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

Saturday, June 22, 2013

week ending June 22

U.S. Fed balance sheet grows in latest week | Reuters: (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week on increased holdings of U.S. Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which is a broad gauge of its lending to the financial system, stood at $3.427 trillion on June 19, compared with $3.367 trillion on June 12.The Fed's holdings of Treasuries rose to $1.919 trillion as of Wednesday, from $1.906 trillion the previous week.The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) rose 1.209 trillion from $1.165 trillion the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $70.66 billion, down slightly from $70.89 billion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $25 million a day during the week versus $15 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 20, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Watch What Fed Says, Not What It Does - At this week’s Federal Reserve monetary policy meeting, it comes down more to what officials will say, than what they’ll do. On the action front, economists expect very little. The central bank’s rate setting Federal Open Market Committee is widely expected to press forward with its $85 billion per month in Treasury and mortgage bond buying, as it seeks to provide stimulus to the economy. Most forecasters still think it will be a few more months, at minimum, before Fed officials have enough confidence in the economy to change the scope of that program. So it will fall to the Fed’s words to define the outcome of the meeting set to take place over Tuesday and Wednesday. Officials’ primary challenge is to drive home the idea that while the economy may be improving, there is still uncertainty surrounding the bond-buying outlook. Central bankers also need to repeat what they’ve been saying in speeches: Smaller bond buying won’t represent a tightening in monetary policy, just a reduction in the amount of stimulus the Fed is delivering. It’s a crucial point, and one financial markets have struggled with over recent weeks, as traders and investors have increasingly come to price their markets for a change in Fed policy, amid considerable anxiety about the changing monetary policy outlook.

What the bond market is telling the Fed - Central bankers nowadays have the power to move the global markets by uttering nothing more than a brief, off-the-cuff remark. “Whatever it takes,” was Mario Draghi’s version, which saved the euro last year. “In the next few meetings,” was Ben Bernanke’s equivalent last month. There will be rapt attention turned on the Fed chairman’s press conference on Wednesday to see whether he retracts that remark, which of course relates to the time when the Fed might start to slow the pace of its asset purchases. Mr Bernanke does not carelessly throw out such remarks, so it would surely be incoherent for him to withdraw it completely this week. The Fed is unlikely to have been particularly troubled by the bout of market volatility seen lately. Much of it has come in foreign markets, which are not the Fed’s responsibility. Meanwhile, in the US itself, the reversal of the “reach for yield” is precisely what the Fed has been wanting to see for several months. The killer phrase “in the next few meetings” is therefore likely to remain on the table after the press conference on Wednesday. However, the Fed chairman will hammer home exactly what he means by this message, since there are signs that it has been misunderstood by investors. In particular, the US Treasury market is sending some messages which should worry the Fed.

Economists Blame Fed for Higher Bond Yields - Who’s to blame for the sharp rise in long-term interest rates of recent weeks? Economists have their fingers out and they’re pointing at the Federal Reserve. Though the 10-year yield eased a bit late last week, it has jumped by around half a percentage point since May. The Wall Street Journal asked economists what’s behind the backup in its latest monthly economist survey. It wasn’t inflation worries or budget deficit worries. More than two-thirds of respondents — 26 of 40 who answered the question — said the market was responding to perceptions that the Fed is preparing to pull back on its $85-billion-per-month bond buying program. The program is meant in part to hold long-term interest rates down.Long-term rates can also move higher when the economy is strengthening. Economists said that was a secondary reason now. Just a quarter of the respondents, or nine economists, thought that improving economic fundamentals were driving the increase. One implication is that if the Fed moves less aggressively than investors expect, yields can move back down. Indeed, the decline in yields late last week may have been a sign that investors are reassessing how quickly the Fed will pull back. If yields are just rising because of expectations about Fed policies, and not due to stronger underlying economic conditions, rates could overshoot to the upside and further slow the economy, then turn back down later.

Fed Policy and Bond Yields - In an open economy with a current account deficit the equilibrium interest rate is the one that attracts sufficient foreign capital to finance the current account deficit with a stable exchange rate. If the currency is rising it indicates that yields may be too high, while a falling currency implies that yields are too low. This is important to understand because the US 10 year T-bond yields rose 46 basis points in May and the bulk of the increase stemmed from a rise in Japanese yields. They surged because investors decided that Abenomics was working. This, in turn, pulled bond yields up some 25 to 35 basis points in Britain, Germany, the US and many other countries. All of this preceded the release of the Fed minutes and Bernanke’s Congressional testimony.  Yet Wall Street and many bloggers  seem to ignore the point that two-thirds of the May bond yield rise was due to foreign factors, not the possibility of Fed tapering. If you are going to model Canadian interest rates the first thing you do is put the US  bond yield in the model.  After that you work on including the factor that drive the spread between US and Canadian rates.  I think you should do this in  models  of US interest rates. In my model I include the average of the British, German and Japanese yields.  I’ve been running this model for almost 20 years and over that time the foreign become more important while domestic variables, like fed funds, have declined in importance.

The Fed is Not To Blame This Time As Treasuries Sell Off, But There’s a Lesson Here - Lately the Wall Street and media noise machine has taken up the Fed bashing bullhorn in conjuring a “reason” to explain the recent selloff in Treasuries. In fact, the Treasury market has been in a bear market for almost a year, with yields making higher lows and higher highs since last July. Admittedly, the Fed’s disjointed, multivoiced, multimode elephantine dungheap of a communications policy has had the effect of confusing both the punditocracy and big mahoff investors. But I don’t think that that’s the main cause of the turn in the bond market from bull to bear. In my view, the primary impetus for that turn is that the giant banks who get funding from the ECB–which means essentially all the multinational market behemoths– are rushing willy nilly to repay hundreds of billions in ECB loans. These largely include the massive emergency loans made under the LTRO program in late 2011- early 2012. The ECB had given hundreds of billions of these loans with a 3 year term, with an option to repay after one year. A few of the banks did not want those loans in the first place, but the ECB shoved them down everyone’s throat so that the banks who really did need them would not be stigmatized. This is the “theory of collective guilt” that central banks apply when forcing emergency funding into the world’s banking system. The central banks don’t want to call attention to which banks are stronger and which are weaker. All must be seen as equal. Equally shitty

Fed Keeps $85 Billion Pace of Bond Buying, Sees Risks Waning -  The Federal Reserve will keep buying bonds at a pace of $85 billion a month and said that risks to the economy have decreased.“The committee sees downside the risks to the outlook for the economy and the labor market as having diminished since the fall,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. It repeated that it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation. Chairman Ben S. Bernanke is expanding the Fed’s balance sheet toward $4 trillion as he seeks to reduce a jobless rate that stands at 7.6 percent after four years of economic growth. Investor concern that the Fed may soon start to reduce the pace of asset purchases this month pushed 10-year Treasury yields to a 14-month high.

Fed Statement Following June Meeting - The following is the full statement following the Fed’s June meeting.

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

FOMC Projections and Press Conference - Just a couple of months ago, several analysts argued that the Fed would start to taper QE purchases in June.  That was NEVER in the cards.  September is possible, but I still expect they will wait until December or early 2014 to start to taper. The Fed is clearly missing on the low side of their inflation target.  If that continues, the next move will be to increase purchases!  James Bullard even argued "the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings". Bernanke press conference here or watch below.On the projections, GDP was revised down slightly, the unemployment rate was revised down, and inflation was revised down sharply for 2013.   Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.  The unemployment rate was at 7.6% in May. 

Bernanke sees 2014 end for QE3 - The end is in sight for US Federal Reserve easing that has dominated financial markets for half a decade after it set out an optimistic economic outlook that would lead to the end of asset purchases in mid-2014. Markets plunged as Ben Bernanke, Fed chairman, said it would be “appropriate to moderate the monthly pace of purchases later this year” as long as the economy grows as expected. It is the first time the Fed has set out a framework for ending its third round of quantitative easing, known as QE3, which Mr Bernanke said could come to a complete halt when the unemployment rate is around 7 per cent. The yield on 10-year Treasuries hit its highest since March 2012 at 2.36 per cent, up sharply from 1.60 per cent at the start of May, while equities stumbled with the S&P 500 closing 1.4 per cent lower. Labour markets have shown “further improvement in recent months”, said the rate-setting Federal Open Market Committee as it tweaked its economic outlook upwards. “The committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall.” For now, the Fed said that it would continue to buy assets at a pace of $85bn a month, and expects to keep interest rates low as long as the unemployment rate remains above 6.5 per cent.

Fed Watch: FOMC Statement: First Reaction - The June FOMC statement was released minutes ago, and it sent a clear signal that the door to scaling back asset purchases was now wide open. Of course, we still await the press conference, where Federal Reserve Chairman Ben Bernanke can place his own spin on the statement, but I suspect we will see him take the opportunity to set the stage for a policy change as early as September. Two key sentences stand out.  First, on inflation: Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. This sounds like the FOMC continues to downplay the recent slide in inflation and instead focus on the longer-term forecast and stable inflation expectations. Thus, inflation is as of yet not an impediment to scaling back asset purchases. Second, despite the weight of fiscal contraction: The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. One justification for QE3 and the conversion of Operation Twist to an outright pruchase program was to protect against downside risks, primarily fiscal policy. If those risks are diminishing, so too is the case for the current rate of asset purchases.

FOMC Statement: Second Reaction - We now have Federal Reserve Chairman Ben Bernanke's press conference behind us, and we will be pulling it apart for nuances and insights for days.  What I expected going into this presser was this: Bernanke will attempt to detail how exactly the data flow is supportive of scaling back asset purchases in the next few months (I believe the Fed prefers September) while at the same time disassociating asset purchases from interest rate policy. Of course, Bernanke did not say September.  But I think he made clear that assuming the Fed's forecasts hold, they see that asset purchases will be gradually reduced beginning later this year with the expectation that the Fed will QE draw to a close by the middle of next year.  He confirmed my suspicion that although the Fed sees the fiscal sector as a drag on overall growth, they do not believe it has harmed the underlying momentum of the economy.  I would even say that he sounded relatively optimistic. Thus, downside risks have diminished and it is appropriate to begin reducing accommodation. Interesting, he seemed to set a trigger, not a threshold, for ending QE - the program should be concluded when unemployment hits 7%.  I am surprised that he set a number, although it is consistent with the idea that the Fed wants to end QE well ahead of the 6.5% threshold for unemployment.  Watching the unemployment rate just became even more important, as a faster than expected move to 7% will be associated with a faster end to QE.

FOMC Meeting: What Happened? - Markets are reacting to the Fed's first "tap on the brakes". The fear among market participants is that once the Fed begins to cut its current asset purchase program – which is still a hypothetical development, depending on future economic data – it will be just the first step toward normalized (higher) short-term interest rates. The official written statement from the Federal Open Market Committee (FOMC) meeting was mostly status quo in that policy actions (Fed Funds target rate and continuing the large-scale asset purchase program) are the same as before. It reiterates in exactly the same language as the last FOMC meeting statement that current policy will continue "until the outlook for the labor market has improved substantially in a context of price stability". However, they released an updated economic forecast with a somewhat improved projection for unemployment and less downside risk for the economy compared to the March forecast. The new forecast projects weaker growth for 2013 than the March forecasts, but stronger growth in 2014 and 2015. It also shows a lower projection for inflation for 2013 (0.3% lower), 2014 (0.2% lower) and 2015 (0.1% lower) than the previous forecast. The Fed's new forecast is more optimistic than private forecasts and contains projections that are not visible in the current economic data.

As good as it gets - THE June meeting of the Federal Reserve's Open Market Committee may prove one of the critical turning points in America's economic recovery, with major ramifications for global markets. You can read print coverage here and here. But I also wanted to walk through the important points here at the blog. Ben Bernanke made several things clear in his post-meeting remarks yesterday. The first and most notable of his clarifications concerned the timing of "tapering": the plan to rein in stimulative asset purchases now taking place at a pace of $85 billion per month. These purchases, commonly called QE3*, were introduced with the promise to continue them until labour markets experienced "substantial improvement". "Substantial", however, was not initially defined. Yesterday, Mr Bernanke spelled out that the Fed had in mind an absolute improvement in the unemployment rate, from about 8.1% when the programme was first introduced to about 7%. (The current rate is 7.6%; it ticked up a shade in May, from 7.5%.) Based on the Fed's economic projections, the economy is likely to achieve that rate by the middle of next year. And so if the economy seems to be following the projections, the pace of purchases will be scaled back starting late this year, with further reductions occuring in steps until mid-2014. Tapering will always be contingent on conditions, he insisted. If either unemployment or inflation lag the Fed's goals, the process will take longer. And if there were to be a sharp deterioration in the economy, an increase in the pace of purchases would be a possibility.

The Fed begins its long and gradual exit -When we look back on the FOMC meeting on June 19 2013, it will probably be seen as the moment when the Fed signalled that it was beginning the long and gradual exit from its programme of unconventional monetary easing. The reason for this was clear in the committee’s statement, which said that the downside risks to economic activity had diminished since last autumn, presumably because the US economy had navigated the fiscal tightening better than expected and the risks surrounding the euro had abated. This was the smoking gun in the statement. With downside risks declining, the need for an emergency programme of monetary easing was no longer so compelling. The Fed has been the unequivocal friend of the markets for much of the time since 2009, and certainly ever since last September. That comfortable assumption no longer applies. Fed chairman Ben Bernanke, however, went to great lengths to mitigate the hawkish overtones of this message in several respects. The asset purchase programme would be ended only when the US unemployment rate has fallen to 7 per cent, which the central bank expects to happen by mid-2014, he said. In the meantime, the pace of asset purchases could be increased as well as reduced, depending on the incoming economic data.

The Fed Provides “Forward Guidance” on the Taper and May Be, Once Again, Too Optimistic - Federal Reserve chairman Ben Bernanke did not say anything today about taking away the famous punch bowl.  He didn’t even say that he and his Fed colleagues, who’ve been pouring $85 billion per month of punch into that much expanded bowl, were going to start to slow down the juice flow.He said that when the party heats up to a particular point–when the unemployment rate falls to around 7%, that’s when they’ll stop the flow.  Again, to be clear–that’s not the point at which they’ll  end the party, which in this overstretched analogy means when they begin to raise interest rates (that will have to wait for 6.5% unemployment, as per earlier announcements) or unwind their balance sheet (start selling bonds back into the market).  For now and for the near term, the punch bowl will still be there and even growing, though if the jobless rates starts heading towards seven, it will be growing more slowly.And yet…the markets were not amused.  Nor calmed.  The Dow tanked almost 200 points before starting to come back a bit.Perhaps market participants think the Fed is once again too rosy in their economic scenario.  I agree.  Without exception, they’ve had to dial back every one of their forecasts.  So the fact that they now think unemployment will hit 6.5% (party over!) at the end of 2014 could be spooking some participants, but if they’re once again wrong about this, then based on their guidance, they’ll leave rates alone.  So why all the angst?

7% Unemployment: The Fed’s Newest Threshold - Federal Reserve Chairman Ben Bernanke cleared up one thing Wednesday: what exactly constitutes “a substantial improvement” in the job market. Six months ago, when the Fed unveiled the latest iteration of its bond-buying program, Mr. Bernanke said the asset purchases of $85 billion a month would continue “until we see a substantial improvement in the outlook for the labor market.” The Fed used words rather than numbers, he explained at that December press conference, “because we ourselves don’t know precisely what would define substantial improvement.” In March, at his next press conference, Mr. Bernanke reiterated that message about “substantial improvement” in the labor market and outlook. “To this point, we’ve not been able to give quantitative thresholds for the asset purchases in the same way that we have for the federal funds rate target.” Some other Fed officials have suggested the lack of specificity was a form of constructive ambiguity to allow them flexibility with the policy. Others said the hazy objective represented the difficulty of getting Fed officials to collectively agree on what success would look like. On Wednesday, Mr. Bernanke and the Fed came to that quantitative conclusion: 7% unemployment.

The Fed washes its hands of the new normal US economy - Who’s going to be the next Federal Reserve chairman? It may not matter much, at least as it concerns normalizing monetary policy. The wheels are motion. At either its September or December policymaking meeting, the US central bank will likely launch the Great Tapering. And sometime next year, the controversial asset purchases will end, followed by the first rate hike in 2015 with more to follow over the subsequent couple of years. And assuming the economic recovery plays out as the Fed’s forecasting models project, that will be that. The days of “extraordinary accommodation” will be over – even though the Fed has completely failed to meet its dual mandate of stable prices and maximum employment. Inflation is below 2%, and the “real” unemployment rate – taking into account the collapsed labor force – is over 9%. The Fed is tightening even though it was already too tight. Lars Christensen: While, NGDP growth expectations for the next 1-2 years are around 4-5% (ish) 30-year bond yields are around 3.3%. This in my view is a pretty good illustration that while the US economy is in recovery market participants remain very doubtful that we are about to return to a New Great Moderation of stable 5% NGDP growth. … In fact I would argue that when US 30-year hopefully again soon hit 5% then I think that we at that time will have to conclude that the Great Recession finally has come to an end. Last time US 30-year yields were at 5% was in the last year of the Great Moderation – 2007. …

Bernanke On Soaring Interest Rates: "We Were A Little Puzzled By That" -  Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy." Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.

Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot -  Yves Smith - The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. Asia had a bad night with the Chinese interbank market going into even more distress than before (that can’t be laid mainly at the Fed’s doorstep but it sure didn’t help). The Nikkei was down 1.7%, which is almost a routine market move, but the Hang Seng also fell 2.9%. All major European stock markets are down over 2%. S&P future are down over 16 points, or roughly 1%.  We’ve pointed to several things that have been troubling about the Fed’s apparent view prior to the FOMC statement yesterday and the Bernanke press conference, which only rattled investors further. First was that the Fed seems to be suffering from a bad case of confirmation bias, in that it seems to be underweighing data that is inconsistent with the idea that the economy is getting better (as in on the path to decent growth, as opposed to a gear or two above stagnation). For instance, even though inflation continues to fall (a sign of weakness) the central bank is taking the view that that’s temporary, and it is also of the view that the sequester isn’t going to impose a meaningful drag.  But that may not matter. Fedwatcher Tim Duy highlights the fact that the Fed has a pattern of being too optimistic about growth, but is likely to stick to its guns on exiting QE when its unemployment thresholds are breached. And the big fail is that the Fed using the headline unemployment rate as one of its main metrics for when to wind down QE means it is choosing to stick its head in the sand as far as the severity of underemployment is concerned. This is the economic version of “peace with honor”.

When Did Bernanke Lose Control? - The initial knee-jerk reaction to QE3 and the extension into unlimited free money forever last September sent mortgage spreads dramatically lower and sparked a super-excited flood of cash into cheap-to-finance REO-to-rent housing markets. This created the faux-prosperity that even Bernanke is banking on in our housing markets now. However, that mortgage spread (the difference between 30Y mortgage rates and 10Y Treasury yields) compression slid wider from its initial move but had stabilized. Until, that is, Bernanke mentioned the 'Taper' word - at which point the mortgage market moved well beyond its pre-QE3 levels and things began to escalate. While Bernanke has done his best to convince us that the Fed will be here, the mortgage market seems to be a non-believer and even at $85 billion a month (across MBS and Treasuries) he has lost control of the mortgage market. As Bloomberg notes, the tone of Bernanke’s comments were "very assuring and soothing, but that’s like a mother telling her baby that she will be leaving in a very gentle voice," said one mortgage trader, adding "the baby will still have a fit."

This is why global markets are freaking out - This isn’t a crisis like the ones that struck the United States starting in 2008 or Europe in 2010. Rather, it is a byproduct of the world’s central banks, having intervened on vast scale to deal with the economic travails of the last several years, introducing uncertainty and even a little chaos as they start to contemplate how and when the era of easy money might end.  If the market swings really do undermine U.S. growth, then the Fed, as Bernanke said repeatedly in his news conference, will move that much more gingerly in removing its help for the economy. Indeed, just Thursday, investors’ expectations for inflation over the next few years fell 0.1 percentage point, to 1.75 percent, the lowest since last July. Because the Fed aims for inflation of 2 percent, that would suggest there is more room for the central bank to pump money into the economy without sparking an outburst of higher prices. In effect, with the Fed starting to think about an exit from an era of easy money, it will be a great test of just how resilient this economic recovery really is. If the whole thing — the rises in stock prices, in corporate earnings, in the housing market, even in job growth — is driven solely by the flood of money, or whether five years of zero-interest rates and trillions of dollars in bond purchases have succeeded at getting a more resilient economic engine for the United States up and running.

Unwinding quantitative easing - Vox EU - Chairman Bernanke’s hints about the end of quantitative easing (QE) have produced volatility in financial markets. This column argues that financial markets were startled because an end to QE is likely to cause capital losses for bond holders since term premium is substantially negative. Bank regulators should be alert to the possibility. This fundamental explanation is teamed with widespread confusion among market participants about how quantitative easing actually works.

Fed Watch: Hilsenstory - Jon Hilsenrath analyzes the week's events and concludes: The markets might be misreading the Federal Reserve’s messages. Specifically:“The FOMC was more hawkish than we had expected,” economists at Goldman Sachs concluded after the Wednesday Fed policy meeting, a view widely held on Wall Street trading floors. However, a close look at Mr. Bernanke’s press conference comments and Fed official’s interest-rate projections released after the meeting show the Fed took several steps aimed at sending the opposite signal. I am going to add two points. First is that while great pains were taken to lock up expectations of the path of short-run interest rates, the Fed may be underestimating the importance of the flow of asset purchases. Federal Reserve Chairman Ben Bernanke reiterated the Fed's belief that the stock of asset held is the key variable. Felix Salmon, however, has the oppostie view: At his press conference yesterday, Ben Bernanke reiterated his view that the way QE works is through simple supply and demand: since the Fed is buying up fixed-income assets, that means fewer such assets to go round for everybody else, and therefore higher prices on those assets and lower yields generally. In reality, however, the flow always mattered more than the stock: when the Fed is in the market every day, buying up assets, that supports prices more than the fact that they’re sitting on a large balance sheet. And even more important is the bigger message sent by those purchases: that we’re in a world of highly heterodox monetary policy, where the world’s central banks can help send asset prices, especially in the fixed-income world, to levels they would never be able to reach unaided.

Lone Dissenter No More: Fed Officials Have Divergent Objections -- Unexpectedly, the central bank saw two officials book formal opposition to the path supported by most Fed policymakers. The dissenters’ divergent views illuminated some of the conflicting influences now confronting the Fed, and highlighted the uncertainty now surrounding the monetary policy outlook.There was little surprise that Kansas City Fed President Esther George again opposed the FOMC decision to press forward with its bond buying stimulus. In something unprecedented for an official in her first FOMC voting rotation, Ms. George is now four for four in casting dissents, as she again worried very easy Fed policy will create new bubbles and fuel an inflation break out.Meanwhile, St. Louis Fed boss James Bullard took an unexpected path and dissented in what was effectively the opposite direction. Some of what Ms. George fears, Mr. Bullard would like to see. His dissent stated that he’d like the Fed to more explicitly signal it will defend its 2% inflation target, in a climate where price pressures are well below where he’d like them to be.

Fed’s Bullard Explains Dissent -- The president of the Federal Reserve Bank of St. Louis, James Bullard, says he dissented at this week’s Fed policy meeting largely because inflation is running well below the central bank’s 2% target and said the committee should have waited before authorizing Fed Chairman Ben Bernanke to detail a plan to reducing the size of the Fed’s bond purchases. In a statement posted on the St. Louis Fed website, Mr. Bullard said that “a more prudent approach would be to wait for more tangible signs that the economy was strengthening and inflation was on a path to return toward target” before announcing its plan — provided the economy unfolds as the Fed expects — to begin reducing the size of its $85-billion-a-month in bond buying later this year. Bullard said he “feels strongly” that the Fed’s policy should be “state-contingent,” that is dependent on economic conditions, rather than tied to the calendar, as he said Mr. Bernanke did at his press conference on Wednesday.

The Fed: Bullard slams Fed taper plan, says timing was off— The Federal Reserve mistimed its announcement of a plan to end its bond-purchase program, St. Louis Fed President James Bullard said Friday.  In a statement elaborating his dissent from the Fed policy decision issued Wednesday, Bullard noted that the central bank announced that less-accommodative policy was in store at the same time that it marked down its forecasts for 2013 growth and inflation.  Bullard’s statement came at the end of the Fed’s self-imposed communications blackout period.  Other Fed officials have issued dissent statements as soon as the blackout period is over, but Bullard’s remarks seemed more powerful, given that they came after the financial markets had a sharp negative reaction to the Fed’s decisions.  Robert Brusca, chief economist at FAO Economics, said Bullard “illuminates why markets reacted badly to the Fed statement.”  On Wednesday, Fed Chairman Ben Bernanke said the central bank was prepared to scale back its $85 billion–per–month bond-purchase program later this year, if the economy continued to improve as expected. See comprehensive MarketWatch coverage of Bernanke’s press conference.

Fed Watch: It's About The Calendar - St. Louis Federal Reserve President James Bullard explained his FOMC dissent in a press release this morning, and it was an eye-opener. I don't see how you can read Bullard's statement and not conclude that the primary consideration for scaling back asset purchases is the calendar. I think that the date, not the data, is more important than Fed officials like to claim.  Bullard first attacks the Fed's decision in light of falling inflation: No surprise here; Bullard frequently voices concerns about the path of inflation and inflation expectations on both sides of the target. The real action begins with the next sentence: President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

Analysis on Tapering QE3 - Now we are seeing a flurry of articles with headlines suggesting reducing the monthly purchases of assets is "close" or "near". It depends on the definition of "close" or "near", but it is clear tapering will not happen until later this year at the earliest. Here is the key quote from Bernanke:  "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program."What does "consistent with this forecast" mean? (see projections here)

Four Charts to Track Timing for QE3 Tapering - Yesterday Fed Chairman Ben Bernanke said: "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program." Here are four graphs that we can use to track if the incoming data is "broadly consistent" with the FOMC projections. The first graph is for GDP. The second graph is for unemployment rate. The current forecast is for the unemployment rate to decline to 7.2% to 7.3% in Q4 2013. The third graph is for PCE prices. . The last graph is for core PCE prices

More Thoughts on QE3 Taper Timing - Yesterday I posted Four Charts to Track Timing for QE3 Tapering. I will update those charts as data is released. The table below lists the four remaining FOMC meetings this year and the key data that will be available at each meeting. Following the September and December meetings, the FOMC will release updated quarterly projections and the meeting will be followed by a press conference. It seems more likely that the Fed will announce tapering at a meeting with a press conference. As the four charts indicated, economic growth (and inflation) would have to pick up for the Fed to announce the tapering of asset purchase at the December meeting. To start tapering at an earlier meeting, economic growth would have to increase significantly. To taper at the July meeting, the advance estimate of Q2 GDP would probably have to be well above 3%, May PCE prices increasing at a much faster pace, and the May unemployment rate at 7.5% or below. Even then, I think most FOMC members would want to wait for more data. There is a slight chance of tapering starting in September.  There is a press conference following the meeting, and updated quarterly projections will be released.  If the unemployment rate for July and August average below 7.4%, and PCE prices were increasing - it is possible the Fed could announce tapering. The most likely meeting for announcing tapering this year is in December.  By then the 2nd estimate of Q3 GDP will be available (plus some better forecasts for Q4).  The November employment report will be available (and the FOMC will have a good idea if the unemployment rate will be around 7.2% in Q4), and PCE prices through October will be available (we will have evidence if the decline in inflation is "transitory".

By Pivoting Away From Stimulus, Is The Federal Reserve Making the Same Mistake as Congress? OK, clearly the markets aren’t listening to me—not exactly a surprise.  But they’re not listening to Ben either, who’s been saying that the economy’s getting a bit better, so interest rates are going up.  And at some point, sooner than later, he and his buds are going to start adding a bit less juice to the punch bowl.  Surely, markets, (he’s saying) you didn’t think this easy money party was going to last forever?  After all, central banks in healthy economies don’t have $3.4 trillion balance sheets and hold rates at zero.  Years ago, Congress and the administration pivoted too soon from the jobs deficit to the budget deficit.  That left Bernanke along with Janet Yellen, his vice-chair, and others on the board (e.g., Charles Evans), as the only policy makers in this benighted town speaking out about the plight of the unemployed and explicitly criticizing the Congress for creating fiscal headwinds against their monetary tailwinds.Now, though their statement from yesterday acknowledges ongoing weakness (“unemployment rate remains elevated”), they too are talking about pivoting, even though most forecasts, including the IMFs, are for slower growth this year than last year.  True, the Fed’s own forecasts don’t predict that, but a) they’re only forecasting growth of between 2.3 and 2.6% (2012 was 2.2%), well below what’s needed to close ongoing output gaps, and b) they’ve been consistently optimistic and have had to mark down every one of their prior guesstimates.

The Taper is Too Sharp -  Yves Smith - I have to say I’m still gobsmacked by the Fed’s belief that the labor markets are showing meaningful improvement, and the further “clarification” that this means the central bank thinks it’s on track to start easing up on bond buying this year. Clifford Garcia at FT Alphaville does a good job of capturing why many investors were caught off guard: Before the presser on Wednesday, Ben Bernanke’s vague definition of “substantial improvement” in the outlook for labour markets resembled the old line about porn: he’ll know it when he sees it. The phrase was originally intended to represent the scenario under which asset purchases would end, not when they would be slowed (or “tapered”). And the purpose of this round of quantitative easing was to “increase the near-term momentum” of the economy until growth was self-sustaining, and conducted in the context of price stability….Bernanke’s decision on Wednesday to confirm his earlier congressional testimony — when he said that the Fed would begin scaling back asset purchases later this year — can be understood as a move in the direction of such a variable policy.7% would normally be considered a bad number on then way to a worse number. Now it’s some sort of victory. Help me. And the focus on headline unemployment, as we and numerous other commentators have pointed out, overstates the health of the labor market if you look at the pretty much any other metric (labor force participation, wage levels, trends in hours worked, quality of new jobs, etc.) The Fed looks to be cherry-picking data to validate its desire to get out of the QE business.

A Potentially Tragic Taper - Paul Krugman - I want to weigh in briefly on the Fed’s latest, in which Bernanke confirmed that the Fed is getting significantly more hawkish — based on relatively optimistic forecasts. My reaction is, this is not good. They might get away with it, but there’s also a serious chance that this will end up looking like a historic mistake. Bear in mind, first, that the US economy is still deep in the hole, which is especially obvious if you look at employment rather than unemployment:Aging of the population accounts for some but not much of the fall in the employment ratio; the fact is that we are still a very long way from acceptable employment levels. Meanwhile, inflation remains below the Fed’s target. Maybe the Fed believes that the situation will improve — but as everyone points out, the Fed has been consistently over-optimistic since the crisis began. And for now the economy still needs all the help it can get.  How can the Fed help?  To use my old phrase, it must credibly promise to be irresponsible. And what it has just done, instead, is signal that it’s still a conventionally minded central bank.

Markets Insight: It’s hard to write a happy ending to ‘QE’ story - Was it just a transitory bout of angst? Or have we finally witnessed the end of the great 32-year bull market in bonds? It feels to me like the latter with yields on 10-year and 30-year US Treasuries up by half a percentage point since the start of May and emerging markets in a funk. We are in such uncertain monetary territory that anything could yet happen to upset that judgment. What is clear is that the rules of the global market game have changed in a remarkably short space of time. This is most visible in currency markets where the absurdity of risk-on, risk-off trading appears to be coming to an end. Since the financial crisis there has been a tendency for traders to move into emerging market and commodity currencies and into equities in the risk-on phase where central banks succeeded in persuading investors to assume more risk. In risk-off mode they moved back into the dollar which enjoyed haven status because of its pre-eminent reserve currency role and its solid underpinning by highly liquid markets. In the turmoil of recent weeks the dollar has been strengthening on good news – the opposite of its recent risk-on behaviour. At the same time emerging market currencies have ceased to be a vehicle for providing generalised risk-on exposure to financial markets, while emerging equities have underperformed developed world equities.

VINCENT REINHART: There’s A Fundamental Flaw In The Message The Fed Is Trying To Send - Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates. But in a note put out yesterday, Morgan Stanley Chief Economist Vincent Reinhart argues there's a flaw in this logic. Fed officials have been trying to convince everyone that their asset purchase decision

  • • is data-dependent,
  • • could be made soon, but,
  • • once taken, does not put the balance sheet on a fixed course.

The logical conclusion they hope everyone draws from this is that, as it is a flexible instrument subject to an ongoing calibration of the costs and benefits, the onset of tapering does not convey information about the date of the first fed funds rate hike. Such an inference, however, is flawed. As long as the Fed is using the two instruments to influence the economy, policy decisions on their setting depend on the Fed’s outlook for the economy. A change in one reveals something about a change in the Fed’s outlook, which therefore has implications for the other policy instrument. Asset purchases can be a data-dependent, flexible instrument, but they will also be informative. Logically then, the Fed’s tapering talk reveals some combination of their being more confident about the economic outlook and less convinced that additional QE is providing net benefits.

If Bernanke really shakes the tree, half the world may fall out - We no longer have a free market. The world’s financial asset prices have become a plaything of central banks and the sovereign wealth funds of a few emerging powers. Julian Callow from Barclays says they are buying $1.8 trillion worth of AAA or safe-haven bonds each year from an available pool of $2 trillion. Nothing like this has been seen before in modern times, if ever. The Fed, the ECB, the Bank of England, the Bank of Japan, et al, own $10 trillion in bonds. China, the petro-powers, et al, own another $10 trillion. Between them they have locked up $20 trillion, equal to roughly 25pc of global GDP. They are the market. That is why Fed taper talk has become so neuralgic, and why we all watch Chinese regulators for every clue on policy. We will find out tomorrow whether Ben Bernanke is ready to blink after the market ructions of the last three weeks, sobered by the cascading upsets across the Brics and mini-Brics; or whether he will stay the course with Fed tapering sooner rather than later. Investors seem to think he will indeed blink, or at least blink enough to put off the day of reckoning for another three month investment cycle, which is what hedge funds care about, and that if he doesn’t blink it will be because the economy is picking up speed. They cling to the Bernanke Put, when the new reality may instead be the Bernanke Call.

Bernanke & Fed Don’t Know How to Quit QE: David Stockman - Stockman says the Fed’s asset purchases, known as quantitative easing (or QE), and near zero interest rates policy is wrong-headed. “We experimented. We violated every rule of sound money, every tradition that ever existed of what a central bank does on the theory that there was going to a great depression if we didn’t.”But the reality, says Stockman, was different—a severe recession was in the making because of “the housing and credit boom” fueled by the Fed’s policy of low interest rates under Chairman Alan Greenspan and then Ben Bernanke. “It wasn’t going to be a Great Depression,” says Stockman. And now, says Stockman, “ All this cheap money is doing nothing but creating a temporary illusion of recovery setting us up for the next fall.”

Why the Fed Cannot "Exit" Successfully... Without a Market Crash  Bernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature. One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs. After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this. In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up. And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be. Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared:

Should the Fed cut payroll tax rates rather than interest rates when growth weakens? -- Last month I wrote about the idea of a tax cut financed by the Fed, perhaps combined with an NGDP target. As David Beckworth writes, this could be a way of combining fiscal and monetary policy responses to demand shocks: This two-tier approach to NGDP level targeting should create a foolproof way to avoid liquidity traps. It should also reduce asset boom-bust cycles since NGDP targets avoid destablizing responses to supply shocks that often fuel swings in asset prices. This approach is consistent with Milton Friedman’s vision of monetary policy, would impose a monetary policy rule, and provide a solid long-run nominal anchor. Ryan Avent would go further. In addition to NGDP level targeting, he would let the Fed have direct control of the payroll tax rate as an additional policy tool when interest rates fell near zero. Maybe even the primary tool. There would be several key upsides. The first would be to make moot concerns about the effectiveness of monetary policy. The second, related advantage would be the elimination of the zero lower bound as an obstacle to monetary policy. The beauty of the payroll tax rate as policy instrument is that there are no headaches associated with negative tax rates.

A quick note on “helicopter drops” -  David Beckworth has a fantastic piece arguing that, in service of an NGDP target, the Fed might sometimes coordinate with the treasury to arrange “helicopter drops”, which Beckworth defines as” a government program that gives money directly to households”. Scott Sumner quibbles, noting that No country has been doing more “helicopter dropping” over the past 20 years than Japan. They’ve massively boosted both their national debt and their monetary base (which is what “helicopter drops” mean to economists.) And their NGDP is lower than 20 years ago. Not good. Beckworth is very clear that he supports heli drops precisely because “[f]iscal policy geared toward large government spending programs is likely to be rife with corruption, inefficient government planning, future distortionary taxes, and a ratcheting up of government intervention in the economy.” Direct, unconditional, uniform transfers to households are nearly immune to corruption and involve no increase in the degree to which government directs the use of real economic resources.  Sumner and Beckworth are simply using different definitions of “helicopter drop”. Sumner’s objections are less persuasive if we do Beckworth the courtesy of accepting his definition for the purpose of evaluating his proposal.  Readers should note that I am not neutral in this argument: my position is very close to Beckworth’s. Although it’s not perfect, I’ve been persuaded (largely by Sumner!) that the best macro- policy we can hope for in the medium term is targeting an NGDP level path. Like both Sumner and Beckworth, I believe there are circumstances under which conventional monetary policy (defined as central-bank sales and purchases of obligations issued or guaranteed by the US Treasury) might not be sufficient to maintain that target. Sumner argues that we augment conventional monetary policy with negative 2% IOR (effectively a tax on bank reserves), and then no fiscal supplement would ever be necessary.

Obama says Bernanke has ‘stayed a lot longer’ than he wanted at Fed (Reuters) - President Barack Obama hinted in an interview aired on Monday that he may be looking for a new chief of the U.S. Federal Reserve Bank, saying Ben Bernanke has stayed a lot longer than the current chairman had originally planned. Obama, speaking to Charlie Rose, host of a PBS interview program, compared Bernanke to longtime FBI Director Robert Mueller, who agreed to stay two years longer than he had planned and is to leave in the coming months. "Well, I think Ben Bernanke's done an outstanding job. Ben Bernanke's a little bit like Bob Mueller, the head of the FBI - where he's already stayed a lot longer than he wanted or he was supposed to," Obama said. Asked whether he would reappoint Bernanke if he wanted to keep the job, Obama did not answer directly. "He has been an outstanding partner, along with the White House, in helping us recover much stronger than, for example, our European partners, from what could have been an economic crisis of epic proportions," Obama said. Bernanke, who has tried to nurse along the ailing U.S. economy through the 2008 financial crisis, is widely expected to step down when his second term as chairman expires at the end of January.

Uncertainty at Fed Over Its Stimulus Plans and Its Leadership - NYT - President Obama suggested late Monday that he was likely to nominate a new Fed chairman this year, saying that Mr. Bernanke had “already stayed a lot longer than he wanted or he was supposed to.” Mr. Obama added that Mr. Bernanke, whose second four-year term in office ends in January, has done an “outstanding job.” The comments bounced around Washington on Tuesday even as Mr. Bernanke convened a regularly scheduled meeting of the Fed’s policy-making committee to debate how much longer the Fed will continue its current efforts to stimulate the economy. The Fed is not expected to announce any immediate changes on Wednesday, at the close of the meeting, but investors are watching for signs that the Fed is considering scaling back later this year. The central bank is buying $85 billion a month in mortgage-backed securities and Treasury securities, in addition to holding short-term interest rates near zero. Both measures are intended to encourage job creation by easing financial conditions, and the Fed pledged to press the campaign until it saw “sustained improvement” in the outlook for the labor market. But that message has been muddled recently by conflicting pronouncements about the duration of the asset purchases from several of the 19 Fed officials who help make policy. Mr. Bernanke contributed to the confusion by telling Congress last month that the Fed might begin to reduce the pace of its purchases this year — but might not — while avoiding any clear account of how the central bank would make such a decision.

Bernanke Exit Signaled by Obama Means Tapering, Feldstein Says -  PresidentBarack Obama clearly signaled this week that Federal Reserve chairman Ben S. Bernanke will be leaving the central bank when his term ends in January and that looming departure means Bernanke will want to begin tapering asset purchases this year, said Harvard University economics professor Martin Feldstein. The Fed has been making $85 billion in monthly bond purchases in an effort to spur job growth and galvanize faster U.S. economic expansion. The policy making Federal Open Market Committee is meeting today in Washington, with four more FOMC meetings scheduled before the end of the year.“One of the implications of the fact that Ben is now very, very likely to be leaving at the beginning of the year is that he’s going to want to get the so-called exit strategy under way,” Feldstein said on CNBC television today. “He’s going to want to start the tapering before he leaves so that he can say, ‘I did all these good things, and I put us on an exit path.’” Obama said Bernanke has “already stayed a lot longer than he wanted or he was supposed to” in an interview with Charlie Rose that was broadcast June 17 on PBS.

Key Measures show low and falling inflation in May - 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% (2.0% annualized rate) in May. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% 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 rose 0.1% (1.8% annualized rate) in May. The CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for May here. Fuel oil declined at a 28% annualized rate in May.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 1.7%, and the CPI less food and energy rose 1.7%. Core PCE is for April and increased just over 1.0% year-over-year.

Two Measures of Inflation: Headline and Core Below Fed Target -  The BLS's Consumer Price Index for May, released a few minutes ago, shows core inflation below the Federal Reserve's 2% long-term target range at 1.68%. Core PCE, at the end of last month, is significantly lower at 1.05%, its all-time low. The Fed is on record as preferring Core PCE as its inflation gauge.  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low, until the latest (April) reading of 1.05%. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us clues as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that in the past the less volatile Core PCE has been their metric of choice. On the other hand, the disinflationary trend of late give PCE additional significance as support for a sustained policy of quantitative easing. The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

Inflation Continues to Undershoot Fed Target - Federal Reserve officials both expect and want inflation to be higher than it is. So far, that isn’t happening. Consumer price data released Tuesday showed inflation rose a mere 1.4% in May from a year earlier. While the consumer price index isn’t the Fed’s preferred inflation measure — the personal consumption expenditures price index is — the reading is a reminder that price gains are still well below the central bank’s 2% target. Economists at Macroeconomic Advisers say the CPI rise likely translates to an annualized gain of 0.7% in the second quarter — a very weak reading.Soft inflation matters a lot to monetary policy. Central bankers have said repeatedly they want price gains on target. Overshooting, undershooting: both are equally undesirable. The longer price pressures stay under the Fed’s goal, the greater the case becomes for the Fed to press forward with, or even boost, its $85 billion per month bond buying program aimed at stimulating growth. Tepid inflation is sure to be on the table for Fed officials as they deliberate over monetary policy on Tuesday and Wednesday this week. Economists don’t expect the central bank to change course right now, but there are major questions about the outlook for bond buying. What happens with inflation is central to that debate.

Bernanke ignores low inflation, market doesn't -- The most striking thing from today’s Federal Reserve Open Market Committee decision is what wasn’t said: How will the Fed respond if inflation continues to undershoot its 2 percent target? This issue lies at the heart of the dissenting vote from St. Louis Fed President James Bullard, who argued that “the committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings."   I agree. This is no trivial matter: The Fed’s preferred inflation measure (core personal consumption expenditures) is running at 1.05 percent, the lowest level ever recorded, and the headline measure is running at 0.7 percent. Inflation tends to be highly persistent, so today’s low readings are likely to repeat themselves in the future. Moreover, inflation expectations are declining, and the unemployment rate remains elevated -- factors which are likely to further depress future inflation. And with short-term interest rates stuck at zero, declining inflation amounts to a rise in real interest rates, which would likely further depress both economic activity and inflation.

Vital Signs Chart: No Inflation Pressure - The consumer-price index rose a seasonally adjusted 0.1% in May and the core price index — which excludes food and energy — climbed 0.2%. Year over year, the indexes rose 1.4% and 1.7%, respectively. The Fed tends to rely more heavily on a different inflation measure in policy consideration, but price increases this year haven’t given central-bank policy makers much cause for concern.

Why We Shouldn't Trust The Fed's Inflation Target - It can’t be emphasized enough (I’ve emphasized it here, here and here) that there’s a close link between the Fed’s narrowing focus and the core, theoretical models that economists developed in the decades after World War II. These model builders naïvely ignored boom-bust cycles in credit and asset markets, just as the Fed disastrously eliminated the relevance of these cycles from its policy framework. Or, more precisely, policymakers reversed Martin’s maxim, spiking the punch bowl when credit and asset markets weaken but dismissing the case for action when the 'party gets going'. In order to explain, we thought it might be interesting to create one of those island economy stories to demonstrate a problem with the Fed’s policy framework - how the Fed’s inflation target can cause policymakers to do the exact opposite of what they should be doing.

Making the Case for a Rise in Inflation - NYT  - I understand Paul Volcker’s impatience with those tempted to let inflation rip — at least a little bit — to spur economic growth.  “The implicit assumption behind that siren call must be that the inflation rate can be manipulated to reach economic objectives — up today, maybe a little more tomorrow, and then pulled back on command,” Mr. Volcker said in a speech at the Economic Club of New York a few weeks ago. “All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”  And yet despite Mr. Volcker’s enormous skepticism about the merits of inflation, a heretical thought that first surfaced as the economic crisis gripped the world five years ago is again gaining traction among experts: economic policy should be aiming for significantly higher inflation than the 1 to 2 percent annual rate that the United States economy is currently experiencing. When Mr. Volcker took the helm of the Federal Reserve in 1979, inflation neared 12 percent — a catastrophe by American standards. He spent much of his eight-year tenure strangling the economy with high interest rates.  But now mainstream economists like Kenneth Rogoff at Harvard are pressing the case that “a sustained burst of moderate inflation is not something to worry about.”

The case for official e-money +1 - The voices arguing that digital e-money should be added to the central bank/government toolkit are not only rising in number, they’re getting louder as well. Among the first to argue the point, of course, was Willem Buiter back in 2009, before he took up the position of chief economist at Citi. But there’s also been a strong patter of support from advocates such as Mobino’s Jean-Francois Groff and Slate’s Matt Yglesias (to name a few). All have said that digital currency is not only a logical step to take in a zero or negative rate environment, but that it can also encourage the velocity of money and bring back seigniorage revenue to the government.Above all, as we have noted, digital currency also has the potential to alleviate the safe asset shortage and the deposit glut. People, after all, choose to keep their money in bank deposits mostly for three reasons. First, because they are attracted by the interest they can make; second, because they believe their cash will be safer in a bank than in their mattress; and third, because bank deposits allow them to digitise their money and participate in the digital payment economy.Since reasons one and two are fast disappearing — if not gone already — that leaves us with reason three as a prime driver for standard deposit accumulation.

Chart that seems to violate key principles of money creation - The chart below shows a clear divergence in trends of the total loans and leases on US banks' balance sheets and the broad money supply measure (M2). Loan balance growth is slowing, while the money supply keeps growing at a steady rate of around 7%.This is enough to give some economists nightmares. Many still believe that bank loan balances and M2 money supply have to be tightly linked because the creation of deposits (the money supply) is entirely tied to lending. And this chart shatters that belief. But in spite of the divergence in the chart above, the "loans create deposits" axiom still stands - deposits are still created through bank credit. What's at play here is shadow banking. Two key developments explain much of this divergence without violating these principles.
1. Loans on banks' balance sheets do not represent the entirety of credit creation. Loans originated by banks increase deposits, but banks often sell some loans into the shadow banking system, such as Fannie and Freddie. A material portion of these mortgages then ends up back on banks' balance sheets in the form of Agency MBS.
2. As discussed before, M2 includes another form of shadow banking - retail money market funds. These funds have seen their AUM rise recently due to increased risk aversion, particularly in fixed income (see last chart in this post). That development has added to M2 growth without increasing loans on banks' balance sheets.

It's not just the Fed - The yield on 10-year U.S. Treasuries has jumped 50 basis points since the start of May, leading some to speculate that the market is already starting to price in anticipation of an end to the Fed's bond-buying program. There may be some truth to that, but it's only part of the story. It's helpful to begin by looking back to when the Fed started the latest rounds of large-scale asset purchases. On November 3, 2010, the Fed announced its intention to purchase $75 B each month in long-term Treasuries through June of 2011, a measure popularly referred to as QE2. The theory was that these purchases would reduce the interest rate on those securities. But what happened over the next two months was the 10-year yield went up 60 basis points. . Part of what persuaded the Fed to move, and what persuaded everybody else that the Fed was going to move, was a very weak labor market and signs of disinflation. But these same factors would also tend to depress interest rates even if the Fed didn't buy a single bond. Some of the drop in rates in the fall of 2010 was likely caused by anticipation of QE2, but some was also due to a very weak economy. So are we seeing the same pattern in reverse over the last six weeks with the 50-basis-point run-up in the 10-year yield?

Interest Rates -  Interest rates have jogged up in recent months and some people are getting apocalyptic about it.  The above chart shows thirty year mortgage rates - the little jag up at the very end is the feature of interest.  Below is 10 year US government debt. This is no big deal.

Reminder of an Important Graph - I gave a presentation the other day and re-used the figure below from this important speech by Fed vice-chair Janet Yellen back in February, showing the current and historical impact on real GDP of fiscal stimulus or drag in recoveries.  I reprint it here because a) I think it’s so important, b) it’s a very intuitive approach to demonstrating the problem of premature contractulation, and c) I was reminded of it when I was just looking at these three forecasts for real GDP growth in 2013 (keep in mind that GDP growth in 2012 was 2.2%):
GS: 1.9%
IMF: 1.9%
Moody’s: 2.0%
So, the economy’s improving (too slowly, but directionally speaking) in terms of the housing market, household and business balance sheets, the job market, and so on.  Yet growth is slightly decelerating. Yellen’s figure shows that this is not only an obvious policy mistake, but that it’s an historical outlier.

The Current U.S. Economy: Text and Subtext - The International Monetary Fund just published its most recent assessment of the United States economy.  Its summary, below, is clear and incisive.  Yet, there’s another layer to all of this so I’ve added annotations — the numbers in brackets — intended to peel back the economic onion a bit, as it were. The United States recovery has remained tepid over the last year [1], but underlying fundamentals have been gradually improving [2]. The modest growth rate of 2.2 percent in 2012 [3] reflected legacy effects from the financial crisis, fiscal deficit reduction [4], a weak external environment [5], and temporary effects of extreme weather-related events. These headwinds notwithstanding, the nature of the recovery appears to be changing. In particular, house prices and construction activity have rebounded, household balance sheets have strengthened, labor market conditions have improved, and corporate profitability and balance sheets remain strong, especially for large firms [6]. With the sizable output gap and well-anchored inflation [7] expectations keeping inflation subdued, the Fed appropriately continued to add monetary policy accommodation over the past year by increasing its asset purchases and linking the path of short-term rates to quantitative measures of economic performance, thus helping to maintain long-term rates at exceptionally low levels [8]. Overall financial conditions have eased, as risk spreads narrowed, stock market valuations surpassed their pre-crisis peak [9], and bank credit conditions gradually eased.

Fed Expects Faster Growth, Lower Unemployment Next Year - The Federal Reserve projects that the unemployment rate could fall to 6.5% in 2014, a threshold it has conditionally set to begin raising interest rates. Still, most Fed officials expect to hold off on a rate increase until 2015, according to assessments of monetary policy for the coming years that showed 15 of 19 officials expect the first tightening will come that year. The latest unemployment and economic-growth forecasts for 2014 are an upgrade from the last set of estimates, made in March. The projections reflect officials’ expectations and hint at their next monetary-policy moves. The central bank’s economic and monetary-policy projections, released Wednesday, are based on the responses of the 19 members of the policy-setting Federal Open Market Committee. The forecasts are updated in conjunction with the Fed’s FOMC meeting held Tuesday and Wednesday. A policy statement follows each meeting.

This graph shows how bad the Fed is at predicting the future: On Wednesday the Fed issued its latest policy statement and accompanied it, as always, with economic projections. They project the economy will grow by 2.3 to 2.6 percent, in real terms, in the fourth quarter of 2013 relative to the fourth quarter of 2012. That speeds up to 3.0 to 3.5 percent in 2014 and 2.9 to 3.6 percent in 2015. Unemployment also is projected to fall, hitting 5.8 to 6.2 percent in 2015, all while inflation stays below 2 percent. Hooray! Or, rather, hooray? It’s hard to get too enthused about these projections, and not just because 5.8 percent unemployment — well above the rate we’d have if we had full employment — eight years after the recession started in December 2007 is really embarrassing. But the bigger reason not to get too excited is that the Fed is wrong all the time. I went back through every June forecast the Fed has released from 2009 to this year. Each of those forecasts included projected growth, unemployment and inflation rates for the year in question and the two years after. So the 2009 projection forecast 2009, 2010, and 2011, the 2010 projection forecast 2010, 2011, and 2012, and so forth. And those forecasts just kept getting less and less optimistic as the years wore on:

Fed's Economic Projections: Myth Vs. Reality (June 2013): The FOMC lives in a fantasy world. The economy is not improving materially and deflationary pressures are rising as the bulk of the globe is in recession or worse. The problem is that the current proposed policy is an exercise in wishful thinking. While the Fed blamed fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment. However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in riskiest of assets from stocks to junk bonds. However, if you want to see the efficiency of the Federal Reserve in action it is important to view their own forecasts for accuracy. I have been tracking the Fed's forecasts for you so that you can see the changes as they occur for GDP, Employment and Inflation.  When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2012 at 3.95%. Actual real GDP (inflation adjusted) was 2.2% or a negative 44% difference. The estimate at that time for 2013 was almost 4% versus current estimates of 2.3% currently.As of the latest Fed meeting the forecast for 2013 and 2014 economic growth has been revised down to 2.9% and 3.05% respectively as the realization of a slow-growth economy is recognized. However, the current annualized trend of GDP suggests growth rates in the next two years are likely to be lower that that.

Fed Watch: The Chart to Watch? -- Dylan Matthews at Wonkblog has a common chart illustrating the Fed's recent forecast errors: The story is that the Fed has tended to overestimate the strength of the economy, and has consequently had to maintain easy policy longer than policymakers had anticipated. Assuming the Fed continues this pattern of errors, they may delay the now-anticipated exit from asset purchases. As monetary policymakers continue to emphasize, policy is data dependent. But while the growth forecasts have tended to be overly optimistic, the same is not true for the unemployment forecast. Those forecasts have tended to move downward over time: I am sure this difference has not been lost on the Fed, especially if they have a Phillips Curve view of inflation. I suspect that as unemployment creeps lower, they will downplay low growth in favor of emphasizing the importance of low unemployment. This is especially true now that Bernanke has defined a 7% trigger for ending asset purchases. In short, don't assume that a failure to meet the growth forecast will hold the Fed's hand. Watch the unemployment forecast; it may be more important at this point in the policy cycle.

The Economy Can’t Recover If the Workers Don’t: Can the economy recover if workers don’t? Federal Reserve Chair Ben Bernanke yesterday suggested as much, but investors were clearly skittish. Bernanke announced that while the Fed would continue its extraordinary measures to prop up the economy, the end might be in sight. If the official unemployment rate continues to fall, the Fed might ease up on the gas later this year and begin reducing its purchases of bonds and mortgage securities. The bond and stock market began plummeting as he spoke. The essence of Bernanke’s argument is that the economy is slowly recovering. Stocks are up. Housing prices are coming back. The economy has been generating jobs. It seems to be overcoming the drag of sequester spending cuts. Although inflation is still virtually nonexistent, the bond vigilantes have been increasing pressure on the Fed to move away from its extraordinary intervention. Only there’s one small problem. Most Americans aren’t invited to the celebration. The economy may be recovering, but workers are still ailing.There are still more than 20 million Americans in need of full-time work. The official unemployment rate has drifted down – although still an abysmal 7.6 percent – mostly because people are dropping out of the market. The employment rate – the percentage of people of working age who are working – is still at recession levels. At current rates of growth, the U.S. won’t return to the pre-recession level of 5 percent unemployment until 2022. (And even at that level, Americans were not seeing wage increases. )

U.S. Yields Climb to 22-Month High as Global Bonds Slide on Fed - Treasury 10-year note yields climbed to a 22-month high as government bonds tumbled from Germany to New Zealand after Federal Reserve Chairman Ben S. Bernanke said policy makers may end bond purchases in mid-2014. The U.S. yields pared the advance as riskier assets slid and the high rate levels drew investors. Yields surged the most since 2011 yesterday, when Bernanke said the Fed may slow its $85 billion in monthly buying under quantitative easing later this year if growth is in line with its forecasts. A Bloomberg survey said it will cut purchases by $20 billion in September. A sale of U.S. inflation-linked debt drew below-average demand.

Treasury Snapshot: 10-Year Closing Yield Highest Since October 2011 - I've updated the charts below through today's close (June 20). The latest Freddie Mac Weekly Primary Mortgage Market Survey, out today, puts the 30-year fixed at 3.93%, down five bps from last week, but that precedes the bond market's reaction to yesterday's Federal Reserve meeting summary and Chairman Bernanke's press conference. As I type this, puts the 30-year fixed at 4.05%. The yield on the 10-year note closed today at 2.41%, its highest close since 2.42% on October 27, 2011. Prior to that was the slide from the 3% plus range in the summer of 2011.  The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Uncle Sam’s Growing Investment Portfolio - The federal government has been borrowing rapidly to finance recent budget deficits. But that’s not the only reason it’s gone deeper into debt. Uncle Sam also borrows to issue loans, build up cash, and make other financial investments. Those financial activities have accounted for an important part of government borrowing in recent years. Since October 2007, the public debt has increased by $6.9 trillion. Most went to finance deficits, but about $650 billion went to expand the government’s investment portfolio, including a big jump in student loans. Before the financial crisis, Uncle Sam held less than $500 billion in cash, bonds, mortgages, and other financial instruments. Today, that portfolio has more than doubled, exceeding $1.1 trillion:  Financial crisis firefighting drove much of the increase from 2008 through mid-2010. Treasury raised extra cash to deposit at the Federal Reserve; this Supplemental Financing Program (SFP) helped the Fed finance its lending efforts in the days before quantitative easing. Treasury placed Fannie Mae and Freddie Mac, the two mortgage giants, into conservatorship, receiving preferred stock in return; shortly thereafter, Treasury began to purchase debt and mortgage-backed securities (MBS) issued by Fannie, Freddie, and other government-sponsored enterprises (GSEs). And through the Troubled Asset Relief Program (TARP), Treasury made investments in banks, insurance companies, and automakers and helped support various lending programs.

Why I am a fiscalist - Here are three propositions about the macroeconomy:
1. The Monetary Stimulus Proposition: Monetary easing will raise real output and employment in a significantly depressed economy (and doing this is now worth the costs).
2. The Fiscal Stimulus Proposition: Government spending of any type will raise real output and employment in a significantly depressed economy (and that doing this is now worth the costs).
3. The Public Capital Proposition: The U.S. is currently below the optimum level of government provision of public capital (infrastructure, etc.).
I am skeptical about all three of these propositions, and I think you should be too. Macro data is not very informative, so while empirics can  be suggestive, it won't be decisive. And for that same reason, the relevant theories have not been reliably confirmed by real-world observation. We live in a world of extreme "model uncertainty". There is evidence for and against all 3 of these propositions.  But here's the thing. If either the Fiscal Stimulus Proposition or the Public Capital Proposition is true, we need to boost government spending. In fact, even someone who is not a supporter of any kind of stimulus might support fiscalist policy recommendations.

IMF Article IV on the US: “deficit reduction in 2013 has been excessively rapid and ill-designed” - The IMF has just concluded its Article IV consultation with the US. The concluding statement observes: In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal. At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic activity. A slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further. On the fiscal front, the IMF staff recommends:

  • Repealing the sequester and adopting a more balanced and gradual pace of fiscal consolidation in the short term;
  • Expeditiously raising the debt ceiling to avoid a severe shock to the U.S. and the global economy;
  • Implementing a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability;

IMF urges repeal of 'ill-designed' U.S. cuts - (Reuters) - The International Monetary Fund urged the United States on Friday to repeal sweeping government spending cuts and recommended that the Federal Reserve continue a bond-buying program through at least the end of the year. In its annual check of the health of the U.S. economy, the IMF forecast economic growth would be a sluggish 1.9 percent this year. The IMF estimates growth would be as much as 1.75 percentage points higher if not for a rush to cut the government's budget deficit. The IMF cut its outlook for economic growth in 2014 to 2.7 percent, below its 3 percent forecast published in April. The Fund said in April it still assumed the deep government spending cuts would be repealed, but it had now dropped that assumption. Washington slashed the federal budget in March, adding to the drag on the economy created by tax increases enacted in January. The IMF said the United States should reverse the spending cuts and instead adopt a plan to slow the growth in spending on government-funded health care and pensions, known as "entitlements." The Fund would also like the United States to collect more in taxes.

Against Stupidity, The IMF Itself Contends In Vain - Krugman - Yesterday the IMF chided the United States for spending too little and cutting its budget deficit too fast — and most people, if they heard about it, just shrugged. To be honest, that was my initial reaction too: we’ve come to accept the sheer stupidity of our current economic policies, and the fact that apparently nothing can be done about it, as part of the “new normal”. Still, every once in a while we should step back and consider the awesomeness of the situation. Normally, we expect governments to have trouble containing demands that they spend more and/or tax less. Normally, we expect the IMF to be a fiscal scold, telling spendthrift governments to make tough choices; the old joke is that IMF stands for It’s Mostly Fiscal. But now we’re in a situation — a liquidity trap — in which more government spending is a good thing, because it helps put unemployed resources to work; meanwhile, the cost in terms of future debt service is minimal, because interest rates are so low. Both ends of the intellectual case for austerity — the claim that spending cuts are actually expansionary and the claim that terrible things happen when debt rises even if interest rates are low — have collapsed. What could be easier, then, than for politicians to make constituents happy by spending more on things voters like?

Fight the Future, by Paul Krugman - Last week the International Monetary Fund, whose normal role is that of stern disciplinarian to spendthrift governments, argued that the sequester and other forms of fiscal contraction will cut this year’s U.S. growth rate by almost half, undermining what might otherwise have been a fairly vigorous recovery. And these spending cuts are both unwise and unnecessary.  Unfortunately, the fund apparently couldn’t bring itself to break completely with the austerity talk that is regarded as a badge of seriousness in the policy world. Even while urging us to run bigger deficits for the time being, Christine Lagarde, the fund’s head, called on us to “hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.”  So here’s my question: Why, exactly, do we need to hurry up? Is it urgent that we agree now on how we’ll deal with fiscal issues of the 2020s, the 2030s and beyond?  No, it isn’t. And in practice, focusing on “long-run fiscal sustainability” — which usually ends up being mainly about “entitlement reform,” a k a cuts to Social Security and other programs — isn’t a way of being responsible. On the contrary, it’s an excuse, a way to avoid dealing with the severe economic problems we face right now. In particular, projections of huge future deficits are to a large extent based on the assumption that health care costs will continue to rise substantially faster than national income — yet the growth in health costs has slowed dramatically in the last few years, and the long-run picture is already looking much less dire...

Fiscal Headwinds: Is the Other Shoe About to Drop? - SF Fed -The current recovery has been disappointingly weak compared with past U.S. economic recoveries.  Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries.

Krueger: Sequester Cuts Hurting Key Research - WSJ - Across-the-board cuts in federal spending have not only damped short-term economic growth but also threaten long-term investments that could provide a boon in the future, the White House chief economist said Tuesday. Alan Krueger, the departing chairman of the White House Council of Economic Advisers, warned the cuts, known as the “sequester,” are harming important federally-funded research and development that can eventually lead to new technologies that drive the economy. Mr. Krueger said the popularity of horizontal drilling and hydraulic fracturing, drilling techniques that are now “powering the economy,” stem from private-sector research sponsored by the U.S. Department of Energy in the 1970s. “That’s the kind of research that I think is going to be sacrificed because of the sequester,” Mr. Krueger said, speaking at The Wall Street Journal CFO Network conference in Washington, D.C. Mr. Krueger, who plans to soon return to Princeton University, said U.S. economy was on track to grow at a rate of about 3% had policymakers found a way to replace the sequester with smarter cuts. That’s higher than the 2.4% growth rate reported during the first quarter.

Is This a Realistic Time for a “Grand Bargain?” - Paul Krugman makes a point this morning that I’ve been making around here a lot lately: even if you still long for a balanced (meaning not just spending cuts but also tax revenues), sustainable budget deal–what folks around here call a “grand bargain”–you really have to ask yourself if the current cast of Congressional characters are the right folks to broker that deal. Importantly, as the fiscal picture has improved, both through actions we’ve taken already–$2.5 trillion in deficit savings over the next decade–and the improving economy, it’s much tougher to make the hair-on-fire urgency case that drove this benighted debate in recent years. Still, while a “grand bargain” that links reduced austerity now to longer-run fiscal changes may not be necessary, does seeking such a bargain do any harm? Yes, it does. For the fact is we aren’t going to get that kind of deal — the country just isn’t ready, politically. As a result, time and energy spent pursuing such a deal are time and energy wasted, which would be better spent trying to help the unemployed. I think that’s right.  One way our current dysfunction gets solved is when a majority of the electorate sends a clear message to legislators about the size, role, and functions of government they’re willing to support.

Boehner: Government ‘Arrogance’ Hurts Economy - House Speaker John Boehner (R., Ohio), told a business group Thursday that the political controversies surrounding the Obama administration — from problems at the Internal Revenue Service to surveillance of journalists by the Justice Department — are symptomatic of a government “arrogance” that is hurting the economy. “In America, the people have always had a healthy skepticism about their government, but lately they have had more reason than usual to be skeptical,’’ Mr. Boehner said in a speech to the National Association of Manufacturers. “When government is out of control like this, at odds with the people it’s supposed to serve. it makes it that much harder to do our work to grow our economy,’’ Mr. Boehner said. “The arrogance we’re seeing now is the same arrogance that has left our economy plodding along.’’ Mr. Boehner argued that the economy is recovering too slowly and should not be regarded as the “new normal,’’ and reiterated Republicans’ agenda for spurring economic growth through overhauling the tax code and spurring domestic energy production.

CBO Scores the Immigration Reform Bill and Finds…(wait for it)…It Reduces the Deficit - Well, would you look at that: CBO just released their analysis of the fiscal impact of the immigration reform legislation from the Senate and it turns out that the bill is expected to lower the budget deficit by $197 billion over the next decade.  The CBOs guesstimate of the bill’s impact over its second decade—2024-2033—is $690 billion in deficit reduction (and by $300 billion more if you’re willing to include the impact of their predicted GDP growth impacts on the deficit; the agency avoids this type of “dynamic scoring” on their deficit impacts–they do include population and employment effects but not, e.g., the revenues spun off by faster GDP growth). What’s going on here is that the budget agency expects immigration to generate more costs but even more revenues.  Between health programs, entitlements, SNAP, etc., they expect spending to go up about $260 billion over the next ten years.  But they estimate revenues to go up about $460 billion.  The net difference, about -$200 billion, is the projected impact on the deficit.What’s also interesting here is the CBO’s analysis of the economic impact of comprehensive reform.  Here are their topline findings:

  • –the increase in immigration would increase real GDP by 3.3% in 2023 and 5.4% in 2033;
  • –but per capita income would be slightly lower through 2031 “…because the increase in the population would be greater, proportionately, than the increase in output; after 2031, however, the opposite would be true.”
  • –The CBO estimates that average wages would be 0.1% lower in 2023, because the capital/labor ratio (which boosts average wages in economic models) would fall and “…because the new workers would be less skilled and have lower wages, on average, than the labor force under current law.”

CBO Report Cites Economic Benefits Of Immigration Reform - The Congressional Budget Office came out with a report late yesterday that cites a wide variety of economic benefits from immigration reform, a report that arguably helps the advocates of reform in the Senate and elsewhere make their case: Congressional budget analysts, providing a positive economic assessment of proposed immigration law changes, said Tuesday that legislation to overhaul the nation’s immigration system would cut close to $1 trillion from the federal deficit over the next two decades and lead to more than 10 million new legal residents in the country. The report estimates that in the first decade after the immigration bill is carried out, the net effect of adding millions of additional taxpayers would decrease the federal budget deficit by $197 billion. Over the next decade, the report found, the deficit reduction would be even greater — an estimated $700 billion, from 2024 to 2033. The deficit reduction figures for the first decade do not take into account $22 billion in the discretionary spending required to implement the bill, however, making the savings slightly lower.

How Immigration Reform Would Help the Economy - Simon Johnson - After many months of rival assertions by interested parties, we finally have an authoritative assessment by an impartial referee of the effects of the so-called Gang of Eight senators’ proposed legislation on immigration. On Tuesday, based on work with the Joint Committee on Taxation, the Congressional Budget Office released two reports – one on the direct federal budget impact and one on the broader and longer-run economic effects, with a helpful summary blog post by the office’s director, Douglas Elmendorf). The assessment is positive. This precise immigration proposal would improve the budget picture (see this helpful chart) and stimulate economic growth. The immediate effects are good and the more lasting effects even better. If anything, the long-run positive effects are likely to be even larger than the C.B.O. is willing to predict, in my assessment. (I’m a member of the office’s Panel of Economic Advisers but I was not involved in any way in this work.)

Want To Reduce the National Debt? Find More Workers - Why do some people oppose immigration reform? One conservative objection is that we should follow rules and punish lawbreakers (not to mention all the other arguments that have to do with protecting a white, Protestant, English-speaking nation). That fits nicely with the Strict Father worldview identified by George Lakoff. Another common conservative objection is that we can’t afford more immigration because it would increase deficits and the national debt; that also fits with the tough-minded, austerity-loving ethos of modern conservatism. The little problem is that more immigrants, and more legal immigrants, are unambiguously good for the economy and for the federal budget deficit.  This is the conclusion of two reports put out by the Congressional Budget Office this week: one a cost estimate of the bill currently in the Senate, the other an expanded estimate incorporating additional economic impacts of the bill. The bottom line is that the bill would make the economy 5.4 percent bigger in 2033 than it would be otherwise; per capita GNP would be 0.2 percent higher and wages would be 0.5 percent higher in 2033. Finally, immigration reform would reduce aggregate deficits by about $200 billion* over the first decade and about $1 trillion in the second decade.

Tightening the Border - The path to immigration reform, if not to citizenship, may have just become a bit less steep as Senate Republicans “reached an agreement on Thursday on a plan to strengthen border security … raising hopes that the new deal could build Republican support for the immigration legislation being debated on the Senate floor.” You might expect someone like me — as a progressive who has long supported comprehensive immigration reform and a welcoming policy stance to those who want to try to make it in America — to recoil at this development.  But I think the general idea makes sense. To be more precise, we kid ourselves if we think we can fix our broken immigration system without controlling legal immigrant flows. Unfortunately, the returns to spending $30 billion more on militarizing the border may be smaller than border-control advocates think. We’re already spending $18 billion per year and illegal flows are way down (though part of that is because of the diminished magnet of the weaker United States economy).  Resources would be much better spent strengthening employer verification systems.

Rational Expectations Theory Debunked in a Minute - Barry had this up on his blog over the weekend.  It is one of the best economic lectures I have ever seen.  Blyth is brilliant, funny and deeply irreverent. The lecture is a little over 50 minutes and worth every minute of your time.  Here's his explanation of the the "confidence fairy" which is from the video starting at about 45 minutes. This is the confidence fairy thing,  Imagine the economy is falling around your ears; you don’t know if you’re going to have a job tomorrow, your partner is already unemployed, you really don’t know about the future, but you really worry about the debt, you just lie awake all night worrying about the debt as people do,  So the government credibly signals that it’s going to massively cut government expenditures and what you do using your rational expectations that are built into your head – well you know the true structural form of the equation governing the economy  – you calculate your lifetime budget and lifetime expenditures in relation to the fact that twenty years from now that because of these state spending cuts now you’ll pay less taxes then. Thereby you can retrodect how much extra money you’ve got now and everybody goes to Ikea and buys a couch and that cures the recession. I am not making this shit up.

Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates - Income inequality in the United States—already well above that experienced in other advanced economies—has surpassed Gilded Age levels, and the Great Recession and ongoing jobs crisis will exacerbate this trend until full employment is restored While market forces are the primary driver of rising inequality, recent economic research suggests that tax policy has contributed as well, both by exacerbating after-tax income inequality since the late 1970s and by spurring a shift of pretax income toward high-income households. This paper reviews empirical trends in pre- and post-tax income inequality since 1979 and summarizes recent empirical and theoretical research on the role of tax policy in exacerbating market-based income inequality. It finds that increasing top marginal tax rates could yield potentially large results in slowing the growth of income inequality, and as shown in Fieldhouse (2013a), do so without substantially reducing productive economic activity:

Inflation, Taxes, and Income - To add to the fire Jazz and Steve have kindled, YOY inflation is at its lowest level historically according to the BEA and Next New Deal blog. It does not look like we need austerity policies and a little fiscal fire might put people back to work and stir the economy into growth. “Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.” Next New Deal: We Just Had the Lowest Core Inflation in 50 Years. What Does This Mean for “Expectations” and Monetary Policy? EPI points to a ~40 year tax policy trend favoring Capital over Labor wages resulting in a stagnation of wages for much of the population and a skewing of gains to a small minority.

Meet America’s Most Shameless Defender of the 1 Percent, Harvard Economist Greg Mankiw - Lynn Parramore -It’s not really news that America’s economics departments, particularly at elite institutions, are stuffed with people whose careers are founded on protecting monied interests. But it’s pretty rare when someone just comes straight out and announces the fact. Meet Greg Mankiw, chairman and professor of economics at Harvard, one of the most influential economists in the country. As chairman of the Council of Economic Advisers, he guided the economic blundering of George W. Bush. Then in 2006, he became an adviser to Mitt Romney and steered Romney's economic positions in 2012, which included some of the most shocking expressions of classism yet heard from a presidential candidate. Mankiw's name might not be a household word, but the tentacles of his power and influence extend into Washington, the blogosphere and the classroom, where he molds young minds through his ubiquitous textbooks and lectures  Mankiw is the self-appointed Defender in Chief of the 1 percent. How do we know this? Well, because he just published a 23-page paper called “Defending the One Percent.” It’s helpful to understand the official propaganda line in the class war, and Mankiw has laid it out in a paper that purports to determine whether income inequality requires any intervention.

The Politics of Intellectual Fashion - For years now, Anat Admati has been leading the charge for higher capital requirements for banks, especially large banks that benefit from government subsidies, first in a widely cited paper and more recently in her book with Martin Hellwig, The Banker’s New Clothes. Admati’s great service has been clearing the underbrush of misunderstandings and half-truths so that it is possible to have a debate about the benefits of higher capital requirements. Yet even after all this work, the media (and, of course, the banking lobby) continue to repeat claims that are simply false or highly misleading. In another effort to beat back the tides of ignorance, Admati and Hellwig have put out a new document, “The Parade of the Bankers’ New Clothes Continues,” which catalogs and addresses these claims. In the simply false category, the most common is probably that capital is “set aside”; in fact, banking capital is assets minus liabilities, and the capital requirement places no restrictions on what a bank can do with those assets. In the highly misleading category is the claim that higher capital requirements would force banks to reduce their lending. Banks can respond to higher capital requirements by raising more equity capital or by reducing their balance sheets. As Admati and Hellwig write, “If increased equity requirements cause banks to reduce their lending, the reason is that they do not want to increase their equity.”  And why don’t they want to increase their equity? Because executives have one-way compensation packages based on return on equity, which is not adjusted for risk, so they don’t want to increase the denominator.

NEP’s Bill Black Appears on Tell Somebody - Bill Black appeared on the June 11, 2013 pledge drive edition of Tell Somebody. The topics of discussion were economics and regulation. You can listen here.

Wall Street's lawfare strategy against regulation - Last week, in a Washington, DC courtroom, a whole bunch of powerful people gathered with a common purpose: to try to kill the Dodd-Frank financial reform act.  That quest may seem a bit overdone, given the already weakened state of the attempt at financial regulation – like taking hammer to a housefly.  Still, a phalanx of injured parties – 11 states, two groups dedicated to conservative economic agendas and one Texas state bank – argued that Dodd-Frank is unconstitutional.  Their complaints all center around the part of Dodd-Frank that wants to solve the problem of "too big to fail" by allowing regulators to manage the bankruptcy of big banks. The idea of this affront to capitalism makes the people behind the lawsuit sputter – in a way that, strangely, they never do at the prospect of the government having to step in and save banks with multibillion-dollar bailouts. Among their complaints is that: the law forces banks to bow to the authority of the US Treasury; it interferes with state securities regulators; and it imposes high costs of complying with the law on small banks, as well as the larger ones that can afford it.  The lawsuit also argued that banks should, in effect, be allowed to remain too big to fail because it is unconstitutional to give the US Treasury the power to wind them down: it argues that Dodd-Frank "empowers the Treasury Secretary to order the liquidation of a financial company with little or no advance warning, under cover of mandatory secrecy, and without either useful statutory guidance or meaningful legislative, executive or judicial oversight." The depth of the outrage from Wall Street and its legislative nursemaids is amusing sometimes, in that it is entirely out of scale with the weakness and uselessness of the law they're attacking.

Wall Street is winning the long war against post-crash regulation - There are no such things as borders in the world of finance; it's an integrated whole. ... That's why it's so baffling that the House of Representatives came down, this week, on the side of ignoring abuses of US-made derivatives – known as swaps – as soon as they're wired overseas. These swaps were at the heart of the London Whale trading debacle... The House voted overwhelmingly to let the measure – labeled the London Whale Loophole Act by critics – pass. It's one of several measures that the House has taken to weaken oversight of derivatives; the other two will come up for debate soon. It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate. According to MapLight:"On average, House agriculture committee members voting for HR 992 [one of the derivatives bills] have received 7.8 times as much money from the top four banks as House agriculture committee members voting against the bill." It's no surprise, of course – given the well-known influence of Wall Street in writing and influencing the bills that regulate Wall Street. Citigroup lobbyists infamously drafted 70 lines of an 85-line amendment that protected a large acreage of derivatives from regulation.

Myerson’s misses the Miasma that is Modern Executive Compensation - William Black - This is the fourth installment of my exploration of the work of Roger Myerson, Nobel Laureate in economics in 2007.  It is part of what will be a broader series of articles exploring why economics is unique among the sciences in awarding the Prize to scholars whose predictive work proves profoundly wrong and leads to public policies that cause great harm.  The first installment used Myerson’s Prize lecture to explore his paean to plutocracy as the purported unique advantage of capitalism. The second expanded this point by examining the model he proposed in his December 2012 lecture to prevent bank CEOs from causing harm in response to their “moral hazard.”  I explained why Myerson’s model would intensify bank CEOs’ already perverse incentives to engage in control fraud and why his model of compensating bank CEOs was unethical and would fail because it would require shareholders to accept negative returns. The third installment noted that his September 2012 article argues that: “In this sense, a tax on poor workers to subsidize rich bankers may actually benefit the workers, as the increase of investment and employment can raise their wages by more than the cost of the tax [p. 25].” The same September 2012 article by Myerson discusses what he considers the relevant literature on executive compensation for bankers.  Here, I discuss only his statements in the article about executive compensation.

Corrupted credit ratings: Standard & Poor’s lawsuit and the evidence - VoxEU - In its civil lawsuit against Standard & Poor's, the US Department of Justice accuses the credit-rating agency to have defrauded federally insured financial institutions like Western Federal Corporate Credit Union: "Standard & Poor’s, knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in RMBS [residential mortgage-backed securities] and CDO [collateralised debt obligations] tranches ..." (US Department of Justice 2013).In response to the civil lawsuit filed by the US Department of Justice in February 2013, Standard & Poor's affirms that its ratings were "objective, independent and uninfluenced by conflicts of interest". This column presents empirical evidence opposing this claim. The data suggests a systematic rating bias in favour of the agencies' largest issuer clients.

Bid to relaunch synthetic CDO unravels - An attempt by two big Wall Street banks to revive notorious credit boom-era securities blamed for exacerbating the global financial crisis has failed after investors balked at buying some of the derivatives on offer. JPMorgan Chase and Morgan Stanley have scrapped a plan to sell “synthetic collateralised debt obligations” – sliced and diced pools of credit derivatives – after failing to find investors willing to take on all of the deal’s different pieces. Bankers at the two Wall Street firms were looking at reviving synthetic CDOs, which were criticised for adding to losses during the financial crisis, after receiving inquiries from some investors hungry for higher yielding investments. JPMorgan and Morgan Stanley had been tentatively sounding out investors about a “full capital structure” synthetic CDO, according to people familiar with the talks. The deal would have included a range of tranches: a “senior piece” considered less risky than the “mezzanine”, or middle, piece, and the lowest-ranking “equity” tranche. Investors, though, balked at buying the top slice of the floated deal, according to people familiar with the talks. Finding the appropriate prices for these senior tranches has proved difficult since CDOs were created.

 In Countrywide Case, Watchdogs Without Any Bark - FOR the last two weeks, a justice in New York State Supreme Court has heard testimony in one of the most pivotal cases of the financial crisis. The hearings will tell whether Bank of America can extinguish legal liability for more than a million Countrywide Financial loans by paying $8.5 billion in cash and agreeing to loan servicing improvements in a settlement struck with 22 investors in 2011.But the case, being heard by Justice Barbara R. Kapnick, extends far beyond the impact of the settlement on Bank of America’s balance sheet. It is also laying bare an industry practice that has put investors in mortgage securities at a disadvantage and reduced their financial recoveries in the aftermath of the home loan mania. The practice at issue involves trustee banks overseeing the vast and complex mortgage pools bought by pension funds, mutual funds and others. Trustees like Bank of New York Mellon were paid by investors to make sure that the servicers administering these mortgage deals, known as trusts, treated them properly. Trustees receive nominal fees — less than a penny on each dollar of assets — for the work.

A broken model - "In my article on the slow death of banks, I suggested that banks maintained on life support would eventually become redundant as new forms of financial intermediation took their place. This is the first of two posts in which I discuss what those new forms might look like. The key change that we are seeing is what we might call "disintermediation" - flight of both lenders (depositors) and borrowers from traditional deposit-taking lenders to other types of financial intermediary, many of them specialists in particular aspects of financial management networked to other providers that do different things. This has already happened to a large extent in the US, but the UK and European models of banking are founded on universal banks and it is difficult for many people even to imagine what a banking system deconstructed into its component parts looks like. But when you break down the traditional banking model, it becomes apparent that there is a fundamental conflict at the heart of universal banking that makes it untenable as a business proposition in the current climate....." The remainder of this article can be found here.

Unofficial Problem Bank list declines to 757 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 14, 2013.  Changes and comments from surferdude808:  As anticipated, it was quiet week for changes to the Unofficial Problem Bank List as the OCC will wait until next Friday to provide its enforcement actions through mid-May 2013. There were three removals, which leave the list holding 757 institutions with assets of $274.8 billion. Last year, the list held 919 institutions with assets of $354.0 billion.

Lenders seek court actions against homeowners years after foreclosure - The Salvadoran immigrant had worked for years as a self-employed landscaper to make a $15,000 down payment on a four-bedroom house in Rockville. He had achieved a portion of the American dream, earning nearly six figures. Then the economy soured, and lean paychecks turned into late mortgage payments. On Aug. 20, 2008, one year after he bought his dream home for $469,000, the bank’s threat to take his house became real via a letter in the mail. Just four days before the bank seized the property, he moved out, along with his wife and their two young children. That wasn’t the worst of it. In November, more than three years after the foreclosure, he was stunned to learn he still owed $115,000 — with the interest alone growing at a rate high enough to lease a luxury car. “I’m scared, you know,” Benavides said. “I can’t pay.” The 42-year-old is among the many homeowners being taken to court by their lenders long after their houses were taken in foreclosure. Lenders are filing new motions in old foreclosure lawsuits and hiring debt collectors to pursue leftover debt, plus court fees, attorneys’ fees and tens of thousands in interest that had been accruing for years. It’s an aftershock of the foreclosure crisis, and most homeowners don’t know it’s coming.

WaPo on Deficiency Judgments - Historically lenders haven't pursued many previous homeowners for deficiencies after foreclosure because it wasn't worth their time. As the following article notes:  It’s unclear how many people walk away from homes when they can still afford to pay the mortgage. Likewise, there is little publicly available data on how many people pay off their deficiency judgments. A recent government audit found the recovery rate at one-fifth of 1 percent. In judicial foreclosure states, the lender will frequently file for a deficiency judgment as part of the foreclosure case (they are in court anyway). Then the lender might sell the deficiency judgment to a debt collector for a pittance. Sometimes the debt collector will settle for pennies on the dollar (a nice return because they paid almost nothing) or the debt collector will force the former borrower into bankruptcy. In non-judicial foreclosure states, the lenders rarely bothered to file for a deficiency judgment.  (Tanta and I wrote extensively about mortgage deficiency judgments several years ago). Of course everything changes if the lender thinks the borrower has assets and "strategically defaulted".  In these cases the lender can recover some of their losses. From Kimbriell Kelly at the WaPo: Lenders seek court actions against homeowners years after foreclosure Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

Bank of America’s Foreclosure Frenzy - In one corner, we have five former Bank of America Corp. employees who told a federal court they were instructed to mislead customers on the verge of losing their homes and stall their applications for loan modifications.  In another corner, we have Bank of America, which says nothing could be further from the truth. We have known for years that the U.S. Treasury Department’s Home Affordable Modification Program failed miserably at its stated goal of helping struggling homeowners. In part, that’s because companies and divisions of major banks that service mortgage loans often can make more money from foreclosures than from loan modifications.  It didn’t bother the banking industry’s “robo-signers” that they risked committing perjury when they signed false affidavits filed in courthouses across the country to speed foreclosures along. Now, Bank of America would have us believe that all of these former employees were making things up under penalty of perjury when they came forward and told their stories.

Bank of America Whistleblowers Allege Rot at the Core of the Mortgage Industrial Complex: From affidavits filed in litigation against the bank, some of the most serious charges include the following:

  • Bank employees routinely lied to borrowers about whether their applications for mortgage modifications were complete and removed documents from the borrower's file to provide grounds for rejecting such applications.
  • Bank employees would delay consideration of modification applications and then force borrowers to re-apply for a modification because their applications were deemed stale.
  • Bank officials offered bounties to front line employees and their supervisors for meeting foreclosure quotas, regardless of the merits of the bank's claims.
  • Bank employees routinely used deceptive tactics to steer borrowers away from modifications on favorable terms under the federal Home Affordable Modification Program (HAMP) and into agreements with terms that were far more beneficial to the bank.
  • The bank lied to the federal government and the public about its loan modification performance.
  • The bank would routinely purge backlogged modification applications and reject them without any basis for doing so.
  • Employees who challenged these bank practices were fired.

Bank of America Whistleblowers Reveal Shocking Bank Wrongdoings, Surprise Surprise - Did you spend the past couple days so suspicious of the NSA that you had forgotten to set aside just a little bit of your suspicion for the banks? Don’t worry, we can fix that pretty quickly! Turns out Bank of America may have been foreclosing on homeowners who qualified for in-house loan modifications and the government-sponsored Home Affordable Modification Program because — get this! – it was more profitable to put the homeowners out on the street:  Six former Bank of America Corp employees have alleged that the bank deliberately denied eligible home owners loan modifications and lied to them about the status of their mortgage payments and documents.  Yes, we know how shocked — SHOCKED — you all are to hear of this, given that there are currently  4,000,000 people in this country who may have been wrongfully foreclosed upon and many bank foreclosures occur while homeowners are in the process of loan modification. It is probably even more shocking that many of these people may have been wrongfully foreclosed upon so the bank can make a few extra bucks, given that BofA could afford to quadruple CEO Brian Moynihan’s pay package but a couple years ago.  But once again, this is why we are not the CEO’s of a big company! You do not make money by helping borrowers modify home loans and avoid foreclosure; you make it by kicking them out of their homes and then selling their homes and keeping all the money, even if the homeowners have spent decades building up equity and pouring their savings into making home improvements.

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in May - Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in May.  Look at the two columns in the table for Total "Distressed" Share. In almost 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, and the California Bay Area - short sales now out number foreclosures.

Will local governments use eminent domain to restructure underwater mortgages — and kill the housing recovery? -The odds just increased that US municipalities will use eminent domain powers to seize underwater mortgages and then write down debt for homeowners. In North Las Vegas, Nevada, the city council voted Wednesday to enter into a 60-day advisory services agreement with Mortgage Resolution Partners, a firm pushing the eminent domain idea. After consulting with MRP over the next two months on how the process might work, the city council will consider the proposal in August and perhaps vote to proceed with eminent domain refinancing. This is pretty big news with potentially huge implications for the nation’s housing finance system. Analyst Jaret Seiberg of Guggenheim Washington Research Group: Our concern remains that eminent domain refinancings will spread as soon as one community shows that it is a viable policy. We believe the use of eminent domain to refinance underwater borrowers could damage the housing finance system by causing investors to question if the loans are really secured.

Bernanke: GSEs aren’t necessary to support homeownership - Yesterday, Bernanke was asked if removing the government guarantee from housing finance would end homeownership as we know it. His abbreviated answer: Not necessarily. Plenty of other countries have homeownership rates higher than the US and no GSEs. This is precisely what AEI scholar Alex Pollock explained in his testimony, “Why We Don’t Need the GSEs,” showing how the US ranks 20th in homeownership out of 28 economically advanced countries: The benefit of GSEs for homeownership has been touted to protect Fannie Mae and Freddie Mac from substantial reform, despite their documented role in the financial crisis. A convenient story for some in the housing industry – but one not supported by facts. When it comes to GSE reform, “it’s possible that we may find that a different structure is better,” Bernanke said.

MBA: Mortgage Applications Decrease, Mortgage Rates Increase - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey  - The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.17 percent, the highest rate since March 2012, from 4.15 percent, with points decreasing to 0.41 from 0.48 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the sixth straight weekly increase for this rate. ...The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.30 percent from 3.32 percent, with points increasing to 0.39 from 0.38 (including the origination fee) for 80 percent LTV loans. The first graph shows the refinance index. With 30 year mortgage rates above 4%, refinance activity has fallen sharply, decreasing in 5 of the last 6 weeks. This index is down 38% over the last six weeks. The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is up almost 10% from a year ago

Bond selling hits US homebuyer costs - A fierce burst of selling in the bond market has sent borrowing costs for US homebuyers sharply higher, posing a risk to the rebound in America’s housing market, which has underpinned the economic recovery. Yields on benchmark US Treasuries, which move inversely to prices, on Friday jumped to a peak of 2.55 per cent, their highest level in almost two years, as investors bet that the Federal Reserve would soon begin to wind down its emergency bond-buying programme, “quantitative easing”. The average rate on a new 30-year fixed rate mortgage has jumped to 4.24 per cent, according to The average 30-year fixed rate was 3.40 per cent as recently as early May. Wholesale mortgage rates rose by 15 basis points on Friday, an indicator that new loans could rise still further. A wave of refinancing sparked by historically low rates has helped cut the living costs of millions of American families. But mortgage bankers warned the phenomenon, which has also boosted profits at banks such as Wells Fargo and JPMorgan Chase, was now approaching “burn out”, with the rate hike helping snuff it out. “The mortgage market overall in the US is going to contract fairly significantly,” said David Stevens, chief executive of the Mortgage Bankers Association. He expects refinance volume to decline by more than half next year to about $400bn.

Housing Seen Shrugging Off Loan Rate Rise as Banks Loosen - Fed Chairman Ben S. Bernanke said this week that the central bank may scale back its unprecedented stimulus program this year as the economy and housing improve, ending the era of record-low mortgage rates and marking the first test for the year-old housing recovery. While rising costs make purchasing real estate more expensive, the upshot for homebuyers is that banks will need to respond by improving credit availability that has been holding back the market for the past five years. “If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.” Mortgage rates in the U.S., after increasing at the fastest pace in a decade, have jumped after Bernanke confirmed on June 19 that the central bank is ready to slow its purchases amid signs of an improving economy and housing market. Wells Fargo & Co. (WFC), the largest mortgage lender, increased the rate on a 30-year mortgage to 4.5 percent yesterday from 4.13 percent on June 18 and 3.88 percent last month. The average rate for a 30-year fixed loan climbed to 3.93 percent earlier this week from 3.35 percent last month and the record low 3.31 percent reached in November, according to Freddie Mac.

Mercurial Mortgage Rates to Stabilize Soon, Analysts Say - While rates on home loans are likely to remain modest by traditional standards, the ultralow borrowing costs that encouraged millions of homeowners to refinance and helped revive the moribund housing market are quickly becoming a memory. As yields on 10-year government bonds rise amid signs that the economy is improving and that the Federal Reserve will reduce bond purchases, mortgage rates have quickly followed. Rates on 30-year fixed mortgages hit 4.25 percent on Thursday, up from 4.12 percent on Wednesday morning before the Fed chairman, Ben S. Bernanke, signaled the central bank might begin easing back on stimulus efforts later this year. As recently as May, the average interest rate on a 30-year fixed mortgage stood at 3.5 percent, close to the lowest in decades. While mortgage rates are moving higher, rates on other forms of credit like car loans, home equity loans and credit cards are not expected to budge. They are either already set at relatively high levels, like most credit card borrowing costs, or tied to short-term interest rates, which the Fed has indicated will not rise before 2015. For example, the rate on a five-year car loan currently is just over 4 percent, about where it was in mid-May.

What The Recent Surge In Rates Means For Your Home Purchasing Power - In one month, the average 30 year fixed rate mortgage has jumped by over 60 basis points. What does this mean for net purchasing power? Well, as the chart below shows, assuming a $2000/month budget to be spent on amortizing a mortgage (or otherwise spent for rent), it means that suddenly instead of being able to afford a $425K house, the average consumer can buy a $395K house . This means that, all else equal, housing just sustained a 7% drop in the average equlibrium price based on what buyers can afford. But assuming the current selloff in rates continues, things are going to get much worse: we may be seeing 5%, 5.5% even 6% and higher mortgages in the immediate future. It also means that a buyer who could previously afford a $506K house with a $2,000 monthly budget at an interest rate of 2.5% will be able to afford only $316K if and when the average 30 Year fixed hits 6.5%: a 40% drop in affordability based on just a 4% increase in interest rates!

Number of the Week: Will Higher Rates Kill Housing? - $96: How much more your monthly payment would be with a 4.5% 30-year mortgage rate than a 3.5% rate, assuming a 20% down payment on a $208,000 home (the median price in the May existing-home sales report). Mortgage rates are likely only moving higher from here, but there’s no reason to worry that the housing recovery will be derailed — yet. The interest rate on a fixed-rate 30-year mortgage has been trending up since hitting an all-time low of 3.47% late last year. The trend accelerated this week as expectations the Federal Reserve will begin pulling back on its bond-buying program this year were cemented following Chairman Ben Bernanke‘s press conference. Rates were quoted as high as 4.5% late this week. The biggest initial negative macroeconomic impact from higher rates is likely to come from slowing refinancing activity. Historically low rates and rebounding house prices have enabled thousands of homeowners to lower their monthly mortgage payments, freeing up more cash to spend elsewhere. Refinancing activity has already slowed and the higher rates go, the more it will dry up. But as long as rates don’t shoot up too far too fast, they aren’t likely to seriously damp the housing market. An analysis by economists at Goldman Sachs Group Inc. shows that if rates hit 6%, homes would still be affordable by historical standards. Higher rates could also drive demand, as homebuyers may feel pressure to act before mortgages become even more expensive.

Existing Home Sales in May: 5.18 million SAAR, 5.1 months of supply - The NAR reports: Existing-Home Sales Rise in May with Strong Price Increases Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012. Total housing inventory at the end of May rose 3.3 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April. Listed inventory is 10.1 percent below a year ago, when there was a 6.5-month supply.  This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in May 2013 (5.18 million SAAR) were 4.2% higher than last month, and were 12.9% above the May 2012 rate. This is the highest sales rate since November 2009 (housing tax credit). The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.22 million in May up from 2.15 million in April.   Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Bubble, Bubble, Toil and Trouble as Existing Home Sales Rise for May 2013 --- The NAR reported existing home sales jumped 4.2% from last month and inventories are still a very tight 5.1 months of supply for May 2013.   Existing homes sales have increased 12.9% from a year ago.  Volume was 5.18 million against April's 4.97 million annualized existing home sales.  This is the highest volume level since November 2009 when the first time home buyer tax credit gave an artificial jump to sales.  Prices are now through the roof and even the NAR admitted the prices of homes are too high and blames artificially low inventories of homes for sale as the reason.  Inventory of existing homes decreased -1.9% for the month, a 5.1 months supply and inventory is down -21.5% from a year ago.  Listed inventories are also down -10.1% from a year ago.  Short supply partially explains the increasing prices.  NAR claims buyer traffic has increased 29% from a year ago.  Time on the market is at bubble year levels.  From the report: Forty-five percent of all homes sold in May were on the market for less than a month. The median time on the market is the shortest since monthly tracking began in May 2011; on an annual basis, a separate NAR survey of home buyers and sellers shows the shortest selling time was 4 weeks in both 2004 and 2005.The national median existing home sales price, all types, is up, now at $208,000, a 15.4% increase from a year ago.  Median price has also broken the $200,000 barrier.  Even more eerie, the last time there were 15 consecutive months of median existing home price increases was also the height of the housing bubble, March 2005 through May 2006.   This is also the sixth month in a row for double digit median price increases.  This is the largest jump in annual price increases since October 2005.  It is looking like we have a price bubble.

Vital Signs Chart: Home Resales Jump - The slowly mending housing market flashed another sign of strength. Existing-home sales rose in May to a seasonally adjusted annual rate of 5.18 million. That is up 4.2% from April and up 12.9% from a year ago. May’s level last was reached in late 2009, when tax breaks for home buyers helped spur sales. Other good news: Homes are fetching higher prices and selling faster.

Comment on Existing Home Sales: Inventory near Bottom - The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 3.3% in May from April, and is only down 10.1% from May 2012.  This fits with the weekly data I've been posting. This is the lowest level of inventory for the month of May since 2002, but this is also the smallest year-over-year decline since July 2011. The key points are: 1) inventory is very low, but 2) the year-over-year inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow. The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included.  However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. The NAR reported total sales were up 12.9% from May 2012, but conventional sales are probably up over 20% from May 2012, and distressed sales down.  The NAR reported (from a survey):  Distressed homes – foreclosures and short sales – accounted for 18 percent of May sales, unchanged from April, but matching the lowest share since monthly tracking began in October 2008; they were 25 percent in May 2012.

Existing Home Inventory is up 14.9% year-to-date on June 17th - 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 April).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data). In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Redfin: "Here Comes the Inventory" - The bottom for inventory is a key topic for 2013 .. From Tim Ellis at Redfin: Here Comes the Inventory Increasing home prices are giving more sellers sufficient equity to sell, and sellers who already had equity are being lured into the market after seeing their neighbor’s homes sell in record time and in fierce bidding wars.More inventory begets more inventory, too. “I have several clients who are ready to take the plunge and list their homes—they’ve even decluttered and we have the listing ready to hit the MLS,” explained Redfin listing specialist Paul Stone. “The sellers are just waiting to get under contract on a home to buy, at which point we’ll pull the trigger and list their current home.” Here’s what the inventory recovery looks like so far, along with a forecast for the rest of the year, should the trend hold: Total active listings are still down 22% from a year ago as of May, but even that is an improvement compared to the 32% year-over-year drop we experienced in January.

FNC: House prices increased 4.6% year-over-year in April - From FNC: FNC Index: Rise in Home Prices Picks up in AprilThe latest FNC Residential Price Index™ (RPI) shows that U.S. home prices continue to rise in April, up 0.7% from the previous month. April’s gain marks the largest price acceleration since June 2012, caused in part by rising seasonal demand entering spring and summer.... 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 April home prices rose much faster than in the previous months. The two narrower indices (30-MSA and 10-MSA composites) similarly recoded a nearly 1.0% increase. On a year-over-year basis, home prices were up 4.6% from a year ago. The indices have been revised downward for the prior months, resulting in more moderate annual price accelerations. Note: This increase is partially seasonal.  This year prices were up 0.7% in April (from March).  Last year, in April 2012, prices were up 1.0% in April - so this is slower seasonal price appreciation. The year-over-year change slowed in April, with the 100-MSA composite up 4.6% compared to April 2012. The FNC index turned positive on a year-over-year basis in July, 2012.This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. Note: The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. Even with the recent increase, the FNC composite 100 index is still off 28.6% from the peak

Will Home Prices Be Constrained by Stagnant Incomes? - The U.S. Federal Reserve has put a lot of its eggs in the housing basket. After all, a healthy housing sector brings benefits to the economy. Home-building provides jobs, mortgage financing offers revenue to the banking system, and households feel more financially secure if the value of their home isn’t freefalling into the abyss. By keeping mortgage rates super cheap, the Fed has propped up housing demand. And after years of few projects, builders are breaking ground on more homes. Tuesday brought news that housing starts in May rose 6.8% to an annual rate of 914,000. While much of the gain came in apartment projects, single-family homes edged up 0.3% to 599,000. Some fret the recent rise in mortgage rates could scramble the Fed’s goal. The 30-year fixed rate edged up to 4.15% last week. What is the impact if the 30-year fixed rate jumped from its recent low of 3.5% to 4.5%? A new single-family home costs, on average, $310,000. With a 10% downpayment, the monthly payment increases by $161. With a 20% downpayment, the rise is $143. The extra cost wouldn’t darken the housing outlook except it is running up against puny growth in incomes.

Housing Starts in U.S. Rose in May to 914,000 Annual Rate -  Beginning construction of new U.S. homes increased in May and permits to build single-family houses rose to a five-year high, extending a rebound that is helping shore up the expansion.Housing starts climbed 6.8 percent, less than forecast, to a 914,000 annualized rate after a revised 856,000 pace in April, the Commerce Department reported today in Washington. The median estimate of 82 economists surveyed by Bloomberg called for a 950,000 rate. Applications to build one-family homes increased 1.3 percent to a 622,000 pace, the fastest since May 2008. Building permits that exceed the level of starts indicate residential construction will keep rising as improving job opportunities and historically low mortgage rates lure buyers. The recovery in residential real estate that’s spurred optimism among builders such as Hovnanian Enterprises Inc. shows how record monetary stimulus from Federal Reserve policy makers, who meet today and tomorrow, is bolstering economic growth.

Housing Starts increase in May to 914,000 SAAR - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent above the revised April estimate of 856,000 and is 28.6 percent above the May 2012 rate of 711,000. Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent above the revised April figure of 597,000. The May rate for units in buildings with five units or more was 306,000. Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent below the revised April rate of 1,005,000, but is 20.8 percent above the May 2012 estimate of 806,000. Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent above the revised April figure of 614,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in April.The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) increased in May following the sharp decrease in April (Multi-family is volatile month-to-month). Single-family starts (blue) increased slightly to 599,000 SAAR in May (Note: April was revised down from 610 thousand to 597 thousand). The second graph shows total and single unit starts since 1968.

Housing Starts In May Rebound After April's Sharp Correction - New residential construction in the US increased last month to a seasonally adjusted annual rate of 914,000, which is nearly 7% higher than April’s count. Meanwhile, newly issued building permits declined 3.1% in May to a seasonally adjusted 974,000 annual pace vs. the previous month. Nonetheless, the housing recovery is still very much alive and kicking. But today’s numbers are a reminder that growth is probably slowing, which is only natural as new supply moves in line with demand. The last year or so has been about playing catch-up with demographics, but the big adjustments are probably behind us. The cycle for housing construction, in other words, is maturing.  Meantime, the key risk in the months ahead can be summed up in one question: How will the end of the Federal Reserve’s quantitative easing monetary policy strategy impact housing? Interest rates aren’t likely to rise any time soon, certainly not in tomorrow’s FOMC announcement. But with growing confidence that modest growth for the economy is the likely path ahead, the crowd’s increasingly focused on the recent rise in mortgage rates and what it means for housing recovery going forward.

Housing Starts: A few comments - A few comments:
• Overall the housing starts report was a little disappointing with total starts at a 914 thousand rate on a seasonally adjusted annual rate basis (SAAR) in May. This was below the consensus forecast of 950 thousand SAAR.
• However starts are up significantly from the same period last year. Over the first five months of 2013, multi-family starts are up close to 40% from the same period in 2012, and single family starts are up 24%. Those are significant increases in activity. Based on permits and the June homebuilder confidence survey, I expect starts will increase further in June.
• 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).

Residential construction recovery has a long way to go - New housing construction in the US has increased substantially since the lows of the Great Recession, but remains near pre-recession lows.  Given the population growth since the recession, improvements in household formation, cheap mortgages, and relatively high rent, one would expect construction to be significantly stronger. Even if households can't afford to buy a new home, they need a place to rent. That means someone should be building a rental unit.  Something is holding back construction. Anecdotal evidence suggests that local and regional banks who used to fund residential construction are still holding back. In fact hundreds of banks who used to be in that businesses have been shut down by the FDIC because the construction firms they financed magically "disappeared" in 2008. And those banks that are still around seem to be rather gun-shy, as memories of the great real estate bubble are still fresh on credit officers' minds. When it comes to housing developments, unless you are Toll Brothers, financing is not easy to come by. With financing tough to come by, while we've seen improvements in residential construction spending, it is still at 1998 levels.

U.S. Homebuilder Confidence Soars to 7-year High - For the first time in seven years, most U.S. homebuilders are optimistic about home sales, a sign that construction could help drive stronger economic growth in coming months. The National Association of Home Builders/Wells Fargo builder sentiment index leaped to 52 this month from 44 in May. A reading above 50 indicates more builders view sales conditions as good, rather than poor. The index hasn’t been that high since April 2006, just before the housing market collapsed. Measures of customer traffic, current sales conditions and builders’ outlook for single-family home sales over the next six months also soared to their highest levels in seven years. Steady job growth, low mortgage rates, rising home prices and tight supplies of homes for sale have supported a recovery in housing this year.

NAHB: Builder Confidence increases in June, Over 50 for first time since April 2006 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 8 points in June to 52. Any number above 50 indicates that more builders view sales conditions as good than poor. From the NAHB: Builder Confidence Hits Major Milestone in June Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good than poor. All three HMI components posted gains in June. The index gauging current sales conditions increased eight points to 56, while the index measuring expectations for future sales rose nine points to 61 – its highest level since March 2006. The index gauging traffic of prospective buyers rose seven points to 40. The HMI three-month moving average was up in three of the four regions, with the Northeast and Midwest posting a one-point and three-point gain to 37 and 47, respectively. The South registered a four point gain to 46 while the West fell one point to 48.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts (May housing starts will be released tomorrow). This was well above the consensus estimate of a reading of 45.

Surprising Slowdown in Nonresidential Building: EcoPulse -  Private nonresidential construction is losing steam in the U.S., a sign that commercial real estate may be a drag on the economy as business leaders are reluctant to make large property investments.Spending on lodging, office, commercial and manufacturing buildings grew 5.6 percent in April to about $11 billion from a year ago on a nonseasonally-adjusted basis, the slowest pace in almost two years, data from the Census Bureau show. Four years into the economic expansion, “we’d expect to see more lasting signs of strength,” said Kermit Baker, chief economist for the American Institute of Architects. “That hasn’t happened yet.” Normally, this type of construction exhibits “late-cycle” growth because the design and building process may take several years, so business leaders need to be confident that a durable recovery is well under way before undertaking a project, Baker said. Activity has been “unusually volatile” since the 18-month recession ended in June 2009, with “only brief flashes of growth,” he said. Investment in nonresidential projects historically is “about on par” with spending on homebuilding, and further weakness would be troubling

AIA: "Strong Rebound for Architecture Billings Index" in May - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Strong Rebound for Architecture Billings Index Following the first reversal into negative territory in ten months in April, the Architecture Billings Index has bounced back in May. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 52.9, up dramatically from a mark of 48.6 in April. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.1, up slightly from the reading of 58.5 the previous month.This graph shows the Architecture Billings Index since 1996. The index was at 52.9 in May, up from 48.6 in April. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion in 9 of the last 10 months. : This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  The increases in this index over the past 10 months suggest some increase in CRE investment in the second half of 2013

Fixing America’s failing bridges would cost billions (NBC video) A new report from Transportation for America, less than a month since the Skagit River bridge collapse in Washington State, found more than 66,000 U.S. bridges are structurally deficient. Pennsylvania has the most bridges in need of repair, followed by Oklahoma, Iowa, Rhode Island and South Dakota. NBC’s John Yang reports.

Fed: Household Debt Service Ratio near lowest level in 30+ years - The Federal Reserve released the Q1 2013 Household Debt Service and Financial Obligations Ratios yesterday. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.  The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio...The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases. The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages (blue) and consumer debt (yellow). The overall Debt Service Ratio increased slightly in Q1, and is just above the record low set last quarter thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt also increased slightly in Q1, and is back to levels last seen in early 1995.

Young Households Falling Behind in Net Worth - 8 graphs - I have some good news and some bad news: The good news is that the total wealth of US households are slowly recovering from the credit crisis and Great Recession. The bad news is it has not been sufficient to keep up with inflation; lots of people — especially those who loaded up on debt before the collapse — are lagging. Household wealth rose by $3 trillion in Q1, to $70.3 trillion — greater than the $68.1 trillion in Q3 2007, before the recession began. About a third of the gains were courtesy of rising stock prices, another third was rising real estate values.

Credit-Card Delinquencies Declined in May - Late credit-card payments declined for major lenders in May, continuing a steady performance that has been bolstered by recent signs that the U.S. economic recovery is gradually gaining traction. Bloomberg News Persistently low delinquency rates have enabled banks to boost their earnings by releasing funds set aside to cover future losses, known as loan reserves. While industry executives have repeatedly predicted the period of declining losses would end, that has yet to occur, setting up lenders to continue reaping the financial benefits of consumers’ post-crisis discipline. "People default on their cards when they lose their jobs, and there’s modestly better job creation and the unemployment rate has been stable to down, so it could go on for a while.”

Consumer Prices in U.S. Increased Less Than Forecast in May - The cost of living in the U.S. rose less than forecast in May, restrained by the first drop in food prices in almost four years and signaling inflation remains under control.  The consumer price index was up 0.1 percent after falling 0.4 percent in April, the Labor Department reported today in Washington. The median forecast of 82 economists surveyed by Bloomberg News called for an increase of 0.2 percent. The core index, which excludes volatile food and fuel costs, climbed 0.2 percent as projected. A recession in Europe and slower growth in emerging markets such as China, combined with restrained wage gains in the U.S., have made it difficult for companies to raise prices. The lack of inflation gives Federal Reserve policy makers, meeting today and tomorrow in Washington, more leeway to address unemployment as they consider whether to dial down their record monetary stimulus. “We don’t’ really have an inflation issue in this country,” . “Some Fed officials have expressed concern about inflation, but I think the Fed is cognizant of the fact that we’re probably at the low readings on inflation.”

Inflation Matches YoY Forecast, But with Shelter Costs Up & Food Costs Down - The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.36%, which the BLS rounds to 1.4%, up from 1.06% last month (rounded to 1.1%). Year-over-year Core CPI (ex Food and Energy) came in at 1.68% (rounded to 1.7%), essentially unchanged from last month's 1.72% (rounded to 1.7%). 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) increased 0.1 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment.  The shelter index rose 0.3 percent and accounted for more than half of the seasonally adjusted all items increase in May. The energy index rose modestly, with the gasoline index flat but increases in the electricity and natural gas indexes accounting for the rise. The food index, however, turned down in May, with the food at home index falling 0.3 percent.  The index for all items less food and energy increased 0.2 percent in May. Besides the shelter increase, advances in the indexes for airline fares, recreation, and apparel also contributed to the rise. In contrast, the indexes for medical care and used cars and trucks declined in May. The all items index increased 1.4 percent over the last 12 months, an increase from last month's 1.1 percent figure. The 12-month change in the index for all items less food and energy remained at 1.7 percent. The food index has risen modestly over the last 12 months, advancing 1.4 percent, while the index for energy has declined, falling 1.0 percent.  More... The consensus forecast was for a MoM 0.2% for both Headline and Core and a YoY 1.4% for Headline and 1.7% for 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 Increases 0.1% on Rent, Prescription Drug Prices Drop for May 2013 - The May Consumer Price Index increased 0.1% from April.  CPI measures inflation, or price increases.  The culprit this time isn't gasoline, but shelter, which increased 0.3% for the month.  This is the largest monthly increase in the shelter index since July 2011 and was responsible for half of the overall 0.1% inflation monthly increase.  Take food and energy items out of the index and CPI actually rose 0.2% from April.  Shelter is part of this figure. CPI is now up 1.4% from a year ago as shown in the below graph.   Core inflation, or CPI minus food and energy items, increased 0.2% for May.  Core inflation has risen 1.7% for the last year, the same as last month 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.  Those wanting the Fed to continue their quantitative easing will be pleased with these low annual inflation figures.   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 include shelter, transportation, medical care and anything not food or energy.    Shelter increased 0.3% and is up 2.3% for the year.  The shelter index is comprised of rent, the equivalent cost of owning a home, hotels and motels.  Rent increased 0.3% for the month, while the equivalent of owning a home increased 0.2%.  Lodging away from home, which has much less weight in the shelter index, increased 1.2% for the month.  Welcome summer vacationers!   Airfares jumped 2.2%.  New cars and trucks prices had no change for the month and used autos declined by -0.1%.  Clothing increased as apparel prices rose 0.2%.  Many indexes saw no change, but transportation services increased 0.4% for the month.   Graphed below is rent, where cost increases hits people who can least afford it most.

Housing Starts, Permits, CPI All Miss - Following last week's jump in headline PPI some expected a reversal in the recent trend of BLS-measured disinflation. No such luck: moments ago the BLS reported that according to its hedonic adjustments, May headline consumer price inflation rose by 0.1%, below expectations of a 0.2% increase, and up 1.4% from the prior year. Alternatively, core CPI, excluding food and energy rose by 0.2% in line with expectations, and up 1.7% from past year. According to the BLS, "The shelter index rose 0.3 percent and accounted for more than half of the seasonally adjusted all items increase in May. The energy index rose modestly, with the gasoline index flat but increases in the electricity and natural gas indexes accounting for the rise. The food index, however, turned down in May, with the food at home index falling 0.3 percent." Should the recent surge in WTI continue, look for this "disinflation" to not persist, and certainly look for it to end as soon as the PBOC decides the time to get involved in markets returns.

A note about the CPI - Consumer prices for May were reported on Tuesday as having risen +0.1%, in line with my prediction based on gas prices of +0.2% +/-0.1%.  I haven't been making these forecasts just as an exercise in crystal ball gazing (well, okay, maybe just a little), but also as a way of elaborating on a theme I've been writing about for a long time -- the major but largely unremarked impact of the secular increase in gas prices on the consumer economy.  What I've been trying to show, among other things, is that the relative change in gas prices has been the driving determinant in whether wages fall behind, keep up with, or increase vs. the general price level since gas prices bottomed in 1999. With gas prices finally plateauing or even declining slightly in the last year, real wages have started to increase again.I believe this is an important reason why the economic expansion has so far survived both the payroll tax increase and Sequestration.

What Inflation Means to You: Inside the Consumer Price Index - The Fed justified a previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link.  The chart below shows the cumulative percent change in price for each of the eight categories since 2000.

Chained CPI Versus the Standard CPI: Breaking Down the Numbers - The Consumer Price Index for Urban Consumers (CPI-U, or more generally CPI) is the most familiar gauge of inflation in the US. The data for the non-seasonally adjusted series stretches back a century to January 1913. But the news of late is about a relative newcomer to the inflation metrics of the Bureau of Labor Statistics (BLS), the Chained CPI for Urban Consumers (C-CPI-U). The BLS has a Frequently Asked Questions page on the Chained CPI that's been around for a while.  For a snapshot comparison of how the conventional CPI and Chained CPI stack up against each other, I've created a variation on the CPI chart I've been updating monthly for the past several years here. The chart illustrates the overall change in inflation for CPI, Core CPI, and the eight top-level components of CPI since the turn of the century (more here). I also include energy, which is a collection of subcomponents, and College Tuition and Fees, a subcomponent of one of the top eight. The BLS has published the data for these metrics for chained CPI from December 1999. The one missing element is College Tuition and Fees, a subcomponent of Education and Communication. The chart below pairs the two versions of each component showing the total change since December 1999. We can thus have a more educated sense of how the Chained CPI and conventional CPI differ from one another.

Real Retail Sales Per Capita: Another Perspective on the Economy - The Advance Retail Sales Report released last week shows that sales in May came in at 0.6% month-over-month and 4.3% year-over-year. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data in its current format. I've highlighted recessions and the approximate range of two major economic episodes. The green trendline is a regression through the entire data series. The latest sales figure is 4.8% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.8% below the blue line end point.We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy. The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 156.7% since the beginning of this series. Adjust for population growth and the cumulative number drops to 107.3%. And when we adjust for both population growth and inflation, retail sales are up only 23.6% over the past two decades.

What Made Egg Prices Soar Nearly 42%? -  Prices that U.S. companies pay for fresh eggs took flight last month, buoyed by an avian flu outbreak in Mexico. Bloomberg News The producer price index for fresh eggs soared almost 42%, the biggest gain on record, driving broader inflation for food products, the Labor Department said Friday. A leading reason for the crack up: U.S. farmers are exporting more eggs to Mexico, eating into supplies for American consumers. The United States’ southern neighbor has been hit by avian influenza, forcing the slaughter of thousands of chickens. Fresh egg exports to Mexico for the first four months of 2013 totaled 12.9 million dozen, up sharply from 478,539 dozen for the same period in 2012, the U.S. Department of Agriculture reported earlier this month. “We have been shipping a lot of eggs to Mexico,” said Dave Harvey, an economist at the USDA. Fresh-egg prices tend to be volatile. Unlike meats or poultry, eggs can’t be frozen. A chicken lays an egg and it has to be moved to market quickly.

Weekly Gasoline Update: Down Two-to-Three Cents - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for Regular was down three cents and Premium two cents. Since their interim high in late February, Regular is down 16 cents and Premium 17 cents.  According to, three states (Hawaii, Illinois and Alaska) are averaging above $4.00 per gallon, down from six last week. One state (California) is in the 3.90-4.00 range, down from four last week.

Could someone explain the market failure that protecting car dealerships solves? - The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers.  GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.Does anyone really think that the industrial organization of the automobile retail industry works well?  My family buys a car every five years or so, and our experience is that no one tries to exploit asymmetric information like auto dealers.  I have lots of reasons to believe that our experiences are not unique. What amazes me is that even in the age of the internet, when one can use sites like Edmunds to figure out what to pay for a car, dealers start out by assuming that the consumer is stupid, hope they get an absurdly marked up price, and only get reasonable when they find out their customer actually knows something.

NY Fed: Empire State Manufacturing index increases in June - From the NY Fed: Empire State Manufacturing Survey: The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey’s measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5...Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3. This was above the consensus forecast of a reading of 0.0.

NY Fed Manufacturing Index Improved in June -- New York manufacturers say business conditions returned to expansion this month but the subindexes covering current activity are much weaker, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey, released Monday. The Empire State’s business conditions index increased to 7.84 in June from -1.43 in May. A reading below 0 indicates contraction. The May reading was the first negative number since January. Economists surveyed by Dow Jones Newswires had expected the latest index to strengthen to 0. The New York Fed survey is the first factory report released by regional Fed banks for June. 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. Despite the rise in the conditions index, the Empire subindexes were generally much weaker. The new orders index declined to -6.69 from -1.17 last month. The shipments index plunged to -11.77 from -0.02. The shipments reading is the weakest since early 2009.  The employment index declined to 0.00 in June from 5.68, and the workweek index dropped to -11.29 from -1.14.

Empire Fed Headline Beats Despite Plunge In Most Indicators, "Labor Market Conditions Worsened"- And yet another baffle with absolute and unbelievable BS economic number is out, this time the Empire Fed index which magically spiked from -1.43 to 7.84 on expectations of a 0.00 print. We say magically, because besides the headline number, virtually everything else was down! To wit: New Orders down, Shipments down, Unfilled Orders down, Delivery Time down, Inventories down, Number of Employees down, Avg Workweek down, should we continue? The Empire Fed report admits as much: "The general business conditions index—the most comprehensive of the survey’s measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell." Almost as if the NY Fed apologized for having to make up headline numbers.

Empire State Manufacturing Improves Modestly, But Details Show Serious Weakness - This morning we got the latest Empire State Manufacturing Survey.  The diffusion index for General Business Conditions beat expectations, posting a expansionary reading of 7.8. The consensus was for a slight expansion to 0.8. However, a quick look at the report shows that several of the key components are in contraction mode: New Order -6.8, Shipments -11.8, Unfilled Orders -14.5, Delivery Time -6.5, Inventories -11.3 and Average Employee Workweek -11.3. The two big positives were Price Paid +21.0 and Prices Received +11.3. Bottom line: The headline diffusion index looks deceptively better than the underlying data. Here is the opening paragraph from the report. The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey's measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5. The prices paid index held steady at 21.0, while the prices received index rose seven points to 11.3. Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3. Continuing the trend seen in the past few months, indexes for the six-month outlook declined, suggesting that optimism about future conditions was weakening further. Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):

Empire Manufacturing Index: Looking Inside Pandora's Box - The June release of the New York Federal Reserve regional manufacturing survey posted a much improved print of 7.84 from a negative May reading of -1.43. However, much like "Pandora's box", what you see on the outside and what is inside are two terribly different things. I have compiled a month-over-month chart of all the current sub-indexes for the survey from May to June, which all point to a contraction underway in the region's manufacturing sector. Econoday did an unusually good summary on the survey stating: New orders, at minus 6.69, are down for a second straight month with contraction in backlog orders very deep, at minus 14.52. Shipments are at minus 11.77 with inventories at minus 11.29 in what are also deep rates of monthly contraction. These readings extend what is a very soft run for data out of the manufacturing sector, a run that will support the doves at the Fed. The headline for the Empire State report, as it is for the Philly Fed report, is not the sum of components, but rather a single reading from a single subjective question on general month-to-month conditions."

Vital Signs Chart: Bad News Inside Manufacturing Uptick - One gauge of manufacturing ticked up in June, but the news isn’t all good. The Empire State Manufacturing Survey’s index of general business conditions rose nine points this month to a seasonally adjusted 7.8. However, when manufacturers were asked about specific areas such as new orders, shipments and numbers of employees, they expressed less optimism than in May.

Philly Fed Business Outlook: Manufacturing Activity Increased - 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 rose to 12.5 from the previous month's -5.2. The 3-month moving average came in at 2.9. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's headline number is the highest since April 2011. Here is from the release today:  Most of the survey's broadest current indicators were positive this month, suggesting an improvement in business conditions. The June Business Outlook Survey indicates an expansion of activity this month, with all of the broad indicators — except for employment — recording notable improvement over May. Firms reported higher prices for inputs and their own manufactured goods this month. Firms continue to expect positive growth over the next six months and were relatively more optimistic about adding to payrolls. (Full PDF Report)  Today's 12.5 was substantially higher than the -2.0 forecast at  The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012. At this point the contraction in 2013 is shallower, thanks to positive monthly readings in March and April. The next few months will bear close watching.

Philly Fed Manufacturing Survey indicates Expansion in June -- Catching up ... from the Philly Fed: June Manufacturing Survey Manufacturing firms responding to the monthly Business Outlook Survey indicated that regional manufacturing activity increased this month. Most of the survey’s broadest current indicators were positive this month, suggesting an improvement in business conditions. The survey's indicators of future activity continue to suggest that firms expect growth over the next six months.  The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‑5.2 in May to 12.5, its highest reading since April 2011. Labor market conditions showed continued weakness, however, with indexes suggesting lower employment among the reporting manufacturers. Although it increased 3 points to ‑5.4, the employment index remained negative for the third consecutive month. Earlier in the week, the Empire State manufacturing survey also indicated expansion in June.

Philly Fed Notes Rebound in Manufacturing - Business conditions for mid-Atlantic manufacturers rebounded this month to their highest level since April 2011, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed’s index of general business activity within the factory sector jumped to 12.5, from -5.2 in May. Economists surveyed by Dow Jones Newswires expected the latest index to recover to -2. Readings under zero denote contraction, and above-zero readings denote expansion. Factories around the U.S. continue to recover, albeit in a choppy fashion. On Monday, the New York Fed said its measure of New York State activity bounced back, with its index rising to 7.84 from -1.43 in May. But earlier Thursday, Markit’s flash purchasing managers’ index slipped to 52.2 for June, reflecting U.S. factories barely expanding. Within the Philly Fed survey, the subindexes were broadly positive. The new orders index bounced to 16.6 this month from -7.9 in May. The shipments index also returned to positive territory, up 13 points to 4.1. Signs of weakness lingered in the labor-market readings, however, with the employment index rising just 3 points to -5.4, marking its third-straight month of negative results. The Philadelphia Fed said 20% of firms reported employment decreases, compared with 15% reporting increases. A majority at over a third of respondents said increased production would come through adding additional workers, followed by increasing work hours. The average workweek index managed to tilt back into positive territory, at 0.8, from -12.4 in May.

Strongest Philly Fed Since April 2011 Reinforces Taper Tantrum - If the June Empire Fed index was a humiliating embarrassment to whoever collates the data, with only the headline number rising even as all index components plunged, and was merely released to baffle with BS some more before the FOMC meeting, today's Philly Fed release will surely shock anyone who believes the markets and the economy are still correlated. Printing at 12.5, this was a surge from May's -5.2, far above the -2.5 expected, the highest print since April 2011, and the biggest beat of expectations since October 2011. When "Baffle with BS" fails, just baffle with BS some more. Of course, keep in mind that while in previous months the plunging Philly Fed led to a bad news is good news outcome, today's big

Jobless Claims & US PMI Data Still Signal Modest Growth - Today’s updates on US economic data is a bit of a yawn, but that’s okay because the numbers are still trending positive, albeit moderately so. The initial June estimate of the manufacturing purchasing managers index from Markit Economics ticked down to 52.2 from May's 52.3, but that’s still well above the neutral 50 mark and so this benchmark tells us that the sector is still growing at a decent if unspectacular pace. Meanwhile, initial jobless claims last week jumped by 18,000 to a seasonally adjusted 354,000, but the worst you can about this series at this point is that it’s treading water. Then again, the year-over-year trend for new unemployment filings remains continues to fall at a healthy rate and so today’s numbers still point to modest healing for the labor market. Let’s take a closer look at the numbers, starting with US Manufacturing PMI. According to Markit, the data reflects a manufacturing sector that’s expanding. It’s a relatively slow pace, but the fact that today’s PMI number continues to hold above the 50 mark implies that the June release of the ISM Manufacturing Index (scheduled for July 1) will again signal growth after slipping into contractionary territory in the May report.

US Industrial Production Slowdown - The latest contraction in the ISM manufacturing report indicates the US manufacturing sector is slowing.  There have been signs this was happening for the last few months.  First, we've seen weak readings from some of the regional manufacturing reports.  For example, here is the latest Empire State 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. And the latest Philadelphia Fed Report: 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 (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent). Richmond also shows a slowdown:In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained four points settling at −2 from April's reading of −6. Among the index's components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at −10, and the jobs index subtracted six points to end at −3. We also see this slowdown in the overall industrial production numbers coming from the Federal Reserve.

US struggling with chronic excess capacity - In another sign of recent weakness in the manufacturing sector, capacity utilization in the US has stalled, as demand remains soft. US industries are producing significantly below their capacity and "5.5 percentage points below long-run average" according to the Fed. We are certainly far under the 82-85% level at which economists believe that the traditional measures of inflation are expected to rise. 24/7 Wall St.: - ... [US] manufacturing base still matters, as the United States remains one of the top exporters in the world. And a disturbing trend may be forming that signals some underlying weakness in the old core economy. This could be bad news for employment, growth, exports, revenue, capital spending and just about everything else.  Industrial production came in flat for the month of May rather than a 0.2% expected gain. The reading on capacity utilization posted an unexpected drop to 77.6%, versus a Bloomberg expectation for a 0.1% gain to 77.9%. To make matters worse, the 77.8% from April was revised to 77.7%. The peak cycle was 78.3% in March, which makes things look even worse.  Moreover, the long-term trend in capacity utilization in the US shows a secular decline. After each major recession over the past 50 years, capacity utilization peaked at a lower level than after the previous recession. So far in the post-Great Recession recovery, this trend has not been violated, as the nation struggles from chronic excess capacity.

Economic Growth in the Near Term for the Industrial Midwest - Chicago Fed - What are the near-term prospects for economic growth in the industrial Midwest? In part because the Midwest is steeped in the production of durable goods, such as automobiles and machinery, its economy has long experienced more-pronounced swings over the business cycle than the overall U.S. economy. The current expansion following the Great Recession has been no exception. Until last year, the Midwest economy was generally outperforming the national economy. But weakness in manufacturing exports due to slowing global economic growth emerged in 2012.This weakness is giving those of us tracking the Midwest’s economic progress a reason for pause. In order to better track the pace of the Midwest’s economic growth, the Chicago Fed unveiled its very own Midwest Economy Index, or MEI, in early 2011. The MEI shows that for the most part, the region’s economic growth has been exceeding its own long-run trend since mid-2010 (blue line in the chart below). At the same time, the so-called relative MEI—which provides a picture of Midwest growth conditions relative to those of the nation—has been indicating that regional economic growth has mostly been outperforming U.S. economic growth over the same period (red line in the chart below). And because the Midwest economy (as well as the national economy) still has ample slack four years after the Great Recession’s conclusion in mid-2009, many are still hoping—and perhaps still expecting—that the Midwest economy’s robust performance will continue.

All of a Sudden, There Aren’t Enough Electric Cars to Keep Up with Demand - Last year, Nissan sold about half the number of Leafs it had anticipated, marking two years in a row of disappointing sales for the electric car pioneer. One of the factors holding the Leaf back from appealing to the masses has been the upfront price premium drivers have had to pay for the cars, when compared with similar vehicles that run on plain old gas. But in early 2013, Nissan tried to cut the knees out from this part of the anti-EV argument. The automaker dropped base prices on the Leaf by $6,400 for the new model, making the idea of buying an electric car for under $19,000 a reality, when state and federal incentives are factored in. And once lease deals, tax credits, and gas savings are considered in the equation, word has spread this spring that it’s basically possible to drive an EV for next to nothing. Nissan’s EV competitors have followed with compelling deals of their own, including $199-per-month lease specials for the Chevy Spark EV and Fiat 500e. Mitsubishi and Toyota have also dropped prices dramatically for EV models. As CNET pointed out, the Honda Fit EV might be the best offer of all: a three-year lease for $259 per month, with no money down, unlimited miles, a 240-EV home charging station, and auto insurance included. Honda’s previous lease deal was $389 per month, a price point that failed to get consumers excited.But within days of Honda dropping the special lease price by $130 in early June, dealerships in California were sold out and customers had to compete to get on the waiting list for more, per the Los Angeles Times:

If American Car Companies Are Doing Well, Why Aren’t They Hiring? - American auto manufacturers are selling cars and making profits again, so that means that our auto industry has recovered from its terrible collapse of just a few years ago. Right? The companies themselves have recovered, but that doesn’t mean that they’re going on a hiring spree just yet.  The problem isn’t money: automakers have that. They’re not selling record numbers of cars, but the prices are higher. If anything, their problem is an excess of caution. Instead of expanding existing plants and building new ones, automakers are pushing productivity and demanding more from the workers they have. “[H]ow long can this go on before you start having some issue with morale in the plants?” one industry expert asked NPR rhetorically. Factories are at 90% capacity, and how many man-hours it takes to assemble a car is way down. Productivity is good, but it means that you can’t gauge economic recovery by the number of new people on the payroll. Automakers must have learned their lesson from 2008 and 2009: they’re not about to invest in capacity for business they don’t have yet. They’re hiring and expanding, but slowly and cautiously.

How Technology Is Destroying Jobs - That robots, automation, and software can replace people might seem obvious to anyone who’s worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee’s claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States. And, they suspect, something similar is happening in other technologically advanced countries. Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

Krueger: Alarming Decline in Corporate Fairness Hurts US - It now seems hard to believe that there was a time when America's corporate leaders gave a damn about the welfare of the nation. Yes, it was true that their market was overwhelmingly domestic back then. But there was also a genuine patriotism mixed in with the drive for profits, some of it attributable to the World War II generation who rose to top decision-making positions in their companies. But you rarely hear the word "patriotic" in the comments of today's corporate leaders. Their sole loyalty now seems to be their stockholders and the global marketplace, which they are milking for every available dollar. Thomas B. Edsall notes in his NYT Opinionator post that Alan Krueger, chairman of the Council of Economic Advisers says that "the uncritical worship of the free market in the 1980s allowed the nation's corporate elite to abandon longstanding constraints in its treatment of labor, especially in shifting the rewards of rising productivity from employees to the owners of capital." Worse, writes Edsall: With the blessing of the new right, Krueger argues, corporate America has abandoned its commitment to the commonweal over the past three decades. It no longer honors norms of fairness and equality. To Krueger, it is in the economic sphere that American integrity has been eroded and its ideals corrupted.

Profits Without Production, by Paul Krugman -  So what’s really different about America in the 21st century? The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.  To see what I’m talking about, consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.  Obviously, G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.  Apple, by contrast, seems barely tethered to the material world. Depending on the vagaries of its stock price, it’s either the highest-valued or the second-highest-valued company in America, but it employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas.  To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

“Profits Without Production” - For me, Profits Without Production equates to Profits sans Direct Labor Input. In most manufacture in the US today, Direct Labor Input is an extremely small ~10% of the Cost of Manufacturing which will vary up and down dependent upon the industry. (For the accountants and the purists, this does not include customary or legislative benefits which I categorize as Overhead. Drucker and many other consultants [including myself] have repeatedly pointed out that whacking labor to reduce the costs of manufacturing is akin to beating a dead horse and this cost has been dropping because of efficiencies since the sixties..) Maybe I have not searched in the right areas or blogs to read up on this topic; but, Paul Krugman in his latest article dicusses what I believe has become more wide spread in the US over the last decade, Profits Sans Labor or as he points to Production. Yet this is a growing trend and I have not seen much on the topic of Profits sans Labor or Production.  “But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? … Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. . . .” While it is possible to produce a part without direct labor input to it with automated machines, my point in particular is about the rise of profits in certain industries (if one could call them such) with no direct labor input or material product in the end.

On what really is different this time around - Paul Krugman says it himself: it’s the similarities between our time and other economic periods that often offer the best insight. But he’s currently in Paris thinking deep Parisienne style thoughts, which might explain the following… There are, as he notes, some important distinctions to be made this time around, not least globalisation’s impact on the role of intangible rents. Consequently, we may be living in an economy in which profits no longer remotely resemble a “natural” aspect of the economy. They are, one might say, somewhat synthetic. From Krugman: Consider the changing identity of the most valuable company in America. For a long time, it was GM, then Exxon, then IBM. These were companies with huge visible production activities: GM had more than 400,000 employees, which was amazing when you consider that the overall national work force was much smaller than the one we have today, Exxon had oil refineries. IBM was an information technology company, but it still had many of the attributes of an old-style manufacturing giant, with many factories and a large, well-paid work force. But now it’s Apple, which has hardly any employees and does hardly any manufacturing. The company tries, through fairly desperate PR efforts, to claim that it is indirectly responsible for lots of US jobs, but never mind. The reality is that the company is basically built around technology, design, and a brand identity.

Krugman Discovers Intellectual Property: The 1 Percent are the Takers - While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or  even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts. Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price. In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation -- and that is what the business press says.

Consensus Emerging With Economists That U.S. Economy Based On Rents Not Production - Karl Marx may have been too optimistic about capitalism. Economist Michel Hudson has long claimed that Marx’s contention that ultimately industrial capitalism would triumph over finance capitalism was wrong. That, in fact, bankers have prevailed subjugating the productive forces of industry to the power of debt slavery and rentier capitalism. The real economy has been subsumed by the FIRE economy. Whereas the old industrial capitalism sought profits, the new finance capitalism seeks capital gains mainly in the form of higher land prices and prices for other rent-yielding assets. This was previously a fringe view. To mainstream economists modern capitalism was all about value creation and productivity not rent seeking. That was then, this is now. Recently, two prominent Nobel Prize-winning economists have defected to the Hudsonian view of contemporary capitalism. Joseph Stiglitz, the former Chief Economist of the World Bank and Nobel-prize winner for economics, has submitted that much of the American economy is based on rent-seeking activity not production.  And now, in another high profile defection, Nobel Prize-winning economist Paul Krugman has endorsed the Hudsonian view in a column titled Profits Without Production:

Weekly Initial Unemployment Claims increase to 354,000 - The DOL reports: In the week ending June 15, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 18,000 from the previous week's revised figure of 336,000. The 4-week moving average was 348,250, an increase of 2,500 from the previous week's revised average of 345,750.The previous week was revised up from 334,000.The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 348,250.The 4-week average has mostly moved sideways over the last few months.  Claims were above the 340,000 consensus forecast

Jobless Claims in U.S. Increased More Than Forecast Last Week - More Americans than forecast filed applications for unemployment benefits last week, showing progress on reducing joblessness remains uneven amid slower growth this quarter.  Jobless claims climbed by 18,000 to 354,000 in the week ended June 15 from a revised 336,000 the prior period, the Labor Department reported today in Washington. The median forecast of 46 economists surveyed by Bloomberg called for 340,000. No states were estimated and there was nothing unusual in the data, a Labor Department spokesman said as the figures were released.  Employers will need to limit firings before the world’s largest economy can show bigger gains in payrolls. Federal Reserve officials announced yesterday that they would maintain the central bank’s $85 billion in monthly asset purchases until the expansion shows further signs of strengthening.

Don’t Blame the Work Force - NYT (editorial) There is a durable belief that much of today’s unemployment is rooted in a skills gap, in which good jobs go unfilled for lack of qualified applicants. This is mostly a corporate fiction, based in part on self-interest and a misreading of government data.  A Labor Department report last week showed 3.8 million job openings in the United States in April — proof, to some, that there would be fewer unemployed if more people had a better education and better skills. But both academic research and a closer look at the numbers in the department’s Job Openings and Labor Turnover Survey show that unemployment has little to do with the quality of the applicant pool.  In a healthy economy, job openings are plentiful and unemployment is low. April’s tally of 3.8 million openings might sound like a lot, but it is still well below the prerecession average, in 2007, of 4.5 million openings a month. It is also far lower than the record high of 5.2 million openings in December 2000, when the survey was started near the peak of a long economic expansion.  Unemployment is also stubbornly high — 7.5 percent in April, or 11.7 million people, a ratio of 3.1 job seekers for every opening. No category has been spared: unemployed workers outnumber openings in all of the 17 major sectors covered by the survey. The biggest problem in the labor market is not a skills shortage; rather, it is a persistently weak economy where businesses do not have sufficient demand to justify adding employees.

Will Obamacare Hurt Jobs? It's Already Happening, Poll Finds - Small business owners' fear of the effect of the new health-care reform law on their bottom line is prompting many to hold off on hiring and even to shed jobs in some cases, a recent poll found. "We were startled because we know that employers were concerned about the Affordable Care Act and the effects it would have on their business, but we didn't realize the extent they were concerned, or that the businesses were being proactive to make sure the effects of the ACA actually were minimized," said attorney Steven Friedman of Littler Mendelson. His firm, which specializes in employment law, commissioned the Gallup poll. Forty-one percent of the businesses surveyed have frozen hiring because of the health-care law known as Obamacare. And almost one-fifth—19 percent— answered "yes" when asked if they had "reduced the number of employees you have in your business as a specific result of the Affordable Care Act." The poll was taken by 603 owners whose businesses have under $20 million in annual sales. The poll supported that anecdotal data with the finding that 48 percent of owners think the law will be bad for their bottom line. Just 9 percent of the small employers surveyed agreed that Obamacare would be "good for your business," while another 39 percent saw "no impact."

U.S. shale is a boon to manufacturers but not their workers (Reuters) - This city has been down for so long, it's hard to believe what's risen up here in the heart of America's "Rust Belt." On an industrial site littered with scrap metal, a French-Japanese joint venture called Vallourec Star has just opened a $1.1 billion state-of-the-art steel pipe mill. The plant, the largest capital investment by a manufacturer in northeast Ohio since the 1960s and Youngstown's first new steel mill since the 1920s, is a big example of the money that has flowed into the state's industrial sector in recent years thanks to the surge in U.S. natural gas and oil drilling. The uptick in energy exploration has prompted companies like The Timken Co. and U.S. Steel Corp. to pump hundreds of millions of dollars into their plants in the state to boost production. Wayne Struble, the policy director for John Kasich, Ohio's Republican governor, said the flood of energy-related dollars could be a major "game changer" for the state. But state employment data, academic research and a week-long tour of half a dozen factories in Ohio suggests the shale gas revolution has been a disappointment when it comes to job creation. "The industries benefiting are more capital intensive than labor intensive," said Tom Waltermire, the chief executive of Team NEO, the economic development agency for northeast Ohio. "Even a manufacturing renaissance won't require the same headcount per unit of output as we had 20 or 30 years ago. If it did require that, the renaissance would never happen."

“This was really eye-opening for me”: Fed’s Raskin shocked at low quality of work at local job fair - The first portion of Federal Reserve Governor Sarah Bloom Raskin’s remarks to the Roosevelt Institute earlier this month were pretty standard central bank fodder. But the second half of her comments offered an unusually personal look at one Fed official’s dismay with the country’s economic situation. Stumbling into a job fair near her house, Raskin was stunned by the generally low quality of positions available. In her own words: I decided on my way into work I would stop at a jobs fair. There was a jobs fair at a local community college close to my home and I thought, I’m going to, you know, instead of pounding through all this heavy data that we typically look at at the board of governors, let me just go into this job fair. I went in and I have to say the kinds of jobs that were being offered surprised me. There were a number of restaurant jobs, some jobs from the military. There was one job from a community bank. Then there were a slew of jobs from, of all places, swimming pool companies. I thought that was kind of interesting. When I inquired about what these jobs were, they were lifeguard jobs, which I thought also was quite telling because back in the day to be a lifeguard I didn’t think quite required an advanced degree. These were the kinds of jobs we got in high school summers, I thought.

U.S. wages fall amid overseas pressure -  Competition from China and other low-wage rivals, coupled with fallout from the 2007-09 financial crisis, has put American wages under such unprecedented strain that they have shifted into reverse -- not merely stagnating, but falling. "Water finds its equilibrium, its own level," said Jeff Joerres, chief executive of Milwaukee-based global staffing giant ManpowerGroup Inc., who refers to this accelerating leveling of wages as "global labor arbitrage." "It's happening so fast on a global scale that it's scary," Mr. Joerres said. In the U.S., the phenomenon is not limited to isolated and vulnerable sectors, such as commodity manufacturing. Rather, wages have fallen across the entire national economy -- down 1.1 percent in the 12-month period from September 2011 to September 2012, the most recent comparisons available. "Average weekly wages declined in every industry except for information," the U.S. Bureau of Labor Statistics reported in its latest economic census. That quarterly report has shown year-over-year declines only six times since the data collection began in 1978 -- and four of those have occurred since 2009.

Cutting wages won’t create jobs -  You know the summer has started when the restaurant industry fires up its annual campaign to blame the minimum wage for the lack of summer job opportunities for teens looking to make some side money. With few supporters on their side, restaurant industry advocates are now appealing to outdated myths about the impact of raising the minimum wage, in order to justify their campaign to block a long-overdue increase. The historical record already shows that cutting the minimum wage will not improve job prospects for teens. The federal minimum wage remained unchanged for ten years from 1997 to 2007, and over that time it lost over 22 percent of its purchasing power as the cost of living continued to rise – yet, even with the minimum wage effectively decreasing in real terms, teen employment continued to drop steadily over this period. If cutting the minimum wage for ten years in a row did not boost teen employment when we tried it before, why would we expect anything different today?

McD's worker sues: Don't pay by debit card - Gunshannon, a single mother of one daughter, quit her job at McDonald's and went to see an attorney, Mike Cefalo of West Pittston. A class-action lawsuit was filed Thursday in Luzerne County Court by Cefalo on behalf of Gunshannon and other employees, seeking damages, fees and costs.The suit seeks an unspecified amount of monetary damages and asks for punitive, compensatory and liquidated damages, plus legal fees and litigation costs against the company for its "ill-gotten gains contrary to justice, equity, good conscience and Pennsylvania law." Gunshannon said she didn't sign the card and chose to not enroll in the payroll system offered because she felt the fees would be exorbitant and actually drop her earnings below minimum wage.She was to be paid about $7.44 per hour - her paystub didn't list her hourly rate. Minimum wage is $7.25. According to the complaint filed, the JP Morgan Chase payroll card lists several fees, including a $1.50 charge for ATM withdrawals, $5 for over-the-counter cash withdrawals, $1 per balance inquiry, 75 cents per online bill payment and $15 for lost/stolen card. Gunshannon said she had taken her concerns to the main office of the franchise holder - Albert and Carol Mueller, trading as McDonald's, in Clarks Summit. She was told that the card was the only option, she said

Will the Robots Steal Your Paycheck? BREAKING: They Already Have ... For three decades, wages have evaporated as a share of the economy. Meanwhile, the proportion of national income consumed by profits, dividends, and capital gains has steadily grown. Capital 1, Labor 0.  So it's a bad time to be a working stiff in the U.S. But it turns out that this isn't just an American story. A pair of economists at the University of Chicago's Booth School of Business, Loukas Karabarbounis and Brent Neiman, are out with a new working paper showing that just as the rise of income inequality has been a global phenomenon, so too has been the fall of labor. Building off their previous research on the topic, the pair compiled data for 56 countries and found that worldwide, workers' share of GDP had fallen roughly five percentage points since the 1980s. So why are workers seeing their slice of the pie shrink? Blame robots, say Neiman and Karabarbounis. Specifically, cheap robots (or, if you'd prefer, cheap PCs, cheap industrial machinery, and cheap technology on the whole). As the digital revolution started unfolding in earnest during the 1980s, the cost of computing power fell precipitously. As a result, the pair suggest that companies began investing in high-tech equipment instead of comparatively inefficient and expensive employees. To oversimplify just a bit: Robots really have been taking our jobs, or at least our raises.

Minimum Wage: Catching up to Productivity: Between 1979 and 2012, after accounting for inflation, the productivity of the average American worker increased about 85 percent. Over the same period, the inflation-adjusted wage of the median worker rose only about 6 percent, and the value of the minimum wage fell 21 percent. As a country, we got richer, but workers in the middle saw little of the gains, and workers at the bottom actually fell behind.The economy did not always work this way. From the end of World War II through 1968, the wages for workers in the middle, and even the minimum wage, tracked productivity closely. The economy, bolstered by the labor, civil rights, and women’s movements, greatly expanded opportunity and delivered strong wage growth at the middle and even at the bottom. By the 1970s, however, conservatives and corporate interests had had enough. They regained control of the political system and enacted a series of economic changes that, taken together, greatly reduced the bargaining power of workers at the middle and bottom of the wage distribution. The link between productivity growth and wages was broken.

Faces of the Minimum Wage - AT least one part of the labor force has expanded significantly since the recession hit: the low-wage part, made up of burger flippers, home health aides and the like.Put simply, the recession took middle-class jobs, and the recovery has replaced them with low-income ones, a trend that has exacerbated income inequality. According to Labor Department data, about 1.7 million workers earned the minimum wage or less in 2007. By 2012, the total had surged to 3.6 million, with millions of others earning just a few cents or dollars more. In his State of the Union address in February, President Obama made raising the federal minimum wage his banner economic proposal. The White House argued that increasing the wage to $9 an hour from its current $7.25 and indexing it to inflation would lift hundreds of thousands of families above the poverty line. Combined with tax measures the administration has supported, Alan B. Krueger, the departing chairman of the White House’s Council of Economic Advisers, said that raising the minimum wage would undo “a lot of the rise in inequality we’ve seen over the last 20 years.” But the proposal has gone nowhere. Democrats in Congress put forward a bill raising the minimum wage to more than $10 an hour, and their Republican counterparts voted it down.

Volunteering lifts job prospects of the jobless -  Unemployed Americans stand a much better chance of finding a paying job if they first work for free. That is the key finding from a new federal study that is billed as the first empirical examination of the benefits of volunteering for out-of-work Americans. The report, to be released Tuesday by the Corporation for National and Community Service, a federal agency that encourages and facilitates volunteerism, found that jobless Americans increase their odds of finding work by 27 percent if they volunteer.  Strikingly, the benefits of volunteering flow most generously to those who do not have a high school diploma and to jobless people who live in rural areas — two of the groups that have the hardest time finding new jobs. While they forfeit income during the time they spend volunteering, the effort can be an investment: Those groups increase their chances of finding work by more than 50 percent by volunteering, the study found.

Counterparties: Unpaid internshit - A Federal district judge in Manhattan has ruled that Fox Searchlight Pictures violated state and federal labor laws by using unpaid production interns on “500 Days of Summer” and “Black Swan”. The ruling in the “Black Swan” case could have a big impact for the estimated 1 million American college students who work in unpaid internships. Ross Perlin, author of the 2011’s “Intern Nation”, says the decision could end decades of what’s effectively “wage theft”: At their peak following the 2008 crash, unpaid internships were increasingly crowding out paid ones and replacing regular positions altogether, in the process turning the entry-level job into an endangered species. It was “a capitalist’s dream,” as sociologist Andrew Ross put it: free white collar labor made to seem almost entirely normal. Dylan Matthews — a former intern himself — writes that the ruling has the effect of turning a 2010 Department of Labor fact sheet into established law: the judge in the Black Swan case said Searchlight’s internships violated all six of that document’s criteria on what an internship should be. Rebecca Greenfield — whose LinkedIn profile suggest that, yes, she’s been an intern — talked with both of the plaintiffs. Both were well-off enough to afford to perform free labor. That unpaid internships favor the wealthy isn’t a new argument, but recent legal scrutiny hasn’t gotten rid of the practice. ProPublica is running an investigation into the intern economy — there’s even a Kickstarter campaign to help them hire an intern to cover interns. The organization’s research intern has held six internships, both paid and unpaid, and writes that she’s struggled financially since finishing grad school in 2011. She does, however, say that she’s both learning and getting paid at ProPublica.

The unpaid internship racket — MSNBCLast week, a federal judge in New York named Judge William H. Pauley III ruled that three unpaid internships for Fox Searchlight Pictures were in violation of the Fair Labor Standards Act, paving the way for a monetary judgment for three plaintiffs and for class action lawsuits against Fox and other employers who have maintained unpaid internships. Might this be the end of our modern free-labor apprentice system? If so, good riddance. Unfortunately, Pauley’s decision didn’t address the biggest moral objection to unpaid internships: they’re starkly inegalitarian. Wealthier kids are in a much better position to work free of charge than non-wealthy kids, especially when you take into account the burden of college debt. Giving the rich more opportunities for career advancement than the poor isn’t against the law (except insofar as it might have a disparate impact on minorities, who are protected under civil rights law—an issue the plaintiffs in the Fox case didn’t raise). But rigging career success to favor rich kids does violate most people’s innate sense of fairness. One especially crass method to parcel out internships has been for wealthy parents to donate them at high-priced fundraising auctions for fancy private high schools that their children attend. The philanthropic impulse is sincere (especially since such auctions typically fund scholarships for lower-income students at the schools). But the effect is to rig opportunity so efficiently that the non-elect never have the opportunity to learn such internships exist much less acquire (i.e., purchase) them.

7-Eleven‘s Modern Day Plantation System - Who in America is willing to work 100 hours a week without getting paid for those brutally long hours (not to mention without the time-and-a-half pay required for overtime)? The answer should be, “no one.” But for undocumented immigrants, who don’t have the right to take above-board, normal jobs, almost any job, no matter how abusive or how low the pay, is better than nothing—especially if they owe debts to criminal smugglers who know where their families live.  According to the New York Times, fourteen 7-Eleven franchises have been charged with raking in $180 million since 2000 in illegal profits from underpaying employees, and another 40 franchises are under investigation. Employees who should have been paid as much as $1000 a week were paid only $300-$500 while being forced to live in unregulated, substandard boardinghouses operated by the stores’ owners. It took 13 years for an employee to finally complain about wage theft and call in the authorities to break up the illegal operation. That’s a good measure of the fear and intimidation that keeps the undocumented in the shadows and lets greedy employers get away with paying sweatshop wages.

The Not-So-Good Old Days - NYT - In 1950, a young man, with or without a high school degree, would have found it much easier than it is today to get and keep a job in the auto industry. And in that year, according to Colin Gordon, a historian at the University of Iowa, the average autoworker could meet monthly mortgage payments on a median-priced home with just 13.4 percent of his take-home pay. Today a similar mortgage would claim more than twice that share of his monthly earnings.  Other members of the autoworker’s family, however, might be less inclined to trade the present for the past. His retired parents would certainly have had less economic security back then. Throughout much of the 1960s, more than a quarter of men and women age 65 and older lived below the poverty level, compared to less than 10 percent in 2010.  In most states, his wife could not have taken out a loan or a credit card in her own name. If she wanted a job, she had to turn to the “Help Wanted — Female” section of the classifieds, where she might learn, as one 1963 ad in this newspaper put it, that “you must be really beautiful” to be hired.

Who Killed Equality? - There are two main schools of thought on income inequality: The fatalists, who contend that rising inequality is the ineluctable result of a changing economy, and the redistributionists, who blame a skewed tax system and lethargic government. Perhaps it’s time to consider a third. Fatalists conclude that government hasn’t caused inequality -- taxes and social services haven’t changed all that much -- so government action raising taxes or increasing infrastructure spending, for example, won’t fix it either. The only possible remedy is more education and training for workers, which will take decades. Shame, isn’t it?  The redistributionists agree with much of this analysis. But they think the fatalists understate both how much the government has contributed to inequality by cutting taxes on the rich and not investing in the poor, and how much good it could still do. In a new paper for the Economic Policy Institute, Andrew Fieldhouse makes the most optimistic version of this case.

“Technology Causes Inequality” Refuted - David Cay Johnston has a nice writeup of a recent paper on inequality based on the World Top Incomes Database. The paper, by Facundo Alvaredo et al., is important because it largely refutes the idea that technological change is the big reason for diverging incomes between skilled and unskilled workers. As Johnston writes: That [sharply different levels of increased inequality] is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy. As the paper shows, the income share of the top 1% in the U.S. declined from a high of around 24% just before the Great Depression to a low of about 9% in the late 1970s. Since then, it has soared all the way back to about 23% just before the Great Recession, but falling back to 20% in 2010. Other English-speaking countries have had similar “U shaped” patterns, as the authors describe them. The paper gives examples of other countries where the 1% share is permanently below its 1920s level, such as Germany, Japan, France, and Sweden. In all four cases, that share is only about 10%. As Johnston emphasizes, these countries are all essentially equal to the U.S. technologically so their substantially lower levels of inequality stand in direct contradiction to frequent economists’ claims that technology is the problem (Richard Freeman has a balanced analysis).

RIP, American Dream? Why It's So Hard for the Poor to Get Ahead Today - Now, we like to think of ourselves as a classless society, but it isn't true today. As the Brookings Institution has pointed out, America has turned into a place Horatio Alger would scarcely recognize: we have more inequality and less mobility than once-stratified Europe, particularly the Nordic countries. It's what outgoing Council of Economic Advisers chief Alan Krueger has dubbed the "Great Gatsby Curve" -- the more inequality there is, the less mobility there is. As Tim Noah put it, it's harder to climb our social ladder when the rungs are further apart. And it's getting worse. Inequality is breeding more inequality. It's a story about paychecks, marriage, and homework. Now, it's not entirely clear why the top 1 percent have pulled so far away from everyone else, but there's a long list of suspects. Technology has let winners take, if not all, at least most, in fields like music; deregulation has set Wall Street free to make big bonuses off big bets (and leave taxpayers with the bill when they go bad); globalization and the decline of unions have left labor with far less leverage and share of income; and falling top-end tax rates have exacerbated it all. But high-earners aren't just earning more today; they're also marrying each other more. It's what economists romantically call "assortative mating" -- and Christine Schwartz, a professor of sociology at the University of Wisconsin, estimates inequality would be 25 to 30 percent lower if not for it.

Debating the Rise of the Top 1 Percent - So some papers that will make up a symposium in the summer issue of the Journal of Economic Perspectives about the rise of the top 1 percent of incomes are hitting the airwaves. Larry Mishel and I are contributing one as well, The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes. Greg Mankiw mounts a self-described “defense” of the top 1 percent here (PDF), Miles Corak writes about the implications of inequality for mobility here (PDF), and Alvaredo, Atkinson, Piketty and Saez examine the top 1 percent in historical and international perspectives here (PDF).1 Our argument (shocker) is that the rise of the top 1 percent of incomes is not simply the result of a competitive, well-functioning market rewarding skills and capital to the precise degree necessary to elicit their supply. Instead, lots of the rise in top 1 percent of incomes is about the creation and/or redistribution of economic rents. We highlight the two occupations that dominate the top 1 percent—corporate executives and finance professionals—and review the voluminous data and research literature that strongly suggests that these occupations exercise substantial market power over their own pay, and that their pay exceeds the contribution they make to economic output.

It is hard to defend the 1 per cent by claiming their contribution added value - Bill Mitchell - Writer of popular textbooks on macroeconomic myths, N. Gregory Mankiw has just put out a paper – Defending the One Percent – which is due for publication in the Journal of Economic Perspectives. The paper presents a narrative about the shift in the US personal income distribution (sharply towards higher inequality) since the 1970s in terms of rewards forthcoming to exceptionally skilled entrepreneurs who have exploited technological developments to provide commensurate added value (welfare) to all of us. As a result, rewards reflect contributions and so why is that a problem? In other words, the “left” (as he calls the critics of the rising inequality) are wrong and are in denial of reality. That view is unsustainable when the evidence is combined with a broad understanding of the research literature. Ability explains the tiniest proportion of the movements in income distribution. Social power and class, ignored by the mainstream economics approach, provides a more reliable starting point to understanding the rising inequality.

The complacency of the meritocrats - I like Greg Mankiw.  But he has a huge blind spot when it comes to inequality. Mankiw was an economic adviser to Mitt Romney, whose party platform and vice presidential candidate endorsed deep cuts in Pell Grants, Medicaid, nutrition and housing assistance, and other programs that benefit poor and low-income Americans. These proposed cuts were matched by deep tax cuts at the top of the income distribution. In his latest essay, “Defending the one percent,” Mankiw attempts to explain the philosophical underpinnings for such policies. Mankiw joins the tradition of grant economists such as Kenneth Arrow and Amartya Sen who have pondered inequality. Yet I’m puzzled by Mankiw’s argument, which combines a breezy tone with extreme disdain for “the left,” an ecumenical term he uses to describe everyone from President Obama to French President Francois Hollande to Joseph Stiglitz and the Occupy movement.  It’s not surprising that a bright kid from a modest background who became a Harvard professor holds sunny views of American meritocracy. I wouldn’t dismiss the reality of that. Yet almost by definition, most people have different experiences.

The Bigger Problem With Mankiw's Plan to Give Everything to the One Percent - Dean Baker - Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people. While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible. The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market. Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.

“The Political History of American Inequality” - Yves Smith -, which is a portal for news and data about income inequality, has published a particularly well-presented paper, The Political History of American Inequality, by Colin Gordon, a professor of history at the University of Iowa who has focused on 20th century American public policy and political economy. I’ve sampled it, and it’s clear and engagingly written and has great interactive chart porn, as you can see (you can play with the charts below).

The importance of redistribution - The US is becoming more and more a society of haves and have-nots, a society that could allow a candidate for president to make claims about merit that suggest that anyone who isn't a successful "have more" is just plain irresponsible (Romney's infamous 47% speech to a private group of wealthy and powerful fundraisers).  The Great Recession--engendered in large part by the greed of the have-more class, especially bankers and corporate managers and owners who reap disproportionate rewards for their labor or simple ownership of assets compared to the workers who make those rewards possible--has left the US an even more unequal society than it was before, as the wealthy have mostly recovered and moved ahead, while the middle class and poor have mostly suffered, with jobs that have moved from decent to inadequate and pay scales that continue to reflect the upper class's willingness to exploit the rest of society for their own selfish ends.  (And this is true even if that upper class gives "generously" to charities that further their own interests and push their own views about education or transportation or religion onto the recipients of that "charity".)

Time to take basic income seriously? --Paul Krugman is getting serious about the effects of technology and robots on the economy. He’s made noises about this theme before, but this time he’s taking things a bit further by offering a potential solution to the more sour consequences of the new industrial revolution.  If the fight is between capital and labour, and capital is winning, it seems subsidies in the form of some basic type of income may be called upon. As Krugman notes, the issue relates to the fact that it is now jobs on all fronts that are being jeopardised. Highly skilled, unskilled not to mention the professions most suited to little grey matter. The new inequality we are seeing has little to do with how well educated you are. It’s hard to penetrate beyond the barrier on education alone. The new inequality is about capital owners and non-capital owners. And increasingly, it’s about technology capital owners. Those who own the robots and the tech are becoming the new landlord rentier types. As Krugman concludes: Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt). So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.

The Capitalist’s Case for a $15 Minimum Wage - The fundamental law of capitalism is that if workers have no money, businesses have no customers. That’s why the extreme, and widening, wealth gap in our economy presents not just a moral challenge, but an economic one, too. In a capitalist system, rising inequality creates a death spiral of falling demand that ultimately takes everyone down.  Low-wage jobs are fast replacing middle-class ones in the U.S. economy. Sixty percent of the jobs lost in the last recession were middle-income, while 59 percent of the new positions during the past two years of recovery were in low-wage industries that continue to expand such as retail, food services, cleaning and health-care support. By 2020, 48 percent of jobs will be in those service sectors.  Policy makers debate incremental changes for arresting this vicious cycle. But perhaps the most powerful and elegant antidote is sitting right before us: a spike in the federal minimum wage to $15 an hour.  True, that sounds like a lot. When President Barack Obama called in February for an increase to $9 an hour from $7.25, he was accused of being a dangerous redistributionist. Yet consider this: If the minimum wage had simply tracked U.S. productivity gains since 1968, it would be $21.72 an hour -- three times what it is now.

The minimum-wage stimulus -- Nick Hanauer has a good idea today: raise the minimum wage to $15 per hour. The minimum-wage intervention would kill a lot of birds with one stone: it’s a win-win-win-win-win-win. First of all, most simply and most cleanly, it would immediately raise the incomes of millions of cash-strapped Americans — precisely the people who most need to be earning more than they’re making right now. A whopping 51 million people would benefit directly, along with 30 million who would benefit indirectly: these are enormous numbers. Secondly, the cost to the government of putting billions of extra dollars into these workers’ hands would in fact be substantially negative:   We currently spend $316 billion per year on programs designed to help the poor, with the lowest-income households receiving about $8,800 per year. Billions of those dollars would be saved as the workers in question saw their wages rise.  Thirdly, the move would constitute a huge economic stimulus program: Hanauer says that it would inject about $450 billion annually into the US economy every year. If you like massive stimulus but you don’t like the idea of the government paying for it, then a higher minimum wage is the program for you. Fourthly, and crucially, a higher minimum wage would be good for employment. A $450 billion stimulus, delivered directly into the hands of the Americans most likely to spend it, can’t help but create jobs across the economy.

Florida’s Governor Signs Business-Backed Bill Banning Paid Sick Leave - Florida Gov. Rick Scott (R) signed a bill on Friday that blocks local governments from implementing paid sick leave legislation, the Orlando Sentinel reports. He made his decision quickly, only taking four of the 15 days he legally had to review the bill before he signed it. In signing the bill, Scott sided with big business interests including Disney World, Darden Restaurants (owner of Olive Garden and Red Lobster), and the Florida Chamber of Commerce. The bill is part of a national effort to pass so-called “preemption bills” that would block paid sick leave legislation that is backed by the American Legislative Exchange Council (ALEC), a right-wing group that coordinates conservative laws across states. The state’s House Majority Leader, Steve Precourt (R), who was instrumental in putting forward the preemption bill, is an active ALEC member. The bill has made moot a 2014 referendum in Orange County that would have decided whether to require paid sick leave. More than 50,000 voters had tried to get the measure on the November 6 ballot but the County Commission voted it off. It made it on the ballot in 2014 thanks to a three-judge panel.

Taking the extreme out of extreme poverty - The Supplemental Nutrition Assistance Program—you know, the one where the policy debate is that the House wants to cut it by $21 billion over 10 years while the Senate "only" wants to cut it by $4 billion during that time—reduced the number of households with children living in extreme poverty by 48 percent in 2011.  Contrary to what Republicans yelling about poor people with TV sets and refrigerators would have you believe, the "extreme" in "extreme poverty" is no joke here. We're talking about households living on with less than $2 per person per day, and if you only count cash income, there were 1.6 million such households in 2011. If you include SNAP benefits, the number drops to 857,000. What's more: SNAP also cut, by roughly half, the rise in extreme poverty among households with children between 1996 and 2011, the study found. That rise, by the way, was driven by the grand and glorious welfare reform law of 1996. The Center on Budget and Policy Priorities reminds us that: One reason SNAP is so effective in fighting extreme poverty is that it focuses its benefits on many of the poorest households.  Roughly 91 percent of monthly SNAP benefits go to households below the poverty line, and 55 percent go to households below half of the poverty line (about $9,800 for a family of three).  One in five SNAP households lives on cash income of less than $2 per person a day.

Revisiting SNAP Rolls and the Economy - I recently pointed out that contrary to conservative claims that the food stamp, or SNAP, program has run amok, participation is high for a reason: there are still a lot of folks struggling to provide their families with adequate nutrition, and this program has been particularly responsive to that need.  This is what we call: a good thing, not a bad thing.  As I wrote then: SNAP rolls increased sharply in the recession, as you’d expect—along with UI, SNAP was and is highly elastic to increased need—[and] they’ve decelerated of late as the economy has slowly improved, though here again, it’s not improved as fast for those more exposed to food insecurity. But did they increase more than they “should have” over the past few years?  One simple way to answer that question is to build a statistical model of SNAP caseloads as a function of the economy, estimate the model through 2007, and then project caseloads over the next few years based on actual economic outcomes. Then compare your forecast to the actual path of food stamp rolls.  If the conservatives are right (and you’ve got a solid model), then your prediction should be well below the actual caseload path. Fortunately, that’s one of the things that Ganong and Liebman do in this new paper (I borrowed their figure below).  They predict the post-07 increase in the rolls based on the change in unemployment and find that their predicted caseloads pretty closely match what actually happened (the weighted estimate provides a particularly tight fit and it is the right one to use when forecasting the national caseload*).

Farm Law Fails in U.S. House on Cuts to Food Stamps - A $939 billion agriculture bill opposed by Republicans over crop subsidies and Democrats fighting cuts to the food-stamp program failed in the U.S. House of Representatives, throwing food and farm programs into limbo. The vote today came less than two weeks after the Senate passed a $955 billion version. Without a new law, current programs begin to expire on Sept. 30, potentially doubling milk prices next year. Republicans supported the measure 171-62 while Democrats voted 24-172 in opposition. House leaders can try again later with this version, or bring up a revised measure. The farm bill, which would benefit crop-buyers such as Archer-Daniels-Midland Co. (ADM), grocers including Supervalu Inc. (SVU) and insurers including Wells Fargo & Co. and Ace Ltd (ACE), has been working through Congress for almost two years. The current authorization for U.S. Department of Agriculture programs, passed in 2008, was extended last year after the Senate approved a plan and the House declined to consider its own.

A New Level of Draconian: One Reason the SNAP Bill Failed in the House - Running to NOW! at noon on MSNBC with Alex Wagner, but just read this statement from my CBPP colleague Bob Greenstein, a person who’s been deeply involved with the food stamp program for 40 years, and wanted to share it with you.…this extreme provision would allow states to terminate benefits to households where adults — including parents with children as young as 1 year old and many people with disabilities — are not working or participating in a work or training program at least 20 hours a week.  It would not require states to make any work opportunities available and would provide no jobs and no funds for work or training programs.  Thus, people who want to work and are looking for a job but haven’t found one could have their benefits cut off.  Their children’s benefits could be cut off, as well. Why would a state do this?  Because, under the measure, states would have a powerful financial incentive to pursue this route:  it allows them to keep halfof the savings from cutting people off SNAP, and to use the money for whatever state politicians want — tax cuts, special-interest subsidies, or anything else. You got that?  It’s bribing states with federal dollars to throw people and their kids off the SNAP even if they want to work or get trained, but can’t find a job or program.

What Congress and the Media Are Missing in the Food Stamp Debate - To follow the congressional debate about food stamp (SNAP) funding in the Farm Bill—and media coverage of that debate—you would think that the relevant issues are the deficit, rapists on food stamps, waste and abuse and defining our biblical obligation to the poor. The only thing missing from that conversation is the state of hunger in America today and how we should respond to it.“A good part of the food stamp debate in Congress and the media is not an evidence-based conversation, it’s fantasy-based,” says Jim Weill, president of the Food Research and Action Center (FRAC), a nonprofit organization working to improve public policies to eradicate hunger in the United States.  Weill insists that there is plenty that we know about food stamps that Congress and the media are busy ignoring, including from the government’s own data: a January 2013 Institute of Medicine (IOM)/National Research Council (NRC) report clearly described the inadequacy of SNAP benefits for most people struggling with hunger.

Welfare reform took people off the rolls. It might have also shortened their lives.: Welfare reform is pretty popular. A Rasmussen poll last July found that 83 percent of American adults favor the work requirement placed on welfare by the 1996 Personal Responsibility and Work Opportunity Act, commonly known as the welfare reform law. In 2002, closer to the bill’s enactment, a Pew poll found 46 percent of Americans thought the bill changed the welfare system for the better, and only 17 percent thought it changed things for the worse.  The average number of people receiving cash benefits from Temporary Assistance for Needy Families (TANF), the name welfare has gone by since 1996, has fallen from 12.6 million that year to 4.6 million in 2011. “Caseloads declined by 54 percent. Sixty percent of mothers who left welfare found work, far surpassing predictions of experts,” President Clinton wrote in a 2006 op-ed in the New York Times. “Child poverty dropped to 16.2 percent in 2000, the lowest rate since 1979, and in 2000, the percentage of Americans on welfare reached its lowest level in four decades.” But it’s not that simple. Indeed, the health consequences of the change, a new study suggests, are potentially quite large, and quite negative. The Health Affairs study, written by Columbia’s Peter Muennig and Zohn Rosen, along with the Wallace Foundation’s Elizabeth Ty Wilde, finds that welfare reform increases mortality among recipients, reducing life expectancy by about nine months.

BLS: State unemployment rates were "little changed" in May - From the BLS: Regional and state unemployment rates were little changed in May Regional and state unemployment rates were little changed in May. Twenty-five states had unemployment rate decreases, 17 states had increases, and 8 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today.... Nevada had the highest unemployment rate among the states in May, 9.5 percent. The next highest rates were in Illinois and Mississippi, 9.1 percent each. North Dakota again had the lowest jobless rate, 3.2 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 and many other states have seen significant declines (California, Florida and more). 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 three states: Nevada, Illinois, and Mississippi.  This is the fewest states with 9% unemployment since 2008. The second graph shows the number of states with unemployment rates above certain levels since January 2006. At the worst of the employment recession, there were 9 states with an unemployment rate above 11% (red).

Unemployment Fell in Half of U.S. States in May - Unemployment rates fell in half of U.S. states last month, led by drops in California, West Virginia, New York and Hawaii. The Labor Department said Friday that unemployment rates rose in 17 states and were unchanged in eight. Hiring has been steady nationwide, leading to a better job market in many areas of the country. Employers added jobs in 33 states last month. The biggest gains were in Ohio, Texas and Michigan. The unemployment rate dipped in the Northeast to 7.5% from 7.6%, and fell in the West to 7.8 percent from 8%. It was flat in the Midwest at 7.2% and edged up in the South to 7.2% from 7.1%. California and West Virginia had the largest declines in unemployment among all states. In California, the rate dropped to 8.6 percent from 9 percent in April. West Virginia’s rate fell to 6.2% from 6.6%.

State Economies Slog Towards Recovery - State level data released today by the Bureau of Labor Statistics shows which states have struggled the most to return to pre-recession employment levels. Between February 2013 and May 2013, fifteen states experienced decline in overall employment. The Midwest continues to show the weakest employment growth, with 0.0 percent job growth over the three-month period from February 2013 to May 2013. At the same time, both the South and West have slipped to underwhelming growth rate of 0.2 percent from February to May. In May 2013, there were three states—Nevada, Illinois, and Mississippi—with unemployment rates of 9.0 percent or more, down from four states with such high unemployment rates in April and seven in March of 2013. Meanwhile, there are now eight states in which the unemployment rate is less than 5.0 percent, including Nebraska and North Dakota, which have rates less than 4.0 percent.

Midwest, Southern States Register Lowest Unemployment - Half the nation’s states registered declines in their unemployment rates in May, with the lowest rates in the Midwest and South. But Western states still register the highest joblessness, according to a Labor Department report released Friday. In May, Nebraska and the Dakotas had the lowest unemployment rates, which were all at or below 4%. Nevada, Illinois and Mississippi had the highest rates, all above 9%. Seventeen states saw their jobless rates rise in May from the prior month while eight states and the nation’s capital showed no change, the report showed Nationwide, unemployment stood at 7.6% in May, up from 7.5% in April, the Labor Department said earlier this month. June unemployment figures will be released July 5.  Changes in unemployment remained relatively stable in May but nearly every state saw rates fall since the period last year. The fraction of people out of work and looking for work in the West was highest, reaching 7.8%, down from 8% in April. Unemployment also dropped in the Northeast to 7.5% in May, down a tenth of a percentage point from April. It rose slightly in the South to 7.2%, and remained flat in the Midwest. Forty-one states saw unemployment rates drop since last May, with the largest declines in Hawaii, which was down nearly 23%, Utah, California and Florida. Job woes expanded in only four states from a year ago: North Dakota, Tennessee, Illinois and Delaware.  See the full interactive graphic.

Ongoing State Jobs Deficits—Keeping State Employment Gains in Perspective - Friday’s infographic from Stateline at the Pew Charitable Trusts shows year-over-year job creation at the state level. We track state-level job trends at the Economic Policy Institute also, paying particular attention to trends in job creation and state unemployment rates. These trends are important—they provide point-in-time information and benchmark states’ progress getting back on track since the start of the Great Recession in 2007. Our monthly analyses track trends over the previous three months, six months and year. Many of our EARN state partners produce reports that drill down deeper in their respective state labor markets. It’s important, though, to step back and look at these recent trends in the context of job loss during the Great Recession and population growth since the beginning of the recession. This lens on state economies tells a very different, though equally important, story about what is happening in the labor market at the state level. We see, for instance, that despite the fact that Texas has led job creation, with 326,000 jobs gained between April 2012 and April 2013, it continues to have a jobs deficit of nearly 600,000 jobs. In other words, in order for Texas to return to pre-recession employment rates, the state would need to create another 594,100 jobs.

Illinois' finances worst ever in FY 2012-auditor (Reuters) - Illinois' finances sank deeper into the red in fiscal 2012, with the general revenue fund deficit hitting a record $9.1 billion as increased spending outran a jump in revenue, according to a report released on Thursday by the state auditor general. The deficit for the fiscal year that ended June 30, 2012, was up $1.1 billion from fiscal 2011 when measured by generally accepted accounting principles, according to the comprehensive annual financial report. The bigger deficit was driven by a nearly $4.7 billion increase in spending that eclipsed revenue growth of $3.7 billion, the audit said. General fund revenue totaled $37.3 billion. Illinois' financial condition continued to be the worst of any U.S. state.

How Wall Street Fraudsters Plunder Public Finances, And How to Fight Back - Say your town needs a new bridge. It might turn to Wall Street to come up with strategies to finance the project. This is supposed to be a win-win arrangement, but in the lucrative municipal finance business, one side has turned out to be the big loser. Guess which? Nearly five years after Wall Street’s shady activities triggered massive funding crises for cities, states, and municipalities, the $3.7 trillion municipal finance cesspool has yet to be dredged. Banks continue to profit from their bad — or even fraudulent — advice that cost billions of dollars of taxpayer money. Meanwhile, the rest of us must tighten our belts, or pay higher taxes, or see services slide. Let’s take a look at how bankers cooked up scams to drain the public coffers and why they continue to get away with it.

Detroit Recovery Plan Threatens Muni-Market Underpinnings - Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default. Orr, appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city, proposed a deal last week that included skipping a $39.7 million payment on pension-obligation debt. The city is also set to default on unsecured unlimited-tax and limited-tax general-obligation bonds as it grapples with $17 billion in liabilities to avoid a record bankruptcy. By calling into question the safety of any security backed by a government’s general obligation to pay what it owes, Orr, 55, imperils similar debt across Michigan, the eighth-most-populous state. As local governments strive to rebound from the longest recession since the 1930s, they may confront higher borrowing costs. “It definitely sets a precedent, and there’s definitely going to be a penalty going forward for the city and the state,”

Detroit takes aim at its pensioners - If you want to wade through some unutterably depressing reading on this Monday morning, you should spend some time with the official Detroit Proposal for Creditors. It starts by noting that the city’s per capita income, averaged over its 684,799 residents, is just $15,261 per year. (That’s less than half the income of neighboring Livonia.) Auto insurance alone eats up a good $4,000 of that, for residents with a car. As a result, the real pain here is going to be felt by two main groups. The first is the companies who provide wraps for municipal debt — companies whose muni arms somehow managed to escape the financial crisis largely unscathed, and which had to expect some losses on all the debt they were insuring. It’s hard to feel any sympathy for them. But the second group — Detroit’s municipal retirees — had much less choice about taking on their unsecured exposure to the city’s finances. Looking at the straits Detroit is in, the bond default makes sense. But it’s not being driven by stratospheric pension costs, and the swipe at pensioners does look rather gratuitous.

Detroit Swap Banks Go First as Bankruptcy Looms: Muni Credit - Wall Street firms that sold interest-rate swaps to Detroit as part of $1.4 billion of pension-bond issues stand to get paid before investors and the retirees the borrowings were supposed to help. In 2009, the companies -- UBS and SBS Financial Products Co. -- could have forced the city to pay a fee to end the agreements, which were designed to cut the cost of the debt. Instead, the firms struck a deal giving them a claim on Detroit’s gambling-tax revenue, guaranteeing they’ll get paid $50 million a year. Under Emergency Manager Kevyn Orr’s proposal last week to restructure the insolvent city’s finances, the payments get priority over promises to retirees and holders of unsecured debt, including the pension borrowings. Being ranked among secured creditors gives the banks the same protection as investors in water and sewer bonds or general obligations secured by liens on state aid.

Rotting, Decaying And Bankrupt – If You Want To See The Future Of America Just Look At Detroit - Eventually the money runs out.  Much of America was shocked when the city of Detroit defaulted on a $39.7 million debt payment and announced that it was suspending payments on $2.5 billion of unsecured debt, but those who visit my site on a regular basis were probably not too surprised.  Anyone with half a brain and a calculator could see this coming from a mile away.  But people kept foolishly lending money to the city of Detroit, and now many of them are going to get hit really hard.   Detroit Emergency Manager Kevyn Orr has submitted a proposal that would pay unsecured creditors about 10 cents on the dollar.  Similar haircuts would be made to underfunded pension and health benefits for retirees.  Orr is hoping that the creditors and the unions that he will be negotiating with will accept this package, but he concedes that there is still a "50-50 chance" that the city of Detroit will be forced to formally file for bankruptcy. 

Coming to a Broke Municipality Near You: The Greek, Um, Jefferson County, Solution - Yves Smith - Jefferson County’s sewer system train wreck is now looking an awful lot like the periphery country in Europe mess. Jefferson County has been out of the headlines for a while, but the apparent endgame of its sewer system mess is almost certain to be a harbinger for the municipal bankruptcies that are growing like kudzu over the US. The short story of the Jefferson County mess was that it was required to build a new sewer system in the 1990s because it was oozing raw sewage into the Cahaba River. Rather than repair the leaks, the county commissioner signed a consent decree in 1996 that committed the sewer authority to an insanely high standard of performance, that of having no overflows at all.  But not only was the resulting plant insanely expensive, but the sewer project turned into a Wall Street pillaging event as well. JP Morgan bribed country commissioners to make sure it had the lead role in the financing (it even engaged what by any pre-2000s standard would be a criminal anti-trust violation, paying Goldman $3 million to absent itself) and loaded the county up with a swap-ridden finance confection that it couldn’t begin to understand that predictably blew up. Even with the stink-to-high-heaven corruption (20 local officials, including the mayor, were convicted), the sewer commissioners did nothing for years rather than default to get Wall Street’s attention or put the system in bankruptcy. Yet even though a JP Morgan banker was recorded saying that the payment of bribes (laundered through various intermediaries) was the cost of doing business, the bank and its employees got off scot free. To give you an idea of how horrific the financial structure was, we turn the mike over to Matt Taibbi, who recaps the state of play as of late 2009:

Throwing children in prison turns out to be a really bad idea: The United States still puts more children and teenagers in juvenile detention than any other developed nations in the world, with about 130,000 detained in 2010. And as it turns out, this is very likely a bad idea. A new paper by economists Anna Aizer and Joseph J. Doyle, Jr. offers strong evidence that juvenile detention is a really counterproductive strategy for many youths under the age of 19. Not only does throwing a kid in detention often reduce the chance that he or she will graduate high school, but it also raises the chance that the youth will commit more crimes later on in life.What the researchers found was striking. The kids who ended up incarcerated were 13 percentage points less likely to graduate high school and 22 percentage points more likely to end up back in prison as adults than the kids who went to court but were placed under, say, home monitoring instead. (This was after controlling for family background and so forth.) Juvenile detention appeared to be creating criminals, not stopping them.

Chicago schools facing cuts under new funding system - Public schools across Chicago are seeing budget cuts that could force layoffs, increased class sizes and more reductions to specialty programs, like art and music.. A teacher at Roosevelt High School confirmed a $1.1 million decrease in the school’s budget, Lincoln Park High School reported a drop of about $1 million and Goethe Elementary is slated for about $265,000 less. Teachers at Von Steuben High School said they weren’t sure exactly how much their budget decreased, but had been told they may no longer have a librarian, a writing center or an administrator to deal with discipline issues.Chicago Public Schools officials said, like any year, many schools may see cuts, while others are likely to see increases. District spokeswoman Becky Carroll did not say if the overall amount of money spent at the school level would decrease, noting that the budget is not yet final.CPS is fundamentally changing how it distributes money to individual schools. Instead of providing positions and buckets of money for specific programs, principals are getting a specific amount for every child that enrolls at their school. Some 40 schools and the district’s 100 charter schools have been funded this way for several years.

Philadelphia Closes 23 Schools, Lays Off Thousands, Builds Huge Prison - Philadelphia laid off thousands of school employees last week after the state of Pennsylvania continued its austerity measures against public schools. And while the state is essentially destroying Philadelphia public schools through under-funding (claiming budgetary concerns), it somehow found enough money to build a $400 million prison just outside of the city.  The Philadelphia public school system has been a target for school reform and Charter-enthusiasts for the past few years, and several figures (including the mayor) have defended charter schools as a viable replacement to the entire public school system. The school closures, which (of course) disproportionately affect schools in poor and minority neighborhoods, will force students to venture far outside of their own neighborhoods to attend their closest school. Charter schools in Philadelphia have been plagued by scandal and corruption, have no requirement to admit any student and can dismiss a student at any time. In the end, the closings will mean more overcrowding in the remaining public schools and higher unemployment in an already poor city. Good thing there's about 4,000 new beds about to open up just outside the city.

Teacher pensions are squeezing school funding across the United States, study says - If something doesn't change fast, many public school districts around the country will soon be paying enormous chunks of their per-pupil funding to cover the pension and health care benefits of retired teachers, according to a new study by the Washington, D.C.-based Thomas B. Fordham Institute. The first of three case studies was released this month, focusing on the School District of Philadelphia. Subsequent studies will soon be released on the Milwaukee Public Schools and Cleveland Metropolitan School District. At the heart of Philly’s problem, the Fordham report argues, are long-standing promises to teachers about both pensions and health care that were inadequately funded, especially after the stock market crashes of 2000 and 2008. Looking into the near future, the Fordham report estimates that the total cost of teacher retirement benefits in Philadelphia will explode from $73 million in 2011 to $349 million by 2020 — in constant 2011 dollars. To put that in perspective, the report frames the burden in terms of per-pupil cost, jumping from $438 in 2011 to $2,361 in 2020.

How The American University was Killed, in Five Easy Steps - Let’s go back to post World War II, 1950s when the GI bill, and the affordability – and sometimes free access – to universities created an upsurge of college students across the country. This surge continued through the ’60s, when universities were the very heart of intense public discourse, passionate learning, and vocal citizen involvement in the issues of the times. It was during this time, too, when colleges had a thriving professoriate, and when students were given access to a variety of subject areas, and the possibility of broad learning. The Liberal Arts stood at the center of a college education, and students were exposed to philosophy, anthropology, literature, history, sociology, world religions, foreign languages and cultures. Of course, something else happened, beginning in the late fifties into the sixties — the uprisings and growing numbers of citizens taking part in popular dissent — against the Vietnam War, against racism, against destruction of the environment in a growing corporatized culture, against misogyny, against homophobia. Where did much of that revolt incubate? Where did large numbers of well-educated, intellectual, and vocal people congregate? On college campuses. Who didn’t like the outcome of the 60s? The corporations, the war-mongers, those in our society who would keep us divided based on our race, our gender, our sexual orientation.

Giving Employers What They Don't Really Want - Reading the recent literature in the field of higher education, you might notice that what educators think employers want involves several trends:

  • 1. Employers want students to have college majors that provide them with readily transferable job knowledge and skills. The more professional the major, the better.
  • 2. They want students who have had access to top-quality means of knowledge transfer. In this view, perhaps MOOCs are hot because, in the ideal, the lectures would cost the students (and the colleges) next to nothing and be taught by the most famous scholars in the world.
  • 3. They want students who have demonstrated, through grades and standardized-test scores, that they are high achievers. In addition, employers want evidence of knowledge acquired in college.

The problem is that none of those three assertions holds up well, at least according to two recent surveys of what employers really want, one conducted by the Association of American Colleges and Universities and the other by The Chronicle.

College Graduates Face Tall Hurdles to Home Ownership - The volatile housing market has slowed purchases of starter homes, but it hasn’t wiped out college graduates’ desire for them. Members of the Class of 2013 regard buying their own house or apartment as the most significant consumer purchase on the path to adulthood, based on an online survey by The Wall Street Journal.  Among seven purchases on the survey, owning a home ranked first by far, followed by starting a 401K plan and paying for one’s own health insurance. Other options, in order of popularity, were buying a new car, paying for a major vacation, and buying a TV or sofa. The Wall Street Journal is working on a year-long project following members of the Class of 2013 on social media, as they move past graduation and into the “real world.” These answers were provided by members of that group via a private Facebook group.  More stories featuring the class of 2013 are here. Grads face tall hurdles to home ownership. First-time buyers’ share of home purchases has skidded to about 30% so far this year, below the 40% to 45% share “which historically would be considered normal,” says Lawrence Yun, chief economist for the National Association of Realtors. One reason is that investors are buying more homes for cash. Dr. Yun doesn’t see much of a recovery in first-time home buyers’ market share  for the next two to five years; he cites young adults’ heavy student-debt loads, tight credit and uncertainty about potential changes in federal consumer-protection rules governing home sales.

Recent Graduates Have Saved A Negative 13% Down-Payment On Their First Home - Considering the median price of a home in the US is $208,000 according to NAR, the average student debt balance is the equivalent of a 13% down payment. In other words, two-thirds of recent graduates have saved a negative 13% down payment toward their first home. Of course, these are the same people that the bulls are counting on for household formation, population growth, job creation and other equally irrelevant arguments for strong housing demand in the future. Take a look at the table below and tell us if you are still optimistic.

NYU’s Gilded Age: Students Struggle With Debt While Vacation Homes Are Lavished on the University’s Elite - A review of deeds and mortgages in some of the toniest towns on the East Coast reveals that not only is New York University financing luxury Manhattan brownstones and high rise condos for its faculty and administrators out of its nonprofit coffers, it has also been secretly financing country homes for a select group. These extravagances have fallen directly on the shoulders of financially struggling students. NYU ranks fourth in Newsweek’s 2012 list of the least affordable colleges. In September 2009, the New York Times published a remarkable exercise in inanity, profiling John Sexton, President of NYU, relaxing at his Fire Island beach house. We don’t learn from the interview that his home on Fire Island has been financed since 1994 by several million dollars in loans from the NYU School of Law Foundation and NYU itself, according to the Suffolk County Clerk’s records. This is not the only residence that NYU has made possible for its President. He has the use of two well appointed apartments owned by NYU in Manhattan. Sexton, who turned 70 in September, is also set to receive a length of service bonus of $2.5 million in 2015 and an annual pension of $800,000 when he retires. That pension is the equivalent of NYU taking $10 million of its assets and placing them in an immediate annuity for Sexton.

NYU Administrators Create Student Debt Slaves to Subsidize Summer Homes, Ginormous Pension - Yves Smith - When union members demand decent pay levels and work conditions, they are charged with featherbedding and overmanning or the new neoliberal catchall, “demanding uncompetitive wages”. But when the upper crust loots institutions, the mainstream media is typically missing in action. The latest find is from Pam Martens, who has been keeping tabs on the administrator-enriching real estate racket at NYU. She ferreted out an egregious housing deal for Jack Lew when he was at NYU. As we wrote in February: He received over $840,000 for the academic year 2002-2003, which had him earning more than most university presidents, including NYU’s president. And on top of that, as Pam Martens ferreted out, he was apparently given a $1.3 million house. I’m not making that up, go read her piece. The mechanism was that NYU lent the $1.3 million to buy the house to Lew and then forgave it over five years. Oh, and they paid him the money to pay the interest too.  Now the house deal (which is rather bizarre given that NYU owns lots of nice faculty housing) might be what made Lew’s pay deal so out of line relative to his job. But if the forgiveness of debt was not included in the total, it’s even more insane, the equivalent of $1.1 million a year. There’s simply no way this compensation level (or the house side deal) was justified by any notion of what the position demanded. You don’t need a marquee name for an operations job. I can give a long list of people I know personally who have more relevant experience and be happy with a ton less money. And it’s important to recognize that this sort of rent extraction by unproductive overhead is a significant contributor to the explosion in education costs. 

Student Debt Relief Companies Charge Excessive Fees For Free Programs: Report - Student borrowers are getting ripped off by private companies that offer to help them manage their loans but then charge hundreds of dollars for services the federal government offers for free.That's according to a report released Wednesday by the National Consumer Law Center, a national non-profit that advocates on behalf of low-income individuals. Nationwide, outstanding student debt tops $1 trillion, according to the Consumer Financial Protection Bureau, an agency that has taken a keen interest in education loans, and NCLC points to the "growing student loan debt relief industry" as cause for concern.  "There were a shocking number of inaccuracies and lack of transparency among the companies in our investigation," NCLC attorney Deanne Loonin, an author of the report, said in a statement.

Student loan debt has nearly doubled in last five years, report says - Student loan debt has nearly doubled in the past five years, according to a congressional report released Tuesday, less than two weeks before interest rates on federally backed student loans are set to jump to 6.8% from 3.4%. Sen. Amy Klobuchar, a Minnesota Democrat who is the vice chair of the congressional Joint Economic Committee, released the report and said it underscores the need for “immediate action” to block the rate hike scheduled for July 1. With little time to head off that hike, however, a bill has yet to clear the Senate. A pair of competing bills failed test votes earlier this month. The House in May passed a bill basing interest rates on the 10-year Treasury note. The report highlights the burden of debt on students now. Debt has increased from $550 billion in the fourth quarter of 2007 to just under $1 trillion in the first quarter of 2013, it says. If interest rates on subsidized Stafford loans double on July 1, a student borrowing the maximum amount would face an extra $4,500 in costs, the report calculated. House Speaker John Boehner, an Ohio Republican, said the House has done its work. “It’s time for the Senate to do theirs,” he said at a press conference on Tuesday.

Detroit’s Recovery Plan Dips Into Pensions to Keep City Afloat - Detroit Emergency Manager Kevyn Orr's proposal to cut pension benefits previously thought sacrosanct for 30,000 workers and retirees may tip Detroit into bankruptcy if unions don't play along. Getting dispassionate bondholders to take partial payment will be easier than wresting retirement cuts from unions, said Ken Schneider, a Detroit bankruptcy lawyer. He said Orr’s June 20 meeting with unions and creditors meant to frame negotiations over $17 billion in debt and obligations may presage the largest U.S. municipal bankruptcy. “It’s one thing for union leaders to say, ‘This was forced on us by a court,’ and something else to say, ‘We agreed to this,’” Schneider said in a telephone interview. “That’s a harder sell to your members.” Orr’s plan will test retirees’ contention that Michigan’s constitution protects vested pension benefits. No such shield exists, the state-appointed manager’s advisers said June 14 when they unveiled his plan to restructure Michigan’s largest city, a former auto-manufacturing powerhouse that lost one-quarter of its population since 2000. Orr has said that if he doesn’t get what he wants, Chapter 9 bankruptcy would be a last resort.

Illinois Pension Impasse Predicted in Penalty Jump - Illinois borrowing costs are headed for the biggest monthly increase since May 2012 as investors bet two rating cuts won’t be enough to spur lawmakers to fix the worst-funded U.S. state pension system. The extra yield bond buyers demand on the state’s taxable debt has jumped 0.25 percentage point this month, data compiled by Bloomberg show. The rising borrowing costs and credit reductions this month from Moody’s Investors Service and Fitch Ratings are the backdrop for a special session set for today. It’s the second called by Democratic Governor Pat Quinn in 10 months after lawmakers failed to deal with a $97 billion unfunded pension liability before leaving the capital May 31. Even as lawmakers prepared to convene, they acknowledged the likelihood of failure. Democratic leaders are moving to create a conference committee to develop a compromise, said Rikeesha Phelon, spokeswoman for senate President John Cullerton. The governor will call another special session next month, according to his spokeswoman, Brooke Anderson.

State pensions in America. Ruinous promises - California still has a mammoth long-term pension gap. If it used the same pension accounting standards as private companies must, its total debts would be a terrifying $1 trillion. California is far from alone. Few fiscal problems are as grave, or as little understood, as underfunded state and municipal pensions. The funding gap for all state schemes is estimated at $4 trillion—25% of GDP. Some states have allowed staff to “spike” their final-salary pensions by racking up lots of overtime in their last year on the job, vastly increasing their retirement payouts. Some retire with packages worth millions. The states granted these generous benefits on the basis of recklessly optimistic assumptions, such as that their pension funds’ assets would continue to generate the same bumper returns as during the equity bull market of the 1980s and 1990s. It gets worse. To calculate the cost of pensions, one must use a discount rate on future liabilities. The higher the discount rate, the lower the liabilities appear to be. States and municipalities use the expected return on assets in their pension funds, which they guess to be 7.5%. But this is a strange approach. The liability will still exist even if the expected return is not achieved. If the stockmarket performs badly, taxpayers will have to make up the shortfall. Pensions are a bond-like liability, so the discount rate should be based on a bond yield. In any case, the states’ assumed investment return is far too high at a time when Treasury bonds yield a piffling 2%.

Suddenly, Retiree Nest Eggs Look More Fragile - MANY Americans don’t have enough money to carry them through retirement — and many of them know it. That’s clear from recent studies, and it’s evident in the responses to last week’s Strategies column, “For Retirees, a Million-Dollar Illusion.”  The column showed that in this environment of ultralow interest rates, a retired couple could easily exhaust a $1 million bond portfolio, even with relatively modest withdrawals. Most households only wish they had that kind of money. As I wrote on the Bucks blog in an initial response to readers, the column focused on $1 million because of its symbolic power, not because it represents the savings of a typical American family. In fact, the median financial net worth of American households of all ages, excluding homes and cars, is $10,890, as estimated by Edward N. Wolff, an economics professor at New York University. For households headed by those in the 55-to-64 age bracket, it’s $61,300. A large majority of Americans are in far worse straits than the millionaire households. Some readers asked how to protect their financial nest eggs. Others observed that in this economy, saving more and spending less wasn’t always possible. I’ll return to challenges like these in future weeks. But first, it’s worth examining some of the systemic issues that led to this state of affairs. My previous column didn’t directly address the big picture — and that picture is troubling.

Would immigration “amnesty” help Social Security? - The Center for American Progress has released a report by Adriana Kugler, Robert Lynch, and Patrick Oakford arguing that legalizing undocumented immigrants will generate significant benefits for Social Security’s financing. According to SSA, about half of undocumented immigrants currently pay payroll taxes, using a false or expired Social Security number. The other half work “under the table.” Since neither group can legally collect benefits, this means that undocumented immigrants as a group improve Social Security’s finances. The CAP report argues that Social Security would benefit even more if these individuals were legalized: immigrants currently working under the table would begin paying taxes and even those who currently pay into Social Security would earn more when legalized and therefore pay higher taxes. That’s true, but immigrants who pay into Social Security will eventually collect benefits out of it. And, due to low average earnings and short working lives, legal immigrants on average receive more in benefits than they pay in taxes. In addition, undocumented workers who had paid taxes prior to legalization would, if they are able to document them, be able to claim benefits on those taxes. So while legalization would provide a short-term cash infusion to Social Security it would weaken the system’s finances over the long term.

How To Fix Social Security Disability Insurance - Social Security Disability Insurance has often been forgotten in the debate over the broader Social Security program. But Congress is beginning to pay attention, perhaps because the program is due to become insolvent by 2016. The program needs to be fixed. The question is, as always, how.There are some interesting solutions—many aimed at keeping people working or helping to get them back in the workforce after a bout of disability. These reforms won’t work for everyone—many SSDI recipients are permanently disabled. But they may work for some. SSDI is critically important to people with disabilities. It benefits nearly nine million workers and more than two million of their dependents. And for many, it is a key part of the safety net that supports them when illness or injury makes it impossible to work.Yet, the program has big problems. In 2009, it paid disabled workers $121 billion, triple what it paid in 1989.It takes in less money than it pays out in benefits and will be insolvent, at least technically, in just three years.It faces severe administrative problems, including long delays in processing applications, and a deeply troubled appeals process. In the words of the Social Security Advisory Board, the benefit process “may award benefits to individuals who do not meet SSA disability criteria and deny benefits to individuals who do met the criteria.” Perhaps most troubling, many believe its design discourages work—which is almost always bad public policy.

Let’s raise Social Security taxes now - The most recent report from the Social Security trustees was virtually unchanged from last year and showed a 75-year deficit equal to 2.72% of taxable payrolls.  That figure means that if payroll taxes were raised immediately by 2.72 percentage points – 1.36 percentage points each for the employee and the employer – the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2088.  Alternatively, benefits would have to be cut by 16.5%– or by 19.8% if the reductions were limited only to new beneficiaries. We need to eliminate Social Security’s deficit, and we need to do so soon for two reasons.  First, the sooner we make changes the smaller they need to be.   If nothing were done until the trust funds were depleted in 2033, the payroll tax would have to be increased by 4.1 percentage points at that point, with the increase rising to 5.1 percentage points by 2087.  Alternatively, benefits would have to be cut to match scheduled taxes, which would require a 23% cut in 2033 rising to 28% in 2087. Second, the sooner we make changes the fairer it will be to young workers, who are already scheduled to contribute more than they will get back in benefits.  If the change were made this year, the second half of the baby boom demographic group (who are mainly in their 50s today) would contribute to solving the problem; if we wait, the entire baby boom gets off scot free by retiring before any changes are made.  They escape entirely from helping to solve a problem that has been evident during their entire working life.

Choice of Health Plans to Vary Sharply From State to State - When a typical 40-year-old uninsured woman in Maine goes to the new state exchange to buy health insurance this fall, she may have just two companies to choose from: the one that already sells most individual policies in the state, and a complete unknown — a nonprofit start-up. Her counterpart in California, however, will have a much wider variety of choices: 13 insurers are likely to offer plans, including the state’s largest and best-known carriers. With only a few months remaining before Americans will start buying coverage through the new state insurance exchanges under President Obama’s health care law, it is becoming clear that the millions of people purchasing policies in the exchanges will find that their choices vary sharply, depending on where they live. States like California, Colorado and Maryland have attracted an array of insurers. But options for people in other states may be limited to an already dominant local Blue Cross plan and a few newcomers with little or no track record in providing individual coverage, including the two dozen new carriers across the country created under the Affordable Care Act.

Costs of Alzheimer's disease could bankrupt Medicare - "Alzheimer's is an incredible burden,” said Alan Holbrook. “We weren't going to be a burden on anybody. But after this, as this started happening, we started looking at our finances, and we realized that we had maybe five or six years worth of ability to pay her bills,” said Holbrook, who’s wife eventually had to be put in a long-term care facility. At a price-tag of $150,000 each year, the cost of her care was a financial storm their savings simply couldn't weather. So Holbrook applied for Medicaid. “You're helping to pay my wife's bill here,” said Holbrook. Sadly, the Holbrooks’ experience is not an isolated one. Of the more than $200 billion per year that Alzheimer's costs families and society in general, 70 percent is covered by Medicaid and Medicare, according to the Alzheimer’s Association.

Obamacare Rollout Seen Slowed by Confusion Over Benefits - Judith Mayer Lynn, uninsured and battling breast cancer, should be a fan of the Affordable Care Act. Instead, she barely knows about it. The 56-year-old Nevada woman was unaware of subsidies in the law that will help people like her buy coverage in 2014, she said in an interview. Lynn didn’t know the act requires insurers to pay for prescription drugs, hospital stays and other services she’s spent the last two years scrimping to afford. Nor did she realize she can no longer be denied a policy due to her illness.Told of the benefits, Lynn remained unconvinced, skeptical of insurers and government alike. “It’s a joke,” she said. “There’s going to be loopholes in all of these provisions.” Such ignorance about the 2010 law is hardly unusual. An April poll by the Kaiser Family Foundation found that 40 percent of Americans weren’t even sure the act remained law. That’s raising concerns among supporters that many who stand to gain the most from Obamacare won’t sign up. A weak showing could undercut the act’s effectiveness, handing a political weapon to its Republican foes as the U.S. Congress rolls toward mid-term elections next year.

ObamaCare’s Relentless Creation of Second-Class Citizens (2) - When talking about ObamaCare, single payer advocates sometimes hear “But the ACA helped me,” or “the ACA helped my sister,” and so on. Of course, a program as large as ObamaCare is bound to help somebody; it’s just that single payer advocates want everybody to be helped in the same way that you or your sister were. And that’s the problem with ObamaCare: It doesn’t treat health care as a basic human right that should be guaranteed for all. Instead, ObamaCare uses a complex and intricate Rube Goldberg-esque system of eligibility rules to throw people into various buckets by past (and projected) income, age, existing insurance coverage, jurisdiction, family structure, and market segment. In a system so complex, people will inevitably be thrown into the wrong buckets, or land between buckets, because their personal circumstances don’t mesh well with the Rube Goldberg device.* Some citizens get lucky, and go to HappyVille; others, unlucky, end up in Pain City. The lucky are first-class citizens; and the unlucky, second class. In an earlier post, I gave three examples of the whimsical and arbitrary distinctions that ObamaCare makes between citizens who should be treated equally; in this post, I’d like to give three more.

The Affordable Care Act’s Prevention and Public Health Fund - What will it take for the Affordable Care, known more commonly as Obamacare, to succeed? Realistically speaking it will take a lot of things for the ACA to be a real success, but one vital area will be managing America’s chronic health problem. This is where Prevention and Public Health Fund comes it. Never heard of it before? Well let’s start with a little background. The fund was established when the Care Act was signed into law back in 2010. It’s mission is to fund projects aimed at improving American public health. For example outreach programs about healthy food options, walking and biking infrastructure projects, or increasing access to blood pressure screenings at the dentist’s office. Before the sequester the fund was supposed to invest $15 billion during its first 10 years. But Republican lawmakers have slashed its budget by 40 percent since last year. Now the fund is also being victimized by the Department of Health and Human Services who announced plans in April to withdraw $454 million from the fund. That money for the HHS will pay for outreach efforts concerning the federal health insurance exchanges being established in the majority of states. The move to withdraw the money from the fund was in response to Republicans repeating blocking funding requests from the HHS. When the news of the withdrawal by the HHS was announced the balance of the fund stood at $949 million.

What Sweden Can Tell Us About Obamacare - Last month, for the 37th time, the House of Representatives voted to repeal Obamacare, with many Republicans saying that its call for greater government involvement in the health care system spells doom. Yet most other industrial countries have health care systems with far more government involvement than we are ever likely to see under Obamacare. What does their experience tell us about Republican fears?  While in Sweden this month as a visiting scholar, I’ve asked several Swedish health economists to share their thoughts about that question. They have spent their lives under a system in which most health care providers work directly for the government. Like economists in most other countries, they tend to be skeptical of large bureaucracies. Yet none of them voiced the kinds of complaints about recalcitrant bureaucrats and runaway health costs that invariably surface in similar conversations with American colleagues. Little wonder. The Swedish system performs superbly, and my Swedish colleagues cited evidence of that fact with obvious pride.  The United States spends more than $8,000 a person per year on health care, well more than twice what Sweden spends. Yet health outcomes are far better in Sweden along virtually every dimension. Its infant mortality rate, for example, was recently less than half that of the United States. And males aged 15 to 60 are almost twice as likely to die in any given year in the United States than in Sweden.

Health Care Thoughts: Conference Wrap-up - So I do some conferences with a lot of people who are way smarter than me, people literally and figuratively on the cutting edge. What thoughts are dominating health care these days, especially the provider community? Here is a list of frequent talking points, further in-depth discussion of some of them later. The provider community is in chaos, seeking “what is the best strategic move to insure survival?” The focus of Obamacare isn’t clear, is it?

  1. quality is paramount
  2. cost reduction is paramount
  3. both are paramount
  4. nobody knows
  5. something will evolve

‘Premium Shock’ and ‘Premium Joy’ Under the Affordable Care Act - Starting on Oct. 1, Americans can purchase individual health insurance in what is known as the nongroup market on the newly established electronic health-insurance exchanges that were called for in the Affordable Care Act of 2010. That coverage will take effect on Jan. 1. In the meantime, Americans will be bombarded with information on the premiums they will pay for coverage on the exchanges. Much of that information will be pure speculation, and a good part of it will be strategic misinformation (a topic that I will explore more fully in a future post). So let’s review what the new arrangement seeks to accomplish.

ObamaCare Icebergs: Medical Debt and the Start-Up of the Federally-Run Exchanges - Yves Smith - An article published by the Boston Fed, gives a stark picture of the extent and severity of medical indebtedness in the US, and why Obamacare won’t remedy that problem. And we’ll discuss later that getting the machinery running looks likely to be another serious shortcoming with the program. Himmelstein start by reviewing the scale of the medical bankruptcy problem. In 2001, medical bills contributed to 50% of bankruptcies. By 2007, they played a role in 62%. The medical debtors were typically middle class. And of the people who declared bankruptcy for medical-related reasons, 78% were had medical insurance. As bad as that is, it masks the size of the overall medical debt problem. Consider:

    • 53 million working age adults reported having trouble paying medical bills in 2010. 30 million were contacted by a debt collector. 44 million were paying off medical debts on an installment plan
    • In 2010, 20.9% of all Americans lived in a household that struggled to pay medical bills. And insurance didn’t make a dent, since it a virtually identical proportion, 20.2% of insured, non-elderly people lived in a household with medical expense problems
    • A 2011 survey determined that 51% of uninsured 19 to 29 year olds had trouble paying medical bills or debts. But so did 29% of people in that age group who did have insurance
    • Consumer Reports found that the biggest financial problem for American households is paying for medical care

The article also stresses that Romneycare has not put a dent in medical bankruptcies in Massachusetts, that the 59% of bankruptcies before the program that had medical expenses as a trigger is “statistically indistinguishable” from the 53% afterwards. And if you look under the hood, you can see why. It’s crappy insurance.

Aetna Pulls Out Of California Individual Insurance Market In Response To Obamacare - If Obamacare's stated goal was to broaden the health insurance market, give more options to consumers, and generally lower the cost of health insurance, courtesy of the IRS' flawless execution of yet another unprecedented government expansion, it may be in for a tough time. Because while on paper every statist plan of centrally-planned ambitions looks good, in reality things usually don't work out quite as expected. Case in point the news that Aetna will stop selling health insurance to individual consumers in California at the end of 2013, in advance of Obamacare's complete transformation of the insurance market: a transformation which just incidentally may see most private health insurance firms follow in Aetna's steps and the emergence of a single-payer system along the lines of the British National Health Service. A government-mandated and funded system which, needless to say, crushes private enterprise, and ends up costing far more for all involved than an efficient market based on individual wants, needs and capabilities constantly in flux.

Is it time to tweak Obamacare? Sen. Joe Donnelly thinks so. - The Affordable Care Act defines a full-time worker as anyone who works 30 hours or more each week. That’s a really important definition, as businesses are required to provide health insurance to all of their full-time employees. Sen. Joe Donnelly (D-Ind.) thinks this is also a bad definition: He’s begun hearing from constituents whose employers have reduced their hours just below 30 per week, in order to dodge the employer mandate. On Wednesday, he introduced the Forty Hours is Full Time Act of 2013 with co-sponsor Sen. Susan Collins (R-Me.), which would – as the name implies – move the threshold for providing insurance up to 40 hours per week. Donnelly supported the Affordable Care Act in 2010, when he was a legislator in the House. But he also sees the need for tweaks like this one, in order to make health reform work. We spoke Thursday afternoon about his new bill, whether any changes to the health law will pass Congress and how implementation is going in Indiana. What follows is a transcript of our discussion, lightly edited for clarity.

Healthcare Needs Reform - kid dynamite - warning – this turned into a long meta-post… I got into an interesting Twitter discussion today with some folks about health insurance and ObamaCare.  I hate Twitter-debates about complex subjects, but this one didn’t go off the rails too badly.  I figured it was worthy of a blog post and some greater-than-140-character discussion.  You can scroll to the top here to see the initial tweet I was responding to. When I write about health insurance, let me be clear about something off the bat:  I am writing from a point of view of expertise only in my own experiences with the System.   I am not a scholar on National Health Care.  I have not spent years studying global nationalized policies and their features and costs.   I cannot tell you what ObamaCare will do for you (or for me) or for our national health care system.   I can only tell you one thing, as a guy who buys his own high deductible health care plan: the current system is fucked.

Supreme Court Decision Will Likely Reduce Prescription Drug Prices -  Thanks to the Supreme Court, it may soon become slightly easier to get the  cheaper generic version of some medications.  In the case of FTC v. Actavis, Inc. the Court decided 5-3 that the FTC has the power to try to stop “pay for delay” on anti-trust grounds.  This is a practice in which drug companies pay generic drug makers not to bring the generic version to the market. Without the competition the price of brand name drug remains high and the two companies basically split the extra profits. Justice Kennedy joined with the four liberals on the court to form the majority. Justice Alito recused himself. From the Syllabus: Although the anticompetitive effects of the reverse settlement agreement might fall within the scope of the exclusionary potential of Solvay’s patent, this does not immunize the agreement from antitrust  attack. This is a victory for the FTC, the Obama administration, consumers and tax payers. This will likely reduce the price of some drugs by bringing more generics to the market quicker. The FTC estimates this practice cost Americans roughly $3.5 billion a year. This should not only help save people money but should modestly improve the deficit given that health care programs make up a large segment of the federal budget.

Health Spending: Watching for a Rebound - Every new report about the American health care economy seems to confirm the same pattern: spending is rising at the slowest pace in decades. In 2013, health spending will grow less than 4 percent for the fourth time in five years and shrink as a share of the economy, according to the number crunchers at the Centers for Medicare and Medicaid Services. In February, the Congressional Budget Office forecast that spending on Medicare and Medicaid over the coming decade would be $382 billion less than it had predicted last August. The new numbers have provided an unexpected dose of optimism to the debate about squaring a budget deficit that is expected to widen sharply as the baby-boom generation enters retirement. But this optimism might be premature, because nobody knows for sure how long the slowdown in medical spending will continue. And there is reason to suspect it may not last long. The pace of health spending could pick up again as soon as the economy recovers. It depends on what is causing the decline: newfound efficiency or simply economic decline.

A Longer Look at Medical Inflation - Eric Morath of the Wall Street Journal reports today that "U.S. health-care costs fell in May for the first time in almost four decades, the latest evidence that government policies and an expansion in generic drugs are constraining prices." Maybe. But I'd like to push back on this once again. The chart on the right shows real medical inflation—that is, medical inflation above and beyond overall inflation. As you can see, over the past 30 years it's been on a noisy but fairly steady downward path. Each peak is lower than the previous one, and the same is true of each trough. If anything, though, this trend has slowed a bit over the past decade. It's still on a downward slope, but it strikes me as unlikely that government policies have had an awful lot to do with this. For a somewhat more pessimistic view, take a look at the chart below, which goes back 60 years. Aside from the noise, what you mainly see is a spike in the 1980s, followed by a reversion to the long-term average of about 1.5 percent. In other words, it's possible that we overreacted to what turned out to be a fairly short-lived swell from about 1983 to 1993 and are now overreacting to the fact that we've returned to our long-term average.

Only the Poor Die Young - People who are lower on the socioeconomic ladder (indicated by their level of education, occupation, or income) have shorter and less healthy lives, on average, than those on higher rungs. Indeed, life expectancy at birth often varies by 5-10 years, depending on social and economic well-being, with poorer people spending 10-20 more years of life suffering from illness or disability than their wealthier counterparts. In the nineteenth century, this situation would not have been surprising, given low average income, widespread poverty, and lack of social security. But such data are commonly reported for high-income countries today, including those ranking high on indices of economic prosperity and human development – even Western Europe’s highly developed welfare states. Long-term time-series data indicate that the socioeconomic mortality gap narrowed before the 1950’s, but has grown substantially since then. More puzzling is the fact that more generous welfare policies do not translate into smaller health disparities. Even the Nordic countries – world leaders when it comes to creating universal and well-designed welfare policies that cover citizens from cradle to grave – face significant health disparities, despite their relatively low income inequality.  

SARS-like virus has high mortality rate in Saudi Arabia, specialists say - A new virus responsible for an outbreak of respiratory illness in the Middle East may be more deadly than SARS, according to a team of infectious disease specialists who recently investigated a set of cases in Saudi Arabia. Of 23 confirmed cases in April, 15 people died — an “extremely high” fatality rate of 65 percent, according to Johns Hopkins senior epidemiologist Trish Perl, a member of the team that analyzed the spread of the virus through four Saudi hospitals.Saudi officials said that as of Wednesday, 49 people have contracted the disease and 32 have died. The infectious disease experts, who published their findings online Wednesday in the New England Journal of Medicine, reported that infection occurred by way of person-to-person contact and poses an especially serious risk because it is easily transmitted in hospital settings. Worldwide, the overall death rate from the Middle East Respiratory Syndrome Coronavirus — or MERS-CoV — is at 59 percent, according to the Centers for Disease Control and Prevention. That rate is expected to bounce around as new clusters of infection develop.

Autism Tied to Air Pollution, Brain-Wiring Disconnection - Bloomberg: Researchers seeking the roots of autism have linked the disorder to chemicals in air pollution and, in a separate study, found that language difficulties of the disorder may be due to a disconnect in brain wiring. Researchers from Harvard University’s School of Public Health found that pregnant women exposed to high levels of diesel particulates or mercury were twice as likely to have an autistic child compared with peers in low-pollution areas. The findings, published today in Environmental Health Perspectives, are from the largest U.S. study to examine the ties between air pollution and autism. One in 50 U.S. children are diagnosed with autism or a related disorder, according to the Centers for Disease Control and Prevention. Children with autism may be unresponsive to people, become indifferent to social activity and have communication difficulties. A separate study from Stanford University and published in Proceedings of the National Academy of Sciences is the first to suggest that weak connections between brain regions for speaking and reward may be why.

Want to stop flu epidemics? Give workers paid sick days -  Nearly a quarter of American workers have no paid time off, and researchers from the University of Pittsburgh have found that lack of access to universal paid sick leave is contributing to the spread of potentially dangerous infections. After simulating an influenza epidemic in Pittsburgh and surrounding areas, researchers found that giving people paid sick days reduced workplace flu infection rates by nearly 6 percent. The team of epidemiologists also investigated what they termed “flu days,” an alternative to comprehensive sick leave that allowed workers two paid days off to recover from the illness. One flu day resulted in a 25 percent decrease in infection trasmission; two paid days off resulted in more than a 40 percent decrease, according to the study. “The Centers for Disease Control and Prevention recommends that people with flu stay home for 24 hours after their fever breaks,” “However, not everyone is able to follow these guidelines. Many more workers in small workplaces than in large ones lack access to paid sick days and hence find it difficult to stay home when ill. Our simulations show that allowing all workers access to paid sick days would reduce illness because fewer workers get the flu over the course of the season if employees are able to stay home and keep the virus from being transmitted to their co-workers.”

Why Safer Food Workers Mean Safer Food - Americans these days are nervous about what they eat, and they should be, what with outbreaks of foodborne illnesses, meat pumped with veterinary drugs and genetically modified organisms creeping into our groceries. China seems even more rife with food hazards: rivers brimming with pig carcasses, poisonous baby formula, lakes of toxic waste. But in both hemispheres, reports about health and safety scares tend to gloss over an underlying malaise afflicting the food system: the many hazards that are concentrated further up in the production chain, in the slaughterhouses and processing plants where corporations regularly subordinate workers’ health and safety, along with public health concerns, to their insatiable hunger for profits. A 2011 petition filed with the Inter-American Commission on Human Rights by the Midwest Coalition for Human Rights and Nebraska Appleseed described the unsavory conditions that U.S. meat-processing workers face every day: Processors require their line employees to work at an extremely fast pace to keep up with these demands. The work is performed in very dangerous conditions: floors are slippery with grease, blood, and fat; temperatures are extremely cold or hot, and the work is arduous and repetitive—employees make upwards of 20,000 cuts a day.

NYC May Eventually Require Residents To Compost Food Scraps In Citywide Program - Are you gonna eat that? No? Mind if it just stick in this here bucket, let it sit for a bit and then dump it on my garden? That’s what we call composting (in a nut shell) and it’s been on the mind of New York City’s Mayor Michael Bloomberg lately. His administration tested out a pilot program recently and is now looking at requiring all city dwellers to take part eventually. City officials said yesterday that after the successful test program in 3,500 Staten Island homes and some Manhattan apartments, the program is expected to expand to 100,000 houses and other dwellings in all five boroughs in the fall, reports the Associated Press. And while the scrap collecting would be a voluntary effort to make NYC greener at first, Bloomberg’s team wants it to be a mandatory situation in a few years. That kind of program isn’t unprecedented in the U.S., as both San Francisco and Seattle require compost collection for some residents. It could be a tricky plan to execute, however, so if NYC can pull it off, other cities may follow.

U.S. Bee Deaths From Colony Collapse Disorder May Be Tied To Diet, Study Finds: (Reuters) - Bee keepers' use of corn syrup and other honey substitutes as bee feed may be contributing to colony collapse by depriving the insects of compounds that strengthen their immune systems, according to a study released on Monday. U.S. bee keepers lost nearly a third of their colonies last winter as part of an ongoing and largely unexplained decline in the population of the crop-pollinating insects that could hurt the U.S. food supply. A bee's natural food is its own honey, which contains compounds like p-coumaric acid that appear to help detoxify and strengthen a bee's immunity to disease, according to a study by scientists at the University of Illinois. Bee keepers, however, typically harvest and sell the honey produced by the bees and use substitutes like sugar or high-fructose corn syrup to feed them. "The widespread apicultural use of honey substitutes, including high-fructose corn syrup, may thus compromise the ability of honey bees to cope with pesticides and pathogens and contribute to colony losses," according to the study, which was published on May 28 in the Proceedings of the National Academy of Sciences.

Researchers find genetic diversity key to survival of honey bee colonies - When it comes to honey bees, more mates is better. A new study from North Carolina State University, the University of Maryland and the U.S. Department of Agriculture (USDA) shows that genetic diversity is key to survival in honey bee colonies – meaning a colony is less likely to survive if its queen has had a limited number of mates. Researchers optimize induction stove design using COMSOL "We wanted to determine whether a colony's genetic diversity has an impact on its survival, and what that impact may be," says Dr. David Tarpy, an associate professor of entomology at North Carolina State University and lead author of a paper describing the study. "We knew genetic diversity affected survival under controlled conditions, but wanted to see if it held true in the real world. And, if so, how much diversity is needed to significantly improve a colony's odds of surviving." Tarpy took genetic samples from 80 commercial colonies of honey bees (Apis mellifera) in the eastern United States to assess each colony's genetic diversity, which reflects the number of males a colony's queen has mated with. The more mates a queen has had, the higher the genetic diversity in the colony. The researchers then tracked the health of the colonies on an almost monthly basis over the course of 10 months – which is a full working "season" for commercial bee colonies

Growth in crop yields inadequate to feed the world by 2050 – research - If the world is to grow enough food for the projected global population in 2050, agricultural productivity will have to rise by at least 60%, and may need to more than double, according to researchers who have studied global crop yields. They say that productivity is not rising fast enough at present to meet the likely demands on agriculture. The researchers studied yields of four key staple crops – maize, rice, wheat and soybeans – and found they were increasing by only about 0.9% to 1.6% a year. That would lead to an overall increase of about 38% to 67% by 2050, which would only be enough to feed the population if the lower end of the estimate of yields needed and the maximum yield increase turns out to be the case. It also does not take into account other factors, such as climate change, which the World Bank said this week could lead to massive food shortages in many areas as soon as the 2030s. The study's findings are also likely to fuel debate over the efficacy of genetically modified crops, which some scientists have argued may be needed in future to feed the rapidly growing global population, which is expected to reach at least 9 billion by 2050.

Pesticides spark broad biodiversity loss: Agricultural chemicals affect invertebrates in streams and soil, even at 'safe' levels - Agricultural pesticides have been linked to widespread invertebrate biodiversity loss in two new research papers. Pesticide use has sharply reduced the regional biodiversity of stream invertebrates, such as mayflies and dragonflies, in Europe and Australia, finds a study published today in the Proceedings of the National Academy of Sciences1. Previous research has shown similar decreases in individual streams, but the study by Mikhail Beketov, an aquatic ecologist at the Helmholtz Centre for Environmental Research in Leipzig, Germany, and his colleagues analysed the effects of pesticides over broad regions. The team examined 23 streams in the central plains of Germany, 16 in the western plains of France and 24 in southern Victoria, Australia. They classified streams according to three different levels of pesticide contamination: uncontaminated, slightly contaminated and highly contaminated. The researchers found that there were up to 42% fewer species in highly contaminated than in uncontaminated streams in Europe. Highly contaminated streams in Australia showed a decrease in the number of invertebrate families by up to 27% when contrasted with uncontaminated streams.

Are Fungus-Farming Ants the Key to Better Biofuel? - In the US, corn-based ethanol is a big business, consuming 40 percent of the domestic corn crop and providing roughly 10 percent of the fuel supply, which would otherwise be dirty fossil fuels. But the practice of topping your tank off with corn is fraught with problems: Some argue that the crop should be used for food; it's sensitive to drought; and the ethanol-making process might be contributing to an E coli epidemic, to name a few. That's why the Obama administration recently announced a plan to invest $2 billion in organic fuels that rely on things other than corn, including switchgrass and gas from cattle poo. But this weekend, a group of scientists discovered a chemical key that could revitalize corn-based ethanol by allowing it to be made from stalks, leaves, and other bits beside the cob itself. This won't help much with the drought problem (less corn is still less corn), but it could alleviate the food-vs-fuel debate and the E coli problem as more kernels are saved to go straight to livestock. Turns out, the savior of ethanol could be the South American leafcutter ant.

Gagged by Big Ag: How Exposing Abuse Became a Crime - More than a month had passed since People for the Ethical Treatment of Animals had released a video of savage mistreatment at the MowMar Farms hog confinement facility where he worked as an entry-level herdsman in the breeding room. The three enormous sow barns in rural Greene County, Iowa, were less than five years old and, until recently, had raised few concerns.  The recordings caught one senior worker beating a sow repeatedly on the back with a metal gate rod, a supervisor turning an electric prod on a sow too crippled to stand, another worker shoving a herding cane into a sow's vagina. In perhaps the most disturbing sequence, a worker demonstrated the method for eutha­nizing underweight piglets: taking them by the hind legs and smashing their skulls against the concrete floor—a technique known as "thumping." Their bloodied bodies were then tossed into a giant bin, where video showed them twitching and paddling until they died, sometimes long after. Recognizing that, in the era of smartphones and social media, any worker could easily shoot and distribute damning video, meat producers began pressing for legislation that would outlaw this kind of whistleblowing. Publicly, MowMar pledged to institute a zero-tolerance policy against abuse and even to look into installing video monitoring in its barns. As overheated as likening that incident to a terrorist attack may seem, such thinking has become woven into the massive lobbying effort that agribusiness has launched to enact a series of measures known (in a term coined by the New York Times‘ Mark Bittman) as ag gag. Though different in scope and details, the laws (enacted in 8 states and introduced in 15 more) are viewed by many as undercutting—and even criminalizing—the exercise of First Amendment rights by investigative reporters and activists, whom the industry accuses of “animal and ecological terrorism.” Ag gag laws allow industry “to completely self-regulate,” says a whistleblowers’ advocate. That should “scare the pants off” consumers who want to know how their food is made.

NOAA, partners predict possible record-setting dead zone for Gulf of Mexico - Scientists are expecting a very large “dead zone” in the Gulf of Mexico and a smaller than average hypoxic level in the Chesapeake Bay this year, based on several NOAA-supported forecast models. NOAA-supported modelers at the University of Michigan, Louisiana State University, and the  Louisiana Universities Marine Consortium are forecasting that this year’s Gulf of Mexico hypoxic “dead” zone will be between 7,286 and 8,561 square miles which could place it among the ten largest recorded. That would range from an area the size of Connecticut, Rhode Island and the District of Columbia combined on the low end to the New Jersey on the upper end. The high estimate would exceed the largest ever reported 8,481 square miles in 2002 . Hypoxic (very low oxygen) and anoxic (no oxygen) zones are caused by excessive nutrient pollution, often from human activities such as agriculture, which results in insufficient oxygen to support most marine life in near-bottom waters. Aspects of weather, including wind speed, wind direction, precipitation and temperature, also impact the size of dead zones. The Gulf estimate is based on the assumption of no significant tropical storms in the two weeks preceding or during the official measurement survey cruise scheduled from July 25-August 3 2013.  If a storm does occur the size estimate could drop to a low of 5344 square miles, slightly smaller than the size of Connecticut.

NOAA Estimate of Gulf of Mexico Dead Zone Is Shockingly Large -  The near record-breaking Midwestern drought of 2012 did have one positive side effect. The drought significantly reduced the size of the seasonal Gulf of Mexico dead zone. Less rain led to less fertilizer runoff—the dead zone is fed by a buildup of nitrogen-based fertilizer in the Gulf—which meant that the 2012 summer dead zone measured just 2,889 sq. miles. That’s still a zone the size of the state of Delaware, but it was the fourth-smallest dead zone on record, and less than half the size of the average between 1995 and 2012. This year will be different. Heavy rainfall in the Midwest this spring has led to flood conditions, with states like Minnesota and Illinois experiencing some of the wettest spring seasons on record. And all that flooding means a lot more nitrogen-based fertilizer running off into the Gulf. According to an annual estimate from National Oceanic and Atmospheric Administration (NOAA) sponsored modelers at the University of Michigan, Louisiana State University and Louisiana Universities Marine Consortium, this year’s dead zone could be as large as 8,561 sq. miles—roughly the size of New Jersey. That would make it the biggest dead zone on record. And even the low end of the estimate would place this year among the top 10 biggest dead zones on record. Barring an unlikely change in the weather, much of the Gulf of Mexico could become an aquatic desert.

Fracking sucking up water in drought areas: The latest domestic energy boom is sweeping through some of the nation's driest pockets, drawing millions of gallons of water to unlock oil and gas reserves. Hydraulic fracturing, the drilling technique commonly known as fracking, has for decades blasted huge volumes of water, fine sand and chemicals to crack open valuable underground shale formations. But now, as energy companies vie to exploit vast reserves west of the Mississippi, fracking's new frontier is expanding to the same lands where crops have shriveled and waterways have dried up due to severe drought. In Arkansas, Colorado, New Mexico, Oklahoma, Texas, Utah and Wyoming, the vast majority of the counties where fracking is occurring are also suffering from drought, according to an Associated Press analysis of industry-compiled fracking data and the U.S. Department of Agriculture's official drought designations. While fracking typically consumes less water than farming or residential uses, the exploration method is increasing competition for the precious resource, driving up the price of water and burdening already depleted aquifers and rivers.

Colorado: Fracking, Fracking Everywhere, But Not a Drop to Drink? - While wildfires in Colorado and throughout the west are nothing new, the magnitude of this year’s Black Forest fire serves as a haunting reminder of the worsening crisis climate change poses. Throughout all this, we can’t help but draw attention to the oil and gas industry’s use of fracking and its impact on climate change, drought and natural disaster. Residents are watching their backyards burn while the oil and gas industry is using up Colorado’s most precious resource — water. The fire affects not just Colorado residents, who face water restrictions that accompany drought; emergency relief teams also feel the squeeze. In the same state that has limited water to fight off these fires, fracking uses millions of gallons of water to frack a single well. Furthermore, the oil and gas industry neglects water restrictions and often outcompetes farmers and municipalities for the resource. Fracking also poses a threat to climate change as it emits harmful greenhouse gases. As climate change worsens, wildfires will continue to plague Colorado’s drought-parched forests and spread into residential neighborhoods.

Singapore, Malaysia choke as illegal Indonesia forest fires rage (Reuters) - Air pollution in Singapore and Malaysia rose to unhealthy levels on Monday thanks to illegal forest clearing in Indonesia, prompting Singapore to advise people against staying outdoors for long and to urge Indonesia to do something to stop it. In usually clear Singapore, the pollutant standards index hit the highest level in nearly seven years, with the taste of smoke hitting the back of the throat even in air-conditioned offices and the subway. "Given the current hazy conditions, it is advised that children, the elderly and those with heart or lung diseases reduce prolonged or heavy outdoor activities," Singapore's National Environment Agency said in a statement. "Everyone else should limit prolonged or heavy outdoor activities." The agency said the haze was caused by forest fires on the Indonesian island of Sumatra and that it was expected to last for a few days. It said it had "urged the Indonesian authorities to look into urgent measures to mitigate the transboundary haze occurrence". In Malaysia, the air quality reached unhealthy levels in several northeastern states as well as the southern state of Malacca, a UNESCO heritage site popular with tourists, the country's Department of Environment said.

Singapore Smog Reaches ‘Hazardous’ All-Time High on Fires - Singapore’s smog level reached a all-time high today, as officials head to Jakarta to discuss ways to stem the pollution caused by forest burning on the Indonesian island of Sumatra.  Singapore’s Pollutant Standards Index jumped to 371 at 1 p.m., the National Environment Agency, or NEA, said on its website. That exceeded the 321 at 10 p.m. yesterday evening, which was a record, according to Channel NewsAsia. A reading above 300 is deemed “hazardous.”  The Malay Peninsula has been plagued for decades by forest fires in Sumatra to the west and Kalimantan on Borneo island to the east. The current smog could hurt the city-state’s services industries such as tourism, according to Wai Ho Leong, an economist at Barclays Plc in Singapore. A week of “unhealthy” readings may shut down leisure travel into Singapore for at least a month, maybe longer, Leong said. “That disruption could mean roughly $1 billion in terms of reduced shop takings, empty rooms, fewer flights.”

A $19 Billion Plan to Fortify New York City Against Climate Change - In what may some day be termed a landmark speech in modern urban history, Mayor Michael Bloomberg of New York City proposed this afternoon an aggressive, long-term plan to protect the city against the ravages of climate change and forestall a future Hurricane Sandy. The elaborate climate fortification program, spelled out in a 400-page report, has elements ranging from public assistance to protect buildings and harden critical infrastructure to far-out concepts for construction of both permanent and temporary seawalls to protect both waterfront and the creeks and canals that can be "back door" gateways to flood waters. The total cost of the program comes to about US $19.5 billion, which is roughly equivalent—perhaps not coincidentally—to the estimated cost of Sandy. Much of what the mayor talked about calls for further study, which he is initiating, and much of it will never happen. Some sea barriers would require the kind of water control engineering the Dutch have pioneered on a grand scale. But perhaps the feasibility of particulars matters less than the forceful commitment the mayor made to comprehensive protection of the city's waterfronts, a promise his successors may find difficult to back way from or ignore.

May 2013 Earth's 3rd Warmest May;: May 2013 was the globe's 3rd warmest May since records began in 1880, according to NOAA's National Climatic Data Center (NCDC). NASA rated it the 10th warmest May on record. The year-to-date period of January - May has been the 8th warmest such period on record. May 2013 global land temperatures were the 3rd warmest on record, and global ocean temperatures were the 5th warmest on record. May 2013 was the 339th consecutive month with global temperatures warmer than the 20th century average---- [And the 20th century average temperature was itself higher than average.]

May tied for third-warmest on record globally, agency says - Global average temperatures last month were tied with 2005 and 1998 for the third-warmest May since record-keeping began in 1880, according to federal data released Thursday. The combined average surface temperature over land and the ocean was 59.79 degrees Fahrenheit, which is 1.19 degrees Fahrenheit above the 20th-century average, according to the National Oceanic and Atmospheric Administration (NOAA). The first five months of 2013 was the eighth warmest January-May stretch on record, the agency said in a summary of its monthly temperature report. May continued a long streak of above-average temperatures, NOAA said. “It ... marked the 37th consecutive May and 339th consecutive month [more than 28 years] with a global temperature above the 20th-century average. The last below-average May global temperature was May 1976, and the last below-average global temperature for any month was February 1985,” the agency said in its monthly report.

Study: Northern hemisphere summers now warmest of last 600 years - Summers in the northern hemisphere are now warmer than at any period in six centuries, according to climate research published on Wednesday in the science journal Nature. Harvard University researchers analysing evidence from Arctic tree rings, ice cores, lake sediments and thermometer records said recent warm temperature extremes in high northern latitudes “are unprecedented in the past 600 years” both for magnitude and frequency. “The summers of 2005, 2007, 2010 and 2011 were warmer than those of all prior years back to 1400,” they reported.“The summer of 2010 was the warmest in the previous 600 years in western Russia and probably the warmest in western Greenland and the Canadian Arctic as well,” they said. “These and other recent extremes greatly exceed those expected from a stationary climate.”

Up to half of all birds threatened by climate change - Between a quarter and a half of all birds, along with around a third of amphibians and a quarter of corals, are highly vulnerable to climate change. These findings have emerged from the most comprehensive assessment to date of the impact of global warming on life. Its results have led some researchers to warn of the need for unprecedented conservation efforts if we don't cut our emissions. The new assessment of climate change risk was performed by scientists from the International Union for Conservation of Nature (IUCN), the organisation that produces  the Red List of Threatened Species. "When the Red List was invented, it was long before anyone worried about climate change," says Wendy Foden of the IUCN in Cambridge, UK. Red List assessments of extinction risk do consider climate change, but in a limited way. The main tools used in these earlier assessments are species distribution models, says Foden. These map out the climate conditions where a species lives now, then estimate how that liveable area will alter as the climate changes. In many cases, species' habitable ranges will move and shrink, putting them at risk. But that's not enough to assess risk. Some species may be able to cope if their environment changes. Others may be particularly suited to evolving new adaptations that will allow them to acclimatise to the changing environment. And yet more species may simply move to new areas.

Biologists worried by migratory birds’ starvation, seen as tied to climate change - At the Maine Coastal Islands National Wildlife Refuge, the tiny bodies of Arctic tern chicks have piled up. Over the past few years, biologists have counted thousands that starved to death because the herring their parents feed them have vanished. Puffins are also having trouble feeding their chicks, which weigh less than previous broods. When the parents leave the chicks to fend for themselves, the young birds are failing to find food, and hundreds are washing up dead on the Atlantic coast.What’s happening to migratory seabirds? Biologists are worried about a twofold problem: Commercial fishing is reducing their food source, and climate change is causing fish to seek colder waters, according to a bulletin released Tuesday by the U.S. Fish and Wildlife Service.

Climate change a threat to migratory birds, wildlife group says -  -- Climate change is altering and destroying important habitats that America’s migratory birds depend on, the National Wildlife Federation said Tuesday in a report. The environmental organization warns that a warming climate might lead to declines and even extinctions in some bird populations, and it calls on Congress and the president to curb carbon pollution and adopt what it calls “climate-smart conservation strategies.” “We need urgent action at the local, state and federal levels to cut carbon pollution and confront the changes we’re already seeing,” said Larry Schweiger, the president and CEO of the National Wildlife Federation. Migratory birds face unique challenges because they require different places to live each season in order to raise their young, migrate and overwinter. At least 350 species in North America fly to South or Central America every fall and return in the spring. In many coastal wetlands and beach habitats, which are home to birds such as king rails and piping plovers, the rise in sea level has changed where the birds can go.

World's poorest will feel brunt of climate change, warns World Bank - Millions of people around the world are likely to be pushed back into poverty because climate change is undermining economic development in poor countries, the World Bank has warned. Droughts, floods, heatwaves, sea-level rises and fiercer storms are likely to accompany increasing global warming and will cause severe hardship in areas that are already poor or were emerging from poverty, the bank said in a report. Food shortages will be among the first consequences within just two decades, along with damage to cities from fiercer storms and migration as people try to escape the effects. In sub-Saharan Africa, increasing droughts and excessive heat are likely to mean that within about 20 years the staple crop maize will no longer thrive in about 40% of current farmland. In other parts of the region rising temperatures will kill or degrade swaths of the savanna used to graze livestock, according to the report, Turn down the heat: climate extremes, regional impacts and the case for resilience. In south-east Asia, events such as the devastating floods in Pakistan in 2010, which affected 20 million people, could become commonplace, while changes to the monsoon could bring severe hardship to Indian farmers.

Lines in the Sand - A lot of what’s known about carbon dioxide in the atmosphere can be traced back to a chemist named Charles David Keeling, who, in 1958, persuaded the U.S. Weather Bureau to install a set of monitoring devices at its Mauna Loa observatory, on the island of Hawaii. By the 1950s, it was well understood that, thanks to the burning of fossil fuels, humans were adding vast amounts of carbon to the air. But the prevailing view was that this wouldn’t much matter, since the oceans would suck most of it out again. Keeling thought that it would be prudent to find out if that was, in fact, the case. The setup on Mauna Loa soon showed that it was not. Carbon-dioxide levels have been monitored at the observatory ever since, and they’ve exhibited a pattern that started out as terrifying and may be now described as terrifyingly predictable. They have increased every year, and earlier this month they reached the milestone of 400 parts per million. No one knows exactly when CO2 levels were last this high; the best guess is the mid-Pliocene, about three million years ago. At that point, summertime temperatures in the Arctic were 14 degrees warmer than they are now and sea levels were some 75 feet higher. When the milestone was passed, Keeling’s son Ralph, a geochemist at the Scripps Institution of Oceanography, glossed the event as follows: “It means we are quickly losing the possibility of keeping the climate below what people thought were possibly tolerable thresholds.”  Maureen Raymo, a marine geologist at the Lamont-Doherty Earth Observatory, was more blunt. “It feels like the inevitable march toward disaster,” she told the Times.

Climate talk shifts from curbing CO2 to adapting - : (AP) - Efforts to curb global warming have quietly shifted as greenhouse gases inexorably rise. The conversation is no longer solely about how to save the planet by cutting carbon emissions. It's becoming more about how to save ourselves from the warming planet's wild weather. It was Mayor Michael Bloomberg's announcement last week of an ambitious plan to stave off New York City's rising seas with flood gates, levees and more that brought this transition into full focus. After years of losing the fight against rising global emissions of heat-trapping gases, governments around the world are emphasizing what a U.N. Foundation scientific report calls "managing the unavoidable." It's called adaptation and it's about as sexy but as necessary as insurance, experts say.

Climate Change Getting Worse by the Minute - What goes up and doesn't come down? Greenhouse gas emissions, apparently. The world set another record in 2012, spewing some 31.6 billion metric tons of carbon dioxide, methane, hydrofluorocarbons and other greenhouse gases into the air. The 2012 contribution keeps us on pace for not one more degree Celsius of warming, or even two, as is the avowed goal of the international climate negotiations that saw another inconclusive round conclude this past week. We are on track for three degrees C of warming or more, this century. That calculation comes from the International Energy Agency, a kind of cartel for oil-consuming rich nations. But don't despair. The U.S. in recent years has reduced its greenhouse gas emissions back to levels last seen in the 1990s. That's thanks mostly to burning less coal. And there are some quick and easy steps that could reduce emissions globally: more energy efficiency, less leaking methane, an end to fossil fuel subsidies and a ban on inefficient coal-fired power plants. If we did all of those, we might get on a new track that leads to a world that’s less hot and bothered.

Exceptional 2012 Greenland Ice Melt Caused By Jet Stream Changes That May Be Driven By Global Warming - New research finds that “unusual changes in atmospheric jet stream circulation caused the exceptional surface melt of the Greenland Ice Sheet (GrIS) in summer 2012.” Prof. Jennifer Francis tells me these changes are consistent with those caused by warming-driven “Arctic Amplification.” And that may mean GrIS may melt faster than climate models have projected. Back in May, a study found that by 2025, there is a “50-50 chance” of this unprecedented ice melt happening annually simply based on the continued rapid warming of GrIS.  This new study, “Atmospheric and oceanic climate forcing of the exceptional Greenland ice sheet surface melt in summer 2012,” suggests this kind of melt may become commonplace even sooner. As the news release explains, an international team used a computer model and satellite data “to confirm a record surface melting of the GrIS for at least the last 50 years – when on 11 July 2012, more than 90 percent of the ice-sheet surface melted. This far exceeded the previous surface melt extent record of 52 percent in 2010.”  The research “clearly demonstrates that the record surface melting of the GrIS was mainly caused by highly unusual atmospheric circulation and jet stream changes, which were also responsible for last summer’s unusually wet weather in England.”

Why NASA’s latest photo of Alaska is freaking people out - At first glance, it’s just a great photo of nearly the entire state of Alaska on an exceptionally clear day. What could be the problem? Well, turns out that photo shows an anomaly that some are fretting signifies yet another big shift in global climate – a shift toward the hot.NASA writes (without saying “global warming”): “The same ridge of high pressure that cleared Alaska's skies also brought stifling temperatures to many areas accustomed to chilly June days. Talkeetna, a town about 100 miles north of Anchorage, saw temperatures reach 96°F on June 17. Other towns in southern Alaska set all-time record highs, including Cordova, Valez, and Seward. The high temperatures also helped fuel wildfires and hastened the breakup of sea ice in the Chukchi Sea.” A writer for Slate rings the alarm bell the loudest: The melt in Greenland and the high temperatures in Alaska may be more signs—like we needed more—of the reality of climate change. Even scarier is the fact that the climate models used before didn’t predict this sort of thing. The climate is very complex, and it’s hard to model it accurately. This is well-known and is why it’s so hard to make long-term predictions.

An unexpected lesson in Antarctic ice melt - It's called calving, and it occurs when enormous chunks of ice burst free from glaciers or floating ice shelves and drop into the sea with an explosive, heart-stopping crash. This process, which produces icebergs, has long been viewed as the primary mechanism for ice loss along the continent of Antarctica. Now however, scientists say calving is only half the story. In what is being described as the first comprehensive survey of all Antarctic ice shelves, a study to be published Friday in the journal Science reports that 55% of the ice loss is due to melting at the base of these vast ice sheets. "We find that iceberg calving is not the dominant process of ice removal," . "Ice shelves melt mostly from the bottom before they even form icebergs."The study's conclusions were based on ice thickness data collected by NASA's Operation Ice Bridge, a six-year program that uses satellites, aircraft, radio echo sounding and other means to survey ice cover on both of Earth's poles. Researchers found that basal melting in Antarctic ice shelves accounted for roughly 1,325 gigatons of melted ice per year, while calving accounted for 1,089 gigatons.

Toxic substance in Fukushima water - Tokyo Electric Power Company (Tepco) said tests showed Strontium-90 was present at 30 times the legal rate. The radioactive isotope tritium has also been detected at elevated levels. The plant, crippled by the 2011 earthquake and tsunami, has recently seen a series of water leaks and power failures. The tsunami knocked out cooling systems to the reactors, which melted down. Water is now being pumped in to the reactors to cool them but this has left Tepco with the problem of how to safely store the contaminated water. There have been several reports of leaks from storage tanks or pipes.

U.S. coal exports set monthly record - Coal exports from the United States in March 2013 totaled 13.6 million short tons, nearly 0.9 million short tons above the previous monthly export peak in June 2012. EIA is projecting a third straight year of more than 100 million short tons of coal exports in 2013, following annual exports in 2011 of 107.3 million short tons and record annual exports in 2012 of 125.7 million short tons.  Increased Asian demand for coal contributed to the record level of coal exports from the United States in March. Of the record export tonnage, 6.3 million short tons were steam coal and 7.4 million short tons were metallurgical coal.  Five customs districts accounted for 90% of the coal exported from the United States during March: Norfolk, Virginia; New Orleans, Louisiana; Baltimore, Maryland; Mobile, Alabama; and Houston-Galveston, Texas. Each of these customs districts is located on the Atlantic Ocean or Gulf of Mexico (see map below), and each has access to world-class coal loading infrastructure. A previous Today in Energy article focused on the history of coal tonnage exported from major customs districts. The top five destinations of exported coal (in descending order) during March were China, Netherlands (a large transshipment point), United Kingdom, South Korea, and Brazil.

Natural gas to rival oil as road fuel: IEA -  Natural gas is set to emerge as a significant new transportation fuel over the next five years, raising the prospect of a challenge to oil's dominance in the sector, the International Energy Agency said Thursday. Already, gas demand in road transport grew tenfold between 2000 and 2010, but cheap gas in the U.S. as a result of the boom in production of shale gas, and concerns over air pollution and oil dependency in China, could help it develop into a more mainstream fuel, the IEA said. In its five-year gas outlook, the Paris-based energy watchdog said it expects natural gas use in road transportation to rise to 98 billion cubic meters by 2018, covering around 10% of incremental energy needs in the transport sector. According to the IEA, this shift will do more to reduce the medium-term growth in oil demand than both biofuels and electric cars combined. "Gas is already a major fuel in power generation, but the next five years will also see it emerging as a significant transportation fuel, driven by abundant supplies as well as concerns about oil dependency and air pollution," said Maria van der Hoeven, the IEA's executive director.

Illinois Adopts Nation’s Strictest Fracking Regulations - On Monday, Governor Pat Quinn signed legislation to regulate fracking in the state of Illinois. Legislation overwhelmingly passed both the Illinois Senate (52-3) and the House (108-9) last month. The law is now seen as the nation’s strictest for oil and gas drilling. The Chicago Tribune writes that the legislation will force oil and gas companies to register with the Department of Natural Resources. In the permitting process they must detail:

  • how the well will be drilled
  • the amount of fluid used and at what pressure
  • how it will withdraw water, contain waste, and disclose the chemicals used

Additionally, a 30-day public comment period begins seven days after the Department of Natural Resources receives a permit application; and people who suspect fracking has polluted their water supply can request an investigation forcing the Department of Natural Resources to investigate within 30 days and reach a determination within 180 days. While other states like Arkansas, Colorado, Pennsylvania, Texas, and Wyoming, have rules or laws requiring companies to disclose chemicals used during the drilling process, Illinois is the first state to require fracking companies to disclose the specific chemicals used both before and after fracking occurs. Illinois will also be the first to mandate companies conduct water testing throughout the entire fracking process.

EPA abandons study that linked fracking, Wyoming water pollution - The Environmental Protection Agency said Thursday that it won’t finalize a draft 2011 study that concluded water pollution in a Wyoming region might stem from hydraulic fracturing, the controversial oil-and-gas development method. The decision to abandon the probe quickly buoyed gas industry advocates of the method dubbed “fracking,” who say it’s a safe practice. The EPA said it will not complete or seek peer review of a 2011 draft study, which found that groundwater pollution in the Pavillion, Wyo., area was consistent with chemicals used in gas production. The EPA said it stands by its work but that it would now support further study led by the state of Wyoming. “While EPA stands behind its work and data, the agency recognizes the State of Wyoming’s commitment for further investigation and efforts to provide clean water and does not plan to finalize or seek peer review of its draft Pavillion groundwater report released in December, 2011,” the EPA said as part of a joint release with the state of Wyoming.

FracFocus 2.0 to Revolutionize Hydraulic Fracturing Chemical Reporting Nationwide:, the national hydraulic fracturing chemical disclosure registry, will fully implement major upgrades beginning June 1, 2013, that will dramatically improve the site’s functionality for state, industry and public users. The enhancements to FracFocus and its system have been referred to as FracFocus 2.0. FracFocus 2.0 contains several new features that will enhance the usability and informational content of the system. “State oil and regulatory agencies and participating companies have had the ability to test the new reporting method since last November in order to allow preparation for the change,” the organizations stated. “ By launch date all submissions of data must be made using the FracFocus 2.0 process.”FracFocus 2.0 users will now be able to more efficiently search for well site chemical information due to the site’s conversion to an XML database platform. In addition to using GIS mapping technology to identify chemicals used in individual wells, users will also have the option to search and pull reports by date ranges, chemical names or Chemical Abstract Service (CAS) numbers.

Catastrophic Oil Spill Threat to Canadian River Basin - The Mackenzie River Basin, a vast globally important area in Canada, is at great risk from climate change and a catastrophic oil spill from the tailing ponds of tar sands mining, according to a panel of nine Canadian, American and British scientists. The warning came just days after the Canadian Oil Producers Association says it expects oil production from tar sands in the region to double by 2030. A report produced after a series of hearings last year says effective governance is vital for the river basin, which is five times the size of France. Water pours into the Arctic Ocean from the 1118 mile-long Mackenzie River at the rate of four Olympic sized swimming pools a second.The watershed’s biodiversity and its important role in hemispheric bird migrations, stabilizing climate, and the health of the Arctic Ocean means it needs protection urgently. Already the temperatures in the region have increased more than 2°C (3.6°F) as a result of climate change and permafrost areas are melting causing damage to roads, bridges and homes. It is also deforming the ground and changing water flows. The report says that large quantities of methane trapped in the soil by permafrost are in danger of being released threatening to rapidly increase the rate of climate change.

‘Every Plant And Tree Died’: Huge Alberta Pipeline Spill Raises Safety Questions As Keystone Decision Looms - A massive toxic waste spill from an oil and gas operation in northern Alberta is being called one of the largest recent environmental disasters in North America. First reported on June 1, the Texas-based Apache Corp. didn’t reveal the size of the spill until June 12, which is said to cover more than 1,000 acres. Members of the Dene Tha First Nation tribe are outraged that it took several days before they were informed that 9.5 million liters of salt and heavy-metal-laced wastewater had leaked onto wetlands they use for hunting and trapping. “Every plant and tree died” in the area touched by the spill, said James Ahnassay, chief of the Dene Tha. As the Globe and Mail reports, the Apache disaster is not an anomaly:  The leak follows a pair of other major spills in the region, including 800,000 litres of an oil-water mixture from Pace Oil and Gas Ltd., and nearly 3.5 million litres of oil from a pipeline run by Plains Midstream Canada.After those accidents, the Dene Tha had asked the Energy Resources Conservation Board, Alberta’s energy regulator, to require installation of pressure and volume monitors, as well as emergency shutoff devices, on aging oil and gas infrastructure. The Apache spill has renewed calls for change. Following initial speculation that the leak stemmed from aging infrastructure, officials from Apache Corp. revealed that the pipeline was only five years old and had been designed to last for 30.

Keystone XL Pipeline Shuns High-Tech Oil Spill Detectors -  TransCanada Corp. (TRP), which says Keystone XL will be the safest pipeline ever built, isn’t planning to use infrared sensors or fiber-optic cables to detect spills along the system’s 2,000-mile (3,200-kilometer) path to Texas refineries from fields in Alberta. Pipeline companies have been slow to adopt new leak detection technology, including infrared equipment on helicopters flying 80 miles an hour or acoustic sensors that can identify the sound of oil seeping from a pinhole-sized opening. Instead of tools that can find even the smallest leaks, TransCanada will search for spills using software-based methods and traditional flyovers and surveys. As pipelines multiply across North America to carry booming supplies of oil and natural gas, a series of recent spills and explosions are raising concerns about the safety of the conduits, including Keystone XL, which is awaiting U.S. government approval. “There are lots of things engineering-wise that are possible, that the industry doesn’t do,”

How Shell is trying to send a chill through activist groups across the country - This summer, the 9th Circuit Court in California is weighing the question of whether companies have the right to take preemptive legal action against peaceful protesters for hypothetical future protests. This will be an extraordinary decision that could have a significant impact on every American’s First Amendment rights. The case, Shell Offshore Inc. vs. Greenpeace, was filed by Shell Oil Company. Last summer, Shell assumed –based on conjecture — that Greenpeace USA would protest the company’s drilling in the Alaskan Arctic.  Shell asked the 9th Circuit court for a preemptive injunction and restraining order against Greenpeace USA [Full disclosure: Philip Radford is the executive director of Greenpeace USA]. Despite Greenpeace’s appeal, the court granted the injunction for the entire duration of the drilling period, a decision which effectively gave a federal blessing to the company’s wish to do its controversial work in secret. Greenpeace has asked the court for a full review, and this summer, the court will decide the ultimate fate of the case. If the court rules in Shell’s favor, it would have a profound chilling effect on First Amendment rights across the country. Nothing would stop other corporations from taking similar preemptive legal action against anyone they deem to be likely protesters.

Summer Heat – The Movement Against Ripping the Face off the Earth for a Brief Fossil-Fueled “Party”  - Another initiative for summer 2013 in the US, one of the centers of the worldwide fossil fuel industry, “Summer Heat”, is attempting to build a movement that draws the connection between climate change and keeping fossil fuels in the ground and pushing this connection into public awareness and onto the political agenda of ruling elites. “Summer Heat” will attempt to build a framework of common meaning around a series of movements against the more desperate, “unconventional” fossil fuel extraction practices that exact a more obvious toll on their points of extraction than the “easy” fossil fuel extraction of the days of oil gushers and natural gas driven upwards through vertical boreholes by underground pressure. These movements are for the most part geographically distributed and sometimes have different points of entry into their opposition to the new and more violent extraction methods of the fossil fuel industry. The growing fight against the Keystone XL pipeline points out the much higher chances of damage to local environments from the more corrosive tar sands-derived heavy oil/bitumen in transit in the pipeline as well as the obvious open sore of the tar sands mining efforts in Alberta, Canada.. Hydraulic fracturing or fracking does not leave such large open scars as tar sands extraction but instead creates a more widely dispersed patchwork of drilling sites and laces toxic chemicals and methane/natural gas into the water table in densely populated and highly productive agricultural lands.

Nurses, Environmentalists Lead Keystone XL Protest in San Francisco Real News Network

Keystone XL Activists Labeled Possible Eco-Terrorists in Internal TransCanada Documents - Documents recently obtained by Bold Nebraska show that TransCanada -- owner of the hotly-contested Keystone XL (KXL) tar sands pipeline -- has colluded with an FBI/DHS Fusion Center in Nebraska, labeling non-violent activists as possible candidates for "terrorism" charges and other serious criminal charges. Further, the language in some of the documents is so vague that it could also ensnare journalists, researchers and academics, as well. TransCanada also built a roster of names and photos of specific individuals involved in organizing against the pipeline, including's Rae Breaux, Rainforest Action Network's Scott Parkin and Tar Sands Blockade's Ron Seifert. Further, every activist ever arrested protesting the pipeline's southern half is listed by name with their respective photo shown, along with the date of arrest.  It's PSYOPs-gate and "fracktivists" as "an insurgency" all over again, but this time it's another central battleground that's in play: the northern half of KXL, a proposed border-crossing pipeline whose final fate lies in the hands of President Barack Obama.

TransCanada Is Secretly Briefing Police About Keystone XL Protests and Urging Terrorism Prosecutions -  New documents show that TransCanada, the corporation behind the $5.3 billion Keystone XL oil pipeline, has been briefing police about non-violent protesters and urging prosecutors to consider them “terrorists.” Environmentalists have waged a diverse campaign against the 2,000-mile pipeline that has included civil disobedience at the White House, tree sits and blockades, and a new lawsuit by the Sierra Club saying the U.S. State Department’s environmental review of the Keystone XL is “plagued by conflicts of interest.”  In response, TransCanada is filing lawsuits across the country in hopes of deterring opposition; in Oklahoma, they recently filed a restraining order against protesters.New documents show that TransCanada is also working behind the scenes with local police, providing cops with names and photographs of dozens of activists, warning of non-violent tactics, and urging terrorism prosecutions. A TransCanada PowerPoint presentation was obtained by Bold Nebraska through the Freedom of Information Act. The briefing offers a rare look at how the energy industry giant is trying to silence its opposition.

Gulf Oil Spill Cleanup Ends As BP Pulls Out, Leaves Unanswered Questions: Finding tar balls linked to the BP oil spill isn't difficult on some Gulf Coast beaches, but the company and the government say it isn't common enough to keep sending out the crews that patrolled the sand for three years in Alabama, Florida and Mississippi. Tourist John Henson of Atlanta disagrees, particularly after going for a walk in the surf last week and coming back with dark, sticky stains on his feet. Environmental advocates and casual visitors alike are questioning the Coast Guard decision to quit sending out BP-funded crews that have looked for oil deposits on northern Gulf Coast beaches on a regular basis since the 2010 spill spewed millions of gallons of oil into the Gulf after an explosion and fire that killed 11 workers. The patrols ended this month as coastal monitoring reverted to the way it operated before the spill: The Coast Guard investigates beach pollution reported by the public through a federal system, the National Response Center, and conducts cleanup operations as needed.

North Dakota’s Bakken Hits Record Oil Production Level in April - Producers in North Dakota’s Bakken shale formation increased oil output to a record 727,149 barrels a day in April, according to preliminary data compiled by the state Industrial Commission.Increased output from shale formations including the Bakken and the Eagle Ford in southern Texas helped U.S. oil production reach 7.37 million barrels a day in the week ended May 3, the most since February 1992, Energy Information Administration data show. The figure slipped by 76,000 barrels a day to 7.22 million last week. Bakken oil priced on the spot market in Clearbrook, Minnesota, weakened by 25 cents yesterday to $2.75 a barrel above West Texas Intermediate crude in Cushing, Oklahoma, according to data compiled by Bloomberg. About 75 percent of Bakken oil left North Dakota on trains in April, up from 71 percent in March, the state Pipeline Authority said. About 17 percent was shipped out via pipeline, down from 20 percent in March. North Dakota produced 793,249 barrels a day, up 1.3 percent from March. The state rig count in April was 186 in April, the same as in May. It’s 184 now, said Lynn Helms, director of the state Mineral Resources Department. Drillers completed 119 wells in April.

Results may vary: Beware of kaleidoscopic vision in the oil and gas industry - Like children looking through a kaleidoscope who are unaware of its actual workings, the media and the public have been misled into believing that early production results in the shale natural gas and tight oil formations in the United States will be repeated again and again across the United States and the world. This has led to exuberant forecasts of energy independence for the United States, an end to the dominance of OPEC in world oil supplies, and fossil fuel abundance for decades to come. Two important trends cast doubt on this naive view. First, in the United States, home of the hydraulic fracturing "miracle," domestic natural gas production has been flat since January 2012. The shale gas revolution may well be over in the United States as the current production level becomes increasingly difficult to maintain in the face of ferocious decline rates for shale gas wells--rates that range between 79 to 95 percent after just three years according to a comprehensive survey of 65,000 oil and gas wells in 31 U.S. shale plays. This means that at least 79 percent of all shale gas production must be replaced every three years just to keep shale gas production flat! Further undermining the abundance narrative, U.S. crude oil production has gone almost flat since October 2012. This is not a long enough period to indicate anything definitive about the trajectory of domestic crude production. But, it comes at a time when reports from newer tight oil plays in Ohio and Colorado have proved hugely disappointing. Ohio pumped just 700,000 barrels of oil from its tight oil fields for all of 2012, an amount being pumped daily from the same kind of fields in North Dakota.

Why Oil is So Strong in the Face of Almost Universally Weakening Markets -  Good news for the state of North Dakota, which tops the US charts for growth and daily oil production as figures are released for 2012, but bad news for natural gas prices, which analysts say look set for another downward climb.Oil has managed to stay sticky in price with Brent remaining above $100 a barrel and West Texas Intermediate hovering close to $95 a barrel.  How can oil stay so strong in the face of almost universally weakening markets? The answer lies in two reasons unique to oil – and they are both financial and not fundamental in nature.    First is the Brent oil market, which has become the global benchmark for pricing.  Brent crude is priced mostly upon North Seas crude, which has continued to experience a weakening supply profile:  the production from the North Sea continues to disintegrate.   And even though new supply from deep water and shale plays in the US augment the already increased supply from Saudi Arabia and Iraq, the financial connection to a small North Sea market with an inherent supply shortage continues to put upwards pressure on prices. And while it would be far more useful for consumers to find a more logical financial benchmark for pricing global crude, don’t expect one to emerge any time soon. 

Jakarta Set for Big Fuel-Price Increase - —Indonesian lawmakers on Monday set the stage for the government to raise the price of subsidized fuel for the first time in years, a move championed by economists but deeply unpopular with millions of voters. The legislative action signals the end of a long road to reforming the costly subsidy, a process President Susilo Bambang Yudhoyono had found difficult to complete as he nears the end of a decade in power. Indonesia holds direct presidential elections in 2014. After more than 11 hours of deliberations, legislators voted to approve revisions to the state budget allowing for the distribution of cash aid to Indonesia's poorest citizens to help compensate for the fuel-price increases. Mr. Yudhoyono requested the allocation to ease the shock the higher prices would have on tens of millions of Indonesians living below the poverty line. Mr. Yudhoyono's administration is expected in the coming days to announce an increase in fuel prices, for the first time since 2008, by about 44% for low-grade gasoline and 22% for diesel. The country's economy has been a success in recent years, growing faster than 6% a year and drawing record amounts of foreign direct investment, amid a global recession. But economists have long argued the trillion-dollar economy needs to wean itself off increasingly costly fuel subsidies that accounted for almost 16% of the government budget last year to allocate funds to fix the country's rickety infrastructure.

Statistical Review of World Energy 2013 -- The BP Statistical Review of World Energy has been published for 62 years. More information can be found in about the review. Our definitions and explanatory notes page explains the terms used in the Review. A list of referenced countries can be found on regional definitions. The conversion factors cover calculation between weight, volume and calorific measures. Links to the organizations and companies that contributed to the Review are listed in links to contributors.

500 Years Of (Mostly Rising) Energy Prices - Starting with Wood from 1500 to present day Coal and Oil prices; here is 513 years of Energy source prices...

Extreme Energy, Extreme Implications: Interview with Michael Klare - If oil and gas is a profoundly dynamic phenomenon, then so too must be environmental risk and conflicts over natural resources—and we are not getting the full picture from the mainstream media, according to Michael T. Klare, professor of peace and world security studies at Hampshire College, TomDispatch blogger, and author of Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Metropolitan Books, 2008). As risk multiply, conventional sources evaporate and we are left with “extreme” energy, renewables may be the only way to avoid war and disaster. Klare discusses:

• Why we are talking about a “resurgence” of American power
• Why the issue of US natural gas exports is a geopolitical dilemma
• Why Myanmar is important but not critical to the US Asia-Pacific “pivot”
• Why Myanmar IS critical to China
• Why India and Japan are key to the US’ evolving Asia policy
• Why the shale revolution is the number topic around the world
• Why unconventional oil and gas has the unfair advantage
• Why WE don’t need Keystone XL, but the tar sands industry is desperate
• Why the renewables are the only way forward

Liquid Fuel Consumption is Unlikely to Fall While it is Still Subsidized - The EIA has noted, in This Week in Petroleum that, for the first time, the sum of Non-OECD country demand contributed more than half to the total of liquid fuels consumed in the world. It does, however, point out that the projections of the Short Term Energy Outlook are for the two curves to re-intersect at the end of 2014.  The reality of that second assumption is, I rather suspect, more based on hope than reality. Once you start providing power, and all its benefits, to the general population you are on a slippery slope that it is almost impossible to back away from. Consider (as a small example) the problems that Egypt is currently having with the supply of subsidized bread to the general populace. Once you start supplying a commodity at a subsidized price it becomes very hard to change the equation, and too much of the non-OECD world is now living in an economy where energy use is subsidized. The problem that the above graph fails to recognize is that you cannot wean a culture from subsidies in the immediate short term and still expect their government to survive in its present condition.

India’s Energy Ties With Iran Unsettle Washington - India’s relentless search for hydrocarbons to fuel its booming economy has managed the rather neat diplomatic trick of annoying Washington, delighting Tehran and intriguing Baghdad, all the while leaving the Indian Treasury fretting about how to pay for its oil imports, given tightening sanctions on fiscal dealings with Iran. On 7 June the US State Department reluctantly announced that it was renewing India’s six-month waivers for implementing sanctions against Iran, along with seven other countries eligible for waivers from the sanctions owing to good faith efforts to substantially reduce their Iranian oil imports. In New Delhi’s case, it is the U.S. and EU-led sanctions rather than any willingness on India’s part that has seen a fall in its Iranian oil imports. India is the second largest buyer of Iranian oil, a nation with whom it has traditionally had close ties. U.S. Secretary of State John Kerry said that India, China, Malaysia, South Korea, Singapore, South Africa, Sri Lanka, Turkey, and Taiwan had all qualified for an exception to sanctions under America's Iran Sanctions Act, based on additional significant reductions in the volume of their crude oil purchases from Iran.

Why Further Sanctions Against Iran will be Counterproductive - A June 6, 2013, article from Reuters is titled, “Lawmakers in new drive to slash Iran’s oil sales to a trickle.” According to it, U.S. lawmakers are embarking this summer on a campaign to deal a deeper blow to Iran’s diminishing oil exports, and while they are still working out the details, analysts say the ultimate goal could be a near total cut-off. My concern is that the new sanctions, if they work, will put the United States and Europe in a worse financial position than they were before the sanctions, mostly because of a spike in oil prices. How much reduction in oil exports are we talking about? According to both the EIA and BP, Iranian oil exports were in the 2.5 million barrels a day range, for most years in the 1992 to 2011 period. In 2012, Iran’s oil exports dropped to 1.7 or 1.8 million barrels a day. Recent data from OPEC suggests Iranian oil exports (crude + products) have recently dropped to about 1.5 million barrels a day in May 2013.  If the ultimate goal is “close to total cut-off,” an obvious question we should be asking ourselves is whether it makes sense to handicap world oil production by close to 2.5 million barrels relative to 2011, or close to 1.5 million barrels relative to May 2013. Oil prices have spiked in the past when there has been an interruption in world oil supply. Why wouldn’t they this time? Furthermore, who are really handicapping: Ourselves or Iran?

Red Steel City: What China’s Oldest Steel Factory Says About the Nation’s Future If you want to understand the history of modern China, a good place to start is the Wuhan Iron & Steel (Group) Corp., with headquarters in Wuhan, a centrally located city of 10 million that is often called the Chicago of China. At the entrance of the 27-sq-km campus is a museum that documents the history of the company, beginning with its founding after the Qing dynasty’s Opium Wars, when it was decided by the provincial governor that China should enhance its “learning of advanced technology from the West to resist the invasion of Western countries.” That meant making steel — a lot of it. WISCO is the oldest steel plant in China and has churned out the metal used to make everything from the rifle that fired the first shot in the 1899–1901 Boxer Rebellion to the stunning Bird’s Nest Stadium for the Beijing Olympics. It is also an archetypal example of the Chinese state-owned enterprise (SOEs), giant Communist Party behemoths that have come to exercise huge power within the Chinese economy (SOEs represent only 4% of the companies in Wuhan, for example, but 50% of its economy).  Some 70,000 workers and their families, over 300,000 people in all, live on site in Red Steel City, an ecosystem with its own sports teams, cultural performances, newspaper (with 43 employees!), and group weddings. Nothing in the U.S. steel industry compares.

Why They Build Mega Yachts In Central China — An Economic Mystery Story -  With the rise in global wealth over the past two decades, the number of mega yachts, which start at about $50 million and top out at around $250 million, has been growing — as have the prices and backlog. “The order books of traditional yachtmakers in Germany, Italy and the Netherlands are filled for the next several years, and demand means the costs have just become too high,”  Solution: yachts made in China. “It wasn’t the first place we thought of,” says Bean, who is used to people raising an eyebrow at the thought of what may be the world’s most expensive luxury good being manufactured in a country still better known for light fixtures and component electronic parts. Indeed, he looked at setting up production in Poland, Turkey, Russia and a number of other countries before finally settling on Wuhan, a city of 10 million in central China. The inland city, which sits on the Yangtze River, had the advantage of a port that wasn’t vulnerable to tsunamis and workers whose hourly rates are a fraction of those in Europe and lower even than those in China’s more developed coastal areas. No matter that they’d never built big boats there before. Bean brought in consultants from companies in Europe to manage and train the local labor, and has convinced Lloyd’s Register, which sets international yachtmaking standards, to open a Wuhan office to monitor Dynasty’s new construction and give the Chinese-made boats an international quality seal of approval.

Job Prospects for China's Grads Bleak - A record seven million students will graduate from universities and colleges across China in the coming weeks, but their job prospects appear bleak - the latest sign of a troubled Chinese economy. Businesses say they are swamped with job applications but have few positions to offer as economic growth has begun to falter.The Chinese government is worried, saying the problem could affect social stability, and it has ordered schools, government agencies and state-owned enterprises to hire more graduates at least temporarily to help relieve joblessness. "The only thing that worries them more than an unemployed, low-skilled person is an unemployed, educated person," Lu Mai, secretary- general of the elite, government- backed China Development Research Foundation, acknowledged in a speech this month that fewer than half of this year's graduates had found jobs so far. China quadrupled the number of students enrolled in universities and colleges over the last decade. But its economy is still driven by manufacturing, with a preponderance of blue-collar jobs.

China's economy: new warning signs - China's consumer confidence declined sharply in May to 99.0 from 103.7 in April. Of course household spending in China represents only around 35% of the GDP (according to the World Bank), while the US consumer is over 70%. Nevertheless taken together with China's manufacturing PMI, we may be seeing signs of renewed economic weakness. China's stock markets also sold off in the last few weeks (now at a 6-month low). These are all indicators of potentially slower growth ahead. And slower growth poses a number of risks that have been masked by the nation's booming economy. One of the key risks of course is the size and health of the shadow banking system. Fitch in particular has been ringing some alarm bells with respect to China's private credit growth. Forbes: - With a shadow banking system that is becoming increasingly prominent, the rise of bundling of assets and securitization, and an acceleration of policy tightening, over-indebted local governments and institutions will feel the pain of a rising cost of capital, prompting Fitch Ratings to raise red flags about the future growth prospects of the Chinese economy. At Nomura, where they noted that liquidity tightening is dangerous in a highly leveraged economy, they increased their probability that a risk scenario could push GDP growth below 7% this year, threatening social stability

China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale - China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.  “The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” . “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.” “The market is disappointed by the lack of reverse repos from the PBOC,” “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth. 

China braces for capital flight and debt stress as Fed tightens - A front-page editorial on Friday in China Securities Journal - an arm of the regulatory authorities - warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” it wrote. The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade. It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output,” it said. There have been signs of serious stress in China’s interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default.

Fitch says China credit bubble unprecedented in modern world history - China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead. "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing. "There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph. While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.

China Banking Stress May Come Faster on Cash Crunch, Fitch Says - China’s worst cash crunch in at least seven years is an indicator of shadow lending gone awry and a banking crisis may appear earlier than expected if liquidity remains tight, according to Fitch Ratings. “We are starting to see some issues emerging” in liquidity, Charlene Chu, Fitch’s head of China financial institutions, said in an interview today with Zeb Eckert on Bloomberg Television in Hong Kong. “It will be very important over the next month or so to see how that plays out. If that doesn’t go away, some of this may be moving ahead faster and earlier than we thought.” The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 6.03 percent in June, the most since the National Interbank Funding Center began compiling a weighted average in 2006. Agricultural Development Bank of China Co. scaled back the size of two bond offerings today by 31 percent as the liquidity crunch squeezes demand for the securities. Chinese finance companies are calling for the central bank to resume capital injections as the nation’s slowing growth and speculation the U.S. will rein in monetary stimulus curbs global demand for the Asian nation’s assets. Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital flows into China, rose 66.9 billion yuan ($10.9 billion) in May, the central bank reported June 14. That was the smallest gain since November.

China Wrestles With Banks' Pleas for Cash - China's big banks are pressuring the central bank to free up funds to ease an unusual cash squeeze in the world's No. 2 economy, according to people familiar with the matter, illustrating a stark choice facing Beijing as it grapples with weaknesses in its financial system: add money to its system to help its lenders, or stay the course to rein in a rapid expansion of credit. The Chinese interbank funding market has seen rates soar since early this month amid slowing foreign-capital inflows and banks' needs to fulfill investor obligations, among other factors. The squeeze is pushing up banks' funding costs and could impede a key source of funds for growth even as the economy slows. In a further sign of tighter conditions, Agricultural Development Bank of China, a state-controlled policy bank, on Monday reduced by a third the size of its planned 26 billion yuan ($4.2 billion) bond offering. The Ministry of Finance, in a rare failure Friday, was unable to sell all of the debt it offered at an auction. The tight liquidity situation is leading to some calls from Chinese banks for the People's Bank of China to inject more cash into the market by lowering the share of deposits banks are required to set aside against financial trouble. The measure is known as the reserve-requirement ratio, or RRR. "Internally, we're hoping for an RRR cut by the end of Wednesday," said a senior executive at one of China's top four state-owned banks.

China Cash Crunch: 1-Day Interest Rate Spikes to Record High 25% - The clampdown on China's shadow banking continues today, with Money Rates at Record Highs as PBOC Lets Cash Crunch Build China’s benchmark money-market rates climbed to records as the central bank refrained from using reverse-repurchase agreements to address a cash crunch in the world’s second-biggest economy.  The seven-day repurchase rate, which measures interbank funding availability, rose 270 basis points, or 2.70 percentage points, to 10.77 percent in Shanghai, according to a daily fixing announced by the National Interbank Funding Center. That was the highest in data going back to March 2003. The one-day rate rose by an unprecedented 527 basis points to an all-time high of 12.85 percent, a separate fixing showed. An intra-day gauge of the one-day rate touched a record 25 percent.  Banks paid 6.5 percent for 40 billion yuan of six-month deposits from the Finance Ministry at an auction today, the highest rate since March 2012 and up from 4.8 percent at the previous sale on May 23. The yield on one-year government bonds surged 56 basis points to 4 percent, according to the National Interbank Funding Center. That’s the highest level on record for a benchmark note of that maturity.

China short-term interbank rates hit record -- Borrowing costs in China's interbank money markets surged on Thursday, with the rates on the overnight and seven-day repurchase agreements jumping to record highs, Reuters reported. The rate on the benchmark weighted-average seven-day repurchase, or repo, soared 3.80 percentage points to a record high of 12.06%, while the rate on the overnight repo rate spiked even more, by 5.98 percentage points to 13.85%, the report said. The People's Bank of China -- the country's central bank -- has said it won't be conducting any repo business in the regular open market operations on Thursday to ease the liquidity shortage, Reuters said. However, in an indication that liquidity is expected to improve significantly from mid-July, the rate on the 14-day repo fell 52 basis points to 7.41%, while that on the 21-day rate inched up 8 basis points to 7.59%, Reuters added.

Chinese Interbank Markets Having a Heart Attack, Repo and Shibor Skyrocket, Could Trigger Bigger Unraveling - Yves Smith - The Chinese central bank is playing very high stakes poker. China’s interbank markets have been highly stressed for the last two days. An effort by the central bank to tighten in order to put a crimp on shadow banking activities looks to be spiraling out of control as one-week repo rates hit nearly 8.3% up 144 basis points in a day, and one-week Shibor has risen from its June 5 level of 4.8% to just shy of 8.1% today. Per Reuters: The People’s Bank of China (PBOC) told the market that it would not conduct repo business in its regular open market operations on Thursday, frustrating widespread expectations that it would use reverse repos to inject cash to ease an acute market squeeze over the last two weeks.  By not easing liquidity conditions, it could exacerbate an economic slowdown that already appears well under way. China’s factory activity weakened to a nine-month low in June as demand faltered, a preliminary survey showed on Thursday. The benchmark weighted-average seven-day bond repurchase rate jumped a whopping 380 basis points to a record high of 12.06 percent, while the overnight repo rate surged 598 bps to 13.85 percent… But a full-blown crisis is unlikely as liquidity is expected to improve significantly from mid-July, after the seasonal effects of the quarter-end fade and a large volume of maturing PBOC bills and government bonds injects cash into the market, traders said.

China's Volcker shock -  IF YOU fix the price of something, the quantity demanded may vary a lot. If instead you fix the thing's quantity, then prices will jump around. Most central banks now peg the interest rate at which banks can borrow reserves. This price therefore remains pretty stable. And when central banks feel the need to raise it, they do so in deliberate, incremental steps. We're used to charts like the one on the right which shows two overnight, euro-area interest rates in 2006, the year before central banks lost control. But when the price of borrowing is fixed, the amount borrowed can vary a lot.  In China, as everyone is discovering this week, things are different. The country's central bank, the People's Bank of China (PBOC), sets a target for the quantity of money (M2) and uses quantitative reserve requirements to keep money and credit in check. It does also fix some interest rates: it caps the rate banks can pay their depositors, and it puts a (largely redundant) floor under the rate they can charge borrowers. But it allows the price at which banks borrow from each other to flap around much more than other central banks would tolerate. The seven-day repo rate, which has become a key benchmark, has risen from just 2.78% in mid-May to over 10% on Thursday (see third chart). And although this cash crunch is unusually severe and prolonged, it is not unprecedented. In January and June 2011, interbank rates also spiked after the central bank unexpectedly raised reserve requirements. In their volatility, Chinese borrowing rates resemble euro-area borrowing quantities much more than they resemble comparable rates.

The Chinese credit crunch - Don’t be misled by posts which focus on “Chinese monetary policy.”  This is first and foremost about credit markets. Read this FT Alphaville post about the Chinese carry trade (and bow down and revere them, while you are at it).  The previous Chinese credit overextension, the inability to keep this process going forever, and Bernanke’s talk of “tapering” all point in the direction of more expensive credit for the Chinese economy.  This economy was addicted to cheap credit in the first place, so that’s a big deal.  (By the way, promising to print more currency won’t solve the core problem here, with apologies to Scott Sumner.) Note that a lot of the cheap credit has been funneled through a dollars mechanism, as explained in the first link.  To the extent dollars become more expensive to borrow, the Chinese central bank cannot easily do a complete offset.  The relevant lever here seems to have been U.S. interest rates, I am sorry to say. What can the consolidated Chinese central bank/government do?  They can be easy with the yuan but that makes illegal and semi-legal capital flight all the more dangerous as a threat.  Keep in mind that China has to enforce capital controls — in both directions — at the same time as it conducts monetary policy, so it does not have access to the full range of effective instruments in a “carry trade world.”  There is already too much borrowing which cannot be made good, not even by more lending.  And they don’t want to push their current bubbles any further but rather seek to defuse them. 

Blame China, Here’s Why - Markets throughout the world cratered yesterday and today. The US, Asia, Europe, bonds, stocks, and precious metals especially got whacked. Wall Street pundits and opinion makers all blamed Bernanke’s dog and pony show yesterday. However, Bernankephobia is probably not the real reason for the massive wave of liquidation. This panicky selling has all the earmarks of a margin driven liquidation. The world’s second largest economy, China, has been undergoing a massive liquidity crunch in recent days as the central bank there maintains a tight monetary policy that has drained reserves from the system this year. The Chinese central bank, the People’s Bank of China (PBOC), has kept things tight in an attempt to bring the shadow banking system there to rein and to cool massive speculative bubbles. Of major media outlets only the New York Times has recognized the impact of the China credit crunch on the markets today, but even it blames the selloff on “concern” about it, rather than actual forced selling because of it. With the PBOC unwilling to ease the crunch, players in that system with assets abroad will raise cash to meet margin by selling whatever assets they can, wherever they can, particularly the world’s most liquid markets- US stocks and Treasuries. To the extent that they hold assets in those markets, they sell. This selling is significant enough at the margin to send asset prices crashing around the world, which triggers more margin calls in other assets, gold in particular, as well as in leveraged positions in US Treasuries and Treasury futures.

PBOC Said to Inject Cash After China Money Rates Jump - China’s benchmark money-market rates retreated from records after the central bank was said to have made funds available to lenders amid a cash squeeze.  The one-day repurchase rate dropped 384 basis points, or 3.84 percentage points, to 7.90 percent as of 9:33 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That is the biggest drop since 2007. The seven-day rate fell 351 basis points to 8.11 percent. They touched record highs yesterday of 13.91 percent and 12.45 percent, respectively.

China moves to save its banks, or does it? - Courtesy of, which is a far more intelligent operation than the entire Australian business press which is asleep at the wheel on the Chinese credit crunch: Bloomberg reports the People’s Bank of China injected liquidity overnight, but the spike in borrowing costs yesterday to a decade high of over 12% freaked a whole lot of people, not to mention the Australian stock market. But it’s clear now that the new leadership in Beijing are determined to take some of the heat out of China’s shadow banking sector and some of the usual infrastucture-driven stimulus. Beijing wants to make growth more sustainable, which means slower.We’ll see what that does to China’s banking system and their shadows, which have expanded credit in China by more in the last 5 years than was built up by the US economy in decades of operation. The pressure is on. The chart below shows the parallels between short term interest rate spikes ahead of the Lehman crisis and China’s interbank rates in recent days.

No, China Is Not Having a Lehman Brothers Moment - Chinese banks have made about a $1 trillion a year in new lending over the last four years, as part of their effort to buoy growth following the 2008 financial crisis. That’s something that many China watchers like myself have been following closely – in October of 2011, I commissioned Ken Miller to write this piece looking at whether the dysfunctional cycle of cheap state loans to developers was leading to a real estate bubble the likes of what we’ve already seen in the U.S. Now, it seems that the state has suddenly decided that there is indeed too much liquidity and a risk of too many non-performing loans in the system, and banks (which are all state controlled) have suddenly shut off the money spigots. The question now is whether China is in for a banking crisis, and what that might mean for the world. There’s little doubt that credit in China is in the red zone, as Morgan Stanley head of emerging market Ruchir Sharma wrote in a very smart piece in the Wall Street Journal in February: “When private credit grows faster than the economy for 3-5 years that usually signals financial distress. In China, private credit has been growing much faster than the economy since 2008, and “the radio of private credit to GDP has risen by 50 percentage points to 180%, an increase similar to what the U.S. and Japan witnessed before their most recently financial woes.”

Charting China’s Cash Crunch - A cash crunch in China’s all important money markets has hit the headlines, conjuring images of the U.S. after the collapse of Lehman Brothers. On Thursday, interbank borrowing rates hit a nosebleed-inducing 28% for seven-day loans. Bank of China – one of China’s biggest lenders – issued a denial after rumors of a default swirled. The shock has started to ripple out to the rest of the financial markets, triggering a sell-off in equities. Is this Lehman with Chinese characteristics? The answer is no. The central bank has vast resources at its disposal to prevent a downward spiral. But it does highlight increasing stress in China’s financial sector, as growth in the real economy pushes toward a 20-year low. China Real Time charts it out.

China Manufacturing PMI Hits Nine-Month Low as Output and New Orders Decline - (graphs) The HSBC Flash China Manufacturing PMI™ is in contraction, at a nine-month low, with output and new orders in decline.

  • Flash China Manufacturing PMI™ at 48.3 (49.2 in May). Nine-month low.
  • Flash China Manufacturing Output Index at 48.8 (50.7 in May). Eight-month low.

China factory activity slowing further in June — China’s manufacturing sector was slowing further in June, according to HSBC’s preliminary results from its monthly survey, released Thursday. The “flash” version of HSBC manufacturing Purchasing Managers’ Index fell to a nine-month low of 48.3, down from May’s final reading of 49.2. A reading below 50 indicates contraction. The result came in below a 49.1 forecast from a Bloomberg News survey of economists. Details within the survey results were equally dim. The subindex measuring output swung from expansionary territory to an eight-month low of 48.8, while those for overall new orders and for new export orders both showed an accelerating decline. “Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures,” wrote HSBC chief China economist Hongbin Qu.

China Manufacturing Shrinks Faster in Threat to Europe: Economy - China’s manufacturing is shrinking at a faster pace this month, a trend that threatens to stem an economic recovery in the euro area from the currency bloc’s longest-ever recession. A preliminary reading of 48.3 for the Chinese Purchasing Managers’ Index (EC11FLAS) released today by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists. In Europe, a composite index based on a survey of purchasing managers in the services and manufacturing industries rose to 48.9 from 47.7 in May, Markit Economics said. While that’s the highest in 15 months, a measure below 50 still indicates contraction.China’s manufacturing weakness, along with a cash crunch in the nation’s money market, will test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first four months of the year failed to stoke growth, China’s State Council, led by Li, said yesterday that the financial system needs to do a better job of supporting the economy.

China’s Great Uprooting - Moving 250 Million Into Cities -  — China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a transformative event that could set off a new wave of growth or saddle the country with problems for generations to come. The government, often by fiat, is replacing small rural homes with high-rises, paving over vast swaths of farmland and drastically altering the lives of rural dwellers. So large is the scale that the number of brand-new Chinese city dwellers will approach the total urban population of the United States — in a country already bursting with megacities. This will decisively change the character of China, where the Communist Party insisted for decades that most peasants, even those working in cities, remain tied to their tiny plots of land to ensure political and economic stability. Now, the party has shifted priorities, mainly to find a new source of growth for a slowing economy that depends increasingly on a consuming class of city dwellers.The shift is occurring so quickly, and the potential costs are so high, that some fear rural China is once again the site of radical social engineering. Over the past decades, the Communist Party has flip-flopped on peasants’ rights to use land: giving small plots to farm during 1950s land reform, collectivizing a few years later, restoring rights at the start of the reform era and now trying to obliterate small landholders.

Pepe Escobar: Why American Worries about “Containing China” Are Off the Mark - from naked capitalism. Yves here. As China has become more powerful economically, and is building up its navy (a substantial navy is a precondition of being a true superpower), some pundits have taken to anticipating a world where US cedes dominance to China over a protracted and likely unstable transition period, using the decline of the British Empire and the rise of American influence as a guide. That’s unlikely to be the right frame of reference. As Tom Engelhardt writes in his intro to Pepe Escobar’s piece: As Escobar explains, to spur the staggering levels of growth that keep the country and the Party afloat, the Chinese leadership is embarking on a kind of forced urbanization program that may have no historical precedent. It is guaranteed to destabilize the countryside, while yet more peasants flood into the cities. It’s seldom acknowledged here (though the Chinese leadership is well aware of it) but China has a unique, almost two-thousand-year-long record of massive peasant uprisings (often religiously tinged) sweeping out of the countryside and upsetting established rule. The last of them was Mao Zedong’s peasant revolution that established the present People’s Republic. Mass protest in China has been on the rise. Environmental conditions are disastrous. Let the Chinese economy falter and who knows what you’ll see. This is not a formula for an expansive imperial power, no less the next master of planet Earth, whatever Washington’s fears and militarized fantasies may be. Yves again. That does not mean that China won’t be seeking to assert its influence and that the US military industrial complex won’t be disposed to play that up. But instead of seeing a bumpy, fractious transition of leadership, we may instead see a change from a world where an overextended US is still dominant to one of jockeying major countries and power blocs.

Pettis on China, Europe, Japan: Bad News for Those Looking for Growth - Via email here is another update from Michael Pettis at China Financial Markets. What follows is from Michael Pettis. Special points

  • Europe is attempting to resolve domestic imbalances by forcing them onto their trade partners. This will end badly, especially for Germany.
  • China’s new lending, exports, investment, housing starts and GDP growth all continued to slow in May. Many of the numbers came in well below market expectations.
  • This is par for the course. Although we may from time to time get a “pop” in quarterly growth, the overall trend will be for growth expectations to follow actual growth numbers down for many years. China cannot get credit growth under control at anywhere near current GDP growth rates.
  • Even though credit growth slowed more than expected, it is still extraordinarily high, especially for the amount of growth it is generating. Total social financing grew in May by 2.3% of GDP while GDP itself grew by around 0.6%.
  • The IMF claims that China’s real fiscal deficit is around 10% of GDP. This limits Beijing ability to expand fiscally.
  • Although overall unemployment seems stable, unemployment among university graduates continues to be very high. It is early to say but this might have social implications at some point.

Saving Abenomics: No Time for Cold Feet on QE - Prime Minister Shinzo Abe captured the attention of economists, pundits, and global markets with his bold plans to boost growth and inflation in Japan. Stock prices soared, real bond yields plummeted, and the yen dropped sharply. These trends boded well for Abe’s success. More recently, markets seem disappointed with the details (or lack thereof) on Abe’s structural reforms and the unwillingness of the Bank of Japan (BOJ) to implement its quantitative easing (QE) plans flexibly. In this post I focus on what the BOJ should do to achieve its inflation goal and how that will help reduce the long-run burden of Japan’s large national debt.According to the International Monetary Fund (IMF), net government debt in Japan is already a worrisome 145 percent of GDP and still growing (compared to 90 percent and stable in the United States). It is well known that countries often grow or inflate their way out of large debt burdens. I leave it to others to discuss the structural reforms Japan needs to raise its long-run growth rate. I focus on raising inflation to the new target of 2 percent.

Goldman Slams Abenomics: "Positive Impact Is Gone, Only High Yields And Volatility Remain; BOJ Credibility At Stake" - While many impartial observers have been lamenting the death of Abenomics now that the Nikkei - essentially the only favorable indicator resulting from the coordinated and unprecedented action by the Japanese government and its less than independent central bank - has peaked and dropped 20% from the highs, Wall Street was largely mum on its Abenomics scorecard. This changed overnight following a scathing report by Goldman which slams Abenomics, it sorry current condition, and where it is headed, warning that unless the BOJ promptly implements a set of changes to how it manipulates markets as per Goldman's recommendations, the situation will get out of control fast. To wit: "Our conclusion is that the positive market reaction initially created by the policy has been almost completely undone. At the same time, a lack of credible forward guidance for policy duration means that five-year JGB yields have risen in comparison with before the easing started, and volatility has also increased. It will not be an easy task to completely rebuild confidence in the BOJ among overseas investors after it has been undermined, and the BOJ will not be able to easily pull out of its 2% price target after committing to it."

Board Divided Over Inflation Target - The Bank of Japan's policy board has proven surprisingly united over the bold monetary easing program of its new governor, Haruhiko Kuroda. But there appear to be growing doubts over his goal to achieve a 2% inflation rate within the next two years to end years of deflationary pressures. Mr. Kuroda managed to win a consensus within the nine-member board for his aggressive measures at his first meeting in early April. But there has been continued controversy over his insistence he can break 15 years of deflation and turn the current 0.4% annual fall in prices into a 2% rise. Many private-sector economists who applaud the BOJ’s actions still contend the goal is unreachable, and such doubts have also emerged on Mr. Kuroda’s own board.“It’s like they are all in the same boat but looking in different directions,” said one person familiar with the BOJ’s thinking.

Japan's trade deficit climbs to $10.5B in May -- Japan’s trade deficit rose nearly 10 percent in May to 993.9 billion yen (nearly $10.5 billion), highlighting the challenge Prime Minister Shinzo Abe faces in revitalizing manufacturing as industries increasingly shift production offshore. Rising costs for imports due to the cheaper yen matched a 10 percent rebound in exports from a year earlier, the Finance Ministry reported Wednesday. A weakening in the yen’s value has pushed up costs for imports of crude oil, natural gas and other commodities for this resource-scarce nation, but the deficit in May was bigger than most economists’ estimates. Strong growth in exports to the U.S., China and the rest of Asia were offset by even stronger imports from the Middle East and China.

Rupee Plunges Most in 21 Months to Record as Stocks, Bonds Slide - India’s rupee tumbled to a record, prompting the central bank to intervene to support the currency, after the U.S. signaled it will phase out a stimulus program. Stocks and bonds plunged the most in at least a year. The Federal Reserve said yesterday it could taper its $85 billion in monthly bond buying later this year and halt the purchases in mid-2014 as long as the U.S. economy performs in line with the central bank’s projections. The Reserve Bank of India probably sold dollars around the unprecedented 59.98 level to prevent the rupee from sliding past 60 a dollar, three traders said, asking not to be named as the information isn’t public. “There will be pain due to the current-account deficit and as leveraged investors are pulling money from Indian debt,” . “Policy makers will now have to put their heads together to think about more structural, long-term fixes.”

Elite Denial of Corruption and Inequality – World Bank Case Study from naked capitalism  - Yves here. While readers may think development policy has limited relevance to US and advanced economy readers, the IMF and World Bank have been and continue to be vehicles to make the world, particularly smaller or otherwise more influenceable regimes, more friendly to the interests of US multinationals. And at the same time US companies are taking down a record share of GDP in profits, the country’s ranking in inequality is worse than that of many developing economies. New York City is more unequal than China, and as the chart below shows, is also more unequal than Russia, famed for its oligarchs, and India, which still has hundreds of millions living in abject poverty.  So the World Bank’s efforts over time to exclude issues like corruption and inequality from its analysis have direct and obvious parallels to policy discussions here. Wade’s anecdotes of the way the World Bank refused to even allow the “c” word to be acknowledged are striking. It’s a near certainty that the big reason inequality is now a regular topic of conversation among economists, for instance, is that the rapid rise of a super rich class while average workers are left in the dust makes it impossible to ignore.  Cross posted from Triple Crisis

Ending Poverty by Giving the Poor Money - Can you alleviate poverty by just giving money to the poor? It seems like a tautology, sure. But for development experts, it is a subject of serious research. Say you give $100 to a poor person in a developing country with no strings attached, rather than providing goods or services like food or schooling, or $100 to use for a specific purpose. Does the money simply provide a one-time boost to her consumption? Or might it help her make longer-term investments, raising her standard of living down the line?  A new study that speaks to those questions comes from Christopher Blattman of Columbia University, etal. The scholars looked at a cash-transfer operation called the Youth Opportunities Program, run by Innovations for Poverty Action, a nonprofit development group. In the program, the Ugandan government offered young adults the chance to band together, submit a proposal and receive a big sum — equivalent to a year’s income per person — with no follow-up. But once the groups got the money, they were able to do whatever they wanted with it. It turns out that winning the money had profound effects. It made participants much more likely to enroll in skills training, and it increased the labor supply. It increased their earnings on two- and four-year horizons, especially among women. Indeed, women who won money from the program had average earnings 84 percent higher than women who did not, after four years. Winners were more likely to pay business taxes too. All in all, the annualized return on the “investment” of the cash transfer worked out to a whopping 40 percent. Professor Blattman and I recently discussed the implications of the research for poverty alleviation and development. A lightly edited and condensed transcript follows.

Lender Targets Developing Nations’ Top Entrepreneurs - What would happen if business owners in developing countries who lacked access to commercial lending were offered a more generous helping hand – offering credit that exceeded the typical $5,000 microloan? That question underpins a report released last week by the Aspen Network of Development Entrepreneurs, a project of the Aspen Institute started in 2009.The short answer, according to ANDE Executive Director Randall Kempner, is that millions of jobs could be created in emerging markets—and in many poor countries—by “accelerating” entrepreneurs caught in this gap.“ “According to the International Labor Organization, we need to create 400 million new jobs in the next decade to maintain the level of unemployment that we have today,” said Mr. Kempner. “That level of unemployment isn’t exactly leading to peace and comity in the world.” ANDE’s network of 181 members range from corporations to nonprofit institutions to individual investors who focus on promoting the growth of businesses in emerging markets located primarily in Latin American, Africa, and Asia. ANDE, whose members include Wal-Mart Stores Inc., eBay Foundation, and JPMorgan Chase, offers loans of $20,000 to $2 million as well as consulting services to more than 60,000 startups and midsize businesses with total funding of $1.7 billion since 2009.

The Great Banking Divide - Among the many ways in which emerging economic powers (like the BRICS) are supposed to be doing better than developed countries in patterns of bank lending. So while the credit crunch continues for many businesses and households in the US and Europe, banks in the developing world are said to be providing larger and larger amounts of credit to enable investment and economic expansion. Between December 2008 and 2011, the BRICS countries expanded bank lending to businesses in their domestic economies by 62 per cent, whereas in the G-8 countries such lending fell by 4 per cent. Much of the increase in bank credit to business in the BRICS came from China, and much of the decrease in the developed countries came from troubled European economies. Despite the tepid recovery, it has been harder and harder to get loans for business in the United States and Europe. This is particularly true for small businesses, which have been starved of credit ever since 2008, because they cannot really access other sources of financing their investments or even their working capital. So is this difference in patterns of bank lending yet another sign of the overall economic decline of the hitherto dominant western powers and the rise of the new kids on the global block? Does it suggest that as the fulcrum of economic power shifts to the South (and East) this is being facilitated and accentuated by patterns in finance as well?

Nicaragua OKs plan for cross-country canal, environment be damned - Nicaragua is one step closer to being carved in half by a massive cross-country canal. Leftist President Daniel Ortega rammed the project through his country’s congress last week. The lawmakers gave the Hong Kong-based HKND Group a 50-year concession to excavate and operate the canal, which is intended to rival Panama’s. If it’s actually built — and that’s still a big if — it promises to give an economic boost to the bitterly poor country. Nicaragua would get a minority share of profits and, say backers, tens of thousands of jobs too. But critics warn that would come at the expense of the environment and clean water supplies. From Agence France-Presse: Centro Humboldt environmental group deputy director Victor Campos told AFP the project to link Nicaragua’s Atlantic and Pacific coasts will jeopardize the watershed that supplies water to most of the impoverished country’s population when it transits through Lake Nicaragua. …In Lake Nicaragua lies an island with an active volcano and some 300 islets that serve as breeding grounds for the American crocodile (Crocodylus acutus), the largest reptile living in Central America and the Caribbean.One of the possible canal routes would pass through the sprawling Cerro Silva nature reserve between the southern Caribbean coast and the El Rama River port, home to coastal ecosystems, wetlands and tropical forests that environmentalists warn could disappear.

Biggest protests in 20 years sweep Brazil (Reuters) - As many as 200,000 demonstrators marched through the streets of Brazil's biggest cities on Monday in a swelling wave of protest tapping into widespread anger at poor public services, police violence and government corruption. The marches, organized mostly through snowballing social media campaigns, blocked streets and halted traffic in more than a half-dozen cities, including Sao Paulo, Rio de Janeiro, Belo Horizonte and Brasilia, where demonstrators climbed onto the roof of Brazil's Congress building and then stormed it. Monday's demonstrations were the latest in a flurry of protests in the past two weeks that have added to growing unease over Brazil's sluggish economy, high inflation and a spurt in violent crime. While most of the protests unfolded as a festive display of dissent, some demonstrators in Rio threw rocks at police, set fire to a parked car and vandalized the state assembly building. Vandals also destroyed property in the southern city of Porto Alegre. Around the country, protesters waved Brazilian flags, dancing and chanting slogans such as "The people have awakened" and "Pardon the inconvenience, Brazil is changing." The epicenter of Monday's march shifted from Sao Paulo, where some 65,000 people took to the streets late in the afternoon, to Rio. There, as protesters gathered throughout the evening, crowds ballooned to 100,000 people, local police said. At least 20,000 more gathered in Belo Horizonte. The demonstrations are the first time that Brazilians, since a recent decade of steady economic growth, are collectively questioning the status quo.

Hundreds of Thousands Join Brazil Protests  - Hundreds of thousands of people have rallied across Brazil as part of a protest movement over the quality of public services and the high cost of staging the World Cup. About 800,000 people marched on Thursday in rallies across the country of 194 million people, according to an AFP news agency tally - an intensification of the movement which started two weeks ago by public anger about an increase in public transport fares.  Police fired tear gas in Rio de Janeiro, scene of the biggest protest where 300,000 people demonstrated near City Hall, to disperse a small group of stone-throwing protesters. In the capital Brasilia, security forces blocked protesters trying to break into the foreign ministry and throwing burning objects. The military police finally threw a security cordon around the building. In Sao Paulo, an estimated 110,000 people flooded the main avenida Paulista to celebrate the fare rollback and keep the pressure on Rousseff's leftist government to increase social spending.

Brazil protests continue despite concession - Brazilian authorities are bracing for a new wave of protests as hundreds of thousands of people across 80 cities have responded to social media posts, calling for them to rally in the streets. In an attempt to cool anti-government sentiment, authorities in Sao Paulo and Rio on Wednesday cancelled the proposed transit fare hikes, but the crowds have continued to gather, despite the government climb-down. Al Jazeera's Adam Raney, reporting from Rio de Janeiro, said the government was yet to establish how to calm the tensions. "It is overall a leaderless movement, what we're seeing is the government, not just trying to spin the story, but also trying to understand what it is the protesters want, what [they] can deliver," he said.

Brazil hit by largest protests yet as hundreds of thousands march - With an international soccer tournament as a backdrop, demonstrators are also denouncing the more than $26 billion of public money that will be spent on the 2014 World Cup and 2016 Olympics, two events meant to showcase a modern, developed Brazil. The unrest comes six months before an election year and at a time when Brazil, after nearly a decade-long economic boom in which the country's profile soared on the global stage, enters a period of uncertainty. Economic growth of less than 1 percent last year, annual inflation of 6.5 percent and a loss of appetite for Brazilian assets among international investors have clouded what had been a feel-good era for Brazil. Brazil's currency, the real, dropped to a four-year low on Thursday, trading as weak as 2.275 per U.S. dollar. The country's benchmark stock market index, the Bovespa, also hit a four-year low.

Brazil’s Protests Reflect the Malaise of an Opportunity Lost -  The protests sweeping across Brazil’s biggest cities have morphed from frustration over fare hikes for poor public transportation to a more generalized dissatisfaction with the poor state of public services, from inadequate education and health care to high crime rates, thick bureaucracy and ample evidence of corruption within government ranks.  But they also reflect a malaise into which Brazil, which over the last decade has lifted tens of millions out of poverty thanks to a long-running global commodities and domestic consumption boom, has slipped into over the last couple years.  Yet, as president, they are taking a toll on Ms. Rousseff, who was elected in 2010, when Brazil’s economy grew 7.5%. She had an enormous opportunity to build on that growth, which the government had fueled through a heavy dose of fiscal and monetary stimulus in reaction to the global financial crisis. But the money was directed in no small measure toward social welfare programs, pensions and other types of subsidies for consumption that weren’t reduced following the recovery. That, in turn, fueled inflation that is now running at the 6.5% upper end of the official tolerance range, even as economic growth this year is expected to clock at a subpar 2.5%, following a sorry 0.9% expansion last year.

Brazilian Revolt Claims First Fatality as Violence Erupts - Brazil’s swelling street rebellion claimed its second fatality in the largest and most violent protests yet, as 1 million demonstrators rallied for better public services and an end to corruption. President Dilma Rousseff, who has been struggling to get in front of the mass movement, will meet with cabinet members today to discuss emergency measures to help quell violence and prepare proposals on education, health and other demands of protesters, a government official aware of her agenda said. The movement triggered by an increase in bus fares this month has spread amid a groundswell of discontent among Brazil’s middle classes.  Brazil’s annual inflation through mid-June accelerated to 6.67 percent, its fastest pace since November 2011. Urban bus fares rose 1.83 percent in the month through mid-June and made the greatest impact on inflation of all components.  Almost 1 million people marched in 27 capital cities, Folha reported, citing police estimates in each state. That’s four times the estimated turnout on June 18, which was the previous record for the growing movement.

As social unrest escalates, Brazil investors flee - The wide-spread social unrest across Brazil continues. The Guardian: - Brazil's president, Dilma Rousseff, and key ministers are to hold an emergency meeting on Friday following a night of protests that saw Rio de Janeiro and dozens of other cities echo with percussion grenades and swirl with teargas as riot police scattered the biggest demonstrations in more than two decades.  The protests were sparked last week by opposition to rising bus fares, but they have spread rapidly to encompass a range of grievances, as was evident from the placards. "Stop corruption. Change Brazil"; "Halt evictions"; "Come to the street. It's the only place we don't pay taxes"; "Government failure to understand education will lead to revolution". Rousseff's office said she had cancelled a trip to Japan next week. Many are asking how is it that this "economic miracle" has generated so much anger. As discussed earlier (see post), Brazil's tremendous growth combined with the wealth of natural resources masked a number of problems. Taxes and corruption are of course a big part of the issue. Allocation of certain resources to high profile projects at the expense of healthcare and education is another. But as has been the case throughout history, social unrest is often triggered by rising prices - particularly on items that the average citizen cares about.

Brazilian Currency Touches Four-Year Low, Prompting Intervention - Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.  “If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.” Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday. The currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.”

Sweeping Protests in Brazil Pull In an Array of Grievances - “One hundred thousand people, we never would have thought it,” said Ms. Vivian, one of the founders of the Free Fare Movement, which helped start the protests engulfing Brazil. “It’s like the taking of the Bastille.”  The mass protests thundering across Brazil have swept up an impassioned array of grievances — costly stadiums, corrupt politicians, high taxes and shoddy schools — and spread to more than 100 cities on Thursday night, the most yet, with increasing ferocity.  All of a sudden, a country that was once viewed as a stellar example of a rising, democratic power finds itself upended by an amorphous, leaderless popular uprising with one unifying theme: an angry, and sometimes violent, rejection of politics as usual.  Much like the Occupy movement in the United States, the anticorruption protests that shook India in recent years, the demonstrations over living standards in Israel or the fury in European nations like Greece, the demonstrators in Brazil are fed up with traditional political structures, challenging the governing party and the opposition alike. And their demands are so diffuse that they have left Brazil’s leaders confounded as to how to satisfy them.

Brazil protests – what is going on? - I believe it’s easier than before to explain where the protests came from, and more difficult to predict what they will mean. I want to shoot off some scattered thoughts, but they may presuppose a tiny bit of knowledge. So first, some background for those that need it. Here are the five stories I’ve done for the LA Times in the last week. The most important is the first one, the big feature I did yesterday attempting to explain what is behind all of this.

Brazil protests tap into frustration of have-nots (June 20)
Protests continue as thousands rally in São Paulo (June 18)
Authorities in Brazil reduce bus fares in response to protests (June 18)
Tens of thousands protest conditions in Brazil (June 17)
Protests against São Paulo fare hike turn violent (June 13)

After these were written, over a million people took to the streets last night across the country. Though in many cases these were supposed to be victory celebrations after fares were reduced in São Paulo and Rio, clashes ensued, one protester was killed by a car, and on the other side of Brazil a middle-aged street cleaner died after she inhaled tear gas.

Mexico’s Spoiled Rich Kids --You can spot them prowling the streets of Mexico City's wealthy enclaves in sports cars. The guys wear their hair slicked back and designer shirts with the top three buttons open. The women have expensive bags and sunglasses. They are nearly always followed by a black SUV packed with armed bodyguards.  They are known in Mexico as "Juniors"—the sons and daughters of the country's elite, young people whose love of brand names is surpassed only by their sense of entitlement. Juniors grow up to dominate the upper echelons of business and politics. They live behind high walls, travel in private jets and seem utterly untouchable—and out of touch in a country that struggles with poverty and violence.  For the first time, though, Mexico's Juniors are coming under fire. In April, Andrea Benitez, the daughter of a well-connected politician, turned up at a trendy restaurant in Mexico City without a reservation and threw a fit when she was not given the table she wanted. So she called inspectors at Profeco, the government's consumer protection agency—which happened to be run by her father. Inspectors promptly shut down the restaurant.  What Ms. Benitez didn't count on was Mexico's growing middle class, which is fast developing an intolerance of Juniors and using social media to do something about it

Worthwhile Canadian Comparison - Paul Krugman - Canada offers a useful test case for theories about what lies behind the Great Recession and the Not-So-Great Recovery. In its early stages, the slump was widely seen as essentially a banking crisis. This view in turn led some people — unfortunately, I believe, including some senior people in the Obama administration — to believe that the economy would bounce back quickly once banking was stabilized. In fact, however, banking was stabilized pretty quickly, and most measures of financial disruption look like this: That is, a period of severe disruption in 2008-9, but a return to relatively normal conditions thereafter. Yet the economy remained depressed. As a result, many economists — myself included — turned to a view that stressed nonbanking issues, especially the broader effects of the collapsed housing and the overhang of private debt. Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis. And for a while Canadian housing prices lagged those south of the border. Since then, however: And Canadian household debt has kept rising even as the US level has declined: So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

New Report: How the U.S.-EU Trade Deal would Grant Sweeping Corporate Privileges - The Trans-Atlantic Free Trade Agreement (TAFTA) is in trouble.  Report after report has indicated that the massive U.S.-EU deal is on shaky ground now that the NSA spying scandal has fueled European privacy concerns and botched the hopes of U.S. telecommunications firms to use the deal to downsize data privacy protections. The discovery of an unapproved strain of genetically-modified wheat in Oregon has also thrown water on plans for the deal, stoking European resistance to U.S. agribusiness's calls for TAFTA to be used to dismantle Europe's GMO labeling policies.  And France's refusal to accept Hollywood's demands to fill French TV with U.S. movies has only further crippled prospects for the deal.  But there's another polemical component of TAFTA that could prove just as critical in contributing to the deal's unraveling: the extreme corporate privileges of the "investor-state" system slated for inclusion in the pact.  About 10,000 people in the U.S. lambasted this extreme provision within 32 hours last month, spurred by a single email, in comments to the Obama administration on TAFTA. 

More Obama Administration Secrecy: Rep. Grayson Sees and Can’t Discuss Classified Trans-Pacific Trade Agreement Draft - Yves Smith -- We’ve mentioned before the unheard-of steps the Administration is taking to keep a large, and potentially important trade deal, the Trans-Pacific Partnership, under wraps. We say “trade deal” but that is already a misnomer. International trade is already substantially liberalized. Based on what little information has been wrestled from the Administration, the TPP is most important a means for financial firms and multinationals to undermine nation-based regulations.  An overview from an earlier post:Apparently Obama wants to make sure his corporate masters get as many goodies as possible before he leaves office. The Trans-Pacific Partnership and the US-European Union “Free Trade” Agreement are both inaccurately depicted as being helpful to ordinary Americans by virtue of liberalizing trade. Instead, the have perilous little to do with trade. They are both intended to make the world more lucrative for major corporations by weakening regulations and by strengthening intellectual property laws… Now get this: the draft text of the TPP is classified. This is simply unheard of for a trade deal. The US Trade Representative has been providing summaries of the US position on key issues to Congress but that falls way short of adequate disclosure. Congressmen almost never have the time (even where they have the ability) to read long agreements in full and parse how key sections work (which often mean going back to definitions and in some cases, existing law). So keeping most staffers and third parties with expertise away assures that (until the last minute) the discussion and “clarifications” of the provisions under negotiation will come only from parties that are already in the tank.

European Union, US 'intend to move forward fast' on transatlantic trade deal - The transatlantic trade deal between the European Union and the United States was announced at the G8 summit this week, as British Prime Minister David Cameron and US President Barack Obama vowed to "fire up our economies and drive growth and prosperity around the world." The two leaders formally announced the Transatlantic Trade and Investment Partnership, also known as TTIP, at a press conference in Lough Erne, Northern Ireland on Monday, where the world's wealthiest nations gathered for their annual conference. "We’re talking about what could be the biggest bilateral trade deal in history, a deal that will have a greater impact than all the other trade deals on the table put together," Cameron said. "I'm hopeful we can achieve the kind of high-standard, comprehensive agreement that the global trading system is looking to us to develop," Obama said. "I'm confident we can get it done."

Trade Deal Could Stick U.S. With EU’s Bank Bomb - Simon Johnson - With grand rhetoric, Group of Eight leaders this week seized upon the prospect of a deal between the U.S. and Europe that would reduce or eliminate tariffs and other trade barriers. David Cameron, the U.K. prime minister, called it “the biggest bilateral trade deal in history” and “a once-in-a-generation prize” that “we are determined to seize.”  But would the proposed trans-Atlantic trade agreement really be a prize, or would it more closely resemble a poisoned chalice for the U.S.?  I think the latter is more likely. The European economy is a mess, with big unanswered questions about how sovereign debt will be handled and whether a strong fiscal union will be built in the euro-currency area. The periphery countries are struggling to recover, and even the two biggest economies, France and Germany, seem likely to show unimpressive growth in the near term.  Italy will continue to have a great deal of public debt and very little growth for the foreseeable future. Keeping interest rates low rarely works as a strategy over the business cycle -- unless you are prepared to accept substantial inflation. Does any of the Italian debt become a joint obligation of other euro-area members at some point? It is very hard to see through the murk.  The biggest danger, however, is the European banking system.

Sherrod Brown Wimps Out on Secret Trade Negotiations In USTR Vote; Elizabeth Warren Takes Risk in Bucking Obama - Has Sherrod Brown started to follow Obama’s lead in the bait and switch category? The Ohio senator has long styled himself an opponent of “free trade” which has become a neoliberal PR term for what William Greider has long called “managed trade”. Our major trade partners have long made concerted efforts to play these pacts so as to preserve trade surpluses, or at least make sure they don’t run persistent deficits. And the dirty secret here, which American policymakers were attentive to through the 1980s, was that US trade deficits are tantamount to having America export jobs (our demand is supporting foreign workers). Brown has had a reputation as pro-labor, anti “free market” ideology. He’s pushed for China to be called a currency manipulator. A year ago, Brown joined with labor leaders on the Trans-Pacific Partnership, seeking “to prevent another NAFTA-style agreement from undermining Ohio manufacturing and automotive jobs.” In a speech earlier this month, he insisted that currencies be addressed before any trade deals be finalized. But Brown caved on a critical trade-related vote on the Senate floor on Wednesday. He voted for Obama’s pick for the US Trade Representative, Michael Froman.  Even though the vote was 93 in favor and only four nays, it’s noteworthy that Warren was joined by Carl Levin (along with Bernie Sanders and Joe Manchin).

Trans-Atlantic Trade and Its Discontents -  The North American Free Trade Agreement will be 20 years old in 2014, and all those who predicted it would bring about disaster have long gone silent.  And now there is a new trade horizon. At the Group of 8 summit meeting, official talks were launched for an E.U.-U.S. free-trade agreement. The E.U. commissioner for trade, Karel De Gucht, has talked about a “living agreement” to be finished by the end of 2014.  On the surface, this is good news for everyone. The collective interests of the world’s first- and second-largest markets would be served by an agreement that would boost combined G.D.P. by almost 1 percent. There is great hope that cooperation would reduce unnecessary regulation on both sides of the Atlantic.  But the politics, as they now stand, do not serve to achieve that goal.  De Gucht’s goal is understandable. The current commission will end its term in October 2014, and both he and the current leadership want the credit for finalizing an agreement with the United States. Yet the first rule of trade talks is that they take time.  The second is that politics can shift the sands very quickly, creating a typical “tragedy of the commons” scenario in which an overall positive outcome is blocked by special interests.

International Cities Are Turning Into ‘Elite Citadels’ - They are a well-paid couple from the caste known in Paris as “bobos”: people with bourgeois incomes and bohemian tastes. In the popular narrative, bobos have invaded Paris, driving out pure bohemians and the working class. But my bobo friends had a new story: they themselves were being driven out of Paris. To get enough space for their kids, they were leaving for the suburbs. When they’d told the headmaster at the children’s school, he had looked sad and said: “Everyone is leaving.” Paris is pricing out even the upper middle-class. There is a wider story here. The great global cities – notably New York, London, Singapore, Hong Kong and Paris – are unprecedentedly desirable. At last week’s fascinating New Cities Summit in São Paulo, the architect Daniel Libeskind said: “We live in a time of renaissance … cities are coming back to life, after a long neglect.” Edward Luce chronicled the urban revival in last Saturday’s FT Magazine. However, there’s an iron law of 21st-century life: when something is desirable, the “one per cent” grabs it. The great cities are becoming elite citadels. This is terrifying for everyone else.

Global Power Project, Part 1: Exposing the Transnational Capitalist Class - The Global Power Project, an investigative series produced by, aims to identify and connect the worldwide institutions and individuals who comprise today's global power oligarchy. Many now know the rhetoric of the 1% very well: the imagery of a small elite owning most of the wealth while the 99% take the table scraps. This rhetoric and imagery was made popular by the growth of the Occupy movement, so it seems appropriate that a project of should expand on this understanding and bring the activities of the global elite further to light. In 2006, a UN report revealed that the world’s richest 1% own 40% of the world’s wealth, with those in the financial and internet sectors comprising the “super rich.” More than a third of the world’s super-rich live in the U.S., with roughly 27% in Japan, 6% in the U.K., and 5% in France. The world’s richest 10% accounted for roughly 85% of the planet's total assets, while the bottom half of the population – more than 3 billion people – owned less than 1% of the world’s wealth. Looking specifically at the United States, the top 1% own more than 36% of the national wealth and more than the combined wealth of the bottom 95%. Almost all of the wealth gains over the previous decade went to the top 1%. In the mid-1970s, the top 1% earned 8% of all national income; this number rose to 21% by 2010. At the highest sliver at the top, the 400 wealthiest individuals in America have more wealth than the bottom 150 million.

A new cross-border tax-haven database and its significance - The International Consortium of Investigative Journalists hit the mother lode when it published the first of its dozens of exposés on the off-shore tax-haven business back in April. The series, based on the mammoth database obtained, somehow, from two unlucky companies involved in the giant and shady asset-hiding business, continues to reverberate. The number of investigations, reforms, and responses it sparked around the world —from Cananda to Mongolia to the Philippines to the E.U.—is still expanding and is documented at length here. One of the most crucial bits of fallout came in May when David Cameron at a White House press conference called for an end to the “scourge of tax evasion,” which is all the more significant since the U.K. is, of course, a haven hub. Not coincidentally, the issue is on the G-8 agenda this week. As I wrote at the time, this has to be landmark of some kind: 86, now 112 journalists from more than three dozen news organizations, including The Washington Post, Le Monde, the Guardian, the Canadian Broadcasting Corp, etc., in 46 58 countries analyzing 2.5 million records relating to 120,000 companies in ten offshore jurisdictions. What’s especially significant is that many journalists worked on the project for more than a year: that’s scores of thousands of reporter-hours, as many as a 100,000 hours or more, by my calculations. The roster of staffers is here. Now, the entire database itself has come online. Released over the weekend, it’s an elegantly designed Web application that allows users to look up customers of the off-shore haven business, which sets up shell companies in jurisdictions that allow the real principals to be concealed from the public and, usually, even authorities..

Russia to Tap Reserve Funds for Infrastructure Projects - Faced with meager economic growth worldwide and a worrisome ebbing of Russia’s own oil and gas revenues, President Vladimir V. Putin announced on Friday an ambitious and risky economic stimulus program that would spend up to $43.5 billion in reserve funds on three big infrastructure projects. Mr. Putin’s plan, which would lend money from the national pension reserves, has provoked fierce debate within the Russian government as well as warnings from international economic experts, who said that what the Russian financial system needed most was deep structural reform, to eliminate corruption and build investor confidence. In his speech, Mr. Putin said Russia would use the reserves to modernize the storied Trans-Siberian Railway, which runs to Moscow from Vladivostok in the Russian Far East; to construct a 500-mile, high-speed rail line to Moscow from Kazan, the capital of the Tatarstan region; and to build a superhighway ringing Moscow.

Lines Blur in U.S.-Europe Debate on Austerity - As President Obama begins an annual meeting with the leaders of some of the world’s richest nations on Monday in Northern Ireland, the economic-policy gulf that has divided them since the global crash in 2008 has narrowed significantly — just not exactly in ways that the White House would have liked. The Europeans lately have slightly eased their austerity policies, after four years of deep spending cuts and rising taxes that many economists blame for keeping the Continent in recession long after America’s ended. And the Obama administration, after years of pressing Europe to adopt American-style stimulus measures, is now presiding — if reluctantly — over European-style austerity that is measurably slowing its recovery. Much of that austerity is in the form of across-the-board spending cuts known as sequestration that were forced by Republicans in Congress. But Mr. Obama supported an end this year to both a temporary payroll-tax cut, which the Congressional Budget Office and private analysts credited with spurring consumer spending and creating jobs, and the Bush-era income tax cuts for the wealthy. What stimulus remains in the American economy can be credited to the expansionary monetary policies of the independent Federal Reserve System.

Spanish austerity cuts put lives at risk, study finds (Reuters) - Austerity cuts in Spain could lead to the effective dismantling of large parts of its healthcare system and significantly damage the health of the population, according to a study published on Thursday. Researchers who analyzed the situation warned that if nothing was done to reverse the trend, Spain risked spiraling health problems and could see increases in infectious diseases such as tuberculosis and the virus that causes AIDS. As part of the analysis, interviews were conducted with 34 doctors and nurses across Catalonia in northern Spain. Many reported feeling "shocked", "numbed" and "disillusioned" about the cuts, and some expressed fears that "the cuts are going to kill people", the researchers said. "For five years, policies to address the financial crisis have focused almost entirely on economic indicators," The study published in the British medical Journal (BMJ) found that Spain's national budget cuts of almost 14 percent and regional budget cuts of up to 10 percent in health and social services in 2012 have coincided with increased demands for care, particularly from the elderly, disabled and mentally ill. The researchers also noted increases in depression, alcohol-related disorders and suicides in Spain since the financial crisis hit and unemployment increased

Spain's high-speed trains and abandoned stations -A one-track dirt road used by local farmers is the main access to a magnificent glass-and-steel train station in the small city of Villena, on Spain's latest high-speed rail route. It is a spanking new 4,500 square meter building - essentially in the middle of nowhere. The central government financed the rail route, inaugurated on Monday, between Madrid and Alicante on the Costa Blanca. The Valencia regional government was supposed to fund works to connect it to the nearby motorway and Villena, home to 35,000. But it ran out of money, leaving the station high and dry.

Spain's mortgage crisis lingers on as bad loans soar - Spain's real estate crisis continues to rankle as bad bank loans skyrocketed in April. Although institutions are dumping their toxic assets into bad banks, defaulting customers might force them into higher bailout debt. The total from dubious loans held by Spanish banks rose to 167.1 billion euros ($222.9 billion) in April from 162.3 billion euros in March, according to figures released by the Bank of Spain on Tuesday. Compared with the volume of all credits, the bad loan ratio rose from 10.47 percent to 10.87 percent within those two months, according to the central bank. According to Bank of Spain data, nonperforming loans reached a record high of 11.23 percent of all credits in November 2012, and then fell in December for the first time in 17 months, just to rise again in January. This was the result of the country's banks offloading of troubled assets to Sareb, which is a mostly state-funded bad bank charged with ridding the national banking sector of toxic assets.

"It's A Massacre" - Each Day 134 Retail Outlets Close In Italy - If anyone is still not convinced that surging stock bourses in Europe are indicative of anything more than central bank liquidity, carry trade allocation and localized asset bubbles, we present a snapshot of what is actually happening on the ground via Italy's Ansa: "It's a massacre," said Confesercenti President Marco Venturi. "Each day 134 shops, restaurants and bars close in recession-hit Italy, retail association Confesercenti said on Wednesday. Confesercenti, which represents small and medium-sized businesses in the retail and tourism sectors, said 224,000 enterprises had closed their shutters since the start of the global economic crisis in 2008.

The toxic legacy of the Greek crisis - Simon Wren-Lewis of Oxford university tells the story in an excellent blog post. He draws on a critical evaluation by the International Monetary Fund of the programme for Greece agreed in May 2010. Here is the report’s summary of the failings: “Market confidence was not restored, the banking system lost 30 per cent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment. Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.” While the programme forecast a 5½ per cent decline in real gross domestic product between 2009 and 2012, the outcome was a fall of 17 per cent. According to the OECD, the association of high-income countries, real private demand fell by 33 per cent between the first quarters of 2008 and 2013, while unemployment rose to 27 per cent of the labour force. The only justification for such a depression is that a huge fall in output and a parallel rise in unemployment is necessary to force needed reductions in relative costs on to a country that is part of a currency union. Since the Greeks want to remain inside the eurozone, they have to bear the resultant pain. Yet even this cannot justify one aspect of the programme. The International Monetary Fund is supposed to lend to a country only if its debt has been made sustainable. But it was not, in the least, as a host of commentators pointed out at the time. Instead of making debt sustainable, the programme merely let many private creditors escape unscathed.

IMF Looking to Avoid Mistakes Made With Greece - The International Monetary Fund said earlier this month it made major mistakes in its 2010 bailout of Greece, errors in a large part due to a poor assessment of the country’s debt. Now the fund’s trying to teach government officials around the world how to avoid making similar blunders. The world’s emergency lender and economic adviser says it will soon start teaching online courses to thousands of central bankers and ministerial bureaucrats around the world, expanding what has until now been only on-campus training. The project is jointly run with edX, a nonprofit institution founded by Harvard University and the Massachusetts Institute of Technology, an effort to evolve education with “groundbreaking methodologies, game-like experiences and cutting-edge research on an open source platform.” The IMF’s first two pilot courses are on how to accurately assess debt and develop healthy financial systems

The Greek public broadcaster showdown, and when do people finally snap? - There is now a chance that the Greek coalition government will collapse, and in some manner re-form, due to the controversy over the possible shutdown of Greece’s public broadcasting outlet (now suspended by the Greek High Court).  Here are comments from Matt, and also from Open Europe.  Here is a long update on the story. There is a broader point about the possibility of countries on the periphery leaving the eurozone or otherwise choosing a radical change, such as outright default or capital controls or an illiberal government or a blatant renegotiation of the current deal.   Very often there is an ongoing history of major problems and depredations.  Then things seem to get better or perhaps they really do get better.  Expectations start to rise.  Then some small events come along and those events are blown out of proportion, leading to the crisis in public opinion that didn’t quite happen in the first place. The current Turkish crisis was set off by a dispute over a public park, and the recent demonstrations in Brazil seem to have been prompted by a 7% hike in bus fare prices, which is about ten U.S. cents.  Yet in neither case is the small trigger the ultimate cause of the discontent. Many deconversions from religion, or from fandom, or even from marriage, work the same way.  Big lies are told and those lies inflict some damage.  The institution in question soldiers on.  A bit later, an apparently smaller slight or problem brings the whole thing crashing to the ground, precisely when things appeared to be getting better.

Germany’s ascendancy over Europe will prove short-lived -- If demography is destiny, it may be clear within five years that ageing Germany is going the way of Japan. Within 20 years it may equally be clear France and Britain are regaining their 19th century role as the two dominant powers of Europe, albeit a diminished prize.  The European Commission’s 2012 Ageing Report says Germany’s population will shrink from 82m to 66m over the next half century due to social structures that cause low fertility, while France jumps to 74m and Britain to 79m. This is out of date already since the German census revealed in May that the country has 1.5m fewer inhabitants than thought. They miscounted foreigners going home. The total is down to 80.2m.  The old age dependency ratio will jump from 31pc in 2010, to 36pc in 2020, with the workforce shrinking by 200,000 a year this decade. The ratio will climb to 41pc in 2025, 48pc in 2030, and 57pc in 2045. The UK and France will see a much gentler rise.  “Germany is at the high point of its economic output. It will not get any stronger,” said Germany’s EU commissioner, Guenther Oettinger. He accuses his nation of turning flabby, obsessed with “welfare benefits, female quotas, the minimum wage and 'no’ to shale fracking”.

130,000 leave Germany due to failing economy, lack of business opportunities --Thousands are emigrating from Germany, one of Europe’s strongest economies, to seek opportunities elsewhere, citing “no safety for the future” and overcomplicated business legislation as the reasons behind their decision. Some 130,000 people – the most in a generation – left Germany in 2012, RT’s Peter Oliver reported. Recent government data has shown that unemployment in Germany climbed by 21,000 in May – four times more than economists forecast. At the end of May, the Federal Labor Office published unemployment statistics showing that 2.96 million Germans (3 percent of the country’s population) are currently jobless. This, combined with mounting economic problems, has forced some Germans to look for career opportunities elsewhere, with Switzerland, the US, Australia and Canada among the top destinat

Germany 'exporting' old and sick to foreign care homes - Growing numbers of elderly and sick Germans are being sent overseas for long-term care in retirement and rehabilitation centres because of rising costs and falling standards in Germany. The move, which has seen thousands of retired Germans rehoused in homes in eastern Europe and Asia, has been severely criticised by social welfare organisations who have called it "inhumane deportation". But with increasing numbers of Germans unable to afford the growing costs of retirement homes, and an ageing and shrinking population, the number expected to be sent abroad in the next few years is only likely to rise. Experts describe it as a "time bomb". Germany's chronic care crisis – the care industry suffers from lack of workers and soaring costs – has for years been mitigated by eastern Europeans migrating to Germany in growing numbers to care for the country's elderly. But the transfer of old people to eastern Europe is being seen as a new and desperate departure, indicating that even with imported, cheaper workers, the system is unworkable.

In the countries of the old - Germany is exporting people. Well, Eurozone countries exporting people is hardly news. But Germany isn't exporting the same sort of people as other Eurozone countries. Other countries are exporting their young and their skilled. Germany is exporting its old. Economically this makes complete sense. Germany has a lot of old people and a relative shortage of the young & skilled. So it imports young & skilled people and exports old ones. After all, exporting old people is surely better than killing them. There's nothing new about this, of course. Britain has been exporting old people for years. Relatively well-off pensioners like to retire to the sun after years of tolerating British weather. The southern countries of Europe contain substantial populations of expatriate Brits, many of them retired and living on savings. The economic collapse of the southern European states has taken its toll on them, of course: many British retirees in Cyprus lost substantial amounts of money in the recent bank restructuring, and owners of Spanish properties have seen the value of their villas and apartments drop as property prices have collapsed. But most of the sun-seeking pensioners are still there and enjoying a comfortable - and increasingly cheap - retirement.

Leaving the debts behind --- MATT YGLESIAS links to a piece updating us on the migratory solution to euro-zone unemployment:A study by Real Instituto Elcano in February showed 70% of Spaniards under 30 have considered moving abroad. Portugal has seen 2% of its population leave in the past two years. The numbers leaving every year has doubled since 2008. A record 3,000 people are leaving Ireland every month, the highest level since the famine of the 19th-century. Some of them are Poles going home, but many of them are Irish.Not surprisingly, a lot of them are moving to Germany. More than a million migrants moved to Germany last year, according to the Federal Statistics office, a rise of 13% from a year earlier. The number of immigrants coming from Spain, Greece, Portugal and Italy has risen by between 40% and 45% compared to 2012. But others are heading to wherever they have traditionally found work: Britain for the Irish, South America for the Spanish, and the U.S. for the Italians. As Mr Yglesias notes, this is one of the shock-absorbing mechanisms euro-area pioneers envisioned, and it is certainly better for Spaniards to be working in Germany than doing nothing in Spain. But in the absence of a mechanism for debt mutualisation across the euro area, I worry about some of the knock-on effects of large-scale migration.

Europe in Depression - Paul Krugman  - I’m in Paris for an economics conference, opening tonight with what is billed as a debate (although it’s more of a dialogue) over European economics with Mario Monti. So it’s worth looking at the ever-valuable Eurostat (pdf) for an update on Europe’s truly remarkable performance since the crisis struck: Actually, it’s not just the performance — with employment, after a slight uptick, back to declining 5 full years after the recession began — that’s remarkable; so is the fact that, as far as I can tell, European leaders don’t see this performance as a sign that there is anything fundamentally wrong with their policies, the structure of the euro system, or both.

The OMT Goes to Court - Imagine a scheme that would transfer money from Spain, Greece, and Italy to Germany. According to Paul De Grauwe and Yuemei Ji, this is precisely what the European Central Bank's Outright Monetary Transactions (OMT) program has the potential to do. Yet 35,000 Germans have filed complaint against the scheme. The Federal Constitutional Court of Germany is undergoing deliberations on the legality of the European Central Bank's OMT program. The program was announced last August, when the ECB announced that it would be willing, in certain scenarios, to buy government bonds without limit. Even though the ECB has not yet purchased government bonds under this scheme, the announcement alone reduced problematically-high bond yields in Italy and Spain, leading Mario Draghi to declare the program a big success. Andreas Vosskuhle, president of Germany's Federal Constitutional Court, however, said Tuesday that the court will not take the success of the OMT into account when deliberating its legality or constitutionality. Andreas Wiedemann has written an excellent summary of the hearings on June 11 and 12. The court is expected to make a ruling some time after the German elections on September 22.  Mark Thoma links to a note by Helmut Siekmann and Volcker Wieland on the legal issues of the case. They begin by explaining several types of criticism of the OMT.

The ECB's OMT and the German Constitutional Court - The Outright Monetary Transactions (OMT) program undertaken by the ECB has been key in stabilizing sovereign yields in the euro area periphery. Helmut Siekmann and Volker Wieland have evaluated the (German) legal concerns surrounding the program, here. The paper is summarized in the Economist. The authors note:  A case may be made that the OMT exceed the European System of Central Banks’ (ECSB) competences and violate the prohibition of monetary financing enshrined in EU primary law. While standard open market operations are aimed at fine-tuning monetary conditions in the whole area of the euro, OMT imply subsidies to selected sovereigns by lowering risk premia demanded by the market. Granted that the threat of deflation has led other central banks to purchase government debt, this debt has been federal or national debt rather than debt of regional authorities. The Federal Reserve has bought federal debt but not mitigated financial problems of troubled states such as California. Also, the Bundesbank has never tried to influence debt costs of German member states. Finally, the current membership of the euro zone cannot be guaranteed by the ECB as long as Member States remain sovereign. The Economist article is here.

The European "Bail-Ins" Will Continue Until Morale Improves - While we have been told vehemently that the Cypriot deposit confiscation was not a template, yet another European nation is embarking on an until-now-considered-safe asset class to recapitalize its banks. As The Telegraph reports, pensioners and other retail investors in the Co-operative Bank are facing massive losses under a GBP1.5 billion rescue plan for the ailing mutual as investors and the bank's parent would make "a joint contribution" to the bank's recapitalisation, without any help from taxpayers. It seems the days of 'hoping' for a bail-out are over and perhaps that is why European financial credit has been underperforming - as that reality has yet to strike equity holders. The realization that deposits (or their mutual equivalent) are nothing more than loans to highly levered institutions may begin to dawn on a European (or in fact global) depositor base.

ECB’s Weidmann: Deeper Fiscal Union Needs More Public Support - A broad deepening of fiscal integration leading toward a “fiscal union” in the euro zone requires deeper public support than currently exists both inside and outside Germany, European Central Bank Governing Council member Jens Weidmann said Monday. Speaking at a reception sponsored by the local chamber of commerce, Mr. Weidmann urged a “realistic” approach such a deepening of the fiscal policies in the single currency zone. He said that support among the broader public for such a move in the face of the euro-zone crisis at present is seen “neither in Germany nor in partner countries.” Mr. Weidmann is also head of the Deutsche Bundesbank. Some observers have argued that more shared fiscal integration in the currency zone would help mitigate the vast differences in the currency bloc, with some countries seeing massive unemployment, while others, such as Germany, are doing relatively well. Most German leaders, however, are against the collectivization of liabilities at the euro-zone level without stronger supervision across countries on fiscal matters. Mr. Weidmann also repeated that the European Commission should not have granted France extra time to meet deficit goals. In reference to new fiscal rules in the euro zone, Mr. Weidmann said these rules “must be applied” in the right spirit. “I do not believe it is right to maximize the flexibility of these rules at the very beginning,” he said. He said that given its size France should have served as an example of moving to fiscal rectitude. “I am therefore not especially happy with this decision.”

Structural Excuses - Paul Krugman - I promised in an earlier post to say something about why I tend to get annoyed when I hear the phrase “structural reform”, especially in Europe. Part of the reason is that the phrase sounds good, but could mean lots of things. In many cases “structural reform” is code for eliminating worker protections and/or sharply cutting social benefits. Sometimes this may be necessary — let’s face it, France has made it much too attractive to retire at 55 — but such things should be called by their proper names, not wrapped in vague language that conceals the nature of the pain. That brings me to a second problem: whenever some catchphrase becomes part of what Very Serious People say because it sounds Serious, it’s time to stop using the phrase, to force the VSPs to talk about what they really mean. In the US context, “entitlement reform” is VSP boilerplate — I mean, who can be against reform? But the main thing about “structural reform” in Europe is the role it plays in discussion of macroeconomic policies. Instead of reflecting on the fact that Europe is sinking deeper into depression five years into the slump, and clearly needs less austerity and more aggressive monetary expansion, the usual suspects start talking about the need for structural reform.

Defense cuts 'hollowing out' European armies: U.S. envoy (Reuters) - Most European allies are "hollowing out" their armies as they slash Defense spending, casting doubt on whether Europe can remain a viable military partner of the United States, the outgoing U.S. ambassador to NATO said on Monday. Many Western European countries have slashed Defense spending in response to austerity induced by the 2008 financial crisis and the United States now accounts for nearly three-quarters of total NATO Defense spending, Ivo Daalder said. "Most European allies are hollowing out their militaries, jettisoning capabilities, and failing to spend their existing budgets wisely," "As a result, the gap between American and European contributions to the alliance is widening to an unsustainable level," he said. "The trends need to be reversed." The concern in the United States was that "Europe is not investing enough in Defense to remain a viable military partner",

ACEA - European Automobile Manufacturers' Association: In May, demand for new passenger cars declined by 5.9% in the EU*, reaching 1,042,742 units. In absolute figures, this is the lowest level recorded for a month of May since 1993 when new registrations stood below one million. Five months into the year, a total of 5,070,840 new cars were registered in the region, or 6.8% less than in the first five months of 2012. In May, most major markets faced a downturn ranging from -2.6% in Spain to -8.0% in Italy, -9.9% in Germany and -10.4% in France. The UK was the only country to post growth (+11.0%). Overall, the EU* registered 1,042,742 new cars, or 5.9% less than in the same period last year. From January to May, Spain and Germany saw their market shrink by 5.8% and 8.8% respectively, while Italy (-11.3%) and France (-11.9%) recorded a double-digit decline. The UK continued its positive trend, expanding by 9.3%. In total, the 5,070,840 new cars registered over five months represented a 6.8% decrease in demand compared to the same period last year. 

European car sales fall to lowest level since 1993 - New car sales in the European Union last month fell 5.9 per cent year-on-year to their lowest level for May since 1993, as demand for new vehicles continued to decline across the EU’s biggest economies. May’s fall marks a return to gloomy form for the continent’s troubled carmakers after a small rise in April sales ended an 18-month long losing streak and raised slim hopes of a possible end to the pain, blamed on high unemployment, sluggish economic growth and falling consumer spending power. The UK was again the only large market to post a rise in new registrations, with an 11 per cent rise compared with May last year, the 15th consecutive monthly jump. Car sales fell 9.9 per cent in Germany, 10.4 per cent in France and 8 per cent in Italy, according to data released by the European Automobile Manufacturers’ Association (ACEA) on Tuesday. “May brought some worrying figures, notably for the German and French markets,” “It seems as if April was nothing more than a bright spell in the horrendous European sky of car sales.” Executives and analysts have predicted a prolonged slide in sales across the EU’s car market, which began after the global financial crisis derailed the continent’s economic growth, saying there is no reason to believe that the fall shows any signs of bottoming out.

EU car sales hit 20-year low for May as recession hurts - New car sales across Europe fell to their lowest level in two decades for May as the deepening recession hurt demand. Registrations dropped 5.9% to 1.04m in May, compared to a year ago, according to the industry body, the ACEA. This is the lowest level for May since 1993 when new registrations plunged below one million. The UK was the only country to report a rise in sales, with sales up 11%. UK's performance was likely to have been boosted by the government's Funding for Lending Scheme (FLS). FLS was launched last August, in an attempt to boost lending and get the economy expanding. Under the scheme, banks and building societies are allowed to borrow money cheaply from the Bank of England, providing they loan that money to individuals or businesses.

European Car Sales Drop To 20-Year Low, Germany Clobbered - When the S&P, always so conveniently ahead of the curve, yesterday revised its forecast for Europe from growth in the second half of 2013 to 2014 one couldn't help but golf clap, as well as wonder if they finally started looking at the fundamental depressionary reality on the ground instead of the rating agency's infamous "models." A depressionary reality confirmed by the latest car sales number for May which just hit a fresh 20 year low. From AP: European car sales hit their lowest level for the month of May in 20 years as the region's recession dragged on, the European automakers' association said Tuesday. They meant depression instead of recession, but it's an honest mistake. Passenger car sale demand for May dropped by 5.9 percent on the same month last year in the 27-country European Union to 1.042 million units, the lowest level since May 1993, when sales dropped below 1 million, according to new figures released by ACEA. For the first five months of the year, sales dropped 6.8 percent to 5.07 million.

European Car Sales Hit 20-Year Low; Don't Worry, Things Have Stabilized - NPR reports European Car Sales Hit 20-Year Low For May.  Country by Country Details:

  • Passenger car sales dropped by 5.9% from May 2012 in the 27-country European Union to 1.042 million units, the lowest level since May 1993
  • German car sales dropped 9.9% in May, Italy was down 8%, France down 10.4%, Spain down 2.6%
  • PSA Peugeot-Citroen, Renault, Ford, General Motors and Fiat all suffered double-digit declines in May
  • Volkswagen had a 2.8% drop in brand sales and 5.9 percent decline for the group. Sales of Mercedes brand were up 2.8% percent and BMW brand sales declined 8.1%.
  • Jaguar/Land Rover and Japan's Mazda resisted the crisis with a 9.8 percent and 30 percent increase in sales, respectively, but on much smaller volumes and a market share of just 1 percent. Korean automaker Hyundai saw sales rise 1.9 percent.

Euro-Area Services, Factory Output Rises More Than Forecast - : Euro-area services and factory output increased more than economists forecast in June, adding to signs the currency bloc may emerge from its record-long recession in the second quarter. A composite index based on a survey of purchasing managers in both industries rose to 48.9 from 47.7 in May, London-based Markit Economics said today. That is the highest in 15 months and exceeded the median estimate of 48.1 in a Bloomberg News survey of 26 economists. A reading below 50 indicates contraction.The six-quarter contraction in the euro-area economy is forecast to end in the April-June period, when economists project gross domestic product will stagnant before growing 0.1 percent in the third quarter, according to a Bloomberg survey. Still, a slowdown in Chinese manufacturing is raising concerns that European exports may struggle to help the recovery at a time when budget cuts continue to damp consumer spending. Today’s report “reinforces the view that the euro-zone recession is gradually petering out,”

Europe’s pain eases but… Some more flash PMI data out of the Eurozone overnight and although the data continues to improve in terms of the rate of decline there is some worrying signs that not all is as good as the headline figures suggest. German data is at stall speed with weak future indicators. Marginal growth in output was recorded in the German private sector during June, but latest PMI data pointed to declining new orders and a second successive monthly fall in employment. The seasonally adjusted Markit Flash Germany Composite Output Index posted 50.9, up from the reading of 50.2 in May. Overall growth in output was largely reflective of higher activity in the service sector (51.3), while manufacturing production was broadly unchanged (50.1). In contrast to the expansion of output, new business decreased in June amid signs of weakening demand in both domestic and export markets. The rate of decline in new orders was solid, and slightly faster than in May. Services companies posted a stronger decline than manufacturers, despite goods producers reporting the fastest fall in new export orders of 2013 so far.

Spain Leads Slump in European Bonds as Bernanke Signals QE Exit - Spanish bonds led a decline in European government securities after Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers may end asset purchases in mid-2014, sparking a global rout in fixed-income investments. Spain’s 10-year yields surged the most in 11 months after demand fell at an auction of 4 billion euros ($5.28 billion) of debt. Italian and Portuguese bonds also slumped. German 10-year yields climbed to the highest level since February after Bernanke said yesterday that the Fed may “moderate” its $85 billion in monthly purchases this year if growth is consistent with the Fed’s forecasts. “The Fed move makes the price of most asset classes look wrong,” “Higher-yielding European assets like Portugal are getting hurt and Italy and Spain aren’t far behind. In a world where they’ve been doing well it doesn’t take a lot to shake the market.”

Greek debt costs surge on government collapse - Borrowing costs for debt-laden Greece have surged massively as the smallest party in the ruling coalition decided to exit the government. The move raised uncertainty over reforms and the country's ability to repay debt. Yields on Greek 10-year government bonds soared to above 11 percent in midday trading Friday - their highest level so far this year. Interest to be paid on the benchmark government debt rose by almost 1 percent from Thursday, in a sign that investor confidence in the debt-laden eurozone country is eroding. In addition, shares traded at the Athens Stock Exchange were down by over 3 percent. The turmoil in Greek financial markets was the result of a government crisis, caused by the pullout from the government by the Democratic Left - junior partner in the three-party ruling coalition led by conservative Prime Minister Antonis Samaras. The collapse of the government sparked renewed fears over the country's reform process and its ability to repay massive debt. For the past three years, Greece has been dependant on rescue funding to the tune of 240 billion euros ($316 billion), provided by the EU, the International Monetary Fund (IMF) and the European Central Bank.

EU fails to agree on bank bailout rules - EU finance ministers failed to reach a deal on new rules for bailing out European banks after nearly 18 hours of negotiations early Saturday morning, forcing them to reconvene next week for a make-or-break session ahead of a summit that was supposed to set the course for a future EU “banking union”. The talks broke down over wide-ranging disputes both within the eurozone and between euro and non-euro countries on how flexible the rules should be in requiring bank creditors and investors to pay for a bank failure in order to spare taxpayers from shouldering most of the bailout burden in the future. “If it was just fringe issues, we would stay through the night,” said Michael Noonan, the Irish finance minister who chaired the meeting as holder of the EU’s rotating presidency. “There are still real issues, core issues outstanding.” Diplomats and officials involved in the talks said the biggest problem became the varying demands from multiple countries to have the rules tailored to their specific financial systems – the same issue that has been bedevilling negotiators for weeks. A German-led group of countries insisted that such “bail-in” rules be of limited flexibility, giving national authorities little choice of when to force losses on equity and bond holders after a bank collapses, as well as limited room to choose which kinds of liabilities can be exempted from such bail-ins. But a much wider range of countries, including France but also many non-euro countries, urged more flexibility for member states to tailor bailouts to specific situations. Diplomats said that despite multiple bilateral deliberations throughout the night, France refused to give in to German and Dutch demands for stricter rules.

Unable to Reach Deal, Europe Plans New Talks on Bank Rescues - European Union finance ministers haggled early into Saturday morning over rules to lessen the chances that taxpayers will bear the burden if banks collapse, but they failed to reach a deal. “We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting here. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.” Diplomats said the next attempt to reach a deal was scheduled for Wednesday — a day before the leaders of the European Union’s 27 member states gather for a summit Brussels, their last scheduled meeting before the summer. The leaders had been expected to endorse the finance ministers’ decision. The failure to reach a deal could further unsettle investors who were already jittery about the lingering recession in the euro zone, turbulence on global markets, renewed political instability in Greece, and hints that Cypriot leaders were balking at their bailout agreement.

Yanis Varoufakis: The Death of Direct Bank Re-capitalisation: Europe’s (Newest) Day of Shame - Here is the essence of what they agreed to: When a bank needs capital injections, the first thing that happens is that the national government provides the capital needed to raise the bank’s minimum capital ratio (T1) to 4.5% of its assets. After that, a sequence of haircuts must follow. First to be haircut are the shareholders and bondholders and then come the uninsured depositors (i.e. the Cyprus model is enacted). Beyond that, the ESM and the national government pout more money in the bank, with the latter participating at a rate of 20%, which can later be reduced to 10%.  Two points need to be made here, and shouted from the rooftops: The Eurozone’s fragmentation is to continue: Member-states that are not insolvent will be able to bailout their banks’ unsecured depositors, just as the head of the Eurogroup did with Dutch SNS-Real recently. On the other hand, insolvent member-states will have to follow the above blueprint, with deposits above €100,000 savaged and the member-state going further into debt. Legacy losses will be used as a disciplinary device: The Eurogroup reached no decision on whether the above can operate retrospectively. They announced that banks already recapitalized by insolvent states will be dealt with on a case-by-case nature. Thus, Greece, Spain and Ireland will now have to tussle, to beg, to plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks. As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60 billion, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest.

Another shameful day for Europe as EMU creditor states betray South - Anybody with serious banking exposure to any EMU state on the front line of Europe's macro-economic crisis now knows what to expect. The deal reached by EMU finance ministers on the use of the bail-out fund (ESM) to recapitalise distressed banks makes clear who will in fact suffer the real losses: first shareholders, then bondholders and then deposit holders above €100,000. They stand to lose almost everything, as we saw with Laiki in Cyprus. Officials from the European Central Bank and the European Commission warned during the Cyprus crisis that it would be dangerous to set such a precedent, fearing contagion. The Portuguese were openly alarmed. The states that are already in trouble will have to carry most of the burden of recapitalising banks, pushing them over the edge into actual insolvency. They will have to come up with the money needed to raise capital ratios to 4.5pc of assets. Then come the private haircuts, which of course risk devastation for the host country, and the collapse of investor confidence. Only then does Europe step in to share part - not all - of any further recap needs.

How Austerity Has Failed - Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed. What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. ... Austerity came to Europe in the first half of 2010, with the Greek crisis, the coalition government in the UK, and above all, in June of that year, the Toronto summit of the group of twenty leading countries. This meeting prematurely reversed the successful stimulus launched at the previous summits and declared, roundly, that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013.”...What was the consequence? In a word, “dire.”...The right approach to a crisis of this kind is to use everything: policies that strengthen the banking system; policies that increase private sector incentives to invest; expansionary monetary policies; and, last but not least, the government’s capacity to borrow and spend. Failing to do this, in the UK, or failing to make this possible, in the eurozone, has helped cause a lamentably weak recovery that is very likely to leave long-lasting scars. It was a huge mistake. It is not too late to change course.

Is a little bit of inflation just what the doctor ordered? - My colleague Dylan Matthews wrote today on one of the mysteries of global economics in the last few years: The combination of weak economic growth out of Britain yet decent performance on employment. Economists think of this as a “productivity puzzle,” in that what has happened mathematically is a downshift in the productivity of British workers– less economic output per hour of labor (or at least a failure of productivity to rise at its historical rates).. It is true that Britain has had stagnant growth over the last three years. But it has also had inflation a good bit above the 2 percent that the Bank of England aims for (the UK consumer price index rose 3.7 percent in 2010, 4.2 percent in 2011, and 2.7 percent in 2012). This often has been characterized as a bad thing–evidence that the British economy was in a nightmare of 1970s-style stagflation, or stagnation plus inflation.But maybe that view looks at things all wrong. That outburst of inflation may have been just what the doctor ordered to keep from having higher unemployment despite Britain’s weak economic growth.

Retail sales leap in May - Retail sales had a very good month in May, breaking a sequence of disappointing numbers. Volumes and values both rose by 2.1% compared with April, largely on the back of a jump in food sales, which had been suspiciously weak. Sales volumes overall reached a record level. So in volume terms food sales jumped by 3.5% in May compared with April. The overall volume of sales in the latest three months was up by 0.7% on the previous three, suggesting consumer spending will make another contribution to growth in the second quarter, in line with recent quarters. More here

FX Rates Said to Face Global Regulation in Libor Review - Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, two people familiar with the matter said. The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks, including the WM/Reuters rates, as soon as next month, said the people, who asked not to be named because the talks aren’t finalized. The U.K. Financial Conduct Authority, which oversees markets and prosecutes financial crime, is looking into potential manipulation in the $4.7 trillion-a-day foreign-exchange market after being contacted by a whistle-blower in March. The regulator has sent requests for information to four banks, including Deutsche Bank AG (DBK) and Citigroup Inc (C)., according to one of the people. “All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence,”

Banking Commission: Bankers should face threat of jail and loss of bonuses -  Senior bankers should face jail and the loss of millions of pounds in bonuses if they are involved in a future banking collapse, according to a report by a cross-party group of MPs and peers.  The Government has been urged to introduce a new criminal offence for “senior persons” who run banks in a “reckless manner”, as well as much more stringent clawback rules that could see managers being stripped of several years’ worth of pay. Andrew Tyrie MP, the chairman of the Commission on Banking Standards, warned that bankers had escaped “personal responsibility” for their actions, and said that drastic reforms were the only way to restore trust in banks.  “Where the standards of individuals, especially those in senior roles, have fallen short, clear lines of accountability and enforceable sanctions are needed,”

The world is still being held hostage by its rotten banks - In the midst of this turbulent summer in the markets, the revolving door at the top of British banking has been spinning unexpectedly fast. At the Bank of England, Sir Mervyn King, the governor, is shortly to be replaced by the governor of the Canadian central bank, Mark Carney. The abrupt recent announcement of the impending departure of deputy governor Paul Tucker preceded the appointment of Charlotte Hogg, head of retail banking at Santander, as the Bank’s first chief operating officer. In the private sector, Stephen Hester recently found himself brutally ejected from his role as chief executive of Royal Bank of Scotland. Many in the City of London were disconcerted by the timing of the Tucker announcement and the Hester defenestration. Meantime the Basel III capital regime is pushing more risk from bondholders on to shareholders, which is healthy. Yet in dealing with large, complex financial institutions the rules for risk-weighting bank assets are insanely complex and distorting. In a speech last year the Bank of England’s Andrew Haldane argued that the regulators use rules that are needlessly complicated – adding that this was tantamount to asking a border collie to catch a Frisbee by applying Newton’s law of gravity to calculate its flight path. He would like more attention to be paid to a simple leverage ratio requiring a minimum level of equity capital in relation to bank liabilities. Yet Basel III’s backstop leverage figure is just 3 per cent by 2019. For a banking system to operate on the basis that a fall of a mere 3 per cent in the value of bank assets will wipe out the banks is simply absurd; all the more so when banks’ risk-management techniques were shown to be hopelessly flawed in the crisis, yet remain substantially unchanged. The dangers here were highlighted when JPMorgan, supposedly the best risk manager in the business, lost $6bn in the “London whale” trading fiasco. Its much admired bosses had no notion at all of what was afoot.

This Big Business of Big Brother -- By now all have heard of the whistle blower exposing the NSA capturing all sorts of communications traffic.  The latest is the United States and Great Britain didn't stop there, they have been spying at the G-20 meeting, filled with the highest echelons of economic and financial officials.Foreign politicians and officials who took part in two G20 summit meetings in London in 2009 had their computers monitored and their phone calls intercepted on the instructions of their British government hosts, according to documents seen by the Guardian. Some delegates were tricked into using internet cafes which had been set up by British intelligence agencies to read their email traffic.The revelation comes as Britain prepares to host another summit on Monday. If anyone recalls, 2009 was the height of the Great Recession, with still a blare glimmer of hope the world would actually truly reform the global financial system.  This latest revelation also refutes the claim all of this warrantless eavesdropping going on is simply to thwart terrorists.  The 2009 G-20 meeting was all about financial reform, so the fact real time spying was going on one has to wonder why that is.  At the time, massive debt forgiveness as well as nationalizing the banks was being considered.  Needless to say none of that happened. 

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