderate economic growth, yet overall real demand in the economy is still fairly weak. As a reminder, GDP is made up of:  Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q4 to Q1 GDP major components.  GDP percentage point component contributions are calculated individually. Consumer spending, C in our GDP equation, shows an increase from Q4.  In terms of percentage changes, real consumer spending increased 3.4% in Q1 in comparison to a 1.8% increase in Q4.  Services drove consumer spending with a 1.42 percentage point contribution in household consumption expenditures.  Goods consumer spending contributed 0.98 percentage points to personal consumption expenditures.  Below is a percentage change graph in real consumer spending going back to 2000. Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon).

Fed Watch: Steady As She Goes - The BEA released revisions to Q1 GDP numbers today, taking growth down a hair from the original 2.5% to 2.4%. Bloomberg is claiming that the downward revision to GDP and a rise in initial unemployment claims account for today's gain in equities. The idea is that the weaker data will dissuade the Fed from slowing down the pace of asset purchases this year.  It is of course dangerous to assign a cause to every fluctuation in asset prices. In this case, I am hard pressed to see that today's data has any meaningful impact on policy. If anything, a focus on the data over a longer period rather than the month-to-month or quarter-to-quarter movements should convince you that little has changed since 2010. Gross domestic product and income in levels: Abstracting from inventory changes, look at the remarkable consistency of real final sales growth: And as far as initial claims are concerned, you must have pretty sharp eyesight to conclude that something fundamentally changed last week: Also note the the Fed may discount soft GDP numbers in any event. Recall the words of New York Federal Reserve President William Dudley:“The important thing to recognize about the U.S. economy is that things are actually improving underneath the surface,” Dudley said in the interview. “We don’t really see that so much in the activity data yet because of the large amount of fiscal drag.”  Policymakers are trying to look past the fiscal drag to see if it is bleeding through to the broader economy. If not, they will conclude that growth is set to jump next year as the fiscal impact wanes. And they want to be ahead of the jump with respect to QE. Hence why the next few months of data are so important.

Bad News Is Good As GDP, Claims Miss Pushes Futures Higher; Five States' Data "Estimated" - Just when there was some concern that the US economy was no longer imploding at the usual pace, we get confirmation that nothing is actually better, following the one-two punch of weaker than expected Q1 revised GDP data, printing at 2.4% on expectations of an unchanged 2.5% print driven by a revision in Private Inventories (from 1.03% to 0.63% of total GDP, offset by a plunge in imports sliding from -0.9% to -0.32%). Personal Consumption posted a tiny increase from 2.24% to 2.40% which can only mean the consumer overextended themselves in Q1 - perhaps it is about time to ask the question of how consumption in the "sequester" and tax-hike quarter was the highest since Q4 2010. Additionally, initial claims increased from the as usual upward-revised 344K to 354K, on expectations of a 340K print. GDP broken down by components:

Latest US GDP Numbers Confirm Consumer-Led Expansion but Government and Exports were Weaker than Previously Thought - The second revision of GDP data released today by the Bureau of Economic Analysis confirmed that the U.S. economy expanded at a moderate 2.4 percent annual rate in the first quarter of 2013. The figure for overall growth was almost unchanged from the 2.5 percent of last month’s advance estimate. However, there were significant changes in several of the components of GDP growth, as the following table shows. Growth of consumer spending was even stronger than previously reported. In fact, we could say that consumers accounted for all of the reported growth, since pluses and minuses in other sectors just cancelled each other out. Increases in consumer spending were broad-based, with durable goods, nondurable goods, and services all showing solid gains. As a whole, investment was weaker than previously reported, contributing just 1.16 percentage points to total growth, down from 1.56 points in the advance estimate. However, the news was not all bad. Fixed investment held up well. The decrease came entirely from slower growth of nonfarm inventories than had previously been reported. Looking ahead, the slower pace of inventory increase in Q1 is a moderately good sign. It makes it less likely that factories and stores will have to cut back orders in Q2 to work off unwanted stocks of unsold goods. Not surprisingly, fiscal drag continued to be a factor slowing GDP growth. As the next chart shows, federal, state, and local governments all made negative contributions to growth in Q1. The biggest decrease came in federal defense spending. The measure of government activity reported in the GDP accounts, government consumption expenditure and gross investment, excludes entitlement spending and interest payments on government debt

A few comments on 2nd Estimate of GDP - Earlier the BEA reported the second estimate of Q1 GDP. The revisions were fairly small, as the BEA reported that real GDP increased at a 2.4% annual rate in Q1, revised down from the advanced estimate of 2.5%.  The underlying details were slightly positive.Personal consumption expenditure (PCE) grew at a 3.4% annualized real rate in Q1, revised up from 3.2%.The change in private inventories was revised down to a 0.63 percentage point contribution from a 1.03 percentage point contribution in the advance report (a 0.40 percentage point decline between estimates). This smaller buildup in inventories for Q1 is probably a positive for Q2.A key negative was the contribution from state and local government from -0.14 percentage points to -0.29 percentage points - the largest drag since Q2 2011. This graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years - and is now adding to the economy. However the drag from state and local governments has continued.  Just ending this drag will be a positive for the economy.  Note: In real terms, state and local government spending is at the lowest level since Q1 2001.With consumer spending holding up, residential investment increasing - and state and local governments near the bottom - this suggests decent growth going forward. Of course there will be a substantial drag from Federal fiscal policy over the next couple of quarters

Is Economy Doing Better Than GDP Suggests? - Why has job growth been decent over the past year, even as gross domestic product has remained weak? Maybe because the economy is doing better than GDP suggests. Employers have added a bit better than two million jobs over the past year, or about 173,000 jobs per month. That’s hardly robust growth, but it’s significantly better than would be expected given that the economy as a whole — as measured by GDP — has grown only 1.7% over the past year. That’s led some economists to question whether there’s been a shift in longstanding relationships between the labor market and the broader economy. But Thursday’s GDP report offers an alternate explanation: Perhaps GDP isn’t fully capturing recent economic growth. An alternate, lesser-known measure of output, known as gross domestic income, or GDI, shows the economy growing 2.2% over the same period — still not great, but more in line with recent job gains. In a nutshell, gross domestic product measures expenditures — consumer spending, business investment, international trade and everything else that people, companies and governments spend money on. Gross domestic income, as the name implies, measures income, including both personal income and corporate profits. In theory, the two numbers should be the same: They’re measuring the same thing, just from different directions. And in the long run, the two do generally line up. In the short run, however, they often diverge, with GDI typically showing more volatility.

Real GDP Per Capita: Another Perspective on the Economy - Earlier today we learned that the Second Estimate for Q1 2013 real GDP came in at 2.4 percent, down from 0.1 percent in the Advance Estimate released last month. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.  I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.6% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 20 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.04% off the all-time high following the deepest trough in the series. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Government Potholes on Road to Recovery - The private economy looks to be revving up to motor through the next couple quarters. The public sector will be a big pothole along the way.  Although Thursday’s revisions to first-quarter U.S. gross domestic product lowered the top-line annualized growth rate, the details offer a better profile for future growth. That’s because the slightly slower pace — now 2.4% from 2.5% reported earlier — largely reflects less inventory accumulation over the winter. According to the Commerce Department‘s new figures, real inventories grew by $38.3 billion last quarter, less than the $50.3 billion reported a month ago. Demand from businesses and consumers held up, despite higher taxes. Plus, housing growth while revised lower still stood at a healthy 12.1%. Monthly indicators suggest spending by households and companies will continue to rise this quarter, although perhaps not as strongly as in the first quarter. Because inventories aren’t excessively large, companies will need to satisfy growing private demand by lifting output and hopefully payrolls. Then there is the public sector. Federal spending dropped at an 8.7% annual rate and state and local governments shrank by 2.4% (the 13th decline in the past 14 quarters). The government sector subtracted almost one percentage point from GDP growth last quarter, although that’s an improvement from the 1.41-point drag in the fourth quarter of 2012. But there are more minus signs ahead.

Why hasn't austerity been more of a drag on the U.S. economy? - This is the U.S. economy in a nutshell, as revealed in Tuesday’s news ticker: Housing prices rose faster over the past year than they have in the past seven. Consumer confidence hit its highest level in five years. The stock market rallied another 0.9 percent to hover near an all-time high, as measured by the Standard & Poor’s 500. And the national retail price of gasoline has fallen for six days straight and is down 16 cents a gallon since late February, providing nice relief to drivers. Which all raises an obvious question: Whatever happened to the austerity economy? At the start of the year, it looked like 2013 would be a battle between positive and negative forces shaping the economy. On the positive side of the ledger, arguing for stronger growth to finally burst out, housing was finally gaining momentum after a six-year slump and consumers had made major progress toward righting their household finances, enabling them to ramp up consumption. On the negative side, federal fiscal policy seemed to be fighting it tooth and nail, with tax increases and spending cuts that threatened to suck the wind out of any nascent economic boom. So far, the positives seem to be winning. Gross domestic product rose at a 2.5 percent rate in the first quarter, a bit better than the average over the past several years, and the nation added an average of 196,000 jobs a month in the first four months of 2013, a solid step up from the past few years.

No cause for relief—austerity will indeed drag hard on the economy in 2013 and 2014 - The normally excellent Neil Irwin and Ylan Q. Mui at Wonkblog are mostly wrong, I think, in arguing that the economy is “holding up surprisingly well” in a year of austerity. The data they cite to make this judgment are rising prices in both the stock market and home prices and falling gasoline prices. But rising stock prices are actually pretty irrelevant to most American families, and today they mostly reflect the stunningly high profit margins of American corporations. These profit-margins in turn are boosted by extremely weak wage-growth, as inflation-adjusted wages for the vast majority of American workers have fallen in each of the last three years. In short, one could easily make the case that today’s high stock prices are actually mostly a sign of bad news for American workers. Rising home prices do indeed spur consumption across the board. But given that today’s home prices are in line with long-run historical averages, and given as well that we know bad things happen when these prices rise above their long-run historical averages and people begin borrowing against their appreciated home equity, rising home prices are, to me, a sign of worry, not celebration. A part of the macroeconomic bundle that led to the crisis was a sharp fall in the personal savings rate, as people bought consumption gains by  borrowing against the value of their homes (as opposed to being able to purchase these consumption gains with robust wage-increases). And guess what? Last quarter’s modest-but-decent growth in consumption spending was accompanied by a large fall in the savings rate, as it reached its lowest level since before the Great Recession began.

The Fed's been keeping the economy afloat. That's the problem. -- The U.S. economy, as I wrote yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner  and Ezra say I should have mentioned an  important reason: the apparent success of the Federal Reserve’s policies, introduced last September, of pumping more money into the economy and pledging to keep rates low even after the economy improves. They’re right! But that may not be a good thing. There is good reason to think that monetary easing is doing quite a bit of the work offsetting tighter fiscal policy. The Fed’s policies, including buying $85 billion in bonds each month with newly created money, are directly aimed at housing; $40 billion of those purchases are of mortgage-backed securities, meaning the money is being funneled directly toward the sector. And sure enough, a solidifying housing market is an important part of the economy’s holding up. And a second important consequence of Fed easing is to boost the prices of other financial assets, including the stock market. So far so good. The bad news, though, is that these channels through which monetary policy affects the economy tend to offer the most direct benefits to those who already have high incomes and high levels of wealth.

Does Steady GDP Growth “Prove” that Market Monetarists Are Right About Ineffective Fiscal Policy and Foolish Keynesianism? - You’re seeing a lot of crowing these days from the likes of Scott Sumner, David Beckworth, Lars Christensen, et al., claiming that fiscal austerity has obviously had no effect on GDP growth. “Look!” they say: “Even with the sequester and all the other government spending cuts, growth in 2013 has been the same as 2012! The notion that government spending affects GDP growth (“Keynesianism”) is obviously false and stupid.”  As Scott says in a recent post:The left predicts fiscal austerity will slow the recovery, and yet both GDP and jobs are actually a bit ahead of the 2012 pace so far this year.This is specious reasoning. The “left” prediction has been that “fiscal austerity will will slow the recovery” relative to what it would be otherwise, not relative to 2012, or Q1 2012. Scott, not the lefties, chose 2012 as the benchmark. But I know they know: when you compare 2012 to 2013, ceteris is not paribus. Look at the four highlighted numbers here, showing growth/decline in the two GDP-component numbers that dominate our economy:

More on Ineffective Fiscal Policy - This is a companion piece to Steve’s AB post from earlier today, where he points out the specious reasoning of  “the likes of Scott Sumner, David Beckworth, Lars Christensen, et al., claiming that fiscal austerity has obviously had no effect on GDP growth.” I wrote Sumner off a few years ago due to a highly unfavorable chaff/wheat ratio.  I’ve tried really hard to like Beckworth, but these guys simply wallow in confirmation bias.  I’ve repeatedly criticized Beckworth at his blog for cherry picking short-term time series data to make his points. Comparing 2013 to ’12 is an example of time series cherry picking used to justify absolutist dogma.  Back on Feb 10, Beckworth said: “despite this austerity happening at a time of high unemployment and a large output gap, a slowdown in aggregate demand growth has failed to materialize.” And also:  “we should at least see aggregate demand faltering over the past few years while this unfolded. But in fact, we see relatively stable aggregate demand growth, as measured by NGDP” He does admit in the end that, “the Fed has failed to restore NGDP to its pre-crisis trend.” but uses this to get in a dig at the Fed for not following his preferred agenda.

The “Dutch Disease” and Once and Future Economic Crises in the US - The term Dutch Disease refers to negative macro-economic effects on a country of a boom in commodity exports or other developments that result in large capital inflows. The negative effects are most apparent when the boom ends and the country is faced with the need to simultaneously adopt counter-cyclical, trade/exchange rate and structural policies if it is to enjoy a return to sustainable full employment. Despite the original example – the Netherlands – the Dutch Disease has generally been associated with difficulties experienced by emerging market economies. However, the term encompasses economic dislocations arising from a variety of external shocks, as well as across economies with differing levels of development. The piece will argue that it is also possible that the Dutch Disease contributed to the recent US recession and that the prospective energy-led US economic recovery could amount to nothing more than another bout of the Dutch Disease. Definition The term Dutch Disease was first used in 1977 by The Economist. It linked the exploitation of a large natural gas field discovered in 1959 off the coast of Holland to a subsequent decline in Dutch manufacturing. The narrow definition (from Wikipedia): Dutch Disease is the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation’s currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation’s other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive.

Treasury Yield Snapshot: 10-Year Yield Highest Since Early April of 2012 -  I've updated the charts below through Tuesday's close. The yield on the 10-year note stands at 2.15%, up 72 bps from its all-time closing low of 1.43% set last July and at its highest level since early April of 2012. The S&P 500 is now up 16.75% for 2013, fractionally below its all-time closing high set last Tuesday. The latest Freddie Mac Weekly Primary Mortgage Market Survey (which will be updated tomorrow) puts the 30-year fixed at 3.59%, slightly off its 3.63% interim high in mid-March but well above its all-time low of 3.31%, which dates from the third week in November of last year. Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist. For a eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository. Many first-wave boomers (my household included) were buying homes in the early 1980s. At its peak in October 1981, the 30-year fixed was at 18.63 percent. The 30-year fixed mortgage at the current level is a confirmation of a key aspect of the Fed's QE success, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from recent historic lows of last summer). But, as for loans to small businesses, the Fed strategy is a solution to a non-problem.

U.S. Deficit Shrinking At Fastest Pace Since WWII, Before Fiscal Cliff - Believe it or not, the federal deficit has fallen faster over the past three years than it has in any such stretch since demobilization from World War II. In fact, outside of that post-WWII era, the only time the deficit has fallen faster was when the economy relapsed in 1937, turning the Great Depression into a decade-long affair. If U.S. history offers any guide, we are already testing the speed limits of a fiscal consolidation that doesn’t risk backfiring. That’s why the best way to address the fiscal cliff likely is to postpone it. While long-term deficit reduction is important and deficits remain very large by historical standards, the reality is that the government already has its foot on the brakes. In this sense, the “fiscal cliff” metaphor is especially poor. The government doesn’t need to apply the brakes with more force to avoid disaster. Rather the “cliff” is an artificial one that has sprung up because the two parties are able to agree on so little.

So Much for the Impending Economic Armageddon Federal Budget Deficit - Surprise, when tax revenues increase the deficit goes down.  Such was the news of a new CBO update on the budget deficit.If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008.  Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.  Below is the CBO graph of the newly projected budget deficit.  As economic activity increases, tax revenues increase, people need less social services and deficits go down.  Winding down war also helps.  Fannie Mae also gave Treasury a gift of $59.4 billion in unexpected Q1 profits and has paid $95 billion to the Treasury this year.  As a result, the deficit has dropped dramatically.  Who knew, unless one took a basic economics course, that budget deficits and a terrible economy are linked and highly correlated.  Gouging health care costs are still a major problem, but this mega disaster so many rail about as the next great economic implosion has time to be averted. However, budget shortfalls are projected to increase later in the coming decade, reaching 3.5 percent of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

Sorry Folks, Austerity’s Not Dead Yet! It makes a good headline; but it’s dangerous to say “austerity is dead,” just because new budget projections indicate that the deficit has already been cut by $200 Billion more than in previous projections, and because the Reinhart-Rogoff study has been debunked successfully, and, hopefully, irretrievably. Austerity will only be dead when legislators, Presidents, Prime Ministers, Central Bankers, and international lending organizations stop trying to implement it, whether or not they stop because deficits have already been cut. Of course, those claiming austerity is dead, mean by their claim that deficit cutting efforts have already been successful enough in the United States that future projections in all the mainstream budget plans now show only “moderate” deficits (See the Table which now includes CBO revised budget projections.) These don’t signal a debt crisis, and instead suggest that we can now turn to the really serious economic, health, and environmental challenges we face.

Reasoning by Metaphor - We don’t make policy in this country based on our knowledge of the likely outcomes; instead we limit our actions to those possible in an age dominated by gut feelings and the irrational demands of the rich, driven by faulty reasoning. This week we see several examples of disrespect for knowledge and reasoning. On the more or less left, we have the spectacle of Michael Kinsley, currently an editor at large at The New Republic, exploring the Puritan within himselfKrugman also is on to something when he talks about paying a price for past sins. I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. I think that last sentence means that it is a least possible that the people who caused the Great Crash might suffer now or in the future, Kinsley’s nod at the unfairness of his solution.  Matt Taibbi points out that our national debate is all about how government is just like a household that has run up too much debt, a stupid metaphor. It completely ignores all the ways that governments and households are radically different, not least of which is that governments don’t die. People use that metaphor to frame their thinking about how to cope with continuing federal deficits, and come up with answers that lead to austerity and the Republican refusal to raise the debt ceiling. The error in both cases comes from reasoning with a metaphor. Kinsley talks about a “we” who did bad things with money and the economy. By we, he means society. Then he uses individuals as a metaphor for society. If you commit a sin, you should be punished. If society commits a sin, it should be punished. This reasoning is identical to the reasoning from the household metaphor.

Economic policy is largely being driven by obstructionism, not economic advisers - Consequently, the U.S. economy will almost certainly continue muddling through an adverse equilibrium of anemic growth, severely depressed output, massive underemployment, large cyclical budget deficits, subdued price inflation, widespread real wage deflation and low interest rates. It’s really quite simple: a steep aggregate demand shortfall continues to keep the economy’s performance well below potential, and the Federal Reserve has been and will continue to be incapable of fully ameliorating this shortfall so long as contractionary fiscal policy is being pursued. (See this paper for a thorough treatment.) In short, the intellectual debate over austerity vs. stimulus has been totally decoupled from the policy debate and, more importantly, policy outcomes in Washington—despite having been resolved in a virtual TKO by those opposed to foisting austerity on depressed economies. The United States doesn’t face, or, perhaps more accurately, no longer faces a deficit of economists capable of opening up an intermediate macroeconomics textbook and relearning liquidity trap/depression economics. But the U.S. Congress faces a depressing deficit of

Macroeconomic Hippie-Punching - Paul Krugman - The usual form of macroeconomic hippie-punching in recent years has been the pro-stimulus or anti-austerity article that opens with several paragraphs of the dangers of long-term budget deficits and the importance of a medium-term debt strategy — often with a specific condemnation of Those Who deny the importance of such — followed by a discussion of the reasons why slashing spending right now is a very bad idea. And I’ve watched the response: the centrists who are the presumed audience read the first three paragraphs, say “Yes — the hippies are all wrong!” and never get to the part saying that, well, actually, the hippies are right on the important stuff. To some extent this is just about the fact that the hippies have indeed been right across the board on macro, the same way they were on the Iraq war. But it’s also about journalistic messaging: if you have a point you want to get across, you should always, always, put it right up at the front, and get to the qualifications later. The patient reader who will wade through your preemptive hippie-bashing to get to the good stuff is a myth — just as much a myth as the reasonable centrist who can be won over by hippie-bashing in the first place.

Optimal Civility - There has been some discussion of civility as a result of Reinhart and Rogoff’s open letter to Krugman, which included accusations of incivility:We admire your past scholarly work, which influences us to this day.  So it has been with deep disappointment that we have experienced your spectacularly uncivil behavior the past few weeks.  You have attacked us in very personal terms, virtually non-stop, in your New York Times column and blog posts.This has highlighted a question to me that is aside from the RR vs K debate, which is what optimal civility looks like? Civility is just one characteristic with which you could throw in the related writerly characteristics of generosity, harshness, and others. The case for writing with civility is that doing otherwise has a poisonous effect on debate. People who you might persuade stop reading you, those who write in disagreement are pressured to return the incivility, which in turn drivers other readers out of the conversation. I believe it also affects those you are being uncivil towards in more than their rhetoric. Through this process incivility leads to defensiveness, and this in turn drives polarization. In addition incivility drives people out of the debate. Writers may have counterarguments to some piece they read but don’t want to reply because they don’t wish to be the target of incivility and personal attacks. Overall, I would characterize the internet in suffering from too little rather than too much civility.

Nonsense in the Reinhart-Rogoff Rescue Effort - Dean Baker - The mainstream of the economics profession continue to try to rescue Carmen Reinhart and Ken Rogoff (R&R) from the consequences of their famous Excel spreadsheet error. The latest is Michael Heller, who has pronounced Paul Krugman the loser in his exchanges with R&R because he conceded that countries with debt-to-GDP ratios that exceed 90 percent of GDP have slower growth. This is the sort of piece that should really have the general public thinking about defunding economics programs everywhere. The fact that countries with higher debt-to-GDP ratios have slower growth than countries with lower debt-to-GDP ratios was never at issue. The corrected spreadsheet shows this to be true across the board at every debt level. There is no importance to 90 percent. The 90 percent cliff came about because of the Excel spreadsheet error, it does not otherwise exist in the data. Heller's claim that R&R never said anything about a 90 percent cliff is an effort to re-write history. This number was embedded in the Bowles-Simpson report that came to be the guidepost for debate on the deficit in Washington policy circles. It also has been used by top officials in the European Union and elsewhere as a basis for austerity. Using the corrected data the closest thing resembling a cliff can be found in the range of debt-to-GDP ratios of 20 percent of GDP. There would be no reason that 90 percent would ever appear in a discussion of debt in the corrected R&R debt-to-GDP data.

Debt, growth and competing risks - CARMEN REINHART and Kenneth Rogoff have revived the debate over their work on debt and growth with an open letter to Paul Krugman. They accuse him of incivility, factual misstatements and general wrongness. On the first, he's guilty (but so are many economists, usefully). On the second, he is guilty of a lesser charge; Ms Reinhart and Mr Rogoff do seem to have made their data available as they turned it up, but they do not respond to charges that they were slow in making public their Excel spreadsheet, which is what allowed critics to understand what they had done and where they had gone wrong. On the third, Ms Reinhart and Mr Rogoff have swung and missed. They have retreated to the general position that a negative relationship exists between debt loads and growth. And on the matter of causality—which one might say is the crux of the debate—they can do no better than argue that the evidence is mixed.But all parties involved seem to be reluctant to hone in on the key questions that follow from this sensible point: how do such risks stack up against other macroeconomic threats, and what is the best way to reduce debt risks?

After Running The Numbers Carefully There's No Evidence That High Debt Levels Cause Slow Growth - This does not have the fun dramatic flair of an Excel spreadsheet error, but this empirical analysis from Miles Kimball and Yichuan Wang is much more devastating to Reinhardt and Rogoff than anything we've seen yet. What Kimball and Wang did was actually set about to try to answer the causal question of whether high debt levels cause slow growth. And what they found is that there is no such evidence.  This is important, because as Kimball writes on his blog it really does seem like there ought to be at least a little evidence of this. The same Keynesian theory that predicts that increasing your deficit during a recession can spur growth also seems to say that high debt levels will create "crowding out" when you're not in a recession. But they ran the numbers and they don't find it. The statistical association between a high debt to GDP level and slow GDP growth appears in their data to come entirely from the fact that slow GDP growth leads to a high ratio. You rarely get a definitive empirical study, but this is pretty striking evidence.

Debt and Growth: The State of the Debate - Paul Krugman -- So, after a brief diversion into issues of manners and etiquette, I hope we’re back to the substance. And there are really three points that have been established; I’m not sure that everyone understands that any one of those points is enough to refute most of the debt/deficit discussion of the past three years.

  • 1. There is no threshold at 90 percent, even though that claim has dominated a lot of policy discussion for three years. The appearance of such a threshold in the original Reinhart-Rogoff paper was an artifact of missing data (not deliberately, and perhaps unavoidably, but that’s not the issue here) plus an odd statistical technique. Indeed, it was in large part an artifact of the treatment of just one country, New Zealand, in the postwar years.
  • 2. There is a mild negative correlation between debt and growth. Even if this is interpreted as a causal relationship, however, it is not a strong enough correlation to justify the debt panic of recent years.
  • 3. There is pretty good evidence that the relationship is not, in fact, causal, that low growth mainly causes high debt rather than the other way around.

We’ve spent three years letting policy be dominated by unwarranted fears

What Reinhart and Rogoff should do now - Carmen Reinhart and Kenneth Rogoff wrote an angry open letter about how Krugman has been uncivil to them.  Krugman’s reply strikes me as being convincing even devastating.  I want to focus on one sentence in the R&R letter politicians may float a citation to an academic paper if it suits their purposes.  But there are limits to how much policy traction they can get with this device when the paper’s authors are out offering very different policy conclusions. “ The claim that there are such limits is not supported with any historical evidence.  I think it is plainly false, unless the limits are say thta the  politicians can’t travel faster than light by distorting academic work. The example of R&R and the alleged 90% critical level of debt to GDP is proof that their claim is false.  Politicians have gotten huge policy traction citing them and Herndon had a significant impact on the policy debate.  Also note the case of Kenneth Arrow whose first welfare theorem and impossibility theorem have been used for decades to argue that markets are superior to political processes and who is a democratic socialist.  His view on that rather important issue has had no impact on the debate, while misuse of his mathematical results has had a huge impact. Phillips made no claim that the scatter he plotted was a structural relationship.  He expressed horror over how it was used. R&R’s claim about history is plainly utterly false and they should know it. But there is something they can, and really should, do.  If politicians are misusing their work, they can denounce those politicians by name

Wonkbook: Bernanke lashes Congress: Federal Reserve Chairman Ben Bernanke thinks Congress is doing quite a lot wrong. He headed to the Hill on Wednesday to present them with an itemized list. “The expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year,” he said. The Federal Reserve can offset some bad economic policy coming out of Congress, but not this much bad economic policy coming out of the Congress. “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”  The result, as Neil Irwin writes, was an unusually blunt testimony from the central bank chief. He basically walked up to Congress and said, “You’re the reason the economy isn’t taking off more.” This is why people need to stop celebrating our rapidly falling deficits. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong. We’re cutting deficits much too quickly in the next few years — that’s what Bernanke’s testimony is about. We’re letting them rise (albeit modestly) between 2016 and 2023. We’re doing basically nothing about long-term deficits, which is where the problem actually lies. And we’re using policies, like sequestration, that most everyone agrees are bad policy — so we’re cutting spending by cutting the wrong kind of spending.

A Budget That Tightens Belts by Emptying Stomachs - 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.” Basically, most states have used this policy to streamline enrollment: Families are made eligible for food stamps based on their receipt of other benefits, such as housing or childcare subsidies. That often means broadening eligibility for working-poor families or those with overall household income or savings that exceeds regular, stricter thresholds for qualifying for food stamps.

More and more Americans are feeling the effects of the sequester: Back in April, lawmakers had a brief moment of panic over the sequester. The across-the-board spending cuts threatened to cause delays at airports across the country. So Congress quickly passed a bill to divert $253 million to air-traffic controllers. Crisis averted. Since then, however, politicians haven’t said much about the rest of the $85 billion in federal spending cuts that went into effect March 1. The sequester will automatically cut defense spending by 7.9 percent and everything else by 4.6 percent, chopping bluntly through everything from national parks to R&D. But so far, the political backlash has been restrained. The U.S. economy is still chugging along, after all. And even President Obama seems resigned to the cuts these days, preferring instead to highlight America’s shrinking deficit. So it’s worth asking: Whatever happened to the sequester? Is it still a big deal? We decided to check in on what was going on around the country. As it turns out, plenty of people have started to notice — about 37 percent in a May 19 poll said they’d been personally affected. And the sequester is starting to have an impact around the country, although many of the cuts haven’t yet sunk in. Here’s a round-up:

When Sequestration Becomes Devastation - To really understand what sequestration means, look to next year. The $85-billion cut to federal spending began this March and hit government in an intentionally indiscriminate fashion. It was a 7.9 percent cut to defense spending and a 4.6 percent cut to other programs. Next year, however, sequestration is different in two ways: It's much deeper and much more selective. The results won't be pretty. Sequestration will lop $92 billion off the 2014 budget. On top of that, $35 billion of last year's cuts go into effect next year, according to a Congressional Budget Office report. This is because of the difference between "budget authority" and "outlay." (The former is what Congress appropriates to an agency in law, whereas the latter is actual spending. Outlays lag authority, as not all spending takes place in its authorization year.) More important, sequestration will work in a new way. In 2014, Congress will choose which agencies face cuts -- the process is no longer automatic. It starts in the House of Representatives' Appropriations Committee. Last week, the committee adopted a blueprint for next year's cuts, and this shows just how painful sequestration will be. Even the committee's Republican chairman and members admitted it. "The guillotine of sequestration has fallen," said Representative Hal Rogers, the Kentucky Republican who runs the committee. "There are going to be some ugly numbers in there,"

Defense workers receive furlough notices: The Department of Defense has begun delivering furlough notices to civilian employees, setting in motion a chain of actions that will result in hundreds of thousands of Defense workers losing time on their jobs. Some 750,000 Defense employees face up to 11 days of furlough beginning July 8 owing to automatic budget cuts mandated by sequestration. Although most other federal departments have managed to avoid furloughs, Secretary of Defense Chuck Hagel announced May 14 that the Pentagon has concluded that it cannot make the necessary cuts without them. The distribution of the notices of proposed furloughs, which began Tuesday, is scheduled to be completed by June 5.“To the greatest extent possible, employees will be notified of a furlough in writing, hand-delivered to the employee by the immediate supervisor,”

Washington 'Spends' More on Tax Breaks Than on Medicare, Defense, or Social Security - Tax expenditures are funny, They're not taxes, exactly, because they save us money. They're not spending, exactly, because the dollars are never actually spent. They're somewhere in between. So think of it as tax spending.  Or just think of it as the ultimate nudge. The carrot hiding behind the tax code's big stick, tax spending guides us by making certain behaviors and actions cheaper. We encourage employers to provide health care by taxing wages and not taxing health benefits. We encourage investing by making a dollar earned from dividends cheaper than a dollar earned from a salary. And as the CBO reports in a new study today, Washington's tax spending budget -- comprised of everything from mortgage deductions to the child tax credit to lower tax rates on capital gains -- is so massive, it's technically larger than Medicare, Defense, or Social Security. The tax spending budget is equal to 1/17th of the US economy.

Krugman Misrepresents the Left-Right Divide in U.S. Politics -Dean Baker - In his contribution to the debate over whether there is a group of open-minded "reformed" conservatives, Paul Krugman misrepresents the central focus of the left-right divide in national politics. He tells readers:"Start with the proposition that there is a legitimate left-right divide in U.S. politics, built around a real issue: how extensive should be make our social safety net, and (hence) how much do we need to raise in taxes? This is ultimately a values issue, with no right answer."This is not an accurate characterization of the left-right divide in U.S. politics since there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance. Polls consistently show that the overwhelming majority of people across the political spectrum strongly support keeping these programs at their current level or even expanding them. The main impulse for cutting back these programs comes from elites of both political parties who would like to pay less in taxes....

Taxing the Rich - Paul Krugman For my sins (and, yes, an honorarium too), I’m doing this. So it’s worth putting out some of the basics.  First, over the past three decades we’ve seen a soaring share of income going to the very top of the income distribution (right scale) even as tax rates on high incomes have fallen sharply, with the recent Obama increases clawing back only a fraction of the previous cuts:  Second, there is now a lot of hard empirical work on the incentive effects of high top tax rates. None of it shows the kind of huge negative effects that figure so prominently in right-wing rhetoric. In particular, none of it suggests that we are anywhere close to the point where raising taxes on the rich would reduce revenue as opposed to increasing it. Finally, you can use the results of these studies to estimate the “optimal” tax rate on top incomes; I think the best way to think about what optimality means is, what’s best for the 99 percent, since the 1 percent will be doing fine regardless. And just about everything points to substantially higher tax rates than we now have.

Surprise! When the rich get richer, taxes go lower - Ezra Klein  -  As you’re probably aware, the share of income in the U.S. held by the top one percent has grown considerably in recent decades. The latest data by inequality experts Thomas Piketty and Emmanuel Saez estimates that the top one percent has gone from taking home a low of 8.87 percent of total income in 1975 to taking 19.82 percent in 2011. And it was even higher pre-crisis; their 2007 share was 23.5 percent. But what you may not know is that this was far from a universal phenomenon. Other Anglophone nations, like the UK, Canada, Australia, New Zealand and Ireland, experienced gains for top earners (albeit smaller ones than in the United States), but Japan, France and Germany barely saw any change. In a new paper with Facundo Alvaredo and Anthony Atkinson, Piketty and Saez look at how these different countries changed their tax policies as inequality grew. The answer, perhaps unsurprisingly, is that countries where inequality grew the most also saw the biggest cuts in top marginal tax rates for wealthy earners:

Do falling tax rates explain the rising incomes of the top 1%? - Top income shares have increased significantly in some rich countries, but not so much in others. In the United States the fraction of income going to the top 1% has more than doubled since the late 1970s. And while top shares have increased in other countries like Canada and the United Kingdom, they have not gone up all that much elsewhere, say in Germany or Sweden. Globalization and technological change are often said to be the causes of growing inequality, but all rich countries have been confronted by these forces, and on their own they cannot account for the variation in top income shares between countries. A full explanation has to rely on institutions, policies, or norms of pay that differ across national boundaries.The first and most obvious place to look is at changes in tax rates. Top income tax rates have certainly varied across the rich countries. But they have varied in a particular way: countries experiencing the largest falls in top tax rates have also experienced the largest increases in top income shares. Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez offer this intriguing picture in a recently released working paper called The top 1 percent in international and historical perspective.

Counterparties: Broken tax breaks - The Congressional Budget Office is out with a report that boils down the byzantine US tax code into something relatively simple: the benefits of taxes aren’t distributed equally. In fact, more than half of the total dollar value of America’s 10 largest tax breaks, deductions and exclusions go to the top 20% of American earners. 17% of these tax expenditures — including the mortgage interest deduction and preferential tax rates for capital gains — go to the top 1%.Meanwhile, the middle class and poor get relatively few such benefits from the tax code: 8% of the value of these tax expenditures goes to the middle quintile and 13% go to the lowest-earning quintile.Gawker takes the populist angle on this: “Surprise: The Tax Code Mostly Benefits the Rich”. Derek Thompson has a headline tweak: “Right headline might be: Here’s What Happens When You Have a Progressive Tax System With Lots of Breaks in a Top-Heavy Economy”. And the CBO itself points out the poorest Americans get benefits equal to 12% of their after-tax income, while the top 20% of earners get benefits equal to roughly 9% of their income. (Regardless of which metric you use, the middle class gets screwed by the tax code.)Kevin Drum thinks the CBO’s calculations distort the picture a bit. Lower tax rates for capital gains and dividends aren’t really tax expenditures, Drum writes. And the CBO ignores the value of the standard deduction to the lower and middle classes. As a result, Drum argues, the CBO makes the tax code seem more tilted toward the wealthy than it really is. Whatever method you use, the tax code matters — which is one reason why reforming it has been so politically fraught. The 10 largest expenditures total $900 billion, or 5.7% of GDP, the CBO says. As Dylan Matthews notes, over a decade these expenditures cost nearly $12 trillion. That’s more than Medicare, defense, or Social Security.

Showing the IRS some love after witch hunt -You may not have discerned this through the fog and mist of recent weeks, but the Internal Revenue Service is pretty durn good at its job. Over the last few years it has successfully focused its enforcement efforts on the wealthiest taxpayers — those with the best opportunities for skirting the tax law; in 2012, 18% of returns reporting $5 million to $10 million in income, and 27% of those reporting more than $10 million, were audited, while only 1% of those with income less than $25,000 were examined. No one is talking about this record just now. Not while Washington remains wrapped up in its witch-hunting cabaret about whether rank-and-file employees in the agency's Cincinnati outpost selected — excuse me, "targeted" — conservative organizations for special scrutiny of their eligibility for preferential tax treatment simply because of their political leanings. Thus far, there's no evidence that's what happened. Indeed, the IRS inspector general has found that groups whose names featured "tea party," patriot," or other terms favored by conservatives were a minority of the organizations selected for scrutiny. The IG also reported that most of the groups given special attention were, in fact, suspiciously political and therefore possibly ineligible for the donor anonymity that C4 (c)4 designation confers.

Nonprofit Applicants Chafing at I.R.S. Tested Political Limits - When CVFC, a conservative veterans’ group in California, applied for tax-exempt status with the Internal Revenue Service, its biggest expenditure that year was several thousand dollars in radio ads backing a Republican candidate for Congress. The Wetumpka Tea Party, from Alabama, sponsored training for a get-out-the-vote initiative dedicated to the “defeat of President Barack Obama” while the I.R.S. was weighing its application.  And the head of the Ohio Liberty Coalition, whose application languished with the I.R.S. for more than two years, sent out e-mails to members about Mitt Romney campaign events and organized members to distribute Mr. Romney’s presidential campaign literature.  Representatives of these organizations have cried foul in recent weeks about their treatment by the I.R.S., saying they were among dozens of conservative groups unfairly targeted by the agency, harassed with inappropriate questionnaires and put off for months or years as the agency delayed decisions on their applications.  But a close examination of these groups and others reveals an array of election activities that tax experts and former I.R.S. officials said would provide a legitimate basis for flagging them for closer review.

The Real IRS Scandal - Linda Beale - It does not appear to be quite so clear that the IRS actions were either "outrageous" (as so many hopping on the IRS "scandal" bandwagon suggest) or even "inappropriate".  The right's willingness to push this for all it is worth is typical of what passes for Congressional action these days--partisan politicking with a great dash of scandal mongering and a very little seasoning of legislative action intended to put the country in a better position.Most of the media--which is generally right of center--has foamed at the mouth over the "scandal", puffing it up to bigger and bigger proportions with each day. ... A great deal of that coverage (much of it from the right) involves super emphasis on the word "scandal" and not much emphasis on the underlying facts of the matter. So kudos to the New York Times for a recent story on the issue that probes the question of politicking much more closely. Confessore & Luo, Groups Targeted by IRS Tested Rules on Politics, New York Times (May 26, 2013). See also Barker & Elliot, 6 things you need to know about dark money groups, (May 27, 2013). Here are the Times writers' descriptions of a few of the groups that applied for C-4 status and "cried foul" about the IRS's selection of them for closer scrutiny for politicking:

Getting to Tax Reform - The improving deficit means that tax reform need not raise net revenues, as President Obama has demanded; the controversy about aggressive tax avoidance by Apple and other multinational companies has focused Congress’s attention on a key goal of tax reform, which is fixing the multinational tax regime; and the furor over the Internal Revenue Service and accusations that it targeted conservative groups almost certainly means there will be bipartisan legislation to make sure this doesn’t happen again, thus providing a legislative vehicle for tax reform. The Joint Committee on Taxation has recently published a 568-page report on various tax reform options based on the work of House Ways and Means Committee working groups. The committee has even released draft tax reform legislation involving financial derivatives, small businesses and the international sector. The Senate Finance Committee has released a number of tax reform options papers related to family taxation, business investment and innovation, international competitiveness and other topics. Many insiders also believe that the recently announced retirement of the committee’s chairman, Senator Max Baucus of Montana, improves the prospects for tax reform because his precarious position as a Democrat from a heavily Republican state limited his ability to lead a contentious debate on the subject.

Untangling What Companies Pay in Taxes - The tax filings of companies, like those of individuals, are confidential. When individual companies want to make the case that they pay large amounts of tax – as many do – they often point to complex calculations from their financial statements that portray the companies in the best light.  But there is one standardized measure of corporate taxes that allows for meaningful comparisons among companies and industries. It is known as Cash Taxes Paid and appears in the public reports that companies are required to file for investors. The category reflects the combined amount of corporate income tax that a company pays in a given year, to foreign governments, the United States government and state and local governments. This number often varies significantly from year to year, depending on a company’s accounting strategy and on how many tax breaks it qualifies for that year. As a result, a single year’s Cash Taxes Paid number can be misleading. But a 2008 academic paper suggested that looking at several years, at least, could offer insight into corporate taxes.  For a column for the Sunday Review this week, I asked S&P Capital IQ, a financial research group, to collect the last six fiscal years of Cash Taxes Paid for the companies in the Standard & Poor’s 500-stock index. Capital IQ then compared these numbers to the companies’ pretax earnings, including unusual items, for the same six years. Together, the two statistics create an effective tax rate for each company, as well for various industries.

Kissing Away the Corporate Tax - My column on Wednesday startled some readers. Was I proposing to do away with corporate taxes simply because globalization is making it easier for multinational companies to avoid them? Should we really just roll over and accept defeat? Well, other advanced nations seem on their way to doing exactly that.  They have found a way of reducing corporate tax rates that improves economic efficiency, lowers the cost of capital for their companies and may even increase the progressivity of their tax system: offsetting those lower corporate rates with higher tax rates on the income that companies provide to their shareholders. Since 2000, the top corporate tax rate in Britain has fallen to 23 percent, from 30 percent; in France it has receded to 34.4 percent, from 37.8 percent, and in Denmark it has declined to 25 percent, from 32 percent, according to data from the Organization for Economic Cooperation and Development.

Your Humble Blogger Speaks on the Melissa Harris-Perry Show About Apple’s Senate Hearing, Corporate Tax Avoidance -  Yves Smith - We appeared on the Melissa Harris-Perry show on Saturday to participate in a discussion of the Senate Permanent Subcommittee on Investigations hearing on Apple’s astonishingly low tax payments.  This was a lively discussion and I had to push a bit to get my comments in.  The discussion was in two segments. I believe if you watch the first clip, it will roll into the second, but in case not, I’ve included the second one as well.

Why Libs and Cons Should All Love Milton Friedman’s Corporate Tax Proposal - I’m constantly astounded that nobody on the left or the right ever mentions Milton Friedman’s proposal for taxes on corporate profits. On page 174 of (my edition of) Friedman’s libertarian bible Capitalism and Freedom, he proposes what seems a simple and sensible plan (transcription here): …the abolition of the corporate income tax, … with the requirement that corporations be required to attribute their income to stockholders, and that stockholders be required to include such sums on their tax returns. In other words, treat C-corp profits like S-Corp (pass-through) profits. Shareholders (they’re the “owners,” right?) pay taxes on them whether or not they’re distributed as dividends. Corporations would pay zero taxes on profits. If corporations want to distribute enough in dividends to cover their shareholders’ tax bills, fine. That’s between the shareholders and the corporation. I suggest: announce that this change will take place five or ten years hence, and let the capital markets adapt in the meantime.

Why should Apple have access to consumers if it refuses to pay its fair share of taxes? -Robert Reich - The chairman of a parliamentary committee investigating Google for tax avoidance calls the firm “devious, calculating, and unethical”, yet British officials court the firm’s CEO as if he were royalty. David Cameron urges tax havens to mend their ways and vows to crack down on tax cheats, yet argues taxes must be low in the UK because “we’ve got to encourage investment, we’ve got to encourage jobs and I want Britain to be a winner in the global race”. The same disconnect is breaking out in the US. A Senate report criticises Apple for shifting billions of dollars in profits into Irish affiliates where its tax rate is less than 2%, yet a growing chorus of senators and representatives call for lower corporate taxes in order to make the US more competitive. The American public wants to close tax loopholes and shelters used by the wealthy to avoid paying taxes, yet the loopholes and shelters remain in place. These apparent contradictions are rooted in the same reality: global capital, in the form of multinational corporations as well as very wealthy individuals, is gaining enormous bargaining power over nation states.

Beware Capitalist Tools - Robert Reich - Forbes Magazine likes to call itself a “capitalist tool,” and routinely offers tool-like justifications for whatever it is that profit-seeking corporations want to do. Recently it has deployed its small army of corporate defenders and apologists in the multi-billion dollar fight to keep the effective tax rates of global corporations low. One of its contributors, Tim Worstall, recently took me to task for suggesting that a way for citizens to gain some countervailing power over large global corporations is for governments to threaten denial of market access unless corporations act responsibly.   He argues that the benefits to consumers of global corporations are so large that denial of market access would hurt citizens more than it would help them.  Wortstall thereby begs the central question. If global corporations obeyed all national laws — the spirit of the laws as well as the letter of them – and didn’t use their inordinate power to dictate the laws in the first place by otherwise threatening to take their jobs and investments elsewhere, there’d be no issue. It’s the fact of their power to manipulate laws by playing nations off against one another – determining how much they pay in taxes, as well as how much they get in corporate welfare subsidies, how much regulation they’re subject to, and so on – that raises the question of how citizens can countermand this power.

Globalisation isn't just about profits. It's about taxes too - Joe Stiglitz - Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalization, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Stiglitz on globalization: the MNEs bought the law they wanted; it's time to take it back - Joseph Stiglitz has a new read-worthy article. Globalization isn't just about profits; it's about taxes, too, The Guardian (May 27, 2013).  As he notes towards the conclusion of the piece, the big MNEs aren't simply "applying the law as they find it" in order to minimize their taxes legally.  They were instrumental in making the law what it is today. To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. So what hope is there to fix the mess?  First, Stiglitz reminds us of the way American MNEs avoid paying taxes to support the very public goods that made their riches possible. It's no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the supreme court, in its Citizens United case seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction didn't endow corporations with a sense of moral responsibility; and they have the Plastic Man capacity to be everywhere and nowhere at the same time – to be everywhere when it comes to selling their products, and nowhere when it comes to reporting the profits derived from those sales.

A Way to Tax Corporations That They Cannot Escape - Dean Baker -Eduardo Porter has a column discussing the increasing ability of corporations to escape income taxes. The idea is that they can play games on where their income originated so that it always shows up in countries with the lowest tax rates. There are different possible responses to this problem. One is to follow the lead of many state governments which tax companies in proportion to the share of total sales that occur within the state. That seems like a reasonable path, but I remember an even surer route to collecting tax that was proposed some years back. Suppose we give companies the option of giving the government an amount of non-voting stock ( i would suggest something like a 30 percent stake) which would be treated exactly like the company's common stock, except without the voting privileges. This means that if the company distributes profits to the shareholders through dividends, then the government's shares get the exact same dividend. If it buys back 10 percent of its shares, then it also buys back 10 percent of the government's shares. The beauty of this approach is that there is no way to escape the implicit taxation. In addition it has the enormously beneficial effect that there would no longer be any money in playing tax games. Companies could focus on doing business -- making better products or providing better services -- rather than gaming the tax code.

Is Apple Risking Its Brand Overseas With Its Tax Gimmicks? - Yves Smith - One of the striking aspects of the Senate Permanent Subcommittee on Investigations hearing on Apple’s aggressive tax-avoidance strategies is the way the Senators bent over backwards to declare Apple love even as they poked and prodded at the tech giant’s various, um, devices. Being an icon of US tech prowess, even if the halo is slipping, will do that.  For those with less Apple lust or otherwise unwilling to cut the Cupertino giant slack just because it has sleek products and cool stores, a new article by tax maven Lee Sheppard at Forbes gives a layperson-friendly overview of how Apple managed to keep $44 billion of revenues out of the hands of the tax men (I’ve spoken to Sheppard, who has also given me copies of her vastly more technical, paywalled articles at the journal Tax Notes on l’affaire Apple). One of the things that readers might not realize that even with the Senate scrutiny, tax pros still have to engage in a bit of guesswork to figure out precisely how Apple arrived at the miraculous result of having foreign sales, which contribute roughly 60% of Apple’s total profit, taxed nowhere. But certain parts are clear.  Apple has achieved a result that is similar to Google’s parking its intellectual property overseas. The consumer products company has an Irish holding company at the apex of its foreign operations. This company is in Ireland and has no employees or operations. But it is the group finance company. And the money is not in Ireland, but in New York banks and managed by employees in Nevada. So the funds are in the US even though they are domiciled abroad. This company has no residence from a tax perspective and pays taxes nowhere.

Why Democrats Can't be Trusted to Control Wall Street - Robert Reich - Who needs Republicans when Wall Street has the Democrats? With the help of congressional Democrats, the Street is rolling back financial reforms enacted after its near meltdown. According to the New York Times, a bill that’s already moved through the House Financial Services Committee, allowing more of the very kind of derivatives trading (bets on bets) that got the Street into trouble, was drafted by Citigroup — whose recommended language was copied nearly word for word in 70 lines of the 85-line bill. Where were House Democrats? Right behind it. Rep. Sean Patrick Maloney, Democrat of New York, a major recipient of the Street’s political largesse, co-sponsored it. Most of the Democrats on the Committee, also receiving generous donations from the big banks, voted for it. Rep. Jim Himes, another proponent of the bill and a former banker at Goldman Sachs, now leads the Democrat’s fund-raising effort in the House. Bob Rubin – co-chair of Goldman before he joined the Clinton White House, and chair of Citigroup’s management committee after he left it – is still influential in the Party, and his protégés are all over the Obama administration. Jack Lew, Obama’s current Treasury Secretary, was chief operating officer of Citigroup’s Alternative Investments unit, a proprietary trading group, from 2006 to 2008, before he joined the Obama administration. Peter Orszag, Obama’s Director of the Office of Management and Budget, left the Obama Administration to become Citigroup’s vice chairman of corporate and investment banking, and chairman of the financial strategy and solutions group.

Wall Street Lobbyists Literally Writing Bills In Congress - Not only is Congress punting rulemaking to captured and compromised regulators, Wall Street lobbyists are now actually drafting the bills. “Wall Street writes its own laws” used to be a useful polemic, now it’s a statement of fact. 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. Citigroup wrote its own law? What do lawmakers get for doing Wall Street’s bidding? 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.).. And as its lobbying campaign steps up, the financial industry has doubled its already considerable giving to political causes. The lawmakers who this month supported the bills championed by Wall Street received twice as much in contributions from financial institutions compared with those who opposed them, according to an analysis of campaign finance records performed by MapLight, a nonprofit group

See How Citigroup Wrote a Bill So It Could Get a Bailout - On Friday, the New York Times reported on the front page that Citigroup drafted most of a House bill that would allow banks to engage in risky trades backed by a potential taxpayer-funded bailout. The Times notes that "Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill." Special-interest lobbyists often play a role in writing legislation on the Hill, but such sausage-making is rarely revealed to the public. In this instance, members of Congress and a band of lobbyists have been caught red-handed, and Mother Jones has obtained the Citigroup draft that is practically identical to the House bill. As you can see in the side-by-side comparison below, the lobbyists for Citigroup really earned their pay on this job.

Eric Holder Under Investigation By House Judiciary Committee For Lying Under Oath - With the euphoric market once again serving as a much needed distraction from far bigger geopolitical issues, many have forgotten the plethora of scandals the Obama administration has recently found itself engulfed in. This may change shortly, following news that the head of the US Department of Justice, Eric Holder himself, is now being investigated for lying under oath. Will he too receive an extended absence of leave (with pay) after pleading the fifth, or will the circle of lies slowly but surely start to unwind? Of course, in the New Normal it is probably not only expected, but given, that the chief legal enforcer is just a little more equal when it comes to the same justice he is tasked to enforce.

U.S. accuses currency exchange of laundering $6 billion (Reuters) - U.S. prosecutors have filed an indictment against the operators of digital currency exchange Liberty Reserve, accusing the Costa Rica-based company of helping criminals around the world launder more than $6 billion in illicit funds linked to everything from child pornography to software for hacking into banks. The indictment unsealed on Tuesday said Liberty Reserve had more than a million users worldwide, including at least 200,000 in the United States, and virtually all of its business was related to suspected criminal activity. U.S. Attorney Preet Bharara called the case perhaps "the largest international money laundering case ever brought by the United States." "Liberty Reserve has emerged as one of the principal means by which cyber-criminals around the world distribute, store and launder the proceeds of their illegal activity," according to the indictment filed in U.S. District Court for the Southern District of New York. Officials said authorities in Spain, Costa Rica and New York arrested five people on Friday, including the company's founder, Arthur Budovsky, and seized bank accounts and Internet domains associated with Liberty Reserve.

US targets digital currency in huge fraud probe - The United States on Tuesday unveiled what it said was the world's "largest" money laundering probe against the digital currency operator Liberty Reserve. The Costa Rica-based entity, which operates a hugely popular online currency system outside of the control of national governments, is charged with running a "$6 billion money laundering scheme and operating an unlicensed money transmitting business," the US Attorney's office for New York said. Prosecutors said Liberty Reserve processed at least 55 million illegal transactions for at least one million users "and facilitated global criminal conduct." The probe involved law enforcement in 17 countries "and is believed to be the largest money laundering prosecution in history," the prosecutor's office said.

Counterparties: Bits of laundry - Even criminals need financial intermediaries. Yesterday federal prosecutors shut down Liberty Reserve, a currency exchange and payment processor, and indicted seven people connected to the company. The indictment called the company a “financial hub of the cybercrime world… including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking”, and alleges it laundered $6 billion via 55 million illegal transactions for one million users over the last seven years. The Tico Times has a detailed article on the history of the Costa Rica-based business, not to mention “flashy cars, lavish gifts, multiple identities and armed Russian henchmen”. The criminal attraction to Liberty Reserve is obvious. An email address was all that was needed to to set up an account — some accounts had oh-so subtle names like “Russian Hackers” — and paper trails were nonexistent. The principals seemed aware of who used their services: in an IM conversation, they referred to the company as a “money laundering operation that hackers use”. Speaking of things hackers like that can be used to launder money, what does Liberty Reserve’s indictment mean for Bitcoin? Kevin Roose says that while both Liberty Reserve and Bitcoin offer users anonymity, “in Bitcoin’s case, there’s nobody to arrest, no entity to prosecute for the sins of the system ”. Bitcoin is vulnerable, Roose notes, to enforcement that targets the exchanges and processors which the currency relies on to function. Timothy Lee thinks that any attempt to shut down, or even regulate, Bitcoin would only drive the currency further underground (assuming that’s possible), making it all the more attractive to criminals.

Why Did Criminals Trust Liberty Reserve? - Liberty Reserve, the alternative-payment network and digital currency that federal prosecutors shut down a couple of days ago, was not, as it described itself, the Internet’s “largest payment processor and money transfer system.” (PayPal, obviously, is much bigger.) But Liberty Reserve was, by all accounts, the Internet’s largest payment processor for illicit and criminal transactions. The Justice Department says that since the founding of Liberty Reserve, in 2006, it has handled more than fifty-five million transactions totalling more than six billion dollars, and as of last year it had more than a million users. In effect, Liberty Reserve provided a key piece of the infrastructure for criminal activity on the Web. What makes it so interesting is that it was only able to do so by getting hundreds of thousands of criminals to trust it. Descriptions in reports of the legal action against Liberty Reserve have made its day-to-day business sound enormously confusing. So let’s walk through how it worked.

Bill Black: How Dare DOJ Insult HSBC’s Crooks as Less “Professional” than Liberty Reserve’s Crooks? By Bill Black - Standard Chartered and HSBC’s leaders must be doubly humiliated by the description by Mythili Raman, the acting head of the U.S. Department of Justice’s (DOJ) Criminal Division, of Liberty Reserve’s money laundering operation. In the very first clause of her May 28, 2013 statement to the media on the actions against Liberty Reserve’s controlling officers, Raman emphasized how “professional” they were as money launderers: “Today, we strike a severe blow against a professional money laundering enterprise charged with laundering over $6 billion in criminal proceeds.” In four paragraphs, she used the word “professional” three times and “sophisticated” once to describe Liberty Reserve’s money laundering.  In her second sentence she continued her emphasis on how large Liberty Reserve’s money laundering operations were. Raman claimed that DOJ’s action against Liberty Reserve was “the largest international money laundering prosecution in the history of the Department.” She described the scale of Liberty Reserve’s operations as “enormous” and a “massive criminal enterprise.” The indignant response of Standard Chartered and HSBC’s leaders to Raman has to be: “and what are we, chopped liver?” The government charged Standard Chartered was a massive money launderer that Iran used to escape sanctions designed to keep them from developing nuclear weapons

Bill Black: Our System Is So Flawed That Fraud Is Mathematically Guaranteed - Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse. In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system. A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators. In a number of cases, they clawed back the funds and profits that the convicted parties had fraudulently obtained. “When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."- Bastiat

SEC Turns Its Attention Back To Accounting Fraud, Literary Criticism - A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts: An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects. Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research. Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”

OCC Probe of JP Morgan Debt Collection Abuses Will Show if Agency Can Be Reformed -  Yves Smith - As readers probably know all too well, the Office of the Comptroller of the Currency has long been the most cronyistic of all bank regulators. So the default assumption when it cranks up an investigation is to assume that it’s just a window-dressing exercise or worse, a stealth bailout of some sort.  Yet the Washington Post tells us that the OCC is widening an investigation into debt collection, where alleged robosigner JP Morgan is the sinner-in-chief. What gives?By all accounts, incoming OCC chief Tom Curry is serious about trying to reform the agency. And if media accounts and the case filed by California attorney general Kamala Harris against JP Morgan are remotely accurate, JP Morgan’s conduct is so far beyond the pale that the OCC should be able to extract a handsome settlement and, more important, force reforms on the bank and the industry generally. Now mind you, I’m not optimistic about Curry’s odds of success, and I therefore think the OCC should be shuttered and its responsibilities given primarily to the FDIC. But this situation serves to illustrate how the power dynamics in DC are shifting on bank reform.

Who Should Actually Have Say on Pay? - It's say-on-pay season at American corporations. What shareholders have been saying, in overwhelming numbers, is yes! At 74% of the 1,471 companies that have voted so far in 2013, according to Equilar's say-on-pay tracker, the "yes" percentage exceeded 90%. That's up from 69% in 2012 and 2011. Only 31 companies (2%) have gotten sub-50% no-confidence votes in 2013. One key reason for shareholders' positive tone is that the stock market has been doing well. Since say-on-pay hit the U.S. in 2011 (it was part of the Dodd-Frank Act), academic researchers have found that the chief determinants of how shareholders vote appear to be (a) stock performance, and (b) the voting recommendations of proxy-voting advisors ISS and Glass-Lewis, which are based in part on returns to shareholders over the previous three years. To a large extent, say-on-pay — which was introduced in the UK in 2002 and has spread to several other countries, most recently Switzerland — is a simple exercise in bandwagon-following. That's not all it is, though. The size, growth, and design of paychecks do play into both the voting recommendations from ISS and Glass Lewis and the votes of shareholders. There is evidence that say-on-pay votes have led British companies to make executive paychecks more sensitive to poor performance. Say-on-pay votes do have an impact. The question is, what kind of impact?

Why the Shareholder Rescue Never Comes - Shareholders can't be counted on. That's the message from the dispiriting shareholder vote on whether to leave Jamie Dimon as both the chief executive and the chairman of JPMorgan Chase, or to split the roles. Even more shareholders backed him in his dual role this year than did last year. For some time, reformers have hoped that shareholders might ride to the rescue to solve the problem of Bank Gigantism, otherwise known as Too Big to Fail. Big-bank critics, like the freethinking analyst Mike Mayo [1], analysts at Wells Fargo [2], and Sheila Bair [3], the former head of the Federal Deposit Insurance Corporation — and others, including me — have raised the possibility that shareholders might revolt over banks' depressed stock valuations and seek breakups. Broken-up banks would be smaller and safer. No, it's not going to happen. Shareholders are part of the problem, not the solution. No group has skated free of severe (and deserved) criticism in the wake of the financial crisis: financial firms, regulators, credit rating agencies, borrowers and the news media. That is, except one, which happens to be among the most culpable: institutional investors. Yet today, the structure of institutional investing is the same. And so is shareholders' view of their responsibilities. When applied to banks, corporate governance campaigns are wasted efforts.

What’s Wrong With Jamie Dimon Is What’s Wrong With America - A lot of people have attacked JPMorgan Chase CEO Jamie Dimon over the years, including this author. After today's shareholder votes at JPM, Mark Gongloff is right to describe Dimon as a "cult leader." It's too easy to externalize responsibility by pinning the blame on villains. Every people has used the symbolism of demons in an attempt to extirpate something within themselves. The Jamie Dimon story shows that something more fundamental needs repair – in our economy, in our society, in us. Don't get me wrong. That isn't meant to suggest that we're guilty of fraud, or greed or fiscal mismanagement. But we definitely have some work to do. Chuck Prince. Robert Rubin. Lloyd Blankfein. Jeff Immelt. Brian Moynihan. Jamie Dimon. The bank CEO names roll off the tongue almost as rapidly as the billions pass algorithmically through cyberspace. What happens if one falls, as Prince did? Another takes his place before his predecessor's shadow has left the ground he was standing on. And we use the male pronoun advisedly, since so far they've all been male. Male, and ambitious, and aggressive. To a man, in fact, they've embodied the aggression we profess to idolize as a society, in our leaders and in our athletes, until it gets us where we live. If Jamie Dimon and his peers have any legitimate complaint about the condemnation that's heaped upon them today, it's this: A few years ago you praised us for doing exactly what you condemn us for today. You're the ones who made Gordon Gekko a culture hero, these bankers might say, not us.

Andy Haldane: The Counter-Reformation in Banking Has Just Begun -- It is appropriate that Andy Haldane, Executive Director for Financial Stability at the Bank of England and a member of the Institute for New Economic Thinking’s Advisory Board, used the birthplace of Europe’s counter-reformation to urge on the unfinished business of “counter-reforming” our current banking system. Speaking at the Festival of Economics, Haldane issued his own criticisms of today’s “too big to fail” (TBTF) banks – an outgrowth of the financial deregulatory “reforms” of the last 30 years. The 2008 global financial crisis led to the worst recession in the developed world since the Great Depression. Five years later, as Haldane pointed out, we are still experiencing the effects of the crisis. And if one is to judge by his outspoken comments, Haldane is clearly not working to grease his own wheels through the revolving door that so often characterizes the unhealthy nexus between regulators on the one hand and Wall Street/City of London market practitioners on the other. His presentation showed how much (to use Rahm Emanuel’s memorable expression) we have let a good crisis go to waste. The opportunity presented by the financial crisis of 2008 to reform the structures and practices that gave rise to the greatest economic downturn since the Great Depression has basically gone nowhere.

Fed’s Pianalto Sees Room to Expand Stress Tests - A U.S. Federal Reserve official said on Friday that there is scope to extend bank stress tests beyond the companies already involved in the process, while adding that the central bank’s new financial stability mandate needs to be made clearer.  Federal Reserve Bank of Cleveland President Sandra Pianalto didn’t comment on monetary policy in remarks prepared for delivery at a conference on financial stability, held in Washington. Ms. Pianalto noted that the process the Fed is undergoing as it seeks to improve the stability of markets is akin to the learning curve it faced on the monetary policy front after the blunders that led to the high inflation, weak job growth environment of the 1970s.. “The Federal Open Market Committee has had decades of experience” in implementing its legal mandate to keep price pressures contained and inflation under control, Ms. Pianalto said. “By comparison, the Federal Reserve and other financial regulators are in the early stages of crafting a comprehensive approach to fulfilling the mandate of ensuring financial stability,” she said.

European regulators clash with US over derivatives market reforms - European regulators have clashed with the US over the timing of reforms to the $633tn derivatives market in a letter urging further delays to guidelines that would extend Washington’s reach overseas. The letter sent on Tuesday is the latest sign of strain over how different countries should split the job of overseeing the global derivatives market. The US, stung by the 2008 bailout of AIG after losses at its London derivatives arm, is seeking broad authority to police foreign trading that puts domestic taxpayers at risk. The hardline approach has riled Brussels and governments in the EU and Asia, who fear the US move will scupper global efforts to harmonise rules and will force banks to navigate overlapping and at times contradictory rules. Wall Street banks are also fighting expanded US authorities. At issue is “cross border guidance”, which would outline how the US would keep tabs on banks and hedge funds whose international swap trading could have a direct impact on the US economy. Gary Gensler, chairman of the Commodity Futures Trading Commission, is pushing to finalise the guidance before an exemption for foreign market participants expires on July 12, imposing the rules more widely. “I think we’re on a path to do that [finalise the guidance by July 12], but if we don’t, it’s not a mandated provision from Dodd-Frank,” the financial reform law passed in 2010, he said in an interview before the letter was received. CFTC did not have an immediate comment on the letter.

Regulating Bank Governance: Mandating CEO-Chairman Division at Too-Big-to-Fail Banks - For a while, the battle over whether to split the JPMorgan Chase CEO and Chairman positions looked like the corporate governance battle of the year, but seems to have ended with a whimper, rather than a bang. The media coverage of the issue, however, largely overlooked the unique, bank-specific aspects of corporate governance. Specifically, what's at stake in the corporate governance of a too-big-to-fail bank like JPMorgan Chase is not just the share price, but also the public fisc. There is a strong federal regulatory interest in having good governance at too-big-to-fail banks because of our explicit (FDIC) and implicit (bailout) insurance of too-big-to-fail banks. This suggests that federal bank regulators and Congress should be pushing to ensure that too-big-to-fail banks conform with best practices in corporate governance. To the extent good governance at a too-big-to-fail bank includes division of the CEO and Chairman positions, ensuring such a division should be on the regulatory agenda. Financial regulation may need to include governance regulation. I don't want to be naively optimistic about how much of a difference good governance can make at too-big-to-fail banks; I'm not sure how much it might really matter from the perspective of the public fisc. It might well be that the big banks are simply too large to manage, and the marginal difference from governance reforms is inconsequential:

U.S. Regulators Could Vote Next Week On Systemic Non-Bank Firms --U.S. financial regulators could vote as soon as Monday to finally designate the first set of large non-bank financial firms as “systemically important financial institutions,” drawing them in for heightened government scrutiny. The long-awaited move would fulfill a central tenet of the 2010 Dodd-Frank law, which handed more power to regulators to oversee large financial companies whose collapse could pose risks to the broader financial system. The Financial Stability Oversight Council is widely expected to eventually designate a handful of companies, including American International Group Inc., Prudential Financial Inc. and GE Capital unit of General Electric Co., all of which have advanced to the third stage of the government’s process. U.S. officials haven’t made public the names of companies being considered for the systemic designation, and they didn’t disclose which firms would be receiving a letter noting that the evidence-gathering process was complete. Regulators are required under law to determine which firms may pose a systemic risk to the financial system and economy more broadly and subject them to tougher scrutiny and higher capital requirements. Banks with more than $50 billion in assets automatically receive the designation.

Regulators Want Better Financial Data - Six years after the recent financial crisis, U.S. financial regulators still aren’t done mapping out all the complexities and interconnections of the financial system, the head of the Treasury office created to bolster efforts to identify threats to financial stability said Thursday.Improving the quality and scope of the financial data available to regulators are key to finishing that map, Richard Berner, director of the Office of Financial Research, said in a speech to a conference co-sponsored by his group and the Federal Reserve Bank of Cleveland.“We can’t analyze what we can’t measure. The financial crisis revealed that the data available to monitor the financial system were too aggregated, too limited in scope, too out of date, or otherwise incomplete,” Mr. Berner said. “To conduct effective and comprehensive financial stability analysis, we need more high quality, standardized data” that looks across the financial system, he said.The Office of Financial Research, which was created by the Dodd-Frank law, has identified data gaps that it believes are a priority to fill, Mr. Berner saidThe office, for instance, is working with the Federal Reserve to “improve the data and scope of data” in so-called repo markets, where financial institutions take out short-term loans to fund themselves using Treasurys as collateral, he said.

How Did Major Hedge Fund Earn 30% Returns for 20 Years Straight? Lots of Cheating - How would you like to invest $10,000 and watch it grow over 20 years into $1,461,920? Well that's what happened at the giant hedge fund, SAC Capital Advisors, which made a 30% return for 20 years in a row.    How is it possible to make such profitable investments again and again and again? The U.S. Attorney for Manhattan, Preet Bharara, believes he has the answer: SAC is cheating ... again and again and again. In fact, Bharara suggests that hedge funds that engage in insider trading may be rotten to the core:   "Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual; we are talking about something verging on a corrupt business model, for the defendants seem to have taken the concept of social networking and turned it into a criminal enterprise. " [refers to a 2011 hedge fund indictment, not the current case against SAC.]  To date, nine current and former SAC employees face insider trading criminal charges stemming from their work at the firm. Four have pled guilty and two are still fighting their indictments. Now the head of SAC, multi-billionaire Stephen A. Cohen (note the initials), will be subpoenaed to appear before a grand jury. The federal strategy may be to indict the entire hedge fund and shut it down, according to the New York Times.

My name is Mr Market, and I’m a QE-aholic - The mid-year market correction of 2013 is quite different to the previous three mid-year market corrections. It’s caused by economic strength and stability, rather than the opposite. In each of 2010, 2011 and 2012 global equities fell in the second quarter because of either growth slowdowns in the US, eurozone crisis flare-ups, growth scares in China and, in 2011, rising oil prices caused by the Arab Spring. In May 2013, the big US economic releases such as non-farm payrolls, manufacturing surveys, retail sales and small business confidence have all been better than expected, Japan’s economy rebounded in the second quarter and with the Nikkei up 70 per cent Japan looks to have turned the corner, eurozone bond yields are still declining as the risks of a euro break-up recede, and fears of Chinese hard landing are also receding. This year’s market correction, starting later than usual, was sparked purely by speculation about the end of QE3 – the Federal Reserve’s third, ongoing, round of quantitative easing. After Fed chairman Ben Bernanke’s testimony to Congress last week markets now believe that will happen around the end of this year or early next year, although they had already been coming to that conclusion. Markets have become addicted to liquidity instead of reality; it could be a painful, volatile, withdrawal, but worth it in the end.

Counterparties: Bruised bonds - With Federal Reserve chairman Ben Bernanke hinting that the US central bank may be getting ready to cut back on its bond-buying program, the bond market has been beaten up. The yield on the benchmark 10-year Treasury note rose dramatically this month, from 1.63% at the beginning of May to today’s closing rate of 2.2%. As David Wessel notes, that’s the biggest monthly move in three years. Optimists see this as a sign of economic growth, while bond investors are worried about their books, warning of an impending crash. Neil Irwin explains that higher rates may be a sign of increasing confidence in economic growth. “If this explanation is true, then the slight uptick in interest rates from such low levels shouldn’t be enough to undermine the nascent housing recovery,” he says. Wessel agrees with Irwin, arguing that “markets, hungry for more certainty than Fed officials can provide, over-interpret each adverb Fed officials use”. UBS’s head of global rates strategy put out a note today which hypothesized that the market is overreacting to rumors about QE, concluding that bonds are cheap. Goldman Sachs, on the other hand, says, “the bond sell-off: It’s for real,” and expects rates to hit 2.5% by the end of the year. BofA agrees, warning that “risks of a bond crash are high”. Either way, argues Alen Mattich, the Fed is in a Catch-22 situation. “Central banks argue that their bond purchases are meant to push down yields in order to make long term finance cheaper. But, at the same time, a sign that QE’s working is rising yields.” The trick, then, is to figure out how to keep rising yields from slowing growth.

Sallie Mae Shocks Bondholders in Asset Strip - SLM Corp. (SLM) dealt bondholders a blow as the student loan company prepares to move cash-generating assets out of their reach and rely more heavily on secured funding as it seeks to split into two separate entities. Fitch Ratings cut the company known as Sallie Mae to speculative grade yesterday, citing the new structure’s weaker credit profile while Standard & Poor’s and Moody’s Investors Service said they may reduce the credit as well. Newark, Delaware-based SLM’s bonds lost more than $200 million in value after the disclosure, according to data compiled by Bloomberg. Sallie Mae is separating its education loan business from its consumer lending operation, following legislation in 2010 that cut companies out of the government-guaranteed student loan market. The lender’s $17.9 billion of unsecured bonds will be serviced by the company housing Sallie Mae’s $118 billion portfolio of U.S.-backed loans that it’s winding down, while the earnings, cash flow and equity of the newly formed SLM Bank will be moved out of bondholders’ reach, according to Moody’s.

Small business lending freeze starting to thaw - The credit health of small companies across the country improved during the first quarter of 2013, according to a new report by Experian and Moody’s Analytics ... Sageworks, a financial information firm, released its latest private company report earlier this week, which shows that the average risk of business loan default has dropped to 4.1 percent from 5.1 percent last April. “The improvement in default rates coupled with healthy sales and profitability show that private companies may be well positioned to borrow,” said Sageworks Chairman Brian Hamilton.The small business lending Index from Direct Capital, which provides equipment leasing and business loans, backs up that claim, showing that small business borrowing demand ticked higher nationwide for the fourth straight month in April. Over that period, the number of small business owners seeking loans has surged 44 percent compared to the first four months of 2012. But are they actually finding the capital they need? More and more of them, yes, according to online lending platform Biz2Credit’s monthly survey.The report showed the nation’s largest banks approved 16.8 percent of small business loans in April, up from 15.7 percent in March and 10.6 percent in April 2012.

Citi settles US suit over $3.5 billion in mortgage securities (Reuters) - Citigroup has reached a settlement with a federal agency that had accused the bank of misleading Fannie Mae and Freddie Mac into buying $3.5 billion of mortgage-backed securities. The settlement with the Federal Housing Finance Agency was disclosed in a filing on Tuesday in U.S. District Court in Manhattan, where a series of related cases by the agency against Wall Street banks are pending. The filing did not disclose the terms of the deal. FHFA spokeswoman Stefanie Johnson said the settlement was "satisfactory" but declined to say how much Citi would pay. FHFA is active in settlement discussions with other banks that were subjects of these lawsuits, she said. Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to discuss the terms of the settlement but said the bank was "pleased to put this matter behind us." The accord marks the second so far out of 18 securities fraud cases the FHFA filed against banks in 2011 over more than $200 billion in mortgage-backed securities sold to Fannie and Freddie.

What’s Inside the Government’s Deal With Citigroup? - The conservator for Fannie Mae and Freddie Mac was eager for publicity in September 2011 when it sued 17 financial institutions, accusing them of ripping off the two government-backed housing financiers. It isn’t so enthusiastic anymore.  This week the U.S. Federal Housing Finance Agency told a federal judge it had settled its case against Citigroup Inc. (C) The agency won’t say how much money Citigroup is paying. Neither will Citigroup, which survived the financial crisis only because it got multiple taxpayer bailouts. The parties agreed to keep the terms confidential. The government has decided this is none of the public’s business.  The agency had accused Citigroup of violating securities laws and making misrepresentations about $3.5 billion of mortgage bonds that it sold to Fannie and Freddie during the housing bubble, before they were seized by the government. This is the second such lawsuit to be resolved so far. In January, the agency dropped its suit against General Electric  after reaching a deal over mortgage bonds sold to Freddie Mac. In that case, too, the terms weren’t disclosed.  This should make every American’s blood boil. The government is devoting taxpayer resources to pursue these claims in court. The public is entitled to know the results. It’s that simple.

Why Citi blinked in FHFA MBS cases – and what it means for other banks - In litigation, as in life, past is prelude. To understand why Citigroup and its lawyers decided to settle the Federal Housing Finance Agency's $3.5 billion mortgage-backed securities suit, you have to look back nine years to the shareholder class action stemming from securities and accounting fraud at WorldCom. Citi was one of more than a dozen bank underwriters targeted in the case, though its exposure was exacerbated by secret loans that Citi predecessor Salomon Brothers - WorldCom's lead investment banker - supposedly extended to WorldCom CEO Bernard Ebbers and other officials at the telecom. In May 2004, after the 2nd Circuit Court of Appeals agreed to hear the banks' interlocutory appeal of Cote's class certification ruling, Citi grabbed that tiny bit of leverage and reached a $2.65 billion settlement with the plaintiffs, the first big deal for WorldCom investors. Citi's $2.65 billion turned out to be the biggest recovery from any single bank defendant in the WorldCom securities litigation, in which shareholders ended up recovering more than $6 billion. But don't assume that Citi made a mistake by settling first. Quite the contrary. Every subsequent press release announcing another bank settlement in the WorldCom case included a sentence noting that the amounts being paid by defendants were "higher, on a percentage basis, than the rate established by the amount the Citigroup defendants agreed (to pay) in May 2004."

Banks don't want to pay for funding when they can get it for free - As US banks continue to grow their deposit base, they are reducing reliance on commercial paper (CP). Why pay for funding when depositors are willing to provide capital for free and in increasingly larger amounts? On the other hand foreign-owned banks, a number of whom don't have a large retail presence in the US, have recently increased their issuance of CP. The chart below shows the divergence in CP outstanding between the two groups.

FDIC reports Record Earnings for insured institutions, Fewer Problem banks, Residential REO Declines in Q1 - The FDIC released the Quarterly Banking Profile for Q1 today.  Improvements in noninterest income and expense, plus broad-based reductions in loan loss provisions, outweighed declining net interest income and helped lift industry earnings to an all-time high of $40.3 billion in first quarter 2013. First-quarter net income was $5.5 billion (15.8 percent) higher than in first quarter 2012, as a reduction in expenses for litigation costs and proceeds from a legal settlement boosted reported earnings. The FDIC reported the number of problem banks declined:  The number of FDIC-insured institutions reporting financial results fell to 7,019 in the first quarter, down from 7,083 in fourth quarter 2012. Mergers absorbed 55 institutions during the quarter, and four institutions failed. This is the smallest number of failures in a quarter since second quarter 2008. For a 7th consecutive quarter, no new insured institutions were added. Except for charters created to absorb failed banks, there have been no new charters added since fourth quarter 2010. The number of insured institutions on the FDIC’s “Problem List” declined for an eighth consecutive quarter, from 651 to 612. Total assets of “problem” institutions declined from $233 billion to $213 billion. The number of full-time equivalent employees at insured institutions fell from 2,110,276 to 2,102,839 during the quarter.The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) declined from $8.34 billion in Q4 2012 to $7.89 billion in Q1. This is the lowest level of REOs since Q4 2007. Even in good times, the FDIC insured institutions have about $2.5 billion in residential REO.  This graph shows the dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs

Banks Behaving As If 'It' Never Happened - Today's Quarterly FDIC data release was cheered by many on the basis that US banks made the most money ever ($40.6bn) in Q1 which must mean something positive, right? With rates low, spreads low, margin high, and collateral in short supply, where all these profits coming from? The following chart, which may make some nauseous in its simple and direct clarification of just how blind we have become to what is going on, has the answer. Simply put, bank earninsg have soared on the back of nothing less than a total collapse in loan loss provisions (LLPs). In fact, LLPs are now at their lowest levels since the peak of the housing bubble (and as we showed yesterday here and here, a bubble this is) - at a level of reserves that suggest the banks believe 'It' never happened. The delusion continues...

Unofficial Problem Bank list declines to 767 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for May 24, 2013.  Changes and comments from surferdude808:  This week the Unofficial Problem Bank List declined to 767 institutions with assets of $283.7 billion after four removals and one addition. A year ago, the list held 931 institutions with assets of $358.0 billion. The removals were all from unassisted mergers including Centennial Bank, Fountain Valley, CA ($546 million); The Washington Savings Bank, FSB, Bowie, MD ($357 million); First National Bank of Baldwin County, Foley, AL ($187 million); and Kinderhook State Bank, Kinderhook, IL ($18 million). The addition was The Talbot Bank of Easton, Easton, MD ($713 million Ticker: SHBI).

Piggy Banks - NY Fed - What do banks do? Ask an economist and you’ll get a variety of answers. Banks play a vital role in allocating capital by linking savers and borrowers; they produce information by screening and monitoring borrowers; they create liquidity; they share and distribute risk; they engage in maturity transformation by borrowing short and lending long. What you won’t usually hear is that banks may help people stick to an optimal savings plan that they might not be able to stick to if they invested their money themselves. In other words, banks may serve as piggy banks by preventing people from consuming assets when the return to investing is high, even when the temptation to consume is strong. In a New York Fed staff report, now forthcoming in the Journal of Financial Services Research, we develop this notion of banks as a commitment device, or piggy bank. Our study uses a modified version of a classic model by Douglas Diamond and Phillip Dybvig. Their model features savers who have one unit of wealth to invest to support their consumption over time. Savers have two assets to invest in: a liquid, short-term asset that pays off relatively soon and a long-term, illiquid asset that pays off with a delay. A key feature of the Diamond-Dybvig model is that savers have random demand for liquidity, that is, there’s some chance that they’ll  have to consume early, before the long-term asset pays off. People like that are called, aptly, early consumers, but it should be clear that “early” could be tomorrow, next year, or before retirement. The other people are called late consumers. The random demand for liquidity forces savers to trade off liquidity and returns because the long-term asset pays more, but the short-term asset pays sooner.

More Market State In Action: Consumers Treated Differently Under the Law Than Businesses -  Yves Smith - You thought corporate personhood was a bad thing? Think twice. You should be so lucky as to be a corporate person. They don’t just get treated like you and me, they are increasingly being treated better than you and me. Bear with this very specific and for non-laywers, legally dense illustration, that I received earlier in the week: in re: You et al. v. JP Morgan Chase Bank, N.A., et al., Case No. S13Q0040, Georgia Supreme Court.   I ran this message by Georgetown law professor Adam Levitin, who is arguably the top US expert on mortgage securitizations. He gave the ruling a quick read and said it did appear that there appeared to be an inconsistency, that the Georgia court found that the note follows the mortgage, rather than the mortgage follows the note. They failed to reconcile the statute that says note follows the mortgage with the UCC Article 9 provision that says the opposite. Oops. But this is where it gets interesting, and ugly. It’s clear that the conclusion the court reached in the consumer case would be untenable if you had two banks dealing with each other. Levitin speculated that what would happen in Georgia was not that some later court would come down one way or the other on this rather basic question. Instead, he anticipated that the law would be applied one way for consumers when banks want to foreclose and the opposite way for warehouse lending.

 Homeowners Take the Foreclosure Fight to the DOJ - Mata was among 500 activists from across the country who came to the nation’s capital to “Bring Justice to Justice”—participating in three days of action organized by Home Defenders League and Occupy Our Homes. They were calling for the criminal prosecution of banks for ongoing illegal activity, including illegal foreclosures; and for resetting mortgages to a property’s fair market value for the more than 13 million homeowners still at risk of foreclosure.  Mata and her family have been in their home for more than ten years. Their struggle began in 2009 when she and her husband were laid off from their jobs in retail and engineering, respectively. They survived by cashing out on their 401(k)s and working in low-wage jobs.  “We didn’t have any problems until last year,” she said, when they no longer could afford both their home and food for their family of five. So Mata and her husband requested a mortgage modification from Bank of America. “We asked them to tack on what we owed to the principal, and to give us the going interest rate because we still have a high rate,” she said. “We aren’t even asking for a principal reduction. Plus we’re both working, we have equity in our home—but they still refuse.”

Barbara Parramore Speaks About Her Arrest in “Moral Monday Protests” Against Republican Railroading of Extreme Right-Wing Agenda in North Carolina - Yves here. NC intern Jessica Ferrer interviewed 80 year old Barbara Parramore, who was one of 57 arrested in North Carolina on May 20 as part of what has become weekly protests at the state General Assembly called “Moral Mondays”. Background courtesy Daily Kos:These acts of civil disobedience are in protest of the Republican supermajority’s ramrodding of nearly 2,000 bills — many of them designed to decimate public education, deny/restrict access to health insurance, kneecap labor rights, seize local control from elected municipal governments, restrict women’s access to reproductive healthcare, expand firearms permissions, eviscerate oversight boards, permit exploitation of public lands, implement “fracking” and other environmental abuses, and suppress voter rights — through the state legislature since the end of January. Her bail was posted by the NAACP. I was told by her daughter Lynn Parramore that the police were for the most part “not hostile” but the process was designed to intimidate. She was put in zip handcuffs, which made it hard for her to balance when climbing stairs. She was frisked twice, X-rayed and scans of her fingers and hands were added to a Federal database.Here is some footage from the protest. The police move in around 5:20:

Time To Sell Foreclosed Homes Hits Record -  Those who recall about the implicit housing subsidy we discussed when we coined the term "foreclosure stuffing" which is merely the well-planned systemic bottleneck to clearing foreclosed properties already in the system, and thus artificially reduce housing supply will be happy to learn that according to RealtyTrac the average time for a foreclosed property to sell just hit a record at nearly 400 days across the entire nation. Important research came out of Zillow last week on "effective" negative equity; a term I coined relating to a novel thesis I have been working with for 3 years, which few understand, respect, or model...I suppose until now. (Zillow report link here) In short, per Zillow 44% of all mortgage'd homeowners -- the core of US housing demand & supply -- are Zombies; 60% when including those lacking sufficient income or credit needed for a loan. As a result, the nations' "Maximum Potential Demand" profile has been gutted.

Lawler: Single Family REO Inventory Continued to Decline in Q1; Down 24% from Year Ago, 39% from Two Years Ago - From economist Tom Lawler: The FDIC released its Quarterly Banking Profile for the first quarter of 2013, and according to the report the carrying value of 1-4 family residential real estate owned (REO) by FDIC-insured institutions at the end of March was $7.89 billion, down from $8.34 billion at the end of December, and down from $11.08 billion at the end of March 2012. Assuming that the average carrying value of SF REO at FDIC-insured institutions is 50% higher than the average for Fannie Mae and Freddie Mac, here is a chart showing quarterly SF REO inventories at Fannie, Freddie, FHA, FDIC-insured institutions and private-label securities. (The source of my PLS data only had data through the end of February, which I used for Q1/2013). Click on graph for larger image. SF REO inventories at these entities totaled an estimated 341,439 at the end of March, down 24% from last March, down 39% from March 2011, and down 47% from September 2008

44% of Homeowners With a Mortgage Can't Sell: Zillow - About 44% of homeowners with mortgages cannot afford to sell their homes, according to a recent blog post from real estate company Zillow.  Despite a recovery in prices, over a quarter of homeowners with mortgage loans still owe more than their homes are worth. "But another 18.2 percent of homeowners with mortgages, while not technically underwater, likely do not have enough equity to afford to move," according to the blog post. 43.6% of homeowners have less than 20% equity in their homes. That makes it hard for them to move or trade-up, given the considerable costs involved in buying and selling a home, including the cost of a down payment for the next mortgage. This inability to sell is one of the big factors behind the acute shortage of existing homes for resale in the country. Strong investor demand for foreclosed homes is another reason.Previously, foreclosures provided an overwhelming supply of homes that dragged down the market. Now investors are snapping up distressed properties at a rapid pace and converting them into rentals. The share of distressed sales -- foreclosures and short sales -- is now only 33% of all sales, compared to 44% recorded a year ago, according to a survey from Campbell/Inside Mortgage Finance.

Freddie Mac: "Fixed Mortgage Rates Highest in a Year" - From Freddie Mac today: Fixed Mortgage Rates Highest in a Year Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates following long-term government bond yields higher. The average 30-year fixed moved up nearly half a percentage point since the beginning of May when it averaged 3.35 percent. ... 30-year fixed-rate mortgage (FRM) averaged 3.81 percent with an average 0.8 point for the week ending May 30, 2013, up from last week when it averaged 3.59 percent. Last year at this time, the 30-year FRM averaged 3.75 percent.  15-year FRM this week averaged 2.98 percent with an average 0.7 point, up from last week when it averaged 2.77 percent. A year ago at this time, the 15-year FRM averaged 2.97 percent.

Treasury & Mortgage Snapshot: 30-Year Fixed Mortgage Highest in a Year - I've updated the charts below through Thursday's close. The latest Freddie Mac Weekly Primary Mortgage Market Survey, out today, puts the 30-year fixed at 3.81%. That's the highest rate since mid-May of last year. Its all-time low was 3.31%, which dates from the third week in November of last year. The yield on the 10-year note stands at 2.13%, up 70 bps from its all-time closing low of 1.43% set last July. The S&P 500 is now up 16.0% for 2013, fractionally below its all-time closing high set last Tuesday.  Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist.  For an eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository. Many first-wave boomers were buying homes in the early 1980s. At its peak in October 1981, the 30-year fixed was at 18.63 percent. The long-term graph doesn't capture the recent rise in rates over the past six months.

4% 30 Year Mortgage Rates? - From Zillow today: 30-Year Fixed Mortgage Rates Rise to 12-Month Highs; Current Rate is 3.71% Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 3.71 percent, up from 3.58 percent at this same time last week. The 30-year fixed mortgage rate hovered between 3.65 and 3.68 percent for the majority of the week before rising to the current rate this morning.. “Now at 12-month highs, we expect rates to remain stable in the near-term, but new direction from the Fed and employment figures could boost rates significantly.”  Here is an update to an old graph - by request - that shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey. Currently the 10 year Treasury yield is 2.135% and 30 year mortgage rates are at 3.71% (according to Zillow). Based on the relationship from the graph, if the ten year yield stays in this range, 30 year mortgage rates might move up to around 4%.

The New Retirement: Why You Don’t Have to Pay Off Your Mortgage -Low interest rates have changed the game for retirees—but not always in a bad way. Consider your mortgage. With rates having fallen so far, there may no longer be a pressing need to own your house outright before you call it quits at the office. Of coure, this is little comfort to millions of savers trying to eke by each month on income from bank deposits paying below 1%. But low rates are a boon to those saddled with a mortgage payment at a time in life when carrying large debts has long been considered ill-advised. In 1989, just 26.4% of all households were retired with a mortgage, according to the Federal Reserve’s Survey of Consumer Finances. That jumped to 46.5% by 2007. The percentage receded a bit during the recession. But the longer-term trend remains up. These stats trouble traditionalists, who view owing money on a house in retirement as heresy. Yet clinging to a mortgage in retirement has benefits too, especially with the average 30-year fixed-rate mortgage running at just 3.5%. You might be better off keeping the mortgage and investing the money elsewhere, which amounts to borrowing at a tax-deductible 3.5% in order to start a business, invest in stocks, or purchase an income property. Over time, such investments should provide superior returns.

MBA: Mortgage Purchase Applications increase, Refinance Applications decline sharply in latest survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 12 percent, the largest single week drop in refinance applications this year, from the previous week to the lowest level since December 2012. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. "Refinance applications fell for the third straight week bringing the refinance index to its lowest level since December 2012 as mortgage rates increased to their highest level in a year,” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.90 percent, the highest rate since May 2012, from 3.78 percent, with points unchanged at 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Cash And Tarry: Mortgage Applications Plunge At Fastest Rate Since 2009 - In the 'old normal' a spike in interest rates would have sparked an avalanche of 'rational' home-buyers and refinancers to apply for mortgages for 'fear' of the 'never-to-be-seen-again' rates disappearing. It seems, however, courtesy of a Bernanke-trained market, that this surge in rates has pushed many to the sidelines (mortgage applications slipped 8.8% WoW and -23% in the last 3 weeks), we presume waiting for the omnipotent-one to save the day yet again. The year-to-date shift in mortgage applications is now the worst since 2009 and the divergence between home sales and application for a mortgage is growing wider every week (reminding us of another euphoria and exuberance-driven unreality divergence).

Existing Home Inventory is up 16.4% year-to-date on May 27th - 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 April).  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.

Flippers once again ride the housing wave -  California, the number of homes sold in recent months that had been flipped — or bought and resold within six months — has reached the highest levels since late 2005, according to PropertyRadar, a real-estate data firm. About 6,000 homes have been flipped in the state this year through April, or more than 5% of all homes sold statewide. While flipping is re-emerging nationwide, brokers say it is happening most in California, where home prices have risen sharply over the past year. Six of the 10 largest price gains in major U.S. cities over the past year have been in California, according to Zillow. In April, home values rose by 25% from a year earlier in San Jose, San Francisco and Sacramento, and by 18% in Los Angeles. “When prices rise, this trade works. It’s not anything more sophisticated than that,” said Christopher Thornberg, an economist with Beacon Economics in Los Angeles. Prices are shooting up due to the short supply of homes for sale, which partly reflects the reluctance of homeowners to list homes at prices down sharply from their peak.

Carrington Stops Buying U.S. Rentals as Blackstone Adding -Hedge fund manager Bruce Rose was among the first investors to coax institutional money into the mom and pop business of single-family home rentals, raising $450 million last year from Oaktree Capital Group LLC. (OAK) Now, with house prices climbing at the fastest pace in seven years and investors swamping the rental market, Rose says it no longer makes sense to be a buyer.  “We just don’t see the returns there that are adequate to incentivize us to continue to invest,” [Bruce] Rose, 55, chief executive officer of Carrington Holding Co. LLC, said in an interview at his Aliso Viejo, California office. “There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”  Blackstone Group LP (BX), the largest investor in single-family rentals, has spent $4.5 billion to amass more than 26,000 homes and continues to buy, according to Eric Elder, a spokesman for Invitation Homes, the rental housing division of the world’s largest private equity firm. ... Blackstone’s net yields on its occupied houses are about 6 percent to 6.5 percent ...

So Who is the Dumb Money Ruining the Rental Housing Market? -  Yves Smith - The head of Carrington, which is known as an established distressed debt investor, a servicer that has been a target of litigation, and more recently, early entrant in the single family home rental business, said this week it was no longer buying houses for lease because dumb money had ruined the market. From Bloomberg: “We just don’t see the returns there that are adequate to incentivize us to continue to invest,” Rose, 55, chief executive officer of Carrington Holding Co. LLC, said in an interview at his Aliso Viejo, California office. “There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.” The degree to which the housing “recovery” has been driven by speculators isn’t fully appreciated. Reuters tried to pin down a number, but they apparently did it by identifying specific private equity firms and tying them to purchases. They came up with “at least 10%” in Las Vegas, suggesting that was representative for the most distressed markets.  But while it’s hard to get good data in such a fragmented field, that estimate is likely to be markedly too low. Some sources have said that cash buyers have accounted for as much as 50% of the activity in the hottest states, and those would also have a bigger impact in the national estimates of home price appreciation.Why are these investors so hard to identify? Many are newbies. One colleague reports that he knows roughly 15 newly minted real estate mini-moguls. They might have had some cash from a previous life on Wall Street, and raised a bit more initial dough from well-heeled friends. But most after buying a few houses then raised money overseas, mainly from the Middle East and China.

LPS: House Price Index increased 1.4% in March, Up 7.6% year-over-year -  LPS uses March closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: U.S. Home Prices Up 1.4 Percent for the Month; Up 7.6 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on March 2013 residential real estate transactions. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. The LPS HPI is off 19.5% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 49.0% from the peak in Las Vegas, 37.3% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and at a new peak in Austin, Dallas and Denver!  (Also a new peak for the state of Texas).

Home Prices See Double-Digit Jump -With a 10.9% increase from March 2012 to this March, home prices continued their upward trajectory as measured by the S&P/Case-Shiller Home Price Index. The index has been rising for some time, but the pace of the increase is now the highest since the “bubble” days of April 2006. Some of that is due to an investment push by financial firms, as we noted last month in an article on February’s 9.3% year-over-year gain. The spending certainly seems to be widespread, with a dozen U.S. cities registering double-digit year-over-year gains. Hot markets basically got hotter, as Detroit, formerly up 15.2%, jumped 18.5%; Atlanta, formerly up 16.5%, jumped 19.1%, and Las Vegas, formerly up 17.6%, soared 20.6%. The price increase laurel still goes to Phoenix, where prices, are up 22.5%. That’s if you can find anything to buy. Inventory is tight all over the country, and real estate listing aggregator Zillow has noted that in February, the number of listings on the site was down 17% from the previous year. Last week, the site published a report arguing that that’s due to homeowners who are “underwater” (remember them?) owing more on their mortgages than they have in equity, and thus unwilling or unable to list their homes.

Case-Shiller: Comp 20 House Prices increased 10.9% year-over-year in March - S&P/Case-Shiller released the monthly Home Price Indices for March ("March" is a 3 month average of January, February and March prices). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the Q1 national index. Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.  From S&P: Home Prices See Strong Gains in the First Quarter of 2013 According to the S&P/Case-Shiller Home Price Indices Data through March 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed that all three composites posted double-digit annual increases. The 10-City and 20-City Composites increased by 10.3% and 10.9% in the year to March with the national composite rising by 10.2% in the last four quarters. All 20 cities posted positive year-over-year growth. In the first quarter of 2013, the national composite rose by 1.2%. On a monthly basis, the 10- and 20-City Composites both posted increases of 1.4%. Charlotte, Los Angeles, Portland, Seattle and Tampa were the five MSAs to record their largest month-over-month gains in over seven years. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 27.3 % from the peak, and up 1.5% in March (SA). The Composite 10 is up 10.3% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 26.6% from the peak, and up 1.3% (SA) in March. The Composite 20 is up 10.9% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices.

Case-Shiller Shows Home Prices Are Skyrocketing Back to the Bubble Years - The March 2013 S&P Case Shiller home price index shows a 10.9% price increase from a year ago for over 20 metropolitan housing markets and a 10.3% change for the top 10 housing markets from March 2012.  This is the highest yearly gain since April 2006.  Prices are soaring at the same pace as the housing bubble return.  Not seasonally adjusted home prices are now comparable to October 2003 levels for the composite-20 and December 2003 for the composite-10.   Below is the yearly percent change in the composite-10 and composite-20 Case-Shiller Indices, not seasonally adjusted. Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data.   All city home prices have had positive gains for three months in a row.  Phoenix prices just keep soaring, up 22.4% from a year ago and Las Vegas, ground zero for the housing bubble, is up 20.6%.  San Francisco is now up 22.3%, back to it's have and have not housing market where one needs to be a millionaire to own a home.  Twelve of the 20 cities saw double digit annual home price increases in their respective areas.  Double digit gains imply the housing bubble has been re-established as home prices are clearly out of reach again for most. S&P also produces a third national index.   S&P is using the not seasonally adjusted national index when they report Q1 2013 home values are up 10.2% from Q1 2012, although the seasonally adjusted change is the same.   Below is the national index, not seasonally adjusted (blue), which are used as the headline numbers, against the seasonally adjusted one (maroon). Below is the quarterly national index percent change from a year ago.  The seasonally adjusted change was 7.3% from Q4 2011 to Q4 2012.   From Q3 2011 to Q3 2012 the change was 3.6%.   The national index also shows soaring prices and a return to not affordable housing.

America’s healthily idiosyncratic housing market - This is the chart of US Case-Shiller prices. You can click to enlarge it, but sometimes it helps to take a step back: The thicker blue line is a composite of 10 cities, the red line is a composite of 20 cities, and the medium-weight green line, for you locals, is New York City. This isn’t the chart you’re possibly familiar with, the one showing the sharp spike upwards in the past few months. That chart measures year-on-year gains; this one shows absolute levels, with January 2000 arbitrarily set as the 100 point. The messages from this chart are different from the ebullient headlines you might be seeing elsewhere. The first message is that house prices aren’t suddenly soaring again: we had a big bubble from about mid-1997 to mid-2006, whe then had a big crash from mid-2006 to mid-2009, and since then we’ve basically just been wiggling sideways: nationwide house prices now are basically back to where they were at the beginning of 2009.The second message is that there are massive regional variations, as you’d expect in a country the size of the USA. After setting every city equal to 100 in January 2000, the range today is enormous: it goes from 81, in Detroit, to 190, in Washington. And for all the bidding-war anecdotes in chattering-class circles about houses selling in one day for way above the asking price, there’s not much sign of frothiness here: indeed, New York prices actually fell in March.

Homes See Biggest Price Gain in Years, Propelling Stocks - Standard & Poor’s Case-Shiller home price index posted the biggest gains in seven years. Housing prices rose in every one of the 20 cities tracked, continuing a trend that began three months ago. Similar strength has appeared in new and existing home sales and in building permits, as rising home prices are encouraging construction firms to accelerate building and hiring.  The broad-based housing improvements appear to be buoying consumer confidence and spending, countering fears earlier this year that many consumers would pull back in response to government austerity measures.  Economists generally expect home prices to continue rising, particularly as the economy improves and more young people move out of their parents’ homes and into homes of their own. And many dismiss concerns of a potential bubble, not only because household formation is growing but also because housing prices remain well below their highs. Even after 10 straight months of year-over-year gains, the 20-city Case-Shiller composite price index is 28 percent below its previous peak in July 2006, which is probably a good thing. “Talk of a house price bubble seems premature,” said Ed Stansfield, an economist at Capital Economics. “In relation to incomes, rents or their own past, U.S. home prices still look low.” What’s more, credit is still hard to come by. The Federal Reserve has pushed interest rates down about as far as they can go, but many people who want to buy are still finding it difficult to get a home loan.

As the Housing Bubble Inflates: Month 9 - Yesterday was all abuzz as the just-released Case-Shiller index for March 2013 revealed that home prices in the U.S. had increased by 10.9 percent from their March 2012 level.  That, of course, is nearly two-month old news. Our first chart jumps a month forward in time to see where things stand through April 2013:  Here, the U.S. Census Bureau reports that median new home sale prices in the U.S. reached a preliminary record value of $271,600 in April 2013, with the 12-month trailing average of median new home sale prices reaching a preliminary record value of $250,633. We say these values are preliminary since they will be revised as additional data is recorded in the next several months. The recent trend has been for the data to be revised upward.  Meanwhile, Sentier Research indicates that median household income has reached a value of $51,546 in April 2013, up from the $51,320 that they previously reported for March 2013. Here, the 12-month trailing average of median household income in the U.S. is $51,301.  In the nine months since the second U.S. housing bubble began to inflate in July 2012, the median sale price of new homes in the United States has increased at an average rate of well over $22 for each $1 increase in median household income. The only period of time in modern American history that had a similar rate of price escalation was the original inflation phase of the first U.S. housing bubble.  Our second chart shows more of that history. The red-dashed line box in the upper right hand corner is detailed in our first chart:

Don’t Believe New Housing Bubble Hype - Recent increases in home prices have already ignited new talk of a housing bubble. Don’t believe it. Some regions are seeing a surge of housing demand amid extremely low interest rates and investors searching for opportunities. And it is true that some regions are up more than 25% from their bottom. But as Dan Greenhaus of BTIG LLC points out, none of the 20 cities tracked by the Standard & Poor’s Case-Shiller home-price indexes is back to its peak level. “Those previous peaks may not have been justified but they were and are largely seen as ‘bubble levels,’” said Mr. Greenhaus. “Can home prices again be in a bubble and yet be 27% below their previous peak? Perhaps, but we don’t yet think so.”

A Look at Case-Shiller, by Metro Area -- Home prices extended a winning streak of year-over-year gains, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 10.9% in March from a year earlier. All 20 cities posted year-over-year gains for January, February and March. Prices in the 20-city index were 1.4% higher than the prior month. Adjusted for seasonal variations, prices were 1.1% higher month-over-month. Only two cities, Minneapolis and New York, posted monthly drops. But on an adjusted basis, no city reported a monthly decline. Read the full S&P/Case-Shiller release.

Real House Prices, Price-to-Rent Ratio, City Prices relative to 2000 - Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.  This is why economists also look at real house prices (inflation adjusted). The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through March) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q3 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to December 2003 levels, and the CoreLogic index (NSA) is back to February 2004. Real House Prices The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q2 2000 levels, the Composite 20 index is back to March 2001, and the CoreLogic index back to March 2001. In real terms, house prices are back to early '00s levels.This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to Q2 2000 levels, the Composite 20 index is back to February 2001 levels, and the CoreLogic index is back to March 2001. In real terms - and as a price-to-rent ratio - prices are mostly back to early 2000 levels.The last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

Don’t Forget the Fed! - There’s a spate of articles out today on the improving housing market, with reference to its positive impact on the overall economy. The latest sign [of the housing recovery] emerged Tuesday as the Standard & Poor’s Case-Shiller home price index posted the biggest gains in seven years. Housing prices rose in every one of the 20 cities tracked, continuing a trend that began three months ago. Similar strength has appeared in new and existing home sales and in building permits, as rising home prices are encouraging construction firms to accelerate building and hiring. The broad-based housing improvements appear to be buoying consumer confidence and spending, countering fears earlier this year that many consumers would pull back in response to government austerity measures. We’ll see re austerity—the cuts and furloughs are slowly unfolding—but there’s no question that the housing market, once a huge anvil around the economy’s neck, is now raising homeowners’ wealth and facilitating stimulative refis into very low mortgage rates. It’s the last part—about the low borrowing rates and especially about the Federal Reserve’s role in pushing them down—that I thought the articles overlooked a bit (excepting the WSJ one, which mentioned this point early on).

Home Sales Power Optimism - The pace of home-price gains has raised concerns among some economists over whether low mortgage rates have stimulated unsustainable home-price inflation—the proverbial bubble that some critics of Fed policies have feared.  The worries about rapid price growth look especially founded in more expensive markets such as San Francisco, Los Angeles and San Diego that have witnessed double-digit price gains over the past year. While home prices still look cheap on a historical basis, "the trouble is that that impression is almost entirely the function of low mortgage rates," said Stan Humphries, chief economist at Zillow Inc. Cheap credit is "distorting housing considerably," he said. Others say it's too soon for alarm. Price gains largely reflect a rebound from low levels and prices remain largely in line with their long-run relationship between incomes and rents, said Christopher Thornberg, an economist with Beacon Economics in Los Angeles. "Could this thing go on too long? Absolutely," he said. "Could it turn into the next bubble? Absolutely. But we're not there yet, so I'm not going to start screaming 'Bubble.' "

Why rising home prices should worry you  -- Home prices are set to soar this summer. The WSJ reports: Home prices rose in the 12 months through March by the most in seven years as the recovery in residential real estate gained momentum. The Standard & Poor’s Case-Shiller index, released Tuesday, showed that all 20 cities had posted year-over-year growth for the third straight month.  But don’t feel rich just yet. Rising home prices may be an indication of easy money policy, not strong economic fundamentals. AEI scholar Ed Pinto warned in an op-ed this spring that the Federal Reserve is blowing another housing bubble by keeping interest rates artificially low. Recent data released by the Federal Housing Finance Agency (FHFA) suggest that the increase in house prices is not being driven by a broad-based improvement in the economy’s fundamentals. Instead, the Fed’s lower rates are simply being capitalized into higher home prices. If that’s the case, Pinto suggests housing could come crashing down again when interest rates go up. Interest rates could go up sooner as opposed to later based on Chairman Bernanke’s testimony last week. With real incomes essentially stagnant, this is a market recovery largely driven by low interest rates and plentiful government financing. This is eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover. Creating over a trillion dollars in additional home value out of thin air does sound like a variant of dropping money out of helicopters.

NAR: Pending Home Sales index increases slightly in April - From the NAR: Pending Home Sales Edge Up in April - The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.3 percent to 106.0 in April from 105.7 in March, and is 10.3 percent above April 2012 when it was 96.1; the data reflect contracts but not closings. Home contract activity is at the highest level since the index hit 110.9 in April 2010, immediately before the deadline for the home buyer tax credit. Pending sales have been above year-ago levels for the past 24 months...The PHSI in the Northeast jumped 11.5 percent to 92.3 in April and is 17.7 percent above a year ago. In the Midwest the index rose 3.2 percent to 107.1 in April and is 15.1 percent higher than April 2012. Pending home sales in the South slipped 1.1 percent to an index of 119.2 in April but are 12.3 percent above a year ago. With pronounced inventory constraints, the index in the West fell 7.6 percent in April to 94.6 and is 2.6 percent below April 2012.  Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in May and June. With limited inventory at the low end and fewer foreclosures, we might see flat or even declining existing home sales.

Chart Of The Day: Crushed US Consumer + All Time High New Home Prices = Record Housing Bubble - We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...

St. Louis Fed Releases Key Findings of New Research Center on Household Financial Stability: In an essay from the Federal Reserve Bank of St. Louis’ new Center for Household Financial Stability, the authors provide data on the damage to household wealth during the Great Recession, explore the circumstances that led to large declines in household wealth, make the case that such wealth has not fully recovered and show why all of that matters for U.S. economic recovery. Boshara and Emmons featured several findings:

  • Average household wealth in real terms, contrary to recent headlines, has not fully recovered; indeed, it is only about halfway back to prerecession levels.
  • While many Americans lost wealth because of the recession, younger, less-educated and/or African-American and Hispanic families lost the most, in percentage terms.
  • Those subgroups had higher-than-average concentrations of their wealth in housing and higher debt-to-asset ratios than less economically vulnerable groups.
  • The very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance sheets.
  • Balance sheet failures were important contributors to the downturn and weak recovery.

Households’ Net Worth Still Faces Long Road to Recovery - Economists at the Federal Reserve Bank of St. Louis say in new research that despite signs to the contrary, U.S. households’ net worth levels have a long way to go to fully recover from the impact of the housing bubble and financial crisis. The findings were released as part of the St. Louis Fed’s 2012 annual report, which was made public on Thursday.. In the report, the Midwestern bank announced the launch of a new Center for Household Financial Stability, which will track the nation’s effort to dig itself out of the hole it found itself in during the financial crisis. In the report, the bank said data shows a near complete recovery in total aggregate wealth is misleading. The analysts argue aggregate household net worth data isn’t adjusted for inflation, population growth or the nature of the wealth. They noted a lot of the recovery in net worth has been tied to the stock market, and is thus concentrated in holdings of wealthy families. “Clearly, the 91% recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45% recovery of wealth losses indicated by the average inflation-adjusted household measure,” the report said. “Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the researchers said. The St. Louis Fed report notes those debt levels and problems with rebuilding net worth have played a large role in the sluggish recovery. It also said those who were hardest hit by job losses and reduced income over recent years were the ones with the most borrowing and riskiest balance sheets.

Regular People Are Only Halfway Recovered From the Recession - "The typical household has regained less than half [the wealth lost in the recession]," according to a new analysis by the St. Louis Fed. "That's far below the estimate in a Federal Reserve report in March that calculated that Americans as a whole had regained 91 percent of their losses." Uhhh... yeah. I mean I understand there's a margin of error in these things and all, but going from "the average American household has regained 91% of its wealth" to "the average American household has regained less than half of its wealth" is a margin of error approaching 100%, for a report that was just issued two months ago, by the same agency. Let's all try a little harder. But just to make sure everyone is all on the same page now, Americans are only halfway recovered from the recession. And furthermore, "The very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance sheets." Anyhow, this new report is surely correct, because it's way more depressing than the last one.

Generation X Hit Hardest By Recession - Members of Generation X, now in their late 30s to late 40s, were especially hard-hit by the recent recession, and are at risk for downward mobility in their retirement years, a new report finds. Generation Xers, the group of Americans following the Baby Boomers, lost nearly half of their overall net worth between 2007 and 2010, according to a report from the Pew Charitable Trusts. Generation Xers lost an average of about $33,000, reducing their “already low” relative levels of wealth, the report found. While Gen-Xers saw greater increases in wealth from home equity during the housing boom, they have lower overall rates of home ownership compared to earlier generations, which mutes the impact on the wealth of their group over all, the report found. The report defined Generation X as those born between 1966 and 1975, so they now range in age from 38 to 47. By comparison, both early and late baby boomers also were hurt by the recession, but to a lesser extent, losing 28 percent and 25 percent of their median net worth, respectively.

Real Median Household Incomes: Up 0.5% in April But Only a Fractional 0.6% Year-over-Year - The Sentier Research monthly median household income data series is now available for April. Nominal median household incomes were up $77 month-over-month and $877 year-over-year. However, adjusted for inflation, real incomes rose $266 (0.5%) MoM but are up only $317 (0.6%) YoY. The reason for the counterintuitive larger increase in MoM real incomes is that the Consumer Price Index for April dropped 0.4% from the previous month.  In the latest press release, Sentier Research spokesman Gordon Green concisely summarizes the recent data. This latest reading on real median annual household income reflects, to a large extent, the reduction in consumer prices of 0.4 percent between March 2013 and April 2013. Even though we are technically in an economic recovery, the most recent experience suggests that real median annual household income is still having difficulty gaining any solid traction. We are watching this household income series closely for signs of any sustained directional movement. I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The first chart below chains the nominal values and real monthly values in April 2013 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for January 2000 and the peak and post-peak trough in between.

Personal Income declined slightly in April, Spending declined 0.2% - The BEA released the Personal Income and Outlays report for April:  Personal income decreased $5.6 billion, or less than 0.1 percent ... in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.5 billion, or 0.2 percent. In March, personal income increased $36.2 billion, or 0.3 percent ... and PCE increased $14.2 billion, or 0.1 percent, based on revised estimates. Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in April, compared with an increase of 0.2 percent in March. ... The price index for PCE decreased 0.3 percent in April, compared with a decrease of 0.1 percent in March. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared with an increase of 0.1 percent. Personal saving -- DPI less personal outlays -- was $306.9 billion in April, compared with $301.4 billion in March. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.5 percent in April, the same as in March.This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.    Some of the decline in spending is probably related to lower gasoline prices in April - and that is actually a positive (gasoline prices rebounded in May though).    Also PCE was revised up for January (slightly), February and March. A key point is that the PCE price index was only up 0.7% year-over-year (1.1% for core PCE).   Core PCE increased at a 0.1% annualized rate in April keeping the pressure off the Fed to taper asset purchase

Weak income growth holding back consumer spending - As discussed previously, economists maintain that in spite of the slowdown in manufacturing, the US consumer should provide the necessary lift to improve growth. According to the theory, with consumer confidence improving, the spending should follow. But that's not exactly what happened. While consumer spending is up on the previous year, the growth in spending has moderated to the lowest level in three years. The  explanation is simple: incomes are just not growing very fast (chart below). The spike in personal income at the end of last year is "tax planning" - shifting of income into 2012 in anticipation of higher taxes in 2013 (taking capital gains, receiving special dividend income, receiving some of 2013 pay in 2012, etc.). Outside of that, income growth has moderated. These days "happy"consumers are not necessarily big spenders - the relationship between sentiment and personal spending growth is not solid. Reuters: - "Consumer spending is on a very modest track because income is not growing very much. Wage gain is very low even though job growth has picked up," .

How Does Income Growth Compare to Other Recoveries? - Consumer surveys out this week show shoppers are feeling much happier about the economy. But that optimism may not translate into spending. While the spirit is willing, the wallet is weak. Steve Blitz, chief economist at ITG Investment Research, points out how miserably real disposable income is growing in this recovery. In fact, the increase since the end of the last recession is the worst for the 7 most recent recoveries that have lasted this long. That lagging trend was the case even before this year’s tax hikes. But all is not lost in the spending outlook. “A lot of spending is generated by those whose habits to buy come out of their equity portfolios rather than their W-2,” says Blitz. That means the continued stock market rally will provide some of the spendable cash that is missing from paychecks. But Blitz still sees the U.S. economy only about 2.5% this year.

April Was A Rough Month For Spending & Income - Consumer spending and disposable personal income declined last month, the US Bureau of Economic Analysis reports. That’s a worrisome sign because the annual rate of growth for both indicators has been trending lower for two years. The margin of comfort, in other words, is wearing thin, and today's report doesn't offer much in the way of encouraging signals for expecting a bullish change in the weather. On a monthly basis the numbers are sobering. Indeed, red ink in April prevailed for both personal consumption expenditures (PCE) and disposable personal income (DPI) for the first time since 2009. You can't tell much from one set of monthly numbers, but historical context doesn't look much better these days. The year-over-year trend continues to slip. Although both PCE and DPI are still rising, the rate of growth continues to grind lower.  Private-sector wages—the main driver of personal income—paint a more encouraging profile from a year-over-year perspective, with April’s growth rate ticking up a bit to 3.8% vs. a year earlier. That’s roughly in line with the trend over the past two years and so from this vantage nothing’s changed. The problem is that wage growth on a month-to-month basis has stagnated, remaining close to unchanged in April. Another month or two of treading water and the annual rate for wages will turn sharply lower.

Analysis: Consumers May Turn Frugal but Won’t Hunker Down - Ryan Sweet, senior economist at Moody’s Analytics and the Wall Street Journal’s Mathew Passy break down the latest reading on personal income and outlays.

April Income Lower Than Expected, Leads To Weaker Spending; Savings Rate At Unsustainable Lows - In yet another confirmation that the US consumer continues to get slammed, and is respectively slamming the GDP by spending less, today's April personal spending and personal income both missed expectations, printing flat and declining -0.2% from the March numbers, much as expected following the Q1 spending spree, which means that economic growth in Q2 and onward as a function of consumer spending will only "taper" going forward especially with the delayed impacts of the payroll tax negative effect on spending finally starting to trickle down. What's worse, is that since incomes did not improve in April, the savings rate remained flat at a minuscule 2.5%, or just off the lowest its has been since the start of the Second Great Fed-propped Depression. Real disposable income actually posted a modest increas. The magic of a lower than expected deflator (-0.3%, Exp. -0.2%).

Real Disposable Income Per Capita: Up Only 0.27% Year-over-Year - Earlier today I posted my latest Big Four update featuring today's release of the April data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The 0.19 percent nominal month-over-month shrinkage is a disturbing move after the pattern of oscillation during November-to-February caused by year-end 2012 tax management strategies. The April nominal data puts us back to the level of October 2012. The real MoM change was 0.6 percent, thanks to the disinflationary trend in the PCE price index used to deflate the series (more on that topic here).The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 50.5% since then. But the real purchasing power of those dollars is up only 14.8%. Year-over-year disposable per-capita income is up a meager 1.01%. But if we adjust for inflation, its only up 0.27%.  Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level.

Consumers Most Confident Since 2007, Celebrate By Biggest Spending Drop In One Year - It doesn't get any better than this. For the fifth month in a row, UMich consumer confidence has beaten expectations and its final print at 84.5 for May is the highest in six years. This 'confidence' survey fits with the conference board's exuberance also. We can only assume that it is the one-year high mortgage rates and considerably lower-than-expected income and spending that is driving it? As a gentle reminder, the US consumer was this cock-a-hoop just before the market last topped in Q3 2007 - so we are not sure if it is 'useful' for anyone but a self-aggrandizing anchoring-biased asset-gatherer. Current economic conditions (at Oct 2007 highs) are surging (as are expectations) by their most since Sep 2009. Of course, in perfect 'correlation' with this 'confidence', these consumers decided that May was the first time in a year to cut spending...

Vital Signs Chart: Americans Saving Less - Americans are socking away less. The personal saving rate—which reflects how much people have left after spending and taxes—fell to 2.3% in the first quarter from 3.6% a year earlier. The rate leapt late last year when fiscal-cliff concerns led some firms to give bonuses early, but it has slid as consumers have spent more despite their incomes being crimped by higher taxes.

Americans Now Know More About Often Pathetic Personal Finances - The only good news in a new report Wednesday on the personal finances of Americans is that now everyone can find out more about how badly many of them are handling their personal finances. In a survey in every state and the District of Columbia that covered 25,509 people, the foundation supported by the Financial Industry Regulatory Authority, working with the Treasury Department and other government entities, found:

  • -Fewer than half, 41%, of Americans spend less than they make.
  • -Over a quarter, 26%, have unpaid medical bills and those under 34 years old are more likely to have them than those who are older.
  • -More than half, 56%, have no rainy-day savings enough to cover surprise financial distress.
  • -Over a third, 34%, pay only the minimum amount on their credit cards.
  • -Younger Americans are more likely to show signs of financial stress.
  • -Of five basic questions about personal finance, the national average was 2.88 correct answers.

The head of the new Dodd-Frank Consumer Financial Protection Bureau reacted to the report with alarm. "We have built the greatest system of economic liberty in the history of mankind," said Richard Cordray, "but it will only endure if we take the necessary steps to strengthen that system from the bottom up, starting with the individual."

Restaurant Performance Index increases in April - From the National Restaurant Association: Restaurant Performance Index Hits 10-Month High as Operators’ Business Expectations Improve Driven by higher same-store sales and an improving outlook among restaurant operators, the National Restaurant Association’s Restaurant Performance Index (RPI) hit a 10-month high in April. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.0 in April, up 0.4 percent from a level of 100.6 in March. In addition, April represented the third time in the last four months that the RPI topped the 100 level, which signifies expansion in the index of key industry indicators. ..The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 100.1 in April – up 0.3 percent from a level of 99.8 in March. April represented the first time in eight months that the Current Situation Index rose above 100, which signifies expansion in the current situation indicators.

Consumer Confidence Beats Expectations, Now at a 5-Year High - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through May 15. The 76.2 reading was above the consensus estimate of 72.5 reported by and 7.2 points above the April upwardly adjusted 69.0 (previously reported at 68.1). This is the highest level for this index since February of 2008.Here is an excerpt from the Conference Board report. "Consumer Confidence posted another gain this month and is now at a five-year high (Feb. 2008, Index 76.4). Consumers' assessment of current business and labor-market conditions was more positive and they were considerably more upbeat about future economic and job prospects. Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike, and sequester."  Consumers' appraisal of present-day conditions improved in May. Those saying business conditions are "good" increased to 18.8 percent from 17.5 percent, while those stating business conditions are "bad" decreased to 26.0 percent from 27.6 percent. Consumers' assessment of the labor market was also more positive. Those claiming jobs are "plentiful" increased to 10.8 percent from 9.7 percent, while those claiming jobs are "hard to get" edged down to 36.1 percent from 36.9 percent.  Consumers' outlook for the labor market was also more upbeat. Those expecting more jobs in the months ahead improved to 16.8 percent from 14.3 percent, while those expecting fewer jobs decreased to 19.7 percent from 21.8 percent. The proportion of consumers expecting their incomes to increase dipped slightly to 16.6 percent from 16.8 percent, while those expecting a decrease edged down to 15.3 percent from 15.9 percent.   [press release]

Consumer Confidence at Five-Year High - A better view of the current economy and the job markets pushed U.S. consumer confidence in May to the highest level since 2008, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence increased to 76.2 in May from a revised 69.0 in April, first reported as 68.1. The board said the May index is the highest since February 2008. Economists surveyed by Dow Jones Newswires had expected the index to increase but only to 72.0. Consumer expectations for economic activity over the next six months jumped again to 82.4 this month from a revised 74.3 last month, which was up more than 10 points from March’s reading of 63.7. April expectations were first reported at 73.3. The board’ present situation index, a gauge of consumers’ assessment of current economic conditions, increased to 66.7 from April’s revised 61.0, originally put at 60.4. The present-situation index is the highest since May 2008, while expectations are the best since October 2012.

A Virtuous Cycle For Housing Prices & Consumer Confidence? - The business cycle bears took another hit yesterday. Home prices rose at a 10.9% annual pace in the March update of the 20-city composite of the S&P/Case-Shiller Home Price Index. That's the fastest rate of increase in seven years. Meanwhile, consumer confidence rose to a five-year high this month, the Conference Board reports. Two data points alone are suspect, but looking at yesterday's numbers in context with a broader review of economic and financial indicators suggests once again that the economy will continue to expand at a modest rate for the foreseeable future.  Were you expecting a recession? That's been the forecast from a handful of analysts for some time. But the latest reports throw cold water (again) on the idea that the economy is succumbing to the darker angels of the business cycle. There's no law that says recessions can't begin when housing prices are rising in excess of 10% a year, but it's unlikely. When the main source of wealth on household balance sheets is climbing at a healthy pace, that's usually a big positive for the economy.

Vital Signs Chart: Confidence Up, but Still Below Prerecession Levels - Americans are gaining confidence in the economy. The Conference Board’s consumer index rose 7 points this month to a five-year high of 76.2. Rising stock prices, improving home values and steady job gains are lifting consumer expectations about the economy. Yet many Americans don’t expect incomes to rise and overall confidence remains below the prerecession average of 105.

Consumer Sentiment at Highest Level Since 2007 - U.S. consumers’ view of the economy remained solid this month, according to data released Friday. The Thomson-Reuters/University of Michigan final-May consumer sentiment index edged up to 84.5 after the preliminary May index jumped to 83.7 from 76.4 at the end of April, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires had expected the final-May index to increase to 84.0. The end-May reading is the highest since July 2007. The current conditions index for all of May rose to 98.0 from the preliminary reading of 97.5, while the expectations index increased to 75.8 from 74.8. The current index is the highest since August 2007. The mood among consumers has shifted. On Tuesday, the Conference Board reported its measure of consumer confidence in May increased to the best reading since February 2008. The shift comes despite higher tax rates and still only modest job growth so far this year. Households may be reacting to better housing markets and rising home values as well as gains in stock prices.

Michigan Consumer Sentiment: Highest Since July 2007 - The University of Michigan Consumer Sentiment final number for May came in at 84.5, up from the 83.7 preliminary reading and a major advance over the April final reading of 76.4. This indicator remains at the highest level since July of 2007, prior to the Great Recession. The consensus was for the index to remain unchanged at its May preliminary level of 83.7. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now only 1% below the average reading (arithmetic mean) and is spot on the geometric mean. The current index level is at the 42nd percentile of the 425 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us about 15 points above the average recession mindset and 3 points below the non-recession average. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average. 

Weekly Gasoline Update: A Slight Ease in Prices Before Memorial Day - 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 fell three cents and Premium one cent. Since their interim high in late February, Regular is down 14 cents and Premium 17 cents. According to, five states are averaging above $4.00 per gallon, down from eight last week. Six states are in the 3.90-4.00 range, unchanged from last week.

Gasoline prices spike in Midwest - Gasoline prices have smashed records in much of the upper Midwest as refinery outages, low inventories and continuing high crude oil prices have combined to inflict pain at fuel pumps on the eve of the summer driving season. Prices hit a record $4.27 a gallon in Minnesota on May 20, up 80 cents in less than a month, according to AAA’s Daily Fuel Gauge Report. In North Dakota, where the production of crude oil has been booming, gasoline prices set a record of $4.24 on Wednesday, up 64 cents in less than a month. The federal Energy Information Administration’s weekly petroleum report blamed the sharp price increases in the Midwest on “both planned and unplanned refinery maintenance.” It said that as a result of limited gasoline production, “inventories, which were robust going into turnaround season, have been significantly depleted.” The agency said getting extra supplies from the Gulf of Mexico coast by pipeline could take as long as three weeks.

How safe is that bridge you're driving over? - When a bridge fails, such as the I-5 bridge in Washington state, it raises questions about the safety of millions of travelers. Where are America's risky bridges? Are interstate bridges being properly inspected? What will it take to make the nation's bridges safer? We shouldn't be worried, but we should be wary: that's the message from the American Society of Civil Engineers, which puts out a "report card" on the safety and maintenance of U.S. bridges. That may be a passing grade, but it's not good enough, says infrastructure expert Barry LePatner. That's because there have been nearly 600 bridge failures since 1989, LePatner told CNN. And one out of every nine U.S. bridges is rated as "structurally deficient," according to the ASCE. Thursday's collapse was apparently caused when a tractor-trailer struck one of the overhead beams of the bridge, which is nearly six decades old. LePatner said it is "totally unacceptable" that the bridge did not have another support structure."Bridges today have redundancy so that where you have something hitting a structural element, there (are) other supports to keep the bridge up,"

The Falling-Bridge Lesson: The U.S. Infrastructure Failure Is Still Totally Inexcusable - When a bridge falls in America -- like this one near Seattle on Thursday night -- infrastructure spending has a way of transforming from a fringey bugaboo to A1 national obsession. Fortunately, falling bridges in America are still a rarity. Unfortunately, infrastructure spending is being unnecessarily squeezed by sequestration and the incredible shrinking discretionary budget at the very moment that infrastructure spending is a historic bargain for the federal government. Public construction spending has been declining since the middle of the recession in outright terms ... ... and as a share of the economy, it's at a 20-year low (the lowest on record with St Louis Fed data). Our construction budget has been the victim of deficit fears, but it's the infrastructure deficit that's truly absurd.

Oil & Trains - I am impressed by soaring oil production in the US, which rose to a new cyclical high of 7.3mbd in mid-May. This output boosts industrial production. It also has been a windfall for the railroad industry where weekly car loadings of petroleum and chemical products has soared 41% over the past four years to a record high of 43,085 units in mid-May. That activity is helping to stoke the forward earnings of the S&P 500 Railroads into record territory.

Durable Goods up 3.3%, yet, not the Great Wunderful for April 2013 -  The Durable Goods, advance report shows new orders increased by 3.3% for April 2013.  Wall Street soars, yet the gains are on volatile aircraft new orders.   Aircraft and parts new orders from the non-defense sector increased 18.1% and jumped 53.3% from the defense sector.   Excluding all transportation, new orders rose 1.3%.   Core capital goods new orders increased 1.2%.  Below is a graph of all transportation equipment new orders. Core capital goods new orders increased 1.2% for April, which is a much better indicator overall for economic activity.  Machinery increased 1.9% in new orders after two months of declines.  Computers also bounced back with a 3.6% increase in new orders after poor showing for the previous two months.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves.

Durable Goods Orders Still Decelerating Despite Fed Money Printing -  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. from Census Bureau. The consensus forecast was for an increase of 1.6% according to the widely followed survey by As usual, they weren’t close.  The old seasonal adjustment bugaboo reared its ugly head. That and the fact that most economists are quacks practicing the dark arts of economics fraudquackery means that they almost never guess the number.The media frames it as the economy beating forecasts. In reality the economy does not “beat” or “miss.” The economy is what it is. All the guesswork about what the numbers will be and the attention the media gives that, are just silliness. But that’s the game and many traders play it, trying to guess whether the number will “beat” or “miss,” and on top of that, trying to guess how the market will react to that. It’s a bit of a fool’s errand.April Real Durable Goods Orders, adjusted for inflation and not seasonally manipulated, rose 3.2% year over year. That compares with a 3.5% year to year decrease in March. In spite of the uptick, the annual rate of change remains in the declining trend in which it has been since early 2010. This deceleration has been consistent whether the Fed was pumping QE full bore or was in a pause. After the initial rebound in 2010, the Fed’s money printing has had no discernible impact. This isn’t new. It’s part of a downtrend in US manufacturing that has persisted since 1999.

May Vehicle Sales forecast to be at or above 15 million SAAR - Note: The automakers will report May vehicle sales on Monday, June 3rd (next Monday). Here are a few forecasts: From J.D. Power: J.D. Power and LMC Automotive Report: May New-Vehicle Retail Selling Rate Expected to be 1 Million Units Stronger than a Year Ago Total light-vehicle sales in May 2013 are expected to increase to 1,439,400, up 8 percent from May 2012 [forecast is 15.2 million Seasonally Adjusted Annual Rate, SAAR]. Fleet sales have generally been weaker than expected in 2013, but continue to average nearly 21 percent of total sales. Fleet sales in May 2013 are projected to reach 281,000 units, representing less than 20 percent of total sales.  From TrueCar: May 2013 New Car Sales Expected to Be Up Almost Nine Percent According to TrueCar; May 2013 SAAR at 15.2M, Highest May SAAR The May 2013 forecast translates into a Seasonally Adjusted Annualized Rate ("SAAR") of 15.2 million new car sales, up from 14.9 April 2013 and up from 13.9 million in May 2012. From Kelley Blue Book: New-car Sales To Improve 6 Percent In May With Help From Memorial Day Weekend Sale Events New-car sales will hit 15.0 million seasonally adjusted annual rate (SAAR) in May, which is an expected 6 percent year-over-year improvement, according to Kelley Blue Book ...

Lower Commodities Prices Provide Economic Tailwind - Lower prices for commodities from cotton to copper are helping U.S. businesses by reducing their raw-material costs and buoying consumers by keeping a lid on prices paid. Copper, used in many goods including electronics, is off nearly 10% this year. Silver, which has various industrial uses, has tumbled more than 25%, and wheat is down more than 10%.Cotton prices are up a bit this year, but they are down about 50% since a surge two years ago. Cheaper commodities have a dark side, as they reflect weak global growth. But they also act as a subtle economic stimulus. Consumers paying less for clothes have more to spend on cars and dinners out, while companies pay less for many costly supplies. Lower commodity prices are one reason inflation remains subdued. U.S. consumer prices rose 1.1% in April from a year earlier, well below the Federal Reserve's target of about 2%. In The Wall Street Journal's latest survey of economists, 47.5% said weakness in commodity prices was a worrying sign, but 52.5% saw an encouraging signal of lower costs for businesses and consumers.

Richmond Fed Manufacturing: Still Contracting, But Less Pronounced - The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to nation's Central Bank. The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Today the manufacturing composite remains in contraction territory at -2, but that is a slower rate than the -6 of April. Because of the highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends (now at -1.7).Manufacturing activity in the central Atlantic region contracted at a less pronounced rate in May after pulling back in April, according to the Richmond Fed’s latest survey. Looking at the main components of activity, volume of new orders edged lower and employment turned marginally negative. Shipments however, moved into positive territory. Evidence of diminished weakness was also reflected in most other indicators. District contacts reported that backlogs and capacity utilization remained negative but improved from April readings, while the gauge for delivery times turned positive. In addition, inventories grew at a slightly slower rate.

Dallas and Richmond Fed: Regional Manufacturing Activity mixed in May - These are the last two regional manufacturing surveys for May. From the Richmond Fed: Manufacturing Activity Declined At A Slightly Slower Rate In May; Expectations Improved Manufacturing activity in the central Atlantic region contracted at a less pronounced rate in May after pulling back in April, according to the Richmond Fed’s latest survey. In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained four points settling at −2 from April's reading of −6. Among the index's components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at −10, and the jobs index subtracted six points to end at −3. And from the Dallas Fed: Texas Manufacturing Activity Expands Texas factory activity increased sharply in May, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from -0.5 to 11.2, indicating a notable pickup in output.. The new orders index rebounded to 6.2 after falling to -4.9 in April. Similarly, the shipments index bounced back to 3.1 after dipping to -0.4. The capacity utilization index came in at 6.4, up from 2.7 last month. The general business activity index remained negative but moved up five points to -10.5. The company outlook index declined from -2.2 to -6.8, reaching its lowest level since July 2010. Labor market indicators reflected weaker labor demand. The employment index fell to -6.3 in May, registering its first negative reading this year and reaching its lowest level since November 2009.  Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Final May Consumer Sentiment increases to 84.5, Chicago PMI increases sharply to 58.7

  • • The final Reuters / University of Michigan consumer sentiment index for May increased to 84.5 from the April reading of 76.4, and up from the preliminary reading of 83.7. This is the highest level since July 2007. This was above the consensus forecast of 83.7. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011.
    • From the Chicago ISM:   The Chicago Purchasing Managers reported April's Chicago Business Barometer sprung 9.7 to 58.7, the highest since March 2012 and in sharp contrast to April's 3-1/2 year low. All Business Activity measures surged in May, reversing weakness seen in most categories in March and April. PMI: Increased to 58.7 from 49.0. (Above 50 is expansion).

Chicago-Area Manufacturers See Strong Growth - A recovery in orders for U.S. manufacturers sent the keenly-watched Chicago Business Barometer to a forecast-beating 58.7 in May, rebounding after hitting its lowest level in more than three years in April. The latest survey of Chicago-area purchasing managers, better known as the Chicago PMI, was well above the consensus of 50.3 among economists surveyed by Dow Jones Newswires, and hit its highest level since March, 2012. The seasonally-adjusted index of 58.7 for May — released Friday by the Institute for Supply Management-Chicago — compares with the 49.0 recorded in April. A reading above 50 indicates expansion. Of the five business activity measures in the indicator, production was the strongest performer, jumping to 62.7 from 49.9 in April. New Orders rose to 58.1 from 53.2, employment climbed to 56.9 from 48.7. Supplier deliveries jumped to 52.3 from 47.9 and prices paid increased to 55.3 from 51.0.Order backlogs rose to 53.1 from 40.6, hitting its highest level since December, 2011.

Chicago PMI Soars To Highest Since March 2012 Crashing Expectations, Respondents Despondent - So much for all the other diffusion indices, both around the world and in the US, telegraphing manufacturing contraction. Three minutes before its official release, the rumor was that the subscribers had seen a 58.7 print, on expectations of a 50.0 number, and up from 49.0 Sure enough, this is just what happened when the official number hit, leading the Chicago PMI to the highest print since March 2012: a 8 sigma beat to the consensus print and far higher than the biggest forecast. And while last time the plunge in the PMI was bullish for stocks as it meant no Tapering, today the beat is also bullish because it means QE is working, and as a result the stock market has wiped out all earlier losses. Looking at the report, backlogs, deliveries and employment all snapped out of sub 50 contraction, while production soared from 49.9 to a ridiculous 62.7. Even employment soared from 48.7 to 56.9. Amusingly, the only thing that dipped in April was Inventories, down from 40.6 to 40.4.

In shift, high-tech firms look to add factory jobs in U.S - Motorola Mobility, once a pioneer in shifting manufacturing to China, is opening a smartphone factory in Texas, the company said Wednesday, joining a small but growing movement toward bringing technology jobs to the United States. The decision follows announcements by major tech firms, including Apple and Lenovo , planning to add U.S. manufacturing capacity after more than a decade in which the flow was almost exclusively in the other direction — with millions of jobs going to East Asian factories known for low wages and minimal labor protections. The shifts to the United States are fledgling, and some industry experts say the companies are motivated less by long-term manufacturing needs than by public relations strategy. At a time of rising governmental scrutiny of technology companies, analysts say, there are few better ways to acquire allies on Capitol Hill than to create manufacturing jobs in lawmakers’ home districts. But Motorola Mobility officials said they see significant business logic to having a factory close to the engineers who are designing a new flagship smartphone and the customers they hope will buy it. Officials say it aids innovation while allowing for leaner inventories and lower shipping costs.

Once again, the US consumer is expected to save the day - The "seasonal" manufacturing activity slowdown in the US (discussed here) has arrived on schedule. It is visible not just in the Markit PMI measure (below), but across other national and regional indicators as well.Here are some recent news quotes on the subject:

    • CSM: - The Federal Reserve said that U.S. factories cut back sharply on production in April, as automakers produced fewer cars and most other industries scaled back.
    • IBT: - A key index of U.S. manufacturing fell in April more than expected, the Institute for Supply Management said Wednesday. The ISM's purchasing managers index fell to 50.7 from March's 51.3, more that the 50.9 expected by analysts polled by Thomson/Reuters I/B/E/S.
    • MarketWatch: — Manufacturers in the Philadelphia region reported fewer orders for their products in May and became more skittish about hiring new workers, offering further evidence the economy is struggling to grow.
    • - Manufacturing activity in the State of New York fell unexpectedly last month, official data showed on Thursday. In a report, Federal Reserve Bank of New York said that Empire State manufacturing activity fell to a seasonally adjusted -1.4, from 3.1 in the preceding month.

But no worries. Why bother with manufacturing when US personal consumption remains firmly above 70% of the GDP

Postal Service is on its last legs, with little help in sight –  The Postal Service lost $1. 9 billion between January and March, and $15. 9 billion last year. The 238-year-old institution loses $25 million each day, and has reached its borrowing limit with the federal Treasury. Daily mail delivery could be threatened within a year, officials say. Americans increasingly go online to write letters, pay bills and read magazines, and mail volume has fallen by a quarter since 2006, according to the Government Accountability Office. The decline is expected to continue. Postmaster General Patrick Donahoe has reduced staff, consolidated mail facilities and lowered express delivery standards in an effort to cut spending. But the savings have not been enough to match the drop in revenue. “We are in real trouble, and we need comprehensive postal reform yesterday,” Mickey Barnett, chairman of the Postal Service Board of Governors, told a congressional committee last month. The Postal Service is a government corporation, which means it is organized like a business yet subject to congressional oversight. Consequently, reform is difficult, said Mike Schuyler, a fellow at the Washington-based Tax Foundation who has studied postal issues for nearly two decades. “The Postal Service has far too little flexibility when it needs to adjust, and it’s really in handcuffs because of all the requirements Congress puts on it,” Schuyler said.

Weekly Initial Unemployment Claims increase to 354,000 -  The DOL reports: In the week ending May 25, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 10,000 from the previous week's revised figure of 344,000. The 4-week moving average was 347,250, an increase of 6,750 from the previous week's revised average of 340,500.  The previous week was revised up from 340,000. 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 347,250. Claims were above the 340,000 consensus forecast

Weekly New Unemployment Claims at 354K, Higher Than Forecast - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 354,000 new claims number was a 10,000 increase from the previous week's upwardly revised 344,000 (originally 340,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, jumped by 6,750 to 347,250. Here is the official statement from the Department of Labor: In the week ending May 25, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 10,000 from the previous week's revised figure of 344,000. The 4-week moving average was 347,250, an increase of 6,750 from the previous week's revised average of 340,500.  The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 18, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 18 was 2,986,000, an increase of 63,000 from the preceding week's revised level of 2,923,000. The 4-week moving average was 2,986,500, a decrease of 11,500 from the preceding week's revised average of 2,998,000.  Today's seasonally adjusted number was above the consensus estimate of 340K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

Vital Signs Chart: Fewer Mass Layoff Events - U.S. firms in April conducted 1,199 mass layoffs — job cuts involving at least 50 employees — involving 116,849 workers, seasonally adjusted. That was down from 1,337 mass layoffs a month earlier and the lowest showing since June 2007. The number of mass layoffs has averaged 1,322 a month this year, slightly below the average of 1,351 in the first fourth months of 2012.

Let Them Make Their Own Jobs - American Express’s chief executive adopted a kinder tone in his commencement speech this year at the University of Massachusetts, Amherst, but offered a similar message. Acknowledging that jobs are hard to find, he emphasized that new technology makes it easier to invent them. Yes, but that is slim consolation to college graduates who face weak demand for their hard-won skills either as workers or entrepreneurs. Their new diplomas may send them to the front of the employment line, but the jobs they find there don’t offer as much money or career potential as before.A recent report from the Economic Policy Institute estimates that the inflation-adjusted wages of young college graduates declined 8.5 percent from 2000 to 2012. Graduating in a poor job market has long-lasting negative consequences. Such lemony facts can be turned into lemonade and sold by the side of the road. The business news media brims with celebration of millennial entrepreneurship and the rise of freedom-seeking freelancers. But entrepreneurship goes up with joblessness partly because it just sounds so much more hopeful. It also looks better on a résumé, since reported spells of unemployment reduce job chances.

Breadwinner Moms | Pew Social & Demographic Trends: A record 40% of all households with children under the age of 18 include mothers who are either the sole or primary source of income for the family, according to a new Pew Research Center analysis of data from the U.S. Census Bureau. The share was just 11% in 1960. These “breadwinner moms” are made up of two very different groups: 5.1 million (37%) are married mothers who have a higher income than their husbands, and 8.6 million (63%) are single mothers.1 The income gap between the two groups is quite large. The median total family income of married mothers who earn more than their husbands was nearly $80,000 in 2011, well above the national median of $57,100 for all families with children, and nearly four times the $23,000 median for families led by a single mother.2 The groups differ in other ways as well. Compared with all mothers with children under age 18, married mothers who out-earn their husbands are slightly older, disproportionally white and college educated. Single mothers, by contrast, are younger, more likely to be black or Hispanic, and less likely to have a college degree.

Labor union decline, not computerization, main cause of rising corporate profits - "Some economists contend that computerization is the primary cause and that it has increased the productivity of machines and skilled workers, prompting firms to reduce their overall demand for labor, which resulted in the rise of corporate profits at the expense of workers' compensation," Kristal said. "But, if that were the case, and computerization was the principal cause for the decline in labor's share of national income, then labor's share should have declined in all economic sectors, reflecting the fact that computerization has occurred across the board in the past 30 to 40 years." This is not the case, however, as Kristal showed in her study, in which she considered data on 43 non-agricultural private industries and 451 manufacturing industries from 1969 through 2007. "It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor's share of income," Kristal said. "By contrast, in the lightly unionized industries of trade, finance, and services, workers' share stayed relatively constant or even increased. So, what we have is a large decrease in labor's share of income and a significant increase in capitalists' share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers' bargaining power, was the main force behind the decline in labor's share of national income."

Walmart Workers Launch First-Ever 'Prolonged Strikes' Today  -Walmart employees are on strike in Miami, Massachusetts and the California Bay Area this morning, kicking off what organizers promise will be the first “prolonged strikes” in the retail giant’s history. The union-backed labor group OUR Walmart says that at least a hundred workers have pledged to join the strikes, and that some workers walking off the job today will stay out at least through June 7, when Walmart holds its annual shareholder meeting near Bentonville, Arkansas. Organizers expect retail employees in more cities to join the work stoppage, which follows the country’s first-ever coordinated Walmart store strikes last October, and a high-profile Black Friday walkout November 23. Like Black Friday’s, today’s strike is being framed by the union-backed labor group OUR Walmart as a response to retaliation against worker-activists.

Ongoing joblessness: A national catastrophe for African American and Latino workers - As my colleague Heidi Shierholz has noted, the recent “hold steady” jobs report represent an ongoing disaster for all workers. But historically, and since the Great Recession, unemployment has inflicted significantly more pain on black and Hispanic workers. EPI recently released five reports on unemployment through the recession that reveal the depth of suffering among black and Hispanic workers in states with large minority populations, focusing particularly on black and Hispanic unemployment in  Michigan, Mississippi, New Mexico, North Carolina, and Texas. Coupled with historic barriers to employment for people of color, the economic collapse of the recession and painfully slow recovery have taken a much greater toll on African Americans and Hispanics than whites. The figure below shows the significant disparities in black-white and Hispanic-white unemployment in the U.S. over the last 34 years. African American unemployment rates have almost always been at least twice—and sometimes more than two and a half times—that of whites since 1979. Even at the depths of the Great Recession, when white unemployment was much higher, the black unemployment was 1.88 times that of whites. At this disparity’s peak in 1989, the black unemployment rate was 2.71 times the white unemployment rate. Likewise, Hispanic unemployment rates have been at least one and a half times (and, throughout the 90s, more than twice) that of whites since 1979.

US Worker Wages: "Not Off The Lows" - The chart below shows the year over year change in real wages and the 5 year moving average. The most recent print was not unexpectedly negative. However, where it gets even worse is when one normalizes for volatility by extending the comparison period to encompass more than just 4 quarters, and stretches the duration to a 2 year period over period change in real US wages. Look at this way, the change in real US wages has never been worse... ... and sadly is not off the lows.  But aside from this minor fact, the US consumer has not been more confident in 5 years.

A Brand New Report Shows Just How Wrong Silicon Valley's Claim Of A 'STEM Shortage' Is - A popular meme of the immigration debate has to do with the claim from technology companies that there's a Science, Technology, Engineering and Math (STEM) worker shortage in the United States. This is frequently used to bolster the argument that the U.S. should increase the number of temporary visas issued to foreign-born workers in order to fulfill demand in the tech industry for techie talent. A new report from the esteemed Georgetown Center on Education and the Workforce presents a pretty significant rebuttal to that claim. Released on Wednesday, the annual report looks at how new college graduates are faring in the recession-era economy.  Most interesting is the technology sector numbers. Were there truly a STEM shortage — were demand for STEM majors to exceed supply — one would expect that unemployment statistics for recent STEM graduates would be outstandingly low. The reality? Nope. From the report: Unemployment seems mostly concentrated in information systems (14.7 %) compared with computer science (8.7%) and mathematics (5.9%). As noted in an earlier report, hiring tends to be slower for users of information compared to those who write programs and create software applications. Let's get a little perspective here. According to the report, new information science graduates have worse unemployment than sociology (9.9%), archaeology (12.6%) and English (9.8%) majors.

The Great U.S. Worker Sell Out Through Comprehensive Immigration Reform - There is a war going on and it is against the U.S. worker.  Tech companies have formed lobbyist groups, phony think tanks and social media traps.  CEOs luncheon with the President of the United States, whispering their demands in the President's ear and he heartily obliges them  Tech companies even wrote legislation, which was promptly passed by the Senate Judiciary committee under the guise of Comprehensive Immigration Reform.  We are being inundated with lies and fictional white papers, all to labor arbitrage American technical professionals buried into Comprehensive Immigration Reform.  As a result, Big Tech Business is getting all the cheap labor they want:More than any other group, the high-tech industry got big wins in an immigration bill approved by the Senate Judiciary Committee last week, thanks to a concerted lobbying effort, an ideally positioned Senate ally and relatively weak opposition.The result amounted to a bonanza for the industry: unlimited green cards for foreigners with certain advanced U.S. degrees and a huge increase in visas for highly skilled foreign workers.And thanks to the intervention of Sen. Orrin Hatch, R-Utah, the industry succeeded in greatly curtailing controls sought by Sen. Dick Durbin, D-Ill., aimed at protecting U.S. workers.In exchange, Hatch voted for the bill when it passed the committee, helping boost its bipartisan momentum as it heads to the Senate floor next month.

Do low wages for unskilled workers weaken the case for more immigration? - Here is a point which I think the anti-immigration forces are getting wrong, mostly on the side of economics.  It can be pointed out that low-skilled (native) labor in the United States has not seen strong income gains for some time.  You might then wonder whether it makes sense to bring more unskilled labor into the country. In my view the evidence (and here) suggests that the negative wage pressures on unskilled labor, to the extent they have international origins at all (as opposed to TGS or automation or political factors), come more from outsourcing and trade than from immigration.  So if you limit low-skilled immigration, outsourcing likely will go up, as it would be harder to find cheap labor in the United States.  The United States will lose the complementary jobs as well, such as the truck driver who brings cafeteria snacks to the call center.  Conversely, if you increase low-skilled immigration, you will also get more investment in the United States and more complementary jobs as well and possibly some increasing returns from clustering and maybe more net tax revenue too.  On top of that the individuals themselves have greater choice as to where to spend their lives and build their careers.

Some International Minimum Wage Comparisons - The Global Wage Report 2012/13 from the International Labour Organization has this useful figure comparing minimum wages across high-income countries.  The horizontal axis shows the minimum wage as a percentage of the median wage for the country. By this measure, the U.S. minimum wage ranks among the lowest in the world at less than 40% of the median wage, although comparable to Japan and Spain. France and New Zealand have a minimum wage that is about 60% of the median wage. The vertical axis shows the minimum wage converted to dollars (using the purchasing power parity exchange rate). By this measure, the U.S. minimum wage is middle-of-the-pack, above Japan and similar to Canada, although well below the United Kingdom, France, Australia, and Netherlands. For a post on how the minimum wage affects employment and prices, see my February 2013 post on "Minimum Wage and the Law of Many Margins."  For a post on proposals to raise the minimum wage, see my November 2012 post on "Minimum Wage to $9.50? $9.80? $10?"

The hollowed middle - What has happened to inequality in recent years? By one standard, it's increased; the share of pre-tax incomes going to the top 1% has rose from 10.4% in 1993 to 13.9% in 2010. By another standard, though, it hasn't much changed lately. Gini coefficients rose sharply between the mid-70s and early 90s but have since moved more or less sideways (figure 5 here). There's no inconsistency between these two facts. The Gini coefficient measures all inequalities whilst the top 1% ratio measures just one. It's possible, then, for the top 1% to pull away from everyone else without increasing the Gini, as long as inequalities elsewhere in the income distribution are falling.  Which poses the question: if inequality between the top 1% and the rest has risen, in what offsetting sense has inequality fallen? My table helps answer this. It shows ratios of income to the bottom decile for three years: 1977 (when current data began); 1993, when the Gini peaked; and 2010-11, the latest year available. I'm using two measures of income: original, which is pre-tax incomes from wages, savings and suchlike; and disposable, which are after directs taxes and benefits*.  This shows that between 1977 and 1993 all income deciles pulled away from the bottom two deciles. In 1977, the top decile's disposable income was 5.23x that of the bottom, but in 1993 it was 9.2x.

Inequality on the Horizon of Need - By any economic measure, we are living in disappointing times. In the United States, 7.2% of the normal productive labor currently stands idle, while the employment gap in Europe is rising and due to exceed that of the US by the end of the year. So it is important to step back and remind ourselves that the “lost decade” that we are currently suffering is not our long-run economic destiny. But what is our long-run economic destiny? Keynes looked forward to a time, perhaps 2050, when everyone (in England, at least) would be able to have the lifestyle of a Keynes.  We are wiser – and perhaps sadder – than Keynes. We know that we want hip replacements and heart transplants and fertility treatment and cheap air travel and central heating and broadband Internet and exclusive beachfront access. Already nearly everybody in the North Atlantic region has enough food to avoid hunger, enough clothing to stay warm, enough shelter to remain dry. And yet we want more, feel resentful when we do not get it, and are self-aware enough to know that luxuries turn into conveniences, and then into necessities – and that we are very good at inventing new luxuries after which to strive. But at least we can count on being able to generate a relatively egalitarian middle-class society as we collectively slouch toward our consumerist utopia, right? It was Karl Smith of the University of North Carolina who explained to me that this was likely to be wrong. The long post-Industrial Revolution boom, which carried unskilled workers’ wages to previously unheard-of heights – keeping them within shouting (or at least dreaming) distance of the lifestyles of the rich and famous – is not necessarily a good guide to what will come next.

No one really believes in ‘equality of opportunity’, by Ezra Klein: ...Everyone in American life professes to believe in equality of opportunity. But nobody really believes in it. ... You can’t have real equality of opportunity without equality of outcome. A rich parent can purchase test prep a poor parent can’t. A rich parent can usher their children into social networks a poor parent can’t. A rich parent can make donations to Harvard that a poor parent can’t. When people say they believe in “equality of opportunity,” they really mean they believe in “sufficiency of opportunity.” They don’t believe all children should start from the same place. But they believe all children should start from a good enough place. They believe they should have decent nutrition and functioning schools and a safe community and loving parents. They believe they should have a chance. The question is what they’re willing to do about that belief. Democrats who believe in sufficiency of opportunity tend to want to spend more on health care and education for the poor. ... They believe that the less children or their parents need to worry about staying afloat, the more they’ll be free to work to get ahead.

About those 11 million Americans getting federal disability benefits … -- New Social Security Administration data show just shy of 11 million Americans — including workers and their family — receiving Social Security disability benefits. That’s up 24% since the start of the Great Recession and 16% since the downturn officially ended. So to what extent is the surge in disability rolls contributing to the decline in US labor force participation — and perhaps a larger permanent pool of jobless Americans? Economists blame persistently high EU unemployment in the 1980s on the relatively easy availability of long-term jobless benefits. Likewise, few SSDI recipients ever return to the labor market. And the econ team at Goldman Sachs has found that higher unemployment “statistically boosts the growth in SSDI benefit recipients at the state level, consistent with the idea that SSDI applications and enrollment do not depend purely on objective health criteria but also on the state of the economy.” In effect, SSDI partly functions as a sort of long-term unemployment insurance, a role greatly enabled, according to a paper by David Autor and Mark Duggan by “congressional reforms to disability screening in 1984 that enabled workers with low mortality disorders such as back pain, arthritis and mental illness to more readily qualify for benefits … Notably, the aging of the baby boom generation has contributed little to the growth of SSDI to date.” Total costs? SSDI payments ($137 billion) + related Medicare payments ($80 billion) + loss of economic output ($95 billion, according to JPMorgani) = $312 billion a year.

From the Mouths of Babes, by Paul Krugman -  I usually read reports about political goings-on with a sort of weary cynicism. Every once in a while, however, politicians do something so wrong, substantively and morally, that cynicism just won’t cut it; it’s time to get really angry instead. So it is with the ugly, destructive war against food stamps.  Food stamps have played an especially useful — indeed, almost heroic — role in recent years. In fact, they have done triple duty.  First, as millions of workers lost their jobs through no fault of their own, many families turned to food stamps to help them get by — and while food aid is no substitute for a good job, it did significantly mitigate their misery. Food stamps were especially helpful to children who would otherwise be living in extreme poverty, defined as an income less than half the official poverty line.  But there’s more. Indeed, estimates from the consulting firm Moody’s Analytics suggest that each dollar spent on food stamps in a depressed economy raises G.D.P. by about $1.70 — which means, by the way, that much of the money laid out to help families in need actually comes right back to the government in the form of higher revenue.  Food stamps greatly reduce food insecurity among low-income children, which, in turn, greatly enhances their chances of doing well in school and growing up to be successful, productive adults. So food stamps are in a very real sense an investment in the nation’s future — an investment that in the long run almost surely reduces the budget deficit, because tomorrow’s adults will also be tomorrow’s taxpayers.  So what do Republicans want to do with this paragon of programs? First, shrink it; then, effectively kill it.

The New Crime of Eating While Homeless - Whenever one of our cities gets a star turn as host of some super-sparkly event, such as a national political gathering or the Super Bowl, its first move is to tidy up — by having the police sweep homeless people into jail, out of town, or under some rug. But Houston’s tidy-uppers aren’t waiting for a world-class event to rationalize going after homeless down-and-outers. They’ve preemptively outlawed the “crime” of dumpster diving in the Texan city.In March, James Kelly, a 44-year-old Navy veteran, was passing through Houston on his way to connect with family in California. Homeless, destitute, and hungry, he chose to check out the dining delicacies in a trash bin near City Hall. Spotted by police, Kelly was promptly charged with “disturbing the contents of a garbage can in the [central] business district.” Seriously. “I was just basically looking for something to eat,” he told the Houston Chronicle. But, unbeknownst to both this indigent tourist and the great majority of Houston’s generally generous citizens, an ordinance dating way back to 1942 says that “molesting garbage containers” is illegal. Also, in 2012, city officials made it a crime for any group to hand out food to the needy in the downtown area without first getting a permit. It’s a cold use of legal authority to chase the homeless away to…well, anywhere else.

Banner Week for Politicians Trying to Keep Poor People Hungry and Sick - First, Louisiana Senator David Vitter, sad little boy and lover of prostitutes, proposed an amendment to the long-delayed farm bill that would make certain ex-cons ineligible from food stamps for life. Senate Democrats working on the bill accepted this amendment, because at this point, why not? The amendment would ban convicted murderers, rapists, and pedophiles from ever receiving the ability to buy food for themselves, even after their release from prison, making life harder for people who have already paid their debt to society. "Suppose you did something terrible when you were 19, and you were straight the rest of your life, you paid your debt to society, now you’re 82 and living in poverty, should you be stripped of food stamps? Is this the right thing to do?” said Bob Greenstein, founder and president of the Center on Budget and Policy Priorities. To top off this great achievement in American politics, the Times is running a piece today on the courageous Republican governors who are refusing to expand Medicaid to the poorest residents of their states, because their state would have to pay a pittance to do so (the federal government would do the rest under the Affordable Care Act).

Children of the Great Collapse: While the safety net performed well during the worst phase of the downturn, other trends have been troubling. Families lost trillions of dollars in home equity, the largest source of wealth for working- and middle-class households. Long-term structural inequality persists, so the modest economic growth that has returned since 2010 is eluding most families. Budget battles are threatening both the basic anti-poverty outlays and the investments in children and families that could help push back on inequality and its impact on opportunity. Progressives did well, at least during President Barack Obama’s first two years, at expanding the safety net during a serious economic emergency, using taxes and income transfers. But they have not done well in addressing the long-term trend of an erosion of “primary” income, namely wages and salaries. This leads to a paradox: A lot of people get help in a deep recession, but their incomes and life prospects stagnate during relatively good times. Looking forward, both the safety net and measures that might improve the primary income distribution will be under increasing attack from pressures to cut the budget deficit. In fact, there are plenty of strategies that could help reconnect families and children to restored economic growth, but policy is pushing in the opposite direction.

Joblessness Shortens Lifespan of Least Educated White Women, Research Says - Researchers have known for some time that life expectancy is declining for the country’s least educated white women, but they have not been able to explain why. A new study has found that the two factors most strongly associated with higher death rates were smoking and not having a job.  The aim of the study, which is being published Thursday in The Journal of Health and Social Behavior, was to explain the growing gap in mortality between white women without a high school diploma and those with a high school diploma or more. The study found that the odds of dying for the least educated women were 37 percent greater than for their more educated peers in any given year in the period of 1997 to 2001. The odds had risen to 66 percent by the period of 2002 to 2006. The authors controlled for age. The researchers used a health survey conducted by the National Center for Health Statistics, drawing on data from about 47,000 women ages 45 to 84. The study weighed more than a dozen factors to see which were causing the divergence in mortality rates. Poverty, obesity, homeownership, marital status and alcohol consumption were among the factors investigated.   But they mattered little. As it turned out, smoking was important, as had long been established, but researchers were surprised that joblessness had a dramatic effect, even after controlling for factors that employment would have generated, like income and health insurance.

Why Suicide Has Become an Epidemic--and What We Can Do to Help - But suicide is not an economic problem or a generational tic. It’s not a secondary concern, a sideline that will solve itself with new jobs, less access to guns, or a more tolerant society, although all would be welcome. It’s a problem with a broad base and terrible momentum, a result of seismic changes in the way we live and a corresponding shift in the way we die—not only in America but around the world. We know, thanks to a growing body of research on suicide and the conditions that accompany it, that more and more of us are living through a time of seamless black: a period of mounting clinical depression, blossoming thoughts of oblivion and an abiding wish to get there by the nonscenic route. Every year since 1999, more Americans have killed themselves than the year before, making suicide the nation’s greatest untamed cause of death. In much of the world, it’s among the only major threats to get significantly worse in this century than in the last.

California Faces a New Quandary, Too Much Money - After years of grueling battles over state budget deficits and spending cuts, California has a new challenge on its hand: too much money. An unexpected surplus is fueling an argument over how the state should respond to its turn of good fortune. The amount is a matter of debate, but by any measure significant: between $1.2 billion, projected by Gov. Jerry Brown, and $4.4 billion, the estimate of the Legislature’s independent financial analyst. ...At least seven other states — among them Connecticut, Utah and Wisconsin — have reported budget surpluses in recent weeks, setting the stage for legislative battles that, if not as wrenching as the ones over cuts, promise to be no less pitched. Lawmakers are debating whether the new money should be used to restore programs cut during the recession, finance tax cuts or put into a rainy-day fund for future needs.

Surpluses Help, but Fiscal Woes for States Go On -  While the fiscal picture is brightening around the country, with many states expecting surpluses this year after years of deficits and wrenching budget crises, mounting Medicaid costs and underfunded retirement promises are continuing to cloud their long-term outlook.And some of the surpluses that are materializing, as welcome as they are, are not as robust as they appear at first glance — especially as bills come due for some of the costs that states put off during the long economic downturn. When Texas lawmakers went into session in January, they were met with some good news: the state was projecting an $8.8 billion surplus when its two-year budget cycle ends in August. But it turned out that much of that extra money was already spoken for: more than half of it had to be used to pay Medicaid costs the state had delayed paying earlier. And Texas, like many states, has not been fully funding its pensions. Last year the state contributed just 49.2 percent of what actuaries said was needed by the state workers’ pension fund. Eventually the remaining money, around $358 million, will still have to be put into the fund, along with the 8 percent investment return the fund is supposed to earn each year.

Detroit could sell 'priceless' art to pay down debt -- The city of Detroit is so far in debt that it may be forced to take drastic measures. To cover a nearly $16 billion debt, the city may have to sell artwork that many consider priceless. Matisse, Renoir, Van Gogh, Diego Rivera's iconic "Detroit Industry" are treasures at the Detroit Institute Of Arts, and art that could be sold to pay down Detroit's debt. More than $15 billion in debt, Detroit's emergency manager Kevyn Orr asked the museum for an inventory to appraise its 60,000 pieces. Graham Beal, director of The Detroit Institute of Arts says, "They basically let us know that the collection was not off the table." What makes Detroit unique is that the city actually owns all of the art, making them vulnerable for sale. In most other cities the art is owned by a non-profit. In a statement, Orr insists, "There is no plan on the table to sell any asset of the city." But says "it is possible that the city's creditors could demand the city use its assets to settle its debts."

New York City Public Libraries Attack Alert – Privatizing Prized Locations and Cutting Budget by 35% - Libraries (along with post offices) have been a central part of urban planning for over a century. Public facilities such as libraries helped generate central areas. In this context it is no coincidence wealthy benefactors such as Andrew Carnegie took interest in planning and constructing public libraries. Even though these institutions have become less important for land values and foot traffic, their presence helped generate these neighborhoods. Now that these buildings have “done their jobs” (in FIRE sector terms) they can do one more thing for finance and real estate: be killed for private sector fun and profit. This is precisely what is taking place in New York City. Our billionaire Mayor is now trying to deliver a death blow to the public library system. In his budget for Fiscal year 2014 “the Administration is proposing a $193 million subsidy for the systems, which is a 35 percent reduction from the Fiscal 2013 Adopted Budget.” Unsurprisingly, the number one impact highlighted by the mayor is “branch closings”. According to Albor Ruiz writing in the New York Daily News, “More than 60 libraries will have to close their doors and there will be massive layoffs resulting in disastrous cuts to hours and services.” At this point in the negotiations, the final cuts may end up being somewhat less severe. However even a cut half or a third as large as this one would be devastating.

Philly school leaders approve 'doomsday' budget; arts, sports on chopping block — Faced with a huge deficit, the Philadelphia school board reluctantly approved a bare-bones budget Thursday that cuts thousands of jobs and "falls catastrophically short" in providing an adequate education for its students, in the words of the school district's chief executive. The School Reform Commission approved a $2.4 billion spending plan that includes deep cuts in art, music, athletics and other programs. The vote means layoff notices could begin going out next month to assistant principals, guidance counselors, librarians and other employees. "This is not the budget that anyone wants," Superintendent William Hite Jr. said. "It falls catastrophically short of meeting the students' needs." Parents, teachers, students and community members begged the panel to reconsider, but commission members said they had little choice given the district's $304 million deficit. Officials promised to work to secure additional funding from the city and state to help reduce the impact of the cuts.

States Raise College Budgets After Years of Deep Cuts - After cutting spending on public colleges and universities during the economic crisis, many state governments have begun to boost higher-education budgets once again.  Lawmakers in Indiana recently approved a $500 million funding increase over two years for state colleges and universities, a 14.6% increase, following four years of cuts. New Hampshire's governor has proposed increasing the university budget for the coming academic year by $20 million, or 37%. And state lawmakers in Florida recently approved a budget that increases higher-education funding by $314 million, or 8.3%, following seven years of cuts. The new funding reflects the brightening financial picture in many state capitals. Tax revenue in 47 states rose last year, according to Census Bureau data. Government revenue collections for all states increased by an average of 4.5%.

The Deep Hole in Higher Ed Funding: “Many state governments have begun to boost higher-education budgets,” the Wall Street Journal reports today.  That’s welcome news, but as the striking chart below (from our recent report) shows, those increases follow several years of severe cuts.

  • States are spending $2,353 or 28 percent less per student on higher education, nationwide, in the current 2013 fiscal year than they did in 2008, when the recession hit.
  • Every state except for North Dakota and Wyoming is spending less per student on higher education than they did before the recession.
  • Eleven states have cut funding by more than one-third per student, and two states — Arizona and New Hampshire — have cut their higher education spending per student in half.

Moreover, as the Journal notes, states like Kansas and North Carolina are considering more cuts in higher ed funding.  That’s particularly troubling given that both states are also seriously considering costly income tax cuts, as we explain here and here.A large and growing share of future jobs will require college-educated workers.  Investing in higher education to keep tuition reasonable and quality high at public colleges and universities, and to provide financial aid and other supports like counseling and career guidance to students who need it most, would help states to develop the skilled workforce they will need to fill these jobs.  That’s a better strategy than tax cuts to strengthen state economies.

Public colleges are often no bargain for the poor - Many public colleges and universities expect their poorest students to pay a third, half or even more of their families’ annual incomes each year for college, a new study of college costs has found.  With most American students enrolling in their states’ public institutions in hopes of gaining affordable degrees, the new data shows that the net price – the full cost of attending college minus scholarships – can be surprisingly high for families that make $30,000 a year or less.The numbers track with larger national trends: the growing student-loan debt and decline in college completion among low-income students.  Because of the high net price, “these students are left with little choice but to take on heavy debt loads or engage in activities that lessen their likelihood of earning their degrees, such as working full time while enrolled or dropping out until they can afford to return,” Stephen Burd wrote in a recent report for the New America Foundation...

Student debt crisis: 'it's like carrying a backpack filled with bricks' - At the moment, the Diede family lives in California. Christian wants to own a home again, but for now they are a roaming family whose home is a 400-square-foot RV. A big part of the problem is Amy's student loan debt. It does not merely affect their bank statement, it has found its way into their daily thoughts and life. Together, Amy and Christian owe over $82,000 in student loans. "It's like carrying a big backpack filled with bricks all over the place, and I can't ever let it go. It's always there. I may get rid of a few bricks, but there's always going to be more. I don't see the student loans going away." What's interesting is that Amy's younger brother did not go to college, yet his life is financially far better off. "I used to do my work before I went out to play. But he would just take off and, you know, do whatever. He was a gangster wannabe!" Amy's brother has no college degree, no student loan debt, and earns far more than Christian. He also has a huge home in the Midwest and frequently takes expensive vacations. Here's a painful reality: student loans put millions of Americans in a precarious situation – if they lose their jobs, become sick, or have a sudden emergency that leads to time off work, any of these things can lead to total financial ruin.

Sallie Mae Plans to Split into 2, Names New CEO — Sallie Mae plans to split into two separate, publicly traded companies. The student loan giant also named John Remondi as its CEO. Sallie Mae, formally named SLM Corp., said Wednesday that the two separate companies — an education loan management business and a consumer banking business — would help unlock value and boost its long-term growth potential. The education loan management business would include the company’s portfolios of federally guaranteed and private education loans, as well as most related servicing and collection activities. Remondi will continue as its CEO. The principal assets of the business are likely to include approximately $118.1 billion in federally guaranteed loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for about 10 million federal education loan customers. This includes 4.8 million customer accounts serviced under Sallie Mae’s contract with the U.S. Department of Education.

State Pension System Liabilities - When states value their pension systems, they typically use a discount rate of 8 percent. The authors note that the principles of financial economics suggest using a much more conservative discount rate. "This means discounting either with a taxable state-specific municipal yield curve, which credits states for the possibility they could default on pension payments, or with a Treasury yield curve, which presents the benefit payments as default-free." The states estimate their unfunded liabilities at just under $1 trillion. That gap increases to $1.3 trillion using the municipal yield curve and to $2.5 trillion using the Treasury curve. The authors focus on the narrowest measure of liabilities, which is liabilities frozen as of June 2009, not accounting for future work by existing employees, new hires, or future pay increases.

Ben Bernanke's Latest Casualty: The Pension Plan -  For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions." On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs. Quote WaPo: "Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities."

Senior citizens struggle with mounting debt - It used to be that many Americans entered retirement having paid off their mortgages and most of their other debts. This should have been senior citizens' Golden Years. Nowadays, more and more people over the age of 65 are struggling with mounting debt levels, fueled primarily by mortgages and credit cards. The average debt held by senior citizens has ballooned to $50,000 in 2010, up 83% since 2001, according to Federal Reserve data crunched by the Employee Benefit Research Institute. "They had more debt in their working years and they've carried it over into retirement," said Craig Copeland, senior research associate at the institute. Much of this is due to an increase in housing-related debt. Families headed by someone at least 60 years old had the largest increase in average mortgage debt, in terms of percentage, between 2000 and 2012, according to the St. Louis Federal Reserve.

Social Security and Medicare Trustees Report Released - Here is the summary of the 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.  And a brief excerpt: What is the Outlook for Future Social Security and Medicare Costs in Relation to GDP? One instructive way to view the projected costs of Social Security and Medicare is to compare the costs of scheduled benefits for the two programs with the gross domestic product (GDP), the most frequently used measure of the total output of the U.S. economy (Chart A). Under the intermediate assumptions employed in the reports and throughout this Summary, costs for both programs increase substantially through 2035 when measured this way because: (1) the number of beneficiaries rises rapidly as the baby-boom generation retires; and (2) the lower birth rates that have persisted since the baby boom cause slower growth of the labor force and GDP. Social Security’s projected annual cost increases to about 6.2 percent of GDP by 2035, declines to 6.0 percent by 2050, and remains between 6.0 and 6.2 percent of GDP through 2087. Under current law, projected Medicare cost rises to 5.6 percent of GDP by 2035, largely due to the rapid growth in the number of beneficiaries, and then to 6.5 percent in 2087, with growth in health care cost per beneficiary becoming the larger factor later in the valuation period.

Social Security trust fund to run dry in 2033— Medicare’s finances got an upgrade on Friday but the long-term prognosis for Social Security stayed the same, in the latest snapshots of the politically sensitive entitlement programs that are certain to play into Washington’s coming fiscal battles. Trustees for the Medicare program said its hospital insurance fund would be exhausted in 2026, two years later than was estimated a year ago. Social Security’s reserves, meanwhile, will run out by 2033, a projection unchanged from last year. While the Medicare report paints a slightly healthier picture for that program, neither report will likely do much to quell a partisan debate about entitlements and overall government spending. That debate will ramp up this fall, when Congress and the Obama administration face a deadline for raising the U.S. debt ceiling. Another flashpoint will be government funding for the next fiscal year. House Republicans and Senate Democrats have each passed budget blueprints, but they differ vastly in approaches to taxes and spending. “These programs face long-term challenges,” Treasury Secretary Jacob Lew said in a statement. “Social Security and Medicare represent a fundamental obligation we have as a country to provide income and health care security for our fellow citizens.”

2013 Social Security Report - The 2013 Annual Report of the Trustees of Social Security was released today Friday the 31st of May. The short take-aways are ‘not much change’ and ‘no news is good news’: date of Trust Fund depletion remaining at 2033 and the 75 year actuarial gap going up from 2.66 to 2.72 which is precisely the structural amount due to the change in actuarial period. (On the other hand the numbers INSIDE that number would repay examination, an exercise for the diligent student.)  For now I am just putting this up for comment, consider this a Social Security open thread.

Social Security’s challenges continue to be modest and manageable - Every year since 1941, the Social Security Trustees have issued a report on the long-term financial outlook of Social Security. The 2013 report is out today, along with the Medicare trustees report. The Social Security trust fund reserves increased by $54.4 billion in 2012, and this year’s surplus is projected to be $28 billion. Social Security will continue to run a surplus through the end of the decade, with the trust fund growing from $2.76 trillion in 2013 to a peak of $2.92 trillion in 2020. Beginning in 2021, Social Security will begin drawing down the trust fund to provide a cushion to help pay for the Baby Boom retirement. This was anticipated. The trust fund was never meant to grow indefinitely and its drawdown should not be cause for concern, though the recession and weak recovery have accelerated the process. If no policy changes are made to Social Security, the trust fund will reach exhaustion in 2033, unchanged from last year’s report. (See this interesting blog from CBPP looking at how trust fund exhaustion dates have fluctuated since 2000 due to demographic and economic uncertainties; note that the exhaustion date was the same in 2000 as it was during the recession in 2009.) Even in the unlikely event that nothing is done to prevent automatic benefit cuts when the trust fund runs out, Social Security would still be able to pay out 77 percent of promised benefits to recipients. Modest increases in revenue, however, could keep Social Security paying out full benefits for the foreseeable future. Even without any changes, Social Security will be able to keep paying full benefits for another two decades. So there is absolutely no reason why any action or “grand bargain” including Social Security reform must happen now, especially with a dysfunctional Congress. The projected shortfall over the long-term outlook—75 years—is 2.72 percent of taxable payroll, 0.05 percentage points higher than in last year’s report. This small adjustment is due to changes in marginal income tax rates that lowered projected revenue from the taxation of benefits, changes in demographic data and assumptions, and the changing valuation period (one less surplus year), among other things.

Number of the Week: Disability Fund Three Years From Insolvency - 10,978,040: The number of Americans receiving federal disability insurance in May 2013,  Medicare may be in better shape than it was last year, but the program that pays nearly 11 million people who receive disability benefits will be insolvent within three years unless action is taken. The trustees of the Social Security and Medicare programs said on Friday that the disability trust fund will run out of money in 2016. This isn’t a new development.. The fund has been paying out more than it brings in since 2009, drawing down a surplus built during the 1990s. But that can’t go on forever. In fact, it can only continue under the current system until 2016 based on the most recent forecasts by the trustees. A more pessimistic set of assumptions pushes the date one year closer to 2015, while a more optimistic alternative projects the program can keep its head above water for ten years. That is a possible but not terribly likely scenario. The ranks of disability beneficiaries have swelled amid a rough job market and the aging of the Baby Boomers, who are now in their 50s and 60s, historically the prime age for receiving disability payments. The average monthly payment to a disability beneficiary was $977.42 in May. Benefit payments won’t be halted if the trust fund runs dry, but they will have to be cut by 20% to 30%. Congress can avoid the cuts in one of two ways. Lawmakers can increase the payroll tax, sending more money to the disability fund, but calling for higher taxes isn’t a particularly popular position. It would be easier to divert some of the funds already going into other Social Security programs.

Stewardship of Our National Treasures: CBPPs Analyses of the Medicare and Social Security Trustees’ Report - I told you I’d link to these–my CBPP colleagues’ analyses of the Trustees report on Soc Sec and Mcare–and here they are. Paul’s Medicare analysis echoes some of my earlier points regarding the positive impact of health reform on the Medicare’s finances, and he also pre-empts some potential silliness re claims of “bankruptcy!” The projected  insolvency of the HI trust fund doesn’t mean that Medicare is “running out of  money” or “going bankrupt,” as is sometimes suggested.  Even in 2026, when the trust fund is projected for  exhaustion, incoming payroll taxes and other revenues will be sufficient to  continue paying 87 percent of program costs.  Moreover, trustees’ reports have been  projecting impending insolvency for four decades, but Medicare has always paid  the benefits owed because Presidents and Congresses have taken steps to keep  spending and resources in balance in the near term.My emphasis, but why do I emphasize that point?  Because it is a reminder that these programs are not some inert physical entity like the climate or the oceans.  They are institutions that we have created–that every advanced economy has created–in order to provide retirement security to those who have come before us.  We can nurture them and ensure their solvency, or we can break them.  Neither outcome is inevitable–we must choose.

Judge Gives Patriot Coal OK to Cut Benefits -A federal bankruptcy judge in St. Louis ruled Wednesday that Patriot Coal can cut health benefits for retired coal miners and their spouses as part of a plan for the company to emerge from bankruptcy. The ruling specifically approved Patriot's "motion to reject collective bargaining agreements and to modify retiree benefits." The Surratt-States ruling will allow Patriot to make changes to benefits for both working and retired miners under existing contracts. It will allow Patriot to adjust wages and benefits, as well as "work rules for union employees to a level consistent with the regional labor market," according to a statement from the company. The UMWA had argued Patriot Coal was created in October 2007 to hire all union workers who previously worked for Peabody Energy and Arch Coal east of the Mississippi River. The new company assumed responsibility for the health insurance of union miners who had already retired from Peabody and Arch. Patriot filed for Chapter 11 bankruptcy in July 2012. UMWA officials have consistently said Patriot was designed to fail.

Thanks, SCOTUS: The Perverse Outcomes of State Medicaid Exemptions - As discussed here, because of the Supreme Court’s decision to allow states to opt out of the Medicaid expansion under health care reform, there’s a particularly weird accident going out to happen. 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.More than half of all people without health insurance live in states that are not planning to expand Medicaid. Some of those folks, even in states that don’t accept the Medicaid expansion, will get subsidized coverage in the new exchanges, which will ultimately be set up in all states (that part of the law was upheld by the court).  But since the law was written to provide Medicaid to the poorest of the uninsured and subsidies for private coverage for the rest (up to four times the poverty threshold), someone just below the poverty line in states that refused the expansion goes without while someone just above gets significant help paying for coverage. Researchers at the Urban Institute estimate that 5.7 million uninsured adults with incomes below the poverty level could also gain coverage except that they live in states that are not expanding Medicaid. See the figure below re who is covered and uncovered by current Medicaid eligibility rules.

Jan Brewer To GOP: Expand Medicaid Or I'll Veto All Bills - Arizona's Republican Gov. Jan Brewer is stepping up her pressure on the GOP-led legislature to expand Medicaid by declaring a moratorium on legislating until they give in. Brewer vetoed five unrelated bills on Thursday, according to the Arizona Republic, and threatened to keep blocking legislation until Republicans expand Medicaid to cover thousands of Arizonans, which Obamacare permits at minimal cost to the state. "I warned that I would not sign additional measures into law until we see resolution of the two most pressing issues facing us: adoption of a fiscal 2014 state budget and plan for Medicaid," Brewer wrote in a statement explaining her decision. "It is disappointing I must demonstrate the moratorium was not an idle threat." Republicans in state legislatures are facing significant pressure from their right flank to reject the expansion, a move that conservative activists see as their last line of defense against Obamacare. Arizona state House Republicans who support Brewer's Medicaid expansion plan are reporting growing threats of retribution, according to the Republic.

Chart of the day: Geographic variation in Medicare hospital readmission rates - From a recent paper by Gerhardt et al. (PDF): There is clear geographic clustering, with relatively lower rates in most of the western half of the country, with the exception of in and near California, and relatively higher rates in the eastern half, with the exception of the upper mid-west. I wonder to what extent this variation can be explained by disease burden vs. system factors (acknowledging the endogeneity of diagnoses).

Medicare Trustees Report Shows Lower Cost Growth Helping Medicare Financing - The trustees’ report on the financial outlook for Medicare and Social Security is due out in minutes.  But for now, check out this press release on the Medicare hospital insurance trust fund: The Medicare Trustees today projected that the trust fund that finances Medicare’s hospital insurance coverage will remain solvent until 2026, two years beyond what was projected in last year’s report.“The Medicare Hospital Insurance trust fund is projected to be solvent for longer, which is good news for beneficiaries,” “Thanks to the Affordable Care Act, we are taking important steps to improve the delivery of care for seniors with Medicare. These reforms aim to reduce spending while improving the quality of care, and are an important down payment on solving Medicare’s long term financial issues.” OK, there’s a little spin in there…and as I’ve stressed before, the years-of-solvency numbers jump around in ways that have more to do with underlying economy growth than structural reforms.  Nor are we out of the woods in terms of the long term cost challenges of health care in the US–and that’s true whether we’re talking private or public sector care…if anything, the public programs do a better job at controlling costs compared to the private side. But that said, something important appears to be going on in the rate of health care spending, and some of that–no one knows how much–relates to changes in the health care delivery system of the type that are amped up in the Affordable Care Act.*

Immigrants Contributed An Estimated $115.2 Billion More To The Medicare Trust Fund Than They Took Out In 2002–09 - Many immigrants in the United States are working-age taxpayers; few are elderly beneficiaries of Medicare. This demographic profile suggests that immigrants may be disproportionately subsidizing the Medicare Trust Fund, which supports payments to hospitals and institutions under Medicare Part A. For immigrants and others, we tabulated Trust Fund contributions and withdrawals (that is, Trust Fund expenditures on their behalf) using multiple years of data from the Current Population Survey and the Medical Expenditure Panel Survey. In 2009 immigrants made 14.7 percent of Trust Fund contributions but accounted for only 7.9 percent of its expenditures—a net surplus of $13.8 billion. In contrast, US-born people generated a $30.9 billion deficit. Immigrants generated surpluses of $11.1–$17.2 billion per year between 2002 and 2009, resulting in a cumulative surplus of $115.2 billion. Most of the surplus from immigrants was contributed by noncitizens and was a result of the high proportion of working-age taxpayers in this group. Policies that restrict immigration may deplete Medicare’s financial resources.

ObamaCare Clusterfuck: If you’re over 55 and forced into Medicaid, Medicaid is a collateral loan, and a death tax on your estate -From an analyst/informant to Paul Craig Roberts in Counterpunch: [I]f an Exchange determines you are eligible for Medicaid, you have no other choice. Code for Exchanges specifies, “an applicant is not eligible for advance payment of the premium tax credit (a subsidized plan) or cost-sharing reductions to the extent that he or she is eligible for other minimum essential coverage, including coverage under Medicaid and CHIP.” Therefore, you will be tossed into Medicaid unless there are specific rules as to why you would not be eligible. If you are enrolled in a private plan through an Exchange and have been receiving a tax credit, and your income decreases making you eligible for Medicaid, in you go. If you are allowed to opt out because you don’t want Medicaid, you will have to pay a penalty for being uninsured unless you can afford to purchase insurance in the open market....Furthermore, to increase enrollment in health coverage without requiring people to complete an application on their own, states are advised to automate enrollment whenever possible by using existing databases for social services programs such as SNAP (food stamps) to enroll people who appear eligible for Medicaid but are not currently enrolled. Therefore, you could find yourself auto-enrolled in Medicaid against your will if your state acts on this advice.

California Puts Tentative Price on Health Policies Under New Law - California, widely seen as a model for how individuals will buy health insurance under the new health care law, announced Thursday that 13 insurers had been chosen to sell policies through the insurance marketplace — or exchange — being created under the law.  State officials said that rate increases for individuals who already had insurance would not be as high as some had feared. Blue Shield of California, for example, estimated its current customers would see rate increases of about 13 percent. Some estimates had suggested rate increases could be 30 percent. The increases are largely the result of higher prices and the need to cover people who now have no insurance and are likely to have expensive medical problems.  The new rates for individuals will be about the same — or lower — than the current rates for small businesses, according to officials from Covered California, the group operating the exchange.  The changes in the market are really making individuals much more like employer groups,” Paul Markovich, the chief executive of Blue Shield, said. Like people who now receive health insurance through their employers, individuals buying policies on their own will be able to enroll next year even if they have a potentially expensive medical condition, and the policies’ benefits and premiums will be more standardized.

The Obamacare Shock, by Paul Krugman - Obamacare goes fully into effect at the beginning of next year, and predictions of disaster are being heard far and wide. There will be an administrative “train wreck,” we’re told; consumers will face a terrible shock. Republicans, one hears, are already counting on the law’s troubles to give them a big electoral advantage. No doubt there will be problems, as there are with any large new government initiative, and ... we have the added complication that many Republican governors and legislators are doing all they can to sabotage reform. Yet important new evidence — especially from California — suggests that the real Obamacare shock will be one of unexpected success.  Massachusetts has had essentially this system since 2006; as a result, nearly all residents have health insurance, and the program remains very popular. So we know that Obamacare — or, as some of us call it, ObamaRomneyCare — can work.  Skeptics argued, however, that Massachusetts was special: it had relatively few uninsured residents even before the reform, and it already had community rating. What would happen elsewhere? In particular, what would happen in California, where more than a fifth of the nonelderly population is uninsured, and the individual insurance market is largely unregulated? Would there be “sticker shock” as the price of individual policies soared?  Well, the California bids are in — that is, insurers have submitted the prices at which they are willing to offer coverage on the state’s newly created Obamacare exchange. And the prices, it turns out, are surprisingly low. A handful of healthy people may find themselves paying more for coverage, but it looks as if Obamacare’s first year in California is going to be an overwhelmingly positive experience.

Obamacare Saved Newly Insured Dependents $147 Million in 2011 - : The provision of the Affordable Care Act, popularly known as "Obamacare," that allows young adults up to the age of 25 to stay on their parents' health insurance plans shifted at least $147 million in health care costs from patients and hospitals to insurance companies in 2011, according to a new study by researchers at RAND Corporation. That provision, which went into effect in September 2010, was one of the first major parts of the Affordable Care Act to take effect, allowing young adults to stay on their parents' health plans until their 26th birthday. The Centers for Disease control estimates that the dependent-coverage provision expanded insurance coverage to about 3.1 million adults between the ages of 19 and 25. The RAND Corporation study was published Wednesday in the New England Journal of Medicine. According to the study, the percentage of visits to the emergency room by uninsured young adults fell 9 percent in 2011 and the number of emergency visits by young adults covered by private insurers increased 5 percent.

No Villagers, this is not a center-right country --  CNN with the latest polling on Obamacare: Fifty-four percent of Americans oppose President Barack Obama’s signature domestic policy achievement, according to a CNN poll released Monday, while 43 percent support the law.But, for once they asked the most relevant follow-up question: Thirty-five percent of the country opposes the law because it’s too liberal, while 16 percent argues it isn’t liberal enough. That's right. It is not a majority position against a national health care plan or "big gummint" or any other of the typical beltway signifiers of a "center right nation." It turns out that only 35% of the country has that attitude. The majority either support the plan or want more. I doubt that most people every understand that from the way the polls are presented.  And perhaps more significantly, it's highly doubtful that the 16% who think the plan isn't liberal enough would join with the Republicans to deny medicaid funding or refuse to create the exchanges or any of the other tactics that are being used to make implementation impossible. Those liberals are all for medicaid funding and undoubtedly would oppose any repeal of the significant advances in the plan short of a public consensus to switch to a single payer plan.

Six Ways Obamacare Might Be Judged - With the Affordable Care Act soon to be implemented, people on all sides are grabbed by small pieces of news showing that the law will either be a big success or a failure. Part of this divergence in predictions is there are vastly different criteria by which to even define “success.” There are at least six ways to possibly judge Obamacare and it is only using the most generous criteria that you can make the case it will succeed.

  • 1) Comparing the ACA to other first world countries – Under this criteria it will be a clear failure. Even the supporters of the law admit after it is implemented the United States will still have the most expensive, complex, and wasteful health care system on earth.
  • 2) Compared to Obama’s original promises – Again by this standard the law is a failure. It does not contain a public option, a national exchange, drug re-importation or Medicare-direct drug price negotiation. It will not save the average family $2,500 a year. Thanks to the Cadillac tax, many people who like their current insurance will not be allowed to keep it, directly contradicting Obama’s promise.
  • 3) Compared to the smaller promises made when the law was signed – Even by this modest benchmark it would be hard to argue that current indicators point to the law being a success. The law will cover significantly fewer people than originally projected, although that is mainly the fault of Supreme Court and Republicans at the state level.
  • 4) Compared to the status quo – This is the low criteria by which many supporters of the law use to predict it will be a success. Since the law will significantly expand Medicaid and Medicaid is a good program that helps many people, on that provision alone a decent argument can be made.
  • 5) Compared to the conservative dystopian nightmare – Some conservatives have gone so over the top by claiming that Obamacare will be the beginning of a Stalinist state, that it will be impossible for the actual implementation of the law not to seem mundane by comparison.
  • 6) Will it ever become popular – This is the purely political way to judge the law and no one honestly knows the answer. Opinions about the law have remained remarkably stable since it was first approved, but that could change when the law is implemented.

31 Million Uninsured Under the PPACA . . . Perhaps it is a little known fact; but states today can, if they so choose to do so, qualify Medicaid coverage for everyone. States can also cover beyond 100% of FPL which some states do. The majority of states do not cover certain single adults as determined by each state’s rules for Medicaid coverage. “Currently, few states cover non-disabled, non-pregnant parents up to 138 percent of FPL in Medicaid, and even fewer states cover such adults without dependent children. At present, only 18 states provide comprehensive Medicaid coverage to parents at or above 100 percent of FPL ($18,530 for a family of three in 2011), and the median state covers working and non-working parents up to only 63 and 37 percent of FPL, respectively. The majority of states do not cover non-disabled, non-pregnant adults without dependent children at any income level, and many low-income women only qualify for Medicaid coverage when they are pregnant. As has been noted, ‘it’s a very common misconception that Medicaid covers all poor people, but that’s far from the truth.’”“Nationally, just over half (53 percent) of the uninsured who would be newly eligible for Medicaid are male. This is not surprising, since, as indicated above, Medicaid has historically had much broader eligibility for parents than for adults without dependent children, and a high proportion of these parents have been single mothers. ‘Overall, 47 percent of the uninsured who would be made newly eligible for Medicaid under the ACA are women.” Opting into the Medicaid Expansion under the ACA: Who Are the Uninsured Adults Who Could Gain Health Insurance Coverage?.

Health Care Thoughts: I really shouldn’t write this….. So I am in the grocery store, and coming around the aisle hear the beep-beep of a back up alarm on a power cart. I often try to help power cart shoppers reach items on higher shelves, especially the little old ladies and men wearing veteran caps. The fellow on the cart I would estimate to be about 5′ 9″ and at least 450 pounds. And I was going to offer to help but then I saw him struggling to put three cartons of ice cream in his basket. I decided to mind my own business but the image really bothers me. Mrs. Rustbelt and me have become sort of go to experts on issues related to the morbidly obese, her clinical and me on equipment and safety, so I know what lies ahead. My sweetheart has a rep for managing difficult diabetes cases. The future. Chances of diabetes near 100%, congestive heart failure near 100%, extremity pain near 100%, below knee amputation/s near 100%, early death near 100%. The gentlemen cannot be cared for safely in about 95% of the hospital rooms and about 95% of the nursing homes in the country. He will not fit well in a conventional ambulance and will be a danger to the paramedics and firefighters who would have to transport him. Even a minor surgery carries a very high risk and moving him onto a surgical table is a dangerous maneuver. “Routine” anesthesia could kill him.

With Money at Risk, Hospitals Push Staff to Wash Hands - At North Shore University Hospital on Long Island, motion sensors, like those used for burglar alarms, go off every time someone enters an intensive care room. The sensor triggers a video camera, which transmits its images halfway around the world to India, where workers are checking to see if doctors and nurses are performing a critical procedure: washing their hands.  This Big Brother-ish approach is one of a panoply of efforts to promote a basic tenet of infection prevention, hand-washing, or as it is more clinically known in the hospital industry, hand-hygiene. With drug-resistant superbugs on the rise, according to a recent report by the federal Centers for Disease Control and Prevention, and with hospital-acquired infections costing $30 billion and leading to nearly 100,000 patient deaths a year, hospitals are willing to try almost anything to reduce the risk of transmission.  Studies have shown that without encouragement, hospital workers wash their hands as little as 30 percent of the time that they interact with patients.

For New Doctors, 8 Minutes Per Patient - A doctor-in-training we both knew listened intently to our conversation, but when we asked him about his experiences with patients, he looked lost and struggled for a response. “My generation is different from yours,” he finally said, and then told us about getting “caught” sneaking back to the hospital earlier that year to talk with a couple of patients. He had already officially signed out for the night, but even going back just to say hello would count toward and push him over his 80-hour weekly work limit. Such a violation could cause his residency program to lose its accreditation. “My generation is different because we can’t have the same relationships with patients as you did,” the young man said. “We just don’t have the time.” His comment unnerved me then and for a long time afterward. I knew he was being honest about his own experiences, but I couldn’t believe that the same held true for all doctors-in-training. Now a new study confirmswhat the young doctor told us: doctors-in-training are spending less time with patients than ever before.

Future Doctors Unaware of Their Obesity Bias Two out of five medical students have an unconscious bias against obese people, according to a new study by researchers at Wake Forest Baptist Medical Center. The study is published online ahead of print in the Journal of Academic Medicine.  “Bias can affect clinical care and the doctor-patient relationship, and even a patient’s willingness or desire to go see their physician, so it is crucial that we try to deal with any bias during medical school,” said David Miller, M.D., associate professor of internal medicine at Wake Forest Baptist and lead author of the study.  “Previous research has shown that on average, physicians have a strong anti-fat bias similar to that of the general population. Doctors are more likely to assume that obese individuals won’t follow treatment plans, and they are less likely to respect obese patients than average weight patients,” Miller said.  Miller and colleagues conducted the study as part of their efforts to update the medical school’s curriculum on obesity. The goal was to measure the prevalence of unconscious weight-related biases among medical students and to determine whether the students were aware of those biases.

'Horror movie in a pill’: Side-effects of Lariam worse than malaria - AN RTÉ INVESTIGATION into the use of Lariam as an anti-malarial by the Irish Defence Forces found a “plausible link” between the drug and a number of suicides of soldiers. Two of the world’s leading authorities on the medication said the results of the probe require urgent investigation. The Prime Time programme revealed new research showing a higher risk of suicide among members of the army who had taken Larium during their deployments overseas than those who didn’t.“These figures are consistent with Lariam causing symptoms of mental illness including anxiety and depression, and are also consistent with the known association of these conditions with a strongly increased risk of suicide. These figures also indicate evidence of more serious events, such as psychosis, potentially leading to more sudden and impulsive suicides,”

Why a Saudi Virus Is Spreading Alarm --Dr. Margaret Chan, director-general of the World Health Organization, closed the annual World Health Assembly this week [May 27] sounding alarm about a new SARS-like virus circulating primarily in Saudi Arabia. "My greatest concern right now is the novel coronavirus," Chan warned the representatives of two hundred nations gathered in Geneva. "We do not know where the virus hides in nature. We do not know how people are getting infected. Until we answer these questions, we are empty-handed when it comes to prevention." But impeding an effective response is a dispute over rights to develop a treatment for the virus. The case brings to the fore a growing debate over International Health Regulations, interpretations of patent rights, and the free exchange of scientific samples and information. Meanwhile, the epidemic has already caused forty-nine cases in seven countries, killing twenty-seven of them. At the center of the dispute is a Dutch laboratory that claims all rights to the genetic sequence of the Middle East Respiratory Syndrome coronavirus [MERS-CoV]. Saudi Arabia's deputy health minister, Ziad Memish, told the WHO meeting that "someone"--a reference to Egyptian virologist Ali Zaki--mailed a sample of the new SARS-like virus out of his country without government consent in June 2012, giving it to Dutch virologist Ron Fouchier of Erasmus Medical Center in Rotterdam.

New Tools to Hunt New Viruses - A new flu, H7N9, has killed 36 people since it was first found in China two months ago. A new virus from the SARS family has killed 22 people since it was found on the Arabian Peninsula last summer. In past years, this might have been occasion for panic. Yet chicken and pork sales have not plummeted, as they did during flus linked to swine and birds. Travel to Shanghai or Mecca has not been curtailed, nor have there been alarmist calls to close national borders. Is this relatively calm response in order? Or does the simultaneous emergence of two new diseases suggest something more dire? Actually, experts say, the answer to both questions may well be yes. “We’ve done a great job globally in the last 10 years,” . “Compared to H5N1 and SARS, we’re getting on top of these diseases much, much faster.” But he added that “people have become desensitized over time — it’s ‘Oh, O.K., another one.’ ” And scientists say the world cannot afford to relax. The threat is real. New diseases are emerging faster than ever.

In China, 'cancer villages' a reality of life - They say Wuli was once famed for wooded hills and fertile soil. Government officials came in the 1990s and promised riches. "All the local officials did was fill their pockets with money," says an older woman angrily. During this period, a number of textile companies moved into Wuli, building their plants across town. "All these factories should be moved, because they have caused the cancer," says one man, as others nod. "All of these factories should be removed from here."They tell us that Wuli is now a "cancer village." The term surfaced a few years ago, when trailblazing Chinese journalists and activists like Deng Fei unearthed evidence of unnaturally high rates of cancer across China, mostly in rural areas dominated by industry. Deng, who was working for a Hong Kong based magazine at the time, focused on the impact of water pollution in rural China."Since water is so important to people, the pollution has a more significant impact on people's health," he says."China is suffering from the negative impact of improper economic growth patterns. And the country will continue to pay the price for heavy pollutants in the future."

Walmart pleads guilty to dumping hazardous waste in California - Walmart, which has endured a year of bad publicity around its US labour relations and working conditions in its overseas supply chain, on Tuesday pleaded guilty to dumping hazardous waste in numerous sites in California. The retail giant will now pay a fine of $81m to settle misdemeanour charges around the issue, which also covers allegations of misdoings in Missouri. It brings an end to an investigation that has lasted nearly a decade. Walmart admitted that it had negligently dumped pollutants into sanitation drains across California, and also tossed waste into local trash bins. Some material was also improperly taken to product return centers throughout the US without proper safety documentation. Officials at Walmart pointed out that the case covered incidents that had happened between 2003 and 2005, and insisted it had now changed its procedures. "We have fixed the problem. We are obviously happy that this is the final resolution," Walmart, which in 2010 agreed to pay $27.6m in a similar case, says that its entire national system for dealing with hazardous waste has been comprehensively overhauled.

Leading neuroscientist: Religious fundamentalism may be a ‘mental illness’ that can be ‘cured’ - A leading neurologist at the University of Oxford said this week that recent developments meant that science may one day be able to identify religious fundamentalism as a “mental illness” and a cure it. During a talk at the Hay Literary Festival in Wales on Wednesday, Kathleen Taylor was asked what positive developments she anticipated in neuroscience in the next 60 years. “One of the surprises may be to see people with certain beliefs as people who can be treated,” she explained, according to The Times of London. “Somebody who has for example become radicalised to a cult ideology – we might stop seeing that as a personal choice that they have chosen as a result of pure free will and may start treating it as some kind of mental disturbance.” “I am not just talking about the obvious candidates like radical Islam or some of the more extreme cults,” she explained. “I am talking about things like the belief that it is OK to beat your children. These beliefs are very harmful but are not normally categorized as mental illness.”

Breeding the Nutrition Out of Our Food - WE like the idea that food can be the answer to our ills, that if we eat nutritious foods we won’t need medicine or supplements. We have valued this notion for a long, long time. The Greek physician Hippocrates proclaimed nearly 2,500 years ago: “Let food be thy medicine and medicine be thy food.” Today, medical experts concur. If we heap our plates with fresh fruits and vegetables, they tell us, we will come closer to optimum health. This health directive needs to be revised. If we want to get maximum health benefits from fruits and vegetables, we must choose the right varieties. Studies published within the past 15 years show that much of our produce is relatively low in phytonutrients, which are the compounds with the potential to reduce the risk of four of our modern scourges: cancer, cardiovascular disease, diabetes and dementia. The loss of these beneficial nutrients did not begin 50 or 100 years ago, as many assume. Unwittingly, we have been stripping phytonutrients from our diet since we stopped foraging for wild plants some 10,000 years ago and became farmers.  These insights have been made possible by new technology that has allowed researchers to compare the phytonutrient content of wild plants with the produce in our supermarkets. The results are startling.  Wild dandelions, once a springtime treat for Native Americans, have seven times more phytonutrients than spinach, which we consider a “superfood.” A purple potato native to Peru has 28 times more cancer-fighting anthocyanins than common russet potatoes. One species of apple has a staggering 100 times more phytonutrients than the Golden Delicious displayed in our supermarkets.

Nutritional Weaklings in the Supermarket - New York Times grahic

The USDA’s Latest Report on Energy Use in Agriculture - K. McDonald - It has been just shy of two years since the USDA came out with its last report on energy use in agriculture. The title of this month’s new report is, “Agriculture’s Supply and Demand for Energy and Energy Products.” This time they presented the subject by saying that energy inputs no longer have a linear relationship with agriculture since commodities are now used for the production of biofuels, and that farmers adapt in other ways to rising energy costs. The agriculture sector in the U.S. uses less than 2 percent of total U.S. energy consumption. However, energy and energy-intensive inputs account for a significant share of agricultural production costs. For example, corn, sorghum, and rice farmers allocated over 30 percent of total production expenditures on energy inputs in 2011. From 2001 through 2011, direct energy use accounted for 63 percent of agricultural energy consumption, compared with 37 percent for indirect use, as shown in the graph below. Direct energy uses in farming include diesel and gasoline fuels to run machinery to plant, till, and harvest; to dry crops; for livestock use; and to transport goods. As shown in the graph, less fuel was used in 2011, when prices were higher. Electricity is used to heat and cool livestock and dairy operations, and for pump irrigation. Its use has remained relatively constant, along with its price during this time period.

The new farm bill is an economic disaster - Just when you think Congress can't get any dumber, it crafts a $1tn farm bill that harms the poor and promotes unhealthy food.  The US Congress, its approval rating still near all-time lows, is reinforcing its own record of stupefyingly short-sighted lawmaking with what may be the most harmful piece of economic legislation in America in years: the $1tn 2013 farm bill.  As members of Congress have negotiated over various amendments and riders to the bill, they've set an impressively consistent trend: they mix good ideas and bad ideas and combine them to create the absolutely worst possible policies. Elements of the farm bill, as it stands, will cut food stamps to the poor and the previously incarcerated, thus increasing poverty and possibly crime; add to the growing obesity crisis by encouraging chemical sugar substitutes; push genetically modified food at the expense of public health with the so-called "Monsanto Protection Act"; and support factory farming at the expense of sustainable food production with abusive crop subsidies.  That's quite a lot of damage to wreak with a single law, but this Congress certainly seems up to the challenge.  The farm bill will set US food policy for 2014 to 2023, encompassing everything from agriculture to food stamps. The food stamps show the worst decision-making. Conservatives are apparently annoyed that Americans are using more food stamps. That much is true. Food stamp usage has grown by at least 70% since the financial crisis in 2008, with a record 47.8 million people relying on food stamps in order to afford their weekly grocery bills.

A new bait and switch farm bill - The Senate agriculture committee passed its version of the 2013 farm bill on May 14. Though sold as a deficit-reduction measure that maintains key supports for farmers, the bill’s numbers deserve a closer look as it heads to the Senate floor next week.The new bill does get one thing right: eliminating the Direct Payments program — a $5 billion annual giveaway to farmers just for being farmers. In the current era of tight budgets, such payouts are neither needed nor possible.But then come the budget gimmicks. Instead of counting the bill’s savings against the previous farm bill’s budget, Senate Agriculture committee members have included the sequestration spending cuts in their savings estimates. This makes it appear as though the committee’s bill annually saves $600 million more than it actually does. But more importantly, despite eliminating the Direct Payments waste, the new bill might actually make things worse. Instead of simply eliminating this outdated expense, Senate lawmakers replaced it with a new one that could very likely be more costly: the Shallow Loss Agricultural Risk Coverage program (ARC). As reported in the AEI paper, “Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow Loss Farming Programs,”,this program essentially guarantees that farmers receive approximately 89% of their expected incomes — a program about which no other business in America could dream. In effect, the program would issue payments to farmers when crop prices (and thus revenues) fall.

Is the government helping speculators manipulate grain futures? - While the activities of the Agriculture Department don’t always garner a lot of attention, a highly questionable decision it recently made to help wealthy speculators could, over time, cost anyone who buys food.  Until recently, the Agriculture Department released its numbers at 7:30 a.m. Central Time, two hours before the main market for grain trading opened in Chicago. Farmers and other end users then had two hours to read the report, figure out what trades to make and call their broker to place their orders. Speculators — who trade futures contracts to benefit from price differentials and thereby help lubricate the market — also studied the numbers and predicted which direction orders would go. All trades — whether placed by a wheat farmer in Nebraska or a hedge fund manager in New York — waited in line alongside one another until 9:30 a.m., when they would be registered at the same time. Last May, the CME extended its trading day from 17 hours to 21 hours, eliminating the two-hour break in the morning when USDA released its reports. Suddenly, farmers and end users no longer had time to understand the information before trading began. Algorithmic traders, armed with a variety of technologies that allow them to gather and process information almost instantly, were left free to place their bets long before any regular grain traders had time to open, let alone read, the report. “People who are out trying to feed cattle don’t have access to high-power computers for trading in milliseconds,”

How Big Finance is Eating the World’s Lunch Agricultural Wealth - If you hear a kind of whooshing, rushing noise, don’t worry—it’s not US jobs moving to China. Today’s great sucking sound is the sound of agricultural wealth being siphoned off into the global financial system. Dragging poverty and insecurity in its wake, this broad movement of wealth from agriculture into finance is enriching and empowering finance capital at the expense of farmers, traders, consumers, rural communities and the earth. In fact, that sucking sound is really the sound of injustice. Finance capital globally deploys a huge variety of methods and techniques that generally serve to redistribute wealth from agriculture to finance. These include debt, farmland acquisition, commodity hoarding, and derivative and insurance markets. In the following posts, I outline the wealth transfer mechanism in each of these contexts, focusing largely on new data and evidence from the past several years.

Dirt & Development - I saw that the European Union’s Institute for Environment & Sustainability has just published a Soil Atlas of Africa and it is available online. It uses computer mapping techniques to create stunning illustrations of the the type of soil problems that Africa suffers from.  Below is a picture from the cover of the atlas:  Among other things, the atlas finds that:

    • 1. “While Africa has some of the most fertile land on the planet, the soils over much of the continent are fragile, often lacking in essential nutrients and organic matter.”
    • 2. “Aridity and desertification affects around half the continent while more than half of the remaining land is characterised by old, highly weathered, acidic soils with high levels of iron and aluminium oxides (hence the characteristics colour of many tropical soils) that require careful management if used for agriculture.”
    • 3. “Soils under tropical rainforests are not naturally fertile but depend instead on the high and constant supply of organic matter from natural vegetation and its rapid decomposition in a hot and humid climate. Breaking this cycle (i.e. through deforestation) quickly reduces the productivity of the soil and leaves the land vulnerable to degradation”
    • 4. “In many parts of Africa, soils are losing nutrients at a very high rate, much greater than the levels of fertiliser inputs. As a result of rural poverty, farmers are unable to apply sufficient nutrients due to the high costs of inorganic fertilisers or from a lack of farm machinery (Africa has the lowest use of industrial fertilisers in the world).

Corn Growers Turn to Pesticides After Genetically Modified Seeds Fail - The $1 billion pest has done it before. It beat crop rotation during the 1990s when a new strain of the western corn rootworm began breeding opposite fields so they’d be ready for corn planting in the following year. “Up until then rotation of corn and soybeans was a pretty good control strategy,” After that came the controversial genetically modified Bt seeds–from Monsanto and licensed to others—that came with built-in toxins to slay the destructive corn rootworm. And everyone from the Environmental Protection Agency (EPA) that approved them to Monsanto who developed them to Land Grant universities who monitor the performance of American agriculture—all said use of the Bt seeds would reduce pesticide use. Herbicide-tolerant and Bt-transgenic crops did result in some reduced pesticide use. Bt crops reduced insecticide use by 10-12 million pounds annually in the period from 1996 to 2011. There is USDA data showing an even more dramatic decline. But in the last couple years, the billion dollar pest with a new immunity has begun striking back against Monsanto’s Bt seed. And America’s corn farmers—who are planting a near record 97.3 million acres this year—are responding with the only weapon in their arsenal by dramatically upping their pesticide use.

EPA raises allowable limit of glyphosate from terracist Monsanto's RoundUp pesticide, destroys human microbiome - While it’s true that glyphosate the chemical has been the subject of much scientific analysis, it’s also true that farmers don’t use pure glyphosate. They use Roundup on their fields — and Roundup is a product with other “inactive” chemical ingredients. And there is increasing evidence that Roundup as a product is far more toxic than glyphosate on its own because the ingredients interact in troubling ways.  All of which is to say that there’s isn’t really a good health argument in favor of increasing Americans’ exposure to the chemical. There are, however, some pretty compelling reasons not to — and that’s where your microbiome comes into the picture. Even if we aren’t absorbing all the Roundup that’s on the food we eat, we are certainly exposing the residents of our digestive tract to it. And here’s the funny thing. While we don’t have the metabolic process that Roundup disrupts, many microbes do. So, in short, we may be dousing our interior landscapes with a potent and effective intestinal flora herbicide. Oopsie.  So why would the EPA allow more of this stuff in our food? The agency didn’t decide to do this entirely on its own, of course. It did so because Monsanto asked.

Challenging Monsanto: Over two million march the streets of 436 cities, 52 countries — RT News: Millions of activists around the world have rallied against Monsanto, the biotechnology giant for genetically engineering agriculture and food while suppressing negative scientific research. Organized by the 'March Against Monsanto' movement, an estimated two million have taken part in the massive event on Saturday spanning six continents, 52 nations, and at least 48 US states. “We will continue until Monsanto complies with consumer demand. They are poisoning our children, poisoning our planet,” she said. “If we don't act, who's going to?”

Russia Warns Obama: Monsanto -  The shocking minutes relating to President Putin’s meeting this past week with US Secretary of State John Kerry reveal the Russian leaders “extreme outrage” over the Obama regimes continued protection of global seed and plant bio-genetic giants Syngenta and Monsanto in the face of a growing “bee apocalypse” that the Kremlin warns “will most certainly” lead to world war.  According to these minutes, released in the Kremlin today by the Ministry of Natural Resources and Environment of the Russian Federation (MNRE), Putin was so incensed over the Obama regimes refusal to discuss this grave matter that he refused for three hours to even meet with Kerry, who had traveled to Moscow on a scheduled diplomatic mission, but then relented so as to not cause an even greater rift between these two nations. At the center of this dispute between Russia and the US, this MNRE report says, is the “undisputed evidence” that a class of neuro-active insecticides chemically related to nicotine, known as neonicotinoids, are destroying our planets bee population, and which if left unchecked could destroy our world’s ability to grow enough food to feed its population.  So grave has this situation become, the MNRE reports, the full European Commission (EC) this past week instituted a two-year precautionary ban (set to begin on 1 December 2013) on these “bee killing” pesticides following the lead of Switzerland, France, Italy, Russia, Slovenia and Ukraine, all of whom had previously banned these most dangerous of genetically altered organisms from being used on the continent.

China destroys three shipments of GM corn from US:

  • 1. Wanzai Port in Zhuhai City destroyed two shipments of imported GM foods
  • 2. Harbin intercepted a total of 115 kgs of GM corn seeds, which will be destroyed

The news items below report that in May, the Chinese government destroyed three shipments of GM corn from the US. The shipments were illegal under China’s GMO biosafety law. The law says that the Ministry of Agriculture must require environmental and food safety tests to be carried out by Chinese institutions, in order to verify data provided by the seed developer. All these documents must be reviewed by the National Biosafety Committee before the MOA can issue a safety certificate.  Yet these shipments of US corn did not have the relevant safety certificates and approval documents, according to the news reports below.

GMO lose Europe – victory for environmental organisations - ”In Europe Monsanto only sells GM corn in three countries. GM corn represents less than 1% of the EU’s corn cultivation by land area. Field trials are only in progress in three countries. We will not spend any more money to convince people to plant them,” states Brandon Mitchener, Public Affairs Lead for Monsanto in Europe and Middle East, in an interview with Investigative Reporting Denmark. The decision was taken quietly. The company found no reason to communicate it. This means that every agribusiness company has now given up on genetically modified crops in Europe – apart from selling them in Spain and Portugal. “This is not surprising, knowing that BASF stopped its biotech research in Europe in 2012 and Syngenta moved its research years before. It will influence the international expansion of GMOs on a global scale,” BASF, Bayer and Syngenta halted their development of GMO potatoes in Europe in 2012, for the very same reasons as Monsanto – the battle was lost.

Lobbying And GMO Giant Monsanto Buckles In Europe - Wolf Richter - The “March Against Monsanto” in 52 countries, an unapproved strain of its genetically modified wheat growing profusely in Oregon, cancelled wheat export orders…. A rough week for Monsanto. But now it threw in the towel in Europe – where its genetically modified seeds have faced stiff resistance at every twist and turn. Even its deep corporate pockets and mastery of lobbying have failed: “It’s counterproductive to fight against windmills,” its spokesman told the Tageszeitung. The propitious week started last Saturday with the “March Against Monsanto,” when people in over 400 cities in 52 countries protested against the company, its influence over governments, and its GMO seeds. Much of it was focused on the mundane issue of labeling. Protesters wanted GMO ingredients in food to show up on the label, just like fat or protein. A simple solution to the controversy: let consumers decide. But a red line for the industry. It’s worried that consumers will read the label – and choose an alternative. So Monsanto continued to assure us through its minions that labeling would be too costly, that it would kill the cupcake shop down the street, that we don’t need to know anyway because GMO foods are safe for human consumption, etc. etc.

Supermarkets as GMO Battleground - 1. Four British supermarket chains – Tesco, Sainsbury’s, Marks and Spencer, and “the Co-Op” – have announced that they will begin selling poultry and eggs from chickens which were fed GM soy. The items won’t be labeled. This reverses their previous policy banning such items from their stores. They join Asda and Morrison’s who previously broke off from the boycott. That leaves only Waitrose among large British retailers maintaining the no-GM poultry/egg policy. All the chains sell unlabeled GM meat and milk. 2. Tesco put out a press release telling three lies about why they’re doing this. A. LIE: There’s not enough non-GM soy available. TRUTH: ABRANGE, the Brazilian Association for Producers of Non-GMO Soy, and the certification groups CERT-ID and ProTerra, quickly put out releases and reports denying this. They say there’s more than enough non-GM soy to supply all of Europe. Retailers in Germany, Austria, and France confirmed this. (Further confirmation came at the same time in China, where a consortium of Brazilian soy producers met with Chinese government officials about future soy exports to China. In response to Chinese requests for large amounts of non-GM soy, even the regular Brazilian trade group (primarily pro-GMO) assured them that Brazil could fill that order.

Rogue Monsanto Wheat Sprouts in Oregon - Wheat's non-GMO status is why the Internet went berserk when the US Department of Agriculture revealed Wednesday that Roundup Ready wheat had sprouted up on a farm in Oregon. According to the USDA, a farmer discovered the plants growing in a place they shouldn't have been and tried unsuccessfully to kill them with Roundup. Oops. USDA testing confirmed that the rogue wheat was the same experimental Roundup Ready variety that Monsanto had last been approved to test in Oregon in 2001. The revelation had immediate trade implications. About half the overall US wheat crop gets exported—and Oregon's wheat farmers export 90 percent of their output. Many countries accept US-grown GM corn and soy for animal feed. But as the USDA noted, no country on Earth has approved the sale of GM wheat. And if Roundup Ready wheat is growing on one farm, our trading partners might legitimately ask, what guarantee is there that it's not growing on others?  Already, Japan has responded by suspending imports of US wheat, Bloomberg reports.

Wheat Falls as Japan Suspends U.S. Imports on Biotech Crop Find -  Wheat in Chicago fell, headed for the biggest monthly loss since February, after Japan suspended imports from the U.S., where the government discovered an unapproved, genetically modified strain growing in an Oregon field.  Japan, the biggest buyer of U.S. wheat behind Mexico, suspended imports of western-white wheat and feed wheat from the U.S., said Hiromi Iwahama, the director for grain trade and operation at the agriculture ministry. Scientists said the rogue wheat in Oregon was a strain tested from 1998 to 2005 by Monsanto Co. (MON), the world’s top seedmaker. Japan also canceled a purchase of 24,926 metric tons of white wheat. The finding may hurt U.S. export prospects at a time when the U.S. Department of Agriculture is expecting record global production, boosted by a 48 percent increase in Russian output and a 40 percent gain from Ukraine. Exports from the U.S. probably will fall 9.8 percent to 25.2 million tons in the year that starts on June 1, according to the USDA.  “This is not something we need to see when exports are suffering anyway,”

Japan cancels U.S. wheat order on GMO fear: report - Japanese authorities have canceled a tender offer to buy wheat from the U.S., after unapproved genetically modified wheat was found in an Oregon field, Reuters reported on Thursday. Other major wheat importers South Korea, China and the Philippines also said they were monitoring the situation, after the find stirred concerns that the modified wheat could have made it to the marketplace, the report said. On Wednesday, the U.S. Department of Agriculture said it had conducted a genetic test on the wheat and found that it was an experimental type produced by Monsanto Co. that hadn't been approved for sale. The European Commission has since said it has asked EU member states on Thursday to check imports of U.S. soft white wheat.

South Korea Is Latest To Suspend US Wheat Imports In Aftermath Of Monsanto Rogue Wheat Discovery -  As a reminder, recently news broke out that a rogue genetically modified strain of wheat developed by Monsanto, had been found in an Oregon field late last month. But while modified food has long been a diet staple, this particular breed was the first discovery of an unapproved strain, and what made things worse is the lack of any information how the rogue grain had escape from a field trial a decade ago. As Reuters reports, "even after weeks of investigation, experts are baffled as to how the seed survived for years after Monsanto had ceased all field tests of the product. It was found in a field growing a different type of wheat than Monsanto's strain, far from areas used for field tests, according to an Oregon State University wheat researcher who tested the strain."  The USDA was quick to deny any suggestion of public danger: The USDA said the GM wheat found in Oregon posed no threat to human health, and also said there was no evidence that the grain had entered the commercial supply chain. But the discovery threatens to stoke consumer outcry over the possible risk of cross-contaminating natural products with genetically altered foods, and may embolden critics who say U.S. regulation of GMO products is lax.

GM salmon can breed with wild fish - The potential risks of genetically modified fish escaping into the wild have been highlighted in a new study. Scientists from Canada have found that transgenic Atlantic salmon can cross-breed with a closely related species - the brown trout. The fish, which have been engineered with extra genes to make them grow more quickly, pass on this trait to the hybrid offspring. The research is published the is published the Proceedings of the Royal Society B.. However, the biotech company AquaBounty, which created the salmon, said any risks were negligible as the fish they were producing were all female, sterile and would be kept in tanks on land. The transgenic salmon are currently being assessed by the US authorities, and could be the first GM animals to be approved for human consumption.

GM 'hybrid' fish pose threat to natural populations, scientists warn: The offspring of genetically modified salmon and wild brown trout are even faster growing and more competitive than either of their parents, a new study has revealed, increasing fears that GM animals escaping into the wild could harm natural populations. The aggressive hybrids suppressed the growth of GM salmon by 82% and wild salmon by 54% when all competed for food in a simulated stream. "To the best of our knowledge, this is the first demonstration of environmental impacts of hybridisation between a GM animal and a closely related species," wrote the scientists from Memorial University of Newfoundland. "These findings suggest that complex competitive interactions associated with transgenesis and hybridisation could have substantial ecological consequences for wild Atlantic salmon should they ever come into contact [with GM salmon] in nature." The leader of the study, Krista Oke, said: "These results emphasise the importance of stringent regulations to ensure GM animals do not escape into nature." Salmon and brown trout are closely related and can produce hybrids in nature, though usually less than 1% of offspring are hybrids. But the researchers, writing in the journal Proceedings of the Royal Society B, warned that "escapes and introductions of domesticated salmon can increase rates to as much as 41%."

Study reveals more acid seas could alter early development of Atlantic longfin squid - Acidifying oceans could dramatically impact the world's squid species, according to a new study led by Woods Hole Oceanographic Institution (WHOI) researchers and soon to be published in the journal PLOS ONE. Because squid are both ecologically and commercially important, that impact may have far-reaching effects on the ocean environment and coastal economies, the researchers report. "Squid are at the center of the ocean ecosystem—nearly all animals are eating or eaten by squid," says WHOI biologist T. Aran Mooney, a co-author of the study. "So if anything happens to these guys, it has repercussions down the food chain and up the food chain." Research suggests that ocean acidification and its repercussions are the new norm. The world's oceans have been steadily acidifying for the past hundred and fifty years, fueled by rising levels of carbon dioxide (CO2) in the atmosphere. Seawater absorbs some of this CO2,turning it into carbonic acid and other chemical byproducts that lower the pH of the water and make it more acidic. As CO2 levels continue to rise, the ocean's acidity is projected to rise too, potentially affecting ocean-dwelling species in ways that researchers are still working to understand.

Student science experiment finds plants won't grow near Wi-Fi router - Five ninth-grade young women from Denmark recently created a science experiment that is causing a stir in the scientific community. It started with an observation and a question. The girls noticed that if they slept with their mobile phones near their heads at night, they often had difficulty concentrating at school the next day. They wanted to test the effect of a cellphone's radiation on humans, but their school, Hjallerup School in Denmark, did not have the equipment to handle such an experiment. So the girls designed an experiment that would test the effect of cellphone radiation on a plant instead. The students placed six trays filled with Lepidium sativum, a type of garden cress into a room without radiation, and six trays of the seeds into another room next to two routers that according to the girls calculations, emitted about the same type of radiation as an ordinary cellphone. Over the next 12 days, the girls observed, measured, weighed and photographed their results. Although by the end of the experiment the results were blatantly obvious — the cress seeds placed near the router had not grown. Many of them were completely dead. While the cress seeds planted in the other room, away from the routers, thrived. The experiment earned the girls (pictured below) top honors in a regional science competition and the interest of scientists around the world.

Robobee Officially Takes Flight: Robotic Pollinators to Replace Dying Bees - No, this is not a tabloid - it's real. According to the latest video, which has now been posted below, robotic insects have made their first controlled flight. According to the creators of Robobee:  The demonstration of the first controlled flight of an insect-sized robot is the culmination of more than a decade's work . . . Half the size of a paperclip, weighing less than a tenth of a gram, the robot was inspired by the biology of a fly, with submillimeter-scale anatomy and two wafer-thin wings that flap almost invisibly, 120 times per second.I n addition to the recent suggestion from insecticide producers that we should "plant more flowers" to aid the declining bee population, Harvard's School of Engineering and Applied Sciences has been working with staff from the Department of Organismic and Evolutionary Biology and Northeastern University's Department of Biology to develop robotic bees. These insectoid automatons would be capable of a multitude of tasks. Autonomous pollination, search and rescue, hazardous exploration, military surveillance, climate mapping, and traffic monitoring - to name a few

Drought damage could top $200 billion -  The current drought pattern may be the costliest U.S. natural disaster of 2012 and 2013, according to experts with Harris-Mann Climatology. The long-range weather, commodity and stock forecasting service released their annual summer outlook last week, and the news wasn’t good for much of the Corn Belt. “The drought in the Southwest is expected to move and expand eastward over the central and southern Great Plains, as well as at least the western Midwest, by late June or July. Flooded areas near the Missouri River are likely to turn to the opposite extreme of dryness later this summer season," Long-term climatologist and forecaster Cliff Harris said in a news release. The company also expects drought to return to the Great Plains and western Midwest within the next six weeks. If the drought pattern continues, its damage estimates could be near $200 billion, making it the country’s costliest natural disaster of 2012 and 2013– even more costly than Hurricane Sandy. “We’re still in a pattern of wild weather ‘extremes,’ the worst in more than 1,000 years, since the days of Leif Ericsson. For example, 2012 was the warmest year ever for the U.S., but on January 22, 2013, there was a record for the most ice and snow across the Northern Hemisphere continent,” Harris added.

Water Waste May Leave Us Thirsty - Since 1900, the U.S. has pulled enough water from underground aquifers to fill two Lake Eries. And in just the first decade of the 21st century, we've extracted underground water sufficient to raise global sea level by more than 2 percent. We suck up 25 cubic kilometers of buried water per year. That's the message from the U.S. Geological Survey's evaluation of how the U.S. is managing its aquifers. Or mismanaging. For example: water levels in the aquifer that underlies the nation's bread basket have dropped in some places by as much as 160 feet.  The rest of the world isn't doing any better. A conference of water scientists just issued the so-called Bonn Declaration, which declares that this lack of foresight will cause the majority of people alive in 2050 to face "severe" freshwater shortages. Mismanagement of water resources is a hallmark of this new human-dominated era in the Earth's geologic history, known as the Anthropocene. Despite building, on average, one large dam every day for the last 130 years, we use more water than we store. And we're letting that freshwater escape to the seas. Which means we may find ourselves with water, water everywhere, but not much fit to drink.

Drought Will Magnify Water Scarcity Issues - It’s well-documented that more regions of the United States will face increased water scarcity over the years to come, yet we often forget that an age-old problem — drought — magnifies the effects of water scarcity. A new report issued by the Columbia University Water Center, in conjunction with Veolia Water and Growing Blue, shows the water-scarce regions where drought is expected to have the greatest impact. The study reveals that some of the most iconic areas of the United States will be affected. Of greatest concern are several notable metropolitan areas, including Washington, D.C., New York City, Los Angeles and San Diego. Taken alone, this could impact nearly 40 million Americans. However, this threat extends to numerous counties, many located in “America’s breadbasket” — Nebraska, Illinois and Minnesota — which produce almost 40 percent of the country’s corn. In response, organizations are starting to develop tools designed to map water scarcity risk. The estimates used by these tools are typically based on supply and demand. It’s clearly important to understand any discrepancies between supply and demand, but without understanding climate variations, a major factor is being ignored.

Erratic US 'weather whiplash' accounts for billions of dollars in global losses - America has some of the wildest weather on the planet, and it turns out those extremes – which run from heat waves and tornadoes to floods, hurricanes and droughts – carry a heavy price tag. Climate studies have associated more frequent and intense weather events – such as heavy storms and heat waves – with climate change. The wild swings in weather across the midwest over the last few years – including heat waves, floods, and drought – have been cited as an example of what lies ahead with future climate change. A report from the environmental research organisation World Watch Institute on Wednesday provided further evidence of the costs of those extreme shifts – known as "weather whiplash". The report found that the United States alone accounted for more than two-thirds of the $170bn in losses caused by natural disasters around the world last year. Hurricane Sandy, the drought that spread across the corn belt last summer, and a spate of tornadoes and other extreme storms together accounted for $100bn of those global losses, the report said. Some $58bn was covered by insurance still making 2012 the most expensive year in terms of natural disasters in the US since hurricane Katrina in 2005.

Sequester guts wildfire prevention, sets up bigger blazes - Last year saw the third-worst wildfire season in five decades; the Southern California fire that threatened thousands of homes earlier this month looks to be only the first flash of what the National Oceanic and Atmospheric Administration announced last week will be an above-average season for much of the Southwest. But the sequester took a 7.5 percent bite out of the Forest Service’s budget, nearly half of which is spent fighting wildfires. That means there will be 500 fewer pairs of boots on the ground and 200,000 fewer acres treated to prevent fires; the agency’s next proposed budget cuts preventative spending by a further 24 percent. It’s all part of what fire ecologists, environmentalists, and firefighters interviewed by Climate Desk describe as an increasingly distorted federal budget that has apparently forgotten the old adage about an ounce of prevention: It pours billions ($2 billion in 2012) into fighting fires but skimps on cheap, proven methods for stopping megafires before they start.

Tracking the price of climate change - A new analysis by the Natural Resources Defense Council, the NRDC, finds that the federal government spent three times more than the private insurance industry on climate change impacts last year. And, of course, those federal efforts are entirely funded by taxpayers.  “It is in effect a climate disruption tax, equivalent to a 2.7 percentage point increase in what Americans paid in sales taxes last year.” That’s Daniel Lashof, director of the NRDC’s Climate and Clean Air Program and co-author of the report.  We spent nearly $100 billion in 2012 on drought-related crop insurance, storms like Hurricane Sandy, floods and wildfires. By comparison the nation spent $95 billion on education last year and just $91 billion on transportation.

Weather Satellite's failure on eve of hurricane season: For the second time in less than a year, the main satellite that keeps an eye on severe weather systems in the eastern half of the United States has malfunctioned, according to government officials. The failure is indicative of the overall aging of the nation's weather satellite network that could lead to gaps in coverage as the fleet is replaced, an expert said. Although a backup satellite began operating Thursday, the failure of GOES-East, also known as GOES-13, is "really bad timing because of the upcoming hurricane season, and also we are smack dab in the middle of severe weather season," Marshall Shepherd, president of the American Meteorological Society, told NBC News. Hurricane season officially starts on June 1. The National Oceanic and Atmospheric Administration issued an outlook Thursday calling for a "possibly extremely active" season with 13 to 20 named storms, including three to six major hurricanes with winds of 111 miles per hour (179 kilometers per hour) or higher. The satellite that failed on Tuesday is one of NOAA's three geostationary satellites. GOES-East hovers above the equator at 75 degrees longitude, providing a steady stream of image data for the eastern U.S. and Atlantic Ocean. The second satellite is GOES-West, which focuses on the western U.S. and the Pacific. The backup satellite, GOES-14, is in geostationary orbit at 105 degrees longitude. This 30-degree difference between GOES-East and GOES-14 means "you can't see as far east," Thomas Renkevens, deputy division chief with NOAA's satellite products and services division, explained to NBC News

Bill Would Shift NOAA Resources from Climate Research - A bill being drafted in the House could potentially undermine the climate science research activities and the oceans programs of the National Oceanic and Atmospheric Administration (NOAA). It also would open up the weather satellite sector, which has been a troubled area for NOAA in recent years, to more privatization. The bill, known as the “Weather Forecasting Improvement Act,” would put more emphasis on research and development of new weather forecasting capabilities for anticipating near-term, high-impact events, such as tornadoes and hurricanes, at the possible expense of two of the agency’s other long-standing areas of focus — climate and marine science. The bill was the subject of a May 23 hearing in the House Science Subcommittee on the Environment. It has not yet been formally introduced, and is largely being drafted by Republicans on the subcommittee, which has jurisidiction over NOAA’s National Weather Service, according to several close observers of the legislation.

Climate change linked to more pollen, allergies, asthma: — From the roof of the Gottlieb Memorial Hospital in the Chicago suburbs, an 83-year-old retired doctor finds troubling evidence of why so many people are sneezing and itching their eyes. Joseph Leija counts the pollen and mold spores that collect on slides inside an air-sucking machine atop the six-story building. "There's been an increase, no doubt about it," he says of the 5 a.m. weekday counts that he's been doing as a volunteer for 24 years. "My allergies are much worse than they used to be," says Amanda Carwyle, a mom of three who lives 95 miles south in Pontiac, Ill. "I used to be able to take a Benadryl or Claritin and be fine." Now, despite three medications and allergy shots that make her feel a bit like a zombie, she says her eyes are watery and her head stuffy. "I'm so miserable." Climate change might be partly to blame. Scientists see a link to carbon dioxide, a heat-trapping greenhouse gas emitted by burning coal, oil and other fossil fuels. Tests show that the more CO2 in the atmosphere, the more plants generally grow and the more pollen they produce.

Climate change thaws out 400-year-old plants  - As glaciers melt and slowly recede from the land they once covered, we don’t really know what we’re going to find there. Scientists have already found plants that have been chilling out under glaciers for about four centuries — plants that, now that they’re out from under the ice, have decided to start growing again. These plants are of a specific type, called bryophytes. Plants like this (moss is one example) don’t have vascular tissue to shuttle water and nutrients around, which means they deal better with harsh Arctic winters. When a team of scientists from the University of Alberta was poking around the receding Teardrop Glacier, they happened upon a patches of bryophytes sneaking out from under the ice — “these huge populations coming out from underneath the glacier that seemed to have a greenish tint,” the lead researcher, Catherine La Farge, told the BBC. “When we looked at them in detail and brought them to the lab, I could see some of the stems actually had new growth of green lateral branches, and that said to me that these guys are regenerating in the field, and that blew my mind,” she told BBC News.

Intense Heat Wave In India Brings Sunstroke Deaths, Electric Grid Meltdown, And Spoiled Fruit - Heat wave conditions have claimed the lives of over 500 people in India since April. India’s Department of Disaster Management reported that 524 people have died of sunstroke since April 1. The Indian Meteorological Department said tomorrow’s forecast called for clear skies and continued heat, warning that “the heatwave will continue.” The Times of India reported that the state of Hyderabad’s 500 sunstroke deaths in just three days is the highest such death toll in recent history. New Delhi saw 43 degrees C (or over 109 degrees Fahrenheit) today, western states such as Gujarat saw highs between 116-118 degrees Fahrenheit, and the northern state of Uttar Pradesh hit 45 C (113 F). This state is one of the nation’s poorest, with 190 million people. Its energy infrastructure is inadequate to the demand of so many residents trying to cool themselves. Since pumps are often required to provide water, this also means that a power outage comes with a water outage. Angry residents attacked power company officials and even set fire to a power station. For the rest of the population, power outages combined with humidity caused most people to stay indoors. India’s neighbor Pakistan has responded to its own extreme heat by turning off the air conditioning government offices and telling civil servants not to wear socks.

Mount Everest region glaciers retreating as climate warms: A recent study led by a graduate student at the University of Milan in Italy reveals declining snow amounts and retreating glaciers in the Mount Everest region, reaffirming fears that many scientists hold – increasing global temperatures could cause irreversible damage. The research presented at an American Geophysical Union (AGU) conference in Mexico earlier this month, shows that the glaciers in the Everest region have shrunk by 13 percent over the last 50 years. The snowline has also moved uphill nearly 580 feet.  Lead researcher Sudeep Thakuri and his team used satellite imagery and topography maps to examine changes in the region’s mountain structure. They also evaluated temperature changes and rainfall amounts using hydro-meteorological data from various Nepal Climate Observatory stations and data from Nepal’s Department of Hydrology and Meteorology.

A Rough Guide to the Jet Stream: What it is, how it works and how it is responding to enhanced Arctic warming - Barely a week goes by these days in the Northern Hemisphere without the jet stream being mentioned in the news, but rarely do such news items explain in detail what it is and why it is important. As a severe weather photographer this past 10+ years, an activity which requires successful DIY forecasting, I've had to develop an appreciation into what makes it tick. This post, then, is a start-from-scratch primer based on that knowledge plus some valuable assistance from academia into where the current research is heading. Because of its length and breadth of coverage, I've broken it up into bookmarked sections for easy reference: to come back here click on 'back to contents' in each instance.

Study explores atmospheric impact of declining Arctic sea ice: There is growing recognition that reductions in Arctic sea ice levels will influence patterns of atmospheric circulation both within and beyond the Arctic. New research in the International Journal of Climatology explores the impact of 2007 ice conditions, the second lowest Arctic sea ice extent in the satellite era, on atmospheric circulation and surface temperatures. Two 30-year simulations, one using the sea ice levels of 2007 and another using sea ice levels at the end of the 20th century, were used to access the impact of ice free seas. The results showed a significant response to the anomalous open water of 2007. The results confirm that the atmospheric response to declining sea ice could have implications far beyond the Arctic such as a decrease in the pole to equator temperature gradient, given the increased temperatures associated with the increase in open water, leading to a weaker jet stream and less storminess in the mid-latitudes.

The Jet Stream: How Its Response To Enhanced Arctic Warming Is Driving More Extreme Weather -  We’ve written extensively about how how arctic ice loss is driving extreme weather. We’ve known for a long time that global warming melts highly reflective white ice and snow, which is replaced by the dark blue sea or dark land, both of which absorb far more sunlight and hence far more solar energy. That is one of the many sources of “polar amplification,” whereby the Arctic warms much faster than other parts of the globe. Now it seems increasingly clear that the amplified Arctic warming in turn amplifies extreme weather by weakening the jetstream (see video here). The National Oceanic and Atmospheric Administration (NOAA) explained in an October 2012 news release: The effects of Arctic amplification will increase as more summer ice retreats over coming decades. Enhanced warming of the Arctic affects the jet stream by slowing its west-to-east winds and by promoting larger north-south meanders in the flow. Predicting those meanders and where the weather associated with them will be located in any given year, however, remains a challenge. The researchers say that with more solar energy going into the Arctic Ocean because of lost ice, there is reason to expect more extreme weather events, such as heavy snowfall, heat waves, and flooding in North America and Europe but these will vary in location, intensity, and timescales.

Acceleration of summer Arctic sea ice loss - I have recently outlined the changes in the Cryosphere Today Area index (CT Area), using anomalies to examine the changes from the long-term-average seasonal cycle. I've shown the changes in the CT Area anomalies (link), the autumn response to increasing open water in the summer season (link), and the recent June anomaly crashes (link). I have also covered research showing the majority of surface-based Arctic Amplification is a response to summer ice loss (link), and that this amplification is probably being understated by the GISS dataset (link). However, I have not addressed a substantial issue -- that of the summer acceleration loss of area when compared to the loss of winter area. In the graphic to the left, the green trace (annual daily maximum) is read on the left-hand axis, and the red trace (annual daily minimum) is read on the right-hand axis. However, both axes are 6M km^2 across, and are merely offset to match the earlier period. From this it can be seen that, for much of the period, both maximum and minimum follow each other relatively closely. In other words, whatever caused the reduction in area in March and September, it seemed to be applied equally to regions geographically remote and removed in time by 6 months. This period of decline of sea ice also covers a period of substantial volume loss; September lost 7,800 cubic kilometres of sea ice from 1979 to 2006. However, since the 1990s, and to a far more marked degree since 2007, the two plots have diverged markedly. This is the Summer Acceleration.

If this is real... - In the first Arctic Sea Ice update of the 2013 melting season that was posted a couple of days ago, I announced that a cyclone was forecasted to move over the Arctic Basin and stay there for a while. It's been there for a couple of days now as can be seen on this animation of Danish Meteorological Institute SLP images: It's not particularly strong (especially not compared to GAC-2012), but it stays in the same spot for quite a while and so is bound to have some effect on the ice below. Now, according to the Naval Research Laboratory's ACNFS forecast model, this effect is quite pronounced. And to show you just how pronounced, here's their sea ice concentration animation from May 22nd, with a forecast up to June 6th: And it's only logical for their sea ice thickness animation to follow suit: Basically, ACNFS is forecasting a 'hole' in the middle of the ice pack, with much lower concentration and thus overall thickness compared to the surrounding ice. I don't place a lot of trust in this particular model, but if this would come about at the start of June... Well, let's say it would be something we haven't seen before and the melting season would already be memorable before it started for real. On the other hand, more surprises shouldn't be a surprise, of course, given recent trends.

Big firms should report environmental impact : UN panel  (Reuters) - Big companies should report their impact on the environment in addition to their earnings under a U.N. plan to boost economic growth and ease poverty by 2030, according to recommendations by a panel of world leaders released on Thursday. Slowing climate change and protecting the environment should be at the core of global development, said the 27-member panel, led by British Prime Minister David Cameron, Indonesian President Susilo Bambang Yudhoyono and Liberian President Ellen Johnson Sirleaf. "There is one trend - climate change - which will determine whether or not we can deliver on our ambitions," the report said. "Without environmental sustainability, we cannot end poverty; the poor are too deeply affected by natural disasters and too dependent on deteriorating oceans, forests and soils." The report - handed over by Yudhoyono to U.N. Secretary-General Ban Ki-moon in New York - recommends 12 so-called illustrative goals to replace eight Millennium Development Goals that were aimed at reducing poverty and hunger. Those goals were agreed to by world leaders in 2000 and expire in 2015.

The Case for a Profit Motive in Conserving the Environment - I think you may appreciate this recent chat I had with Mark Tercek, the president of The Nature Conservancy and co-author of “Nature’s Fortune: How Business and Society Thrive by Investing in Nature.”  The event, organized by the Aspen Institute, took place earlier this month at Roosevelt House, which houses the Public Policy Institute of Hunter College.

Exxon’s $100m Algae Investment Falls Flat: Exxon Mobil Corp. is cutting its losses on algae biofuels after investing over $100 million only to find that it couldn’t achieve commercial viability. Earlier this week, Exxon announced that while it wasn’t throwing in the towel, it would be forced to restructure its algae research with partner California-based Synthetic Genomics Inc (SGI). When the two launched their algae-derived biofuels program in 2009, Exxon planned to invest around $600 million with the goal of developing algae fuels within 10 years. But it’s been more complicated than expected, and after $100 million down the drain, it has become clear that much more research—and at least another decade and half—are needed. Exxon spokesman Charles Englemann told Bloomberg that the partners had “gained significant understanding of the challenges that must be overcome to deliver scalable algae-based biofuels.” What they were hoping to achieve on a commercially viable scale was the exploitation of algae as a source of oil that could be converted in existing refineries into transportation fuels. 

Exxon CEO: ‘What Good Is It To Save The Planet If Humanity Suffers?’ - At yesterday’s meeting for ExxonMobil shareholders in Dallas, CEO Rex Tillerson told those assembled that an economy that runs on oil is here to stay, and cutting carbon emissions would do no good. He asked, “What good is it to save the planet if humanity suffers?” One good would be that humanity has a habitable place to live. And in acting to stop the increasingly dangerous effects of climate change, we could avoid a great deal of suffering. Tillerson missed the billions of dollars in damages, thousands of lives lost, millions displaced, and rampant ecological destruction due to the carbon emissions that cause climate change. Exxon does not see carbon emissions falling significantly until 2040. Staying on this path will mean more suffering: heat waves, conflict, food insecurity, Dust Bowl-like drought, extreme flooding, sea level rise, increasingly destructive storms, and worsening refugee crises. A Carbon Disclosure Project Report noted that “ExxonMobil noted that the company’s ‘operations around the world include remote and offshore areas that present challenges from existing climate extremes and storms. These severe weather events may disrupt supplies or interrupt the operations of ExxonMobil facilities.’ ” Even so, A 2011 study found that “9 out of 10 top climate change deniers [were] linked with Exxon Mobil.”

Geoengineering - Our Last Hope, or a False Promise? - Geoengineering — the deliberate, large-scale intervention in the climate system to counter global warming or offset some of its effects — may enable humanity to mobilize its technological power to seize control of the planet’s climate system, and regulate it in perpetuity. But is it wise to try to play God with the climate? For all its allure, a geoengineered Plan B may lead us into an impossible morass. While some proposals sound like science fiction, the more serious schemes require no insurmountable technical feats. Two or three leading ones rely on technology that is readily available and could be quickly deployed. Some approaches, like turning biomass into biochar, a charcoal whose carbon resists breakdown, and painting roofs white to increase their reflectivity and reduce air-conditioning demand, are relatively benign, but would have minimal effect on a global scale. Another prominent scheme, extracting carbon dioxide directly from the air, is harmless in itself, as long as we can find somewhere safe to bury enormous volumes of it for centuries. But to capture from the air the amount of carbon dioxide emitted by, say, a 1,000-megawatt coal power plant, it would require air-sucking machinery about 30 feet in height and 18 miles in length, according to a study by the American Physical Society, as well as huge collection facilities and a network of equipment to transport and store the waste underground. The idea of building a vast industrial infrastructure to offset the effects of another vast industrial infrastructure (instead of shifting to renewable energy) only highlights our unwillingness to confront the deeper causes of global warming — the power of the fossil-fuel lobby and the reluctance of wealthy consumers to make even small sacrifices. 

Global warming caused by chlorofluorocarbons, not carbon dioxide, new study says - Chlorofluorocarbons (CFCs) are to blame for global warming since the 1970s and not carbon dioxide, according to new research from the University of Waterloo published in the International Journal of Modern Physics B this week. CFCs are already known to deplete ozone, but in-depth statistical analysis now shows that CFCs are also the key driver in global climate change, rather than carbon dioxide (CO2) emissions. "Conventional thinking says that the emission of human-made non-CFC gases such as carbon dioxide has mainly contributed to global warming. But we have observed data going back to the Industrial Revolution that convincingly shows that conventional understanding is wrong," said Qing-Bin Lu, a professor of physics and astronomy, biology and chemistry in Waterloo's Faculty of Science. "In fact, the data shows that CFCs conspiring with cosmic rays caused both the polar ozone hole and global warming." "Most conventional theories expect that global temperatures will continue to increase as CO2 levels continue to rise, as they have done since 1850. What's striking is that since 2002, global temperatures have actually declined – matching a decline in CFCs in the atmosphere," Professor Lu said. "My calculations of CFC greenhouse effect show that there was global warming by about 0.6 °C from 1950 to 2002, but the earth has actually cooled since 2002. The cooling trend is set to continue for the next 50-70 years as the amount of CFCs in the atmosphere continues to decline."

A Fossil Fuel-Free New York State by 2050 - The Northeast is still reeling from the impacts of Superstorm Sandy's fury. Costs for Sandy could exceed those for Katrina and if they do not, Sandy will be the number-two all-time most costly weather disaster in the United States - and this ranking is normalized for things like increasing population, increasing wealth in coastal areas and inflation. (1) Research out of Stanford and Cornell has given us the most detailed plan yet for converting our society to fossil-free energy sources and beginning to address the new climate pollution -caused or -enhanced weather extremes. The plan is for New York State. Even though some officials and media outlets have dismissed it as too aggressive and overreaching, its benefits far outweigh the costs. The evidence linking Arctic Amplification to extreme weather in mid latitudes costs $569 billion and creates 4.5 million construction-phase jobs, with earnings (in the form of wages, local revenue and local supply-chain impacts) of $314 billion, along with 58,000 permanent jobs with annual earnings of $5.1 billion per year. This is before the health and environmental benefits of $33 billion per year, savings to the United States of $1.7 billion per year because of reduced global warming impacts (a savings which increases to $12.1 billion per year in 2100), and increased tax valuation due to eliminating the fossil fuel industry. (2)

Solar Industry Anxious Over Defective Panels - The solar panels covering a vast warehouse roof in the sun-soaked Inland Empire region east of Los Angeles were only two years into their expected 25-year life span when they began to fail. Coatings that protect the panels disintegrated while other defects caused two fires that took the system offline for two years, costing hundreds of thousands of dollars in lost revenues. It was not an isolated incident. Worldwide, testing labs, developers, financiers and insurers are reporting similar problems and say the $77 billion solar industry is facing a quality crisis just as solar panels are on the verge of widespread adoption. No one is sure how pervasive the problem is. There are no industrywide figures about defective solar panels. And when defects are discovered, confidentiality agreements often keep the manufacturer’s identity secret, making accountability in the industry all the more difficult. But at stake are billions of dollars that have financed solar installations, from desert power plants to suburban rooftops, on the premise that solar panels will more than pay for themselves over a quarter century.

Next Shoe To Drop: Shoddy Solar Panels From China  The photovoltaic industry is in a perverse situation. To make power generation from solar competitive, prices of solar panels had to come down. Tens of billions in subsidies were plowed into the industry. Technological advances came along. And the price per watt crashed exponentially, from $76 in 1977 to about $7 in 1989. Then it hit $4 in 2005, $2 in 2010, and a forecast $0.74 per watt in 2013 (graph). But it wreaked havoc. Business models collapsed. Funding dried up. PV companies bled red ink. In the US, a slew of them, including Solyndra, went bankrupt. Others shut down or changed course. Tens of billions in taxpayer subsidies and investor capital spiraled down the drain. . Now even Bosch Solar Energy AG is fleeing the business after burning through $3.1 billion. Same story in France, in Spain. Bloodletting everywhere. They all blamed the low prices of Chinese solar panels. Complaints that led to anti-dumping proceedings in the US and aggravated the trade war between the EU and China. But solar power generators, from utilities with large-scale installations to farmers with solar panels on their barns, were ecstatic about the low prices. They enjoyed subsidies, nearly free financing, and the hope that the system would more than pay for itself over the course of its 25-year life span. It would be a good deal. But it might not be. The price war that Chinese manufacturers waged was a suicide mission. Now even they’re going bankrupt, including their erstwhile number one, Wuxi Suntech, when the banks pulled the ripcord in March. Existentially threatened, they cut costs ... and corners.

Terrorism and the Electric Power Delivery System - I am currently reading Terrorism and the Electric Power Delivery System.  From the summary:  The electric power delivery system that carries electricity from large central generators to customers could be severely damaged by a small number of well-informed attackers. The system is inherently vulnerable because transmission lines may span hundreds of miles, and many key facilities are unguarded. This vulnerability is exacerbated by the fact that the power grid, most of which was originally designed to meet the needs of individual vertically integrated utilities, is now being used to move power between regions to support the needs of new competitive markets for power generation. Primarily because of ambiguities introduced as a result of recent restructuring of the industry and cost pressures from consumers and regulators, investment to strengthen and upgrade the grid has lagged, with the result that many parts of the bulk high-voltage system are heavily stressed. A terrorist attack on the power system would lack the dramatic impact of the attacks in New York, Madrid, or London. It would not immediately kill many people or make for spectacular television footage of bloody destruction. But if it were carried out in a carefully planned way, by people who knew what they were doing, it could deny large regions of the country access to bulk system power for weeks or even months. An event of this magnitude and duration could lead to turmoil, widespread public fear, and an image of helpless- ness that would play directly into the hands of the terrorists. If such large extended outages were to occur during times of extreme weather, they could also result in hundreds or even thousands of deaths due to heat stress or extended exposure to extreme cold.

International Power Outage Comparisons - The above (Fig 1.2a of Terrorism and the Electric Power Delivery System) shows a measure of total electric grid outage duration across a sample of countries in the world.  The measure is SAIDI = System Average Interruption Duration Index.  This is the total number of minutes per year of outage experienced by an average customer, but it explicitly excludes major events (hurricanes, earthquakes).  Most utility outage measurements are reported exclusive of major events.  This is irritating if one is interested in the climate change signal,  but understandable for utilities trying to measure their endogenous performance, rather than exogenous events that they can't control in their own operations. The data are for 1992-2001, but this measure is fairly stable over time, so it's probably not too different now.  Japan is the best with only 6 minutes of average outage.  That's six-nines reliability (99.9999% uptime).  By contrast, the US experience is over three hours (99.96% uptime).  The developing countries in the sample range from a few hours (Argentina) to a few days (Columbia) of outage per year.

The End Of The World Isn't As Likely As Humans Fighting Back - While it’s certainly true that one can tell a compelling dramatic story about the end of the world, as a mechanism of foresight, apocaphilia is trite at best, counter-productive at worst. Yet world-ending scenarios are easy to find, especially coming from advocates for various social-economic-global changes. As one of those advocates, I’m well aware of the need to avoid taking the easy route of wearing a figurative sign reading The End Is Nigh. We want people to take the risks we describe seriously, so there is an understandable temptation to stretch a challenging forecast to its horrific extremes--but ultimately, it’s a bad idea. Here’s why: It’s simplistic William Gibson famously said “the future is here, it’s just not evenly distributed.” Unless we’re talking about an extinction-level asteroid strike, true dystopian futures will affect diverse parts of the world differently. This is true at a high level, even for dystopias--most of the time, the poorest parts of the world are also the ones hit the hardest by Globally Scary Threats--but it’s better to think of this observation as something more akin to a scalpel. Even within the same region or country, some communities will be hit harder than others, and some will have access to far greater resources than others. If your dystopian scenario includes the phrase “we’re all doomed” or otherwise implies the Globally Scary Threat will affect us all equally, it’s probably bad futurism.

Germany thwarts EU in China solar fight - Germany led a majority of EU members on Monday to oppose punitive duties on imported Chinese solar panels, undermining an aggressive attempt by the bloc’s trade commissioner to combat allegedly unfair competition from China. Karel De Gucht is confronting Beijing in the EU’s biggest ever trade investigation. But Philipp Rösler, Germany’s economy minister, made clear his government’s opposition to duties at an official lunch in Berlin for Li Keqiang, the visiting Chinese premier. Mr De Gucht, who is from Belgium, has recommended that provisional punitive tariffs averaging 47 per cent be imposed on imports from Chinese solar producers, whom he accuses of selling goods below cost. The anti-dumping case has emerged as a test of whether the EU can maintain a unified trade policy orchestrated by Brussels, or whether national governments would ultimately fracture under intense commercial lobbying by Beijing. Under EU rules, the commission has the authority to determine whether those provisional duties are enacted. But opposition from member states would weaken Mr De Gucht’s hand as the investigation moves toward a conclusion in December, when they can ultimately can block his proposal.

China has the upper hand in solar panel standoff with EU - The EU’s blustery, faux tough-guy trade commissioner Karel De Gucht is vowing to implement duties of 47% on all Chinese solar panels imported into EU territory. Only problem is that at last count, 18 of the 27 members of the Union oppose him. This includes the powerful voice of German Chancellor Angela Merkel, who promised Chinese Premier Li Keqiang last weekend that she would do all she could to see to it that there “are no permanent import duties” on solar panels from the PRC. Merkel’s stance has been joined by Great Britain, the Netherlands, Sweden, and a number of Eastern European nations (of the larger economies, only perpetual trade hawks France and Italy are supporting the Commission). Fully aware of the situation, the Chinese have stepped up pressure on De Gucht. After a brief meeting on Monday, Chinese trade representative Zheng Shan issued a belligerent statement, warning that if the duties were imposed China “would not stand idly by” but would “take necessary steps to defend its national interest.” (read: at least equivalent trade retaliation somewhere else). The Commission is now left with querulous complaints against its own constituents — to wit, a bureaucrat who stated: “I would be lying if I said we did not consider it annoying” that we were not supported. And he added plaintively that China “is a country that knows extremely well how to play the divide and rule, using carrots and sticks.”

Oops: Europe’s green mandates have resulted in more imported coal and wood consumption - The European Union has been pushing their member states to derive no less than one-fifth of their energy from so-called renewable sources by 2020, and the major hope behind the whole thing was that supporting wind and solar energies would put them into a position where they could help everybody meet those goals. Unfortunately for them, however, wind and solar have yet to emerge as the miracle technologies that green-energy advocates have been so desperately insisting they will be, despite their many generous subsidies. Not only are the recession-wracked Europeans paying an average of 37 percent more than Americans for electricity, but they are increasingly relying on buying and shipping American resources to meet their green-energy goals to make up for their underperforming renewables’ shortcomings. The WSJ reports: Under pressure, some of the Continent’s coal-burning power plants are switching to wood. But Europe doesn’t have enough forests to chop for fuel, and in those it does have, many restrictions apply. So Europe’s power plants are devouring wood from the U.S., where forests are bigger and restrictions fewer. This dynamic is bringing jobs to some American communities hard hit by mill closures. It is also upsetting conservationists, who say cutting forests for power is hardly an environmental plus. … U.S. wood thus allows EU countries to skirt Europe’s environmental rules on logging but meet its environmental rules on energy. …

The Earthquake Kit -  The roiling set of problems at the Fukushima nuclear complex seems only to grow as one unprecedented situation after another arises, including a possible massive build-up of salt -- 99,000 pounds are estimated to have accumulated in reactors 2 and 3 -- from sea water pumped into the damaged reactors to cool them.  Salt can encrust uranium fuel rods and heat them up dangerously. In the meantime, the “mox” fuel (which contains highly toxic plutonium with a half-life of 24,000 years) in reactor 3 now seems to be leaking and venting.  The release of mox fuel into the environment represents a situation with which the nuclear industry has little experience.  Fears are rising that there could be "a crack or a hole in the reactor core's stainless steel chamber or in the spent fuel pool that's contained by a massive concrete container," which could prove devastating.  And that’s just to begin to lay out the problems at the complex itself, which are predicted to go on for "weeks, if not months." Meanwhile, the tap water of Tokyo, with radiation levels high enough several days ago to be considered a danger to infants, got much attention until it dropped back into a more normal range.  Some other measurements have been at least as eye-opening.  These would include radiation levels 1,600 times higher than normal taken days ago about 12 miles from the plant and modestly elevated ones 74 miles away, as well as a recent spike in levels of iodine to 1,850 times the legal limit in adjacent sea waters, and water leaking into a plant turbine room registering levels 10,000 times more than normal.  One thing you can undoubtedly count on: no one’s going to be eating spinach, found not just to have traces of Iodine-131 (half-life 8 days), but of cesium-137 (half-life 30 years), produced anywhere near Fukushima for a while.

EIB says would consider backing Cyprus LNG terminal (Reuters) - The European Investment Bank, the financing arm of the EU, said on Thursday it would consider investing in an LNG terminal which Cyprus plans to construct in coming years to tap natural gas in the east Mediterranean. Discovery of the resource off Cyprus could help to ease a grim economic outlook after authorities had to close one bank and seize savings in a second in return for 10 billion euros in aid from the European Union and International Monetary Fund in March. Authorities have said they will go ahead with the construction of a liquefied natural gas plant on the southern coast, hoping to process Cypriot gas, and also potentially gas discoveries from neighbouring states like Israel and Lebanon with exports from around 2020. "If that is the decision of Cypriot colleagues and friends then we would be open, to have the necessary due diligence from the banking point of view and from the technical point of view," EIB President Werner Hoyer told journalists. Hoyer, in Nicosia to sign a 100 million euro investment loan to Cyprus, was responding to a question on whether the EIB would contemplate an investment in the plant.

IEA says U.S. gas prices of US$5 could spur return to coal - U.S. gas prices of around US$5 per million British thermal units could prompt the world’s largest economy to step up use of coal, after years of cutting back on its consumption in favour of cleaner-burning gas, the West’s energy agency said on Monday. The United States’ shale revolution has driven up domestic gas production and led to a drop in gas prices. The production increase has led to plans to export the fuel, with Wood Mackenzie predicting exports of 50 million tonnes of liquefied natural gas (LNG) by 2020. Such exports are widely expected to boost U.S. domestic gas prices, but it is still unclear how much they will rise. “Our analysis shows if U.S. gas prices come to around $5 mmBtu – it is about $4.30 per mmBtu now – we may well see coal come back,” Fatih Birol, chief economist of the International Energy Agency, told reporters at an industry conference. Only regulatory intervention to bar a switch back to coal could prevent greater coal use if gas prices rise to $5 per mmBtu, Birol said.

Must-See Video Shows Impact Of Coal As Its Use In U.S. Power Sector Rebounds - A new video from the Sierra Club makes the connection between coal, public health, and greenhouse gas emissions. Coal 101 points out that the United States still gets 40 percent of its electricity from coal, and new data from the Energy Information Administration shows that natural gas is not replacing coal as many assume. In fact, coal is reclaiming its market share.What does this mean? As the U.S. burns more coal, carbon dioxide emissions will rise. This has serious impacts both globally and locally. Burning coal also harms human health from air and water pollution, mercury poisoning, and toxic waste in the form of coal ash. Rural communities have to deal with mountaintop removal mining — i.e. blowing up a mountain to get at what’s inside, and leaving slag behind.There are signs of hope — the amount of electricity from renewable energy has doubled over the last few years, with Iowa and South Dakota getting more than 20 percent of their energy from wind for example. The video explains more:

State forces fracking on some owners - Columbus Dispatch: A little-used state law that can force unwilling landowners to allow fracking on their property is growing more popular among drilling companies. Since August, drilling companies have filed 11 so-called “unitization” requests with the Ohio Department of Natural Resources. Each request sought access to Utica shale oil and gas buried beneath the unwilling property owners’ land. The new requests, three of which have been approved, involve 38 landowners, businesses and public agencies that did not sign mineral-rights leases with drilling companies. The law allows companies to add unwilling properties to large drilling units to maximize access to oil and gas as long as at least 65 percent of the acres in a unit have been leased.In July 2012, the state had approved one such request. The properties in these newest requests cover more than 674 acres in Carroll, Columbiana, Harrison, Jefferson and Trumbull counties. Critics of shale drilling and fracking say unitization violates basic property rights.

New Mexico county first in nation to ban fracking to safeguard water - (w/ graphic) - Wells are the Alcons' only source of water. The same is true for everyone else in Mora County, which is why last month this poor, conservative ranching region of energy-rich New Mexico became the first county in the nation to pass an ordinance banning hydraulic fracturing, the controversial oil and gas extraction technique known as "fracking" that has compromised water quantity and quality in communities around the country. "I don't want to destroy our water," Alcon said. "You can't drink oil." In embracing the ban, landowners turned their back on potentially lucrative royalty payments from drilling on their property and joined in a groundswell of civic opposition to fracking that is rolling west from Ohio, New York and Pennsylvania in the gas-rich Marcellus shale formation. Pittsburgh became the first U.S. city to outlaw fracking in November 2010 after it came to light that an energy company held a lease to drill under a beloved city cemetery. Since then, more than a dozen cities in the East have passed similar ordinances.

Escalating Water Strains In Fracking Regions - It’s bad enough that Western farmers and ranchers are reeling from a three-year-old drought and record heat waves. Now they’re feeling the heat from the goliath energy industry – over water. From Texas to Colorado, hydraulic fracturing energy production is using larger amounts of water. So much that farmers and other major users are getting increasingly nervous about running out of the precious resource, especially as more people move to these states. In drought-ravaged Texas, fracturing-related water use has doubled in three years, while dozens of communities are imposing water-use restrictions. In Colorado and North Dakota, energy companies are paying exorbitant money – up to 10 times more than farmers typically pay – to secure increasingly scarce municipal water. And, with populations and energy production projected to grow sharply in the coming years, these competitive pressures are likely to worsen, especially if tighter water management measures for the industry are not put into place. A new federal study showing rapid depletion of underground water supplies in some of these same regions only adds to the urgency.

The fate of Keystone XL - So let’s move on to Keystone XL, which saw a House pass a bill on Wednesday that would pretty much take things out of the president’s hands, speeding up the approval process for this Canada-Texas pipeline. The Obama administration opposed the bill, saying it “seeks to circumvent longstanding and proven processes” by removing a requirement for a presidential permit and by eliminating the need for any new environmental studies. To wit, the House bill—known as the Northern Route Approval Act--would approve the northern leg of Keystone XL without the inconvenience of waiting for presidential approval. The vote went down with 241 in favor and 175 against and there were only 19 Democrats who supported it. In an alternative universe, this might be a major victory for Keystone and a major defeat for its opponents. But in this reality, it’s not likely to get past the House. It takes things a bit too far and alienates those Democrats who have traditionally supported Keystone XL. All in all, it’s probably a bad strategic move by the project’s strongest supporters.

Tar Sands Oil: You Can Stall It, But I Doubt You Can Stop It - In a recent New Yorker piece, Elizabeth Kolbert argues that President Obama should reject the Keystone pipeline to “put a brake on the process” of extracting this highly polluting energy source from Alberta’s tar sands. It’s a timely argument because approval of the pipeline’s construction is at the top of the Republican’s wish list, and they’ll continue hammering on it until they get it.  If the President doesn’t approve it in time for the debt ceiling debate, I’ll bet you a metric ton of CO2 that it’s a Republican condition for raising the ceiling. However, while her argument is timely, it’s not very strong.  Here’s the problem: “It’s overwhelmingly likely the oil would find another way to market,” USA Today observed in a recent editorial. For instance, a pipeline could be built to British Columbia, and the oil shipped from there to China, though there are many political and logistic barriers to such a plan—among them the Canadian Rockies. Sure, the Canadians and everyone else in the energy-supply chain business would rather move this goop south through the relatively unencumbered American Midwest, on through our southern ports and onto the world market.  But if they can’t do that, as long as they can sell it for more than it costs to extract and move it—and by “costs,” I’m decidedly not including the heavily discounted environmental costs—then extract and move it they will.

Group: State Department inspector general is probing Keystone pipeline review - A liberal watchdog group says the State Department’s inspector general (IG) is probing possible conflicts of interest in the federal environmental review of the proposed Keystone XL oil sands pipeline. The Checks and Balances Project said it will unveil evidence next Wednesday of an IG inquiry into State’s use of Environmental Resources Management (ERM), the consultants behind State's March draft analysis that gave Keystone a largely clean bill of health. In April, Checks and Balances and other green groups called for an IG probe. Their request followed revelations in Mother Jones magazine that a senior ERM analyst had worked as a consultant for Keystone developer TransCanada Corp. on previous projects. The Mother Jones story, based on unredacted ERM filings with State, showed that the ERM official had also worked with big oil companies, and also showed previous work with oil industry interests by two other ERM contributors to the Keystone analysis. Doug Welty, a spokesman for State’s IG office, said Friday that it’s the IG’s policy not to comment on “any possible, pending, ongoing or future investigations.”

B.C.’s opposition to Northern Gateway pipeline plan sends strong message - Those who hoped the re-election of Christy Clark’s Liberal government in British Columbia would mean her eventual endorsement of the proposed Northern Gateway pipeline were reminded Friday the project has a long way to go to win the province’s essential backing. Read B.C.'s full submission to the Joint Review Panel on Northern Gateway .In its final submission to the Northern Gateway Pipeline Joint Review Panel, B.C. says it cannot support the project as presented because proponent Enbridge Inc. has been unable to address British Columbians’ environmental concerns. “We have carefully considered the evidence that has been presented to the Joint Review Panel,” B.C. environment minister Terry Lake in a statement. “The panel must determine if it is appropriate to grant a certificate for the project as currently proposed on the basis of a promise to do more study and planning after the certificate is granted. Our government does not believe that a certificate should be granted before these important questions are answered …‘Trust me’ is not good enough in this case.”

Canada Putting Too Many Eggs in Oil Basket - Canadian Natural Resources Minister Joe Oliver said natural resources are the cornerstone of the federal and provincial economies. The U.S. economy, on the road to modest recovery, remains central to a Canadian oil market that relies heavily on exports. Oliver said at an investment conference in Quebec that the natural resources sector represents about 20 percent of the gross domestic product. The Canadian economy has suffered, however, because there aren't many new conduits to get oil exports to foreign markets. The potential to reach Asian could provide a relief valve for the Canadian economy, while the option still exists to ship oil through the United States for exports. With opposition mounting along the borders, however, Canada's export-driven economy may become landlocked. "Our natural resources are one of the cornerstones of the economic development of Quebec and Canada," Oliver said the natural resources sector accounts for about 1.6 million Canadian jobs and represents about one-fifth of the GDP. Canada is in the top tier in terms of oil production. Nearly all of its oil exists in so-called oil sands and the federal government now controls enough of that type of crude to put Canada behind Saudi Arabia and Venezuela globally. Most of the economy is structured around oil exports and almost all of those exports are directed toward U.S. refineries.

Harper government nixed reviews for some oil sands projects following warnings of water disruption - The federal government removed some oil sands projects from a list of those requiring environmental screenings, after being told in an internal memorandum that this form of industrial development could disturb water sources and harm fish habitat. The memo to the deputy minister of the Department of Fisheries and Oceans, dated May 5, 2011, came a year before Prime Minister Stephen Harper’s government introduced hundreds of pages of changes to Canada’s environmental laws, which will allow the government to exclude some oil sands projects from reviews. In total, the changes eliminated about 3,000 federal environmental assessments, including hundreds of evaluations of projects involving fossil fuels and pipeline development, once the laws were adopted in July 2012. Ministers in Harper’s government said this would reduce unnecessary delays and focus federal resources on investigating projects with the greatest potential impacts on the environment.

Alberta’s bitumen loss could be B.C.’s shale gas gain - Canada’s westernmost province is likely to see an uptick in “selective” merger and acquisition activity as global liquefied natural gas players seek reserves needed to backstop export developments, Greg Pardy, co-head of global energy research at RBC Dominion Securities Inc., said in May 22 report. The opposite appears true in Alberta, as pipeline constraints and high production costs dampen enthusiasm for oil sands deals. Marathon Oil Corp. last week abandoned plans to sell portions of its 20% stake in the Athabasca Oil Sands Project, saying it couldn’t reach an agreement with a prospective buyer. Murphy Oil Corp. and ConocoPhillips Co. have also backed away in recent weeks from selling oil sands assets. “There’s some real questions about whether Alberta is ever going to be able to get any of its energy outside of the province other than into the U.S.,” said Tom Valentine, a partner in the Calgary office of Norton Rose Canada LLP. Would-be buyers “are now looking at Alberta as a real worrisome investment opportunity, and that’s why I think you’re seeing some of the excitement migrating to the other side of the mountains.”

Shell Admits Real Reason Coast Guard Had To Rescue Its Arctic Drilling Rig: Failed Tax Avoidance Scheme - The main reason an offshore oil rig ran aground off the coast of Alaska late last year was because oil company Royal Dutch Shell was trying to depart state waters to avoid paying millions in taxes. Sean Churchfield, operations manager for Royal Dutch Shell in Alaska, testified to the Coast Guard over the weekend that the Kulluk, an Arctic offshore drilling rig, left Dutch Harbor in December “driven by the economic factors.” When the Coast Guard’s legal advisor Lt. Cmdr. Brian McNamara asked why leaving by the end of the year was such a concern, Churchfield said:“The end of the year to my understanding was when the tax liability potentially would have become effective.” The cost of maintaining the rig in Dutch Harbor was another factor, but the tax liability was larger, according to Churchfield. The Kulluk is a 28,000 ton oil drilling ship that ran aground off the shore of Sitkalidak Island, Alaska due to an extremely strong winter storm in the waning hours of 2012. The Coast Guard took part in a joint operation to evacuate all crewmembers. Currently, the Kulluk and its counterpart the Noble Discoverer are in Asia for repairs.

In U.S. energy boom, a growing tax dodge - So-called master limited partnerships were created in their current form in 1987. The corporate tax exemption is available for passive companies that pay out nearly all of their income to shareholders, who then pay taxes -- generally real estate or investment firms. But the law also extended the tax-free status to certain types of oil and gas companies. For a long time, the MLP structure was primarily used by the transport companies. U.S. pipeline owners argued that the tax break allowed them to attract investors to a low-growth, but vital, portion of the nation's energy infrastructure. Recently, though, a growing variety of energy companies have been seeking out the tax-free status, many of which are not low-growth or lacking investment. Of the seven energy companies that have IPOed this year as MLPs, only one was in the pipeline business. In addition to Emerge, there was an oil refiner, a coal miner, and a shipping company. In all, 40 MLPs have issued stock this year in either IPOs or follow-on offerings, raising $11.2 billion, up from 27 companies raising nearly $8 billion in the same time last year.

US shale boom starts to fade - For the past three years, the boom in the US shale oil industry has outstripped all expectations. Production surged far faster than any forecasts; drillers raced to secure space in new pipelines to get their crude to market. Now, at the periphery, that may be changing – at least for a while.News from two of the country’s less developed shale plays in Colorado and Ohio last week offer a reality check for the wave of euphoria that has washed across the industry. The stumbles mark a break from the past few years, when nearly every new project was an overnight success and output grew and grew. On Thursday, Ohio, home to the Utica shale, finally released annual data on 2012 production that showed the state pumped less than 700,000 barrels of oil from its shale wells — barely enough to fill a small oil tanker. North Dakota’s Bakken shale pumps more than that every day. Even state officials said it the result was “lower than initially estimated.” The day before, NuStar Energy LP had said it would shelve a plan to reverse a pair of underused refined products pipelines to ship crude from Colorado’s Niobrara shale oil play to Texas. It failed, twice, to garner enough commitments from potential customers to justify investing in the conversion. Neither development was a surprise to industry experts, and both were likely affected by extenuating circumstances.

Is the Typical NDIC Bakken Tight Oil Well a Sales Pitch? - In this post I present the results from dynamic simulations using the typical tight oil well for the Bakken as recently presented by the North Dakota Industrial Commission (NDIC), together with the “2011 average” well as defined from actual production data from around 240 wells that were reported to have started producing from June through December 2011.The use of the phrase “Typical Bakken Well” by NDIC as shown in Figure 01 is here believed to depict what is to be expected from the average tight oil well.  The results from the dynamic simulations show:

  • If the “Typical Bakken Well” is what NDIC recently has presented, total production from Bakken (the portion that lies in North Dakota) should have been around 1.1 Mb/d in February 2013, refer also to Figure 03.
  • Reported production from Bakken by NDIC as of February 2013 was 0.7 Mb/d.
  • Actual production data shows that the first year’s production for the average well in Bakken (North Dakota) presently is around 55% of the “Typical Bakken Well” presented by NDIC.
  • The results from the simulations anticipate a slowdown for the annual growth in oil production from Bakken (ND) through 2013 and 2014.

Well Costs at the Bakken Are Declining: The Bakken Shale has been producing oil since 2008. Some 3,000 wells have been drilled and production has risen to 450,000 barrels per day. Throughout the period well cost have been rising, however, and one of the assumptions of Bakken production has been that they would continue to rise and the wells would eventually play out.Now new technological improvements have reversed this pattern. Over the last year, costs per well have actually declined for the first time, as illustrated in the graph above. Just 100 feet below the primary Bakken formation drillers have now discovered an entirely different reservoir, the Three Forks formation, which is sealed off by a separate layer of shale. Continental Oil has developed a new four-well drilling platform that can access both formations with the same well. Where horizontal drilling techniques formerly allowed operators to access one square mile of reservoir per well, they are now able to extend out for two square miles. This has considerably reduced drilling costs. Estimates are now that there is room for 48,000 wells in the 8 million acres of he Bakken and that it can eventually produce 24 billion barrels. At the current pace, this would be 1.2 million barrels a day, the current rate form the Gulf of Mexico. But even then, geologists estimate that 90 percent of the oil would be left in place. Further developments such as the injection of carbon dioxide could increase this recovery by orders of magnitude.

Did the shale revolution already find its biggest oil field at the Eagle Ford? - In case you didn’t catch it, investment house Credit Suisse had a wonderfully informative conference call for their clients last week on how they see the future of the shale revolution that has engulfed the oil patch in the last decade and become hyper-active especially in the last several years.Among the bank’s conclusions: shale is a vital component of current US production which is growing at a huge clip — CS sees as much as 10 million b/d of US oil production in the next several years, up from 6.5 million b/d last year. CS also noted consistently improving well results from big plays such as the Permian Basin in West Texas and Bakken Shale in North Dakota. But one other thing Credit Suisse said, which echoes the sentiments of many in the industry, was that it was “skeptical” a new large field on the order of the Eagle Ford Shale in South Texas would happen. The Eagle Ford is one of the most prolific shale fields which boasts an estimated 943,000 b/d of liquids production and is forecast to produce 1.6 million b/d by late 2018. Instead, Credit Suisse said existing areas with “stacked” pay targets — i.e., layered formations –are better bets right now. When you consider how far industry has come in the last five years alone, it seems almost reactionary to make such a statement. And Credit Suisse is far from alone in that view: many executives share it — even from top shale producers.

Iran becoming marginalized as oil production capacity declines - Facing concerns about dwindling oil production capacity (ability to supply incremental amounts of crude into the market) Iran stated back in April that the nation in fact has plenty of spare capacity and is simple dealing with weak global demand. FARS: - "The current capacity of Iran's crude oil production is 4.2 mb/d and we are currently supplying oil as much as the world market needs," [Iranian Oil Ministry Spokesman Alireza Nikzad Rahbar] said.  According to Iranian officials the demand weakness in global crude markets is mostly due to slowing economic growth in the US - driven by US budget cuts.FARS: - According to Khatibi, following the failure in solving budget issues, the US administration has decided to reduce its expenditures, which in turn can have an impact on economic growth and oil demand by the country.   ... "These days those negative factors including slowdown in oil demand growth and worsening economic outlook in industrial countries especially the US are prevailing in the market," he added. The statement basically says that Iran can provide all the extra crude the world needs, and would have produced more if it wasn't for the US faltering economy. But all this wonderful rhetoric aside, does Iran really have the capacity to produce 4.2 million barrels of oil per day (mb/d)? According to JPMorgan, the nation's current capacity is closer to 3.3 mb/d. Moreover, the capacity is expected to continue its decline.

U.S. Oil Boom Divides OPEC - The American energy boom is deepening splits within the Organization of the Petroleum Exporting Countries, threatening to drive a wedge between African and Arab members as OPEC grapples with a revolution in the global oil trade. OPEC members gathering on Friday in Vienna will confront a disagreement over the impact of rising U.S. shale-oil production, with the most vulnerable countries arguing that the group should prepare for production cuts to prop up prices if they fall any lower."We are heading toward some problems," said a Persian Gulf OPEC delegate. African OPEC members such as Algeria and Nigeria—which produce oil of similar grade to shale oil—are suffering the worst effects from the North American oil boom. Nigeria Oil Minister Diezani Alison-Madueke deemed U.S. shale oil a "grave concern." Gulf countries, notably Saudi Arabia, pass relatively unscathed—and are the only OPEC members with the flexibility to cut production. But they are unlikely to let that happen at Friday's meeting, several OPEC delegates said. That would deepen power struggles that have dominated the organization in recent years. Iran, Venezuela and Algeria, who need high oil prices to cover domestic spending and offset falling production, have regularly clashed with Gulf countries led by Saudi Arabia, who have the financial strength to withstand lower prices.

Energy fact of the day: OPEC imports are at a 25-year low - According to data released this week from the Energy Information Administration, imported oil from OPEC countries this year, at an average of 3.368 millions of barrel per day through March, is at the lowest level since 1988, see chart above. That’s a 38% reduction from the peak of 5.4 million barrels of oil per day that were imported from OPEC countries in 2008 – before America’s shale oil boom created an energy revolution.

Will Saudi Arabia Allow the U.S. Oil Boom? Interview with Chris Faulkner - Technology, technology, and more technology—this is what has driven the American oil and gas boom starting in the Bakken and now being played out in the Gulf of Mexico revival, and new advances are coming online constantly. It’s enough to rival the Saudis, if the Kingdom allows it to happen. Along with this boom come both promise and fear and a fast-paced regulatory environment that still needs to find the proper balance.  In an exclusive interview with, Chris Faulkner, CEO of Breitling Energy Companies - a key player in Bakken with a penchant for leading the new technology charge—discusses:

•    How Bakken has turned the US into an economic powerhouse
•    What the next milestone is for Three Forks
•    What Wall Street thinks of the key Bakken companies
•    Where the next Bakken could be
•    What to expect from the next Gulf of Mexico lease auction
•    What the intriguing new 4D seismic possibilities will unleash
•    What the linchpin new technology is for explorers
•    How the US can compete with Saudi Arabia
•    Why fossil fuel subsidies aren’t subsidies
•    How natural gas is the bridge to US energy independence
•    Why fossil fuels shouldn’t foot the bill for renewable energy
•    Why Keystone XL is important
•    Why the US WILL become a net natural gas exporter

Life, energy, the universe and everything - What is being called into question today is not our basic need to live on the energy gradients available to us on Earth. No humans can exist without such gradients or be blamed for doing what nature designs humans to do, namely, to seek out those gradients wherever they are and use them to enhance our survival and our ability to propagate. This innate drive actually forms the basis for what we call culture: art, architecture, music, and literature. Without high degrees of energy dissipation, such cultural emanations would not be possible for we would all have to live close to the land and eke out a bare existence.As it turns out, surpluses--that is the extra energy that farmers produce in the form of food and fiber and that which those who extract energy-bearing minerals such as coal, oil, natural gas, and uranium produce beyond what they need for themselves--are the basis of civilization. Surpluses have allowed at first a few and now a huge number of people to carry on livelihoods that merely consume the surplus. The ancient Romans achieved a complex culture and empire powered by the Sun in the form of surplus wheat and Mediterranean winds for sail transport. Today, of course, we've built our complex civilization using energy-dense fossil fuels that vastly enhance our production of food and that power a worldwide mining, manufacturing and logistics system.What is being called into question today are both the rate at which we are exploiting the Earth's available energy gradients and the sources of those gradients. In practical terms, this means the rate at which we are consuming the nonrenewable energy resources mentioned above and the rate at which the fossil fuel portion of those resources is spewing climate changing gases into the atmosphere.

In One Chart, Here’s How Investors Are Massively Giving Up On Commodities  -  One of the big themes of the year has been the sell off in commodities. Gold, of course, has had a rough year. But so too have industrial commodities like copper. Whereas past commodity downturns have been closely associated with declines in risk assets, there's a sense this time of the "supercycle" coming to an end. And indeed while U.S. equities remain within a hair of all-time highs, and inflows into stocks spike, there's been a big decrease in money going into commodity funds. This chart from Jefferies tells the story: Commodity funds continued to experience significant net outflow. The latest amount of net outflow stood at a net US$2.1bn. Recent 15 consecutive weekly outflows totalled a net US$23bn. YTD net withdrawals cumulated to U$24bn. Commodity funds saw net inflows of US$17bn for the full year in 2012. This is the fourth yearly inflow while the total amount of injections in 2012 topped the four-year period.

Energy-hungry China scours the globe to secure future supplies -- China's energy imports are so fundamental to its survival and development that China's new leadership has taken extraordinary steps to secure future supplies. In a flurry of official visits over the past two months involving President Xi Jinping, Premier Li Keqiang and Foreign Minister Wang Yi, China has sought to bolster its energy relations with big strategic neighbors Russia and India, key energy exporters Indonesia, Brunei and South Africa, emerging resources suppliers such as Tanzania and the Republic of Congo in Africa, and renewable energy pioneer Germany. In addition, China hosted a visit by Australian leader Julia Gillard, whose discussions with Xi and Li touched on clean energy expertise and the burgeoning resources trade between the two countries. China's push for energy security and its willingness to buy assets around the globe may drive up costs for other energy importers like India, Japan, South Korea and Europe. They will have to compete with China through a combination of co-operation, conservation and technological advances.

Murder Versus Trade: U.S. and China Rivalry over Africa’s Riches -The U.S. African Command (AFRICOM) has built a network of compliant African regimes ‘eager for American bribes and armaments.’ In 2012, Africom staged Operation African Endeavour, with the armies of 34 African nations taking part, commanded by the U.S. military. As Middle East specialist Tony Cartulucci explains, ‘It is no coincidence that, as the Libyan conflict was drawing to a conclusion, conflict erupted in northern Mali. It is part of a premeditated geopolitical reordering that began with toppling Libya, and since then using it as a springboard for invading other targeted nations, including Mali and Syria, with heavily armed, NATO-funded and aided terrorists. “The economically weak imperialist Western alliance has now staked its future on an endlessly expanding world war for resources that entails its re-colonization of the Global South [especially Africa]. This is a level and scale of violence that could result in a nuclear confrontation with the main countries that this resource war is aimed at: China, India, and Russia.” According to Dr. J. Peter Pham, an advisor to the U.S. Defence and State Departments, a main objective of AFRICOM is: “protecting access to hydrocarbons and other strategic resources which Africa has in abundance — a task which includes ensuring against the vulnerability of those natural riches and ensuring that no other interested third parties, such as China, India, Japan, or Russia, obtain monopolies or preferential treatment.”

Chinese hackers jeopardize secrecy of U.S. weapons programs - Chinese hackers have gained access to secret designs for a slew of sophisticated US weapons programs, officials said Tuesday, possibly jeopardizing the American military’s technological edge. The breaches were part of a broad Chinese campaign of espionage against top US defense contractors and government agencies, officials said, confirming a Washington Post account of a Pentagon report. The Defense Science Board, a senior advisory group with government and civilian experts, concluded that digital hackers had gained access to designs for two dozen major weapons systems critical to missile defenses, combat aircraft and naval ships, according to a Pentagon document cited by the Post. The cyber spying gave China access to advanced technology and could weaken the US military’s advantage in the event of a conflict, the board said.

Report: Hackers Obtain Specs for US Weapons Systems - Previously undisclosed sections of a US government report obtained by the Washington Post show that designs for some of the Pentagon's most advanced weapons systems were "compromised by Chinese hackers" in an act of cyber-espionage that one industry expert called "breathtaking." According to the Post: Among more than two dozen major weapons systems whose designs were breached were programs critical to U.S. missile defenses and combat aircraft and ships, according to a previously undisclosed section of a confidential report prepared for Pentagon leaders by the Defense Science Board. Experts warn that the electronic intrusions gave China access to advanced technology that could accelerate the development of its weapons systems and weaken the U.S. military advantage in a future conflict. The Defense Science Board, a senior advisory group made up of government and civilian experts, did not accuse the Chinese of stealing the designs. But senior military and industry officials with knowledge of the breaches said the vast majority were part of a widening Chinese campaign of espionage against U.S. defense contractors and government agencies. Among the weapon system compromised were the advanced Patriot missile system, known as PAC-3; an anti-ballistic missile sytem, known as the Terminal High Altitude Area Defense, or THAAD; the Navy’s Aegis ballistic-missile defense system; the F/A-18 fighter jet, the V-22 Osprey, the Black Hawk helicopter; the Navy’s new Littoral Combat Ship; and the F-35 Joint Strike Fighter, one of the most expensive weapons systems ever created by the US military, with a staggering development price of $1.4 trillion..

China Said to Study U.S. Property Investments With Reserves - China is studying the possibility of investing a portion of its $3.4 trillion in foreign-exchange reserves in U.S. real estate, said two people with direct knowledge of the situation. The State Administration of Foreign Exchange began the study after seeing signs of a recovery in the U.S. property market, said the people, who asked not to be identified as they weren’t authorized to speak publicly about the matter. China may acquire properties, invest in real estate funds or buy stakes in property companies, they said. The safety of the investments will be the top priority, said the people, who didn’t elaborate on a timetable or other details. China has set up an operation in New York to make alternative investments in the U.S., an effort by the country’s foreign-exchange reserves manager to diversify away from U.S. government debt, the Wall Street Journal reported last week, citing people it didn’t identify. Prices for single-family homes increased in 89 percent of U.S. cities in the first quarter as the housing market extended its recovery following a five-year slump. The median sales price rose in 133 of 150 metropolitan areas measured from 74 year earlier, the National Association of Realtors said in a report on May 9.

China’s Tilt Toward the Private Sector? - In a speech this month to Communist party officials (reported in yesterday’s New York Times), Li Keqiang, the recently chosen Prime Minister of China, called for greater reliance on the private sector and reduced dependence on governmental regulations and oversight of the economy. In a remarkable admission he said “The market is the creator of social wealth and the wellspring of self-sustaining economic development.” Several troubling developments in the Chinese economy led to Li’s speech. China has had very rapid economic growth during the past 30 years that lifted many hundreds of millions of Chinese out of dire poverty. However, during the first quarter of 2013, China’s GDP expanded by “only” 7.7% compared to a year earlier. Although China’s rate of growth is still fast compared to other nations, it is considerably lower than its growth during earlier years. For example, from 2003 to 2011, China’s GDP grew at rates that ranged from about 9% to over 14%. While the last quarter may be only a temporary decline in China’s growth rate, it is consistent with a slowing of growth during the past several years, and with other adverse developments in the Chinese economy. The Chinese economy has used low wages to specialize in labor-intensive products for the export market. This model is breaking down because wages have risen greatly during past decade, and export markets have shrunk because of reduced demands from the sluggish economies of the European Union, Japan, and the United States.

Report Finds Chinese Elderly in Dire State - China's elderly are poor, sick and depressed in alarming numbers, according to the first large-scale survey of those over 60, an immense challenge for Beijing and one of the greatest long-term vulnerabilities of the Chinese economy. The survey of living conditions for China's 185 million elderly paints a bleak picture that defies the efforts of the government to build what it calls a "harmonious society," one dedicated to human welfare rather than simply economic growth. Of the generation that built China's economic boom, 22.9%—or 42.4 million—live in poverty with consumption of less than 3,200 yuan a year ($522). The fear of being old and poor, which prompts many Chinese to stash away their earnings, also cuts against another of Beijing's priorities: to rebalance the economy toward stronger consumption. The survey, led by Chinese and international academics, covered 17,708 individuals across 28 of China's 31 provinces and was partly funded by the Chinese government through a science foundation. While careful to credit the government with progress on expanding pension and health-care coverage, it also showed that physical disability and mental-health problems are widespread: Of those surveyed, 38.1% reported difficulty with daily activities and 40% showed high symptoms of depression.

China's dead pig scandal ushers in hard times for fishermen and hog farmers - Pinghutang is the main river that flows into “the pig triangle” – an area bordered by the towns of Xinfeng, Pinghu and seaside Haiyan that has dominated pig production on the Yangtze River Delta for three decades. It joins the Huangpu River 60 kilometres downstream from Xinfeng, which took much of the blame for the dead pigs after ear tags were traced to its villages. The dead pig scandal has dredged up problems associated with water pollution and pig farming in China, but behind the headlines, the story has had a cascading effect on the troubles of the fishermen and pig farmers in the region. Zhao’s cleaning job started early last year when local authorities hired fishermen to clean already polluted waterways. She called the work “tough” and said she had witnessed the decline of the environment in the last two decades. Pig manure and carcasses were a familiar sight in the waters. “It was quite common to see dead pigs dumped on riverbanks and along roadsides, even at this time of the year,” said Zhao.

IMF lowers China growth forecast… again - Just in, the International Monetary Fund (IMF) has reportedly lowered its Chinese growth forecasts for the second time in six weeks. From the AFR: At a briefing in Beijing on Wednesday morning the IMF said it expected the world’s second biggest economy to grow at 7.75 per cent this year and a similar level in 2014. This is down from 8 per cent in April, when the IMF shaved 0.1 percentage points off its forecast. After concluding its annual review of China the IMF warned about the record expansion of credit in recent years… China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of this year. Many economists expect it to slow further over the year as the country’s new leaderships appears more comfortable with lower growth levels. The government is forecasting growth of 7.5 per cent this year. The point about China’s authorities becoming increasingly comfortable with lower growth levels was confirmed earlier in the week by China’s President, Xi Jinping, who signaled a tolerance for slower expansion in exchange for greater environmental sustainability:

The outlook of the Northeast Asian infrastructure market : The prolonged global economic slump has hit the construction industry particularly hard, but the Northeast Asian infrastructure market is emerging as a new growth engine. China and Russia have increased their investments in roads, ports, and power plants, thus providing new growth opportunities for infra builders. What should Korea do to take advantage of the expanding infrastructure market in Northeast Asia? Dr.Data shows that the Chinese economy is projected to grow at an average of 8% from 2013 to 2018, and the Russian economy around 4% during the same period. Meanwhile, out of 144 countries studied, the quality of infrastructure in China and Russia ranks 69th and 100th, respectively, indicating the poor state of their economic backbones. But their rapid economic growth is expected to increase the calls for new and better facilities. Experts project that the size of the infrastructure market in Northeast Asia, comprised mainly of China, Russia, Korea, and Japan, would grow at an annual rate of 8.1%. China and Russia’s infrastructure markets accounted for 62% of the region’s total in 2010, and are likely to expand more than 10% to 74.4% by 2020. Not only is the state of infrastructure in China and Russia inferior to those of other nations, but the two countries’ rapid population growth and urbanization are likely to lead to more demands for basic physical and organizational structures. In particular, amazing growth is expected in China’s energy sector and Russia’s transportation and energy fields.

China Credit-Bubble Call Pits Fitch’s Chu Against S&P - Chinese banks are adding assets at the rate of an entire U.S. banking system in five years. To Charlene Chu of Fitch Ratings, that signals a crisis is brewing. Total lending from banks and other financial institutions in China was 198 percent of gross domestic product last year, compared with 125 percent four years earlier, according to calculations by Chu, the company’s Beijing-based head of China financial institutions. Fitch cut the nation’s long-term local-currency debt rating last month, in the first downgrade by one of the top three rating companies in 14 years. “There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast,” Chu, 41, said in an interview. Chu’s view puts her in a minority among those charting the future of the world’s biggest nation. She questions how long China can maintain the model of growth driven by bank lending that has allowed its economy to sidestep the global financial crisis. Fitch’s sovereign-debt downgrade to A+, the fifth-highest level has sparked a debate in which Chu’s calculations have been called “biased” by an Australia & New Zealand Banking Group Ltd. economist and a “misinterpretation” by Everbright Securities Co. Her views have struck a nerve. “Everyone is talking about credit -- about the credit cycle, leverage and credit-quality problems,” “It’s a big black box, and it’s quite scary.”

Europe and China Trade Talks End Bitterly -— Trade negotiations between the European Union and China ended on Monday with mutual recriminations. China called on the European Union to refrain from imposing tariffs on solar panels, and the European trade commissioner complained that China was pressuring individual countries to prevent Europe from reaching a consensus. The European Union accuses Chinese firms of selling solar panels below cost in Europe, a practice known as dumping, and has already proposed antidumping tariffs of nearly 50 percent on Chinese solar panel shipments. That is one of the largest categories of Chinese exports to Europe and worth about $27 billion a year. But Germany’s economy minister said that his country had informed the European Commission, which is the executive branch of the European Union, that it opposed proceeding with the solar panel tariffs. If a majority of the European Union’s 27-member states oppose tariffs during the current consultation period, then the commission could be forced to abandon the tariffs. But that could risk undermining the commission’s long-term ability to negotiate trade deals on behalf of the bloc. Zhong Shao, China’s vice minister of commerce and chief international trade representative, denounced the European Commission for not reaching a deal at the talks, which were held in Brussels.

Is China bending on the Pacific Trade Pact? - It’s too early to render any definitive judgment, but Chinese officials may be signaling a change of stance regarding participation in the Trans-Pacific Partnership Agreement — or it could just be a head feint before the June 6 California G-2 summit (though carefully not so labeled) between President Barack Obama and PRC President Xi Jinping. What has piqued the interest of trade experts was the sudden announcement by Chinese Commerce Ministry spokesman, Shen Danyang, that the PRC would “study” joining the US-led TPP. Specifically, Shen stated on the ministry’s website: “We will analyze the advantages, disadvantages, and the possibility of joining the TPP based on careful research and according to principles of equality and mutual benefit. China has attached importance to the TPP negotiations and continuously followed their development.” He concluded: “China also hopes to exchange information and material with TPP members on the negotiations.” Chinese officials have made statements of interest previously, but the timing of these comments has sparked new speculation about a possibly evolving Beijing stance.

Haruhiko Kuroda says rates must stay low until economy improves - Haruhiko Kuroda, Japan’s central bank governor, said the country’s financial system could cope with rising interest rates only once the economy improved, as he laid out the stakes in his attempt to tame the volatile bond market.  Japanese banks and insurance companies have accumulated vast holdings of government bonds whose value would fall sharply if investors demanded higher yields on newly issued debt. The BoJ calculates that a 1 percentage point rise in rates would lead to mark-to-market losses equivalent to 10 per cent of tier one capital at big banks, and 20 per cent at weaker regional lenders. Mr Kuroda said he believed that Japanese financial institutions were “strong enough to deal with these negative effects even if such a situation occurred” and that the risk of systemic instability was “not large”. Rates on 10-year Japanese government bonds climbed to 1 per cent last week for the first time in a year. The market has gyrated since Mr Kuroda announced in April that the BoJ would dramatically increase its purchases of JGBs, to the equivalent of about 70 per cent of new issuance, in an effort to stimulate lending and investment and reverse more than a decade and a half of consumer price declines.

Asian Stocks Drop for Fifth Day as Yen Strengthens, Oil Declines - The yen strengthened and Japanese stocks slumped as the nation’s top central banker signaled higher interest rates. Bank of Japan Governor Haruhiko Kuroda, speaking yesterday, cited an April BOJ report indicating rates could rise between one and three percentage points in an improving economy without causing instability. China won’t sacrifice the environment to ensure short-term growth, President Xi Jinping said on May 24, indicating a tolerance for slower growth. Markets in the U.S. and U.K. are shut today for holidays.  “In Japan, we expect more volatility and with bond yields that low you don’t need a big move to end up with a capital loss,” . “We’ve had confirmation from China that the recovery is going to be very shallow by their standards.”

The Japanese scare will not last - Jitters in Japan about bond markets have caused the yen to rise and the Nikkei to fall over the last week, and even after soothing comments from Bank of Japan Governor Kuroda on Sunday, the slide continued. Maybe, some are wondering, Japan really isn’t set to boom. Don’t buy the hype. The scare will be short-lived. The Bank of Japan is headed by an activist president who, since taking over in March, has engineered a massive confidence shock designed to break Japan of its deflationary torpor. Under Kuroda, the BoJ has pledged to expand its balance sheet by US $1.4 trillion and double the monetary base by year-end 2014. Bond purchases at a rate of US $70 billion per month will facilitate the growth of the balance sheet. This move, as many have pointed out, implies a contradiction. Doubling the monetary base is intended to push up inflation towards a 2% target, but bond buying is intended to push down interest rates to force investors to take on more risk in the real economy. If the BoJ wants to push down interest rates by buying bonds, what does it expect will happen if inflation rises and investors demand higher interest rates to accordingly compensate them? Portfolio managers should be vigilant, but Kuroda will do whatever it takes to keep the yen moving down and push inflation up.

BoJ boss puts faith in Japan's 'resilience' - The governor of Japan's central bank has shrugged off concerns that the recent spike in bond prices could damage the country's fledgling recovery. Haruhiko Kuroda, the Bank of Japan head, said analysis by the central bank last month showed that the country could withstand an increase in market interest rates of as much as 3 per cent, as long as there were accompanying improvements in the economy. Japan's sharemarket crashed 7 per cent last Thursday following weak economic data in China, speculation that the US was close to winding up its money-printing program and on fears that falling Japanese government bond prices would undermine the government's economic strategy and punch a hole in bank balance sheets. Sharemarkets across the world also took fright, with the Australian market down 2 per cent on the day. But Mr Kuroda said that Bank of Japan estimates in April showed that a 1 to 3 percentage point rise in interest rates would not cause problems for Japan's financial system, as long as it was accompanied by economic improvements, since a recovery would lead to increased lending and help to improve banks' earnings.

BOJ has room for more stimulus, top Abe adviser says - Koichi Hamada, a retired Yale University professor advising Prime Minister Shinzo Abe, says the Bank of Japan can add to already unprecedented stimulus if necessary to drive an economic revival. BOJ Gov. Haruhiko Kuroda “should continue to trust in his judgment and ease further” if needed, said Hamada, 77, who was tapped by Abe last year to advise on monetary policy. A stock slump was “a natural correction” and “Abenomics” is working “as well as or better than expected,” Hamada said.The economy grew the most in a year last quarter and the yen fell past 100 against the dollar this month, boosting exporters such as Mazda Motor Corp. Abe’s challenge now is to implement structural reforms to maintain a recovery threatened by volatile bond yields and a stock market that last week plunged the most in two years.

BOJ to Make More-Frequent Bond Purchases - The Bank of Japan plans to increase the number of days per month that it buys domestic sovereign debt and reduce the amount of each offer, in its latest attempt to mitigate market turbulence. "Many people voiced opinions for increasing the number of operations, while decreasing the amount bought," a Bank of Japan official told reporters Wednesday, after a meeting between central-bank officials and bond-market participants. He said that the bank would release the details of future purchasing operations on Thursday and would plan to make purchases on 10 or more days in June, up from eight in May. Dealers have said that more-frequent operations and smaller amounts would allow them to better manage their inventory and would have less impact on the market. That could help cut down on gyrations in prices that have followed the central bank's April 4 announcement of a large-scale bond-buying program. There were 56 participants at the 90-minute meeting, according to the bank. They represented some of the government-bond market's major investors, including banks, securities companies, insurance companies and pension funds.

IMF warns over yen weakness - The International Monetary Fund has said that Japan’s efforts to reinvigorate its economy have weakened the yen to a level “moderately below” its natural trading value, even as the fund reiterated its support for the aggressive monetary easing that has fuelled the currency’s decline. “We appreciate that the attempt to escape deflation has had an effect on the exchange rate and our assessment is, right now, that leaves the exchange rate moderately below what would be consistent with medium-term norms,” David Lipton, IMF first managing director, said during a news conference in Tokyo. The IMF nonetheless gave its blessing to the ultra-loose monetary policy being pursued by the Bank of Japan, saying exchange rates would eventually adjust “in an appropriate fashion” and that the benefits of a revived Japanese economy would outweigh any loss of competitiveness that Japan’s trade partners experienced as a result of a weaker yen. “We fully endorse the BoJ’s objective to raise inflation to 2 per cent and the sweeping enhancements to its monetary policy framework,” the IMF said after its annual review of Japan’s economic conditions and policies. The yen has weakened by about 20 per cent against other major currencies since late last year, after it became clear that the incoming government of Shinzo Abe, prime minister, was intent on pushing the BoJ into a much more assertive stance. The central bank has since moved to double the amount of money in circulation, part of an attempt to reverse stubborn declines in consumer prices.

Can Japan Export Its Way to Recovery? - From an article with Isao Kamata, in the Spring 2013 La Follette Policy Review: The new administration of Japanese Prime Minister Shinzo Abe has introduced a three-pronged approach to stimulating growth in Japan. The components of the plan include increased fiscal stimulus through public works, growth strategies aimed at reinforcing private investment, and an aggressive increase in monetary stimulus through unconventional policies. The third element of Abe’s program has generated substantial controversy in international policy circles. Two measures promoted by Abe’s choice as governor of the Bank of Japan, Haruhiko Kuroda, potentially have major international repercussions.  Kuroda is committed to raising the rate of inflation from zero to 2 percent and driving down longer term interest rates by purchasing government bonds and other assets. Although government officials have stressed they would not directly intervene in foreign exchange markets to weaken the yen, expansionary monetary policy will inevitably lead to considerable depreciation of the yen, which should spur exports and, therefore, increase economic growth.  In this note, we assess the rationale for Kuroda’s aggressive action, the prospects for success along the international dimension, and potential hazards to the Japanese economy.

Air cargo industry's woes may point to weakness in Asia's growth - One of the leading indicators analysts often look to in order to understand economic trends is the air cargo volume. For example, according to Reuters, Singapore's Changi Airport "moved 1.8 percent less cargo in April from a year ago". That's a potential indication of weakness in demand not just in Singapore, but across Asia's other economies. The health of the air cargo industry is also plagued by another (related) factor: overcapacity. Singapore Air for example just announced it is mothballing its second cargo plane since December of last year. This combination of global economic weakness and overcapacity has resulted in a sharp decline in ISI's air cargo industry survey. And unless Apple comes out with another high-demand product, things don't look good for the industry. This may also be a signal that the relative weakness across some of Asia's major economies is worse than many had assumed (we may already be seeing signs of that in China's latest PMI numbers) .

Poor Empiricism: The “Middle Income” Trap - Increasing evidence that the era of high growth in Asia may be nearing its end has triggered speculation on ways to revive growth in the region. It has also challenged the belief that more developing countries would like the first generation new industrialisers in Asia (South Korea, Singapore, Taiwan and Hong Kong) transit to developed country status in a relatively short period of time. This has spawned a new industry involving the use of multi-country, inter-temporal GDP numbers to identify the countries that have escaped being stuck in the so-called “middle income trap” and the lessons that can be learned from them. A typical analysis would first use the data to say something of the following kind: Growth slowdowns are more likely to occur when countries reach income levels (measured in PPP terms) that identify them as being in the “middle income range”. But some countries, such as the first tier new industrialisers in Asia, managed to escape this middle income trap. Examining their experience (even though they are few in number) points to what needs to be done if others such as China, India, Indonesia, Malaysia, and Vietnam are to ensure sustained growth that takes them to developed-country status. However, per capita income, whether measured in nominal or PPP terms, says little about an economy. At similar levels of per capita income countries can be characterised, among other things, by very different distributions of that income, vastly different economic structures, substantial differences in their exposure to foreign trade and investment flows and very different past and current policy environments.

US entering Asian century with eyes closed - The time has come to think the unthinkable: the era of American dominance in international affairs may well be coming to an end. As that moment approaches, the main question will be how well the United States is prepared for it. Asia's rise over the past few decades is more than a story of rapid economic growth. It is the story of a region undergoing a renaissance in which people's minds are reopened and their outlook refreshed. Asia's movement toward resuming its former central role in the global economy has so much momentum that it seems virtually unstoppable. While the transformation may not always be seamless, there is no longer room to doubt that an Asian century is on the horizon, and that the world's chemistry will change fundamentally. Global leaders _ whether policymakers or intellectuals _ bear a responsibility to prepare their societies for impending global shifts. But too many American leaders are shirking this responsibility. Intellectuals have a special obligation to think the unthinkable and speak the unspeakable. They are supposed to consider all possibilities, even disagreeable ones, and prepare the population for prospective developments. Honest discussion of unpopular ideas is a key feature of an open society.

Central Banks Act With a New Boldness - Central bankers, anywhere in the world, are a cautious lot. They prefer slow and steady over the dramatic gesture. And they rarely go public with criticisms of other central banks. But the economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices. The Fed has announced plans to keep borrowing costs at historic lows until unemployment declines. The staid Bank of England has bought more than a half-trillion dollars’ worth of bonds to ignite British business activity. Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward an audacious new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank. So far, the results of these activist central banks have fallen short of expectations. “I’m not sure why we’re not getting more response,” said Donald L. Kohn, a former Federal Reserve vice chairman who is now at the Brookings Institution. “Maybe we’ve made some progress in identifying some of the causes, but it’s not fully satisfying why we have negative real interest rates everywhere in the industrial world and so little growth.”

Brazil’s Central Bank Raises Rate and Some Eyebrows -Brazil’s central bank on Wednesday confronted an increasingly acute policy dilemma with firm hand and clear voice, seeming to throw its customary caution to the wind. In its fourth monetary policy meeting of 2013, the central bank voted unanimously to raise its Selic base interest rate by a half point to 8%. In a brief statement, the central bank said the change was “continuing with” an adjustment in interest rates that would help put inflation on a downward path.Most analysts had expected a more modest quarter-point increase in the face of soft economic growth.“They finally woke up,”  “But they need to stay awake or it won’t work.”The central bank’s policy dilemma became unexpectedly acute earlier Wednesday, when the government’s IBGE statistics bureau released first quarter economic growth figures. The data showed disappointing first quarter growth of only 0.6%. Most analysts had predicted 0.9% growth.But slower growth is coming at the same time as rising inflation. Brazil’s 12-month inflation rate is currently running at 6.46%, up from 5.84% at the end of 2012. The current rate is skating dangerously close to the 6.5% ceiling of Brazil’s inflation targeting range, which is 2.5%-to-6.5%.

Brazil’s Central Bank Boosts Credibility In Hawkish Turn - Brazil’s central bank bolstered its flagging inflation-fighting credibility with its late Wednesday decision to raise its key interest rate a half point—double what was expected—to 8%. Last month, the market was decidedly unimpressed with the bank’s quarter-point hike from the historic low of 7.25%. That’s because central bank officials had talked tough, leading to expectations for a more aggressive move, the first after nearly two years amid inflation that was running above the ceiling of the bank’s tolerance range. Its statement was also seen as convoluted and wishy-washy. But this time around, the bank ensured that all aspects of its decision would be viewed as hawkish. In addition to the bigger size of the rate increase, the policy committee’s decision was unanimous, and its statement short and blunt:  “This decision will contribute to bring inflation into a declining trend and should ensure that this trend continues next year.” The decision also followed much weaker-than-expected first-quarter economic data. Nomura’s Tony Volpon, in a Thursday note, said the decision “could prove to be the most important since August of 2011,” when the central bank unexpectedly cut rates without even a pause from the preceding decision to raise them.

Brazil faces 1970s stagflation as resource boom wilts - Brazil has been forced to tighten monetary policy to curb inflation despite a slump in growth and a manufacturing crisis, raising fears that the country’s economic model is breaking down. The central bank raised interest rates a half point to 8pc, bucking the worldwide trend towards looser money. The surprise move came hours after the release of data showing growth remained stuck at 1.9pc in the first quarter. This was far short of expectations for the fifth quarter in a row and dashes hopes of a quick return to pre-crisis growth rates. The country grew just 0.9pc last year, a recession in emerging market terms. “Brazil is stuck in a 1970s 'stagflation’ trap,” said Lars Christensen from Danske Bank. “It has rising inflation and falling long-term growth. There is obviously a structural problem and it is getting worse. “The country is a very good illustration of why emerging markets have been doing so badly lately. They are trying to manage their problems by fiddling around with wage and price controls and other half-baked measures to treat the symptoms. There is a whiff of Argentina to this." The Bovespa index of stocks in Sao Paulo is down by more than a third in dollar terms since early 2010, and has entirely missed the roaring global equity rally over the past year. The real has fallen 8pc since March and has broken out of its trading band.

Lifting Asia's economic voice - One of Australia's objectives when it chairs the G20 in 2014 should be to lift the voice of Asia in global economic forums.A step in this direction would be for Australia to coordinate a joint statement by the six Asian members of the G20 (Australia, China, India, Indonesia, Japan and Korea) in support of a major point of focus for the G20. Such an issue could be the importance of resisting protectionism in all its forms and maintaining the multilateral approach to trade liberalisation.It would be even more powerful if an 'Asian' statement came from not only the official sector, but also the business community. Australia's B20 leadership group should work for a joint 'Asian business statement' on G20 priorities.The global centre of economic activity is increasingly shifting towards Asia. This was highlighted in the Australia in the Asian Century White Paper. But the White Paper did not mention that Asia's voice in the global economy is not commensurate with its economic weight. Many others have pointed to the lack of an 'Asian voice', particularly in the G20.

High home ownership bad for employment? - Overnight, the Peterson Institute of International Economics (PIIE) released an interesting study exploring the hypothesis that high home ownership damages the labour market. The study, which is based on an examination of data from the US, found that rises in the rate of home ownership are a precursor to eventual sharp increases in unemployment in that state, due to:

  • lower levels of labour mobility;
  • greater commuting times; and
  • fewer new businesses being formed.

The study has potentially important implications for Australia, where home ownership rates are relatively high by international standards, according to the IMF (see next chart). Current policy in Australia tends to favour home ownership over renting, possibly leading to ownership rates being higher than they otherwise would be. More importantly from an economic perspective, housing transaction costs – particularly stamp duties on property transfers – are high in Australia, which act as a road block to moving house, stifling labour mobility and increasing commuting times in the process.

India fiscal year GDP up 5%, weakest in a decade -- India's gross domestic product grew 4.8% in the fiscal fourth quarter ended March 31 from the year-earlier period, according to official data released Friday. The rate, which matched economists' estimates, was slightly ahead of the 4.7% growth recorded in the three months ended Dec. 31, but weaker than the 5.1% expansion in the year-earlier period. GDP growth in the full year ended March 31 came in at 5%, the weakest rate of expansion in a decade. Indian stocks held their losses after the data, with the 30-stock benchmark Sensex / down 1.1% at 19,992.33. The Indian rupee also stayed weak, with the U.S. dollar changing hands for 56.55 rupees, compared with 56.38 rupees late in North American trade.

India records slowest growth in a decade - India’s economy grew at 5 per cent in the financial year to March, the slowest rate in a decade of rapid expansion, the Central Statistics Office said on Friday. In the latest quarter that ended on March 31, gross domestic product grew 4.8 per cent year-on-year, in line with economists’ forecasts and only slightly above the 4.7 per growth rate recorded in the preceding three months. Economists blame India’s relatively sluggish growth over the past year on a reluctance by foreign or domestic business to invest because of poor infrastructure for power and transport, uncertainties over taxation, bureaucratic delays and continued restrictions on foreign direct investment. “With no visible pick-up in any key levers of the economy, the situation remains grim,” said Chandrajit Banerjee, director-general of the Confederation of Indian Industry, calling the latest numbers disappointing but as expected. “Demand in the system is weak with low levels of consumption, government expenditure and investments,” he said. “While the fiscal deficit situation would not allow government expenditure to go up, every means needs to be explored for raising consumption and investment demand.”

Pakistan Faces Struggle to Keep Its Lights On -  Electricity shortages, bad for years, have reached crisis proportions. Lights go out for at least 10 hours a day in major cities, and up to 22 hours a day in rural areas. As the summer heat pressed in suddenly last week — touching 118 degrees Fahrenheit in the eastern city of Lahore — Pakistanis again took to the streets to protest the chaotic state of the country’s power delivery system. Doctors and nurses picketed outside hospitals, complaining about lacking clean water and having to cancel operations. Demonstrators burned tires, blocked traffic or pelted electricity company officials with stones. Students cannot study for exams, morgues struggle with decomposing bodies, and even the rich complain that their expensive backup generators are straining badly — or, in some cases, blowing up from overuse. In a bid to quell discontent, Pakistan’s interim government, which is running the country until Mr. Sharif takes over, has ordered civil servants to switch off their air-conditioners and stop wearing socks — reasoning that sandals were more appropriate in such hot conditions.

Child victims of Pakistan's 'begging mafia' - For many Pakistani Muslims, visiting a shrine and donating money to beggars go hand in hand. But their generosity has encouraged the creation of a "begging mafia" which forces thousands of children into a life of slavery. Shrines dedicated to holy men are dotted across most cities and towns in Pakistan. In the folk Islam of the region, they are regarded as saints, and can attract huge numbers of worshippers, eager to pray for their blessings. The shrines have always been a magnet for beggars, especially children, as many of the pilgrims believe giving money to the poor will increase the chance of their prayers being heard. The result? Children are being kidnapped and traded between begging gangs. "In 2010, 3,000 children went missing in Karachi alone," says Ali. "Many of these children will be moved around shrines in Pakistan. They will have their heads shaved. They will be tattooed. They will be made unrecognisable to their parents.In some cases, if a child isn't disabled, a disability can be inflicted upon them, says Ali. "We have dealt with cases where children have a limb cut off," he says. "Their hair can be pulled out. An eye can be removed. The intention is for the child to attract sympathy and money."

The World's Richest 8% Earn Half of All Planetary Income -The lead research economist at the World Bank, Branko Milanovic, will be reporting soon, in the journal Global Policy, the first calculation of global income-inequality, and he has found that the top 8% of global earners are drawing 50% of all of this planet's income. He notes: "Global inequality is much greater than inequality within any individual country," because the stark inequality between countries adds to the inequality within any one of them, and because most people live in extremely poor countries, largely the nations within three thousand miles of the Equator, where it's already too hot, even without the global warming that scientists say will heat the world much more from now on. For example, the World Bank's list of "GDP per capita (current US$)" shows that in 2011 this annual-income figure ranged from $231 in Democratic Republic of Congo at the Equator, to $171,465 in Monaco within Europe. The second-poorest and second-richest countries respectively were $271 in Burundi at the Equator, and $114,232 in Luxembourg within Europe. For comparisons, the U.S. was $48,112, and China was $5,445. Those few examples indicate how widely per-capita income ranges between nations, and how more heat means more poverty. Wealth-inequality is always far higher than income-inequality, and therefore a reasonable estimate of personal wealth throughout the world would probably be somewhere on the order of the wealthiest 1% of people owning roughly half of all personal assets. These individuals might be considered the current aristocracy, insofar as their economic clout is about equal to that of all of the remaining 99% of the world's population.

Dear governments: Want to help the poor and transform your economy? Give people cash. - Countries like Uganda have mostly young, poor, populations. No one is unemployed. If you have no income, you’re in trouble. So you scrape by doing odd jobs and low return activities. The real problems are underemployment (not enough hours) and low productivity employment (low return, low wage work). So how do you create “good” jobs and productive work? Another way of asking this question is “what is holding young people back?” or “what constrains them?” Every government or NGO program has an answer to this question, even when they don’t know it. From the vast, vast number of training programs–financial literacy, trade skills, life skills–the default answer seems to be “skills”. If you think these programs are worth doing, presumably it’s because you think (1) youth lack these skills, (2) they can’t otherwise get them, and (3) giving them these skills will produce high returns.Development economics has a slightly different answer. The evidence is pretty pessimistic about job training programs and financial literacy in poor countries. It’s more optimistic about returns to primary and secondary school in poor countries–wages go up maybe 10-15% with every extra year of schooling. Given how much time and money school takes, though, that’s not always the best return. More and more, economists think that the real constraint is capital. Studies show that the poor, on average, have high-earning opportunities if they get a little cash or equipment. Studies with existing farmers or businesspeople have seen returns of 40 to 80% a year on cash grants

The End of the Beginning of the End: A report released early this year by the organization Oxfam International revealed that the combined income of the richest 100 people in the world is enough to end global poverty four times over, and that the gap between rich and poor has exploded by some 60% in the last 20 years. Rather than hinder this division, the recent global economic crisis has exacerbated it. Money does not disappear, you see, but tends to be translated up the income ladder in times of financial distress. According to UNICEF, nearly half the world's population lives on less than $2.50 a day. One billion children live in poverty, and 22,000 of them die each day because of it. More than one billion people lack access to adequate drinking water, and 400 million of those are children. Almost a billion people go hungry every day. The incomes of 100 people out of the seven billion on the planet could fix that, and then fix it again, and then fix it again, and then fix it again. The exact total of the wealth of these individuals is actually something of a mystery, thanks to the tax havens they use to hide their fortunes. There are trillions of dollars squirrelled away in those havens - no one knows quite how much - and the subtraction of that money from the global economy has a direct and debilitating effect on the people not fortunate enough to be part of that elite 100.

Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s - Three bond restructurings totaling about $9.7 billion in the Caribbean this year are failing to ignite economic growth and may not help the region avoid more defaults, according to Moody’s Investors Service. The bond swaps this year didn’t go far enough to fixing the Caribbean’s “unsustainable” mix of debt and deficits, Warren Smith, the president of the Caribbean Development Bank, said May 22. Jamaica and Belize, which restructured about $9.5 billion in local and global bonds this year for the second time since 2006, face a “high probability” that they will default again, Moody’s said in a May 20 report. Among Caribbean island economies, only the Bahamas is expected to grow more than 1.5 percent this year compared with 4 percent for Latin America, Moody’s said in an earlier report. Without faster growth, repeat defaults may become common as Caribbean governments find it easier to cut bond payments than spending

Brazil 'to write off' almost $900m of African debt - Brazil has announced that it will cancel or restructure almost $900m (£600m) worth of debt with Africa. Oil- and gas-rich Congo-Brazzaville, Tanzania and Zambia are among the 12 African countries to benefit. The move is seen as an effort to boost economic ties between the world's seventh largest economy and the African continent.  Official data in Brazil show that its trade with Africa has increased fivefold in the past decade.  The debt announcement was made during the third visit in three months to Africa by Brazil's President Dilma Rousseff, who attended the African Union summit in Ethiopia.

No saviour in sight as world credit cycle rolls over - This may be as good as it gets for the world economy. The HSBC index for the global business cycle hit a three-year high around Easter, and has since rolled over. Any country that has failed to lock in a self-sustaining recovery by now must expect to pay the price for the failings of its policy establishment, and some risk a slide into outright deflation. “We see building evidence of a cyclical downturn,” said Fredrik Nerbrand, HSBC’s global asset guru. “We find it highly troubling that the eurozone is still marred in a recession at the same time as our cyclical indicators appear to have peaked.” The bank said there is a market “disconnect” between the world’s gloomy outlook and talk of tapering by the US Federal Reserve, the supposed moment when it starts to wind down its $85bn of monthly bond purchases. It is surprising to me that HSBC’s leading indicator has taken so long to buckle, since commodities topped in September and the Dutch CPB index of world trade contracted over the February-March period. Rarely has there ever been such an equity boom on such quicksand.

OECD: Europe's Recession Threatens Entire Global Economy - The recession in Europe risks hurting the world's economic recovery, a leading international body warned Wednesday. In its half-yearly update, the Organization for Economic Cooperation and Development said that protracted economic weakness in Europe "could evolve into stagnation with negative implications for the global economy." The OECD again slashed its forecast for the economy of the 17-country eurozone, saying it will shrink by 0.6 percent this year, after a 0.5 percent drop in 2012. The OECD had predicted a 0.1 percent decline for the eurozone in its report six months ago – and this time last year, it forecast growth of nearly 1 percent for 2013. The U.S. economy will continue to outpace Europe, the OECD said, with growth of 1.9 percent in 2013 and 2.8 percent in 2014. For global gross domestic product, the OECD forecasts an increase of 3.1 percent for this year and 4 percent for 2014. Noting that eurozone policymakers have "often been behind the curve," the OECD warned that Europe was still beset by "weakly capitalized banks, public debt financing requirements and exit risks." Meanwhile, the eurozone's 12.1 percent unemployment rate "is likely to continue to rise further ... stabilizing at a very high level only in 2014," the OECD said.

OECD predicts that pigs will fly - Its an amazing world where the neo-liberals go from one ridiculous economic policy failure (plan) to another as if we are totally without any understanding of what they are up to. The latest examples include the German talk about how growth oriented they are and their sudden concern for the youth unemployment emergency that they now say needs immediate attention. Of-course, this “emergency” has been staring them in the face for nigh on five years and is the creation of their policies. Now they cry crocodile tears and promise a few measly billion in structural assistance, which won’t even scratch the surface of the problem they created. And they have the audacity to think they have credibility. Another example, is the decision by the ruling elites in Brussels to give France, Spain, Poland and Slovenia a further two years to kill their economy and this is being constructed as lenience. So bash your economy to hell slighly more slowly than before and everyone is meant to think that is credible. Why do we tolerate these morons? Then we have the OECD who waste trees by producing their Economic Outlook, which came out yesterday. There is clearly a race between the OECD and the IMF as to which organisation can produce the most inaccurate forecasts. There is one rule of thumb that you might remember – when the OECD says something you can generally conclude it is wrong and probably the opposite is the correct position.

IMF Rethinks Sovereign Defaults, Again - I noted back in January that the IMF had started to do its own “lessons learned” on its European financial crisis response and had begun to admit it had made some fairly terrible mistakes in its assessment of the debt sustainability of a number of nations, including Greece, under its current programs. Late last week the IMF released another discussion paper (available below) that covers recent developments in sovereign debt restructures and their effect on IMF policy. The paper concludes that:

    • First, debt restructurings have often been too little and too late, thus failing to re-establish debt sustainability and market access in a durable way. Overcoming these problems likely requires action on several fronts,
    • Second, while creditor participation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases.
    • Third, the growing role and changing composition of official lending call for a clearer framework for official sector involvement, especially with regard to non-Paris Club creditors, for which the modality for securing program financing commitments could be tightened; and
    • Fourth, although the collaborative, good-faith approach to resolving external private arrears embedded in the lending into arrears (LIA) policy remains the most promising way to regain market access post-default, a review of the effectiveness of the LIA policy is in order in light of recent experience and the increased complexity of the creditor base.

Debt Dynamics: Track Global Debt Levels - Very cool look at recent decades and the fluctuations in public and private debt loads around the globe. Click to see how global economic forces have affected debt-to-GDP ratios

Swedish Rioters Torch Cars, Target Schools as Violence Spreads - Arsonists targeted schools and set cars alight in Stockholm in a sixth night of rioting by youths as the unrest spread to some of Sweden’s smaller cities.  While the capital was calmer than at the height of the violence, when rocks were thrown at police and firefighters, as many as 30 cars were torched and attempts were made to burn down three schools overnight, Stockholm police spokesman Kjell Lindgren said today by phone. The number of incidents in the city has been declining since riots erupted there in the early hours of May 20, he said. Sweden, where immigrant unemployment is about twice the national average, experienced similar unrest in 2008, when rioters clashed with police outside the southern city of Malmoe. That outburst of violence also spread to Stockholm’s Tensta and Husby suburbs. The latest unrest started in Husby, and spread to other immigrant neighborhoods around the capital.

Unrest may spread across Europe, warns Red Cross chief - Rocketing unemployment and poverty in some areas of Europe could lead to rising civil unrest, unless governments take measures to address the humanitarian consequences of austerity measures, the secretary-general of the International Federation of Red Cross and Red Crescent Societies (IFRC) has warned. Bekele Geleta’s caution comes as police battle with rioters in Stockholm, where high unemployment and social deprivation in migrant communities have been blamed for a week of violence. As Europe continues to grapple with the financial crisis, the situation for many young people is dire. More than half of under-25s are out of work in Greece and Spain. In some areas of Greece, that figure has hit 75 per cent, while in Portugal youth unemployment soared from around 30 per cent two years ago to 43 per cent now.

Cyprus’ fate ‘a path of inevitability’: the IMF’s internal views on Cyprus bailout - LEAKED INTERNAL documents of the International Monetary Fund (IMF) reveal the executive board’s concern over “optimistic” and “ambitious” forecasts of a Cyprus recovery under the troika bailout and adjustment programme. On May 15, the IMF board approved a €1 billion loan to Cyprus for three years as its part of a €10 billion international bailout. The approval allowed for the immediate disbursement of around €86m. The significant remainder- €9 billion- will come from the EU, suggesting a new IMF approach to troika bailouts of eurozone countries. In the days leading up to the decision, the 24 directors of the executive board representing IMF member countries shared their views on the Cyprus bailout in a document recently leaked by the online financial site Stockwatch. The document provides insight into the views, concerns and self-criticism of the Washington-based international lender on recent devastating developments in Cyprus.

More on the Trumped-Up Charges Against Cyprus - Yves Smith - As readers may recall, the Eurozone decided to make an example of Cyprus by using it to set the precedent of raiding deposits to fund a bailout (query: is a self-bailout even properly called a bailout?). Admittedly, if you are going to let your banking sector get to be 800% to 900% of GDP, you had better be sure your banks have really good assets and lots of equity, and the authorities look to have been remiss in that regard. And a lot of cynics thought the real reason for Cyprus being handled so harshly was that the Greek Cypriots had rejected the Annan Plan in a 2004 referendum, nixing integration of the island. The EU had wanted Cyprus to enter the union undivided and was unhappy about the rebuff.  But that wasn’t the reason given for being rough on Cyprus. Instead, the European and US media ran the official script that Cyprus was a big seedy tax haven.  The retort from the Cyprus-bashers, who pooh-poohed its better-than-Germany marks from MoneyVal (the official Council of Europe body that evaluates anti-money laundering measures) is that Cyprus might have perfectly good rules, but it didn’t enforce them. The critics seemed to be vindicated when MoneyVal “significantly revised” its four earlier, favorable reports after Deloitte was sent in to do a quick-turnaround assessment.  It turns out another shoe has dropped. The Central Bank of Cyprus obtained a copy of the full report, and issued a sharp statement describing how the summary misrepresented the underlying report. For instance, recall the 29 transactions that it deemed to be suspicious that were waved through. It turns out those 29 transactions were out of a universe of 570,000.

Cyprus bailout caused a mini-run on banks: ECB - The euro zone’s botched bailout of Cyprus caused a mini-run on banks in many of the currency union’s 17 members in April, exacerbating the decline in lending to the real economy, data from the European Central Bank showed Wednesday. The Cyprus bailout was notable for being the first time that the euro zone imposed losses on depositors in order to bring systemically important banks back to an acceptable level of capitalization. Although European officials rushed to stress that Cyprus’s problems were unique, depositors in other countries, most notably in those with stressed banking sectors of their own, appear to have feared that their savings could face similar treatment as the euro zone tries to revive a partly moribund banking system. The ECB said that the level of private bank deposits in most countries in the euro zone fell in April, although much of the money withdrawn appeared to find its way to banks elsewhere in the region. On aggregate, household deposits rose by 10 billion euros ($12.9 billion) on the month, extending the trend of recent months.

Who Owns This Land? In Greece, Who Knows? - Mr. Hamodrakas put a padlock on his gate and waited to see what would happen. Soon enough, he heard from neighbors. Three of them claimed that they, too, had title to parts of the property. In this age of satellite imagery, digital records and the instantaneous exchange of information, most of Greece’s land transaction records are still handwritten in ledgers, logged in by last names. No lot numbers. No clarity on boundaries or zoning. No obvious way to tell whether two people, or 10, have registered ownership of the same property. As Greece tries to claw its way out of an economic crisis of historic proportions, one that has left 60 percent of young people without jobs, many experts cite the lack of a proper land registry as one of the biggest impediments to progress. It scares off foreign investors; makes it hard for the state to privatize its assets, as it has promised to do in exchange for bailout money; and makes it virtually impossible to collect property taxes. Greece has resorted to tagging tax dues on to electricity bills as a way to flush out owners. Of course, that means that empty property and farmland has yet to be taxed. Mr. Hamodrakas is far from resolving the dispute with his neighbors. The courts in Greece are flooded with such cases. “These things take years,” he said, “maybe a decade to settle.”

Bank of Greece predicts 4.6 percent economic contraction in 2013, worse than other forecasts — Greece's central bank warned Wednesday that unemployment and the recession are likely to be worse than expected this year, while a leading international organization said the country's slow financial recovery might even force it to seek additional bailout loans. The Bank of Greece said the economy is likely to contract by a further 4.6 percent in 2013, with unemployment set to reach 28 percent. The figure is worse than the 4.2 percent contraction and 26.6 percent jobless rate predicted by the government and the country's rescue lenders. The economy shrank an estimated 6.4 percent in 2012 and by 7.1 percent in 2011. Greece has been in recession since late 2008 and unemployment has risen to 27 percent as of February. Some 64.2 percent of people under the age of 25 are out of work. The conservative-led government has promised an end to recession and a return to state borrowing on bond markets next year. "It is estimated that the economy will return to positive growth rates in 2014, while unemployment will begin to de-escalate from 2015," the Bank of Greece report said.

Nightmare in Portugal - Krugman - The FT has a long, deeply depressing portrait of conditions in Portugal, focusing on the plight of family-owned businesses — once the core of the nation’s economy and society, now going under in droves. This is what it’s really about. And anyone playing any role in our current economic debate, whether as an actual policy maker or as an analyst giving advice from the sidelines, should be focused, above all, on how and why we’re allowing this nightmare to happen all over again three generations after the Great Depression. Don’t tell me that Portugal has had bad policies in the past and has deep structural problems. Of course it has; so does everyone, and while arguably Portugal’s are worse than those of some other countries, how can it possibly make sense to “deal” with these problems by condemning vast numbers of willing workers to unemployment? The answer to the kind of problems Portugal now faces, as we’ve known for many decades, is expansionary monetary and fiscal policy. But Portugal can’t do those things on its own, because it no longer has its own currency. OK, then: either the euro must go or something must be done to make it work, because what we’re seeing (and the Portuguese are experiencing) is unacceptable.

Portuguese bestseller calls for euro exit - Portugal is waking up. A new book calling for withdrawal from the euro and a return to the escudo has vaulted to the top of the bestseller list. The incendiary tract – “Porque Debemos Sair do Euro” (Why We Should Leave The Euro) – is written by Professor João Ferreira do Amaral from the Insituto Superior de Economia e Gestão (ISEG). The professor has already secured the backing of Luís António Noronha Nascimento, the chief justice of Portugal’s Supreme Court.This follows the apostasy of Jerónimo de Sousa, the Secretary-General of the Portuguese Communist Party, who has called for a referendum on both the euro and the EU. De Sousa says the EU is “unreformable”, has been hijacked by a “directorate” of dominant powers, and has led to the death of Portuguese sovereignty. The new book makes a poignant parallel with Portugal’s subjugation by Phillip II of Spain, and its travails as a captive province of the Spanish Empire for 60 years.

We Are Not Greece, Portugal Is Not Cyprus, Or Is It - Calling on "all citizens, with or without party, with or without a job, with or without hope," a coalition of groups across Europe are planning a June 1 international demonstration, People United Against The Troika!, to protest austerity measures imposed by the all-powerful troika - International Monetary Fund, European Central Bank, and European Commission - that have led to bank bailouts on one side and, on the other, unemployment, foreclosures, social inequity and cuts in public services such as health care and education in country after country, all in the name of a debt crisis that, in organizers' words, "once again privatizes profits and socializes losses, while demanding bloody cutbacks in return." In honor of the event, they've made a masterful video.

Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble -Spain keeps digging a bigger and bigger hole as the latest economic reports show.

  • In spite of massive tax hikes, overall revenue is down 5.3% YoY
  • Tax collections are down 6.7% YoY
  • VAT collection is down 9.9% in spite of a September increase in the VAT rate
  • Non-interest expenses are up 1.1% from a year ago
  • As compared to the first quarter of 2011, tax revenues have plunged by 58%
  • As compared to first quarter of 2011, personal income tax and other direct taxes have fallen almost 35%.
Those numbers are courtesy of Libre Mercado which reports Spanish Government has Largest January to April Deficit in History. So what does Shäuble have to say about this?Please consider these Google-translated snips from the Libre Mercado report Wolfgang Schäuble supports Rajoy's policies and Cites "impressive" Results of the Spanish reformsSchäuble is convinced that "Spain has made ​​enormous progress in recent years under the Government of Mariano Rajoy". So much so that now Spain "has a strong economy, reduced labor costs, has significantly increased its exports and has done a good job in restructuring its banking sector, also after the trial of the Troika".

Evolution of Spanish Public Debt and Pension Promises - Inquiring minds may be interested in a chart of Spanish public debt over time to see how the policies of Spain and the Troika are working out in practice. I picked that chart up from estrategiastendencias.  My stab at a translation of text regarding public debt reads "Spanish banks are deluded. They must think we are going to save them from the assets that they have purchased." Regarding pensions, here is a Mish-modified translation of various paragraphs from site: "Pension benefits need to drop between 22% and up to 45% on average to avoid bankruptcy of the system. The projected costs and revenues of Social Security until 2050 and the population pyramid ensures an inevitable adjustment to retirement benefits. We are up Spain creek without a paddle. The state does not have money for anything."

EU Requires Spain to Raise Vat - The last thing a country in recession should do is raise taxes. Well, Spain is in a depression, not a recession yet the EU requires Spain to raise the VAT and lower pension benefits within a year. One year. That is the time that the government has to undertake major reforms. The European Commission has published today the document with recommendations to the European Council on the National Reform Plan. Includes advice on pensions, taxes, government spending, administrative reform, etc.. There is virtually nothing that Brussels (and the governments of EU members) does not create the need to change, accelerate or deepen.On Wednesday Brussels gave Spain more time to reach a budget deficit of 3%, but warns that to achieve this, it is still necessary to continue with the fiscal effort. Brussels calls for "a systematic review of the tax system by March 2014." Normally, these words have meant raising taxes on consumption (VAT or special) to relax the pressure on other that penalize wealth creation, such as income tax or social contributions. But in the current document there are only requests to raise taxes.

Spain's 'Lost Generation': Youth Unemployment Hits 57 Percent - Despite having a bachelor's degree, five years of professional experience and speaking three languages, Paloma Fernandez has joined the swelling ranks of Spain's "lost generation" that can't find work in a grinding recession. The 28-year-old, who has a degree in translation, lost her job of four years at the justice ministry in December 2011 and as of last month she lost the right to collect unemployment benefits. Since losing her job she has sent out dozens of resumes for jobs as a translator, administrative assistant or receptionist but has not had any luck. Many other Spanish youths find themselves in the same situation. The unemployment rate for those between the ages of 16 and 24 has soared to 57.22 percent, and a record 27.16 percent overall, at the end of the first quarter as the country struggles through a double-dip recession sparked by the collapse of a decade-long building boom in 2008.

Yawning deficits force Dutch pension funds to cut payouts - A combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits. For the Dutch, the cutbacks are the first ever in a nation which has the second largest “defined benefit” system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unraveling under the pressure of the financial crisis and ensuing recession.In April, under orders from the Dutch central bank, 66 of the country’s 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities.This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt.

Italian bankruptcies hit record high - Bankruptcies in Italy reached a record high in the first quarter of this year, the Cerved market research agency said on Wednesday, as the country's longest recession in over 20 years continues to bite hard. Cerved data made available to ANSA reported that the number of bankruptcy procedures started in the first three months of 2013 hit a record of 3,500, up 12% on the same period last year. The agency said this is in addition to the 19,000 companies that voluntarily decided to close in the first quarter, up 5.8% on the same period in 2012

Italian Unemployment Soars WAY Beyond Expectations And Hits An All-Time High - Just a quick reminder of the abject terribleness of the European economy, and the Italian one in particular. Italian unemployment just came in at 12%, which is well beyond expectations of 11.6%, per ForexLive. That's the worst level since they began tracking this in 1977. So yes, horrible.

S&P says France must deliver promised budget cuts to protect rating  (Reuters) - France needs to deliver promised budget cuts if it wants to avoid a further credit rating downgrade, Standard & Poor's lead analyst for France told Reuters on Monday. S&P, which stripped France of its coveted AAA rating in January 2012, could confirm the current AA+ rating if the public debt ratio looked set to stabilize, but analyst Marko Mrsnik says it remains to be seen if France can achieve that in 2015. "We take on board expectations that in the 2014 budget there will be additional measures that will move the position towards smaller deficits," Mrsnik said. "We expect mild recession this year and slow recovery thereafter." The ratings agency forecasts the economy will shrink 0.2 percent this year and grow 0.6 percent next year - half the government's 2014 growth forecast. S&P expects France will cut its budget deficit to 3.3 percent of output next year from 3.8 percent this year, slightly more pessimistic than the government but more optimistic than the European Commission's projections. With these forecasts underpinning the rating, one of the main triggers for a downgrade would be if "economic growth prospects deteriorate further or the economy is threatened by continuing rigidities in the labor market and services sector," Mrsnik said.

The gap between France's "hard" and "soft" economic indicators poses risks - France continues to pose the biggest near-term risk to the euro area's economic recovery. Why France some may ask? After all it was Italy and Spain who presented the biggest challenge to the union's stability in 2011 and 2012. The situation in those two nations is dire indeed. However the so-called "hard" economic measures in Italy and Spain have generally "caught up" with the "soft" indicators (surveys). For example the Italian GDP growth is now roughly in sync with the service PMI measure (below).

Eurozone fears for Slovenia as bad debt brings economy to a standstill - Slovenia needs at least €900m ($1.15bn) by July to refloat one of its struggling banks. This is a large sum of money for a country with a GDP of only €35bn. The question is where to find the funds. The public deficit is deepening and investors are beginning to question the country's solvency, to such an extent that it can no longer borrow on the money markets. On 30 April Moody's, the credit-rating agency, downgraded Slovenian bonds to junk status. Both Brussels and the OECD are urging the government to take action. But why is there such a hurry? The economy may be sluggish, but Slovenia, once a part of Yugoslavia, still feels like a Balkan version of Switzerland, with plush mountain pastures and tidy streets. With the unemployment rate at about 10% and public borrowing equivalent to just over half of GDP – far less than France – many Slovenians cannot understand what the fuss is about. But Slovenia looks likely to be the next eurozone hotspot, though at first sight the situation seems very different. Here the banking sector's assets only add up to 130% of GDP, compared with 750% in Cyprus.

The Neverending Irish Success Story - Paul Krugman -- Jean Pisani-Ferry has a generally reasonable discussion of the problems with the “troika” that has managed European rescue policies. But I was struck by this: Three years later, the results are mixed at best. Unemployment has increased much more than anticipated and social hardship is unmistakable. There is one bright spot: Ireland, which is set to recover from an exceptionally severe financial crisis. But there is also a dark spot … What’s the Irish for “et tu, Jean”? As best I can tell, Ireland has been universally (that is, by all the Serious people) proclaimed a successful role model at least once a year since the crisis began. Meanwhile, unemployment remains spectacularly high, although down a bit. Growth looks like this: This is a “bright spot”?

Recession out of the picture as Fermanagh puts on a brave face for G8 leaders - Just a few weeks ago, Flanagan’s – a former butcher’s and vegetable shop in the neat village – was cleaned and repainted with bespoke images of a thriving business placed in the windows. Any G8 delegate passing on the way to discuss global capitalism would easily be fooled into thinking that all is well with the free-market system in Fermanagh. But, the facts are different. ... The butcher’s business has been replaced by a picture of a butcher’s business. Across the road is a similar tale. A small business premises has been made to look like an office supplies store. It used to be a pharmacy, now relocated on the village main street. Elsewhere in Fermanagh, billboard-sized pictures of the gorgeous scenery have been located to mask the occasional stark and abandoned building site or other eyesore.

Polls show that Europeans have no idea what inflation is; hence the ECB should generate more inflation I’ve frequently argued that the average person has no idea what “inflation” is, and hence public opinion polls about inflation are meaningless.  Even in the 1930s, when prices were falling fast, there was lots of concern about inflation.  Most people conflate the terms “cost of living” (price level) and “standard of living” (RGDP.)  Hence when RGDP does poorly, people (wrongly) think inflation is a big problem. Now Carola Binder has a blog post that beautifully illustrates this confusion.  She shows that 45% of Europeans consider inflation to be a big problem, far more than those who worry about unemployment.  Even in Greece 26% view inflation as the big problem, only slightly below the 30% for unemployment.  Only the Swedes are economically literate.  And keep in mind that there is virtually no inflation in Europe, indeed the price level would probably be falling, if measured using a reasonable index. Because people wrongly equate “inflation” with “having trouble paying my bills” (i.e. falling RGDP), the European public would actually prefer a policy of higher inflation, as it would lead to higher RGDP, and hence people would have an easier time paying their bills.  They just don’t know it.

PIMCO braces for euro zone debt writedowns as revival disappoints (Reuters) - PIMCO, the world's largest bonds house, is weighing up a fresh sell-off in "expensive" euro zone debt, fearing policymakers could ask investors to forgive more sovereign debt. Sketching out a three- to five-year investment outlook this week, managers at the $2 trillion fund firm said they believed the European Central Bank was reviewing its Fairy Godmother role in money markets after months of stubborn recession, a switch PIMCO says could herald painful losses for complacent investors. "Investors and financial markets are very confident that the ECB, in extremis, will be the lender of last resort, that they won't let things fall apart. We are less so," Andrew Balls, head of the firm's European portfolio management said. "We think the ECB is likely to swing between periods of 'whatever it takes' activism and periods of refusal to act." Reflecting this caution, PIMCO has steadily reversed small overweight positions on Spanish and Italian government debt in most of its accounts since March. The firm is now broadly underweight on euro zone sovereigns, euro zone credit and the European banking sector and is recommending gradual movement into assets with 'real' returns, including inflation-linked bonds, commodities, real estate and emerging market currencies. While it sees little chance of a big bond market exodus in the near term, PIMCO said this strategic change should help to protect portfolios against the feeble 0.5 percent annual economic growth it expects in the euro zone over the next three to five years.

Europe's austerity: big worries, small thinking -The economist Yanis Varoufakis has an apt metaphor for Europe's latest approach to its economic crisis. Imagine, he says, that your neighbours demanded you do a 100m sprint in under 10 seconds. They whip you, and threaten dire sanctions for flunking. But as August looms and with your times getting worse not better, your taskmasters change the regime. The target remains in place, the threats are just as grave – but the deadline is extended to December. So, have your neighbours loosened their grip? Of course not, says Mr Varoufakis, they have simply extended into the future their "maddened misanthropy, making a virtue out of abject policy failure". So it goes in the EU too. The European Commission has confirmed what was already widely suspected: that France, Spain, Portugal, the Netherlands, Poland and Slovenia will all be allowed extra time to complete their austerity plans. In some quarters this was greeted as "Europe in retreat". It is nothing of the sort. There has been no relinquishing of the actual budget targets, let alone a move towards replacing the cuts with other economic policies. Put at maximum strength, this decision allows Paris and the other capitals to bring in the automatic stabilisers: to spend more on unemployment and other benefit bills, which are rising fast amid this ferocious economic slump. That tweak alone will help take the edge off the pain of the crisis, but it will do nothing to resolve the underlying crisis. It is a palliative, and no more.

Sleepwalking to disaster – Economist - Our correspondents explain why Europe's leaders should be concerned by the current absence of bad news.

Counterparties: Why Europe wants to be more Austrian -European leaders convened at Sciences Po in Paris today to tackle the continent’s increasingly scary youth unemployment crisis. They did a great job of delivering concerned rhetoric (“We have to rescue an entire generation of young people who are scared,” said Italian labor minister Enrico Giovannini). They weren’t quite as good at nailing down specifics. However, there is some evidence that leaders are slowly becoming motivated to do something. Their clear incentive: the political ramifications of inaction could look something like last week’s riots in Stockholm, if not much worse. Joe Weisenthal points to the below chart, showing Germany (DE) and Austria (AT) both with youth unemployment rates below 8%, Greece (EL) and Spain (ES) well above 50%, and Italy (IT) and Portugal (PT) each approaching 40%. Far more countries in Europe are above 20% youth unemployment than are below it. The most serious step toward reducing unemployment is the Youth Guarantee, adopted last month by the EU’s council of ministers (though implementation is left to the member states, so the plan’s fate is far from certain). The plan would ensure a job or training program to anyone under the age of 25 within four months of leaving school or becoming unemployed. This is all based on programs already in place in Finland and Austria, which have youth unemployment rates of 20% and 8%, respectively. The plan is estimated to cost a total of €21 billion, a fraction of the €150 billion youth unemployment is currently costing the economic union annually. Euro zone countries have already set aside €6 billion for the guarantee over the next six years.

Germany sees "revolution" if welfare model scrapped (Reuters) - German Finance Minister Wolfgang Schaeuble warned on Tuesday that failure to win the battle against youth unemployment could tear Europe apart, while abandoning the continent's welfare model in favour of tougher U.S. standards would cause "revolution". Germany, along with France and Italy, backed urgent action to rescue a generation of young Europeans who fear they will not find jobs, with youth unemployment in the EU standing at nearly one in four, more than twice the adult rate. "We need to be more successful in our fight against youth unemployment, otherwise we will lose the battle for Europe's unity," Schaeuble said. While Germany insists on the importance of budget consolidation, Schaeuble spoke of the need to preserve Europe's welfare model. If U.S. welfare standards were introduced in Europe, "we would have revolution, not tomorrow, but on the very same day," Schaeuble told a conference in Paris. "We have to rescue an entire generation of young people who are scared. We have the best-educated generation and we are putting them on hold. This is not acceptable," Italian Labour minister Enrico Giovannini said.

German Job Revival Goes Missing - German jobless claims jumped in May as the usual recovery in spring was much weaker than in previous years, the BA labor agency said Wednesday. German jobless claims in May rose by 21,000 from April in seasonally adjusted terms. The number of new claims exceeded an expected increase of 3,000, indicating that Germany's robust labor market isn't totally immune to a deep recession in the euro zone.  But the weak spring revival is no reason to panic, BA chief Frank-Jürgen Weise said. Germany's job market remains "solid" despite the challenging economic backdrop and labor demand is projected to pick up in the second half of the year, he said. A relatively high number of public holidays in May and the cold weather could have also depressed activity, said Carsten Brzeski, an economist at ING DiBa.  Neglecting seasonal effects, the total number of unemployed fell by 83,000 people to 2.973 million in May, pushing down the unadjusted jobless rate to 6.8% from 7.1% in April, BA said. The adjusted jobless rate was unchanged for the seventh consecutive month at 6.9% in May.  Germany's labor market has held up well despite euro-zone unemployment reaching 12.1% in March, the last month for which official data is available. The outlook for Germany's labor market remains stable, economists say, even though the economy had a very weak start to the year.

Procyclical Policy for Germany - Paul Krugman - First, the half level: what, exactly, does it mean to call for expansionary monetary policy by the ECB? Like other major central banks, the ECB has near-zero policy rates, so we’re talking about some kind of unconventional monetary policy. Are we supposed to envision the ECB doing huge purchases of unconventional assets (over and above what it’s already doing in the form of lending to banks against sovereign debt and the promise of outright monetary transactions if necessary)? Alternatively, are we supposed to see a European version of Abenomics, with the ECB credibly committing to a higher inflation target? Second, and now we get to where I’m really baffled, if we’re against policies that are procyclical for Germany,what on earth do R&R imagine a more expansionary monetary policy (however achieved) does? Europe as a whole is deeply depressed; Germany is not. So any policy that causes overall European expansion is going to be pushing the German economy up against capacity, and pushing up German inflation. There is no difference at all between fiscal and monetary expansion as far as that issue is concerned.Finally, aren’t policies that are procyclical for Germany, and raise inflation there, the whole point of the exercise? We have a competitiveness gap between the periphery and the core that must be closed through some combination of falling wages in Portugal, Spain, etc. and rising wages in Germany. The idea is to shift the balance of that adjustment somewhat away from the deflationary countries — overheating in Germany isn’t a bug, it’s a feature, and indeed the crucial feature.

Austerity About-Face: German Government to Gamble on Stimulus - Wolfgang Schäuble sounded almost like a new convert extolling the wonders of heaven as he raved about his latest conclusions on the subject of saving the euro. "We need more investment, and we need more programs," the German finance minister announced after a meeting with Vitor Gaspar, his Portuguese counterpart. The role he was slipping into last Wednesday was new for Schäuble. The man who had persistently maintained his image as an austerity commissioner is suddenly a champion of growth. If Germany couldn't manage to trigger an economic recovery, "our success story would not be complete," he said. And as if to convince even the die-hard skeptics, he added: "The German government is always prepared to help." After three years of crisis policy, it was an impression shared by very few people in countries like Portugal, Spain and Greece. They are more likely to associate Schäuble and his boss, Chancellor Angela Merkel, with austerity mandates ushering in hardship, deprivation and unemployment. But a new way of thinking has recently taken hold in the German capital. In light of record new unemployment figures among young people, even the intransigent Germans now realize that action is needed. "If we don't act now, we risk losing an entire generation in Southern Europe," say people close to Schäuble.

EU eases hard line on austerity - Brussels will on Wednesday give its clearest signal yet that it is moving away from a crisis response based on austerity, allowing three of the EU’s five largest economies to overshoot budget deficit limits and pushing instead for broader reform. In its annual verdict on national budgets of all 27 EU members France, Spain and the Netherlands will be given a waiver on the annual 3 per cent deficit limit. Brussels will also free Italy from intensive fiscal monitoring despite its new prime minister’s decision to reverse a series of tax increases imposed by his predecessor. The European Commission will make these moves on the condition that national governments embark on stalled labour market reforms. Brussels believes the delay in implementing them has contributed to Europe’s unemployment crisis. “There are limits to what can be achieved with austerity,” said Maarten Verway, a senior European Commission economist. Commission officials insist they are not abandoning “fiscal discipline” altogether, noting that even France and Spain, which will receive two-year extensions to their deficit deadlines, will still have to take stringent measures to get ballooning budgets back under control.

Europe rethinking austerity? - As I noted yesterday, the chatter about Europe changing course on ‘austerity’ is growing, although as I stated although this appears to be positive step forward, I really think we need to wait until after September to get a handle on exactly what that means. The outcome of the German election is very likely to have a large effect on the policy shifts from Berlin and Brussels and, although we are seeing signs that the hard-liners are loosening their grip on policy, we’ve seen significant back-flips in the past. In the meantime, the current policy framework within the region continues to slow economic output and retrench private sector investment. Overnight the OECD warned that the Eurozone is once again slowing more “than expected”: The OECD has again cut its growth forecasts for the eurozone and called on the European Central Bank to consider doing more to boost growth. The organisation says the eurozone will shrink by 0.6% this year, widening the gap between it and faster-growing economies such as the US and Japan. The UK forecast was revised down to 0.8% growth this year and 1.5% in 2014. Meanwhile, the European Commission has given France two more years to complete its austerity programme.

Record unemployment, low inflation underline Europe's pain (Reuters) - Unemployment has reached a new high in the euro zone and inflation remains well below the European Central Bank's target, stepping up pressure on EU leaders and the ECB for action to revive the bloc's sickly economy. Joblessness in the 17-nation currency area rose to 12.2 percent in April, EU statistics office Eurostat said on Friday, marking a new record since the data series began in 1995. With the euro zone in its longest recession since its creation in 1999, consumer price inflation was far below the ECB's target of just below 2 percent, coming in at 1.4 percent in May, slightly above April's 1.2 percent rate. That rise may quieten concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the euro zone. Almost two-thirds of young Greeks are unable to find work, exemplifying southern Europe's 'lost generation'. Economists and policymakers including Germany's finance minister, Wolfgang Schaeuble, have said the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors. In France, Europe's second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40 percent of young people out of work.

Euro leaders unite to tackle soaring youth unemployment rates - European leaders warned on Tuesday that youth unemployment – which exceeds 50% in some countries – could lead to a continent-wide catastrophe and widespread social unrest aimed at member state governments. The French, German and Italian governments joined forces to launch initiatives to "rescue an entire generation" who fear they will never find jobs. More than 7.5 million young Europeans aged between 15 and 24 are not in employment, education or training, according to EU data. The rate of youth unemployment is more than double that for adults, and more than half of young people in Greece (59%) and Spain (55%) are unemployed. François Hollande, the French president, dubbed them the "post-crisis generation", who will "for ever after, be holding today's governments responsible for their plight". "Remember the postwar generation, my generation. Europe showed us and gave us the support we needed, the hope we cherished. The hopes that we could get a job after finishing school, and succeed in life," he said at conference in Paris. "Can we be responsible for depriving today's young generation of this kind of hope?" . We're talking about a complete breakdown of identifying with Europe.

Europe Winning Global Unemployment Race - If the scramble to hit 100% unemployment was a race, then Europe is about to leap the rest of the world.  April euro area unemployment rate rose to 12.2%, a fresh all time high. That means 19.375 million people were jobless, up from 15.5 million in April two years ago. At the country level, Germany and Austria remain among the countries with the lowest unemployment rates, close to 5%, while the situation is the worst in Greece and Spain (27% and 26.8%, respectively). As SocGen admits, the gradual increase appears to continue in all the worst-hit countries, including Italy, Cyprus and Portugal, with Ireland being the only exception with a decline in unemployment to 13.5%. Italian unemployment hit 12%, up from 11.5% and far worse than expected. This was the worst unemployment in 36 years.

A portrait of European policy failure - Another month, another 95,000 people lost their jobs in the eurozone. The EMU unemployment rate nudged up a point to 12.2pc, but this understates those who have dropped out of workforce. The European Commission says the real rate for Italy is around 20pc, not the declared rate of 11.2pc. There are now 19.4 million registered unemployed in Euroland and 26.6 million in the EU as a whole. There are 5.6m youths below the age of 25 looking for jobs. Frankly, I have nothing further to say on this. The chart below contrasts EMU policy failure with the US and Japan.

‘Truly Abysmal’: Europe Needs Overhaul, EU Commissioner Says - The European Union has done its best lately to exude optimism about its efforts to emerge from the ongoing euro crisis. Not only have important steps been made, say EU leaders, but increased political and economic integration mean that the future of the bloc is bright.  European Energy Commissioner Günther Oettinger, however, would beg to differ. Oettinger, Germany's representative on the EU's executive body, held a speech on Tuesday at the German-Belgian-Luxembourgian Chamber of Commerce in which he outlined what he sees as the EU's shortcomings.  "Europe is in dire need of an overhaul," he said, according to the German tabloid Bild. But Brussels, he continued, "still hasn't recognized its truly abysmal state."  The commissioner reserved most of his bile for France, identifying it as a principal point of concern and saying that it "is not prepared at all for that which is necessary." Specifically, he said that the country needs to undertake a far-reaching "pension reform, which in truth means pension cuts." In addition, he demanded that the retirement age be raised and that the number of public servants be slashed. He added that the country has "little innovation."

Europe should embrace a financial transaction tax - The banking industry has launched a concerted and broad attack against the plans of 11 European countries to impose a financial transaction tax. Bankers are complaining that the tax will kill growth, rob pensioners, make the European debt crisis worse, impoverish small farmers and more. On examination, the arguments by opponents of the FTT have three defining features. First, they are inconsistent. We are told that the tax will be so completely avoided that no one will pay it. Then we are told that the tax will bring economic and financial ruin. It is hard to have it both ways. Commission are small: 0.1 per cent on stocks and bonds, and 0.01 per cent for derivatives. The impact of a tax of these levels would be no more pernicious than if the spread between the buying and selling prices given by market makers for many stocks returned to where they were about a decade ago. The FTT would be only one of several costs for investors who decide to buy or sell a security. When all the transaction costs are added up – administration, management, research, broker and banker commissions, clearing and settlement fees – they amount to nearly 1 per cent of assets per year for liquid assets and significantly more for illiquid assets. On average, long-term equity funds turn over their portfolios only once every two to three years so the cost of the tax on an average share transaction would be spread over two or more years. These funds also participate in initial public offerings and cash markets that will be exempt. I estimate that the FTT will comprise no more than 5 per cent of annual transaction costs for long-term equity holders. Why is nobody complaining about the ruinous effects of the other 95 per cent?

EU exit would put US trade deal at risk, Britain warned - The Obama administration has warned British officials that if the UK leaves Europe it will exclude itself from a US-EU trade and investment partnership potentially worth hundreds of billions of pounds a year, and that it was very unlikely that Washington would make a separate deal with Britain. The warning comes in the wake of David Cameron's visit to Washington, which was primarily intended as a joint promotion of the Transatlantic Trade and Investment Partnership (TTIP) with Barack Obama, which the prime minister said could bring £10bn a year to the UK alone, but which was overshadowed by a cabinet rebellion back in London. The threat by Cameron's ministers to back a UK exit in a referendum on the EU raised doubts in Washington on whether Britain would still be part of the deal once it had been negotiated. More immediately, Obama administration officials were concerned that the uncertainty over Britain's future would further complicate what is already a hard sell in Congress, threatening a central pledge in the president's State of the Union address in February. With formal negotiations expected to start within weeks, the state department already has hundreds of staff working on the partnership. Sources at US-UK meetings in London last week said American officials made it clear that it would take a monumental effort to get TTIP through a suspicious Congress and that "there would very little appetite" in Washington to do it all again with the UK if Britain walked out of Europe.

No guarantee Carney will get the presses rolling - Two weeks ago I pointed out that, while there were a few reasons for the stock market’s strength, quantitative easing(QE) by central banks was the most important. Sure enough, a hint that America’s QE programme may not continue at its present $85bn (£56bn) pace , from Ben Bernanke, the Federal Reserve chairman, sent markets tumbling, led by a 7% sell-off in Japan. We may not have seen the end of the equity rally, but it relies on central banks playing the accommodative game. One question is what this means for the Bank of England and its new governor, Mark Carney, who will take the helm in just over a month’s time. George Osborne will continue with his fiscal strategy, although with a further nod towards boosting infrastructure spending where possible. Bringing forward £10bn such spending, to start now, as the IMF wants, may be easier said than done. What more monetary activism can the Bank do under Carney? Bank rate has been 0.5% for more than four years and there has been £375bn of quantitative easing through purchases of gilts (British government bonds), equivalent to roughly a quarter of Britain’s annual gross domestic product.

The OECD's deficit fetishism will stunt growth – when all we need is houses - There is a fatalism about the OECD. Listening to officials at the thinktank's Paris HQ, there is none of the energy that bounces off their counterparts at the International Monetary Fund. The IMF wants action from governments. So does the Organisation for Economic Co-operation and Development, but only incremental action; nothing that would disturb the markets or the orthodox economic thinking that has characterised its response to the banking crisis. Tied in a straitjacket of its own making, it only whispers how some of its 34 member countries might implement a series of technical measures, which it meekly says may provide support for jobs and growth "at the margins". The recovery is what it is, live with it, seems to be the message. For George Osborne, the OECD's economic outlook is like a warm embrace. Keep on track with public spending cuts, it says. Let the UK's welfare system, already reduced in value in real terms, be spread more widely to catch those who lose out when Whitehall pulls the funding plug.

Britain Plans I.P.O. for Postal Service - – Britain is preparing to privatize Royal Mail, the country’s postal service, whose origins date to 1516 and the carrying of post for Henry VIII and the Tudor court. The government said on Wednesday that it had appointed Goldman Sachs and UBS as the lead banks to manage a planned initial public offering on the London Stock Exchange later this year. Barclays and Bank of America Merrill Lynch will also work on the sale. The planned offering could value Royal Mail at about £3 billion ($4.5 billion), according to some analysts. The government has been considering a sale of Royal Mail for years, but plans became more concrete over the last year when the company’s finances started to improve. Pressure is also growing on the government to find additional savings to reduce the budget deficit. The sale of the service, which was opened to the public by Charles I in 1635, would be the biggest privatization in Britain since the railroads in the 1990s. Royal Mail is one of Britain’s largest employers, and the government plans to set aside about 10 percent of Royal Mail’s shares to be held by its workers.

Courts may be privatised to save Ministry of Justice £1bn - Telegraph: The courts may be privatised in a justice shake-up that could save the Ministry of Justice £1 billion a year. The plans would free the courts from Treasure control, placing court buildings and thousands of staff in the hands of private companies. The system would be funded by extracting larger fees from wealthy litigants and private sector investment, and by encouraging hedge funds to invest by an attractive rate of return, according to The Times. Fears that privatisation would erode the independence of the courts would be allayed by placing the courts under a Royal Charter, as has been proposed for the regulation of the press. Earlier this year Justice Secretary Chris Grayling paved the way for reform by instructing officials to explore plans and ensure that the Courts and Tribunal Service provides value for money. Mr Grayling, who is thought to be in strongly in favour of the reforms, will be presented with a paper outlining the options within two weeks, and the changes could begin this autumn.

Number of Britons relying on food handouts triples in year - More than half a million people in Britain, the world's seventh richest nation, are turning to emergency food aid to combat destitution and hunger, two charities said on Thursday. Releasing their report, "Walking the breadline: the scandal of food poverty in 21st century Britain", Oxfam and Church Action on Poverty called for a parliamentary inquiry into poverty in the United Kingdom, where they estimate the number of people using food banks has more than tripled in the last year. The report blamed the sharp rise in demand for food donated by members of the public on delays in benefit payments, rising unemployment, the higher cost of food and fuel and changes to the welfare system.

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