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

Saturday, June 29, 2013

week ending June 29

U.S. Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week on increased Treasuries holdings, Fed data released on Thursday showed. The Fed's balance sheet liabilities stood at $3.436 trillion on June 26, compared with $3.427 trillion on June 19.The Fed's holdings of Treasuries rose to $1.928 trillion as of Wednesday, from $1.919 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) dipped to $1.208 trillion from $1.209 trillion the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $70.658 billion, unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $24 million a day during the week versus $25 million a day the previous week.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, June 27, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Central banks told to head for exit - Central banks must head for the exit and stop trying to spur a global economic recovery, the Bank for International Settlements has said following a week of market turbulence sparked by the US Federal Reserve’s signal that it would soon cut the pace of its bond buying. US Treasury markets, which saw yields hit their highest level in almost two years on Friday, face further challenges this week as they prepare to sell an extra $99bn of debt. After last week’s global sell-off, markets in the US will also be knocked by traders winding down for the end of the second quarter. The BIS, which counts the world’s leading monetary authorities as members, said cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health. It used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth. The BIS report comes on the back of last week’s markets turmoil, fuelled by Fed chairman Ben Bernanke’s comments that the central bank could slow its $85bn monthly bond-buying programme this year and end it by mid-2014. Often referred to as the central bankers’ bank, BIS said the global economy was “past the height of the crisis” and its goal was “to return still-sluggish economies to strong and sustainable growth”. “Alas, central banks cannot do more without compounding the risks they have already created,” the BIS said, adding that delivering more “extraordinary” stimulus was “becoming increasingly perilous”.

BIS Says Party Over for Quantitative Easing - The Bank for International Settlements has demanded Central Banks stop their quantitative easing in hopes of a global economic recovery.  All that has happened is a stock market love affair while the real economy languishes.  BIS has issued their annual report demanding nations deleverage, which is codespeak for austerity.  The Bank fo International Settlements is the bank of the central banks, so these ultimatums to their 58 Central Bank members are significant.   The BIS demand is clear, quit quantitative easing, adding to balance sheets and issuing zero interest rates and get back to layoffs, downsizing and austerity.  Those are the BIS marching orders to their members as their annual report implies Central Banks are simply staving off the inevitable with unforeseen financial consequences. Originally forged as a description of central bank actions to prevent financial collapse, the phrase “whatever it takes” has become a rallying cry for central banks to continue their extraordinary actions. But we are past the height of the crisis, and the goal of policy has changed – to return still-sluggish economies to strong and sustainable growth. Can central banks now really do “whatever it takes” to achieve that goal? As each day goes by, it seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.

The Bank Of International Settlements Warns The Monetary Kool-Aid Party Is Over - When a month ago the Central Banks' Central Bank, aka the Bank of International Settlements (or BIS) in Basel where the MIT central-planning braintrust meets every few months to decide the fate of the world, warned that the Fed-induced collateral shortage is distorting the markets, few paid attention. That the implication behind said warning was that QE can not continue at the current pace, was just as lost. A few short weeks later following the biggest plunge in markets since 2011 in the aftermath of Bernanke's taper tantrum, some are finally willing to listen. However, they will certainly not like what the BIS just released as a follow up, both in the form of the BIS' 83rd Annual Report, and the speech by Jaime Caruana to commemorate said annual meeting. For the simple reason that it reads like a run of the mill Sunday morning Zero Hedge sermon, which says, almost verbatim, that the days of kicking the can via flawed monetary policy are now over, and that the time for central banks to end the monetary morphine drip has finally come.  The BIS message, as summarized by the FT, is that "central banks must head for the exit and stop trying to spur a global economic recovery... cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health by delaying adjustments to governments’ and households’ balance sheets."

I'm a central banker, get me out of here - CENTRAL banks are unable to repair banks’ broken balance sheets, to put public finances back on a sustainable footing, to raise potential output through structural reform. What they can do is to buy time for those painful actions to be taken. But that time, provided through unprecedented programmes of monetary stimulus since the financial crisis of 2008, has been misspent. Neither the public nor the private sector has done enough to reduce debt and to press ahead with urgent reforms. Yet only a forceful programme of repair and reform will allow economies to return to strong and sustainable growth. That is the message from the Bank for International Settlements (BIS), the closest that central bankers have to a clearing-house for their views. Based in Basel, the BIS can point to prescience before the financial crisis, when William White, then its chief economist, worried that excessive credit growth was generating bubbles that could burst in a messy fashion. So how far should the warning in its annual report released today be heeded?

The BIS Has Lost Its Mind, Advocates Kicking Citizens and the Bond Markets Even Harder - Yves Smith - If anyone doubted that Ben Benanke’s “we’re convinced the economy is getting better, so take your lumps” press conference after the FOMC statement last week was awfully reminiscent of 1937, the newly-released Bank of International Settlements annual report is tantamount to a kick to the groin. And to change metaphors, if the Fed’s sudden hawkish posture is playing Russian roulette with the real economy, the BIS just voted loudly for putting a couple more bullets in the cylinder. Investors took the news badly, with 10 year Treasury yields rising from 2.18% before the FOMC statement to 2.53% at the end of Friday. And the selloff continues, with the 10-year yield as up to 2.62% as of this writing. Some commentators thought the Fed talk was misread, pointing to the various thresholds and triggers the central bank set for for commencing its QE exit and they actually weren’t so terrible. Others refused to believe Bernanke was serious, with Marc Faber saying that bonds, stocks, and equities were “very oversold” and arguing, “We are going to go with the Fed to QE99.” Now before you say, “This is no big deal, QE didn’t do much for the real economy” bear in mind what it was intended to do: to goose asset prices to help growth. The immediate object was to repair bank balance sheets. By making bond prices higher, they not only made equity levels looked better, but that operation also enabled banks to sell equity, something that would have been impossible if they looked feeble.  Now who gets whacked the hardest when bond prices go down fast? Banks and securities dealers (who are pretty much all banks these days). Banks are structurally long. Derivatives markets aren’t deep enough for them to get net short (and have the bet actually pay off). The best they can do to minimize damage is reduce their inventories, particularly of the long and medium term bonds (yes, and do as much hedging as possible, but that’s only a partial remedy). So Bernanke’s apparent renouncement of the “give banks plenty of warning so they can get out of the way” practice is a great big test of whether the banks are really as healthy as all the regulators have been insisting they are.

Fed’s Fisher: Fully in Favor of Dialing Back Bond Purchases - Gradually reducing the volume of assets purchased by the Federal Reserve is the right direction for monetary policy in the U.S., said a top Fed official. Richard Fisher, president of the Federal Reserve Bank of Dallas, said in a speech to the Official Monetary and Financial Institutions Forum in London that assuming economic forecasts come out as expected then “it would be appropriate for us to dial back the monetary stimulus.” Mr. Fisher added that he “fully” agreed with the announcement made recently by the Chairman Ben Bernanke. The Fed chairman’s discussion of the end of the Fed’s purchases of assets, known as QE3, has helped drive down major stock and bond markets as investors reckon with the pullback of liquidity from the financial system.

Fed Needs Threshold System for Bond Buying Program, Kocherlakota Says - The Federal Reserve needs to clarify the conditions that would lead it to pull back on the level of stimulus it is now providing the economy, a U.S. central bank official says. In an unusual move, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota issued a statement Monday that aired his concerns with the actions taken at last week’s Federal Open Market Committee meeting. While it isn’t uncommon for officials who have dissented against Fed policy at meetings to release statements, Mr. Kocherlakota is in an usual position in that he doesn’t currently hold one of the FOMC voting slots that rotate among the regional bank presidents. That said, Mr. Kocherlakota’s plea for clarity will likely sit well with financial markets. While the Fed didn’t change the actual course of its bond buying stimulus program at the end of the FOMC meeting last Wednesday, officials nevertheless suggested that an improving economy will mean the Fed can start paring back on its bond buying stimulus effort at some point later in the year. Mr. Kocherlakota’s statement argued that just as the Fed has adopted what it calls thresholds to guide the time when it will raise rates, it should also offer some form of guidance about the conditions that could cause it to end what is now an $85 billion per month program of Treasury and mortgage bond buying.

Et Tu, Bernanke?, by Paul Krugman -  For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless... You can argue — and I would — that the Fed’s activism, while welcome, isn’t enough, and that it should be doing even more. But at least it didn’t lose sight of what’s really important.  Until now.  Lately, Fed officials have been issuing increasingly strong hints that they are eager to start “tapering,” returning to normal monetary policy.The trouble is that this is very much the wrong signal to be sending given the state of the economy. We’re still very much living through what amounts to a low-grade depression — and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon.  The first thing you need to understand is how far we remain from full employment four years after the official end of the 2007-9 recession. It’s true that measured unemployment is down — but that mainly reflects a decline in the number of people actively seeking jobs, rather than an increase in job availability. Look, for example, at the fraction of adults in their prime working years (25 to 54) who have jobs; that ratio fell from 80 to 75 percent in the recession, and has since recovered only to 76 percent.

Did the Fed move the target? - There's been some blowback in the last few days about whether the Fed actually introduced any uncertainty, or changed from a data-responsive to a calendar-responsive regime. After all, Bernanke must understand the consequences of higher long term interest rates, so he will hold off, or reverse course, if it looks like the economy is faltering.  But this confidence ought to evaporate if, in fact, the Fed has moved the goalposts, as a writer at Naked Capitalism thinks:  For those who arent refinancing their mortgages and without financial investments, it’s hard to say what the Fed has accomplished; their earlier stated targets were to lower unemployment to 6.5%, and to allow short term inflation to reach 2.5% in order to stimulate growth. Now, however, ..., they say they’ll be satisfied with 7% unemployment, and despite inflation fears accompanying the quadrupling of the Fed’s balance sheet, core PCE inflation was at a record low in April. From here, it seems they just want to get out ....So, has the Fed moved the goalposts? Here's the Fed statement from half a year ago establishing the unemployment and inflation markers:  ...the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Did you catch the distinction? The Fed hasn't necessarily changed the standards for raising interest rates.. What is different is that the Fed has established new, looser criteria for ending QE. 

"We are not tightening", says a tightening Fed - MONETARY policy is fundamentally about coordinating expectations. The extent to which everyone in an economy spends and invests depends upon how everyone thinks everyone else will spend and invest. Central bankers acknowledge that coordinating expectations is important. That's why central banks now set clear policy targets, and it's why they have mostly prioritised greater transparency and communication in recent decades. But central bankers don't like emphasising the expectations side of things too much, because it makes their task seem much less like engineering or science and much more like psychology or poker. Instead, they like to think of guidance and policy targets as a complement to the mechanical policy tools at their disposal, like their ability to use reserve creation to influence interest rates. There is a discontinuity in central bank policy when short-run interest rates approach zero. Monetary policy seems to dampen shocks to a much smaller extent when rates are near zero than it does at other times. But why is that? One view is that when rates approach or hit zero the economy enters a liquidity trap and standard monetary policy becomes powerless. Another view is that monetary policy doesn't become powerless but central banks are more concerned about the side-effects of non-standard policy and therefore adopt a less responsive reaction function: it then takes more of a shock to generate a monetary response of a given size.

Can the Taper Matter? Revisiting a Wonkish 2012 Debate - Last week, Ben Bernanke tested the waters for “tapering,” or cutting back on the rate at which he carries out new asset purchases, and everything is going poorly. As James Bullard, the president of the Federal Reserve Bank of St. Louis, argued in discussing his dovish dissent with Wonkblog, “This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.” But if you really believe in the expectations channel of monetary policy, can this even matter? Let’s use this to revisit an obscure monetary beef from fall 2012. Cardiff Garcia had a recent post discussing the fragile alliance between fiscalists and monetarists at the zero lower bound. But one angle he missed was the disagreements between monetarists, or more generally those who believe that the Federal Reserve has a lot of “ammo” at the zero lower bound, over what really matters and how. For instance, David Becksworth writes, “What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful.” But one of the most important and influential supporters of expansionary monetary policy, the one who probably helped put the Federal Reserve on its bold course in late 2012, thinks exactly this. And that person is the economist Michael Woodford.

Ben Bernanke Starts a Bond Panic; Fed Pals Step In to Soothe Nerves - Since Federal Reserve Chairman Ben Bernanke held his press conference on Wednesday, June 19, of last week, hedge funds have been stampeding to unwind trades, driving down the value of not just bonds, but stocks, exchange-traded funds (ETFs) and gold as well. Even U.S. Treasury notes, the typical safe haven amidst panic selling, have lost significant value. The Treasury selloff is likely a result of the liquidity of the instrument; when hedge funds must raise cash quickly to meet margin calls and there are no bids for some of their other asset holdings, they have no choice but to sell the most liquid investments. It also didn’t help that Bernanke made his remarks the week before the U.S. Treasury was set to auction $179 billion of Treasury bills and notes. The increase in interest rates resulting from the panic selling has forced the U.S. government to offer higher interest rates on its debt auctions this week. Bernanke, a man of measured words, clearly did not mean to set off a panic. So what was it that the bond vigilantes found so repugnant in Bernanke’s press conference of June 19: First, Bernanke said the Fed might actually sell some of its holdings of mortgage backed securities at some point: “One difference is worth mentioning. While participants continue to think that, in the long run, the Federal Reserve’s portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run, limited sales could be used to reduce or eliminate residual MBS holdings.” The problematic part of those two sentences are the words “difference” and “worth mentioning.” This signaled a change in thinking and that’s what the market seized upon.

Bursting Bernanke's bubble - The last time we discussed the Credit Suisse Global Risk Appetite Index, it was headed for "euphoria" (see this post from May 21). Around May 22 something changed, and it was all downhill from there.It was Bernanke's first hawkish statement. May 22; Bernanke: - We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook. If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases. Intentionally or not, the Chairman burst the market bubble just before it hit "euphoria". It was clear that the Fed was becoming concerned about froth forming in fixed income markets (Bernanke spoke about it - see this post). It was time to end it.  The unfortunate outcome of this action however is that it remains unclear whether the economy would have been better off if QE3 was never launched at all. The next 12 months will be filled with uncertainties about the exit timing, rising rates, and shaky credit markets. Anecdotal evidence suggests that some banks are becoming jittery about growing their balance sheets in this environment. As a result, loan growth is already slowing. That can't be good for business growth and hiring. When the dust settles, the economy may end up being in worse shape than it would have been if the Fed left it alone in August of 2012

A Hawkish Signal Bernanke Didn't Send - WSJ -- The markets have misread Ben Bernanke. The Federal Reserve chairman's news conference a week ago was widely seen as a signal that the Fed is preparing to wean the economy off easy money, perhaps sooner than many anticipated.  Global stock markets plunged. The bond market pushed yields on 10-year U.S. Treasury notes close to 2.6%, higher than they've been since August 2011. Rates on 30-year fixed-rate mortgages leapt, hitting 4.6% this week, up from 4.1% the week before, according to HSH Associates. Futures markets are betting the Fed might lift short-term rates from zero as soon as mid-2014.  That is neither what Mr. Bernanke expected nor what he meant. "There is no change in policy here," he said at the news conference. Mr. Bernanke said that if the economy unfolds as the Fed expects—and he emphasized the "if"—it would reduce later this year the size of its purchases of Treasury and mortgage-backed bonds, currently at $85 billion a month. He said the plan is to cease the bond purchases, known as "quantitative easing," in mid-2014 if "subsequent data remain broadly aligned with our current expectations" that unemployment will fall to about 7%.  He repeated the vow to keep short-term interest rates near zero "at least" until unemployment falls to 6.5%, probably not before 2015.

Two Fed Presidents Emphasize Stimulus to Persist After QE Taper - Two Federal Reserve presidents who differ over the need for more stimulus emphasized that monetary policy remains accommodative, less than a week after a timeline to reduce bond purchase jolted financial markets. “What we’re talking about here is dialing back,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in London yesterday. “The word ‘exit’ is not appropriate here,” said Fisher, who doesn’t vote on policy this year and has been critical of the Fed’s easing policies.Minneapolis Fed President Narayana Kocherlakota, who has called for easier policy, said yesterday the Fed must emphasize in its statement that policy will remain accommodative “for a considerable time” after the end of quantitative easing. “We have to bring that forward and hammer it every time we talk about policy,” Kocherlakota, who also doesn’t vote this year, said to reporters in a conference call. Fisher and Kocherlakota both vote next year on the Federal Open Market Committee, when the members will be deciding when to end asset purchases, assuming they follow the timeline set out last week by Chairman Ben S. Bernanke. New York Fed President William C. Dudley, who has a permanent vote on the panel, said on June 23 the Fed has been too optimistic about the economy in the past. The Fed officials’ comments highlight the challenges they confront while seeking to lay out a strategy for curtailing the asset purchases that have pushed the Fed’s balance sheet to a record $3.47 trillion. The Standard & Poor’s 500 Index has fallen 4.8 percent since June 18, the day before Bernanke said the Fed could start reducing $85 billion in monthly bond purchases this fall and end them in the middle of next year if the economy meets the Fed’s forecasts.

The Fed’s bad timing - If you only read one article on US monetary policy and the latest actions of the Fed, it should be Wonkblog’s interview with St Louis Fed president James Bullard — an interview that answers pretty much every question you might have, with the exception of the “why did they do this” one. Bullard — who was the sole dissenting dove at the last FOMC meeting — released a formal statement shortly afterwards, in which he explained that he is more dovish than the rest of the committee just because inflation is significantly lower than the Fed’s target. The statement explained: President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

Potential Losses In The Federal Reserve’s Portfolio -  I have written extensively on the issue of Quantitative Easing (QE) and Interventions as I believe many aspects of these practices lack recognition and understanding. Quantitative Easing in general carries an array of risks, detrimental impacts, unintended consequences, and complex impacts on the economy and markets. One such set of dynamics embedded within QE that I believe lacks recognition is the risk of losses that can occur in the Federal Reserve's portfolio. I previously wrote of this in the post of March 7, 2012 titled "Dynamics And Risks Of The Federal Reserve's Portfolio." While the subject of potential losses is complex – and quantification of such potential losses is made difficult due to the many factors involved – the sheer size of the numbers involved, as well as various adverse situations that may develop during the course of portfolio losses – make this an issue that deserves recognition. It appears that many people discount the risk of losses, as well as the potential for the Federal Reserve to exhaust its capital base, as they figure that the U.S. Treasury can always replenish the capital. As well, there is the issue of "mark to market" losses vs. accounting losses, and how the markets view the difference.  However, if one believes that there is possible adverse impact(s) stemming from mark-to-market losses in the Federal Reserve's portfolio as well as the exhaustion of the Federal Reserve's capital, a disconcerting picture appears, especially in today's rising interest rate environment.

The Fed's accounting magic makes mark to market losses disappear - We are getting a number of questions related to the Federal Reserve experiencing a major loss on its securities holdings due to the sharp correction in bonds over the past couple of weeks. How big is the loss and how will it impact everything from the central bank's capitalization to distribution of income to the US treasury? The answer is that while the mark to market loss on the Fed's $3.2 trillion of securities holdings is massive (here is the full portfolio in detail), it will never be recorded on the bank's financial statements unless the Fed begins to sell the portfolio. Currently it has no plans to do so. While private institutions in the US usually follow Generally Accepted Accounting Principles (GAAP) for their financial reporting, the Federal Reserve Banks do not. Instead their financials are prepared using the Financial Accounting Manual for Federal Reserve Banks - a set of accounting rules just for the Fed. And when it comes to securities holdings, the method of accounting is "straight-line amortization" rather than "fair value". FRB: - The primary difference between the accounting principles and practices in the Financial Accounting Manual and GAAP is the presentation of all System Open Market Account securities holdings at amortized cost rather than the fair value presentation required by GAAP. Treasury securities, government-sponsored enterprise (GSE) debt securities, Federal agency and GSE mortgage-backed securities, and investments denominated in foreign currencies comprising the SOMA [System Open Market Account Holdings (the bond holdings)] are recorded at cost on a settlement-date basis rather than the trade-date basis required by GAAP. The cost basis of Treasury securities, GSE debt securities, and foreign government debt instruments is adjusted for amortization of premiums or accretion of discounts on a straight-line basis.

Why Wall Street Doesn't Trust the Fed - Wall Street took the weekend to mull over the Federal Reserve's plans to end its easy-money ways over the next few years. It still doesn't like what it sees. This morning, eurodollar futures have priced in another rise in Fed's expected policy rate, continuing a trend that began last month. The markets seem convinced that the Fed has set its plan for ending monetary stimulus and will execute it regardless, even though that's precisely what its chairman Ben Bernanke promised it wouldn't do in his press conference last week. The "policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook, as well as on the cumulative progress toward our objectives," Bernanke said. Nobody believes him because he broke his promise even as he made it. He announced tighter monetary policy despite disappointing economic data over the past month. James Bullard, president of the Federal Reserve Bank of St. Louis, made the point in a statement explaining his dissent from the Fed's announcement. The exit strategy's announcement, Bullard wrote, was "inappropriately timed." It signaled "a step away from state-contingent monetary policy" -- that is, a promise to let the pace of economic healing dictate the pace of monetary withdrawal. Instead, it looked as though the Fed had "calendar objectives" in mind. Bullard elaborated his position in a later interview.

Fed’s Lockhart: FOMC Meeting Wasn’t Major Shift in Direction - The Federal Reserve will be keeping monetary policy very stimulative for years to come, a U.S. central bank official said Thursday. “Nothing has changed” in the Fed’s outlook toward tightening interest rates, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech in Marietta, Ga. “The timing of the first move to raise the policy rate will depend on overall economic conditions, but I would estimate ‘liftoff,’ as it is called, to come sometime in 2015,” the official said. Mr. Lockhart, in a speech before a local group, said that while his confidence in the outlook has increased, economic conditions are still “mixed.” The official expressed his support for the Fed pressing forward with what is currently an $85 billion-a-month campaign of bond buying in a bid to help boost growth and lower the unemployment rate. Mr. Lockhart spoke in the wake of last week’s gathering of the Federal Open Market Committee. Central bankers signaled then that if the economy performs as they expect, they will be able to slow the pace of bond buying later this year and likely bring it to a close next year.

Fed’s Powell: Market Adjustments Larger Than Justified by What Fed Has Said - Federal Reserve governor Jerome Powell on Thursday sought to correct market misunderstandings of what central bank officials have been trying to communicate since mid-May about their plans for winding down the Fed’s $85 billion a month bond-buying program. “Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” Mr. Powell said in a speech prepared for delivery at the Bipartisan Policy Center. In particular, he said that market indicators suggesting investors believe the Fed will raise short-term rates sooner than before they did in May are out of whack with what the Fed’s stated policy plans and forecasts would indicate. In its so-called “forward guidance,” the Fed says it will keep short-term rates near zero until the unemployment rate hits 6.5%. Fed officials have repeatedly said that the figure is a threshold, not a trigger, and they are likely to keep rates there for a considerable time after they end the bond-buying program. Economic projections the Fed released this month show the vast majority of Fed officials don’t believe they will raise rates until 2015. “The reaction of the forward and futures markets for short-term rates appears out of keeping with my assessment of the [Federal Open Market] Committee’s intentions, given its forecasts,” Mr. Powell said. “To the extent the market is pricing in an increase in the federal funds rate in 2014, that implies a stronger economic performance than is forecast either by most FOMC participants or by private forecasters.”

Fed’s Dudley: Markets Wrong to Think Tighter Policy Coming Soon - A top U.S. central bank official warned financial markets they’re reading the Federal Reserve wrong if they think a tightening in monetary policy has gotten closer.“A rise in short-term rates is very likely to be a long way off” even as it’s possible that the central bank may slow the pace of its bond-buying program later this year, Federal Reserve Bank of New York President William Dudley said Thursday.The official noted a shift in market rates that’s happened since the last gathering of the monetary-policy-setting Federal Open Market Committee is seen by observers as signaling rate rises could come “much earlier than previously thought.” Mr. Dudley, who is at the core of Fed monetary policy decision making, said “let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants.”Mr. Dudley’s speech came in the wake of the last week’s Fed monetary policy-setting meeting. The gathering roiled markets greatly. The Fed signaled then that if the economy plays out as it expects, it will likely begin to slow the pace of its $85 billion per month bond buying program later this and potentially end it next year.

Fed’s Stein Adds to Chorus Saying Markets Misread Bernanke -- Yet another Fed official is suggesting the markets misinterpreted Chairman Ben Bernanke‘s statements last week about winding down the central bank’s $85 billion-a-month bond-buying program. Jeremy Stein, a member of the seven-person Fed board of governors, said in a speech Friday that Mr. Bernanke’s comments last week represented a subtle change in how far the Fed is willing to go in explaining its goals for the bond-buying program known as quantitative easing. At a press conference following the Fed’s June 18-19 policy meeting, Mr. Bernanke said that if the economy continues to strengthen in the way the Fed expects, the central bank would start reducing its monthly bond purchases later this year and could end the program altogether around mid-2014. Mr. Bernanke said unemployment likely would be at about 7% when the Fed bought the bond-buying program to a close. The jobless rate stood at 7.6% in May. Until now, the Fed has been willing to say only that it would continue the program until the jobs market showed “substantial improvement.” It explicitly declined to say what that phrase meant. Mr. Bernanke’s statements last week marked a shift in that willingness, Mr. Stein said.

Fed Officials Try to Ease Concern of Stimulus End - The economy is the victim of a little misunderstanding, Federal Reserve officials said on Thursday, telling investors who have sent borrowing costs soaring that they are misguided in believing the Fed’s stimulus campaign is about to wane.  The message, delivered in three separate but similar speeches, reflects the Fed’s frustration with a broad rise in interest rates that began in May and accelerated after remarks last week by the Fed’s chairman, Ben S. Bernanke. “I don’t want to be too cute about a serious matter,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in Marietta, Ga., “but to make an analogy, it seems to me the chairman said we’ll use the patch — and use it flexibly — and some in the markets reacted as if he said ‘cold turkey.’ ” The speeches, including one by William C. Dudley, president of the Federal Reserve Bank of New York and one of Mr. Bernanke’s closest allies, appeared to make an impression, helped along by upbeat domestic economic data and an easing of concerns about Chinese financial conditions. Stocks rose modestly, ending up for the third day in a row, while interest rates ticked downward, inverting the recent pattern.

Bond Markets to the Fed: We Don’t Believe You! - The stock market may steal the headlines, but in many ways its the bond market — be it mortgage-backed securities, government bonds, or corporate debt — that is the real star of the economic show. When the Federal Reserve seeks to regulate the economy, it does so by involving itself in the bond market, through buying and selling government debt and mortgage-backed securities. For years now, the Fed has been in the practice of buying bonds in order to keep interest rates low, which boosts the economy by making it cheaper for corporations and individuals to borrow. The indirect effect of low interest rates is higher stock and home values, but it’s always interest rates, rather than asset values, that the Fed watches most closely. And for several weeks now, and especially since Ben Bernanke’s press conference last Wednesday, interest rates have been rising quickly on everything from corporate debt to mortgages. (The average 30-year mortgages hit a two-year high of 4.46% on Thursday.) In fact,  many observers are now worried that spiking rates will put a damper on the already anemic U.S. economic recovery. Economists from Goldman Sachs estimate that recent rate increases could shave as much as 0.4% from growth over the next year.

IMF’s Lagarde: Fed Exit Talk ‘Wasn’t Sufficiently Grounded with Information’ - The head of the International Monetary Fund Thursday criticized the Federal Reserve‘s recent communication on how it plans to exit from its easy money policy, saying that lack of clarity likely fueled market volatility. Investors around the world started adjusting their portfolios for a higher-interest rate environment in recent months amid public discussion among Fed officials about the possibility of the central bank slowing down its cheap cash injections into the U.S. economy. That caused major volatility in markets around the globe, with emerging markets hit particularly hard. Last week’s announcement by the Fed that the economy may be getting strong enough to grow with less central bank support has sparked a new round of market gyrations. “Clearly it was an announcement that took the markets by surprise and that was probably not as sufficiently grounded with information for them to feel that there was certainty,” IMF Managing Director Christine Lagarde said in an interview on MSNBC’s ‘Morning Joe’ show. Wary of how the move out of extraordinary monetary policy may impact the still fragile global economy, the IMF has been warning central bankers to take great care in their exit strategies. Monetary policy “will have to gradually over time, with appropriate communication, transition to more normal monetary policies,” Ms. Lagarde said. She acknowledged it’s a tough task. “Managing expectations…is always difficult when markets react so feverishly,” she added.

On the Failure of Non-Standard Monetary Policies... - Brad DeLong - If you believe--as I do--that the overwhelming proportion of the effects of non-standard monetary policy at the zero nominal lower bound come from reducing short-term safe real interest rates by raising expectations of inflation, the failure of Bernanke's monetary policy to ever raise the average of 5, 10, and 30-year TIPS inflation break-evens above 2.5%--and its recent fall to 2.0%--demonstrates that Bernanke's policies have failed. I tend to say that they have failed because they were tried only half-heartedly, and confusedly. And if Abenomics succeeds, I will regard that as strongly confirmed: I will then say we have three examples--Abe Shinzo, Franklin Roosevelt, and Neville Chamberlain--of successful expansionary non-standard monetary policy via régime shift, and another example of how half-measures and half-hearted policies do not summon the inflation expectations imp.

Necessary and Sufficient Conditions for Effective Monetary Policy at the Zero Lower Bound - As long since noted by Krugman, for the monetary authority to be able to stimulate demand when the safe short term interest rate is almost exactly zero,  it has to be able to credibly pre-commit to causing high inflation, by keeping that interest rate extremely low in the future when  the economy has recovered  and is overheating.   This is enough of a problem that the leading theorists and practitioners of monetary policy at the ZLB (obviously Krugman, Michael Woodford, Ben Bernanke Sinzo Abe and Haruhiko Kuroda *)  insist that efforts to stimulate with unorthodox monetary policy be complemented by expansionary fiscal policy. I think, however, that there is another problem.  I do not find arguments including “credibility” to be credible.  At the very least the word should be “credited” that is believed, not “credible” that is believable.  My efforts to check on the effectiveness of non-conventional monetary policy have been total Fred.  I look (often) at interest rates on TIPS and normal nominal Treasuries.  I am finding out what bond traders seem to believe.  But my interest is in the effect on aggregate demand most of which is not purchases by bond traders (a large fraction of them are rich, but there aren’t all that many of them).

Asymmetric Nature of Greenspan/Bernanke Put Monetary Policy -  I’m not opposed to the withdrawal of monetary stimulus but the stimulus itself. In particular I am opposed to the nature of the stimulus which focuses all its efforts on propping up asset prices. However, unlike most Fed critics who tend to be conventional “austerians”, I’m a strong critic of asset-price based monetary policy and an equally strong advocate for combined monetary-fiscal stimulus in the form of direct cash transfers to households. I support helicopter drops not just because it is fairer and more “neutral” in its impact on income distribution than quantitative easing. I support helicopter drops because it is the parachute that prevents the hard landing if we stop quantitative easing. I support helicopter drops because it is the most free-market of all macro-stabilisation policies. Rather than bailing out banks and firms and propping up asset prices, helicopter drops simply mitigate the consequences of macroeconomic volatility upon the people. I support helicopter drops because it helps us build a resilient economic system as opposed to chasing the utopian aim of perfect macroeconomic stability.

Fed’s Dudley: Financial Stability Critical to Effective Monetary Policy - A central bank official at the heart of the monetary policy-making process said the Federal Reserve must consider the state of financial markets when making monetary policy. Federal Reserve Bank of New York President William Dudley didn’t directly address the current state of the U.S. economy and monetary policy in his speech. Nevertheless, the official’s comments on the relationship between the central bank and markets, as well as the arc of monetary policy over the course of recent years, suggests Mr. Dudley still sees broad scope for aggressive Fed policy actions. In his remarks, Mr. Dudley explained the Fed must take account of the state financial markets are in when deciding what level of monetary policy to apply to the economy. He indicated that when markets are impaired the Fed may need to provide more stimulus than would traditionally be the case. “The stance of monetary policy needs to be judged in light of how well the transmission channels of monetary policy are operating,” Mr. Dudley said. “When financial instability has disrupted the monetary policy transmission channels, following simple rules based on long-term historical relationships can lead to an inappropriately tight monetary policy,” he said.

QE myths and the Expectations Fairy - There are perhaps more myths about QE than almost any other monetary policy instrument. Here are five of the most pernicious QE myths:
Myth 1: QE raises inflation. Despite the considerable evidence that it does nothing of the kind, people still persistently believe that it does - that "eventually" inflation will come. This is because of the widespread misrepresentation of QE as "printing money". Numerous people have painstakingly explained what QE is and how it works, but inflationistas aren't listening.
Myth 2: QE stimulates the economy by forcing banks to lend. This is based on the idea that if you throw money at banks they will lend. But banks only lend if the risk versus return profile is in their favour.
Myth 3: QE stimulates the economy by persuading corporates to invest. This is based on the idea that if you make borrowing ridiculously cheap for corporates they will invest. But corporates only borrow to invest if the risk versus return profile is in their favour.
Myth 4: QE encourages households to increase spending. This is by means of the "wealth effect", whereby people who have assets that are increasing in value feel wealthier so spend more. Why the esteemed economists in charge of central banks seem incapable of understanding that having illiquid assets (such as houses) that are increasing in value doesn't make people who are income-dependent spend more is beyond me.
Myth 5: QE debases the currency. Whether this is seen as a positive effect depends on your viewpoint: devaluing the currency is supposed to help exports, but hard-money enthusiasts are appalled at the very idea of debasing the currency - they regard it as theft

The conservative confusion about the Fed and monetary policy -- Over at National Review, I write (again) on the mistaken opposition — mostly from the center right — to the Fed’s bond-buying policy. To a great extent, I blame this reality on the reemergence of the pre-WWII “Austrian” take on monetary policy. But in addition to getting some cogent anti-Big Government arguments, the center-right also incorporated the Austrian business-cycle thesis into its Great Recession critique. Many conservatives blamed the downturn on government for creating a housing bubble through housing policy and the Fed. So more or less, the public debate became a reply of the 1930s debate — Hayek vs. Keynes, markets vs. government — on what caused the Great Depression.  Both takes, I believe, are wrong. The Great Recession and Financial Crisis (at least in their severity) were more or less a replay of the Great Depression, which Milton Friedman correctly termed the “Great Contraction” due to the Fed’s deflationary monetary policy. Economist David Beckworth gets at this when he calls the recent downturn Bernanke’s Little Depression.” The Fed has helped prevent a second Great Depression, but it has not done all it could have.

Whose low rates are these? - A LONG debate has been raging over the nature of low long-term interest rates. In one camp, there are those who say that low rates are mostly a result of the quantitative easing pursued by rich-world central banks. Purchases of assets from banks using newly created money artificially raise bond prices, in this view, thereby holding down interest rates. In the other camp are those who argue that low rates are mostly a result of broader economic forces. Falling inflation is partly reponsible. So is the expected path of short-run real interest rates. (That is mostly an artefact of central bank policy, of course, but central bank's would argue that they are setting rates appropriately given broader conditions.) Other significant contributors to low rates include market demand for safe assets and government and central bank demand for foreign exchange reserves. Tyler Cowen reckons that recent market moves suggest the first camp, which blames QE, may have the right of it. Long-term interest rates began rising steadily in late May, when Fed officials began discussing an end to QE in earnest. And they soared after the Fed's last meeting, when Ben Bernanke gave an explicit (though still nominally data-contingent) timetable for ending asset purchases. Markets see QE ending, rates soar, QED.

Bond Losses of $1 Trillion if Yields Spike, BIS Says - Bondholders in the United States alone would lose more than $1 trillion if yields leap, showing how urgent it is for governments to put their finances in order, the Bank for International Settlements said on Sunday. The Basel-based BIS lambasted firms and households as well as the public sector for not making good use of the time bought by ultra-loose monetary policy, which it said had ended up creating new financial strains and delaying rather than encouraging necessary economic adjustments. The BIS, a grouping of central banks, was one of the few organizations to foresee the global financial crisis that erupted in 2008. Since then, government bond yields have sunk as investors seek a traditionally safe place to park funds, regulators tell banks to hold more bonds and central banks buy bonds as a means of pumping money into vulnerable economies.

The end of low interest rates - The yield on 10-year U.S. Treasury securities averaged 1.8% during 2012, the lowest levels in 60 years. But that episode may now be behind us.The yield closed Friday above 2.5%, with half the gain from last year's levels coming during the last week alone. About 10 basis points of the increase came in two sharp jumps on Wednesday. The first began around 2:00 p.m. EDT with the release of the minutes of the latest FOMC meeting, and the second around 2:42 p.m.  That second jump on Wednesday appears to coincide with the statement by Fed Chair Ben Bernanke in a press conference that Fed bond purchases might end when the unemployment rate reaches 7%: 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 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.

Fed Officials Intensify Effort to Curb Surge in Interest Rates - Federal Reserve officials intensified efforts to curb a growth-threatening rise in long-term interest rates, seeking to clarify comments by Chairman Ben S. Bernanke that triggered turmoil in global financial markets. William C. Dudley, president of the Federal Reserve Bank of New York, said yesterday any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent this week from as low as 1.63 percent in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart sought to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.

The Recent Surge in Yields: How Does It Compare with the Past? - The bond market selloff after the FOMC meeting and Chairman Bernanke's surprising specifics about exiting QE was quite stunning. However, his hawkish position was supported by today's release by the Bank for International Settlements (BIS) of its annual report. The abstract for opening section, headed Making the most of borrowed time, begins with the following assertion: Originally forged to describe central banks' actions to prevent financial collapse, "whatever it takes" has become a rallying cry for them to continue their extraordinary policies. But we are past the height of the crisis, and the goal of policy today is to return to strong and sustainable growth.  Prior to the FOMC drama, Treasury yields had been rising since their interim low in early May. But Wednesday during Bernanke's press conference, yields began soaring and the selloff accelerated. The 10-year note yield closed at 1.66 on May 2nd. It closed Friday at 2.52, up 86 bps. Expressed as a percentage gain, that's a rise of 52% in 35 market days. The 5-year yield went from 0.65 to 1.42, up 77 bps, a 118% increase. To put the selloff in its historical perspectives, I've plotted the 35-day volatility for these two Treasury yields since the earliest Fed record of daily closes in 1962. Expressed as a percentage increase, the rise in yields since May 2nd is unprecedented. Here is the 10-year note yield with its 35-day volatility. I've also included the Fed Funds Rate to help us understand how the latest volatility compares with periods when the FFR changes.

U.S. inflation-linked bonds roiled, pose dilemma for Fed - U.S. inflation-linked government bonds have tumbled to levels that analysts say approach those common in periods of financial crisis, a sharp turnaround for what has been one of the best-performing bond classes in recent years. Bond markets around the world have been rocked by the shift in thinking from the U.S. Federal Reserve, which Fed chairman Ben Bernanke made clear last week when he said the U.S. central bank may start paring bond purchases later in the year. But the relative illiquidity of Treasuries Inflation-Protected Securities and the large number of long positions in that market made the rout in these securities even worse as investors headed for the exits. TIPS have been strong performers in recent years as investors sought protection on the expectation that bond purchases would increase inflation. That hasn't happened, however, and the bonds dramatically worsened after Bernanke downplayed concerns about low inflation, stating that he expects price pressures to rise back to the Fed's targets. Bernanke focused instead on the improving economy and falling unemployment rate.

TIP this - The TIPS market has told an interesting story the past month. The implied inflation rate has collapsed. As of this morning, the market is pricing inflation at 1.94%%. A few month ago it was 2.5%.   The market is saying that when QE is in full force, with no end in sight, inflation expectations are high. When there is even a scent of QE being cut back, inflation expectations fall. The markets are therefore acting 'rationally'. That the market is repricing inflation lower must be killing Bernanke. It's the worst possible outcome for him. In a Zero Bound world the only thing that Ben can do is juice up inflation expectations. It's remarkable that Bernanke can whisper about ending QE (with absolutely no clarity on the timing and pace) and he kills the chance that the economy will actually improve. This is a complete failure of Bernanke's communication policy. It's so significant that I think there has to be another development. Ben is going to try (again) to calm down market jitters. So far, his usual tricks to goose markets have not worked. Hilsenrath has tried and tried to send Bernanke's message that the Fed is not easing up on the short end to no avail. If Bernanke says something on the record, it will likely be met with more selling.

PCE Price Index Update: Core PCE Remains at Historic Low - The June Personal Income and Outlays report for May was published today by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.02% is an increase from last month's adjusted 0.73%. The Core PCE index of 1.06% is little changed from last month's 1.05%, which is lowest Core PCE ever recorded. As I pointed out last month, the continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for ten of the last 13 months since its interim high of 1.96% in March of 2012 and is now little more than half that YoY rate. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.  I've calculated the index data to two decimal points to highlight the change more accurately.  For a long-term perspective, here are the same two metrics spanning five decades.

Behind the Numbers: PCE Inflation Update, May 2013 - FRB Dallas - After two straight monthly declines, the headline, or all-items, PCE price index rose in May at an annualized rate of 1 percent. A fall in the price of gasoline (3.4 percent at an annualized rate) was again a drag on the headline index, though not to the same extent as in March or April. Gasoline (and other motor fuel) shaved just under 0.2 annualized percentage points off of May’s headline rate. As regular readers of the Inflation Update will recognize, that’s an unusually modest contribution for the motor fuel category. Not to worry, though—immodesty will return in next month’s release (more on that below). The biggest single drag on the headline rate in May was not from the typically volatile energy or food categories, but rather the price index for prescription drugs. Down an annualized 7 percent in May, the drug price index shaved about a quarter of an annualized percentage point off May’s headline inflation rate. The 12-month headline inflation rate, which had dipped to 0.7 percent in April, climbed back to 1 percent in May. The six-month headline rate climbed to an annualized 0.4 percent rate, from an annualized –0.1 percent in April. The Dallas Fed’s Trimmed Mean PCE inflation rate for May was an annualized 1.3 percent, up from a revised 0.0 percent in April. Based on the original underlying data from the BEA, our trimmed mean had actually posted a negative reading last month (–0.1 percent annualized), which would have been a first for the series. The revised 0.0 percent is not unprecedented, but still quite rare. The six-month trimmed mean rate inched down to an annualized 1.1 percent in May from 1.2 percent in April. The 12-month trimmed mean rate—which is also our rule-of-thumb forecast for headline inflation over the next 12 months—held steady at 1.3 percent.

Two Measures of Inflation: Headline and Core Way Below Fed Target - The BEA's Personal Consumption Expenditures Chain-type Price Index for May shows core inflation well below the Federal Reserve's 2% long-term target at 1.06%, one basis point above lowest Core PCE ever recorded, which was the previous month. The Core Consumer Price Index release earlier this month, also data through May, is higher at 1.68%. The Fed is on record as using PCE as its primary inflation gauge. In the shorter term, however, the Fed has raised the top range of its inflation target by half a percent.  ...the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.  [Source]  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 April 2013 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 of 2011. 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.

Low Inflation Highlights Fed Dilemma - Inflation is running well below the Fed’s 2% target. Thursday’s reading on the Fed’s favorite inflation gauge showed prices up just 1.1% in May from a year earlier, matching the lowest pace on record. Fed Chairman Ben Bernanke and other central bank officials maintain it’ll pick up. But a substantial band of economists outside the Fed is starting to challenge Mr. Bernanke’s diagnosis. The Fed chief, in his press conference last week, said the downshift in inflation may reflect “transitory factors” that will dissipate. “These are some things that we expect to reverse and we expect to see inflation come up a bit,” he said. “That being said … we don’t take anything for granted.” Fed governor Jerome Powell underscored the message in a speech Thursday, saying most Fed officials are looking through the temporary movements and expect inflation to return to 2% over the coming years.  How inflation moves in the coming months will shape the central bank’s next steps. If inflation doesn’t rise close to the Fed’s target, Mr. Bernanke said the Fed might rethink its plan to begin scaling back the size of its bond-buying program later this year. Overall inflation was 1% in May from a year earlier, the Commerce Department said Thursday. Core inflation, the Fed’s preferred measure that strips out volatile energy and food costs, rose 1.1% from a year earlier. That matched the previous month’s reading and equaled the smallest rise in underlying prices on record.

Just how helpful is inflation? -- According to one widely adopted class of economic models, raising the inflation rate would be one of the most helpful things that could happen to economies in the situation currently faced by Japan and the U.S. Here I describe some new research relevant for testing that theory. With the short-term interest rate stuck near zero at the moment for the United States and Japan, an increase in expected inflation would mean a reduction in the expected real interest rate. According to a wide class of economic models, such a development should help boost total spending and help the economy to grow more quickly. One extreme, if less widely accepted, implication of that claim is that even policies that reduce the overall productive potential of the economy might actually prove to be beneficial insofar as they result in higher inflation. Examples include increasing the monopoly power of firms and labor unions, raising payroll taxes, or even the more crazy-sounding policies adopted as part of the New Deal in the 1930s, such as killing baby pigs and destroying good fruit in hopes of getting higher prices for farmers. Although many economists would hesitate to embrace such proposals as constructive policy measures, their potential usefulness is a logical implication of a very popular class of economic models, as demonstrated for example in recent research by Gauti Eggertsson of the Federal Reserve Bank of New York.

“Global Spillovers and Domestic Monetary Policy” - If QE1 through QE3 and other unconventional monetary policy (UMP) measures had little impact upon implementation, why did the hint of a stepback induce such large reactions in international markets? I doubt that there will be a persuasive answer to that question from those who doubted the efficacy of UMP in the past, but in this paper presented at the BIS Annual Conference, entitled “Navigating the Great Recession: what role for monetary policy?”, I argue that various unconventional monetary measures did in fact have substantial spillover effects from the advanced economies to the emerging market economies, and attempt to interpret those effects in the context of various models. From the paper: In general, quantitative and credit easing and forward guidance seem to weaken the home currency, at least in some instances. This means that countries not matching expansionary monetary policy in the advanced economies will occasionally see their currencies face upward pressure. Policymakers in these countries will then have to decide whether to offset the upward pressure with increased foreign intervention, lower interest rates, or capital controls.  The consequent policy challenge will vary depending on the situation facing individual countries. Countries already at or near full employment might welcome the resulting appreciation of their currency, as long as they were near external balance. However, for those countries that are far below full employment, such an occurrence will be very unwelcome. (And of course, even countries near full employment might not welcome currency appreciation for reasons of political economy).

Careless talk may cost the economy - Since the beginning of May, monetary policy has undergone a substantial tightening. This has taken the form of a rise in the yield on the bonds of highly rated governments. The yield on 10-year US Treasuries rose by 88 basis points between May 2 and the end of last week, to 2.51 per cent. This is a clear tightening of monetary conditions: a rise in these yields lead to rising borrowing costs for the private sector. It is, however, not clear that it is deliberate: longer-term bond yields are not an explicit target for monetary policy. Moreover, part of the reason for the jump in rates is rising confidence. But talk of “tapering” US quantitative easing is also a factor. It is hard to manage a policy whose effects depend on expectations. But it must be done better: this tightening is premature. That is surely not how it would appear to the Bank for International Settlements, whose annual report calls for an early end to loose policies: “Authorities need to hasten structural reforms so that economic resources can more easily be used in the most productive manner. Households and firms have to complete the repair of their balance sheets. Governments must redouble their efforts to ensure the sustainability of their finances. And regulators have to adapt the rules to an increasingly interconnected and complex financial system and ensure that banks set aside sufficient capital to match the associated risks.” This is central bank bromide. Worse, it is hard to understand how the BIS thinks its recommendations add up across the world economy. In essence, it suggests that the private sectors should run bigger financial surpluses, as heavily-indebted agents repay debt, while governments should run smaller deficits. Unless one assumes that advanced countries will run vast current account surpluses with the rest of the world, this is a plan for a depression. The BIS does not even consider the possibility that monetary policy has been ineffective because it is competing with the fiscal tightening the BIS has recommended.

Four Years of Recovery in Charts -- The recovery that began in June 2009 has been painfully slow. Jobs, median household income, industrial production and home prices still haven’t returned to the levels they were at before the recession. But despite the weak pace of overall growth, the recovery has proved surprisingly resilient.The following charts show how this recovery compares to others in some key metrics. Click for larger version.

Reports Reflect Fed’s Message of Stronger Economy - The U.S. housing recovery is strengthening. Factories are fielding more orders. And Americans’ confidence in the economy has reached its highest point in 5½ years. That brightening picture, captured in four reports Tuesday, suggests that the economy could accelerate in the second half of the year. It underscores the message last week from the Federal Reserve, which plans to slow its bond-buying program this year and end it next year if the economy continues to strengthen. The Fed’s bond purchases have helped keep long-term interest rates low. Investors appeared to welcome the flurry of positive data. The Dow Jones industrial  gains made up only a fraction of the markets’ losses since Chairman Ben Bernanke said last week that the Fed will likely scale back its economic stimulus within months — a move that would send long-term rates up. But the rising confidence of U.S. consumers shows that most Americans are focused on a better job market, said Beth Ann Bovino, chief economist at Standard & Poor’s. “Maybe households agree with the Fed: the economy is improving,” Bovino said.

Getting Back to Normal? - Atlanta Fed's macroblog - Central to any discussion about monetary policy is the degree to which the economy is underperforming relative to its potential, or in more ordinary language, how much slack exists. OK, so how much slack is there, and how long will it take to be absorbed? Well, if you ask the Congressional Budget Office (and a lot of people do), they would have told you last February (their latest estimate) that the economy was underperforming just a shade more than 4 percent relative to its potential last summer, and that slack was likely to increase a little by this summer (to around 4.7 percent). Go to the International Monetary Fund (IMF), and they tell a very similar story in their April World Economic Outlook. The IMF estimates that the amount of slack in the U.S. economy was about 4.2 percent last year, and they expected it would rise a little to about 4.4 percent this year. As devotees of our Business Inflation Expectations survey know (and you know who you are), the Atlanta Fed has a quarterly, subjective measure of economic slack in the economy as seen by business leaders. This month, businesses told us something pretty interesting—the amount of slack they think they have narrowed pretty sharply between March and June.  Last March, the panel told us that their unit sales were 7.7 percent below "normal"—similar to their assessments in December and September. This month, however, the group cut their estimate of slack to 4.3 percent below normal, on average (see the table).

If H2 2013 Is So Full Of Growth Expectations, Then Why Is This Chart Dropping? - While mass layoffs are hardly the stuff of dream recoveries, the following chart from Stone McCarthy may just clarify the un-recovery hopes this year a little more. Non-withheld individual income taxes were up sharply year-over-year in the last few months reflecting moves by taxpayers to accelerate income into 2012, in anticipation of tax hikes in 2013. However, now we have passed the prior year's tax liabilities deadline, and payments in June are just for the current year, there is a problem. Individuals make estimated payments if they expect they won't satisfy their current year tax obligation through withholding and as the chart below shows, non-withheld tax payments were down 3.0% versus the comparable period last year - hardly the stuff of consumer-spending-driven recoveries as clearly individuals are not expecting incomes to rise at all this year in aggregate. With every analyst and strategist pointing to H2 2013 as the hope-and-change driven recovery that satisfies a market's extrapolation way beyond current data, we suspect this tax-based deterioration signals more disappointment for the dreamers.

Chicago Fed: "Economic Activity slightly improved in May" - The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic activity slightly improved in May: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.30 in May from –0.52 in April. The index’s three-month moving average, CFNAI-MA3, decreased to –0.43 in May from –0.13 in April, marking its third consecutive reading below zero and its lowest level since October 2012. May’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.This suggests economic activity was below the historical trend in May (using the three-month average).According to the Chicago Fed:The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Chicago Fed: Economic Activity Slightly Improved in May - According to the Chicago Fed's National Activity Index, May economic activity slightly improved from April, now at -0.30, up from April's -0.52 (an upward revision from -0.53). This index has been negative (meaning below-trend growth) for twelve of the past fifteen months. Here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to -0.30 in May from -0.52 in April. Two of the four broad categories of indicators that make up the index increased from April, but only one of the four categories made a positive contribution to the index in May.  Forty-nine indicators improved from April to May, while 35 indicators deteriorated. Of the indicators that improved, 25 made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

U.S. first-quarter GDP cut to 1.8% from 2.4% - The U.S. economy grew a lot slower in the first quarter than previously believed, mainly because of less consumer spending on services and weaker business investment. Gross domestic product rose by 1.8% in the January-to-March period, down from a prior estimate of 2.4%, the Commerce Department said Wednesday in the last of three regular updates. Economists polled by MarketWatch had expected growth to remain unchanged at 2.4%. The increase in consumer spending - the main engine of the U.S. economy - was lowered to 2.6% from 3.4%. Americans did not spend as much on services such as health care and legal advice, the government said. Outlays for services were reduced to a 1.7% increase from 3.1%. Investment in business structures such as office buildings and plants also fell a steeper 8.3% instead of 3.5% as previously reported. Meanwhile, exports were revised to show a 1.1% decline and not a 0.8% gain, while imports actually fell 0.4% instead of rising 1.9%. The biggest bright spot: residential investment jumped 14% in the first quarter, up from a prior read of 12.1%. That's further evidence of a housing market gaining momentum. Most other figures in the GDP report were little changed.

First Quarter GDP Final Revision Puts Growth Below 2.0% -  When the initial estimate of Gross Domestic Product growth was unveiled in April and revealed to be 2.5%, the general consensus was that this was generally good news even if it did come in below what had been estimated at the time. A month later, when it was revised slightly downward to an annualized growth rate of 2.4%, it still seemed like generally good news notwithstanding the slight download. Today, though, we got the final revision and things aren’t looking nearly as good: U.S. economic growth was more tepid than previously estimated in the first quarter, held back by a moderate pace of consumer spending, weak business investment and declining exports.Gross domestic product expanded at a 1.8 percent annual rate, the Commerce Department said in its final estimate on Wednesday. Output was previously reported to have risen at a 2.4 percent pace after a 0.4 percent stall speed in the fourth quarter. Economists polled by Reuters had expected first-quarter GDP growth would be left unrevised at 2.4 percent. When measured from the income side, the economy grew at a 2.5 percent rate, slower than the fourth-quarter’s brisk 5.5 percent pace.Details of the report, which showed downward revisions to almost all growth categories, with the exception of home construction and government, could cast a shadow over the Federal Reserve’s fairly upbeat assessment of the economy last week.

Q1 GDP Revised down to 1.8% Annualized Real Growth Rate - GDP was revised down from a 2.4% annualized real growth rate to 1.8% in Q1. From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis....The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports. Personal consumption expenditure growth was revised down from a 3.4% annualized rate in the 2nd estimate to 2.6% in the 3rd estimate of GDP. Last week I posted Four Charts to Track Timing for QE3 Tapering . Here is an update to the GDP chart. The current FOMC forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013. The first quarter was below the FOMC projections (red), and it appears the second quarter will also be below the FOMC forecast - if so, then GDP will have to pickup in the 2nd half of 2013 for the Fed to start tapering QE3 purchases in December

GDP Q1 Third Estimate at 1.8%: A Surprising Downward Revision - The Third Estimate for Q1 GDP was a surprising downward revision to 1.8 percent from 2.4 percent in the Second Estimate, which was a slight downward revision from the 2.5 percent Advance Estimate. Both and had forecast no change. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.  The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 2.4 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined (for more information,   The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product.  Here is a close-up of GDP alone with a line to illustrate the 3.2 average (arithmetic mean) for the quarterly series since the 1947, with the latest GDP revisions, this number had been at 3.3 for 14 quarters, but slipped to 3.2 in Q2 of 2012. I've also plotted the 10-year moving average, currently at 1.7. The current GDP is now just a hair's breadth above that moving average.

Final Q1 GDP Is A Huge Miss, Personal Consumption Craters - Following yesterday's epic trifecta of economic growth when durables, housing and confidence data all slammed expectations, it was up to GDP to be the bad cop. Sure enough, following the already disappointing first Q1 GDP revision which revised the preliminary 2.5% number to 2.4%, today economists were expecting an unchaged print. Instead they got a crash to 1.77%. And on what? Why the collapsing US consumer whose true colors have finally come out in the final Q1 GDP revision: responsible for 2.40% of the GDP print in the first revision, Personal Consumption Expenditures tumbled to just 1.83% of GDP. In absolute terms, PCE plunged from 3.4% to 2.6% on expectations of 3.4%. There goes the buying power of the overlevered, undersaved US consumer. And perhaps just as disturbing was that Fixed Investment, i.e. CapEx, cratered to only 0.39% of the GDP print, down from 0.53% in the first revision, and 0.52% in the prelim. This was the lowest Fixed Investment number since Q3 of 2012.What is worst, is that non-residential fixed investment crashed from 2.2% to 0.4%. In other words, growth CapEx is now officially dead.

GDP Revised Down to 1.8% for Q1 2013 - Q1 2013 real GDP was revised downward to 1.8% from 2.4%.   This is fairly bad news, as fourth quarter 0.4% GDP already showed a stagnant economy.   The revisions were so extensive it is like reading a different report.  Consumer spending was the biggest downward revision followed by significantly less exports than originally reported.  Investment was also less and the only saving grace was due to less imports, which subtracts from economic growth.  Generally speaking a 1.8% GDP implies weak economic growth and overall real demand in the economy is also weak.The below table shows the percentage point spread breakdown from Q4 to Q1 GDP major components.  GDP percentage point component contributions are calculated individually. The next table shows the revisions and spread between the major components of Q1 GDP.  As we can see they were really across the board.  Consumer spending, C in our GDP equation, still shows an increase from Q4, but not nearly as much as the advance GDP report showed..  In terms of percentage changes, real consumer spending increased at an annual rate of 2.6% in Q1 in comparison to a 1.8% increase in Q4.  Services drove consumer spending with a 1.06 percentage point contribution in household consumption expenditures.  Goods consumer spending overall contributed 1.04 percentage points to personal consumption expenditures.  Below is a percentage change graph in real consumer spending going back to 2000.

OUCH — 1Q13 GDP, Third Estimate: An Annualized 1.8%, Down From 2.4% in May, and Way Down From the 3.0% Original April Prediction (Update: The Farm Inventories Mystery) - I vaguely remember someone saying that the initial 2.5% reading two months ago was too good to be true:… the consumption element seems far too high, especially with the March slowdown in retail sales. Here’s part of the report from the Bureau of Economic Analysis:… The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports. And don’t forget that initial expectations in April were for a reading of 3.0%. Oops. Predictions today were for no change. Oops, again. I also thought that the farm inventory buildup number was ridiculous, and that it would come down. Well, it didn’t, instead going from an initial 0.78 points of GDP in April to 0.83 points today. So about 45% of the first quarter’s GDP growth occurred because we produced — but didn’t sell — a lot more food. Really?

The Chicago Cubs Recovery  Want stronger growth? “Wait till next year.” Of course, what every Cubbies fan knows, “next year” can be a long time in coming. The Cubs have not won the World Series since 1908. The U.S. economy has not achieved 3% growth for a full year since 2005. Growth of 3% or more is what is needed to make this recovery feel like a recovery–speed sustains the virtuous cycle of greater demand leading to more hiring and better income growth that fuels more spending. The Federal Reserve is linking its policy to expectations of faster growth. As Chairman Ben Bernanke said at last week’s news conference, if the data suggest “the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases.” Wednesday’s revisions to first-quarter gross domestic product indicate the Fed’s foot will remain firmly on the gas. The new data show real GDP grew at a meager 1.8% annual rate last quarter, not the 2.4% reported a month ago. What is troubling is that the downward refiguring came in private-demand sectors. Consumer spending grew only 2.6%, not the 3.4% previously estimated, as service spending was trimmed dramatically. Business investment was also less than estimated before. The foreign sector cut GDP growth a little less than first thought, but that confirms weak demand is a global phenomenon: both first-quarter exports and imports now show declines, instead of small increases reported earlier. Inventories were little changed as was the decline in government spending.

The Economy Is Even More Sluggish Than We Thought -  In April, the BEA announced that GDP had grown 2.5 percent in the first quarter of the year. Not great, but not too bad. At the end of May, that was revised down a tick to 2.4 percent. Today, in its final estimate, the hammer was dropped:The U.S. economy grew at a slower pace than previously estimated in the first quarter as consumer spending and business investment were revised sharply downward, amid signs the pace of growth is likely to have slowed in recent months.The nation's gross domestic product, the broadest measure of all goods and services produced in the economy, grew at a 1.8% annual rate from January through March....The first quarter's revision was due largely to personal consumption expenditures that notched lower to a 2.6% gain from 3.4%. Consumer spending, which accounts for two-thirds of economic output, largely drove overall gains in the first three months of the year. So, that economic recovery that you thought was proceeding pretty sluggishly? Well, it's proceeding even more sluggishly than you thought. Apparently the fiscal cliff had a pretty big effect after all. I can't wait to see how the sequester affected second quarter growth.

GDP Revision, Prices, Fed Reserve, and the Blues - There’s a great There’s a great old blues song –here’s the great BB King’s version of Might Have Made Your Move too Soon. I thought of that number this AM when we learned that GDP growth was significantly revised down for the first quarter, from 2.4% to 1.8%.   From BEA: The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports. The percent changes just noted are annualized quaters and OTE’ers know I like to smooth out some statistical noise by looking at year-over-year changes.  That’s what the figure below shows for real GDP and for the core price index (PCE) that the Fed apparently weights heavily in their assessment of price pressures.  I see deceleration. Now, I’m a simple guy.  I see trends like this and once again scratch the aging head, wondering why the central bank would start talking about reeling in their stimulus, especially given that they’re the only game in town, what with Congress off in la-la-land.  Ben and co. are deeper than me…they’re looking ahead, peering around corners, fretting about well-anchored inflation and asset bubbles.  And as I’ve stressed, their first move isn’t taking away the punch bowl; it’s reducing the size of the ladle. Still, all that said, it may be the case that the Fed chair and the bluesman don’t just share the same initials.  BB might have made his move too soon.

Visualizing GDP: The Consumer Is Key - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. That noticeable change in today's 1.8 percent Third Estimate (rounded from 1.78) from 2.4 percent in the Second Estimate was explained in today's press release as follows: The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.  My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product.  Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.83 of the 1.78 real GDP, up from 1.28 in Q4. In fact, not only did PCE make the largest contribution, it was fractionally larger than the annualized Q1 GDP. The other three headline components (Gross private domestic investment, Net exports of goods and services and Government consumption expenditures) essentially were a wash.

Real GDP Per Capita: Another Perspective on the Economy - Earlier today we learned that the Third Estimate for Q1 2013 real GDP came in at 1.8 percent, down from 2.4 percent in the Second Estimate released last month. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.9% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 20 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.19% off the all-time high following the deepest trough in the series. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted.

Why Was GDP Revised Down so Much? - The economy expanded at a 1.8% annual pace in the first three months of the year, far slower than the 2.4% pace estimated just a month ago. The latest revision came largely from weaker-than-expected consumer spending — particularly in the services sector — and sharply slower business investment. The government offers three readings of the nation’s gross domestic product in the months after a quarter ends, updating its estimates each time based on new information. The initial estimate of first-quarter growth, in late April, came in at 2.5%. Releasing reports based on incomplete data isn’t unusual for government agencies, considering the demand by financial markets and policy makers for snapshots of the current economy. Rather, it’s a trade-off between timeliness, accuracy and relevance, the BEA has said. The Commerce Department typically needs to make smaller revisions on its third GDP estimate from its second reading. From the first reading on GDP growth, the average change is plus or minus 0.5 percentage point, according to the agency’s Bureau of Economic Analysis, which assembles the GDP report. The average change from the second to third readings is only 0.2 percentage point higher or 0.2 percentage point lower. Why the large move this time? The department cited newly available information from a Census Bureau quarterly services survey and from international travel data. For the first quarter, the GDP revision came mostly from spending on services – notably, net foreign travel, legal services, personal care, and health care services including dental and home health care.

Why such a Large Downward Revision of Q1 GDP Growth? - Today’s GDP report from the Bureau of Economic Analysis revised the estimate for Q1 growth sharply downward, from 2.4 percent to 1.8 percent. As the following chart shows, the revision makes the rebound from the slowdown at the end of last year look less robust. The early estimates for each quarter are based on incomplete data supplemented by extrapolations from historical trends, and revisions are common. The revision announced today was larger than usual, however. The average revision (without regard for sign) is 0.2 percentage points from the second estimate to the third. This time it was 0.6 points. The change from April’s advance estimate of 2.5 percent was even larger. How can we explain it? One way is to look at the contributions to GDP growth of each sector of the economy. The following table compares the data from the advance estimate to those of the third estimate. It shows that the downward revision affected every part of the economy. Growth of consumer spending, which almost always makes the largest single contribution, was revised downward from 2.24 percentage points to 1.83 percentage points. The contribution from investment growth fell from 1.56 points to .96 points, with decreases in both fixed and inventory investment. Shrinkage of the government sector, which has had a negative impact on growth throughout the recovery, was more rapid than previously reported. Every sector of government—federal defense and nondefense, state and local—made a negative contribution to growth in Q1. Net exports made a smaller negative contribution to growth than previously reported, -.09 percentage points rather than -0.5 points, but when we look at the details, we cannot really call that good news. One disappointing development was a revision of export growth from positive to negative. As the next chart shows, that meant that exports fell in Q1 for the second consecutive quarter. Up to Q4 2012, exports had been one of the strongest drivers of the recovery.

Fiscal Drag and 2013Q1 Growth - The third release of 2013Q1 GDP suggests even more tepid growth than originally thought. Government spending at all levels, state/local, and both Federal defense and nondefense, is deducting from growth (in contrast to the previous two recoveries). These graphs suggest that faster growth could be achieved if we were not cutting government spending so rapidly. A comparison of government spending in this recovery against the preceding two is below (employment is compared in this post).

This Indicator Gives You a Good Idea On Actual US Economic Growth In Real Time - The downward revision of the Q1 GDP estimate from 2.4% to 1.8% is pretty silly considering that there is a real time indicator that tells us exactly where we were in Q1 and exactly where the economy is heading right now. It’s not a perfect indicator. It requires some thought and a few adjustments, but it is my favorite. It’s real time. It’s not based on subjective data. It’s not seasonally adjusted hocus pocus mumbo jumbo. It’s not a survey sample. It’s an actual total of tax collections by the US Government, updated through yesterday, that most of the time tells us EXACTLY how fast the US economy is growing, or shrinking as the case may be. I track withholding taxes every week in my weekly reports on the Treasury market. The government publishes the data every day, along with hundreds of other line items on revenues and outlays in the Daily Treasury Statement. I have compiled the data back to 1998. I run charts of the data because I find visuals far more illustrative than columns of numbers. Charts, if properly constructed, tell stories. They enable us to understand the economic world far better than simply reading headlines or mainstream media reports, which usually bend or miss the truth altogether.

Limits to Growth – of What? - from naked capitalism - Average national income is a notoriously imperfect measure of the average person’s well-being. The 2010 BP oil spill in the Gulf of Mexico – with clean-up and damage costs of $90 billion – added about $300 to the average American’s “income.” But it added nothing to our well-being. The world’s most expensive prison system, costing almost $40 billion per year, adds another $125 per person. This doesn’t make us better-off than people living in countries that don’t incarcerate one in every 100 adults. Of course, national income includes many good things, too. Growing food and building homes add to national income. So does public spending on education and health care. Unlike oil spills and jails, these really do add to our well-being.Along with good stuff and bad stuff, national income includes a third category of stuff that’s just useless – goods and services that neither add to our well-being nor subtract from it, but still get counted in the income pie. A prime example is what the economist Thorstein Veblen called “conspicuous consumption” – items consumed not for their intrinsic worth, but simply to impress other people and jockey for a higher rung on society’s pecking order. These goods and services have zero net effect on national well-being, since for every person who climbs a rung, someone else slips one.Of course, not all bad or useless things are counted as national income. But neither are all good things. Unpaid work caring for children, the elderly and the disabled doesn’t count. Clean air, clean water and climate stability don’t count. Open-source information and culture don’t count.The national income pie is an odd subset of the good, the bad, and the useless. All three slices get lumped together when economists tell us that average income in the United States today is roughly $42,000 per person.

The Big Four Economic Indicators: Real Personal Income Less Transfer Payments - I've now updated this commentary to include the Real Personal Income less Transfer Payments data for May. As the adjacent thumbnail illustrates, this indicator has been trending higher since the tax-planning strategy, which produced a huge spike in November and December with a steep month-over-month decline in January.  May Real PI less TP rose 0.36% (rounded to 0.4%) from April. The May year-over-year real growth rate is 2.26% (rounded to 2.3%). If we study this YoY chart in the Appendix below, we can plot this indicator level for the beginning months of the eight recessions over this time frame. The May reading of 2.3% is below the level of five of the eight and tied with the level at the start of the 1990 recession. The two recessions started at a lower level -- the first part of the early 1980's double dip and the December 2007 onset of the Great Recession. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data point is for the 47th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.

Stop 'Retarding' Economies With Ultra-Loose Monetary Policy: BIS - Low-interest rates and extra liquidity from central banks may have bought economies across the globe some time since the financial crisis, but this monetary policy now needs to end to ensure a return to growth, a new report by the Bank for International Settlements (BIS) said. The Basel-based BIS - known as the central bank of central banks - said in its annual report that using current monetary policy employed in the euro zone, the U.K., Japan and the U.S. will not bring about much-needed labor and product market reforms and is a recipe for failure. "Central banks cannot do more without compounding the risks they have already created," it said in its latest annual report released on Sunday. "[They must] encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever-larger quantities of government securities." Instead the BIS has called for reforms by governments to enhance productivity and encourage employment growth. It also urges households and firms to complete the difficult job of repairing their balance sheets and says governments must step up their efforts to ensure the sustainability of their finances.

Bonds Drop Globally as U.S. Yields Advance to Highest Since 2011 -- Treasuries slumped, pushing 10-year yields to the highest since 2011, as government bonds from Australia to Germany slid on speculation that a reduction in accommodation from the Federal Reserve will lead to an eventual end of record low central-bank borrowing rates. The benchmark U.S. yields extended gains following a 40 basis-point rise last week, the most in 10 years, after Fed Chairman Ben S. Bernanke said the central bank may begin tapering its quantitative-easing program this year and end it in mid-2014. Two-, five- and seven-year notes also declined before the Treasury auctions $99 billion of the securities this week. “No one wants to buy, no one wants to get in front of a speeding train,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade with the central bank. “The Federal Reserve is probably going to have to be the impetus to stabilize this.”

1% increase in interest rates: necessary but not sufficient for recession - At this point probably everybody who pays attention knows that interest rates have backed up a full 1% in the last month. That it will have a strong negative impact on mortgage refinancing and some negative impact on the purchase of houses also has been widely remarked.  But is it enough to bring on a recession? No, or at least, not yet.  As it turns out, while recessions in the last 50 years have always been preceded by a 1% YoY increase in interest rates, a backup in interest rates is not a sufficient signal by itself to forecast a recession. I've shown this in the below graph of 10 year treasuries. The values are inversted so an increase shows up as a decrease. I've also added 1 to the values, so that a +1% increase in interest rates shows up exactly at zero: Interest rates have backed up at least 1% YoY 15 times in the last 50 years. In 7 of those cases, a recession has folloed within the next 2 years. So the increase in rates is a necessary but not sufficient marker of recession.  What has made a difference is the duration of the increase, at least since the beginning of the great decline in interest rates over 30 years ago. Below is a graph that I posted a little over one year ago, showing conventional mortgage rates since their peak in 1980. The red sections represent those periods of time where mortgage rates have failed to make a new low for at least 3 years:

Treasury Snapshot: 10-Year Yield Slips But 30-Year Fixed Mortage Soars - I've updated the charts below through today's close (June 27). The latest Freddie Mac Weekly Primary Mortgage Market Survey, out today, puts the 30-year fixed at 4.46%, the highest since August of 2011. The yield on the 10-year note closed today at 2.49%. That's 11 basis points off its interim closing high of 2.60% on Monday. Here is a snapshot of the 10-year yield and the 30-year fixed mortgage since 2008. 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. Now let's see the 10-year against the S&P 500 with some notes on Federal Reserve intervention. Fed policy has been a major influence on market behavior. It will be interesting to see how the index fares in the wake of the latest Fed communications on the timetable and conditions for tapering QE.

Treasury Yields at Almost 2-Year Highs Amid Bets on Fed Tapering - Treasury yields traded at almost the highest levels since 2011 after a comment by Federal Reserve Governor Jeremy Stein fueled speculation the central bank may start to reduce its bond buying in September. Yields extended an advance earlier as Richmond Fed Bank President Jeffrey Lacker said he’s against continuing bond purchases. Stein said policy makers should concentrate on the amount of economic progress made since the buying program began “in making a decision in, say, September.” Fed Chairman Ben S. Bernanke said June 19 bond purchases may be cut this year and ended in 2014 if growth is in line with central-bank estimates.“The markets have been very volatile, and they remain very sensitive to Fed communication and economic data,” “These levels are justified as the market prices in more normal yields without participation by the Fed. The market is not patient, as no one wants to be the last one out the door.” Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.48 percent at 2:56 p.m. New York time, after reaching 2.55 percent, according to Bloomberg Bond Trader prices. They touched 2.66 percent on June 24, the highest since August 2011. The yields have fallen five basis points this week.

Increasing Bond Yields Risk Debt Spiral in U.S., Japan, BIS Says - Major economies risk ballooning debt loads unless their growth can keep pace with increases in borrowing costs as spending on the elderly rises, according to the Bank for International Settlements. Japan’s public debt would swell to 600 percent of gross domestic product by 2050 on a 2 percentage-point increase in funding costs, should its age-related government spending continue unchecked, the Basel-based BIS said in its 83rd annual report. In the U.S., the debt-to-GDP ratio would almost double to 200 percent under the same circumstances, it said. “Governments in several major economies currently benefit from historically low funding costs,” the BIS said. “At the same time, rising debt levels have increased their exposure to higher interest rates. The consolidation needs of countries experiencing low interest rates would be greater if their growth-adjusted interest rates were to rise.”

Foreigners Boosted U.S. Investments in First Quarter Amid Recovery - Foreign investors boosted their holdings in the U.S. in the first quarter as the American economic recovery lifted domestic markets. Assets owned by foreigners climbed by $749.3 billion in the first three months of the year, to $22.69 trillion, the Commerce Department said Tuesday. Those figures exclude financial derivative products. The increase reflects $295.5 billion in financial inflows from abroad as well as $453.8 billion in increased value as U.S. markets rose. Foreign investments in the U.S. exceeds U.S. investments abroad, which shrank slightly to $21.62 trillion in the first quarter, the Commerce Department said. Figures released earlier this month show that foreign investors appeared to show less interest in investing money directly into the U.S. economy in the first quarter, yet they were more inclined to invest in U.S. Treasury securities than in the fourth quarter, as concerns about the budget cuts and tax hikes known as the fiscal cliff receded. But in April, overseas appetite for Treasury debt crashed, with public and private investors abroad selling a net $54.46 billion in U.S. government notes and bonds, the Treasury said earlier this month. That was the highest since monthly record keeping began in 1978.

Central banks sell record sums of US debt - Central banks sold a record amount of US Treasury debt last week while bond funds suffered the biggest ever investor withdrawals as markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing programme. Holdings of US Treasuries held at the Fed on behalf of official foreign institutions dropped a record $32.4bn to $2.93tn, eclipsing the prior mark of $24bn in August 2007. It was the third week of outflows in the past four. Private investors are also dumping fixed income. Bond funds tracked by EPFR Global, a data provider, saw total redemptions of $23.3bn in the week to June 26. US funds were the worst hit, with withdrawals totalling $10.6bn, but emerging market debt funds also saw record redemptions of $5.6bn. Over the past five weeks emerging market debt and equity fund outflows have totalled $35bn, of which $22.5bn has fled stock market funds. “People are throwing in the towel,” said Markus Rosgen, chief Asia equity strategist at Citigroup. “It’ll drag the market down lower over the course of the summer.” Fixed income markets have tumbled since Fed chairman Ben Bernanke first signalled on May 22 that the US central bank would begin reducing its asset purchases later this year. Yields on 10-year US Treasuries have risen sharply since then, hitting 2.52 per cent on Friday compared with 1.62 per cent at the start of May. The noticeable rise in short-term Treasury yields – in spite of the Fed stressing it is in no hurry to tighten policy – could be the result of developing countries selling Treasury holdings to finance currency interventions.

Uncle Sam’s Trillion-Dollar Portfolio Partly Offsets the Public Debt -- When policy folks talk about America’s federal borrowing, their go-to measures are the public debt, currently $12 trillion, and its ratio to gross domestic product, which is approaching 75 percent. Those figures represent the debt that Treasury has sold into public capital markets, pays interest on, and will one day roll over or repay. These debt measures are important, but they paint an incomplete picture of America’s fiscal health. They don’t account for the current level of interest rates, for example, or for the trajectory of future revenues and spending. A third limitation, the focus of this post, is that the public debt doesn’t give Treasury any credit for the many financial assets it owns. As we noted last week, Uncle Sam has been borrowing not only to finance deficits but also to make student loans, build up cash, and buy other financial assets. That portfolio now stands at $1.1 trillion, equivalent to almost one-tenth of the public debt. Those assets have real value. They pay interest and dividends and could be sold if Treasury ever cared to. In fact, Treasury has sold many financial assets in recent years, including mortgage-backed securities and equity stakes in TARP-backed companies, even as it expanded its portfolio of student loans.

Dead-enders in Dark Suits - Krugman - The Bank for International Settlements is the central bankers’ central bank; accordingly, it tends to exhibit the prejudices of the tribe in especially concentrated form. In particular, it has been relentless in making the case for higher interest rates, on the grounds that … well, the logic keeps changing. For a while it was warning about inflation and commodity prices; when the inflation failed to materialize and commodity prices slumped again, it simply changed the argument to one against bubbles, plus the quite amazing argument that central bankers must not keep rates low because that would take the fiscal pressure off governments. Who, exactly, elected these people to run the world?  But in its latest report the BIS really transcends itself. Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length. Early on, for example, it declares that studies have repeatedly shown that as government debt surpasses about 80% of GDP, it starts to become a drag on growth. Somebody didn’t get the memo (or, more likely, the report had already been sent to the printers when Reinhart-Rogoff-Wrong broke).

A few comments on dumb policy - Please excuse my frustration ... there are frequently honest disagreements on policy, but occasionally there are policies that are almost universally panned. I could go on ... but now we have the sequestration budget cuts that are considered a blunder by most economists and analysts (at least the ones I respect).  These are mindless across the board budget cuts that are hurting the economy - and probably not helping with deficit reduction in the long run. If they are hurting the economy, and not helping with deficit reduction, why can't we get rid of the cuts? Some people say the "PAYGO" rules require an offset.  We all know who is to blame.  If the House passed a bill ending the sequestration budget cuts today, the Senate (barring a filibuster) would pass it tomorrow, and the President would sign the bill the second it landed on his desk.  So the problem is the House - and since I'm naming names - the problem is with the House leadership of John Boehner (R- OH), Eric Cantor (R- VA), and Paul Ryan (R-WI).  Unfortunately none of these men are even arguing to end the sequestration cuts; they aren't even talking about them.   This is frustrating and embarrassing for the U.S. - and this also impacts the Fed.  If we ended the sequestration budget cuts, then there would be a better chance that the Fed could taper and end QE3 sooner rather than later.  Dumb policy is hurting the country right now ... and if I was a reporter, I'd ask these three Congressmen about ending the cuts at every opportunity

Debased Economics: John Boehner’s remarks on recent financial events have attracted a lot of unfavorable comment, and they should. ... I mean, he’s the Speaker of the House at a time when economic issues are paramount; shouldn’t he have basic familiarity with simple economic terms? But the main thing is that he’s clinging to a story about monetary policy that has been refuted by experience about as thoroughly as any economic doctrine of the past century. Ever since the Fed began trying to respond to the financial crisis, we’ve had dire warnings about looming inflationary disaster. When the GOP took the House, it promptly called Bernanke in to lecture him about debasing the dollar. Yet inflation has stayed low, and the dollar has remained strong — just as Keynesians said would happen. Oh, and this is another reminder to the “market monetarists”, who think that they can be good conservatives while advocating aggressive monetary expansion to fight a depressed economy: sorry, but you have no political home. In fact, not only aren’t you making any headway with the politicians, even mainstream conservative economists like Taylor and Feldstein are finding ways to advocate tighter money despite low inflation and high unemployment. And if reality hasn’t dented this dingbat orthodoxy yet, it never will.

A Friendly Reminder That There's No Econ 101 Requirement for Politicians... If you've been following the discussion regarding the recent statements from the Federal Reserve and the resulting impact on financial markets, then congratulations- you officially know more about current monetary policy than Speaker of the House John Boehner. Here's what Boehner (third in the line of succession for the presidency, mind you) had to say on the matter:  "The sell-off is in large part due to the policies that we've had coming out of the Federal Reserve," Boehner said. "You can't continue to deflate our money and deflate it and deflate it have the equity markets go up without some change." I suppose that the first sentence is technically true, but the rest is some combination of nonsense and the opposite of reality. First, what the Fed is doing is increasing the money supply, which is certainly not deflation. In fact, increasing the money supply often leads to inflation, which is the opposite of deflation and refers to prices rather than specifically to the money supply.  Debasing is a term that refers to devaluing a currency, generally via inflation, so it appears as though Boehner is unknowingly playing some sort of word mash-up game.  Second, and more substantially, the market reaction was not in any way attributed to the Fed's continued policy of monetary expansion- in fact, the reaction is viewed as mainly due to the fact that the Fed will likely stop said expansion at some point in the foreseeable future! This is because a slowdown (or "taper") in the monetary expansion will raise interest rates, creating a less favorable business environment.

Recession underinvestment will haunt America for years (Yglesias) With the economy slowly but steadily improving over the last 18 months, it's becoming increasingly clear how horribly we botched public policy during the downturn. Public sector construction spending has fallen steadily since Obama's inauguration, with the federal boost provided by the stimulus bill more than outweighed by state and local cutbacks. That's left the country with a backlog of maintenance and upgrades that are needed, to say nothing of the basic need for additional construction as the population grows. A stronger economy means that states are crawling out of budget crisis mode now and can maybe start to think about ramping their spending back up. But there's a problem. The downturn led to an extended period of very low interest rates in which it would have been cheap to finance projects, but the stronger economy is bringing higher interest rates and thus a systematically higher cost structure. So we underinvested when it was cheap, and now that it's possible to spend a bit more, that extra money is going to be eaten up by debt service obligations. It'll probably take several more years before we start making real progress toward where we need to be.

Our New Look at the Long-Term Budget Picture - The long-term budget outlook remains challenging, but recent legislation and other developments have made it more manageable, our major new report finds.  Here’s the opening: Despite marked improvement since our previous projections of 2010, the long-run budget outlook remains challenging and will ultimately present policymakers with difficult choices, according to CBPP’s updated projections through 2040. Under current budget policies, the federal debt will edge down as a share of the economy in the middle of this decade but then resume a gradual rise.  The projected ratio of debt to gross domestic product (GDP) — which was 73 percent at the end of fiscal year 2012 — will reach 78 percent in 2023 and 99 percent by 2040.  (See graph.) Although the rising debt-to-GDP ratio remains a concern, we no longer project the debt to grow at an explosive rate, as many previous estimates (including ours) indicated and as many analysts and policymakers have taken as conventional wisdom about the long-term outlook.  Since we issued our previous long-term projections in early 2010, the projected debt-to-GDP ratio in 2040 has shrunk by half — from 218 percent of GDP to 99 percent.  The long-term “realistic baseline” of the Committee for a Responsible Federal Budget (CRFB), a nonpartisan fiscal watchdog, paints a similar picture, with a projected debt-to-GDP ratio of 108 percent in 2040.  (CRFB issued its projection before the Medicare and Social Security trustees released their 2013 reports, which slightly improve the outlook.)  The Center for American Progress’s recent long-term forecast is also similar.

Immigration and Fiscal Policy - An overhaul of immigration law would reduce the federal deficit. That’s the conclusion of a broad range of studies, from the libertarian Cato Institute to the conservative American Action Forum to the liberal Center for American Progress. Wait, it would really increase the deficit. That’s the analysis of the Heritage Foundation and the Center for Immigration Studies. But hang on a second. Immigrants have little impact on the federal deficit. That’s what the Organization for Economic Cooperation and Development thinks. Needless to say, the impact of immigration on the budget is a complicated question, and a subject of lively debate. In no small part, that is because economists disagree on what to measure. The effect of pending legislation, or of current immigration? All immigrants or just undocumented immigrants? By household or by individual? In one fiscal year or over a lifetime? Different metrics produce different results. of billions of dollars. According to a recent report from the nonpartisan Congressional Budget Office, the Senate bill would slash the deficit by $200 billion over the next 10 years and $700 billion for the decade after that. (As a share of the overall economy, which is likely to exceed $400 trillion in the next 20 years, that is fairly trivial.) The deficit reduction would come from both increasing spending and increasing revenue. Over the course of a decade, the government would pay out an additional $262 billion on programs like Medicaid, but it would see its revenues go up by $459 billion, too.

If Defense Contractors Are Rich, Why Aren’t Their Workers Paid? - The headlines to emerge from the shadier corners of private defense contracting these days are, generally, stories of extravagance. Just last week, The Atlantic deemed Edward Snowden “Exhibit A for How Washington Blows Money on Contractors,” in a story that aimed to describe “what the leaker’s $200,000 salary tells us about the absurd cost of privatizing government.” Meanwhile, in the Wall Street Journal, we learned that President Obama plans to target the lush executive pay of federal contractors, alongside another story that attributed Washington’s “New Boomtown” moment to many of these same companies—Booz Allen types who’ve prompted “luxury-condo developers from around the country” to arrive “in droves.”   Just yesterday, a remarkable “alert letter” from the Office of the Special Inspector General for Afghanistan Reconstruction (SIGAR) went public. The document addressed itself directly to Secretary of State John Kerry and Secretary of Defense Chuck Hagel, among others—but it is relevant to any American who doesn’t want his or her tax dollars used to extort labor from war-zone workers. Over the course of ten pages, it outlined some Wild West claims about “predatory contracting practices” by an array of prime defense purveyors, many of whom have not been paying their Afghan subcontractors—sometimes for years, and sometimes to the point of starvation. Employees delivering goods and services for U.S. government contracts have been “unable to support their families with necessities (clothing, food and firewood) due to the lack of funds.” Some sixty-nine million dollars in unpaid cash is at stake.

Why Marriage Equality Is Good For The Economy And The Budget - On Wednesday, the Supreme Court ruled that the Defense of Marriage Act, a federal law defining marriage as between a man and a woman, is unconstitutional while also dismissing the Proposition 8 case, effectively making it legal again for gay couples to get married in California. These historic decisions mean so much to America’s gay and lesbian couples. But they will also mean something for the federal budget and the economy at large. Without DOMA, the federal government will now give gay couples who are legally married in their home states benefits they had previously been denied. In 2004, the Congressional Budget Office (CBO) looked at what it would mean for the federal government to recognize same sex marriages. In all, this would impact 1,138 statutory provisions in which marriage is a factor in determining benefits, including perhaps most prominently Social Security and federal taxes. The CBO found a slightly positive impact on the budget if same-sex marriages were to be legalized in all states and recognized by the federal government: an extra $1 billion each year for the next ten years. It estimates that the government would see a small increase in tax revenues: $500 million to $700 million annually from 2011 to 2014 depending on the fate of the Bush tax cuts (which were law at the time of the report). The government would have to spend more on Social Security and the Federal Employees Health Benefits program, but it would also save money when it came to safety net programs such as Supplemental Security Income, Medicaid, and Medicare. On net, gay marriage would reduce spending by about $100 million to $200 million a year from 2010 to 2014.

What Will Supreme Court Decision on DOMA Mean for the IRS? - I couldn’t help but think about the consequences of a hundred thousand or so married couples who will now file joint returns rather than as singles or heads of household. My Tax Policy Center colleague Bob Williams has pointed out that while the tiny fraction of couples with wealth high enough to be affected by the estate will be unambiguously better off, the income tax is more of a mixed bag. Gay couples will now get to experience the joys and agonies of marriage bonuses and penalties.  But for about 75,000 married same-sex couples, the Supreme Court’s ruling could come with a very nice (though belated) wedding gift: Nearly $200 million in refunds. As Bob and others have pointed out, today’s ruling means that many newly recognized couples will now be able to file amended returns to claim the marriage bonuses they might have enjoyed for the past three years were it not for DOMA. . We can’t know exactly how many couples will benefit and by how much because there is currently no way to identify legally married same sex couples on individual income tax returns. Josh Keller of the New York Times estimated that “At least 82,500 gay couples have married since Massachusetts became the first state to legalize gay marriage in 2004 [through 2012].” This total probably reflects some under-reporting. It also doesn’t include the second half of 2012 in New York and doesn’t include those legally married outside the United States.

Documents Show Liberals in I.R.S. Dragnet -  The instructions that Internal Revenue Service officials used to look for applicants seeking tax-exempt status with “Tea Party” and “Patriots” in their titles also included groups whose names included the words “Progressive” and “Occupy,” according to I.R.S. documents released Monday. The documents appeared to back up contentions by I.R.S. officials and some Democrats that the agency did not intend to single out conservative groups for special scrutiny. Instead, the documents say, officials were trying to use “key word” shortcuts to find overtly political organizations — both liberal and conservative — that were after tax favors by saying they were social welfare organizations. But the practice appeared to go much farther than that. One such “be on the lookout” list included medical marijuana groups, organizations that were promoting President Obama’s health care law, and applications that dealt “with disputed territories in the Middle East.” Taken together, the documents seem to change the terms of a scandal that exploded over accusations that the I.R.S. had tried to stifle a nascent conservative political movement. Instead, the dispute now revolves around questionable sorting tactics used by I.R.S. application screeners.

Finance Committee Asks Senators to Start Tax Reform Process - The Democratic and Republican leaders of the Senate Finance Committee on Thursday began a legislative push to simplify the tax code by asking all senators to identify what tax breaks, deductions and credits should be kept. Senator Max Baucus of Montana, the committee’s chairman, and Senator Orrin G. Hatch of Utah, the committee’s ranking Republican, said they wanted to start the process by clearing the tax code of all special breaks. They gave their colleagues until July 26 to produce their so-called pardon list. “To make sure that we clear out all the unproductive provisions and simplify tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives,” the senators told their colleagues. They also asked for proposals for changes to the tax code. The leaders of both the finance committee and the House Ways and Means Committee have promised a robust effort this Congress to overhaul the tax code, but they face extremely long odds. President Obama has expressed only tentative interest. Senate Democratic leaders have offered little support, and although Republicans say it is a top priority, they have been loath to say which breaks they would sacrifice or curtail.

Senate Finance Leaders push "blank slate" to tax reform - Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve.  See Letter from Baucus and Hatch At first glance, this doesn't sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, "Non-Profit" hospitals, and corporate executives' deferred pay.  .  But it isn't clear that this duo can possibly carve a better system this way.  They have both already bought into the idea that the US has to "lower rates" to let Big Business be "competitive", an idea that ignores business reality and sets Congress up for a series of lobbying "auctions" (this tax break for that campaign contribution) They are both therefore part of the avid group of Big Business supporters who want to cut taxes, not raise revenues to deal with infrastructure needs, safety net needs, climate change, and the many other challenges that face a nation that has spent 40 years in the thrall of bankrupt Chicago School market theories that support winner-take-all systems.  Both have touted the idea that taxes should be "simpler''--as though having language that two-year-olds could read would be a reasonable way to ensure that the most sophisticated legal minds hired by the wealthiest Americans don't scam the system!  Remember that most of the complications in the Code are there to do two things--to provide special tax subsidies lobbied for heavily by Big Business (with a few for ordinary folk) and to prevent sophisticated (rich) taxpayers from ripping off the system as much as possible.

Tax lobbyists spring into action - Get ready for the tax lobbying bonanza. The proposal by Senate Finance Committee leaders to move on a foundation for tax reform with a “blank slate” — leaving thousands of provisions on the chopping block — will spark a furious lobbying spree that’s bound to exhaust both K Street and Capitol Hill.Suddenly lobbyists have one month — until July 26 — to make sure that tax breaks they covet make it across the finish line. On the flip side, they must also make sure that there aren’t any unwanted taxes in the final product that Finance Committee Chairman Max Baucus (D-Mont.) and ranking member Orrin Hatch (R-Utah) hope to move in the fall. It’s a complicated two-step. But many lobbyists are responding with confidence — so sure that their tax breaks are vital to a particular industry or the broader economy that there’s no way they could be scrapped. “Many special provisions, like the [research and development] credit, are active parts of the tax system for a reason — they support growth,” said Dorothy Coleman, the vice president of tax and domestic economic policy for the National Association of Manufacturers. “Their impact speaks for itself and we are hopeful that the Senate will see fit to include them in any tax reform package.”

Congrats, CEOs! You’re making 273 times the pay of the average worker. Want to know exactly how much richer the average chief executive is than you and me? Take a look at the Economic Policy Institute’s latest white paper, which tracks the growth of CEO compensation over the last half century. Here are the major takeaways:

  • Average pay for the CEOs of the top 350 firms, including the stock options they exercised, was $14.1 million in 2012–up 37.4 percent from 2009.
  • That’s a bit higher than it would be if you just measured stock options granted. “Firms apparently pared back the value of new options granted because CEOs fared so well by cashing in options as stock prices grew,” the report’s authors write.
  • The ratio of CEO pay to average worker pay is 273-1, down from a high of 383-1 in 2000, but up from 20-1 in 1965.
  • CEO pay has increased faster than wages to high-skilled workers, suggesting that the salary market isn’t very efficient. “Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment,” the report concludes.

How Many High Wealth Individuals? - How many people in the world have a million dollars or more in financial assets? That is, leave aside the value of real estate or other owned property. Capgemini and RBC Wealth Management provide some estimates in a report that seeks to define the global market for the wealth management industry, the World Wealth Report 2013. The report splits High Net Worth Individual (HNWI, natch) into three categories. Those with $1 million to $5 million in financial assets are in the "millionaire next door" category, and while I find that name a bit grating, it's fair enough. After all, a substantial number of of households in high-income countries that are near retirement, if they have been steadily saving throughout their working life, will have accumulated $1 million or more. The next step up is those with $5 million to $30 million in financial assets, who this report calls the "mid-tier millionaires." At the top, with more than $30 million in financial assets are the "ultra-HNWI" individuals. Here's the global distribution:

Do Private Equity Firms and their Partners Owe Ordinary Income Tax Under Today’s Law? - For a decade, Congress has been debating how to tax managers of private equity firms. The argument is pretty familiar to tax wonks: Should these partners treat this compensation (commonly called carried interest) as capital gains, as they do today? Or should they be taxed at the higher ordinary income rate as President Obama and others have urged? But what if the predicate of the debate is wrong? What if the returns to private equity firms themselves, as well as their managers, are already ordinary income under current law? What if the IRS has been getting it wrong all these years to the great benefit of private equity funds and similar investment firms?That’s the provocative argument my Tax Policy Center colleague Steve Rosenthal made in a paper earlier this year. Last month, Steve, who has had a long career as a tax lawyer, debated his theory with Andrew Needham, a partner at Cravath, Swain & Moore and a well-known expert in the tax treatment of these firms.An edited version of their debate, before the American Bar Assn. national tax section, was reprinted by our friends at Tax Notes who have kindly made it publicly available. The legal arguments get pretty technical but they come down to this:

How to Tax Capital Gains - The recent controversy over the taxation of “carried interest” (the share of profits that managers of private equity funds, hedge funds and the like commonly receive) demonstrates the problems that can arise from taxing capital gains differently from other types of income. While it’s relatively simple to change the way we treat carried interest, it would be far better to undertake an overall reconsideration of the way we tax capital gains.We can do better, and here are some guidelines: Increase the capital gains tax rate, but not the “lock-in” effect. Since the important work by Martin Feldstein and his collaborators in the 1970s, economists have understood that taxing capital gains has a big impact on investors’ decisions about when to sell capital assets. Higher tax rates delay sales, causing investors to be “locked in” to their current holdings, unable to balance their portfolios as they would wish. Although more recent research has shown that increases or decreases in the sale of assets are largely timing responses triggered by changes in tax rates rather than permanent shifts in behavior, we must take the lock-in effect seriously, because in fact tax rates are constantly changing.

Economists Build Libor Time Machines as Losses Puzzle Investors - Ramada is among a growing number of mathematicians, analysts and researchers trying to tackle one of the toughest questions to emerge from the Libor scandal: If banks manipulated rates tied to $300 trillion in instruments such as mortgages and student loans, how much did it cost investors? Investors suing banks to recover losses must quantify those damages, which some analysts have estimated will total billions of dollars. While regulators have uncovered e-mails between employees trying to rig the London interbank offered rate, the benchmark for more than $300 trillion of securities worldwide, it has been harder to show that investors actually lost money.As regulators in the U.S., Europe and Asia probe an expanding list of benchmark rates -- underpinning loans, currencies and even some oil products -- the difficulties individual investors face in calculating losses show why many may never be compensated. The math probably will depend on data from illiquid instruments, such as credit-default swaps.

A Wall Street regulator's race against time - The rumor is that Gary Gensler, the Goldman Sachs trader turned Wall Street regulator, may see his time atop the Commodities Futures Trading Commission end in July. The question is whether he can finish perhaps the most important piece of financial reform before he’s out – or whether the House will manage to stop him. What do the following financial crises — AIG, Lehman Brothers, Citigroup off-balance sheet SIVs, Bear Stearns, Long-Term Capital Management, and the “London Whale” of JP Morgan — all have in common? According to a speech given by Gensler earlier this month, they all involved exposures to derivatives across countries.  This is the issue Gensler is racing to address before the end of his term. As Marcus Stanley, of Americans for Financial Reform, notes to Erika Eichelberger of Mother Jones, “Wall Street banks routinely transact more than half their derivatives through foreign subsidiaries.” So a natural part of financial reform would be to make sure that the trades that go on with these foreign affiliates have to follow the same rules as firms in the United States. You shouldn’t be able to evade regulations by opening a P.O. Box in a foreign country.

Gensler Staring Down Administration and Banks on Derivatives Reform - Yves Smith - Readers may recall that Gary Gensler, the head of the Commodities Futures Trading Commission, is being pushed out by Obama. His planned replacement is so appallingly lightweight (oh, and formerly in a very junior role at Goldman) as to assure that all she’ll be able to do is take dictation from financial firm lobbyists.  But Gensler may be having a last laugh before he leaves office. The proximate reason for his ouster was that he was refusing to accede to the demands of banks and foreign regulators over implementation of Dodd Frank rules on swaps. As we wrote earlier this month: Shahien Nasiripour at the Huffington Post describes how Gensler is being ousted for his position on swaps regulation, which was coming to a head in international meetings starting June 20, with a July 12 deadline looming. The industry was pushing for the usual “race to the bottom” approach, since the Dodd Frank provisions are more stringent than overseas requirments. International regulators were apparently also unhappy with Gensler’s tough stand, to the point where they were complaining to Treasury Secretary Jack Lew.  And bear in mind that the reason the banks are howling like stuck pigs is that the businesses in question are are significant profit sources.  George Bailey, via e-mail, describes how Gensler is in a position to prevail in this important but largely unnoticed regulatory battle.

Administration, Congress Trying to Give Gensler the Brooksley Born Treatment over Derivatives Reform - Yves Smith - It’s actually getting amusing to watch the banking industry try to pull out heavy but rusty artillery and aim at a regulator who looks like he is about to *gasp* make them comply with some rules they were certain they’d be able to evade. In this case, the regulator is Gary Gensler, the head of the Commodities Futures Trading Commission, and he has both domestic and foreign derivatives dealers up in arms about the fact that he is standing firm on not extending certain exemptions under Dodd Frank past a July 12 deadline (see this post for details). The industry, not having taken the idea seriously that they might not get their way, is now trying every avenue open to them to force Gensler into line. The funny bit is that this attack is a ham-handed repeat of a strategy that was used successfully against a Gensler predecessor, Brooksley Born. As readers no doubt know, Born, who was new to her role, took an interest in regulating derivatives, in particular, credit default swaps (which are not true derivatives but are more accurately described as unregulated insurance agreements). Alan Greenspan, Bob Rubin and his then deputy Larry Summers, and SEC chairman Arthur Levitt pressed her repeatedly to back off. When that failed, they end ran her, going to Congress to prohibit her from acting until “more senior regulators” decided what, if anything, to do. Born left shortly thereafter.

S.E.C. Has a Message for Firms Not Used to Admitting Guilt - In a departure from long-established practice, the recently confirmed chairwoman of the Securities and Exchange Commission, Mary Jo White, said this week that defendants would no longer be allowed to settle some cases while “neither admitting nor denying” wrongdoing. “In the interest of public accountability, you need admissions” in some cases, Ms. White told me. “Defendants are going to have to own up to their conduct on the public record,” she said. “This will help with deterrence, and it’s a matter of strengthening our hand in terms of enforcement.” In a memo to the S.E.C. enforcement staff announcing the new policy on Monday, the agency’s co-leaders of enforcement, Andrew Ceresney and George Canellos, said there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.” They added, “Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.” Ms. White said that most cases would still be settled under the prevailing “neither admit nor deny” standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims.

Regulators Are Said to Plan a Civil Suit Against Corzine -Federal regulators are poised to sue Jon S. Corzine over the collapse of MF Global and the brokerage firm’s misuse of customer money during its final days, a blowup that rattled Wall Street and cast a spotlight on Mr. Corzine, the former New Jersey governor who ran the firm until its bankruptcy in 2011. The Commodity Futures Trading Commission, the federal agency that regulated MF Global, plans to approve the lawsuit as soon as this week, according to law enforcement officials with knowledge of the case. In a rare move against a Wall Street executive, the agency has informed Mr. Corzine’s lawyers that it aims to file the civil case without offering him the opportunity to settle, setting up a legal battle that could drag on for years. Article ToolsFacebookSaveTwitterE-mailGoogle+PrintSharePermalinkRelated Links Documents: Reports on MF Global's Bankruptcy Without directly linking Mr. Corzine to the disappearance of more than $1 billion in customer money, the trading commission will probably blame the chief executive for failing to prevent the breach at a lower rung of the firm, the law enforcement officials said. If found liable, he could face millions of dollars in fines and possibly a ban from trading commodities, jeopardizing his future on Wall Street.

Corzine Gets Sued! - Just when you think they all got completely away with it, along comes one government regulator, the CFTC.  The U.S. Commodity Futures Trading Commission issued a settlement with MF Global.   The firm settlement consisted of full restitution of the $1 billion customer money lost plus a $100 million fine.  Yet the CFTC also filed civil charges against former CEO Jon Corzine along with another MF Global executive, Edith O'Brien.The U.S. Commodity Futures Trading Commission (CFTC) today filed an enforcement action in the United States District Court for the Southern District of New York against MF Global Inc. (MF Global), a registered futures commission merchant (FCM), MF Global Holdings Ltd. (Holdings), former Chief Executive Officer of MF Global and Holdings Jon S. Corzine, and former Assistant Treasurer of MF Global Edith O’Brien based on, among other violations, MF Global’s unlawful use of customer funds that harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.MF Global has agreed to settle all charges against it on terms set forth in a proposed order that is subject to court approval and includes 100% restitution of the approximately $1 billion lost by all commodity customers when the firm failed on October 31, 2011. The CFTC acknowledged something we knew all along.  Corzine was lying about not knowing how customer funds was unlawfully used for trades or where $1.2 billion of MF Global's customer money went.

Corzine Officially Charged By CFTC For Filing False Reports, Commingling Funds And Other Violations ... the Complaint charges that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts; (ii) filed false reports with the CFTC that failed to show the deficits in the customer accounts; and (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation; and that Holdings controlled the operations of MF Global and is therefore liable as a principal for MF Global’s violations of the Commodity Exchange Act and CFTC regulations.

Corzine Charged in MF Global Collapse - Federal regulators on Thursday filed civil charges against former MF Global Holdings Ltd. Chief Executive Jon S. Corzine and a top lieutenant for overseeing the misuse of almost $1 billion in customer funds, saying Mr. Corzine "bears responsibility" for the New York commodities brokerage's 2011 demise. The Commodity Futures Trading Commission's complaint cited conversations not previously disclosed purportedly showing Mr. Corzine played a more active role in the firm's activities than he had suggested in the past. The lawsuit, filed in U.S. District Court in Manhattan, comes as a new blow for Mr. Corzine, whose reputation—built on a career as a top executive at Goldman Sachs Group Inc., New Jersey governor and U.S. senator—has been tarnished in the past two years. Mr. Corzine, 66 years old, has been grilled by Congress in several high-profile hearings and is the focus of several civil lawsuits related to his oversight of the company. The agency also charged a former executive at the firm, Edith O'Brien, with misusing customer funds, saying she aided and abetted the violations. The agency is seeking monetary penalties from Mr. Corzine and Ms. O'Brien and to ban the two from ever again trading commodities on Wall Street. The CFTC's 47-page complaint depicts Mr. Corzine as instrumental in making decisions that put customer accounts at risk by allegedly moving money in violation of strict rules prohibiting such transfers. In addition to the firm's misuse of customer funds, the CFTC also charged Mr. Corzine with "failure to supervise diligently," a violation of CFTC rules requiring top officials at regulated firms to maintain strong oversight of a firm's operations and employees.

Wall Street Cop Goes After Corzine — and Derivatives Loopholes - Gary Gensler, the chairman of the Commodity Futures Trading Commission, has been the toughest cop in D.C. since the financial crisis, and the only person really willing to take on Wall Street. Although his term may soon be coming to an end, the CFTC yesterday showed it still has plenty of bite left by suing Jon Corzine, the former New Jersey governor and U.S. senator who used to be the chief executive of MF Global, the brokerage firm that melted down after it apparently misused some $1 billion of customer money. The CFTC also filed civil charges against Edith O’Brien, ML Global’s former assistant treasurer. If the case is successful, it will be one of the few times that a banker has been held personally responsible for the failings of a firm. The CFTC isn’t saying Corzine himself approved any misuse of funds, but it is accusing him of failing to “supervise diligently” the activities of the firm. It’s also got plenty of juicy insider language from phone records laying out the impending implosion of the firm, and various efforts to keep MF, and Corzine, from melting down – which reminds me of the way Gensler and company successfully used incriminating emails from traders to show just how egregious their behavior was during the LIBOR scandal.

Corzine’s disgraceThe CFTC complaint we were waiting for has now arrived: MF Global, Jon Corzine, and MF’s former assistant treasurer, Edith O’Brien, have all been charged with misusing — stealing, effectively — almost $1 billion in customer funds. They took the money out of customer accounts knowing that they weren’t allowed to do so, and they failed to repay it, and they also failed, naturally, to tell the CFTC what they were doing. Corzine, as the CEO of a highly-regulated financial institution, was responsible for ensuring that his company didn’t break the law, but he didn’t seem to care nearly as much about those responsibilities as he did about his own trading account. And while other investment-bank CEOs at least pay lip service to the idea of being client-focused, Corzine seemed to care about clients mainly as a source of funds he could use to meet margin calls. On October 6, 2011, in response to the Firm’s liquidity stresses, Corzine told an MF Global Treasury Department employee that they were going to do all the things they could do to not draw on the revolver the next day, even if that meant “go[ing] negative” in the FCM customer accounts.“Going negative”, here, means exactly what you think it does: that the amount of money in segregated client accounts was lower than the amount of money those clients were being told that they had. And Corzine was saying this as early as October 6, when he still had a $1.2 billion credit line to play with, and well over three weeks before Halloween, when MF Global eventually ended up filing for bankruptcy.

US rate volatility sparks surge in junk-rated debt yields - US interest rate volatility has sparked a surge of more than 2 percentage points in yields for junk-rated debt as investors have quickly retreated from the riskiest sector of the corporate bond market. The average yield for lower-quality rated company bonds was on the cusp of rising above 7 per cent on Wednesday for the first time in almost a year, after a jump from 4.95 per cent in early May, according to Barclays data. It leaves the asset class poised to erase its gains for the year after being up nearly 6 per cent just over a month ago. The stunning reversal in sentiment for high-yield US debt has accelerated since late May when Ben Bernanke, chairman of the Federal Reserve, indicated a willingness to consider reducing bond purchases under its policy of quantitative easing. That stance, subsequently affirmed by this month’s Fed policy meeting, has triggered a stampede out of US debt securities, with the junk sector leading the way after yields – which move inversely to prices – had dropped to a record low on the back of strong investor demand earlier this year.

IPOs Have Accelerated in 2013 - I was curious to know whether the recent rise in interest rates, and corresponding stock market correction, was having any effect on the IPO market.  IPOs are Initial Public Offerings - private companies first turning into public companies by offering their shares on one of the public markets.  Accordingly, I updated the graph above, which shows the cumulative count of IPO pricings since 2008.  The rate of these IPOs is a (rough) proxy for the rate of finished innovations reaching the economy, and so is (again very roughly) associated with economic growth. I first made this graph in June of last year, and the data are from Yahoo Financial.  As you can see, 2008 and 2009 had a suppressed rate of IPOs due to the financial crisis and great recession.  Since then they've been proceeding at a steady pace.  The rate in 2013 is slightly higher than the last three years, and there's no slowdown in the last couple of months. You can see this by looking at the yearly counts

How Much Are the NSA and CIA Front Running Markets? -  Yves Smith - A 2008 paper found evidence that the CIA and/or members of the Executive branch either disclosed or acted on information about top-secret authorizations of coups. Stocks in “highly exposed” firms rose more in the pre-coup authorization phase than they did when the coup was actually launched. The conclusions:Covert operations organized and abetted by foreign governments have played a sub- stantial role in the political and economic development of poorer countries around the world. We look at CIA-backed coups against governments which had nationalized a considerable amount of foreign investment. Using an event-study methodology, we find that private information regarding coup authorizations and planning by the U.S. government increased the stock prices of expropriated multinationals that stood to benefit from the regime change. The presence of these abnormal returns suggests that there were leaks from the CIA or others in the executive branch of government to asset traders or that government officials with access to this information themselves traded upon it. Consistent with theories of asset price determination under private information, this information took some time to be fully reflected in the stock price. Moreover, the evidence we find suggests that coup authorization information was only present in large, politically connected companies which were also highly exposed.

Don’t Panic as Bond Market Ship Not Sinking, Pimco’s Gross Says - Bond yields and risk spreads were too low two months ago and global markets that were too leveraged are now reducing risk, according to Bill Gross, manager of the world’s largest mutual fund at Pacific Investment Management Co. Gross’s $285 billion Pimco Total Return Fund led declines among the most-popular bond mutual funds earlier this month after the Federal Reserve sparked a global selloff in bonds by indicating it may start reducing asset purchases known as quantitative easing, or QE. “In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat,” Gross said in his July commentary titled “The Tipping Point”, posted on Newport Beach, California-based Pimco’s website. "Don't panic," he wrote.

Runaway CEO Pay Gets a Free Pass - H.R. 1135, the “Burdensome Data Collection Relief Act.”, speaks to an ongoing frustration in America’s body politic: CEO pay. Most Americans think corporate executives are grabbing far too much compensation. Not the members of the House Financial Services Committee. By a 36-21 margin, they’ve just voted to repeal the only statutory provision now on the books that puts real heat on overpaid CEOs. The full House, observers expect, will shortly endorse this repeal. The specific provision 31 Republicans and five Democrats voted to overturn — section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act — imposes a new disclosure mandate on corporations. Under Dodd-Frank, as enacted into law, major companies must annually reveal the ratio between what they pay their CEOs and what they pay their median — most typical — workers. Corporate pay reformers consider this ratio to be crucial information for reining in executive excess. If Americans could see — and compare — the exact CEO-worker pay ratio from one corporation to another, the reformers believe, the resulting negative publicity on the corporations with the widest pay gaps might just discourage excessive future executive compensation.

Blogs review: Profits without investment in the recovery - What's at stake: Paul Krugman has kicked off an interesting debate in the blogosphere about a new disconnect between profits and production, which may have slowed the recovery. In contrast to previous downturns, investment has been especially slow to recover. This seems paradoxical given that profits have recovered from the slump. Krugman provides an explanation for this puzzle based on the growing importance of monopoly rents in the 21st century economy.  Paul Krugman writes that the growing importance of monopoly rents is producing a new disconnect between profits and production. Since around 2000, the big story has been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment?

Is Sheila Bair Dangerously Naïve When It Comes to Dodd-Frank - The problem comes down to this: Bair and many on the Democrats’ side of the aisle, refuse to acknowledge that their much ballyhooed financial reform legislation passed in July 2010, the  Dodd–Frank Wall Street Reform and Consumer Protection Act, is an utter failure in reining in the abuses of the Wall Street behemoths as well as useless in preventing another taxpayer bailout.  Thomas Hoenig, former President of the Federal Reserve Bank of Kansas City and now Vice Chair of the FDIC, told the Committee that the biggest banks are “woefully undercapitalized” and that we have a “very vulnerable financial system.” Hoenig was also a member of the Federal Reserve System’s Federal Open Market Committee from 1991 to 2011. Hoenig is so convinced of the utter failure of Dodd-Frank that he is strongly advocating the restoration of the Glass-Steagall Act which would force the separation of banks holding insured deposits from Wall Street brokerage firms and investment banks. Richard Fisher, President of the Federal Reserve Bank of Dallas, said “I don’t think we have prevented taxpayer bailouts by Dodd-Frank” and added that the legislation “enmeshes us in hyper bureaucracy.” The President of the Federal Reserve Bank of Richmond, Jeffrey Lacker, honed in on the core of the problem: While the FDIC is to pay creditors no more than they would have received in a liquidation of the firm, the Act provides the FDIC with broad discretion to pay more. This encourages short-term creditors to believe they would benefit from such treatment and therefore continue to pay insufficient attention to risk and invest in fragile funding arrangements.

Fed’s Lacker: Dodd-Frank May Not Curtail Emergency Powers - It remains an “open question” whether the Federal Reserve could use its emergency lending powers to help an individual financial institution in times of crisis, Richmond Fed President Jeffrey Lacker told U.S. House lawmakers Wednesday. Mr. Lacker questioned measures included in the 2010 Dodd-Frank financial overhaul law to prevent the Fed from using its “unusual and exigent” powers to rescue a failing financial firm, as happened with American International Group Inc. in September 2008. It “seems conceivable” the central bank could design a lending program that could benefit and be used by only a single institution, he said. “It’s an open question about how constraining” Dodd-Frank is, Mr. Lacker said. The comments came at a House hearing on the issue of “too-big-to-fail” banks and whether the Dodd-Frank overhaul law and other post-crisis changes have eliminated the risk to the broader economy posed by large, complex banks. Mr. Lacker appeared alongside Dallas Fed President Richard Fisher, Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and former FDIC Chairman Sheila Bair.

Save If Failure Impending - Yesterday the House Financial Services Committee held a hearing on the too big to fail problem. Ordinarily a hearing includes a couple of witnesses chosen by the majority who say one thing and one or two witnesses chosen by the minority who say exactly the opposite thing. In this, however, it was hard to tell who was chosen by which side (although I can guess), given the extent of the agreement among former Fed bank president Thomas Hoenig, current Fed bank presidents Richard Fisher and Jeffrey Lacker, and former FDIC chair Sheila Bair. All agreed that the too big to fail problem still exists, five years after the financial crisis, and that it continues to distort the market for financial services. For example, Lacker, who is perhaps the most sanguine about Dodd-Frank (he likes the living will provisions of Title I), said, “Given widespread expectations of support for financially distressed institutions in orderly liquidations, regulators will likely feel forced to provide support simply to avoid the turbulence of disappointing expectations. We appear to have replicated the two mutually reinforcing expectations that define ‘too big to fail.’” There was disagreement over whether Dodd-Frank, and the Orderly Liquidation Authority regime that it created, would continue the practice of bailing out failing financial institutions, with Bair arguing that Dodd-Frank “abolished” bailouts. Of course, everyone is against bailouts, but at the same time everyone is in favor of protecting the financial system and the economy against disaster.

Regulators Weigh Requiring More Reserves at Big Banks -  U.S. financial regulators, concerned that large banks remain a risk to the financial system, are considering requiring the biggest banks to boost a key metric that gauges institutions' ability to withstand a crisis, according to people familiar with the talks. Officials at the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. may force banks to increase the amount of equity they hold against all assets, not just those considered most risky. Officials are discussing requiring major U.S. banks to boost their so-called "leverage ratio" to between 5% and 6%—beyond the 3% regulators proposed last year. The requirement for a 3% leverage ratio hasn't yet gone into effect but regulators already think it doesn't go far enough, according to people familiar with the discussions. The Fed and other regulators are concerned that Wall Street banks remain so large and complex they continue to pose risks to the financial system. They want to compel banks to reduce their size and complexity by making it onerous and expensive to be a large bank, in part by increasing capital requirements. Leverage ratios are seen as a simpler way to measure a bank's capital buffer than risk-based capital measures, which focus strictly on offsetting the risk of certain assets they carry on their balance sheets. Supporters such as FDIC Vice Chairman Thomas Hoenig and former FDIC Chairman Sheila Bair say boosting leverage ratios will better ensure large, complex banks have adequate buffers in times of crisis. Critics say it is a blunt measurement that treats all financial institutions equally regardless of the actual risks they carry on their balance sheets.

Focus on Bank Liabilities, Not Bank Assets - John Cochrane has a great column in today's Wall Street Journal on how to create a better banking system.  He says that we should focus on the nature of bank liabilities (demand deposits, in particular) rather than on the riskiness of bank assets. Traditional banks are peculiar institutions. Traditional banks have depositors who want short-term, liquid, riskless assets. Yet these deposits are backed by long-term, illiquid, risky loans. This incongruity is fundamental. As we have seen, it cannot be easily fixed by a government policy such as deposit insurance. There is, however, a simple, market-based solution: mutual funds. Individuals who want truly riskless assets can invest in mutual funds that hold only Treasury bills. Those who are willing to undertake greater risk can invest in mutual funds that hold privately issued CDs, bonds, or equities. Long-term, illiquid loans could be made by finance companies, which would raise funds by issuing equity and bonds. In the world I am describing, all household assets would be perfectly liquid. Preventing bank runs---he original motivation for deposit insurance--would be unnecessary, because changes in demand for various assets would be reflected in market prices.  In essence, the system we have now is one in which finance companies are themselves financed with demand deposits. Yet these finance companies hold assets--long-term bank loans--that are risky and illiquid, much in the same way that fixed capital is risky and liquid. Imagine that the auto industry financed itself with demand deposits. Undoubtedly, self-fulfilling "runs" on GM and Ford would be common, and the auto industry would be highly unstable.

Regional Fed Presidents, FDIC Official Warn On Too Big to Fail - WSJ - U.S. efforts to rein in "too big to fail" banks in the wake of the 2008 financial crisis have fallen well short and must be replaced with more aggressive measures to split up or downsize the largest financial firms, a pair of Federal Reserve bank presidents and a top regulatory official will tell lawmakers Wednesday. "These institutions operate under a privileged status that exacts an unfair and nontransparent tax upon the American people and represents not only a threat to financial stability, but to the rule of law," Federal Reserve Bank of Dallas President Richard Fisher said in prepared remarks. Mr. Fisher is slated to appear at a hearing of House lawmakers focused on the 2010 Dodd-Frank financial-overhaul law and whether it effectively addressed the risks posed by large, complex financial institutions on the broader economy. Federal Reserve Bank of Richmond President Jeffrey Lacker, Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and former FDIC Chairman Sheila Bair are also slated to testify. Mr. Lacker will say that U.S. officials need to eliminate the belief among creditors that the government would step in, either directly or through various financing mechanisms, to help an ailing bank in times of crisis.

Steepening yield curve benefits banks, but major headwinds remain - The treasury curve has steepened materially over the past few weeks, driven by Bernanke's seemingly hawkish statements. One group of companies that will benefit from this adjustment is the banking sector. The reason is simple. Given the short end of the curve has not budged, banks will continue to pay next to nothing on deposits. But they can now charge much higher rates on new term loans they make. That spread increase (net interest income) will flow right into equity and juice up bank dividends. Bank shareholders and executives should thank Bernanke for this "gift". But there are headwinds appearing on the horizon for the banking sector that may negate some of these gains. Here are a few examples:
1. A portion of bank revenue has been generated from mortgage refinancing in the past couple of years. But that game is over (see post) and the refi fee revenue will no longer be there. We'll let our friends who analyze bank shares quantify that number, but it can't be immaterial.
2. With rates rising, loan demand in the corporate sector may in fact decline. We are already seeing evidence of that.

Banks Are Starting To Lend More Freely - Real estate agent Mickey Knickerbocker was as surprised as anybody when her client closed on a $905,000 Manhattan Beach town house using "piggyback" financing: a two-mortgage deal designed to minimize the down payment. Popular during the housing boom, piggybacks all but disappeared after the mortgage meltdown taught banks and regulators a big lesson: Borrowers needed to have skin in the game. So the loans seemed like a throwback to the days of carefree lending, especially on such a pricey property. With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have also gotten plentiful and cheap. Meanwhile, banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say. "We are definitely not seeing the looseness we saw during the boom years, but it seems to me that the pendulum is swinging back,"

Unofficial Problem Bank list declines to 751 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 21, 2013. Changes and comments from surferdude808:  As expected, the OCC released its enforcement action activity through mid-May today. For the week, there were seven removals and one addition that leave the Unofficial Problem Bank List at 751 institutions with assets of $273.0 billion. A year ago, the list held 921 institutions with assets of $354.6 billion.   The sole addition this week was First National Bank, Camdenton, MO ($262 million). Next week, we anticipate the FDIC will release its enforcement action activity through May 2013. With the quarter ending, we will update the transition matrix. We continue to monitor the airwaves for any news on Capitol Bancorp and the fate of the banks it controls, but nothing hit the wire this week.

Mega bank rejects AIG bid to reopen MBS settlement (Reuters) - Bank of America has rejected a bid to re-open negotiations into its proposed $8.5 billion settlement with investors in mortgage securities, indicating it plans to take its chances that a New York judge will approve the deal. American International Group Inc (AIG.N) and the Federal Home Loan Banks of Boston, Chicago and Indianapolis, which object to the settlement, sent a letter to Bank of New York Mellon Corp (BK.N), the trustee overseeing the securities. The letter, which was filed in New York State Supreme Court on Thursday, requested immediate settlement discussions. "We are willing and available now to discuss ... how to best construct an open, fair and transparent process," Daniel Reilly, a lawyer for AIG, and Derek Loeser, a lawyer for the home loan banks, wrote. AIG and other objectors complained that the accord offered them only a fraction of what they lost, and was negotiated without them.

Subprime securities – still being downgraded - Lifted from comments by reader Juan comes this article from the Finacial Times: Some two weeks ago Moody’s announced it was downgrading 28 tranches of various bonds (as well as upgrading two tranches, and confirming others) in an action that covered roughly $1.2bn worth of mortgage-backed securities (MBS)...Today’s rating action concludes the review actions announced in March 2013 relating to the existence of errors in the Structured Finance Workstation (SFW) cash flow models used in rating these transactions... In the impacted deals, all collected principal and interest is commingled into one payment waterfall to pay all promised interest due on bonds first, then to pay scheduled principal from the remaining funds. The cash flow models used in previous rating actions, which mistakenly applied separate interest and principal waterfalls, have been corrected, and today’s rating action reflects the commingled payment waterfall. Whoops!

Regulatory Looting, Promontory-Style: Botched Foreclosure Reviews Alone Generate More than Double Goldman’s Revenues per Employee -  Yves Smith - It’s really hard to convey a sense of how utterly grotesque the looting that Promontory Financial Group conducted on the misnamed Independent Foreclosure Reviews. Readers may recall that these reviews were set up as part of a 2011 settlement by the Office of the Comptroller and the Currency and the Fed with 14 major servicers. The reviews were shut down abruptly at the very beginning of this year due to revelations about lack of independence of the reviews and burgeoning consultant bills. And as Congressional hearings revealed, the money spent on the reviews was a complete waste (well, except for the banks, for whom it was a cheap “get out of damages” card). The banks and the OCC decided which homeowners would get how much though a process that clearly had to be arbitrary. A USA Today article yesterday revisits the topic of how paltry and arbitrary the payments were: Almost all the checks have gone out from a settlement that government regulators initially touted in 2011 as their most aggressive effort to root out banks’ errors, hold them accountable and right the wrongs done to many homeowners. The outcome falls short of the vindication many borrowers expected… The payouts, far from closing the books on an economic catastrophe that rocked millions of households in the worst years of the Great Recession, have instead reignited old feelings of anger and frustration. It also contains numerous examples as well as useful statistics, consistent with numerous reader complaints at NC. For instance: Max Caycoya, 42, an engineer in Houston, got a $500 payout that left him angry and confused. He says he had a loan modification request denied in 2010, so he expected $6,000 for being in the “modification request denied” category. John Failla, 47, a casino supervisor in Tucson, was denied a loan modification from Bank of America, he says. He expected $6,000 and got $500.

Another Conflicted Foreclosure Review: PricewaterhouseCoopers and Ally/ResCap - One of the fundamental tenets of the “independent” foreclosure reviews of mortgage servicers ordered by the OCC and Federal Reserve Board was the independence and objectivity of the consultants. The ICs for the IFRs were supposed to determine how much harm had been inflicted on borrowers subjected to error-ridden and, in some cases, fraudulent foreclosures.We know that Allonhill was disqualified after the reviews started. We also know that the OCC looked the other way at the blatant independence conflict when JP Morgan engaged Deloitte to review Deloitte’s former audit clients’ foreclosure failures at Bear Stearns and Washington Mutual – now owned by JPM. There was at least one more serious consultant independence issue than previously reported. PricewaterhouseCoopers, selected to perform the “independent” foreclosure reviews for Ally/ResCap, approved by the Fed, was the ResCap independent auditor during a portion of the period covered by ResCap’s foreclosure reviews.  ResCap is a wholly owned subsidiary of Ally Financial Group, formerly GMAC. General Motors Acceptance Corp. is the second largest remaining Troubled Asset Relief Program investment, according to a January report from the Special Inspector General of TARP, with $14.6 billion in TARP funds owed. Taxpayers still own 74% of the company, as of January, as a result of the auto bailouts of GM and Chrysler the Federal government “rescued” GMAC, once the auto financing subsidiary of GM.

Bank of America whistle-blower’s bombshell: “We were told to lie”  - Bank of America’s mortgage servicing unit systematically lied to homeowners, fraudulently denied loan modifications, and paid their staff bonuses for deliberately pushing people into foreclosure: Yes, these allegations were suspected by any homeowner who ever had to deal with the bank to try to get a loan modification – but now they come from six former employees and one contractor, whose sworn statements were added last week to a civil lawsuit filed in federal court in Massachusetts. “Bank of America’s practice is to string homeowners along with no apparent intention of providing the permanent loan modifications it promises,” said Erika Brown, one of the former employees. The damning evidence would spur a series of criminal investigations of BofA executives, if we still had a rule of law in this country for Wall Street banks.The government’s Home Affordable Modification Program (HAMP), which gave banks cash incentives to modify loans under certain standards, was supposed to streamline the process and help up to 4 million struggling homeowners.  In reality, Bank of America used it as a tool, say these former employees, to squeeze as much money as possible out of struggling borrowers before eventually foreclosing on them.  Former Treasury Secretary Timothy Geithner famously described HAMP as a means to “foam the runway” for the banks, spreading out foreclosures so banks could more readily absorb them.

New Bank of America whistle-blower emerges: More customer abuse secrets - Dave Dayen - Last week, I detailed bombshell revelations from Bank of America whistle-blowers, in which former employees of the bank detailed systematic fraud and deceptive practices inside their loan modification department — including bonuses and Target gift cards for staff who racked up foreclosures.Now, another new lawsuit, featuring a separate whistle-blower, contains additional remarkable revelations – and may shed light on Bank of America’s strategy in getting out from under the mountain of legal exposure and costs in which it now finds itself. Simply put, the bank seeks to pocket quick cash and evade practices set forth in major settlements – by cashing out of the subprime mortgage servicing business. The result would be to leave struggling homeowners back at square one, with even fewer protections to avoid foreclosure.

Administration Keeps Pretending Mortgage Servicing Has Been Fixed, Whistleblowers Say Otherwise - by Yves Smith -- It sometimes feels like a Sisyphean task to keep discussing how Americans were thrown under the bus in the various mortgage settlements reached in 2011 and 2012. The mortgage-industrial complex was deemed too big to fail and as a result, malfeasance and fraud were deemed to be mere “errors”, offensively low damages were paid, and the banks were told to adhere to current law, with a few new requirements thrown in (single point of contact, ending dual tracking, and processing modifications in a timely manner). The reason far more serious remedies needed to be implemented was that mortgage servicers have never had the systems in place to handle more than a trivial level of delinquent mortgages. Servicing delinquent mortgages well, or even adequately, and processing modifications is a high-cost, high touch operation, while servicing mortgages that are being paid on time is a factory: highly routinized, high volume, low cost. The only way to get servicers to invest in staff and systems to service delinquent mortgages and process mods properly would be to put a very big boot on their neck. And that never happened.  As, we need to belatedly stop and take note of the latest “nothing to see here” effort by the Administration with the issuance last week of the latest report of the monitor of the national/49 state settlement entered into in early 2012. The media made much of the fact that the large servicers had satisfied most of their financial requirements. Um, that wasn’t that hard, since the cash component was a steal.

LPS: Mortgage Delinquency Rate lowest since May 2008, Foreclosure inventories lowest since March 2009 - According to the First Look report for May to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in May compared to April, and declined about 12% year-over-year. Also the percent of loans in the foreclosure process declined further in May and were down almost 27% over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.08% from 6.21% in April. Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.05% in May from 3.17% in April.   The number of delinquent properties, but not in foreclosure, is down about 13% year-over-year (452,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 27% or 585,000 properties year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still high, but declining fairly quickly.  LPS will release the complete mortgage monitor for May in early July.

Modifications Decline Significantly; Foreclosure Sales Rise - Modifications under the HOPE NOW alliance declined significantly in April, due entirely to a decline in the number of proprietary transactions. HOPE NOW said its members completed 69,888 loan modifications during the month, down from 88,485 in March. Modifications completed under the Home Affordable Modification Program (HAMP) actually increased slightly, from 11,913 to 11,966 but proprietary modifications fell to 57922 from 78,522. Of the proprietary modifications in April, 93 percent included interest rates that were fixed for at least five years, 83 percent featured reduced principal and interest payments, and for 76 percent that reduction was greater than 10 percent.  Since HOPE NOW was begun as a voluntary, private sector alliance of mortgage servicers, investors, mortgage insurers, and non-profit counselors in 2007 its members have completed 6.39 million loan modifications, 5.2 million under proprietary auspices and 1.19 million through HAMP (which began in 2009).  Foreclosure sales increased from 52,000 in March to 59,000 in April, a 14 percent escalation. Foreclosure starts increased by 1,000 to 116,000. Short sales reached a total of 1.26 million since HOPE NOW started tracking them in 2009 with an additional 27,000 short sales. There were 28,000 in March.

The Housing Finance Mechanism In The US Is Not Fixed - I was fortunate enough to gather with Ed Pinto, Josh Rosner, and Chris Whalen. They have great expertise in housing, housing finance, mortgaging, impacts of the Fed on the banking system, and the regulatory regimes that are affecting the country. Those three have had their share of experiences with congressional testimony and analysis. Regular readers and viewers of economic and financial television will recognize them. The mortgage interest rate in the US is up about 100 basis points in a brief time, thanks to the failed communication policy of the Fed. What does that rise mean? We speculated about how much of a setback will occur to the housing recovery. We know refinancing will come to a stop. Rosner pointed out that a large number of people in the market were cash and speculative buyers. That activity may slow down or come to a stop. The salvaging of the foreclosure document mess will slow. Chris Whalen has done serious work on that. Ed Pinto has been all over the issues involving FHA (the Federal Housing Administration), another mess in the making.The takeaway from the group and others gathering here at Leen’s Lodge is pretty clear. Housing, finance, mortgaging, and the recovery in the US will see a setback. How severe that setback will be remains to be seen. The range of outcomes may span several hundred thousand single-family housing starts a year. The news is not good. The economy is likely to slow because of the slowdown in the housing recovery. The policy options available to the Fed are likely to become more difficult.

Congressional Report Raises Spectre of FHA Bailout - The Federal Housing Administration's (FHA) losses over the next 30 years could be much higher than originally projected, according to the findings of a congressional committee. The dismal forecast has some bracing for another taxpayer-financed bailout. The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) is reporting that a worst-case scenario stress test conducted last year estimated the FHA could suffer losses as high as $115 billion. That forecast is significantly worse than the one reported by independent auditor Integrated Financial Engineering Inc., which projected losses of $65 billion for the 79-year old agency. The primary cause of the FHA's troubles is the plague of underwater mortgages that has struck the housing sector in recent years. During the late housing bubble, the FHA lost market share as more private lenders sold “subprime” loans to home buyers. But with the collapse of the housing market in 2007-08, much of that business returned to the FHA. While the agency has played a major role in propping up home prices, it has also been overwhelmed by defaults.

The End of Fannie and Freddie? - NYT - On Tuesday, Senator Mark Warner, a Virginia Democrat, and Senator Bob Corker, a Republican from Tennessee, introduced a complicated bill that is intended to solve, once and for all, the problem known as Fannie Mae and Freddie Mac. It has now been nearly five years since Fannie and Freddie were put into conservatorship by the Treasury Department. Since then, we have been through the financial crisis, the housing crisis and the foreclosure crisis. Although the housing market has come a long way back, the market for private mortgage-backed securities — that is, bundles of mortgages sold to investors without a government guarantee — remains moribund. Believe it or not, the much-maligned Fannie and Freddie have kept the housing market alive by taking on the credit risk for most plain-vanilla mortgages, especially that most sacred of sacred cows, the 30-year, fixed-rate mortgage. Indeed, ever since the creation of mortgage-backed securities in the 1970s, this has been a critical role of Fannie and Freddie; their “wrap” helped give investors the confidence to buy securities stuffed with thousands of mortgages they were never going to inspect individually. Currently, an incredible 77 percent of the mortgages being made in America are guaranteed by Fannie and Freddie. Yet this can’t last forever. Conservatorship was supposed to be temporary. Although Fannie and Freddie are now making a gaggle of money, for complicated reasons having to do with the way the Treasury Department originally set up the conservatorship, that money is not reducing the government’s $180 billion bailout of the two companies.  Meanwhile, many Republicans have been screaming that the financing of housing should be left to the private market and that Fannie and Freddie must be put out of business. (They believe, wrongly, that Fannie and Freddie caused the financial crisis.) And the Obama White House — shocker! — has punted.

Misguided Corker-Warner Kill Fannie and Freddie Bill Relies on Private Market Sparkle Ponies - Yves Smith - Let’s be clear: I’m not a fan of Fannie and Freddie. Subsidizing housing finance is a lousy way to subsidize housing (and that’s before you get to the question of whether housing should be subsidized at all, save for low-income people). It’s indirect, inefficient, and very hard to measure what the effects are.  But reality is path-dependent and we need to remember where we are now. As much as the Republicans have good reason to go obsess over Fannie and Freddie (they were Democratic party pork machines), both parties have been utterly unwilling to take any serious steps needed to have either a functioning private mortgage securities market or see about migrating more mortgage lending back onto bank balance sheets. We now have a mortgage market that has gone before the crisis from having Federally-guaranteed loans as a large component of the market to being virtually the only game in town, with the GSEs as the biggest providers. You’d think a critical first step would be at least to get a decent private label market back in running. But for the most part, investors are still correctly leery, since the sell-side has successfully beaten back meaningful investor protections (such as a proposal floated by the FDIC in early 2010).  Reuters gives a brief overview: Under the bill, which is being led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, the two companies would be liquidated within five years. The legislation would provide for government reinsurance that would kick in only once private creditors had shouldered large losses. “It lessens the footprint of the federal government in housing and winds down Fannie and Freddie,” Corker said at a news conference. “But at the same time it keeps the housing finance industry in a liquid state.”

Fannie Mae, Freddie Mac: Mortgage Serious Delinquency rates declined in May, Lowest since early 2009 - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in May to 2.83% from 2.93% in April. The serious delinquency rate is down from 3.57% in May 2012, and this is the lowest level since January 2009.  The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in May to 2.85% from 2.91% in April. Freddie's rate is down from 3.50% in May 2012, and this is the lowest level since May 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Although this indicates some progress, the "normal" serious delinquency rate is under 1%.   At the recent rate of improvement, the serious delinquency rate will not be under 1% until 2016 or even 2017

U.S. Home-Loan Credit Easing, Mortgage Bankers Say - Mortgage availability in the U.S. has eased, returning to 2011 levels, as home prices recover, according to a new index from the Mortgage Bankers Association and AllRegs. The Mortgage Credit Availability Index -- calculated based on criteria including credit scores, loan type and loan-to-value ratios from 85 lenders and investors -- rose 7.2 percent in May from a year earlier. Mortgage availability was about eight times greater during the height of the housing boom in 2006 and 2007, when lenders offered loans to borrowers with no down payments and unverified incomes, the Washington-based bankers group said. Lenders are easing underwriting standards as rising home prices reduce the risk of making new loans, said Michael Fratantoni, vice president of research and economics for the the Mortgage Bankers Association. The S&P/Case-Shiller (SPCS20Y%) index of home values in 20 cities climbed 12.1 percent in the year through April, the most since March 2006, a report showed today. “Credit availability is still quite tight, but we have seen some modest loosening over the past year,” Fratantoni said. “We can see that both as more lenders being willing to extend credit and the terms of that credit loosened slightly.”

Bank of America Said to Send Property Reviews to India -  Bank of America Corp. (BAC) opened a unit in India to review home-valuation reports as it seeks to rebuild share in U.S. mortgages at a lower cost, said four people with knowledge of the move.  Workers in the new Bangalore office follow checklists to determine if appraisals are complete, said the people, who requested anonymity because they weren’t authorized to comment. The firm also eliminated jobs of licensed U.S. workers in its LandSafe business, the appraisal division of the Charlotte, North Carolina-based company, which made $78.7 billion in loans last year, the people said.“One of the biggest problems in the mortgage business is all the paperwork involved, and how do you engineer it to reduce the bottlenecks,” said Bert Ely, an independent banking consultant in Alexandria, Virginia. “With offshoring, the potential for problems is always there, but it’s hard to be critical for trying to minimize costs.”

Mortgage rates spike to two-year high. The refinancing gravy train has ended. - US 30yr mortgage rates spiked to a 2-year high on Friday (4.49%).In the near term this spike may actually push some potential buyers who have been on the sidelines into purchasing a home. People are concerned that rates will rise even further, which may have the effect of increasing June/July sales (see this story). The longer term effect however is less clear. While 4.5% is low by historical standards, it certainly takes a portion of the population out of the housing market. Also the speed of the rate spike may have a negative impact on consumer sentiment. Monthly payments on a new mortgage have increased by 10% from just a month ago (roughly $100/month for a median house price). One thing we can be confident of is that the wave of mortgage refinancing is over. Consumers have been putting extra cash into their pockets by refinancing multiple times in recent years. That gravy train just ended.

Average 30-year mortgage rate up to 4.46% - U.S. mortgage rates surged this week, reaching their highest level in two years and threatening to slow the housing industry's steady recovery. Mortgage buyer Freddie Mac said Thursday that the average rate on the 30-year fixed loan jumped to 4.46% this week, the highest level since June 2011. That's up from 3.93% from the previous week. It was the largest weekly increase in the 30-year rate since April 1987, Freddie Mac said.The average rate on the 15-year mortgage jumped to 3.50% from 3.04%. That's the highest since August 2011. A year ago, the rate on the 15-year mortgage was at 2.94%.  The increases follow rising yields on the 10-year Treasury bond in the wake of Federal Reserve Chairman Ben Bernanke's comments last week that the Fed could start trimming its stimulus policies later this year if the economy continues to improve. Mortgage rates track the 10-year Treasury rate, which is at a two-year high.

U.S. Mortgage Rates Jump to 2-year High of 4.46% -  U.S. mortgage rates have suddenly jumped from near-record lows and are adding thousands of dollars to the cost of buying a home. The average rate on the 30-year fixed loan soared this week to 4.46 percent, according to a report Thursday from mortgage buyer Freddie Mac. That’s the highest average in two years and a full point more than a month ago. The surge in mortgage rates follows the Federal Reserve’s signal that it could slow its bond purchases later this year. A pullback by the Fed would likely send long-term interest rates even higher. In the short run, the spike in mortgage rates might be causing more people to consider buying a home soon. Rates are still low by historical standards, and would-be buyers would want to lock them in before they rise further. But eventually, more expensive home loans could price some people out and slow the housing market’s momentum, which has helped drive the U.S. economy over the past year.

Freddie Mac: Mortgage Rates highest since July 2011 - From Freddie Mac today: Mortgage Rates Roiling From Taper Talk Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates jumping along with bond yields amid recent Fed remarks that it could begin tapering its bond purchases later this year. The average 30-year fixed-rate mortgage rose from 3.93 percent last week to 4.46 percent this week; the highest it has been since the week of July 28, 2011. ... 30-year fixed-rate mortgage (FRM) averaged 4.46 percent with an average 0.8 point for the week ending June 27, 2013, up from last week when it averaged 3.93 percent. Last year at this time, the 30-year FRM averaged 3.66 percent.  15-year FRM this week averaged 3.50 percent with an average 0.8 point, up from last week when it averaged 3.04 percent. A year ago at this time, the 15-year FRM averaged 2.94 percent. Mortgage rates have increased for seven consecutive weeks, and spiked higher last week. This graph shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey. 

Existing Home Inventory is up 16.9% year-to-date on June 24th - 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 May).  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.

Motivated home buyers skip the bidding wars - Southern California housing prices are rising sharply, and there's a shortage of houses available for sale.  So agents like Mathys are resorting to reconnaissance and back-channel networks to find homes that haven't yet hit the market. They're cold-calling homeowners with offers and targeting specific neighborhoods with direct mail. Some come bearing bizarre gifts in return for a listing. One agent offered a seller the use of his exotic car; one of his clients offered free dogs. And they're chasing so-called pocket listings, homes privately marketed among those in the know. The low-profile nature of the listings makes them hard to quantify. But agents and other real estate experts say they've become common in the booming Southland market, where the median home price shot up nearly 25% in the last year.

Is This The Recovery In Housing They Wanted?  A mortgage market that is practically 100% government-driven, impossibly low rates for impractically long periods of time, no MtM concerns to clear delinquent or foreclosed property from bank balance sheets, and sure enough 'prices' for the houses that are being sold have risen. But there's a rather worrisome unintended (we presume) consequence of this 'recovery'. As BofAML notes today, the US has shifted to renting at the dramatic expense of homeownership... From 2007 through 2012, there have been over 5 million new renters, which came at the expense of 1.2 million fewer homeowners. This shift pushed the homeownership rate to 65%, the lowest since mid-1995. The increase in renting has been driven by two key factors: 1) foreclosures forced many homeowners to become renters, and 2) tight credit conditions with an uncertain outlook for home prices encouraged households to rent.

MBA: Mortgage Refinance Applications Decline as Mortgage Rates Increase - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey: The Refinance Index decreased 5 percent from the previous week to the lowest level since November 2011. The seasonally adjusted Purchase Index increased 2 percent from one week earlier... “Mortgage rates increased by the most in a single week since 2011, and refinance application volume dropped to its lowest level in almost two years. However, applications for conventional purchase loans picked up by more than 3 percent over the week, and total purchase applications were 16 percent higher than one year ago, indicating that homebuyers are not yet dissuaded by the increase in mortgage rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.46 percent, the highest rate since August 2011, from 4.17 percent, with points decreasing to 0.35 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. With 30 year mortgage rates near 4.5%, refinance activity has fallen sharply, decreasing in 6 of the last 7 weeks. This index is down 42% over the last seven 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.

10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? -  My friend Michael Becker, a mortgage broker at WCS Funding Group writes ... As bad as Treasuries are selling off, the sell off in MBS is much worse. I looked at some charts this morning and the prices of Fannie Mae and Ginnie Mae coupons continue to drop. The FNMA 3.5 coupon was trading at 106 22/32 on May 2nd, and this morning it was trading at 99 9/32. Ginnie Mae is worse. In terms of interest rates, I locked an FHA purchase on May 2nd and the rate was 3.25%, and that rate carried a 2 point lender credit to help pay for closing costs. In order to get the same deal today, (a 2 point lender credit) the rate would have to be 5% today.  This as an apples to apples comparison illustrates that FHA rates have increased 1.75% in 7 weeks.  You could get 4.625% on an FHA purchase, but you wouldn't get any closing cost help. I was locking well qualified borrowers at 3.50% on conventional loans (Fannie Mae) at the beginning of May, and now they are looking at 4.875%. Most of this pain has occurred since the FOMC meeting last Wednesday, and I am sure the talking heads at CNBC have no idea how much interest rates have spiked.  They keep saying that housing is strong enough to withstand this rise in rates, but I think they are deluding themselves. 

Zillow 30-Year Fixed Mortgage Skyrockets By Massive 50 bps In One Week To 4.38%, Most Since 2011 - The 30-year fixed mortgage rate on Zillow(R) Mortgage Marketplace is currently 4.38 percent, up fifty basis points from 3.88 percent at this time last week. The 30-year fixed mortgage rate hovered between 3.82 and 4 percent late last week, before spiking up near the current rate over the weekend. This represents the highest rate on Zillow Mortgage Marketplace since July 2011. "Last week rates spiked up to levels not seen since July 2011 after Federal Reserve Chairman, Ben Bernanke reiterated the Fed's commitment to scale back its stimulus program later this year," said Erin Lantz, director of Zillow Mortgage Marketplace. "This coming week, we expect rates will be volatile as the market recalibrates and determines whether we've reached a new plateau near 4.5 percent or whether this week's rate spike was an overreaction that warrants a downward adjustment."

Rates and the US housing market -  Even before last week’s FOMC meeting and the subsequent spike in long-term rates, the US refinancing wave was already receding, the result of both the higher rates and the limited pool of eligible borrowers. Refinancing showed further unsurprising signs of decline in Wednesday’s mortgage application numbers, even as the number of applications for home purchases continued its steady uptick. (Though be careful with the dual Y axes above, and see Calculated Risk for more). We don’t mean to be entirely dismissive of the prevailing higher rates. The economy didn’t need any shade thrown at one of its few bright spots, especially with the continued fiscal drag and steady-but-unimpressive employment gains. Low rates not only spur along housing but also make credit more affordable for buying durable goods and automobiles, purchases of which often accompany newly formed households. And there isn’t much evidence (yet) to show that the fundamental supply-side problems we previously discussed have been mitigated, as such improvements would partly depend on the housing market’s continued rebound and wider improvements in the economy. But at least the higher rates have arrived at a time when the housing market had favourable momentum.

The Dark Side Of Soaring Rates: A Housing Market That Lost 16% Of Its Value In Under Two Months - A week ago, we provided a simple, irrefutable analysis of "What The Recent Surge In Rates Means For Your Home Purchasing Power" in which we demonstrated how the average home affordability goes down (due to the declining marginal purchasing power in a rising rate environment) as interest rates (for mortgages and all rate-sensitive products) go up. What this means is that all else equal, absent a massive increase in disposable income (especially when the opposite is happening to disposable income), the average home affordability plunges as rates go up. So here is the benchmark price-rate curve updated for a reality, in which the national average 30 Year fixed has exploded from 3.40% on May 1 to a whopping (for the New Normal) 4.875% as of today for Wells Fargo customers. The matching affordability collapse: from $450K to $378K, or a stunning 16% equilibrium price drop in under two months!

Mortgage Rate Shock Likely to Dent the Housing Market -  Yves Smith - As regular readers know, your humble blogger, along with a lot of investors, was taken by surprise when the typically dovish Bernanke not only started using the taper word a month ago, but then made the demise of Fed heroics sound even more imminent by talking about higher unemployment “thresholds,” namely 7%, than had been voiced previously. And the reading of Fedwatchers like Tim Duy and (even before the FOMC statement) James Aitken is that the central bank wants out of the QE business sooner rather than later. The underpinnings of this spotty and tepid recovery have been improving consumer confidence due to recovery in home prices and a rising stock market. With home price appreciation being touted as a sign that all is better, the peculiar dismissal by Bernanke of the recent sharp rise in mortgage rates is another sign of how disconnected the Fed is. I have two friends who are looking for homes and both were freaked out by the rate rise even prior to the latest ratchet up since the FOMC meeting. The increase might well produced a last hurrah as buyers rush to get deals done out of fear that interest rates are running away from them. But several posts tonight give concrete evidence of how much damage has likely already been done to the housing “recovery,” although it will take several months to translate into price and activity data.  First is from Housing Wire, in which Fannie Mae’s chief economist takes issue with the notion that 4% mortgage rates is nothing to be concerned about:Fannie Mae Chief Economist Doug Duncan said the concern should be less about what the rates have risen to and more about the speed at which they are rising.  Duncan noted that in 1994, for instance, rates rose 2% over a 12-month period, resulting in a huge impact on home prices, which fell significantly.  “If the rise happens rapidly, it tends to have an impact,” said Duncan, who added that once rates rise 100 basis points, home sales may begin to slow.

Goldman on The Impact on GDP of Higher Mortgage Rates - A few brief excerpts from a research note by economists at Goldman Sachs: The Drag from Higher Mortgage Rates: The rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption. Complementing our past research on the impact of mortgage rates on various aspects of housing, we use a vector autoregression (VAR)-based approach to trace out the potential impact of the rise in mortgage rates. This analysis points to a manageable total impact on real GDP growth over the coming year of roughly two tenths of a percentage point. The direct effects of higher mortgage rates are likely to be larger in magnitude than the indirect effects.  Our estimate is subject to uncertainty. On the one hand, factors other than housing affordability―such as origination capacity constraints and borrower credit quality issues―are at present probably more important constraints than they have been historically. As a result, the sensitivity of housing indicators to changes in mortgage rates may be lower than historical estimates suggest. On the other hand, for technical reasons the nature of our statistical analysis may understate the magnitude of the potential impact.

US Mortgage Rates Skyrocket - from naked capitalism Yves here. So what is the Fed going to do, now that it has delivered a big blow to the nascent housing recovery? Risk its credibility by beating a serious retreat on taper talk, or keep whistling in the dark and wait and see what happens to July and August home sales (and remember, most housing market data is reported with a nearly two month lag…)? From Bloomberg: The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012. The average 15-year rate climbed to 3.5 percent from 3.04 percent. Here’s the chart: In short, the Fed has just tightened by five rate rises in two months. Why so fast? Well, as we know, central banks did blow a little bond bubble and deflating it is hard to control. For instance, foreign investors are fleeing the 30 year Treasuries that determine mortgage rates: Still, the leap in rates is not as bad as it looks for the reason that most US mortgages are fixed-rate for the life of the loan. But it is a sore test for new lending which is showing its effects. From the MBA: Mortgage applications decreased 3.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 21, 2013.

Bubble, Bubble, Toil And Trouble - There was a brief but frenzied sell-off in the markets last week when Ben Bernanke intimated that one day quantitative easing will end and short-term interest rates will rise. But of course the damage has already been done, another sad turn of events which is most clearly seen in the U.S. housing market. I've devoted some time to this issue lately, and it is still worth writing about because denial regarding "the recovery" is still running high. Of course that's not unusual in human affairs. I was especially interested in CNN Money's Surging home sales raise new housing bubble fears (June 20, 2013).  The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth," said Lawrence Yun, the chief economist for the National Association of Realtors. He said there needs to be a 50% increase in home building. Whoa! I think we need to look at new housing starts. Are you a gambling man? Would you say the odds are pretty good that there will be a 50% increase in new home starts and completions in the next year?  Don't answer that. That's a rhetorical question

LPS: House Price Index increased 1.5% in April, Up 8.1% year-over-year - The timing of different house prices indexes can be a little confusing. LPS uses April closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: LPS' April HPI Report: Home Prices Up 1.5 Percent from March, 8.1 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on April 2013 residential real estate transactions. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.The LPS HPI is off 18.2% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 47.7% from the peak in Las Vegas, 39.6% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and at a new peak in Austin, Dallas and Denver!  (Also, on the state level, new peaks for the Colorado and Texas).

Case-Shiller: Comp 20 House Prices increased 12.1% year-over-year in April - S&P/Case-Shiller released the monthly Home Price Indices for April ("April" is a 3 month average of February, March and April prices). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities). Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.  From S&P: Home Prices Set Record Monthly Rise in April 2013 According to the S&P/Case-Shiller Home Price Indices Data through April 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices ... showed average home prices increased 11.6% and 12.1% for the 10- and 20-City Composites in the 12 months ending in April 2013. From March to April, the 10- and 20-City Composites rose 2.6% and 2.5%.  All 20 cities and both Composites showed positive year-over-year returns for at least the fourth consecutive month. Atlanta, Dallas, Detroit and Minneapolis posted their highest annual gains since the start of their respective indices. On a monthly basis, all cities with the exception of Detroit posted positive change.“The 10- and 20-City Composites posted their highest monthly gains in the history of S&P/Case-Shiller Home Price Indices,” “Thirteen cities posted monthly increases of over two percentage points, with San Francisco leading at 4.9%." The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).  The Composite 10 is up 12.8% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 24.8% from the peak, and up 1.7% (SA) in April. The Composite 20 is up 13.5% from the post-bubble low set in Jan 2012 (SA).  The second graph shows the Year over year change in both indices.

Case-Shiller Index Shows Home Prices Ballooned to the Stratosphere in April 2013 - The April 2013 S&P Case Shiller home price index shows a 12.1% price increase from a year ago for over 20 metropolitan housing markets and a 11.6% change for the top 10 housing markets from April 2012.  This is the highest yearly gain since March 2006.  Prices are on fire exceeding the jacked up price pace of the housing bubble.  The monthly jump in the composite-10 was an astounding 1.8% and 1.7% for the composite-20, seasonally adjusted.   Not seasonally adjusted, the monthly increases were 2.6% and 2.5% for the 10- and 20-City Composites respectively.  These are the highest annual gains in seven years,  Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data.  San Francisco is now up 24%, back to it's have and have not housing market where one needs to be a millionaire to own a home.  Fourteen of the 20 cities saw double digit annual home price increases in their respective areas, four above 20%  Double digit gains imply the housing bubble has clearly been re-established.  S&P reports the not seasonally adjusted data for their headlines.   Housing is highly cyclical.  Spring and early Summer are when most sales occur.  See the bottom of this article for their reasoning. All city home prices have had positive gains for four months in a row.   For the month, the not seasonally adjusted composite-20 percentage change was 2.5% whereas the seasonally adjusted change for the composite-20 was 1.7%.   The monthly not seasonally adjusted composite-10 percentage change was 2.6%, whereas the seasonally adjusted composite-10 showed a 1.8% increase as well.  There were record monthly gains for Atlanta, Dallas, Detroit and Minneapolis, not seasonally adjusted. The below graph shows the composite-10 and composite-20 city home prices indexes, seasonally adjusted.  Prices are normalized to the year 2000.  The index value of 150 means single family housing prices have appreciated, or increased 50% since 2000 in that particular region.  Case-Shiller indices are not adjusted for inflation.

Housing Prices Show Biggest Jump in 7 Years — But Here Come Rising Interest Rates! - U.S. single-family home prices, as measured by the S&P/Case-Shiller Home Price Index, jumped 12.1% in April from the previous year. This is the fastest increase since 2006 for the 20-city index, which still shows home prices about a quarter off the highs of the real estate bubble.The strength of the increase was broad-based, with S&P Dow Jones Indices analyst David Blitzer noting in a statement that thirteen cities posted monthly increases of more than two percentage points. Those range from Charlotte (up 2.0% from the previous month, and up 7.3% year-over-year) to San Francisco (up a blazing 4.9% from the previous month, and 23.9% year-over-year). The index, which reflects April data, continues a streak of improvement lasting several months. Even Detroit, the one city that was flat on a monthly basis, has shown a rise of 19.8% year-over-year.  So the big question now is: Will the party go on if interest rates continue to rise? A double-digit bump in interest rates in June should in theory affect potential homebuyers who are shopping for houses this summer. However, with the data lag of Case-Shiller — remember we just saw April numbers — a slowdown isn’t likely to show up until fall. Until then, the housing market should continue to rocket. If you think that’s a strong verb, some more numbers: Las Vegas up 22.3% year-over-year; Phoenix up 21.5%, and Atlanta — never really a victim of real estate bubble speculation in the 2005-2006 peak — up 20.8%.

A Look at Case-Shiller, by Metro Area -- Home prices extended a winning streak of year-over-year gains, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 12.1% in April from a year earlier. All 20 cities posted year-over-year gains for January, February, March and April. Prices in the 20-city index were 2.5% higher than the prior month. Adjusted for seasonal variations, which reflect a traditional stronger spring selling season, prices were 1.7% higher month-over-month. No city posted a monthly decline, though prices in Detroit were flat. Economists see rising home prices as an important economic driver, though they note that prices remain below the peak. “It is worth highlighting that home prices remain 26% below their precrisis peak, suggesting that it may take quite some time for home prices to fully retrace the fall. Nevertheless, the ongoing climb in home prices is a highly positive force for underwater homeowners,”  Read the full S&P/Case-Shiller release

Real House Prices, Price-to-Rent Ratio, City Prices relative to 2000 - Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.  This is why economists also look at real house prices (inflation adjusted).The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through March) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q3 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to February 2004 levels, and the CoreLogic index (NSA) is back to April 2004.  The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q2 2000 levels, the Composite 20 index is back to September 2001, and the CoreLogic index back to October 2001. In real terms, house prices are back to early '00s levels.This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to Q2 2000 levels, the Composite 20 index is back to February 2002 levels, and the CoreLogic index is back to April 2002. In real terms - and as a price-to-rent ratio - prices are mostly back to early 2000 levels.

Zillow: Case-Shiller House Price Index expected to show over 12% year-over-year increase in May - The Case-Shiller house price indexes for May will be released Tuesday, July 30th. Zillow has started forecasting Case-Shiller a month early - and they have been pretty close. Note: Zillow makes a strong argument that the Case-Shiller index is currently overstating national house price appreciation. Zillow Predicts Another 12% Annual Increase in Case-Shiller Indices for May The Case-Shiller data for April came out [Tuesday] and, based on this information and the May 2013 Zillow Home Value Index (released last week), we predict that next month’s Case-Shiller data (May 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) increased 12.1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) increased 12.2 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from April to May will be 1.3 percent for the 20-City Composite and 1.6 percent for the 10-City Composite Home Price Indices (SA). ... The Case-Shiller indices are giving an inflated sense of national home value appreciation because they are biased toward the large, coastal metros currently seeing such enormous home value gains, and because they include foreclosure resales. The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices — not just because of market improvements, but also because the sales are no longer distressed. In contrast, the ZHVI does not include foreclosure resales and shows home values for May 2013 up 5.4 percent from year-ago levels. We expect home value appreciation to continue to moderate in 2013, rising only 4.1 percent between May 2013 and May 2014. Further details on our forecast of home values can be found here, and more on Zillow’s full May 2013 report can be found here. The following table shows the Zillow forecast for the May Case-Shiller index.

What Caused the (Next) Housing Bubble? (Six Graphs) -  Steve Roth - Political Calculations gives us this chart of median new home prices versus median incomes over the last 46 years. The rising tip at the upper right (!) is May 2013. What do you think: sustainable? Here’s the zoomed-in version of recent years, from inside the red dashes: As they say, …new homes are, virtually by definition, at the margin for all real estate markets. Their prices are therefore especially sensitive to changes in the levels of both supply and demand in the overall market. Wow. THE RULES OF THE GAME MUST HAVE REALLY CHANGED between 2000 and 2001. They suggest it was “money leaving the U.S. stock market” and flowing into the housing market, which is no doubt somewhat true. But:

  • 1. A great deal of that dot-bomb money didn’t “go” anywhere; it simply vanished. You gotta ask: this would result in more money going into real estate, with the off-the-charts results we see above?
  • 2. Have we ever seen a stock-market crash causing a real-estate bubble? I can’t think of an instance, but I could be wrong…
  • 3. That’s your typical lump-of-money/loanable funds incoherence, ignoring the fact that the financial system creates new money and lends it to the real sector to buy houses.

I’d suggest that there was a sudden increase of availability of new money. Yeah, Greenspan spiked the punch bowl at the same time, so the money was cheaper. But I’m thinking that lending standards plummeted starting in 2001.

House Prices and Mortgage Rates - Several people have asked me about a comment from Fannie Mae chief economist Doug Duncan as quoted in a NY Times article a couple of weeks ago: In a Shift, Interest Rates Are Rising  “There’s no strong correlation between interest rates and home prices,” said Douglas Duncan, chief economist at Fannie Mae. Duncan is correct. However, a key difference now compared to earlier periods, is that there is more investor buying. And investors will compare their returns on different investments - and rising rates will probably slow investor demand for real estate, even if they are all cash buyers.   But, in general, I think rising rates might slow price increases but not lead to a decline in prices (we might see some seasonal declines). I'll post some more thoughts on the relationship between house prices and interest rates (long term readers might remember I wrote about this in 2005), but first I'd like to post a couple of graphs. The first graph shows the Corelogic House Price Index (started in 1976) and 30 year fixed mortgage rates as reported by Freddie Mac in their weekly Primary Mortgage Market Survey® . Even with mortgage rates rising sharply in the late '70s, house prices continued to increase. And there were a few spikes in interest rates (like in 2000) that didn't slow price increases.The second graph shows the same data, but with house prices in real terms (adjusted for inflation). Real prices were fairly flat in the late '70s and early '80s ... so maybe the spike in interest rates slowed price increases ... and then the economic weakness in the early '80s kept prices from rising even as mortgage rates declined.

Housing Inflation Ain’t Recovery- Check Out This Chart! - Let’s call a spade a spade, please. What we have here is housing “inflation,” hardly housing “recovery.” Housing prices are rising 10-15% per year, but nobody in the media is calling it what it is. There’s a wall of silence. We have narrowed the definition of inflation to such a degree that nothing is “inflation” unless the Fed or the BLS says so. Massive asset bubbles, particularly housing bubbles, go unrecognized by mainstream economists because they simply pretend that asset bubbles are not manifestations of inflation. Meanwhile they throw the term “recovery” around as if it actually means what it says. You want “recovery?”  This  ain’t it. The so called housing recovery is a Fed concocted dead cat bounce that will disappear along with the Fed and foreign central bank subsidized mortgage rates (which are tied primarily to the 10 year Treasury yield). Prices have risen 10% in the past 12 months and 18% in the past two years while new home demand and construction has barely moved off historic lows. As for employment in the home construction, it remains dead. ZIRP and subsidized mortgages have caused gross distortions in the housing market that fool people into thinking that there’s some kind of fundamental recovery under way. Those subsidized super low mortgage rates have driven phony demand.  As mortgage rates normalize, the phony demand will dry up.  Likewise, as fixed income investment yields return to historically normal levels, empty nesters and retirees who have wanted to downsize or cash out will soon be able to actually earn a decent return on their money. They have sat on their hands and stayed put in their old homes because the proceeds of a sale would earn zero interest.  They’ll soon have an incentive to sell. For sale existing home supply will increase just when the phony demand is vaporized.

The Next Housing Bubble Is About To Pop All Over You -- Flippers. Record home prices. Stock markets at record highs. Record low-interest rates. Just add some sad tales about young couples making $250,000 per year in Silicon Valley who still can't afford a million-dollar bungalow and you've got 2007 all over again. We cannot seem to get out of the terrible loop from real estate bust to housing bubble. Playing the residential property market is the one drug addiction that's still socially acceptable. Despite what just happened a few years ago and is still lingering in much of the country, the housing boom is back. "While flipping is re-emerging nationwide," reports this morning, "brokers say it is happening most in California, where home prices have risen sharply over the past year." Bay Area median prices have already topped a half-million dollars, which is where they were in 2007 before prices collapsed by 56 percent.

New Home Sales at 476,000 SAAR in May - The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 476 thousand. This was up from 466 thousand SAAR in April (April sales were revised up from 454 thousand). February sales were revised up from 429 thousand to 445 thousand, and March sales were revised up from 444 thousand to 451 thousand. Very strong upward revisions. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in May 2013 were at a seasonally adjusted annual rate of 476,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.1 percent above the revised April rate of 466,000 and is 29.0 percent above the May 2012 estimate of 369,000." The second graph shows New Home Months of Supply. The months of supply increased in May to 4.1 months from 4.0 months in April.   The all time record was 12.1 months of supply in January 2009.

A few comments on House Prices and New Home Sales - First on house prices, Zillow's chief economist Stan Humphries wrote this morning:  “Today’s Case-Shiller numbers may reflect where the housing market has been in some of the frothier metros, but they are not indicative of where it’s headed. The housing market worm has turned over the past few weeks – inventory levels are beginning to show signs of easing, and mortgage interest rates are creeping up. Going forward, both of these factors will help mitigate extreme price spikes caused by very strong housing demand and very low housing supply,” I agree with Humphries view on prices. I've been tracking inventory weekly, and it appears inventory levels are starting to increase (even after seasonal adjustment). Also I've heard reports from several real estate agents that the market has "slowed" (fewer multiple offer situations), even before mortgage rates increased.  I also think Humphries is correct that this will slow down price increases going forward. And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to start to close over the next few years. The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through May 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

Housing Recovery Elusive for U.S. Homebuilders - Interesting chart form Dave Wilson showing how elusive the U.S. housing market’s rebound  has been for the Homebuilders. Existing single-family homes sold at about the same pace in May as they did in January 2000, according to data compiled by the National Association of Realtors. New home sales are running a full 45% lower. One new home was sold last month for every 9.7 resales. Bill McBride of Calculated Risk observed: “Builders weren’t able to compete with the low prices of all the foreclosed properties.”

NAR: Pending Home Sales index increased in May - From the NAR: May Pending Home Sales Reach Highest Level in Over Six Years: The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 6.7 percent to 112.3 in May from a downwardly revised 105.2 in April, and is 12.1 percent above May 2012 when it was 100.2; the data reflect contracts but not closings. Contract activity is at the strongest pace since December 2006 when it reached 112.8; pending sales have been above year-ago levels for the past 25 months. .. The PHSI in the Northeast was unchanged at 92.3 in May but is 14.3 percent above a year ago. In the Midwest the index jumped 10.2 percent to 115.5 in May and is 22.2 percent higher than May 2012. Pending home sales in the South rose 2.8 percent to an index of 121.8 in May and are 12.3 percent above a year ago. The index in the West jumped 16.0 percent in May to 109.7, but with limited inventory is only 1.1 percent above May 2012. Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in June and July.

Pending Home Sales Jump 6.7% for May 2013 - Pending Home Sales increased by 6.7% in a month.  This is the highest monthly increase since May 2011 according to the National Association of Realtors.  Pending home sales have increased 12.1% from a year ago.  Pending home sales are also back to December 2006 housing bubble year levels.  The above graph shows pending home sales are really spiking up again.  Pending home sales have also increased annually for 25 months in a row. The PHSI are contracts which have not yet closed and why pending home sales are considered a future housing indicator. The PHSI represents future actual sales, about 45 to 60 days from signing. From the NAR: NAR's Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity.The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Here are the regional pending home sales from the report:The PHSI in the Northeast was unchanged at 92.3 in May but is 14.3 percent above a year ago. In the Midwest the index jumped 10.2 percent to 115.5 in May and is 22.2 percent higher than May 2012. Pending home sales in the South rose 2.8 percent to an index of 121.8 in May and are 12.3 percent above a year ago. The index in the West jumped 16.0 percent in May to 109.7, but with limited inventory is only 1.1 percent above May 2012.At the same time, mortgage interest rates just jumped to 4.46%.  This is the highest weekly increase since 1987.  Mortgage interest rates are also back up to July 2011 levels.

Vital Signs Chart: Contracts to Buy Homes Surge - One housing-market measure surged in May — but at a pace that may be hard to sustain. The Pending Home Sales Index rose 6.7% to a seasonally adjusted annual level of 112.3. That is up 12.2% from a year ago and a high last seen late in 2006. The index measures contracts, not closings. Will higher mortgage rates spur buyers into action — or keep them out of the market?

Way Too Many Americans Spend Most of Their Income on Rent -- The Harvard University Joint Center for Housing Research's annual report on the state of housing in America is out (as if we had to tell you!). The good news: the housing recovery is "well underway," with home prices up by nearly 12% in the past year; home sales were up 20% in 2012; and home improvement and construction spending are contributing positively to the economy once again.  The bad news: this is a terrible time to be poor and want to live indoors. Even worse than usual. The rental market is tightening. Homeownership rates have fallen for eight straight years. Household incomes are down over the past decade. Low-cost apartments are continually disappearing from the housing stock. And the housing picture for the poor in America is far from sunny. A few key stats: -On average, real home values for Hispanic owners plummeted nearly $100,000 (35 percent) between 2007 and 2010, while the decline for black owners was nearly $69,000 (31 percent). By comparison, average values for white homeowners fell just 15 percent over this period.

U.S. Median Wealth Only 27th in the World - As I discussed last week, U.S. median wealth per adult is lower than many other countries. To be exact, it comes in at #27 for 2012, at $38,786 per adult.  Professor Davies said it was unlikely that U.S. wealth per adult dropped by 1/4 in one year, but that the new lower estimate is more accurate.  That leaves the United States still with low levels of median wealth for rich countries. as Les Leopold reported on Alternet.  In total, it trails 20 OECD countries and six non-OECD countries. These low levels of wealth contribute, of course, to the coming retirement crisis as Americans have low levels of savings to supplement Social Security, while almost half of private sector workers have no retirement plan of any type.  A solution to the crisis will require a tremendous push politically, but otherwise millions of Americans will be condemned to poverty in their old age. Here is the list of the top 27 countries by median wealth per adult.

Warren Mosler: Consumer Borrowing Has Kept Economy Afloat, but for How Much Longer? from naked capitalism.  Yves here. Warren Mosler, who is one of the leading writers on Modern Monetary Theory, circulated an e-mail with his assessment of the state of the economy and the impact of quantitative easing and agreed to letting me publish it.  I’ve only got one area of difference with his assessment. He thinks that having ended QE will be more positive economically than some might believe because savers will have more interest income. However, like many, I have my doubts about the adjustment process. The Fed and the Administration have relied heavily on the confidence fairy (supported by a recovery in wealth levels due to super low interest rates) and as he details, deficit spending and consumer borrowing. Past tightenings have always been gradual and on the short end of the yield curve, which means the effect on long-term bond yields has similarly gradual. Here, we’ve had a sharp move in a month. ZIRP and negative real yields gave investors incentives to go for riskier assets (indeed, some argued that was the point of QE). And even though Mosler speaks of eventual benefits for investors in terms of income (ie, assets will be priced to provide decent income), they are going to suffer mark-to-market losses getting there. The wealth effect isn’t as strong for stocks as for housing, but there has to be a wealth effect for bonds as well. How will retail investors react in a world where Vanguard and Schwab give them intraday prices to bond losses?

Personal Income increase 0.5% in May, Spending increased 0.3% - The BEA released the Personal Income and Outlays report for May:  Personal income increased $69.4 billion, or 0.5 percent ... in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $29.0 billion, or 0.3 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in May, in contrast to a decrease of 0.1 percent in April. ... The price index for PCE increased 0.1 percent in May, in contrast to a decrease of 0.3 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of less than 0.1 percent. The following graph shows real Personal Consumption Expenditures (PCE) through May (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Consumer Spending in U.S. Rebounds as Incomes Increase - Consumer spending in the U.S. rebounded in May following the largest drop in more than three years, a sign the biggest part of the economy will underpin growth this quarter.Household purchases, which account for about 70 percent of the economy, rose 0.3 percent after a 0.3 percent decline the prior month that was the biggest since September 2009, Commerce Department figures showed today in Washington. Incomes advanced 0.5 percent, more than projected. The report may help ease concern about the outlook for the economic expansion after data yesterday showed household purchases rose at a slower pace than previously estimated in the first quarter. Rising home prices and an improving job market, combined with faster income gains, may help to accelerate spending in the last six months of 2013. “Consumer spending will continue to be the driver of the recovery,” said Tom Simons, an economist at Jefferies LLC in New York, who accurately predicted the gain in purchases. “The second half looks better. The labor market is continuing to improve. The housing rebound will help as well.”

Real Disposable Income Per Capita: Up Only 0.43% Year-over-Year -  Earlier today I posted my latest Big Four update featuring today's release of the May data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of hikes in 2013. The May nominal 0.41% month-over-month and 1.45% year-over-year numbers are getting us approximately back to the trend we saw in 2012 prior to the forward pull of income and subsequent plunge to manage expected tax increases. The real MoM change of 0.33 percent was not far off the nominal value thanks to the disinflationary trend in the PCE price index used to deflate the series (more on that topic here).  For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 50.5% since then. But the real purchasing power of those dollars is up only 14.8%. Year-over-year disposable per-capita income is up a meager 1.45%. But if we adjust for inflation, its only up 0.43%.

Real Disposable Income is Falling at 2008 Rates - The biggest single most important item in the GDP report yesterday was the collapse in disposable income for Americans. Most investors will focus on the drop in GDP growth for 1Q13 and view it as opening the door for the Fed to continue with QE 3 and QE 4 without any tapering in sight. After all, the markets have believed that bad economic news is good news for the markets for four years based on the belief that a weak economy will mean more money printing from the Fed. However, the real issue in the BEA’s report on GDP growth was the collapse in real per capita disposable income which fell at a annualized rate of 9.21%. That is a truly staggering collapse in incomes. The last time we say anything even close to this was in the third quarter of 2008. That was right after Lehman failed and the entire economy and stock market were melting down. Buckle up, things are getting worse in the US at a truly alarming rate.

Real Median Household Incomes: Down 0.1% in May and 0.3% Year-over-Year -  The Sentier Research monthly median household income data series is now available for May. Nominal median household incomes were up $44 month-over-month and $539 year-over-year. However, adjusted for inflation, real incomes declined $33 MoM and $177 YoY. This latest reading on real median annual household income reflects the cessation of declines in consumer prices that had been occurring since February 2013. Even though we are technically in an economic recovery, the most recent experience suggests that real median annual household income is still having difficulty gaining any solid traction. We are watching this household income series closely for signs of any sustained directional movement. As for the data itself, Sentier makes it available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The first chart below is an overlay of the nominal values and real monthly values chained in May 2013 dollars. The red line illustrates the history of nominal median household, and the blue line shows the real (inflation-adjusted value). I've added callouts to show specific nominal and real monthly values for January 2000 start date and the peak and post-peak troughs.

Personal Savings Rate Rises To 2013 High As Consumers Defer Spending Spree - There was little of note in today's May Personal Income and Spending report (aside from the now-traditional backward looking revision of Q1 data): personal spending was expected to come increase 0.3% in May, and so it did, up from a revised 0.3% drop in April. Income, however, spurted by 0.5% in the month, more than double the expected 0.2%, up from an adjusted 0.1% increase in April. The income rise was as a result of a $24 billion increase in wages, and a $31 billion rise in income on assets (interest and dividend income).  Finally $19.4 billion in personal current transfer receipts (government generosity) completed the picture of why Americans' incomes rose in May. However, despite this beat in income, spending was in line with expectations, and following the revisions of January-April data, the May 3.2% savings rate was the highest reported so far in 2013. For the Keynesians out there, this is hardly the strong indicator of consumer spending they have been looking for.

The State of the U.S. Consumer, in Charts -- Consumer spending has risen 9% since the end of the recession in mid-2009, after adjusting for inflation, half the average rate of increase in the seven previous recoveries since 1960. Following the recessions in 2001 and 1991, spending was up around 11%-12% by this point in the upturn. (See more charts gauging four years of economic recovery.)

Consumer Confidence Hits 5-Year High - U.S. consumer confidence jumped in June to a five-year high thanks to a better view on job prospects, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence rose to 81.4 this month from a revised 74.3 in May, originally reported as 76.2. The board said the June index is the highest since January 2008. Economists surveyed by Dow Jones Newswires had expected the index to fall back to 75.5. Consumer expectations for economic activity over the next six months rose to 89.5 this month from a revised 80.6 in May, first put at 82.4. The June index is the highest since February 2011. The high level suggests “faster growth consumer spending–around 3%–if consumers spend their confidence,” wrote economists at Credit Suisse. The board’s present-situation index, a gauge of consumers’ assessment of current economic conditions, increased to a five-year high of 69.2 from a revised 64.8 in May, originally reported as 66.7. Consumers see more job opportunities this month and beyond. The board’s survey showed 11.7% of consumers now think jobs are “plentiful,” up from 9.9% thinking that in May. Another 36.9% think jobs are “hard to get,” little changed from 36.4% who said that last month.

Consumer Confidence Beats Expectations, Highest Since January 2008 - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through June 13. The 81.4 reading was well above the 75.4 forecast by and 7.1 points above the May downwardly adjusted 74.3 (previously reported at 76.2). This is the highest level for this index since January of 2008.Here is an excerpt from the Conference Board report. "Consumer Confidence increased for the third consecutive month and is now at its highest level since January 2008 (Index 87.3). Consumers are considerably more positive about current business and labor market conditions than they were at the beginning of the year. Expectations have also improved considerably over the past several months, suggesting that the pace of growth is unlikely to slow in the short-term, and may even moderately pick up." Consumers' assessment of current conditions continued to improve in June. Those stating business conditions are "good" held steady at 19.1 percent, while those saying business conditions are "bad" decreased to 24.9 percent from 26.0 percent. Consumers' appraisal of the job market was also more positive. Those claiming jobs are "plentiful" increased to 11.7 percent from 9.9 percent, while those claiming jobs are "hard to get" edged up to 36.9 percent from 36.4 percent. Consumers' outlook for the labor market was also more optimistic. Those anticipating more jobs in the months ahead improved to 19.6 percent from 16.3 percent, while those anticipating fewer jobs decreased to 16.1 percent from 20.0 percent. The proportion of consumers expecting their incomes to increase dipped slightly to 15.2 percent from 15.6 percent, while those expecting a decrease declined to 14.4 percent from 15.3 percent.   [press release]

Consumer Sentiment Turns Up -- U.S. consumers feel more wealthy, which is raising optimism about the economy at the end of June, according to data released Friday. The Thomson Reuters/University of Michigan end-of-June consumer-sentiment index increased to 84.1 from a preliminary 82.7. The index is just below the nearly six-year high of 84.5 at the end of May. Economists surveyed by Dow Jones Newswires expected the end-June index to increase to 83. “Rising household wealth rather than resurgent jobs and wages was mainly responsible for the recent gains in consumer confidence,” the report said. “Gains in spending during the balance of 2013 can be expected to be more heavily concentrated than usual among upper income households, with the housing market serving as the bellwether industry,”

Michigan Consumer Sentiment: June Final Beats Expectations - The University of Michigan Consumer Sentiment final number for June came in at 84.1, up from the 82.7 preliminary reading. Today's number came in above the forecast of 82.8.  See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 1% below the average reading (arithmetic mean) and spot on the geometric mean. The current index level is at the 42nd percentile of the 426 monthly data points in this series.The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us about 15 points above the average recession mindset and 3 points below the non-recession average. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Consumers’ Hopes Running Ahead of Paychecks-  Consumers are feeling fairly cheery about the U.S. economy, according to two surveys out this week. Tuesday’s Conference Board‘s report said confidence is the highest in five years. Friday’s Thomson-Reuters/University of Michigan survey said its consumer sentiment index rebounded at the end of June from a slip earlier in the month. The index stands close to the nearly six-year high posted in May. Consumers’ hopes, however, are running ahead of their wallets. Thursday’s report on personal income showed a healthy 0.5% gain in income–but much of that came from a jump in government transfer payments after a drop in April. Wages and salaries increased a slower 0.3% in May. Paycheck gains look middling for June. Early forecasts for June payrolls, scheduled for release July 5, show economists expect about 150,000 new jobs were created this month–less than 175,000 new slots in May. The average hourly pay is forecast to rise less than a nickel. Compared to their respective year-ago levels, the confidence index has increased almost 30%, while wages and salaries are up 3.7% and total personal income up 3.3%. The Michigan sentiment report says rising wealth is propelling sentiment higher, not resurgent jobs and wages. That’s why increased optimism is concentrated among upper-income households who are more likely to own stocks and homes.

Non-inflation Denial - Krugman - Ed Kilgore owes me a big one; he sent me to Erick Erickson explaining that the Acela is the root of all evil, or something,and my eyes are still hurting. But being who I am –and given that Erickson tagged his post as being about economics — I was caught by this line: The rest of America is nervous about where their next meal and paycheck are coming from, how they are going to afford to bail their kids out of crumbling schools, and the price of a gallon of milk and loaf of bread that keep going up though Ben Bernanke tells them there is no inflation. Actually, I spend most of my time worrying about the lack of jobs and falling real paychecks. However, I like to distinguish between problems we actually have and problems we don’t — and here’s what the Bureau of Labor Statistics has to say about the prices of a gallon of milk and a loaf of bread: Of course, the BLS could be lying. But that’s tinfoil-hat territory, especially given that independent estimates of inflation closely track the official measures.

Don’t trust Washington’s inflation stats? How about the Internet’s? -- Some back-and-forth on inflation between Erick Erickson and Paul Krugman makes it a good time to trot out the above chart from MIT’s Billion Prices Project, ”an academic initiative that uses prices collected from hundreds of online retailers around the world on a daily basis to conduct economic research.” So a real-time inflation measurement for the Internet Age. And it more or less confirms what US government statistics show. Inflation remains low. As the First Trust econ team noted yesterday, “Overall consumption prices are up only 1% in the past year while core prices, which exclude food and energy, are up only 1.1%. Both are clearly below the Fed’s 2% target.” The chart below is the Fed’s preferred inflation gauge:

Yes, We Have No Inflation -- Inflation remained sluggish in May. Prices continued to rise at the slowest pace in at least half a century, up just 1.1 percent over the previous year, the Bureau of Economic Analysis said Thursday. While some other measures of inflation are rising a little more quickly, the Federal Reserve regards this one as most accurate. Slow inflation may sound like a good thing, but it’s not. Particularly not now. Economic research suggests that inflation is best in moderation. Price increases lead to wage increases, which makes it easier to repay existing debts, like mortgages, and more attractive to incur new debts, like borrowing to start a company. Inflation also functions as a kind of economic WD-40, easing shifts in the allocation of resources.  It is easier for struggling companies and industries to adjust by withholding cost-of-living increases than by seeking to impose wage cuts.  Perhaps most importantly, moderate inflation keeps the economy at a safe distance from deflation, or general price declines, which can freeze activity as would-be buyers wait for lower prices. Such a buffer would be particularly valuable now because the Fed is already stretching the limits of its ability to stimulate the economy, leaving the United States unusually vulnerable to any new shocks.

Restaurant Performance Index at 14 month high in May - From the National Restaurant Association: Restaurant Performance Index Hits 14-Month High on Positive Sales and Customer Traffic Results - Buoyed by stronger same-store sales and customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) hit a 14-month high in May. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.8 in May, up 0.9 percent from April and the third consecutive monthly gain. May also represented the third straight month that the RPI surpassed the 100 level, which signifies expansion in the index of key industry indicators.“The May increase in the Restaurant Performance Index was driven by broad-based gains in the current situation indicators, most notably positive same-store sales and customer traffic results,". The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 101.6 in May – up 1.6 percent from a level of 100.1 in April. May represented the strongest Current Situation Index reading since March 2012, and signifies expansion in the current situation indicators.

Gasoline Prices down slightly Nationally, Higher in California due to Refinery Issues - The refineries in the Midwest are back online, and gasoline prices are falling. From the StarTribune: Gas prices trend down, easing road trips Average gas prices in the Twin Cities peaked at $4.35 on May 18. By late last week, though, the average price had dropped to $3.52, lower than the national average ... However in California: Gas prices up 5 cents overnight Southern California gasoline prices are on the rise in response to a partial shutdown of a major refinery outside of Los Angeles. ... ExxonMobil confirmed the shutdown Wednesday of crude distillation units at its Torrance refinery, which has reduced production significantly from the 150,000-barrel-a-day capacity.  Oil prices were down this week, with WTI down to $93.69 per barrel, and Brent at $100.91. Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be under $3.40 per gallon. That is almost 20 cents below the current level according to

Vehicle Miles Driven: Population-Adjusted Fractionally Off the Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through April. Travel on all roads and streets changed by +1.2% (2.9 billion vehicle miles) for April 2013 as compared with April 2012. Travel for the month is estimated to be 251.1 billion vehicle miles. Cumulative Travel for 2013 changed by -0.3% (-2.7 billion vehicle miles). The Cumulative estimate for the year is 941.4 billion vehicle miles of travel. (PDF report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data and have hit new post-financial crisis lows. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Vehicle Sales in June forecast to be at highest level since 2007 -  The automakers will report June vehicle sales on Tuesday, July 2nd (next Tuesday). Here are a couple of forecasts: From Reuters: June auto sales on pace for best showing since December '07: study June auto sales are on track for their best month since before the 2008-2009 sales plunge ... J.D. Power and LMC Automotive said June sales will show a seasonally adjusted annualized rate of 15.7 million vehicles sold, up 7.6 percent from a year ago and the best showing since December 2007. From TrueCar: June 2013 New Car Sales Expected to Be Up Nearly Eight Percent According to TrueCar; June 2013 SAAR at 15.7M, Highest June SAAR Since 2007For June 2013, new light vehicle sales in the U.S. (including fleet) is expected to be 1,380,543 units, up 7.8 percent from June 2012 ... The June 2013 forecast translates into a Seasonally Adjusted Annualized Rate ("SAAR") of 15.7 million new car sales, up from 15.3 million in May 2013 and up from 14.4 million in June 2012. Based on the first five months of 2013, it appears auto sales will increase again this year, but not double digit growth like the last few years.  This suggests auto sales will contribute less to GDP growth this year than in the previous three years.

ATA Truck Tonnage Index surged 2.3% in May - Trucking activity in the U.S. picked up in May, according to the American Trucking Associations (ATA), which said its monthy truck tonnage index for the month exceeded the levels recorded in both May 2012 and April 2013. The associations' seasonally adjusted For-Hire Truck Tonnage Index — which measures trucking activity against a base of 100 from the year 2000 — was 6.7 percent ahead of May 2012 and at the highest level the ATA has recorded in the index's 13 years of existence. May was up 2.3 percent over April as well, the ATA said. "After bouncing around in a fairly tight band during the previous three months, tonnage skyrocketed in May," Mr. Costello attributed some of the increase to rising factory output, for the first time since February, and stronger retail sales. "The 6.8-percent surge in new housing starts during May obviously pushed tonnage up as home construction generates a significant amount of truck tonnage," he said. Tonnage shipped continues to outpace the number of loads hauled as heavy freight — such as housing construction materials and sand and water for hydraulic fracturing — is outperforming box trailer freight, he added.

The State of U.S. Business, in Charts - Despite stellar profits and lean payrolls, U.S. firms remain scarred by the deep downturn, surveys of businesses show. Their appetite for investing continues to be patchy and their hiring slow, a reflection of the global turbulence. (See more charts gauging the economic recovery.)

Feral Hogs Could Also Root Up Business Spending - The potential drag from higher interest rates has focused on home buying and prices. But the equity and bond markets’ negative reaction to even a hint that the Federal Reserve might ease off on buying bonds also adds risks to the outlook for capital spending. Why is capex important? In the gross domestic product accounts, business investment on equipment and software is a larger sector than residential construction (both have spin-off impacts like computer services for capex and furniture for housing). Plus, businesses that expand their operations often need to expand their staff as well. So far in this recovery, capital spending’s performance is roughly on par with that of other expansions. But despite record low interest rates and solid profit growth, companies are hardly on a spending spree. Although Wednesday’s revisions to first-quarter GDP may change the numbers a bit, business investment on equipment and software grew at less than a 5% annual rate last quarter. Second-quarter spending is shaping up to be better, but not in double-digit territory, according to Tuesday’s durable goods report. New orders for nondefense capital goods excluding aircraft–the category related to capex–increased 1.1% in May, the third consecutive modest increase. Shipments edged up 1.7% but that followed a 2% drop in April. Economists at BNP Paribas calculate on a 3-month annualized basis, shipments are up 2.7%, compared with the first quarter’s 5.8% pace.

Dallas Fed: Regional Manufacturing Activity "surges" in June - From the Dallas Fed: Texas Manufacturing Activity Surges and Outlook Improves Texas factory activity increased sharply in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose six points to 17.1, posting its highest reading in more than two years. Notably stronger manufacturing activity was reflected in other survey measures as well. The new orders index climbed to 13 in June, a level not seen since July 2011. The capacity utilization index rose to a two-year high, jumping from 6.4 to 15.3. The shipments index advanced 12 points to 15.4. Perceptions of broader business conditions rebounded strongly in June. The general business activity index rose to 6.5 after posting negative readings in April and May. The company outlook index soared 20 points to 13.3, reaching its highest level in 16 months. . The employment index was zero in June, suggesting no change in employment levels. The hours worked index moved up to 4.8 after four months in negative territory.  This was above expectations of a reading of 0.0 for the general business activity index. This is the 3rd regional Fed report for June and all were above expectations and indicated expansion.

Kansas City Fed: Regional Manufacturing contracted in June - From the Kansas City Fed: Tenth District Manufacturing Survey Fell Modestly. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity fell modestly, although producers’ expectations for future activity continued to increase. The month-over-month composite index was -5 in June, down from 2 in May but equal to -5 in April and March ... Other month-over-month indexes showed mixed results. The production index dropped from 5 to -17, its lowest level since March 2009, and the shipments and new orders indexes also fell markedly. The order backlog and employment indexes increased somewhat but still remain slightly below zero. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Final June Consumer Sentiment at 84.1, Chicago PMI declines to 51.6 - The final Reuters / University of Michigan consumer sentiment index for June decreased to 84.1 from the May reading of 84.5, but up from the preliminary June reading of 82.7.  This was above the consensus forecast of 83.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011. From the Chicago ISM:  June 2013:  The Chicago Business BarometerTM declined to 51.6 in June, the largest monthly drop since October 2008, and down from a 14-month high of 58.7 in May. The gyrations seen over the past few months are not typical for the Barometer and some of this might be attributable to the unseasonable weather conditions. Of the five Business Activity measures which make up the Barometer, four declined with only the Employment indicator posting an increase. Order Backlogs plunged deep into contraction to the lowest level since September 2009 and was the single biggest drag on Barometer. Faster Supplier Delivery times and declines in Production and New Orders also contributed to the Barometer’s weakness. PMI: Decreased to 51.6 from 58.7. (Above 50 is expansion). This was well below the consensus estimate of 55.0.

Chicago PMI: Largest Monthly Drop In Four Years - Chicago PMI ticked 51.6. Consensus was for 55.0. It's the largest monthly drop in over four years. May was 58.7. "The gyrations seen over the past few months are not typical for the Barometer and some of this might be attributable to the unseasonable weather conditions," the report says. Here's the comment from Philip Uglow, chief economist at MNI indicators: Activity dropped back in June following the large rise in May. The trend level of the Barometer has picked up since the fourth quarter of 2012, and while these latest data point to some weakening between the first and second quarter, it is too early to say if this will continue. April had hit 49.0, indicating contraction. Another sign that volatility has returned. Full text:

Chicago PMI Plummets By Most In Over 4 Years; Weather Blamed - A devastating 49.0 in April, a surge to 58.7 in May, and then a crash right back to 51.6 in June, far below the expectation of a 55.0, and just above the lowest economist forecast of 51.5. This was the biggest monthly crash in over 4 years. What's another name for this hilarious data series? Why the Baffle with BS Index of course, or Chicago PMI for short. What many saw as definitive proof of an industrial rennaissance in the May number (which only led to a huge ISM disappointment), will mean the economy stasis continues which should at least be good for the market. And since Baffle with BS must continue, look for the Mfg ISM, for which Chicago is a leading indicator, on Monday to be a solid beat. As for the PMI, fear not: it's the weather's fault.

Durable Goods Orders in May Better Than Expected -  The June Advance Report on May Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders: New orders for manufactured durable goods in May increased $8.0 billion or 3.6 percent to $231.0 billion, the U.S. Census Bureau announced today. This increase, up three of the last four months, followed a 3.6 percent April increase. Excluding transportation, new orders increased 0.7 percent. Excluding defense, new orders increased 3.5 percent.   Transportation equipment, also up three of the last four months, led the increase, $6.9 billion or 10.2 percent to $74.3 billion. This was led by nondefense aircraft and parts, which increased $6.3 billion. Download full PDF  The latest new orders number at 3.6 percent was above the forecast of 3.0 percent. Year-over-year new orders are up 7.6 percent, the highest YoY in ten months. If we exclude transportation, "core" durable goods were up 0.7 percent MoM and 2.8 percent YoY. If we exclude both transportation and defense, durable goods were up 0.4 percent MoM but up 3.4 percent YoY. The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

Durable Goods Orders Beat Expectations On Boeing Orders - The May Durable Goods data released moments ago (which like in previous instances will almost certainly be revised downward subsequently but is enough to trigger kneejerk momentum response algos) was better across the board, printing at a 3.6% increase in May on expectations of a 3.0% rise, down from an upward revised 3.6% in April. Virtually all of the pick up in new orders was due to a surge in Boeing orders, which recorded 232 new plane orders, of which however half were orders (funded by still cheap credit) for planes still in the design phase. Stripping away volatile orders for transports (of which non-defense aircraft and parts exploded by 51% in May), the remaining durable goods orders posted a far more modest 0.7% increase, which too beat expectations of an unchanged print. Will today be the day when good economic news are finally bad market news? Stay tuned.

Analysis: Durable Goods Report Looks Encouraging -- Durable goods orders came in slightly higher than expected during May. The Wall Street Journal’s Dan Loney talks with Wells Fargo economist Tim Quinlan about the report.

Vital Signs Chart: Business Spending up in May - Durable-goods orders rose 3.6% in May, largely on brisk demand for airplanes. New orders for nondefense aircraft and parts surged 51% last month from April. Inside the report, the details were solid but not stellar. Orders for nondefense capital goods, excluding aircraft, which is a proxy for business spending, rose 1.1% to a seasonally adjusted value of $68.29 billion.

The ’’Real’’ Goods on the Latest Durable Goods Data -- Earlier today I posted an update on the May Advance Report on April Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data. Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods. Now we'll leave Transportation in the series and exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at a more concentrated "core" durable goods orders. Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

More Thoughts on Patents and Copyrights - Dean Baker - Since my comments on Greg Mankiw's defense of the one percent prompted so much response, I thought I should add some clarification on the treatment of patents and copyrights. First off, my main point is that these are government policies designed to meet a public purpose (i.e. promoting innovation and creative work), not natural rights that are an end in themselves. In this sense altering them does not raise questions of rights as would restricting the freedom of speech or assembly. Those who like to point to the constitutional origin of these forms of property should note where patents and copyrights appear in the constitution. They are listed as a power of Congress along with other powers, like the power to tax. The constitution authorizes Congress to create monopolies for limited periods of time "to promote the Progress of Science and useful Arts." In this sense, patents and copyrights are explicitly linked to a public purpose. If it were determined that patents and copyrights are not the most efficient means for promoting innovation and creative work, and therefore Congress decided to stop authorizing these monopolies, individuals would have no more constitutional basis for complaint than if Congress decided that it didn't need to raise taxes. Once we recognize that patents and copyrights are policies to promote innovation and creative work then the question is whether they are best policy and if so, are they best structured now for this purpose. Neither assumption is obvious and I would argue that the latter is almost certainly not true.

Private-Sector Group Picks Up Labor Report Hit by Spending Cuts - Federal spending reductions are leading the Labor Department to cut a program that tracks international labor data. But a private-sector research group said Thursday it would pick up right where the government left off. The Conference Board this summer will take over the study and release of data that looks at manufacturing productivity, unit labor costs, consumer prices, wage rates and employment and unemployment data for 34 countries. It’s used to assess U.S. economic performance relative to other countries and evaluates the competitiveness of the U.S. in international markets. The organization said it will make the data available to the public at no cost.The Labor Department has said it is plans to shut to down its International Labor Comparisons program after across-the-board spending cuts, known as the sequester, required all federal agencies to cut their budgets. The report does not have market implications like the larger employment report the agency releases at the beginning of each month.

The Slow Jobs Recovery in Charts - The recession ended four years ago. But for many job seekers, it hasn’t felt like much of a recovery

Weekly Initial Unemployment Claims decline to 346,000 - The DOL reports: In the week ending June 22, the advance figure for seasonally adjusted initial claims was 346,000, a decrease of 9,000 from the previous week's revised figure of 355,000. The 4-week moving average was 345,750, a decrease of 2,750 from the previous week's revised average of 348,500.The previous week was revised up from 354,000. 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 345,750. The 4-week average has mostly moved sideways over the last few months.  Claims were close to the 345,000 consensus forecast.

Weekly New Unemployment Claims at 346K, In Line with Forecasts - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 346,000 new claims number was a 9,000 increase from the previous week's 355,000 (an upward revision from 354,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell by 2,750 to 345,750. Here is the official statement from the Department of Labor: In the week ending June 22, the advance figure for seasonally adjusted initial claims was 346,000, a decrease of 9,000 from the previous week's revised figure of 355,000. The 4-week moving average was 345,750, a decrease of 2,750 from the previous week's revised average of 348,500.  The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 15, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 15 was 2,965,000, a decrease of 1,000 from the preceding week's revised level of 2,966,000. The 4-week moving average was 2,973,250, a decrease of 9,250 from the preceding week's revised average of 2,982,500.  Today's seasonally adjusted number close to the consensus forecast of 345K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

Americans Support Job Creation To Fix Crumbling Infrastructure - Seventy-two percent of Americans say they support spending government money to put people to work on urgent infrastructure repairs, according to a new survey by Gallup. The same number say they would support a law that would spend government money to create 1 million new jobs. Over 90 percent of Democrats, about 70 percent of independents, and a majority of Republicans support these job creation policies.While an earlier poll showed higher support for these policies when government spending wasn’t mentioned, the increase was only three to five percentage points, which “suggests Americans’ support for job creation outweighs concerns they may have about government spending,” Gallup concludes. Nearly 80 percent also support lowering taxes for businesses and manufacturers who create jobs in the U.S.Recent bridge collapses are just one symptom of the need to invest in U.S. infrastructure. The country got an overall D+ grade from the American Society of Civil Engineers. To raise that grade to a B, it would need to spend $3.6 trillion on upgrades by 2020, yet it is only expected to spend about $1.6 trillion. If that gap in spending isn’t closed, the country will not just risk unsafe infrastructure but lose $3 trillion in GDP and 3.5 million jobs. Meanwhile, the unemployment rate still stands at 7.6 percent. Instead of spending more money to get the economy going, the U.S. has turned to austerity, which has reduced GDP and lowered the outlook for growth.

Just Released: Are Recent College Graduates Finding Good Jobs? - NY Fed - Stories abound about recent college graduates who are struggling to find good jobs in today’s economy, especially with student debt levels rising so quickly. But just how bad are the job prospects for recent college graduates when one moves beyond anecdotes and looks at the data? How widespread is unemployment? And how common is it for college graduates to work in a job that doesn’t require a bachelor’s degree—that is, how widespread is underemployment? We examined these questions at today’s economic press briefing at the Federal Reserve Bank of New York.    In our presentation, we show that both unemployment and underemployment for young graduates are in fact higher now compared to, say, a decade ago. At the same time, however, we show that it is not unusual for newly minted college graduates to take some time to transition into the labor market and find jobs that utilize their education. In other words, young graduates typically have relatively high unemployment and underemployment rates as they start their careers, but those rates drop pretty rapidly by the time they hit their late twenties.

Some Unemployed Keep Losing Ground - Nearly 12 million Americans were unemployed in May, down from a peak of more than 15 million, but still more than four million higher than when the recession began in December 2007. Millions more have given up looking for work and no longer count as unemployed. The share of the population that is working or looking for work stands near a three-decade low. Yet the job market is recovering. The unemployment rate has fallen to 7.6% from a peak of 10%. Employers have created 5.1 million jobs since the end of the recession and 6.3 million jobs since the labor market bottomed out in early 2010. And for all the attention on monthly ups and downs, job growth has held to a fairly steady pace of about 175,000 jobs a month over the past two years. The trouble is that the pace is still far too slow to fill quickly the huge hole created by the recession. Even if the rate of hiring doubled, it would take more than three years to get employment back to its prerecession level, after adjusting for population growth, according to estimates from the Brookings Institution's Hamilton Project. "At 175,000 jobs per month, we're years away," said Adam Looney, a Brookings economist. "It just sort of speaks to how far we fell during the recession and how slow we've been to recover."

The Future of Fair Labor - NYT - President Franklin D. Roosevelt signed the Fair Labor Standards Act to give a policy backbone to his belief that goods that were not produced under “rudimentary standards of decency” should not be “allowed to pollute the channels of interstate trade."  John F. Kennedy signed its most important amendment, the Equal Pay Act, which guaranteed women and others equal pay for equal work. Despite this noble history, today the act faces an uncertain future, thanks to a series of disconcerting shifts in the way we think about work in America.  The problem is indicative of the moral and political slipperiness of our time. A large and growing number of employers willfully classify their employees as “exempt” from the law by shifting their jobs, but not their pay, to administrative, executive and professional categories. Being exempt allows employers to ignore pesky things like overtime or minimum wages, since these are salaried, not hourly workers. Lawsuits over back overtime pay resulting from misclassifications have gone through the roof.  If the line between exempt and nonexempt workers has become unfairly blurred, the line distinguishing employee and independent contractor has faded to near invisibility. We are moving toward the “1099 economy,” named after the tax form provided to independent contractors, a classification that often walks the line of legality.

This week in the War on Workers: If you’re not born rich, how do you rise? - Matt Bruenig looks into the important question of what's more important: a college degree or being born rich? Of course, you're more likely to go to college if you were born rich, but it doesn't stop there. In the chart above, the red bars are people who didn't go to college and the blue bars are people who did. They're grouped by the income quintile they were born into, and within each bar you see where they ended up. Bruenig lays out the results: Look at the red bar furthest to the right. That is the bar describing where kids born into the richest fifth who do not get a college degree wind up. Notice that 25% of those kids still wind up in the richest fifth. Now look at the blue bar furthest to the left. That is the bar describing where kids born into the poorest fifth who do get a college degree wind up. Notice that only 10% of those kids wind up in the richest fifth.  So, you are 2.5x more likely to be a rich adult if you were born rich and never bothered to go to college than if you were born poor and, against all odds, went to college and graduated. The disparity in the outcomes of rich and poor kids persists, not only when you control for college attainment, but even when you compare non-degreed rich kids to degreed poor kids!

Wages falling - Real wages decline by Kenneth Thomas. Speaking of inequality by Kenneth Thomas. Wage stickiness coming unglued. And an op ed by David Cay Johnston this last week: Breaking news alert! Wages fell at the fastest rate ever recorded during the first quarter of this year, the government’s Bureau of Labor Statistics reported. Hourly wages fell 3.8 percent in the first quarter, the biggest drop since the BLS began tracking compensation in 1947. Productivity rose half a percentage point. The result was that what economists call “labor unit costs” fell 4.3 percent. In plain English, that means paychecks overall shrank, but work output grew. If you are a business owner, that is news worthy of a toast with a bottle of the finest Cristal champagne, which at $595 is more than the $518 that a median-wage worker earns in a week. If you have not heard this news about plummeting wages, it is not surprising. Except for right-wing websites, and an item at the liberal Huffington Post, the June 5 announcement went unreported.

No, real wages are not falling - About a month ago, I came across a post on Mish's blog claiming we were DOOMED because real wages had plummeted by 5% in the first quarter of this year alone, based on productivity and unit labor costs. As I normally do, I actually clicked through on the link to find the source data. A few minutes of poking around showed decisively that Mish's reasoning was fallacious. Since a lot of his own commenters called him on it, I didn't see any need to pile on.  Unfortunately, this claim has just come back big time, being touted by a Pulitzer Prize winning journalist, David Cay Johnston, and picked up by Prof. Brad DeLong. It is utter nonsense. I left a couple of comments at Prof. DeLong's blog, but I wanted to back up my claims with the graphical truth.  To begin with, as the BLS makes clear, it's definition of "wages" in this report includes non-standard compensation, i.e., things like bonuses. This turns out to be important, because when you examine the table helpfully provided with the report, particularly the sixth column from the left, "real compensation per hour," you see the -4.6% statistic for the first quarter of this year touted by Mish and Johnston. And literally directly below it, you see the increase of +7.8% for the 4th quarter of last year. Don't believe me? Here's a copy of the table:

Sales, Office Workers Had Higher Benefits Than First Thought - The U.S. Labor Department fixed its flub in employment compensation data. And it turns out benefit increases didn’t slow to historical lows to start the year. When the Labor Department initially published its employment cost index for the first quarter of 2013 it did so with a major caveat: the agency discovered an error in benefits data for sales and office workers and, as a result, broader compensation figures could be inaccurate.The government issued three quarters of revised employment cost data late Wednesday, correcting errors it disclosed April 30.The revised figures show the employment cost index advanced 0.5% during the first three months of the year, an upward revision from the 0.3% gain initially reported. Benefits for all workers increased by 0.6% during the quarter, the Labor Department said, a major recasting from the previously stated 0.1% increase. The initially reported gain in benefits would have been the smallest advance since 1999. The new figure is essentially in line with quarterly increases posted since late 2011.

76% of Americans are living paycheck-to-paycheck - Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings, according to a survey released by Monday. Fewer than one in four Americans have enough money in their savings account to cover at least six months of expenses, enough to help cushion the blow of a job loss, medical emergency or some other unexpected event, according to the survey of 1,000 adults. Meanwhile, 50% of those surveyed have less than a three-month cushion and 27% had no savings at all.Even more disappointing; The savings rates have barely changed over the past three years, even though a larger percentage of consumers report an increase in job security, a higher net worth and an overall better financial situation. So why aren't Americans saving more? Last week, online lender CashNetUSA said 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn't enough money left over for saving more.

US: Desperately Seeking Income - Westpac Institutional Bank yesterday released a sobering note (below) on the ongoing income squeeze taking place in the US. In spite of the current cyclical economic recovery, the recent fall in the US unemployment rate has been driven almost entirely by lower labour force participation (see next chart). In fact, the overall number of jobs is still 2.5 million below its peak, the employment-to-population ratio has also barely moved off its lows, and aggregate hours worked is yet to recover lost ground (see next chart). To make matters worse, real average hourly wages are still 0.5% lower than their June 2009 level, with real weekly wages (inflation-adjusted take-home pay) having grown by only 1.3% over the past four years (see next chart). And while households have benefited from lower interest rates, this boost to discretionary incomes has been offset by rising health care and gasoline costs, meaning that real discretionary incomes have not grown since 2006 (see next chart). This all leaves Westpac to conclude: It is little wonder then that consumption growth has failed to accelerate in a significant and sustainable fashion. Not only do households continue to be weighed down by large historic debt burdens, they are having their purchasing power eaten away by price rises for life’s ssentials.

We Were Middle-Class Once, And Young - Paul Krugman - As I noted the other day, Greg Mankiw (pdf), in his defense of the one percent, seems oddly oblivious, among other things, to the extent to which America has changed since he was young. We are a much more unequal society now, and as a consequence arguably one with a lot less intergenerational mobility too. I argued this impressionistically — but it turns out that Miles Corak has a paper for the same volume making the argument with lots of evidence. For example, here’s data on “enrichment expenditures”, defined as “the amount of money families spend per child on books, computers, high-quality child care, summer camps, private schooling, and other things that promote the capabilities of their children”: .. Not only do the affluent spend much more on their children, but the gap has grown a lot since Greg and I were young. Maybe all that spending is wasted — but I doubt it. We have become both a more unequal society and a society with more unequal opportunities.

70 Percent of Americans 'Emotionally Disconnected' at Work: Shocking Poll Reveals Workforce Zombieland - If you thought that Americans who kept their jobs during the Great Recession were glad to be working, you would be dead wrong. According to a report, 70 percent of American workers are “emotionally disconnected” at work, with nearly one in five employees “actively disengaged.” It’s zombieland out there for the American workforce.  Gallup’s ongoing “State of the American Workforce” survey reveals that America is largely a nation of working automatons, with most people not feeling emotional ties to what they do and sizeable numbers actively seeking to sabotage their colleagues and managers.   Nearly one in five hates work so much they sabotage their employers. “These latest findings indicate that 70 percent of American workers are ‘not engaged’ or ‘actively disengaged’ and are emotionally disconnected from their workplaces and less likely to be productive,” the pollers said. “Currently, 52 percent of workers are not engaged, and worse, another 18 percent are actively disengaged in their work.” Which Americans hate their jobs the most? Educated young men appear to be the least committed to their employer, Gallup said, adding that lower-paying service sector jobs also have large percentages of alienated workers. In contrast, women are more loyal and attentive workers, as well as people who are at the beginning and end of their work lives.

Prepaid and Payroll Cards Get a Lawsuit - Every day we have outrage after outrage against the U.S. worker and middle class.  There is so much economic injustice, it's hard to keep up.  Yet some stories are so outrageous you'll swear out loud and scare the dog.  Such is the story of McDonald's workers being paid by debit cards instead of checks, forced to do so.  An McDonald's ex-employee just sued over it: The franchise required employees to accept payment on a J.P. Morgan Chase payroll card. But the card, she contends, imposes fees on virtually every transaction, creating a monetary and physical barrier to her hard-earned cash. Gunshannon worked less than a month at the Shavertown McDonald's location when she learned that the franchise required employees to accept payment on a J.P. Morgan Chase payroll card. But the card, she contends, imposes fees on virtually every transaction, creating a monetary and physical barrier to her hard-earned cash. Among the costs, according to her lawsuit: $1.50 for an ATM withdrawal, $5 for over-the-counter cash withdrawals and $1 to check the balance. There's even a charge to pay a bill online or if the card is lost or stolen. As a result of all of these fees, McDonald's is paying less than minimum wage.  Now isn't this the epitome of abuse and ripoff?  Prepaid bank cards are being used from so called product rebates to welfare benefits.   Believe this or not, they even have social security benefits on prepaid cards, along with various fees of course. Yet with each card comes the great ripoff of the poor and consumers by taking out a host of fees to even use the card.

Grayson Announces Bill to Let Workers Personally Sue Bosses Who Retaliate -  In a Tuesday interview, Congressman Alan Grayson (D-FL) announced the introduction of a bill to dramatically expand the legal remedies available to non-union workers who are punished for workplace activism. “Retaliation in the workplace today when people exercise their right to organize is pervasive,” Grayson told The Nation, “and the law against it has become utterly impotent.” Grayson’s bill has been referred to the Republican-controlled House Committee on Education and the Workforce, where it is virtually guaranteed to languish. “It may not pass today,” said Grayson. “It may not pass tomorrow. But it indicates the direction that we have to go in if we’re going to preserve the middle class in America.” A spokesperson for Congressman John Kline, the committee’s chairman, did not respond to a request for comment last night. The committee is scheduled to take up two GOP bills restricting union recognition tomorrow.

Immigration and the Labor Market - Are American workers are about to experience unwelcome new competition for their jobs? The bill moving through Congress to overhaul the nation’s immigration laws, if approved, would give employers access to expanded visa programs that would admit hundreds of thousands of immigrant workers, of both low and high skills, to toil in workplaces from strawberry fields to technology companies.  The legislation also offers legal status to millions of immigrants working illegally across the country, and ultimately a shot at citizenship. But by many accounts, most American workers need not worry about the prospect of hordes of workers entering the country with an eye on their jobs. Rather, immigration is seen as more likely to leave American workers better off.The latest organization to come to this conclusion is the Congressional Budget Office, which issued a report this month concluding that the immigration bill would add six million workers to the American job market by 2023 and nine million by 2033 – increasing the labor force by 5 percent.In the beginning, the jump in immigration would hit pay, the office said. It expects that by 2023 average wages would be 0.1 percent lower, on average, than they would have been absent a change in law.  Still, most American workers would have little to worry about. Average wages would decline to a large extent because most of the new immigrant workers would be paid less than domestic laborers, pulling the average down. Most importantly, the decline would only be temporary. Wages would rise as businesses invested to take advantage of the expanded labor force. By 2033, the C.B.O. forecast, average wages would be 0.5 percent higher than they would have been without the new immigrants.

Senate Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants - Beginning in January, businesses with 50 or more full-time employees, that do not currently offer healthcare benefits that are considered “acceptable” by the Obama administration, must pay a penalty if at least one of their workers obtains insurance on a new government-run “exchange.” The penalty can be as much as $3,000 per employee.  Many employers have been preparing to cope with the new regulations by slashing the hours of full-timers to part-time status. Since “full-time,” in the language of ObamaCare, is averaging 30 hours per week, employers will, in general, receive the penalty if they have 50 or more employees who are working an average of 30 hours per week.  If the immigration bill becomes law, many employers could receive incentives of hundreds of thousands of dollars to hire amnestied immigrants over American citizens. In addition, these newly legalized immigrants could work “full-time,” an advantage for companies and businesses as well, while employers could lay off or diminish to “part-time” status, American workers.

Will Immigration Reform Work for the U.S. Economy? - But immigration policy is also economic policy, and here the case for reform is just as strong. If we care about future growth in America, our goal must be to provide a path to citizenship for the 11 million undocumented immigrants currently in the United States, as well as for future immigrants. If we get it right, a new report from the Congressional Budget office shows that everyone who lives and works in America will see significant economic gains; even conservativeeconomists are weighing in to support reform. That's because newly legalized workers will see their wages increase by 15 percent and their poverty rates decline. They will be able to invest in education and training, and apply for better jobs where those skills are actually valued. Employers will benefit from having a more productive and better educated workforce, and won't have to compete against unscrupulous firms that exploit undocumented workers. And since newly legalized immigrants will also be consumers and homeowners and taxpayers and entrepreneurs, the economyas a whole will see an increase in GDP and tax revenues; reduced deficits; greater social security solvency; and as many as 900,000 additional jobs.

An Anti-Immigrant Bill Masked as Reform - On Monday, 67 senators voted for cloture on Hoeven-Corker, a “border security” amendment to the immigration reform bill. The vote virtually guarantees that immigration reform will pass in the Senate. At the same time, it also guarantees the bill’s costs to immigrant communities will far outweigh its benefits. The refrain that Democrats and their allies have been repeating – that the immigration reform bill offers a path to citizenship for 11 million undocumented immigrants – is simply a lie. The Congressional Budget Office estimates that if the bill were to pass, roughly 4 million of the current 11.5 million undocumented immigrants would be excluded. Their estimate is overly optimistic, and it’s possible that nearly half of undocumented immigrants would never benefit from the legalization. But even those who would eventually benefit are in for a long, difficult, precarious path. Fifty Arizonas The reform bill would create a bleak future for millions of undocumented immigrants. To kick off the post-reform era, ICE would be required to organize a massive deportation campaign, rounding up 90 percent of all immigrants who overstayed a visa in the previous year. As it progressed, day-to-day life would become significantly more difficult for undocumented people than it is currently.

Advocates Oppose Senate Immigration Bill Over Escalation of Border Militarization - Yves Smith -  I am posting this Real News Network video on the Senate version of the bill in the hopes that readers will share information and views in the comments section.  At the 50,000 foot level, the various immigration bills represent a major shift in philosophy, away from immigration rules having keeping families together as a significant focus, to one far more oriented towards giving business “needs” much higher priority. One of these “needs” is the claim that there aren’t enough STEM graduates, ergo, the US must issue more HB-1 visas. The reality is, if you are even a casual reader of Slashdot, is that we haven’t had much in the way of entry level jobs in IT for ten years. Engineering grads at NC will similarly tell you that engineering salaries are on the whole so low as to not make it viable to be an engineer (the most attractive use of an engineering degree seems to be to next get a law degree and do IP related law).  This segment focuses on some elements of the Senate bill that appear to be under the radar as far as media coverage is concerned. First is that the bill does not provide a path to citizenship for a significant portion of the current illegal immigrant population (frankly that’s been a feature of past immigrant “reform” bills too; the Hispanic community may have been promised more than it was ever going to have delivered on this front). Second is that is includes a large budget to militarize the border with Mexico.

Sleeping-Giant Issue of Unpaid U.S. Interns Gets Scrutiny  - Student internships, especially common in competitive industries like journalism, finance and filmmaking, could change if the appeals court upholds the ruling of a federal judge in New York who found that moviemaker Fox Searchlight Pictures Inc. violated labor laws by not paying two of its interns. Cases have also been brought against Hearst Corp., Conde Nast Publications and the Public Broadcasting Service’s Charlie Roses how. “This question of whether private-sector internships violate the minimum wage laws has been sort of a sleeping-giant issue for many years,”. “The absence of payment is done with a wink and a nod. Interns know they better not make any trouble about this.”  According to a survey by the National Association of Colleges and Employers, a Bethlehem, Pennsylvania-based recruiting and research group, more than 63 percent of graduating seniors in 2013 either had an internship or a co-op, a position more closely tied to an educational curriculum. About 48 percent of those were unpaid, according to the survey. To critics, unpaid internships are an abuse of the labor system, a way for employers to take advantage of desperate job seekers. Supporters, including some former unpaid interns, see it as a way to get training and career contacts.

Employers Still Dodging Minimum Wage Law 75 Years After Its Passage: Seventy-five years after the passage of a landmark federal law aimed at guaranteeing workers a minimum wage, a growing number of employers have forged a way to pay less: Many are classifying full-time workers as contractors to evade the law, employment experts say. Catherine Ruckelshaus, the legal co-director of the National Employment Law Project, an advocacy group for workers, described it as the "go-to mechanism" for employers in a range of industries, including construction, trucking and janitorial services.  "It hurts workers and their families, it hurts law-abiding employers who can't compete against employers who misclassify, and it hurts the state and federal coffers, because we're losing billions of dollars in tax and insurance money," she said. In the last decade, a number of states have found that the problem is growing. A recent report by the Ohio attorney general revealed that the percentage of the state's misclassified workers climbed by more than half between 2008 and 2009. Illinois, Massachusetts and California have also found evidence that misclassification is becoming more prevalent.

Tipped Workers Deserve a Raise As Well - The word “minimum” is not difficult to define. Several synonyms immediately come to mind: lowest, least, smallest, littlest… So you might reasonably assume that the “minimum wage” is the lowest wage employers can legally pay their workers, right? Wrong. Some 3.3 million workers are paid the sub-minimum wage—often called the “tipped minimum wage”—of only $2.13 per hour. For these workers, employers may claim a “tip credit,” by converting tips received by the worker into income. So long as this tip credit, when combined with the tipped minimum wage, adds up to the minimum wage, the employer need not pay more than $2.13 per hour. If tips fall short of this amount, the employer is supposed to make up the difference. The federal minimum wage is currently $7.25 per hour, so the maximum tip credit that an employer can claim is $5.12 per hour at the federal level. The law effectively transforms tips earned by the worker into a subsidy for the employer. The tipped minimum wage hasn’t been raised in 22 years.

Forced to Work Sick? That's Fine With Disney, Red Lobster, and Their Friends at ALEC - Before jetting off last week for a trade mission at the Paris Air Show, Florida Gov. Rick Scott took a moment to sign into law a bill that banned local governments from requiring employers to offer paid sick leave. The restaurant industry and Florida's big theme parks lobbied hard for the passage of the legislation, which blocked local efforts to give low-wage workers a basic benefit that's standard in virtually every industrialized country in the world except the United States. The Florida law is the most recent in a series of victories by low-wage industries that, with the aid of Republican-led state legislatures, have succeeded in derailing or overriding measures providing this benefit to workers. Working behind the scenes in this campaign is a familiar foe of employee rights, the American Legislative Exchange Council (ALEC), whose membership includes a range of major corporations and industry groups. The corporate-funded organization's model "preemption" legislation—disallowing municipalities from enacting their own paid leave laws—have been introduced by state legislators around the country

The Expendables: How the Temps Who Power Corporate Giants Are Getting Crushed - ProPublica - In cities all across the country, workers stand on street corners, line up in alleys or wait in a neon-lit beauty salon for rickety vans to whisk them off to warehouses miles away. Some vans are so packed that to get to work, people must squat on milk crates, sit on the laps of passengers they do not know or sometimes lie on the floor, the other workers’ feet on top of them. This is not Mexico. It is not Guatemala or Honduras. This is Chicago, New Jersey, Boston. The people here are not day laborers looking for an odd job from a passing contractor. They are regular employees of temp agencies working in the supply chain of many of America’s largest companies – Walmart, Macy’s, Nike, Frito-Lay. They make our frozen pizzas, sort the recycling from our trash, cut our vegetables and clean our imported fish. They unload clothing and toys made overseas and pack them to fill our store shelves. They are as important to the global economy as shipping containers and Asian garment workers. Many get by on minimum wage, renting rooms in rundown houses, eating dinners of beans and potatoes, and surviving on food banks and taxpayer-funded health care. They almost never get benefits and have little opportunity for advancement.  Across America, temporary work has become a mainstay of the economy, leading to the proliferation of what researchers have begun to call “temp towns.” They are often dense Latino neighborhoods teeming with temp agencies. Or they are cities where it has become nearly impossible even for whites and African-Americans with vocational training to find factory and warehouse work without first being directed to a temp firm.

Redistribution and public production of public goods - In recent posts, the Importance of Distribution and Markets, Minimum Wages, and the Sins of Friedmania,  I have noted the centrality to sustainable democratic institutions of corraling the market so that the power and wealth of the elite few does not work to impoverish the many.  That means that government either rungs many programs for the benefit of the many itself--such as Medicare, Veterans' Care, public education, public utilities--or government ensures that it has systems in place to counter the power of the elite--such as redistributionist tax policies, social welfare policies that satisfy important needs such as health care and retirement security, with a good measure of "required self-help" through mandatory savings mechanisms. Mark Thoma has a recent piece in the Fiscal Times that reflects the same ideas, from a slightly different perspective.  He enumerates 7 ways that markets don't work and require government intervention: retirement savings, health care, carbon emissions, labor support, financial sector, government contracting, and economic and political power.  See Mark Thoma, 7 Important Examples of How Markets Can Fail.

GOP Economist Makes Terrible Defense of the 1% --  Gregory Mankiw plays a small but important role in the political ecology: an accomplished Harvard professor who validates Republican economic policies. It’s almost impossible to find empirical support for debt-financed tax cuts, but when George W. Bush proposed them, Mankiw and his Harvard pedigree were there to reassure that they were “fiscally responsible” and would surely lead to higher growth.  Mankiw, to his enormous credit, does not conceal his agenda. He lays his agenda on the table in the form of a paper, “Defending the One Percent,” explicating his beliefs. In so doing, Mankiw — perhaps admirably, or at least bravely — ventures completely outside his area of expertise, economics, into moral philosophy. The result is — well, there’s no other way to put it. It’s an embarrassing piece of ignorant tripe.Mankiw’s essay is a sprawling mess, but it hinges on a few key premises. One is that market wealth reflects a person’s productivity. Higher taxes on the rich, he writes, would take from “the most productive members” of society and give to “society’s less productive citizens,” and he uses "productive" and rich" as synonyms throughout. Mankiw considers the possibility that CEO compensation, which has exploded, does not perfectly reflect their economic contribution, rejects that possibility, and then pronounces himself satisfied. But there are lots and lots of ways that a person’s income does not measure his contribution to society.  We all know people in our field who earn too much, or too little, because of social connections, or race, or gender, or luck, or willingness to cut ethical corners of one variety or another. Or Paris Hilton.

Inequality and Mobility, Again - As I noted yesterday, Greg Mankiw’s defense of the top 1% maintains that while some may be unhappy with our high levels of inequality, those levels are economically benign and a result of the high value-added of the winners relative to the losers.  I challenged the latter claim in yesterday’s post.  This post briefly takes on the more serious first claim (more serious because a) it has generational implications, and b) you’ll be very hard pressed to convince some economists that pay doesn’t equal marginal product). There are at least three arguments why our historically high levels of inequality are far from benign:

–they reduce access to opportunities and thus reduce economic mobility;
–they lead to slower macro-economic growth;
–they violate basic fairness as those who are growing the size of the pie end up with smaller slices.

I have a long paper on the second concern coming out soon.  The third point is especially compelling to those who focus on the fact that median income or earnings used to track productivity growth up until around three decades ago. But the first concern is one I raised well before we had any data for it (I first worried about this in chapters of EPI’s State of Working America, of which I was a co-author of many editions).  Here at OTE, you can see references here, here, here, here.

The Rise of Disability - The share of working-age Americans receiving federal disability payments has roughly doubled in recent decades. It rose from 23 of every 1,000 workers in 1980 to 47 of every 1,000 workers in 2011. Put differently, 5 percent of the potential work force is more or less permanently out of action. That’s not good. The government likes to describe the increase mostly as the result of two demographic trends. Americans, on average, are getting older, and old people are less healthy. Also, as more women have entered the labor force, the share of female workers with health problems has climbed closer to the male average.  Independent experts, however, see substantial evidence that disability insurance increasingly serves as a safety net for people who cannot find jobs – people, that is, who might still have the ability to perform at least some kinds of work. A new research note from the Federal Reserve Bank of San Francisco estimates 40 percent to 60 percent of the growth in disability claims in recent decades is a result of the program’s attracting a broader constituency. They note that it has become easier to qualify, as claims increasingly are judged on subjective criteria. And the benefits have become more lucrative, particularly for low-wage workers. The formula is based on average wages, so rising income inequality has increased benefit payments even as the wages of most workers have stagnated. The difference is important because disability insurance is a very sticky kind of safety net.  Historically, few people who qualify for disability during downturns return to the work force during rebounds, creating a twofold drag: Fewer workers and more people depending on each of those workers to pay their taxes.

Philly Fed: State Coincident Indexes increased in 33 States in May -- From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for May 2013. In the past month, the indexes increased in 33 states, decreased in eight states, and remained stable in nine, for a one-month diffusion index of 50. Over the past three months, the indexes increased in 43 states, decreased in five, and remained stable in two, for a three-month diffusion index of 76.  These are coincident indexes constructed from state employment data. From the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In May, 37 states had increasing activity, down from 44 in April (including minor increases). This measure has been and up down over the last few years since the recovery has been sluggish.  Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. The map is mostly green again and suggests that the recovery is geographically widespread

States Are Recovering Lost Jobs at Surprisingly Similar Rates - NY Fed - The U.S. economy lost more than 8 million jobs between January 2008 and February 2010. In contrast with earlier recessions, employment declines were seen across almost all states. The extent varied: In this recession, states with big housing busts generally saw steeper job losses, especially in construction, while some states also had severe job losses driven by manufacturing declines. One feature of this employment recovery is that it’s actually been quite uniform across states—and much more uniform than in earlier recoveries. With few exceptions, states appear to be marching in lockstep.    In this post, we look at where individual states now stand in terms of the employment recovery and note some commonalities. Somewhat surprisingly, in contrast with past cycles a state’s job-growth performance in the recovery to date appears largely uncorrelated to its rate of job loss in the 2008 downturn. We also show how there’s been less dispersion across states in the current employment recovery than in past cycles, and discuss possible contributing factors.

Which States Are Winning the Recovery? - The Great Recession was not an equal-opportunity disaster. Some states (Nevada, Florida, California, Michigan) got absolutely mauled in the downturn. Others (Texas, New York), came out bruised, but not really bloodied.  As researchers from the New York Federal Reserve point out today, however, the recovery period has been a different story. Other than oil-drenched North Dakota, and to a lesser extent Texas and Utah, most states have had a fairly similar rate of employment growth since the economy bottomed out in 2009. And so the states that were in the deepest jobs hole when the recession ended are more or less still in the deepest jobs hole today. Those include Sun Belt states like California, Florida, and Arizona, as well as parts of the industrial midwest, like Michigan and Ohio.  The biggest winners: New York, West Virginia, Texas, Alaska, the Dakotas, and Utah. Or, to oversimplify a bit, Wall Street and resources.

North Carolina becomes first state to disqualify itself for federal jobless benefits - A new law taking effect in North Carolina over the weekend will cut unemployment benefits for new claims and disqualify the state from receiving federal funds for the long-term jobless. According the The Associated Press, lawmakers passed the bill in February to accelerate the repayment of $2.5 billion federal debt by cutting jobless benefits and increasing taxes on businesses. Because the bill cuts benefits to those who are newly unemployed, the state also disqualified itself from receiving federally funded Emergency Unemployment Compensation (EUC). The U.S. Labor Department has estimated that about 170,000 out-of-work North Carolinians stand to lose $700 million in EUC payments.

Bill Moyers: The United States of ALEC - video - Yves Smith: Lobbying isn’t just a Beltway phenomenon. Big businesses take their fights to the states, where they can get their way with far less fuss and expense than on the national stage. Even though the corporate-backed American Legislative Exchange Council lost important sponsors in 2012 as a result of supporting voter ID and Stand Your Ground legislation, a new Bill Moyers investigation finds it remains a powerhouse.  From the opening segment of this show: What if you were a corporation that stood to make a bundle if oil from the Canadian tar sands was imported by the United States? You’d set your sights on Washington, spread some money around inside the beltway, hire big gun lobbyists to wine and dine the politicians, and stroke the regulators to let the “free market” work, right? You’d also take your battle to the states, because if you can get laws that serve your interest in one state capitol after another, it might not matter much what Washington has to say about it. This is how ALEC has worked for years, pushing changes state by state that could never have been achieved if they had been put to the test of open and broad popular support. ALEC has been so successful working its will behind closed doors in secret, that most Americans had never even heard of it until recently. Moyers also has an interactive map that allows you to put in your address and see if your state legislator is a member of ALEC.

A Legal Blow to Sustainable Development - The decision in Koontz v. St. Johns River Water Management District will result in long-lasting harm to America’s communities. That’s because the ruling creates a perverse incentive for municipal governments to reject applications from developers rather than attempt to negotiate project designs that might advance both public and private goals — and it makes it hard for communities to get property owners to pay to mitigate any environmental damage they may cause. The court’s 5-to-4 decision, with Justice Samuel A. Alito Jr. writing for the majority, arose from an order issued by a Florida water management district denying an application by Coy A. Koontz Sr. to fill more than three acres of wetlands in order to build a small shopping center. The district made clear that it was willing to grant the permit if Mr. Koontz agreed to reduce the size of the development or spend money on any of a variety of wetlands-restoration projects designed to offset the project’s environmental effects. Because Mr. Koontz declined to pursue any of these options, the district denied the permit.  Mr. Koontz went to court and claimed that the permit denial constituted a “taking” under two Supreme Court precedents, Nollan v. California Coastal Commission and Dolan v. City of Tigard. These cases established that when the government approved a development subject to certain conditions, like a requirement that a developer dedicate an easement to the public, the conditions would be deemed an appropriation of private property unless the government could show a logical relationship and a “rough proportionality” between the conditions imposed and the projected effects of the development.

Munis Extend Worst Losses Since 2008 as Illinois Sets Sale -The U.S. municipal market is poised for its worst monthly loss since 2008, leading investors to offer a record amount of tax-exempt debt as yields surged to 26-month highs. The selloff is the backdrop for a $1.3 billion general-obligation sale tomorrow by Illinois, the lowest-rated U.S. state. Local-government debt has lost 5.1 percent this month, matching the drop in September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America Merrill Lynch data show. Institutional bondholders such as mutual funds put about $2 billion of munis up for sale yesterday, the most since at least 1996, when data compiled by Bloomberg begins. Yields on 10-year AAA munis jumped to 2.96 percent at 4 p.m. in New York, the highest since April 2011.

Illinois Pays 17% More Than in April for $1.3 Billion Muni Sale - Illinois paid 17 percent more in extra yield than in April as it issued $1.3 billion of general obligations, less than a month after lawmakers failed to bolster the nation’s worst-funded state pension system. The deal was Illinois’s first since its credit rating was cut after legislators left the state capital on May 31 without striking a deal on retirement costs. The issue included uninsured bonds maturing in July 2023 that yielded 4.46 percent, down from 4.56 percent in preliminary marketing, data compiled by Bloomberg show. The revised yield is about 1.5 percentage points more than benchmark munis. In April, the state sold 10-year securities yielding 3.3 percent, or 1.29 percentage points above AAAs.

Number Of U.S. Children Living In Poverty Grew To 23 Percent In 2011: Survey - The family is one of many in the U.S. that have been trying to raise children in the face of joblessness and homelessness. An annual survey released Monday by the Annie E. Casey Foundation shows the number of children living in poverty increased to 23 percent in 2011, after the recession. The Southwest has been hit particularly hard. New Mexico, for the first time, has slipped to worst in the nation when it comes to child well-being. More than 30 percent of children in the state were living in poverty in 2011 and nearly two-fifths had parents who lacked secure employment, according to this year's Kids Count survey. Nevada is ranked No. 48, followed by Arizona. Mississippi, which has traditionally held last place, made slight improvements in early childhood education while reading and math proficiency for some students increased, putting the state at No. 49. Overall, the report shows there have been gains in education and health nationally, but since 2005, there have been serious setbacks when it comes to the economic well-being of children.

Unemployment and family separation affect grandchildren - Researchers from The University of Western Australia and its affiliate, Perth's Telethon Institute for Child Health Research, have found the impact of long-term unemployment and separation in a family extends to future generations.  The analysis, looking at the influence of long-term joblessness and separation of grandparents on grandchildren, appears in the Annual Statistical Report 2012 of the Longitudinal Study of Australian Children, released by the Australian Institute of Family Studies. Professor Steve Zubrick, from The University of Western Australia, and Kirsten Hancock, senior analyst at the Telethon Institute for Child Health Research (TICHR), looked at two particularly disruptive family history events - joblessness and separation - and their impact on the social and emotional well-being and academic achievement of children. The research showed the effects of joblessness and separation experienced by grandparents extended beyond the outcomes of their own children (the study parents) into the next generation as well (the study children, or grandchildren).

New rules aim to rid schools of junk foods - High-calorie sports drinks and candy bars will be removed from school vending machines and cafeteria lines as soon as next year, replaced with diet drinks, granola bars and other healthier items. The Agriculture Department said Thursday that for the first time it will make sure that all foods sold in the nation's 100,000 schools are healthier by expanding fat, calorie, sugar and sodium limits to almost everything sold during the school day. That includes snacks sold around the school and foods on the "a la carte" line in cafeterias, which never have been regulated before. The new rules, proposed in February and made final this week, also would allow states to regulate student bake sales. The rules, required under a child nutrition law passed by Congress in 2010, are part of the government's effort to combat childhood obesity. The rules have the potential to transform what many children eat at school. While some schools already have made improvements in their lunch menus and vending machine choices, others still are selling high-fat, high-calorie foods. Standards put into place at the beginning of the 2012 school year already regulate the nutritional content of free and low-cost school breakfasts and lunches that are subsidized by the federal government. However most lunchrooms also have the "a la carte" lines that sell other foods — often greasy foods like mozzarella sticks and nachos. Under the rules, those lines could offer healthier pizzas, low-fat hamburgers, fruit cups or yogurt, among other foods that meet the standards.

America Is Raising A Generation Of Kids Who Can’t Think Or Write Clearly - The decades-long war against English and the other humanities has succeeded in many ways, which has had some unintended and very negative effects, according to a new report from the American Academy of Arts and Sciences.  Parents don't read to their children as much, K-12 humanities teachers are not as well-trained as STEM ones, federal funding for international education is down 41% over four years, and many college students graduate without being able to write clearly. Although humanities degrees are not in total freefall, the bigger problem centers on the decline in pre-college humanities education and in the liberal arts curriculum in college. Humanities get a tiny fraction of the federal funding that STEM programs do. Many schools, public ones in particular, are already under huge financial pressure, so they're going to focus more of their energies on the things that they can get others to pay for:

Is Philadelphia the Next Chicago? - Last week four members of UNITE HERE, one of the four unions representing staff in the School District of Philadelphia, began a hunger strike that would culminate nine days later with a thousand-person rally at the state capitol. Two parents, organizers with UNITE HERE, and two cafeteria workers represented by the union fasted in protest of what the Philadelphia Federation of Teachers (PFT) has termed the “doomsday budget.” That budget is an attempt by the School District of Philadelphia to fill a $300 million deficit by laying off 3,700 staff and eviscerating the teachers’ union contract. In addition to ending teachers’ seniority protections and step increases (scheduled raises for consecutive years worked), the district’s proposal includes a wage cut, an increase in employee benefit contributions, and the elimination of necessary overtime pay—prep time for teachers and emergency visits by nurses. The plan would institute unlimited class sizes and reserve the right for the district to contract out union jobs. Other clauses absolve the district of the responsibility for providing water fountains and educators’ desks.

High School Standards and Graduation Rates: The Tradeoff - "During the first seventy years of the twentieth century, the high school graduation rate of teenagers in the United States rose from 6 percent to 80 percent. A result of this remarkable trend was that, by the late 1960s, the U.S. high school graduation rate ranked first among countries in the Organisation for Economic Co-operation and Development (OECD). Between 1970 and 2000, the high school graduation rate in the United States stagnated. In contrast, the secondary school graduation rate in many other OECD countries increased markedly during this period. A consequence is that, in 2000, the high school graduation rate in the United States ranked thirteenth among nineteen OECD countries. Until quite recently, it appeared that the stagnation of the U.S. high school graduation rate had continued into the twenty-first century. However, evidence from two independent sources shows that the graduation rate increased substantially between 2000 and 2010. This increase prevented the United States from losing further ground relative to other OECD countries in preparing a skilled workforce. But graduation rates in other OECD countries also increased during that decade. As a result, the U.S. high school graduation rate in 2010 was still below the OECD average."

Bridging the Income Barrier at Top Colleges - The Hamilton Project, a Washington group affiliated with the Brookings Institution, has released a report calling for the expansion of a recent experiment aimed at persuading highly qualified low-income students to apply to top colleges. Only 34 percent of high-achieving high school seniors in the bottom fourth of income distribution attended any one of the country’s 238 most selective colleges in a recent year, according to research conducted by Caroline M. Hoxby of Stanford and Christopher Avery of Harvard. Among top students in the highest income quartile, the figure was 78 percent. The experiment intended to change the situation mailed information packets on financial aid, admissions standards and graduation rates. Students who received the information were substantially more likely to attend top colleges — colleges with more resources and higher graduation rates — than students who did not receive them. The Hamilton Project argues for an outside group, like the College Board, to help expand the experiment. It also suggested varying it – sending the information earlier than the senior year of high school, for instance – and allowing researchers to study its effectiveness.  In making its case, the group presented a series of charts on inequality and education in the United States. One notes that the cognitive ability of very young children does not differ much across income groups, suggesting there is a large pool of untapped academic talent among poorer children

Ranking The Smartest To Dumbest States... And Vice Versa - If judging a state's intellectual capacity can be quantified by the percentage of the population with higher education (or the street smarts to garner student loans... to gain a degree of course because anything else would be illegal), then the District of Columbia ranks as the 'smartest' while Mississippi and West Virginia rank as the 'dumbest'. Perhaps most notable is that 52% of US Graduates are either employed with jobs that don't require a degree or are unemployed.

Is the labor market return to higher education finally falling? -- Peter Orszag considers that possibility in his recent column.  About one in four bartenders has some kind of degree.  Orszag draws heavily on this paper by Beaudry and Green and Sand, which  postulates falling returns to skill.  It’s one of the more interesting pieces written in the last year, but note their model relies heavily on a stock/flow distinction.  They consider a world where most of the IT infrastructure already has been built, and so skilled labor has not so much more to do at the margin.  This stands in noted contrast to the common belief — which I share — that “IT-souped up smart machines” still have a long way to go and are not a mature technology.  You can’t hold that view and also buy into the Beaudry and Green and Sand story, unless you think we have suddenly jumped to a new margin where machines build machines, with little help from humans. Rather than accepting “falling returns to skill,” I would sooner say that education doesn’t measure true skill as well as it used to.

Dropping Out of College, and Paying the Price - NYT - The rising cost of college looms like an insurmountable obstacle for many low-income Americans hoping to get a higher education. The notion of a college education becoming a financial albatross around the neck of the nation’s youth is a growing meme across the culture. Some education experts now advise high school graduates that a college education may not be such a good investment after all. “Sticker price matters a lot,” said Lawrence Katz, a professor of Harvard University. “It is a deterrent.”  College graduation rates in the United States are continuing to slip behind, according to a report published on Tuesday by the Organization for Economic Cooperation and Development, failing to keep pace with other advanced nations. In 2000, 38 percent of Americans age 25 to 34 had a degree from a community college or a four-year institution, putting the nation in fourth place among its peers in the O.E.C.D. By 2011, the graduation rate had inched up to 43 percent, but the nation’s ranking had slipped to 11th place. This from perhaps the first nation to try mass college education, graduating more students from college than anybody else. Graduation rates in the United States among 55- to 64-year-olds are higher than in any industrial country except Canada and Israel — reflecting the nation’s head start. What’s most troubling, perhaps, is that Americans are actually enrolling in college and then dropping out halfway through — when they’ve probably already incurred a bunch of debt and won’t benefit from the better job prospects that come with a degree.

Fed Shocked To Find Student Loans Used For Anything But To Learn - Since January, under pressure from the Fed, the Education Department has flagged 126,000 applicants attempting to pocket federal loans and grants without any intent of going to school. As the WSJ reports, officials are cracking down on fraud in student-aid programs after evidence of recipients - acting alone or as part of organized crime rings - misusing funds. "What we find are very poor students academically that are borrowing to the max, getting the maximum in their Pell grant and just going from school to school," noted one director of financial aid, with roughly $829 million in Pell grants as "improper payments," in the last year. Rather stunningly, more than 34,000 participants in crime rings improperly received federal student aid last year, up 82% from 2009. "We started seeing student borrowing that was just over the top with no explanation for why," another director noted, adding "it's not so much about the education, it's the money." Most federal student aid requires no credit check and comes with few restrictions on how the money is spent and Federal officials say the Internet has helped fuel student aid fraud.

Public Research for Private Gain - In a unanimous vote last month, the Regents of the University of California created a corporate entity that, if spread to all UC campuses as some regents envision, promises to further privatize scientific research produced by taxpayer-funded laboratories. The entity, named Newco for the time being, also would block a substantial amount of UC research from being accessible to the public, and could reap big profits for corporations and investors that have ties to the well-connected businesspeople who will manage it. Despite the sweeping changes the program portends for UC, the regents' vote received virtually no press coverage. UC plans to first implement Newco at UCLA and its medical centers, but some regents, along with influential business leaders across the state, want similar entities installed at Berkeley, Davis, Santa Cruz, and other campuses. UC Regents Chairwoman Sherry Lansing called Newco at UCLA a "pilot program" for the entire UC system. The purpose of Newco is to completely revamp how scientific discoveries made in UC laboratories — from new treatments for cancer to apps for smartphones — come to be used by the public. Traditionally, UC campuses have used their own technology transfer offices to make these decisions. But under Newco, decisions about the fate of academic research will be taken away from university employees and faculty, and put in the hands of a powerful board of businesspeople who will be separate from the university. This nonprofit board will decide which UC inventions to patent and how to structure licensing deals with private industry. It also will have control over how to spend public funds on these activities.

College Debt Forcing Recent Grads To Put Off Major Life Decisions - According to a recent survey conducted for the American Institute of CPAs by Harris Interactive, 41% are not contributing to their retirement, 40% have put off buying a car, 29% can’t buy a house, and 15% have decided to delay marriage. Kevin Fudge says he’s not a marriage counselor, but he does counsel couples on how to deal with overwhelming college loan debt. He’s a financial aid advisor at American Student Assistance. “I’ve actually met people who are afraid to tell their partners what their debt is. They are so terrified that this is going to be a deal breaker.” But chances are your partner has at least some college debt. Americans have now racked up more in college loans than credit card bills. Recent graduates owe an average of $28,000. “What’s the number one reason why couples split up? They always say money,” explains Kevin. So to keep debt from ruining the relationship, Kevin says it’s vital to talk about it and stick to a budget. “It can be something that you work with together and it doesn’t have to drive a wedge between you.”

Student Loan Interest Rates On Verge Of Doubling - One of the main reasons the entire debt-fueled house of cards propping the western financial system, hasn't collapsed in a smouldering heap so far - a development that has stumped all those who think of the Reinhart-Rogoff sovereign debt matrix as one dimensinal with only debt/GDP as the key variable and completely ignoring the interest rate (manipulated or not) - is that the cash interest payment on the global mountain of debt has been rather tame, courtesy of all developed world central banks going all in with serial, or increasingly more, parallel monetization of debt. However, while the US Treasury has the benefit of the Federal Reserve (and its Primary Dealer tentacles) as a backstopped buyer of all the debt that's fit to print, individual Americans are not as lucky. And as America's massively overindebted student body may be about to find out, there is no surer way to burst a debt bubble than to send its rates soaring. Because unless Congress pulls off a miracle in the next 24 hours and passes legislation that delays an inevitable doubling of rates on the most popular Federal (subsidized) Stafford loans, the interest is set to double from 3.4% to 6.8%.

Time is running out before student loan rates double — Both Democrats and Republicans agree that they want to avoid such an outcome for student borrowers like Mullen, and NBC News has learned that a bipartisan agreement has been reached in the Senate. But with less than a week left until student loan interest rates are scheduled to rise from 3.4% to 6.8%, Congress has little time to push a bill through. And even if a deal does pass, it’s still highly likely that future students will pay more in interest to the federal government as legislators continue to insist on budget austerity. About 95% of all college loans are issued by the federal government, which provides significantly lower interest rates than private borrowers, typically without requiring a credit check. The rising interest rates would specifically hit the low-income students who receive subsidized Stafford loans, which go to borrowers with demonstrated financial need and don’t require interest payments until after they leave school. The rising rates won’t affect the 7.2 million students who took out these subsidized Stafford loans this year—only future borrowers. For those who borrow the maximum amount of $19,000 over four years will have to pay an additional $3,834 in interest payments over 10 years if rates are allowed to double to 6.8%, according to the Congressional Research Service.

Rowboats for Retirement - A lot of people used to think of 401(k) retirement accounts this way. But in the last six years, most Americans have gained a new appreciation of financial bad weather and the threat of a perfect storm. Stock market volatility, low interest rates and a sagging bond market have discouraged retirement savings. Persistent unemployment and stagnant wages have left many workers treading water, struggling so hard to stay afloat that they couldn’t open a retirement account even if they wanted to. A new report from the National Institute on Retirement Security, based on analysis of the 2010 Survey of Consumer Finances, shows that about 45 percent of all working-age households don’t hold any retirement account assets, whether in an employer-sponsored 401(k) type plan or an individual retirement account. Among those 55 to 64 years old, two-thirds of working households with at least one earner have retirement savings less than one year’s income, far below what they will need to maintain their standard of living in retirement. By a variety of measures, most households, even those with defined benefit pensions, are falling far short of the savings they will need.

Retirement Planning by New York Times Commenters- The New York Times ran an article discussing the possibility that a retirement account of $1 million might not be enough to see a family through the end of their lives. The article says that if a family has a portfolio of $1 million invested solely in tax-free municipal bonds and draws down 4% plus inflation annually, there is a 72% chance that they will outlive their portfolio. That article and its follow-ups drew nearly 800 comments from NYT readers. It’s a self-selected sample, but it provides insights into the way people think about their own retirements, their investment and savings strategies, and more importantly into the way this group thinks about other people and our economic system.  A number of comments pick at the premises of the main argument. Some point out that this article only applies to a few people. The article suggests that about 10% of households have a financial net worth of at least $1 million, meaning that the fair market value of their stocks, bonds and similar financial assets less their related debt is equal to at least $1 million. Then there are people who didn’t read the part about inflation and argue that if you took out 4% of $! million every year, even with no interest, you’d get 25 years. This group is matched by the group that says that if you get $30K from Social Security, that’s worth $1 million at 3%, so that should be part of your financial net worth. This group needs to make friends with the annuity class of assets

Retirement savings $14 trillion below threshold -- The National Institute on Retirement Security (NIRS) recently released a study that analyzed the state of Americans' retirement savings and compared them to benchmarks gauging progress toward maintaining retirement living standards. The results shouldn't surprise you if you've been following the news on the level of retirement savings prevalent in American households. The study found that Americans of all ages are falling well short of the savings amount they need to secure their retirement. Still worse, 45 percent of working-age Americans have no retirement savings at all! The estimated gap in needed savings totals $14 trillion if you count only savings set aside specifically for retirement; the gap declines to $6.8 trillion if you consider total net worth, the largest item being home equity. Focusing on working-age boomers -- those who are 55 to 64 years old -- roughly one-third have no retirement savings at all. Another one-third have retirement savings equal to less than one year's salary. These results are far below the benchmark recommendations developed by financial experts. Fidelity Investments estimates that to be on track for a comfortable retirement, an individual age 55 should accumulate an amount seven times their annual salary

Public pension costs swamp revenues of 10 U.S. states -Moody's (Reuters) - Ten U.S. states have public pension liabilities that are at least as big as their annual revenues, according to a Moody's Investors Service report released on Thursday that found the Illinois pension bill was equal to 241 percent of its revenues. The rating agency took a new approach to determining the health of public retirement systems by weighing each plan's net pension liability - the difference between the projected benefit payments and the assets set aside to cover those payments - against state revenue. The typical discussion about how much money public pensions have is incomplete, said the author of the Moody's report, senior analyst Marcia Van Wagner. By comparing those amounts to states' revenues, though, the rating agency can get a better sense of states' abilities to pay for the obligations, she said. For many of the states that ability is very limited. In nearly half, the pension liability is equal to half the state's annual revenue. After Illinois, Connecticut had the highest pension burden in the country, with a pension liability equal to 189.7 percent of revenues. That was followed by Kentucky, at 140.9 percent; New Jersey, 137.2 percent; Hawaii, 132.5 percent; and Louisiana, s 130.2 percent. Colorado's net pension liability was slightly more than revenues at 117.5 percent and Maryland's slightly less at 99.5 percent.

Employers Test Plans That Cap Health Costs - Hoping to cut medical costs, employers are experimenting with a new way to pay for health care, telling workers that their company health plan will pay only a fixed amount for a given test or procedure, like a CT scan or knee replacement. Employees who choose a doctor or hospital that charges more are responsible for paying the additional amount themselves. Although it is in the early stages, the strategy is gaining in popularity and there is some evidence that it has persuaded expensive hospitals to lower their prices. In California, a large plan for public employees has been especially aggressive in using the tactic, and the results are being watched closely by employers and hospital systems elsewhere. Under the program, some employees are being given the choice of going to one of 54 hospitals, including well-known medical centers like Cedars-Sinai and Stanford University Hospital, that have agreed to charge no more than $30,000 for a hip or knee replacement. Prices for the operation normally vary widely in the state, with hospitals billing from $15,000 to $110,000 for the same operation, a spread that is typical for much of the nation. “It’s a symptom of the completely irrational pricing structure hospitals have,”.

Health Care Thoughts: Cap per Procedure - Some employer health plans are experimenting with a cap-per-procedure system, allowing $X for a certain procedure and forcing employees to pay any difference.  This is not as harsh for employees as it first sounds, as the plans are using this as leverage to cap fees from providers, in effect pre-negotiating the fees within the employee cap. This is directed mostly at hospitals, which have wildly differing charge-masters. This could be favorable for lower cost providers, and we were using this strategy for ambulatory surgery centers a decade ago (ASCs generally have lower prices and better patient satisfaction) Experimentation is good, but this is gonna be a wild ride for the next few years.

Honest Piece by Casey Mulligan on Medicaid Expansion - Dean Baker  - Some applause please for Casey Mulligan. Mulligan has been a strong opponent of the Affordable Care Act and the expansion of Medicaid provided under the act. However he used his column today to dispel a misunderstanding of a study of the health impact of increased Medicaid enrollment in Oregon. The study was written up in an article in the New England Journal of Medicine which noted that the study found no statistically significant impact of Medicaid enrollment on health care. However Mulligan makes the point that the study actually did find that the people enrolled in Medicaid had improved health by several important measures. While the improvements were not large enough to meet standard tests of statistical significance this does not mean that they were not important. As Mulligan notes, given the limited number of people in the study and the relatively short time-frame (2 years), it would have been highly unlikely that it could have found statistically significant gains in health outcomes. Mulligan deserves credit for clarifying this point, especially when the implications seem to be directly at odds with his view of the policy. It would be great if debates on economic policy were always like this.

Medical Competition and the Cost of Medical Care- - Patients in the United States pay considerably more for standard medical procedures, like colonoscopies or mammograms, than do patients in Switzerland, Germany, and other rich countries. The health care delivery system in the United States is based on strong competition among private physicians and not for profit hospitals. Although a full consideration of why procedures are more expensive in the US would require the analysis of many factors, I will concentrate my discussion on whether this competition among physicians and hospitals is an important factor raising the cost of procedures. As Posner indicates, the great majority of patients have only limited knowledge about the procedures they need and the quality of physicians and hospitals. Doctors and hospitals interested in increasing their revenues can sometimes take advantage of this consumer ignorance by suggesting expensive procedures and medical treatments that are not warranted. However, most American consumers of medical care, even when ignorant of the treatments they need, have some protection against excessive medical care. The federal and state governments through Medicare and Medicaid pay over 35% of total spending on medical care in the United States. The American government officials involved in approving payments for different procedures have no more financial interest in approving excessive charges for different treatments than do officials in other countries.Medicare and Medicaid do get lower prices for different procedures than most private insurance companies because the government can use its economic power in the health market to get better prices.

Health Care Thoughts: California Assembly Bill 880 (pending) -It was a no brainer to predict Obamacare would have a major impact on restaurant and retail employers, especially in the throes of a weak economy. The composition of the work forces and often slim margins guarantee problems. Darden Corp. (Red Lobster and Olive Garden) is infamous for whining and threatening layoffs, and of course Wal-Mart is well know as the “evil empire” of employers (the ACA part-time employment provision is often referred to as the “Wal-Mart loophole).A clear result of Obamacare was for employers to consider cutting as many employees as possible under 30 hours. In California this would make many employees of corporate giants eligible for Medi-Cal, and California politicians are not happy, thus the pending legislation. Employers with more than 500 employees would pay a penalty (possibly $6,000 or more per year) to the state treasury for every employee on Medi-Cal. This appears to apply to seasonal workers, although the commentaries I have read are rather murky on the details. More research to follow. This could have a major impact on seasonal agricultural employment. It occurs to me one solution would be to reduce the number of part-time employees and just make the full-time employees work harder. I’m not certain that is what the Assembly intends.

22% Think Obamacare Will Make Their Situation Better, 42% Say Worse - A new Gallup poll shows Americans Wary of Health Law's ImpactAmericans are more negative than positive about the healthcare law's future impact on their family and on the U.S. in general. Forty-two percent say that in the long run, the law will make their family's healthcare situation worse; 22% say it will make it better. And almost half believe the law will make the healthcare situation in the U.S. worse; 34% say it will make it better.  These data are from a June 20-24 Gallup poll, conducted as the Obama administration and its supporters are trying to raise awareness of the Affordable Care Act. A new nonprofit group, Enroll America, just launched a campaign, "Get Covered America," to help the uninsured in particular learn about the new law and how to sign up for health coverage, which everyone is required to carry starting in 2014.

Obamacare– Fear-Mongers Poison Minds; Hatred Blinds - Maggie Mahar at Health Beat Blog writes about the confusion about, the anger at, and the mischaracterization of the PPACA by every day people, medical workers, and politicians. Having myself presented the facts to rebut assumptions and fallacies, I find her comments interesting and on the money. Maggie’s words: Judith Mayer Lynn, uninsured and battling breast cancer, should be a fan of the Affordable Care Act1. Instead, Bloomberg reports, she know little about it. When Bloomberg interviewed the 56-year-old she was unaware of subsidies in the law that will help people like her buy coverage in 2014,. “Lynn didn’t know the Affordable Care Act requires insurers to pay for prescription drugs, hospital stays and other services she has spent the last two years scrimping to afford. Nor did she realize she can no longer be denied a policy due to her illness”.When 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.’” If you showed Lynn the list of “essential benefits” that insurers will have to include in the policies they sell to people like her, could you persuade her to read the list—and explain where she saw the holes? Probably not, as her mind is closed to a discussion. In an interview at an Access to Healthcare office in Las Vegas, Lynn said she was unaware of those benefits — and didn’t trust Obama to produce them anyway.

 Dead Being Billed for Life Insurance - Life insurance for the dead? In a plot that might have been conceived by Fred MacMurray and George A. Romero, the nation's leading insurance companies continued billing customers for life insurance long after they were dead.  The companies--including such household names as AIG, Hartford, John Hancock, Met Life, Prudential, Transamerica and TIAA-CREF-- have agreed to a multi-state settlement under which they will repay some $763 million owed the heirs of the deceased.  Prime mover in the settlement has been Controller John Chiang of the State of California, whose citizens stand to get back as much as $87 million from 11 insurers.  California law requires a life insurer to pay death benefits to heirs within three years after the demise of the policyholder. To keep tabs on which holders are alive and which are dead, insurers keep a so-called Death Master file, based on Social Security data. When a death is recorded in the file, insurers know not to expect payment of any further premiums. Most policies, however, put the onus on the beneficiary to file a claim for benefits, after the policy holder's death. Absent the filing of a claim, says Chiang's office, the insurer, prior to the settlement, could legally continue to draw down the policy's cash reserves, continuing to collect premium payments from the dead.

Depression, Diabetes, and You - Most people already know that psychiatric medications often bring risks of sexual side effects and/or weight gain, but it turns out there's another, more serious hazard waiting for users of some of these drugs. According to a recent paper by Andersohn et al. in Am J Psychiatry 2009; 166:591–598, long-term antidepressant use may be an invitation to diabetes. The Andersohn paper draws on data from the U.K.'s extensive patient database. The numbers are solid and the results hard to argue with. Bottom line: Even after controlling for body mass index (BMI), hypertension, hyperlipidemia, smoking, age, and other factors, the authors of the study found that long-term use of antidepressants (of any kind: tricyclic, MAOI, SSRI) was associated with an almost two-fold greater risk of diabetes.

Supreme Court rules generic-drug makers can't be sued over defects -  Americans who are badly hurt by a generic drug may not sue the drug maker for compensation, the Supreme Court ruled Monday, giving manufacturers a shield from liability for the medications taken most commonly in this country. The 5-4 decision tossed out a $21-million jury verdict in favor of a New Hampshire woman who suffered horrible skin burning over most of her body and was nearly blinded after taking a pill to relieve shoulder pain. The court majority said the federal Food and Drug Administration had approved this drug for sale, and that federal approval trumps a state’s consumer-protection laws.

Europe Fines Drug Companies for Delaying Generics - — Europe’s top antitrust enforcer continued a crackdown on drug company efforts to keep low-cost generic versions of their medicines off the market, a campaign that is taking place on both sides of the Atlantic. On Wednesday, the European Commission fined a Danish pharmaceutical company and a number of generic producers a total of 146 million euros, or $195 million. The commission said that Lundbeck of Denmark colluded with companies like Ranbaxy of India and Merck of Germany in 2002 and 2003 to delay market entry of a less expensive generic version of a blockbuster antidepressant called citalopram. Joaquín Almunia, the European commissioner for competition, said that Lundbeck also destroyed significant quantities of the low-cost version of the drug. “All this occurred at the expense of patients who were deprived of access to cheaper medicines,” Mr. Almunia said at a news conference on Wednesday. “It also harmed our public health systems, who for a longer period had to artificially bear the costs of an expensive medicine and one of the most widely prescribed antidepressants.”

Obama Administration, Congress Intensify Opposition To Global Generic Drug Industry: The Obama administration and members of Congress are pressing India to curb its generic medication industry. The move comes at the behest of U.S. pharmaceutical companies, which have drowned out warnings from public health experts that inexpensive drugs from India are essential to providing life-saving treatments around the world. Low-cost generics from India have dramatically lowered medical costs in developing countries and proved critical to global AIDS relief programs; about 98 percent of the drugs purchased by President George W. Bush's landmark PEPFAR AIDS relief program are generics from India. Before Indian companies rolled out generic versions priced at $1 a day, AIDS medication cost about $10,000 per person per year. But India's generic industry has also cut into profits for Pfizer and other U.S. and European drug companies. In response, these companies have sought to impose aggressive patenting and intellectual property standards in India, measures that would grant the firms monopoly pricing power over new drugs and lock out generics producers.

A World of Rising Health Care Costs - Americans are used to hearing that health care will bust the budget. The Congressional Budget Office projected last year that Medicare, Medicaid and other government health programs would eat up 9.6 percent to 10.4 percent of the nation’s gross domestic product by 2037, crowding out many other vital programs. But a new report from the Organization for Economic Cooperation and Development suggests that the United States is not the only country that will struggle to contain public spending on medical care. In fact, costs are likely to increase slightly less in the United States than in other industrialized countries and some big developing countries around the world. Public spending on medical services has slowed much more sharply in other countries since the financial crisis hit government budgets around the industrial world. Government health expenditures across the O.E.C.D. grew only 0.1 percent in both 2010 and 2011, on average, after growing 4.9 percent a year between 2000 and 2009. In Greece they plummeted more than a quarter over those two years. In Britain they contracted by 2 percent. In the United States, by contrast, government health spending grew 3.3 percent in 2010 and 2.2 percent in 2011.

8 Foods We Eat In The U.S. That Are Banned In Other Countries

Our Overcrowded Planet: A Failure of Family Planning - Until just a couple weeks ago, the great global food challenge was how to feed 9 billion people in 2050. But no longer — the number of mid-century mouths just jumped. Now it’s projected to be 9.6 billion, closing in on double-digit billions. And forget about expectations that world population will stabilize this century: By 2100, according to the latest projections, the number of people on the planet will hit 10.9 billion — and will still be growing by 10 million a year. These hundreds of millions of unanticipated future humans come from the “medium-fertility,” or best-guess, calculations of United Nations demographers, who this month released their biannual projections of future world population. And what a surprise their calculations are, dashing the hopes of optimists who had been assuming that human fertility is falling everywhere and that population growth would end “on its own” within a few decades.

Republicans Eye Splitting Farms, Food Stamps for Measure - Bloomberg: Republican leaders in the U.S. House are exploring divorcing farm subsidies from food stamps to revive an agriculture bill, breaking up a political alliance that for decades expanded spending on farmers and hungry families. Majority Leader Eric Cantor, a Virginia Republican, is considering the possibility of advancing a slimmer, farm-only plan that can win enough Republican votes to pass, according to a party aide who spoke yesterday on condition of anonymity. A bill without food stamps wouldn’t need support from Democrats, who have championed the nutrition program for more than three decades and joined Republicans to defeat the bill last week.  “We have an opportunity to make common-sense reforms by splitting the bill into a real, farm-only farm bill and having an honest conversation about how Washington spends taxpayer money.” The farm legislation, which benefits crop-buyers such as Archer-Daniels-Midland, grocers including Supervalu Inc. and insurers including Wells Fargo & Co., has been working through Congress for almost two years. The Senate on June 10 passed a plan that would cost $955 billion over a decade. Current legislation begins to expire Sept. 30.

Brain-eating amoebas thrive in US lakes as global warming heats waterways - It’s a fatal infection without an effective treatment, and one that strikes in a decidedly gruesome manner: An amoebic organism lurking in water is inadvertently inhaled during a swim on a hot summer’s day. From there, it travels through the nasal passage and into the brain, where it multiplies, devours one’s cerebral fluid and gray matter, and almost invariably causes death. These "brain-eating amoebas" — known to doctors and scientists as Naegleria fowleri, or N. fowleri — aren’t believed to kill often. In the US, researchers estimate that between three and eight people die from N. fowleri disease, commonly referred to as PAM (primary amebic meningoencephalitis) each year. But that might not be the case for long. In recent years, N. fowleri has popped up in unexpected locations, which some experts suggest is a sign that warmer waters — caused by brutal summer heat waves and rising temperatures across the country — are catalyzing their spread.

EPA Ups Allowable Residue of Monsanto's Toxic Herbicide on Food - In a little reported development, the Environmental Protection Agency last week issued a new rule raising the allowable concentration of Monsanto’s herbicide glyphosate, otherwise known as Roundup, on food crops, animal feed and edible oils. Despite the proven risk, this ruling is clearly a result of successful lobbying effort on the part of the Ag Giant to raise the residue limits of this toxic chemical. "Glyphosate has been shown in several recent studies to be an endocrine disruptor," writes the Cornucopia Institute, in a statement about the news. "According to the National Institutes of Health, endocrine disruptors could have long-term effects on public health, especially reproductive health. And the 'dose makes the poison' rule does not apply to endocrine disruptors, which wreak havoc on our bodies at low doses." They continue: A June 2013 study concluded that glyphosate “exerted proliferative effects in human hormone-dependent breast cancer.” An April 2013 study by an MIT scientist concluded that “glyphosate enhances the damaging effects of other food borne chemical residues and environmental toxins,” and pointed out that glyphosate’s “negative impact on the body is insidious and manifests slowly over time as inflammation damages cellular systems throughout the body.”

Research Shows that Monsanto’s Big Claims for GMO Food Are Probably Wrong - The World Food Prize committee’s got a bit of egg on its face—genetically engineered egg. They just awarded the World Food Prize to three scientists, including one from Syngenta and one from Monsanto, who invented genetic engineering because, they say, the technology increases crop yields and decreases pesticide use. (Perhaps not coincidentally, Monsanto and Syngenta are major sponsors of the World Food Prize, along with a third biotech giant, Dupont Pioneer.)  Monsanto makes the same case on its website, saying, “Since the advent of biotechnology, there have been a number of claims from anti-biotechnology activists that genetically modified (GM) crops don’t increase yields. Some have claimed that GM crops actually have lower yields than non-GM crops… GM crops generally have higher yields due to both breeding and biotechnology.” But that’s not actually the case. A new peer-reviewed study published in the International Journal of Agricultural Sustainability examined those claims and found that conventional plant breeding, not genetic engineering, is responsible for yield increases in major U.S. crops. Additionally, GM crops, also known as genetically engineered (GE) crops, can’t even take credit for reductions in pesticide use. The study’s lead author, Jack Heinemann, is not an anti-biotechnology activist, as Monsanto might want you to believe.

SEEDS of DEATH: Changing Nature to Accommodate Industry Model - video on MarketWatch 666 from AbyNormal -  Every single independent study conducted on the impact of genetically modified food shows that it damages organs, it causes infertility, it causes immune system failure, it causes holes in the GI tract, and it causes multiple organ system failure.  The whole concept of genetically modified organisms is throwing a monkey wrench in the life on this planet.  The reason why they have 170 million acres of genetically engineered corn, soybeans, cotton, canola oil and sugar beets in the United States is because it doesn’t have to be labeled. The first genetically modified animal, the salmon, may soon be approved for human consumption and there has not been sufficient animal health testing, human health testing, or environmental impact testing of these new transgenic fish. Basically, they take agriculture and build an industrial model which doesn’t fit nature. So instead of changing our agricultural model to accommodate what is natural, they’re changing nature to accommodate the industrial model.

Monsanto Points to Sabotage in Oregon Wheat Field in GMO Case - Monsanto Co. MON -0.25%said sabotage was the likely cause of unapproved genetically modified wheat recently found in an Oregon field, calling the case "highly suspicious." The crop-biotechnology company Friday called on authorities to investigate the discovery as it made its strongest statement yet that sabotage led to the incident, which was announced in May by the U.S. Department of Agriculture. Monsanto had said earlier this month that sabotage was among several possible causes. The discovery of the wheat, genetically engineered to survive exposure to the widely used herbicide glyphosate, has threatened to upend the wheat market. In the wake of the discovery, Japan and South Korea imposed restrictions on imports of U.S. wheat, which remain in place. The fact the genetically modified wheat in question was found in one isolated portion of a farmer's field, instead of being dispersed throughout the field, indicated that contamination of seed supplies in the region didn't appear to be a possibility, said Robb Fraley, Monsanto's chief technology officer and executive vice president. Instead, Mr. Fraley said during a media briefing, the unapproved wheat appeared to be placed in the northeast Oregon field separately, adding the farmer was a "victim" in the incident.

Trans-Pacific Partnership and Monsanto - : Something is looming in the shadows that could help erode our basic rights and contaminate our food. The Trans Pacific Partnership (TPP) has the potential to become the biggest regional Free Trade Agreement in history, both in economic size and the ability to quietly add more countries in addition to those originally included. As of 2011 its 11 countries accounted for 30 percent of the world's agricultural exports. Those countries are the US, Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Viet Nam. Recently, Japan has joined the negotiations. Six hundred US corporate advisors have had input into the TPP. The draft text has not been made available to the public, press or policy makers. The level of secrecy around this agreement is unparalleled. The majority of Congress is being kept in the dark while representatives of US corporations are being consulted and privy to the details.The chief agricultural negotiator for the US is the former Monsanto lobbyist, Islam Siddique. If ratified the TPP would impose punishing regulations that give multinational corporations unprecedented right to demand taxpayer compensation for policies that corporations deem a barrier to their profits.

Why Is the Obama Administration Suddenly So Interested in African Farms? - This week, President Obama is making his first major visit to Africa since taking office. One topic that's likely high on his agenda: US investment in African agriculture. With the global population expected to top 9 billion by 2050, the Obama administration is pushing hard to use foreign development funds to expand farming in the developing world, and especially in Africa. Since 2009, when Obama made a pledge at the G8 Summit in L'Aquila, Italy, to devote massive resources to global "food security," Congress has committed more than $3.5 billion to an agricultural development program called "Feed the Future." Congress has since renewed the initiative's funding.Broadly speaking, the idea behind Feed the Future is to grow more food than ever before by making it easier for global agribusiness companies to invest in poor countries. As USAID head Rajiv Shah indicated at the official unveiling of Feed the Future in 2010, the agency could advocate on companies' behalf to make investment easier in partner countries.

You have no idea how much we rely on honeybees and how much their collapse could cost us - Honeybees don’t just produce honey: the hard-working insect is also fundamental to the world’s food supply.One-third of the food we eat depends on insect pollination, mostly by honeybees that are raised and managed by beekeepers.The value of insect pollinators on world agricultural production, which accounts for their role in producing better quality and quantity of harvests, was estimated at $208 billion in 2005.That figure does not even include the retail value of what honeybees pollinate — everything from apples and cherries to broccoli and pumpkins — or the honey that bees produce. In the United Kingdom alone, where honeybees contribute an added crop value of about $413 million, the estimated retail value is north of $1 billion.But the downward spiral of honeybee populations — both wild and captive — has put all of all of that at risk. The number of managed colonies is declining nationwide because of new pressures including disease, parasites, and the phenomenon known as colony collapse disorder, when bees inexplicably disappear from their hives. The stresses of being trucked around the country thousands of mile each year to pollinate different orchards has also taken its toll.

House Adds Honey Bee and Pollinator Protections to Farm Bill -- The Center for Food Safety applauds the passage of a pollinator protection amendment Wednesday that was offered by Rep. Alcee Hastings (D-FL) to the Farm Bill currently being considered by the U.S. House of Representatives, a fitting and positive development during National Pollinator Week. “Honey bees and other pollinators have been suffering record-high population losses,” said Andrew Kimbrell, executive director of Center for Food Safety. “Pollinators are vitally important to agriculture and are an integral part of food production. These critical species are at the front lines of pesticide exposure and it is high time that the government do more to protect them.” The Hastings amendment, which passed 273-149 with 81 Republicans and 192 Democrats voting in favor, seeks to better improve federal coordination in addressing the dramatic decline of managed and native pollinators as well as direct the government to regularly monitor and report on the health of pollinators including bees, birds, bats and other beneficial insects.

Marijuana Crops in California Threaten Forests and Wildlife -It took the death of a small, rare member of the weasel family to focus the attention of Northern California’s marijuana growers on the impact that their huge and expanding activities were having on the environment. The animal, a Pacific fisher, had been poisoned by an anticoagulant in rat poisons like d-Con. Since then, six other poisoned fishers have been found. Two endangered spotted owls tested positive. Mourad W. Gabriel, a scientist at the University of California, Davis, concluded that the contamination began when marijuana growers in deep forests spread d-Con to protect their plants from wood rats. That news has helped growers acknowledge, reluctantly, what their antagonists in law enforcement have long maintained: like industrial logging before it, the booming business of marijuana is a threat to forests whose looming dark redwoods preside over vibrant ecosystems. Hilltops have been leveled to make room for the crop. Bulldozers start landslides on erosion-prone mountainsides. Road and dam construction clogs some streams with dislodged soil. Others are bled dry by diversions. Little water is left for salmon whose populations have been decimated by logging. And local and state jurisdictions’ ability to deal with the problem has been hobbled by, among other things, the drug’s murky legal status. It is approved by the state for medical uses but still illegal under federal law, leading to a patchwork of growers. Some operate within state rules, while others operate totally outside the law.

During Record Drought, Frackers Outcompete Farmers for Water Supplies – The impacts of 2013′s severe drought are apparent across the nation in forests, on farms and on once snowy peaks. Meanwhile, the oil and gas industry is demanding unprecedented amounts of water for hydraulic fracturing, better known as fracking. Colorado farmer Kent Peppler told the Associated Press (AP) that he is fallowing some of his corn fields this year because he can’t afford to irrigate the land for the full growing season, in part because deep-pocketed energy companies have driven up the price of water. “There is a new player for water, which is oil and gas. And certainly they are in a position to pay a whole lot more than we are,” Peppler said. In a normal year, Peppler would pay anywhere from $9 to $100 for an acre-foot of water in auctions held by cities with excess supplies. But these days, energy companies are paying some cities $1,200 to $2,900 per acre-foot. In seven states, including Colorado, Oklahoma, Texas and Wyoming, the vast majority of the counties where fracking is occurring are also suffering from drought, according to an AP analysis of industry-compiled fracking data and the U.S. Department of Agriculture’s official drought designations. The persistent U.S. drought wreaked havoc on American agriculture, raising food prices and forcing farmers to make record high insurance claims on lost profits for 2012.

Official: Tennessee water complaints could be 'act of terrorism' -- A Tennessee Department of Environment and Conservation deputy director warned a group of Maury County residents that unfounded complaints about water quality could be considered an "act of terrorism." "We take water quality very seriously. Very, very seriously," said Sherwin Smith, deputy director of TDEC's Division of Water Resources, according to audio recorded by attendees. "But you need to make sure that when you make water quality complaints you have a basis, because federally, if there's no water quality issues, that can be considered under Homeland Security an act of terrorism." "Can you say that again, please?" an audience member can be heard asking on the audio. Smith went on in the recording to repeat the claim almost verbatim. The audio was recorded May 29 by Statewide Organizing for Community eMpowerment, a Smyrna-based civic action group that had been working with Maury County residents to tackle water quality complaints in Mount Pleasant. Residents there have complained to the state for months, saying some children had become ill drinking the water. The comment shocked and outraged attendees, who saw it as an attempt to silence complaints, said Brad Wright, organizer for SOCM in Middle Tennessee.

China warns it will execute serious polluters - Whoever polluted this river is in big trouble.  There are carrot and stick approaches to tackling pollution. China is reaching for the stick. The country announced Wednesday that it is willing to impose the harshest possible penalty on polluters. From Reuters: Chinese authorities have given courts the powers to hand down the death penalty in serious pollution cases, state media said, as the government tries to assuage growing public anger at environmental desecration. … A new judicial interpretation which took effect on Wednesday would impose “harsher punishments” and tighten “lax and superficial” enforcement of the country’s environmental protection laws, the official Xinhua news agency reported. “In the most serious cases the death penalty could be handed down,” it said. The announcement comes at a time when China is attempting to turn a new leaf in environmental protection following decades of unchecked pollution and a slew of anti-pollution protests.  China also said it is reducing the amount of damage that must be caused by a polluter before they are prosecuted. From South China Morning PostThe [new judicial] interpretation … states that a person can be convicted if he or she causes pollution that seriously injures a person. Previously, an incident would have had to result in a death before a person was convicted.  

The microbeads in your body wash are slowly filling the Great Lakes with plastic - Sigh. You think the world would have caught on by now that plastic is one of the most incidentally destructive inventions the human race has ever come up with. Sure, L.A. just banned plastic bags, which is great. But meanwhile those tiny microbeads — the little bits of plastics in body wash that cosmetics companies invented for no real reason except to have a new thing to sell their customers — are slowly accumulating in the Great Lakes, where fish eat them.  Scientific American reports:They are too tiny for water treatment plants to filter, so they wash down the drain and into the Great Lakes. The biggest worry: fish such as yellow perch or turtles and seagulls think of them as dinner. If fish or birds eat the inert beads, the material can deprive them of nutrients from real food or get lodged in their stomachs or intestines, blocking digestive systems.  I know, I know. But your skin feels so soft! (Does it? Does it reeeeallly?) Well, don’t worry: Soon you’ll probably be able to buy “natural” mud from the Great Lakes that’s full of the same exact exfoliants!

Researchers study 18,000 hours of deep sea footage, find ocean seafloor is covered in trash : We've all seen images of trash on beaches, or floating on the surface of the ocean. But a surprising amount ends up on the deep seafloor, at depths so great that it's been very hard for us to really know what the situation is. Because it's no very practical to fund a deep sea mission just to look for trash, researchers at the Monterey Bay Aquarium Research Institute instead decided to comb through thousands of hours of video recorded by remotely controlled vehicles over the past 20+ years, specifically looking for debris. About 1/3 of the trash were made of plastic, more than half of those being plastic bags, which are notoriously dangerous for marine life. Next were metal objects, at about 1/5 of the total. Other common debris included rope, fishing equipment, glass bottles, paper, and cloth items.

Warming oceans make parts of world ‘uninsurable’, say insurers - Insurers have issued a rare warning that the speed at which the oceans are warming is threatening their ability to sell affordable policies in a growing number of places around the world. Parts of the UK and the US state of Florida were already facing “a risk environment that is uninsurable”, said the global insurance industry trade body, the Geneva Association. They were unlikely to be the last areas with such problems, said John Fitzpatrick, the association’s secretary-general. He said governments needed to invest more in flood defences and tighten building restrictions in risky locations to mitigate the fallout from extreme weather hazards, citing losses from superstorm Sandy, which struck particularly hard in New York and New Jersey last October and cost the economy about $65bn. “Governments may have fiscal austerity issues in the short run. But in the long run they’re going to have big exposures – to repair damaged infrastructure from storms.” In spite of the losses from Sandy and a spate of natural catastrophes the previous year, overall global property insurance premiums have remained broadly stable outside loss-hit areas. However, insurers warn premiums have been kept artificially depressed in the short term because capital has flocked to the sector in the face of historic low interest rates.

Heat Wave May Threaten World's Hottest Temp. Record - A brutal and potentially historic heat wave is in store for the West as parts of Nevada, Arizona and California may get dangerously hot temperatures starting Thursday and lasting through next week. In fact, by the end of the heat wave, we may see a record tied or broken for the hottest temperature ever recorded on Earth. The furnace-like heat is coming courtesy of a “stuck” weather pattern that is setting up across the U.S. and Canada. By midweek next week, the jet stream — a fast-moving river of air at airliner altitudes that is responsible for steering weather systems — will form the shape of a massive, slithering snake with what meteorologists refer to as a deep “ridge” across the Western states, and an equally deep trough seting up across the Central and Eastern states. All-time records are likely to be threatened in normally hot places — including Death Valley, Calif., which holds the record for the highest reliably recorded air temperature on Earth at 134°F. That mark was set on July 10, 1913, and with forecast highs between 126°F to 129°F this weekend, that record could be threatened. The last time Death Valley recorded a temperature at or above 130°F was in 1913.

Alberta flooding could wipe $2-billion from Canadian economy in June - The worst flooding in Alberta’s history could knock $2-billion off the Canadian economy in June, according to BMO Capital Markets. Much of southern Alberta has been under a state of emergency after record water levels on the Bow River steamrolled through municipalities and downtown Calgary, the province’s largest city. Canada’s energy capital continued to pump out and began assessing damages as the deluge subsided Monday, four days after the Bow and Elbow Rivers first breached their banks, swamping the downtown and leaving thousands homeless and without power. Preliminary estimates of damages range between $3-billion and $5-billion, BMO analyst Tom MacKinnon said in a note to clients Monday. Losses after insurance could reach $3.75-billion, he said.

94 in Alaska? Weather Extremes Tied to Jet Stream -  Lately, the jet stream isn't playing by the rules. Scientists say that big river of air high above Earth that dictates much of the weather for the Northern Hemisphere has been unusually erratic the past few years. They blame it for everything from snowstorms in May to the path of Superstorm Sandy. And last week, it was responsible for downpours that led to historic floods in Alberta, Canada, as well as record-breaking heat in parts of Alaska, experts say. The town of McGrath, Alaska, hit 94. Just a few weeks earlier, the same spot was 15 degrees. The current heat wave in the Northeast is also linked. "While it's not unusual to have a heat wave in the east in June, it is part of the anomalous jet stream pattern that was responsible for the flooding in Alberta," Rutgers University climate scientist Jennifer Francis said Tuesday in an email. The jet stream usually rushes rapidly from west to east in a mostly straight direction. But lately it's been wobbling and weaving like a drunken driver, wreaking havoc as it goes. The more the jet stream undulates north and south, the more changeable and extreme the weather. It's a relatively new phenomenon that scientists are still trying to understand. Some say it's related to global warming; others say it's not.

Arctic heat wave hits central Siberia, pushing temperatures to 90 degrees F (32C) and sparking tundra fires - Today, a heatwave circling the Arctic set its sights on central Siberia. Temperatures soared into the upper 80s to near 90 degrees over a vast region of Siberian tundra, setting off pop-corn thunderstorms and sparking large, ominous fires reminiscent of the blazes that roared through this region during late June of 2012. Those fires were so large they sent a plume of smoke over the Pacific Ocean and blanketed valleys in western Canada. Each individual fire in the above image hosts a plume of smoke about a hundred miles long. The fire to the far left, hosts a very long smoke plume of at least 350 miles in length. You can see these soaring Siberian temperatures and related fires on the Arctic weather map above. Note the instances of 32 degrees Celsius temperatures (which is 89.6 degrees on the Fahrenheit scale).  If you look to the right side of the above map, you’ll see a large swath of pink spanning the Arctic from Norway all the way to the Pacific coastal region of Siberia. The most intense heat is located directly in the center of this zone where sporadic readings of 90 degree temperatures start to pop up. Fires are also shown on this weather map, indicated by a vertical black bar with a squiggly black line at the top. Heatwave conditions also appear to have re-flared in Scandinavia where numerous instances of 80 degree + weather appear.

Scientist: ‘Miami, As We Know It Today, Is Doomed. It’s Not A Question Of If. It’s A Question Of When.’ - Jeff Goodell has a must-read piece in Rolling Stone, “Goodbye, Miami: By century’s end, rising sea levels will turn the nation’s urban fantasyland into an American Atlantis. But long before the city is completely underwater, chaos will begin.” Goodell has talked to many of the leading experts on Miami including Harold Wanless, chair of University of Miami’s geological sciences, department, source of the headline quote. The reason climate change dooms Miami is a combination of sea level rise, the inevitability of ever more severe storms and storm surges — and its fateful, fatal geology and topology, which puts “more than $416 billion in assets at risk to storm-related flooding and sea-level rise”:South Florida has two big problems. The first is its remarkably flat topography. Half the area that surrounds Miami is less than five feet above sea level. Its highest natural elevation, a limestone ridge that runs from Palm Beach to just south of the city, averages a scant 12 feet. With just three feet of sea-level rise, more than a third of southern Florida will vanish; at six feet, more than half will be gone; if the seas rise 12 feet, South Florida will be little more than an isolated archipelago surrounded by abandoned buildings and crumbling overpasses. And the waters won’t just come in from the east – because the region is so flat, rising seas will come in nearly as fast from the west too, through the Everglades.

Notes On The Coming Mass Extinction - This week saw the release of a new study in PLOS ONE with the unwieldy title Identifying the World's Most Climate Change Vulnerable Species: A Systematic Trait-Based Assessment of all Birds, Amphibians and Corals. This text is from a press release from the University of Witwatersrand (Johannesburg) Vertebrate extinction rates are currently estimated to be 10–100 times greater than background, largely due to the effects of habitat loss, over-exploitation and invasive species. However, anthropogenic climate change is becoming a significant new threat... Most species at greatest risk from climate change are not currently conservation priorities, according to an International Union for Conservation of Nature (IUCN) study that has introduced a pioneering method to assess the vulnerability of species to climate change. Up to 83% of birds, 66% of amphibians and 70% of corals that were identified as highly vulnerable to the impacts of climate change are not currently considered threatened with extinction on The IUCN Red List of Threatened Species. They are therefore unlikely to be receiving focused conservation attention, according to the study.

Climate change: A cooling consensus | The Economist -- GLOBAL warming has slowed. The rate of warming of over the past 15 years has been lower than that of the preceding 20 years. There is no serious doubt that our planet continues to heat, but it has heated less than most climate scientists had predicted. Nate Cohn of the New Republic reports: "Since 1998, the warmest year of the twentieth century, temperatures have not kept up with computer models that seemed to project steady warming; they’re perilously close to falling beneath even the lowest projections". Mr Cohn does his best to affirm that the urgent necessity of acting to retard warming has not abated, as does Brad Plumer of the Washington Post, as does this newspaper. But there's no way around the fact that this reprieve for the planet is bad news for proponents of policies, such as carbon taxes and emissions treaties, meant to slow warming by moderating the release of greenhouse gases. The reality is that the already meagre prospects of these policies, in America at least, will be devastated if temperatures do fall outside the lower bound of the projections that environmentalists have used to create a panicked sense of emergency. Whether or not dramatic climate-policy interventions remain advisable, they will become harder, if not impossible, to sell to the public, which will feel, not unreasonably, that the scientific and media establishment has cried wolf.

Kerry Prods India to Cut Greenhouse Gas Emissions - Secretary of State John Kerry urged India on Sunday to begin to address climate change by reducing emissions of greenhouse gases even as it attempts to bring electricity to tens of millions of its citizens now living without it. “I do understand and fully sympathize with the notion that India’s paramount commitment to development and eradicating poverty is essential,” Mr. Kerry said in a speech at the start of a two-day visit. “But we have to recognize that a collective failure to meet our collective climate challenge would inhibit all countries’ dreams of growth and development.” In an effort to prod the Indians to act, Mr. Kerry warned that climate change could cause India to endure excessive heat waves, prolonged droughts, intense flooding and shortages of food and water. “The worst consequences of the climate crisis will confront people who are the least able to be able to cope with them,” he said. Mr. Kerry has long been active on the issue of climate change. His speech was part of a broader push by the Obama administration that includes a presidential address, scheduled for Tuesday, on steps the White House plans to take domestically, including establishing the first limits on carbon emissions from new and existing power plants.

At Chernobyl, danger lurks in the trees — For almost three decades the forests around the shuttered nuclear power plant have been absorbing contamination left from the 1986 reactor explosion. Now climate change and lack of management present a troubling predicament: If these forests burn, strontium 90, cesium 137, plutonium 238 and other radioactive elements would be released, according to an analysis of the human health impacts of wildfire in Chernobyl's exclusion zone conducted by scientists in Germany, Scotland, Ukraine and the United States. This contamination would be carried aloft in the smoke as inhalable aerosols, that 2011 study concluded. And instead of being emitted by a single reactor, the radioactive contamination would come from trees that cover some 660 square miles around the plant, said Sergiy Zibtsev, a Ukrainian forestry professor who has been studying these irradiated forests for 20 years. "There's really no question," he added. "If Chernobyl forests burn, contaminants would migrate outside the immediate area. We know that."

Obama Outlines Ambitious Plan to Cut Greenhouse Gases - — President Obama, declaring that “Americans across the country are already paying the price of inaction,” announced sweeping measures on Tuesday to reduce greenhouse gas pollution and prepare the nation for a future of rising temperatures. Embracing wholeheartedly an issue that could define his legacy but is sure to ignite new political battles with Republicans, Mr. Obama said he would use his executive powers to require reductions in the amount of carbon dioxide emitted by the nation’s power plants. The carbon cuts at power plants are the centerpiece of a three-pronged climate-change plan that will also involve new federal funds to advance renewable energy technology, as well as spending to fortify cities and states against the ravages of storms and droughts aggravated by a changing climate. Mr. Obama waded more deeply than he has before into the dispute over the proposed Keystone XL pipeline, which would carry heavy crude oil from Alberta to depots and refineries in the Midwest and on the Gulf Coast. He said he would not approve the 1,700-mile pipeline if it was shown that it would “significantly” worsen climate change. The president’s comments were ambiguous: He did not specify what aspects of the project he was including or what level of climate impact he considers “significant.” Opponents and backers of the pipeline found support for their positions in his remarks.

Obama on Climate Change: ‘We Don’t Have Time for a Meeting of the Flat Earth Society’ - As part of President Obama’s new climate-change plan, the Environmental Protection Agency will design rules to limit carbon emissions from existing power plants. But is this really the most effective way to reduce greenhouse gases? Many economists will say no, it’s not. EPA rules are a pretty blunt instrument: the Clean Air Act was originally designed for very different pollutants like sulfur and mercury, and the agency will need to get creative in applying the law to a more pervasive gas like carbon dioxide. A better approach, they’ll typically say, would be for Congress to set a price on carbon that required polluters to pay for the damage caused by their emissions. People would then decide how best to adjust to the new price of fossil fuels on their own. That would be cheaper and more efficient. Again, that’s the conventional wisdom. But in an interesting recent paper (pdf) for Resources for the Future, Nathan Richardson and Arthur G. Fraas look at this comparison in much greater detail. Their conclusion? It actually depends how each is designed. EPA regulations might even be more effective than a carbon tax in a few cases.

Proposed climate regulations might not be too bad - The word "flexibility" is a very good thing from the perspective of economic efficiency:  The Supreme Court has already ruled that it can be used to regulate greenhouse gases, which include carbon dioxide emissions, but figuring out how to do that within the technical requirements of the law will be a major challenge.  The administration’s thinking appears to have been influenced by a proposal from an environmental group, the Natural Resources Defense CouncilThe group urged a creative approach, calling on the federal government to set a target level of greenhouse gases for each state, taking account of historical patterns. A state generating a lot of power from coal, then exporting it to other states, would not be unduly penalized, for instance.  As the environmental group envisions it, states would meet their goals by tweaking the overall electrical system, not just by cracking down on individual power plants. States might urge companies to produce more renewable power, for instance, but they could also retrofit homes and businesses to reduce energy waste, or encourage the use of clean-burning natural gas instead of coal. States would presumably be allowed to use market signals, like a price on greenhouse emissions, to achieve their goals, as California and nine Northeastern states are already doing.

Climate change plan helpful but not enough - With this week's heat wave, air quality warnings and severe weather forecasts as a backdrop, President Barack Obama could scarcely have picked a more auspicious moment to reveal his multi-pronged plan to address climate change. His surprise decision to oppose the Keystone XL pipeline from Canada if the project is judged to cause a net increase in greenhouse gases underscores the seriousness of the issue — while the swift criticism of that choice (and Mr. Obama's plan, generally) demonstrates the Congressional denial and partisanship that is endangering the nation's health and safety. That this country and world are threatened by man-made climate change is well-established. The 12 hottest years ever recorded in the U.S. have taken place in the last 15 with last year the warmest ever recorded in the lower 48 states. Warming oceans, the rise of sea levels, the rapid retreat of ice sheets in the Arctic and elsewhere provide ample evidence that the pace of the current trend is unusually swift and alarming. Yet the failure of the legislative branch to seriously address this crisis should be seen as the most disturbing trend of all. In recent years, plenty of bills have been introduced on the subject, but few, if any, with the words "climate change" get serious debate on Capitol Hill, let alone pass the House or Senate. Nor has President Obama made this a particularly high priority, content to push conservation efforts like promoting green energy or raising fuel efficiency standards or adopting EPA regulations that help but fall far short of what is needed.

Critics: Obama's Plan Lacks Urgency on Climate Crisis - Environmentalists warn that President Obama's 'climate plan'—announced Tuesday in a speech at Georgetown University—does not contain the urgency required by the fast-spiraling crisis of global warming and climate change and that though some aspects were welcome, the overall approach falls well short of what's needed. The plan hinges on Obama's claim that he plans to use his presidential powers to override a Congress under 'partisan deadlock' and order the Environmental Protection Agency to impose carbon emissions limits on current and new power plants. Though many of the large green groups in the US praised the push for tighter regulation on coal plants by the EPA, critics say Obama's plan is unclear about exactly how strict these regulations will be. As an example, the president's plan says that the EPA must be "flexible" to states' needs, a vague directive that critics charge provides rhetorical cover for further inaction. Furthermore, critics charge that "new" power plant regulations are hardly groundbreaking or far-reaching enough to meet the demands of the crisis. The 2007 Clean Air Act already empowered the EPA to regulate emissions for new facilities, and yet this has done little to reign in power plant emissions, which account for approximately 40 percent of U.S. carbon emissions.

Aggregate Supply, Aggregate Demand, and Coal - Paul Krugman  - But there’s one crucial economic point I want to get out there right away: while the usual suspects will denounce all this as job-destroying regulation, tougher climate policy will, almost surely, be job-creating, not job-destroying, under current conditions. Why? Well, ask yourself first how, exactly, pollution regulations are supposed to destroy jobs. They will indeed raise costs, that is, shift up the aggregate supply curve. But our economy isn’t supply-constrained right now, it’s demand-constrained; so why would this make a difference? Even if prices go up a bit, how will this reduce real demand? It’s like the argument about wage flexibility, which I’ve addressed many times in this blog: downward flexibility of wages does nothing helpful when you’re in a liquidity trap, and cost increases do no harm. So, no job cuts. Why might new regulations actually be expansionary? Because they will provide power companies with an incentive to invest in ways that will reduce their emissions, even if they currently have excess capacity. Obama had a great phrase near the end of his speech: “Invest, divest” — that is, shift away from more to less polluting ways of doing business. And the “invest” part would be exactly what the economy needs. Yes, this is a variation of the “termites” theory, under which wrecking capacity can actually be expansionary — but that theory is right under these conditions. In short, everything you’re going to hear about the downside of the new regulations will be wrong, at least for the short to medium run.

Taking action on climate change - The Obama administration is side stepping congress and finally doing something about climate change.  The "action plan" has a nice outline of strategies, but no specifics.  It will be interesting to see what kinds of rules the EPA and DOE roll out in response to this initiative and how they will be justified under existing laws like the Clear Air Act. Precedent for this kind of action was established by the Supreme Court awhile back.  If the Obama administration didn't take action soon, agencies would be sued by environmental groups and forced to do something.  So this kind of thing was bound to happen, one way or another. In response, Paul Krugman makes an interesting and surely controversial point.  The new rules, whatever they turn out to be, will make energy more costly.  That's not to say action shouldn't be taken, but that there are tradeoffs involved with curbing climate change.  Krugman argues, however, that because these are not ordinary times, the costs may be considerably less.  Indeed, these rules may actually benefit the rest of the economy, not hurt it.  In other words, action on climate change could be free lunch.

Sometimes it just feels good to be wrong (really, really wrong) - Paul Krugman says the proposed climate regulations will lead to net benefits:  while the usual suspects will denounce all this as job-destroying regulation, tougher climate policy will, almost surely, be job-creating, not job-destroying, under current conditions.Why? Well, ask yourself first how, exactly, pollution regulations are supposed to destroy jobs. They will indeed raise costs, that is, shift up the aggregate supply curve. But our economy isn’t supply-constrained right now, it’s demand-constrained; so, no job cuts.  I don't think that when business firms are forced to hire workers to meet environmental regulations it will result in no additional cost simply because those workers are currently unemployed. Won't those unemployed workers ask to be paid? Jobs will be lost as business firms adjust to these higher costs (the net impact on employment is likely trivial). And by the time this proposal hits the economy, the plan isn't supposed to be completed until a year from now and the legal action will likely push these regulations down the road another year or two, hopefully the economy will be in the expansionary phase of the business cycle.  Finally, as I've said before, assessing environmental policy with a macroeconomic model is not the best way to assess an environmental policy. The benefits of the policy are the reductions in negative market and nonmarket climate change impacts and the costs are the negative effects in markets (resulting from lower supply of carbon intensive goods). In other words, analysts should do some benefit-cost analysis and forget about the jobs.

Invest, Divest and Prosper, by Paul Krugman -  Mr. Obama wasn’t touting legislation we know won’t pass. The new plan is, instead, designed to rely on executive action. This means that ... it can bypass the anti-environmentalists who control the House of Representatives.  Republicans realize this, and right now they don’t seem eager to attack climate science, maybe because that would make them sound unreasonable (which they are). Instead, they’re ... denouncing the Obama administration for waging a “war on coal” that will destroy jobs.  And you know what? They’re half-right. The new Obama plan is, to some extent, a war on coal — because reducing our use of coal is, necessarily, going to be part of any serious effort to reduce greenhouse gas emissions. But making war on coal won’t destroy jobs. In fact, serious new regulation of greenhouse emissions  It’s always important to remember that what ails the U.S. economy right now isn’t lack of productive capacity, but lack of demand. Suppose that electric utilities, in order to meet the new rules, decide to close some existing power plants and invest in new, lower-emission capacity. Well, that’s an increase in spending, and more spending is exactly what our economy needs.  O.K., it’s still not clear whether any of this will happen. Some of the people I talk to are cynical..., believing that the president won’t actually follow through. All I can say is, I hope they’re wrong.

The Vacant Climate Plan - Yesterday, President Obama announced his new Climate Action Plan in a nationally televised speech. He described the emerging climate crisis and its impacts–both past, present and future, while be suffered the heat of an abnormally warm June day in Washington, DC. His arguments for climate action were compelling and hard to argue with. Unfortunately his actions do not match his words. Unlike Bill McKibben, I do not believe that “the solutions agenda [Obama has] begun to advance moves the country in a sane direction.” (Did you read the actual Climate Action Plan, Bill?!?) No, what I read in Obama’s Action Plan was a rehashing of the same old dangerous false solutions that many of us have been fighting for years and years. But what’s really criminal is that even though Obama clearly understands both the science and implications of climate change, he still pushes an agenda that will drive us all over the climate cliff. First the plan’s “Case for Action” reiterates Obama’s pledge to decrease carbon emissions by a paltry 17% below 2005 levels by 2020–but only if all other major economies agree to do so as well. Climate scientists are not calling for 17% reductions by 2020. In fact, countries like the US need to reduce our emissions by 80-90%. And not in seven years, but immediately. Last year preferably. The main takeaway from Obama’s horrific bit of greenwashed nonsense? We can continue our unsustainable way of life indefinitely with just a few key tweaks.

Americans Don't Give A Damn About Global Warming - On Tuesday the President laid out his plan to end-run the Congress and allow the EPA to regulate carbon emissions from existing coal plants. The plan didn't get much attention in the press because the Supremes were very busy this week eviscerating the Voting Rights act and letting gays get married in California. You can find an informed discussion of the plan at the Wonkblog, from which I took this chart. On the eve of the Presidents speech, the almost-completely-useless Pew Research Center released the results of a poll on international threats. 40% of Americans see climate change as a global threat. That's the lowest percentage in the world. I can personally attest to the lack of interest in the climate. Traffic to DOTE always goes down when I talk about global warming, especially when I put it in the title like I did today. Also note that human destruction of life in the oceans didn't even make the list, as we would expect. On the other hand, the nuclear programs of North Korea (59% of Americans) and Iran (54% of Americans) did. That tells you all you need to know about the Human Prospect right there.

That's one big broken window* - Christine Lagarde, the managing director of the International Monetary Fund, said Thursday that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs,” Lagarde said on the MSNBC program “Morning Joe.” via

Radiation Levels Skyrocket at Fukushima - Record high levels of radioactive tritium have been observed in the harbor at Fukushima. Japan Times notes: The density of radioactive tritium in samples of seawater from near the Fukushima No. 1 nuclear plant doubled over 10 days to hit a record 1,100 becquerels per liter, possibly indicating contaminated groundwater is seeping into the Pacific, Tokyo Electric Power Co. said. *** Tepco said late Monday it was still analyzing the water for strontium-90, which would pose a greater danger than tritium to human health if absorbed via the food chain. The level of cesium did not show any significant change between the two sample dates, according to the embattled utility. On June 19, Tepco revealed that a groundwater sample taken from a nearby monitoring well was contaminated with both tritium and strontium-90. *** During a news conference Monday in Tokyo, Masayuki Ono, a Tepco executive and spokesman, this time did not deny the possibility of leakage into the sea, while he said Tepco is still trying to determine the cause of the spike.

Renewable Energy to Beat Gas in Power Mix by 2016, IEA Says (1) -  Renewable energy may supply more electricity than nuclear reactors or natural gas by 2016, spurred by declining costs and growing demand in emerging markets, the International Energy Agency said. Wind, solar, bioenergy and geothermal use may grow 40 percent in the next five years, double the 20 percent pace in 2011, the Paris-based organization said today in a report on the industry. Excluding hydropower, cleaner sources of energy may reach 8 percent of total world electricity generation capacity by 2018, compared with 4 percent in 2011, the IEA said. The findings are another indication that renewables increasingly are rivaling fossil fuels on price without subsidy as the cost of wind and solar technologies declines. The report suggests ways that governments can do more to reduce the pollution blamed for global warming. “Renewable power sources are increasingly standing on their own merits versus new fossil-fuel generation,” IEA Executive Director Maria van der Hoeven said in New York today. “Many renewables no longer require high economic incentives.”

India to Eclipse China as World’s Coal Power, Buoying BHP -  India is burning coal in power plants at the fastest pace in 31 years. At the same time, domestic supplies of natural gas that are the main alternative are falling at the quickest rate in Asia, data from 2012 compiled by BP Plc (BP/) show. Both trends run counter to those in most major economies and give India clout over global coal prices. India’s growing appetite for imported coal should benefit suppliers in the $69 billion global coal trade such as BHP Billiton (BHP) and Indonesia’s PT Adaro Energy. India is set to eclipse China as the top importer of power station coal by 2014, as China burned the fuel in 2012 at the slowest pace since 2008, and U.S. demand fell for a second year, according to Energy Aspects Ltd. “India is increasingly becoming an important swing factor in the coal markets and exporters will look there for price support as Chinese imports slow,” “Chinese imports will start to fall as they use more of their own coal.” As Asia’s second-biggest energy consumer, with an economy expanding 5 percent last year, India used 10.2 percent more coal from a year earlier. That was the sharpest rise since 1981 and reversed three years of slower gains, according to this month’s BP Statistical Review 2013.

Coal-Power Financing Minimized in World Bank Energy Policy -  The World Bank plans to restrict its financing of coal-fired power plants to “rare circumstances,” according to a draft strategy that reflects the lender’s increased focus on mitigating the effects of climate change. The Washington-based lender will help countries find alternatives to coal, according to the draft obtained by Bloomberg News which lays out the bank’s policy on lending to its member countries. The paper, which is subject to revision, describes universal access to energy as a priority for the World Bank’s mission to help end poverty. The bank “will cease providing financial support for greenfield coal power generation projects, except in rare circumstances where there are no feasible alternatives available to meet basic energy needs and other sources of financing are absent,” according to the report. Greenfield is a term for a new facility. “Private-sector finance will be the preferred option, but where the World Bank Group does engage, the existing screening criteria for coal projects will apply,” according to the undated report, titled “Toward a Sustainable Energy Future for All: Directions for the World Bank Group’s Energy Sector.”

The U.S. will stop financing coal plants abroad. That’s a huge shift.: One of the more significant lines in President Obama’s climate-change speech this week got relatively scant notice. In a major policy shift, Obama said he would place sharp restrictions on U.S. government financing for new coal plants overseas.The announcement comes after years of federal support for coal projects abroad, and it’s a shift that could divert billions of dollars away from a cheap source of electricity that contributes heavily to global warming. Obama’s coal pledge also comes at a time when the World Bank is mulling a proposal to limit its lending for coal projects in developing countries. “Today, I’m calling for an end to public financing for new coal plants overseas unless they deploy carbon-capture technologies, or there’s no other viable way for the poorest countries to generate electricity,” Obama said in his speech at Georgetown University on Tuesday. Those restrictions will most heavily affect the U.S. Export-Import Bank, a government-backed lender that acts to boost American sales overseas. Over the past five years, the bank has provided financing for a handful of large coal plants, including $805 million for a 4,800-megawatt plant in South Africa and $917 million for a 4,000-megawatt facility in India. The lender said each of those deals helped support hundreds of American jobs, from engineers to coal miners.

Obama Climate Plan Touts Gas Fracking As “Transition Fuel,” Doubling Down on Methane Risk - The administration's "Climate Action Plan" for cutting carbon pollution in his second term in the Oval Office at Georgetown University and unfortunately, it's a full-throttle endorsement of every aspect of fracking and the global shale gas market. Hydraulic fracturing ("fracking") is the toxic horizontal drilling process via which gas is obtained from shale rock basins around the world, and touting its expanded use flies in the face of any legitimate plan to tackle climate change or create a healthy future for children.  Here is what President Obama said today at Georgetown about natural gas and fracking: Now even as we're producing more domestic oil, we're also burning more clean-burning natural gas than any country on earth. And again, sometimes there are disputes about natural gas, but we should strengthen our position as the top natural gas producer because in the medium-term at least, it can provide not only safe cheap power, but it can only help reduce our carbon emissions. The "Fact Sheet" announcing the Plan further explains: "We have a moral obligation to leave our children a planet that’s not polluted or damaged, and by taking an all-of-the-above approach to develop homegrown energy and steady, responsible steps to cut carbon pollution, we can protect our kids’ health and begin to slow the effects of climate change so we leave a cleaner, more stable environment for future generations."

Obama’s New Climate Plan: Less Coal, More Fracking - On June 25, President Obama gave a “major” climate speech, and John Aravosis posted the video and full text here. John focused on one element of that speech, the part about the Keystone pipeline:“I do want to be clear. Allowing the Keystone pipeline to be built requires a finding that doing so will be in our nation’s interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline’s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.” The speech was promoted by, among others, Huffington Post, as saying that the President would promise that Keystone must be carbon neutral: Me? I think we’re being set up for a Yes, but I’ve thought that since the subject came up. If the baby keeps grabbing for the candy, you have to conclude s/he wants it. Same with this. What About the Rest of the Speech? Looks Like Less Coal, More FrackingThere’s much to like in Obama’s energy plan (pdf), but one piece stuck out very much — if you listened to the speech, you have to know the fracking industry must be delighted. If “natural gas” = “fracking” (and it does), the poison-your-ground-water-for-profit industry will see a big boost in income. Will there be a finder’s fee? Here are relevant sections from the first part of Obama’s speech. Remember, “fracking” is one of our replacement phrases. Every time you see “natural gas” say “fracking,” as described here. Obama (my emphasis and [bracketed comments]:

Fracking critics unhappy with Obama climate speech - — President Barack Obama's speech this week on climate change forcefully rejected some key arguments made by opponents of natural gas fracking, upsetting some environmental groups that otherwise back his climate goals. Obama, in his address Tuesday calling for urgent action to address climate change, praised what he called "cleaner-burning natural gas" and its role in providing safe, cheap power that he said can also help reduce U.S. carbon dioxide emissions. Regulators in many states with heavy new drilling activity say fracking, a colloquial term for hydraulic fracturing, is being done safely and is essentially similar to the hundreds of thousands of oil and gas wells that have been drilled all over the nation. The drilling boom has reduced oil and gas imports and generated billions of dollars for companies and landowners. Many scientists and environmental groups also agree with Obama's main point: that while there are some negative effects from natural gas, burning coal is far worse for the environment and public health. There's no dispute that natural gas burns far cleaner than coal, but its main component, methane, is a potent heat-trapping gas.

Bombshell Study Finds Drinking Water Near Fracking Wells Contaminated With Methane - Wells used for drinking water near the Marcellus Shale in northeast Pennsylvania have methane concentrations six times higher than wells farther away. That is the finding of a Duke University study published on June 24th in the Proceedings of the National Academy of Sciences.  The researchers analyzed 141 drinking water wells (combining data from a previous study of 60 sampled wells in 2011) from the Alluvium, Catskill, and Lock Haven aquifers and a few drinking water wells from the Genesee Formation in Otsego County of New York. Methane was detected in 82 percent of drinking water samples for homes within a kilometer (0.62 miles or 1,093 yards) of hydraulic fracturing, or fracking, wells.  Robert Jackson from Duke’s Nicholas School of the Environment wrote the report and confirmed that, “the methane, ethane and propane data, and new evidence from hydrocarbon and helium isotopes, all suggest that drilling has affected some homeowners’ water.”

Are Fracking Wastewater Wells Poisoning the Ground beneath Our Feet? - Over the past several decades, U.S. industries have injected more than 30 trillion gallons of toxic liquid deep into the earth, using broad expanses of the nation's geology as an invisible dumping ground. No company would be allowed to pour such dangerous chemicals into the rivers or onto the soil. But until recently, scientists and environmental officials have assumed that deep layers of rock beneath the earth would safely entomb the waste for millennia. There are growing signs they were mistaken. Records from disparate corners of the United States show that wells drilled to bury this waste deep beneath the ground have repeatedly leaked, sending dangerous chemicals and waste gurgling to the surface or, on occasion, seeping into shallow aquifers that store a significant portion of the nation's drinking water. In 2010, contaminants from such a well bubbled up in a west Los Angeles dog park. Within the past three years, similar fountains of oil and gas drilling waste have appeared in Oklahoma and Louisiana. In South Florida, 20 of the nation's most stringently regulated disposal wells failed in the early 1990s, releasing partly treated sewage into aquifers that may one day be needed to supply Miami's drinking water. There are more than 680,000 underground waste and injection wells nationwide, more than 150,000 of which shoot industrial fluids thousands of feet below the surface. Scientists and federal regulators acknowledge they do not know how many of the sites are leaking.

Study links contaminated water to fracking - Drinking water wells near natural gas “fracking” sites were six times more likely to be contaminated than others, finds a new study of New York and Pennsylvania homes. A nationwide boom tied to hydraulic fracturing, or fracking, has boosted U.S. natural gas production by 30 percent since 2005. Concerns about environmental effects from the wells, which shatter layers of shale deep underground to release gas or oil, have also risen.In a new study released Monday by the Proceedings of the National Academy of Sciences, a research team led by Robert Jackson of Duke University sampled 141 drinking water wells across northeastern Pennsylvania and southern New York. The results add to a 2011 study that first linked closeness to fracking wells to drinking water contamination with methane.“It is looking like we are seeing a problem with well construction in some places,” Jackson said.Along with finding methane more likely to be contaminating drinking water wells within 1,000 feet of fracking sites, the study found propane in 10 nearby wells. Ethane gas was 23 times more likely to be seen in homes similarly close to fracking sites.On the plus side, there was no sign of industrial fluids used in the fracking process, such as diesel fuel.

EPA Pushes Back Fracking Impact Study to 2016 –  The U.S. Environmental Protection Agency (EPA) is moving back its timeline for release of its study on the impact of hydraulic fracturing from 2014 to 2016, the agency announced this week at the Shale Gas: Promises and Challenges conference in Cleveland, OH.  The study, aimed at assessing the threats fracking poses to groundwater supplies and air quality, began in 2010 under the direction of Congress. The intent was to create a thorough assessment of the drilling method so states could make informed decisions on whether to ban fracking or regulate the industry. With the study’s release still years away, some observers question whether it will mean much at all, as the industry is likely to continue its takeover. Horizontal drilling is already taking off in North Dakota, Pennsylvania, Colorado and Ohio, to name a few. Just this week, Illinois enacted a new law welcoming the industry into the southern portion of the state.

Will Israel's rush to export natural gas turn out to be a mistake? -- As the United States contemplates exporting natural gas to the rest of the world, previously energy-poor Israel seems about to jump on the export bandwagon. The current government is seeking approval to export about 40 percent of the production from its newly discovered offshore natural gas fields.In an era of high volatility in energy prices and supplies and in a country surrounded by unfriendly neighbors, one would think that Israel would want to keep this valuable energy prize all to itself. Current estimates suggest that the remaining 60 percent of production will allow Israel to supply all its needs for 25 years. My question is: What will the country do after that? Presumably it will need natural gas after 25 years. And, what if estimated reserves turn out to be too optimistic and the supply doesn't last that long? No one really knows what's in a reservoir until it is actually produced. What if the current steep rise in the rate of natural gas consumption continues for a number of years? Estimates stated in years of supply are usually based on the current rate of consumption. But if the rate of natural gas consumption continues to accelerate, the 25-year supply will shrink to a fraction of that number and the inevitable peak in production from these fields will occur even sooner. Moreover, additional supplies are unlikely to come--at least at favorable prices--from any of Israel's neighbors.

Enbridge grapples with pipeline shutdown, weekend spill in northern Alberta - Enbridge is working to contain and clean up a weekend spill of synthetic crude into a wetland area and small lake in northern Alberta. Enbridge also shut other pipelines in the area as a precaution, including the Athabasca and Waupisoo pipelines. The release of crude comes as Alberta grapples with major flooding, including in the city of Calgary where Enbridge has its head office. Enbridge said in its initial assessment that unusually heavy rains may have resulted in a ground movement that affected the pipeline, which is part of its Athabasca network. The company shut down Line 37 after a spill was discovered early Saturday near its Cheecham Terminal, about 70 kilometres southeast of Fort McMurray, Alta., which is the hub of Alberta’s oilsands industry. The Alberta Energy Regulator said late Sunday that it was working on the problem but hadn’t confirmed the company’s estimate that between 500 and 750 barrels of oil had spilled.

Keystone XL – The Safest Pipeline Ever Built - Pipeline leak detection is about to go another round in the media with TransCanada Corp.’s announcement that Keystone XL will be the safest pipeline ever built and won’t need expensive, high-tech leak detection systems. That doesn’t mean there won’t be any leak detection, it just means the pipeline will rely on computer software, flyovers and surveys rather than higher tech infrared sensors, acoustic sensors, and fiber optic cables. The difference is between detecting big leaks and small leaks (before they become big). It could be an issue for Keystone XL as it awaits approval from the US government, even if it will be the safest pipeline ever built.   The US Environmental Protection Agency has already recommended that Keystone XL employ advanced external leak detection tools, but TransCanada says it’s not practical for its 4.7 million-barrel/day pipeline capacity. This despite the fact that new leak detection systems would have reportedly cut 75% of the cost of major leaks that totaled $1.7 billion in damage (not including clean-up costs and financial impact) between 2001 and 2011. If TransCanada gets it way on this it will mean that its planned internal leak detection would only pick up spills of more than 12,000 barrels per day or more, according to some accounts. But external leak detection systems could cost an additional $700,000+ for TransCanada. (Earlier this year we ran a very interesting interview with Synodon Inc. (SYD) on leak detection. Be sure to check that out here).

Narrow and Flawed, Federal Pipeline Safety Study Fails to Settle Controversy - Diluted bitumen, a controversial form of heavy Canadian oil, poses no more risks to pipelines than conventional oil, according to a long-awaited report released Tuesday by the National Academy of Sciences. But environmentalists and pipeline watchdogs said the study's scope was so narrow and its methodology so flawed that it does little to settle the controversy over whether diluted bitumen, or dilbit, is more dangerous to humans and the environment than the light, conventional crude oil that most U.S. pipelines were built to handle. The report examined the potential for pipeline leaks but did not address the consequences of a spill, the key concern for environmentalists and people who live near pipelines. And the conclusions were based not on new research but primarily on self-reported industry data, scientific research that was funded or conducted by the oil industry, and government databases that even federal regulators admit are incomplete and sometimes inaccurate.

Environmentalists seek new review of Keystone pipeline plan - Six advocacy groups have asked the State Department to prepare a new environmental review of the proposed Keystone XL oil pipeline, saying that evidence has emerged showing it will hurt the environment. The demand, contained in a 48-page letter, comes as President Obama has pledged to block the project, which would carry heavy crude from Canada to the Gulf Coast, if it would “significantly exacerbate the climate problem.” The letter sent Monday says that several new analyses show that the project will speed heavy crude extraction in Canada’s oil sands region. Activists say the State Department should refuse to approve the pipeline because of adverse impact on the environment. The State Department is currently responding to more than 1.2 million comments on a draft environmental assessment issued in March, which suggested that denying a permit to the pipeline firm Trans­Canada would have little overall climate impact because the oil would be extracted and shipped out anyway.“Limitations on pipeline transport would force more crude oil to be transported via other modes of transportation, such as rail which would probably (but not certainly) be more expensive,” the assessment said.

Obama State Dept. Leaving Citizens in the Dark About Exact Keystone XL Pipeline Route - Believe it or not, the precise route of TransCanada's Keystone XL tar sands pipeline remains shrouded in mystery.   Of course, both TransCanada and the U.S. State Department have revealed basic Keystone XL route maps. And those who follow the issue closely know the pipeline would carry Alberta's tar sands diluted bitumen or "dilbit" southward to Port Arthur, TX refineries and then be exported to the global market.   But the real path is still a secret: the actual route of KXL is still cloaked in secrecy. Case in point: the travails of Thomas Bachand, Founder and Director of the Keystone Mapping Project.  "I went looking for a map, and discovered there wasn’t one," Bachand explained in a November 2012 interview with National Public Radio. "I went over to the State Department website, and found some great information, but then I discovered there wasn’t any route information."  His experience with TransCanada was even worse.   "TransCanada [also gave me] the runaround. Their excuse was that [releasing the information] was a national security risk, which is just a joke."  Due to lack of transparency on the part of President Barack Obama's State Department and TransCanada, what was once merely an ambitous photo-journalism project has morphed into a full-fledged muckraking effort -- and a Freedom of Information Act (FOIA) request battle royale -- that's now lasted about a year and a half for Bachand. The State Department still has yet to give him the goods. 

Price difference between Brent and WTI crude oil narrowing - The Brent-WTI spread, the difference between the prices of Brent and West Texas Intermediate (WTI) crude oils, has narrowed considerably over the past several months. The spread, which was more than $23 per barrel ($/bbl) in mid-February, fell to under $9/bbl in April, and has ranged between $6/bbl and $10/bbl since then.  The narrowing of the spread is supported by several factors that have:

  • Lowered Brent (North Sea) prices because Brent-quality crude imports into North America have been displaced by increased U.S. light sweet crude production, reducing Brent-quality crude demand
  • Raised WTI (Cushing, Oklahoma) prices because the infrastructure limitations that had lowered WTI prices are lessening

Number of the Week: U.S. Oil Boom Affecting Global Prices - $5.60: The price difference between benchmark oil prices in the U.S. and overseas. The U.S. oil boom is finally affecting global energy prices — but don’t expect cheap prices at the pump as a result. U.S. oil production peaked in the early 1970s and has been on a more or less steady decline ever since. Or at least, that was the case until five years ago, when the fracking boom in North Dakota and elsewhere led to a sudden surge in domestic crude production. The U.S. pumped 6.5 million barrels a day of oil last year, according to the Energy Information Administration, the most since the mid-1990s, and production has continued to surge; April’s figure of 7.4 million barrels per day marked the best month in more than two decades. (Other sources suggest an even bigger increase.) You might think all that extra oil would be good news for drivers, but so far that hasn’t happened. The price of a gallon of regular gasoline averaged $3.62 in 2012, the highest on record. Moreover, gas prices have kept on rising even as improved fuel efficiency, a weak economy and other factors have kept demand growth in check.

Melting Ice, Freezing Fossil Fuels Ambitions: Interview with Fen Montaigne - Visibly melting sea ice is the best evidence that the planet is warming. So prospecting for oil in the Arctic is a tricky endeavor that must be undertaken slowly and with extreme caution, argues Fen Montaigne, senior editor of Yale Environment 360, author of books, and contributor to National Geographic, The New Yorker and Smithsonian magazines. So just how hot is it going to get? Hotter than we can handle if we fail to reduce greenhouse gas emissions significantly, Montaigne tells us in an exclusive interview in which we discuss:

•    Why prospectors should proceed with extreme caution in the Arctic
•    Just how hot it’s going to get with global warming
•    Why science is being side-lined in the climate change debate
•    Why oil companies will have to keep their assets in the ground
•    Why we need to rethink agricultural subsidies
•    What we can expect next from the volatile EV market
•    What really concerns environmentalists about natural gas
•    The great fossil fuels paradox
•    Why natural gas may not only be a bridge to the future, but the future itself
•    Why the US government has no business mandating ethanol

Energy Return on Investment is too Low to Maintain Current Economic System - My major point when I gave my talk at the Fifth Biophysical Economics Conference at the University of Vermont was that our economy’s overall energy return on investment is already too low to maintain the economic system we are accustomed to. That is why the economy is showing signs of heading toward financial collapse. Both a PDF of my presentation and a podcast of the talk are available on Our Finite World, on a new page called Presentations/Podcasts. My analysis is with respect to the feasibility of keeping our current economic system operating. It seems to me that the problems we are experiencing today–governments with inadequate funding, low economic growth, a financial system that cannot operate with “normal” interest rates, and stagnant to falling wages–are precisely the kinds of effects we might expect, if energy sources are providing an inadequate energy return for today’s economy.  Commenters frequently remark that such-and-such an energy source has an Energy Return on Energy Invested (EROI) ratio of greater than 5:1, so must be a helpful addition to our current energy supply. My finding that the overall energy return is already too low seems to run counter to this belief. In this post, I will try to explain why this difference occurs. 

How the world benefits from Chinese piracy - Kal Raustiala and Christopher Sprigman have a  fantastic article in the latest issue of Foreign Affairs about IP laws and piracy in China. The title, which I love, is “Fake It Till You Make It,” and the gist is clear: Given that Chinese copying has benefits as well as costs, and considering China’s historical resistance to Western pressure, the fact is that trying to push China to change its policies and behavior on intellectual property law is not worth the political and diplomatic capital the United States is spending on it. This is if anything a vast understatement. Chinese IP piracy — if what we’re talking about can properly be called that, given the degree to which it is condoned by the Chinese government — is wonderful for China, for its economic growth, for helping hundreds of millions of its citizens out of poverty, and for the sake of global innovation more broadly. You and I, as US consumers, actually benefit from it. The only losers are the large US corporations who seek to extract rents from various copyrights and patents — even as they, notoriously, tend to be quite unwilling to pay taxes on any of their overseas revenues.

Divorces now surpass marriages in China, report says - If any of us needs more proof that China is rapidly becoming a quintessentially middle class nation – with all that portends for companies whose products appeal to those with a bit of coin in their pocket – then take a look at the divorce statistics. The state-owned Shanghai Daily reported today that divorces now surpass marriages in China, with Shanghai reporting a 13.6 per cent rise in marital dissolutions last year, the biggest jump in recent years.  “Incompatibility, financial difficulties, extramarital affairs, family disputes, sex and differences in opinion over children’s education were among the major reasons blamed for divorces,” And it seems the one-child generation – only children born after the introduction of the policy in 1979 – are even more likely to call it quits as soon as the connubial bliss starts to fade. “Those born after 1980 were pampered by their parents as China’s one-child policy came into effect. They tend to be more self-centred and less tolerant in a marriage than those born earlier,” “When disputes erupt, neither the husband nor the wife is willing to compromise because they grew up in a similar one-child policy environment,” she said. “So quarrels escalate into divorces, sometimes with parents’ intervention.”

Tyler Cowen Goes Off the Track on China's Aging - Tyler Cowen has an interesting piece on the problems facing developing countries going forward. As he notes, these will be different in the future than they were in the past. However the piece is strange due to one of the items it mentions, the aging of the population, and one it leaves out, intellectual property claims. On the former point, Cowen seems determined to apply the Peter Peterson financed obsession with cutting Social Security and Medicare to the whole world. He gives us the bad news: "It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly. In Iran, for example, it is now estimated at 1.86 per woman, which over time would mean that families are not replenishing themselves. And shrinking and older populations, of course, limit future economic growth."  Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP.  I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world. Cowen also gives us the bad news about China: "Finally, many lower-income countries will be old before they are rich. China’s population, for example, is aging rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income." Let's think about this one for a moment.  Per capita GDP has risen by a factor of 13. This swamps the growth in almost every other developing country. While aging can impose some burden on the working population, it will not prevent both workers and retirees from enjoying much higher living standards than they did in the recent past.

China: Just as Desperate for Education Reform as the U.S. - I saw the problem firsthand at Wuhan University, one of the top 10 schools in China. While not as elite as Peking University or Tsinghua (which are often referred to as China’s Harvard and MIT, respectively), Wuhan is certainly one of China’s Ivies. Yet while the dozen or so students I met with there were clearly bright and hard working, they had trouble thinking creatively or outside the box. One young man claimed he wanted to put his economics degree to work fixing China’s environment. But when I asked him how he might go about that — by starting a company? Lobbying the government? Using social media? — he looked confused and simply shrugged. One reason for this sort of response might be that Chinese education typically encourages students to stay in the box and not question authority. “There is growing concern, among parents, employers and policymakers alike, that the system’s emphasis on rote learning and high-stakes exam taking does not foster the mental agility and innovative flair that the 21st century economy will need,” says a McKinsey report on the Chinese educational system and skills gap released in May. It’s a high-stakes problem. McKinsey estimates that at the lower end of the labor market (meaning factory workers with primary education or less) there will be 23 million more workers than jobs in China by 2020. Meanwhile, at the top end (workers with university degrees or vocational training) there’s an increasing talent shortage — Chinese employers will need about 24 million more workers than the country is likely to supply during the same time span. If the country doesn’t bridge the gap, the opportunity cost is likely to be $250 billion, according to McKinsey.

China's 'Shadow Banks' Fan Debt-Bubble Fears - The lenders at Citic and other institutions that make up China's "shadow banks" have created the closest thing China has to the culture of Wall Street. They take risks that traditional banks won't, going so far as to create investment funds for assets like top-shelf liquor and mahogany furniture. Their top executives drive luxury cars and frequent expensive clubs. Now, China's shadow banks—a mélange of trust companies, insurance firms, leasing companies, pawnbrokers and other informal lenders subject to limited oversight—are at the center of mounting concerns over whether the country's slowing economy could trigger a debt crisis. In recent days, the Chinese government has moved to crack down on undisciplined lending. Chinese stocks posted their worst one-day loss in nearly four years on Monday after China's central bank released a statement signaling it was moving to contain runaway credit growth. Markets fell further in early trading Tuesday.The People's Bank of China began earlier this month to curtail funding for the country's interbank-lending market, where banks lend to each other and to some big shadow financiers, sending interbank rates, usually in the 2% to 3% range, as high as 25% before settling Monday at 6.64%. China's official Xinhua news agency said Sunday that the central bank had engineered the cash crunch to tame runaway shadow-financing activities, suggesting its monetary policy has begun to shift from focusing on "quantity" to "quality." Xinhua said there is "a lot of hot money seeking speculative investments, and private lending is still widespread."

PBoC breaks silence over China cash crunch - The Chinese central bank has finally broken its silence over the country’s cash crunch, telling banks the onus is on them to manage their own balance sheets better. The People’s Bank of China said liquidity was at a “reasonable level” and called on big lenders to do more to help restore calm to the country’s anxious markets. Interbank rates spiked to double digits last week, even momentarily hitting 28 per cent, before easing. The sudden cash squeeze raised the spectre of a credit crisis in the world’s second-biggest economy and rattled global investors. “Commercials banks must pay close attention to the liquidity situation in the market and must strengthen their analysis and forecasts of factors affecting liquidity,” the central bank said. “Financial institutions, especially large commercial banks, must at the same time as strengthening themselves, play an active role in using their advantages to support the central bank in stabilising the market,” it added.PBOC Says It Will Ensure Stability of China Money Market -  China’s central bank said it will keep money-market rates at a “reasonable” level and seasonal forces that have driven them up will fade. The People’s Bank of China has provided liquidity to some financial institutions to stabilize money market rates and will use short-term liquidity operation and standing lending facility tools to ensure steady markets, according to a statement posted to its website today. It also called on commercial banks to improve their liquidity management.The statement is the first public confirmation of central bank action to ease a cash squeeze that sent China’s overnight repurchase rate to a record last week and came hours after Ling Tao, deputy head of the PBOC’s Shanghai branch, said liquidity risks were controllable. Premier Li Keqiang is seeking to wring speculative lending out of the nation’s banking system after credit expansion outpaced economic growth. The PBOC is giving the market “a pill to soothe the nerves,” “The message is clear: the central bank doesn’t want to see a tsunami in China’s financial markets and market rates will drop further.”

Is China Central Bank Back-Dating Info to Cover for Unprecedented Credit Bubble -- A press release by the People's Bank of China (PBOC) was made available today (24 June 2013).  The date on the document was 17 June 2013.  All last week the PBOC was being criticized for lack of statements about the turbulence in the Chinese credit markets.  For the story as it developed see GEI News, 19 June, 21 June and 22 June. Now, if we can believe that the 17 June date represents when the banks in China received the policy statement then the PBOC was clearly communicating in real time to the banks, and in fact pre-announced the tightening of the short-term interbank lending market. On the other hand, absent further information, it is also possible that the letter was backdated to 17 June in order to provide cover for what could be considered a failure to communicate. And, if the letter was communicated to the banks on 17 June (and somehow was never leaked to the press), what is the justification of not making the information public in a timely manner?

Li’s Cash Squeeze Risks 1st China GDP-Goal Miss Since ’98 - China’s biggest squeeze on credit in at least a decade is increasing the chance that Li Keqiang will be the first premier to miss an annual growth target since the Asian financial crisis in 1998. Goldman Sachs Group Inc. and China International Capital Corp. yesterday joined banks from Barclays Plc to HSBC Holdings Plc in paring their growth projections this year to 7.4 percent, below the government’s 7.5 percent goal. The cuts followed a tightening in central bank liquidity that yesterday left the overnight repurchase rate more than double the year’s average. “The current leadership is trying to build its reputation in a different way than the previous administration, which felt that its target was holy and had to be met regardless of the circumstances,” The danger is that putting the growth goal aside undermines public confidence in China’s economic policy making that’s already been shaken by limited communication on the government’s objectives behind the cash squeeze. The central bank yesterday contributed to the biggest drop in Chinese stocks in almost four years by releasing a week-old statement saying liquidity was “reasonable.”

Goldman Sachs cuts China GDP growth view - Goldman Sachs became the latest investment bank to downgrade its forecasts on China growth for this year and next, citing tighter financial conditions. In a note dated June 23, Goldman said it now expects real gross domestic product growth at 7.5% year-on-year in the second quarter of 2013, from 7.8% previously. It expects GDP growth of 7.4% and 7.7% for 2013 and 2014, respectively, from 7.8% and 8.4%, previously. "The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue," wrote economist Li Cui in a note. Goldman joins HSBC, Morgan Stanley and UBS who have all recently cut their growth forecasts on China.

Think 7% growth in China is slow? Try 6%, says Credit Suisse - Credit Suisse has put out a downbeat view of the Chinese economy that stands out even amid the ongoing stampede of China bears. On Wednesday, the bank said it wouldn’t be surprised if China’s GDP growth eased to a rate of 6%. Repeat: 6%. There’s a combination of factors behind this bearish view, Credit Suisse says. Most are very familiar: high leverage, a slowing sensitivity of growth to leverage, policy tightening, an apparent housing bubble, already high levels of infrastructure investment, a declining labor force, rising wages and the cost of capital. But the bank has added one more ingredient to the mix: the recent change in political leadership in China. “In year one of a 10-year term, reform [is] likely to be preferred to growth,” the bank says in a report authored by Andrew Garthwaite and other strategists. The current administration, led by President Xi Jinping and Premier Li Keqiang, took over in November last year and is expected to keep the helm for two five-year terms. Its attempts to lay a foundation for long-term growth have rested on steering the economy away from traditional drivers such as investment, and toward a consumption-driven model instead.

China’s slump puts U.S. economy at risk – Concerns are growing about China’s economy as the country’s new leadership tries to get a handle on deep problems that experts say have been years in the making. There was a record spike Thursday in rates banks charge when they lend to one another, evoking memories of the credit shortage that shook the U.S. economy during the financial crisis. A disappointing figure from the manufacturing sector provided another ominous sign this week, causing further alarm that China’s slowdown is well under way. For years, China has been viewed as a place flush with money, erecting gleaming airports, highways and entire cities seemingly overnight. But experts say that much of that building — and impressive economic growth — was fueled by debt that local governments are now struggling to repay, especially as the economy slows down.

Chinese Banks Stop Lending Due To Liquidity Freeze - If one thought the schizophrenic lies out of Europe between 2010 and 2013 were bad enough (the bulk of which it now appears were orchestrated by Mario Draghi), here comes China, a country which already has a "credibility" issue so to say, which has no choice but to lie as blatantly as possible in order to preserve some semblance of stability. The reason: as first forecast here months ago, and as has subsequently materialized, the credit/liquidity collapse in the country that lives and breathes on credit creation is rippling through the banking sector and causing unprecedented fallout for a financial industry that is already starved for every marginal yuan. Not unexpectedly following news that various retail and online banking services had been impaired in the early part of the week at China's biggest banks, now Caixin reports that banks are simply shutting lending to both businesses and individuals.

China Poses Global Growth Risk as Li Squeezes Credit - China’s effort to balance its economy without breaking it puts global growth at risk should policy makers fail. Premier Li Keqiang’s three-month-old government is allowing the tightest squeeze on credit in at least a decade to wean the nation off a cash binge that threatened to destabilize the world’s second-largest economy. The aim is to deliver sustainable, more-even economic expansion closer to 7 percent than the rates faster than 9 percent witnessed in recent years. The risk is that getting the transition wrong will stifle credit and hurt activity at home and abroad just as the Federal Reserve pivots toward withdrawing stimulus. “Things are quite a lot different in China than might have been expected. It does potentially pose risks for global growth.”

Pettis: No Lehman but shadow run possible - Exclusively from Michael Pettis’ newsletter:Short-term rates in the interbank lending market rose steadily over the past two weeks and then suddenly soared Thursday amid rumors of the market’s having frozen up and one or more large banks having missed payments. Rates decline Friday but still remained high.For the past ten years China’s soaring credit has been accommodated by rapid money expansion as the PBoC was forced to monetize large net inflows on the current and capital account. This year, however, while credit continued to expand at historically unprecedented rates, net foreign exchange inflows seem to have dried up, especially after the authorities clamped down some time in May on the over-invoicing of exports that had been used to bring “carry trade” money illegally into the country.The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks’ events were likely to have been simply an exacerbation of those strains.I believe talk in the market of China’s experiencing its own “Lehman moment” are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.

China Bad-Loan Alarm Sounded by Record Bank Spread Jump - Borrowing costs for Chinese banks have surged the most in at least six years this month as rating companies say a cash crunch threatens to swell bad loans.  The yield spread for one-year AAA bank bonds over similar-maturity sovereign notes jumped 56 basis points so far this month to 163 basis points, the most in ChinaBond records going back to 2007. The similar AA gap widened 59 basis points to 188. Even as China Construction Bank Corp. (939) President Zhang Jianguo said yesterday cash conditions have normalized, the benchmark seven-day repurchase rate was fixed at 6.85 percent, almost twice the 3.84 percent average for this year.  Money-market rates touched the highest level last week since at least 2003, prompting three of the largest rating agencies to warn banks may run out of cash to pay investors in their wealth management products and to extend new loans, increasing the risk their customers will default. The People’s Bank of China is seeking to wring speculative lending out of the system after total credit approached 200 percent of gross domestic product, according to Fitch Ratings.

Why China’s crunch is serious this time - The standard analysis that China could miss its growth target of 7.5 per cent for the year by a few basis points was disappointing but hardly cause for concern. In reality, growth has been far lower. In the past, such slowdowns would cause Beijing to instruct its banks to further loosen credit, as occurred from 2009-2010 when the outstanding loan books of Chinese banks expanded by 58 per cent in a mere two years. This time, central authorities did not respond in the same way. President Xi Jinping demanded that the central and lending banks attack the ‘four winds’ of ‘formalism, bureaucracy, hedonism and extravagance.’ Central authorities were sending a message to the country’s banks: over-rapid credit expansion would not be tolerated. Although it has the cash to do so, central authorities instructed the central bank to refrain from injecting cheap capital into the commercial banking system. The seven-day repo rate (repossession or repo rate is the interest of capital charged by the Central Bank to commercial banks) jumped from 2.78 per cent in mid-May to over 10 per cent in mid-June. The overnight repo rate ended on 25 per cent on June 20 having reached 30 per cent at one stage, effectively freezing this avenue of funds for banks. Subsequently, interbank lending rates (what commercial banks lend to each other) breached 13 per cent in mid-June in the highest ever recorded levels. Starved of cash, several banks also defaulted on their interbank obligations, creating a mini-panic amongst the country’s banks. There were fears that this could be China’s Lehman Brothers moment.  

China top auditor warns on rising debt: report - China's top auditor on Thursday warned about risks threatening the country's economic development and called for better management of state-owned assets, according to a Xinhua news report. Speaking at an ongoing session of the Standing Committee of the National People's Congress -- China's parliament -- Liu Jiayi, auditor general of the National Audit Office, said local governments must improve their debt management as their borrowings have surged. The debt level at 18 provincial-level governments and municipalities had soared to 3.85 trillion yuan ($626 billion) by the end of last year, according to a report submitted to the committee, the report said. Audits showed some companies "blindly invested" in some industries, and some 45 projects without approval had invested 58.3 billion yuan by the end of 2011, Liu reportedly said

The Big Four Central Banks Muddy The Same Sea Of Liquidity, And Then There’s China  - Lee Adler - Shortly after I completed this post, the BoE announced a 200 billion yuan ($32.6 billion) swap line with the PBoC, according to the Financial Times. This is the first time a G7 country has taken a step to provide funding for the PBoC, although Japan already has such a line, according to the FT. Might not the Fed be far behind? What a firestorm that would ignite. The headline, “Bernanke bails out China?” I can’t see it but it would certainly make things interesting if they did.  The world’s major central banks are now working at cross purposes, creating massive crosscurrents that are making life extremely difficult for investors. This isn’t likely to end soon. In fact, conditions should get worse. The 4 big central banks in the world are the Fed, ECB (European Central Bank), BoJ (Bank of Japan), and PBoC (Peoples Bank of China). The BoE, (Bank of England) is far smaller but important from a policy signaling perspective and because of who its counterparties are. They include not only the 3 mammoth British banks that are US primary dealers but all the other major players in world markets, who all have big operations in London. The Fed, ECB, BoJ, and BoE all deal with the same banks and the securities dealers affiliates of those banks. For example, of the Fed’s 21 Primary Dealers who are the Fed’s sole counterparties, only seven are US domiciled. Three are Canadian banks. Eight are European, including three British banks, and three are Japanese. All of these banks are also major players in Europe and Japan.

Mexico Manufacturing Looks to Gain Competitive Edge on China -- Mexico’s competitive edge over China in some types of manufacturing is set to keep growing. That’s the assessment of the Boston Consulting Group, which in a new report estimates Mexican factory wages will be nearly 30% lower than China’s by 2015, when adjusted for productivity differences. Mexican workers typically produce more per hour than their Chinese counterparts. By that same measure, Mexico already last year became a less expensive place than China to make some products, according to BCG’s estimates. Mexico’s strengthening factory sector is helping boost that nation’s economy. BCG estimates that within five years, Mexico’s factories will churn out up to $60 billion a year more in goods — much of it destined for export. About two-thirds of Mexico’s exports currently go to the U.S. Mr. Sirkin says four industries in particular are getting a boost: electronics, automobiles, appliances, and machinery. Besides having relatively low wages, Mexico is also benefiting from its close proximity to the U.S. and low energy costs. Mexico also has more free trade agreements — 44 — than any other country. That makes it an attractive place to make goods destined for many markets.

Day Traders Take Control of Japanese Stock Market Using 300% Leverage; What Can Possibly Go Wrong? - High-Frequency-Trading (HFT) Algorithmic Programs dominate the equity markets in the US with as much as 80% of the volume in some markets. Day Trading With 300% Leverage  It's different in Japan. In what seems like a flashback to dot-com trading in the US in 1999, Abenomics Spurs Day Traders as Japan Stock Volatility Hits 2-Year HighSitting before a cluster of computer screens in an apartment with the drapes shut, it took Naoki Murakami seconds to make $3,500 betting $1 million that Tokyo Electric Power Co. (9501) shares would fall a fraction of a percent. Day trading helps explain why Japanese individuals now account for more than 40 percent of the nation’s equity volume, or about as much as the overseas institutions that once were the biggest traders. They’ve also helped make Japan the most volatile developed market. Dramatic price movements aren’t the only thing that’s made Japan a day trader’s paradise. Deregulation of margin trading opened the flood gates, Murakami said. After rules were relaxed in January, investors can borrow three times as much as their brokerage account balances and turn loans over the instant they exit a trading position.

Judging Japan’s Experiment -- Japanese Prime Minister Shinzo Abe’s economic plan seemed to sail off almost flawlessly this year as stocks soared and the yen tumbled from levels late last year. Investors world-wide were excited that this might be Japan’s long-awaited revival after 15 years of deflation and decline. But has Japan really turned a corner? The ride is suddenly bumpier as volatility jolts the markets, sending bond yields and the yen higher and the Nikkei Stock Average into a bear market. Skeptics question Mr. Abe’s resolve to deliver radical growth strategies, while gyrations in asset prices have raised doubts about the Bank of Japan’s handle on markets. It will take months, and even years, before the official data show whether the grand Abenomics experiment — a newly aggressive central bank, big new government spending, and economic restructuring—is working as planned, stalling out, or heading off the rails. Here are the key factors, and some important data — from household inflation expectations and banking lending patterns, to golf-club membership prices and wages — to watch for valuable early clues to gauge the success of Abenomics.

Japan’s Shoppers Start to Buy, Tentatively - Prime Minister Shinzo Abe’s bid to revive Japan’s deflated economy hinges on consumers like Mr. Horii starting to feel flush enough to start splurging on the finer things in life.  A wide recovery in consumer spending has been the weakest link in “Abenomics,” the bold economic stimulus strategy that Mr. Abe has pushed since taking office in late December.  Abenomics has already brought big profit bumps to the nation’s exporters, thanks to a yen made weaker by Mr. Abe’s aggressive policies. He found a kindred spirit in Haruhiko Kuroda, the Bank of Japan’s new governor, who has committed the central bank to easing the money supply and reinflating the economy. Stock markets have rallied, as foreign investors jumped back into a country they had all but written off for its seemingly unshakable stagnation.  Numbers released on Friday by the government provided more proof of Japan’s corporate recovery. Industrial production rose by a robust 2 percent in May from the previous month. Tokyo’s benchmark Nikkei index climbed 3.5 percent Friday on the strong showing. Reversing a 15-year-long slide in prices, which Mr. Abe has singled out as both a cause and a symptom of waning profits, wages and consumption, is a tougher order. For companies to feel confident enough to start raising prices, Japan’s consumers have to start spending again, and data confirming that trend is still mixed.

A million engineers in India struggling to get placed in an extremely challenging market - Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed. Others will take jobs well below their technical qualifications in a market where there are few jobs for India's overflowing technical talent pool. Beset by a flood of institutes (offering a varying degree of education) and a shrinking market for their skills, India's engineers are struggling to subsist in an extremely challenging market. According to multiple estimates, India trains around 1.5 million engineers, which is more than the US and China combined. However, two key industries hiring these engineers -- information technology and manufacturing -- are actually hiring fewer people than before. For example, India's IT industry, a sponge for 50-75% of these engineers will hire 50,000 fewer people this year, according to Nasscom. Manufacturing, too, is facing a similar stasis, say HR consultants and skills evaluation firms. According to data from AICTE, the regulator for technical education in India, there were 1,511 engineering colleges across India, graduating over 550,000 students back in 2006-07. Fuelled by fast growth, especially in the $110 billion outsourcing market, a raft of new colleges sprung up -- since then, the number of colleges and graduates have doubled.

India Funding Strain Grows as Fed Outlook Hurts Rupee - India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the U.S. will curb monetary stimulus as its economy improves.  The rupee touched the weakest level versus the dollar on June 20 after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows. “The prospect of the U.S. unwinding stimulus means that funding the shortfall will get more challenging,” . “Even if the deficit narrows, it will remain too high for comfort.”  The rupee, which touched an all-time low of 59.98 per dollar last week, fell 0.6 percent to 59.6475 as of 11:33 a.m. in Mumbai.  The currency’s 9 percent tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the Finance Ministry, said June 20.

Let the rupee fall... India enters the currency war - Almost exactly a year ago we discussed the issues faced by India, as the nation's currency weakened to record lows (see post). We are now back to another round of rupee devaluation. In the last few days the USD/INR exchange rate exceeded the psychologically important level of 60 for the first time in history. Foreign investors are panicking, as capital leaves emerging markets. Why wouldn't India's central bank intervene? Here is one possibility. India's current account has been under significant pressure in the past few years. Exports have not kept up with rising domestic demand and increasing labor costs have made it more difficult to compete in global markets.

Emerging Markets, Hitting a Wall - NYT -- A GROWTH slowdown in the so-called BRICS nations — Brazil, Russia, India, China and South Africa — could be impeding the expansion of the global economy. That’s serious enough, and indeed we are seeing unrest in Brazil over stagnant living standards. Yet a graver problem may be lurking behind the headlines — namely, that sustained, meteoric growth in emerging economies may no longer be possible.  The disconcerting truth is that the great “age of industrialization” may be behind us, a possibility that has been outlined most forcefully by the economist Dani Rodrik, who is leaving Harvard for Princeton next month. And evidence for this view is coming from at least four directions:   First, machines can perform more and more functions in manufacturing, and sometimes even in services. That makes it harder to compete via low wages.  Supply chains are now scattered across many countries. Another barrier is the difficulty of sustaining a cultural vision for catching up economically. South Korea was a poor nation in the 1960s, and its economic rise required sacrifices from millions of people in work hours, savings and investment in education. But within 20 years or so, one could see that South Korea would most likely join the ranks of economically developed nations. Finally, many lower-income countries will be old before they are rich. China’s population, for example, is aging rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income. It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly.

Prospects for future economic growth - Tyler Cowen refers to some of my work in his NYT piece on dimming prospects for high growth in emerging market economies. Coincidentally, the brand new Global Citizen Foundation has just published my more substantial paper on this topic, titled “The Past, Present, and Future of Economic Growth.” There is a lot in this paper, but the bit that I think is really new is the distinction between two different growth drivers, which I call the “fundamentals” and “structural transformation” channels.  Not great descriptors, but bear with me for a while to see what I am getting at.By fundamentals, I am referring to the development of fundamental capabilities in the form of human capital and institutions. Long-term growth ultimately depends on the accumulation of these capabilities—everything from education and health to improved regulatory frameworks and better governance. By structural transformation, I have in mind the birth and expansion of new (higher-productivity) industries and the transfer of labor from traditional or lower-productivity activities to modern ones. With the exception of natural-resource bonanzas, extraordinarily high growth rates are almost always the result of rapid structural transformation, industrialization in particular.

South Africans Plan to Protest Obama’s Crimes Against Africa During Presidential Visit -  Yves Smith - An Obama tour of Africa is likely to provide a marker of how he is perceived in the rest of the world, although any negative reports are unlikely to get much play in our lapdog media. But since Obama was shunned in the recent G-8 conference, it’s going to be interesting to see how his African hosts muster up the appearance of enthusiasm during his visit.  The NSA scandal has only confirmed increasingly negative views of Obama overseas. He now has what looks like a “too little too late” tour of Africa, which looks intended to reverse growing Chinese influence there. The Middle Kingdom is Africa’s largest trading partner has been acquiring agricultural and mineral resources. And African countries may regard China as a much better ally than the US.  Even if China is engaged in a land-grab, it isn’t hard to look like a lesser evil with American and past European colonialists as the benchmark.  From the Real News Network: (video)

Rousseff calls for constitutional vote to quell Brazil protests - Brazilian President Dilma Rousseff has proposed holding a referendum on political reform to tackle mass protests against poor public services and corruption that have swept through the country. In a bid to ally herself with the concerns of protesters Ms Rouseff proposed “five pacts” covering a national vote on amending Brazil’s constitution, fiscal responsibility and extra spending on health, education and transport. “The people in the streets are demanding changes. The people are telling us they want more citizenship, they want quality public services, efficient mechanisms to fight corruption,” Ms Rousseff said. Analysts immediately questioned Ms Rouseff’s ability to deliver on her promise, which could affect the chance of her re-election in 2014. In April, her government delivered the biggest deficit in four years. Brazilian governments have been promising political reform for most of the past 20 years but only minor and faulting progress has been made. Most analysts agree that Brazil has too many political parties, which find it too easy to get members elected to Congress. Once elected, members are free to change parties at will and often owe greater allegiance to backers in business than to their voters. As a result, government is often stymied by a need to balance regional and special interests, and voter accountability is all but non-existent.

President’s promises fail to calm Brazil -  Protesters in Brazil have returned to the streets in low-income suburbs of Sao Paulo to demand better education, transport and health services, one day after President Dilma Rousseff proposed a wide range of actions to reform the country's political system. Police said at least 500 people blocked streets for several hours on Tuesday in a peaceful protest in the districts of Capao Redondo and Campo Limpo on the outskirts of Brazil's largest city.The protesters did not appear appeased by Rousseff's proposals, which shifted some of the burden for progress onto Brazil's unpopular Congress by calling for a referendum on reform politicians will have to approve.The divided Congress is likely to struggle to take any quick action on such a referendum.

Brazil Economists Reduce 2013, 2014 Expansion Outlook -Survey - Brazilian economists and analysts revised their forecasts downward for the country's economic expansion for 2013 and 2014, citing tepid activity so far and current inflationary pressures, according to a weekly Brazilian central bank survey released Monday. The 100 respondents in the survey reduced their expectations for economic expansion this year to 2.46% from 2.49% in last week's survey. It was the sixth-consecutive forecast reduction for 2013. For 2014, they reduced the growth outlook to 3.1% from 3.2%. In the meantime, survey respondents increased their inflation view for the end of this year to 5.86% from 5.83%. For the end of 2014, economists and analysts maintained their view for inflation at 5.8%.

Lula Default Scare Echoed in Worst Rout Since ’02: Brazil Credit - Brazilian government bonds are suffering the biggest quarterly losses since the run-up to former President Luiz Inacio Lula da Silva’s election in 2002 led to speculation that the nation would default. Dollar-denominated bonds from Brazil, Latin America’s biggest nation, plunged 7.55 percent since the end of March, the biggest slide since a 16 percent drop in the third quarter of 2002 before Lula’s October election that year. The loss this quarter exceeds a decline of 6.15 percent for countries with triple-B ratings, according to Bank of America Corp. Investors are becoming concerned that President Dilma Rousseff’s administration is undoing the progress of her mentor and predecessor, who overcame bondholder skepticism to win the nation’s first-ever investment grade in 2008. Brazil is now grappling with inflation above its 6.5 percent target, the prospect of a credit downgrade and the biggest street protests in more than two decades as speculation increases the Federal Reserve will reduce its unprecedented bond buying that had pushed investors into higher-yielding emerging markets.

How Ecuador Won By Defying Neoliberal “Washington Consensus” Playbook - By Bill Black - Ecuador is a particular problem for entities like Heritage. Heritage has an “economic freedom index.” “Freedom” has a specialized meaning to Heritage – financial regulation and regulation to protect workers’ health and safety tends to be treated as a decline in freedom. Simply having the government spend money – even if the spending dramatically increases health, safety, and education – can be treated by the index as making a nation less “free.” Like the competitiveness indices created by the World Economic Forum, the Heritage indices represent faux empiricism in the service of ideological dogmas. Heritage sculpted its index to attempt to support its view that regulation and government spending reduce economic growth. Nations like Ecuador expose the fallacies of Heritage’s index. Heritage’s index has a “quick facts” component that reports that Ecuador’s economic growth was 7.8% and unemployment was 4.9% (unemployment is now down to 4.1%, the best in Latin America).  As I have explained in prior articles, Ecuadorian President Rafael Correa has dramatically increased spending in precisely the categories that the Washington Consensus claimed Latin American governments should concentrate their spending – health, education, and infrastructure.  A million Ecuadorians have been brought out of poverty (in a nation of 15 million) under the Correa administration. The enormous emigration of Ecuadoreans prior to his leadership has been replaced by net immigration.

William Black Appears on Alpha and Omega - NEP’s William Black appeared on the June 22, 2013 episode of Alpha and Omega. The topic of discussion is about a series of articles he has written over the last year on the economic achievements and political shenanigans of Rafael Correa, the President of Ecuador. You can visit the site here.

Labor’s Declining Share Is an International Problem -- In a recent post, I noted the declining share of national income going to labor in the form of wages and benefits and the rising share going to capital income like dividends. Before talking about solutions to this problem, it’s important to understand that this is a worldwide phenomenon not confined to the United States. This fact is documented in recent studies. For many years, economists said they believed that labor’s share of income was an empirical relationship so stable that it was virtually a constant.  It takes time for economists to separate trends from the normal ups and downs in various types of economic data, and it took a while before they realized that labor’s falling share went beyond what could be explained by the recent recession. The latest Economic Report of the President (see Pages 60-61) discusses this phenomenon and suggests that it results from changes in technology, increasing globalization, changes in market structure and the decline of labor unions.More importantly, the report notes that labor’s falling share is even more pronounced in other developed countries. The reason this is important is that it allows us to avoid focusing too much on policies and factors unique to the United States. For example, labor’s share of income has fallen even in countries with much stronger protection for labor unions and greater unionization of the labor force.

Trans-Pacific Partnership: 11 Things Harper Doesn't Want To Reveal About Uber-Secretive Trade Pact - The most recent round of talks on this trade deal took place in Vancouver last week, and was met with some minor protests. But, again, you might not know it, from all the attention it’s been getting. “The federal government had no intention of even mentioning [the Vancouver talks] until it was leaked, after the fact, by news media in Peru,” the CBC reported. Canada lobbied for years to be admitted to the Trans-Pacific Partnership talks, which now include Australia, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam. Canada was finally formally admitted last October. So why is the Harper government now doing everything it can to keep the Trans-Pacific Partnerships details a secret? According to opponents of the TPP, Harper is keeping it quiet because he fears it will be controversial among Canadians. Everything from the rules surrounding Internet downloads, to how our groceries are produced, to when you can copy textbooks legally, will be affected.

World Trade Increased in April - The volume of world trade rose in April following two straight months of decline, a reflection of modest growth in the global economy growth. In its monthly report, the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Monday said trade volumes rose by 1.4% in April, having declined by 0.1% in March. The pattern of world trade growth suggests the euro zone remained the weakest part of the global economy, holding back a more rapid pickup in activity. Exports from the 17 countries that use the euro fell 1.0%, while imports fell 0.3%. By contrast, exports from the U.S. rose by 2.0%, while imports to the world’s largest economy grew by 3.5%. Among developing economies as a whole, exports rose by 1.7%, and imports by 2.1%. The CPB’s figures are closely watched by policy makers, including a number of central banks, because they provide the earliest available measure of global trade. The April trade figures are consistent with other indicators of economic activity, which have recently pointed to a revival in the U.S. and Japan.

Focus: World GDP | The Economist - FOUR years after the worst of the financial crisis and the world appears to be faltering again. According to The Economist's calculations, world GDP grew by just 2.1% during the first quarter of 2013 compared with a year earlier. Just 12 months ago, output was growing at a reasonable clip of 3.1%. The European Union, the world's second-largest economy, which welcomes its 28th member on July 1st, is back in recession. Meanwhile there are concerns about stumbling blocks as China seeks to rebalance toward a more consumption-oriented economy and more moderate growth rates. Long the mainstay of the world's fortunes, China alone has been responsible for nearly half of all world economic growth since the end of 2009 when the world began growing again. Other big emerging markets, Turkey, Brazil and India, are struggling to quell social unrest over frustration with governments' inability to deliver growth and make appropriate reforms.

Financial dislocation - My latest post at Pieria considers, among other things, the recent BIS report on the global economy and comments from the Archbishop of Canterbury on the future of banking:"The conventional view of the financial system is that it acts as an intermediary function, converting the money created by central banks into a form that can be used in the wider economy and circulating it through lending and deposit-taking. The unconventional monetary policy instruments that have been used by central banks to reflate economies since the financial crisis (and in the case of Japan, for much longer) make use of this model. One way or another, the additional money created by central banks was supposed to find its way out into the wider economy, stimulating new investment, creating jobs and generally increasing economic activity. But this isn't happening. Economies in the developed world remain flat, while the additional money created by QE has gone to inflate asset bubbles and increase inflation in emerging markets. Why has the additional money not gone where it was intended to go?" The remainder of this post can be read here.

On Bullying Friends - Lost in last week’s Taper Talk and generally bad markets was a development that I think has some legs. The Swiss Parliament basically told the US Department of Justice to fuck off. I’m very surprised by this outcome – I would have bet against this result. There will be repercussions. The details can be found here. The quick story is that after many years of pressure from the US DOJ, the Swiss Government was forced to offer up new legislation that would (1) end banking secrecy, (2) force the Swiss Banks to open their books, (3) force the banks to pay pay fines and (4) obligate the banks to identify the names of specific employees who assisted US customers in evading taxes. Eveline Schlumph, the Finance Minister and former President, championed the proposed laws in the political debate. She fell flat. The Swiss said “no”  with a 126 to 67 vote. I believe that this outcome came as a surprise to the tough guys at the DOJ. They have been beating the Swiss Banks to death for years. It’s 100% certain that the DOJ is going to retaliate for the “No” vote in Switzerland. It has to; there is too much at stake. The only question is which Swiss Bank comes under the DOJ rifle scope. I think the DOJ is going to come out swinging for the fence and target a big bank. Credit Suisse, Julius Baer and the Cantonal Bank come to mind.

Top executives laughed off concerns about abuse of bank guarantee - In the internal phone call between the two men, recorded on October 2, 2008, they are clearly celebrating the success of the bank guarantee, rushed through the Dail on September 30. In the telephone conversation, Bowe can even be heard singing bars of the German national anthem for the entertainment of his boss. The pair then laugh at this impromptu burst of song, which they both find hilarious. They continue their jocular tone as they move on to the subject of banking regulation. Drumm and Bowe are heard laughing at the concerns expressed to them by a senior regulatory official that the movement of money was causing a rift between Ireland and its EU partners. Drumm scoffed at the warning and declares to his colleague: "So f***in' what. Just take it anyway . . . stick the fingers up." In this new recording, Drumm jokes to Bowe: "Ah, you're abusing that guarantee. Paying too much in Germany I heard now as well. F***ing ridiculous, John." His senior treasury executive then breaks into song with "Deutschland, Deutschland, Uber Alles" to laughter from Drumm. As both men continued laughing, Drumm mocks the senior regulatory official who had contacted each of them earlier, mimicking the man in another act of comedy which both find hilarious.

Spanish Retail Slump Keeps Growth Hope Pinned on Exports - Spanish officials predicting an end in the next quarter to the worst recession in the country’s democratic history are pinning that hope on its export recovery as a consumer slump shows little sign of abating. With record unemployment weighing on domestic demand, supermarket chain Eroski sought to kickstart sales last week by cutting prices of 2,000 branded products from olive oil to diapers in more than a third of its 1,500 stores. Such tactics show the pain retailers are willing to endure to revive spending in an economic downturn that started in 2008.Economy Minister Luis de Guindos last week forecast the economy to resume expansion in the three months starting July 1. Reports this week may underline how dependent that view is on exports, with economists predicting retail sales data to show a 35th month of annual declines in May, and current account statistics which may confirm a boom in overseas sales.

Berlusconi Convicted by Milan Court in Sex-With-Minor Case -  Silvio Berlusconi, the 76-year-old billionaire and former Italian prime minister, was found guilty by a Milan court of paying a minor for sex and abusing the power of his office. He was sentenced to seven years in jail.  Berlusconi was also given a lifetime ban from public office, Judge Giulia Turri said in the Milan courtroom after a two-year trial. The ruling doesn’t become binding until the end of the appeals process, which could take months or years, and even if the sentence were enforced, it may involve house arrest due to his age. Turri urged prosecutors to seek perjury charges against more than 30 witnesses in the case.The verdict was Berlusconi’s third criminal conviction in eight months. It may exacerbate tension within the make-shift coalition supporting Prime Minister Enrico Letta. The two-month-old government depends on Berlusconi loyalists as well as lawmakers who have opposed the ex-premier since his entry into politics 20 years ago.

Italy's two-yr debt costs soar to highest since Sept. 2012 - Italy's two-year borrowing costs soared to their highest level since September 2012 at an auction on Tuesday reflecting ongoing pressure on riskier debt after the U.S. Federal Reserve signalled it would slow asset purchases by the end of this year. Rome sold 3.5 billion euros of new zero-coupon bonds maturing on June 30, 2015 at a yield of 2.40 percent. A month ago the treasury paid 1.11 percent, a euro lifetime low, to sell zero-coupon bonds though they had a maturity that was six months shorter than the new bonds. The treasury was also offering up to 1 billion euros of inflation-linked BTPei

Italy could need EU rescue within six months, warns Mediobanca - Italy is likely to need an EU rescue within six months as the country slides into deeper economic crisis and a credit crunch spreads to large companies, a top Italian bank has warned privately. Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs. “Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.” The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery. Emphasising the gravity of the situation, it compared the crisis with when the country was blown out of the Exchange Rate Mechanism in 1992 despite drastic austerity measures. Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.

The United States and Europe have nothing to fear from a Syriza government: Our op-ed in the NYT -  Galbraith and Varoufakis - THE sudden closure of Greece’s state television and radio network, the Hellenic Broadcasting Corporation, known as ERT, on June 11 has led to a political drama. The network’s journalists and staff have occupied ERT buildings, and large crowds have gathered to show support. With transmitters dark, broadcasting resumed over the Internet, and soon stations all over Europe picked up the feeds.  The crisis could also take down the Greek government and bring the left-wing opposition to power. This wouldn’t be a bad thing for Europe or the United States. The policies currently imposed upon Europe’s periphery are worsening the crisis, threatening Europe’s integrity and jeopardizing growth. A Greek government that rejects these self-defeating policies will do more help than harm. Despite its flaws, ERT is the only mass forum for public discourse that Greeks have; closing it took all noncommercial political discourse and local news off the air. Now, the government has turned a murky debate over austerity, confidence and credit markets into an open fight over democracy and national independence. In that fight, Syriza stands as the alternative, and Mr. Tsipras now has a chance of becoming prime minister. If he succeeds, nothing vital would change for the United States. Syriza doesn’t intend to leave NATO or close American military bases. Of course, American complicity in the Greek dictatorship of 1967 to 1974 hasn’t been forgotten, and any Greek government will naturally disagree with the United States, to a degree, over the Middle East. But the fact is, Greece’s problem today is with Europe, and Mr. Tsipras doesn’t want to pick a fight with Washington.

Portugal Posts Wider Budget Budget Deficit as Spending Increases - Portugal’s Finance Ministry said the government posted a wider budget deficit in the five months through May after spending rose. The deficit of the central administration and social security agency was 1.91 billion euros ($2.5 billion) compared with a deficit of 1.72 billion euros in the same period of 2012, the Finance Ministry’s budget office said in a report on its website. Spending rose 5.2 percent. Tax revenue increased 5.7 percent, with revenue from indirect taxes falling 4.1 percent and revenue from direct taxes rising 21.8 percent. Prime Minister Pedro Passos Coelho on May 3 announced measures intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers as he tries to meet the terms of a 78 billion-euro aid program from the European Union and International Monetary Fund. Government ministries will have to reduce spending on purchases of goods and services by at least 10 percent next year, Coelho said on May 3.

After sticking it to Ireland a few years back, EU "fixes" the bank bailout plan - Ireland was the one country in the Eurozone "periphery" that seemed to be bucking the trend (see post). Many had hoped that the nation will be able to withstand the Eurozone recession due to its strong trade balance. Exports were really humming until global growth stalled last year (see post). Ireland's trade balance turned negative again and does not seem to be recovering. Furthermore, domestic demand is now weakening. As a result Ireland's GDP contracted and the nation followed the rest of the Eurozone into a recession - just over 3 years after the Great Recession. Given Ireland's high government debt to GDP ratio (Ireland ranks third in the Eurozone after Greece and Italy), this is bad news. The hope was that the government can manage down its leverage as the GDP grows, but that's not how things turned out.

Ireland falls back into recession despite multibillion-euro austerity drive: Ireland is back in recession for the first time since its 2010 bailout, official figures have confirmed. Irish GDP shrank 0.6% in the first quarter of 2013, but the recession was confirmed when official data revised down the economy's performance in the final three months of 2012 to a decline of 0.2%. It means that Ireland has endured three successive quarters of contraction, despite the presence in Ireland of multinationals such as Apple, Google, IBM and several big pharmaceutical companies. The blow comes as Ireland reels from the unfolding Anglo Irish Bank scandal, in which executives at the bailed-out bank were caught on tape joking about their multi-billion euro rescue in 2008 and, at one point, singing "Deutschland über Alles" as they quipped about German deposits shoring up the bank. The output drop reflects an ongoing depression in consumer demand, amid unemployment of nearly 14%. Personal expenditure declined by 3% between the fourth quarter of 2012 and the first quarter of 2013. The decrease in demand reflects Irish consumers' fears for their jobs and a reluctance to get into debt following the credit-fuelled spending boom of the Celtic Tiger years. Exports fell by 3.2% in the first quarter, in a stark reversal for an economy that had enjoyed an export-led recovery.

Merkel Promises Austerity Abroad, Profligacy at Home - Spiegel - Just when it seemed as though German politicians were going to completely forget to campaign ahead of September elections, Angela Merkel has finally showed signs that she hopes to be re-elected this fall. Following months of essentially ignoring her political opponents, the chancellor on Monday presented her party's campaign program and even deigned to launch what might be construed as an attack on her challengers. And they might have a point. Merkel has continually insisted that her party stands for fiscal responsibility in times of crisis in the common currency zone and demanded that Southern European countries pursue strict austerity programs. Indeed, on Monday she urged Europeans to not constantly be looking for the next "pot of money." Yet her platform is full of expensive promises. Tax benefits for families, for example, are to be boosted at a cost of €7.5 billion ($9.8 billion). An additional €1 billion per year is to be spent on road construction. And the conservatives have promised to tackle inequalities in the country's taxation system, a measure that could result in an annual tax revenue shortfall of €6 billion.

Who does it hurt? The IMF on fiscal consolidation - The idea of ‘expansionary austerity’ has failed spectacularly by any account. Martin Wolf’s latest article in the New York Review of Books goes over this, as does Paul Krugman’s earlier piece in the same outlet. In a forthcoming paper written by Josh and I (which I will blog about later), we argue that austerity succeeded at least in part because of the nature of consensus macroeconomics.  One paper that I had wanted to write was to discuss the distributional implications of austerity. For many reasons, including those elucidated by Jim Crotty, Josh and Jerry Epstein, austerian policies and should really be seen as class conflict—protecting the interests of the wealthy and attacking those of the poor. I never got to the empirical tracing out of this argument- but the IMF has. And the abstract really does say it all: “This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments” In other words—it does hurt, and it hurts the relatively poor more. Even more importantly, the claim that spending cuts are ‘better’ for the economy than tax raises as argued by Alesina and some coauthors forgets to ask for whom this is better. The IMF’s answer is that spending cuts are definitely not good for the working class and that advocating spending cuts rather than tax increases imposes distributional costs to those least capable of bearing it.

France's public debt rises to 91.7 pct of GDP in Q1 (Xinhua) -- In the January-March period in 2013, France's public debt rose to 1.87 trillion euros (2.45 trillion U.S. dollars), or 91.7 percent of GDP, official data showed on Friday. According to Insee statistics bureau, the country's debt increased by 36.5 billion euros, pulling the debt-to-GDP ratio up by 1.5 percentage points from the fourth quarter of last year. The first quarter's cost of security funds increased by 2.4 billion euros while the value of the government's net debt was at 1.69 trillion euros, or about 83.3 percent of GDP compared to 82.4 percent in the previous three months. The government expected public debt to account for 91.3 percent of GDP in 2013. (1 euro = 1.31 U.S. dollars)

Destruction of French Manufacturing Placed Squarely on Euro - Inquiring minds are digging into a 23 page report by Dr Eric Dor, Directeur IESEG School of Management, regarding the consequences of monetary union on the destruction of French manufacturing industry. Eric Dor writes "The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares.Abstract: Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.

Austria Starts New Stimulus After Insolvency Shows Not Immune - Austria committed to increase spending by as much as 1.6 billion euros ($2.1 billion) until 2016 for construction projects after a builder filed for the country’s biggest post-World War II insolvency and put 5,000 jobs at risk in an election year. The measures decided in the weekly government meeting in Vienna today include both new projects and bringing forward planned ones to this year and next year, Chancellor Werner Faymann told journalists today. Faymann said he still plans to balance the budget by 2016. “Our budget goal is intact but we have to act to avoid unemployment from rising,” Faymann said. “That’s devastating for those who are affected, and for the budget it’s a disaster because of rising payments and lost revenue.” The decision by Faymann and his conservative coalition partner led by Vice Chancellor Michael Spindelegger comes ahead of a national vote scheduled for Sept. 29 in the country that sports the euro area’s lowest unemployment rate. Their parties are fighting to keep a majority and stay ahead of opposition groups. These include Austro-Canadian billionaire Frank Stronach, the populist Freedom Party and the Greens.

EU ready to explore loan guarantees of up to 100 bln euros - The European Investment Bank and the European Commission are working on plans to generate between 55 and 100 billion euros of new loans to companies to try to kickstart growth in southern Europe, the institutions' said in a joint report. European Union policymakers are desperate to ignite growth in Greece, Cyprus, Italy, Portugal, Spain and Slovenia so they can pay back their debts. It was high sovereign debt that triggered the euro zone crisis more than three years ago. The split into the more economically successful north and troubled south threatens the unity of the 27-nation bloc, and especially the 17 countries that share the euro. The hope is that by providing more and cheaper credit to companies, firms will have the confidence to step up hiring and production so that the wheels of the economy start turning again, especially across the southern belt of Europe, which has been mired in low growth or recession for the past four years. As it stands, a company based in the south can pay two to three times higher interest on the same maturity loan than a competitor in the north.

Possible Futures for the European Banking Union - In September 2012, the European Commission proposed a single supervisory mechanism (SSM) for banks as a preliminary step towards a European banking union. Plans for the union continue this week, as European Union leaders meet in Brussels to set new rules regarding how future bank bailouts will be paid for.  Earlier this year, I attended the Future of the Euro Conference at UC Berkeley. One of the conference panels was about banking unions. The panelists all draw upon economic history to discuss the possible future of a European banking union. Here are videos of their talks:  

EU banks warns regulation leading to higher funding costs - European banks have warned that impending regulatory changes affecting bank deposits, which are being imposed as market interest rates rise, will lead to higher funding costs and more expensive credit for customers. EU regulators’ push for the principle of “depositor preference”, whereby all bank deposits would be off-limits in the event of a bank default, has pushed senior unsecured creditors in banks further down the pecking order, leading them to demand more compensation for the higher risk. “Senior unsecured is the new subordinated – all depositors could have prior claim under some current proposals,” said Tim Skeet, a managing director at Royal Bank of Scotland and a board member of the International Capital Market Association. “That might well lead to a much higher cost of capital for banks. To what extent? We don’t know yet but part of that cost would have to be passed on [to customers].” Also threatening to increase funding costs is the “asset encumbrance” of banks – the percentage of loans and investments banks pledge in order to protect creditors. Some sector watchers warn that requirements for banks to protect retail depositors would see the proportion of unsecured capital they have on hand decline markedly.

E.U. Agrees on Bank-Failure Rule to Avoid Bailouts - The European Union has struck a deal on rules establishing who will pay for bank bailouts in the future without taxpayers having to foot the bill. The agreement reached by the EU’s 27 finance ministers after seven hours of negotiations early Thursday is an important step toward establishing Europe’s so-called banking union with the goal of restoring financial and economic stability to the recession-hit bloc. The set of rules determines the order in which investors and creditors will have to take losses when a bank is restructured or shut down, with a taxpayer-funded bailout being only a limited last resort. “That’s a major shift from the public means, from the taxpayer if you will, back to the financial sector itself which will now become for a very, very large extent responsible for dealing with its own problems,” said Dutch Finance Minister Jeroen Dijsselbloem.

Derivatives Restructured in Eurozone Crisis - Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn. Experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro. Three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Italy risks billions in losses over derivatives - Italy faces potential losses worth billions of euros on derivatives contracts it restructured at the height of the euro-zone crisis, the Financial Times reported Wednesday, citing a confidential report by the Rome Treasury. The 29-page Treasury report details Italy's debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of 31.7 billion euros ($41 billion), the FT said. The FT cited experts as saying the restructuring allowed Italy to stagger payments owed to foreign banks over a longer period, sometimes at more disadvantageous terms for Italy. An European Central Bank spokesman declined to comment on the bank's knowledge of Italy's potential exposure to derivatives losses, the FT said. The Treasury report didn't quantify potential losses on the contracts but three independent experts consulted by the FT calculated the losses based on market prices on June 20, and concluded the Treasury was facing a potential loss at that moment of about EUR8 billion, a surprisingly high figure based on a notional value of EUR31.7 billion, the FT said.

Italy Embroiled In Latest Derivative Loss Fiasco Through Another Mario Draghi-Headed Scandal - It was roughly four years ago when details surrounding such Goldman SPV deals as Titlos first emerged, that it became clear how for over a decade, using deliberately masking transactions such as currency swaps, Greece had managed to fool the Eurozone into believing its economy was doing far better, and its debt load was far lower than it actually was in order to comply with the Masstricht treaty's entrance requirements. As for the Pandora's Box that was opened following the disclosure of just how ugly the unvarnished truth in Europe is, following the Greek disclosure, leading to the general realization that the European experiment has failed and it is now only a matter of time before its final unwind, any comment here is unnecessary - ths has been widely discussed here and elsewhere over the past several years. Now it is Italy's turn. Overnight, the FT reported that "Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis."

Corruption, EuroStyle: ECB Chief Draghi Fudged Italy’s Books to Secure Eurozone Entry, Italy Stuck With Derivative Losses - Yves Smith - As readers of the financial press may recall, there was a kerfluffle over the fact that Greece had used a currency trades designed by Goldman in 2001 to mask the level of its indebtedness and secure Eurozone entry.  The amount of debt raised, as in hidden, was €2.8 billion in 2001, and as a result of a restructuring in 2005, increased to €5.8 billion. Goldman earned large fees for these deals.  These transactions were of keen interest in the Eurozone, not merely because Goldman had helped Greece fudge its accounts and without this, erm, help, Greece would not have qualified for Eurozone entry  Mario Draghi, who was then the heir apparent to Jean-Claude Trichet as ECB chief, had joined Goldman in 2002 and was head of the group that handled the restructuring in 2005. The Bank of Italy issued a denial about Draghi’s involvement that Simon Johnson read as unpersuasive.  Roughly a year later, Trichet vetoed a request by Bloomberg to the ECB’s court to release more information. A new story by Financial Times shows that Draghi and the ECB had far more to hide than the Greece scandal. It appears Draghi was directly involved in arranging similar, much larger transactions for Italy while Draghi was the director general of the Bank of Italy, in 1999. Draghi then went to Goldman. The FT also reports that Draghi’s deputy on these deals, who left the Bank of Italy in 2000, returned as director general in 2012 with Draghi’s support. Sure looks like payback time.

Silver Lining Shattered As European Household Lending Plunges Most In 11 Months - As excess reserves in Europe continue to fall, prompting some to claim this is positive since banks are "no longer hoarding cash," the reality of a dramatically deleveraging European financial system is far worse. As Goldman notes, lending to Non-Financial Corporations (NFCs) fell by a significant EUR17.2bn month-on-month (seasonally adjusted) in May (with a stunning 19.9% drop in Spain). Perhaps more worrisome, while NFCs have been seeing lower lending, households have been 'steady' for much of the last year - until now. Bank lending to households fell by EUR7.5bn in May. This marks the first material decline since July 2012. Simply put, the European economy (ad hoc economic data items aside) is mired in a grand deleveraging and since credit equals growth - and the ECB somewhat scuppered by a German election looming likely to hold down any free money handouts (and the fact that they cling to the OMT promise reality that is clearly not doing anything for the real economy) - with lending collapsing, growth is set to plunge further. As we noted previously, there is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.

Record Joblessness Prompts EU Repeat of Action Pledge - A year ago, European leaders pledged “immediate action” on growth and jobs. Since then, the euro-area economy has shrunk nonstop and unemployment has risen to a record 12.2 percent from 11.4 percent. The solution, according to a draft statement prepared for a European Union summit starting today at 4:30 p.m. in Brussels: “determined and immediate action” on growth and jobs. Neither forecasters nor the euro zone’s 19 million unemployed expect the renewed vow to turn around an economy weighed down by the debt crisis and now endangered by rising interest rates in the U.S. and China, the world’s pacesetters.

ECB exit from easing remains far off, Draghi says - Speaking to committees in the French lower house of parliament, Mr Draghi said there were still downside risks to growth in the eurozone economy and the ECB was ready to take fresh action if needed. "On our policy stance, let me say that it's been accommodative in the past, it is accommodative in the present time and will stay accommodative for the foreseeable future," Draghi said. "Our exit – as Benoit Coeure [ECB executive board member] said a couple days ago – remains distant. At the same time we have an open mind about all other possible instruments that we may consider proper to adopt . . . we stand ready to act again when needed."

ECB Policy Makers Say Accommodative Monetary Policy to Stay - European Central Bank policy makers including President Mario Draghi said they’ll maintain a loose monetary stance for as long as needed, while urging euro area governments to cut their deficits and boost investment. The ECB’s monetary policy “will stay accommodative for the foreseeable future,” Draghi said today in a speech at the French National Assembly in Paris. “We have an open mind about all other possible instruments that we may consider proper to adopt.” An exit is “very distant,” he said at a press conference. Financial markets have tumbled amid concern monetary stimulus will be withdrawn since U.S. Federal Reserve Chairman Ben S. Bernanke said last week that policy makers may start slowing the pace of bond buying later this year and end it in 2014. Draghi’s position was reiterated in later speeches by ECB Executive Board members Joerg Asmussen and Yves Mersch, and Governing Council member Christian Noyer. Central bankers from the Bank of England to the Fed yesterday said they are still a long way off from tightening.

Global Central Bankers Say Tighter Policy Is a Long Way Off - Global central bankers led by Federal Reserve officials said they are still a long way off from tightening monetary policy, seeking to calm investors unnerved by the Fed’s push toward curtailing bond-buying. The comments, along with efforts by the People’s Bank of China to allay concern over a cash crunch, helped halt a slide in stocks after the Fed’s June 19 decision to outline a timetable for tapering quantitative easing. Bank of England Governor Mervyn King and European Central Bank Executive Board member Benoit Coeure today echoed Fed counterparts in saying policy will stay loose to safeguard economic expansion.“Clearly the level of interest rates and the scale of asset purchases will have to be unwound and we must return to more normal conditions at some point,” King told lawmakers in London. “That point is not today.” Also speaking in London, Coeure said euro-region economic growth will probably remain “weak” this year and there should be “no doubts that our ‘exit’ is distant.” In a speech in Berlin, ECB President Mario Draghi said the euro-area economy’s condition “still warrants an accommodative stance.” The Europeans’ comments come a day after two regional Fed presidents emphasized that U.S. policy remains accommodative.

King Says Central Banks a Long Way From Tighter Monetary Policy -  Bank of England Governor Mervyn King said the global economic recovery is at risk of further setbacks and central banks are a long way off tightening monetary policy. “Clearly the level of interest rates and the scale of asset purchases will have to be unwound and we must return to more normal conditions at some point,” King said in testimony to lawmakers at the Treasury Select Committee in London today. “That point is not today.”King’s cautious outlook came as he made his last appearance at the U.K. Parliament committee before he retires at the end of the month. Defending Federal Reserve Chairman Ben S. Bernanke, King said markets overreacted to the Fed chief’s recent comments and that he signaled a potential tapering of stimulus, not a tightening. “Even in the U.S., what you’ve seen there is that they’re still providing more stimulus,” King said. “The rate at which they’re providing more stimulus may be about to suddenly taper, but they’re still providing more stimulus.”

Ignore the pessimists – central banks are helping - Much of the most vocal and opinionated analysis of the impacts of central bank asset purchases – quantitative easing – strikes me as somewhat contradictory. But it is also important and may explain the recent reaction, quite probably an overreaction, to limited news from the Federal Reserve on asset purchases. Some people seem to believe that large-scale asset purchases by central banks have created bubbles in many markets and that stopping such purchases (let alone reversing them) must cause big falls in prices. Others take the view that these central bank purchases are ineffective in stimulating demand in the wider economy. I think the evidence for either of these positions is weak. But some people believe both things – a position that I think is also contradictory as well as being profoundly pessimistic. The first claim – that QE has artificially boosted prices to bubble levels – does not stand up. It is certainly true that in purchasing financial assets, central banks – certainly the Bank of England’s Monetary Policy Committee – has deliberately and consciously raised the demand for these assets and that will have supported their price. Supporting asset prices helps to support growth. It means that many companies find it easier to raise funds, and that many household borrowers face lower longer-term interest rates. And by keeping the value of portfolios of wealth higher than it would have been, the spending of many of the people who own that wealth is supported. Does anyone doubt that many of the households that have seen the value of their savings accounts and other stocks and bonds rise over the past year or so would have been less inclined to spend had these instead fallen sharply in value?

GDP revised extensively - The headline news from today's gross domestic product revisions is that the "double-dip" of late 2011 and early 2012 has been revised away. GDP is now thought to have fallen by a tiny 0.1% in Q4 2011 and to have been flat in the first quarter of 2012. So no double-dip, and some of the other negative quarters since 2009 look likely to be revised away. The snow-affected fourth quarter of 2010, for example, is now down by only 0.2%.But hopes that the Office for National Statistics would solve some of the puzzles about the economy have been dashed. It now thinks the 2008-9 recession was deeper than it first thought - 7.2% versus 6.4% (that 7.2% is actually a return to an earlier estimate) and that the level of GDP is now 3.9% below pre-crisis levels, rather than 2.6%.In truth, the big revisions for 2008-13 are probably a few years away, by which time we may get a picture that fits more closely with employment and other economic magnitudes. For now, however, we will have to carry on puzzling. More here.

UK Growth has been even worse than we thought -That is one headline on the Office for National Statistics (ONS) latest data revisions. Output in the UK economy is now estimated to be currently almost 4% below its previous peak, compared to previous estimates of 2.5% below. Or alternatively, the headline could be that the UK never had a double dip recession: at the beginning of 2012 growth was flat rather than falling by 0.1% (not annualised), so we only had the previous quarter in which growth was actually negative. I’ll leave you to decide which the more informative headline is.  Here is a chart with the old and new data for GDP growth, quarter on quarter. As you can see the big revision is in how much GDP fell in the recession. GDP is now thought to have decreased by a little over 5% in 2009 as a whole, compared to the previous estimate of -4%. At this point I cannot resist telling a small story about this number, but for those who are fed up with my personal anecdotes there is a serious point about inflation to follow. I make a weak attempt to connect the two at the end.

Britain's debt interest payments will be double the defence budget - Britain is on course to spend twice as much paying the interest on its national debt than on the Armed Force after a new cut in the defence budget. The Forces escaped another round of redundancies as the Ministry of Defence was spared the worst of the cuts in the Spending Review. Civilian staff at the MoD will be cut, but officials too will avoid redundancies. However, the defence budget, which is being squeezed hard during the current spending round, will still fall again in 2015/16. Treasury figures show that Britain will spend £32.6 billion on defence in 2015/16. In the same year, the interest payments on the national debt will be £57.8 billion. In 2016/17, debt interest will be £64.4 billion, and £71.3 billion the following year. That means that without a significant increase in defence spending during the next Parliament, Britain will soon spend twice as much on debt interest as defence.

UK Disposable Income Plunges Most In 25 Years - Having miraculously avoided the triple-dip recession and amid a bubbling housing (and stock) market, the average household in the UK is not doing so great. While this may not come as a surprise to many that these two things can be so disconnected, it is simply stunning that UK Disposable Income collapsed in Q1 by its fastest rate in 25 years to its lowest level in almost 8 years. With BoE's Mervyn King on his way out proclaiming that the worst is behind them and "recovery is in sight," perhaps it is Sainsbury's CEO's comments that are most prophetic "It’s unrealistic [for politicians] to paint a picture which is not the reality that consumers are currently experiencing," he said "Nobody should be planning their business today if they're customer-facing on an expectation that consumers have extra money to spend."

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