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

Saturday, May 18, 2013

week ending May 18

Fed Balance Sheet Rises To $3.35 Trillion - The Federal Reserve's balance sheet expanded this week, again hitting a record high as the central bank continues its bond-buying program.  The Fed's asset holdings in the week ended Wednesday increased by $29.65 billion from a week earlier to $3.354 trillion, the central bank said in a weekly report released Thursday.  Holdings of U.S. Treasury securities increased by $10.17 billion in the past week to $1.865 trillion, while mortgage-backed securities rose by $28.94 million to $1.150 trillion.  The Fed is buying an average of $85 billion a month in Treasury and mortgage bonds as part of a program to stimulate economic growth. The Fed's portfolio has more than tripled since the financial crisis due to programs intended to keep interest rates low.  Meanwhile, the report showed total borrowing from the Fed's discount lending window was $49 million on Wednesday, up from $41 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 16, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed Maps Exit From Stimulus - Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations. Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.  The Fed's strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.  Officials are focusing on clarifying the strategy so markets don't overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.  "I don't want to go from wild turkey to cold turkey," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview Friday. "I think we ought to dial it back." Mr. Fisher is part of a contingent of Fed hawks who are wary of the central bank's easy-money policies.

Clues To Watch For The End Of QE "Infinity" - So, apparently, according to Jon Hilsenrath, "QE to Infinity" is actually "finite" after all. With Ben Bernanke set to "exit stage left" in 2014, the question of who replaces him at the helm of the massive USS "Federal Reserve" will be important as to the future of the current course of monetary policy. One of the top contenders for that job is Janet Yellen. However, according to the variety of erudite speakers at the recent Strategic Investment Conference, there are many hurdles ahead for her and she may be just too "dovish" to actually land the job. According to Hilsenrath, the Federal Reserve has already mapped out a strategy for winding down the unprecedented $85 billion monthly bond buying program meant to spur the economy. Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated. The Fed's strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience. Officials are focusing on clarifying the strategy so markets don't overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.

No Mo' PoMo? – Kunstler - Whenever the Federal Reserve wants to tweak the dials of the economy -- or pretend that it can -- it turns first to its sock puppet at The Wall Street Journal, John Hilsenrath, and "leaks" a rumor of policy change (here). They like to do this late on Fridays when financial markets are about to close, so that market players will have a whole weekend to ponder the Fed's actions like medieval viziers reading goat entrails.  Last Friday's puddle of steaming guts was a supposed preview of the Fed's "exit strategy" from its reckless policy of "quantitative easing" or "money" creation (or "liquidity," if you like). In other words, they supposedly intend to stop juicing the financial markets with fake wealth, i.e. capital not accumulated from real productive activity, but just fictively created on computer hard drives. For the past year they have been doing this to the tune of $85 billion a month, "buying" US Treasury bonds and bills and an assortment of miscellaneous securities (mostly trash that can't be pawned off on anyone else) through their so-called "primary dealer" bank cohorts, the too-big-to-fail usual suspects, who "earn" hefty transaction fees in the process of conveying all these pixels from Point A to Point B. These interventions are called Permanent Open Market Operations, or PoMo.The theory all along has been that this $85 a month would seep down to Main Street to provoke spending (increasing the "velocity of money) and therefore "jump start" the economy. The theory has proven itself to be complete horseshit, of course. All it has done is suppress interest rates on bonds, depriving old people of income off their savings by so doing. It also artificially jacked up reckless lending on loans for houses, cars, and college degrees, juiced the share price of stocks, and boosted food prices. Meanwhile, an increasingly former middle class languishes in a purgatory of foreclosure, penury, and desperation. The Fed can't really do anything to help them. It can only burden them with more easy-credit debt, especially their college-age children. But ours is a financialized economy and finance is too abstruse for most ordinary people to understand, so they just muddle along in a fog of dashed hopes and repossession.

Dear Mr. Hilsenrath- QE 3 Has Not Boosted Jobs – Au Contraire - I came across a material error of fact in the Jon Jerry Mahoney Hilsenrath piece that has caused such a stir in the financial wackosphere this weekend.  Being the good citizen that I am, I felt that it was my obligation and responsibility to notify Mr. Hilsenrath of the error. I knew that he would want to correct the record. The error regarded two statements that he juxtaposed that implied that employment had improved as a result of QE, which is not true. Mr. Hilsenrath reported that Philly Fedhead Chucky Cheesesteak Plosser said “It is pretty hard to say we haven’t seen an improvement in the labor market.” However, Jerry did not say whether Mr. Plosser’s statement was connected to the error of fact. He makes no reference as to who supplied the information. Mr. Plosser would be correct in saying that the labor market has improved. That’s been the case since 2009. However, he could not say, and in fact may not have said, that it has improved as a result of QE. That could not be supported. My guess is that he did not say it, but that Jerry juxtaposed the two statements possibly unintentionally, giving  the impression that QE had somehow worked to boost employment. If so, that would be wrong. So I sent him this short, polite email pointing out the mistake.

Fed’s Plosser Wants Bond Buying to Taper at Next FOMC Meeting - Federal Reserve Bank of Philadelphia leader Charles Plosser said Tuesday he wants the central bank to begin cutting back on its bond buying as soon as its next policy meeting. But at the same time, while he doesn’t think it is likely, the non-voting member of the monetary policy setting Federal Open Market Committee said that if price pressures were to wane significantly from their current level, he would be open to increasing the asset purchases in a bid to ward off the forces of deflation. Still, the central banker thinks the far more likely path is for the Fed to start getting its monetary policy in line with what he sees as an increasingly solid pace of recovery. “Labor market conditions warrant scaling back the pace of purchases as soon as our next meeting,” Mr. Plosser said in the text of a speech to be delivered in Stockholm. The next FOMC meeting is scheduled for June 18 and 19. He added “unless we see a significant reversal in current trends that jeopardizes my forecast of near 7% unemployment rate by the end of this year, then I anticipate that we could end the program before year-end.”

Fed Watch: Plosser on the Exit - As is well known, policymakers have been coalescing around a QE exit strategy for some time, since at least the March FOMC meeting. Two central issues with the exit are the timing and the communications. Officials do not want to undermine the recovery, knowing full-well that previous flirtations with exits have gone awry. At the same time, however, they fear the cost-benefit analysis may be turning against them. For some doves it is not the potential inflation cost, but the potential financial instability cost. Some policymakers want to begin tapering asset purchases at the next meeting, some are looking to the summer, and others looking to the fall.  Regarding the communications issue, policymakers seem to be taking pains to make clear that the financial markets should not overreact to any one policy move. The tapering process may be smooth, it may be choppy, it may be long, it may be short. It is contingent on the state of the economy, something inherently unknown. Mostly, they want to avoid a 1994-type of miscommunication.  Today's speech by Philadelphia Federal Reserve President Charles Plosser covers nearly all of these elements. In general, although I do not agree with his conclusions regarding timing, I think he makes a what would be viewed by some as a credible argument for tapering to begin sooner than later.

Fed Officials Offer Split Views on Outlook for Bond-Buying - Several Federal Reserve officials on Thursday agreed that the government’s troubled financial situation was hurting the economy, although finding that common ground did not lead them to concur on the best way forward for monetary policy. The officials that spoke so far on Thursday were the leaders of the Boston, Philadelphia and Dallas Feds. The diverging views on the monetary-policy outlook portrayed in the speeches highlight the ongoing uncertainty about whether the Fed will soon begin to pare its open-ended program of bond-buying. The case to wind things down was made by Charles Plosser of the Philadelphia Fed and Richard Fisher, of the Dallas Fed. For Mr. Plosser, the evidence for easing back on stimulus is clear. He told a group in Milan, Italy, that the manner in which the Fed has tied its policy actions to the evolution of the economy demands a change in course. “I believe that labor-market conditions warrant scaling back the pace of purchases as soon as our next meeting,” the official said. “Unless we see a significant reversal in current trends that jeopardizes my forecast of [a] near 7% unemployment rate by the end of this year, then I anticipate that we could end the program before year end.” Dallas’s Mr. Fisher proposed a more-targeted approach. When it comes to mortgage-bond buying, “I think we can rightly declare victory on the housing front and reef in or dial back our purchases, with the aim of eliminating them entirely as the year wears on,” the official said.

To Buy Bonds or Not to Buy: Fed Hawks, Doves Air Views - Federal Reserve officials are deeply engaged in debating when to begin dialing back an $85 billion-a-month bond buying program, but don't appear near consensus on when to pull the trigger. The presidents of the Dallas, Richmond and Philadelphia Federal Reserve banks, long skeptics of the wisdom of the bond buying, said this week that they would like to see the purchases scaled back immediately. And San Francisco Fed President John Williams, who has been enthusiastic about the merits of the program, said Thursday that he is still prepared to reduce the size of the purchases "as early as this summer." The president of the Boston Fed, meanwhile, suggested that there is a case that the Fed should be doing even more to boost the economy.

Fed’s Williams Open to Tapering Bond Purchases - The leader of the Federal Reserve Bank of San Francisco is open to cutting the central bank’s bond-buying program at some point over the next few months, provided the economy continues to grow. “It’s clear that the labor market has improved since September,” San Francisco Fed President John Williams said Thursday. “It will take further gains to convince me that the ‘substantial improvement’ test for ending our asset purchases has been met,” but if things play out as expected, “we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer,” the official said. “If all goes as hoped, we could end the purchase program sometime late this year,” Mr. Williams said. He added, however, that uncertainty surrounds the outlook, and if he is wrong about the economy, “we will adjust our purchases as appropriate depending on how the economy performs.” His comments came from the text of a speech prepared for delivery in Portland before a gathering of local financial professionals. The official spoke on a busy day for Fed officials, with a number of policy makers all speaking on the economy and the monetary policy outlook.

'The Fed Dials the Wrong Unemployment Number' - Gavyn Davies argues the Fed is targeting the wrong thing (unemployment instead of employment): ...the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed. ...The difficulty is that unemployment is declining towards the announced threshold in part because large numbers of people have left the labour force altogether as the recession has dragged on, and this probably means that the official unemployment rate is no longer acting as a consistent measuring rod for the amount of slack in the labour market. The upshot is that the Fed will probably want to keep short rates at zero until unemployment has dropped a long way below 6.5 per cent...[I]t is a distortion which the Fed cannot afford to ignore. Its mandate requires that it should aim for “maximum employment”, not “minimum unemployment on the official statistics”, which is what it risks doing under its current forward guidance. ... If the Fed is going to make a mistake -- ease too long or tighten too soon -- you can probably guess which mistake I think is worse.

Fed Watch: Fed Notes -- Gavyn Davies at the Financial Times questions the Federal Reserve's employment target:On the wider issue of general monetary policy, the behaviour of inflation and unemployment remain the key drivers, and here the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed.I agree. Davies cites research indicating that recession-driven underemployment makes the unemployment rate a poor measure of resource utilization. The policy implications:What does this imply for policy? It implies that the Fed will have a bias to keep policy aggressively easy long after the unemployment rate has fallen below 6.5 per cent, and even after it has fallen below the estimated natural rate of 5.25 to 6 per cent, provided that the inflation threshold is still intact. This is because the reserve army of disguised unemployed people will exert a downward force on inflation which will not be correctly picked up by the official unemployment statistics. See my related piece on structural (or lack thereof) unemployment here. Davies raises a often-forgotten point: Even though the Federal Reserve is turning its attention to ending quantitative easing, the timing of the first rate hike is most likely much farther off in the future.

The Problem of Central Banks With Multiple Goals and Few Tools - Post the financial crisis, the great recession and in the midst of a painfully slow recovery, economists and central bankers are moving in the direction of flexible inflation targeting, i.e., allowing for the possibility that monetary policy should pursue goals other than just price stability. More recently, and very belatedly, monetary policymakers have acknowledged the existence of a link between monetary policy and financial stability. The existence of the link implies that the Fed faces potential tradeoffs not only between inflation and unemployment, but among inflation, unemployment and financial stability. Given that financial instability implies the possibility of increased unemployment in the future, there are also potential tradeoffs between current unemployment and future unemployment. With financial stability as a goal in addition to its dual mandate, i.e., price stability and full employment, the Fed has three policy goals. How many resources, aka policy tools, does the Fed have? In terms of monetary policy per se, the Fed has one tool, either interest rates or the quantity of reserves.  Policymakers do not have the necessary regulatory tools in place. The financial industry also has a well established record of innovating to avoid regulation. Hence, the Fed and other regulatory authorities will likely continue to lag the markets on the regulatory front. Furthermore, financial regulation and supervision will not control the behavior of financial institutions that innovate to avoid regulation, operate outside the regulatory border or across political boundaries. The remote likelihood of a lasting and sufficiently robust regulatory system raises the possibility that there will be times when it is advantageous for a central bank to alter interest rate policy to reflect financial stability concerns.

Optimal Monetary Policy: Could the Next Big Idea Come from the Blogosphere? - Here is the full text of my 21st Quartz column, “This economic theory was born in the blogosphere and could save markets from collapse,” now brought home to and given my preferred title. (I am now up-to-date bringing home to all of my columns that are past the 30-day exclusive I give Quartz by contract.)   Even before I started blogging, Noah Smith told me I should write a post about NGDP targeting. This is that post. And it is also the post on “Optimal Monetary Policy” that I have been promising for some time. It was first published on February 22, 2013. Links to all my other columns can be found here.

Loose Central Bank Policies Looking Increasingly Dangerous, BIS Official Warns - It’s a refrain that is being heard more and more often, especially from central bankers: the world is expecting too much of them. The latest to take up the refrain is Jaime Caruana, general manager of the Bank for International Settlements, who warned in an unusually frank speech in London that, while the ultra-low interest rates and ultra-easy monetary policy adopted by advanced economy central banks might have been the right response to the crisis when it broke, they are looking increasingly dangerous the longer they last. “A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver,” Mr. Caruana said. “This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness.” Low rates may have helped keep banks alive and keep a roof over the heads of overextended borrowers—but they are threatening the ability of insurance and pension funds to meet their commitments, and tempting them into all kinds of wrong investment decisions in the meantime. Although he didn’t spell it out, he painted a picture of a massive and stealthy transfer of wealth from savers to borrowers.

Central banks saved world economy, now beware the fallout: IMF -(Reuters) - Central banks got it right when they saved the world economy, but their unprecedented actions risk disruptive cross-border spillovers and potentially heavy losses when the time comes to reverse course, the IMF said on Thursday. In its most detailed survey so far of the dramatic measures taken to counter the damage from the 2007-2009 financial crisis, International Monetary Fund staff repeated earlier assessments that the steps had worked but face diminishing returns. However, in new research, they also said central banks could face severe losses when they begin to withdraw the extraordinary sums of money they have pumped into financial systems around the world. Massive market bets are riding on whether the U.S. Federal Reserve and its peers can execute a graceful withdrawal from more than four years of ultra-easy monetary policy, which helped restore confidence in global growth. Central banks have pumped trillions of dollars, euro and yen into the global economy through bond-buying campaigns after interest rates were slashed close to zero. The ultra easy monetary policies have promoted critics to warn of the risk of inflation and asset price bubbles, while some developing nations have argued their richer counterparts were seeking to gain an export edge by lowering the value of their currencies. Jaime Caruana, head of the Bank for International Settlements, warned on Thursday that big central banks should not delay in winding in their economic support programs. The BIS advises global central banks. But the IMF found the benefits of unconventional measures still outweighed the potential costs in the United States and Japan, and it reserved its toughest language for politicians who fail to undertake long-overdue economic reforms.

The Sadomonetarists of Basel - Paul Krugman - The WSJ highlights a speech by Jaime Caruana, general manager of the Bank for International Settlements, warning of the dangers of easy money and the need to raise rates now to avert … something or other. And his views matter, says the Journal: he’s the mouthpiece for a global college of central bankers, almost all of whom find themselves under intense pressure from their national governments to keep things ticking over while they try to repair the economy: the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.I guess we can check the record here and see just how prescient the BIS was. What I do recall, however — which the Journal apparently doesn’t — is that the BIS has spent years warning about the dangers of low interest rates. Except that a couple of years back it was telling a completely different story about why we needed to raise rates; you see, the big danger was of imminent inflation. In fact, inflation is running below target just about everywhere. You might therefore think that the BIS would step back a bit and reconsider both its policy recommendations and the framework it uses to derive those recommendations.

Bernanke signals the Fed is uneasy with "reaching for yield" - As Merrill's junk bond index yield crossed the historical low of 5% on Thursday, some senior Fed officials are clearly becoming uneasy. Corporate credit markets are entering bubble territory (see discussion) and up until recently very little has been said on the topic by the US central bank. On Friday Ben Bernanke sent a signal to the markets that the Fed is watching the "reaching for yield" situation "particularly closely". Ben Bernanke (May 10, 2013) - ... We follow developments in markets for a wide range of assets, including public and private fixed-income instruments, corporate equities, real estate, commodities, and structured credit products, among others.  In light of the current low interest rate environment, we are watching particularly closely for instances of "reaching for yield" and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals. It is worth emphasizing that looking for historically unusual patterns or relationships in asset prices can be useful even if you believe that asset markets are generally efficient in setting prices. For the purpose of safeguarding financial stability, we are less concerned about whether a given asset price is justified in some average sense than in the possibility of a sharp move. Asset prices that are far from historically normal levels would seem to be more susceptible to such destabilizing moves.The chart below must give at least some US central bankers a reason to reflect on the current pace of monetary expansion. What "unusual patterns in valuations" will another $1.5 trillion of securities purchases create? The FOMC is likely to have at least some debate on the topic at the next meeting.

Fed Watch: Implications of Fed Tightening for Equities - Thinking further about this from Friday's Jon Hilsenrath Wall Street Journal article: Stocks and bond markets have taken off since the Fed announced in September that it would ramp up the bond-buying program, and major indexes closed at another record Friday. An abrupt or surprising end to it could send stocks and bonds in the other direction, but a delayed end could allow markets to overheat. And some officials feel they've ended other programs too soon and don't want to repeat the mistake. Although past performance is no guarantee of future performance, it strikes me that previous instances of tighter monetary policy did not trigger immediate widespread declines in equities: Just an eyeball look at past behavior suggests that equities are mostly flat in the initial stages of monetary tightening, and rise in later stages. Generally at least two years before the Fed inverts the yield curve and triggers recession. In addition, we are not expecting the Fed to begin raising rates until late 2014 or 2015. So policy is likely to remain supportive for what, at least three or four more years?Fears of an imminent policy-driven collapse in equity prices are likely greatly over-exaggerated. See also Mark Dow here.

Monetary Policy and Equity Prices at the Zero Lower Bound - A recent Wall Street Journal article by Jon Hilsenrath raises the question of what will happen to stock and bond prices when the Fed ends its bond-buying program. Tim Duy responds that "Fears of an imminent policy-driven collapse in equity prices are likely greatly over-exaggerated." Duy plots time series of the S&P500 alongside time series of the fed funds rate, noting "it strikes me that previous instances of tighter monetary policy did not trigger immediate widespread declines in equities." Of course, these previous instances of tighter monetary policy occurred away from the zero lower bound (ZLB), with the target fed funds rate well above zero.  How do equity prices react to monetary policy at the ZLB? This is the subject of a Federal Reserve Discussion Series paper by Michael Kiley,  The key finding is: Implementation of our identification strategy suggests that, prior to 2009, monetary policy actions that would reduce the 10-year Treasury yield by 100 basis points were associated with a 6- to 9-percent increase in equity prices. In contrast, similar-sized declines in the 10-year Treasury yield associated with monetary policy actions since the end of 2008 have been accompanied by increases in equity prices of 1-½ to 3-percent - a notably smaller association.

Fed’s Kocherlakota Sees No Benefit to Financial Stability From Tighter Policy - - WSJ: Minneapolis Federal Reserve Bank President Narayana Kocherlakota stressed the importance of the Fed maintaining low interest rates and a substantial stimulus program as the economy still undergoes what he called a “not-so-great recovery,” in prepared remarks Friday. In the comments made before a University of Chicago conference, he warned that tightening monetary policy to improve financial stability would yield “tangible and significant” losses for the U.S. economy while providing only “speculative and slight” gains. Mr. Kocherlakota, who isn’t a voting member this year of the policy-setting Federal Open Market Committee, reiterated his dovish position over the past few months and now is stressing that the central bank keep its accommodative tap open and stimulus flowing to a lackluster economy. “Financial stability considerations provide little support for reducing accommodation at this time,” Mr. Kocherlakota said. The remarks were focused on important tests for central bankers. Mr. Kocherlakota said the greatest challenge is the changes in the nature of supply and demand for assets since 2007. He said investors view far fewer assets as safe, with Americans having less confidence in U.S. residential real estate and European sovereign debt.

Fed Watch: Lumping Everything into the Wealth Effect -  After posting my review of Martin Feldstein's WSJ op-ed, I waded through Dallas Federal Reserve President Richard Fisher's latest speech and found this:According to this plot, by driving rates to historical lows along the entire length of the yield curve, investors will rebalance their portfolios and reach out to riskier assets, providing the financial wherewithal for businesses to increase capital expenditures and reengage workers, expand payrolls and regenerate consumption. Rising prices of bonds, stocks and other financial instruments will bolster consumer confidence. The CliffsNotes account of this play has the widely heralded “wealth effect” paving the way for economic expansion, thus saving the day.The latter outcome posits that the wealth effect is limited, for two possible reasons. One is that our continued purchases of Treasuries are having decreasing effects on private borrowing costs, given how low long-term Treasury rates already are. Another is that the uncertainty resulting from fiscal tomfoolery is a serious obstacle to restoring full employment.  Cheap capital inures to the benefit of the Warren Buffetts, who can discount lower hurdle rates to achieve their investors’ expectations, accumulating holdings without necessarily expanding employment or the wealth of the overall economy.Is it just me, or is Fisher being explicitly derisive about the wealth effect? And when did we start lumping all the channels of monetary policy into the "wealth effect"? The wealth effect is but one channel of monetary policy. See something like this graphic from Frederick Mishkin's money and banking textbook:

The myth of liquidity and bubbles in financial markets - Gillian Tett at the Financial Times wonders today about how long the stock market rally will continue. Her argument is that we see data that are at odds with historical norms: Her explanation:  "It is easy to identify the reason for this: as this data has gone haywire in the past couple of years, western central banks have been unleashing an estimated $7tn worth of quantitative easing. This has lowered interest rates on government bonds, forcing investors to search elsewhere for yield." So it is the Central Banks and quantitative easing that is supporting the behavior of financial markets and we need to worry about how sustainable it will be. Gillian Tett refers to the 2003-2007 experience when we witnessed something similar and we know how it ended. This is now a common argument and a concern, that the behavior of central banks and the enormous amount of liquidity that they are introducing in financial markets is simply creating mispricing and bubbles in financial markets. While it is possible that periods of low interest rate create behavior in financial markets that is associated to bubbles and potential instability, the argument that puts all the burden in central banks and liquidity is simply wrong. Let me explain.

Too Much Talk About Liquidity - Paul Krugman -- Antonio Fatas is annoyed at Gillian Tett, who talks to the I-see-bubbles crowd and assumes that they have The Truth — namely, that those crazy central banks are flooding the world with liquidity, driving asset prices to crazy levels, and it will all end in terrible grief. Pretty much the same discussion we’ve been having about the armageddon hedgies. As Fatas says, it’s hard to see what exactly in the data supports this view. Short-term interest rates are near zero because the economy is so depressed, and will stay that way for a long time. Long-term rates are low because people, rightly, expect short-term rates to stay low for a long time. What about stocks? Here’s profits versus the S&P 500: Does this shout “bubble” to you? Now, there are some real puzzles here. Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)

The Fed is not “Printing Money.” It’s Retiring Bonds and Issuing Reserves. Mark Dow had a great post the other day: There is zero correlation between the Fed printing and the money supply. Deal with it. He points out (emphasis mine): From 1981 to 2006 total credit assets held by US financial institutions grew by $32.3 trillion (744%). How much do you think bank reserves at the Federal Reserve grew by over that same period? They fell by $6.5 billion. As he says: 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 this week, even many of the Titans of finance and economics have it wrong. He’s obviously been reading Manmohan Singh and Peter Stella , who add: In fact, total commercial bank reserves at the Federal Reserve amounted to only $18.7 billion in 2006, less than the corresponding amount, in nominal terms, held by banks in 1951. S&S also point out (Table 1 and Figure 1) what we’ve known for decades but many seem unwilling to admit: since WWII, reserve levels have had approximately zero correlation with inflation/price levels.

As a Reminder, the Fed Is NOT Printing Money -- Yes that's right. The Fed is NOT printing money. It is 'retiring Treasuries' and 'issuing Reserves.' And everyone knows that Reserves are benign, if not almost meaningless accounting entities.   Banks just like to collect them.  Like Pokémon cards.  So implies the AngryBear amongst others. And Mark Dow shows that there is zero correlation between the Fed printing money and the money supply.  And so 'deal with it.'  Hey rube, you obviously don't understand the difference between 'liquidity' and 'credit.' I thought it was cute that the study went back to 1986, long before the Fed had to resort to  Quantitative Easing, and expanding its Balance Sheet as they are doing today.   And they are doing it on a continuing basis, and not as an unusual action with regard to secular and isolated liquidity problems.  Unless you want to count chronic insolvency as a liquidity problem.

Harpooning Ben Bernanke - Paul Krugman - Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”. I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

Look at Japan. Look at the euro zone. And the GOP wants the Fed to be more like the ECB?  Republicans should pay close attention to what’s happening in Japan, where the Bank of Japan’s new bond-buying program is already bearing fruit. As the Financial Times reports, ”Japan’s economy grew at the fastest pace among Group of Seven countries last quarter, with solid growth in consumer spending and exports suggesting the expansionary ‘Abenomics’ that has ignited a historic stock market rally is also lifting real output.” The US central bank is also engaged in a bond-buying program. It may not have sparked a boom, but it has done a fair job of offsetting near-term fiscal drag from the fiscal cliff tax hikes and sequestration. For instance: Even though jobless claims have bounced up last week, the four-week moving average remained at the lowest levels of the expansion.  Now US congressman Kevin Brady — an important GOP voice on monetary policy — wants to use the Fed’s 100th anniversary as an opportunity to formally review the central bank’s performance and recommend possible changes. While his proposal for a “centennial commission” has a broad and open mandate, Brady himself is a hard money guy who favors a big role for gold in monetary policy and seems to think the ECB would be a good model for the Fed. Of course, as you may have heard, the euro zone is now in its longest ever recession. That represents a stunning, calamitous failure by the ECB.

Retail Data Highlight Fed Inflation Dilemma - April retail spending data had within in it an example of the dilemma the Federal Reserve currently faces. Retail spending last month rose a better-than-expected 0.1%. It would have risen even more if not for a huge drop in gasoline store sales, a category that booked its biggest decline since December 2008. Falling gasoline prices may be tough for those involved in the energy business, but they’re good for consumers. Money households don’t have to spend on fuel is money that can be spent on other goods and services, which in turn can help boost growth. The inflation front is where things get trickier. Falling gasoline prices also pull down headline inflation. Normally, that’s welcome. But now? Not so much. Price pressures have ebbed to a degree that inflation, as measured by the Fed’s favored personal consumption expenditures price index, is trending well under the Fed’s 2% target. Year over year, this measure was up 1% as of March. As the decline in energy prices winds its way through the data, it’s likely headline inflation will cool even more. That puts the Fed in a challenging position: many officials have placed equal importance in defending the 2% from both the high and low side.

Fed Watch: Busy Data Day -- Something of a busy data day.  Start with the surprise jump in initial unemployment claims: I don't think the jump is out of line with recent volatility, nor does it suggests that the general downtrend is broken. Next we have a disappointing read on housing starts, primarily due to a drop in the volatile multi-family sector: I would take comfort in the opposite move in building permits, which will show up as future starts: The regional manufacturing surveys continue to disappoint, with the Philly Fed survey the latest to fall short of expectations. Calculated Risk has more, and notes that the incoming regional surveys suggest the next national ISM report will be weak. Manufacturing looks likely then to continue bouncing along just above the expansion/contraction mark: One wonders if manufacturing is really slowing, or if this is a diffusion index issue. We can't tell from the index if the expanding firms are growing very quickly or slowly. We do know that while industrial production dipped in April, again there is nothing to suggest it is rolling over: The CPI release revealed that inflation remains nonexistent. Indeed, core-CPI tracked lower: This is what I think the Fed would find as the most important indicator of the day. One would think that low inflation should give the Fed pause in any consideration of tapering quantitative easing in the near future. That said, again we seem to have Federal Reserve policymakers who are discounting the low inflation numbers. San Francisco Federal Reserve President John Williams, in a speech today: I expect that the decline in inflation will prove to be temporary, and that inflation will climb slowly, but stay below the Fed’s 2 percent longer-run target over the next few years.

Inflation Madness - Paul Krugman -- One thing I gather from various economic discussions as well as some of the trolls on this blog is that there’s a widespread view that the kind of monetary policy I advocate — which includes a higher inflation target — isn’t just wrong; it’s madness. It is, I am told in no uncertain terms, proof that I am no longer a real economist, if I ever was. So, a brief list of well-known economists who have been pro-inflation under circumstances like those we face today:

  • Greg Mankiw and Ken Rogoff.
  • Olivier Blanchard, the chief economist of the IMF.
  • Mike Woodford, arguably our leading macroeconomic theorist.
  • Lars Svensson, the deputy governor of the Riksbank, although on his way out because his colleagues disagree.
  • Ben Bernanke, back when he was lecturing the Japanese.
  • If you think this is a terrible idea, that’s your right. But if you imagine that it’s outlandish and somehow uneconomistic, you’re just ignorant.

Most Economists Back Yellen’s Inflation-Fighting Credentials - Janet Yellen is by far the most likely successor to Federal Reserve Chairman Ben Bernanke, according to economists in the latest Wall Street Journal forecasting survey, and most agree that she is sufficiently resistant to inflation to be a successful leader of the central bank. Twenty-nine of 38 who answered the question said Ms. Yellen is the mostly likely candidate. Two economists thought it was former Treasury Secretary Timothy Geithner and one put New York Fed President William Dudley at the top of the list. Six respondents chose the generic “someone else,” with four of those writing in Mr. Bernanke, though it has been widely reported that the chairman isn’t seeking another term. In an open-ended question, economists also were asked who would make the best Fed chairman. Ms. Yellen was the most popular individual candidate with eight votes, but there were many choices. Coming in second with six votes was Stanford University economist John Taylor, whose Republican credentials make him an extremely unlikely pick for President Barack Obama. The only other people receiving multiple votes were Mr. Bernanke, departing Bank of Israel governor Stanley Fischer and former Fed vice chairs Roger Ferguson and Donald Kohn.

Key Measures show low and falling inflation in April - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.8% annualized rate) in April. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.0% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.4% (-4.3% annualized rate) in April. The CPI less food and energy increased 0.1% (0.6% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for April here. Motor fuel declined at a 64% annualized rate in April.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.6%, and the CPI less food and energy rose 1.7%. Core PCE is for March and increased 1.1% year-over-year. On a monthly basis, median CPI was at 1.8% annualized, trimmed-mean CPI was at 1.0% annualized, and core CPI increased 0.6% annualized. Also core PCE for March increased 0.4% annualized.

Low Demand, Low Inflation - Check out the tanking rate of inflation, as per the BLS this AM.  The index has actually declined over the past two months, and prices are up only 1.1% over the past year.  As the figure reveals, with the exception of February, yr-over-yr price growth in overall inflation has mostly been decelerating since late last year. Falling energy costs drove the slide over the last few months–core inflation, which exlcudes volitile food and energy, has been declerating more slowly.  Also, gas prices have reversed course over the last week or so. But the message here is that the underlying economy remains considerably weaker than you’d know about if you just tracked the stock market and corporate profits.  Low inflation at a time like this also slows down the deleverging process regarding household debt, since higher prices erode nominal debt burdens.  At any rate, I’m sure the Fed is watching and I suspect and hope that if this continues, they’ll push out their plans for unwinding their monetary stimulus.

What US Inflation? - From Bloomberg: Wholesale prices in the U.S. dropped in April by the most in three years, reflecting a decrease in fuel costs that is helping underpin profits.  The producer-price index declined 0.7 percent, the biggest decrease since February 2010, after falling 0.6 percent in March, according to a Labor Department report released today in Washington. The median estimate in a Bloomberg survey of 73 economists projected the index would decline 0.6 percent. So-called core wholesale inflation, which excludes often-volatile food and energy prices, climbed 0.1 percent.  Slow growth in the U.S. and abroad is holding input-price gains in check for American factories. Absent a surge in inflation, policy makers at the Federal Reserve have the option of weighing whether the U.S. economic expansion needs more stimulus to pick up. “We’ve seen a moderation in inflation across the board, given the weak demand environment everywhere

Treasury Inflation Expectations Are Near Eight-Month Low - Treasury yields indicated traders’ expectations for inflation was near the lowest in eight months before a government report that economists said will show consumer prices dropped in April.  The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities was 2.28 percentage points after narrowing to 2.24 percentage points on May 9, the least since September. Benchmark 10-year securities declined as Federal Reserve Bank of Philadelphia President Charles Plosser reiterated his view that the central bank should end bond purchases this year. Economists say separate reports today will show U.S. housing starts fell in April, while manufacturing in the Philadelphia region expanded.

Data Quirks May Ease Fed’s Mind on Inflation Slowdown - Even though inflation measures have fallen sharply in recent months, Federal Reserve officials aren’t ringing alarm bells about it as they have done in the past. Fed officials have said they take comfort that the public’s expectation of future inflation, as registered in surveys of households and bond markets, has remained stable. That implies actual inflation will stop falling. Another possible reason for their relative calm: Quirks in economic data. One set of inflation measures, which Fed watches very closely, is down a lot more than another set of inflation measures, which the public watches closely. The Fed tends to favor an inflation index produced by the Commerce Department’s Bureau of Economic Analysis called the personal consumption expenditures, or PCE, price index. That is the index that the Fed references in its formal statement of objectives and it is the index that Fed officials formally forecast every three months. PCE price indexes have been exceptionally soft in the past few months. In March, the latest month for which there are data, the overall index was up 0.97% from a year ago. The core index, which strips out volatile food and energy prices and tends to give a more stable view of where inflation is heading, was up 1.13%. The Labor Department’s consumer price index, is followed more closely by the public in part because that’s what determines cost of living increases for programs like Social Security. = The latest CPI data, released Thursday, showed the headline CPI was up 1.1% in April from a year ago and the non-food, non-energy index was up 1.7%.

Inflation Continues to Make Itself Scarce - WSJ  - Ten trillion dollars just doesn't buy what it used to. Diminished bang for the buck, euro, pound or yen usually is due to higher prices. The world's central banks have the opposite problem, though—expanding balance sheets aren't stoking inflation any longer. At one point, that would have been seen as a positive development, but the trend now has some economists concerned. This week will see the release of U.S. producer and consumer price indexes for April. Both will show further deceleration to 0.7% and 1.4% year on year, respectively, according to FactSet. Consumer prices are expanding at their slowest pace since summer 2010, when the Federal Reserve launched "QE2," its second round of bond buying. It isn't just the U.S. seeing disinflation. Consumer prices in the euro zone rose by just 1.73% year on year in March, the slowest since August 2010. Japan's renewed monetary exertions of recent months haven't yet reversed its outright deflation. Even Chinese inflation has dropped. J.P. Morgan Chase economists pull all these data points together into an unofficial global inflation measure. Over the past two years, it has dropped 1.5 percentage points to 2.4%, year on year, in the first quarter of 2013. Watching a slowdown in purchasing managers' indexes from around the world, they see a risk of it dropping to 1.9% by the fourth quarter, the lowest in decades apart from 2009's global financial collapse.

Surprise! Inflation is too low almost everywhere on earth - The leading economies of the industrialized nations may not have a lot in common, but they are all afflicted by this: Inflation is too low.That was the astoundingly consistent theme out of a range of data released Thursday. Prices rose 1.1 percent over the 12 months that ended in April in Germany, 0.8 percent in France and 1.3 percent in Italy. In the United States, the consumer price index rose 1.1 percent over the last year. Japan reported surprisingly strong first-quarter growth this week as its aggressive new stimulus policies took effect, but that came against a backdrop of continued falling prices; its consumer price index fell 0.9 percent in the year that ended in March.The leading central banks at this point are all unified on this: 2 percent is the amount of annual inflation they are aiming for. And they are all failing in that mission, and nearly all failing in the same direction. The below-trend inflation is partly attributable to falling commodities prices, and just as policy shouldn’t overreact when a short-term commodity blip causes inflation, it shouldn’t make the same mistake in reverse. But even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece.

Fed’s Raskin: Still Long Way From Feeling Like Healthy Economy - The U.S. economy continues to recover from the 2008 financial crisis and the deep recession that followed, but it still has a long way to go until it feels “like a healthy economy,” Federal Reserve governor Sarah Bloom Raskin said in a speech on Thursday. Ms. Raskin, speaking to a group of Washington-area economists, offered a broad overview of the current state of the economy and the outlook ahead, concluding that there is likely to be “modest improvement” in the pace of recovery over the next two years, accompanied by a “modest” fall in the unemployment rate. The jobless rate fell to 7.5% in April. The jobless rate, however, remains “well above the level that the [Federal Open Market] Committee thinks can be sustained once a full recovery has been achieved,” Ms. Raskin said, according to a copy of her prepared remarks. She also noted that the number of people who have been unemployed for 27 weeks or more remains at a historically high level. She said that recent data show that the recovery “continues to gain traction,” but she also noted that improvement hasn’t been even across all sectors of the economy. Like many of her colleagues, she highlighted housing as a bright spot. On the other hand, “overall wage growth has been anemic, and many households have not seen their circumstances improve materially,” she said.

Fed’s Rosengren: Government Fiscal Policy Big Drag on Economy- The economy would benefit much more from the Federal Reserve‘s aggressive monetary policy actions if not for the significant headwinds being created by government taxation and spending policies, a central bank official said Thursday. The policy maker, Federal Reserve Bank of Boston President Eric Rosengren, said some of the economic weakness many see as a sign of ineffective monetary policy is, in fact, created by the headwinds arising from the government’s troubled financial situation. He believes fiscal policy is too austere for the current state of the economy, and said the drag created by the government indicates there may be room for the Fed to be even more aggressive in its efforts to spur better rates of growth and keep inflation at the official target of 2%, he said. “Contractionary fiscal policy will in the near term place downward pressure on inflation and upward pressure on unemployment,” Mr. Rosengren said. He also said the Fed’s inability to keep price pressures near target and its struggle to lower the unemployment rate “can be attributed to the emergence of more fiscal restraint than might have been expected” based on the historical experience of recovery efforts. The headwinds created by government are something the Fed needs to bear in mind as it charts the course for monetary policy, the official said. Mr. Rosengren said very weak inflation gains and slow declines in unemployment “could lead one to argue that policy has not been sufficiently accommodative.” “Monetary policy has been quite effective in offsetting the contractionary effects of recent fiscal policies,” and the economy would be doing better if the Fed wasn’t having to deal with the drag created by the government, Mr. Rosengren said.

PIMCO sees U.S. growth around 2 pct over next 3-5 years (Reuters) - U.S. economic growth will not be "much greater" than 2 percent over the next three to five years, while global inflation will likely pick up, Pimco, the giant bond firm, said on Tuesday in its investment outlook report. Inflation may become "higher and less stable" globally over the next three to five years, while China's growth will remain in the range of 6 to 7.5 percent, Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, said in the firm's Secular Outlook. In light of its growth horizon and view that central banks have "distorted" the pricing of assets, El-Erian said Pimco will continue to reduce exposure to risky assets. "Especially with ever-elevated prices, and absent a favorable growth shift, we will continue to bring down risk postures of portfolios," El-Erian said. The firm's Pimco Total Return Fund, the world's largest mutual fund, increased its allocation of U.S. Treasuries holdings to the highest level in over a year in April, to 39 percent from 33 percent in March, data from Pimco's website showed last week.

Is inequality hurting the US economic recovery? - Stock markets and corporate profits are up, wage growth anemic. So Fed Governor Sarah Bloom Raskin is wondering whether the “large and increasing amount of inequality in income and wealth” is hampering the current US economic recovery and perhaps “pose a significant headwind years to come.” The concern echoes that of economist Robert Gordon, whose recent paper, Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, highlights inequality as one of six headwinds potentially reducing long-run economic growth. But which way does the causality run? In a speech yesterday, Raskin points to globalization and automation as reasons why some two-thirds of all job losses in the recession were in middle-wage occupations, but those occupations have accounted for less than one-fourth of the job growth during the recovery. By contrast, lower-wage occupations have accounted for only one-fifth of job losses during the recession but more than one-half of total job gains during the recovery. As such, Raskin says “the earnings potential for many households likely remains below what they had anticipated in the years before the recession.” So the middle part of the labor market is being hollowed out, what economists call “job polarization.”

Fed Officials Looking Closely at Student Debt - Federal Reserve officials are paying close attention to America’s mounting student debt load. The upward march of student loan borrowing is “something we are keeping an eye on and thinking quite carefully about,” Fed governor Sarah Bloom Raskin said in response to an audience question Thursday. The latest household debt and credit survey by the New York Fed found that outstanding student loan balances rose by $20 billion during the first three months of 2013, to $986 billion as of March 31. “This growing amount of student debt could be coming at a price for other areas of growth in the economy,” Ms. Raskin said. Growing student debt burdens, she said, could lead parents and families to restrain their own spending because they are guaranteeing or actually helping to pay off this debt. Alternately, she said, some hypothesize that big loan balances are “crowding out” household formation – that is, causing young people with big debt to pay off to delay getting married, buying houses and having children until they pay off their loans. The borrowing will “clearly affect [the borrower's] behavior in the future,” San Francisco Fed President John Williams said Thursday, also expressing concern about the issue.

Conference Board Leading Economic Index: April Rebound Suggests Continuing Economic Expansion -  The Conference Board Leading Economic Index (LEI) for April was released this morning. The index rose 0.6 percent to 95.0 (2004 = 100), a welcome improvement over the -0.2 percent last month, which was a downward revision from -0.1 percent. The consensus was for a 0.3 percent increase. Today's press release highlights a "continuing economic expansion with some upside potential."  Here first is an overview of today's release from the LEI technical notes:  The Conference Board LEI for the U.S. increased in April after a small decline the month before. Large positive contributions from building permits, initial claims for unemployment insurance (inverted) and all the financial components offset negative contributions from consumer expectations, average workweek in manufacturing and ISM® new orders. In the six-month period ending April 2013, the leading economic index increased 1.7 percent (about a 3.5 percent annual rate), faster than the growth of 0.5 percent (about a 1.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.  [Full notes in PDF format]

Treasury Yields Climb the Most Since March as Fed Stokes - Treasury 10-year note yields rose the most in two months as signs the U.S. economy is improving stoked speculation that there is no need for the Federal Reserve to ramp up monetary stimulus. The benchmark notes fell, pushing yields to the highest level in six weeks, as the Fed and other central banks pump cash into their economies or cut interest rates, prompting money managers to seek higher-yielding assets. Stronger-than-forecast employment gains reported last week and fewer-than-projected jobless claims helped the dollar rally versus the yen after passing the 100 level on May 9. Consumer sentiment this month may have reached the highest level this year, according to a Bloomberg News survey of economists.

U.S. to Hit Debt Ceiling, but Has Some Breathing Room - The U.S. government will bump up against the federal debt limit this weekend, though a series of emergency steps will allow it to continue paying all of the nation’s bills until at least early September, Treasury Secretary Jacob Lew said Friday. “Nevertheless, Congress should act sooner rather than later to protect America’s good credit and avoid the potentially catastrophic consequences of failing to act until it is too late,” Mr. Lew said in a letter to House and Senate leaders. Lawmakers in January agreed to suspend the debt ceiling until May 18, allowing the White House and Congress negotiate new spending and tax plans. But the sides haven’t made a deal, so on May 19 the debt limit will be restored to its previous level, plus the amount of borrowing that occurred while the limit was suspended. That means that the Treasury will be up against the limit on Sunday. Mr. Lew said the Treasury would be able to use the same extraordinary measures that the department deployed during the last debt-ceiling standoff at the start of the year. Those include halting investments in government worker retiree funds and drawing down some accounts. “Treasury is not able to provide a specific estimate of how long the extraordinary measures will last,” Mr. Lew said.

The Debt Ceiling Is Back - While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world's central bankers and out of the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out. Such a deadline will likely be hit in just over three months.

Shrinking deficit charges the political battlefield - Debt and deficits have dominated US politics ever since, from the tax deal of December 2010 to the debt ceiling row in August 2011 and on to the fiscal cliff at the end of 2012. But even though Washington is gearing up for another budget row – over next year’s spending bills and the debt ceiling again – a crucial change in circumstances is under way. The US deficit is on the decline and the pace of that decline is remarkably rapid. International Monetary Fund figures show the US budget deficit peaked at more than 13 per cent of gross domestic product in 2009. According to the latest estimates from Goldman Sachs, it was running at only 4.5 per cent of GDP in the first quarter of 2013. The main reason for the change is a resurgence in government revenues. They were up 16 per cent in the first seven months of the US fiscal year, mainly because of a recovery in the economy and asset prices. There will be more revenues to come from this year’s tax increase on the highest incomes. But what has happened on the spending side is almost as noteworthy. Outlays are actually falling – down by 2 per cent in the first seven months of the fiscal year – even before adjusting for inflation. Military spending, unemployment benefits and other discretionary spending are all down substantially, and the $85bn in across-the-board sequester cuts due in the 2013 fiscal year are only just starting. When the Congressional Budget Office publishes updated budget projections this week, the result will be clear: It is likely to predict a substantially lower path for the deficit. If the sequester is sustained, the deficit could be back to 3 per cent of GDP within a couple of years – the same level as before the recession.

As Usual, “No One” Saw The Shrinking Budget Defecate - "Rising government revenue from tax collections and bailout paybacks are shrinking the federal deficit faster than expected, delaying the point when the government will reach the so-called debt ceiling and altering the budget debate in Washington." via Falling Deficit Alters Debate – Yahoo! Finance. I sent the following email to the Wall Street Journal’s Damian Paletta, the author of this piece regarding the old “unexpected” refrain. Dear Mr. Paletta: Mainstream pundits did not foresee the shrinking budget defecate. When have they ever foreseen anything? The fact that this would happen was so obvious that you would have to be a blind turd not to have foreseen it. I am not a blind turd. I began forecasting it late last year when I saw that the fecal cliff would be allowed to go through. I also repeatedly stated publicly, not just for my subscribers, that it would be bullish because the reduction in Treasury supply would make more Fedbucks available for stocks, and that stocks would melt up, which is precisely what has happened. You guys keep talking to the same old know-nothing fartbags and report that “no one expected this.” The failure of mainstream media journalists to talk to members of the alternative media who have strong track records of prescience on economic and financial trends and turning points is central to the financial crisis. The unwillingness of you and your cohorts to be critical of mainstream sources, who are NEVER right, is part of the problem.

More American Exceptionalism: Drowning the Baby in the Bathwater - The OECD has finally updated their national account data with 2011 info for most countries, so I thought I’d update this post from a couple of years ago. If you’re thinking that the current (overblown) hoo-ra-ra about U.S. government deficits is a result of too much spending, or that U.S. taxes are insanely high and always going up, you might want to think again (click for larger): While the U.S. number is up from its low or 24.1% in 2009, it’s still hovering at the bottom of the OECD league table. Got tipping points?

How the Case for Austerity Has Crumbled by Paul Krugman - In normal times, an arithmetic mistake in an economics paper would be a complete nonevent as far as the wider world was concerned. But in April 2013, the discovery of such a mistake—actually, a coding error in a spreadsheet, coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines. Looking back, we might even conclude that it changed the course of policy. Why? Because the paper in question, “Growth in a Time of Debt,” by the Harvard economists Carmen Reinhart and Kenneth Rogoff, had acquired touchstone status in the debate over economic policy. Ever since the paper was first circulated, austerians—advocates of fiscal austerity, of immediate sharp cuts in government spending—had cited its alleged findings to defend their position and attack their critics. Again and again, suggestions that, as John Maynard Keynes once argued, “the boom, not the slump, is the right time for austerity”—that cuts should wait until economies were stronger—were met with declarations that Reinhart and Rogoff had shown that waiting would be disastrous, that economies fall off a cliff once government debt exceeds 90 percent of GDP.

Why do people support austerity? A conjecture. - South European economists, my evidence is anecdotal, but every single Italian, Spanish, and Greek economist I've talked to has seemed very down on the notion of fiscal stimulus, and highly disdainful of Paul Krugman. Alberto Alesina seems to be an exemplar of their thinking. When discussing stimulus spending, they tend to predict that this spending will be captured by special interests and wasted. Monetary easing receives scarcely more respect.   I see a very similar attitude among long-time Western observers of Japan (called "Japan hands"), who are mostly very skeptical of Abenomics, and very focused on structural issues. As for American opponents of stabilization policy, these include John Cochrane, who pooh-poohs both fiscal and monetary stimulus, saying that we need to get rid of "sand in the gears" of our institutions in order to promote growth. They also include Tyler Cowen, who often disparages Keynesianism and who often writes about the need to improve our political institutions.What unites all these and other "austerians"? There are several possibilities. One is that austerity is a good idea, and that these smart people recognize that it is a good idea. Another is that these are political conservatives who are worried that countercyclical macroeconomic policy will redistribute income and regulatory privilege away from themselves or their favored social groups. A third is that the psychological impulse toward austerity - tighten your belt in bad times! - is simply very very strong among all humans. And a fourth possibility, favored by Paul Krugman, is the idea that austerity is perceived as morally virtuous. I want to suggest a fifth possibility. I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

Mr. President, End Debt Ceiling Hostage-taking for Good! On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part: In the event that the debt of the United States Government reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients. Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October.

The Partial Faith and Dubious Credit Act - Republicans, especially House Republicans, have been using the national debt ceiling as a kind of cudgel to gain advantage in the budget wars. This game of chicken got a bit scary in August 2011 when the country came within a hair's breadth of defaulting on the national debt. The hard-fought New Year's Day agreement between the two parties postponed the next day of reckoning to May 18, which is now almost upon us. House Republicans are now stirring the pot again with H.R. 807, which should really be called the "Partial Faith and Dubious Credit Act." The bill's central idea is to assure owners of Treasury debt instruments by giving their principal and interest payments priority over all other payments that the U.S. government is obligated to make. (Though the latest version also prioritizes Social Security checks. Hey, this is politics.) Under H.R. 807, should a binding debt limit preclude meeting all federal obligations, Treasury bills and Social Security checks would be safe. But Medicare bills, wages of soldiers and air-traffic controllers, unemployment benefits and the like might not be.  Does that sound like responsible financial practice to you? It shouldn't. Suppose you made every mortgage payment in full and on time but failed to make the minimum required payments on your credit cards and stiffed the automobile dealer entirely. Would your credit rating suffer? Of course. So would the nation's. If the provisions of H.R. 807 ever came into effect, the law could potentially turn the United States of America into deadbeat nation.

Pentagon Furlough of 680,000 Seeks to Save $1.8 Billion - The Pentagon is ordering furloughs of 680,000 civilian workers in an effort to save $1.8 billion of the $37 billion in spending cuts it must make this year. Defense Secretary Chuck Hagel announced yesterday that most of the Defense Department’s civilian employees will face 11 days of unpaid leave, one day a week starting on July 8 and continuing through September. The Defense Department “did everything we could” to avert furloughs, Hagel told workers at a Pentagon facility in Alexandria, Virginia. That includes “sharp cuts in the training and maintenance of our operating forces -- cutbacks that are seriously harming military readiness,” Hagel said in a 10-page memo released as he spoke. While Hagel said he will try to reduce the number of unpaid days later in the year, he made no promises and said more furloughs may be required next year if the budget cuts, called sequestration, continue. “Major budgetary shortfalls drive the basic furlough decision,” with $20 billion of the $37 billion in cuts falling on operations and maintenance accounts, Hagel said in the memo. Fuel-cost increases that were greater than expected have compounded the shortages in accounts that also account for civilian pay, Hagel said.

C.B.O. Cuts 2013 Deficit Estimate by 24% -  Since the recession ended four years ago, the federal budget deficit has topped $1 trillion every year. But now the government’s annual deficit is shrinking far faster than anyone in Washington expected, and perhaps even faster than many economists think is advisable for the health of the economy. That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.  The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

US deficit falls faster than expected - The US budget deficit is declining faster than expected as the rebound of the world’s largest economy helps the government collect more revenue from businesses, households and the two mortgage companies it rescued in the financial crisis. The brighter fiscal outlook comes as other advanced economies are struggling to reduce their deficits through drastic spending cuts and tax rises at a time of weak or negative growth. Growth figures to be released on Wednesday are expected to show that the 17-country eurozone contracted again. New figures released by the non-partisan Congressional Budget Office showed the US budget deficit falling to $642bn, or 4 per cent of gross domestic product. The CBO figures mark a $203bn improvement over its earlier projection only three months ago and a sharp reduction compared with the $1.1tn deficit of 2012, or 7 per cent of GDP. The CBO predicted the deficit would decrease further to 3.4 per cent of GDP in fiscal 2014 and 2.1 per cent the year after, before it starts rising again. The figures were released as the New York Fed said households were continuing to reduce debt, by $110bn in the first quarter of the year. The number of loans that are more than 90 days behind on a payment also fell from 6.3 per cent to 6 per cent. The figures show the improvement in household finances, but also suggest that consumers will only increase their spending slowly.

CBO Update: Deficit Shrinking Rapidly - The Congressional Budget Office (CBO) released their new Updated Budget Projections: Fiscal Years 2013 to 2023 If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, the Congressional Budget Office (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. For the current fiscal year, the CBO was projecting a deficit of 5.3%, and they are now projecting a deficit of 4.0%.  This is down sharply from 7.0% last year.  And the CBO expects the deficit to fall to 2.1% of GDP in 2015.This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.  The rapidly declining deficit might provide policymakers some room to alter the ill-conceived sequestration budget cuts. But at the least, this takes all short term (next 2 to 3 years) deficit reduction proposals off the table.   After 2015, the deficit will start to increase again according to the CBO, but as I've noted before, we really don't want to reduce the deficit much faster than this path over the next few years, because that will be too much of a drag on the economy.

Obama Student Loan Policy Reaping $51 Billion Profit - The Obama administration is forecast to turn a record $51 billion profit this year from student loan borrowers, a sum greater than the earnings of the nation's most profitable companies and roughly equal to the combined net income of the four largest U.S. banks by assets. Figures made public Tuesday by the Congressional Budget Office show that the nonpartisan agency increased its 2013 fiscal year profit forecast for the Department of Education by 43 percent to $50.6 billion from its February estimate of $35.5 billion. The estimated increase in the Education Department's earnings from student borrowers and their families may cause a political firestorm in Washington, where members of Congress and Obama administration officials thus far have appeared content to allow students to line government coffers. The Education Department has generated nearly $120 billion in profit off student borrowers over the last five fiscal years, budget documents show, thanks to record relative interest rates on loans as well as the agency's aggressive efforts to collect defaulted debt. Representatives of the Education Department and Congressional Budget Office could not be reached for comment after normal business hours.

Fiscal consolidation, American style - THE Congressional Budget Office released an updated budget outlook today. Here's the big news: If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, the Congressional Budget Office (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. The 4% of GDP deficit forecast for 2013 is even more remarkable when one notes that the figure for 2012 was 7%. That's a breathtaking pace of fiscal consolidation. CBO reckons that the deficit will continue to fall and will drop to 2.1% of GDP in 2015. Public debt as a share of the economy is also forecast to begin falling from next year. The CBO thinks that deficits will begin rising again from 2016 through 2023, and they might. But CBO guesses that the biggest cause of increasing deficit will be the impact of rising interest rates on interest costs. It forecasts that the yield on the 10-year Treasury will average 4.5% between 2015-2018. That doesn't seem unreasonable looking at Treasury rates over the past generation. But yields have rarely been anywhere close to that level over the past decade. Overall one has to conclude that pundits and politicians alike dramatically overstated the challenge of bringing down American borrowing and stabilising American public debt.

About That Debt Crisis? Never Mind, by Paul Krugman: OK, another toe dipped in reality. The new CBO numbers are out, and they scream “debt crisis? What debt crisis?” Here’s the actual and projected ratio of federal debt to GDP: Yes, debt rose substantially in the face of economic crisis — which is what is supposed to happen. But runaway deficits? Not a hint.Yes, there are longer-term issues of health costs and demographics. As always, however, these have no relevance to what we should be doing now — and it’s far from clear why they should even be a priority for discussion. As I’ve written before, the VSP consensus seems to be that to avoid the possibility of future benefit cuts, we must commit ourselves now now now to … future cuts in benefits.  Why, it’s almost as if the real goal was to make sure that benefits get cut even if the fiscal outlook improves.Meanwhile, our policy discourse has been dominated for years by what turns out to be a false alarm. To the millions of Americans who are out of work and may never get another job thanks to premature fiscal austerity, the VSPs would like to say, “oopsies!”

Our improving short-term budget picture - You will find summaries here from Annie Lowrey and also Ezra Klein.  I like Ross Douthat’s remarks: …almost nobody is willing to break out the champagne on these estimates. The Keynesians think our shrinking deficit is a sign of the White House’s foolish surrender to austerity at a time when the economy still needs more government spending, not less, to achieve real lift-off. The deficit hawks think a dropping deficit will only encourage Washington’s fatal short-term thinking, by persuading policymakers to ignore the still-yawning gap between our long-term commitments and our revenues. Conservatives don’t like the extent to which we’re taxing our way to temporary fiscal stability (some of the unexpected deficit reduction reflected high-income tax filers paying extra for 2012 to avoid higher rates for 2013), while liberals have reason to fret that the White House’s “fiscal cliff” strategy squandered an important opportunity to raise upper-income taxes even more. And anyone who worries about the American political system’s ability to do structural reform can’t be that encouraged by the path we’ve taken to this point – the crude cuts to discretionary spending that leave entitlements untouched, the higher marginal tax rates rather than a rate-lowering, deduction-capping tax reform, and of course the general inability to compromise in the absence of artificial deadlines and self-created crises.

Have we solved our fiscal problems? - Ezra Klein has a good summary of the latest CBO budget projections, which show that the national debt really isn’t going to be a problem at any point in the foreseeable future. The deficit isn’t going away, of course: the smallest it’s likely to get, according to the CBO, is $378 billion, or 2.1% of GDP, in 2015. But that’s entirely manageable, and puts the national debt-to-GDP ratio on a pretty flat trajectory over the medium term. Of course, in the real world, none of this is actually going to happen as forecast. It’s hard enough to forecast what’s going to happen in 2013, let alone what’s going to happen in 2023: the CBO projection for this year’s deficit has fallen from $845 billion to $642 billion just in the past three months, so it’s worth taking all future forecasts with a large pinch of salt — especially since the one thing that’s certain is that there will be substantial changes to US fiscal policy between now and 2023. This chart contrasts quite dramatically with the bipartisan consensus that America’s national debt — and especially the way that it is built up by the entitlement programs of Medicare, Medicaid, and Social Security — are serious problems. As Paul Krugman explains wonderfully in his latest essay for the NYRB, America’s social safety net was actually a key channel through which countercyclical government stimulus entered the economy in the wake of the financial crisis. And given how difficult it is to legislate expansionary fiscal policy on the fly, there’s a strong purely economic case for keeping such programs.

CBO slashes deficit forecast. Is America’s Age of Debt pretty much over? - According to a revised Congressional Budget Office forecast, the budget deficit will shrink this year to $642 billion. That’s the smallest shortfall since 2008. And at 4.0% of GDP,  the deficit this year will be less than half as large as the shortfall in 2009, which was 10.1%.Moreover, CBO’s 2013 deficit estimate is about $200 billion below the one it produced in February thanks to higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac. From 2015 through 2018, CBO sees annual budget deficits of just 2.4% of GDP, right at the 40-year average before the Great Recession. Look at it this way: In 2009, spending was 25.2% of GDP and revenue 15.1% with a deficit of 10.1%. In 2015 when the deficit will be at its low point for the forecast, CBO projects spending at 21.4% of GDP and revenue at 19.3%. So of that eight percentage point swing, 4.2 points came from rising revenue, 3.8 points from falling spending (thank you sequestration). So debt problem solved? Not according to this chart:

Why No One Is Celebrating CBO's New And Much Lower Deficit Estimate -There was a time when a $200+ billion reduction in the federal budget deficit would have been big news and hailed as a singular achievement worthy of either fiscal sainthood or a dance-on-the-table party...or both. Yet yesterday's Congressional Budget Office report showing that the fiscal 2013 federal deficit will be $642 billion, $203 billion less than CBO's previous estimate of $845 billion, did not create any spontaneous cannonizations or celebrations. It also didn't change the still-stalemated and crisis-oriented federal budget debate by even a small amount. The bottomline: It's in almost no one's interest to be happy about the budget news that should have made everyone happier. The White House couldn't take a victory lap because anything it said would have been mischaracterized by congressional Republicans as the president supporting a $600+ billion deficit.  Even though they could take some credit for keeping the sequester in place and, therefore, lowering spending, the congressional Republican leadership couldn't take a victory lap because that would have been taken by some tea partiers as an indication that the speaker and majority leader were not going to demand additional reductions.. There's anything but universal agreement among economists that reducing the deficit in the current economic environment is the right fiscal policy and, therefore, that the reduction in the deficit is good news.

Is The Decline In US Budget Deficits Merely "Interesting"? - In yesterday's Washington Post, the execrable Robert J. Samuelson declared, "So the latest deficit numbers, although interesting, settle nothing.  They don't provide a road map for long-term budget discipline or resolve the debate over the short-term effects of deficits. They do not provide an excuse for both Congress and the White House to postpone genuine discussion an decisions."  And what, pray tell, should those "genuine" discussions and decisions deal with?  Well, of course, the fave topics of the Washington Very Serious People (VSPs), cutting Social Security and Medicare for those naughty and undeserving baby boomers. He makes his disdain for the recent austerian moves by the US government clear in an earlier passage of this pathetically silly column: "Nothing of consequence has changed.  A few numbers have shifted slightly. That's all."  Really?  So, shall we play (Bill) Clintonian games over the defintions of "consequence" and "slightly"?  I mean we are talking about a budget deficit that is now more than a quarter less than it appeared to be just a few months ago. "Slightly," of no "consequence."  Really?

The CBO Is Likely Still Overestimating Future Deficits - The news of the day, yesterday, was that the U.S. budget deficit was declining faster than the consensus expectation. This latest adjustment is primarily due to a stronger than ‘expected’ economic recovery and to the peculiar way in which public-private finances are accounted for.  There was ample evidence that the economy was growing faster than official statistics showed. More important, however, are two longer term factors. First, while revenue and spending decision matter at the margin, the real action in government finances is between asset and liability payments. The government’s primary asset is its taxing power over the U.S. economy. As the economy grows – in nominal terms – so do the payments from this asset. The government’s most important liability payment – from a dynamical point of view - is interest on the national debt. The current recession opened up an enormous spread between the two. Moreover, a cursory look at the issuance decisions of the Treasury and the buying decisions of the Federal Reserve make it appear as if they are attempting to expand this spread. They are not moving all out to maximize it, as they clearly have the power to “corner markets” to use an old phrase. However, the Treasury is ever so slightly shifting its issuance towards longer term debt which is currently cheap, while the Federal Reserve is buying up high-coupon debt issued in the ’80s and ’90s.  Together, this implies that the cost of rolling over U.S. debt is being nudged down and the tail-risk that a huge shift in the bond markets could leave the U.S. government with large bond payments is being eliminated.

Budget Office Says Obama Plan Would Cut Deficit by $1 Trillion - NYT - President Obama’s budget proposal, if enacted into law, would cut more than $1.1 trillion from the government’s projected deficits over the next 10 years, the nonpartisan Congressional Budget Office said on Friday. It would bring deficits down to near 2 percent of economic output, a level many economists consider safe in the long term. And it would hold them there for years to come.  But the proposal, which was released just last month, has already been mostly forgotten in Washington. Senate Democrats and House Republicans have not agreed to come to the table to split the difference between their budgets, either. After two years of knock-down, drag-out fights over taxes and spending, the budget has been put on the back burner, at least for now.  In part that is because the gap between spending and revenue has started to shrink substantially, in response to earlier tax increases, spending cuts and a strengthening economy. Earlier this week, the budget office sharply cut its estimate of the current fiscal-year deficit by more than $200 billion, on higher-than-anticipated tax receipts and big payments to the Treasury from Fannie Mae and Freddie Mac, the mortgage financiers. Were Congress to do nothing and the economy avoid running into a ditch, the deficit would fall to just over 2 percent of economic output in 2015. It is also because the series of automatic cuts, ceilings and self-imposed crises have for the most part ended. The so-called fiscal cliff was avoided when at the beginning of the year Congress managed to pass a more-moderate package of tax increases and cuts. The $85 billion in cuts to domestic and military programs known as sequestration has already hit, with lawmakers doing little to change them.

Money, Taxes and What We Can Afford - People sometimes seem to suggest that the Western democracies are at the end of the road economically.  They claim that these governments are spent, broke, tapped out.  They insinuate that Western nations can no longer afford to carry out ambitious projects of the kind they organized in the past, and must downsize or dismantle many of the governance systems and public enterprises they currently operate.  They insist that these democracies must hand over yet more of their nations’ destinies to the financial and corporate baronies that dominate the private sector, and give the latter a free hand to arrange whatever kind of future they might deign to mash up for us as a by-product of  their voracious struggles for private gain and glory. This line of argument is quire wrongheaded and fundamentally illogical.  There is no way that a democratic political community can be poorer than the parts of that community, and contemporary developed nations remain stupendously rich by global and historical standard.  Those riches all lie available for potential use by mobilized, organized and ambitious democratic societies.   Contemporary democracies in the developed world are by no means poor, but are lacking only in morale, political will and determination, and audacious visions of the future.  This failure of will is due in part to the fact that our plutocratic landlords have used the mass media that they own to demoralize and humiliate the public, to divide and distract its discontents, to sow confusion and disinformation, to sponsor unthinking brutality and barbarism, and to convince us to hate our fellow-citizens and hate democracy more than we hate the landlords who buy us and sell us.

Orrin Hatch on tax reform at the ABA--a predictable right-wing rant - Linda Beale - Orrin Hatch was the keynote speaker for the ABA Tax Section luncheon today in DC.  Having never heard the man in person, I was surprised at the bumbling nature of his speech.  He came across as an old man reciting a set of platitudes from the GOP talking-points rulebook. Asserting that the tax code is "complicated, inefficient, unjust, unfair," he claimed that all are agreed on a need for tax reform, because the tax code is "the major obstacle standing between us and sustained prosperity." Now, folks.  You all know that's bunk, right?  The major obstacles standing between us and sustained prosperity are (1) the billions we squandered on two unnecessary preemptive wars and other costs of excessive militarization of our society, along with (2) the billions spent supporting the 'too big to fail' financial giants that have plundered the middle class while continuing to benefit from cheap (subsidized) funding.  Of course, there are a number of areas of the tax code that also stand in the way of prosperity--the preference for capital over labor, the extensive provisions incentivizing consolidation of business empires, the provisions favoring private equity enterprises that eat up and spit out workers for their own profits.  Those were clearly not the target of Sen. Hatch in his favored tax "reform."

Four easy fixes for corporate taxation - While some economists believe we shouldn’t tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren’t taxed on them, or are taxed less. So what should we do? The answers are simple, which is not to say that achieving them will be simple. Corporate interests hold a lot of political sway right now, and overcoming them will be anything but easy.

  • 1. End the usefulness of tax havens for secrecy by instituting “publish what you pay.” Currently, companies can hide all sorts of transactions because they are only required to publish “consolidated” accounts of their global operations.
  • 2. End the usefulness of tax havens for avoidance by enacting unitary taxation. Upheld by the U.S. Supreme Court in 1983, unitary taxation treats multinational corporations the same way many states already tax the income of multistate corporations: considering all of a company’s subsidiaries as a single entity, and using a formula to determine what portion of its global profits are taxable in your jurisdiction
  • 3. In the United States, end the deferral of taxes until profits are repatriated. In other words, require companies to pay tax in the year the money is earned, rather than when it comes back home years later, if ever. .
  • 4. Don’t cut the corporate income tax rate. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD. In fact, there is a significant economics literature showing that large countries can charge higher taxes than smaller ones do without suffering for it,

IRS admits targeting conservatives for tax scrutiny in 2012 election -  The Internal Revenue Service on Friday apologized for targeting groups with “tea party” or “patriot” in their names, confirming long-standing accusations by some conservatives that their applications for tax-exempt status were being improperly delayed and scrutinized.Lois G. Lerner, the IRS official who oversees tax-exempt groups, said the “absolutely inappropriate” actions by “front-line people” were not driven by partisan motives.Rather, Lerner said, they were a misguided effort to come up with an efficient means of dealing with a flood of applications from organizations seeking ­tax-exempt status between 2010 and 2012.

Report: Top IRS officials knew in 2011 that conservative groups were targeted -  An inspector general’s report due for release this week says senior Internal Revenue Service officials knew that agents were targeting conservative groups for special scrutiny as early as 2011, nine months before the IRS commissioner assured Congress the targeting was not happening. The report is certain to raise questions about the timing of the IRS’s disclosure of the targeting on Friday, how high up were the officials who knew about the practice, and whether anyone outside the agency was aware of it.

The IRS Was Wrong to Single Out Tea Parties, But Many Political Groups Should Not be Tax-Exempt - Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong.  But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption—501(c)(4)s.  That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law.The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.As I wrote in a blog post back in 2010, the tax law is relatively clear about what a (c)(4) can and cannot do. The IRS defines these groups as “civic leagues, social welfare organizations, and local associations of employees.” Their net earnings are supposed to be used for charitable, educational, or recreational purposes. Thanks to smart lawyers who have exploited an outdated law, the tax-exempt status of many groups may be perfectly legal. But others simply do not pass the smell test.  Does anybody really claim the primary activity of these organizations is anything other than getting their favorite candidates elected to political office, or defeating those they disagree with?

Why Should Any Of These Groups Have Tax-Exempt Status?: Nope, I’m not going to defend the IRS, which appears to have acted in ways wholly inconsistent with their mandate for unbiased investigations into, in this case, whether certain political groups should receive tax-exempt status. Republicans will of course try to pin this on the President, despite the fact that since Nixon used the IRS to target his enemies, the president’s been barred from even discussing this kind of thing with the agency. No, the problem here isn’t the president. It’s the Supreme Court’s Citizen United decision and subsequent tax law written by Congress that gives these groups tax exempt status (under rule 501(c)(4)) as long as most of their activities are primarily on educating the public about policy issues, not direct campaigning. Of course, the ambiguities therein are insurmountable. Many of these groups, especially the big ones, spend millions on campaign ads mildly disguised as “issue ads,” and under current law they can do so limitlessly and with impunity. ... Weirdly, the IRS hasn’t seemed particularly interested in going after the big fish here, like Rove’s Crossroads GPS on the right or Priorities USA on the left. Instead, they appear to have systematically targeted small fry on the far right. If so, not only is that clearly biased and unacceptable—it’s also ridiculous given the magnitude of the violations of tax exempt status by these small groups relative to the big ones.

The IRS should do more, not less, scrutinizing of political groups - The recent IRS admissions about the use of "tea party" or "patriot" labels to flag applications for nonprofit status for additional scrutiny raise serious questions about political bias, and should receive a thorough and independent investigation.  There is rightly a growing call for House and Senate hearings to answer those questions, but any investigations must delve deeper into the bigger problem facing our democracy after the Supreme Court's decision in Citizen United: the dramatic surge in the misuse of nonprofits to hide political spending by billionaires and corporations from American voters, and the lack of any meaningful enforcement response. Although the IRS must enforce the law impartially, the agency should not abrogate its responsibility to enforce it in the first place.  Reported political spending by 501(c)4s – the kind of non-profit groups at the focus of this controversy – surged to $254m in 2012, almost matching spending by political parties ($255m), according to the Center for Responsive Politics, thanks in large part to the Supreme Court's decision in Citizens United. The vast majority of that spending – 85% – came from conservative organizations, led by Karl Rove's Crossroads GPS group and Americans for Prosperity, backed by the Koch brothers. Given this disproportionate spending on behalf of conservative candidates at this point in history, most of the groups flagged will logically be conservative organizations, even using impartial criteria.

The Real I.R.S. Scandal -  NEWS that employees at the Internal Revenue Service targeted groups with “Tea Party” or “patriot” in their name for special scrutiny has raised pious alarms among some lawmakers and editorial writers. But even more regrettable is the long-term damage to the credibility of the I.R.S. as an impartial arbiter of whether organizations merit tax-exempt status. This will be difficult to undo, particularly because of the secrecy required for the agency to effectively examine organizations without generating doubts about them, as well as to prevent other organizations from coming up with strategies to evade scrutiny in the future. Indeed, the latest revelations are not the first to cause pushback by Congressional conservatives. In 2011, tax authorities considered applying the gift tax to large contributions to 501(c)(4) groups, and they sent letters to a handful of big donors informing them they may be taxed. The agency received a swift and forceful response from the Republican senators demanding to know whether the I.R.S. was acting on the basis of partisanship. The agency folded like wet cardboard: the deputy commissioner took the extraordinary step of ending the audits in progress. (That official, who has been the acting head of the agency, was fired yesterday by the president.)

IRS Fallout: The Real Scandal Is Secret Money Influencing US Elections- The IRS is under siege for investigating conservative political groups applying for tax-exempt status. But the real problem wasn’t that the IRS was too aggressive. It was that the agency focused on the wrong people—“none of those groups were big spenders on political advertising; most were local Tea Party organizations with shoestring budgets,” writes The New York Times—and wasn’t aggressive enough. The outrage that Washington should be talking about—what my colleague Chris Hayes calls “the scandal behind the scandal”—is how the Citizens United decision has unleashed a flood of secret spending in US elections that the IRS and other regulatory agencies in Washington, like the Federal Election Commission, have been unwilling or unable to stem.  501c4 “social welfare” groups like Karl Rove’s Crossroads GPS, the Koch brothers’ Americans for Prosperity and Grover Norquist’s Americans for Tax Reform—which don’t have to disclose their donors—spent more than $250 million during the last election. “Of outside spending reported to the FEC, 31 percent was ‘secret spending,’ coming from organizations that are not required to disclose the original sources of their funds,” writes Demos. “Further analysis shows that dark money groups accounted for 58 percent of funds spent by outside groups on presidential television ads [$328 million in total].”

Timothy Geithner Is Key To IRS Scandal - Acting IRS Commissioner Steven T. Miller was forced by to resign, predominantly due to the July 7, 2011 memorandum that I published last weekend in my report, IRS HAD ENEMIES LIST IN 2010 & 2012. The document, written on U.S. Treasury Department stationary, demanded that senior IRS management terminate attempts to have donations to selected tax-exempt groups be fully taxed as gifts. The IRS admitted the groups examined were conservative, such as Tea Parties. The Miller memo appeared to confirm that he knowingly lied to Congress while under oath at least twice last year about predatory audits of conservative organizations. But Mr. Miller has told the press he is only resigning when his “acting assignment ends in early June.” I was suspicious Mr. Miller’s resignation was an effort to prevent him from being required to testify again under oath on Friday to three Congressional Committees. But if Mr. Miller is staying until June, he must testify on Friday. With the President throwing the IRS Commissioner “under the bus,” Mr. Miller may be ready to throw former Treasury Secretary Timothy Geithner and President Obama under the bus.  Steven T. Miller is a career civil servant at the IRS. He holds a Juris Doctorate law degree from George Washington University and a Master of Laws in taxation from Georgetown University. He has held several senior positions at the IRS and worked for a number of years as an attorney in the IRS Chief Counsel’s office. He also served as a Congressional staff member for the Joint Committee on Taxation. Holding prestigious law degrees and having given harsh warnings to senior IRS staff in 2011 to ban predatory examinations, it is doubtful Mr. Miller would have authorized continued examinations unless ordered to by his direct boss,

The IRS and the Real Scandal - Robert Reich --The IRS has interpreted our tax laws to allow big corporations and wealthy individuals to make unlimited secret campaign donations through sham political fronts called “social welfare organizations,” like Karl Rove’s “Crossroads,” the U.S. Chamber of Commerce, and “Priorites USA.” This campaign money has been used to bribe Congress to keep in place tax loopholes like the “carried interest” rule that allows the managers of hedge funds and private equity funds to treat their income as capital gains, subject only to low capital gains taxes rather than ordinary income taxes, and other loopholes that allow CEOs to get special tax treatment on giant compensation packages that now average $10 million a year. Despite a growing number of billionaires and multi-millionaires using every tax dodge imaginable – laundering their money through phantom corporations and tax havens — the IRS’s budget has been cut by 17 percent since 2002, adjusted for inflation. To manage the $594.5 million in additional cuts required by the sequester, the agency will furlough each of its more than 89,000 employees for at least five days this year. Finally, all of this, coming at a time when the Supreme Court has deemed corporations “people” under the First Amendment and when income and wealth are more concentrated at the top than they’ve been in over a hundred years, has enabled America’s financial elite to further entrench their wealth and power and thereby take over much of American democracy

Why Washington scandal-mania may save Medicare and Social Security - Liberals who are dreading the scandal-mania that is taking hold should note that it contains a potential upside: It could make a Grand Bargain that includes cuts to Medicare and Social Security benefits even less likely than it already is. That’s because when scandal grips Washington, a president actually needs his core supporters more than ever to ward it off, making it harder to do anything that will alienate them. There is precedent for this. President Bill Clinton long entertained ambitions to dramatically reform Social Security, but those plans were shelved amid the Lewinsky crisis. While there is some argument over whether the crisis was the cause, it did make him more reluctant to alienate Democratic supporters. As John Harris put it in his book about the Clinton presidency: “Come 1998, when Clinton needed every Democratic vote possible in order to survive the Republican attack over Monica Lewinsky, the work of challenging his own ground to a halt. He had no political latitude to push for the reform of the entitlement programs for the aged.”

Cayman Islands Spars With Sachs Over Hedge Fund Directorships - The head of the Cayman Islands financial services industry trade group rejected charges from economist Jeffrey Sachs that the Caribbean nation’s oversight of hedge funds and banks is a “mortal threat” to the global economy.  Sachs, in separate letters to the Financial Times the past two weeks, said some residents of the island nation sit on hundreds of fund boards, limiting their ability to provide oversight. He also said the Cayman banking system has $1.4 trillion in liabilities and assets, citing data from the Bank for International Settlements. The system is a “house of cards” for the global financial system, he said.  “Professor Sachs needs to understand that a significant part of the banking assets registered in Cayman are U.S. banks placing overnight deposits in their own Cayman-registered branch,” Cayman Finance Chief Executive Officer Gonzalo Jalles said in an e-mailed statement May 8. “The money is effectively being transferred between accounts in New York and not being exposed to how a local banker in Cayman decides to invest it.”  The Cayman Islands, a British Overseas Territory located south of Cuba, has the highest number of hedge funds in the Caribbean. About 10,900 funds were registered there in the first quarter, up from about 9,990 in 2011, according to the Cayman Islands Monetary Authority.

IRS, Australia and United Kingdom Engaged in Cooperative Effort to Combat Offshore Tax Evasion IRS - The tax administrations from the United States, Australia and the United Kingdom announced today a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in jurisdictions throughout the world. The three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands. The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure. The IRS, Australian Tax Office and HM Revenue & Customs have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions. Thus, they have developed a plan for sharing the data, as well as their preliminary analysis, if requested by those other tax administrations.

U.S. authorities seize accounts of major Bitcoin operator - U.S. authorities have seized two accounts linked to a major operator in the booming Bitcoin digital currency market, Tokyo-based exchange Mt. Gox. The move may prevent the firm from facilitating the purchase and sale of Bitcoins in U.S. dollars at a time when use of the currency and its value has mushroomed. Bitcoin, which unlike conventional money is bought and sold on a peer-to-peer network independent of any central authority, has grown popular among users who lack faith in the established banking system. A seizure warrant obtained Tuesday by the Department of Homeland Security froze an account that an Iowa-based online payment processor, Dwolla Inc, held at Veridian Credit Union in the name of Mutum Sigillum LLC. An affidavit filed by an agent with the department's investigations unit states that Mutum Sigillum, a Mt. Gox subsidiary incorporated in Delaware, was operating as an unlicensed money transmitter, in violation of federal law.

Sheila Krumholz and Danielle Brian on How Money Rules Washington - Bill Moyers is joined by the heads of two independent watchdog groups keeping an eye on government as well as on powerful interests seeking to influence it. Sheila Krumholz, executive director of the Center for Responsive Politics and, and Danielle Brian, who runs the Project on Government Oversight, talk to Bill about the importance of transparency to our democracy, and their efforts to scrutinize who’s giving money, who’s receiving it, and most importantly, what’s expected in return.

The Care and Feeding of Small Business - As a growing number of small business organizations pursue a policy agenda distinct from that of corporate America, they may be able to nudge state and local government toward new economic development strategies.  Currently, the businesses best able to garner generous grants and tax incentives by promising to create jobs within specific political boundaries are large, mobile corporations that can pit communities against one another, demanding ever-higher subsidies.  Greg LeRoy wrote about the problem at length in “The Great American Jobs Scam.” In his 2010 book, “Investment Incentives and the Global Competition for Capital,” Kenneth Thomas estimated the total cost to American taxpayers at about $70 billion a year.  A number of technical issues regarding treatment of tax expenditures and property tax abatements come into play in such estimates, but another accounting based on investigative reporting by The New York Times generated an estimate of $80 billion a year. The details unearthed in the Times series, United States of Subsidies, show that 48 companies have received more than $100 million in state grants since 2007.  A bias toward large companies has been particularly obvious in the retail sector, where big-box stores have been big winners, with adverse effects on small independent businesses. Critics of Walmart have developed an entire Web site devoted to monitoring the public subsidies it receives.

Mel Watt, Nominee to Head FHFA, Opposes Administration by Voting to Deregulate Derivatives -  Yves Smith - Good progressives like MoveOn, New Bottom Line, the Alliance of Californians for Community Empowerment, AFR, Elizabeth Warren, and Richard Trumka, head of the AFL-CIO have all fallen in line with Obama’s nomination of Mel Watt, Representative from Bank of America North Carolina. It might help if they looked harder at Watt. If they were honest about it, there’s not much to like.  As we wrote earlier, Watt is a protypical bank-friendly Democrat. More proof came last week when Watt voted in favor of two measures to water down the already-underwhelming Dodd Frank. These were two of the worst of a pack of bills designed to gut Dodd Frank’s derivatives regulations. Bear in mind that these votes put Watt at odds with the Administration. Treasury Secretary Jack Lew wrote to the House Financial Services Committee urging it to reject the bills.  Occupy the SEC provided a detailed and persuasive analysis of what was wrong with these measures. Occupy the SEC on Derivatives and Swaps Deregulation Bills.  Watt voted in favor of the worst of all of the measures, HR 992, which was the reversal of what was described as the “push out” provisions of Dodd Franks. Those rules prohibited federal assistance to “swap entities” which in practice mean the could not take place in FDIC insured banks. Watt also cast a vote for HR 677, which would exempt inter-affiliate swaps, which are derivative exposures between units under the same parent company, from Dodd Frank rules. Those Dodd Frank prohibitions were important because they allow various units to operate and potentially be wound down separately. In other words, they reduce the potential of a blow-up in one unit to pull down other entities in the same financial firm.

Warren asks regulators to justify not taking Wall Street to trial - Sen. Elizabeth Warren (D-Mass.) wants financial regulators to justify their policy of settling charges with Wall Street's bad actors out of court. In a letter sent to the Securities and Exchange Commission, Federal Reserve and Justice Department, Warren demanded any analysis regulators have undertaken that justifies a policy of pursuing settlements where the parties involved do not have to admit to wrongdoing. Warren argued that regulators who too readily settle could end up obtaining insufficient compensation for victims while doing little to deter similar actions in the future. "I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because it lacks resources — the regulator has a lot less leverage in settlement negotiations," Warren wrote in the letter. "If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law."

Sen. Warren demands to know why criminal bankers aren’t being locked up - In a letter (PDF) sent to Federal Reserve Chairman Ben Bernanke, Attorney General Eric Holder and SEC Chair Mary Jo White on Tuesday, Sen. Elizabeth Warren (D-MA) demanded to know why the government keeps accepting financial settlements from criminal bankers when they could instead be taken to trial, convicted and locked up.  In six short paragraphs, Warren requested that each institution turn over copies of any internal research “on the trade-offs to the public” between letting big financial firms pay a fine and walk “without admission of guilt” versus moving forward with full-scale prosecutions. The letter was sent as a follow-up to a similar question she asked of the Office of the Comptroller of the Currency (OCC) on Feb. 14. Warren noted that the OCC replied last week denying the existence of any such research. In her letter sent Tuesday, she went on to add: I believe very strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because it lacks resources — the regulator has a lot less leverage in settlement negotiations and will be forced to settle on terms that are much more favorable to the wrongdoer.

Josh Rosner on How Dodd Frank Institutionalizes Too Big to Fail - Yves Smith - Josh Rosner of Graham Fisher testifies before a subcommittee of the House Financial Services committee today on why Dodd Frank has not ended too big to fail, but also has managed to entrench the megafirms’ advantaged position.  Rosner provided Congressional testimony on this same topic in 2011, and deemed Dodd Frank’s plans for winding down systemically important firms to be unworkable. Rosner has good company here; the BIS and the international bank lobbying group the IIF reached the same conclusion. Rosner stresses that he’s not advocating the repeal of Dodd Frank but describing what is flawed so it can be remedied or replaced, and that he sees the sort of fixes embodied in the bills approved in the House to weaken derivatives regulations as a step in the wrong direction. Rosner focuses on Articles I and II of Dodd Frank and describes how their plans to deal with resolving large firms has only made matters worse. It’s key to understand that these two sections are somewhat at odds with each other. Dodd Frank peculiarly provides for two ways to wind up systemically important firms. Title I says they should prepare for bankruptcy. They need to clean up how they are organized and make sure activities fit or can be mapped into legal entities and prepare living wills, which are plans for how they would wind themselves up. But confusingly, banks can also be “resolved” which is more like “rescued with a little pain inflicted on investors” under Title II. Title II provides for a second way to deal with stressed financial firms, which includes having the government provide what amounts to debtor-in-possession financing while the bank is restructured. This, sports fans, is what is otherwise known as a bailout.

Why Title II of Dodd-Frank Has Not Reduced the Likelihood of Bailouts -- Today the House Financial Services Subcommittee on Oversight and Investigations held a hearing on whether the Orderly Liquidation Authority (OLA) in Title II of the Dodd Frank Act has reduced the likelihood of bailouts of large financial firms. I was one of the witnesses. Here is a summary of my 5 minute opening statement.  More details are in my written statement. Unfortunately the likelihood of bailouts has not been reduced by Dodd-Frank. Empirical evidence shows this: large financial firms still pay less to borrow because of market expectations of bailouts. Of course there’s disagreement about this assessment. Ben Bernanke argued in testimony in February that “Those expectations are incorrect” because we have Title II. But other officials differ: President Charles Plosser of the Philadelphia Fed says “Title II resolution is likely to be biased toward bailouts,” and President Jeffrey Lacker of the Richmond Fed admits “we didn’t end too big to fail.”When you look at OLA and assess what would happen in another crisis you can see why bailouts are still likely. To carry out the difficult task of reorganizing a large financial firm under OLA, the FDIC would have to exercise a great deal of discretion which causes unpredictability and uncertainty compared with bankruptcy reorganization.  Thus, there’s confusion about the reorganization process. Without more clarity, policymakers are likely to ignore it in the heat of a crisis and again resort to massive bailouts.

Brown & Vitter Try to End ‘Too Big to Fail’ - My Sunday Washington Post Business Section column is out. This morning, we look at the question: Can two senators end ‘too big to fail’? Here’s an excerpt from the column: “Just how much of a subsidy are the banks receiving? An International Montetary Fund Working Paper quantified it as creating an 80 percent basis point advantage to TBTF banks. A 2012 FDIC study found similar advantages. The implicit government guarantee that these banks would not be allowed to fail allowed them to obtain credit at a more advantageous rate. Bloomberg calculated that this amounted to a taxpayer subsidy of $83 billion a year to the 10 largest U.S. banks, ranked by assets — and $64 billion to the five largest. At the request of Brown and Vitter, the Government Accounting Office is trying to more precisely quantify the annual subsidy to megabanks from the U.S. government.In this column, I want to look at two broad issues: First, what does the legislation (TBTF Act, S. 798) purport to do? How would it affect the competitive landscape for community and regional banks? Could it prevent future megabank bailouts?”

Is the Fed Afraid to Regulate the Big Banks? - Simon Johnson - The skirmishing is almost over, the main armies almost assembled. Ahead is a great battle over the future of our financial system that could have more profound consequences than the Dodd-Frank legislation of 2010.  The battleground is the hearts and minds -- and fears -- of the seven people who make up the board of governors of the Federal Reserve System. The critical contest will be about bank capital and how large financial institutions should fund themselves. The fog of war has masked the terrain, so that even well-informed bank lobbyists don’t realize they have wandered into a potentially disadvantageous position.  It remains to be seen whether the Fed can make the most of this real opportunity for reform. Too many governors still seem encumbered by a flawed mental model of how megabanks work. The headlines continue to focus on the international agreement regarding capital requirements -- known as Basel III - - and how it will be implemented in the U.S. There are interesting questions here, including what the Fed will decide regarding the so-called SIFI surcharge (the extra equity funding required for systemically important financial institutions).

U.S. Regulators: Mixed Progress on Too-Big International Banks - International financial regulators have made limited progress on dealing with the failure of a large, complex financial firm with global operations five years since the onset of the 2008 financial crisis, Federal Reserve and other top regulators said Wednesday. Officials from the Fed, Treasury Department and Federal Deposit Insurance Corp. told a Senate panel that the financial system and its oversight have been greatly strengthened since the crisis, most notably because of the Dodd-Frank financial overhaul law. But despite gains in regulation of the largest and most complex firms, international efforts to prepare for the potential wind-down of a systemically important firm remain a work in progress. “Outside the United States, implementation of the [international standards] remains at an early stage, and many jurisdictions still lack the necessary powers and institutions to resolve effectively” globally important financial firms, said William Murden, director of the Treasury Department’s office of international banking and securities markets. Agreed upon standards must be put in place for government efforts to appear “credible”, he said in prepared remarks for the Senate hearing. Michael Gibson, director of the Fed’s division of banking supervision, said international regulators have made strides in reducing the risks posed by firms largely considered “too big to fail,” but acknowledged more work needs to be done. Implementation of global capital standards, a Fed proposal to require large foreign banks with U.S. operations to meet U.S. standards, and the FDIC’s framework for the orderly liquidation of a faltering financial firm have given regulators more power to address gaps, he said.

If the Fed Knows Banks Are Too Big, Why Doesn’t It Make Them Smaller? - These three men—probably the three most important on the Board of Governors when it comes to systemic risk regulation (as opposed to monetary policy, for example)—all say that they know that the megabanks are too big and complex. They all say that accurate pricing of subsidies and externalities is not an end in itself.* They all say that the goal is smaller, less complex banks. But here’s what baffles me: If the goal is smaller, less complex banks, why not just mandate smaller, less complex banks? Why beat around the bush with capital requirements and minimum long-term debt levels? Those tools might be appropriate if you think huge, complex banks should exist but you want to make them safer. But if you’ve already concluded that banks need to be smaller and less complex, then they’re just a waste of time. They also betray a frightening naivete regarding corporate governance. The theory is that higher capital requirements, for example, will lower banks’ profits, which will upset shareholders, who will eventually force the board of directors to eventually convince the CEO to break up his empire. This scenario, unfortunately, depends on the premise that American corporations are run for the benefit of their shareholders, which is only roughly true, and even that often requires long, expensive, and messy shareholder activist campaigns.

The Myth of a Perfect Orderly Liquidation for Big Banks - Simon Johnson - On Tuesday, with some fanfare, the Bipartisan Policy Center in Washington rolled out a report, “Too Big to Fail: The Path to a Solution.” Focused on how to “resolve” big financial companies — a technical term for the details of handling the failure of such institutions — the report is elegantly written and nicely laid out. You can either read the very short version, the short version or the long version of the same material. Unfortunately, in all three the authors fail to persuade that the problem of too-big-to-fail is fixed or can be brought under control if only we follow their recommendations.  Their argument has three elements. First, big financial companies can be resolved either in bankruptcy or, more likely, through using the orderly liquidation authority, or O.L.A., created by the Dodd-Frank Act of 2010. Second, the key to making O.L.A. workable is sufficient “loss-absorbing” long-term debt and equity at the holding-company level. Third, the implication is that most or all of the big banks already have sufficient “loss-absorbing” debt and equity at the holding company level to make this work. As a result, the authors contend, we (or perhaps financial-sector executives) are in luck — no significant structural changes, like simplification or reductions in scale, are needed at megabanks. All three parts of this argument are unconvincing — and the bottom-line policy implication, “do little, be happy,” is downright dangerous.

Counterparties: Commissioners Found Taken Captive - Today something strange happened: a dreary, easily overlooked vote at the Commodity Futures Trading Commission ended up on Gawker. Gawker, Bloomberg, the NYT and HuffPost agreed that the vote, which approved a watered-down reform to the the $633 trillion derivatives market, was a win for big banks. The 2010 Dodd-Frank act included a provision to bring the opaque world of derivatives — including the kind of trades which nearly brought down AIG — into something like an open market. Over the last three years banks have held 80 meetings with the CFTC officials on how swaps should be brought into public exchanges. Along the way, a proposed rule got pared back: Buyers would have to solicit two prices quotes from banks before purchasing a swap, instead of the proposed five quotes. That requirement will eventually increase to three. The resulting rule is a small reform, but also preserves much of the status quo. Ben Protess writes that the move “could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.” (Five big Wall Street banks dominate more than 90% of the derivatives market.) Wallace Turbeville, formerly of Goldman Sachs, says the two-quote requirement is too easy to game and invites LIBOR-like collusion on swap pricing.

SEC Convenes Foot-Dragging Roundtable on Rating Agency Reform, While Securities Issuers Return to Familiar Rating-Shopping Tricks - David Dayen - A few months ago, I wrote a story for The American Prospect about the credit rating agencies, and their thus-far successful effort to ward off any change to their business model, despite their wretched performance during the crisis. This is true even though Dodd-Frank contained a measure, written by Al Franken, to alter the issuer-pays model that incentivizes higher ratings in the pursuit of future profits. The Franken-Wicker rule would create a self-regulating organization to randomly assign securities to accredited rating agencies, with more securities over time going to the agencies that rated the most accurately. When we last left this rule, the SEC was doing their best to avoid implementing in. The usual watering down in Dodd-Frank made this contingent on a study. Although the language of the law stated plainly that the SEC “shall” change the issuer-pays model to the Franken-Wicker vision or some alternative solution it deemed more feasible, this gave the SEC plenty of wiggle room – they could simply decide that the status quo was the most feasible of all.The study finally came out, six months late, and it read basically like a book report from a distracted high schooler, merely regurgitating public comments given to the agency on a variety of different models. At the end, the SEC recommended only that “the commission, as a next step, convene a roundtable at which proponents and critics of the… courses of action are invited to discuss the study and its findings.”

Corporate Boards Are Still Failing - Dean Baker - The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn't rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today. That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

Guerrillas in the Boardroom - It didn’t garner much attention, but earlier this month, the chairman of a Fortune 500 company was kicked out of his job, and it wasn’t by management. Shareholders voted out Ray Irani, the chairman and former CEO of Occidental Petroleum, at the company’s annual meeting, with 76 percent of investors denying Irani the post.  The Irani ouster was the latest in a flood of shareholder activism, hitting annual meetings of the largest publicly traded companies in America over the past several years. Over 600 shareholder proposals have been filed this year, including a vote by JPMorgan Chase shareholders on May 21 on whether to split the positions of CEO and chairman, which would ensure that Jamie Dimon does not hold both  If this sounds like democracy in action, with shareholders expressing their preferences for the companies they own, and making their voices heard, that’s because it is. But it’s a very peculiar, American-style democracy, complete with unequal representation, lobbying, attempts to rig or delay voting and a byzantine set of rules. For that reason, it has often been often ineffective; but recently, activists have deciphered how to navigate this process and are increasingly changing corporate behavior. Across all types of proposals, activists have been very successful this year. As of April, activists won 66 percent of all proposal votes, compared to 51 percent in 2012.

Just How Useless Is the Asset-Management Industry? - After costs, actively managed mutual funds trail the market. Yet while passively managed, much-lower-cost index funds have been available since 1976, when Bogle launched the Vanguard 500 Index Fund, most investors still put most of their money in the hands of active managers. Why they do this a long-running puzzle.  Vanguard board member Burton G. Malkiel poses it for the umpteenth time, and adds to it the observation that expense ratios on actively managed funds have over the past three decades risen substantially, even though economies of scale would seem to dictate that today's much larger funds ought to have lower expenses as a percentage of assets (domestic equity funds in the U.S. had $3.5 trillion in assets in 2010, up from $25.8 billion in in 1980). And while it seems essential that we have at least some active managers in order to set security prices (if everybody put all their money in index funds, there would presumably be no link between stock price and value), Malkiel says that there's no evidence that stocks were less efficiently priced decades ago than they are now. He concludes: The major inefficiency in financial markets today involves the market for investment advice, and poses the question of why investors continue to pay fees for asset management services that are so high. It is hard to think of any other service that is priced at such a high proportion of value.

The price for junk bonds’ Golden Age will be slower growth - - B-rated US bonds – relatively low-quality junk – yielded more than 18 per cent in 1990. They now yield little over 6 per cent. This is the lowest on record, and less than would usually be expected from a humble bank savings account. Higher-quality junk bonds yield even less, and Barclays’ high-yield index for the US, a popular benchmark, is now yielding less than 5 per cent for the first time ever. The spread, or the extra yield paid, between junk and high-grade corporate bonds has also narrowed to levels which historically have signalled the excessive optimism that comes before a sell-off. These bonds pay a higher yield to compensate for greater risk; but these yields are now lower than the dividend yields paid out by some large and well-established companies on their stocks. That sounds crazy. But bear in mind that the only risk with a high-yield bond, if the investor carries it until it matures, is that the company defaults. And that risk has never been lower. The results of this year’s Deutsche Bank Historical Defaults Study, carried out annually for the last 15 years, show high-yield defaults dropping to historic lows. Default rates used to correlate closely with the economic cycle; bad times meant more defaults. But no more. What can explain this? When interest rates are held artificially low, weak and unprofitable companies can refinance their debt, when once they would have been forced to default. The kinder, gentler interest rate environment has made for a kinder, gentler capitalism, where the weak are not forced out, but instead can finance themselves cheaply for years into the future.

Treasury, Fed may probe Bloomberg News breach - Bloomberg could face federal scrutiny following the media firm's acknowledgment that its reporters had access to sensitive information about customers' activities on Bloomberg financial data terminals. The Federal Reserve and the Treasury Department — Bloomberg clients that have leased numerous terminals for executives and staffers — are considering investigating the extent of Bloomberg reporters' possible monitoring of their data and terminal use. A Fed spokesperson, who asked not to be named, told USA TODAY Sunday that the agency had reached out to Bloomberg for information on what happened. A Treasury department official who also asked not to be named confirmed that the agency is also looking into the issue. Monday morning, the European Central Bank said its experts had also been in touch with Bloomberg about the issue. "The ECB takes the protection of confidentiality in the usage of data products by ECB management and staff very seriously," the bank said in a statement. The Commodity Futures Trading Commission similarly uses Bloomberg terminals, spokesman Steven Adamske said in an e-mail response Sunday. But Adamske said he could not immediately determine whether the regulatory agency would investigate.

Bloomberg is watching you -All social networks are based on a cognitive con. No one likes to give out valuable personal information to some huge corporate entity, so the trick is to make people feel as though they have some kind of control or ownership, even when they don’t. Most of Facebook’s privacy controversies boil down to much the same thing: people share personal information with their friends, using the convenient Facebook platform, and then are shocked when it turns out that Facebook has access to that information and is making money from it. The more centralized and controlling a social network is, and the less that it’s run on a peer-to-peer basis, the more likely it is to run into this kind of trouble. So it probably should come as little surprise to learn that Bloomberg, the highly-centralized and highly-controlling social networking company, has now run headfirst into its very own privacy scandal. (Bloomberg is a competitor of Thomson Reuters, which is my employer and owns Reuters News.) The Bloomberg terminal is a take-it-or-leave-it proposition, as far as its users are concerned: they either sign on the dotted line, pay their $20,000 per year, and get their terminal — or they don’t. Just as with Facebook, the Terms of Use are non-negotiable: unless you agree to them, you don’t get to use the service. And as everybody who’s ever tried to put a naughty word into a Bloomberg message knows, once you’re signed into the Bloomberg system, Bloomberg is watching you.

The Vicious New Bank Shakedown That Could Seriously Ruin Your Life - It’s hard to imagine a more loathsome figure than the mob debt collector, a.k.a the “hired muscle.” Gangsta-style big banks have taken up where this character left off. They may not send a guy to break your kneecaps, but they are working in the shadows, chasing down debts from credit cards using methods that are both fraudulent and unlawful. They do this whether you actually owe the money or not.  Here’s the skinny: After widespread outrage over the big banks’ last crime wave against the American consumer – the “robo-signing” scam in which homeowners were hustled out of their houses by banks that sent fraudulent paperwork through the courts, they are at it again. This time, banksters are accused of helping debt collectors pursue faulty judgments against credit card customers by various dirty tricks that include – surprise! – robo-signing.    California Attorney General Kamala Harris, who filed suit against JPMorgan Chase last Thursday, says that from January 2008 to April 2011 -- just as people were reeling from the Wall Street-driven financial crisis -- the megabank unleashed over 100,000 lawsuits against consumers over uncollected credit-card debt in the state of California alone. That includes 469 lawsuits in a single day.   So how in the world did Chase keep up this breakneck pace? The lawsuit claims that the bank took a number of little shortcuts, like robo-signing, in which bank employees produce sworn documents and other legal filings without bothering to check bank records or examine cases for accuracy.  Another nasty trick Chase is accused of deploying is what’s known, appropriately, as “sewer service.” This means that Chase failed to properly serve notice of debt collection lawsuits against consumers (it dumped the notices “in the sewer”), but then lied and said it did. This means, you, as a consumer, have no idea that a lawsuit has been launched against you. So here’s what happens: you get a default judgment that automatically favors the debt collector. The credit card company can then garnish your wages or freeze your bank account to get the money it says you owe. And you might not even owe it!

JP Morgan Cheating on the Stress Test: Exhibit 46 - JPMorgan’s “London Whale” episode may boil down to a few senior executives attempting to increase their personal compensation. The London Whale episode was a trading travesty in April and May of 2012 during which JPMorgan lost about $6 billion on bets it made with some $300 billion in depositor funds.The losses spurred congressional action, culminating in the Senate’s Permanent Subcommittee on Investigations’ release of a 300-page report and 500 pages of exhibits showing a widespread miscarriage of bank management, bank supervision and integrity. Examine what’s labeled as “Exhibit 46” in the 500 pages of subcommittee exhibits. On December 22, 2012, JPMorgan Chief Investment Officer Ina Drew directed subordinates to implement a plan to enable the bank to buy back stock.  But carrying out the plan was dependent on convincing regulators that such a step would be financially prudent. In a series of emails  about the whale trades, Ina Drew states that she is “trying to work with CCAR submission for firm that is acceptable for an increased buyback plan.”In conventional terms, the committee report alleges that JPMorgan sought to manipulate how the whale trade would appear to regulators so that JPMorgan could buy back stock – an action which typically boosts a share price and thus leads to higher executive compensation.

Richard Cordray and the CFPB Are Monitoring Your Banking Habits - The Consumer Finance Protection Bureau is following the example of big companies that mine pools of information for insight into consumer behavior. The agency maligned by big banks for being overaggressive is assembling a Big Data operation to monitor how millions of Americans interact with lenders and rack up debt. The two-year-old CFPB—which recently announced it’s recouped $425 million for consumers wronged by financial-services companies—is building massive data sets with records from companies it oversees. It’s demanding information on credit cards, credit monitoring, and debt cancellation products from major banks, and spending more than $10 million to buy data on auto and payday loans as well as mortgages from Experian (EXPGF), CoreLogic (CLGX), and other companies. “Within the next year,” says Sendhil Mullainathan, the consumer bureau’s assistant director for research, “CFPB will be the best place for consumer finance data.”

Unofficial Problem Bank list declines to 771 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for May 10, 2013.  Changes and comments from surferdude808:  Surprisingly, the FDIC cranked up the closing machine today. The only changes to the Unofficial Problem Bank List this week were the two failures. After removal, the list holds 771 institutions with assets of $284.8 billion. A year ago, the list held 924 institutions with assets of $361.1 billion.

CoStar: Commercial Real Estate prices declined seasonally in March -    From CoStar: Annual Pricing Gains Seen Across All Regions and Property Types Despite Seasonal Slowdown in First Quarter 2013 The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period.  The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.  This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes.  CoStar reported that the Value-Weighted index is up 37.5% from the bottom (showing the demand for higher end properties) and up 8.1% year-over-year. However the Equal-Weighted index is only up 6.8% from the bottom, and up 5.7% year-over-year.

How Fannie Mae made its profit - Bloomberg reported Fannie Mae (FNMA), the mortgage-financier seized by U.S. regulators in 2008, will pay the Treasury Department $59.4 billion after reporting a record quarterly profit driven by rising home prices and declining delinquencies....After its latest payment, Fannie Mae will have sent the Treasury a total of $95 billion, compared with the $117.1 billion of capital infusions that the company has received. Freddie Mac, which yesterday reported a $4.6 billion profit, will have paid $36 billion, after drawing $72 billion of aid, and Chief Executive Officer Don Layton said it may release $30.1 billion of tax-credit writedowns as soon as next quarter.The coming large payments from the companies will probably help delay the amount of time the U.S. government has until running out of room under its debt ceiling to sometime in October, the Bipartisan Policy Center said today in a posting on its website. But if you study Fannie Mae's 10Q report, you'll find that most of the 2013:Q1 reported profit came from Fannie's decision to recredit itself with $50.6 B in deferred-tax assets. The company's theory prior to 2008 was that, with all its previous losses, it wouldn't have to pay much future taxes as a result of carrying those losses forward. Fannie had been counting the taxes it wouldn't have to pay in the future as one of its main net assets in 2008. When Fannie was taken into conservatorship in 2008, there was a decision that maybe the enterprise would never go back to being a "private" company that owed any taxes, so those deferred-tax assets were written off as a big loss. Now the enterprise is putting them back on the books, as a result of which it claimed a huge after-tax profit for 2013:Q1. So Fannie plans to pay the U.S. Treasury (the GSE's current owner) a big dividend.

Hedgies Bet on Fannie/Freddie Status Quo - David Dayen - The new CBO budget projections showing debt stabilization over the next decade and a reduction of the expected FY 2013 deficit to $642 billion hasn’t been deemed by Washington as a “scandal,” although falling deficits amid high unemployment and below-trend growth is actually, you know, a bit scandalous. But even more unremarked upon is one of the primary reasons for this near-term deficit drop, mentioned in passing by CBO on page 1: CBO’s estimate of the deficit for this year is about $200 billion below the estimate that it produced in February 2013, mostly as a result of higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac. We know that Fannie and Freddie’s profits are coming directly from monetary policy keeping mortgage rates low (subsequently giving them a massive spread on their lending), and their dominance in the marketplace, with the GSEs involved in 9 out of every 10 new mortgages in the country. But they’re “helping” federal finances so much that it’s just incredibly unlikely to see this gravy train end for some time, and everybody knows it. And that’s where the vultures come in. Some of the hedge funds that made fortunes in the housing-market crash are now betting on the recovery of Fannie Mae and Freddie Mac, the government-controlled mortgage giants. Paulson & Co. and Perry Capital LLC are among a handful of hedge-fund firms that have bought so-called preferred shares in Fannie and Freddie, which collapsed in value in 2008 after the companies were taken over by the federal government.

Foreclosure Crisis Cost U.S. $192.6 Billion In Lost Wealth Last Year, Study Finds: Americans lost $192.6 billion in wealth, or an average of $1,700 per household, last year due to foreclosures, according to a report released Thursday by the Alliance for a Just Society, a coalition of progressive grassroots organizations across the country. The report also found that the U.S. could lose $221 billion if officials don't come to the aid of millions of borrowers who owe more on their homes than they're actually worth. The findings indicate that many Americans are still suffering from the housing bust, which critics say was the result of major lenders pushing shoddy loans on borrowers who couldn’t afford them. Meanwhile, Wall Street investors and construction companies are reaping the benefits of a recent rebound in the housing market. “[The wealth loss] has a major impact not only on the families but on communities as a whole,”“They’re putting so much money into trying to save their home, the ripple effect that has on spending hurts the whole community.” The loss of wealth was more pronounced for communities of color, which suffered 17 foreclosures per 1,000 households and lost an average of $2,200 in wealth per household, according to the report. In contrast, predominantly white communities saw 10 foreclosures per 1,000 households and lost an average of $1,300 per household.

Banks' right to foreclose in dispute - The bank foreclosing on an Aurora woman challenging the constitutionality of Colorado's foreclosure laws did not formally own the right to take her house until a month after it filed its case to do so, public real-estate records reviewed by The Denver Post show.  Although a lawyer representing US Bank signed a statement asserting his client had the right to foreclose on Lisa Kay Brumfiel when he filed the case with the Arapahoe County public trustee in September 2011, the assignment of her deed of trust — the document that legally conveys that right — didn't occur until a month later.  The deed-of-trust assignment was filed with the Arapahoe County recorder, where transfers in mortgage ownership used to be filed as a matter of routine. The practice stopped years ago when banks found a way to avoid the costly expense associated with filing documents publicly.  And Brumfiel has company. The Post found several instances in a random check of county foreclosure cases in Colorado where lenders did not formally have ownership to a deed of trust until weeks or months after beginning the process to take the house.

Wells, Citi Halt Most Foreclosure Sales as OCC Ratchets Up Scrutiny - Wells Fargo and Citigroup have halted the vast majority of their foreclosure sales in multiple states following the release of new guidance by the Office of the Comptroller of the Currency. The abrupt slowdown came in response to the OCC's April release of minimum standardsfor foreclosure sales, which are usually the final act in the foreclosure process. The Federal Reserve issued identical guidance to the banks it oversees, making the guidelines universal for the industry. Within two weeks of the release of the guidance, Wells Fargo, Citi and JPMorgan Chase (JPM) all but stopped foreclosure sales, which are usually the point of no return in the foreclosure process. JPMorgan has since resumed its normal volume. The halt is most dramatic with Wells, the nation's largest mortgage originator. The bank's foreclosure sales in five Western states — California, Nevada, Arizona, Oregon and Washington — dropped from as many as 349 a day in April to fewer than 10 a day across the entire region, according to Foreclosure Radar, a California real estate monitoring firm.

Voices of the Harmed Borrowers on Rust Consulting - Checking the queues, I keep noticing Rust harmed borrowers returning to comment on the threads for the three posts Yves did on Rust and the OCC (here, here, and here). It’s almost like they have no other place to tell their stories! Incredible though that may seem.  So I thought I would collect all their comments into a single post, most importantly to show the harmed borrowers that there was a place where they were heard, and to serve as a resource for decision makers,* and possibly to serve as the basis for further analysis at NC. I would also like to ask any Rust employees (temporary or permanent) who encounter this post to read the whole thing, and to reflect.Herewith, the voices of the Rust harmed borrrowers, post by post. There’s a little bit of commentary at the end.

Mortgage Delinquencies by Loan Type in Q1 - The following graphs show the percent of loans delinquent by loan type based on the MBA National Delinquency Survey: Prime, Subprime, FHA and VA. First a table comparing the number of loans in Q2 2007 and Q1 2013 so readers can understand the shift in loan types over the last several years. Both the number of prime and subprime loans have declined over the last 5+ years; the number of subprime loans is down by about 33%. Meanwhile the number of FHA loans has more than doubled and VA loans have increased sharply. Note: There are about 41 million first-lien loans in the survey, and the MBA survey is about 88% of the total.  For Prime and Subprime, a majority of the seriously delinquent loans were originated in the 2005 to 2007 period - and these loans are still in the process of being resolved through foreclosure or short sales. However, for the FHA, a large percentage of the seriously delinquent loans were originated in 2008 and 2009. That is the period when private capital disappeared, and the FHA share of the market increased sharply.

Fannie, Freddie, FHA REO inventory declines in Q1 2013 - The combined Real Estate Owned (REO) by Fannie, Freddie and the FHA declined to 189,5291 at the end of Q1 2013, down from 192,720 in Q4 2012, and down 9% from 209,077 in Q1 2012. The peak for the combined REO of the F's was 295,307 in Q4 2010. This following graph shows the REO inventory for Fannie, Freddie and the FHA. This is only a portion of the total REO. There is also REO for private-label MBS, FDIC-insured institutions, VA and more. REO has been declining for those categories too. Although REO was down for Fannie and Freddie in Q1 from Q4, REO increased for the FHA - this is something to watch.

Lawler: Table of Distressed Sales and Cash buyers for Selected Cities in April - Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in April.   Look at the two columns in the table for Total "Distressed" Share. In every area that has reported distressed sales so far, the share of distressed sales is down year-over-year - and down significantly in many areas.   Also there has been a decline in foreclosure sales in all of these cities.  Also there has been a shift from foreclosures to short sales. In all of these areas - except Minneapolis- short sales now out number foreclosures.

The persistent supply-side constraints in US housing - Every now and then, we take a look at why the US housing comeback continues at a pace that has disappointed those of us who believed (and still hope) that a rebound in household formation will produce a self-sustaining acceleration in the broader recovery. After the release on Thursday of disappointing housing starts but encouraging building permit numbers for April, we’ll do so again now. Start with this helpful chart from Capital Economics: (They don’t explain it in their note, but the economists seem to have looked at the special questions section of the latest Senior Loan Officer Survey. Starting with question number 18, they added together the responses of banks that named these categories as either “very important” or “the most important factor” as a reason for the banks’ not extending more home purchase loans.) You can ignore the specific percentages — these complaints are coming from banks, after all — but as a list of possible reasons why housing credit isn’t looser, it’s not bad.

What Happened To Housing -  I have not spent enough time on the supply side issue in housing. Thankfully, Cardiff Garcia posts on some of the constraints that are holding back a housing boom. He lists a number of concerns but one in particular strike me a significant. I would describe as uncertainty about the GSE's  role a damper, that keeps natural feedback loops from exploding. Cardiff expresses it like this: – Uncertainty about the future of securitisation (and by extension the ability to package and sell the mortgages they do originate), related to: General worries about the gradual withdrawal of the GSEs and the inability of private-label securitisation to fill the gap The eventual definition of Qualified Residential Mortgages by regulators An unwillingness to securitise loans beneath historically high FICO scores and other standards The more specific worry that risk-sharing bonds won’t materialise or be popular if they do Higher guarantee fees by the GSEs Cardiff's phrasing - which I take as informative - casts this as an issue of temporary uncertainty. As the mortgage industry restarts under a new paradigm banks are not exactly sure how its all going to shake out. To the extent that this is uncertainty then we should expect it gradually ease as folks become more familiar with the way things work post crisis. Perhaps more importantly, if the GSEs don't clear things up then we should not be surprised to see a revival in private label securitization.

Existing Home Inventory is up 13.5% year-to-date on May 13th - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.   There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.The Realtor (NAR) data is monthly and released with a lag (the most recent data was for March).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data). In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

MBA: Mortgage Applications Decrease in Weekly Survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. After declining for seven weeks straight, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.67 percent from 3.59 percent,with points increasing to 0.41 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This rate is at its highest level since the week ending April 12, 2013.The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 3.87 percent from 3.79 percent, with points increasing to 0.25 from 0.20 (including the origination fee) for 80 percent LTV loans.The first graph shows the refinance index. There has been a sustained refinance boom for over a year.The decline this week offset the sharp increase last week. The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is just off the high for the year set last week

FNC: House prices increased 5.5% year-over-year in March - From FNC: FNC Index: U.S. Home Prices Up 0.4% in MarchThe latest FNC Residential Price Index™ (RPI) shows the U.S. housing market continued to recover, recording in March the 13th consecutive price increase. In recent months, the ongoing housing recovery has maintained its pace with steady and persistent gains in home prices despite signs of continued job market weakness and soft economic growth.... Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that March home prices rose 0.4% from the previous month, and were up 5.5% from a year ago. ... The two narrower composite indices (30-MSA and 10-MSA composites) show similar month-over-month increases but faster year-over-year accelerations at 6.7% and 7.4%, respectively.The year-over-year change slowed a little in March, with the 100-MSA composite up 5.5% compared to March 2012. The FNC index turned positive on a year-over-year basis in July, 2012.

Why This Housing Upturn Looks Like the Real Thing - Ever since the recovery began in 2009, a weak housing market has held back the U.S. economy. The first rebound in home prices was lackluster and after only a year was followed by another dip. But the recent upturn in home prices looks like the real thing. One clear sign of a turning point: In March, homeownership hit a 17-year low, while the 12-month gain in home prices was the biggest in seven years. Those two extremes suggest that the market has hit bottom. The people who are least well financed have been squeezed out, while demand is growing among people who can afford to pay higher home prices. If that trend continues – and there are good reasons to believe it will – a substantial burden will be lifted from the U.S. economy.The great surprise since the recession ended has been the weakness of the economic rebound, which has been particularly clear in the housing market. After falling 31% from 2006 to 2009, home prices rose almost 5% over the following year. But that recovery faltered, and during the next 20 months prices fell to a new low. Then the current recovery began, and barring another recession, all the evidence indicates that it will be sustainable: In the first quarter, home prices were higher (compared with a year earlier) in 133 of 150 metropolitan areas, according to the National Association of Realtors. On a national basis, the median home price gained 11.3%, the biggest yearly gain since 2005.

Private Equity Residential Landlords Rushing to Cash Out via IPOs - Yves Smith - We’ve been skeptical of the private equity land rush to snap up single family homes for rentals. They’ve been a big enough force in the housing market nationwide to lead some commentators to question how solid the housing “recovery” is. Yet the combination of rising enthusiasm for housing and a richly-valued stock market is leading a raft of PE firms to ready IPOs as a way to take profits and establish valuations for their profit participations. Now bear in mind that real estate is ever and always local, and PE guys have figured out that for operational reasons, they needed to concentrate their buying in certain markets, meaning, say, 200 homes on one side of Atlanta as opposed to 200 homes in 30 states. So it’s possible that some operators who got in early, or otherwise bought well have solid portfolios. But then we have hot money stories like Las Vegas. As Reuters reported last week: Local real-estate broker Fafie Moore says private-equity firms and hedge funds have largely “crowded out” local buyers like Marchillo. That’s because the investment firms have broadened beyond their initial focus – buying homes at foreclosure auctions. Now, they are also bidding for homes listed by private owners and banks. In a sign of how freely the money is flowing, Moore notes around 60 percent of all sales are in cash these days. Fellow broker Trish Nash says she has seen cases where a home gets listed and quickly draws a dozen bids, many in cash. Realtors are talking about a mini-bubble forming here. What is particularly interesting about the Financial Times report on the IPO plans of various PE funds is their eagerness to go to market now: A handful of companies that rent houses to single families are preparing to launch initial public offerings on the US stock market as their private equity and hedge fund owners take advantage of investor interest in the US housing recovery.

Are Hedge Funds Becoming the Market in Real Estate? In a recent article, a reporter for the Atlanta Journal-Constitution detailed how his family had visited 80 houses before finally buying one.  Several of the houses were snapped up by hedge funds, despite full price offers or better from the couple.  What J Scott Trubey wrote about in his first person piece, “80 trips to find the perfect house” is what many others have been experiencing as hedge funds have come to dominate the housing market. Trubey tells how one bid was well over the asking price.  “We knew the house was hot, and we made an audacious bid-$8,000 above the asking price,” he wrote.  “But we lost.  Our Realtors said it was likely to a hedge fund, private investors scooping up homes.” There are many reasons for hedge funds buying heavily into real estate markets across the country.  While housing prices have started to recover, many are still below the peaks before The Great Recession.  That cannot be said of equities with the Dow Jones Industrial Average and Standard & Poor’s 500 Index moving into record territory. The chart below shows the rise in the exchange traded funds for home-builders (NYSE: XHB), the Dow (NYSE: DIA), and the S&P (NYSE: SPY).

Housing Starts decline sharply in April to 853,000 SAAR - From the Census Bureau: Permits, Starts and Completions - Privately-owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 16.5 percent below the revised March estimate of 1,021,000, but is 13.1 percent above the April 2012 rate of 754,000. Single-family housing starts in April were at a rate of 610,000; this is 2.1 percent below the revised March figure of 623,000. The April rate for units in buildings with five units or more was 234,000. Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,017,000. This is 14.3 percent above the revised March rate of 890,000 and is 35.8 percent above the April 2012 estimate of 749,000.The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) decreased sharply in April following the sharp increase in March (Multi-family is volatile month-to-month). Single-family starts (blue) declined to 610,000 in April (Note: March was revised up from 619 thousand to 623 thousand). The second graph shows total and single unit starts since 1968. This shows that housing starts have been generally increasing after moving sideways for about two years and a half years. This was well below expectations of 969 thousand starts in April, mostly due to the sharp decrease in multi-family starts. Total starts in April were only up 13.1% from April 2012; however single family starts were up 20.8% year-over-year.

Housing Starts: A few Comments and Quarterly Housing Starts by Intent -  Overall the housing starts report was a little disappointing. Even just looking at single family starts (removing the volatile multi-family sector), starts were down 2.1% from March. However single family starts were up 20.8% year-over-year, and that is a solid increase.  Even with this significant year-over-year increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. This suggests significantly more growth in housing starts over the next few years. Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).These graphs use a 12 month rolling total for NSA starts and completions.

Is the massive drop in lumber futures telling us something? - According to Nick Timiraos from the WSJ, the latest drop in the seasonally adjusted housing starts measure is nothing to worry about.In fact he lists 4 reasons why this unexpected decline isn't in any way a sign of potential slowdown in the housing market. WSJ: - Thursday’s housing report isn’t as much a signal that the sector is cooling—at least not until there are a few more of these reports—and instead a sign that the housing rebound isn’t going to unfold in a straight line Perhaps. If we are not witnessing a cooling in new home construction, maybe Mr. Timiraos can explain why lumber futures have declined over 20% in the last couple of months. In April the explanation for the decline was related to cooler than usual weather conditions hampering construction. What happened in May? Some have rationalized this by the economic weakness in China. But the last time we checked a large chunk of this Globex-settled lumber still goes into new home construction - while the supply certainly hasn't changed. We look forward to hearing Mr. Timiraos' explanation.

Builder Confidence increases in May - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 3 points in May to 44. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Improves in May Builder confidence in the market for newly built, single-family homes improved three points to a 44 reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May, released today. This gain, from a downwardly revised 41 in April, reflected improvement in all three index components – current sales conditions, sales expectations and traffic of prospective buyers. “While industry supply chains will take time to re-establish themselves following recession-related cutbacks, builders’ views of current sales conditions have improved and expectations for the future remain quite strong as consumers head back to the market in force,” All three HMI components posted gains in May. The index gauging current sales conditions increased four points to 48, while the index gauging expectations for future sales edged up a single point to 53 – its highest level since February of 2007. The index gauging traffic of prospective buyers gained three points to 33.  This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the May release for the HMI and the March data for starts (April housing starts will be released tomorrow). This was slightly above the consensus estimate of a reading of 43.

Households Cut Another $110 Billion In Debt Even With $577 Billion In Q1 Mortgages Originated: Most Since 2007 - As we report every month, non-housing revolving credit balances continue to be flat, although we now have some more granularity, with the Fed adding that the "number of credit inquiries within six months – an indicator of consumer credit demand –declined again the bulk of household leverage driven by non-revolving debt."  Specifically, "there were 158 million inquiries in 2013 Q1, down from the 164 million inquiries seen in the previous quarter."  The balance of non-housing debt, and this is the part that is rapidly rising, is in the form of auto and student loans, both of which increase substantially in Q1, 2013, with student debt rising $20 billion to $986 billion, further propelling this debt category as the largest single form of debt, well above car loans which totaled $790 billion, and where $78 billion in newly created loans were issued in the past quarter. Elsewhere, total mortgage debt on consumer credit reports dipped once more, declining $101 billion to $7.93 trillion, while HELOC balances declined by another $11 billion to $552 billion.  It is not immediately clear how much of the net drop in mortgage balances from $8.033 trillion to $7.932 trillion was due to defaults as opposed to actual pay downs and non-credit rating impairing deleveraging. We do know that a whopping $577 billion in new mortgages were opened in Q1, the highest since Q3 of 2007.  Which means that some $680 billion in mortgages should have been extinguished in one quarter. If this happened primarily via defaults and discharges, one can only wonder just how the bank balance sheets were not decimated in Q1. As a reminder, half a year ago we observed that the bulk of US mortgage debt reduction has come from defaults not from actual deleveraging.

Fed Says U.S. Household Debt Declined to 2006 Level - U.S. households reduced debt during the first quarter by 1 percent to the lowest level since 2006, resuming a deleveraging trend in the wake of the financial crisis, according to the Federal Reserve Bank of New YorkHousehold debt fell to $11.2 trillion in the first quarter compared with a peak burden of $12.7 trillion in the third quarter of 2008. Consumers reduced debt by $110 billion after increasing their borrowing by $31 billion in the fourth quarter of 2012, while delinquency rates fell “across the board,” the Fed district bank said in a statement. Student debt bucked the trend, rising to a record $986 billion.  Consumers are repairing their post-crisis balance sheets as the Fed tries to spur the expansion and enliven the job market by holding the main interest rate at zero and buying $85 billion in bonds every month. More than four years of record stimulus have yet to reignite household borrowing, and the unemployment rate has exceeded 7 percent since December 2008.

NY Fed: Consumer Debt declines in Q1, Deleveraging Continues - From the NY Fed: New York Fed Report Shows Americans Continue to Improve Household Balance Sheets Outstanding household debt declined approximately $110 billion from the previous quarter, due in large part to a reduction in housing-related debt and credit card balances. Meanwhile, delinquency rates for each form of household debt declined, with about 8.1% of outstanding debt in some stage of delinquency, compared with 8.6% the previous quarter. ... In Q1 2013 total household indebtedness fell to $11.23 trillion; 1.0% lower than the previous quarter and considerably below the peak of $12.68 trillion in Q3 2008. Delinquency rates improved across the board: mortgages (5.4% from 5.6%), HELOC (3.2% from 3.5%), auto loans (3.9% from 4.0%), credit cards (10.2% from 10.6%) and student loans (11.2% from 11.7%). The overall 90+ day delinquency rate dropped from 6.3% to 6.0% this quarter, below the 8.7% peak from three years ago.Here is the Q1 report: Quarterly Report on Household Debt and Credit  The first graph shows aggregate consumer debt decreased in Q1. Although overall debt is decreasing, Student debt is still increasing. From the NY Fed:  Outstanding student loan balances increased by $20 billion during the first quarter, to a total of $986 billion as of March 31, 2013.  The second graph shows the percent of debt in delinquency. In general, the percent of delinquent debt is declining, but what really stands out is the percent of debt 90+ days delinquent (Yellow, orange and red) - especially the 120+ days delinquent (orange and yellow). 

Households Cut Overall Debt, but Student Loans Jump -- U.S. households cut debt loads broadly during the first three months of 2013, although student loan borrowing continued to rise, a report from the Federal Reserve Bank of New York says. The bank reported Tuesday that total indebtedness fell by 1% from the previous quarter to $11.23 trillion. Total indebtedness is “considerably below” the $12.68 trillion peak seen in the third quarter of 2008, when the worst phase of the financial crisis began to kick into gear. (See charts and maps looking at U.S. debt and delinquencies.) The New York Fed said the declines in indebtedness were broad based, save for a $20 billion increase in student loan borrowing and an $11 billion increase in auto loans. Total mortgage debt was down to $7.93 trillion, from $8.03 trillion the prior quarter, while credit card balances edged down by $19 billion to $660 billion. The report noted that broadly speaking, the number of people who aren’t making good on their debts is declining. The rate for those who are three or more months delinquent on some sort of loan moved down to 6%, from 6.3% in the final three months of 2012. The current overall delinquency rate is below the 8.7% peak seen three years ago, the New York Fed said.

Car? House? Sorry: Graduates of 2013 Are Each $35,200 in Debt - The typical college graduate will leave campus this month owing nearly as much money as they stand to earn in their first year of full-time employment, new research shows. At a personal level, graduates toting up their private and government student loans, credit card balances, and personal debt will find the sum shocking. On average, they owe $35,200 and half say they are surprised by how much debt they have accumulated, according to a Fidelity Investments Cost-Conscious College Graduates Study. At a broader level, this debt has far-reaching implications for the economy as young people with starting pay of $44,455 spend much of it servicing debt—not buying cars and homes or beginning to save for retirement or emergencies. Some 70% of college grads have loans; many won’t pay them off for a decade. The upshot is that young people are getting a late start building wealth. People in their late 20s to late 30s have 21% less inflation-adjusted wealth than those in the same age range 25 years ago, according to the Urban Institute. That’s partly due to the housing bust, which socked young people who had bought near the top. But student debt is a big factor.

Homeowners do not increase consumption despite their property rising in value - Although the value of our property might rise, we do not increase our consumption. This is the conclusion by economists from University of Copenhagen and University of Oxford in new research which is contrary to the widely believed assumption amongst economists that if there occurs a rise in house prices then a natural rise in consumption will follow. The results of the study is published in The Economic Journal. "We argue that leading economists should not wholly be focused on monitoring the housing market. Economists are closely watching the developments on the housing market with the expectation that house prices and household consumption tend to move in tandem, but this is not necessarily the case," says Professor of Economics at University of Copenhagen, Søren Leth-Petersen.Søren Leth-Petersen has tested this widespread assumption of 'wealth effect' and concluded that the theory has no significant effect. He explains that when economists use the theory of  'wealth effect' the presumption is that older homeowners will adjust their consumption the most when house prices change whilst younger homeowners will adjust their consumption the least. However, according to this research, most homeowners do not feel richer in line with the rise of housing wealth.

My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? - NY Fed - The payroll tax cut, which was in place during all of 2011 and 2012, reduced Social Security and Medicare taxes withheld from workers’ paychecks by 2 percent. This tax cut affected nearly 155 million workers in the United States, and put an additional $1,000 a year in the pocket of an average household earning $50,000. As part of the “fiscal cliff” negotiations, Congress allowed the 2011-12 payroll tax cut to expire at the end of 2012, and the higher income that workers had grown accustomed to was gone. In this post, we explore the implications of the payroll tax increase for U.S. workers.  The impact of such a tax hike depends on two factors. One, how did U.S. workers use the extra funds in their paychecks over the last two years? And two, how do workers plan to respond to shrinking paychecks? With regard to the first factor, in a recent working paper and an earlier blog post, we present survey evidence showing that the tax cut significantly boosted consumer spending, with workers reporting that they spent an average of 36 percent of the additional funds from the tax cut. This spending rate is at the higher end of the estimates of how much people have spent out of other tax cuts over the last decade, and is arguably a consequence of how the tax cut was designed—with disaggregated additions to workers’ paychecks instead of a one-time lump-sum transfer. We also found that workers used nearly 40 percent of the tax cut funds to pay down debt.

Preliminary May Consumer Sentiment increases to 83.7 - graph from Calculated Risk -The preliminary Reuters / University of Michigan consumer sentiment index for May increased to 83.7 from the April reading of 76.4. This is the highest level since July 2007. This was well above the consensus forecast of 78.0. 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.Sorry, World, U.S. Consumers Can’t Save You - To the consternation of U.S. manufacturers and probably Federal Reserve officials, American consumers are being asked — once again — to be Shoppers to the World. The recent reports from retailers show consumers started the second quarter in a better spending mood than economists expected. Falling gasoline prices are freeing up cash to be spent elsewhere while rising home and equity values are making many households feel wealthier. U.S. factories, however, aren’t benefiting much from consumers’ resilience. The Fed reported Wednesday that manufacturing output slid for the second straight month in April. The output of consumer goods was up 2.4% over the past year. Meanwhile after adjusting for negligible goods inflation, April real retail sales excluding restaurants were up about 3.5%. Imports are making up some of the gap between domestic demand and supply, one consequence of economic policies pursued around the world. Of course, global policy makers don’t come out and say, “We want U.S. households to buy more of what we make.” But the recent policy decisions should have that result. The quantitative easing in Japan is damping the yen, which will help the nation’s exporters. On Tuesday, the U.S. Labor Department said import prices from Japan fell 0.6% in April, the largest monthly drop since September 2008, and Labor noted the three-month decline in Japanese import prices pretty much matched the drop in the yen against the dollar.

Michigan Consumer Sentiment: Highest Since July 2007 - The University of Michigan Consumer Sentiment preliminary number for May came in at 83.7, a major advance over the April final reading of 76.4. This is the highest level since July of 2007, prior to the Great Recession. The consensus was for 78.5. 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 2% below the average reading (arithmetic mean) and 1% below the geometric mean. The current index level is at the 41st 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 14 points above the average recession mindset and 4 points below the non-recession average.

Consumer Sentiment Hits Nearly 6-Year High --U.S. consumers’ view of the economy turned much brighter in early May, according to data released Friday. The Thomson-Reuters/University of Michigan early-May consumer sentiment index jumped to 83.7 from 76.4 at the end of April and a preliminary April reading of 72.3, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires had expected the preliminary-May index to increase but only to 78.0. The early May reading is the highest since July 2007. The current conditions index in early May jumped to 97.5 from 89.9 at the end of April, while the expectations index increased to 74.8 from 67.8. The current index is the highest since October 2007, while the expectations is the best since November 2012. The early-May increase implies consumers are looking past the drag coming from federal spending cuts. Offsetting that negative has been rising equity prices, strengthening housing markets and falling gasoline prices. According to the Michigan report, U.S. households don’t expect much change in future inflation. Stable inflation expectations will allow the Federal Reserve to keep pumping stimulus into the U.S. economy. The one-year inflation expectations reading for early May remained at 3.1%. Inflation expectations covering the next five to 10 years slowed to 2.8% from 2.9% at the end of April.

Michigan Confidence Soars To Highest Since 2007, Biggest Beat Of Expectations On Record - In a day devoid of any A-grade economic data, the stop hunting GETCO USDJPY algos had no choice but to look forward to such reflexive C-grade indicators as the UMich Consumer Confidence index, where the polled "consumers" are confident if the market is up and the market is up if "consumers" are confident. Sure enough, the USDJPY literally exploded by over 50 pips and broke the 103 level (send the Yen derivative, the S&P500 spiking) when moments ago the UMich index posted a hilarious reading of 83.7, the highest since August 2007, up from 76.4, and smashing expectations of 77.9 by the most in... ever. Whether this was driven by a near record low in consumer savings, by the collapse in real wages, by the deteriorating Q1 retail results such as WalMart's showing consumers are out of cash, or if all this was irrelevant as everyone on the UMichigan rolodex was long Tesla is unknown. It just is what it is because in a world in which collapsing economic data leads to a record high "market", one buys first, buys second, then BTFD if there is D, and only then are questions asked.

Retail Sales: Slow Growth In April - Whenever a key economic indicator shows weakness in the latest monthly update, the usual worries arise. No explanation required in the current environment and so today’s retail sales report for April will draw a fresh round of dark predictions from the usual suspects. And perhaps they’ll be right this time. But for now, it’s still premature to argue that the modest growth train has derailed, even if it looks that way by focusing on the latest data point. Consumer spending increased a weak 0.1% in April, although that compares favorably to March’s 0.5% decline, the biggest monthly slide since last June. No one will mistake the latest numbers as anything other than a sign that retail consumption has turned sluggish again. But for those who are quick to jump on the listless number du jour as a sign of macro apocalypse, a bit of perspective may inspire a less-strident view.  Let’s start by considering retail sales ex-gasoline, a rough proxy for measuring appetite for what consumers are willing and able to buy vs. what they’re effectively forced to purchase for such things as driving to work. By that standard, retail spending climbed a healthy 0.7% in April, the most since last November.For a clearer look at the trend, the year-over-year change is somewhat more reliable if we’re trying to get a handle on the business cycle. On that front, today’s release suggests that nothing much has changed vs. recent history. Retail sales advanced 3.7% last month vs. the comparable year-ago figure. That’s up, by the way, from March’s 2.9% annual pace.

Retail Sales increase 0.1% in April - On a monthly basis, retail sales increased 0.1% from March to April (seasonally adjusted), and sales were up 3.7% from April 2012. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $419.0 billion, an increase of 0.1 percent from the previous month, and 3.7 percent above April 2012. ... The February to March 2013 percent change was revised from -0.4 percent to -0.5 percent. Sales for February and March were revised up. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 26.4% from the bottom, and now 10.6% above the pre-recession peak (not inflation adjusted) Retail sales ex-autos decreased 0.1%. Retail sales ex-gasoline increased 0.7%. Excluding gasoline, retail sales are up 24.0% from the bottom, and now 11.4% above the pre-recession peak (not inflation adjusted). The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 4.7% on a YoY basis (3.7% for all retail sales). This was above the consensus forecast of 0.3% decline in retail sales. Retail sales ex-gasoline (gasoline prices declined in April) were up 0.7%

Retail Sales: Better Than Expected - The Advance Retail Sales Report released this morning shows that sales in April came in at 0.1% month-over-month, a strong improvement over the downwardly revised -0.5% in March. Today's headline number came in above the consensus forecast of -0.3%. Cheaper gasoline prices gave a boost to Retail Sales ex Gas to the tune of 0.7%, up from -0.1% last month. The first chart below is a log-scale snapshot of retail sales since the early 1990s. I've included an inset to show the trend in this indicator over the past several months. Here is a year-over-year snapshot of the same series. Here we can see that, despite the upward trend since the middle of last year, the YoY series has been slowing since its peak in June of 2011.

Retail Sales Stay Right On Trend But Economists Get it Wrong Again - Retail sales grew modestly and on trend in April. There was no evidence of either a slowing economy or one that is overheating and about to cause conventional inflation measures to move higher. At the same time, as usual, economists got the outlook wrong, underestimating the growth rate. According to the Commerce Department’s Advance Retail Sales Report, retail sales rose by 0.1% in April (month to month)  and were up 3.7% annually, which was an acceleration from the annual rate of +2.8% in March. These are seasonally adjusted estimates which will be revised several times before they are finalized. Neither figure is adjusted for inflation. The median forecast of economists in mainstream media surveys was for sales to be down -0.3% to -0.6% month to month.  The economists’ consensus was too low (what else is new?), with the problem being partly with the seasonal adjustment, and partly just the fact that economic forecasting is quackery. These big forecasting misses happen almost every month lately.

Why yesterday's retail sales report was actually a huge positive - On the surface, yesterday's report on retail sales for April was just barely positive, rising 0.1% after a revised -0.5% decline in March. But the real story is how strong inflation adjusted retail sales are likely to be. In fact, they probably set a new post-recession high. You can thank the loosening of the Oil choke collar for that.  While nominal rales have declined -0.4% since February, once we subtract gasoline sales, nominal sales have actually increased +0.6%.  But it gets better once we factor in inflation. March featured -0.2% deflation, and if my analysis is right, on Thursday we are going to find that consumer prices declined -0.4% or -0.5% in April. That means that real retail sales for April are likely to have risen +0.5% or +0.6% over March, and further that real retail sales are up +0.3% over February to a new post-recession high.  The resilience of the consumer in the fact of the 2% increase in the payroll tax, as evidenced weekly by same store sales and Gallup's consumer spending poll, and now confirmed by the Census Bureau's monthly retail sales report, has to be one of the big surprises of the first half of 2013. The dark cloud within this silver lining is the strong decline in the personal savings rate. At the same time, it certainly bespeaks are real robustness in consumer confidence - at least as reflected in how consumers vote with their wallets.

Retail Sales Post Modest Beat Despite Ongoing Plunge In Gasoline Sales - In keeping with the now constant trend of baffle with BS, since everyone was expecting a weaker advance retail sales print, just like with the BLS report, it was virtually assured that the data would prove everyone wrong. Sure enough, moments ago the census department announced that headline retail sales rose by 0.1% in April, from a downward revised -0.5% in March, beating expectations of a second decline in a row of -0.3%. Retail sales ex autos were in line with expectations at -0.1%, on expectations of a -0.2% print, but it was the sales number ex-autos and gas which surprised the most, rising 0.6% on expectations of a +0.3% increase, up from a -0.1% decline. Of note: gasoline stations saw a dramatic 4.7% drop in sales, following a 3.2% drop in March: are all US commuters now using Back to the Future type hoverboards or just driving to work in the Tesla Model S?

Vital Signs Chart: Tumbling Gas-Station Sales -Sales at gasoline stations tumbled 4.7% in April from a month earlier, as fuel prices continued their decline. From the start of the year, the average price of a gallon of regular gasoline climbed to a peak of $3.78 at the end of February. Prices then turned around, sliding to $3.52 a gallon by the end of April. Year-over-year, seasonally adjusted gas-station sales are down 0.04% from April 2012.

EIA: Gasoline Prices expected to average $3.53 per gallon this summer - From the EIA: Short-Term Energy Outlook Falling crude oil prices contributed to a decline in the U.S. regular gasoline retail price from a year-to-date high of $3.78 per gallon on February 25 to $3.52 per gallon on April 29. EIA expects the regular gasoline price will average $3.53 per gallon over the summer (April through September), down $0.10 per gallon from last month's STEO. The annual average regular gasoline retail price is projected to decline from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to $3.39 per gallon in 2014. Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the projected levels.  Last summer, gasoline prices averaged $3.76 per gallon during the April through September period - so this is a little good news for drivers. According to (see graph at bottom), gasoline prices are up to a national average of $3.58 per gallon. One year ago, prices were at $3.81 per gallon, and for the same week two years ago prices were just over $4.00 per gallon.According to Bloomberg, WTI oil is at $96.04 per barrel, and Brent is at $103.91 per barrel. Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.44 per gallon. That is about 14 cents below the current level according to, so prices might fall a little.

Report Finds Americans Are Driving Less, Led by Youth - For six decades, Americans have tended to drive more every year. But in the middle of the last decade, the number of miles driven — both over all and per capita — began to drop, notes a report to be published on Tuesday by U.S. Pirg, a nonprofit advocacy organization. People tend to drive less during recessions, since fewer people are working (and commuting), and most are looking for ways to save money. But Phineas Baxandall, an author of the report and senior analyst for U.S. Pirg, said the changes preceded the recent recession and appeared to be part of a structural shift that is largely rooted in changing demographics, especially the rise of so-called millennials — today’s teenagers and twentysomethings. “Millennials aren’t driving cars,” he said. In fact, younger people are less likely to drive — or even to have driver’s licenses — than past generations for whom driving was a birthright and the open road a symbol of freedom. Research by Michael Sivak of the Transportation Research Institute at the University of Michigan found that young people are getting driver’s licenses in smaller numbers than previous generations.

Subprime 2.0 - Auto Loan Delinquency Balances Rise 24% YoY - As we warned six weeks ago, the Fed's ZIRP side-effects have driven auto-lenders to scrape the bottom of the subprime-lending barrel once again (loans to subprime borrowers +18% YoY). It seems, based on the Fed's latest data, that this over-exuberant lending is coming back to bite once again as delinquent balances surge 23.9% year-over-year (though optimistically Experian reflects "obviously, we never want to see a rise in delinquencies or repossessions, but... they are still lower than the recession-level rates,"). As Experian also notes today, repossessions rose 16.9% year-over-year. All this as lending volumes overall rose 9.6% to $726 billion in Q1 2013 but average charge-off amounts rose by 9.8% to $7,401 on each defaulted loan - and the worse is yet to come, as "we continue to move forward, we should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate." This will end well.

Inflation Comes in Below Forecast, Thanks Again Mostly to Lower Gasoline Prices - The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.06%, which the BLS rounds to 1.1%, down from 1.47% last month (rounded to 1.5%). Year-over-year Core CPI (ex Food and Energy) came in at 1.72% (rounded to 1.7%), down from last month's 1.89% (rounded to 1.9%). Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment. As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.  The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.  The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent.  More... The consensus forecast was for a seasonally adjusted MoM -0.2% for Headline and 0.2% Core.The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

CPI Shows Inflation Dropped -0.4% on Volatile Gas Prices in April 2013 - The April Consumer Price Index dropped -0.4% from March.  CPI measures inflation, or price increases.  The culprit is gas prices again, which plunged -8.1% for the month.  This is the biggest monthly decline in overall CPI since December 2008, when the economy was at risk of a deflationary spiral.  Take food and energy items out of the index and CPI actually rose 0.1% from March, so once again volatile retail gasoline prices are wreaking havoc in the overall consumer price index, as well as consumer's monthly budgets. CPI is now up 1.1% from a year ago as shown in the below graph.  This is the lowest annual overall CPI increase since November 2010. Core inflation, or CPI minus food and energy items, increased 0.1% for April.  Core inflation has risen 1.7% for the last year and is the lowest annual increase since June 2011.  Core CPI is one of the Federal Reserve inflation watch numbers and 2.0% is their boundary figure.   These figures are actually surprising, considering the Fed has been engaging in quantitative easing, which usually increases commodity prices.  Graphed below is the core inflation change from a year ago. Core CPI's monthly percentage change is graphed below.  The ten year average for core inflation has been a 1.9% annual increase. Core inflation's components are a mixed bag.    Shelter increased 0.2% and is up 2.2% for the year.  The shelter index is comprised of rent, the equivalent cost of owning a home, hotels and motels.  Rent increased 0.2% for the month.  Airfares decreased -0.7%.  Buying an auto increased as new cars and trucks prices increased 0.3% for the month and used jumped by 0.6%.  Clothing declined as apparel dropped by -0.3%.  Transportation services prices also dropped by -0.2% for the month.   Graphed below is rent, where cost increases hits people who can least afford it most.

US CPI Falls in April at Fastest Rate since 2008. Even so, could it be Overstating the True Rate of Inflation? - According to data released yesterday by the Bureau of Labor Statistics, the U.S. Consumer Price Index fell in April at an annual rate of -4.35 percent. It was the second consecutive monthly decrease and the fastest rate of decrease since late 2008, when the economy was in free fall. The April decrease was largely attributable to lower gasoline prices, as have been almost all of the gyrations in the index since the start of the year. The core CPI, which removes its food and energy components, shows much less month-to-month volatility. It rose at an annual rate of 0.6 percent in April, its slowest rate of increase since 2010. The following chart shows that both all-items and core inflation have trended gradually downward over the past two years. Given that perceived inflation is generally higher than the CPI indicates, it will come as a surprise to learn that some professional economists think the CPI overstates the rate of inflation, and does so by an increasingly wide margin. One piece of evidence pointing in that direction is a growing gap between the CPI, calculated by the BLS on the basis of monthly price surveys, and the price index for personal consumption expenditures (PCE index) that is derived from the national income accounts. There are theoretical reasons for thinking that inflation as measured by the CPI, which uses base-period quantity weights, is likely to average a bit higher than the PCE index. (I discussed some of those reasons in this recent post.) The surprising thing, however, is that the gap between the two indexes has been increasing lately, as shown in this figure reproduced from the Atlanta Fed’s Macroblog. (I have added the CPI for April to the original chart.)

Vital Signs Chart: Disinflation on Two Counts - The cost of living in the U.S. dropped last month. Consumer prices fell 0.4%, the second straight month of declines, the Labor Department said. Over the past year, prices have increased just 1.7%, omitting food and energy. That means Americans’ dollars are going further, but also that the economy remains weak — leaving workers and companies unable to seek wage and price increases.

April consumer deflation boosts real wages and sales -- As I expected, the big, surprising decline in gas prices caused April consumer prices to decline -0.4%, one of the biggest declines recorded in the last 50 years outside of the 2008 recession. This brought YoY inflation down to +1.1%, likewise one of the lowest readings outside of the great recession, as shown in blue in the graph below, which also shows YoY producer prices for consumer goods in red [UPDATE: up to date graphs added.]: This also raised real, inflation adjusted wages by +0.5% in April, to their highest level in several years: YoY growth in wages is the highest since early 2011 as well: And it also means April real retail sales rose to a new post-recession high: Because the decline in April prices was due to energy costs, I do not think this correlates with economic weakness, but rather shows how even a temporary loosening of the oil choke collar acts like an economist stimulus.

What Constitutes ‘Shelter’ in Inflation Measure? -- As inflation threatens to melt away entirely, consumers keep paying more for one big-ticket item: housing. The government’s measure of housing costs, based on rent levels rather than home prices, makes up a large part of the consumer price index and also has a sizable weighing in another inflation benchmark that’s favored by the Federal Reserve. The April figures from the Labor Department show the price of shelter rising 2.2% in the past 12 months, a relatively steady rate that hasn’t changed much since the beginning of 2012. Meanwhile, the consumer price index excluding food, energy and shelter grew only 1.4%, the lowest rate in more than two years, compared to 1.7% growth for the core CPI that excludes just food and energy. The upshot? Core inflation would be even lower if it weren’t for the healthy gains in housing costs. But what constitutes “shelter”? To determine what consumers are paying for the roof over their heads, the government looks partly at what renters are paying but more importantly what homeowners would pay if they were renting their own dwellings. So it all comes down to rent. During the revival of the housing market, rents have been kept in check by investors buying homes to rent out and by an increase in the supply of apartments and other multiunit buildings.

Wholesale Prices in U.S. Decrease by Most in Three Years - Wholesale prices in the U.S. dropped in April by the most in three years, reflecting a decrease in fuel costs that is helping underpin profits. The producer-price index declined 0.7 percent, the biggest decrease since February 2010, after falling 0.6 percent in March, according to a Labor Department report released today in Washington. The median estimate in a Bloomberg survey of 73 economists projected the index would decline 0.6 percent. So-called core wholesale inflation, which excludes often-volatile food and energy prices, climbed 0.1 percent. Slow growth in the U.S. and abroad is holding input-price gains in check for American factories. Absent a surge in inflation, policy makers at the Federal Reserve have the option of weighing whether the U.S. economic expansion needs more stimulus to pick up.

US Wholesale Prices Fall 0.7 Pct., Most in 3 Years - Sharp drops in fuel and food costs reduced a measure of U.S. wholesale prices in April by the most in three years. Outside those volatile categories, inflation stayed low. The producer price index, which measures price changes before they reach the consumer, fell a seasonally adjusted 0.7 percent in April from March, the Labor Department said Wednesday. It was the second straight monthly decline and the steepest since February 2010. The index declined largely because gas prices dropped 6 percent and the price of home heating oil fell by the most in almost four years. Food prices also declined 0.8 percent, the most since May 2011. Half of the decline was because of lower vegetable prices, a highly volatile category. Meat prices dropped 2.3 percent. Excluding the volatile food and energy categories, core prices ticked up 0.1 percent in April from March. Pharmaceutical costs rose 0.1 percent. Metal furniture prices jumped 1.7 percent. Prices for cars and pickup trucks, men’s clothes, tires and computers all declined.

Producer Price Index: Headline Inflation Drops 0.7%, Core Rises 0.1% - Today's release of the April Producer Price Index (PPI) for finished goods shows a month-over-month decrease of 0.6%, seasonally adjusted, in Headline inflation. Core PPI rose 0.1%. had posted a MoM consensus forecast of -0.5% for Headline and 0.1% for Core PPI.  The April decline in Headline PPI is the second monthly decline following two months of increases, which had followed three months of declines. Year-over-year Headline PPI is at 0.7%, its lowest level in nine months, and Core PPI is at 1.7%, its lowest since YoY since January 2011. Here is the essence of the news release on Finished Goods:  In April, over eighty percent of the decrease in the finished goods index can be traced to a 2.5- percent drop in prices for finished energy goods. Also contributing to the decline in finished goods prices, the index for finished consumer foods fell 0.8 percent. By contrast, prices for finished goods less foods and energy advanced 0.1 percent in April.  Finished energy: The index for finished energy goods moved down 2.5 percent in April after falling 3.4 percent in March. Over ninety percent of the April decrease is attributable to gasoline prices, which dropped 6.0 percent. Finished foods: Prices for finished consumer foods moved down 0.8 percent in April, the largest decrease since a 1.0-percent drop in May 2011. Half of the April decline can be traced to the index for fresh and dry vegetables, which fell 10.6 percent. Finished core: The index for finished goods less foods and energy inched up 0.1 percent in April following increases of 0.2 percent in each of the previous four months. Leading the April rise, prices for pharmaceutical preparations climbed 0.6 percent.   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increase in 2011 and then began falling in 2012. Now, in early 2013, the YoY rate is about the same as in early 2011.

Producer prices post big drop, factory activity weak - (Reuters) - U.S. producer prices recorded their largest drop in three years in April as gasoline and food costs tumbled, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative. Separate reports on Wednesday showed an unexpected drop in U.S. factory output last month and troubling signs of weakness in manufacturing activity in New York state this month. The Labor Department said its seasonally adjusted producer price index fell 0.7 percent last month, the biggest decline since February 2010. Wholesale prices had dropped 0.6 percent in March.A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries dropping 0.6 percent last month.In the 12 months through April, wholesale prices were up only 0.6 percent, the smallest increase since July last year. Prices had increased 1.1 percent in March.Underscoring the tame inflation environment, wholesale prices excluding volatile food and energy costs nudged up 0.1 percent, the smallest increase since November. The so-called core PPI had risen 0.2 percent in each of the previous four months. In the 12 months through April, core PPI advanced 1.7 percent after rising by the same margin in March.

LA area Port Traffic: Exports down slightly in April - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for April since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 2% in April, and outbound traffic down 2%, compared to the rolling 12 months ending in March. In general, inbound traffic has been increasing slightly recently, and outbound traffic has been mostly moving sideways. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year). This year imports bottomed in March, and bounced back in April. My guess is this suggests an increase in the trade deficit with Asia for April.

Industrial Output In April Slumps The Most In Eight Months - Industrial production fell more than expected last month, sliding 0.5% in April. That’s a bit deeper than economists projected, and it's an even bigger drop relative to the modest gain that my econometric modeling suggested. But based on today's release, it's obvious that April was a rough month for the industrial sector. The worst, in fact, since last August. The manufacturing component of industrial activity didn’t fare much better, slipping 0.4% last month. That’s the second consecutive monthly retreat for manufacturing, according to this series. It’s also the first time that manufacturing in this data set slumped for two months running since 2009.  The slowdown in industrial output is visible in other indicators, including the survey data via the ISM Manufacturing Index. But the weakness in the industrial/manufacturing slice of the economy would be all the more troubling if the labor market was exhibiting equally dark signs of stress. For the moment, that’s not the case. Jobless claims have been plumbing new five-year lows recently and the decent if unspectacular April report on private payrolls suggests that the economy will continue to post modest growth for the near term.

Fed: Industrial Production decreased 0.5% in April - From the Fed: Industrial production and Capacity Utilization Industrial production decreased 0.5 percent in April after having increased 0.3 percent in March and 0.9 percent in February. Manufacturing output moved down 0.4 percent in April after a decline of 0.3 percent in March. The index for utilities decreased 3.7 percent in April, as heating demand fell back to a more typical seasonal level after having been elevated in March because of unusually cold weather. The output of mines increased 0.9 percent in April. At 98.7 percent of its 2007 average, total industrial production was 1.9 percent above its year-earlier level. The rate of capacity utilization for total industry decreased 0.5 percentage point to 77.8 percent, a rate 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972--2012) average. This graph shows Capacity Utilization. This series is up 10.8 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.8% is still 2.4 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.8% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production decreased in April to 98.7. This is 17.9% above the recession low, but still 2.1% below the pre-recession peak. The monthly change for both Industrial Production and Capacity Utilization were below expectations. The consensus was for a 0.2% decrease in Industrial Production in April, and for Capacity Utilization to decrease to 78.3%.

Industrial Production in U.S. Falls by Most in Eight Months - Industrial production declined in April by the most in eight months, reflecting broad-based cutbacks in U.S. manufacturing  that show factories will provide little support for the economy. Output at factories, mines and utilities fell a more-than-forecast 0.5 percent after a revised 0.3 percent gain in the prior month that was weaker than previously reported, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey called for a 0.2 percent decline. Manufacturing, which makes up 75 percent of total production, unexpectedly fell 0.4 percent, the third drop in four months. Business investment is cooling at the same time the economy is projected to slow this quarter as across-the-board federal budget cuts take hold. Faster gains in employment and a pickup in overseas markets are needed to drive demand, which would help to spur orders and inventory building and keep assembly lines running at American factories.

Industrial Production, Capacity Utilization Both Miss: Good Weather Blamed - And the hits just keep on coming. Following today's misses in PPI and Empire Fed, it was up to the Fed's April report of Industrial Production and Capacity Utilization to provide at least some validity to Tepper's latest CNBC preachings. Alas, that did not come and moments ago we got the latest disappointments as IP dropped -0.5% on expectations of a -0.2% drop, driven by a drop in Manufacturing Production which dropped 0.4%, despite expectations of a +0.1% increase. Utilities sliding -3.7% did not help the headline print but at least it allowed the Fed to, you got it, blame the weather, only this time there is a twist: the Fed actually blamed the weather for not being as bad as it was in March for the slack in Utility production. One really can't make this up. And confirming that the slack in the economy is structural and not cyclical as the Fed would wants us to believe was the Capacity Utilization print which tumbled from 78.3% to 77.8%, the lowest since January, and resulting from a decline in both Manufacturing and Utilities utilization.

The Big Four Economic Indicators: Industrial Production - I've now updated this commentary to include April Industrial Production, which included revisions back to November. As the adjacent thumbnail illustrates, this indicator has risen over the past year but the trajectory has not been smooth and, as I mentioned, is extensively revised. Today's Industrial Production index for April declined 0.5% from March, the steepest drop since the -0.8% reading eight months ago. The consensus was for a 0.2% decline. The latest year-over-year growth rate of 1.95% to two decimal places is fractionally above the 1.94% YoY in January, and that was the lowest reading since January 2010. If we study this YoY chart in the Appendix below, which dates from the WWI era, we can plot the Industrial Production level for the beginning months of the 17 recessions over this timeframe. The April reading of 1.9% falls in the bottom half. It is higher than six of them but lower than eleven. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data point is for the 47th month. In addition to the four indicators, I've included an average of the four, which, as we can see, looks to be flattening out of late.

Despite a disappointing report on April industrial production, the oil and gas sector is booming and reached a 40-year high -- Today’s report from the Federal Reserve on industrial production in April was below expectations and generally disappointing, here’s how Bloomberg reported it: Industrial production declined in April by the most in eight months, reflecting broad-based cutbacks in U.S. manufacturing that show factories will provide little support for the economy. Output at factories, mines and utilities fell a more-than-forecast 0.5% after a revised 0.3% gain in the prior month that was weaker than previously reported. The median forecast in a Bloomberg survey called for a 0.2% decline. Manufacturing, which makes up 75 percent of total production, unexpectedly fell 0.4%, the third drop in four months.But there was one part of today’s report on industrial output that wasn’t so disappointing - America’s booming energy sector. The oil and gas extraction component of US industrial production increased in April by almost 9% from a year ago to the highest level since April 1972, more than 40 years ago (see top chart).  Crude oil production in April reached the highest level since April 1992, more than 20 years ago (see middle chart above), and increased by 16% from a year ago, and by 31% from two years ago.Another energy-related sector that is booming are the producers who manufacture the oil and gas field machinery that is being used for the increased drilling activity for shale gas and oil. In April, the output of oil and gas field machinery reached a new record high (see bottom chart above).

Vital Signs Chart: Manufacturing Declines - Economic turmoil abroad is pinching U.S. factories. Manufacturing output fell 0.4% in April, after slumping 0.3% in March and 0.2% in January. Output picked up late last year and is up 1.3% from April 2012, but factories have lost momentum recently amid flagging demand in key export markets. April’s weak report jibes with other readings showing factory activity barely growing.

New York Area Manufacturing Unexpectedly Contracts - Manufacturing (EMPRGBCI) in the New York region unexpectedly shrank in May as factories received fewer orders and sales stagnated. The Federal Reserve Bank of New York’s general economic index declined to minus 1.4 this month from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey called for an increase to 4. Less inventory building by companies and struggling global markets are restraining orders and slowing manufacturing, which accounts for about 12 percent of the economy. At the same time, sustained strength in housing and auto sales may help keep the industry from deteriorating further. “Sales growth is less than inventory growth, and when you’re in that situation it tends to lead to flatness or declines in manufacturing" “Manufacturing might see some regaining of momentum in the second half of the year.” Estimates in the Bloomberg survey ranged from minus 2 to 8.5. Economists monitor the New York report and Philadelphia Fed factory reading, due tomorrow, for clues about the Institute for Supply Management figures on U.S. manufacturing. That report is set for release on June 3.

Empire State Manufacturing Unexpectedly Contracts   - This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions surprised to the downside, posting a contractionary reading of -1.4. There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. Today's decline to -1.4 from 3.1 last month and from 10 three months ago in February is an unexpected slide. The consensus was for a slight expansion to 3.5. Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead): Here is the opening paragraph from the report. The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.

New York Fed Manufacturing Index Contracts in May - New York manufacturing activity slipped into contraction this month, a worrying sign for the U.S. economy, according to the Federal Reserve Bank of New York'sEmpire State Manufacturing Survey released Wednesday. The Empire State's business conditions index declined to -1.43 in May from 3.05 in April. A reading below 0 indicates contraction. The May reading is the first negative number since January. Economists surveyed by Dow Jones Newswires had expected the latest index to strengthen to 3.5. The New York Fed survey is the first factory report released by regional Fed banks for May, and the negative reading suggests the factory slump continues midway through the second quarter. Economists use the surveys as guideposts to forecast the health of the national industrial sector as captured in the monthly manufacturing report done by the Institute for Supply Management. The Empire subindexes were generally weaker. The new orders index declined to -1.17 this month from 2.20 in April. The shipments index fell to -0.02 from 0.75. Labor conditions remain weak this month. The employment index slowed to 5.68 from 6.82 in April, but the workweek index slumped to -1.14 from 5.68. Cost pressures are easing this month. The prices paid index declined to 20.45 from 28.41, and the prices received index dropped to 4.55 from 5.68. Responents were slightly more cautious about the future

Producer Prices Plunge, Empire Fed Slides To First Negative Print Since January -  One of these days we might just get a positive economic print, of the kind that the meandering Tepper was saying is visible everywhere now. Just not yet. Moments ago we got the releases of the May PPI and the Empire Fed, the first of which dropped -0.7%, on expectations of a -0.6% drop, the lowest MoM PPI since July 2009. Technically, this is bullish for the E-Trade baby as it gives the Fed carte blanche to continue QEternity as long as needed. But it was the Empire Fed index that was even more disappointing, as it crushed hopes for an increase from 3.05 to 4.00 in May, instead posting the first contractionary print since January, printing at -1.43. It gets worse when one digs through the data: New Orders dropped from 2.20 to -1.17, Shipments also slid into negative from 0.75 to -0.02, Unfilled Orders deteriorated even more from -3.41 to -6.82, Inventories contracted from -4.55 to -7.95, Prices Paid and Received both contracted, but worst of all, the Average Employee Workweek dropped from 5.68 to -1.14, meaning the collapse in the average workweek persists, and even if the BLS reports a positive print for May, the report will once again mask the declining aggregate end demand for labor.

Philly Fed Manufacturing Index Drops - Mid-Atlantic manufacturers slipped into contraction this month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed’s index of general business activity within its regional factory sector declined to -5.2 in May from to 1.3 in April. Economists surveyed by Dow Jones Newswires expected the latest index to be little changed at 2.0. Readings under zero denote contraction, and above-zero readings denote expansion. “The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings,” the report said. The Philadelphia survey follows Wednesday’s report from the New York Fed that said factories in the Empire State are also experiencing slightly contractionary business conditions this month. Nationwide, manufacturing output declined in March and April, according to Fed data. Within the Philadelphia Fed survey, the subindexes generally weakened this month.

Philly Fed Manufacturing Survey Shows Contraction in May - From the Philly Fed: May Manufacturing Survey Manufacturing firms responding to the monthly Business Outlook Survey suggest that regional manufacturing activity weakened this month. All of the survey’s broadest current indicators were negative this month, indicating weaker conditions compared with April. The survey’s indicators of future activity improved, however, and suggest that firms expect overall growth over the next six months.  The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings.  Labor market conditions showed continued weakness, with indexes suggesting lower employment overall. The employment index decreased 2 points to -8.7, its second consecutive negative reading. ... The workweek index declined 10 points to -12.4, remaining negative for the fifth consecutive month.Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through May. The ISM and total Fed surveys are through April.The average of the Empire State and Philly Fed surveys turned negative again in May. This suggests another weak ISM report

Philly Fed Business Outlook: Manufacturing Activity Weakened The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity dropped from to -5.2 from last month's 1.3. The 3-month moving average came in at -0.6, the eleventh negative reading in twelve months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Here is the introduction from the Business Outlook Survey released today: Manufacturing firms responding to the monthly Business Outlook Survey suggest that regional manufacturing activity weakened this month. All of the survey’s broadest current indicators were negative this month, indicating weaker conditions compared with April. The survey’s indicators of future activity improved, however, and suggest that firms expect overall growth over the next six months.... Summary The May Business Outlook Survey indicates some weakening of activity this month, with all of the broad indicators recording negative diffusion indexes. The survey’s indicators have failed to exhibit any sustained pattern of growth in recent months. The indicators for general activity, new orders, and shipments suggest weaker conditions this month, and firms reported employment reductions. Price pressures continue to be modest. Despite weaker current indicators, firms continue to expect positive growth over the next six months. (Full PDF Report)

Philly Fed Slips Into Contraction (Again); Current Conditions Recessionary, Future Expectations Far Too Optimistic eceived The Philly Fed Business Outlook Survey shows regional activity weakened with current indicators negative. The Six-Month Outlook brightened in what I believe is rampant over-optimism. "The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings."  Note the negative slope of current conditions and future expectations. Current conditions are in recession territory. Key May Index Numbers

  • Business Conditions: -5.2
  • New Orders: -7.9
  • Shipments: -8.5
  • Unfilled Orders: -9.3
  • Number of Employees: -8.7
  • Average Workweek: -12.4

Philly Fed Misses, Key Indicators Negative Across The Board: Employment Index Lowest Since September 2009 - It's just getting plain stupid out there. Just as stocks were exploding into the green (perhaps on expectations of an epic Philly Fed miss), the Philly Fed did not disappoint, printing at -5.2, down from 1.3, and crushing expectations of an increase to +2.0, the biggest miss since February and confirming that the Empire Fed index plunge was not a fluke. Virtually every components in the Philly Fed was red except for Inventories (up to 4.1 from -22.2 in March) and Prices Paid (up to 6.9 from 3.1 in March). Among the plungers, the key New Orders tumbled from -1.0 to -7.9, Shipments crashed from 9.1 to -8.5, Average Workweek slide from -2.1 to -12.4, and the Number of Employees imploded from -6.8 to -8.7, the lowest print since September 2009. And if all of this doesn't send the Stalingrad & Poor 500 to new historic highs, we don't know what will. All one can do now is just laugh at this "market."

How Clueless Are Manufacturing Future Expectations? - Month in and month out I see unwarranted optimism in Europe and in the US. For example, on Thursday I stated "Philly Fed Slips Into Contraction (Again); Current Conditions Recessionary, Future Expectations Far Too Optimistic". Here is the chart I posted: That chart got me to wondering "just how wrong are future expectations historically?" The data is available, all one has to do is chart it.  I asked Doug Short at Advisor Perspectives if he could produce a chart of future expectations offset by six months to see how expectations actually matched what did happen. Doug graciously produced a pair of charts. Note that manufacturers in the Philly region are especially clueless during recessions as to how fast things will improve. They can be wildly off at other times too, as shown by the black ovals. Since the Philly Fed index is generally noisy (huge month-to-month random fluctuations), we decided to smooth out the lines by showing a 3-month rolling average of current conditions vs. a 3-month rolling average of future expectations. Generally speaking, manufacturers' expectations about future conditions are wildly off for many months before during and after recessions.

Why U.S. Manufacturing Can’t Get Off the Mat - In December, I wrote a piece pointing out that despite all the hype surrounding America’s supposed Manufacturing Renaissance, the data painted a starker picture. Hardly a renaissance, U.S. manufacturing seemed to be closer to a recession back then.Six months later the story hasn’t changed much, despite the continued sentiment that “Made in the USA” is staging a big comeback. The anecdotes are nice, but the broader data just don’t bear out a big resurgence. Manufacturing employment over the last 12 months has essentially been flat, stuck at around 11.9 million workers since April 2012. The industry has added around 500,000 jobs since the recession ended, but that’s a drop in the bucket compared with the 1.8 million manufacturing jobs lost from November 2007 through the end of 2010. It’s not just employment that’s been sagging. Industrial production shrank 0.5 percent in April, according to new data from the Federal Reserve. Overall, the country is using about 77 percent of its total industrial capacity, nearly 3 percentage points below the 40-year average. The latest bad news comes from the Philadelphia Fed’s report on regional manufacturing activity, which plummeted to a .2 reading this month. The average estimate of economists surveyed by Bloomberg called for a gain of 2. Anything below zero indicates contraction. Industrial activity has been essentially flat for the Philadelphia region over the last seven months. It bears noting that the Philly reading is notoriously choppy, with a standard deviation around 11 points since 2010, but a miss that large is still bad news. Things aren’t much better in New York, where the latest Empire State Manufacturing Survey registered a .4.

More Bad News On Dying US Manufacturing- Excise Taxes Drop, But Markets Have Reason To Party On -  While US tax collections on everything went gangbusters in April, absolutely through the roof, there was one exception, Federal excise taxes. The following, excerpted from the Wall Street Examiner Professional Edition weekly Treasury Update, looks at what happened, and what it may mean.  As of April 30, month to date withholding tax receipts for the full month were 10.1% ahead of last year (see table below). Non withheld individual taxes were up 52%. They are material at this time because quarterly estimated individual income taxes and underpayments for 2012 are due on April 15. The enormous bulge was partly due to the rate increase that went into effect in January, but even with that, this is a spectacular increase.Quarterly excise taxes were due at the end of the month so this is a complete number for the first quarter. This item is not relevant to April business activity. It suggests a first quarter decline in the categories of economic activity covered by excise taxes. Federal Excise Tax Collections – Click to enlarge Excise taxes are mostly based on quantities, not prices, and they cover a broad range of items, with the majority involving fuels. IRS form 720 lists the various items covered. Gasoline taxes account for about 40-45% of the total, aviation taxes around 15%, with all the others accounting for 40-45%. The vast majority apply to manufactured goods. This data is evidence of the ongoing decline in US manufacturing, a trend that is no secret. The US is a services and trade based economy. Manufacturing accounts for just 12% of GDP.

Business Inventories Flat in March - U.S. firms continued to keep inventories in check in March, suggesting that business remained uncertain about the strength of the economic recovery. Inventories were virtually unchanged in March at a seasonally adjusted $1.641 trillion, the Commerce Department said Monday. Economists surveyed by Dow Jones Newswires had forecast a 0.3% increase. Total sales for U.S. businesses declined 1.1% during the month. Many economists feared that tax increases earlier this year and general fiscal uncertainty in Washington would cause consumers and businesses to pull back. The March sales figure supports those concerns, but data from April are more positive

NFIB: Small Business Optimism Index increases in April - From the National Federation of Independent Business (NFIB): Small-Business Owner Roller Coaster Continues After last month’s disappointing drop in small-business confidence, April’s Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7. ...April was another positive, albeit lackluster month for job creation. Small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain. Job creation plans rose 6 points to a net six percent planning to increase total employment.  In a little sign of good news, only 16% of owners reported weak sales as the top problem (lack of demand).  During good times, small business owners usually complain about taxes and regulations - and taxes are now the top problem again. This graph shows the small business optimism index since 1986. The index increased to 92.1 in April from 89.5 in March.

Leading Employment Indicators Suggest Higher Highs Into the Fall: Back in March I penned an article showing that leading indicators for employment were forecasting further job gains. Since then the employment picture has only improved and now suggests the markets continue to rally into the fall.  Shown below are two indicators, US Job Openings and the Conference Board Employment Trends Index, that both suggest payrolls continue to climb heading into early October.  Another leading employment indicator is the Fed’s Senior Loan Officer Survey, which measures the percentage of banks tightening lending standards for Commercial and Industrial (C&I) loans to small firms. The survey leads employment growth by one quarter and suggests that payroll growth accelerates from present levels heading into the fall with the big acceleration coming in May, with May’s payroll data being released on Friday June 7th.Looking at the long-term history of the Conference Board’s Employment Trends Index paints a very encouraging picture. Shown below is the Employment Trends Index along with its 20-month moving average (20-Mo MA).

Why Washington Saved the Economy, Then Permanently Destroyed the Labor Market - I have two stories for you about Washington and the economy. Both true. But very different. The first story is called: How Washington Saved the Economy. You might begin in 2008, when the Federal Reserve went on an unprecedented spree of asset-buying to un-gunk the banks, push down interest rates, and spur investing in mortally weakened economy. This was followed, in 2009, with an equally historic stimulus package aimed at filling holes in state budgets and sending cash back to families and businesses. The government ran steep $1+ trillion deficits to keep as much money in the weak private sector as possible. There is little question that monetary and fiscal stimulus blunted the recession -- and saved the economy. The second story is called: How Washington Permanently Scarred the Labor Market. You might begin this story in 2011, when Congress (led by Republican obstructionism) embarked on a historic quest to crush deficit spending by any means necessary. Hold the economy hostage over the debt ceiling? Check. Kill the American Jobs Act while scheduling a too-awful-to-be-a-real-law sequester? Check. Allow the too-awful-to-be-a-real-law sequester to become a real law? Checkmate.

When will payroll employment exceed the pre-recession peak? - The WSJ has an overview of several economic forecasts: Economic Road Clearing, but the Going Is Slow The U.S. still employs more than 2.5 million fewer people than when the recession began. At 180,000 jobs a month, it will take until the middle of 2014 to close that gap. Adjust for population growth, and it will take nine more years to return to the prerecession level of employment at the current rate of growth, according to the Brookings Institution. Below is an update of the graph showing job losses from the start of the employment recession, in percentage terms, with a projection assuming the current rate of payroll growth will continue. This suggests that employment will exceed the pre-recession peak around July 2014 (Private employment will reach a new high around March of 2014).  Of course, as the article notes, this doesn't include adjusting for population growth - but this will still be a major milestone.

Weekly Initial Unemployment Claims increase to 360,000 -  The DOL reports: In the week ending May 11, the advance figure for seasonally adjusted initial claims was 360,000, an increase of 32,000 from the previous week's revised figure of 328,000. The 4-week moving average was 339,250, an increase of 1,250 from the previous week's revised average of 338,000.The previous week was revised up. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 339,250. Claims were well above the 330,000 consensus forecast.

Initial Unemployment Claims Take a Hike Up Again - The DOL reported people filing for initial unemployment insurance benefits in the week ending on May 11th, 2013 was 360,000, a 32,000 increase from the previous week of 328,000 and a six week high.  This is the wrong direction for weekly initial unemployment claims and shows, once again, as far as jobs are concerned, the recession never ended.  There is no event this week to explain the jump, but initial claims is a volatile labor metric.  The statistic to pay attention to is the four week moving average on initial unemployment claims.  The four week moving average increased 1,250 to 339,250, after last week's drop gave false hope the job market was improving.  In the below graph we can the four week moving average is still at recession levels and seemingly staying there, now over five years.  If anyone recalls, even before the Great Recession the job market was not so hot.  The four week moving average, graphed below is set to a log scale, from April 1st, 2007.

U.S. Weekly Jobless Claims Jump to Highest Level in 6 Weeks — The number of Americans seeking unemployment aid rose 32,000 last week to a seasonally adjusted 360,000, the most since late March. The jump comes after applications fell to a five-year low. The Labor Department said Thursday that the less volatile four-week average rose just 1,250 to 339,250, a level consistent with modest hiring. Weekly applications are a proxy for layoffs. The big increase could mean companies are cutting more jobs, possibly because of steep government spending cuts that kicked in March 1. Labor officials said there were no special circumstances that caused the spike. Applications tend to fluctuate sharply from week to week and economists typically focus more on the four-week average. That remains 9 percent lower than it was six months ago. The job market has improved over the past six months. The economy has added an average of 208,000 jobs a month since November. That’s up from only 138,000 a month in the previous six months. Still, much of the job gains have come from fewer layoffs — not increased hiring. Layoffs fell in January to the lowest level on records dating back 12 years and have risen only modestly since then. Overall hiring remains far below pre-recession levels.

Not Great Claims Are Not As Bad As Claimed - The media exhibited much consternation today as economists’ consensus guess on  first time unemployment claims turned out to be way too optimistic this week. That raised two questions in my mind. Was the number really that bad, and even if it was, does it matter? The Labor Department reported  that the seasonally adjusted (SA) representation of  first time claims for unemployment  rose by 32,000 to 360,000 from a revised 328,000 (was 323,000) in the advance report for the week ended May 11, 2013. The consensus estimate of economists of 330,000 for the SA headline number was too optimistic after 3 weeks of guesses that were too pessimistic. Call it “evening things up.” They were wrong one way 3 times in a row, so they overcompensated the other way this week. It’s a ridiculous game, but everybody plays anyway. Forecasters are virtually always wrong, not just because economic forecasting is quackery, but also because the seasonally adjusted number, being made-up,  is impossible to consistently guess (see endnote). The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 318,203 in the week ending May 11, a decrease of 15,436 from the previous week. There were 325,094 initial claims in the comparable week in 2012.”The adjusted number that I used in the data calculations and charts for this week is 322,000, rounded. It won’t matter that it’s a thousand or two either way in the final count next week. The differences are essentially rounding errors, invisible on the chart.

What Do Weekly Unemployment Claims Tell us About Recession Risk?  - Every Thursday I post an update on weekly unemployment claims shortly after the BLS report is made available. My focus is the four-week moving average of this rather volatile indicator. The financial press takes a fairly simplistic view of the latest weekly number, and the market often reacts, for a few minutes or a few hours, to the initial estimate, which is always revised the following week. One of my featured charts in the update shows the four-week moving average from the inception of this series in January 1967. The chart, above, however, gives a rather distorted view of Initial Claims. Why? Because it’s based on a raw, albeit seasonally adjusted, number that doesn’t take into account the 103% growth in the Civilian Labor Force since January 1967. The Civilian Labor Force in the chart above has more than doubled from 76.64 Million in January 1967 to 155.24 Million today. The curve of the line, which the regression helps us visually quantify, largely reflects the employment demographics of the baby boom generation, those born between 1946 and 1964. In 1967 they were starting to turn 21. (see this illustration). For a better understanding of the weekly Initial Claims data, let’s view the numbers as a percent ratio of the Civilian Labor Force. The latest percent ratio of 0.23% means that out of 10,000 workers, twenty three made an initial application for unemployment insurance payments in the last week’s data. In fact, the latest data point is close to the low end of the 0.19% to 0.60% range over the last 46 plus years. Initial Claims are substantially below the levels during the business cycles of the stagflation years of the 1970s and early 1980s.What is particularly interesting about this Unemployment Claims ratio series is its effectiveness as a leading indicator for recession starts and a virtually dead-on coincident indicator for recession ends.

FRBSF Economic Letter: Will Labor Force Participation Bounce Back? - This is related to the recent post from Gavyn Davies. Recall that he is worried about the unemployment rate giving misleading signals about the labor market. Many workers have dropped out of the labor force, and if those workers return to the labor force as the economy improves, then the measured unemployment rate will make conditions in the labor market look better than they actually are. In this Economic Letter from the SF Fed, they argue that this is, in fact, something to worry about. They "find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component" (i.e. their analysis concludes that exit from the labor market is temporary for a substantial number of people, and they will begin seeking work again when the economy improves): Will Labor Force Participation Bounce Back? Economic Letter, FRBSF: Since the beginning of the recession in 2007, the U.S. labor force participation rate has dropped sharply. Some of this decline reflects long-term demographic trends and other factors that helped push down the participation rate before 2007. But the recent withdrawal of prime-age workers from the labor market is unprecedented and may reflect a cyclical component that could reverse as the labor market recovery solidifies. The return of these workers to the labor force would partially offset the longer-term demographic influences and potentially cause the participation rate to bounce back (Daly et al. 2012, Van Zandweghe 2012). Moreover, the increase in the number of active jobseekers in the labor force associated with higher participation could slow the decline in the unemployment rate.

Decline in Labor Force Participation Could Be Reversed -The sharp, long running decline in the number of Americans interested and able to work stands a chance of reversing over coming years as long as the economy can continue to grow. New research published by the Federal Reserve Bank of San Francisco Monday argues that a wide range of evidence suggests workers have dropped out of labor markets largely because of demand related issues, in a hopeful note for the employment outlook. As the economy picks up steam, the paper speculates these workers will come back to the job market and take advantage of an improved hiring landscape.For several years now the economy has endured declines in what’s called the labor force participation rate, regardless of whether the economy was losing or adding jobs. Indeed, even as the recovery has taken hold and job growth has returned, the labor force participation rate has been drifting mostly lower. These declines have made the gradual lowering in the unemployment rate look less favorable than would otherwise be the case.

U.S. Labor Participation May Be Low for Years: Fed Study - Workers who have dropped out of the labor force may take a few years to begin searching for work, Federal Reserve economists say in a paper offering insights into the health of a labor market that’s key to central bank policy. Economists have debated how much a slump in labor force participation stems from temporary effects such as weak economic growth or from more lasting forces like an ageing work force. Participation is a key variable influencing the unemployment rate, which Fed officials are monitoring to gauge the appropriate level of stimulus. Vice Chairman Janet Yellen said in March that a decline in unemployment reflecting job-seekers exiting the workforce may understate “the actual degree of labor-market slack.” That’s why the Federal Open Market Committee is keeping an eye on a “broad range” of indicators to assess the state of U.S. employment, she said. The Fed has expanded its balance sheet to $3.32 trillion with bond purchases aimed at spurring economic growth and reducing 7.5 percent unemployment. The FOMC said May 1 it will keep buying $85 billion in bonds each month and may increase or reduce the pace depending on the outlook for inflation and the labor market.

Labor Force Participation Rate Research - The participation rate has declined sharply since the recession started due both to cyclical reasons and also because of demographics. A key question is: How much of the recent decline is due to cyclical factors and how much of the decline was expected due to long term factors? Note: The table at the bottom from Dr. Altig shows the relationship between the participation rate and the unemployment rate. My view has been that there is a large long term factor, although I have expected some bounce back in the participation rate as the economy improves.  Others think there are larger cyclical factors, but they only expect a small bounce back too ... An FSFRB economic letter using state level data: Will Labor Force Participation Bounce Back? Distinguishing between long-term influences on the participation rate, such as demographics, and short-term cyclical effects is important because it helps us understand and predict the future path of macroeconomic variables such as the unemployment rate. Using state-level evidence on the relationship between changes in employment and labor force participation across recessions and recoveries, we find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component. And from Julie Hotchkiss at the Atlanta Fed: Behavior’s Place in the Labor Force Participation Rate Debate Our results suggest that relative to the the average LFPR over the years 2010–12, the average LFPR over the years 2015–17 will rise by about a third of a percentage point—again, if the labor market returns to prerecession conditions.  And from David Altig at the Atlanta Fed: Labor Force Participation and the Unemployment Threshold This table shows the impact of the participation rate. If the participation rate stays flat at 63.3% (the current level), than at the current pace of payroll jobs growth, the unemployment rate will fall to 6.5% by June 2014. However if the participation rate rises to 63.6% - with the same payroll assumptions - the unemployment rate will only decline to 7.0% by next June. A significant difference ...

Labor Force Participation and the Unemployment Threshold - Atlanta Fed's macroblog - On Friday, my colleague Julie Hotchkiss shared in this space the results of her new research (with Fernando Rios-Avila, a Georgia State University colleague) on the recent and prospective behavior of the labor force participation rate (LFPR). The punch line, from my point of view, is this: Our results suggest that relative to the average LFPR over the years 2010–12, the average LFPR over the years 2015–17 will rise by about a third of a percentage point—again, if the labor market returns to prerecession conditions. (Italics original)  As Julie notes: [T]he Federal Open Market Committee has substantially raised the stakes on disentangling...movements in labor force introducing into its policy deliberations concepts like unemployment thresholds and qualitative assessments on "substantial" labor market improvement.  Though the meaning of "substantial labor market improvement"—a condition for adjusting the FOMC's current large-scale asset purchase program—is somewhat ambiguous, the unemployment threshold for considering moving the federal funds rate off the near-zero mark is less so.

Participation Rate Key to Unemployment Drop -- How helpful has the labor-force participation rate’s continuing decline been in also making the unemployment rate drop? Using average monthly growth of 208,000, the Atlanta Fed says at the current participation rate of 63.3% — last seen in 1979 — unemployment would drop to 6.5% from the current 7.5% in June 2014. Reaching that unemployment is key as it’s a benchmark the FOMC has said is liable to warrant some ending of QE. If participation ticks up to 63.6%, that would mean 7% unemployment, and it would remain at 7.5% if the participation rate rebounded to 64%, a level last seen in December 2011.

Labor market stabilization lacks one crucial component - improved hiring - We are clearly seeing signs of stabilization in the US labor markets as new unemployment claims march toward pre-recession levels (though obviously not there yet). Also as we saw today, small businesses have been increasing the numbers of employees (see Twitter link). However, the nation's labor market is still suffering form weak overall hiring. The pattern of hiring in the US has dislocated in late 2008 and has remained virtually unchanged since the recession (chart below). This relative weakness in hiring is consistent across most industries. Thus far the pace of hiring in 2013 has not been significantly different from other post-recession years.

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us -- Atlanta Fed's macroblog - The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year. To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?” We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent.  We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure.  Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.

The Long Shadow of Bad Credit in a Job Search - He been laid off early in the recession and then had the bad fortune of tearing tendons in his knee just when he didn’t have health insurance. The job market was terrible and he had been out of work for more than a year. But the managers at the first two shoe stores to which he applied in the summer of 2010 seemed to be taken by his résumé. He had sold shoes for six years at Salvatore Ferragamo on Fifth Avenue and later at J. M. Weston, where a pair of men’s dress shoes can cost $2,000. The manager at one shop was already discussing salary. The other, he said, invited him to fill out the paperwork normally done on the first day on a job.  “Who does that if they’re not planning on hiring you?” Mr. Carpenter asked.  Yet neither job materialized. One manager, he said, “basically hung up on me.”  “No one lets me explain, ‘Hey, I had this freak injury when I didn’t have health insurance,’ ” he said. “It’s black and white: ‘You have these bad marks on your record, you don’t get hired.’ ” Down to his last $200, he applied for and was granted food stamps and federal housing assistance.

Gatsby and the McJobs Rebellion - How ironic that while the film is recreating a past era of excess and greed, employees in the fast-food and retail industries across the country are engaging in unprecedented strikes over today's flow of wealth from working people to the rich. In the last month, hundreds upon hundreds of fast-food and retail workers walked off the job in five major cities, including, most recently, Milwaukee, where hundreds of workers went on strike Wednesday at major national brands like McDonald's, Burger King, Wendy's, Taco Bell, Denny's and Foot Action. These historic, one-day strikes follow a similar walkout on last fall's Black Friday shopping day by workers at Walmart. What has motivated workers with no job security to draw a line and tell some of the world's richest corporations that enough is enough? As in Gatsby's time, the rich are partying like there is no tomorrow, at working people's expense. One in four American workers is paid less than $10 per hour, well below the poverty line. These include people who prepare food, stock warehouses, staff customer service centers, and care for children, the sick and the elderly. Sub-poverty wage levels have helped fuel the growth in average CEO pay that is now 354 times the average worker's - up from 42 times in 1982. Corporate cash reserves and the stock market are at an all-time high. With the average Walmart salesperson making only $8.81 per hour, the six heirs to the Walmart fortune have pocketed about $100 billion in wealth - more than the least well-off 41 percent of Americans combined.

84 Percent of NYC Fast Food Workers Report Wage Theft in a New Survey - At an 11 am press conference outside a Brooklyn KFC restaurant, fast food workers and activists will release a new report alleging rampant wage theft in their industry, one of the fastest-growing in the United States. The report includes results from an Anzalone Liszt Grove research survey of 500 of the city’s fast food workers, in which 84 percent reported that their employer had committed some form of wage theft over the previous year. Today’s press conference follows strikes by fast food workers in five major cities within six weeks, all demanding raises to $15 an hour and the chance to form unions without intimidation. It lands on the same day as a New York Times article reporting that New York State Attorney General Eric Schneiderman “is investigating whether the owners of several fast-food restaurants and a fast-food parent corporation have cheated their workers out of wages, according to a person familiar with the cases.”  “Wage theft” is a term popularized by activists and advocates over the past decade to describe a wide range of ways in which companies fail to pay employees the wages they’re legally owed. The Fast Food Forward report identifies several types of violations as prevalent in the city’s fast food industry: employees working, without pay, before or after their shift; employees working overtime without being paid time-and-a-half; employees working during their breaks or not receiving breaks; and delivery employees not being reimbursed for expenses like gasoline or safety equipment.

Wal-Mart v. the Feds: Who’s the Low-Wage Job King?  - The federal government is better at creating low-paying jobs than Wal-Mart and McDonald's combined, according to a new report.  A study released earlier this month from the public policy group Demos states that through various forms of government funding in the private sector, nearly two million people are making $12 an hour or less. The number of workers at Wal-Mart and McDonald's together at $12 an hour or less is currently around 1.5 million, according to the report.  "The sheer number of those workers making so little is surprising," said Amy Traub, a senior policy analyst at Demos and co-author of the study. "We assume people working on behalf of America would be making more, but that's not the case," Traub said. "And many of these people are making less than $12 an hour."  The report says that when tax dollars underwrite bad jobs, the economy as a whole is weakened. "People at these levels of income have to go on food stamps or other forms of government assistance and this just compounds the problem," Traub argued. "They're not making a living wage and the economy suffers."

Thinking Utopian: How about a universal basic income? - Mike Konczal  - In light of the recent Oregon Medicaid study, several people have discussed the idea of taking parts of the social insurance system and replacing them with cash benefits. This naturally brings up the debate about whether it should be a policy goal for the United States to adopt a universal basic income (UBI). These poverty-level targeted incomes are universal and unconditional, so everyone would get them regardless of their income, status or work participation. Wonkblog’s Dylan Matthews wrote an overview of universal basic incomes and some proposals for such a system last year. Though establishing a basic income was once at the forefront of politics, it has since become more of a Utopian, abstract project. But sometimes it is helpful to step back from the day-to-day wonk work and think Utopian.First, what are some advantages of providing a universal basic income? To those on the left, a UBI would create greater equality by ending poverty and providing a minimum living standard. It would also increase bargaining power for workers, who could demand better working conditions with a safety cushion. As Erik Olin Wright argues in Envisioning Real Utopias, such bargaining power “will generate an incentive structure for employers to seek technical and organizational innovations that eliminate unpleasant work,” which would “have not just a labor-saving bias, but a labor-humanizing bias.”

Payrolls Increased in 30 U.S. States in April, Led by Texas - Payrolls climbed in 30 U.S. states in April, while the unemployment rate dropped in 40, showing the labor market strengthened across the country. Texas led the gains in payrolls, adding 33,100 jobs last month, followed by New York and Florida, according to figures released today in Washington by the Labor Department. California, New York and South Carolina were among states with the biggest decreases in joblessness. Widespread employment gains indicate that stronger demand has induced companies to fire fewer workers and, at times, boost staff levels. Those decisions will be challenged in May and the following month as slower manufacturing activity, diminished business with the government and a slowdown in consumer spending offer less support to the U.S. expansion.

BLS: Unemployment Rate declined in 40 States in April - From the BLS: April jobless rates down in 40 states, up in 3; payroll jobs up in 30 states, down in 18 Regional and state unemployment rates were generally little changed in April. Forty states and the District of Columbia had unemployment rate decreases, three states had increases, and seven states had no change, the U.S. Bureau of Labor Statistics reported today. Nevada had the highest unemployment rate among the states in April, 9.6 percent. The next highest rates were in Illinois (9.3 percent), Mississippi (9.1 percent), and California (9.0 percent). North Dakota again had the lowest jobless rate, 3.3 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan and Nevada have seen the largest declines. The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is at or above 9% in only four states: Nevada, Illinois, Mississippi, and California.  This is the fewest states with 9% unemployment since 2008

Unemployment Falls in 40 U.S. States, Rises in 3 — Solid hiring helped lower unemployment rates in 40 U.S. states last month, the most since November. The declines show the job market is improving throughout most of the country. The Labor Department said Friday that unemployment rates increased in only three states: Louisiana, Tennessee and North Dakota. Rates were unchanged in seven states. California, New York and South Carolina all reported the largest unemployment rate declines in April. Each state’s rate fell by 0.4 percentage points. The report said 30 states added jobs in April, while 18 reported fewer jobs. Nationwide, employers added 165,000 jobs in April and the unemployment rate fell to a four-year low of 7.5 percent. The economy has added an average of 208,000 jobs a month since November. That’s up from only 138,000 a month in the previous six months.

Most States See Better Jobs - The job market is getting better in most of the country — but not quickly, and not evenly. Forty states saw their unemployment rates fall in April, although most of the changes weren’t statistically significant, the Labor Department said Friday. An even better 43 states have seen their jobless rates fall over the past year.  North Dakota was one of three states to see its unemployment rate rise in April. (The other two were Louisiana and Tennessee). But the state again posted the nation’s lowest level of joblessness, at 3.3%. Nevada once again had the highest unemployment rate, at 9.6%, though that’s a marked improvement from the 11.5% rate the state posted a year ago. California, too, has seen a big drop in its unemployment rate over the past year, to 9% from 10.7%. And Rhode Island in April saw its jobless rate drop to 8.8%, its first sub-9% reading since 2008. Even as unemployment rates fall, however, hiring remains a mixed bag. Nonfarm payrolls increased in 30 states in April but fell in 18 others. Texas and New York led the way with 33,100 and 25,300 new jobs, respectively, while Wisconsin and Minnesota were the only two states with statistically significant drops in employment.  See the full interactive graphic.

The Assault on Food Stamps Takes Legislative Form, and Jamie Dimon Profits! - Last March,  I wrote a post about the two-pronged assault on Food Stamps, now known as the Supplemental Nutrition Assistance Program(SNAP).  Now the legislation doing  just that is being shaped in Congress. The bad news is, the Democratic chairman of the Senate Agriculture Committee, Debbie Stabenow, only wants to cut SNAP benefits by 0.5%. The worse news is that  Republicans want to cut it a LOT more. That great Libertarian hero, Rand Paul, wants to cut the program by $45 Billion a year until $322 billion in “savings” is achieved. “Americans would be flabbergasted” if they knew how much money is spent on Food Stamps, Paul intoned. Fortunately, his amendment was shot down in flames, with 13 Republicans joining all of the Senate Democrats in killing it; whether they were motivated by lost revenue to corporations like Wal-Mart and JP Morgan Chase or fear of rioting is unclear. JP Morgan Chase, you ask? Oh, yes, Jamie Dimon profits handsomely off the SNAP program and has for some time. JP Morgan, you see, makes many of the EBT cards that SNAP recipients use, and charges them a quarter every time they  check their balance. With millions of EBT cards in circulation that benefit one in seven Americans, that’s got to be millions of dollars every month that Jamie Dimon rakes in, for doing exactly nothing productive.

The problem with poor people is quite simple… …They don’t have enough money. My dear (and long-suffering) spouse was on some kind of a panel the other day, where a number of kind good-hearted liberal folks were trying to figure out how to encourage literacy among the poor. Of course this wouldn’t be a problem if there weren’t any poor. You’d then just have rampant illiteracy among the ‘middle class’, which doesn’t seem to cost anybody any sleep. As long as you have a BA and a white-collar job, it doesn’t matter how pig-ignorant you are. So dear spouse suggested that maybe poor people would be better off if they had more money. Shock and dismay all round. Now really, isn’t this the very heart and soul of liberalism? Leave all the core institutions of the society alone — including that most ancient and hallowed of institutions, poor people — but think, think very hard, about clever ways to improve the lot of those… poor… people. Everything is on the table. Sky’s the limit. Think. Think! Think outside the box!

Millions of Americans live in extreme poverty. Here’s how they get by.: Using data from the Survey of Income and Program Participation (SIPP), a Census program that tracks samples of tens of thousands of households across 2 1/2 to 4 years, Edin and Shaefer estimate that in 2011, 1.65 million U.S. households fell below the $2 a day per person threshold in a given month. Those households included 3.55 million children, and accounted for 4.3 percent of all non-elderly households with children. That sounds unbelievable, but Shaefer explained that the research was prompted by qualitative work Edin did in households like this. “Kathy and I were talking and she mentioned that she felt like she was going into more and more homes where there was really nothing in income,” he said. “They were surviving on food stamps, or in some cases on nothing at all.” So they set about investigating whether or not these households showed up on the SIPP. And they did. So how do these families survive? The safety net is a big part of the story. If you take food stamps, housing subsidies and refundable tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) into account, the number of households in extreme poverty is 613,000, or 1.6 percent of non-elderly households with children (compared to 1.65 million and 4.3 percent without transfers). So taking government aid into account reduces the extreme poverty population by 62.8 percent. Then again, there are limits to treating aid as equivalent to cash. As Shaefer said, “You can’t eat a housing subsidy.”

Sequestration Cuts Taking Money Out Of Unemployed People's Pockets: Thanks to federal budget cuts known as sequestration, Judy Cohagen of Arlington, Texas, recently saw her income shrink from $370 to $330 per week. She has a question about that. "I guess I'd really like to know if the $40 a week that was taken from me is making a significant contribution to ending the government's financial problems," she said. "Forty dollars doesn't sound like a lot to a whole lot of people, but $40 when you don't have a lot of income, that's food." The gap between federal government spending and revenue in the 2012 fiscal year was slightly more than $1 trillion dollars. This year, thanks in tiny part to Cohagen's reduced unemployment compensation, the Congressional Budget Office says the deficit will be more like $642 billion. Sequestration accounts for $85 billion of the difference between this year's and last year's deficits. Cohagen is one of nearly 2 million long-term jobless facing reduced benefits as a result of the policy, which forced almost every federal agency to trim spending this year. Long-term unemployment benefits are distributed by states but funded by the federal government, so in March the U.S. Department of Labor told states to reduce weekly benefit amounts.

Tracking Sequestration Across the Nation | PBS -  The sequester. It's the term used to describe a series of across the board federal spending cuts, and a topic that has dominated political talk in Washington since the elections. At the beginning of March the cuts began to kick in when President Barack Obama and members of Congress were unable to work out a deal. As a result, by the end of the fiscal year, $85 billion in automatic reductions to both defense and domestic spending will take effect.  A meals on wheels program based in New Jersey won't be hiring any new workers or adding more routes, in anticipation of the automatic budget cuts. Member station New Jersey Public Television featured the report Monday. In Oklahoma, officials are expecting a variety of cuts to social programs, the National Weather Service and public health. The Head Start program in Central Oklahoma is facing a cut of $600,000, which will have an impact on the number of children admitted to the program and cost at least seven teachers their jobs. Member station OETA has a full report on the sequester's impact in Oklahoma.

Detroit Manager Citing Cash Crisis Targets Debt for Cost Cuts - Detroit may run out of cash next month and must cut long-term debt and retiree obligations, according to emergency financial manager Kevyn Orr’s preliminary plan to save Michigan’s largest city from bankruptcy. Orr’s report says the cost of $9.4 billion in bond, pension and other long-term liabilities is sapping the ability to provide public safety and transportation. He listed cutting debt principal, retiree benefits and jobs among his options. “No one should underestimate the severity of the financial crisis,” Orr said yesterday in a statement. He called his report “a sobering wake-up call about the dire financial straits the city of Detroit faces.” The report, required under a state law that gives Orr broad authority over city government, offers guidelines for cost cuts while giving few details. The document delineates Detroit’s financial situation, noting it is “insolvent on a cash basis.” Its accumulated deficit will top $380 million by June 30, and by then it will run out of cash unless it defers pension payments and other obligations, according to the plan.

Detroit May Run Out Of Cash Next Month - Another day, another US city on the brink of insolvency. This time it's Detroit, whose recently appointed emergency financial manager Kevyn Orr said may run out of cash next month and must cut costs such as long-term debt and retiree obligations. According to Bloomberg, "Orr’s report says the cost of $9.4 billion in bond, pension and other long-term liabilities is sapping the ability to provide such basic services as public safety and transportation. He listed cutting debt principal, retiree benefits and jobs among options he may take. “No one should underestimate the severity of the financial crisis,” He called his report "a sobering wake-up call about the dire financial straits the city of Detroit faces."

Detroit’s emergency manager outlines slash and burn “restructuring” plan - The report begins with a lie, claiming that measures about to be unleashed in Detroit are aimed at improving the “governmental services essential to the public health, safety and welfare of its citizens.” In fact, the aim is to extract every penny possible from the working class to pay back an estimated $9.4 billion in debt, which currently costs the city $246 million to service, or 19.3 percent of the General Fund budget. Orr’s former law firm, Jones Day, represents some of the same Wall Street banks—including Bank of America and UBS—that have profited from its financial misery. In the report, Orr paints a dire picture of the financial state of Detroit. Unemployment has tripled since 2000 and is now officially at 18.3 percent. State revenue sharing has fallen by $160 million, or nearly 50 percent from its peak of $334 million in 2002. There has been a 40 percent decline in income tax since 2000, with a loss of $145 million. These conditions are an indictment of the capitalist system. They point in particular to the devastating impact of the financial crash of 2008, which led to hemorrhaging of the auto industry, a wave of foreclosures and sharp cuts in federal and state aid. But nowhere is there any suggestion that the corporate and financial elite should be made to pay for the catastrophe they wrought. As a hatchet man for the banks, Orr, like Obama and the Republicans in Washington, is seeking to exploit this crisis to further enrich the financial criminals at the top.

Orr's Detroit report spurs worries over retiree pensions, benefits - Political analysts, union leaders and city residents weighed in Sunday on the emergency manager's dire assessment of Detroit's finances, with particular concern directed toward the fate of retiree pensions and benefits. Ed McNeil, a representative for AFSCME Council 25, the city's largest union, said Emergency Manager Kevyn Orr's proposed fixes for the city still must be approved by the state, which has been "calling the shots all along." "Kevyn Orr can't just come in and change retiree benefits," McNeil said. "The emergency manager doesn't have any more power than (state Treasurer) Andy Dillon will give him. Andy Dillon is the one who is really running this thing." One resident, Theo Broughton, said she worries the potential sale of assets, including the water department, will cost Detroit its ability to generate revenue. "Once you sell it, you get one lump sum (of money), then what?" said Broughton, co-founder of the community group Hood Research. Broughton added she's also concerned about the state taking over pensions for city workers.

Watch: How the sequester threatens Head Start — Americans who suffered through sequester-related flight delays last month are hardly the true victims of Washington’s budget gridlock. It’s more than likely that the 70,000 children who are being kicked out of Head Start have it much worse. The program, which helps preschoolers from low-income families to start school, is facing a $406 million cut after the sequester—a package of automatic, across-the-board spending cuts—was enacted earlier this year when Congress was unable to reach a compromise to reduce the country’s deficit. “We’ve snatched the rug out from under 70,000 of the most vulnerable families and children in America,” Ron Herndon, chairman of the board of the National Head Start Association, told Hardball on Monday evening. Herndon added that not only will 70,000 children be barred from participating, but there’s also a spillover effect in that the program has been credited for lowering childhood mortality rate by providing healthy meals and healthcare. The sequester means “Hundreds of thousands of nutritious meals that won’t be served, hundreds of thousands of dental followups won’t be made, hundreds of thousands of medical followups won’t be made, literally hundreds of thousands of home visits to parents to help them prepare their children to do well in school that won’t be made.”

The Growing Cost of Having Kids Is Tipping More Women Towards Ambivalence about Motherhood - Samantha could not be more sure that she does not want to have kids. “Because it just looks awful,” is how she put it. I asked her to elaborate: “Because it looks exhausting. It looks like so much work. It just makes me tired. It makes me tired just looking at it.”    Samantha, a 34-year-old professional I interviewed for a research project about choices around childrearing, was a No Way. She was absolutely sure she didn’t want kids.  I‘ve interviewed plenty of No Ways and many are quick to articulate the time, energy and money it takes to raise children. They see parenting as a choice between further investment in their own “human capital” (their knowledge, skills and talents) and investing in someone else’s. The answer for them is obvious.   No Ways are contributing to the growing trend of childlessness. Many women today have not or will not become mothers by choice. One out of five American women over 40 is  currently childless. Generation X is  even more likely to decide against parenting; as many as one-in-three may skip parenting. While some of these women will face infertility, at least half will have very purposively chosen a childfree life, often alongside supportive partners. And, while traditionally it has been women with higher levels of education who have chosen childlessness, women with less education are looking  more and more like their more educated sisters on this variable.

Michigan District Fires All Teachers, Closes Every School - Summer break has started very early for kids in one Michigan school district. Buena Vista schools have been closed for five days already, and on Monday, the district's website stated that the school would be closed until further notice. For good reason, this decision has parents, and the community, up in arms. The problem in Buena Vista is that the school district, educating approximately 450 kids, is out of money. All the teachers have been laid off and a financial emergency has been declared. The district has suffered from declining enrollment, which, in turn, has led to a loss of $3 million in state funding since 2010. In an effort to keep schools open, teachers said they would work without pay. This is not possible under Michigan law so educators have been left in limbo. To make matters worse, the staff has also lost their health insurance. The Buena Vista School District website states that they consider it their "highest calling to be entrusted with the care and education of the community’s children."

Does Expanding School Choice Increase Segregation? – Brookings - Advocates of expanding the educational options available to students from low-income families raise not only social justice arguments—pointing to the choices made by families that can afford to live close to a good public school or pay private-school tuition—but also the theory that competition induced by expanded school choice will be “the proverbial rising tide that lifts all boats.” Breaking the ironclad link between residence and school attended will, proponents argue, force schools to compete for students and resources in ways that increase the quality of education provided.But critics of school choice policies argue that these reforms will lead to increased segregation by race and class as more motivated families move to better schools, leaving the most disadvantaged students behind in the worst public schools. Criticism has often focused on charter schools given the growth in the charter sector in recent years. Nationwide, charter enrollment grew from 1 to 3 percent of all students between 1999-2000 and 2009-10. Charters make up a much larger share of the market in several places, including 11 percent of Arizona students and 37 percent in the District of Columbia.

The Rise in College Tuition and Student Loans-Becker - During the past 30 years tuition at American colleges has been growing at a fast pace. The increase has been greatest at 4-year private colleges and universities, and least at 2-year public colleges, but all college categories have had large tuition increases. For example, real tuition at the 4-year private colleges has more than doubled since 1980, while tuition at 2-year public colleges increased by over 50%. Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or  colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.  The growth in tuition is not explained by any conspiracy theory, but mainly by increases in the cost of producing college education. Professors and other teachers are the principal input in colleges, so that the cost of these teachers is an important determinant of the cost of producing education.  Colleges have to compete for highly educated persons against employers in both the private and public sectors. Since after 1980 earnings of highly educated persons has risen rapidly in these other sectors, colleges have had to pay a lot more for their faculties and administrative staffs. The greatly increased pay of faculty has substantially raised college costs, which in part have been passed on to students through higher tuition and other fees.

Why Colleges Are Becoming a Force for Inequality - We like to view higher education as the "great equalizer" that leads to social mobility. But selective colleges have long been accused of perpetuating class divides, rather than blurring them. A recent landmark study by Stanford's Caroline Hoxby and Harvard's Christopher Avery lent further empirical evidence to this accusation, finding that high-achieving low-income students do not have access to selective schools. The study showed that the mismatch is due to a lack of knowledge, not quality. Low-income students outside of major urban centers do not even apply to the top-tier colleges for which they are qualified. Many commentators and the study authors themselves have looked for ways to alleviate this mismatch. A follow-up study found that supplying basic information to applicants could substantially increase the number of low-income students applying to more selective schools. Just giving low-income kids packets of information helped them apply to better schools.

College Execs have Private Jets? New Report Finds Public University Presidents Live Large - A new report released by The Chronicle of Higher Education on Monday revealed that public university presidents in the U.S. are doing quite well financially.  The report lists public university presidents’ compensation for the 2012 fiscal year.  Graham Spanier, former president of Penn State University, who was forced out after his handling of the Jerry Sandusky child abuse tragedy, topped the list by bringing in $2.9 million. This includes a base pay of nearly $351,000, a deferred pay of $1.2 million and a severance package of $1.2 million.  Stripling told The New York Times: “The fact that Graham Spanier turns out to be the highest paid president in the country says something about the nature of compensation packages for people who leave under a cloud. … Severance agreements are often very lucrative.”  Following Spanier, Jay Gogue of Auburn University had a compensation package of $2.5 million, and E. Gordon Gee of Ohio State University $1.9 million. Gee received the highest base pay of all the public university presidents at $830,439. The New York Times reported that Gee enjoys a “lavish lifestyle,” which includes “a rent-free mansion with an elevator, a pool and a tennis court and flights on private jets.”

How Colleges Are Selling Out the Poor to Court the Rich - If the federal government were to take all of the money it pours into various forms of financial aid each year, it could go ahead and make tuition free, or close to it, for every student at every public college in the country.   I argued for the idea a couple of months back was that it would allow us to finally stop burning money subsidizing obscenely expensive tuition at dubiously worthwhile private institutions. At the time, I singled out the for-profit college industry, which has been rightfully savaged for devouring federal aid dollars while charging poor students backbreaking prices.  Today, though, I'd like to apologize to the University of Phoenix and its kin. It seems there are plenty of traditional, non-profit colleges leeching off the system as well.  For proof, see the demoralizing report released this week by Stephen Burd of the New America Foundation on the state of financial aid in higher ed. It documents the obscene prices some of the poorest undergraduates are asked to pay at hundreds of educational institutions across the country, even as these same schools lavish discounts on the children of wealthier families in order to lure them onto campus.   And here's the key bit: Many colleges, he argues, appear to be playing an "elaborate shell game," relying on federal grants to cover the costs of needy students while using their own resources to furnish aid to richer undergrads.

Money Cuts Both Ways in Education - — If you doubt that we live in a winner-take-all economy and that education is the trump card, consider the vast amounts the affluent spend to teach their offspring. We see it anecdotally in the soaring fees for private schools, private lessons and private tutors, many of them targeted at the pre-school set. And recent academic research has confirmed what many of us overhear at the school gates or read on mommy blogs. This power spending on the children of the economic elite is usually — and rightly — cited as further evidence of the dangers of rising income inequality. Whatever your views about income inequality among the parents, inherited privilege is inimical to the promise of equal opportunity, which is central to the social compact in Western democracies. But it may be that the less lavishly educated children lower down the income distribution aren’t the only losers. Being groomed for the winner-take-all economy starting in nursery school turns out to exact a toll on the children at the top, too.

Stunning college degree gap: Women have earned almost 10 million more college degrees than men since 1982 - According to data from the Department of Education on college degrees by gender, the US college degree gap favoring women started back in 1978, when for the first time ever, more women than men earned Associate’s degrees. Five years later in 1982, women earned more Bachelor’s degrees than men for the first time, and women have increased their share of Bachelor’s degrees in every year since then. In another five years by 1987, women earned the majority of Master’s degrees for the first time. Finally, within another decade, more women than men earned Doctor’s degrees by 2006, and female domination of college degrees at every level was complete. For the current graduating class of 2013, the Department of Education estimates that women will earn 61.6% of all associate’s degrees this year, 56.7% of all bachelor’s degrees, 59.9% of all master’s degrees, and 51.6% of all doctor’s degrees. Overall, 140 women will graduate with a college degree at some level this year for every 100 men. For bachelor’s degrees, women have earned the majority of those degrees for every college class since 1982, and the female share of degrees has risen every year.

Ohio Republicans Push Law To Penalize Colleges For Helping Students Vote - Republicans in the Ohio Legislature are pushing a plan that could cost the state’s public universities millions of dollars if they provide students with documents to help them register to vote. Backers of the bill describe it as intended to resolve discrepancies between residency requirements for tuition and voter registration, while Democrats and other opponents argue it is a blatant attempt at voter suppression in a crucial swing state.

College Grads Can Look Forward To Lots Of Job Openings — Unfortunately, No One’s Hiring - Mauldin - It is graduation time, and this morning finds me swimming in a sea of fresh young faces as a young friend graduates, along with a thousand classmates. But to what? I concluded my final formal education efforts in late 1974, in the midst of a stagflationary recession, so it was not the best of times to be looking for work. It turned out that I had a far different future ahead of me than I envisioned then. But I would trade places with any of those kids who graduated today, as my vision of the next 40 years is actually very optimistic. With all the advances in healthcare, technology, and communications that have come and will come, they will get to embrace a world full of opportunity; and yet, this generation is starting out with more than just a minor economic handicap. This week’s letter will explore changes in the work marketplace, changes that generated quite a lot of discussion at last week’s Strategic Investment Conference.

Interesting fact of the day: Highest paid public employee in every state is part of the higher education bubble - The highest paid public employee in every one of the 50 states is either a college coach at a public university: football (27), basketball (13), hockey (1), or a college administrator at a public university: president (4), medical school dean (4), law school dean (1).

Student Debt and the Crushing of the American Dream - Joe Stiglitz - A CERTAIN drama has become familiar in the United States: Bankers encourage people to borrow beyond their means, preying especially on those who are financially unsophisticated. They use their political influence to get favorable treatment of one form or another. Debts mount. Journalists record the human toll. Then comes bewilderment: How could we let this happen again?  The crisis that is about to break out involves student debt and how we finance higher education. Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down — some to a point even lower than where they began. Everyone recognizes that education is the only way up, but as a college degree becomes increasingly essential to making one’s way in a 21st-century economy, education for those not to the manner born is increasingly unaffordable. Student debt for graduating seniors now exceeds $26,000, about a 40 percent increase in just seven years. But an “average” like this masks huge variations.According to the Federal Reserve Bank of New York, almost 13 percent of student-loan borrowers of all ages owe more than $50,000, and nearly 4 percent owe more than $100,000. These debts are beyond students’ ability to repay, (especially in our nearly jobless recovery); this is demonstrated by the fact that delinquency and default rates are soaring. Some 17 percent of student-loan borrowers were 90 days or more behind in payments at the end of 2012. When only those in repayment were counted — in other words, not including borrowers who were in loan deferment or forbearance — more than 30 percent were 90 days or more behind. For federal loans taken out in the 2009 fiscal year, three-year default rates exceeded 13 percent.

Just Released: The Geography of Student Debt - This morning, the New York Fed released its Quarterly Report on Household Debt and Credit for 2013 Q1. The report uses the FRBNY Consumer Credit Panel to show that outstanding household debt declined approximately $110 billion (about 1 percent) from the previous quarter. The drop was due in large part to a reduction in housing-related debt and credit card balances. Meanwhile, delinquency rates for each form of consumer debt declined, with the overall ninety-plus day delinquency rate dropping from 6.3 percent to 6.0 percent.  One of the unique aspects of the FRBNY Consumer Credit Panel, which is itself based on Equifax credit data, is the detail we obtain for each kind of household debt. This quarter, we have taken advantage of the geographic information available in the data set and are introducing a set of maps of our student loan data, which indicate regional variation in several dimensions of student debt. They depict:

  • Student loan borrowers as a share of the population. The population with active student loan debts, or “SL borrowers,” as a share of the population with a credit record varies substantially over space.
  • Student loan balances per SL borrower. Student indebtedness is significant for SL borrowers in virtually all states. Educational indebtedness per SL borrower ranges from a low of just under $21,000 in Wyoming to a high of over $28,000 in Maryland. Again, Washington, D.C., stands out: the average SL borrower there owes over $40,000. In general, we find SL-borrower debt levels are highest in California and along the Atlantic and Gulf coasts.
  • Percent of balance ninety-plus days delinquent. Delinquency rates show a distinct regional pattern, with states in the south and southwest having generally higher rates than those in the north. The lowest delinquency rate is South Dakota, at just over 6.5 percent, while the highest is in West Virginia, at nearly 18 percent.

Which States Have Highest Student-Loan Delinquencies? - While student loan debt continues to grow, delinquency rates dropped a bit in the first quarter of 2013, according to new data from the New York Fed. Total student loan balances rose $20 billion in the first quarter to $986 billion. Meanwhile, the percent of student loans more than 90 days delinquent dropped to 11.2% in the first quarter from 11.7% at the end of last year. But the overall level remains elevated. At the end of 2011, just 8.5% of student loans were more than 90 days past due. The New York Fed also provides data on the geography of student loans. Interestingly, there seems to be an inverse relationship between the ubiquity of loans for college and delinquency. Midwest states such as North Dakota, South Dakota, Minnesota and Iowa have some of the highest percentage of consumers with student loans, but the lowest delinquencies. By contrast, states in the south, such as Florida, West Virginia and South Carolina have a smaller share of people with student loans but more borrowers late with their payments.

The US Student Loan Bubble Broken Down By State, And Why Washington D.C. Sticks Out Like A Sore Thumb - Curious how the student loan bubble, just shy of $1 trillion, and now the largest debt portion of the US household non-mortgage wallet,  bigger than credit card and auto loan debt - affects your state? Then the following three charts just out from the NY Fed are for you. What the data shows is that less than 12% of the population in Hawaii has student loans, while the record is in D.C. at over 25%. All those "students" in the nation's capital. Really? But that's not all. While the average loan balance is under $21,000 in Wyoming, it is once again highest in D.C., with the average loan balance over $40,000. It is almost as if D.C. "students" have learned how to game the system.

Number of the Week: Class of 2013, Most Indebted Ever - $30,000: The average student-loan debt for a borrower who received a bachelor’s degree in 2013. The class of 2013 entered college just as the economic recovery was beginning in June 2009, but while their job prospects are better than other recent graduates, their debt burden is heavier. Total outstanding student-loan debt stood at $986 billion at the end of the first quarter of this year, according to the Federal Reserve Bank of New York. That’s up 2.1% from the previous quarter and nearly 50% from the same quarter in 2009. The average debt load for each borrower receiving a bachelor’s degree this year is about $30,000, according to an analysis of government data by Mark Kantrowitz, publisher at student-marketing company Edvisors. That number has doubled over the course of a recent graduate’s lifetime. Even adjusting for inflation, the average debt burden was half that size 20 years ago. Other groups put the average debt figure even higher. A poll from Fidelity Investments earlier this week found 70% of graduates had at least some debt, and the average was $35,200. That figure is higher in part because it includes debt owed to family and credit-card balances.

Vital Signs Chart: Nearly $1 Trillion in Student Debt - Americans are continuing to borrow more for college. In the first quarter of 2013, consumers owed $986 billion in student loans, up $20 billion from $966 billion in the fourth quarter. Student-loan balances outstanding have soared 70% in the past five years because of rising tuition costs and a weak job market that has prompted many Americans to seek refuge in higher education.

Student Loan Debt Horror Stories and the Economic Recovery - Economic Intelligence - In the anything-goes financial world of the early 21st century, student lenders, like mortgage lenders, convinced millions of Americans to take on heavier and costlier debt than they could handle or understand. Now the scary consequences are coming back to haunt us as an economy and a society. Student-loan debt has doubled since 2007. At an estimated $1.1 trillion, it’s the nation’s second biggest form of household indebtedness, after mortgages. One in five families have such loans, with an average balance of $26,682 at last count. Many owe far more than that – more, in some cases, than they can imagine ever being able to repay. The cold statistical facts can be found in recent reports from, among other sources, the Pew Research Center and the Federal Reserve Bank of New York. For a glimpse of the human consequences, though, you can’t beat the more than 28,000 statements that went up on the Consumer Financial Protection Bureau website last week. Here’s just a sample:

The boomer retirement crunch begins - The oldest baby boomers have already turned 65, and the older population of the U.S. is beginning to swell. The age-65-and-older population grew 18% between 2000 and 2011 to 41.4 million senior citizens, according to a recent Administration on Aging report. These numbers are expected to further balloon over the coming decade as baby boomers continue to reach traditional retirement age. Here's what retirement looks like for the typical person age 65 or older in the U.S.: Most retirees have very modest incomes. The median income for people age 65 and older was $27,707 for males and $15,362 for females in 2011. The typical household headed by someone age 65 or older had a median income of $48,538. The median income increased by 2% between 2010 and 2011 after adjusting for inflation. Almost 3.6 million elderly people (8.7%) lived below the poverty level in 2011. The most common source of retirement income is Social Security, and 86% of people age 65 and older receive monthly payments. Social Security is responsible for 90% or more of the income received by 36% of beneficiaries. Only about half (52%) of retirees receive income from their assets. Even fewer retirees receive monthly payments from private (27%) or government (15%) pensions. "We now live in a 401(k) world where people are responsible for our own savings, and baby boomers have not done a very good job. It's a generation that is going to struggle in old age in the absence of reliable anchors and support systems."

Younger Seniors Are Burning Up Their IRAs - The money in your IRA is supposed to last a lifetime, but a new study finds that a lot of seniors are burning through their retirement funds while they still have years of living to go. The Employee Benefit Research Institute, a nonprofit research group, said that 48 percent of people who were aged 61 to 70 and in the bottom half of the income distribution withdrew money from their IRAs annually during the period studied (2002-10). Even in the top quarter of incomes, 29 percent of people aged 61 to 70 annually pulled money out of their IRAs, EBRI said. The sizes of the withdrawals were substantial, too, ranging from 12 percent of funds for young seniors in the top quarter of incomes to 17 percent for those in the bottom quarter. Older seniors (aged 71 and up) appeared to be more frugal, according to the EBRI study. The Internal Revenue Service requires people with ordinary IRAs to make minimum withdrawals each year starting at age 70½. Many of the older seniors withdrew just the minimum—and then stashed some of the proceeds into other forms of savings.

Medicare Claim Costs Growth Under 1% in 2013??? Why? - “All nine of S&P Healthcare Economic Indices showed slower annual growth rates for February 2013 compared to January 2013. As measured by the S&P Healthcare Economic Commercial Index, healthcare costs covered by commercial insurance plans rose by 4.62% in February, down from +5.41% reported for January. Annual growth rates in Medicare claim costs increased by 0.78%, according to the S&P Healthcare Economic Medicare Index, down from +1.40% recorded last month.” Annual Growth Rates Decelerate in February 2013;  When economists such as Tyler Cowen and Congressional leaders such as Ryan and McConnell are calling for cuts in Medicare, and Medicaid;  one has to wonder what the basis is for doing so. Medicare and its associated programs have dropped below 1% cost claims growth in 2013. According to Glen LaFollette and Louise Sheiner, healthcare in the US is sustainable at 1% growth and will not crowd out the other necessities. “An Examination of Health-Spending Growth in the United States: Past Trends and Future Prospects”

Medicare Drug Program Putting Seniors, People With Disabilities At Risk - Ten years ago, a sharply divided Congress decided to pour billions of dollars into subsidizing the purchase of drugs by elderly and disabled Americans. The initiative, the biggest expansion of Medicare since its creation in 1965, proved wildly popular. It now serves more than 35 million people, delivering critical medicines to patients who might otherwise be unable to afford them. Its price tag is far lower than expected. But an investigation by ProPublica has found the program, in its drive to get drugs into patients' hands, has failed to properly monitor safety. An analysis of four years of Medicare prescription records shows that some doctors and other health professionals across the country prescribe large quantities of drugs that are potentially harmful, disorienting or addictive. Federal officials have done little to detect or deter these hazardous prescribing patterns. Searches through hundreds of millions of records turned up physicians such as the Miami psychiatrist who has given hundreds of elderly dementia patients the same antipsychotic, despite the government's most serious "black box" warning that it increases the risk of death. He believes he has no other options. Some doctors are using drugs in unapproved ways that may be unsafe or ineffective, records showed. An Oklahoma psychiatrist regularly prescribes the Alzheimer's drug Namenda for autism patients as young as 12; he says he thinks it calms them. Autism experts said there is scant scientific support for this practice.

Give Back that Pulitzer, Wall Street Journal Editorial Page - The slowdown of health-care costs is one of the most important developments in American politics. The long-term deficit crisis — those scary charts Paul Ryan likes to hold up, with federal spending soaring to absurd levels in a grim socialist dystopian future — all assume the cost of health care will continue to rise faster than the cost of other things. If that changes, the entire premise of the American debate changes. And there’s a lot of evidence to suggest it is changing — health-care costs have slowed dramatically, and experts believe it’s happening for non-temporary reasons.The general conservative response to date has involved ignoring the trend, or perhaps dismissing it as a temporary, recession-induced dip... Yesterday, the Wall Street Journal editorial page offered up what may be the new conservative fallback position: Okay, health-care costs are slowing down, but it has absolutely nothing to do with the huge new health-care reform law. “It increasingly looks as if ObamaCare passed amid a national correction in the health markets,” the Journal now asserts, “that no one in Congress or the White House understood.” It’s another one of those huge, crazy coincidences! Of course, it’s not just that the Journal didn’t predict the health-care cost slowdown. The Journal insisted ... that Obamacare would ... necessarily lead to a massive increase in health-care inflation. In a series of hysterical, freedom-at-dusk editorials which were, unbelievably, awarded a Pulitzer Prize for commentary, the Journal expounded extensively on this belief

Patterns of Changes in Health Insurance - Beginning next year, states and the federal government intend to create opportunities for families to purchase health insurance, separate from their employers, through insurance “exchanges” in the states. Insurers and the federal government will heavily advertise the new plans. Most important, middle- and low-income families may qualify for valuable federal subsidies that will serve to reduce premiums and out-of-pocket health costs. To qualify for subsidized exchange plans, workers cannot be offered affordable insurance by their employers. Paradoxically, employers will create subsidy opportunities for their middle- and low-income employees whenever they fail to offer health insurance. On the other hand, an employer dropping its health insurance next year will put its high-income employees in a tough spot, because they will have to buy insurance on their own without the tax advantages they had in the past by obtaining health insurance through their employer. As a result, employers with relatively many high-income employees will be under pressure to keep their insurance, whereas an employer of middle- and low-income employees may find them asking for health insurance to be dropped from the employee benefit menu.

Oregon's Radical Health Overhaul Blazes New Trail - Ezra Klein - There’s a 90-year-old woman with well-managed congestive heart failure who lives in an apartment without air conditioning.  Kitzhaber, a former emergency room physician, sees this as the perfect example of what’s wrong with our health-care system. “A hot day could send the temperature in her apartment high enough that it strains her cardiovascular system and kicks her into full-blown congestive heart failure,” he said. “Under the current system, Medicare will pay for the ambulance and $50,000 to stabilize her. It will not pay for a $200 window air conditioner, which is all she needs to stay in her home and out of the hospital. The difference to the health-care system is $49,800. And we could save that $49,800 without reducing her benefits or her quality of life.”  The past few years have seen two remarkable health-care experiments in the Beaver State. One is the Oregon Health Insurance Experiment, the first randomized, controlled trial comparing Medicaid -- or any kind of health insurance -- with being uninsured. The other is Kitzhaber’s effort to rebuild the state’s Medicaid program around community health rather than individual fee-for-service treatments. The health-insurance experiment has gotten all the attention. But it’s the Medicaid reforms that really matter.

Competitive Pricing in Oregon is a Test Case for Obamacare - Kevin Drum - Bad news about the implementation of Obamacare seems to pop up relentlessly. So here's some good news to balance it out. Once the exchanges get up and running, insurance companies for the first time will be offering similar products with very public prices, and in Oregon those prices vary from $169 a month to $422 a month for the same standard plan. Here's what happened last week when those prices went online: On Thursday, a comparison of proposed 2014 health premiums became public online, causing two insurers to request do-overs to lower their rates even before the state determines whether they're justified. The unusual development was sparked by a comparison that used to be impossible because plan benefits varied so widely. But under the federal reforms that take effect Jan. 1, health insurance is mandated and every insurer must offer certain standard plans.....Providence Health Plan on Wednesday asked to lower its requested rates by 15 percent. Gary Walker, a Providence spokesman, says the "primary driver" was a realization that the plan's cost projections were incorrect. But he conceded a desire to be competitive was part of it.

Poll: 41% of small businesses are holding off on hiring because of Obamacare - Gallup surveyed 603 small-business owners last month. The topic was Obamacare. The results are in. Forty-eight percent think that Obamacare will be “bad for your business.” Nine percent think it will be good for their business; 39 percent think it will have no impact. Fifty-five percent think Obamacare will raise the amount of money their business pays for healthcare. Thirty-seven percent think it will have no impact; 5 percent think it will lower the amount of money their business spends on healthcare. These questions are about perception, and present useful and interesting information. But the headline comes from a question not about perception, but about action. I quote from Gallup’s report: “When asked if they had taken any of five specific actions in response to [Obamacare], 41% of small-business owners say they have held off on hiring new employees and 38% have pulled back on plans to grow their business. One in five (19%) have reduced their number of employees and essentially the same number (18%) have cut employee hours in response to the healthcare law. One in four owners (24%) have thought about eliminating healthcare coverage for their employees”

ObamaCare Rollout: Feds to Use “Consumer Reporting Agencies” to Determine Eligibility Despite Penalty for Perjury - It looks like young Ezra (and, to be fair, everybody else) missed a major policy change in Obama’s shift to the new, shorter (for individuals*), final version of the basic application for ObamaCare.** As it turns out, the issue (or at least one of the issues; gawd knows what other time bombs are buried in the thing) wasn’t only the length and complexity of the form, though that was and is bad enough; the issue is the actual content of the form. Here’s what I’m talking about. It’s right in plain sight. I’m using a screen dump of the new, shorter, finalized form from Ezra’s article: Here are the key passages as text for Figure 1: I’m signing this application under penalty of perjury, which means I’ve provided true answers to all the questions on this form to the best of my knowledge. I know that I may be subject to penalties under federal law if I intentionally provide false or untrue information. … We’ll check your answers using information in our electronic databases and databases from the Internal Revenue Service (IRS), Social Security, the Department of Homeland Security, and/or a consumer reporting agency. If the information doesn’t match, we may ask you to send us proof. Yes, Equifax (a “consumer reporting agency”) could be affecting your eligibility for ObamaCare (a Federal program). Now, this is a major policy change, or perhaps a policy determination. Here’s the equivalent language in the draft 26-page “Single Streamlined Application.” As you can see, the language had not then been finalized:

ObamaCare Rollout: Feds Use “Nudge Theory” to Get “Consumers” to Sign up for Five Years (Not One)  - In this post I’m continuing the analysis of the final version of the basic application for ObamaCare that I began here. I’m going to look at how ObamaCare “nudges” citizens consumers into “opting” to renew their eligibility automatically for five years, instead of fewer years, or not at all.  Here’s the distinction between “opt in” and “opt out.”From the University of Miami’s Miller School of Medicine:

  • an “opt in” requires an action or affirmation by an individual for inclusion; the default is exclusion;
  • an “opt out” requires an action or affirmation for exclusion; the default is inclusion.

“Opt out” is where a checkbox is checked that is in the interest of whoever’s selling you a product, but not necessarily in your best interest. You’ve all had the experience of signing up for something online, and having to carefully uncheck all the checked boxes? You’re opting out; the default is inclusion, so you have to undo that. But not everybody goes to the trouble, which is why sleazeball marketing companies use the tactic. Banksters liked to use “opt out” to sign you up for over-draft protection (i.e., lots of lovely rents) on ATM overcharges, a practice so vile that even the Fed couldn’t stomach it, and required “opt in” instead.

Untangling Obamacare: What’s behind the rate increases? - Rate hikes just keep coming.  The latest we’ve heard about come from Blue Cross Blue Shield in North Carolina, which just warned 125,000 customers who bought individual policies to brace themselves for unusually large increases. CareFirst Blue Cross Blue Shield of Maryland announced hikes averaging 25 percent for its individual policies and about 15 percent for small businesses. Medico, based in Minnesota, said it would increase rates an average of 13 percent for some 5,000 people covered through small employers who renew their policies this summer. Ditto in other states, where carriers already raised rates for individuals and small employers. Insurance insiders say more will come.  With these increases come lots of questions from the public, questions that journalists will be asked to address. In Rhode Island, Robert Cagnetta, a small business owner and a member of the Health Insurance Advisory Council for the state’s health insurance commissioner, wrote an op ed for the Providence Journal challenging recent rate increases—15 percent for small groups; 18 percent for individuals—announced by Blue Cross & Blue Shield of Rhode Island. “We’re asked to pay blindly, and more and more every year,” he wrote. “We need transparency now.”

House votes to repeal ObamaCare - Only two Democrats sided with Republicans in the party-line 229-195 vote — Jim Matheson (Utah) and Mike McIntyre (N.C.). All Republicans voted in favor of repeal. This is the 37th time the House GOP has voted to repeal or defund at least part of the bill, but this latest bill will also not become law given Democrats' control of the Senate.

Four Better Ways To Spend The $55 Million Wasted On Votes To Repeal The Affordable Care Act - For the 37th time since 2011, House Republicans will hold a vote to repeal Obamacare on Thursday, bringing the total cost of all of their failed repeal votes to roughly $55 million in taxpayer money, according to one estimate. Last year, CBS News calculated that the number of hours spent on 33 repeal votes — then roughly 80 hours, or two full work weeks — cost taxpayers an estimated $48 million. Since then, Republicans have held three more votes (another $4.5 million) and will add another $1.5 million with their latest.  At a time when lawmakers have implemented $85 billion in across-the-board cuts on top of $1.5 trillion in spending cuts over the next decade, no dollar can be spared. And the country has serious health-related needs that could use funding. Here are some better health care uses for the more than $50 million these symbolic votes against the Affordable Care Act have wasted:

Alexander: Sebelius’s Fundraising and Coordinating with Private Entities to Implement Health Care Law “May Be Illegal”: —U.S. Senator Lamar Alexander said today that U.S. Department of Health and Human Services Secretary Kathleen Sebelius’s fundraising and coordinating with private entities to implement the new health care law “may be illegal.” Alexander, the ranking Republican on the U.S. Senate committee overseeing health policy, compared Sebelius’s activities to the Iran-Contra incident when Reagan administration official Oliver North raised funds and directed their spending through private entities in support of Nicaraguan rebels even though Congress had refused to appropriate funds. “If the secretary or others in her department are fundraising and coordinating the activities of Enroll America and soliciting donations to supplement appropriated funds, then those actions may be in violation of the Anti-Deficiency Act,” the senator said.

Health Care Thoughts: Welcome to The Matrix - Health care providers create and store massive amounts of data generated by clinical and business functions. This hot new term for this mass of data is “big data.” Until recently, the sheer bulk of the data prevented regular analysis, with summaries of key data sets being the most efficient use of executive and IT resources.Huge leaps forward in data storage, data processing speeds and data analysis algorithms will allow the analysis of massive amounts of data, while health care reform will require the analysis of massive amounts of data. Where is the interest in health care big data? Government of course, accountable care organizations, integrated networks, large provider units, and private payers.This marriage of an ability to process data and requirements to process data will create urgency and necessity. The need for deep and broad analysis will create a new era, an era dominated by data mining and data analytics. The impact on physicians? Ever action and every order will be scrutinized and analyzed, with a relentless search for quality and cost effectiveness, and a relentless search for outliers. Possible downsides? Immense amounts of resources will be required to process big data, and immense amounts of time will be required to review the results.

If Only there was a Public Option: Part 1,452  - The justification for the Rube Goldberg design of the Affordable Care Act was that state based exchanges would bring the incredibly “magical” power of competition to concentrated insurance markets. So far that it doesn’t seem to live up to its promise. When the law goes into effect next year highly concentrated markets, like Maine, will remain highly concentrated. Maine will have only two insurers on their exchange and their plans will have limited networks. From Bangor Daily News: Magnifying the impact of the move by Anthem and MaineHealth is the fact that only Anthem and a small startup nonprofit, Maine Community Health Options, plan to offer products on Maine’s exchange next year. The deadline to submit plans for federally run exchanges was last Friday and no other carriers did so, according to the insurance bureau. That also means that insurers in other New England states, which many hoped would choose to sell plans on Maine’s exchange, have opted out, at least for the first year. If only there was a public option to provide everyone with a decent basic option and make certain the much promised competition actually existed.

Coming Corporate Control of Medicine Will Throw Patients Under the Bus - Yves Smith - One of the most effective scare techniques employed to preserve our grotesquely inefficient, overpriced health care system has been to invoke the red peril of “socialized medicine”. Never mind that foreigners in advanced economies fail to recognize the caricatures scaremongers supply, or that Americans who need emergency care while overseas are almost without exception impressed with the caliber of care and astonished by the low (sometimes no) cost to them. After all, Americans live in the best of all possible worlds,and consumer and business freedom are always better. In fact, business freedom here increasingly means the God-given right to exploit the vulnerability of the public. The example slouching into view is more corporate control over the practice of medicine. And based on the previews, it will make the horrors falsely attributed to socialized medicine look pale.  Two accounts last week bring the issue home. The first came in the Health Care Renewal blog. It’s a reminder of how the current institutional efforts to regiment doctors undermine the caliber of medical care. It has become distressingly common for HMOs and other medical enterprises to have business-school trained managers putting factory-style production parameters on doctor visits. The post describes how a pediatrician, Pauline, who has developed a reputation for treating chronic conditions is at loggerheads with her for-profit practice. The suits don’t like her patient mix. She gets too many tough cases, when they’d rather have basically healthy kids who are there for a cold or ear infection. Mind you, this is only partly a money issue. These visits can be “up coded” so as to get larger insurance/patient payments, but she get a higher level of patients in less-generous state insurance programs. But some of the pushback is that her practice is perceived as disruptive, since she uses what is perceived as too much of her and staff time, separate and apart from the economics. She’s constantly breaking management’s precious guidelines.

Study: Nearly one-third of all death certificates are wrong - Death certificates are important public health documents. They help epidemiologists understand leading causes of deaths and how they are changing. They power big studies of what killed us in the past — and what kills us now.  And, according to a new Center for Disease Control study, about a third of them may be wrong. Columbia University’s Barbara A. Wexelman led a survey of 521 resident physicians in New York City. About one-third of those doctors completed more than 11 death certificates in the past year, making them pretty familiar with how the system works. “Only one-third of the respondents,” Wexelman and her team found, “believed the current system accurately documents correct cause of death.” Nearly half — 48.6 percent —  of respondents reported having identified a cause of death that did not actually represent what the person died from. A small number, 2.9 percent, had ever gone back and updated a death certificate after learning new information about the patient’s circumstance.

Cloning With Caffeine Produces Patient-Matched Stem Cells - Scientists have created embryonic stem cells that are a near identical genetic match to patients, an advance that could enable transplants and treatments based on an individual’s own tissues. The researchers, at Oregon Health & Science University in Portland, made embryonic stem cells through a procedure known as somatic cell nuclear transfer, which involved taking DNA from skin cells and inserting it into donated human egg cells. The resulting stem cells not only thrived, but could be turned into a variety of cell and tissue types, including heart cells, according to the study published in the journal Cell. The advance was enabled by a surprising ingredient, according to the report: caffeine gave the cells the boost they needed to remodel the donor DNA into embryonic cells.

Revealed: Big Pharma tested dangerous new drugs on unknowing Germans - Western drug companies tested pharmaceuticals on more than 50,000 people in the former communist East Germany, often without the knowledge of patients, several of whom died, the Spiegel news weekly reported Sunday. Some 600 clinical trials were carried out in more than 50 hospitals until the 1989 fall of the Berlin Wall, the report said, citing previously unpublished documents of the East German health ministry, pharmaceutical institute and Stasi secret police. Many major drug companies from Germany, Switzerland and the United States took part, offering up to 800,000 West German marks (about 400,000 euros, $520,000 at today’s exchange rate) per study, a boost for East Germany’s underfunded health care system, Spiegel said.

Antibiotic-resistant superbugs afflict one in 12 patients daily in hospitals across Canada: survey— On any given day, about one in 12 adults in hospitals across Canada are either colonized or infected with a superbug, the first national survey to determine the prevalence of antibiotic-resistant organisms has found. The survey of 176 acute-care hospitals looked at rates of infection or colonization in patients from three bacterial microbes that have become immune to the killing effects of most or all antibiotics — MRSA (methicillin-resistant Staphylococcus aureus), VRE (vancomycin-resistant Enterococci) and Clostridium difficile. “And that by itself is a substantial burden of disease,” said principal researcher Dr. Andrew Simor, head of infectious diseases at Sunnybrook Health Sciences Centre in Toronto.“About one in 12 adults … are going to have one of these three antibiotic-resistant organisms, and clearly the rate would be even higher if you started to add on other resistant organisms that we were not able to measure,” Simor added. Patients can carry, or be colonized by, a microbe like MRSA, but have no signs of active disease, while those who are infected are sick and have symptoms.

The Next Pandemic Is Closer Than You Think - TERRIBLE new forms of infectious disease make headlines, but not at the start. Every pandemic begins small. Early indicators can be subtle and ambiguous. When the Next Big One arrives, spreading across oceans and continents like the sweep of nightfall, causing illness and fear, killing thousands or maybe millions of people, it will be signaled first by quiet, puzzling reports from faraway places — reports to which disease scientists and public health officials, but few of the rest of us, pay close attention. Such reports have been coming in recent months from two countries, China and Saudi Arabia.  You may have seen the news about H7N9, a new strain of avian flu claiming victims in Shanghai and other Chinese locales. Influenzas always draw notice, and always deserve it, because of their great potential to catch hold, spread fast, circle the world and kill lots of people. But even if you’ve been tracking that bird-flu story, you may not have noticed the little items about a “novel coronavirus” on the Arabian Peninsula. This came into view last September, when the Saudi Ministry of Health announced that such a virus — new to science and medicine — had been detected in three patients, two of whom had already died. By the end of the year, a total of nine cases had been confirmed, with five fatalities. As of Thursday, there have been 18 deaths, 33 cases total, including one patient now hospitalized in France after a trip to the United Arab Emirates. Those numbers are tiny by the standards of global pandemics, but here’s one that’s huge: the case fatality rate is 55 percent. The thing seems to be almost as lethal as Ebola.

Fears grow over deadly new virus - The World Health Organization says it appears likely that the novel coronavirus (NCoV) can be passed between people in close contact. This comes after the French health ministry confirmed a second man had contracted the virus in a possible case of human-to-human transmission. Two more people in Saudi Arabia are also reported to have died from the virus, according to health officials. NCoV is known to cause pneumonia and sometimes kidney failure. World Health Organization (WHO) officials have expressed concern over the clusters of cases of the new coronavirus strain and the potential for it to spread. Since 2012, there have been 33 confirmed cases across Europe and the Middle East, with 18 deaths, according to a recent WHO update. Cases have been detected in Saudi Arabia and Jordan and have spread to Germany, the UK and France. "Of most concern... is the fact that the different clusters seen in multiple countries increasingly support the hypothesis that when there is close contact this novel coronavirus can transmit from person to person," the World Health Organization said on Sunday.

Two People Dead From SARS-Like Virus In Saudi Arabia, Two More Infected In France - While the H7N9 birdflu epidemic is still raging in China, with 4 news deaths bringing the total confirmed death toll to 31 (and who knows how many unconfirmed) on 129 infections leading to a mortality rate that is simply staggering, even if the mordibity rate is largely a function of Chinese data censorship, Europe and the middle east may be set for a viral breakout of their own. First is the case of Saudi Arabia where two more people have died from novel coronavirus, a new strain of the virus similar to the one that caused SARS, in an outbreak in al-Ahsa region of Saudi Arabia, the deputy health minister for public health said on Sunday. What is more troubling is that with the lack of accurate newsflow out of Saudi Arabia, come unforeseen consequences, such as the eventual spread of the virus from its localized region to a new area, such as Europe or in this case France, to start. Reuters report that a "second diagnosis of the new SARS-like coronavirus has been confirmed in France, the Health Ministry said on Sunday, in what appeared to be a case of human-to-human transmission. The new infection was found in a 50-year-old man who had shared a hospital room with France's only other known sufferer, the ministry said in a statement."

Dirty medicine - What Thakur unearthed over the next months would form some of the most devastating allegations ever made about the conduct of a drug company. His information would lead Ranbaxy into a multiyear regulatory battle with the FDA, and into the crosshairs of a Justice Department investigation that, almost nine years later, has finally come to a resolution.On May 13, Ranbaxy pleaded guilty to seven federal criminal counts of selling adulterated drugs with intent to defraud, failing to report that its drugs didn't meet specifications, and making intentionally false statements to the government. Ranbaxy agreed to pay $500 million in fines, forfeitures, and penalties -- the most ever levied against a generic-drug company. (No current or former Ranbaxy executives were charged with crimes.) Thakur's confidential whistleblower complaint, which he filed in 2007 and which describes how the company fabricated and falsified data to win FDA approvals, was also unsealed. Under federal whistleblower law, Thakur will receive more than $48 million as part of the resolution of the case.Fortune's account of what occurred inside Ranbaxy and how the FDA responded to it raises serious questions about whether our government can effectively safeguard a drug supply that last year was 84% generic, according to the IMS Institute for Healthcare Informatics, much of that manufactured in distant places. More than 80% of active pharmaceutical ingredients for all U.S. drugs now come from overseas, as do 40% of finished pills and capsules. (Click here for a full list of Ranbaxy products in the U.S.)

NIH Details Impact of 2013 Sequester Cuts - After weeks of worrying about how the mandatory across-the-board 2013 budget cuts known as the sequester would play out at the National Institutes of Health (NIH), the biomedical research community now has final figures. The bottom line is as grim as expected: The agency's overall budget will fall by $1.71 billion compared to 2012, to $29.15 billion, a cut of about 5%, according to an NIH notice today. That is essentially what NIH predicted as part of the 5.1% sequestration. (Including transfers to other agencies and other adjustments in the spending bill funding NIH in 2013, the total reduction is $1.71 billion or 5.5% compared to 2012.)  As a result, NIH expects to fund 8283 new and competing research grants this year, a drop of 703, according to this table. That number firms up the "hundreds fewer" awards that NIH officials warned of earlier this year. Including ongoing (already awarded) grants that are ending, the total number of research grants will drop by 1357 to 34,902 awards. The decline "reflects the fact that NIH's budget is being shrunk due to the new budget and political reality, which is bad news for researchers and the patients they are trying to help," says Tony Mazzaschi of the Association of American Medical Colleges in Washington, D.C.

This Is No Time to Cut Food Stamps - NYT Editorial - “Families who are living in poverty did not spend this nation into debt,” says Senator Kirsten Gillibrand, “and we should not be trying to balance the budget on their backs.” That humane principle will guide the New York Democrat as she seeks to persuade colleagues to resist a proposed $4.1 billion cut in food stamps in an omnibus farm bill heading toward Senate agriculture committee vote.  The cut, spread over 10 years, is a lot less than the devastating $20 billion cut over the next decade the Republican-controlled House Agriculture Committee is considering. Yet food stamps are already scheduled to take a hit when increases approved in the 2009 economic recovery act expire in November. The $4.1 billion reduction would result in an average cut of $90 per month for nearly 500,000 households nationwide, according to Congressional Budget Office estimates.  It is especially galling that members of committee, led by Debbie Stabenow, a Democrat of Michigan, seem determined to hurt struggling families and children while perpetuating unnecessary benefits for big agriculture. Ms. Gillibrand would pay for restoring the trims to food benefits by lowering the subsidies to highly profitable crop insurance companies based overseas.

House and Senate mark up farm bills -  At long last, the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry both marked up farm bills this week.  But there are many miles to go before this legislation ever reaches home. The Associated Press has a summary of several key differences in the main provisions (with dollar amounts stated on a per year basis). In a partisan division that we saw already last year, when this legislation was still over-optimistically known as the "2012 Farm Bill," the House committee proposes deeper cuts to the Supplemental Nutrition Assistance Program (SNAP) than the Senate committee does.  The House committee proposes to cut $2 billion per year, while the Senate committee proposes to cut $0.4 billion per year.  For the Senate committee bill, the National Sustainable Agriculture Coalition summarizes provisions of interest to producers interested in sustainable production practices, especially at the local and regional level.  For the House committee bill, Politico reports on the political angles.  The Hagstrom Report (gated, but valuable) is working overtime this week, and the FarmPolicy blog links to many national and regional media sources.

FDA Admits Chicken Meat Contains Arsenic - Attorneys at Center for Food Safety (CFS) filed a lawsuit on behalf of CFS, the Institute for Agriculture and Trade Policy (IATP) and seven other U.S. food safety, agriculture, public health and environmental groups to compel the Food and Drug Administration (FDA) to respond to the groups’ three year-old petition which calls for immediate withdrawal of FDA’s approval of arsenic-containing compounds as feed additives for food animals. Arsenic is commonly added to poultry feed for the FDA-approved purposes of inducing faster weight gain on less feed, and creating the perceived appearance of a healthy color in meat from chickens, turkeys and hogs. Yet new studies increasingly link these practices to serious human health problems. The lawsuit filed last week seeks to force the FDA to fulfill its mandate to better protect the public from arsenic. The 2009 petition presented abundant science to FDA that organic arsenic compounds—like those added to animal feed—are directly toxic to animals and humans, but also that they convert to cancer-causing, inorganic arsenic inside of chickens, in manure-treated soil and in humans. Additional testing since submission of the 2009 petition demonstrates even greater cause for public concern and therefore greater urgency meriting FDA’s prompt attention.

Produce Industry’s Food Safety Push Takes Toll on the Environment - Clean greens are healthy greens. Or so thought a coalition of farmers, growers and processers in California when, in response to a deadly spinach outbreak of the bacteria Escherichia coli (E. coli), they created a new set of bacteria-minimizing standards for growing and handling leafy greens. Although the standards were designed to eliminate potential sources of contamination by mandating that crop sites be cleared of vegetation and kept a certain distance from wildlife and natural bodies of water, they have had some unintended consequences—namely, the destruction of habitats, the degradation of soil and the pollution of rivers and streams. Researchers found that the 2006 regulations, corporate standards enforced through third-party audits, have not only been ineffective at reducing the risk of food-borne illness, but have contributed to a loss of ecological diversity in the Salinas River Valley, an area of California prized for its variety of animal and plant life and the center of production for 70 percent of America’s leafy greens.**

Don’t Mandate Labeling for Gene-Altered Foods - Should the government require companies to label food that contains genetically modified organisms? Last November, California voters rejected a ballot initiative that would require such labeling, but bills that would do so were recently introduced in both the U.S. House and Senate. Invoking “the right to know,” a lot of people support those bills. In the abstract, the argument for compulsory labeling seems exceedingly powerful. But there is a risk that a compulsory label for GM food would confuse, mislead and alarm consumers, potentially causing economic harm, not least to consumers themselves.  The World Health Organization defines GMOs as “organisms in which the genetic material (DNA) has been altered in a way that does not occur naturally.” As a result of the underlying technology, sometimes called “recombinant DNA technology” or “genetic engineering,” certain individual genes are transferred into one organism from another. GM food can potentially grow faster, taste better, resist diseases, lower reliance on pesticides, cost less and prove more nutritious.  In the U.S., GM food has become pervasive. Tomatoes, potatoes, squash, corn, sugar beets and soybeans frequently have GM ingredients. As much as 90 percent of corn, sugar beet and soybean crops are now genetically modified. In American supermarkets, genetically modified ingredients can be found in about 70 percent of processed foods. Among them are pizza, cookies, ice cream, salad dressing, corn syrup and chips. Should they all be labeled?

Monsanto Wins Seed Case as High Court Backs Patent Rights - The U.S. Supreme Court bolstered Monsanto Co. (MON)’s ability to control the use of its genetically modified seeds, ruling that companies can block efforts to circumvent patents on self-replicating technologies.  The justices unanimously upheld an $84,456 award Monsanto won in a lawsuit against Vernon Hugh Bowman, an Indiana farmer. Rather than buying herbicide-resistant soybean seeds from a Monsanto-authorized dealer, Bowman used harvested soybeans containing the technology to plant his crops. “Bowman planted Monsanto’s patented soybeans solely to make and market replicas of them, thus depriving the company of the reward patent law provides for the sale of each article,” Justice Elena Kagan wrote for the court.  The case may affect makers of live vaccines, genetically modified salmon, and bacteria strains used in medical research, potentially helping makers of those products restrict use beyond the first generation. Even so, the court said its ruling was a narrow one that didn’t resolve all issues concerning patents on self-replicating technologies.

Corporate Win: Supreme Court Says Monsanto Has 'Control Over Product of Life' - The U.S. Supreme Court ruled Monday in favor of biotech giant Monsanto, ordering Indiana farmer Vernon Hugh Bowman, 75, to pay Monsanto more than $84,000 for patent infringement for using second generation Monsanto seeds purchased second hand—a ruling which will have broad implications for the ownership of 'life' and farmers' rights in the future.In the case, Bowman had purchased soybean seeds from a grain elevator—where seeds are cheaper than freshly engineered Monsanto GE (genetically engineered) seeds and typically used for animal feed rather than for crops. The sources of the seeds Bowman purchased were mixed and were not labeled. However, some were "Roundup Ready" patented Monsanto seeds. The Supreme Court Justices, who gave Monsanto a warm reception from the start, ruled that Bowman had broken the law because he planted seeds which naturally yielded from the original patented seed products—Monsanto's policies prohibit farmers from saving or reusing seeds from Monsanto born crops. Farmers who use Monsanto's seeds are forced to buy the high priced new seeds every year.

Monsanto Has Taken Over the USDA - The U.S. Department of Agriculture has been taken over by an outside organization.  RootsAction has launched a campaign demanding a Congressional investigation. The organization is called Monsanto. Monsanto is, of course, the world's largest biotech corporation.  These are the people who brought us Roundup weed killer and the resulting superweeds and superbugs, along with growth hormones for cows, genetically engineered and patented seeds, PCBs, and Agent Orange - which Monsanto now wants us to use as herbicide on genetically engineered corn and soybeans. This chemical company - responsible for environmental disasters that have destroyed entire towns, and a driving force behind the international waves of suicides among farmers whose lives it has helped ruin - has monopolized our food system largely by taking over regulatory agencies like the U.S. Department of Agriculture.

Mexico – Ground Zero in the Fight Against Monsanto for the Future of Maize -Mexico, the birthplace of maize, is at the centre of the global fight to protect the crop’s diversity from the onslaught of genetically modified varieties. “It’s the first time in history that one of the most important harvests in the world is threatened in its centre of diversity,” Pat Mooney, the head of the Action Group on Erosion, Technology and Concentration (ETC Group), an international NGO, told IPS. “If we let the companies win, there will be no chance to defend them in other parts. What is happening here is of key importance for the rest of the world."  Civil society organisations are raising their guard against the possibility that the government of conservative President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI) may approve commercial cultivation of transgenic maize, a move widely condemned by environmentalists and other activists, academics, and small and medium producers due to the risks it poses.

Monsanto Sees ‘Elitism’ in Social Media-Fanned Opposition -  Monsanto Co. (MON) opponents who want to block genetically modified foods are guilty of “elitism” that’s fanned by social media and fail to consider the needs of the rest of the world, Chief Executive Officer Hugh Grant said.  The global population is growing and food consumption will rise even faster as people enter the middle class and eat more protein, the head of the world’s largest seed maker said in an interview. Those who can pay more for organic food want to block others from choosing more affordable options, Grant said.“There is this strange kind of reverse elitism: If I’m going to do this, then everything else shouldn’t exist,” Grant said at Monsanto’s St. Louis headquarters yesterday. “There is space in the supermarket shelf for all of us.”

A million acres of glyphosate-resistant weeds in Canada? - More than one million acres of Canadian farmland have glyphosate-resistant weeds growing on them, including 43,000 in Manitoba, according to an online survey of 2,028 farmers conducted by Stratus Agri-Marketing Inc. based in Guelph, Ont.The shockingly high Canadian numbers met with skepticism from some experts who suggest farmers might be mistaking hard-to-kill weeds with glyphosate resistance. But others say the farmers are probably right.Even though there hasn’t been a single documented case of a glyphosate-resistant weed in Manitoba, the 281 Manitoba farmers surveyed said they believe there’s glyphosate-resistant kochia on 23,000 acres in this province.“That’s probably an underestimate,” .“The farmers are pretty perceptive when it comes to their suspicions about resistance. They’re usually on the mark,” he said noting it’s already prevalent in provinces west of Manitoba. “Why wouldn’t it be in Manitoba, especially in the southwest where kochia is such a prevalent weed?”

Farmland Price Boom Continues, but Pace Moderates - Farmland values in parts of the U.S. Great Plains and the Rocky Mountains continued to rise in the first quarter, but at a more moderate pace, as higher costs and falling commodity prices slowed growth in farm incomes, the Federal Reserve Bank of Kansas City said Wednesday. The value of non-irrigated farmland rose 19% above year-earlier levels, with the biggest increase coming in portions of Missouri, the bank said in a quarterly report. That put the bank’s farmland survey at record levels for the first quarter as a boom in farmland prices continued, fueled in recent years by low interest rates and a record run-up in commodity prices. But even as values climbed, bank officials said the pace of the gains eased. In the district, which stretches from western Missouri to Wyoming, farmland values rose 3.4% in the first quarter from the fourth quarter of 2012. Values rose by 7.7% during the same period a year earlier.  A similar report Wednesday from the Federal Reserve Bank of St. Louis showed a decline in farmland values for parts of the Midwest and Southeast. The bank said values fell by an average of 2.3% in the first quarter compared with the fourth quarter of last year. The bank’s survey of regional bankers found respondents believe land values will rise slightly in the current quarter

Drought, late freezes cut wheat estimates » Oklahoma is expected to harvest less winter wheat this year than last, according to the first U.S. Department of Agriculture estimate released Friday. USDA forecasts Oklahoma’s wheat harvest to total 114 million bushels, down from 154.8 million bushels last year. The prolonged drought and several late freezes are to blame for the decrease in production, according to experts. Harvested acres and yields also are expected to be down this year. USDA predicts 3.8 million acres of wheat to be harvested in Oklahoma, down from 4.3 million last year. Yield is expected to be 30 bushels an acre, down from 36 bushels an acre last year.

Northern California enters moderate drought stage -  Northwest California has moved into a moderate drought designation, according to the National Weather Service, but the agriculture community hasn't been impacted -- at least not yet. ”We're not seeing any significant effects at this time,” Humboldt County Farm Bureau Executive Director Katherine Ziemer said. “Humboldt County is such a rainy area that we don't usually experience a lot of problems with the drought. When others are having a real drought issue, we have a mild drought. ”It's not as hard-hitting as it is in other areas of the state or even the nation,” Ziemer said. The weather service recently released updated drought information, placing all of Northwest California under a “D1 Drought-Moderate” designation on the U.S. drought monitor. In February, the region was given a “D0-Abnormally Dry” ranking.

Jeff Masters: Extreme weather whiplash in the Upper Midwest -- Climate change much? - Does not compute! That must be what residents of Iowa and the Midwest have have been saying to themselves on Tuesday as a ferocious heat wave unprecedented in intensity for so early in the year sent temperatures soaring as high as 108 °F. Just two weeks ago, the deepest snowfall ever measured during any May of record buried a wide swath from Arkansas to Minnesota, with Iowa breaking its all-time snowfall record for May (13” accumulation at Osage on May 1-3.) And how's this for a definition of "Weather Whiplash": Sioux City, Iowa, had their first-ever snowfall on record in the month of May on May 1st (1.4"), but hit an astonishing 106 °F yesterday. Not only was this their hottest temperature ever measured in the month of May, but only two June days in recorded history have been hotter (June, 10, 1933: 107 °F; and June 21, 1988: 108 °F). On May 12th they registered 29 °F, and thus had a 77-degree rise over 56 hours (from 6 a.m. May 12 to 1:30 p.m May 14.)The hottest temperature of all on Tuesday was 108 °F at Tekamah, Nebraska. This is just 2 degrees short of warmest temperature ever recorded in the state of Nebraska during May: 110 °F at Broken Bow in 1895 (exact day unknown). Numerous all-time early season heat records were set on Tuesday, making the event the most notable May wave in the Midwest since multi-day event in 1934. That heat wave was not preceded by unusually cold weather, which is what makes the May 2013 Midwest heat event truly extraordinary.

U.S. Geological Survey: Warmer Springs Causing Loss Of Snow Cover Throughout The Rocky Mountains -A new U.S. Geological Survey study finds, “Warmer spring temperatures since 1980 are causing an estimated 20 percent loss of snow cover across the Rocky Mountains of western North America.” The USGS explains, “The new study builds upon a previous USGS snowpack investigation which showed that, until the 1980s, the northern Rocky Mountains experienced large snowpacks when the central and southern Rockies experienced meager ones, and vice versa. Yet, since the 1980s, there have been simultaneous snowpack declines along the entire length of the Rocky Mountains, and unusually severe declines in the north.” We reported on that previous work in 2011 — see “USGS: Global Warming Drives Rockies Snowpack Loss Unrivaled in 800 Years, Threatens Western Water Supply.” The USGS explained back then: The warming and snowpack decline are projected to worsen through the 21st century, foreshadowing a strain on water supplies. Runoff from winter snowpack – layers of snow that accumulate at high altitude – accounts for 60 to 80 percent of the annual water supply for more than 70 million people living in the western United States.

Clouds ‘cool Earth less than thought’ – Extra cloud cover caused by emissions of industrial pollutants is known to reduce the effects of global warming, but its impact in reducing temperatures has been over-estimated in the climate models, new research has found. This is particularly significant for China and India, because it has been believed that these two giant countries would be partly shielded from the effects of climate change by their appalling industrial pollution. The Max Planck Institute for Chemistry in Germany believes this potential cooling effect has been exaggerated. The Institute’s study looked at the behaviour of sulphate particles in the air created by the reaction of oxygen with sulphur dioxide released from factory chimneys and other sources of pollution. In humid conditions the sulphates attract water droplets and form clouds. This increase in the cloud cover reflects more sunlight back into space and so cools the earth. The Max Planck researchers went to study a cloud formed at the top of a mountain, taking samples at various times to see how the sulphates reacted progressively.  What was crucial was how the sulphates were formed in the first place.

The First Cuts Are the Deepest: Sequester Cuts Increase Health, Climate Risks - Speaker of the House John Boehner (R-OH) claims he did not know whether the automatic budget cuts (or sequester) imposed by the Budget Control Act would hurt Americans, but he must not have been paying attention. In February, the Center for American Progress predicted that “Sequester Will Expose Americans to Greater Health Risks and Other Perils.”Ten weeks after the budget sequester took effect on March 1, the House Appropriations Committee Democrats released “Report on Sequestration Effects and Efforts to Mitigate its Impact.” This brand new analysis confirms many of our predictions that the sequester cuts threaten Americans’ health, safety and well-being. The sequester cuts in energy and environment related programs generally have had the following impacts so far:

  • Less ability to fight wildfires
  • Greater exposure to climate related extreme weather
  • Less protection from air pollution
  • Reduced protection for national parks and other protected places

Orangutans are victims of ‘sustainable’ palm oil as rainforest is razed – ‘All of the animals on the plantation are threatened. The company must therefore stop clearing the rainforest immediately.’: – Perched atop the remains of the last tree, an orangutan looks helplessly on what was until recently the forest he was living in but is now only ruins. Armed with chainsaws and bulldozers, workers of Bumitama Gunajaya Agro (BGA), a palm oil company, have completely destroyed the rainforest for miles. Three other half-starved orangutans – a pregnant female and a mother with her child on her back – were also found crawling around the stumps and tree trunks of the cleared rainforest. “There are more orangutans in the tiny remaining patches of forest in the plantation, along with other protected species such as proboscis monkeys,” explains Adi Irawan of International Animal Rescue Indonesia (IAR). “All of the animals on the plantation are threatened. The company must therefore stop clearing the rainforest immediately.”This may seem hard to believe, but the palm oil producer BGA has been a member of the RSPO, the label for sustainable palm oil, since 2007. BGA’s customers include IOI, Wilmar and Sinar Mas, companies that sell the palm oil to European food and consumer goods manufacturers and biodiesel producers. Even the EU has recognized the RSPO as a certification system for sustainably produced biofuels.

Maps show impact of overcutting old-growth forests, conservation groups say - New maps of B.C.’s forests put together by conservation groups using provincial government data show 74 per cent of productive old-growth forests has been logged and much of the remaining old growth is made up of small, stunted trees. On the valley bottoms, where the largest old-growth trees grow, 91 per cent has been logged, leaving only nine per cent of the classic old forest with iconic trees, the maps show. Victoria conservationist Vicky Husband said it’s an ecological crisis due to a century of overcutting the biggest and best trees. “[It] has resulted in the increasing collapse of ecosystems and rural communities,” Husband said. Even 20 years ago, there were intact watersheds and whole valleys to save, but now they are all gone, except in Clayoquot Sound, Husband said.

World’s fish have been moving to cooler waters for decades, study finds - Fish and other sea life have been moving toward Earth’s poles in search of cooler waters, part of a worldwide, decades-long migration documented for the first time by a study released Wednesday. The research, published in the journal Nature, provides more evidence of a rapidly warming planet and has broad repercussions for fish harvests around the globe. University of British Columbia researchers found that significant numbers of 968 species of fish and invertebrates they examined moved to escape the warming waters of their original habitats.Previous studies had documented the same phenomenon in specific parts of the world’s oceans. But the new study is the first to assess the migration worldwide and to look back as far as 1970, according to its authors. The research is more confirmation that “global change is real and has been real for a long time,” said Boris Worm, a professor of marine biology at Dalhousie University in Halifax, Nova Scotia, who was not part of the study. “It’s not something in the distant future. It is well underway.”

Common plants, animals threatened by climate change, study says - -- Climate change could lead to the widespread loss of common plants and animals around the world, according to a new study released Sunday in the journal Nature Climate Change. The study’s authors looked at 50,000 common species. They found that more than half the plants and about a third of the animals could lose about 50% of their range by 2080 if the world continues its current course of rising greenhouse gas emissions. Climate change affects the availability of nutrition and water for animals and plants. The narrowing of the geographic range of different common species means that plants and animals readily found in a given area could diminish markedly in those areas over the next seven decades. “This study … tells us that the average plant and animal will experience significant range loss under climate change,” said the study’s lead author, Rachel Warren, of the Tyndall Centre at University of East Anglia, United Kingdom. Warren said that until now, much climate change research had focused on the plight of rare species rather than common animals and plants. The study’s conclusions are “entirely consistent with what others are finding around the world,” The new study predicted that plants, reptiles and particularly amphibians would face the greatest risks from climate change. It also concluded that sub-Saharan Africa, Central America, the Amazon region and Australia would likely lose the most species of plants and animals. It projected “a major loss of plant species” in North Africa, Central Asia and South America

‘Dramatic decline’ warning for plants and animals - More than half of common plant species and a third of animals could see a serious decline in their habitat range because of climate change. New research suggests that biodiversity around the globe will be significantly impacted if temperatures rise more than 2C. But the scientists say that the losses can be reduced if rapid action is taken to curb greenhouse gases. The paper is published in the journal, Nature Climate Change. An international team of researchers looked at the impacts of rising temperatures on nearly 50,000 common species of plants and animals. They looked at both temperature and rainfall records for the habitats that these species now live in and mapped the areas that would remain suitable for them under a number of different climate change scenarios. The scientists projected that if no significant efforts were made to limit greenhouse gas emissions, 2100 global temperatures would be 4C above pre-industrial levels. In this model, some 34% of animal species and 57% of plants would lose more than half of their current habitat ranges.

Study: Climate change will cut habitats by 2080: Global warming will destroy more than half of the habitats of most plants and a third of animals by 2080, biologists conclude, unless steps are taken to limit greenhouse gases. Over the past century, average global surface temperatures have increased about 1.4 degrees Fahrenheit, according to the National Academy of Sciences. This global warming is largely due to burning fossil fuels, such as coal, oil and natural gas, which retain heat and warm the atmosphere. Temperatures worldwide are expected to rise roughly 7 degrees by 2100 if the use of fossil fuels continues without attempts to mitigate their effects. Without mitigation, "large range contractions can be expected even amongst common and widespread species," concludes the study led by Rachel Warren of the United Kingdom's University of East Anglia. It was published in the journal Nature Climate Change. In the study, biologists and climate researchers looked at the effects of these increasing temperatures on the living space of 48,786 animal and plant species worldwide. "With no mitigation, the climate becomes particularly unsuitable for both plants and animals in sub-Saharan Africa, Central America, Amazonia and Australia."

Climate change 'will make hundreds of millions homeless' - It is increasingly likely that hundreds of millions of people will be displaced from their homelands in the near future as a result of global warming. That is the stark warning of economist and climate change expert Lord Stern following the news last week that concentrations of carbon dioxide in our atmosphere had reached a level of 400 parts per million (ppm). Massive movements of people are likely to occur over the rest of the century because global temperatures are likely to rise to by up to 5C because carbon dioxide levels have risen unabated for 50 years, said Stern, who is head of the Grantham Research Institute on Climate Change. "When temperatures rise to that level, we will have disrupted weather patterns and spreading deserts," he said. "Hundreds of millions of people will be forced to leave their homelands because their crops and animals will have died. The trouble will come when they try to migrate into new lands, however. That will bring them into armed conflict with people already living there. Nor will it be an occasional occurrence. It could become a permanent feature of life on Earth." The news that atmospheric carbon dioxide levels have reached 400ppm has been seized on by experts because that level brings the world close to the point where it becomes inevitable that it will experience a catastrophic rise in temperatures. Scientists have warned for decades of the danger of allowing industrial outputs of carbon dioxide to rise unchecked.

We've Hit the Carbon Level We Were Warned About. Here's What That Means. - Over the last couple weeks, scientists and environmentalists have been keeping a particularly close eye on the Hawaii-based monitoring station that tracks how much carbon dioxide is in the atmosphere, as the count tiptoed closer to a record-smashing 400 parts per million. Thursday, we finally got there: The daily mean concentration was higher than at any time in human history, the National Oceanic and Atmospheric Administration (NOAA) reported Friday.  Don't worry: Earth is not about to go up in a ball of flame. The 400 ppm mark is only a milestone, 50 ppm over what legendary NASA scientist James Hansen has since 1988 called the safe zone for avoiding the worst impacts of climate change, and yet only halfway to what the IPCC predicts we'll reach by the end of the century. "Somehow in the last 50 ppm we melted the Arctic," said environmentalist and founder of activist group Bill McKibben, who called today's news a "grim but predictable milestone" and has long used the symbolic number as a rallying call for climate action. "We'll see what happens in the next 50."

Climate Sensitivity Stunner: Last Time CO2 Levels Hit 400 Parts Per Million The Arctic Was 14 °F Warmer! We have pushed atmospheric CO2 levels to 400 parts per million (ppm) for the first time in human existence. At the same time, a truly remarkably set of paleoclimate data shows the climate is much more sensitive to CO2 than we thought. And that means returning as quickly as possible back to 350 ppm is a vastly more rational course of action for a non-suicidal civilization, than, say continuing our unrestrained march toward 600 ppm, then 800, and then 1,000. NOAA reported Friday that the daily mean concentration of CO2 in the air around Mauna Loa, Hawaii, surpassed 400 parts per million this week:At the same time, a major new Science study of paleoclimate temperatures — based on “the longest sediment core ever collected on land in the Arctic” – revealed what happened the last time we had similar CO2 levels:“One of our major findings is that the Arctic was very warm in the Pliocene [~5.3 to 2.6 million years ago] when others have suggested atmospheric CO2 was very much like levels we see today. This could tell us where we are going in the near future. In other words, the Earth system response to small changes in carbon dioxide is bigger than suggested by earlier models,” the authors state. Another significant finding to emerge from this first continuous, high-resolution record of the Middle Pliocene is documentation of sustained warmth with summer temperatures of about 59–61 °F [15–16 °C], about 8 °C [14 °F] warmer than today.

Will Climate Change Make You Homeless? -Climate change and weather-related disasters forced over 31 million people to flee their homes in 2012, according to a new report, offering a grim look at what the future holds as climate-related disasters are set to rise. According to the assessment released Monday from the Internal Displacement Monitoring Centre (IDMC), disasters displaced 32.4 million people in 82 countries last year, with most—98%—being the result of weather- or climate-related disasters likes floods and wildfires. Call them "IDPs" (internally displaced persons) or "refugees," and it's tempting for those who have as of yet been unscathed by such disasters to see displacement as a distant problem.  But as the world reaps more and more of what the world's fossil fuel addiction has sown, the distance may be shrinking. From the report: In the longer term, human-induced climate change is expected to increase the frequency and severity of weather-related hazards, including floods, storms, wildfires and droughts which contribute to most disaster-induced displacement

Global Warming: Halfway to a Mass Extinction Event? - As you may know, we’ve restarted our climate crisis writing here at La Maison, beginning with this piece, a global warming picture “from 10,000 feet”: The climate crisis in three easy charts There we took the long view and noticed that the big temperature spike in the early days of the Cambrian, some 540 million years ago when life on earth was exploding in number and diversity of species, is a match for the temperature spike we could very well see in 2100 under the “do nothing” carbon scenario. The Cambrian temperature spikes reached 7°C (12.5°F) above pre-industrial (pre-1800) norms, which is also where we could be headed if we don’t stop. In order to discuss global warming and mass extinction, we need to look at mass extinctions in general to get a sense of the scale of these events and their effect. Consider again the chart of extinctions since the Cambrian, 540 million years ago. (This chart was presented in slightly different form here.) The labels across the top — “Cm” and so on — are geologic “periods”. For your convenience I’ve added the larger divisions, the three geologic eras as well, and indicated where the current geologic period, the Quarternary, fits in. As you can see, only a handful of mass extinctions grew to real size. The biggest one by far is between the Paleozoic and Mesozoic eras — at the Permian-Triassic boundary (“P” and “Tr” above). That extinction is called the Great Dying, since over 90% of all marine species and 70% of land vertebrate species died out. It not only ended the Permian, it ended the whole Paleozoic Era. Look at the chart again and locate the most recent extinction, the one that ended the dinosaurs. That spike killed off 50% of all species. There aren’t many spikes of that intensity on the chart. If James Hansen is right (see below), we’re about to create another one, a 25–50% species-extinction event. Will it end the so-called Age of Mammals? That depends on the effect of temperature on extinctions, and also the temperature the earth finally heats to before warming levels off.

Why the world faces climate chaos - Last week the concentration of carbon dioxide in the atmosphere was reported to have passed 400 parts per million for the first time in 4.5m years. It is also continuing to rise at a rate of about 2 parts per million every year. On the present course, it could be 800 parts per million by the end of the century. Thus, all the discussions of mitigating the risks of catastrophic climate change have turned out to be empty words. Collectively, humanity has yawned and decided to let the dangers mount. Professor Sir Brian Hoskins, director of the Grantham Institute for Climate Change at Imperial College in London, notes that when the concentrations were last this high, “the world was warmer on average by three or four degrees Celsius than it is today. There was no permanent ice sheet on Greenland, sea levels were much higher, and the world was a very different place, although not all of these differences may be directly related to CO2 levels.” His caveat is proper. Nonetheless, the greenhouse effect is basic science: it is why the earth has a more pleasant climate than the moon. CO2 is a known greenhouse gas. There are positive feedback effects from rising temperatures, via, for example, the quantity of water vapour in the atmosphere. In brief, humanity is conducting a huge, uncontrolled and almost certainly irreversible climate experiment with the only home it is likely to have. Moreover, if one judges by the basic science and the opinions of the vast majority of qualified scientists, risk of calamitous change is large. What makes the inaction more remarkable is that we have been hearing so much hysteria about the dire consequences of piling up a big burden of public debt on our children and grandchildren. But all that is being bequeathed is financial claims of some people on other people. If the worst comes to the worst, a default will occur. Some people will be unhappy. But life will go on. Bequeathing a planet in climatic chaos is a rather bigger concern. There is nowhere else for people to go and no way to reset the planet’s climate system. If we are to take a prudential view of public finances, we should surely take a prudential view of something irreversible and much costlier.‘Best estimate’ of melting ice caps - Researchers have published their most advanced calculation for the likely impact of melting ice on global sea levels. The EU funded team say the ice sheets and glaciers could add 36.8 centimetres to the oceans by 2100. Adding in other factors, sea levels could rise by up to 69 centimetres, higher than previous predictions. The researchers say there is a very small chance that the seas around Britain could rise by a metre. The last Intergovernmental Panel on Climate Change (IPCC) report was highly detailed about many aspects of Earth's changing climate in the coming decades, While they estimated that sea levels could rise by 18-59 centimetres by 2100, they were very unsure about the role played by the melting of ice sheets and mountain glaciers. To fill the void, the EU funded experts from 24 institutions in Europe and beyond to try and come up with more accurate figures on the melting of ice sheets and glaciers in Antarctica and Greenland and how this might swell the oceans. Called Ice2sea, the group of scientists have made what they term the "best estimate" yet of the impact of melting based on a mid-range level of carbonemissions that would increase global temperatures by 3.5C by the end of this century.

Climate Change Has Shifted the Locations of Earth’s North and South Poles - Global warming is changing the location of Earth’s geographic poles, according to a new study in Geophysical Research Letters. Researchers at the University of Texas, Austin, report that increased melting of the Greenland ice sheet — and to a lesser degree, ice loss in other parts of the globe — helped to shift the North Pole several centimeters east each year since 2005. “There was a big change,” says lead author Jianli Chen, a geophysicist. From 1982 to 2005, the pole drifted southeast toward northern Labrador, Canada, at a rate of about 2 milliarcseconds —or roughly 6 centimetres — per year. But in 2005, the pole changed course and began galloping east toward Greenland at a rate of more than 7 milliarcseconds per year. Scientists have long known that the locations of Earth’s geographic poles aren’t fixed. Over the course of the year, they shift seasonally as the Earth’s distributions of snow, rain, and humidity change. “Usually [the shift] is circular, with a wobble,” says Chen. But underlying the seasonal motion is a yearly motion that is thought to be driven in part by continental drift. It was the change in that motion that caught the attention of Chen and his colleagues, who used data collected by NASA’s Gravity Recovery and Climate Experiment (GRACE) to determine whether ice loss had shifted and accelerated the yearly polar drift.

Sea Level Rise to Be Less Severe than Feared - (Reuters) - A melt of ice on Greenland and Antarctica is likely to be less severe than expected this century, limiting sea level rise to a maximum of 69 cm (27 inches), an international study said on Tuesday. Even so, such a rise could dramatically change coastal environments in the lifetimes of people born today with ever more severe storm surges and erosion, according to the ice2sea project by 24, mostly European, scientific institutions. Some scientific studies have projected sea level rise of up to 2 meters by 2100, a figure that U.N. Secretary-General Ban Ki-moon has called a worst case that would swamp large tracts of land from Bangladesh to Florida. Ice2sea, a four-year project to narrow down uncertainties of how melting ice will pour water into the oceans, found that sea levels would rise by between 16.5 and 69 cm under a scenario of moderate global warming this century. "This is good news" for those who have feared sharper rises, David Vaughan, of the British Antarctic Survey who led the ice2sea project, told Reuters in a telephone interview. "But 69 cm is a very real impact ... it changes the frequency of floods significantly," he said. And seas would keep rising for centuries beyond 2100, in a threat to coastal cities and low-lying islands such as the Maldives or Tuvalu.

Floods could 'overwhelm Thames Barrier by end of century' - Sea-level rises could send floods driven by storm surges over London's Thames Barrier regularly by the end of the century, if nothing is done to bolster the UK's flood defences, scientists warned on Tuesday. But around the world sea level rises from melting ice alone are likely to be "in the tens of centimetres" rather than several metres by 2100, as some outlying estimates had predicted, according to Ice2Sea, a project bringing together scientists from around Europe in order to improve predictions of sea level rises under climate change. The scientists also said there was only a one-in-20 chance that melting ice would contribute more than 84cm to sea level rises by 2100. Their work has helped to narrow down some of the vast differences in estimates of sea level rises. But their central estimate range is still large – that ice melting is likely to contribute between 3.5 to 36.8cm to global sea levels by 2100, which when added to the likely thermal expansion equates to a sea level rise of about 30cm to 69cm. However, what matters more than sea-level rises alone is the effect of storm surges from the sea. The power of such surges was shown dramatically 60 years ago in Europe, when a surge in the North Sea killed more than 1,800 people in the Netherlands and more than 326 people in the UK.

Todd Stern, Climate Negotiator - Some bullshit goes far beyond the ordinary, and when the question is what will humans do to rein in carbon dioxide emissions?, you are very likely to see it. So it was not terribly surprising to find some astonishing bullshit in the Reuters story U.S. envoy sees new plan energizing global climate talks. The source of the bullshit was Todd Stern, America's climate negotiator.  The United States' new proposal to let countries draft their own emissions reduction plans rather than working toward a common target can unlock languishing U.N. climate negotiations, the U.S. climate change envoy said on Tuesday.  "Countries, knowing that they will be subject to the scrutiny of everybody else, will be urged to put something down they feel they can defend and that they feel is strong," Stern said from Berlin during a summit of environmental ministers focused on ways to advance the U.N. climate talks. The approach would mean abandoning the format of the Kyoto Protocol, to which the United States was not a signatory, which set central goals for industrialized countries to cut emissions by 2012 and then let each work out national implementation. We will regulate CO2 emissions ... by not regulating them. Perfect! It is good to see the United States taking the lead here. FYI, we are talking about a treaty that will not be officially negotiated until 2015, and will not be implemented until 2020.

EPA Is Required To Regulate Carbon Pollution From Existing Power Plants - EPA is legally obligated to issue rules regulating CO2 from existing power plants.Dave Roberts at Grist is (eternally) puzzled that folks don’t seem to know that. Since eternity is a very long time — only slightly longer than the lifetime of some CO2 molecules in the air — I’ll repost his key points:

  1. In 2007, the Supreme Court ruled in Mass v. EPA that CO2 qualifies as a pollutant under the Clean Air Act.
  2. In 2009, EPA issued an endangerment finding that deemed CO2 a threat to public health. Once those two things happened, a cascading series of of legal obligations was set into motion.
  3. First, EPA must regulate “mobile sources” of CO2 under Section 202 of the Clean Air Act. That’s what it did with its new auto mileage standards.
  4. Then, EPA must regulate “stationary sources” of CO2 underSection 111 of the Clean Air Act. First it will issue standards on new power plants. It issued a draft regulation last year, but it missed a deadline in April for issuing the final rule (for which some green groups are suing it). Supposedly it has delayed release of the final regulation so it can do more work to protect the rule against legal challenge.
  5. Then, EPA must regulate existing stationary sources — in the case of CO2, primarily power plants — under Section 111(d). That rule, the 111(d) rule, is the one EPA keeps telling journalists it has “no current plans” to develop, and no surprise, since it’s got its hands full working on the rule for new power plants.

Emissions trading in Europe in Tatters - The European Union's flagship program to fight global warming—a regional carbon-emissions trading system—suffered a major blow Tuesday when legislators rejected a proposal aimed at saving the market from collapse. After the European Parliament's rejection, spooked investors drove the already depressed price of carbon emission permits down by nearly half. Benchmark electricity prices also fell. Europe's Emissions Trading System, launched in 2008, was intended to protect the environment by raising the cost of polluting and encouraging businesses to invest in cleaner technologies. Slack demand for electricity because of the recession and an abundance of permits helped push the price of emitting a ton of carbon below €5 ($6.60) earlier this year, from nearly €30 in 2008. On Tuesday, the price dropped to €2.55 before recovering partially to €3.20.Without some intervention to reduce supply, "the ETS will almost certainly collapse," "Prices will likely sink below €1 per ton as participants recognize that there is no political will at present to restore the market mechanism to functioning order," he said.

For Insurers, No Doubts on Climate Change - If there were one American industry that would be particularly worried about climate change it would have to be insurance, right?  From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt, natural catastrophes across the United States pounded insurers last year, generating $35 billion in privately insured property losses, $11 billion more than the average over the last decade.  And the industry expects the situation will get worse. “Numerous studies assume a rise in summer drought periods in North America in the future and an increasing probability of severe cyclones relatively far north along the U.S. East Coast in the long term,” said Peter Höppe, who heads Geo Risks Research at the reinsurance giant Munich Re. “The rise in sea level caused by climate change will further increase the risk of storm surge.” Most insurers, including the reinsurance companies that bear much of the ultimate risk in the industry, have little time for the arguments heard in some right-wing circles that climate change isn’t happening, and are quite comfortable with the scientific consensus that burning fossil fuels is the main culprit of global warming.  “Insurance is heavily dependent on scientific thought,” Frank Nutter, president of the Reinsurance Association of America, told me last week. “It is not as amenable to politicized scientific thought.”

Direct air carbon capture technology must be developed to help fight climate change. - According to data being gathered at the Mauna Loa Observatory in Hawaii, which has been monitoring atmospheric carbon dioxide since 1958, the CO2 concentration in the Earth’s atmosphere officially exceeded the 400 parts per million mark last week, a value not attained on Earth since humans were first human. This ominous milestone comes at a time when the evidence that human activity is resulting in unprecedented climate change is now overwhelming. More important, perhaps, even if all greenhouse gas production ceased immediately, this elevated carbon dioxide level would persist in the atmosphere for thousands of years. Indeed, even moving relatively quickly toward a carbon-neutral economy will still result in a net increase in CO2 in the atmosphere for the foreseeable future. So in addition to undertaking dramatic global efforts to reduce present and future CO2 emissions, we need a strategy for addressing the carbon already up there. Recently, a broad group of geologists, planetary scientists, climatologists, social scientists, and physicists convened at the Origins Project at Arizona State University, which I direct, to explore such strategies. (Disclosure: Future Tense is a partnership of Slate, the New America Foundation, and ASU.) As an upcoming paper being prepared by 15 of the participants* at the meeting will argue, we came to a broad consensus that there is an increasingly urgent need to seriously consider removing and sequestering CO2 directly from our atmosphere.

Study Finds Loss of Rain Forests Can Deplete Hydropower - The loss of tropical rain forests is likely to reduce the energy output of hydroelectric projects in countries like Brazil that are investing billions of dollars to create power to support economic growth. That is the conclusion of a group of experts whose findings, released Monday, run counter to the conventional understanding of deforestation’s impact on watersheds.  For years, scientists and engineers have noted an increase in river flows when the trees along streams are removed. The water in the soil, which would otherwise have been taken up by the tree roots and sent into the atmosphere, instead moves directly into streams and rivers.  At the same time, large areas of tropical forest actually create rain clouds as moisture from their leaves evaporates. So the elimination of swaths of these forests decreases rainfall. Cut down enough trees, the scientists argue, and the indirect impact of lost rainfall outweighs the direct impact of removing trees.

Amazon deforestation may undercut South American hydropower projects -The deforestation of the Amazon is often referred to in terms of the loss of habitat and species. But it also may come back to cause unforeseen problems for us humans, based on a new study in PNAS. Most models of future hydropower productivity have assumed deforestation will lead to increased water runoff, which will in turn increase the amount of power that existing projects will generate. But the study suggests that the feedback between forests and rainfall will ultimately lead to a prolonged and more intense dry season, leaving hydroelectric plants generating less power. Hydropower is a major contributor of renewable electricity in South America. 100 percent of Paraguay's electricity comes from hydro, and it's a major exporter of power. Brazil isn't far behind, meeting 80 percent of its electrical needs using hydropower, and with several major projects still in the works. The study focuses on one of these projects which will tap into the potential of the Xingu river basin. A series of damns and hydroelectric facilities in the basin are slated to fill 40 percent of the increase in generating capacity that Brazil expects to need by the end of the decade. Currently, estimates for its future production are that it will rise due to deforestation. That's because trees and other plants are very good at extracting moisture from the soil but not as good at retaining it in their leaves. The process by which ground water is released as water vapor by the leaves of plants is called evapotranspiration. Estimates are that the loss of forest will reduce evapotranspiration, raising the future production of electricity by the Xingu project by anywhere from four to 12 percent, depending on the degree of forest loss.

EU To Impose Tariffs on Chinese Solar Panels  - Back in 2008, the darling of the German solar industry, SolarWorld, logged a 31 percent annual increase in revenue for a total of €900 million ($1.18 billion) and expanded its operations by opening North America's largest solar cell plant. Four short years later, in 2012, the company announced €492 million in losses, and today SolarWorld is in the midst of a major debt restructuring deal to stave off bankruptcy. Ironically, SolarWorld made it just long enough to see the success of the effort it spearheaded to slap tariffs on Chinese companies it suspected of conducting price dumping in order to wipe out the competition. On Wednesday, the European Commission in Brussels agreed to impose punitive tariffs of 47 percent on Chinese solar goods.  Last year, China sold €21 billion worth of solar panels and related components in Europe. But all of that is just about to get a lot more expensive with a 47 percent cost increase on panels made in the country. The levies are likely to see a response from China, which has already threatened tariffs seen as reactive in an industry that grew by a power of ten in the last five years as solar panels dropped in price by more than 75 percent. And as with any quickly growing industry, the road has been rocky and strewn with wrecks. SolarWorld helped launch the anti-dumping case with a formal complaint filed together with other solar companies with European Commission last July and a similar case in the United States that resulted in tariffs of up to 250 percent on Chinese solar module manufacturers.

Warren Buffett's Coal Problem - To run his coal trains, the billionaire investor needs to seize land from a bunch of Montana cowboys. That's not going over very well.Buffett's Burlington Northern Sante Fe (BNSF) Railway Company derives a quarter of its $20 billion in annual revenues from transporting coal, and it lobbies aggressively on the industry's behalf. Berkshire Hathaway is one of the very few major U.S. companies that don't disclose their greenhouse gas emissions, and it has opposed shareholders who ask it to do so.  Nowhere is Buffett's green reputation taking more of a beating, though, than in a remote and sparsely populated corner of southeastern Montana. Ranchers, Native Americans, and Amish farmers there are fighting to preserve their livelihoods and landscapes, which are threatened by what, if developed, would be one of the biggest coal strip mines in the West. And shipping all that coal to West Coast ports would be Warren Buffett's BNSF Railway.

Why the renewable energy industry ought to support U.S. natural gas exports - U.S.-based industries and utilities that consume a lot of natural gas have been trying to figure out just how to respond to proposals in Congress to allow expanded natural gas exports, a move that could significantly raise the price of one of their chief inputs. But, there is one segment of U.S. industry that ought to be cheering for such an outcome--though I doubt that its leaders will be offering their support in anything above a whisper. The renewable energy industry would benefit from higher natural gas prices--and higher coal prices, for that matter--since, as these fuels for electric power plants become dearer, renewable energy sources become more competitive. Higher prices--all things being equal--tend to depress economic activity. And, higher energy prices also tend to make American goods less competitive on world markets by increasing the costs of many inputs. But there are good reasons for the American public to shoulder the burden of higher energy prices now to help build a more secure future. First, climate change is already on course to destroy the way of life that Americans say they want to preserve. Second, there is no chance, NONE, that fossil fuels can sustain American society and the world in the long run. Only renewable energy can offer the promise of essentially perpetual supplies.

4 Intelligence Notes Covering US Gas Exports, Kenyan Oil & More: The debate over whether the US should become a net gas exporter moved towards the proponents last weekend, following remarks made by US President Barack Obama during a visit to Costa Rica suggesting that there will be wide support for gas export ventures.  Analysis: This debate has pitted the oil and gas industry against giant chemical manufacturers, with the former eyeing lucrative gas export profits and the latter eyeing lower manufacturing costs if that gas stays at home. But increasingly, we are getting hints from the Obama administration that the oil and gas industry is winning this battle. In Costa Rica, Obama said: “I’ve got to make a decision — an executive decision broadly about whether or not we export liquefied natural gas at all. But I can assure you that once I make that decision, then factoring in how we can use that to facilitate lower costs in the hemisphere and in Central America will be on my agenda.” In April, Obama’s national security advisor noted that US allies around the world are lining up for US gas in expectation of exports; most notably, Japan--which is chomping at the bit to partner up with US LNG exporters—but also India.

Democrats Are Holding Energy—and Prosperity—Captive  -- Domestic natural gas production is booming. Not only will we no longer have to import the stuff, we'll actually have enough to start exporting. But to hear some people tell it, the only thing worse than importing energy is exporting energy. Among those who have their doubts about this prospect is President Barack Obama. Current law requires the federal government to approve all sales of U.S. gas abroad, and that's not a sure thing. "I've got to make a decision -- an executive decision broadly about whether or not we export liquefied natural gas at all," he said recently. Some congressional Democrats are discouraging him. Sen. Ron Wyden of Oregon warns that "major gas consumers could find themselves hit hard with energy price hikes and forced to sideline job-creating efforts" if producers can sell to just anyone. Shipping our homegrown supplies abroad "makes no sense," says Sen. Debbie Stabenow of Michigan. Some corporations also oppose what they call "unfettered exports." Among them are Dow Chemical, Alcoa, Nucor and Eastman Chemical. They argue that selling American natural gas to Americans is good but selling it to foreigners is bad. They fret that foreign buyers will bid up the price of something they buy in great quantity. The correct response to that fear is: So what? It's not the job of the federal government to intervene to depress prices of a commodity just because someone prefers cheap supplies. We don't forbid exports of wheat to control bread prices. We don't ban exports of electronics to keep Best Buy in business.

Natural gas export plans stir debate : A domestic natural gas boom already has lowered U.S. energy prices while stoking fears of environmental disaster. Now U.S. producers are poised to ship vast quantities of gas overseas as energy companies seek permits for proposed export projects that could set off a renewed frenzy of fracking. Expanded drilling is unlocking enormous reserves of crude oil and natural gas, offering the potential of moving the country closer to its decades-long quest for energy independence. Yet as the industry looks to profit from foreign markets, there is the specter of higher prices at home and increased manufacturing costs for products from plastics to fertilizers. Companies such as Exxon Mobil and Sempra Energy are seeking federal permits for more than 20 export projects that could handle as much as 29 billion cubic feet of natural gas a day. If approved, the resulting export boom could lead to further increases in hydraulic fracturing, a drilling technique also known as fracking. It has allowed companies to gain access to huge stores of natural gas underneath states from Colorado to New York, but raised widespread concerns about alleged groundwater contamination and even earthquakes.

The Obama Administration's Policy on LNG Makes No Energy Sense - Chris Martenson - The Obama administration has come out in support of the idea of exporting U.S. natural gas. This stance is counterproductive and shortsighted, and if followed, it will prove harmful to domestic manufacturing (i.e., value generation) and to future generations of Americans. While exporting natural gas would certainly prove to be an economic boon for a very select minority of companies and individuals, it makes no sense from an energy standpoint and undermines our national interests. All it will do is enrich a few while boosting prices for all domestic consumers and shortchanging the energy and environmental inheritance we pass along to our children. In order for natural gas to be turned into a liquid (a.k.a. liquid natural gas or LNG), it has to be compressed and refrigerated all the way down to an astonishing -260 degrees Fahrenheit.  If you have a refrigerator, you already know that it takes energy to cool something down. And the deeper the cooling, the higher the energy required. In order to export LNG, it takes energy to simply turn that energy into a liquid.  How much?  Roughly 25%. That's right; a quarter of the embedded energy in the natural gas is lost before it even makes its way to a customer.

Fugitive methane emissions from Los Angeles basin oil and gas drilling operations at 17%! - Emissions of methane from the Los Angeles basin had been estimated in the mid-2000s as part of the state's landmark cap-and-trade bill, known as A.B. 32, which regulates emissions of the powerful greenhouse gas. But later measurements of the air in the region showed there was a lot more methane being emitted than was accounted for, more than a third as much. Jeff Peischl, an associate scientist at NOAA, has solved this puzzle, outlining the sources of the missing methane in a paper published yesterday in the Journal of Geophysical Research. While methane in the Los Angeles basin comes from many sources, there are three main sectors responsible for the difference in what the state of California had estimated and what is actually being emitted. These are leaks from pipeline distribution systems, natural seeps from areas such as the La Brea Tar Pits and emissions from oil and gas drilling operations in the area. Peischl was able to determine where the methane came from because different sources of methane contain different ratios of compounds called alkanes, like propane and butane. By examining the ratios of alkanes in samples collected from 16 overflights of the Los Angeles basin in 2010, using NOAA's P-3 aircraft, a flying laboratory with sensitive air-sampling equipment, Peischl learned whether methane came from a landfill, dairy or fossil fuel source.

Scientist’s U.S. Road Trip Reveals Unexpected Methane Emissions: Methane measurements collected during a scientist’s road trip across the U.S. indicate that local emissions of the potent greenhouse gas are higher than previously known in many regions. Using a gas chromatograph mounted to the roof of a rented camper, Ira Leifer of the University of California, Santa Barbara, collected air samples from Florida to California, finding the highest methane concentrations in areas with significant refinery activity — such as Houston, Texas — and in a region of central California with oil and gas production. He found that methane concentrations exceeded the levels estimated by the U.S. Department of Energy, particularly in areas near industrial fossil fuel extraction sites. The results point to the importance of targeting these so-called “fugitive” methane emissions in parallel with efforts to reduce carbon dioxide emissions. Leifer's findings were published in the journal Atmospheric Environment.

Will Ohio’s Landfills Become a Dumping Ground for Radioactive Fracking Waste? – Don’t turn Ohio’s landfills into a dumping ground for radioactive waste from the oil and gas industry. That’s the message environmental groups hope will resonate with state lawmakers as they consider whether to approve a controversial proposal by the Ohio Department of Natural Resources (ODNR) to allow the disposal in Ohio landfills of radioactive-laced drill cuttings from deep-shale oil and gas drilling in Ohio and nearby states. “If passed, this proposed law would put a big, trashed-out ‘Statue of Radioactive Liberty’ on Ohio’s eastern border. It would proclaim to the oil and gas industry, ‘Bring us your spent, cast-off, radioactive waste. It’s welcome in Ohio,’” said Jack Shaner, deputy director of the Ohio Environmental Council.Under the ODNR proposal, drill cuttings and brine could be classified by the state as naturally occurring radioactive materials, or NORM. Such materials would not be required to be tested for radioactivity and could remain on site at a horizontal-drilling well pad or could be shipped for disposal in any of Ohio’s 39 licensed municipal solid waste landfills

New Fracking Rule Issued By Interior On Public Land: Companies that drill for oil and natural gas on federal lands will be required to disclose publicly the chemicals used in hydraulic fracturing operations, the Obama administration said Thursday. The new "fracking" rule replaces a draft proposed last year that was withdrawn amid industry complaints that federal regulation could hinder an ongoing boom in natural gas production. The new draft rule relies on an online database used by Colorado and 10 other states to track the chemicals used in fracking operations. is a website formed by industry and intergovernmental groups in 2011 that allows users to gather well-specific data on thousands of drilling sites. The proposed rule also sets standards for proper construction of wells and disposal of wastewater. Fracking involves pumping huge volumes of water, sand and chemicals underground to split open rocks to allow oil and gas to flow. Improved technology has allowed energy companies to gain access to huge stores of natural gas underneath states from Wyoming to New York but has raised widespread concerns about alleged groundwater contamination and even earthquakes.

Obama administration issues draft fracking regulations - The Obama administration drew sharp criticism from environmental and oil industry groups Thursday when it issued a new draft of regulations for fracking on federal and Indian lands. Environmental groups said the new draft provided weaker water protections than a version the Interior Department proposed a year ago, while oil industry groups said they wanted regulation left in the hands of states and were opposed to any federal rules. In its first update of hydraulic fracturing regulations in three decades, the Interior Department’s Bureau of Land Management would require wider disclosure of chemicals used in drilling. It would also require that companies have a water-management plan for fluids that flow back to the surface and take steps to assure wellbore integrity and prevent toxic fluids from leaking into groundwater. But environmental groups expressed disappointment that the regulations do not include a ban on the storage of waste fluids in open, lined pits. They also want complete disclosure of chemicals used in fracking, which the regulations would not require. The regulations would allow companies to disclose the chemicals to FracFocus, an Oklahoma-based Web site that has been criticized for its ties to industry. A Harvard Law School study concluded that FracFocus was not effective and “does not serve the interests of the public.” Companies could also use affidavits to assert trade-secret protection of certain chemicals, although the BLM would keep the authority to require disclosure “if necessary,” the department said.

Oil & Energy Insider 17/05/2013: What we’re really waiting for here is the confirmation of Ernest Moniz as the new energy secretary. This will be the decisive moment, and the confirmation hearing is next week. While Moniz has remained tight-lipped on the issue, the general consensus among analysts is that the new secretary will support an expanded US natural gas export initiative. Things will become clearer next week … so stay with us. On the crude oil side of this equation, the International Energy Agency (IEA) has also weighed in: The verdict: the US should stop dragging its feet and let the crude flow as US oil production continues its sharp ascent. It’s a bit of a regulatory dilemma, since the 1979 Export Administration Act banned the sale of US crude abroad, with the exception of exports to Canada and Mexico. But it’s not 1979 anymore, and the shale boom has rendered these old restrictions unsuitable. If crude export restrictions aren’t addressed, the IEA says, the industry will find a way around them at any rate. The loopholes start with processed products that can no longer be considered “crude”.

US energy revolution gathers pace - The growing role of the US in world energy markets was underlined on Friday as the Obama administration approved wider exports of liquefied natural gas and international companies committed billions of dollars for new infrastructure. The developments were both consequences of the shale revolution in the US, in which improvements in the techniques of horizontal drilling and hydraulic fracturing, or “fracking”, have unlocked new supplies of oil and gas, and raised the prospect that the US will be an increasingly important supplier of energy to the rest of the world. The Department of Energy on Friday authorised the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of the EU. It was the first such approval to be granted for two years and only the second ever. President Barack Obama had been expected to approve worldwide sales from the Freeport project, as the administration sees rising energy exports as providing economic benefits and strengthening the global influence of the US. However, a vocal lobby of companies in industries such as chemicals and steel has urged restrictions on gas exports to ensure US manufacturers continue to derive a competitive advantage from cheap energy. Freeport has signed deals to sell its gas to Osaka Gas and Chubu Electric of Japan, and BP of the UK.

The Mines That Fracking Built: The bluffs rise up gently from the rolling hills and farmlands of Wisconsin's Chippewa County. For years, the bluffs stood silent as small farming communities grew around them. The bluffs are too steep to farm and most of the trees in the area grow on the tops of bluffs and around their rolling slopes and steep faces. It's unusually cold for April and trees stand as silhouettes against a layer of snow. This scene is quickly interrupted at the intersection of two county roads in the small township of Cooks Valley. A large bluff behind a farm has disappeared. The bluff has been blasted, churned up and turned into giant piles of sand. The sand will soon be trucked off to a processing plant, loaded back into trucks or perhaps onto a waiting train and then shipped to oil and gas fields in other states. The sand will be mixed with water and chemicals and forced deep underground to break up rock and release precious fossils fuels. This isn't the kind of sand you find at the beach; it's silica, or "frack sand," a carcinogenic dust and a key ingredient in the hydraulic fracking process which has facilitated a nationwide natural gas boom and, according to opponents, an ongoing environmental crisis. Silica particles are uniquely shaped and prop open fractures in the underground rock to free the oil or gas.

The Mines that Fracking Built, Part Two -- The sandstone bluffs that rise up along both sides of the Mississippi River corridor in Wisconsin and Minnesota are rich in the silica desired by the fracking industry. Wisconsin is home to at least 70 operating mines and a total of 131 mines and processing facilities have been permitted in the state, but Minnesota is home to only eight mines, according to the Minnesota Pollution Control Agency. Just across the Mississippi River from Red Wing, for example, a large sand-processing facility near an expanding underground mine in the tiny town of Maiden Rock, Wisconsin, can suck up to 1.3 million gallons of water a day out of a local aquifer to clean frack sand before it's loaded onto waiting trains. Red Wing, which is home to a nuclear power plant and has a population of 16,000, uses 1.6 million gallons a day. So why has the industry expanded so quickly in Wisconsin, but not in Minnesota? Fossen and his allies point to a number of factors that have kept a major sand rush at bay in Minnesota, including greater access to railways in Wisconsin and some extra regulatory hurdles in Minnesota. But there are some clear socioeconomic differences as well. "A lot of mining in Wisconsin targeted communities with little resources," said Carol Overland, an attorney and environmental activist in Red Wing.

U.K.’s BG Group files $16B plan to export LNG from British Columbia - The U.K.’s BG Group Plc has unveiled plans to export the equivalent of one-quarter of Canada’s current daily natural gas production from a British Columbia terminal starting in 2021. The company, whose Canadian office is in Vancouver, has no reserves nearby. The contradiction of an exporter with no gas has emerged as energy giants BG, Imperial Oil Ltd., Nexen Inc. and Australia’s Woodside Petroleum Ltd. join the growing queue of companies willing to spend billions on liquefied natural gas projects in order to capture higher prices overseas. BG’s $16-billion proposal to export up to 3.3 billion cubic feet of gas per day from a new terminal on B.C.’s Ridley Island, at Prince Rupert, brings to 10 the number of projects in varying stages of development. Five of them plan to export a combined 9.6 billion cubic feet of gas per day beginning in the second-quarter of 2015, according to numbers compiled by AltaCorp. Capital Inc. The total is equivalent to roughly 68% of Canada’s daily gas production in 2012. With roughly 175,000 oil-equivalent barrels per day of production up for sale in public and private processes across Western Canada, “there’s going to be large amounts of reserves” available for would-be buyers, said Jeremy McCrea, an analyst with the Calgary firm.

Coming to sites across the UK soon – fracking flares - The British countryside could be dotted with hundreds of naked flames several metres high after the head of Britain's biggest fracking company warned that any production of shale gas would involve “flaring off” leakages. Andrew Austin, whose IGas company's shale gas licences cover George Osborne's Tatton constituency in Cheshire, said flaring was necessary because it was extremely bad for the environment to allow methane leakages to escape into the atmosphere. “Flaring is the normal thing in standard oil fields, that's why when you fly across the North Sea you can see it. Flaring or not flaring is not the point, it is industry practice,” Mr Austin told The Independent. “It is far better to flare leaked gas than to let it vent into the atmosphere. Methane emissions are 24 times more potent a greenhouse gas than C02,” he added. Other fracking companies, such as Cuadrilla, chaired by former BP chief executive Lord Browne, are also expected to flare off any leakages relating to their shale gas activities in the UK. However, green campaigners argue that flaring is nonetheless environmentally hazardous, producing carbon dioxide, as well as noise and light pollution.

Faulkner County: ExxonMobil’s “Sacrifice Zone” for Tar Sands Pipelines, Fracking - There are few better examples of a “sacrifice zone” for ExxonMobil and the fossil fuel industry at-large than Faulkner County, Arkansas and the counties surrounding it. Six weeks have passed since a 22-foot gash in ExxonMobil’s Pegasus tar sands Pipeline spilled over 500,000 gallons of heavy crude into the quaint neighborhood of Mayflower, AR, a township with apopulation of roughly 2,300 people. The air remains hazardous to breathe in, it emits a putrid strench, and the water in Lake Conway is still rife with tar sands crude. These facts are well known. Less known is the fact that Faulkner County – within which Mayflower sits – is a major “sacrifice zone” for ExxonMobil not only for its pipeline infrastructure, but also for the controversial hydraulic fracturing (“fracking”) process. The Fayetteville Shale basin sits underneath Faulkner County. ExxonMobil purchased XTO Energy for $41 billion in Dec. 2009 as a wholly-owned subsidiary. XTO owns 704,000 acres of land in 15 counties in Arkansas. Among them: Faulkner.“Private Empire” ExxonMobil is now the defendant in a class action lawsuit filed by the citizens of Mayflower claiming damages caused in their community by the ruptured Pegasus Pipeline. ExxonMobil’s XTO subsidiary was also the subject of a class action lawsuit concerning damages caused by fracking in May 2011 and another regarding fracking waste injection wells in Oct. 2012.

Six-figure salaries no draw as young workers shun Canada’s oil and gas sector for ‘sexier’ industries - The Canadian oil and gas industry’s faltering reputation is hurting its ability to attract the country’s youth despite the promise of six-figure salaries. Canadian oil and gas professionals typically receive the fifth-most generous pay packages in the world behind their counterparts in Norway, Australia, Netherlands and New Zealand, according to a report published Tuesday by Hays Oil & Gas and Oil and Gas Job Search. Average salaries in the Canadian oil and gas sector were about US$123,000 last year, significantly higher than the average Canadian salary of US$43,600. A third of the Canadian workforce can also expect bonuses, while 80% of employers expect to raise salaries by at least 5%, Hays data show. That may sound like a sweet deal in an era of 7.2% unemployment in the country, but the oil and gas industry suffers from a perception problem as young people appear to be shunning the industry in favour of technology companies focused on social media and apps.

Robert F. Kennedy Jr.: How Big Oil Uses the Republican Party to Subvert American Democracy: America's national security is rooted in a strong economy at home. As Republican oilman T. Boone Pickens has acknowledged, our deadly addiction to oil is the principal drag on American capitalism. Our nation is borrowing a billion dollars a day to purchase a billion dollars of foreign oil, much of it from nations that don't share our values or that are outright hostile to our interests.  Our oil jones has us funding both sides of the war against terror! Big Oil has embroiled us in foreign wars supporting petty dictators who despise democracy and who are hated by their own people. The export of $700 billion dollars annually of American wealth has beggared our nation, which, a few short decades ago, owned half the wealth on Earth.  Add to these cataclysmic numbers, the $100 billion annual military cost of protecting oil infrastructure in the Persian Gulf, trillions spent on various oil wars over the past decade, billions more in economic injury from oil spills in Valdez, the Gulf of Mexico and in American rivers from the Hudson to the Kalamazoo to the Yellowstone, the massive damage done to the coast of Louisiana from local drilling companies which aggravated New Orleans' destruction by Katrina, not to mention the hundreds of billions annually in externalized health care costs from illnesses caused by the oil industry.  If the oil industry had to pay the true costs of bringing its product to market, gas prices would be upwards of $12 per gallon at the pump, according to economist Amory Lovins, and most Americans would be running to buy electric cars.

Old Technology Fuels New Energy Boom -- With U.S. oil imports hitting a 17-year low, the mainstream media has awoken to the fact that, as I pointed out three years ago, peak oil is not happening anytime soon.  Charles Mann’s excellent cover story in this month’s Atlantic, “What If We Never Run Out of Oil?” focuses on an obscure, though potentially vast source of energy: methane hydrates, or crystalline natural gas trapped below the seabed.  If early exploration ventures by Japan and other countries, succeed, this gas “could free not just Japan but much of the world from the dependence on Middle Eastern oil that has bedeviled politicians since Churchill’s day.” An Associated Press story last week reached a similar conclusion about “unconventionals” in general: companies are opening huge deposits of shale gas, “tight oil,” and other hard to reach petroleum sources that will essentially flip the energy world upside down, as the United States returns to its status among the world’s largest exporters of petroleum. Both of these stories, though, share a common misconception, captured in the AP article’s headline: “New Technology Propels Old Energy Boom.” In fact, the technologies underlying today’s petro-boom are not new at all; they are innovative applications and refinements of technology that has existed for decades.  The boom’s core technology is hydraulic fracturing, or fracking.  And drillers have been fracking wells for nearly 60 years.  More than 1 million wells have been developed using fracking since the 1940s, according to, an industry-supported website.

US Oil Boom to Help Meet New Global Demand: IEA: U.S. shale oil will help meet most of the world's new oil demand in the next five years, even if the global economy picks up steam, leaving the need for OPEC crude barely changed from today's levels, the West's energy agency said on Tuesday. The prediction by the International Energy Agency (IEA) came in its closely watched semi-annual report, which analyses mid-term global oil supply and demand trends. "Following several years of stronger-than-expected North American supply growth, the shockwaves of rising U.S. shale gas and light tight oil and Canadian oil sands production are reaching virtually all recesses of the global oil market," the IEA said. It said it expected global oil demand to rise 8 percent between 2012 and 2018 to reach 96.7 million barrels per day (bpd) based on a fairly optimistic International Monetary Fund's global economic growth assumption of between 3.0 and 4.5 percent a year during the period. That incremental demand will be mainly met by non-OPEC production, which will rise by more than 10 percent between 2012 and 2018 to 59.31 million bpd, the IEA said, increasing its estimate of non-OPEC supply in 2017 by 1 million bpd versus its previous report in October 2012. That will leave OPEC, which had been long seen as the last resort for the world to meet rising demand, with output fluctuating around the current levels of 30 million bpd for the next five years.

U.S. oil boom leaves OPEC sidelined from demand growth (Reuters) - Rising U.S. shale oil production will help meet most of the world's new oil demand in the next five years, even if the global economy picks up steam, leaving little room for OPEC to lift output without risking lower prices, the West's energy agency said. The prediction by the International Energy Agency (IEA) came in its closely watched semi-annual report, which analyses mid-term global oil supply and demand trends. "North America has set off a supply shock that is sending ripples throughout the world," . Oil on Tuesday traded near $103 a barrel, well below its peak of $147 in 2008. The IEA said it expected global demand to rise 8 percent on aggregate between 2012 and 2018 to reach 96.7 million barrels per day (bpd) based on a fairly optimistic assumption by the International Monetary Fund of 3 to 4.5 percent global economic growth a year during the period. That incremental demand will be met mainly by non-OPEC production, which will rise by more than 10 percent between 2012 and 2018 to 59.31 million bpd, the IEA said, increasing its estimate of non-OPEC supply in 2017 by 1 million bpd versus its previous report in October 2012. The United States will overtake Russia as the world's largest non-OPEC producer as early as 2015, the IEA said. That may leave OPEC, which had been long seen as the last resort for the world to meet rising demand, with output fluctuating around the current levels of 30 million bpd for the next five years.

Global boom in tight oil production may be overplayed: BP's Ruhl -: Some predictions of surging global production of light, tight oil from unconventional source rocks may be overblown, with a of number of environmental and political question marks still hanging over the industry, delegates at a London oil conference heard Monday. While some oil market forecasters have predicted tight oil production jumping to 10 million b/d by 2030, many countries hoping to exploit their shale and tight oil potential will find it difficult to replicate the pace of success in the US, BP's chief economist Christof Ruhl said. In particular, the competitive advantage of the US' open economy cannot be matched by other big shale resource holders, such as China and Russia. BP estimates that there are some 240 billion barrels of technically recoverable tight oil globally. Asia has 50 billion barrels of tight oil, versus 70 billion barrels in North America.

12 reasons the American energy boom is overrated - The fossil fuel industry is booming, and has a lot more room to run, thanks to incredible technological progress in oil and gas production from shale rock. In theory, this should create jobs, lower energy costs, and bring manufacturing capacity back to the U.S. But analysts now say that while there are real gains to be had, we should be a bit more realistic about their extent. In his new book “The Power Surge,” Council on Foreign Relations expert Michael Levi says that while it’s undeniable the oil and gas boom has created jobs and wealth, it’s overall impact on GDP will probably be muted. “People who claim that natural gas will spark a broad-based U.S. economic renaissance, if only pesky environmentalists lay off, are exaggerating the benefits of the shale gas bonanza,” he writes. He’s not alone — we recently told you about the note from Capital Economics’ Paul Dales, who says, “The boom in domestic energy production is responsible for only a small part of the rise in GDP since the recession and it does not explain why the US has outperformed most of its closest competitors.” We’ve compiled just a few charts that demonstrate why, outside of the energy industry itself, we’re probably not going to see all that big of a spill-over effect from shale oil and gas production into the broader economy.

Oil Price Update -  A quick graphical update on oil prices.  Brent has dropped to the low end of the range of $100-$120 that it's traded in for the last couple of years.  At this level it strikes me as cheap - Saudi Arabia isn't going to let it go much lower (at least not for any length of time), and any number of things in the world could go wrong to make it go higher.  In particular, I continue to have more faith in the future appetite of Chinese and Middle Eastern motorists to consume oil than US frackers to find it. What's also interesting is that the Brent-WTI spread has halved in the last couple of months.  Robert Campbell has a column arguing that the positive spread  we've been living with since early 2011 is pretty much going to be over: Already the balance at Cushing is not as favorable as it was a year ago. Stockpiles at the hub are poised to drift lower through the summer and with not one, but two major new pipelines requiring perhaps 8 million barrels of linefill between November and March 2014, the imbalance between inbound pipeline capacity and outbound capacity is becoming acutely visible. But if the imbalance persists, the blow will fall hardest on refineries that have no alternative supplies. The golden age of the refinery next door to Cushing is at an end.

Libor in a barrel - IT IS a lesson of the past five years that benchmarks in unregulated markets can fall victim to the incentives they create. Subprime mortgages bundled into securities often won high scores from ratings agencies that stood to profit in a busy market. The London Interbank Offered Rate, LIBOR, was sometimes underestimated by banks which were cast in a healthier light by lower interest rates. Has something similar been going on in energy? That is the suspicion after a series of raids on May 14th by the European Commission’s competition authorities. The commission declared that it feared oil companies had “colluded” to distort benchmark prices for crude, oil products and biofuels. Royal Dutch Shell, BP, Norway’s Statoil and Italy’s ENI (which was not raided) all said that they were co-operating with the commission. The competition authorities also called on the London offices of Platts, a subsidiary of McGraw Hill, an American publisher and business-information firm, which sets reference prices for these commodities.

Senator calls for U.S. to join oil price probe - U.S. public concern over a European probe into possible oil price manipulation escalated Friday as the head of the Senate Committee on Energy and Natural Resources urged the Justice Department to join the investigation. The request from Sen. Ron Wyden, D-Ore., came after European Union investigators this week raided the offices of global energy giants BP, Royal Dutch Shell and Statoil. The anti-trust probe is examining whether the companies manipulated oil prices by making false reports to Platts, an energy industry data service owned by McGraw Hill Financial. MORE: Oil price-fixing scandal heats up The companies have all said they are cooperating with investigators. "Efforts to manipulate the European oil indices, if proven, may have already impacted U.S. consumers and businesses, because of the interrelationships among world oil markets and hedging practices," Wyden wrote in a letter to Attorney General Eric Holder, who chairs the federal government's Financial Fraud Enforcement Task Force. "These effects on American business make it imperative that your task force investigate whether any firms ... may be using false information to manipulate oil prices here or abroad.

April Oil Supply Little Changed - The April numbers are out from the IEA and OPEC, and the overall pattern of flat supply since 2012 is continuing (graph above, not zero-scaled).  I refer you to last month's update for a much more detailed explanation of the context.  April seems to have changed the picture so little that it doesn't make sense to repeat everything in there.

Bill calls for increased US oil production to displace Iranian oil - Sen. James Inhofe (R-Okla.) will introduce legislation Wednesday calling for increased drilling on U.S. federal lands to displace Iranian oil on the world market, according to a copy of the bill obtained by The Hill. The bill requires the president to establish enough “Iranian Oil Replacement Zones” on federal lands to produce 1.25 million barrels of oil per day — approximately the amount Iran exports every day. An Inhofe aide told The Hill that would divert oil the U.S. imports from Saudi Arabia and elsewhere to nations that still buy Iranian crude, such as China, India and Japan. The goal is to give President Obama wiggle room to enforce full sanctions on Iranian oil by ending waivers awarded to some nations.

Attacking Iran’s Nuclear Sites Would be Sheer Madness - A timely article by Wade Stone for Global Research examines what would happen to the oil producing nations of the Gulf in the event that Israel would target Iran’s nuclear reactors and facilities; the reply and the scenario given is nothing short of a nightmare. Most, if not all, the cities in the region of the Arabian Gulf – Dubai, Abu Dhabi, Kuwait City, Riyadh and others – would become uninhabitable for decades to come. The article provides a good study of the ensuing catastrophe that would result. Though frightening as it is, the article looks at the issue mostly from a technical perspective and does not convey enough the hellish reality of the immediate panic that would befall the region and indeed the world, given the repercussions resulting from the inter-dependency of nations today.

India Reluctant to Invest in Canada’s Oil & Gas Industry -Just a few years ago everything was looking rosy for Canada. Plans were in motion to expand the oil sands projects in Alberta and ship the crude south across the border to the US, who would provide a strong and reliable market for the world’s third largest crude oil reserves. Unfortunately the US shale boom saw oil production in the country explode and the US no longer had need of Canada’s hydrocarbons; added to that, the giant Keystone XL pipeline hit hard opposition in the US, and has now become caught up in a political mire. Canada had to look elsewhere for a market, and Asia seemed like the obvious choice. China and India are two of the largest and fastest growing economies in the world, and their thirst for oil is growing exponentially. Related article: Middle East Oil Markets Contracting However, Indian Oil Corp., India’s largest refining company, has said that a lack of pipelines in Canada is proving a major barrier to investing in energy assets in the country. A.M.K. Sinha, the director of planning and business development at Indian Oil Corp., has confirmed that they want to invest in Canada’s energy sector to gain access to crude and natural gas exports, however the lack of infrastructure makes it very difficult.

Kofi Annan: Africa plundered by secret mining deals - Tax avoidance, secret mining deals and financial transfers are depriving Africa of the benefits of its resources boom, ex-UN chief Kofi Annan has said. Firms that shift profits to lower tax jurisdictions cost Africa $38bn (£25bn) a year, says a report produced by a panel he heads. "Africa loses twice as much money through these loopholes as it gets from donors," Mr Annan told the BBC. It was like taking food off the tables of the poor, he said. The Africa Progress Report is released every May - produced by a panel of 10 prominent figures, including Graca Machel, the wife of South African ex-President Nelson Mandela. African countries needed to improve governance and the world's richest nations should help introduce global rules on transparency and taxation, Mr Annan said. The report gave the Democratic Republic of Congo as an example, where between 2010 and 2012 five under-priced mining concessions were sold in "highly opaque and secretive deals". This cost the country, which the charity Save the Children said earlier this week was the world's worst place to be a mother, $1.3bn in revenues.

That Stink Is the Smell of Money: China's New Rubber-Farming Dilemma - According to a recently released report, land under rubber cultivation in Xishuangbanna nearly tripled between 2002 and 2010 to account for more than a fifth of the area's total land. And in those years, rubber's positive impact on local livelihoods, especially among ethnic minorities, has become increasingly pronounced: Traditional wooden homes have given way to modern concrete and rebar edifices and cars have replaced motorcycles. But recent research by Chinese and Western scientists suggests the industry could collapse in the near future if new management strategies are not applied.  So how are the people in this remote corner of one of China's poorest provinces making so much money off of rubber? The answer is plain to see in Xishuangbanna's roads and parking lots: cars.  In 2009 China overtook the United States as the world's largest market for new automobiles and the trend is not going away. The China Association of Automobile Manufacturers predicts seven percent growth in 2013, fuelled by China's domestic consumption and the growing demand for Chinese cars overseas. China's car boom not only has created extensive auto-focused supply chains on the banks of the Yangtze and Pearl Rivers, but also has changed the fortunes of farmers in Xishuangbanna. Cars need tires and this mountainous, lush pocket of southwestern tropical China is a crucial producer of natural rubber for China's massive tire market, which constitutes about one-quarter of global tire demand.

Chinese Power Consumption Collapses: Economic Growth Slowest Since Early 2009 - Not much to add here. If there still is any confusion why China is desperately manipulating its economic data, so balatantly in fact that virtually everyone has now noticed, this chart should put all doubt to rest. According to CLSA's Chris Wood using NEA data, China's monthly power consumption (the most accurate proxy for underlying economic strength according to the current premier) growth slowed from 5.5% YoY in Jan-Feb 2013 to 1.9% YoY in March, the slowest growth rate since May 2009 (as discussed in-depth here).

Chinese Profitability Squeezed Further By Third Year Of Double-Digit Wage Gains - For the third year in a row (since the crisis) average pay at private companies in China surge by greater than double digits - far outstripping GDP growth. 2012 saw a 17.1% nominal rise in average wages for private companies to Yuan 28,752 per annum (still 9% after inflation) but dispersion remains high with "significant gap among regions, industries and specific jobs in some sectors." The continued rise in wages, as the Wall Street Journal notes, is likely to put further pressure on an already pinched manufacturing and construction sector (which accounts for over 41% of all Chinese employment) especially in low-end and labor-intensive positions. With slowing growth (demand) and rising costs (labor, energy), the profitability of Chinese companies is increasingly tenuous and only hindered by potential actions of the central bank.

Chinese Consumers Rapidly Shift From Luxury To Thrift - We know China's growth is fading (even by their own official data) but below the surface data suggests things are a lot worse. Between this drop in growth and the rise in anti-corruption practices (that we discussed here) the imports of Swiss-made luxury watches has tubmled 24% in Q1 for the third quarter in a row of declines. "The corruption crackdown campaign is having a big effect on luxury watch sales, high-end watches are very common gifts and they are items that are quite conspicuous and associated as a sign of corruption." This follows the firing of Communist Party official Yang "Brother Watch" Dacai who posted images of himself wearing 11 luxury watches at different times. Two major luxury watch retailers are significantly underperforming while Swatch is improving as Hong Kong (the world's biggest importer of watches) slows dramatically. But have no fear, we are sure it will be a smooth transition.

Fudging China's export figures or currency trading? - Little doubt remains that China's export numbers are at best unreliable but more likely simply fudged.  MarketWatch: - While it’s unavoidable that any official data from China comes under criticism from the skeptics, the monthly Chinese trade data probably draws the most questions and head-shaking of them all.  The Customs, rather than the National Bureau of Statistics that produces most of China’s other high-profile economic numbers – can sometimes show striking contrasts with other data sets.  For instance, Tuesday’s Customs data showed exports surging 14.7%, well above a Dow Jones Newswires forecast for a 8.6% gain and prompting a swing in the trade account to an $18.16 billion surplus, compared to March’s $884 million deficit.  This paints a very different picture from data on manufacturing (which makes up the lion’s share of Chinese exports) as reported by HSBC and Markit.  A relatively straight forward way to determine the reliability of any export measures is to compare them with the imports reported by the trading partner nations. And that's where things don't match up for China.  The reported numbers for Hong Kong for example diverge dramatically. But who exactly is fudging the numbers and why? The typical answer one hears in the media and from the blogs is that China's government is doing this as a form of propaganda or to please the party leadership. But to assume that the government is willing to cook these figures intentionally, given the tremendous global scrutiny, would be naive.  The distortions are actually driven by the exporters themselves. China's exports are flagging and those involved in moving merchandise abroad have found an alternative way to make money. As the chart below shows, the yuan has been steadily appreciating

China exporters at risk as buyers delay paying - The credit risks faced by exporters are mounting even as trade data suggests a spike in mainland exports since the beginning of the year. Local manufacturers complain that it is taking much longer to collect bills as the appreciation of the yuan and rising costs add to the pressure on overseas buyers, especially those from Europe, who have increased the settlement period from one month to three months. Stanley Lau Chin-ho, vice-chairman of the Federation of Hong Kong Industries, said 40 per cent of his European customers, who make up around a third of his clientele, are demanding more time to settle their bills. "The cash flow is slowing as our products get more expensive due to yuan appreciation and as wages increase," Lau said. "They help us shoulder a part of the appreciation, but in return they want extension on the payment period. Buyers from Europe are particularly more insistent on longer settlement periods."

Chinese activity is solid  - There a lot of bearish material around the web today on disappointing Chinese growth. And it’s true that compared with past years, April’s figures are unspectacular. But it is also the case that activity is solid, more solid than sentiment suggests. Find two reports below, one from ANZ and the other from Phat Dragon on where growth is at. My take is that we are slogging on around 8% and if anything seeing a broadening of activity. Industry is recovering solidly: Retail sales growth looks a little concentrated in jewellery but is still broad based: Total lending growth was down in April but is still running at a ridiculous pace. From CLSA: The concerns about the deteriorating quality of Chinese growth, with much more credit needed to support much lower GDP, are real. But the above figures to set us for a couple of good quarters of activity. I still see Q4 as the denouement for the cycle as real estate curbs kick-in and construction activity begins to fall away.

China’s Total Debt: 200 Percent of GDP - China, the second largest economy in the world has big problems with debt, according to CNN Money, which shows that housing boom based on credit continues to increasingly bury China in debt. This is based on a survey of Swiss bank UBS which calculated that China’s government debt would reach the level of 15% of GDP. It would increase to 55% of GDP if counting local governments and government agencies debt. Moreover, if taking into consideration the debt of companies and households, China’s total debt would reach 200% of GDP, writes CNN Money, which shows that there are countries that are even worse at this, including the United States and Japan. The difference is that in China’s case it’s about emerging economies, and of these, China has the largest total debt. Swiss bank analysts say that China’s debt is a concern, even though the country escaped a hard landing of the economy.

Capital Controls, Currency Wars, and International Cooperation - NY Fed - In a recent staff discussion note and Vox article, International Monetary Fund economists outline several arguments that could justify the use of capital controls by policymakers. One is that capital controls can be a valuable tool to avoid currency overvaluation and protect the export sector at times when the sector is crucial for economic growth. A similar line of thought has been put forward by Gianluca Benigno and Luca Fornaro in a recent research paper. The authors show how reserve accumulation may be justified in these circumstances—shedding light on the much-discussed Chinese-export-led growth strategy. The debate over whether there’s a case for limiting capital flows has intensified recently—both in media and academic forums. The traditional view has generally been that the voluntary exchange of funds across borders makes everyone better off: Borrowers have access to cheaper credit while lenders enjoy higher returns on their investments. But, as a recent article in The Economist highlights, this view has been revisited. In this post, we review arguments on this issue and discuss how our recent research contributes to the debate.  

Are Bubbles Contagious? - In his final edition of "Manias, Crashes, and Panics", Charles Kindleberger didn't think it was chance that within 15 years we could have asset bubbles in Japan, along with Sweden, Norway, and Finland, which were followed by asset bubbles in Thailand, Malaysia, and Indonesia, which were then followed by the US dot com bubble. I won't belabor the details of how he thought these bubbles were connected, except that when a bubble burst the money fled the scene and entered another asset class, often in another country. This "sloshing" of money could create enough inertia to move a strong fundamental market into a full fledged bubble. Is there a bubble anywhere right now? If so, where will the money "slosh" to next? I think gold is probably a bubble because there's no income or utilitarian basis for it to have value, but the gold market isn't big enough to create much economic disruption. Bonds may lose a lot of money, but they aren't purchased speculatively and the upside is limited at zero yield. European values may fall too, but not because of a surge in speculative investments, but because of an untenable currency union.  Industrial metals could certainly fall a lot, but if so that is largely tied to Chinese demand. Which brings me to the most likely large bubble - China. If China has a bubble, then so may nations like  Australia, Brazil, and Chile, whose growth have been helped tremendously by China's demand for their commodities. Combined, that's a lot of investment money that could be looking for a new home.

US hoist by its own pivot petard - It is perhaps premature to announce the death of the US pivot to Asia, but the patient looks less than healthy. The US effort to orchestrate a win-win economic and security regime in Asia through selective and constructive pressure on China is being undercut by an ally that sees its importance, security, and prosperity eroding as China rises. That nation is Japan, which is threatening to frustrate the US plan for a new paradigm in Asia, and replace it with the dismal Middle Eastern model of confrontation and containment, one that the Obama administration is desperate to escape. In this context, we can take an instructive look at the latest kerfuffle in Sino-Japanese relations, the article by in People's Daily by two Chinese scholars calling into question Japan's title to all the Ryukyu Islands in addition to the Senkakus, including the big one - Okinawa. Seduced by the prospect of another China-bashing peep show, seemingly oblivious of the Japanese government's concerted campaign to skew coverage of its disputes with China, and too lazy to read the original article (which apparently appeared only in Chinese, got jerked after the intended uproar was generated, and now seems to exist only on Chinese message boards), most of the media missed the true import of the story. The drift of the article is that after World War II the United States returned sovereignty of the entire Ryukyu chain, not just the Senkakus, to Japan on legally dodgy basis.

BOJ chief expects no spike in long-term Japan interest rates - Japanese long-term interest rates should not shoot higher as a result of money flowing out of government bonds, Bank of Japan Governor Haruhiko Kuroda said on Saturday. Kuroda added, however, that it would be natural for long-term rates to rise over time if Japan meets its goal of pushing inflation up towards two percent. He said a shift in funds from Japanese government bonds to stocks and into lending was already taking place but that the BOJ was increasing its balance of JGB holdings at an annual pace of 50 trillion yen. "The BOJ dealt with short-term volatility in bond prices by adjusting its market operations," Kuroda told reporters after a two-day meeting of G7 finance officials. "I do not expect a sudden spike in long-term bond yields. In the long-run, if the economy recovers and inflation heads towards two percent, we might see nominal interest rates rise but that's natural."

Pro-Inflation Policies Show Signs of Helping Japan Economy - For almost two decades, Japan’s economic fortunes have deteriorated, and little seemed to be done about it. But in the last few months, the nation’s new prime minister, Shinzo Abe, has pushed policy makers and other officials to take bold steps to revive Japan, one of the world’s largest economies. Their handiwork was evident Friday when the yen hit 100 to the dollar for the first time in four years.  Normally a weakening exchange rate might be taken as a sign of decline. In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.The most immediate effect of the weaker yen has been the increase in profits of major exporters. This past week, Toyota Motor reported that net income in the last 12 months had jumped threefold, and Sony produced an annual profit for the first time in five years. Perhaps more important, particularly for the citizens of Japan, who have suffered from a long period of falling wages and prices, the yen’s move is expected to kindle inflation in the once moribund economy.

Abenomics Confusion - Lars Christensen nails it on the confusion surrounding Abenomics: There has been a lot of focus on the fact that USD/JPY has now broken above 100 and that the slide in the yen is going to have a positive impact on Japanese exports. In fact it seems like most commentators and economists think that the easing of monetary policy we have seen in Japan is about the exchange rate and the impact on Japanese “competitiveness”. I think this focus is completely wrong. While I strongly believe that the policies being undertaken by the Bank of Japan at the moment is likely to significantly boost Japanese nominal GDP growth – and likely also real GDP in the near-term – I doubt that the main contribution to growth will come from exports. Instead I believe that we are likely to see is a boost to domestic demand and that will be the main driver of growth. Yes, we are likely to see an improvement in Japanese export growth, but it is not really the most important channel for how monetary easing works.This story is not new. The abandonment of the interwar gold standard in the 1930s by many countries spurred domestic demand and was behind the subsequent sharp recoveries, not any export growth generated by the competitive devaluations. For if everyone is devaluing, there is no place to send additional exports. That was true in the 1930s and is true today.

JGB yields spike in spite of all the BOJ bond buying - Japanese government bonds experienced a spectacular sell-off in the past few days, with the 10-year JGB yield rising by a half of its value. This is taking place in spite of BOJ's pledge to keep on buying paper (see post). Anyone who doubts the central bank's resolve, need only look at its JGB holdings. The Bank of Japan is now buying over 70% of all new government bond issuance. The spike in JGB yields - in spite of all the central bank buying - is quite troubling.  It is precisely the opposite of what the BOJ had intended. It means that liquidity in JGBs is disappearing, as the market is increasingly controlled by a single buyer. And with most speculative players positioned long, what started as a small sell-off, quickly became amplified - as bets are unwound. WSJ: - On Monday, Japanese yields moved higher even as the BOJ scooped up ¥1.2 trillion of JGBs maturing in one to 10 years at three separate operations—exactly the opposite effect the BOJ had been hoping for, strategists said.  With liquidity deteriorating, "a risk-free investment has now become risky,"

Japan’s Bonds Halt Worst Drop in Decade After BOJ Adds Funding - Japanese government bonds halted the biggest slide in almost a decade after the central bank announced a 2.8 trillion yen ($27 billion) infusion of funds. The yield on the five-year note earlier reached 0.455 percent, the most since May 2011. JGBs have plunged in the past three days as an advance in global shares and U.S. bond yields sapped demand for debt with yields still among the lowest in the world. The Bank of Japan supplied an extra 2 trillion yen in one-year funds today, the first of such size since April, in addition to a regular injection of 800 billion yen. “The BOJ’s one-year supply operation is designed to calm the bond market, targeting middle-term securities that have been sold off the most,”

Japan OKs $906 Billion Budget to Revive Economy -- Japan's parliament has approved a record-high 92.6 trillion yen ($906.2 billion) budget for this fiscal year, raising military spending for the first time in 11 years and boosting public works outlays to help revive the economy. The budget was approved late Wednesday after the lower house of parliament, whose decision takes precedence, overrode its rejection by the opposition-dominated upper house. The lower house, which passed the budget on April 16, is controlled by a coalition led by the ruling Liberal Democratic Party. Prime Minister Shinzo Abe took office in late December and the change of administration delayed the process of drafting the budget, which is for the fiscal year that began April 1. A supplementary budget was enacted to bridge the gap until passage of the full-year budget.  Nearly half of the annual budget is financed by government bonds, and Japan's public debt is double the size of its economy. The government has promised to raise sales taxes to help reduce the debt and to carry out reforms to make the economy more resilient and competitive.

Japan GDP Jumps Most in Year as Consumers Open Wallets - Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.  Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The BOJ may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions. Today’s report shows while consumers -- aided by a stock-market surge -- are responding to the reflation campaign mounted by Prime Minister Shinzo Abe and Bank of Japan chief Haruhiko Kuroda, companies remain cautious. That may change as the yen’s 21 percent slide against the dollar in the past six months spurs profits and Abe embarks on reducing regulations hampering the world’s third-biggest economy.

What Does Japan Mean For The Rest of the World?, by Tim Duy: Is Abenomics about boosting exports or domestic demand? I tend to agree with Lars Christensen on this issue: There has been a lot of focus on the fact that USD/JPY has now broken above 100 and that the slide in the yen is going to have a positive impact on Japanese exports.  While I strongly believe that the policies being undertaken by the Bank of Japan at the moment is likely to significantly boost Japanese nominal GDP growth – and likely also real GDP in the near-term – I doubt that the main contribution to growth will come from exports. Instead I believe that we are likely to see is a boost to domestic demand and that will be the main driver of growth. Yes, we are likely to see an improvement in Japanese export growth, but it is not really the most important channel for how monetary easing works. In my view, Abenomics has been remarkably centered on the domestic economy. The impact on the Yen is almost an afterthought, whereas in the past policymakers would have turned to intervention to directly support the economy. This looks like policymakers finally realized that such a policy approach wasn't working and they need to change gears to a frontal-assault on domestic policy levers.That said, a side-effect of Abenomics is currency depreciation, and this will have an impact on global trade. Investment Week has an interview with hedge fund manager Hugh Hendry: "Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favours Japan versus the rest of the world. This is the last thing the global economy needs right now," he said.

Why the TransPacific Partnership Is a Scary Big (Trade) Deal -  NHK Broadcasting, Japan’s equivalent of the BBC, contacted me last month, wanting a statement on the American public’s reaction to the TransPacific Partnership (TPP) negotiations. A super-sized NAFTA, the TransPacific Partnership is a free-trade agreement whereby countries give foreign corporations rights and privileges to encourage investment and global business. The TPP was a major issue during Japan’s recent national elections, when thousands took to the streets in protest. It was hard for the Japanese journalist to believe me when I explained that there is little awareness of the TPP here in the United States, because our media has hardly covered the subject.The corporate powers granted in the TPP can override domestic laws on environmental health and safety, and labor and citizens’ rights. Not only that, but multinationals can claim that those domestic laws hamper free trade and sue member countries for millions of dollars. The TPP is in many ways an attempt to revive the stalled expansion of the World Trade Organization.The talks are scheduled to finish by October of this year. Meanwhile, negotiators are lobbying Congress to grant “Fast Track” authority for the TPP. That would mean Congress couldn’t revise the agreements and could only vote “yes” or “no” to the United States joining the TPP. Leaked documents show how extensive the reach of the TPP would be. It is shaping up as a corporate takeover of public policy that would impact safe food, sustainable jobs, clean water and air, access to life-saving medicines, education, even our very democracy.

India April Trade Gap Widens On Massive Gold Imports - India's trade deficit for April widened from last year as the marked increase in imports driven by gold, outpaced the modest improvement in exports, data released by the Ministry of Commerce revealed on Monday. The trade gap widened to $17.787 billion from $14.041 billion in the same month last year. The deficit figure grew more than 72 percent from March's $10.315 billion. Imports jumped 10.96 percent year-on-year to $41.951 billion driven by massive imports of gold. Imports of gold and silver surged nearly 138 percent to $7.5 billion. Buyers in India, the world's biggest consumer of the precious metal, apparently took advantage of a sharp fall in the price of gold last month. Exports grew 1.68 percent from last year to $24.164 billion. The country's oil imports rose 3.92 percent, while non-oil imports increased 14.90 percent. The Reserve Bank of India has been expressing concern over the increasing gold imports, which has led to a high current account deficit.

Vital Signs Chart: Transportation Costs Picking Up - The cost of transporting goods across oceans is picking up. The Baltic Dry Index, which tracks rates to ship bulk goods, has hit 889, up 27% since the start of the year. The index, an indicator of global economic vitality, remains 22% below the level where it was a year earlier. That suggests economic weakness around the world continues to crimp demand to ship materials.

Inflation rate divergence hits post-recession high - Emerging economies have always run higher inflation rates than developed markets (DM) due to stronger growth. The spread in inflation rates has generally been steady, running roughly 2-3 percentage points. Recently however the spread has blown out to over 4% - a post-recession high.Emerging nations selling into developed markets are losing pricing power and will have a tougher time keeping up with domestic labor cost increases. EM corporate margins will be under pressure, ultimately weakening growth. India is a good example (chart below). While temporary, this divergence could be quite disruptive.

Why Aren't We Seeing Inflation? - We are seeing isolated areas of it in come countries (India and Brazil), but that's it.  Overall, prices are very much contained. Why?  Let's look at a few underlying reasons.
        1.) China's growth slowdown.  I realize that saying China's growth is slowing down is a bit of a misnomer, as their GDP growth is moving from ~10% to ~7%.  But for an economy that has been experiencing massive growth for a number of years (in the 10%+ range), this is a big move.  The slower growth means the consumption of raw materials from China just won't be there at the same pace as before. 

  • 2.) The growth of the US oil market.  I'll touch on this more next week, but the US' development of shale oil as a viable method of extraction oil is keeping a lid on energy prices.  This is keeping one of the most volatile areas of costs very much contained.
    3.) Slow growth.  The EU's ongoing recession is really the big story here.  The second largest economic region in the world (behind the US) is now in its sixth quarter of negative growth. 
  • 4.) Is the commodity bull market over?  Commodities were the big investment category for the last 12 years as traders bet primarily on Chinese growth driving commodity demand.  Is that story over?  Who knows at this point.  But, the question is certainly in play.
    5.) Debt Deflation Dynamics: The US has had a slow recovery because we're in the middle of a debt-deflation economy.  However, we aren't the only economy to be experiencing this phenomena.  Canada and South Korea also have consumer debt issues as do Spanish banks. 

The job fatality rate isn’t budging, and no wonder, with penalties this low - When we think about workplace fatalities, it's natural that we think about cases like the Rana Plaza collapse in Bangladesh, which at this writing had caused more than 1000 fatalities. In the United States, we think about the West Fertilizer Co. explosion, which killed 14, including 10 firefighters. Or the Upper Big Branch Mine explosion. We think about disasters with fatalities in the double digits and dramatic visuals, in other words. And we do notice those stories. Many deaths on the job, though, are virtually ignored outside the circle of people directly affected. They happen in ones and twos, quietly, and the hazards or negligence or outright disdain for the lives of workers that cause them are punished only with fines, usually bargained down to shockingly low levels.  The AFL-CIO released its Death on the Job report this week, and the toll for the United States in 2011 was 4,693 workers killed on the job, an average of 13 every day. It's much harder to know how many died from occupational diseases, but the estimate is 50,000. Everyone's risk is not equal, with states having fatality rates ranging from 1.2 per 100,000 in New Hampshire to 12.4 per 100,000 in North Dakota, differences due partly to the mix of industries in those states; workers in agriculture or mining are at much more risk than workers in finance or education, obviously.

Making Manufacturing Safer - The collapse of the Rana Plaza factory complex, in Bangladesh, last month is now the deadliest accident in the history of the garment industry, and one of the worst industrial accidents ever. Coming after a string of South Asian factory fires last fall that killed hundreds of workers, it provides painful evidence that, two decades since big Western companies started adopting codes of conduct for their suppliers, too little has changed. The problem isn’t so much evil factory owners as a system that’s great at getting Western consumers what they want but leaves developing-world workers toiling in misery. Most of us have a sense that low prices in Dubuque have something to do with low wages in Dhaka, but that’s just one aspect of the pressure that we as consumers exert on global supply chains. Our insatiable demand for variety and novelty has led to ever-shorter product life cycles. In consumer electronics, the average product is replaced in just eight months. The rise of fast fashion means that clothing stores get new products almost every week.“Instead of buying lots of inventory with long lead times, brands wait as long as possible before ordering.” That way, they can ramp up production if a product takes off or shut it down if the product bombs. Flexible supply chains are great for multinationals and consumers. But they erode already thin profit margins in developing-world factories and foster a pell-mell work environment in which getting the order out the door is the only thing that matters. Locke says, “Often, the only way factories can make the variety and quantity of goods that brands want at the price points they’re willing to pay is to squeeze the workers.”

Counterparties: Improving Bangladesh’s clothing industry - Two of the world’s largest retailers say they have a plan to stop tragedies like the Bangladesh collapse from ever happening again. H&M, along with Inditex, which owns the Zara brand and is the world’s largest clothing retailer, has agreed to work with the International Labour Organization on building and fire safety standards. With more than 1,100 dead, this is, James Surowiecki notes, the deadliest disaster in the history of the garment industry and one of the worst industrial catastrophes ever. The Bangladesh story is also, he says, about how Western consumption habits have shaped the global supply chains: . Our insatiable demand for variety and novelty has led to ever-shorter product life cycles. . The rise of fast fashion means that clothing stores get new products almost every week. Americans have become all-too accustomed to this kind of “fast fashion” (read: cheap) clothing. The WSJ reports that clothing prices are up just 10% since 1990, while food prices are up 82%. Global competition has put tremendous pressure on Bangladesh’s $18 billion garment industry to keep its already low costs from rising. “Average monthly pay in 2009 for workers in Dhaka was $47, vs. $235 in Shenzhen and $100 in Hanoi”, Bloomberg Businessweek reports. Already at the bottom of the global wage-scale, workers are quite literally prevented from bargaining by force: 40% of the industry’s workers, which are predominantly female, report being beaten by bosses.As Olga Khazan points out, retailers have long dragged their feet on safety measures that would have added just a few cents to the cost of clothing. H&M, Gap and Walmart refused tougher safety standards after a November fire killed 112 Bangladeshi workers.

Most U.S. clothing chains did not sign pact on Bangladesh factory reforms - Nearly all U.S. clothing chains, citing the fear of litigation, declined to sign an international pact ahead of a Wednesday deadline, potentially weakening what had been hailed as the best hope for bringing about major reforms in low-wage factories in Bangladesh. Companies including Wal-Mart, Gap, Target and J.C. Penney had been pressed by labor groups to sign the document in the wake of last month’s factory collapse in Bangladesh that killed at least 1,127 people. More than a dozen European retailers did so. But U.S. companies feared the agreement would give labor groups and others the basis to sue them in court. Wal-Mart reiterated Wednesday that it would not sign the accord at this time, because it “introduces requirements, including governance and dispute resolution mechanisms, on supply chain matters that are appropriately left to retailers, suppliers and government, and are unnecessary to achieve fire and safety goals.”

U.S. may strip Bangladesh of tariff breaks - The Obama administration may strip Bangladesh of import breaks following deadly accidents in the country’s textile industry, another sign of the pressure building on the southeast Asian nation to improve labor conditions. The move was prompted partly by a fire late last year that killed 112 people and gained momentum after the recent factory collapse that claimed more than 1,100 lives. Business, labor and advocacy groups are all struggling over how to respond to the April 24 incident — the worst-ever in the textile industry but an event that could produce meaningful change in a nation on its way to becoming the world’s largest garment exporter. A group of mostly European nations has signed on to a binding inspection program. U.S. firms such as Wal-Mart have declined, but political backlash may be building. On Thursday, a group of senators wrote to major U.S. retailers urging them to reconsider, and the Obama administration is also debating how to get American firms more constructively engaged.

Mugabe wants to ‘liberate’ Zim from US dollar-  President Robert Mugabe’s regime is planning on a launching a new currency backed by a gold standard in 2015, as part of the Zanu PF leader’s final wish to “liberate” Zimbabwe from Western monetary imperialism. High level government sources told Nehanda Radio that Mugabe, who is standing for his last election as a presidential candidate before the end of September, wants to seal his egregious land reform and indigenisation program agendas with a powerful local currency backed by gold reserves. Harare has been using a basket of foreign currencies, since the formation of a coalition government, with the US Dollar and South African Rand being dominant. Now plans are at an advanced stage to eliminate the US dollar, which Zanu PF ‘think tanks’ see as losing its power as a world reserve currency.

Argentines Hold More Than $50 Billion in U.S. Currency. Here's How We Know - A lot of U.S. dollars are tucked away somewhere in Argentina, most likely in stacks of $100 bills. Seven years ago, the U.S. Treasury, working with the Federal Reserve and the Secret Service, estimated that in the early 1990s Argentines held $20 billion in cash, a number that by 2006 had grown to “perhaps $50 billion or more.” That year there was a total of about $768 billion worth of dollar-denominated cash in the world, which means that someone in Argentina held at least one out of every 15 cash dollars. How about now? The Fed is chary with its data releases. One table in a 2012 Fed paper on demand abroad for U.S. currency tells us that the annual net inflow of commercial shipments of bills denominated in dollars to Argentina and the former Soviet Union has increased since 2006 by 500 percent. In 2011, that growth rate stood at 48 percent, while total demand for U.S. currency, in America and abroad, has increased only about 10 percent. It’s unlikely that all of that growth came from the former Soviet Union alone; otherwise, why include Argentina at all? Demand for large dollar cash transfers to Argentina since 2006, then, has outstripped demand for dollar cash overall in the world. So it seems safe to say that today Argentines hold probably well more than $50 billion, and well more than one in every 15 dollars. (This is why the government of Cristina Kirchner is so furiously digging at the country’s undeclared wealth. Not to bring home what Argentines hold abroad, but to uncover some of those dollars Argentines have—literally—at home.)

Euro-Style Bail-In Plan Means Bondholder Wipe-Out: Brazil Credit - Brazil is drafting rules that would wipe out some creditors of failing banks in an effort to avoid taxpayer rescues, echoing European proposals to make bondholders shoulder more costs after three bailouts in as many years. The central bank said May 6 it had prepared a draft of a “bail-in” proposal that would impose losses on holders of subordinated and unsecured bonds in case of insolvency and use their investments to revive the lenders. The measure would boost funding costs for the nation’s investment-grade banks, which currently pay a near record-low 3.77 percent on average to borrow dollars in the bond market, according to Carlos Thadeu de Freitas Gomes, a former central bank director. The proposal, similar to one being considered by European Union lawmakers, comes after seven Brazilian banks became insolvent in the past three years and the deposit insurance fund spent 3.8 billion reais ($1.9 billion) to rescue Banco Panamericano SA. The rules would clarify risks for investors, save taxpayer money, and shield policy makers from political pressure to rescue lenders that took excessive risks, even as it pushes up costs for financial firms, said Freitas, now the chief economist at the National Commerce Confederation.

Cars made in Brazil are deadly - -- The cars roll endlessly off the local assembly lines of the industry's biggest automakers, more than 10,000 a day, into the eager hands of Brazil's new middle class. The shiny new Fords, Fiats, and Chevrolets tell the tale of an economy in full bloom that now boasts the fourth largest auto market in the world. What happens once those vehicles hit the streets, however, is shaping up as a national tragedy, experts say, with thousands of Brazilians dying every year in auto accidents that in many cases shouldn't have proven fatal. The culprits are the cars themselves, produced with weaker welds, scant safety features and inferior materials compared to similar models manufactured for U.S. and European consumers, say experts and engineers inside the industry. Four of Brazil's five bestselling cars failed their independent crash tests. 

Mexico's Economic Growth Slows - Dallas Fed - Mexico’s economy grew at a modest pace during the first months of 2013, but signs of slowing abound. Exports and industrial production remain at or below year-end levels, employment fell for the first time since mid-2009 and retail sales fell in the most recent month’s data. Inflation has edged back up, and the peso has appreciated against the dollar despite the central bank’s March rate drop. The Global Economic Activity Index (IGAE), a monthly proxy for Mexico gross domestic product, slowed from 0.3 percent growth in January to 0.2 percent in February (Chart 1). While this is a slight improvement since December, IGAE’s three-month moving average shows signs of slowing. In February, service-related activities (including trade, transportation and government) expanded 0.2 percent. Goods-producing industries (including manufacturing, construction, utilities and mining) grew 0.5 percent. Agricultural output fell 2.1 percent. The 2013 gross domestic product growth forecast has been revised down to 3.5 percent from 3.6 percent back in February.

Mexico’s First Quarter GDP Down, But Far From Out - Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected. Mexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009. In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%. But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after President Enrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements.

11 charts that show Canada’s economy is entering a world of hurt - Economists have been debating whether Canada’s housing market was in a bubble and when that bubble would burst. In a new report, British Columbia-based Pacifica Partners Capital Management asserts that question is missing some much scarier stuff going on. Yes, housing is now in decline after largely avoiding the 2008 shock, they say. But everything else has also been going haywire: unemployment, credit, stocks, etc. That is all the more remarkable, they argue, because Canada emerged from the 2008 crisis appearing a paragon of stability in the world. “A pronounced shift in both Canadian and US economies has taken place,” write Pacifica’s analysts. “The Canadian economy, once the envy of Americans, Europeans, and others, is now widely viewed as a commodity dependent, “one trick pony”. In a series of charts we’ve reproduced here, Pacifica shows how a “mean reversion” is taking place in North America, with the U.S. economy recovering while Canada’s is for a world of hurt.

Canada could see indigenous uprisingCentral Banks Want to Hold Emerging-Market Currencies - Central banks want to add Chinese yuan and other emerging market currencies to their emergency cash stocks, according to a new International Monetary Fund survey, a change that could redefine the world’s reserve currencies. The shift, should it occur, would broaden reserve holdings from dollars, yen and euros and modernize countries’ emergency stockpiles of foreign cash. Central banks want their reserves to reflect changes in global trading patterns amid tepid growth in the U.S., Europe and Japan and rapid expansion of emerging economies. Diversifying currency portfolios will give central banks more flexibility to better to respond to emergencies. In “Survey of Reserve Managers: Lessons from the Crisis,” economists found that central banks with more than $2 trillion in reserves want to adjust the composition of currencies in their portfolio. The survey was circulated last year and the results were released last week. Almost all currency reserves are held in U.S. dollars, euros, yen, British pounds and Swiss francs. At the end of 2012 other currencies represented around 3.4% of the total central bank foreign exchange holdings, up from just under 1% in 2002. That’s despite the fact that emerging markets now account for roughly half of the world’s growth.

Russia’s Plan For The BRICS To Dismantle The Dollar System - The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries. The world’s most important commodities are priced and traded in dollars, even if most of these commodities are not produced in the US. The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity. So far, only China has been active in challenging the dollar supremacy. The internationalization of the yuan is an official priority of Chinese leaders. Currency swap agreements with major trade partners like Brazil, France, or Australia are small but important steps in the Chinese strategy. Now, it seems that Beijing has found an ally in the Kremlin. And there appears to be a consensus between the BRICS countries: the urgent necessity to dismantle the dollar system. A week before the recent BRICS summit in Durban, the Kremlin administration has silently produced a document which describes the Russian strategy in the context of BRICS cooperation. The document makes for a fascinating read for anyone brave enough to plow through the dense Russian legalese. In Russia, politics are Byzantine; the fact that the Kremlin decided not to hide the document or leak it to a chosen few journalists, but publish it outright is a very strong signal, a very vocal angry signal directed at the US. A signal that the Western media chose to ignore.

Greek Shipping Loans Seen Falling to Six-Year Low as Rates Slump - Lending to Greek ship owners, who control more vessels than companies in any other nation, fell to a six-year low as charter rates extended losses and banks exited the industry, according to Petrofin Bank Research. Lending fell 2.8 percent to $65.8 billion last year, the lowest since 2006, the research company said in an e-mailed report today. The decline was the biggest since an 8.5 percent contraction in 2009, its figures show. Banks are curbing lending to the industry amid slumping vessel earnings and also because of a debt crisis in European countries including Greece, Petrofin said. The number providing loans to owners fell to 51 last year from 55 in 2011, while 21 shrank their portfolios by an average of 15 percent, according to the report. “Banks have contributed via credit restrictions to the slowdown of ordering and to the restoration over time of a market equilibrium,” Petrofin said. “Whereas for large financially strong public and private Greek companies some ship finance is still available, there are virtually no prospects for the smaller to medium-sized owners, who are often reduced to cash buyers only.”

German Export Machine Hits Skids; Imbalances Intensify: Exports Drop 4.2% YoY, Imports Drop 6.9% YoY -Eurozone imbalances continue to grow even as German exports slump. Why? German imports slumped even more, and the German current account surplus grew.  Via Mish-Modified Google Translate from Les Echos, please consider Germany's Export Machine Slumps in March.  The German trade surplus grew in March for the third consecutive month in raw data (to € 18.8 billion after € 16.8 billion in February) detailed figures released Friday, yet the report shows much weakness. First, calculated seasonally adjusted data, the trade surplus fell slightly on a month to € 17.6 billion after € 17.7 billion in February.  both imports (€ 75.8 billion) and exports (€ 94.6 billion) increased compared with February, annual rate the situation is quite different. In one year, exports fell 4.2% after a decline of 2.8% yoy in February. As for imports, their decline is stronger and reached 6.9% compared to March 2012. In one year, German exports to the euro area fell by 7%, while their decline was limited to 2.2% to European countries outside the euro area and 2.6% to non-European countries.

The global epidemic of underemployed youth: The International Labor Organization is out with a massive new report on youth unemployment, which tries to nail down how many young people (15-24 years old) are unemployed around the world, but also looks at how they are unemployed. The big takeaway from the ILO report is that, the world doesn’t have a single youth unemployment economic crisis. Rather, the world has dozens — which may require dozens of different policy solutions. Breaking down the why and the how of global youth unemployment also reveals a much deeper, even more worrying underemployment crisis. The report does a good job of getting granular about what’s really going on with the youth population in different economies, and more generally, pointing to how education bifurcates the world’s unemployed youth. In the chart below, the majority of youths in low-income countries, where it’s not all that common to have more than a primary education, are in the “irregular employed” category. The ILO says these irregular unemployed are mostly self-employed contractors or young people working for their families (in high income countries, this is also includes those with temp jobs).In higher income countries, the majority of youths fall into the inactive category, which is largely made up of students. But, in both high and low-income countries, fewer than 20% of youths are fully employed:

The Youth Unemployment Problem - We’re not seeing much about Greece in the news lately, but that doesn’t mean things are going well there:. Greek youth unemployment rose above 60 percent for the first time in February, reflecting the pain caused by the country’s crippling recession after years of austerity under its international bailout. Greece’s jobless rate has almost tripled since the country’s debt crisis emerged in 2009 and was more than twice the euro zone’s average unemployment reading of 12.1 percent in March. While the overall unemployment rate rose to 27 percent, according to statistics service data released on Thursday, joblessness among those aged between 15 and 24 jumped to 64.2 percent in February from 59.3 percent in January. Greece isn’t the only country dealing with a glut of unemployed younger workers: A new study from the International Labor Organization takes a global tour of youth joblessness and finds that what’s gone up won’t come down in the next five years. This suggests that many nations, not just the sick men of Europe like Greece and Spain, but also other parts of Europe along with the United States, are facing the potential of having to deal with an entire generation of workers whose careers are going to be severely impacted by the Great Recession. This will have an impact on all levels of  society in ways we probably cannot even anticipate at this point.

The Limits of Governing Budgetary Policies by Rules - The European squabble over budgetary austerity reached a new peak a good week ago when a document drafted by leading representatives of the French Socialist Party, which reportedly had been seen by Elysée officials close to President Hollande, personally attacked German Chancellor Angela Merkel. Less mediatized, but more telling about the nature of the governance problems facing the euro area, are the statements made by Finance Minister Pierre Moscovici this weekend. After having obtained a two-year derogation for France to comply with the 3% deficit threshold of the euro area’s fiscal rules he said: “This is a turning point in the history of European integration since the euro exists. We have witnessed the end of a certain financial orthodoxy and the end of the dogma of austerity.” Though the French government scaled down this triumphant tone subsequently, these words provoked some strong reactions in Germany. The reason for the Franco-German discord over budgetary policy are, first, competing policy preferences, deeply rooted in normative beliefs over “the right” way out of the current crisis. This divergence of views is not only related to different main-stream economic paradigms. It also reflects the structure of the French and the German economies, which have a tradition of diverging sources of growth. While Germany’s growth is export-driven, economic growth in France depends much more on domestic demand. This is particularly so in the current situation, in which France faces significant problems with competitiveness in European and world markets.

Spain is officially insolvent: get your money out while you still can  - I'd not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor, published last month, comes about as close to declaring Spain insolvent as you are ever likely to see in official analysis of this sort. Of course, it doesn't actually say this outright. The IMF is far too diplomatic for such language. But that's the plain meaning of its latest forecasts, which at last have an air of realism about them, rather than being the usual dose of wishful thinking. Let's take the projected budget deficit first. This is expected to decline quite steeply this year to 6.6 per cent of GDP, but that's mainly because the cost of bailing out the banking sector fell substantially on last year's budget. On a like-for-like basis, there has in fact been very little fall in the underlying deficit. And nor on the present policy mix is there ever likely to be, for that's where the deficit is projected to remain until the end of the IMF's forecasting horizon in 2018. Next year, the deficit is expected to be 6.9 per cent, the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government. The situation looks even worse on a cyclically adjusted basis. What is sometimes called the "structural deficit", or the bit of government borrowing that doesn't go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018. By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US.

Austerity and the Unraveling of European Universal Health Care - A great human disaster is now unfolding in the many Eurozone countries that have agreed to slash spending, wages, and living standards to meet the demands of fiscal austerity. One facet of this story that has received far too little attention, however, is the effect of these measures on the health of these nations. Austerity derives from the Greek austeros, for harsh or severe; but, in the area of health care, it has veered into the cruel: health expenditures dwindle, hospital budgets shrink, health care needs rise, and human suffering worsens. Suicide is on the rise; basic hospital supplies are missing; potentially life-saving surgeries are delayed; the rate of new HIV infections increases; drug shortages are ubiquitous; the prevalence of mental illness spikes. And these are just the obvious results. The effects of austerity on health care are both immediate and long reaching. Deep cuts in public health spending clearly exacerbate the suffering caused by the prolonged economic depression. At the same time, the cuts contribute to a more pernicious, slow-moving, and decidedly political process. For austerity is being wielded to initiate the unraveling of one of the great and humane achievements, indeed inventions, of modern Europe: the universal health care system. To understand why this is the case, let us take a brief look at how Europe came to have what it has today, before we return to the dangers of the present course.

How Austerity Kills - NYT - Because the Italian government’s austerity budget had raised the retirement age, Mr. Dionisi, a former construction worker, became one of Italy’s esodati (exiled ones) — older workers plunged into poverty without a safety net. On April 5, he and his wife left a note on a neighbor’s car asking for forgiveness, then hanged themselves in a storage closet at home. When Ms. Sopranzi’s brother, Giuseppe Sopranzi, 73, heard the news, he drowned himself in the Adriatic.  The correlation between unemployment and suicide has been observed since the 19th century. People looking for work are about twice as likely to end their lives as those who have jobs.  In the United States, the suicide rate, which had slowly risen since 2000, jumped during and after the 2007-9 recession. In a new book, we estimate that 4,750 “excess” suicides — that is, deaths above what pre-existing trends would predict — occurred from 2007 to 2010. Rates of such suicides were significantly greater in the states that experienced the greatest job losses. Deaths from suicide overtook deaths from car crashes in 2009.

Italy's industrial production down 5.2%, says Eurostat - Industrial production in recession-hit Italy fell 5.2% in March compared to the same month in 2012, Eurostat said on Tuesday. Meanwhile, Italy's huge public debt reached a record high of 2.034725 trillion euros in March, the Bank of Italy said. The European Union's statistics office said this was the worst showing of the continent's big economies. Year-on-year industrial production was down 1.5% in Germany and 1.6% in France in March. In March industrial production decreased by 1.7% in the eurozone compared to the same month in 2012 and by 1.1% in the EU as a whole. But Eurostat said that, according to its estimates, seasonally adjusted industrial production grew by 1% in the eurozone in March with respect to February and 0.9% in the whole EU. Meanwhile, the housing market slumped to its lowest level since 1985, according to a report released Tuesday by the country's inland revenue agency and banking association ABI. It said that 448,364 properties were sold in 2012, over 150,000 fewer (27.5%) than in 2011. It was the property market's worse annual performance since 1985, when 430,000 homes were sold. And Istat said on Tuesday that Italy's inflation rate fell to 1.1% in April, the lowest level since December 2009.

Italy's public debt reaches new high of 2.0347 trillion - Italy's huge public debt reached a record high of 2.034725 trillion euros in March, the Bank of Italy said on Tuesday. The sum beats the previous record of 2.0227 trillion in January. The debt dropped to 2.0176 trillion in February. The debt, the main reason Italy has been exposed to the eurozone crisis, has risen to around 130% of gross domestic product despite government cost-cutting and tax hikes. The central bank said that tax revenues rose 0.79% in the first quarter of 2013, compared the to same period last year, to reach 83.829 billion euros

Bad debts at Italian banks surpass 130 bln euros (Reuters) - Bad debts held by Italian banks rose to 131 billion euros ($170 billion) in March and lenders further reduced loans to households and businesses, data showed on Tuesday. The Italian banking association ABI said bad loans, a major concern for lenders suffering from Italy's prolonged recession, grew by around 3.3 billion euros from February and by 21.7 percent year on year. Net bad loans were 3.38 percent of total loans in March, ABI said, compared to 3.23 percent in February. Lending by Italian banks to households and non-financial firms fell by 2.1 percent in April, declining for the 12th consecutive month after falling 2.3 percent in February.

We are the country’s Civil Defence force - Beppe Grillo - We’ve got to 30%. At the next elections we’ll have the whole country. We’ll get a country reduced to rubble. We’ll be the Civil Defence force. I no longer want to see those faces, those amateurs that have been in the palaces for twenty years. We are ready with all our proposals, with the citizen’s income, with the abolition of the IRAP tax. We have given back 42 million euro for reimbursements of election expenses and they are getting wound up over the daily amount. Why don’t they go and have a look at how much money is being kept by the people of the PDL and the PDminusL? We are offering candidates in 150 towns now and in 42 in Sicily in June. That’s three times the number we had last year. The foundation of the MoVement is expanding in a geometric progression: they will not stop us any more. In fact they have a terrible terror. A terror that makes them make mistakes. Interpellations about who holds the money when it would be enough to go to the leader or the treasurer of the parliamentary group. It’s not me that handles the money. They are trying to block the Internet. Just watch what they’ll do now. They take it out on 20 young people from Nocera Inferiore for some comments on the blog. Everyday, in all the newspapers with their headlines that associate us with subversion, with Nazism, with everything. But we are fed up with getting knocked about, getting lied about, having dossiers on us. A press like that has never existed before. We are in a ruthless war. We’ll use their methods.

Brussels Puts Spain Under Surveillance; Brussels Denies Putting Spain Under Surveillance - Here is an amusing set of back-to-back headlines regarding Spain. Via Mish-modified Google translate from La Vanguardia Brussels Puts Spain Under Surveillance for Economic Imbalances Spain will be placed under European supervision and its political leeway in deciding what reforms the economy agree will be reduced. European monitoring will take place in the labor market and a review of the pension system and some economic reforms from now must be agreed with Brussels. Spain gets "two extra years to reduce the deficit to make reforms to improve the competitiveness of the economy" in exchange for increased reinsurance the sources said.  Via Google translate from El Economista, Brussels Denies Spain Put Under Surveillance. The European Commission (EC) has denied today that it has decided to put under surveillance to Spain for their excessive macroeconomic imbalances and restated preliminary analysis indicates reform plan that the country is broadly taking adequate steps to correct its problems."I've seen the press reports, speaking on decisions yet to be taken, based on anonymous sources who always suggests a dubious credibility," said community spokesman Economic and Monetary Affairs, Simon O'Connor, in the daily briefing of the EC.

S&P says Cypriot deposit grab may set euro zone precedent(Reuters) - The grab on bank deposits that accompanied Cyprus's bailout could be repeated elsewhere in the euro zone, and the bloc's banking union may not be strong enough when it is introduced, Standard and Poor's said on Wednesday. "We believe that the events in Cyprus highlight the increased reluctance of financially stronger euro zone countries to make their taxpayers' funds available to recapitalize banks outside their home jurisdictions," the ratings agency said in a report. "For this reason, although the key features of the Cypriot banking system are not shared by other euro zone countries, we consider that the bail-in may indeed create a precedent." The ratings firm also raised concerns that the euro zone's plans for a banking union - designed to break the link between costly bank bailouts and unmanageable sovereign debt levels - may fall short of requirements.

As Greece Struggles with Debt Crisis, Its Shipping Tycoons Still Cut a Profit - Greece’s shipping companies defy almost every stereotype that Greeks have been associated with these past years. They are ultra-competitive in a truly globalized market; their family-based structures are an indispensable source of strength rather than weakness; and they are unabashed proponents of the free market when it comes to the transcontinental sea trade, even while in Greece itself, most industries still struggle under the weight of over-regulation and barriers to competition. In a reversal of the narrative that has dominated headlines, in shipping – in particular the container sector – it is well-positioned Greeks who are “bailing out” mismanaged German shipping funds, which over-extended themselves before the global shipping crisis hit in 2008 and are now selling off their ships for a pittance. Greek shipping was also a key enabler and a major beneficiary of the rise of China during the previous decade. It is estimated that in 2007, at the peak of the China boom, 60% of the Asian giant’s raw material needs were supplied by Greek-owned ships. As another major shipowner, Thanasis Martinos of Eastern Mediterranean Maritime, explains, Greeks benefited because “we are the taxi drivers of world shipping. We are mostly free of long-term contracts – unlike, say, the Japanese – and we can go wherever the highest profit opportunities take us.” This week, top names in shipping, including Prokopiou, are accompanying Greek Prime Minister Antonis Samaras to Beijing on a much-publicized trip aimed at strengthening commercial ties between the two countries.

Are Germans Poorer than Other Europeans? from naked capitalism - Yves here There’s been a great deal of consternation over a report that found that the median Spanish and Italian households are more than three times as wealthy as the median German household. This report says that these differences aren’t what they seem to be.  The ECB’s recent survey on household finances and consumption threw up some unexpected results – counter-intuitively, the average German household has less wealth than the average Mediterranean household. In line with a recent contribution from De Grauwe and Ji, this article analyses the principal differences in wealth and income between the main Eurozone countries.

Germany pushes France toward periphery - You know, post June-2012, I genuinely thought we’d moved past the back and forth, chicken and egg arguments within the Eurozone, but alas, we are here again:German central bank head Jens Weidmann has strongly criticized French efforts to reduce its budget deficit, just days after the European Union granted Paris more time to meet EU requirements. He warns that French delays could damage the credibility of euro-zone rules. France needs more time to get its budget deficit under control. That much was made clear last Friday when the European Commission announced it was granting Paris until 2015 to bring its budget deficit below the maximum 3 percent of gross domestic product allowed by European Union rules ensuring the stability of the euro. But on Wednesday evening, Jens Weidmann, the president of Germany’s central bank, the Bundesbank, said he is adamantly opposed to the move. “You can’t call that savings, as far as I am concerned,”  “To win back trust, we can’t just establish rules and then promise to fulfil them at some point in the future. They have to be filled with life,” I would advise readers to take note of this chart to appreciate the irony of comments about “damaged credibility” in breaking treaty rules.

Eurozone recession continues into sixth quarter: The recession across the 17-nation eurozone has continued into a sixth quarter, figures show. The bloc's economy shrank by 0.2% between January and March, according to official figures. That left the region's economy 1% smaller for the period compared with a year ago. Individual data for member countries showed nine were in recession, although Germany recorded weak growth of 0.1% in the period. The figure marks the longest recession since the euro was launched in 1999. It was worse than the 0.1% fall expected by economists, although gross domestic product (GDP) numbers, like other economic statistics, are subject to revisions.

France contracts in 1st quarter as Germany returns to growth - French GDP shrank by 0.2 per cent in the first quarter, the same rate of decline as the final three months of 2012, according to Insee, the national statistics office. Investment, measured by gross fixed capital formation, remained weak, falling a further 0.9 per cent after 0.8 per cent in the fourth quarter. Exports fell and construction output fell. The second consecutive quarter of contraction put France back into recession, its third in four years. Germany, by contrast, managed to swing back into growth, but only barely. First-quarter GDP grew by 0.1 per cent, up from a downwardly revised contraction of 0.7 per cent in the fourth quarter of last year, according to a preliminary estimate by the Federal Statistics Office. The German growth figures were likely to have been dragged down by poor weather and many economists are expecting it to continue to grow as exports pick up. The country’s powerful engineering union, which includes the carmaking sector, agreed a pay deal with employers on Wednesday, giving workers a pay rise of 3.4 per cent in July and a further 2.2 per cent in May 2014.

France Double-Dips As European Recession Is Now Longest On Record - Confirming that in a world in which either commercial or central banks have to be constantly be churning out debt, and in a world in which Europe is doing neither (with European commercial loan growth posting sequential declines across the board, and the ECB's balance sheet still declining although likely not for long), "growth" as defined by conventional standards, is impossible, we got today's European Q1 GDP data. Not only was it bad, but it was even worse than most had expected. And while Germany may have escaped a technical recession after its economy grew by the absolute minimum possible 0.1 percent in the first quarter (does it too also include intangibles in its GDP calculation one wonders) following a drop in Q4, it was France that officially double dipped into its second recession in four years with a 0.2 percent contraction and one year into Hollande's term. As the Bloomberg Brief chart below shows, Germany and France account for 49 percent of euro-area output. Overall, the euro-area economy contracted by 0.2 percent in the first quarter.

François Hollande goes on ‘offensive’ over stalled EU economy - François Hollande promised an “offensive” to bring “more growth and less austerity” to Europe as he launched a bid to resurrect his presidency. Mr Hollande said the first priority of his second-year “offensive” was a four-point plan to “get Europe out of its torpor” – concentrating on combating youth unemployment and a strategy of investment. “The number one objective is changing Europe’s direction to have more growth and less austerity,” he said. “I cannot do it alone,” he said, adding that the European Central Bank could “put in liquidity, as is happening in Japan, which has allowed a fall in the yen and helped exports”. The president promised a 10-year investment programme in digital, energy, health and infrastructure sectors to regenerate growth, saying that it could in part be financed by the sale of some of France’s big state corporate holdings, which have a total market capitalisation of about €60bn. But he made clear that any sales would not be at the expense of ceding state control or influence over vital companies.

Euro-zone GDP drops 0.2%, worse than expected- Gross domestic product for the euro zone contracted by a worse-than-expected 0.2% in the first quarter of 2013, keeping the region mired in recession, data from Eurostat, the statistical office of the European Union, showed on Wednesday. Economists surveyed by FactSet expected the euro-zone economy to shrink by 0.1%. For the broader 27-nation EU, GDP slipped 0.1%. For both regions, however, the data painted a brighter picture than in the fourth quarter last year, when growth rates fell 0.6% and 0.5% respectively. On a country-specific basis, the data showed Spain and Italy both shrank 0.5%, while France fell 0.2%. Germany narrowly avoided a contraction, with the economy growing 0.1%

Europe’s depression deepens - Not that it should be a surprise to most MB [and NC] readers, but the economic data coming out of nations within the Eurozone is once again “worse than expected”. Last night it started with Italy: Italy’s economy contracted more than expected in the first quarter of 2013, shrinking 0.5% from the previous three months as activity fell in all sectors except farming, national statistics institute Istat said Wednesday. Gross domestic product in the euro zone’s third-largest economy has now contracted for seven consecutive quarters, the longest recession since Istat began compiling comparable data in 1990. But Italy certainly isn’t alone. France too, is back into recession:France has entered its second recession in four years after the economy shrank by 0.2% in the first quarter of the year, official figures show. Its economy shrank by the same amount in the last quarter of 2012.President Francois Hollande has said he expects zero growth in 2013, lower than a 0.1% growth forecast by the French government. The preliminary figure, adjusted for seasonal factors and the number of working days, was markedly worse than the average forecast of a 0.3% quarterly contraction in a Dow Jones Newswire poll of 19 economists.Italy’s GDP shrank 2.3% from the fourth quarter of 2012, Istat said, slightly worse than the average forecast of a 2.2% annual decline.While dismal, Italy’s economy didn’t decline as sharply as it did in the final three months of 2012, when it shrank 0.9% from the previous quarter.

What the euro has meant - ACCORDING to Eurostat's first estimate, output in the euro area shrank 0.2% from the fourth quarter of 2012 to the first of 2013 and fell 1% year-on-year. The euro zone has been in recession since the third quarter of 2011. Today's Daily chart is an updated interactive graphic on the European economy. For a bit more context, I thought I'd add two charts of my own. Here is real GDP for a selection of economies: And here is real per capita GDP for the same countries: The charts show the whole of the euro era, and it has not been a particularly glorious time. Indeed, most of the euro area would have been better off being Britain or America over this time, even in per capita terms, and Britain and America have hardly had outstanding performances. The remarkable thing to me is that no euro-area economy is rushing for the exit, despite the fact that real output per person has fallen 15% in Greece and is lower in Italy and Portugal than it was 13 years ago. Perhaps the periphery imagines that they would have done worse without the euro. Or maybe, as Karl Smith says, the euro is only capable of causing such misery because no one is willing to abandon it.

The Savings Heist - One of the puzzles of the global financial crisis has been that there has been no push for debt to equity swaps. In previous crises, most notably the Latin American debt crisis of the 1980s, arguably the beginning of the modern era of hyper usury and financial debauch from globalising Western banks, the situation was solved by at least the appearance of debt for equity swaps. The obvious difference being that with equity the risk lies with the creator of the funds and with debt the risk lies with the recipient of the funds. When there is a risk to the whole system, this is a way to reduce the overall peril. I wonder as we look to Cypriot savers taking a “haircut”, if we are seeing the shape of what will happen in the next crisis. The essence of a debt for equity swap is that the obligation that goes with debt is taken away. Calling the confiscation of bank deposits equity instead of theft would be a way to prettify the actions of the hyper-usurers. Michel Chossudovsky thinks that Cypress is a dress rehearsal  for things to come. A “savings heist” in European and American banks deemed too big to fail. According to the Institute of International Finance (IIF), “hitting depositors” could become the “new normal” of this diabolical project, serving the interests of the global financial conglomerates. This new normal is endorsed by the IMF and the European Central Bank. According to the IIF which constitutes the banking elites mouthpiece, “Investors would be well advised to see the outcome of Cyprus… as a reflection of how future stresses will be handled.” (quoted in Economic Times, March 27, 2013)

Social Mood Darkens in Europe, Especially France, as Eurozone Economy in Freefall - A PEW study on European Attitudes shows social mood is darkening in the Eurozone, but especially in France.  The 78 page study "The New Sick Man of Europe: The European Union" is worth a look in entirety, but let's turn the spotlight on France.  The euro crisis first undermined France’s economy, and now there is strong evidence that it has severely eroded French public attitudes toward the economy, the European project and the country’s domestic leadership. Moreover, France has always bridged Europe’s north and south. French language and culture has Latin roots, but France has historically been considered in the same economic and political league as Germany and Britain. And in their public attitudes, the French were neither Northerners nor Southerners, but a hybrid of the two. Now, measured by a number of indicators, the French look less like Germans and a lot more like the Spanish, the Italians and the Greeks.In the current poll such sentiment reaches a new low, with just 9% saying the economy is performing well. And that judgment is down 21 points since 2007. Only 11% of the French think their economy will improve over the next 12 months, making the French among the most pessimistic of Europeans. And just 9% think their children will be better off financially than their parents, by far the gloomiest forecast for the next generation.

Europeans disillusioned and divided by debt crisis, survey finds - Public support for the European project has plunged as the continent descends into mutual distrust, according to a new survey that shows the damage caused by the region's debt crisis over the last few years. The respected Washington-based Pew Research Centre warned that support for the EU has slid from 60% to just 45% over the past 12 months. In a report titled  The New Sick Man of Europe: the European Union, Pew showed backing for European integration tumbling heavily in France. Europeans are increasingly gloomy about economic conditions, disillusioned about their leaders, and losing faith in the whole idea of European unity, the poll found. "Positive views of the EU are at or near their low point in most of the countries surveyed, even among the young," said the pollsters, who talked to nearly 8,000 people in eight countries – Germany, France, the United Kingdom, Italy, Spain, Poland, Greece and the Czech Republic. The Germans alone are in favour of handing more powers to Brussels to tackle the four-year economic and financial crisis that is severely sapping EU confidence. Pew said: "The effort over the past half century to create a more united Europe is now the principal casualty of the euro crisis. The European project now stands in disrepute across much of Europe. "The prolonged economic crisis has created centrifugal forces that are pulling European public opinion apart, separating the French from the Germans and the Germans from everyone else.

European Leaders Grapple With Youth Unemployment - Record youth unemployment is emerging as the most urgent problem in the euro zone, if the political rhetoric of recent days is any measure. But leaders are struggling to come up with effective ways to prevent jobless young people in countries like Spain and Greece from becoming a lost generation and source of social upheaval. One proposal, floated in a German news report Monday, would use a development bank owned by the European Union to funnel credit to companies that create jobs for young people in the euro zone, nearly a quarter of whom are without jobs. Officials in Berlin quickly played down the report published in the online version of the Rheinische Post newspaper, based in Düsseldorf. But it is clear that policy makers are seriously worried that millions of frustrated young job seekers pose as much of a threat to the euro zone as excessive government debt or weak banks. The issue is likely to come up when finance and economy ministers of the 17 euro zone countries meet Tuesday in Brussels. Angela Merkel, the German chancellor, considers youth unemployment to be Europe’s biggest challenge, her spokesman said Monday.

Catholic Church Voicing Opposition to Eurozone Austerity - Yves Smith - It’s been slow in coming, but religious leaders are starting to speak out against the mechanisms and high social cost of austerity. One dramatic but ineffective effort was when the Archbishop of Cyprus offered to contribute all the church land in Cyprus to a rescue package. He also urged Cyprus to exit the eurozone: Archbishop Chrysostomos II of Cyprus said his country should withdraw from the European Union as the EU will fall apart and cease to exist in the future. “People who rule the European Union, and particularly those making decisions in the so-called troika, do not understand many things and it leads to the collapse of the EU. This is why I believe we [Cyprus] should withdraw from the union before the collapse takes place,” he added. On May Day, the new pope called for less austerity and more jobs. From the New York TimesI think of how many, and not just young people, are unemployed, many times due to a purely economic conception of society, which seeks selfish profit, beyond the parameters of social justice,” the pope said. “I wish to extend an invitation to solidarity to everyone, and I would like to encourage those in public office to make every effort to give new impetus to employment.  A much starker depiction of what is at stake came today in the Telegraph, when Ambrose Evans-Pritchard wrote up an interview with the Archbishop of Toledo. The prelate discussed not only the severity of individual suffering, but more important, the cracks in the social order. This is a much bigger danger, and one that the Troika seems to treat far too casually.

Time travel in Euroland - Unfortunately, this is not news by now, but the president of the Euro group, Jeroen Dijsselbloem in an interview with CNBC yesterday dismissed the role that fiscal policy and monetary policy can have to address the economic crisis: "Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth, but what we really need in all countries is structural reforms in the first place. I'd just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms — I'd like the order to be exactly the other way around. Structural reforms in the first place, fiscal policy and viable targets in the mid-term for all regions in second place — and monetary policy can only accommodate domestic economic problems in the short-term." It is not exactly clear what to make out of his statement but it seems that long-term solutions should come first before we implement those that will help us in the short term. It is surprising that even today there is such a great confusion about long-term versus cyclical problems. This confusion comes from a basic belief that some hold that there is nothing inherently different in the dynamics of an economy when one looks at the short run and the long run. This is part of a never-ending academic debate but when it comes to policy makers and politicians it seems to be more a matter of beliefs.

Worst of Euro-Zone Crisis Not Yet Over - A majority of European investors believe the worst of the euro-zone crisis isn’t over yet, with weak economic growth prospects the central concern, a survey by Fitch Ratings said Monday. Investors doubting the sustainability of current financial market strength were split into two camps: 29% felt this is a short-lived period of market calm, and 30% said markets are irrationally exuberant, ignoring the weak economic outlook for Europe. The remaining 41% of respondents said the worst of the crisis is over due to strong support from the European Central Bank and policy makers. Financial markets in Europe have performed strongly since last autumn, bolstered by confidence the ECB is prepared to deliver policy initiatives aimed at preventing a break-up of the bloc. But economic conditions in the euro area remain subdued. Gross domestic product in the 17 member countries is forecast to shrink by 0.4% in 2013, according to the European Union’s statistics agency. Eurostat figures showed March unemployment was 12.1%. If the rally in financial markets “is not validated by economic stabilization and progress towards banking union, the danger is that market volatility will return with a vengeance over the summer, as it did in 2012 and 2011,” Fitch said.

Euro Recession Seen Longest in Single Currency Era - Euro-area data this week will probably reveal economic scars of the sovereign debt crisis confirming that the region is now suffering the longest recession since the single currency’s creation. Gross domestic product in the 17-nation economy fell 0.1 percent in the first three months of 2013, a sixth straight quarterly decline, according to the median of 39 economists’ forecasts in a Bloomberg News survey. That would exceed the 15-month contraction in 2008-2009 during the financial crisis, and is the longest streak since the euro’s founding in 1999. The data to be released on May 15 follow a series of national GDP reports that day showing the legacy of the sentiment shock and austerity measures since the crisis began. While a European Central Bank pledge to backstop the euro has eased financial-market tensions, economic confidence at a four-month low and record unemployment highlight the risk that the slump will persist.

Counterparties: Europe’s longest recession -- Europe is in the midst of its longest recession since it began keeping records in 1995 — even surpassing the calamity that hit the region in the financial crisis of 2008-2009. While the German economy grew 0.1% from the fourth quarter of 2012 to the first quarter of this year, just about everyone else in the eurozone is shrinking. France’s economy shrank 0.2% quarter on quarter, and is now officially back in recession after just one quarter of positive growth. It’s not alone: Cyprus, Finland, Italy, Greece, the Netherlands, Portugal, and Spain are all in recession right now. And while the UK managed to just barely avoid a triple-dip recession by growing 0.3% in the first quarter, its economy is still 2.6% smaller than it was 5 years ago. Yesterday, Pew’s latest eurozone survey confirmed that the continent’s sentiment matches its dour economic data. The survey’s disconcerting conclusion: The European Union is the new sick man of Europe. The effort over the past half century to create a more united Europe is now the principal casualty of the euro crisis… The prolonged economic crisis has created centrifugal forces that are pulling European public opinion apart, separating the French from the Germans and the Germans from everyone else. Median support for the EU stands at 45%, down 15 percentage points in just the last year. Across the eight surveyed countries, only 26% think the economic integration has strengthened their national economy, a 6 point decline from last year..

Europe’s endless recession, in one chart - More terrible news out of Europe: The euro zone economy has contracted for the sixth consecutive quarter. That’s officially the longest recession in the history of the euro, which launched in 1999. Even France and Germany are now getting dragged down. For a good look at the damage, check out this chart from Philippe Waechter of Natixis Asset Management, which shows that only three of the 17 euro zone nations — Germany, Austria and Belgium — have bigger economies now than they did in 2008. The rest either keep shrinking or have yet to rebound to their pre-recession levels:

Broken transmission mechanisms - NEW figures from Europe reveal that both GDP and inflation in the euro area are falling, while unemployment is steadily rising. The mix of pain calls for monetary easing, and at its last policy meeting the European Central Bank did indeed reduce its main interest rate to 0.75%, a record low for the single-currency area. Yet as a recent Free exchange column explained, low ECB rates aren't having the desired effect around the struggling periphery:  In 2008, as the euro zone started to contract, the ECB slashed its main rate from 4.25% to 1%. But because investors were worried about the state of the banks, the returns that banks had to offer on their own bonds rose. This offset the ECB’s easing, so that firms’ borrowing rates fell by less than normal.When the euro crisis intensified in 2010, the ECB’s influence on interest rates in Spain and Italy waned even further. Banks’ bond yields rose in line with their governments’ cost of borrowing. As predicted by the bank-lending channel, but now as a result of a change that the ECB did not control, the supply of loans contracted. The amount of borrowing in Italy and Spain has started to fall again (see right-hand chart). Some of this may be due to weak demand. But a 2011 study by the ECB suggested that tight credit conditions could take two percentage points off annual growth in the currency area. Recent studies by the IMF and the Bank of Italy concur: credit supply is a big problem.

Europe faces a risk of "zombification" - THERE is now strong statistical evidence that banks in the periphery are discriminating against small and medium-size enterpresises (SMEs), imposing higher interest rates or simply rejecting loan applications in a higher proportion than for larger corporates. This is the clearest sign of impaired monetary policy transmission—loan rejection per construction is a “indicator” that supply, not demand drives the current dearth of credit—and “fragmentation” in the euro area. Indeed this magnifies the polarisation between core where the extraordinarily accommodative monetary stance is fully passed through—possibly too much actually given the still decent economic conditions there—and a periphery where effective monetary and financial conditions remain tougher than what the level of the policy rates suggest and what the speed of contraction in demand warrants. The policy conclusion seems to be straightforward: the central bank should do more to incentivise banks to extend more credit to a sector of the economy which, in countries such as Spain or Italy, employs one worker out of two. It may not be simple  The ECB has already been active on these matters, by extending the eligibility of credit claims as collateral for refinancing. However, while this can certainly help banks to access central bank funding when more traditional sources of collateral get scarce, we are unsure of the impact on actual credit origination in the current circumstances.

EU bank rescue agency needs treaty changes - Germany’s finance minister has warned that a single EU bailout agency and rescue fund for ailing banks is legally untenable until the bloc’s treaties have been overhauled. In today’s Financial Times, Wolfgang Schäuble calls for a “two-step approach” that would leave bank rescues in the hands of “a network of” national authorities until treaty changes can take place. Mr Schäuble’s declaration comes just weeks before the European Commission is due to present its plan for a single bank resolution agency and rescue fund – widely touted as the second pillar in the eurozone’s much-vaunted “banking union” – throwing the proposal into doubt even before it is unveiled. “The EU does not have coercive means to enforce decisions. Its historical roots are young. Its democratic legitimacy could be improved upon,” Mr Schäuble writes. “What it has are responsibilities and powers defined by its treaties. To take them lightly, as is sometimes suggested, is to tamper with the rule of law.” Lawyers for the European Commission and the European Central Bank, which has joined Brussels in pushing for quick adoption of a resolution authority after last month’s creation of a common EU bank supervisor in Frankfurt, have argued that existing treaties allow for centralising powers to shut down or restructure weak banks. But Mr Schäuble writes that the treaties “do not suffice to anchor beyond doubt a new and strong central resolution authority”. He added that promises to create an authority quickly would cost the EU credibility, saying: “We should not make promises we cannot keep.” Even limited changes to EU treaties can take months if not years.

Only the ECB can improve bank credit supply - Despite a range of constraints on its ability to launch unconventional monetary policy measures, the ECB has played a key part in managing the Eurozone crisis, particularly through large scale and long maturity liquidity injections through its Long-Term Refinancing Operations. However, while not explicitly stated, the essential aim of such interventions has been to provide private banks with the funds necessary to stabilise sovereign debt markets in the Eurozone, in the absence of alternative adjustment mechanisms. The focus of the ECB must now turn to private lending and in particular a European version of the Bank of England’s Funding for Lending Scheme, which ties central bank financing of commercial banks to increases in banks net lending in the real economy. Since its inception in 2012 the Bank of England scheme has supported a decline in lending spreads in the mortgage market (see this recent FT coverage). One reason to be optimistic about the prospects for some kind of economic recovery in Britain is that such a boost to the consumer sector combined with some delayed boost to exports through sterling depreciation will raise demand for business loans to exploit the potential supply of cheaper lending possible as a result of the Funding for Lending Scheme. A similar ECB initiative is necessary to address weaknesses in credit supply in the Eurozone. Without it, the prospects for lending growth and economic recovery are bleak, for the incentives to commit available bank funding to risky bank loans ahead of safe but less economically productive investments are very limited.

Does the eurozone have a monetary policy transmission mechanism? Or rather a liquidity leak? - What would happen if the ECB immediately and directly ran a helicopter drop of money to the periphery?  I don’t find that an easy question to answer.  Here is one recent report: But the indicator [interest rate spreads] has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals. “Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak,” said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB in Frankfurt. Or read this update. Here is a more specific story about how small to mid-sized Italian banks are contracting. Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment?  Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome?

ECB to keep monetary policy loose for as long as needed (Reuters) - The European Central Bank will keep its loose and growth-supportive monetary policy stance in place for "quite a long time", ECB executive board members said on Friday. With the euro zone economy stuck in recession, the ECB cut its main refinancing rate to a record low of 0.5 percent and extended its provision of unlimited funds to banks by a year at its May policy meeting, Inflation fell to a three-year low of 1.2 percent in April, allowing some room for maneuver. The ECB's Joerg Asmussen told journalists in Berlin the bank's monetary policy would remain expansive for as long as needed. His colleague Benoit Coeure hit a similar tone when speaking at a conference in Orleans in France, saying the ECB was committed to providing the euro zone with abundant liquidity for as long as necessary. "We are saying that because we are well aware that rigidities and difficulties of transmission in the euro zone mean that the monetary policy will have to stay accommodative for quite a long time," Coeure said. The ECB's record low interest rates do not reach euro zone countries evenly because funding costs for banks in the periphery are higher than in the euro zone's core countries. That makes it more expensive for households and companies to borrow.

Just Say Non To The New "Sick Man Of Europe" - Support For EU Plunges In France And Most European Countries - In some surprising news, and quite contrary to what its record low bond yields would indicate (for a key reason for said artificial demand for French, see The Greater Fool) today the Pew Research center released results from a poll of 7646 EU citizens in March 2013, showing that the new sick man of Europe is Europe itself, or rather the great unification project itself: the European Union.  The sick man label – attributed originally to Russian Czar Nicholas I in his description of the Ottoman Empire in the mid-19th century – has more recently been applied at different times over the past decade and a half to Germany, Italy, Portugal, Greece and France. But this fascination with the crisis country of the moment has masked a broader phenomenon: the erosion of Europeans’ faith in the animating principles that have driven so much of what they have accomplished internally. The European Union is the new sick man of Europe. The effort over the past half century to create a more united Europe is now the principal casualty of the euro crisis. The European project now stands in disrepute across much of Europe.

Lord Lawson is right – Britain does not need Europe - In discussing the pros and cons of Britain’s membership of the EU, the most important point to remember is this: the terms of an exit are freely negotiable. This means that the economic consequences will depend to a large extent on those exit terms. In his article in the Times last week, Lord Lawson, a former UK chancellor, argued that the regulatory costs of the single market for the British economy exceed the economic costs of an exit. As a consequence he favours an exit. Is the analysis correct? Does the conclusion logically follow? I do agree with most of his analysis, especially his point that, for the UK, the single market carries higher costs than benefits. For the EU as a whole, the single market has been a macroeconomic non-event. Its impact on aggregate gross domestic product is statistically imperceptible. David Cameron, Britain’s prime minister, may also find it easier to negotiate favourable exit terms than a treaty change. The latter would be needed if he wanted to put substance to his goal of a fundamental change in Britain’s relationship with the EU. It would have to be agreed by all members, their parliaments, and it would need to pass in several referendums.

G7 agrees action needed against tax evasion, says George Osborne - The G7 group of industrialised nations has agreed collective action needs to be taken to target tax avoidance and evasion, the chancellor George Osborne has said. Speaking at the end of the two-day summit of finance ministers and central bank chiefs in Aylesbury, Buckinghamshire, Osborne said it was "incredibly important that companies and individuals pay the tax that is due". Osborne said there was also strong agreement among the seven member nations – the United States, Germany, Japan, the UK, Italy, France and Canada – on tackling tax cheats. "We all agreed on the importance of collective action to tackle tax avoidance and evasion," he said. "It is incredibly important that companies and individuals pay the tax that is due and this is important not just for Britain and for British taxpayers but also for many developing nations as well." Osborne said British overseas territories "need to do more" to end tax evasion.

Cameron Faces Cabinet Crisis of His Own Making; Purposely Self-Inflicted Wounds - Over the weekend, the UK Secretary of Defence and the Education Minister caused a stir when they publicly stated on Sunday they would vote to leave the European Union if a referendum were to be held now. The Guardian reports David Cameron faces EU cabinet crisis as ministers break ranksDavid Cameron is struggling to maintain Tory discipline over Europe after cabinet loyalists Michael Gove and Philip Hammond said on Sunday they would vote to leave the European Union if a referendum were to be held now.Gove, the education minister, confirmed for the first time that he believes that leaving the EU would have "certain advantages", while Hammond, the defence secretary, later said he too would vote to leave if he was asked to endorse the EU "exactly as it is today". This is fresh on the heels of an announcement last week that former cabinet minister Michael Portillo and Lord Lawson call for Britain to leave the EU. Lawson was Thatcher's longest-serving chancellor. 

Mark Carney will follow the Fed, not the Bank of Japan - Gavyn Davies - Following the astonishing arrival of Governor Kuroda in Japan, Mr Carney must be sorely tempted to follow suit in trying to jolt UK economic expectations towards a new equilibrium. He is likely to get plenty of encouragement in this from the chancellor, who emphasised in the Budget that “monetary activism” is a core part of his overall economic strategy.In fact, Mr Osborne has asked the Bank to focus in the August Inflation Report on how the UK might adopt forward policy guidance, with thresholds, following the example of what the Fed did (successfully) last December. This is an unusually specific request from the Treasury, and even Sir Mervyn seemed sympathetic to this approach today.In the context of high British inflation, there are serious impediments to repeating the fireworks unleashed by the BoJ, but some progress can be made, Fed-style. What exactly can we expect? Mr Carney’s latest speech suggests that forward guidance in Canada worked because…it was exceptional, explicit and anchored in a highly credible inflation-targeting framework. It worked because we “put our money where our mouths were” by [extending liquidity for] the duration of the conditional commitment. And it worked because it reached beyond central bank watchers to make a clear, simple statement directly to Canadians.

U.K. Property Loans Facing 92 Billion-Pound Financing Gap - U.K. commercial real estate investors may be unable to refinance about half of their 198 billion pounds ($303 billion) of bank loans as property values fall, a survey by De Montfort University shows. About 92 billion pounds of remaining bank loans are “likely to be unrefinancable on terms available in today’s lending market,” according to the survey of 78 lenders, which was published today. The amount of the loans is too high compared with the real estate backing them, the report by the Leicester, England-based university said. Banks and other lenders cut U.K. commercial real-estate lending by 7.7 percent last year as they mended balance sheets damaged by losses and sought to meet capital rules, De Montfort estimates. Almost a quarter of all property loans are in “severe distress” because the outstanding debt is higher than the value of the real estate as low-quality buildings in the U.K. depreciated further last year. The U.K.’s weakening economy last year “was having a detrimental impact on borrowers’ cash flows and the capital value of commercial property,”

British families are the deepest in debt -British families are the most heavily indebted in the developed world despite austerity, figures have shown. Data compiled by the House of Commons Library show that British households' debts are equal to 98 per cent of gross domestic product (GDP), more than any of their international peers. The Government's stock of outstanding debt is also more than 90 per cent of GDP, a threshold some economists consider harmful to economic growth. The figures, assembled for Dominic Raab, the Conservative MP, show the scale of Britain's debts despite attempts to cut them in the past few years. Households have been reducing their debts by paying down mortgages and credit card bills, and indebtedness has fallen from more than 100 per cent of GDP in 2010. But writing in The Daily Telegraph today, Mr Raab says that many households' finances remain worryingly exposed to debt. "Between 1997 and 2009, household debt as a share of GDP rose by a third," he writes. "It has started to fall back since 2010, but remains at 98 per cent of GDP – leaving many families acutely vulnerable to any increase in interest rates."

Brits Are Now Poorer Than The French, Swiss, Belgians, Swedes, Austrians, Aussies And Canadians - Between 2005 and 2011 British household incomes have tumbled below those of rich-nation counterparts in Switzerland, Australia, Austria, France, Canada, Belgium and Sweden, according to a new analysis from the UK’s Office of National Statistics. Despite some decent recent news on industrial production, the UK economy remains quite weak. And critics lay the blame squarely at the feet of David Cameron’s conservative-led government. When elected in 2010, Cameron became a global standard-bearer for those who argued that what was needed in the aftermath of the financial crisis and Great Recession was belt-tightening rather than the fiscal stimulus of the kind once prescribed by John Maynard Keynes.

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