week ending July 13

U.S. Fed balance sheet grew in latest week : (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week as the U.S. central bank added to its holdings of Treasury debt, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which are a broad gauge of its lending to the financial system, stood at $3.462 trillion on July 10, compared with $3.450 trillion on July 3. The Fed's holdings of Treasuries rose to $1.953 trillion as of Wednesday, from $1.943 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) stood at $1.208 trillion, little changed from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $69.18 billion, unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $14 million a day during the week versus $36 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 11, 2013 - Federal Reserve statistical release

Fed Watch: On That September Tapering - Market participants have coalesced around a September start to the tapering of quantitative easing. There are, however, a few notable exceptions, such as Bill McBride at Calculated Risk and the economics team at Bank of America Merrill Lynch, both wary that the data will support such a policy shift That puts me on the opposite side of a bet with Bill, which is something that tends to make me nervous. Kind of like the idea of playing Russian Roulette with five chambers loaded.  That said, I think September is the date to begin tapering, and the data flow would need to turn notably downward to forestall a policy shift at that time. I think it is important to recognize that the Federal Reserve is treating quantitative easing and interest rates as two very separate policies, and each has its own relevant data. From the BAML report cited by Bill: though the Fed has attempted to clarify its reaction function, we have become increasingly uncertain. The FOMC has zeroed in on the jobs market and to a lesser extent in reduced downside risks: both argue strongly for near-term tapering. However, the Fed’s mandate is to manage the overall economy and the gap between solid jobs and weakness in other growth and inflation indicators has gotten very big ...  Exactly - quantitative easing has always been primarily about the job market and mitigating downside risks, essentially putting a floor under the economy. Indeed, the decision to initiate open-ended quantitative easing was made on the back of a bad jobs report that was subsequently revised substantially upward; I suspect that many policymakers have some buyers remorse, recognizing that without that preliminary data release, they wouldn't be struggling with the tapering issue now.

That Terrible Taper - Krugman - One of the odd things about the people arguing that we must raise interest rates to head off bubbles — Raghuram Rajan, Martin Feldstein, the BIS, and so on — is the near-universal assertion among this group that just a little rate increase can’t do any real harm. (Just a thin little mint). After all, rates are so low! As I’ve argued, this is a novel economic principle; where else do we argue that demand curves (in this case the demand for investment) are vertical at low prices? But it has occurred to me that it might be helpful to look at what the partial victory of these people — their implicit success in bullying the Fed into talking about tapering despite a still very weak, low-inflation economy — has wrought. Bear in mind that the interest rates that matter most for the economy are not the rates at which the government can borrow, but the rates facing private investors — and above all, mortgage rates, for housing is the most important transmission mechanism for monetary policy. And here’s what we see for mortgage rates since the talk of tapering began: Do you really think that this will have no effect? Really, really?

How Bad Is the Bernanke Taper? - Dean Baker - Paul Krugman, among many others, has been denouncing the decision by Federal Reserve Board Chairman Ben Bernanke to discuss plans for backing away from the current pace of quantitative easing. While I agree completely with his logic, I am bit less concerned about the downside than he seems to be. Krugman is certainly right that there is no reason to be talking of tapering right now. We are close to 9 million jobs below the trend level of employment. By the Congressional Budget Office's estimate we are still 6 percentage points below potential GDP, which corresponds to $1 trillion a year in lost output. Furthermore, inflation is low and falling. And Krugman is also right about the market's strong reaction. The interest rate on both 10-year Treasury bonds and 30-year mortgages is up by more than a percentage point from the pre-taper talk levels. That is not helpful for the economy right now. However, I am also not convinced that it is all that harmful. To my mind, the greatest benefit of low interest rates was the refinancing boom that it allowed. This freed up tens of billions of dollars for consumption. The refinancing process itself also generates economic activity in the form of legal fees, payments for appraisals and other costs (i.e. waste) associated with the refinancing process. Refinancing will quickly slow to a trickle with mortgage rates now over 4.5 percent. But refinancing was always a self-limiting process. At some point everyone who could profitably refinance a mortgage at 3.5 percent will have done so. We surely must have been reaching this point so that refinancing would have slowed in the second half of 2013 and 2014 with or without the Fed taper.

The Fed’s Tapering Troubles and the Real Liquidity Trap - Since Bernanke started talking about “tapering off” Quantitative Easing, the bond markets have freaked out. This is a very logical reaction.  Before last month, it seemed like QE would go on indefinitely. Once that belief was shaken – even in the slightest fashion – everyone ran to the exits. Bernanke and other Federal Reserve economists appear bewildered by this phenomenon. The impression one gets from their follow-up comments is that they wished they could ask bond speculators “did you read the damn speech?” The answer, of course, is no and for good reason.  All investors need to know is the conditions under which QE (and for that matter, the Zero Interest Rate Policy) will be pursued has changed. Now the substantive change may actually be relatively minor, but that’s irrelevant to speculators. The reason is very simple: those holding assets with longer maturities will take huge capital losses with relatively small changes in interest rates (As a reminder: it is basic “bond math” that a change in interest rates send bond prices in the reverse direction. A rise in interest rates makes bond prices fall and a fall in interest rates make bond prices rise). It is better to exit now when those future changes are uncertain then take even more massive losses.

Fed's Williams: "A Defense of Moderation in Monetary Policy" - From San Francisco Fed President John Williams: A Defense of Moderation in Monetary Policy abstract:  This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.

Blanchard Notes Fed Faces Communication Challenge - WSJ - Olivier Blanchard, the International Monetary Fund’s chief economist, said Tuesday the Fed and markets are on a steep learning curve as the central bank pilots through unprecedented monetary policy. For traditional policy rate moves, central bank officials spent 15 years refining their communication so that when the rate was moved, the decision was well understood. But now the Fed’s calculating how to exit from policies that haven’t been tried before. “I think the Fed is doing a relatively good job of it, but I’m sure that they’ll improve their communication over time as they learn how markets react,” Mr. Blanchard said. “They’ve probably learned something from the last three weeks,” he said.. Federal Reserve Chairman Ben Bernanke sparked a reversal in those flows with his June 19 announcement that the Fed could begin reducing its bond buying later this year and end the program altogether by mid-2014 if the U.S. economy improves as Fed officials expect. The news caused investors to restructure their portfolios, stoking volatility in currency, bond and equity markets around the globe. Fund officials have recently criticized the Fed, saying its communication could have been clearer. The IMF, which acts as the world’s emergency lender and economic counselor, also said the U.S. central bank should keep its $85 billion-a-month cash injections going until at least the end of the year, and only slightly let up on the easy-money accelerator in early 2014. The IMF hopes the wild market gyrations will cool. “They largely reflect a one-time re-pricing of risk due to the changing growth outlook for emerging market economies and temporary uncertainty about the exit from monetary policy stimulus in the U.S.,” the fund said in an update of its World Economic Outlook.

Minutes of the Federal Open Market Committee - FRB

Fed Affirms Easy-Money Tilt  - Federal Reserve Chairman Ben Bernanke sought to reassure jittery markets that while the central bank could start winding down its $85 billion-a-month bond-buying program later this year, Fed officials aren't abandoning their broader commitment to easy-money policies."You can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy," he said Wednesday at a conference held by the National Bureau of Economic Research, citing the high unemployment rate, low inflation and "quite restrictive" fiscal policy. He said he expects the Fed won't raise short-term rates for some time after the unemployment rate hits 6.5%, which would be more than a full percentage point lower than its current level. Mr. Bernanke, speaking at Wednesday's conference, said he was "somewhat optimistic" about the economy. However, he noted the June unemployment rate of 7.6% "probably understates the weakness of the labor market," inflation is running below the Fed's 2% objective and fiscal policy is quite restrictive.

FOMC Minutes: "Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases"-  From the Fed: Minutes of the Federal Open Market Committee, June 18-19, 2013. A few excerpts on asset purchases:  While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases. ... Participants discussed how best to communicate the Committee's approach to decisions about its asset purchase program and how to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. Importantly, participants wanted to emphasize that the pace, composition, and extent of asset purchases would continue to be dependent on the Committee's assessment of the implications of incoming information for the economic outlook, as well as the cumulative progress toward the Committee's economic objectives since the institution of the program last September. The discussion centered on the possibility of providing a rough description of the path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely.

Key Passages From Fed Minutes -- A number of Fed officials wanted to end the central bank’s $85 billion per month bond-buying program late this year ….  Participants also described their views regarding the appropriate path of the Federal Reserve’s balance sheet. Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.  But there were a wide, wide range of views about how to proceed, meaning a complex set of choices for the Fed in the months ahead and more confusion in markets …   Some participants had become more confident of sustained improvement in the outlook for the labor market and so thought that a downward adjustment in asset purchases had or would likely soon become appropriate … however, to some other participants, this approach appeared likely to limit the Committee’s flexibility in adjusting asset purchases in response to changes in economic conditions, which they viewed as a key element in the design of the purchase program. Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee’s expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee’s highly accommodative policy stance.

Minutes Muddy the Fed’s Threshold to End Bond-Buying - One of the most important things that came out of Federal Reserve Chairman Ben Bernanke‘s June 19 press conference was his announcement that he believes the central bank can likely stop its bond-buying effort when unemployment falls to around 7%. There had been little expectation the chairman would offer that level of clarity to a goal that had long been wrapped in uncertainty. Given that the chairman was the one putting the number out there, many saw a change with big implications for monetary policy. But problematically, meeting minutes for the June meeting, released Wednesday, show scant evidence of a debate regarding a 7% threshold. This lack of back and forth raises questions about support for the goal, and whether or not the number is an official part of central bank policy.

Even The Experts Throw Up All Over The Fed Minutes -- The Fed may have finally taken speaking out of all sides of its mouth a step too far. Enter GMP's Adrian Miller with the best roundup of the sheer indecipherable gibberish just excreted by the Fed:

• "We are not sure how you can go from ‘many’ needing to see labor gains before tapering begins to half seeing bond buying ending by year end. At the same time, ‘many’ other Fed officials saw bond buying into 2014”
• "We are pretty good at math, but we are having trouble adding up the ‘many,’ ‘several’ and ‘about half’ to equal 100%
• FOMC members appear to have ‘‘decided to cover every possible scenario," and "left us with no clear picture as to what the group is thinking”

Great absurdist summary of a centrally-planned world that has been taken out straight from the pages of the Onion, but honestly, at this point who even cares anymore.

Fed Watch: From Minutes To Bernanke - The minutes of the most recent FOMC meeting tended toward the dovish side, sufficiently so that my conviction on September wavers somewhat. That said, I would say that the minutes did little to clear the murky water that is Fed policy. Consensus about the future path of policy appears to be lacking, with "several" on one side of an issue and "many" on the other. The muddled approach to communications is also evident. But the fact that they made a relatively bold move despite the initial lack of consensus suggests that a strong hand pulled them in that direction. Who could that be? Little doubt that it was Federal Reserve Chairman Ben Bernanke, who also felt like it was necessary to lay down the law a little tonight and make clear what market participants have been unwilling to hear: Quantitative easing and interest rates are two separate policies.  FOMC participants had a generally optimistic economic outlook: In their discussion of the economic situation, meeting participants generally indicated that the information received during the intermeeting period continued to suggest that the economy was expanding at a moderate pace. A number of participants mentioned that they were encouraged by the apparent resilience of private spending so far this year despite considerable downward pressure from lower government spending and higher taxes........Most participants anticipated that growth of real GDP would pick up somewhat in the second half of 2013. Growth of economic activity was projected to strengthen further during 2014 and 2015, supported by accommodative monetary policy; waning fiscal restraint; and ongoing improvements in household and business balance sheets, credit availability, and labor market conditions.That said, they were concerned that the weaker growth numbers would catch up to the labor markets:

The Fed (Sort of) Speaks, but is the Bond Market Really Listening? -- Yves here. As has become typical of late, the markets reacted sharply to the release of the FOMC minutes on Wednesday and Bernanke’s remarks later. For a really good effort at parsing the minutes, see Fedwatcher Tim Duy. The one clear conclusion was how unclear the minutes were:Consensus about the future path of policy appears to be lacking, with “several” on one side of an issue and “many” on the other. The muddled approach to communications is also evident. But the fact that they made a relatively bold move despite the initial lack of consensus suggests that a strong hand pulled them in that direction. Who could that be? Little doubt that it was Federal Reserve Chairman Ben Bernanke, who also felt like it was necessary to lay down the law a little tonight and make clear what market participants have been unwilling to hear: Quantitative easing and interest rates are two separate policies.  The MacroBusiness post below, which is another good recap, also stresses that the Fed is trying to distinguish between “tightening” which is a term it uses to refer only to increasing short term interest rates, versus tapering, which is ending QE. So despite the reaction in the bond and foreign exchange markets to the Fed chief’s comments, I’m not certain Bernanke has really backed off that much. The Fed was never talking about “tightening” any time soon. That was always off the table. So for Bernanke to say, “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” is simply a reaffirmation.

Once Again, the Fed Shies Away From the Exit Door - John Taylor - The Federal Reserve's liquidity operations during the 2008 financial panic represented good central banking: providing loans when markets freeze up. But instead of simply letting those programs expire as the panic subsided, the Fed embarked on its first quantitative easing program (QE1)—large-scale purchases of mortgage-backed securities and Treasurys—trying to stimulate the housing market and the economy.  After that, I warned on these pages in September 2010 about the dangers of "another large dose of quantitative easing" that would raise "more uncertainty about how it will ever be unwound."  Since then the Fed has injected two more massive doses of quantitative easing: QE2 starting in November 2010 and QE3 starting late last year. Then, last month, Fed Chairman Ben Bernanke let it be known in a news conference that the old QE3 (purchasing $85 billion of Treasury bonds and mortgage-backed securities a month until labor market conditions improve substantially) would taper into a new QE3—in which purchases would likely slow by the end of 2013 and stop in the middle of 2014. The turbulent reaction in the markets showed that the predicted dangers from unwinding would be real. The Fed has justified its policies as a means of helping the economy recover. Yet economic growth has come in at less than half what the Fed predicted with all its unprecedented interventions during the past four years, and growth remains under 2% so far this year. Some at the Fed blame other factors for this terribly weak recovery—the latest excuse being cuts in state and local government purchases. But those cuts are the result not the cause of the weak economy as tax revenues have slowed.  A growing number of economists, former central bankers and senior government officials—including Martin Feldstein, Paul Volcker, Allan Meltzer, Raghu Rajan, David Malpass and Peter Fisher—have now concluded that the Fed's policies are not working. Critics want the Fed to return to a more rules-based monetary policy.

The Monetary Debate: Enter Chewbacca - Krugman - The debate over monetary policy has grown increasingly surreal as time goes by. Initially, it was about a fairly straightforward and — crucially — falsifiable position: the claim by monetary hawks like Allan Meltzer and Martin Feldstein that quantitative easing would lead to a major acceleration of inflation. If that inflation had happened, I like to imagine that doves like me would have conceded that we got it wrong, and reconsidered our position. But the inflationary explosion didn’t happen. So, did the hawks reconsider? No, they just came up with new reasons for the same policy position. It’s not about inflation, it’s about financial stability. Yeah, that’s the ticket! OK, I think this represents bad logic — do we really feel that the real economy must suffer to control the irrational exuberance of Wall Street traders? I also believe that it represents bad behavior; aside from, of all people, Larry Kudlow, have any of the inflationistas admitted that they were wrong in round one?But it turns out that even this wasn’t the end of the story. I don’t know whether the hawks are feeling that the financial stability story is wearing thin, or that it’s too hard to sell to some of their audiences, or what. But at this point John Taylor, at least — and I believe he’s not alone — has gone full Chewbacca defense. I mean, if anyone can find a coherent argument in Taylor’s latest, please tell me.

Will the Fed "Taper" in September if the August unemployment rate is 7.6%? - Short answer: No. The BLS will release two more employment reports before the September 17-18 FOMC meeting (employment reports for July and August).  The current unemployment rate is 7.6% (as of June), and the Fed's forecast is for the unemployment rate to decline to an average of 7.2% to 7.3% in Q4 of this year. A significant portion of the decline in the unemployment rate from 10.0% in October 2009 to 7.6% in June 2013 was related to a decline in the participation rate from 65.0% in Oct 2009 to 63.5% in June 2013.  If the participation rate had held steady, the unemployment rate would be 9.7% (assuming an increase in the participation rate with the same employment level). Of course a large portion of the decline in the participation rate was expected and was due to demographics (both the aging of the population, and more young Americans staying in school).  There has been an ongoing debate about how much of the decline in the participation rate has been due to demographics and how much due to economic weakness (I think more demographics, other have attributed more of the decline to economic weakness). However just about every analyst expects 1) a continued long term decline in the participation rate, 2) some short term bounce back in the participation rate as the economy recovers.  The bounce back could be just a flattening of the participation rate (the short term bounce back just offsetting the long term decline) or the participation rate could increase 0.5% or so in the next year or two.   The participation rate could be very important regarding the timing of when the Fed starts tapering QE3 asset purchases.  We can use the Atlanta Fed's Jobs Calculator tool to estimate how many jobs per month will be needed to reach a certain unemployment level based on the participation rate.

Fed’s Plosser: Time to Taper Bond Buying, End by Close of Year - One of the Federal Reserve‘s leading opponents of its bond-buying stimulus efforts called on the central bank to begin shrinking the purchases and stop them by year-end. Speaking at the Rocky Mountain Economic Summit in Jackson Hole, Wyo., Friday, Federal Reserve Bank of Philadelphia President Charles Plosser repeated his desire to see the central bank pull back on its $85 billion-per-month effort to buy Treasury and mortgage bonds. The Fed buys the securities to boost growth and hiring by pushing down borrowing costs. Over recent weeks, the Fed has laid out a plan to slow the purchase at some point provided the economy improves. Mr. Plosser isn’t currently a voting member of the monetary policy setting Federal Open Market Committee. He has long been uncomfortable with the central bank’s stimulus effort, fearing the purchases may destabilize markets and drive up future inflation. Mr. Plosser said that any benefits of the buying are outweighed by the costs, and that the longer the purchases go on, the greater the risks become, especially when the Fed wants to start unwinding a stimulus effort with no precedent in its history. “The time has come for us to exit our current asset purchase program and commit to a way forward that seeks to normalize monetary policy,” Mr. Plosser said.

Sizing up Market Expectations for The Fed’s QE - Federal Reserve Chairman Ben Bernanke has said a couple of times since the Fed’s June 19 policy meeting that the central bank’s plans for its $85 billion per month bond buying program were pretty close to what the market has been expecting. His message: There’s no need to overreact. (See his response to Robin Harding of the FT.) A New York Fed survey of 21 big Wall Street securities dealers sheds light on this assertion – showing that the plan Mr. Bernanke laid out on June 19 was broadly in line with market expectations, though the Fed and the market were a little out of sync on some points. Before every Fed policy meeting the New York Fed surveys the big “primary dealers” that trade securities with it about their expectations. In the survey conducted June 6 through June 10, the Fed asked primary dealers when they expected the central bank to start pulling back on the program.The median estimate – meaning half were above and half were below – was for the Fed to start pulling back on bond buying starting in December 2013, and to finish by the middle of 2014. (See question 6.) That’s broadly in line with what Mr. Bernanke said in his press conference, when he said the Fed could start pulling back later this year and finish by the middle of 2014. Fed officials have been studying the New York Fed’s primary dealer surveys carefully, and the latest one sheds light on market volatility in the wake of the June 19 meeting, in addition to raising some questions. If Wall Street’s big banks were already expecting the Fed to start pulling back later this year and finish the program by the middle of 2014, then was a big move warranted? A follow-up survey conducted by the New York Fed after the meeting provides some additional clues. In the follow-up survey – completed June 24 – the primary dealers said they expected the Fed to start pulling back the program in September rather than December.

The Fed must change itself as well as its policies - FT.com:  Assuming Ben Bernanke leaves his post this year, his successor will inherit a serious policy challenge: disengaging from quantitative easing. Returning to more traditional monetary policy will be tricky. First, there is no precedent in the Fed’s 100-year history. Has there ever been a period in which the US central bank and its leading counterparts worldwide have simultaneously pursued QE against a backdrop of economic faltering and uncoordinated fiscal policies? Second, a prerequisite for ending QE is considerable evidence of a return to normalcy in economic and financial growth. Despite the good news suggested by last week’s jobs data, right now that is not yet fully visible, either in the US or abroad. Moreover, were QE to be halted now, it would be against uncertainties about the effective functioning of larger financial conglomerates. The Dodd-Frank legislation did not resolve the too-big-to-fail problem. The Fed failed to recognise that abandoning the Glass-Steagall Act in the 1990s would accelerate industry consolidation and create more too-big-to-fail institutions. The resulting behemoths stand in the way of returning mortgage funding to the private sector. Imagine for a moment that federal financing institutions such as Fannie Mae and Freddie Mac were somehow dissolved. As the US financial system is now structured, most new mortgage securities would be held at a handful of conglomerates deemed too big to fail.

Fed’s Bernanke: Central Banking Practice and Doctrine Not Static - Federal Reserve Chairman Ben Bernanke steered clear of commenting on current policy in a speech Wednesday, focusing remarks on the history of the central bank he leads and the lessons the long-ago and more-recent past can teach policymakers going forward.  The overriding theme of the talk, prepared for delivery at a conference on the first 100 years of the Fed, hosted by the National Bureau of Economic Research, is “that central banking doctrine and practice are never static,” he said. He pointed to the 2008 financial crisis as one example of how central banking policy must adapt and change to events.Mr. Bernanke, who focused much of his academic research on drawing lessons from the Great Depression, said that the more recent financial crisis that started in 2008 “reminded us of a lesson that we learned both in the 19th century and during the Depression but had forgotten to some extent, which is that severe financial instability can do grave damage to the broader economy.”“The implication,” Mr. Bernanke said in his prepared remarks, “is that a central bank must take into account risks to financial stability if it is to help achieve good macroeconomic performance.”

Analysis: Fed mulls adjusting its tune to quell jittery markets - Federal Reserve officials are considering moving the goal posts on U.S. monetary policy with a promise to keep interest rates low for longer in the hopes of heading off a troubling rise in market-set borrowing costs. Top Fed officials, who have pulled out all the stops to boost the U.S. recovery from recession, have worried for months that investors might drive bond yields up when the time came to reduce the central bank's bond-buying program. Their fears have started to become reality. Yields, which move inversely to the price of Treasury debt, began to climb sharply in May with signs of stronger jobs growth and signals from the Fed that it could begin to scale back its bond purchases, known as quantitative easing, as soon as September. With yields rising, some Fed officials warmed to the idea of anchoring borrowing costs more firmly by pledging to keep overnight rates near zero well after the jobless rate falls below 6.5 percent, the Fed's current threshold for considering tighter monetary policy. Unemployment stood at 7.6 percent in June. Fed Chairman Ben Bernanke raised the prospect of a lower threshold for the jobless rate last month, but the message was lost in the din created when he said the central bank's policy-setting Federal Open Market Committee planned to halt the bond purchases by mid-2014 - a comment that sent bond yields soaring.

Quantitative easing and the curious case of the leaky bucket - FT.com:  Quantitative easing, a term first widely used in Japan in the 1990s, does not have an agreed precise definition. It describes a policy in which the central bank buys assets from the financial sector, and does not necessarily – as in conventional monetary policy – confine such activities to the management of the government’s own debt. Though this policy had been pursued by Tokyo with little success, the US Federal Reserve, Bank of England and European Central Bank all adopted QE after the financial crisis of 2008. Amid all that has been written on this subject, there is very little about how it is supposed to work, or whether it has in fact worked.  In the modern financial economy, the main effect of QE is to boost asset prices, as market gyrations of recent weeks have clearly illustrated. But is the pursuit of higher asset prices an effective or desirable means of promoting economic growth? The distributional impact of the policy demands attention; the one certain consequence of boosting asset prices is that those with assets benefit relative to those without. Many people own houses – but, although in the UK, for example, we need more houses, we do not need another housing boom. The public also holds financial assets indirectly, largely through pension funds. But here there has been a paradoxical effect: because of the way pension funds are valued, QE has generally increased pension funds’ liabilities more than their assets.

China Finance Minister Warns Fed Over Risks of Exiting Easy-Money Policies - China’s finance minister on Thursday warned the U.S. Federal Reserve needs to guard against risks to the international financial system as it considers exiting from its easy money policies. Speaking near the end of two-days of high-level U.S.-China strategic and economic talks, Finance Minister Lou Jiwei said China backs an exit based on a slow, but steady U.S. recovery. “But it should pay careful attention to the impact of its policy on the international financial system and properly handle the timing, tempo and intensity of its quantitative easing monetary policy exit,” Mr. Lou said through an interpreter. The Fed sparked a torrent of capital flow reversals last month as officials outlined a possible exit plan from the bank’s easy money policies. The prospect of higher interest rates caused investors to restructure their portfolios, stoking volatility in currency, bond and equity markets around the globe. Mr. Lou said it is hard to say when the Fed should begin its exit, “but if measured by the unemployment rate, which is 7.6%, probably it is an earlier exit.” Yi Gang, People’s Bank of China deputy governor, said later that because his country’s financial system was largely closed to free cross-border capital movements, any spillover to China from a Fed exit would be limited. “We are fully prepared for these kind of risks,” Mr. Yi said. “China has abundant liquidity and a high reserve requirement ratio, so we have an adequate buffer to tackle such challenges,” he said. By requiring banks to hold more emergency reserves, those firms are able to cover short-term credit crunches.

No, Joe, No One Owes Bernanke An Apology - Young Joe had this to say about the June jobs numbers: It’s clear who the big losers were today: It’s the crowd that says “good news is bad news and bad news is good news” for the market. They argue that good economic news is bad, because good news accelerates the day the Fed tightens, and therefore stocks should dive. They’ve been making this argument pretty much since the day the rally began in early 2009, and basically they’ve always been wrong. Today we got a very strong jobs report, and yet stocks finished at their highs of the day (even as rates jumped and the dollar jumped) which pretty much drove the stake through the heart of this crowd. So if the aforementioned crowd is the loser, then the winner is Bernanke. via It Looks Like Everyone Owes Bernanke A Big Apology – Business Insider. Let’s put the silly chest puffing about which crowd is the loser and who is the winner aside although Joe seems actually to be using Bernanke as a proxy for himself. Indeed, the chief bubblemeister of The Last Ponzi Game Standing does reign supreme. He’s only been wrong about one little thing. That is that rising stock prices will lift all boats. The fact is that some Americans are treading water but more and more are sinking slowly but surely into poverty, as the 7% sails their yachts  toward the horizon and out of view. Meanwhile, the Taper trial balloons show that Bernanke senses that time is running out and that the bigger he blows the stock market bubble, the more dangerous it becomes and the worse the middle class will fare.

Fed Looks at More Than Jobs Report for Labor Market Clues - It may be the most sought after, but the U.S. employment report isn’t the only belle at this ball. The Federal Reserve‘s next policy move will be determined in large part by central bankers’ outlook for employment. (It will not be the only factor: a global crisis or unexpected domestic shock could sway policy decisions.) The Bureau of Labor Statistics‘ employment situation report gives the most comprehensive view of the labor markets. Its importance to Fed policy and financial markets makes it the report everyone wants to dance with. Fed officials, however, have noted they like to take a few turns around the floor with other data that offer broader views of the labor markets. After all, the Fed will make its decision based on the outlook for labor markets, not what happened a month ago. Fed Vice Chair Janet Yellen has singled out the BLS’s job openings and labor turnover survey as a favored dance partner. The report, commonly referred to as “Jolts,” released Tuesday shows labor markets in a holding pattern. In May, businesses posted more job openings and gross hiring also picked up. But the rates remain well below those seen before the most recent recession. May also saw a small increase in job separations. A sizeable part of the gain in separations came from people quitting their jobs. That’s a positive for the labor market outlook since workers tend to give notice only when they are confident they will quickly land another job.

Bullard: If Inflation Weakens Further, Fed Must Act - Inflation is too low and if it gets weaker the Federal Reserve may need to do more on the stimulus front to get price pressures back where they should be, a U.S. central bank official said Friday. “If [inflation] drops any further from here, we are going to have to take it very seriously,” Federal Reserve Bank of St. Louis President James Bullard said in an interview with the Wall Street Journal. Price pressures are at the “lower bound” of where they should be, and “I’m a little nervous” about this situation, the official said. Annual inflation is currently running at around 1%, which is well under the Fed’s 2% target. Central bankers, including Mr. Bullard, have long argued that they want inflation on target; price pressure above and below that mark standing are equally undesirable. In the interview, Mr. Bullard said that if inflation goes under 1% he’d want the Fed to act, although the best way to do this is not entirely clear. Mr. Bullard said the “simplest” way the Fed could counter under-target inflation is by extending its current bond buying stimulus program for longer than currently planned, and take off the table for now any move toward shrinking the monthly size of the effort. Mr. Bullard occupies a unique position in the debate over the Fed outlook. He dissented at the June Fed meeting, arguing the Fed needed to state more strongly that it will defend its 2% inflation target from overly weak price pressures.

Fed Watch: Friday Afternoon Fed Blogging - We gained a lot of insight into Fed policy this week, and not all of it was pretty. Some thoughts as Friday comes to a close:

• 1.) The Fed is deeply divided. The minutes of the last FOMC meeting clearly revealed that the FOMC is splitting into deeply divided factions. Those factions were on display today with the comments of St. Louis Federal Reserve President James Bullard and Philadelphia Federal Reserve President Charles Plosser. Bullard pushed hard on the policy implications of the inflation data. From the Wall Street Journal:“If [inflation] drops any further from here, we are going to have to take it very seriously,” ...Mr. Bullard said the “simplest” way the Fed could counter under-target inflation is by extending its current bond buying stimulus program for longer than currently planned, and take off the table for now any move toward shrinking the monthly size of the effort. On the other side is Plosser, who not only wants to end asset purchases this year, but also change the Evan's rule from thresholds to triggers:
• 2.) Bernanke is pulling the strings. Someone brokered a truce at the FOMC meeting that allowed Federal Reserve Chairman Ben Bernanke to lay out the path to ending asset purchases. That someone must have been Bernanke, indicating that he wanted to introduce the idea that asset purchases would most likely soon be curtailed. This suggests that Bernanke is pro-tapering.
• 3.) Bernanke tipped his hand big time. Bernanke claimed in his press conference that his comments represented the views of the FOMC. But as I noted earlier this week, the minutes make no reference to his 7% unemployment trigger for ending asset purchases. So where did that number come from? Must have been Bernanke revealing his own preference. This was confirmed today by Bullard:

Divided Fed, Broken Models - This week, it has become abundantly clear that the Fed is "deeply divided." In speeches and public communications, FOMC committee members and  Fed Chairman Ben Bernanke have revealed significant differences in their outlooks and intentions for the economy. Tim Duy writes that "The growing division makes it increasingly difficult to think of "the Fed" as a single entity with regards to policy intentions." This is an extremely important point, because most macroeconomic models do consider the Fed as a single entity, and would have different implications if they did not. Monetary policy is often modeled as a dynamic game in which the two players are the central banker and the public. Typically, the central banker can choose what private information to reveal to the public. Monetary policymakers' preferences and reputational concerns determine their optimal communication strategy in the equilibrium of this dynamic credibility game.  In reality, of course, in almost every country, monetary policy is not made by a single representative agent, but rather by a committee of very non-representative agents, each with their own, sometimes conflicting, preferences and reputational concerns. With multiple central bankers, monetary policy is a dynamic game between more than two players-- which makes computing optimal strategies dauntingly complex. Strategic behavior between members of the committee will influence each member's communication strategy with the public and with each other. And the public, aware of these strategic interactions, will have quite a complex task computing their best response.

The Largest and Most Rapid Shift in Expected U.S. Monetary Policy since 1994. The Largest and Most Rapid Contractionary Shift since 1981: Brad DeLong - Not since 1994--or possibly 1982-3--have we had such a large and rapid shift in the market's beliefs about what the Federal Reserve's reaction function is. Not since 1991 have we had such a large and rapid contractionary shift in the market's belief about what the Federal Reserve's reaction function is:

1. When ten-year expected inflation rises and ten-year real interest rates rise alongside, that is good news about future economic growth coupled with a neutral monetary policy--a Federal Reserve expected to respond according to its known reaction function.
2. When ten-year expected inflation falls and ten-year real interest rates fall alongside, that is bad news about future economic growth coupled with a neutral monetary policy--a Federal Reserve expected to respond according to its known reaction function.
3. When ten-year expected inflation rises and ten-year real interest rates fall alongside, that is a shift toward monetary expansion--a Federal Reserve that is now expected to respond according to a reaction function with greater tolerance for inflation in the future.
4. When ten-year expected inflation falls and ten-year real interest rates rise alongside, that is a shift toward monetary contraction--a Federal Reserve that is now expected to respond according to a reaction function with lower tolerance for inflation in the future.

Implied rate hike date moves to October of 2014 - The Fed Funds futures curve steepened again on Friday, bringing forward the implied date of the first rate hike by the Fed. The date is now closer to October of 2014 as opposed to May of 2015 discussed about a month ago (see post) - an immense steepening in such a short time. That means the market now expects the current securities purchase program to end before the start of the fourth quarter of 2014.

Say Hello to Inflation, Inflation is Dead - Quantitative easing (QE or “money printing”) will continue despite Bernanke’s rhetoric about cutting back. (See Don’t Fear the Taper). Funding trillion dollar annual deficits requires monetization of debt. America is almost $17 trillion in debt. Interest rates rising just a few ticks closer to their long-term, normalized levels, would be an insurmountable strain on future budgets. Admitting the true rate of inflation would trigger Cost of Living Adjustment (COLA) raises for government workers, pensioners and social security recipients. Private sector unionized labor and nonfederal government employees would likely demand raises too. Bond buyers would insist on higher coupon rates. Our leaders have sacrificed integrity over fixing the underlying problems. Paul Price discusses the situation in Inflation Will Never Go Up Again. In his view, there is no plausible exit strategy from QE without risking societal breakdown as lifelong promises get broken (pensions, salary adjustments and social security payments). Civil uprisings have already occurred in Greece, Iceland and Cyprus. The masses are rebelling in Egypt today. The U.S. has avoided riots because QE is holding interest rates artificially low. The Bureau of Labor Statistics’ (BLS) manipulation of Consumer Price Index (CPI) allows the government to pretend inflation is not serious. When the public realizes the true extent of inflation, bond buyers will likely demand much higher coupon rates pushing up the government’s cost of debt service dramatically.

Goods Disinflation Reappears, but Shouldn’t Worry Fed - The latest readings on producer prices and import prices show disinflation has not disappeared when it comes to goods. The producer price index jumped 0.8% in June, but that was largely due to higher energy prices. The core PPI, which excludes food and energy, rose 0.2%. Yearly core inflation at the factory gate has held at just 1.7% for the past four months, compared with 2.6% in June 2012. Meanwhile, foreign-made goods are becoming cheaper. Import prices excluding oil fell 0.3% in June, the fourth consecutive decline. Nonoil import prices are down 1.0% compared to a year ago. In June 2012, those prices were rising at a 0.6% annual rate. Weak pricing power for goods reflects extremely sluggish spending around the world. Manufacturers will not be able to mark up their selling prices by very much until global demand picks up, and that looks unlikely in coming quarters. Will the Federal Reserve have to take disinflation worries back into account when it discusses the next policy move? Two other price trends suggest no. First are signs that labor costs are increasing. Wage growth picked up in second quarter while productivity was probably very weak. Rising unit labor costs usually put a floor under selling prices. That’s especially true in the service sector which compromises about 60% of the consumer inflation data. Second, reports of rising rents along with increasing home values suggest shelter inflation–about 40% of the core CPI–will hold at its current 2.3%, if not edge up slightly.

Do the inflationistas really believe what they say? - For several months I've wanted to write a post titled something like "The absolute epic crushing devastation of the inflationista worldview". But I didn't get around to it, and that is a good thing, because Matt O'Brien does it much better than I ever could. And Paul Krugman, who has basically made a sport of slaying inflationistas, chimes in, differentiating between several levels of inflationista craziness. The Inflationista Hall of Shame includes New Classical economists, Austrians, conservative politicians, some Wall Street macro types, faceless European institutions, and Niall Ferguson. Of course it isn't just people in the popular press warning about "the bond bubble", inflation, and "all this money printing". Every Wall Street guy I hang out with in New York seems to think the same thing. "We had the Tech Bubble...we had the Housing Bubble...and I tell you what," confided a stockbroker friend to me over dinner two weeks ago, "I think right now we're in the Central Bank Bubble." To which I of course replied, "If everyone thinks it's a bubble, why doesn't it pop?" But anyway, the question is no longer whether the inflationistas have a good point. They do not. The question is why they continue to profess inflationista views.

The Derp and Fall of Inflation Fearmongers - Back in March 2009, the Fed began expanding its first bond-buying program, and the usual suspects began hyperventilating about hyperinflation. They just couldn't conceive how all the Fed's "money-printing" wouldn't end with double-digit inflation, if not people needing wheelbarrows full of cash to buy the most basic of necessities. But, as Paul Krugman pointed out, this lack of imagination was really a lack of knowledge of Japan's lost decade. There, as here, prices barely rose (or in Japan's case, actually fell), despite big deficits and big bond-buying. Why? Well, the rules change when short-term interest rates hit zero. Risk-averse banks don't want to lend and risk-averse households and businesses don't want to borrow. So central bank bond-buying mostly pushes reserves into banks that just sit there, especially when the central bank pays interest on them. Now, that doesn't mean quantitative easing is pointless -- ask Europe -- just that it's not massively inflationary. But the anti-Bernanke crowd has tried not to notice that prices haven't gone parabolic. They've mostly succeeded in this epistemic closure -- and even when they haven't, they've quickly discounted reality as just a fad. Their excuses have been as predictable as they have been wrong: either the official numbers are irrelevant, or miss "real" inflation, or will show more inflation in a few more years (just wait and see!). But with core PCE inflation, the Fed's preferred measure, now at an all-time low going back 50 years, it's getting harder and harder to get anyone to listen. Here are the stories each group has tried to tell.

Here’s Why “QE Isn’t Money Printing and Does Not Cause Inflation” Are Not Only Big Fat Lies, But Red Herrings -- Here we go again with more self appointed experts repeating the big, pernicious misconceptions about what QE does and does not do. Let me put it bluntly. The ideas that QE does not cause inflation and that it’s not the equivalent of printing money are categorically false, regardless of how many times you see those points made, and on how many websites. They are not true. The idea that QE does not stimulate CPI inflation is correct. That is not the same thing as QE does not cause inflation and is not money printing. QE is money printing. It causes some kinds of inflation, but may not cause some types of inflation at a given time. Under other conditions it may. Under current conditions, it does not raise CPI. QE stimulates inflation, only not the dumbed down definition of inflation encapsulated in CPI or PCE. If you dumb down inflation to exclude all the things that are inflating, then voila, there’s no inflation. However, QE is directly responsible for asset inflation. It was directly responsible for increasing money supply dollar for dollar, but it could not drive CPI inflation. Establishment economists and their supporting cast of lying shills deliberately exclude asset inflation from their definitions of inflation. So it appears that QE does not cause inflation as narrowly defined. If you believe that narrowly defined CPI is the only kind of inflation, then stop reading now. You’re in denial and presentations of fact and logic won’t change that. Same if you don’t believe that QE is printing money. Prior to the central bank’s purchase of the securities the money did not exist. Subsequent to the purchase it did. Oh sure, the Fed didn’t print the money. It just created an electronic credit in the account of the Primary Dealer at the Fed. The Fed paid for the securities with money that did not exist prior to that moment. Now you don’t see it, now you do. Abracadabra, hocus pocus.

Where did the Reach for Yield Go? - Friday’s strong data caused bond yields to spike. This has caused some consternation from economic commentators, and Paul Krugman in particular has argued that the rise in interest rates will have severe economic impacts. While I want to touch on these issues, I will approach them from a different debate -- that over the "reach for yield". My thesis? The recent rebalancing in the stock market shows that the reach for yield was overstated, and that, from this, we can conclude the taper will not have a severe negative effect on growth. Let’s start by refreshing our memory of “reaching for yield”. In his February speech, Jeremy Stein argued that because many institutional investors need to meet nominal return requirements, these investors were reaching into riskier assets. Even though these assets may not offer high expected returns, their variance profiles offer better chances of hitting the nominal requirement. This game of distributions is illustrated below. Even though the safe red (i.e. low variance) asset has a higher expected return, the risky blue (high variance) asset has a better chance of getting the fund manager over the critical red required return line. As a result, a market wide reach for yield may result in a mispricing of risk, jeopardizing financial stability.These arguments have been echoed by many other commentators. Here’s Martin Feldstein in the WSJ using the reach for yield as an argument to taper: Although the economy is weak, experience shows that further bond-buying will have little effect on economic growth and employment. Meanwhile, low interest rates are generating excessive risk-taking by banks and other financial investors. These risks could have serious adverse effects on bank capital and the value of pension funds.

Can the Fed Actually Control Interest Rates?- This was the question asked in Niels Jensen’s latest monthly letter that you can read here.  It seems to be a controversial one, but I think the answer is a bit more straightforward than some might think.  First, some basics:

• The Fed is the monopoly supplier of reserves to the banking system.   
• The Fed sets policy based on its expectations of future economic performance (primarily inflation and unemployment levels).

So, if the Fed wants to set rates on government debt then, as the reserve monopolist, it simply challenges traders to a good old fashioned duel.  The traders get to try to use their limited money balances to challenge the Fed’s unlimited reserve balances.  Said differently, the Fed brings a gun to a knife fight and just starts lighting the traders up.  When they get the message that you don’t fight the Fed then they stop trying.  The thing is, as the reserve monopolist, the Fed will just set the interest rate on the bonds it wants to buy and good fixed income traders will front-run the Fed there.  So if the Fed wanted to set the 10 year bond at 1% then it would announce a 1% target and if the rate didn’t go there then the SOMA desk would start shooting people who are challenging it with knives.  The rate would go to 1% on the 10 year.The Fed can control the interest rate on its debt, but it can’t necessarily control the economy.  So, what happens if the Fed sets a 1% target on the 10 year bond and the economy starts picking up a huge amount of steam and inflation starts to pick-up?  Well, then it becomes a policy game.  Does the Fed keep the rate where it wants thereby inducing more potential inflation?  Or does the Fed react to the changing economy and tighten policy?   That depends on what the Fed wants to do, but it should not be controversial that the reserve monopolist could keep the 10 year yield at 1% even in the case of a very high inflation.  It would probably be counterproductive to do so, but it should not be controversial.

Treasury Three-Year Yields Are Double May’s Levels Before Sale -  Treasury three-year notes yielded more than double their levels in May before the U.S. sells $32 billion of the securities amid speculation the Federal Reserve is preparing to reduce debt purchases. The three-year notes being sold today yielded 0.715 percent in pre-auction trading, compared with a yield of 0.354 percent at the May 28 auction of the securities. The U.S. is due to sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on July 11. Yields have increased on bets the U.S. economy is strong enough to allow Fed Chairman Ben S. Bernanke and policy makers to start trimming the asset buying that has helped cap borrowing costs.

Treasury Snapshot: Yields Off Interim Highs But 30-Year Fixed Mortgage Moves Higher - I've updated the charts below through Thursday's close (July 11th). The yield on the 10-year note closed yesterday at 2.60%, 10 bps off its previous close and 13 bps off its interim high on July 5th. The latest Freddie Mac Weekly Primary Mortgage Market Survey, published yesterday, puts the 30-year fixed at 4.51%, a new interim high and the highest average rate since early August of 2011. Here is a snapshot of the 10-year yield and the 30-year fixed mortgage since 2008. A log-scale snapshot of the 10-year yield offers a more accurate view of the relative change over time. Here is a long look since 1965, starting well before the 1973 Oil Embargo that triggered the era of "stagflation" (economic stagnation with inflation). I've drawn a trendline connecting the interim highs following those stagflationary years. The red line starts with the 1987 closing high on the Friday before the notorious Black Monday market crash.

Bank of America Boosts U.S. 10-Year Yield Forecast to 3% on Jobs - Bank of America increased its year-end forecast for Treasury 10-year yields to 3 percent after data showed June employment exceeded projections, fueling speculation the Federal Reserve will reduce monetary stimulus. “Today’s payroll data, in light of the Fed’s new reaction function, justifies a move higher in rates,” Bank of America Merrill Lynch said in a report. The company, one of 21 primary dealers that trade with the central bank, raised its 10-year forecast from 2.4 percent issued in early June. The outlook for higher yields is also supported by so-called convexity hedging linked to mortgage-backed securities, increased yields on Japanese government securities and outflows from bond mutual funds, the report said. Treasuries may also be hurt as investors in emerging markets reduce duration and central banks liquidate dollar reserve assets to support their local currencies, it said. U.S. 10-year note yields rose 22 basis points, or 0.22 percentage point, to 2.73 percent in New York, according to Bloomberg Bond Trader prices. It was the biggest one-day yield increase since August 2011.

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

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

The first chart shows the complete data series, which stretches back to 1960. I've highlighted recessions and the current level of this daily index through its latest data point.As we can readily see, the current level of this index is higher than it was at the onset of all recessions with the exception of the one in 1973-1975 that was triggered by the Oil Embargo and subsequent gasoline shortages.

Here Comes Stall Speed: Barclays Cuts Q2 GDP Forecast To 0.6%  - It was only a matter of time before Wall Street, overoptimistically hockeysticking everything as always, slammed its wrong Q2 GDP forecasts following the earlier miss in Wholesale Inventories, which printed at -0.5% on expectations of a +0.3% increase, and down from a downward revised -0.1% (was +0.2%). That time has arrived, with Barclays the first to slash its already stall speed 1.0% Q2 GDP forecast by a whopping 40% to 0.4%. From Barclays: US Q2 GDP tracking: Down four-tenths to 0.6% on decline in wholesale inventories Wholesale inventories declined by 0.5% m/m in May, significantly weaker than our forecast (+0.2%) and the consensus (+0.3%). In addition, growth in April was revised down to -0.1% from +0.2%. This subtracted 0.4pp from our Q2 GDP tracking estimate, which now stands at just 0.6% q/q (saar). And here is Goldman: 1. Wholesale inventories declined 0.5% in May (vs consensus +0.3%). Inventory growth in April was revised down three-tenths to -0.1%. By category, auto inventories?which had made solid positive contributions to inventory growth in recent months?were flat, while machinery declined 0.7% and nondurable goods fell 0.8%. The wholesale inventory-to-sales ratio declined to 1.18, its lowest level over the past year. 2. In light of slower-than-expected May inventory accumulation and the downward revision to April, we reduced our Q2 GDP tracking by three tenths to 1.3%.

Economist Caution: Prepare For 'Massive Wealth Destruction': Marc Faber, the noted Swiss economist and investor, has voiced his concerns for the U.S. economy numerous times during recent media appearances, stating, “I think somewhere down the line we will have a massive wealth destruction. I would say that well-to-do people may lose up to 50 percent of their total wealth.” When he was asked what sort of odds he put on a global recession happening, the economist famous for his ominous predictions quickly answered . . . “100 percent.” Faber points out that this bleak outlook stems directly from Federal Reserve Chairman Ben Bernanke’s policy decisions, and the continuous printing of new money, referred to as “quantitative easing” in the media. Faber’s pessimism is matched by well-respected economist and investor Peter Schiff, the CEO of Euro Pacific Capital. Schiff remarks that the stock market collapse we experienced in 2008 “wasn’t the real crash. The real crash is coming.” Schiff didn’t stop there. Most alarming is his belief that daily life will get dramatically worse for U.S. citizens.

The Darkest Pool -  Like entropy, the diminishing returns of technology never sleep. The hubristic techno-narcissism of the day, as seen in mankind’s efforts to fake-out the universe, will eventually get our one-way ticket to Palookaville punched. Perhaps there’s such a thing as being too cool after all.  The trick so far has been to create massive inflation, export the effects of it to other trading partners, and end up with a lot more money here in the USA, or the illusion of more money.  Well, loans, for houses, cars, and college tuitions. In a word: debt. Let’s call it “Rainman Economics,” because it begins to resemble the behavior of a severely autistic human being who performs a small range of obsessive actions over and over and over, often centered on numbers. Rainman Economics is the policy of the Federal Reserve and, indirectly, the government under Mr. Obama.     The suave and genial Mr. Obama just doesn’t know what’s going on — despite being surrounded by minions with briefing folders, sages and vizeers, quantitative augurers neck-deep in mathematical goat entrails, and (always) the lone, silent soldier toting the dire nuclear “football.” Mr. Obama doesn’t know that the universe has launched us on a journey to a place beyond techno-industrialism — and it’s not Ray Kurzweil’s infinity of orgasms. It’s a place where no ring-tones are heard and not so much as a stretch-mark of the Kardashians remains to be found.

New York Times Does Hatchet Job on MMT - I’m a bit late to get to an article in the New York Times that ran on one of the slowest news days of the year, last Saturday, Warren Mosler, a Deficit Lover With a Following. Since Bill Black has since issued a good kneecapping, I’ll soon turn the mike over to him, but I wanted to add some points about the approach used in this heavy-handed exercise propaganda. The first was the framing, that of profiling Mosler, which allowed Annie Lowrey (wife of Ezra Klein who got a junket to St. Croix for this exercise) to deal only peripherally and dismissively with how MMT works, and spends more time on position MMT as unsound, “clearly on the fringe” and even worse, to the left of Keynesians, but nevertheless popular….just the way goldbuggery is. Not that she was all that generous to Mosler either: he’s a “failed Senate candidate” who lived on a “run down but jewel toned Caribbean island.”  But the more troubling part was the way it straw manned MMT, by failing to explain that its roots are operational, based on how a fiat currency works, and by repeatedly claiming its proponents deny that inflation is something to be worried about (as opposed to what they do say, which is that we are so far from having the conditions in place now to generate inflation that making it a big policy preoccupation is wrongheaded). And the Lowry article had no comment section, which would have allowed for corrections and objections (for instance, Stephanie Kelton was misquoted) in contrast with other stories by Lowrey. The failure to allow comments is even more peculiar given that the article occupied the lead position in the business section.

Revealed Biases: Why MMT Critics Continue to Rely on Strawman Arguments - Bill Black -  Critics of MMT are free to point out errors in MMT and to test its predictions. They are free to examine the historical record and to discuss how money is created in a nation with a sovereign currency. They are free to discuss how interest rates are set by a central bank in a nation with a sovereign currency. We have unguarded quotations from Bernanke and Greenspan demonstrating that they know how money is created and interest rates are set. They strongly support MMT. What is not acceptable is what actually happens. There are minor variants on a theme – they attribute positions and beliefs to MMT scholars (and heterodox economics in general) that MMT scholars, and UMKC economists in general, do not hold. The dismissals demonstrate nothing about MMT and heterodox economics, but they reveal a great deal about the dominant biases of neoclassical economists. Their revealed biases are intense and crippling. Their dismissal of rival views is so extreme that the neoclassical scholars gleefully emphasize that they are ignorant of MMT and other heterodox scholarship such as my work on microstructure – and proud of their ignorance. Because they do not read our work, but rather wish to dismiss it as unworthy of being read they need to invent a basis for dismissing our work. Because they do not know what we believe they have no constraints on what they falsely attribute to us. Journalists love “good copy” and chose not to ask how it is logically possible for those dismissing our work to do so without reading our work. The more outrageous the comment dismissing our work, the better the journalist likes it. The latest example of this is a column by Annie Lowrey on July 4, 2013 entitled “Warren Mosler, a Deficit Lover With a Following.” Warran Mosler is a member of the finance industry and a strong proponent of MMT. Lowrey incorrectly attributes a facially absurd quotation to Stephanie Kelton stating that MMT scholars do not publish scholarly articles. Kelton promptly corrected Lowrey.

Econ4 on the New Economy - Yves Smith  - Econ4, a group of heterodox economists, has released a short video and a statement on the “new economy” which they define as more sustainable and equitable forms of organizing “productive” activity and the resources that support them.  While the discussion is helpful, I wish they had gotten more granular in describing specific examples of the sort of organizations they have in mind and how they operate. Mondragon is an obvious illustration, but some US case studies would be helpful.

A Difference Between a Great Recession and Great Depression - On Friday we learned that the U.S. added another 195,000 (seasonally adjusted) non-farm jobs in June. That was a bit better than expected, and another sign that the economic recovery may be, ever so tentatively, gaining speed. But it will take 12 more months like June just to get non-farm employment back to the level of November 2007. That's when employment peaked before the onset of the Great Recession at more than 139 million non-farm jobs; the fact that it's going to take close to seven years, if all goes well over the next year, just to get us back to that level is an indication of how bad the recession was and how weak the recovery has been. And getting back to the 2007 level isn't getting back to normal; the U.S. will have added about 17 million inhabitants between 2007 and 2014, a healthy labor market thus requires millions more jobs.No other U.S. recession since World War II has been nearly this devastating to employment, as Calculated Risk's Bill McBride documents every month with the chart that Business Insider dubs "The Scariest Jobs Chart Ever." But just because the Bureau of Labor Statistics' official employment numbers only go back to 1947 doesn't mean there isn't data available from before then. In the National Bureau of Economic Research's Macrohistory Database, one can find a series of monthly non-farm employment numbers running from 1929 to 1939, compiled by the BLS. And guess what: they make for a much scarier jobs chart than the current recession:

The trade cycle: debt is trade - Nick Rowe - GDP is high in booms and low in recessions (relative to trend). That is (roughly) how we currently define "booms" and "recessions". GDP (roughly) measures the volume of trade in newly-produced final goods. But that is a narrow measure of trade. A lot of goods get traded that are not newly-produced. People buy and sell old houses, for example, where by "old" I mean "not produced this year". And those trades are not counted as part of GDP.  There is nothing wrong with excluding sales of old houses from GDP. Because GDP is supposed to measure the volume of production and not the volume of trade. But there is something peculiar in defining booms and recessions and the business cycle in terms of the volume of production, rather than the volume of trade. We produce goods and trade the goods we have produced, presumably because it makes buyer and seller better off, which is why production matters. But trade in old goods, like old houses, presumably makes buyer and seller better off too, so trade in old goods matters too. As I have argued before, first here and then here, we should call it "the trade cycle", not "the business cycle". We should broaden our focus beyond GDP.

Obama Sees 2013 Deficit Drop to $759 Billion, GDP Growth at 2.0% -  The Obama administration projects the federal budget deficit will shrink to $759 billion for the year ending Sept. 30, the smallest gap in five years as the economy improves and tax collections increase. The Office of Management and Budget said in an update of its forecasts that the economy may grow 2 percent this year on an annual basis. That’s down from the 2.3 percent growth rate predicted three months ago. The median forecast of 86 analysts surveyed by Bloomberg is for a 1.9 percent gain. Next year, the administration projects the economy will grow by 3.1 percent, down from 3.2 percent seen in April. Analysts surveyed by Bloomberg forecast a median increase of 2.7 percent in 2014. “Assuming adoption of the president’s proposed fiscal plan, the administration projects economic growth to continue in the second half of 2013 and to pick up in 2014,” the report said. “As various headwinds die down, and the proposed budget replaces sequestration, the administration expects more rapid growth.” Unemployment may average 7.5 percent this year, down from 7.7 percent the administration predicted in April. 

White House sees budget deficit shrinking to $759 billion for 2013 - The White House on Monday estimated that the budget deficit for 2013 will be $759 billion — a difference of $214 billion from the $973 billion deficit projected in President Obama's budget. If the projection proves correct, it would be the first time since Obama took office that the deficit fell below $1 trillion for the fiscal year. The White House budget office's annual mid-session review says that as a percentage of gross domestic product (GDP), the deficit would be 4.7 percent compared to 6 percent projected in the budget. Buried in the report's tables, however, can be found an increase in deficits compared to the earlier estimate in later years. The deficit for 2014 is projected to increase from $744 billion to $750 billion, and by 2023, the deficit clocks in at $549 billion, $109 billion larger than previously estimated if Obama's blueprint were to be adopted. Some of the changes to the 2103 deficit projection stem from $65 billion in higher revenue. The budget office sees $101 billion more in individual tax revenue due to technical adjustments, but this is lowered by $46 billion due to slower economic growth this year in part due to budget sequestration.

What If You Gave A Midsession Budget Review And Nobody Noticed? - In this era when almost all federal budget process deadlines are routinely missed or completely ignored, it's hard to believe that the fiscal 2014 mid-session review of the budget was released yesterday, a full week ahead of the July 15 statutory deadline. The mid-session review was released with virtually no fanfare. In fact, many of my budget geek friends who, trust me on this, live for the release of federal budget documents, didn't know it had been released until this morning. According to OMB, the 2013 deficit will be $214 billion less ($759 vs $973) than what was estimated earlier in the year in the president's budget (take a look at Table 1). Most of this reduced forecast is the result of three factors: a $65 billion increase in revenues, a $43 billion reduction in discretionary spending and a $71 billion reduction in mandatory spending. Overall, spending is projected to be $154 billion lower than the original projection. The increase in revenues mostly came from individual taxpayers accelerating income into 2012 in anticipation of the 2013 tax rate increase that was part of the fiscal cliff, and the $71 billion in what's classified as lower mandatory spending is the result of Fannie Mae and Freddie Mac running a surplus rather than a deficit. The third factor -- the reduction in discretionary spending -- is almost completely the result of the sequester that went into effect on March 1.

Center on Budget and Policy Priorities - How Much More Deficit Reduction Do We Need Over the Coming Decade? In February, CBPP estimated that $1.5 trillion in deficit savings would stabilize the debt (so it stops rising as a percent of the economy) over the latter part of the decade.  But, the new, more optimistic budget projections the Congressional Budget Office (CBO) released in May lowered deficits over that period by hundreds of billions of dollars.  As a result, we now project that policymakers could stabilize the debt over the coming decade with about $900 billion in further deficit savings. Our new analysis also notes that, while stabilizing the debt is the minimum goal, the improved fiscal outlook may make a more ambitious goal more attainable — one that includes temporary measures to strengthen job creation now while also taking sufficient steps to place the debt ratio on a downward path in the latter years of the decade.

CBO sees $115 billion June budget surplus -- The U.S. will post a $115 billion budget surplus in June, the Congressional Budget Office estimated on Tuesday. Receipts in June totaled $287 billion, 10% more than in the same month last year, while the government spent $172 billion, 27% less than in June 2012. Receipts of individual income taxes and payroll taxes increased in June, as did corporate tax receipts. The Treasury will release the official monthly budget figures on Thursday.

Remember The Debt Ceiling? - As Erskine Bowles notes "Everyone claims that they’re not going to let our nation default. And Lord knows we all ought to pray that they don’t. But, could it happen? You bet." But it seems the world has forgotten that between the "grand bargain' negotiations and the looming final-final debt ceiling deadline, the US fiscal situation remains troubled at best. While Washington is "only capable of focusing on one big issue at a time," dominated currently by espionage, immigration, and scandals, Bowles notes, from mid-September to mid-November the fiscal issues will be forced into the headlines and he believes there is only a 20-25% chance a deal is struck. As Stone & McCarthy notes, the Treasury will exhaust its extraordinary measures to create borrowing authority on October 31, and run out of cash on November 1.

Number of the Week: Potential Perfect Storm of Debt Ceiling and Fed - $173.49 Billion: About how much headroom the Treasury currently has under the debt ceiling. The U.S. will once again run into is debt limit this fall, and the smart money isn’t on whether there will be another congressional showdown, but when it will happen. The drop-dead date is likely to be around Oct. 31,  Treasury has been using extraordinary measures to keep U.S. debt under the cap since May, and rising revenue has managed to put off the day of reckoning for months. But that day will come eventually, and the end of October could shape up to be a perfect storm of policy uncertainty. Before the U.S. gets to the debt ceiling, it will have to deal with funding the government for fiscal 2014 that starts on Oct. 1. Failure to come to an agreement could result in a shutdown. Usual practice is to pass a continuing resolution that kicks the can down the road, and it’s likely that such a move could be pushed off for a few weeks and coupled with the debt ceiling. Meanwhile, the Federal Reserve has a meeting scheduled for the same week that Treasury is likely to bump into the debt ceiling. The Fed is expected to start slowing it purchases of bonds some time in the autumn. Many economists now expect the so-called tapering to begin in September. But, as Chairman Ben Bernanke likes to remind markets, Fed policy is dependent on data, and it’s quite possible that the Fed could be still be debating its first action when it meets in October.

Financial Engineering: The Simple Way to Reduce Government Debt Burdens - Dean Baker -Despite being thoroughly debunked, concern over high government debt-to-GDP ratios has hardly disappeared from policy debates. As such, an overlooked possibility for reducing a high debt burden is simply buying back bonds at a discount when interest rates rise, as is widely predicted. This issue brief calculates the potential savings to the government through a hypothetical buyback of government debt in 2017. Long-term bonds that are issued at low interest rates will sell at substantial discounts to their face value if market interest rates rise. Looking at publicly held marketable debt issued as of the end of February 2013, the face value of the debt is $3,857 billion. The projected market value of this debt is $3,399 billion for an implied debt reduction of $458 billion, or just under 2.3 percent of the GDP projected for 2017.  The interest burden on the Treasury will not change through these transactions. The only effect will be to lower the official value of outstanding debt. However if people in policy positions continue to attach importance to this number then this sort of debt exchange should rank high on the list of policy options. There is no less costly way to eliminate close to half a trillion dollars in debt.

IMF's Lagarde says U.S. budget cuts 'inappropriate' -  The U.S. federal budget cuts are an inappropriate measure that will weigh on potential growth, IMF chief Christine Lagarde said on Sunday, urging Washington to present "credible" fiscal plans. Washington enacted across-the-board federal government spending cuts, known as sequestration, in March because Congress could not agree on an alternative. It has meant everything from furloughs for air traffic controllers to fewer planes for the U.S. Navy to smaller subsidies for farmers. "The budgetary procedure that is in place in the United States, which leads to a budgetary adjustment, seems to us absolutely inappropriate ... because it blindly affects certain expenditures that are essential to support medium and long term growth," Lagarde told an economists' conference in Aix-en-Provence, southern France. Her comments echoed those last month from the IMF itself, which said: "The deficit reduction in 2013 has been excessively rapid and ill-designed." In its annual check of the health of the U.S. economy, the IMF forecast economic growth would be a sluggish 1.9 percent this year. The IMF reckons growth would be as much as 1.75 percentage points higher if not for the rush to cut the government's budget deficit.

Defining Prosperity Down, by Paul Krugman - Friday’s employment report wasn’t bad. But given how depressed our economy remains, we really should be adding more than 300,000 jobs a month, not fewer than 200,000. Full recovery still looks a very long way off. And I’m beginning to worry that it may never happen. What, exactly, will bring us back to full employment?  We certainly can’t count on fiscal policy. The austerity gang may have experienced a stunning defeat in the intellectual debate, but stimulus is still a dirty word, and no deliberate job-creation program is likely soon, or ever.  Aggressive monetary action by the Federal Reserve, something like what the Bank of Japan is now trying, might do the trick. But far from becoming more aggressive, the Fed is talking about “tapering” its efforts. This talk has already done real damage; more on that in a minute.  Still, even if we don’t and won’t have a job-creation policy, can’t we count on the natural recuperative powers of the private sector? Maybe not.  It’s true that after a protracted slump, the private sector usually does find reasons to start spending again.  But that healing process won’t go very far if policy makers stomp on it, in particular by raising interest rates. That’s not an idle worry. A Fed chairman famously declared that his job was to take away the punch bowl just as the party was really warming up; unfortunately, history offers many examples of central bankers pulling away the punch bowl before the party even starts.

The Economy Needs More Spending Now - Alan Blinder  - On the proverbial list of top 10 reasons for poor economic policy, politics occupies about the first six places. But around seventh or eighth place there is a conceptual confusion that sounds pedantic but is highly consequential. I refer to the failure to distinguish between the short-run and long-run effects of particular policies, which are often starkly different. The most prominent recent example is the battle over reducing the federal budget deficit. Some say lower deficits are essential for economic growth; others say reducing the deficit will damage growth. Who's right? Actually, they both are. It depends on the time frame. In the short run, deficit reduction slows growth by cutting the economy's total spending. After all, to reduce its deficit, the government must spend less itself or tax people more. This year, the tax hikes and government spending cuts agreed to in January and before are probably reducing GDP growth by about 1.5-2 percentage points. Think about that. The U.S. economy is struggling to achieve 2% growth this year. Without the fiscal self-punishment, we might be humming along at closer to 4%. Yet you hear every day that large budget deficits threaten growth. How can that be? The answer is that, in the long run, a larger accumulated public debt probably spells higher interest rates, which deter some private investment spending. Economies that invest less grow less. Thus, paradoxically, reducing the budget deficit probably hurts growth in the short run but helps it in the long run.

Government Consumption versus Government Investment - When the economy needs short-term demand stimulus, as it does now, that stimulus can come from spending on infrastructure, i.e. government investment, or it could be from expenditures on something with little long-run benefit such as large fireworks shows held throughout the nation - big extravagant events that spend millions and millions of dollars in the most depressed economic areas (government consumption). In the short-run the goal is to kick start the economy, and a fireworks show is just as good at that task as infrastructure spending if the spending is approximately the same.  Where they differ is in the long-run. The firework show leaves only memories - and sometimes that's enough to justify an expenditure - but let's assume that for the most part the shows were nothing more than an excuse to spend money to get the local economies moving (not that there's anything wrong with that; also, perhaps a series of shows would be better so that the impulse is spread out over time and sustains the economy through the downturn, but the idea is the same). However, infrastructure spending does have long-run benefits and can help the economy grow faster.  Thus, it seems like infrastructure spending is the obvious choice, since it has both short-run and long-run benefits. But there is a further consideration, how fast each type of spending can be put into place. If a "fireworks show" can be put into place very fast, while it takes far longer to get infrastructure spending going, then policy should be a combination of spending that hits the economy right away (government consumption) and spending that hits a bit later, has long-lasting effects, and promotes future growth (government investment).

As Pentagon Furloughs Start, Congress Yawns - One of the most consequential effects of the sequester began today: Weekly unpaid furlough days for more than 650,000 civilian workers at the Defense Department, who will effectively see their pay cut by 20 percent for the  final 11 weeks of this budget year. All the commissaries at domestic military installations are closed, for example, and will be every Monday through the end of September. (Most agencies within the department have decided to salve the economic sting a tiny bit by setting the furloughs on Mondays and Fridays, so that workers might at least enjoy a series of long weekends.) But the visuals of closed cafeterias, equipment maintenance sheds, supply warehouses, payroll offices and the like will have absolutely no effect on the pace of congressional effort toward untangling the budget morass. Whatever work is taking place on that score is totally out of view. And none of the congressional leadership is suggesting this will change before Congress returns from its August recess a full week after Labor Day, when there will be 23 days left before this fiscal year gives way to the next.Some agreement on spending will need to get done by then to forestall a partial government shutdown, which is in neither party’s political interest to permit. Odds are that the first month or so, at a minimum, will be covered by a temporary patch in the form of a continuing resolution that keeps agencies spending at their across-the-board budget cut levels.

Smart Tax Reform Could Shrink the Government - Done well, such house cleaning could make for a simpler, fairer, more pro-growth tax code. It could also shrink government’s role in the economy. Eric Toder and I explore that theme in a recently released paper, Tax Policy and the Size of Government. Here’s our intro: How big a role the government should play in the economy is always a central issue in political debates. But measuring the size of government is not simple. People often use shorthand measures, such as the ratio of spending to gross domestic product (GDP) or of tax revenues to GDP. But those measures leave out important aspects of government action. For example, they do not capture the ways governments use deductions, credits, and other tax preferences to make transfers and influence resource use.We argue that many tax preferences are effec¬tively spending through the tax system. As a result, traditional measures of government size understate both spending and revenues. We then present data on trends in U.S. federal spending and revenues, using both traditional budget measures and measures that reclassify “spending-like tax preferences” as spending rather than reduced revenue. We conclude by examining how various tax and spending changes would affect different measures of government size. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are spending reductions in our expanded measure. Increasing marginal tax rates, in contrast, raises both taxes and spending in our expanded measure. Some tax increases thus reduce the size of government, while others increase it.

How Not to Fix the IRS - House Republicans have decided to make the IRS their summer piñata. Its leadership says it will bring a series of anti-IRS proposals to the floor later this month. And an appropriations subcommittee’s spending bill would slash the agency’s budget by $3 billion, 24 percent below levels Congress approved in March. If the plan is to score political points by hamstringing the agency’s ability to do its job, starving the beast this way makes perfect sense. But if you are interested in improving the way the IRS works, it is foolish and counter-productive. Forgive me, but let’s try to apply a dash of common sense to the agency’s problems. After months of looking, the IRS’ most vocal critics have found no evidence that its poor processing of requests by political organizations seeking tax-exempt status was politically-motivated. It was, however, real. And its cause seems to be a staff that suffered from low skills, poor training, low morale, a shortage of resources, and bad management. It is hard to see how cutting an organization’s budget by one-third will fix any of these problems.

Not All Curbs on Tax Preferences Are Created Equal - Because politicians seem unwilling to confront specific individual tax preferences, it is likely that any broad-based tax reform will be based on across-the-board curbs on deductions, credits, and exclusions. That’s how lawmakers could generate the revenue they need to reduce tax rates and (perhaps) help reduce the deficit without seeming to tackle popular tax subsidies such as those for mortgage interest or charitable giving. But there are many different ways to broadly scale back tax expenditures. And while the distinctions among them may be easily lost in what is sure to be a complicated political debate, these methods yield very different outcomes. Some options would target the highest income households, others would raise taxes more broadly. Some would be fairly simple to administer, others would be mind-numbingly complex. The lesson, you might say, is that a cap is not a limit is not a haircut. To help sort out the differences, my Tax Policy Center colleagues looked at six ways to reduce tax preferences across-the-board.  To make sure they were comparing apples with apples, they designed each option so it would raise roughly the same amount of money (about $1 trillion over 10 years). In addition, because supporters of these ideas have been pretty loose with their definition of what their global curbs would cover, Eric, Joe, and Amanda looked at each of the six in two ways: First, as if they targeted only itemized deductions; and second, as if they included those deductions plus two big exclusions—for employer sponsored health insurance and municipal bond interest. They also looked at whether the plans would retain or scrap the AMT and the current limit on deductions for high-income households (aka Pease).

Household Debt and the Dynamic Effects of Income Tax Changes - This paper investigates a new channel in the transmission of fiscal policy: household debt. Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the UK, mortgagors exhibit large and persistent consumption responses to tax changes. Home owners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Social renters increase their consumption, but by less than mortgagors. Households with non-mortgage debt also tend to adjust their expenditure by more than non-borrowers. Splitting the sample by age and education yields only limited evidence of heterogeneity as the distributions of these demographics overlap across housing tenures. Our findings highlight the role of household debt in evaluating the effectiveness of fiscal policy both in the aggregate and across different groups in society.

Help American businesses – tax their profits abroad - Larry Summers - No one is satisfied with the US corporate tax system. From one perspective, the main problem is that, while corporate profits are extraordinarily high relative to gross domestic product, tax collections are very low. Many very successful companies pay little or nothing in taxes at a time when the budget deficit is a serious concern; and when hundreds of thousands of defence workers are being furloughed, or sent on unpaid leave; and when lotteries are being held to determine which families cease to receive help from the Head Start pre-school education programme. From another perspective, the main problem is that the US has a higher corporate tax rate than any other leading economy and, unlike other countries, imposes severe taxes on income earned outside its borders. This is thought to burden unfairly companies engaged in global competition, to discourage the repatriation of profits earned abroad and – because of the patterns of investment that it causes – to benefit foreign workers at the expense of their US counterparts.These two perspectives on corporate taxes seem to point in opposite directions. The first points towards the desirability of raising revenues by closing loopholes; the latter perspective seems to call for a reduction in corporate tax burdens. It seems little wonder that corporate tax reform debates are so divisive.Many get behind the idea of “broadening the base and lowering the rate” – but consensus tends to collapse when the issue becomes the means to broaden the base. Indeed, a principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system.

Study Finds Benefit to Keeping Interest Costs Deductible - A new study seeks to throw cold water on the idea of limiting tax breaks for business borrowing as a way to help pay for a corporate tax overhaul.  The study, to be released on Wednesday, was done by big accounting firm Ernst & Young and sponsored by a business group, the BUILD Coalition, that is fighting to maintain the current deductibility of interest costs. Members of the group include the Equipment Leasing and Finance Association, International Council of Shopping Centers, National Association of Development Companies, Private Equity Growth Capital Council, Real Estate Roundtable, and the Small Business Entrepreneurship Council.The study found that economic output would be cut by about 0.2% and investment would be reduced by about 0.3% if the deductibility of business interest expenses was cut by 25%.A number of lawmakers as well as the Obama administration have floated various ideas for tightening up on businesses’ interest deductions as a way to help achieve a tax rewrite.

It’s Time to Levy the Land - The Economist over the weekend published a great primer on the benefits of broad-based land taxes: Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors. Property taxes are a stable source of revenue in a globalised world where firms and skilled people can easily move. They are also less prone to cyclical swings. In the financial bust America’s state and local governments saw smaller declines in property taxes than other forms of revenue, largely because the valuations on which tax assessments are based were adjusted more slowly and less dramatically than actual prices. Property taxes may even restrain housing booms by making it more expensive to buy homes for purely speculative purposes. Yet, despite these benefits, the average high income country, including all levels of government, raises under 5% of total tax revenue from annual levies on land or the buildings on it (including council rates):

20 Words That Will Make or Break Financial Reform - Derivatives, those complex exploding financial securities that were at the heart of the 2008 Lehman Brothers collapse and global financial crisis, have been at the top of bank reformers’ agenda over the past five years. Figuring out a way to make them — and thus our financial system — safer has been one of the chief focuses of the Dodd-Frank financial-reform bill. But in the next week, a fight over some 20 words in that bill will come to a head, and if the battle goes the wrong way, it will put us right back to where we were in 2008 — with a system that is neither transparent, nor safe. At issue is whether the new rules on derivatives will apply only in the U.S., or internationally — the latter meaning wherever U.S.-registered swaps dealers, which include all the major global banks like Citibank, JPMorgan, Deutsche, etc., trade. It’s a decision with enormous implications. Derivatives are part of a $300 trillion global market that developed from the 1980s onward and has been almost entirely unregulated since then. That is, it was unregulated, until Commodity Futures Trading Commission (CFTC) chairman Gary Gensler got on the case five years ago. Despite intense industry and political lobbying pressure, Gensler (a former Goldman Sachs partner about whom I wrote a long profile last year) has almost single-handedly led a global charge to clean up the derivatives market, increasing transparency and reporting standards, forcing through new rules about professional conduct and pushing for tougher capital requirements for traders.

U.S. swaps regulator calls vote on cross-border rule (Reuters) - The top U.S. derivatives regulator will meet next week to vote on how its rules apply to foreign companies that want to do business with U.S. firms, a sign it may be nearing a compromise on a thorny issue that has invoked the wrath of foreign regulators. The Commodity Futures Trading Commission announced a formal meeting for July 12 to decide how new rules it has written to regulate the $630 trillion swaps markets apply to companies abroad. The issue has split the CFTC for many months as it started writing new rules to rein in the lucrative swaps market, dominated by banks such as Citigroup Inc, Bank of America Corp and JPMorgan. Chairman Gary Gensler, a Democrat who is widely expected to leave when his term expires at the end of the year, has insisted foreign companies comply with the CFTC's rules if they want to do business with U.S. companies. The rules are an effort to make the opaque derivatives market safer after the financial crisis, and prevent risk that affects U.S. companies from building up abroad. But banks have complained it would subject them to cumbersome and redundant regulation. And European Union financial services czar Michel Barnier has said America should rely on similar rules that are being drawn up in other jurisdictions, after a 2009 global agreement to rewrite the rules for banking.

Banks Win Again: CFTC Caves, SEC Opens Door Wide Open to Fraud - Yves Smith - I’m going to be brief, in part because the CFTC’s probable demonstration of lack of gumption is still in play, while the SEC’s was expected but nevertheless appalling. But the bottom line is that even though we seem some intermittent signs of the officialdom recognizing that big banks remain a menace to the health and well-being to the general public*, the measures to constrain them continue to be inadequate.  As readers may recall, CFTC chairman Gary Gensler was in a position to stare down bank efforts to water down critical provisions of Dodd Frank on derivatives (see here for details of the issues at stake). What appears to have forced Gensler to relent was not the CFTC politics, but bank refusal to prepare, which meant they could stamp their feet and say if Gensler did not back down, the markets would blow up and it would all be his fault. From the Financial Times: It was billed as the mother of regulatory crunches, the day the world’s regulators would part ways on policing derivatives. They would prevent clearing houses handling some US business and force dealers to apply conflicting rules. In the event, on the eve of a deadline when the US would withdraw exemptions for foreign dealers, a landmark transatlantic accord has been sealed that calls a truce in a turf war that has threatened to disrupt financial markets… Behind the numbingly complex detail of cross-border derivatives guidance, a bigger issue was at stake: whether Washington could trust Europeans to enforce financial rules designed to protect US taxpayers. Mr Gensler had previously insisted that any transaction with a US counterparty fell under Dodd-Frank. Now the CFTC has determined that because EU and US rules are “essentially identical”, market participants can “determine their own choice of rules” when transacting privately negotiated swaps..

HSBC wins OK of record $1.92 billion money-laundering settlement - - A federal judge has approved HSBC Holdings Plc's (HSBA.L)(HBC) record $1.92 billion settlement with federal and state investigators of charges that it flouted rules designed to stop money laundering and thwart transactions with countries under U.S. sanctions. While noting "heavy public criticism" of the settlement, which enabled HSBC to escape criminal prosecution, U.S. District Judge John Gleeson in Brooklyn, New York, called the decision to approve the accord "easy, for it accomplishes a great deal." Gleeson ruled on Monday after more than six months of review, rejecting arguments by the U.S. government and HSBC that federal judges lacked "inherent authority" over the approval or implementation of so-called "deferred prosecution agreements." The settlement, announced December 11, 2012, included a $1.256 billion forfeiture and $665 million in civil fines. It resolved charges accusing HSBC of having degenerated into a "preferred financial institution" for Mexican and Colombian drug cartels, money launderers and other wrongdoers through what the U.S. Department of Justice called "stunning failures of oversight."

A Call to Battle on Bank Leverage - Simon Johnson - On Tuesday, federal banking regulators opened an important new phase of the debate on how safe very large financial institutions should become. The next round of argument will be intense; the focus has shifted to the specific and high-stakes question of how much leverage big banks can have – i.e., how much of each dollar on their balance sheet they should be allowed to fund with debt rather than with equity.The people who run global megabanks would rather fund them with relatively more debt and less equity. Equity absorbs losses, but these very large companies are seen as too big to fail – so they benefit from implicit government guarantees. A higher degree of leverage – meaning more debt and less equity – means more upside for the people who run banks, while the greater downside risks are someone else’s problem (the central bank, the taxpayer or, more broadly, you).A key regulator on this issue is the Federal Deposit Insurance Corporation, which was created in 1933 to insure banking deposits – and hence serves as a crucial underpinning for public confidence in the financial system. The F.D.I.C. has a responsibility to financial institutions that pay insurance premiums; the goal is to avoid using federal tax dollars, so any losses are absorbed by the insurance fund. Small banks have been pointing out for some time that while they pay a great deal in insurance premiums, the main dangers in the financial system arise from the excessive leverage and more generally mismanaged risk-taking of big banks. The Independent Community Bankers of America has an excellent set of materials on ending too big to fail.. I highly recommend the white paper put out by the association on this issue.

What Is Bank Capital, Anyway? - Regulators are butting heads with banks this week over capital, with new rules on the table that could force banks to hold more of it. But what exactly is capital, and why is it so important?The question gets at the heart of finance today. In the crisis, a lack of capital brought some banks to the brink. Now, by requiring banks to bolster their capital, the government is trying to eliminate the need for taxpayer bailouts in the future. Though capital is a centerpiece of Wall Street regulation, it resists a simple definition.Capital is often described as a cushion that banks hold against losses. That’s true, but the implications are not always clear. One unfortunate misconception that can arise is that capital is a “rainy day fund.”To understand capital, think about how a financial firm does business. In a typical transaction, a firm pays for an investment with a combination of debt and equity. The more debt, or leverage, that finances the transaction, the more money the firm can make (or lose). More capital (so, less debt) means banks are more able to withstand losses. But it also means they can’t make as much money. This dynamic – more capital leading to lower returns – helps explain why banks tend to argue that holding more capital is “expensive"

FRB: Testimony--Testimony--Tarullo, Dodd-Frank Implementation…Testimony Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C

Fumbling Through the Fog Around Too Big to Fail - Simon Johnson - When Republicans invite a Democrat to testify at a congressional hearing and Democrats invite a Republican, we should pay attention. Such cross-partisan connections aren’t common and typically indicate that congressional leaders are trying to answer difficult questions. That was certainly the case recently, when the House Financial Services Committee held a hearing on how to end “too big to fail.” Specifically, the topic of the June 26 session was “Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts” -- whether the procedures put in place since 2010 to handle the failure of very large financial institutions would work, and whether we should expect the extraordinary official support provided to those institutions to fade away. The conclusion: The problem of too-big-to-fail banks is alive and well, and looms over our financial future.  In the more optimistic camp was Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. His assessment was that the Dodd-Frank financial reform legislation created sufficient legal powers to tackle the threat of large complex cross-border financial institutions. In particular, he said that regulators would be able to determine when financial companies are too big or otherwise too difficult to resolve through bankruptcy -- and could use Title I powers under the legislation to make banks (and others) small enough and simple enough to fail. This looks like wishful thinking.

Giant Banks Take Over Real Economy As Well As Financial System … Enabling Manipulation On a Vast Scale -  Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the economy.They say we need to break up the big banks to stabilize the economy.They say that too much interconnectedness leads to financial instability.They also say that the big financial players are able to manipulate virtually every market in the world. And that the government has given the banks huge subsidies … which they are using for speculation and other things which don’t help the economy. But the big banks have only gotten bigger – and more interconnected – than before the phony financial “reform” legislation was passed a couple of years ago. As if that wasn’t bad enough, four congressmen point out that the big banks are not taking over the tangible economy as well … which allows them to control and manipulate the markets.

On the Poor Definition and Measurement of Corruption - Yves Smith - Sadly, we’ve entered into a word where the word “corruption” has become inadequate to describe the many and varied practices of profitable abuse by the powerful and connected of their inferiors. I’m reluctant to make an object lesson of a large scale and, within its limits, well researched report by Transparency International (see end of the post for the full report). It surveyed 114,000 people in 107 countries. The study concluded that corruption had risen in most countries since its last poll two years earlier. On a scale of one to five, with one indicating corruption was not a problem at all and five signifying a very serious problem, the average response across all countries was 4.1. Yet how did the survey define corruption? In practice, they only asked about two types of behavior: bribes and “when decisions to allocate public resources are distorted by money, power, access, or some combination of the above.” So in cruder terms, it’s pilfering of the public purse. The problem is that this model of corruption implicit in this survey appears to be a developing country model of corruption, in which you can have abusive local headmen running towns of local offices as personal sinecures, and various levels of organized crime either controlling certain services or competing with government in providing “protection” (not that we don’t have that happening in advanced economies too, but we see it as an anomaly). But in the US, we have institutionalized corruption, and it includes form that don’t even register on the Transparency list.

Financial information groups face NY probe - FT.com: Some of the world’s top financial data providers are under investigation over the profits that sophisticated investors make by paying for early access to market-moving information. Under pressure from New York state’s attorney-general, Eric Schneiderman, Thomson Reuters on Monday suspended its practice of releasing closely watched consumer sentiment data two seconds early to clients who pay extra. Mr Schneiderman’s office is investigating the $25bn market data industry and the profits made by some of its biggest clients from trading in the minutes or milliseconds before other investors see market-sensitive data, one person familiar with its probe said. The investigation was triggered by questions over Thomson Reuters’ partnership with the University of Michigan. Since 2008, the company has offered a select group of high-frequency trading houses, banks and other clients the opportunity to pay a fee, reportedly as much as $6,000 a month, to receive the university’s twice-monthly consumer confidence survey two seconds ahead of other clients. Several other economic reports are available early to select investors, including Markit’s Purchasing Managers’ Indices, which Thomson Reuters distributes to all its subscribers two minutes early. The Chicago Business Barometer from Deutsche Börse and the Institute for Supply Management has also been available three minutes early.

History repeats itself, financial-regulation edition - On the positive side of things, the FDIC is insisting on beefing up Basel III, specifically its non-binding 3% leverage ratio. The US is looking to double that number, in a move which might force the eight biggest banks to raise another $89 billion in capital. It’s a very good idea, since America’s banks in particular seem to be extremely good at holding roughly zero capital against their mind-bogglingly enormous derivatives books. On the negative side of things, however, we once again have Treasury and the SEC vs the CFTC: this time, as Shahien Nasiripour predicted, Treasury secretary Jack Lew and SEC chair Mary Jo White are forcing used “a tense meeting last week” to persuade CFTC chairman Gary Gensler to delay crucial new derivatives regulations. The stated reason? “Complaints from policy makers and others about a lack of coordination between U.S. and foreign governments”. On top of that, the White House is rewarding Gensler’s zeal by refusing to nominate him for another term.

Grumbles Follow Plan to Raise Bank Capital - In the years just after the financial crisis — 2010 and 2011 — large American and European banks took drastically different courses. American banks raised a lot of capital. Many of the European ones did not.  One result is that the American banks appear to have a competitive advantage. Being relatively well capitalized, they can afford to lend. That is less true in Europe.  Keep that fact in mind as the debate goes on about the new capital rules that United States regulators proposed this week for the largest American banks, the ones with more than $700 billion in assets. Some of those banks will need to have a lot more capital in a few years than they have now if the proposed rules are not watered down.  The banks were relatively restrained in their reactions this week, leaving it to trade groups to voice their complaints, which have a familiar ring to them.  “Ever-higher capital rules,” warned Robert S. Nichols, the president of the Financial Services Forum, which includes 19 large financial companies, “while a critically important element of safety and soundness, can become prohibitive and actually lead to reduced capability to lend to our nation’s families and businesses at a time when the economic recovery remains fragile.”

JPMorgan Chase Faces Questions on Potential New Capital Rules - It’s often the case that when someone doesn’t want to talk about something, it only invites more questions. That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.  The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.

NEP’s Bill Black Appears On CCTV’s Biz Asia America - CCTV America’s Phillip Yin speaks with Bill Black about new US bank regulations. Bill warns against ‘too big to fail institutions’ and the attempts to create a ‘tame tiger’ through policy, which he believes is a reckless path to the next financial crisis

Reining In the Regulators - NYTimes (editorial) - For all its rabid partisanship, Congress has shown time and again that it is willing to come together to deregulate corporate America. The latest example is a new bill in the Senate that would effectively end the independence of independent regulatory agencies, including the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Consumer Product Safety Commission and the National Labor Relations Board.  Introduced by Republicans Rob Portman and Susan Collins and Democrat Mark Warner, the measure, if enacted, would scotch any remaining hope for putting the Dodd-Frank financial reform law fully into practice anytime soon — if ever. In the long run, it would benefit powerful corporate interests over investor protection, consumer health and safety and basic fairness.  Unlike cabinet departments and executive agencies, independent agencies do not report to the White House. The Senate bill, called the Independent Agency Regulatory Analysis Act of 2013, would require such agencies to submit all significant draft rules to the White House for review. The stated goal is to ensure that new rules appropriately balance costs and benefits. In reality, White House review, first established in 1980 to vet draft regulations from executive agencies, has long proved to be an obstacle to timely and strong regulation.

When Congress Takes Interest in Accounting, Watch Out - Few things are simple in corporate regulation. Reforms often backfire. Changes meant to help shareholders end up enriching executives, or lawyers, or accountants. Less regulation is often better than more. But here's a simple rule that I imagine holds up pretty well. If an overwhelming bipartisan majority in the U.S. Congress decides to delve deep into the details of a corporate regulatory process and tell the rule-makers they can't do something, that overwhelming bipartisan majority is up to no good.This happened in the early 1990s, when the Financial Accounting Standards Board first tried to assign a value other than zero to the stock options handed out to executives and other corporate employees as compensation. With Joe Lieberman leading the way, the Senate voted 88-9 to tell the FASB to give it up. And the FASB did give it up, until the corporate scandals of the early 2000s changed the mood in Congress, giving the accounting standards-setters cover to get stock-options expensing through in 2004. On Monday, it was the House of Representatives that got into the act, with a 321-62 vote in favor of a bill, sponsored by Republican Robert Hurt of Virginia and Democrat Gregory Meeks of New York, that would ban the Public Company Accounting Oversight Board from considering any proposal to force corporations to regularly rotate auditing firms. A couple weeks ago, this "Audit Integrity and Job Protection Act" (a wonderfully Orwellian title, no?) was approved by the House Financial Services Committee by an even more lopsided 52-0 vote.

Senators Introduce Bill to Separate Trading Activities From Big Banks - NYTimes.com: Senator Elizabeth Warren on Thursday introduced an aggressive piece of legislation that intends to take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities.The bill, which is also sponsored by Senator John McCain, Republican of Arizona, and two other senators, is named the 21st Century Glass-Steagall Act. Its intention is to create a modern version of the seminal Glass-Steagall legislation from the 1930s, which placed firm limits on what regulated banks could do. It was fully repealed in 1999, laying the groundwork for the mergers that created some of the biggest banks of today. If passed, it could force many of those banks to let go of their trading operations. Senator Warren’s bill is one of several that have aimed to add far more bite to the overhauls that have been put in place since the financial crisis. The bill serves as a jarring reminder to Wall Street of why it feared her election to the Senate last year.Similarly stringent banking bills introduced in the last few years have struggled to gain sufficient votes in Congress, and this one may be no different. In addition, a move as radical as splitting up large banks is highly unlikely to gain the support of top regulators like the Federal Reserve or the Treasury Department.

Senator Warren Drops a Bombshell in Senate Hearing: Bipartisan Bill to Restore Glass-Steagall Being Introduced - Wall Street regulators hauled before the Senate Banking panel yesterday were likely expecting compliments for their agreement on forcing big banks to boost capital. Instead, Senator Elizabeth Warren dropped a bombshell: she and three other Senators later yesterday were introducing legislation to restore the depression era Glass-Steagall Act.  As regulators from the Treasury, FDIC, Federal Reserve and Office of the Comptroller of the Currency stared back in silence, Senator Warren mapped out why the legislation was being introduced: “…the four largest banks are now 30 percent larger than they were just five years ago and they have continued to engage in dangerous, high-risk practices. So, later today Mr. Chairman, Senators McCain, Cantwell, King and I will introduce a 21st Century Glass-Steagall Act. For half a century after the Great Depression, Glass-Steagall kept this country safe by separating the risky activities of investment banks from the basic checking and savings accounts that consumers rely on every day. “The banks lobbied for weaker regulations and eventually the regulators started unraveling Glass-Steagall and finally in 1999 Congress repealed what was left of it. So now we propose a 21st Century Glass-Steagall so that we can return to the basics and try to keep the gamblers out of our banks..”

Warren Joins McCain to Push New Glass-Steagall Bill for Banks -  Senator Elizabeth Warren said a bipartisan group of U.S. lawmakers will introduce legislation aimed at separating commercial and investment banking, recreating a Depression-era firewall established by the Glass-Steagall Act but repealed in 1999. “Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” Warren, a Massachusetts Democrat, said today in an e-mailed statement. The measure would “make our financial system more stable and secure, and protect American families.”The legislation is also sponsored by Senators John McCain, an Arizona Republican, Maria Cantwell, a Washington Democrat, and Angus King, an independent from Maine who caucuses with the Democrats. The bill aims to separate traditional banks that offer checking and savings accounts insured by the Federal Deposit Insurance Corp. from “riskier financial institutions” that work in investment banking, insurance, swaps dealing, hedge funds and private equity, according to the statement. McCain, a former Republican presidential candidate, said the measure is needed to protect taxpayers and restore confidence in the financial system.

Pimco US funds had record withdrawals in June - Pacific Investment Management Co., the world's largest active fixed-income manager, absorbed a record $14.5 billion in net redemptions last month across its U.S. mutual funds as investors fled bonds in anticipation of the Federal Reserve scaling back its asset purchases. The last time Pimco's U.S. mutual funds had net withdrawals was in December 2011, when investors pulled $2.1 billion, according to Chicago-based research firm Morningstar Inc., which provided the June estimate. The redemption is Pimco's highest since Morningstar started estimating the monthly flows in February 1993. Withdrawals at Pimco were driven by a record $9.9 billion pulled last month from Bill Gross's Pimco Total Return Fund, the world's largest mutual fund, which left it with $268 billion in assets at the end of June. Pimco Total Return lost 4.2 percent this year through July 5, trailing 86 percent of peers, according to data compiled by Bloomberg. It fell 3.7 percent over the past month, worse than 95 percent of comparable funds. Retail investors, who fled volatile stock markets to pour about $1 trillion into the perceived safety of bond funds since the beginning of 2009, reversed that pattern in the past month in anticipation of rising rates. Casey, Quirk & Associates LLC, a consulting firm, in May warned that money managers that rely on bonds could face a difficult future as investors shift $1 trillion away from traditional fixed-income strategies.

The Collateral Shortage Is Back, With A Twist - Today, as per the latest ICAP data, the collateral shortage is back on, with the 10 Year moving from -0.10% in repo yesterday to 0.85% ahead of Wednesday's second re-re-opening of 912828VB3. But what is more curious is the repo shift, because while the On The Run shortage was to be expected with the 10 Year getting pounded to 2.75% on Friday, it was the 3 Year that saw a plunge in repo, with the repo rate soaring from -0.13% to -1.45%: ostensibly the widest it has been in our records database. In other words, the collateral shortage just ahead of the 3 and 10 Year auctions is back and while the shortage of the 10Y OTR is somewhat more manageable than last month, it is the 3 Year, or the short-end, that is now in very short inventory supply.

Is The Load of Cash Fannie and Freddie Dumped On The US Treasury Coming Back To Investors? - One of the issues I addressed in the Treasury update posted this weekend is what happened to all the cash Fannie and Freddie just dumped into the US Treasury. Below is what I wrote last week before I knew the answer. On Friday Fannie and Freddie paid a dividend of $66 billion to the US Treasury. This is a huge windfall for the government and the US taxpayer. Normally when the Treasury gets a tax windfall it pays down debt over the next couple of weeks. Those paydowns are cash credits to the accounts of the holders of the paper, often Primary Dealers or large investors. Those paydowns are usually immediately put back to work in the markets. The reduction of Treasury supply in the weeks of the paydowns also means that there’s insufficient supply to absorb all the Fedbucks being pumped through dealer accounts under QE. It’s a case of all that cash with no place to go. So typically asset prices rally in those weeks. The fair haired child asset class this year has been US stocks. Will these GSE dividend payments be put to similar use? It could be a very bullish couple of weeks if so. Stay tuned. As it turned out, the Federal Government had already used the anticipated cash to pay down some paper over the last several weeks, keeping cash on hand lower than normal in the process. When they got the dividend, cash levels rebounded to a level higher than last year on the same date.

Do Bank Shocks Affect Aggregate Investment? - Traditionally, we have thought of the fates of specific banks as perhaps symptomatic of problems in the financial market but not as causal determinants of fluctuations in aggregate investment and other real economic activity. However, the high level of bank concentration in much of the OECD (Organisation for Economic Co-operation and Development) means that large amounts of lending are channeled through a small number of institutions that are no longer small even in comparison to the largest economies. Consequently, problems in a few large institutions could potentially have a large impact on aggregate lending and on real output. Our study of Japanese lending markets is the first to provide a causal link between bank shocks and firm-level investment rates. The results indicate that 40 percent of aggregate lending and investment volatility over the past two decades can be tied to the idiosyncratic successes and failures of financial institutions.

Rising rates to spur litany of capital losses - FT.com: US banks have watched billions of dollars of paper profits on their securities portfolios wiped out by rising market interest rates, erasing huge gains made during the prolonged run of increasing bond prices since the financial crisis and ensuring that erosions of capital will be a feature of the coming bank earnings season.Data released by the Federal Reserve on Friday showed unrealised gains in these portfolios had plummeted from more than $40bn at the beginning of the year to about $6bn, with the most precipitous falls over the past few weeks amid mounting market concern about the “tapering” of the central bank’s bond-buying programme.

Chart Of The Day: Taper Fears Lead To Biggest Monthly Loss In Bank Securities Portfolios Since Lehman -  Wondering how the blow out in interest rates is impacting commercial banks, which just happen to have substantial duration exposure in the form of various Treasury and MBS securities, not to mention loans, structured products and of course, trillions in IR swap, derivatives and futures? Wonder no more: the Fed's weekly H.8 statement, and specifically the "Net unrealized gains (losses) on available-for-sale securities" of commercial banks in the US gives a glimpse into the pounding that banks are currently experiencing. In short: a bloodbath.

JPMorgan as Biggest Underwriter Sees More Losses - The chief market strategist at JPMorgan, the world’s biggest underwriter of corporate bonds, says the worst first half of the year on record for the securities may only deepen. The notes have lost 3.7 percent on average since May 22 when Federal Reserve Chairman Ben S. Bernanke told Congress the central bank may begin curtailing its unprecedented stimulus program if economic conditions warrant, Bank of America Merrill Lynch index data show. The losses compare with a drop of 2.9 percent for government securities. The performance is a shock to bulls who expected the extra yield offered by corporates relative to government bonds to cushion any selloff that stemmed from the prospects for higher interest rates and a stronger economy. Instead, diminished dealer inventories of the securities brought on by regulatory changes has caused liquidity to drop, exacerbating the price declines.

Recent rate shock will keep fixed income markets from overheating again - It is remarkable how the treasury market reversed the impact of Bernanke's original hawkish comments made back in May (see post). A very similar daily move took place in the "belly" of the curve today with yields moving in the other direction. In spite of Bernanke's apparent "reversal" with respect to the securities purchase program however, the bond market will not return to the frothy levels seen early this spring. There has been too much pain across the fixed income universe. Consider the following fact. Over the past 6 years (possibly longer), the largest 3-month downside price move in long-term treasuries occurred in the period from the close of 4/5/2013 to the close of 7/5/2013. It was nearly a 12% drop on a total return basis (including interest). In fact 5 out of 20 worst 3-month periods for long-term treasuries have been this year. This is something investors don't easily forget.

Banks pushing for repeal of credit unions’ federal tax exemption— Credit unions have been snatching customers from banks amid consumer frustration over rising fees and outrage over Wall Street's role in the financial crisis. Now banks are fighting back by trying to take away something vital to credit unions — their federal tax exemption. With fast-growing credit unions posing more formidable competition to banks, industry trade groups are pressing the White House and Congress to end a tax break that dates to the Great Depression. "Many tax-exempt credit unions have morphed from serving 'people of small means' to become full-service, financially sophisticated institutions," Frank Keating, president of the American Bankers Assn., wrote to President Obama last month. "The time has come to abolish this exemption," Keating said in the letter, which was part of a blitz that included print and radio ads in the nation's capital. Bankers long have complained the tax break is an unfair advantage for large credit unions. Now they see an opportunity to get rid of it as lawmakers begin work on a major overhaul of the tax code that is aimed at eliminating many corporate exemptions and lowering the overall tax rate. The exemption cost $1.6 billion this year in taxes avoided and would rise to $2.2 billion annually in 2018, according to Obama's proposed 2014 budget.

Unofficial Problem Bank list declines to 743 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 5, 2013.  Changes and comments from surferdude808:  Not many fireworks to report with the Unofficial Problem Bank List this week. The only changes are removals through unassisted mergers. After removal, the list stands at 743 institutions with assets of $271.5 billion. A year ago, the list held 913 institutions with assets of $353.4 billion. Next week will likely be quiet unless the FDIC gets back in the closing business after taking the past four weeks off.

REITs Deepening Bond Losses as Leverage Forces Sales  - Since the May 2 comments, shares of the companies, which use borrowed money to make $400 billion in credit market bets, dropped about 19 percent through yesterday and the value of their assets has plunged after the Federal Reserve triggered a flight from bond funds by signaling plans to slow its debt-buying program.  REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth, according to JPMorgan Chase & Co. Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds and fueled a jump in home-loan rates to a two-year high.  Mortgage rates jumped to 4.46 percent at the end of June, up from a near-record low of 3.35 percent in early May, after the central bank indicated it will taper its monthly debt buying, including $40 billion of government-backed housing debt.  Firms including Annaly, American Capital Agency Corp. (AGNC), the second biggest of the companies, and Armour Residential REIT Inc. (ARR), sell shares to the public so the capital can’t be redeemed. They also rely on leverage, typically using about six to eight times the amount of borrowed money compared with their capital. That means they benefited from cheap financing as the Fed kept short-term interest rates near zero for more than four years. REITs more than tripled holdings of government-backed home-loan bonds since 2009 and their increased buying power helped push down mortgage rates.

Mother Of All Bubbles Pops, Mess Ensues - The asset bubbles the Fed’s money-printing and bond-buying binge has created are spectacular, the risk-taking on Wall Street with other people’s money a sight to behold. Among the big winners were mortgage Real Estate Investment Trusts – and those who got fat on extracting fees. But now the pendulum is swinging back, and the bloodletting has started. Mortgage REITs are highly leveraged. They borrow short-term in the repo market at near-zero interest rates, thanks to the Fed, then turn around and buy long-term government-guaranteed mortgage-backed securities issued by bailed-out Fannie Mae, Freddie Mac, and Ginnie Mae. Along the way, they issue more stock and borrow even more. By distributing 90% of their profits, they avoid having to pay income taxes. Hence double-digit dividends. A phenomenal business model. Instead of getting their hands dirty in the real economy, they manufacture dividends, fees, and all sorts of goodies for insiders – while the party lasts. But now the Fed, leery of the risks these drunken partiers were taking on, knocked on the door of that party and threatened to crash it. Annaly Capital Management, the largest mortgage REIT with $126 billion in assets as of March 31, dropped 34% from its September high to $11.53 on Wednesday; most of it since mid-March. American Capital Agency, the second largest, is even better: its entire history is linked to the Fed’s zero-interest-rate policy and money-printing binge.

LPS: Large Decline in Mortgage Delinquencies, U.S. Negative Equity Share Falls Below 15 Percent - LPS released their Mortgage Monitor report for May today. According to LPS, 6.08% of mortgages were delinquent in May, down from 6.21% in April.  LPS reports that 3.05% of mortgages were in the foreclosure process, down from 4.12% in May 2012.  This gives a total of 9.13% delinquent or in foreclosure. It breaks down as:
• 1,708,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,335,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,525,000 loans in foreclosure process.
For a total of ​​4,469,000 loans delinquent or in foreclosure in May. This is down from 5,605,000 in May 2012. The first graph from LPS shows percent of loans delinquent and in the foreclosure process over time.From LPS:  Delinquencies are down more than 15 percent since the end of December 2012, coming in at 6.08 percent for the month. “Though they are still approximately 1.4 times what they were, on average, during the 1995 to 2005 period, delinquencies have come down significantly from their January 2010 peak,”  The second graph shows the percent of loans with negative equity.

RealtyTrac: Foreclosure Activity Drops to Lowest Level since 2006 - This was released this morning from RealtyTrac: U.S. Foreclosure Activity Decreases 14 Percent in June to Lowest Level Since December 2006 Despite 34 Percent Jump in Judicial Scheduled Foreclosure Auctions RealtyTrac® ... today released its Midyear 2013 U.S. Foreclosure Market Report™, which shows a total of 801,359 U.S. properties with foreclosure filings — default notices, scheduled auctions and bank repossessions — in the first half of 2013, a 19 percent decrease from the previous six months and down 23 percent from the first half of 2012. A total of 127,790 U.S. properties had foreclosure filings in June, down 14 percent from the previous month and down 35 percent from a year ago to the lowest monthly level since December 2006 — a six and a half year low. U.S. foreclosure starts in June dropped 21 percent from the previous month and were down 45 percent from a year ago to the lowest monthly level since December 2005 — a seven and a half year low. Year to date through June, 409,491 foreclosure starts have been filed nationwide, on pace to reach more than 800,000 for the year, which would be down from 1.1 million foreclosure starts in 2012. Judicial foreclosure auctions (NFS) were scheduled for 28,296 U.S. properties in June, up less than 1 percent from May but up 34 percent from June 2012. States with substantial annual increases in scheduled judicial foreclosure auctions included New Jersey (up 103 percent), Florida (up 100 percent), Maryland (up 94 percent), New York (up 66 percent), and Illinois (up 65 percent to a 35-month high).

Lawler: Table of Distressed Sales and Cash buyers for Selected Cities in June - Economist Tom Lawler sent me the table below of short sales, foreclosures and cash buyers for several selected cities in June. Lawler writes:  Note that in Phoenix, not only was the distressed sales share down sharply from a year ago, but also that the all-cash share of home sales – while still abnormally high – was also down significantly from a year ago. Overall sales were down 9.9% from last June, and it appears as if “investor” buying might be slowing down a bit.  Vegas’ distressed sales share last month was also down significantly from last June, but the all-cash share was actually up slightly. Overall sales were down 7.7% from last June. Investors still appear to be a dominant force in Vegas, while owner-occupant buying still appears weak.   Look at the two columns in the table for Total "Distressed" Share. In every area that has reported distressed sales so far, the share of distressed sales is down year-over-year - and down significantly in many areas.  Also there has been a decline in foreclosure sales in all of these cities.

Banks Outbidding Private Equity Funds at Foreclosures, Believing They Can Beat Them at the Pump and Dump Game - Yves Smith - It’s conventional to deem local journalism to be dead, but Josh Salman at the Sarasota Herald-Tribune has written well-researched investigative story on bank bidding at foreclosures in his neck of the woods, Big lenders bidding to keep homes, that has national implications. Here’s the overview: Banking giants from Wells Fargo to Fannie Mae are routinely paying top dollar on the auction steps to hold onto their own distressed properties, outbidding cash offers and paying well above assessed value, according to a review of thousands of Southwest Florida auction purchases. They are speculating that the properties will appreciate even more in the next couple of years. The article does not indicate whether the “banking giants” like Wells Fargo are only bidding on properties where the bank owns the loan or serviced loan for private label (non-Fannie and Freddie investors). We’ll assume only the former. It’s ugly enough that way; if the banks are doubling down by deciding to buy homes that they were formerly only servicing (as in simply acting as an agent), this practice goes from typical bank lemming-like behavior to affirmatively deranged. The degree of outbidding is not modest, at least in Southwest Florida:In some cases, lenders this year have bid up to 600 percent more than a property’s worth to retain foreclosures — one of the primary reasons the acquisition costs for competing real estate investors also has spiked in recent months. In the 12 months ending June 1, 4,865 foreclosures were auctioned in Sarasota and Manatee counties. Lenders outbid third-parties to keep 3,754, or 77 percent.Banks paid $259.2 million for the properties, an increase of 34 percent from the amount they spent in the same 12-month period a year ago…

Las Vegas Suburb Accused of Plotting to Seize 5,000 Homes with Eminent Domain to Flip Them for a Profit -The City of North Las Vegas is endangering its financial status with a cockeyed plan to seize up to 5,000 homes through eminent domain, buy them with public money and flip them, a man claims in court. Gregory D. Smith sued North Las Vegas, its City Council and City Attorney Jeffrey Barr, in Federal Court. They are the only defendants. "The City of North Las Vegas has entered into and embarked upon a plan to use the power of eminent domain to condemn and seize privately-owned residential mortgage loans in the City," the complaint states. "The City intends to target for seizure mortgages 1) that are performing, i.e. current in their mortgage debt obligation of the homeowner; and 2) where homeowners owe more on their mortgages than the current fair market value of their home, i.e. 'underwater' mortgages; and 3) that are owned by private securitization trusts in secondary mortgage market lending portfolios rather than backed by the federal government through Fannie Mae, Freddie Mac, or the Federal Housing Authority.

Foreclosure Squeeze Crimps Las Vegas Real-Estate Market - The number of available homes has plunged here after a sweeping state law subjected lenders to stiff new foreclosure rules and penalties. With banks exercising caution, many homeowners—including those seriously delinquent on their loans—have been allowed to remain in place. As a result, there is little on the market at a time when first-time buyers and real-estate speculators are anxious to tap both cheap prices and low-interest mortgages. The perverse outcome: Inventory shortages have spurred new developments despite a glut of properties stuck in foreclosure limbo. The inventory shortages, meanwhile, have been a boon for some—especially builders. "A.B. 284 has been great for us. It darn near eliminated the constant inflow of foreclosures on the resale market," Studies by researchers at the Federal Reserve Bank of Boston show that "delaying the foreclosure process does not in the end lead to fewer foreclosures," said Paul Willen, a senior economist at the Boston Fed. "If they're delaying a foreclosure that is going to happen eventually, what we're really concerned about is that they're reducing the quality of life for the neighborhood."

Progress on Housing Finance Reform - Taxpayers received $66 billion of good news last Monday in the form of dividends to the Treasury from Fannie Mae and Freddie Mac as part of the compensation for the bailout of the two government-sponsored enterprises (G.S.E.’s). The bad news is that these payments reflect the fact that the two firms remain in government hands nearly five years after being taken into conservatorship in September 2008, putting taxpayers at risk in the event of another housing downturn.  A fundamental change in this situation requires Congressional action, which is always difficult in our divided political system. Even so, legislation introduced recently by a bipartisan group of eight senators led by Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, has focused renewed attention on housing finance reform. I was among the many people providing technical advice to the group working on the Corker-Warner proposal and think there is much to like in it.  The legislation includes the essential elements of housing finance reform: a dominant role for private capital; considerable protection for taxpayers against future bailouts; a secondary government backstop to ensure stability; competition and entry by new firms into housing finance so that no future entity is too big to fail; a clear delineation of the roles of private firms and the government; an empowered regulator to ensure that loan quality remains high for guaranteed mortgages; and support for activities related to affordable housing.

MBA: Mortgage Refinance Applications Decline as Mortgage Rates Increase in Latest Weekly Survey -- From the MBA: Mortgage Applications Decrease as Rates Reach Two-year High in Latest MBA Weekly Survey The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.68 percent, the highest rate since July 2011, from 4.58 percent, with points increasing to 0.46 from0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. Note: This was for a holiday week with a large seasonal adjustment. I expect a large decline in refinance activity in the survey next week.The first graph shows the refinance index. With 30 year mortgage rates above 4.5%, refinance activity has fallen sharply, decreasing in 8 of the last 9 weeks. This index is down 50% over the last nine 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 even with the recent decline, the 4-week average of the purchase index is up almost 10% from a year ago

US housing’s resilience -- The Q2 results from Wells Fargo and JP Morgan have again raised the issue of declining mortgage refinancings (if rates stay elevated), along with spurring more general worries about the housing market. Here’s the Wall Street Journal on Friday: Chief Financial Officer Marianne Lake told investors Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise. During a conference call with investors after the bank reported second-quarter earnings, Ms. Lake said pressure on the mortgage refinance business from the sharp rise in mortgage rates in June continued into July. “We expect it could have a significant impact on the refinance market side and the second half of the year,” she said. “If mortgage rates stay at or above current levels, the market could be reduced by an estimated 30% to 40%.”Okay, but refinancings had already been declining since much earlier in the year, well before rates shot up in the past couple of months. And it was always inevitable that the refi wave would recede this year as the number of eligible borrowers dwindled. From a macro perspective, refinancings certainly help, but not as much as housing construction activity — and the relationship between rates and mortgage purchase applications remains unclear right now.

The Housing Unrecovery: Mortgage Application Drought Continues - The unaffordability-train rolls on in the US housing market. While it may destroy the housing-recovery-will-save-us meme (even as homebuilder stocks are the worst performing since the FOMC and many are sliding to 52-week lows), the facts are that a rising mortgage rate (now over 4.50% for the first time in 2 years) does reduce dramatically what the average household can afford to pay (given that people - unlike banks and governments - have limited incomes and balance sheets). Mortgage applications fell for the 8th week of the last 9 at the fastest year-over-year pace in 3 years and slumped to 2 year lows. This bodes extremely ill for home sales and the 'recovery' upon which it has already become dependent (as we noted here).

Vital Signs: Mortgages Pick Up - Home-mortgage activity is gradually picking up. The Mortgage Bankers Association’s index of mortgages to buy a house is up 19% this year, though it fell 3% last week and remains well below levels before the slump. A recent rise in mortgage rates could hinder activity, though some buyers may fast-track plans to take advantage of mortgage rates that remain historically low.

Refinancing plans cut in half over past two months - Applications from home owners looking to refinance have dropped more than 50% over the past two months as mortgage rates climbed almost one full percentage point, according to data released Wednesday. A gauge of applications to refinance declined 4% in the week that ended July 5 – reaching the lowest level in two years – and was down 53% from early May, when mortgage rates hit a recent trough, according to a report from the Mortgage Bankers Association. MBA’s gauge of mortgage applications to buy a home has taken a lesser hit, declining about 9% over the past two months. Rising rates mean that consumers will have a tougher time affording monthly mortgage payments. Some will have to scale back plans for purchases or refinancing, while others may try to rush into the market soon before affordability decreases any further. Economists expect rising rates to curb housing activity to some extent, but they still expect this sector of the economy to continue to add to growth this year. Since early May the average rate for a 30-year fixed-rate mortgage has increased more than nine-tenths of a percentage point, recently hitting 4.29%. Meanwhile, the average rate for a 15-year fixed-rate mortgage has increased more than eight-tenths of a point, recently hitting 3.39%, according to Freddie Mac data. Goldman Sachs analysts estimated that recent mortgage-rate gains mean that for a median-priced single-family home, which costs about $200,000, borrowers who put down 20% face an increase of about $100 in their monthly mortgage payments

Among The Worst Days in Mortgage Rate History - Historical data has its limitations when it comes to mortgage rates.  For instance, the longest-running series are only updated once a week, making it hard to determine exactly where an individual day falls in the record books.  Even then, today's rise in mortgage rates is among the largest ever, and certainly the largest in the past 10 years.  Today alone, rates rose more than most entire weeks.   Conventional 30yr Fixed  best-execution rates moved forcefully into 4.75% territory, with some lenders at 4.875%.  That means that any rate quoted on Wednesday would be roughly 0.375% higher today--brutally ironic considering the most mainstream weekly rate survey from Freddie Mac noted that rates "reversed course and ticked down" on Wednesday. Today's catastrophic surge higher was a direct effect of a stronger-than-expected Employment Situation Report, which not only showed June job creation to be better than expected, but revised the last two months into stronger territory as well.  The more profound indirect consideration is the report's role as the key barometer for Fed policy.  This is the reason the rise in rates of the last two months has been as sharp as it is.

Zillow: 30-Year Fixed Mortgage Rates Surge to Highest Level in 2 Years -The Freddie Mac Weekly Primary Mortgage Market Survey® will be released on Thursday (the series I usually follow), but since everyone is curious about mortgage rates, here is a release from Zillow today: 30-Year Fixed Mortgage Rates Surge to Highest Level in 2 Years Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 4.41 percent, up from 4.17 percent at this same time last week. The 30-year fixed mortgage rate hovered between 4.2 and 4.3 percent early last week and spiked at 4.6 percent on Friday before declining near the current rate early this week. The last time rates exceeded 4.4 percent was July 26, 2011. “Rates surged on Friday after a stronger-than-expected jobs report and upward revisions to prior months’ unemployment levels,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This week, rate movement will depend on whether Wednesday’s release of the Federal Open Market Committee meeting minutes and Fed Chairman Ben Bernanke’s speech reinforce or depress market expectations of a September start of easing federal stimulus.”

U.S. Mortgage Rates for 30-Year Loans Rise to 2-Year High -  U.S. mortgage rates for 30-year loans rose to a two-year high, increasing borrowing costs amid signs of an improving job market. The average rate for a 30-year fixed mortgage climbed to 4.51 percent, the highest since July 2011, from 4.29 percent last week, McLean, Virginia-based Freddie Mac said in a statement today. The average 15-year rate increased to 3.53 percent from 3.39 percent.The 30-year rate, which climbed from a near-record low of 3.35 percent in early May, has risen on expectations that the Federal Reserve will reduce bond purchases as the economy returns to health. Improving employment is bringing more buyers into the market as competition over a tight supply of listings drives up prices. Payrolls rose by 195,000 workers in June, the Labor Department reported on July 5, exceeding the 165,000 gain projected by economists in a Bloomberg survey. “Housing affordability has deteriorated slightly in response to the rise in mortgage interest rates, but remains considerably better than the historical average,”

JPMorgan: At or above current mortgage rates "refinance volumes and margins will be under pressure"- A few excerpts from the JPMorgan investor presentation (Q2 results): Mortgage Production pretax income of $582mm, down $349mm YoY, reflecting lower margins and higher expense, partially offset by higher volumes and lower repurchase losses Mortgage originations of $49.0B, up 12% YoY and down 7% QoQ Purchase originations of $17.4B, up 50% YoY and 44% QoQ...If charge-offs and delinquencies continue to trend down, there will be continued reserve reductions Realized repurchase losses may be offset by reserve reductions based on current trends. If primary mortgage rates remain at or above current levels, refinance volumes and margins will be under pressure and Mortgage Production profitability will be challenged.This graph is from the JPMorgan presentation this morning. The good news is mortgage delinquencies are trending down, and purchases originations are up sharply year-over-year.

House Prices and Mortgage Rates -- A week ago I posted a couple of graphs comparing House Prices and Mortgage Rates. The first graph used nominal house prices and the second graph used real house prices (adjusted for inflation). In that post I noted that historically there has been no strong correlation between interest rates and home prices (I was agreeing with a quote from Douglas Duncan, chief economist at Fannie Mae).  As a caveat, I noted that 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."  Overall my conclusion was that other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates.Today I looked at several previous periods of sharply rising mortgage rates as summarized in the table below.  (I looked for periods when rates increased significantly more than 100 bps in a short period.During all of these periods the economy was growing as mortgage rates increased sharply.  In all of the periods nominal house prices increased, and only in 1994 did real prices decline (that was during the housing bust in several key states like California in the early to mid-90s).

Why Home-Price Gains Will Slow Amid Higher Mortgage Rates -  Home prices moved up at a torrid pace during the first half of the year, but don’t expect them to keep pace during the second half. The big spike in mortgage rates over the past two months has reset the housing market and figures to take a bite out of demand at a time when more sellers have listed homes for sale and when price gains have tested investors’ purchasing appetites. Mortgage rates, which stood at a low of 3.59% at the beginning of May, jumped to 4.58% during the last week of June, according to the Mortgage Bankers Association. Rates rose even more last Friday, after a strong jobs report firmed up investors’ expectations that the Federal Reserve would begin to curtail its bond-buying program later this year. A rule of thumb holds that every one percentage point increase in interest rates reduces affordability by 10%, so the recent move in rates just made homes about 10% more expensive to buyers who need to finance their purchase. “There’s no one in the business right now who doesn’t think the market hasn’t taken a step back. The evidence is all around us,” Here’s a look at seven areas to watch during the second half of 2013:

Quelle Surprise! 38% of Prospective Home Buyers Halt Search Due to Rate Shock – Yves Smith - We’ve been warning that the sudden rise in mortgage rates was going to create a great deal of buyer sticker shock. It’s already virtually halted refis. Even though the increase is arguably from a low base, homebuyers tend to max out on their purchasing power. And we’ve also given reports from brokers that the rise in costs is even larger than the apparent rise in interest rates for important categories of purchasers, since the FHA stopped waving points. Further confirmation comes from the Urban Turf website: UrbanTurf polled prospective homebuyers to see if the jump in rates had resulted in a delay in their housing search. The results were revealing. Of the several hundred buyers who answered the poll, 38 percent said that they would be putting their search on hold because of rising rates, while 57 percent said that they would keep looking. (5 percent were unsure how the rate spike would influence their decision.) Mind you, while 30 year fixed rates (per Bloomberg) have backed a bit off their last Friday recent peak, at 4.54% they are still above the level cited in the Urban Turf poll. Admittedly, there may be sample bias. An online poll would presumably skew a bit younger than the market as a whole. But Urban Turf is a DC based blog, and Washington has been a particularly strong market, so the fear of renters being priced out (it’s a worry of at least one correspondent there) would be a lot stronger driver of behavior than, say, in cities that might also seen good price appreciation in the purchase market but were seeing softening in the rental market due to conversion of foreclosed homes to investor properties. So my guess would be that net net this sample would not be unrepresentative and if anything would be biased towards not being as deterred by rate rise as a truly national sample.

Weekly Update: Existing Home Inventory is up 16.3% year-to-date on July 8th - 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.

Blackstone Raises $5 Billion Rental Bet With Lending Arm -- Blackstone Group, the private-equity firm that has spent $5 billion on more than 30,000 distressed houses, is preparing to expand its bet on the housing recovery by lending to other landlords.  The firm, which already owns more rental homes than any other investor, has set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private.  The world’s largest private-equity firm said last month that it was entering the later stages of its buying spree after leading a group of institutional investors who’ve spent at least $17 billion on more than 100,000 homes over two years, helping fuel the fastest price gains since 2006. By increasing its stake in the rebound through lending, New York-based Blackstone could benefit from smaller landlords already investing in what Goldman Sachs Group Inc. estimates to be a $2.8 trillion market

The Myth of the Lock-In Effect - Cleveland Fed - One story that made the media rounds during the recession and early recovery claimed that under­water homes — when people owe more than the property’s value —  were deterring unemployed people from moving to get new jobs. People with negative equity could sell only at a loss, an option so unattractive that they refused to pull up stakes in search of work. It was a good story with a catchy name, “the lock-in effect.” It seemed to help explain why joblessness persisted so stubbornly during the recovery’s first fitful years. And it seemed to support data showing that mobility was declining in the states with the most underwater homes.But now a team of researchers is spoiling that story, perhaps once and for all. These economists, including the Cleveland Fed’s Yuliya Demyanyk, found conclusive evidence that negative home equity is not an important barrier to labor mobility. In fact, underwater homeowners are probably more likely to move than borrowers with equity in their homes.“If a hypothetical unemployed, underwater homeowner gets a job offer, he is going to take it,” Demyanyk said.

Shift from an ownership to a rental culture - In spite of improvements in the housing market in the last couple of years, the trend away from "homeownership culture" in the US seems to be ongoing. This may be old news for some, but based on the quarterly data from the US Census Bureau, rental vacancies are around a decade low, ...... while homeownership rate is the lowest since 1996.  Even though polls still show that Americans prefer homeownership, issues such as large down-payments, risk of housing price declines, and mobility needs are driving people into rentals. Of course this doesn't mean less demand for housing - just relatively fewer owner-occupied units. Some are suggesting that renting is a cultural phenomenon and it doesn't just apply to housing. A recent article in an influential tech blog talked about the 4 Rs of changing cultural attitudes: "Recycle, reuse, reduce and rent". Ulitzer: - Think about the phenomenon of the Zip Car and other such companies that allow you to pick up and drop off a car at convenient locations. Use and pay for the car when you need it, instead of paying for a car – and parking space – when you are not using it. Similarly, in big cities around the world, there is the developing phenomenon of renting bicycles to ride from place to place. Ride a bike when and where you want and never have to buy one if you live in one of these cities.

Reis: Apartment Vacancy Rate unchanged at 4.3% in Q2 2013 - Reis reported that the apartment vacancy rate was unchanged in Q2. The vacancy rate was at 4.8% in Q2 2012 (a year ago) and peaked at 8.0% at the end of 2009. Some data and comments from Reis Senior Economist Ryan Severino: Vacancy was unchanged during first quarter at 4.3%. While the rate of vacancy compression has been slowing in recent quarters, this marks the first time that the quarterly vacancy rate has not fallen since the first quarter of 2010. Over the last four quarters national vacancies have declined by 50 basis points, a bit slower than last quarter's year‐over‐year decline in vacancy of 70 basis points. The aforementioned stalling in vacancy decline is more a function of increasingly supply than decreasing demand. On the demand side, the sector absorbed 31,973 units in the second quarter, about on par with absorption from one year ago during 2Q2012 and down slightly from the 39,319 units that were absorbed during the first quarter of 2013. Year‐to‐date, the sector has absorbed more units in 2013 than were absorbed through this point in 2012. However, new construction is finally starting to pick up a bit. Asking and effective rents grew by 0.6% and 0.7%, respectively, during the second quarter. This is a slight increase relative to the first quarter when asking and effective rents grew by 0.5% and 0.6%, respectively. However, during the last few quarters rent growth has slowed relative to the mini‐spike that was observed during mid‐2012. This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

Reis: Office Vacancy Rate unchanged in Q2 at 17.0% -- Reis released their Q2 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged at 17.0% in Q2. Vacancy was unchanged during the second quarter at 17.0%. This is a nominal slowdown from the prior quarter's 10 basis point decline in vacancy.  National vacancies remain elevated at 450 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December.  Occupied stock increased by 7.230 million SF in the second quarter. While this is technically an increase versus last quarter's 3.933 million SF of net absorption, it originates from the 7.594 million SF that were completed during the quarter. Auspiciously, this quarter's mini‐spike in construction activity comes hot on the heels of last quarter's scant 2.191 million SF of new office space, the lowest quarterly figure for new completions since Reis began publishing quarterly data in 1999.   Asking and effective rents both grew by 0.4% during the second quarter. This is now the second quarter in a row that both asking and effective rent growth have slowed. 0.4% for both metrics is about on par with the quarterly average growth rate since rents began rising consistently in the fourth quarter of 2010. Asking and effective rents have now risen for eleven consecutive quarters. This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Lumber Prices off 25% from recent peak - Just two months ago I mentioned that lumber prices were nearing the housing bubble highs. Since then prices have declined sharply, with prices off about 25% from the highs in early May. Some of the decline could be related to additional supply coming on the market, and some due to less buying from China (several sources are reporting that China has pulled back significantly on buying North American lumber).On additional supply, a few months ago the WSJ had an article about some producers increasing supply:  Georgia-Pacific, the largest U.S. producer of plywood ... plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.This graph shows two measures of lumber prices (not plywood): 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures. Lumber prices are now about 25% off the recent highs.

The baby boomer divide - Gallup's latest poll on personal finances found that the older baby boomers feel much better about their financial situation than those on the younger side of the Baby Boomer Generation.One explanation for this difference is that the older boomers have more equity in their homes and were not hurt as much by the Great Recession. The younger boomers are also paying their kids' exorbitant college tuition, which the older generation has already finished paying (and the amounts were significantly smaller even when adjusted for inflation).  There is yet another explanation. Members of the younger boomer group feel uneasy about their personal finances because they see a massive wave of older boomers in front of them depleting public retirement resources. Gallup: - The population of Americans aged 65 and older will swell dramatically in the next 15 years as the older generation of today is replaced by the huge number of baby boomers who were born between 1946 and 1964. Any signs of heightened financial worries on the part of baby boomers as they age could be cause for concern, given that there are so many of them, and given concerns that future retirees may not have adequate financial resources to sustain themselves in an era with fewer pensions and potentially less income from sources like Social Security.The chart below shows the assets of the three major government trust funds as a percentage of annual cost to support these programs. It also shows the life expectancy estimates for the youngest and the oldest baby boomers.

Consumers Boost Borrowing - Americans took on more debt in May, particularly for education and cars, a sign consumer spending is still driving an otherwise lukewarm economic recovery. Consumer credit, a measure of borrowing that does not include home mortgages, rose by $19.6 billion in May to a seasonally adjusted $2.84 trillion, the Federal Reserve said Monday. That far surpassed economists’ expectations of a $12.5 billion increase. Overall figures have now grown for 21 straight months, matching the longest uninterrupted increase since the period between November 2006 and July 2008, just before the financial crisis. Americans households have faced higher taxes and a relatively soft labor market throughout this year, but that doesn’t appear to have slowed spending habits for large purchases or education. Revolving credit, which is mostly credit-card debt, rose at a 9.3% annual rate. It was up by $6.6 billion to $856.5 billion, which was the highest level since September 2010. Outstanding credit-card debt bottomed out two years ago and in May saw the largest jump in a year.Nonrevolving credit, which includes student loans and auto financing, rose by $13 billion in May to $1.98 trillion on a seasonally adjusted basis, the Fed said. The figure rose at a 7.9% annual pace and also marks the 21st straight monthly increase, matching gains from late 2006 through mid-2008. In May, purchases of cars and trucks largely drove an overall gain in retail sales, the Commerce Department said last month. Sales of vehicles and parts had the category’s best gain in six months. Separate industry data also showed consumers were increasingly willing to buy more cars and trucks.

Consumer Credit Has Second Highest Monthly Increase In Two Years - As if predicting the jump in interest rates in June, consumers took advantage of cheap credit condition two months ago to load up on credit, pushing the May Consumer Credit higher by $19.6 billion, well above expectations of a $12.5 billion jump. This was the second highest sequential jump post the consumer credit data set revision, only second to the $19.9 billion from last May. And just like a year ago, revolving credit jumped by $6.6 billion following months of stagnating levels. It did the same in May 2012 when it rose by $6.8 billion when consumers also appeared to be prepaying summer purchases. The balance of credit expansion was once again driven by a surge in student and car loans, which amounted to $13 billion of the total May increase. Whether this credit growth continues into June is skeptical following the jump in interest, and especially following the doubling of the prevailing subsidized Stafford Loan rate which will likely cripple future student loan extraction.

Consumer Borrowing in U.S. Rises $19.6 Billion, Most in Year -  Consumer borrowing in the U.S. climbed in May by the most in a year as Americans put more purchases on their credit cards and took out more school and automobile loans. The $19.6 billion increase in credit followed a revised $10.9 billion gain the previous month that was less than initially reported, Federal Reserve figures showed today in Washington. The median forecast in a Bloomberg survey called for a $12.5 billion advance.The boost to household wealth from recovering property values and higher stock prices is putting Americans in a position to capitalize on lower interest rates and purchase costlier items, such as cars. Confidence to borrow is also being punctuated by faster job and income growth that will help sustain the consumer spending that accounts for about 70 percent of the economy.  “Job gains do suggest that income growth is running at a healthy clip, and we’re likely to see consumer spending pick up in the back half of the year.”

US consumer borrowing up $19.6 billion; credit card debt reaches highest point since 2010 - Americans increased their borrowing in May at the fastest pace in a year. Borrowing in the category that includes credit cards reached its highest point since the fall of 2010. Increased borrowing can be a sign that consumers are feeling more confident. The Federal Reserve says consumers increased their borrowing by $19.6 billion in May compared with April. That was the biggest jump since a $19.9 billion increase in May 2012. Total borrowing reached a record $2.84 trillion. The category that includes credit card use rose $6.6 billion, also the largest gain in a year. Credit card debt reached $847.1 billion, the highest level since September 2010 but still below the 2008 peak.Borrowing on autos and student loans increased $13 billion.

Consumer debt is soaring. That’s good news (for now) -  America is starting to re-leverage itself. That’s the implication of new data out Monday afternoon that shows that consumer credit — credit cards, auto loans, student loans, basically every form of debt other than mortgages — is rising by leaps and bounds. According to the Federal Reserve’s monthly report, consumer debt rose $19.6 billion in May, an 8.3 percent annual rate. If that rate of increase were sustained it would mean there’d be an extra $235 billion in consumer credit outstanding a year from now. That would amount to more than $2,000 per household.  This particular data series is jumpy, and there are broader and more reliable measures of consumer debt (particularly those that include mortgages), such as these quarterly numbers prepared by the New York Fed. But even if the May consumer credit numbers overstate the pace at which Americans are escalating their borrowing, it fits with other data suggesting that the post-crisis period of deleveraging — of paying down debts — has ended. Here’s the glass-half-full way of looking at this: Americans are finally feeling more confident about the economy and thus willing to take on debt. Lenders, meanwhile, are growing more comfortable extending loans. The spending enabled by this rising consumer debt can help create a virtuous cycle in which more demand for goods and services creates more jobs, which creates rising income. Indeed, more borrowing by households (and the spending that results) is likely offsetting some of the pain caused by federal spending cuts and deficit reduction.

Consumer Credit Year Over Year - I keep looking for domestic credit expansion, to fill the ‘spending gap’ left by the tax hikes and sequesters.  The headline uptick in consumer credit looked promising, but seems there’s some kind of ‘seasonal’ factor at work, as it’s done this every year for the last three years, so the year over year change isn’t showing any signs of life. Nor is mortgage debt outstanding or any other measure of lending that I’ve seen showing any material growth.  I’m now hearing Q2 GDP growth estimates are down to +1 to + 1.5% or so. This is to be expected when the federal deficit reduction measures aren’t being ‘offset’ by domestic credit expansion and/or increased net exports. In fact, the higher than expected trade deficit was the latest thing to pushing down GDP estimates. Worse, with a bit of a lag, lower GDP growth = lower sales growth= lower job growth (presuming ‘productivity’ doesn’t collapse) and then the lower job growth feeds back into lower sales, etc.  So yes, more jobs mean more income for those working, but without sales and earnings growth their paychecks reduce corporate incomes which then drives ‘negative adjustments’ in hiring policy, etc.  The answer, as always, is quite simple- cut taxes and/or increase govt spending, depending on one’s politics.

May 2013 Consumer Credit Growth of 8.25% Is Imaginary - The headline said: Consumer credit increased at an annual rate of 8-1/4 percent in May. Revolving credit increased at an annual rate of 9-1/4 percent, while nonrevolving credit increased at an annual rate of 8 percent. Econintersect takeaway from the data: Unadjusted total consumer credit is down 0.1% month-over-month, and the year-over-year growth is 5.9% – relatively unchanged from last month. The consumer credit headlines seem to be significantly overstating the real growth. Both May and April 2013 were one of the lowest student loan growth months seen since mid 2012 (see red line on the Flow of Funds into Consumer Credit graph below). The market expected consumer credit to expand $10.5 to $13.2 billion versus the seasonally adjusted expansion of $19.6 billion reported. Note that this consumer credit data series does not include mortgages. The Econintersect analysis is different than the Fed’s as follows:

• an effort is made to segregate student loans from consumer credit to see the underlying dynamics;
• the growth is expressed as year-over-year change, not one month’s change being projected as an annual change.
• where our analysis expresses the change as month-over-month, month-over-month change is determined by subtracting the previous month’s year-over-year improvement from the current month’s year-over-year improvement.

Credit-Card Delinquency Falls to Lowest Rate Since 1990 - Americans are keeping up with their credit card bills better than any time in the past two decades, a reflection of both an improving economy and lingering caution among banks and consumers. The delinquency rate on credit cards issued by banks fell to a seasonally adjusted 2.41% at the end of the first quarter of this year from 2.47% three months earlier, according to an American Bankers Association report to be published Tuesday. That is the lowest rate since 1990 and well below the 15-year average of 3.87%, the banking group found. Credit-card-delinquency rates reached a recent peak shortly after the recession ended, when many Americans were out of work and unable to keep up on their bills. Rates have fallen steadily since, buoyed of late by increasing home values and stock prices.  Delinquency rates fell in the first quarter for 11 of the 13 loan categories the banking group tracks. The association’s delinquency index for fixed-term loans, including financing for autos, boats and home improvement, fell 0.29 percentage point to 1.70% at the end of quarter, the lowest rate since 2004. The association only tracks loans and credit cards issued by banks, not those from retailers, credit unions and financial-services companies such as American Express Co. The data also indicate lenders are being more careful about issuing risky loans in the wake of the financial crisis, while consumers are more cautious about running up big balances. Debt is considered delinquent when the payment is more than 30 days late.

We’re an increasingly cashless society. So why is there more cash than ever?: The proliferation of credit and debit cards, Square, mobile payments, Paypal and other technology means good old paper currency is dying, right? Wrong. The economic and financial upheaval of the past half-decade has made people in the United States and all over the world hungry for U.S. dollars – the paper kind. On June 26, the amount of U.S. currency in circulation reached an all-time high of $1.19 trillion, according to the Federal Reserve. What’s been driving this trend? Fear, probably.When the recession and financial crisis hit in 2007 through 2009, the total currency in circulation skyrocketed, even as the U.S. economy was shrinking. As this chart from the Federal Reserve Bank of San Francisco shows, the currency level also has jumped at other financially stressful moments, too, such as before Y2K.

Consumer Sentiment Dips Slightly - U.S. consumers pulled back some of their optimism about the future economy in early July but are very upbeat about current conditions, according to data released Friday. The Thomson-Reuters/University of Michigan preliminary July consumer sentiment index fell to 83.9 from a final June reading of 84.1 and an early-June level of 82.7, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires expected the preliminary July index to slip to 83.6. Consumers are very upbeat about the present economy. The current conditions index in early July jumped to 99.7 from 93.8 at the end of June. It is the highest reading since July 2007. The expectations index slipped to 73.8 from 77.8. Inflation expectations remain low, according to the Michigan report. The one-year inflation expectations reading for early July increased to 3.3% from a final June reading of 3.0%. Inflation expectations covering the next five to 10 years remained at 2.9%.

Consumer Sentiment in U.S. Unexpectedly Declined in July - Consumer confidence unexpectedly cooled in July as Americans became less optimistic about the outlook for the economy. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 83.9 in July from 84.1 the month prior, today’s report showed. The median forecast in a Bloomberg survey called for a gain to 84.7. The gauge reached an almost six-year high of 84.5 in May.The recent increases in mortgage rates and prices at the gas pump may have restrained consumers’ views on the economy in the next six months. At the same time, the group’s gauge of current conditions jumped to a six-year high as stock prices approached a record after falling in the middle of June.

Michigan Consumer Sentiment: July Preliminary Down Fractionally -The University of Michigan Consumer Sentiment preliminary number for July came in at 83.9, down fractionally from the 84.1 final reading for June. Today's number came in below the Investing.com forecast of 85.0. 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 2% below the average reading (arithmetic mean) and spot on the geometric mean. The current index level is at the 41nd percentile of the 427 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 14.6 points above the average recession mindset and 3.7 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.

Wholesale Inventories Unexpectedly Drop as U.S. Sales Surge -  Inventories at U.S. wholesalers unexpectedly declined in May by the most since September 2011 as sales surged, pointing to a pickup in orders and production.  The 0.5 percent decrease in stockpiles followed a 0.1 percent drop in April that was initially reported as a gain, the Commerce Department said today in Washington. The median forecast in a Bloomberg survey called for a 0.3 percent increase. Sales jumped 1.6 percent, the most since November.  At the current sales pace, wholesalers had enough goods on hand to last 1.18 months, the fewest since April 2012, the report showed. Lean inventories, which may contribute less to second-quarter growth, suggest companies will boost orders to factories to keep pace with growing demand.  “With the drawdown in inventories, if the pace of sales is maintained, we’ll see a pickup in production,” said Millan Mulraine, director of U.S. rates research at TD Securities USA LLC in New York. The sales figures show “we’re ending the second quarter on fairly strong footing.”

Growth Forecasts Fall as Inventories Shrink - The nation’s pace of growth may have fallen below 1% in the second quarter, several economists said Wednesday, after wholesale stockpiles declined in May. The inventories of U.S. wholesalers decreased by 0.5% to a seasonally adjusted $500.87 billion, the Commerce Department said Wednesday. That was the biggest fall since September 2011. Economists had been expecting a 0.3% rise. Wholesalers account for almost one-third of all business inventories in the U.S., with manufacturers and retailers making up the rest. Inventories are a critical part of gross domestic product, the broadest measure of economic output. Rising stockpiles can point to strong production and expectations for healthy economic growth. But after Wednesday’s report, which also revised down April inventories, economists lowered their second-quarter growth estimates. Barclays economists said the new numbers subtracted 0.4 percentage point from its tracking estimate, which now stands at an annualized rate of 0.6%. Macroeconomic Advisers subtracted 0.5 percentage point from their estimate, bringing it to 0.7%. “Though stronger sales than inventories is generally good news for the economy, today’s weak inventory data took a chunk out of Q2 growth prospects,” Action Economics said in a note to clients. The group lowered its second-quarter forecast to only 0.8% from 1.2%.

Gas prices push wholesale inflation up in June: —A big jump in gasoline prices pushed wholesale inflation up in June by the largest amount in nine months. But underlying inflation showed only a modest gain. Wholesale prices rose 0.8% in June compared with May when prices had risen 0.5%, the Labor Department reported Friday. It was the biggest gain since a 1% jump in September and was driven by a 7.2% surge in gasoline prices. Outside of the volatile energy and food sectors, core inflation was up just 0.2% in June. PAIN AT THE PUMP: Gas prices expected to surge again Core prices have risen 1.7% over the past 12 months. Aside from sharp swings in gas prices, inflation has increased very slowly over the past year, giving the Federal Reserve the room to keep interest rates low to boost the economy. The government's Producer Price Index measures inflation before it reaches the consumer. Consumer prices have been rising at a modest rate as well. Over the 12 months ending in May, consumer prices outside of food and energy were up just 1.7%. That's below the Fed's 2% target for inflation. For June, energy prices at the wholesale level were up 2.9%, reflecting the big jump in gas prices. It was the biggest increase since February

Wholesale Prices in U.S. Increase More Than Forecast in June - Bloomberg: Wholesale prices in the U.S. rose more than projected in June, reflecting higher costs for energy and automobiles. The 0.8 percent gain in the producer price index was the biggest since September and followed a 0.5 percent rise the prior month, a Labor Department report showed today in Washington. The median estimate in a Bloomberg survey of 73 economists called for a 0.5 percent gain. The so-called core measure, which excludes volatile food and fuel, increased 0.2 percent, also more than forecast.The data also showed limited cost pressures at the earlier stages of production, indicating demand for materials is being restrained by slower growth in China and weakness in Europe. That helps explain why Federal Reserve policy makers project inflation is likely to be at or below the central bank’s goal. “The increase in producer prices is very much an energy story,”

PPI - Wholesale Inflation Increases 0.8% for June 2013 - The June Producer Price Index increased 0.8% for finished goods.  May PPI increased 0.5%, but April dropped -0.7%.  For the year PPI increased 2.5%.  This is the biggest annual increase since March 2012.   Gasoline again is the culprit, with wholesale prices surging 7.2%.  Core PPI, which is finished goods minus food and energy prices, increased 0.2% for the month.   PPI is also known as wholesale inflation.  PPI often signals an increase in consumer prices down the road, although it is not a 100% guarantee.  Often highly volatile wholesale price changes won't pop up as consumer prices changes due to the processing stages involved and other production factors.  Below is a graph of PPI (maroon) vs. CPI (blue).  Overall, PPI often is an indicator of what's coming down the road for consumer prices.PPI is reported by stages of processing of materials, finished, intermediate and crude.   Finished are commodities ready for final sale, intermediate are partially finished, such as lumber and cotton and crude are products entering the market for the first time, such as raw grain and crude oil.  Unadjusted, finished goods have increased 2.5% for the last 12 months, the highest monthly increase since March 2012.  Graphed below is wholesale finished goods PPI percent change for the year.  While the highest annual increase since March 2012 sounds dramatic, as we can see from the historical graph, 2.5% isn't that bad.  The increase in food prices was due to meat, which surged 4.5% for the month.  Pork lead the meat pack with a 6.3% increase.  Fresh fruits and melons declined by -5.6%.  This month eggs declined -26.8%, but eggs are volatile and no surprise since one needs a willing Chicken first before an egg can be produced.

PPI At 2.5% Has Biggest Annual Jump Since March 2012 On Soaring Energy Prices - If Bernanke is looking for inflation under every rock and cranny, he may have just found it in today's PPI, if only in its energy components. While the headline June number was expected to jump sequentially by 0.5%, the same as May, the final print came at 0.8%, or 2.5% on a Y/Y basis - the highest since March 2012 - driven entirely by Energy good prices, which soared by 2.9% sequentially, the most since February's 3.2%. Foods PPI jumped by a more manageable 0.2%, although no matter how, it is inevitable that producers will now pass both of these to consumers whose purchasing power, especially at the gas pump, is about to be severely tested especially with fuel prices now once again rising at the fastest pace in months.

Wholesale Prices Show a Touch of Inflation - WSJ.com: —The prices that companies pay for a key category of goods remained subdued in June, a development that could give the Federal Reserve a basis to prolong its bond-buying program aimed at stimulating growth. "Core" prices at the wholesale level, which cover all costs except the volatile food and energy segments, rose just 0.2% in June from the prior month, after rising 0.1% in both April and May, the Labor Department said Friday. Core prices were up only 1.7% from a year ago. To be sure, the overall producer-price index—which reflects what companies pay for everything from chickens to cars—rose a seasonally adjusted 0.8% in June from a month earlier. That was the biggest jump in overall prices in nine months, showing substantial gains in prices on energy, passenger cars and meats. Still, the report is the latest gauge to suggest that underlying inflation in the U.S. remains below the Fed's target of 2%. Fed officials are closely tracking inflation data as they debate how and when to rein in the central bank's stimulus measures, including $85 billion a month in bond purchases. Low inflation has prompted the Fed to keep its focus on reducing unemployment through ultra-low interest rates and bond purchases.

Producer Price Index: Headline Inflation Rises 0.8%, Core Rises 0.2% - Today's release of the June Producer Price Index (PPI) for finished goods shows a month-over-month increase of 0.8%, seasonally adjusted, in Headline inflation. Core PPI rose 0.2%. Investing.com had posted a MoM consensus forecast of 0.5% for Headline PPI and 0.1% for Core PPI.  Year-over-year Headline PPI is at 2.5%, its highest since March 2012. In contrast, Core PPI at 1.64% (which the BLS rounds to 1.6%), is fractionally below last month's 1.65% and at its lowest YoY since January 2011.Here is the essence of the news release on Finished Goods:In June, most of the broad-based rise in finished goods prices can be traced to the index for finished energy goods, which increased 2.9 percent. Also contributing to the advance in finished goods prices, the indexes for finished goods less foods and energy and for finished consumer foods both moved up 0.2 percent. Finished energy: Prices for finished energy goods climbed 2.9 percent in June, the largest rise since a 3.2-percent increase in February 2013. The June advance is mostly attributable to a 7.2- percent jump in the index for gasoline. Higher prices for home heating oil and diesel fuel also contributed to the rise in the finished energy goods index. (See table 2.)  Finished core: The index for finished goods less foods and energy moved up 0.2 percent in June, the eighth consecutive advance. A major contributor to the June increase were prices for passenger cars, which rose 0.8 percent. An advance in the index for light motor trucks also was a factor in higher finished core prices.  Finished foods: Prices for finished consumer foods advanced 0.2 percent in June following a 0.6-percent increase in May. The June rise was led by the index for meats, which moved up 4.2 percent.   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increase in 2011 and then began falling in 2012. Now, as we approach mid-2013, the YoY rate is about the same as in early 2011.

Vital Signs Chart: Gas Prices Creeping Down -- Gasoline prices have been creeping down recently as a number of springtime refinery problems have been ironed out. In the past week, the average price of a gallon of regular gasoline was $3.496. That is down from the previous week’s $3.577 a gallon. The most recent figure is up from $3.35 a gallon a year earlier, but well below the 2013 peak of $3.78 a gallon.

Gas Prices Have Biggest Daily Jump In 6 Months -  Do not worry, we are told on a daily basis, the rise in crude oil prices is transitory and won't affect gas prices and implicitly the US consumer's pocket book (already ravaged by spiking mortgage rates). Well, sorry to burst that little fantasy but gas prices in the last few days have surged (up 9c in 4 days). In fact today's jump is the largest in six months and pushes regular close to its all-time high for this time of year. Arguing not to worry as gas prices are more sensitive to Brent is a non-starter as it is very evident, despite the export of WTI, that gas prices are tracking the higher prices of crude oil and if history is any guide - with regard the lead-lag from crude to wholesale gasoline to retail, gas prices will be at new all-time highs for this time of year within the next month.

Watch gasoline futures prices - US fuel prices continue to rise. August NYMEX gasoline futures price cleared $3/gal a couple of days ago and is now at the highest level for 2013. This introduces two new challenges for the US economy:
1. Fuel prices tend to influence consumer sentiment and spending. The sentiment is not necessarily linked to how much consumers actually spend on fuel, but more to the psychology of seeing a sudden spike in this index that most Americans see on a daily basis. And improvements in US consumer sentiment have already stalled recently. Bloomberg: - The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 83.9 in July from 84.1 the month prior, today’s report showed. The recent increases in mortgage rates and prices at the gas pump may have restrained consumers’ views on the economy in the next six months.

2. Today we've seen the producer price index unexpectedly move up due to higher energy costs. USA Today: - A big jump in gasoline prices pushed wholesale inflation up in June by the largest amount in nine months. But underlying inflation showed only a modest gain.

On Manufacturing and Innovation - Manufacturing was once widely recognized as the outstanding strength of America and the basis of its prosperity, but manufacturing also has a more recent history of being almost a pariah. This newer view equated computer chips with potato chips, asserted that manufacturing is better left to others, and suggested that the nation is actually fortunate to be losing manufacturing and aiming to replace it with design, research, and services.  But many Americans, seeing around them the loss of jobs and the devastation of what had been major industrial centers, have not been converted to this new perspective. Polls have clearly shown that most Americans still think that manufacturing matters, and these polls had an election-time impact last year.  Since Americans can't be persuaded that manufacturing doesn't matter, they hear instead: "don't worry, manufacturing is coming back." Now we have a stream of news articles and studies, all announcing, on the flimsiest evidence, that manufacturing is returning to America. But this is closer to fiction than it is to fact.Innovation, in contrast with manufacturing, seems immune to ups and downs. Day in and day out, innovation is everybody's favorite. We hear over and over that America must innovate to survive, America must innovate to compete in the global economy, and that Americans can do it because Americans are inherently innovative.

Small Business Sentiment: A Decline After Two Months of Increase - The latest issue of the NFIB Small Business Economic Trends is out today (see report). The July update for June came in at 93.5, down 0.9 points from the previous month. Today's overall number is at the 19.6 percentile in this series -- the top of the lowest quintile in the history of this series. Since its initial recovery following its Great Recession trough, this index has been stuck in an extremely volatile range for the past three years. Since January of 2011, it has four times bumped a ceiling fractionally above its current level and then retreated.  Here is an excerpt from the opening summary of the report: Small-business optimism remained in tepid territory in June, as NFIB's monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.  The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past four years. The NBER declared June 2009 as the official end of the last recession.

A Detailed Look at the BLS Payrolls Employment Report for June 2013 - The BLS unemployment report shows total nonfarm payroll jobs gained were 195,000 for June 2013, with private payrolls adding 202,000 jobs.  Government jobs declined by 7,000.  May was revised up by 20,000 to show a 195,000 payroll gain and April was also revised up by 50,000 to 199,000 jobs added for that month.   While this is great news, unfortunately the types of jobs gained are mostly low paying ones.The BLS employment report is actually two separate surveys and we overview the current population survey in this article.  The start of the great recession was declared by the NBER to be December 2007.  The United States is now down -2.14 million jobs from December 2007, five and a half years ago. The ongoing employment crisis is past the half decade anniversary. The below graph is a running tally of how many official jobs are permanently lost from the establishment survey since December 2007. We broke down the CES by industry to see what kind of percentage changes we have on the share of total number of payroll jobs from 2008 until now. Below is the percentage breakdown of jobs by industry for January 2008. Below is the breakdown of jobs growth per industry sector for June 2013.  We expected to see construction jobs shrink relative to total payrolls and it did, by 1.1 percentage points.  The financial sector, only shrank 0.2 percentage points as it's share of payroll jobs, in spite of being the maelstrom behind the recession.   Manufacturing, of which the auto industry is a part, has contracted 1.1 percentage points as share of total jobs.   The manufacturing sector just continues to erode.   From these two pie charts we can see the job market has changed into more crappy, low paying service jobs of leisure and hospitality.  Health care has gained the most jobs, yet working in a nursing home and as attendants are also low paying jobs.  Comparing the two pie charts is also a reality check.  The press will tout Science & Technology jobs as well as manufacturing for growth areas.  We can see professional services, of which Science and Technology is a smaller part, has grown by 0.5 percentage points over five years, yet health and education has increased by 1.7 percentage points, with almost all of the job gains in health care.

US Economy Adds 195,000 Payroll Jobs in June; Voluntary Part-Time Work Increases - The U.S. labor market continued to strengthen in June, according to the latest data from the Bureau of Labor Statistics. Strong June data and upward revisions for April and May put payroll job gains for the second quarter of 2013 ahead of those for the first three months of the year. The unemployment rate remained unchanged as both the labor force and the number of employed workers grew. Involuntary part-time work fell to its lowest level since early 2009, and long-term unemployment also fell to a low for the recovery. The economy gained 202,000 private-sector payroll jobs in June. Most of those came in the service sector, although goods-producing industries also gained slightly. The government sector as a whole lost 7,000 jobs, but trends differed strongly by level of government. The federal government lost 5,000 jobs, continuing a long decline. State governments reduced payroll employment by 15,000 jobs, but that was almost fully offset by a gain of 13,000 jobs in local government. As the following chart shows, payroll job gains were revised upward from data first reported for April and May. The revisions raise the total number of payroll jobs added in Q2 2013 to 535,000, significantly more than the 481,000 added in the first quarter. The good quarterly job data provide a reason for optimism regarding Q2 GDP, for which the first estimate is due at the end of the month. The unemployment rate for June remained steady at 7.6 percent, near its low for the recovery. The unemployment rate is the ratio of unemployed persons to the civilian labor force. The labor force grew by 177,000 in the month, the number of employed by 160,000 and the number of unemployed by 17,000. These data are based on a separate household survey that does not always agree with the survey of employers on which the payroll jobs data are based. The two differ partly because of sampling error and partly because the payroll jobs data exclude farm workers and the self-employed.

Total Jobs Growth Slows, Full Time Jobs Growth Falters Badly While Fed Blows Stock Market Bubble - In Part 1 of this report we looked at non-farm payrolls, which come from the BLS the Current Employment Statistics Survey or CES, a survey of business establishments. The BLS also does a survey of households. The household survey or CPS — Current Population Survey– sometimes tells a different story from the establishment survey. It’s also important in that it breaks out full time employment from total employment so that we can analyze that important metric separately. The actual NSA (not seasonally adjusted) number of persons reported in the CPS as employed in June rose by 409,000 from May. Over the previous 10 years, June always had an increase. The average was 712,000.  Last year the increase was 475,000. The year over year gain in total employment under the CPS  was 1.1%, down from 1.2% in May. The annual growth rate has decelerated from 2.2% last October.  The growth rates were actually stronger before the Fed restarted pumping money into the economy in November, when it settled its first MBS purchases in QE3. Full time employment in the CPS rose by 757,000 in June, which is always an up month for full time jobs. This year’s gain was weaker than last year’s 1.39 million and weaker than the average gain of 1.37 million.  The annual gain was 1.2% down from 1.8% in May. It was better than a trough of 0.8% set in March, but still below the 2.4% rate when QE3 was announced in September and 2.1% when the cash started hitting the system in November.  It’s clear that the resumption of QE last fall spurred neither total jobs, nor full time jobs. The sharp slowing of the growth rate does hint that the fecal cliff and secastration, and the approach of the full implementation of Obamacare may have had a negative effect. However stronger months have alternated with weaker months since these programs took effect so it is not yet clear if the budget cuts and tax increases have had or will have a lasting impact.

Trends in Full and Part-Time Employment; Obamacare Job Double Counting and Other Economic Distortions - Reader Tim Wallace provided another excellent series of charts on the employment situation. These charts compare June employment in 2013 to June in prior years. Wallace writes "Hello Mish. The full-time job loss since June of 2007 now tops five million. The overall job loss is still 2 million, in spite of the fact the US now has a working-age population that is 14 million higher than in June 2007."By this comparison only 2012 looks anything close to a normal recovery year. Some of the jump in 2012 is due to revisions from 2010 and 2011 that were not as bad as originally reported. In the last year, the economy gained 1.316 million full-time jobs, about 110,000 a month. Overall jobs rose by 1.639 million, about 137,000 a month, a number just above what it should take to hold the unemployment rate flat. Month-over-month distortions abound. As noted on Friday, Part-Time Jobs Increased by 486,000 with 326,000 Full-Time Jobs Lost. Wallace charts show non-adjusted numbers vs. the same month in prior years, and that is a valid statistical comparison. Let's also look at seasonally adjusted numbers vs. the prior month, also a valid comparison.

For the ‘Where Have You Been?’ File: AP’s Rugaber Discovers Temporary Hiring ‘Is Exploding’ - In a Sunday morning story which will likely have limited reach, and will then probably be considered old news by the time the business week resumes tomorrow, the Associated Press, aka the Administration’s Press, finally got around to recognizing a trend on which yours truly and others have been commenting for at least 2-1/2 years: the surge in employment at temporary help services. That the item’s author is Christopher “Gone Are the Fears That the Economy Could Fall Into Another Recession” Rugaber makes it especially rich, once he explains to his readers some of the reasons why temp services is one of the few sectors employing more people now than it did at its pre-recession peak (bolds are mine): From Wal-Mart to General Motors to PepsiCo, companies are increasingly turning to temps and to a much larger universe of freelancers, contract workers and consultants. Combined, these workers number nearly 17 million people who have only tenuous ties to the companies that pay them – about 12 percent of everyone with a job.Hiring is always healthy for an economy. Yet the rise in temp and contract work shows that many employers aren’t willing to hire for the long run.Uh, Chris, that’s because they don’t have any confidence in the long run. In fact, Rugaber found someone to admit — perhaps so he didn’t have to do so himself — that employers are afraid, of all things, of a “downturn”:The number of temps has jumped more than 50 percent since the recession ended four years ago to nearly 2.7 million – the most on government records dating to 1990. In no other sector has hiring come close. Driving the trend are lingering uncertainty about the economy and employers’ desire for more flexibility in matching their payrolls to their revenue. Some employers have also sought to sidestep the new health care law’s rule that they provide medical coverage for permanent workers.

Full-Time versus Part Time Employment: A Closer Look - The monthly employment report is among the most popular and controversial of the government's economic reports. The latest one, released on Friday, was especially controversial. Shortly after the data was released, David Rosenberg's subscription newsletter featured Ten Reasons to Love the U.S Employment Report, which were paraphrased for the general public by Business Insider. That same morning I featured a contrarian view by Michael Lombardi, What the Worst Jobs Report of the Year Means to You.One of the reasons the monthly employment report is so controversial is that it is an incredible hodgepodge of data from bipolar sources: the Current Population Survey (CPS) of households and the Establishment Survey of businesses and government agencies. For example, the unemployment rate is calculated from household data, but the Nonfarm Employment number comes from the establishment data. Let's take a close look at some CPS numbers on Full and Part-Time Employment. Buried near the bottom of Table A-9 of the Household Data are the numbers for Full- and Part-Time Workers, with 35-or-more hours as the arbitrary divide between the two categories. The Labor Department has been collecting this since 1968, a time when only 13.5% of US employees were part-timers. Today that number has risen to 19.5%. Here is a visualization of the trend in the 21st century, with the full-time percentage on the left axis and the part-time percentage on the right. We see a conspicuous crossover during Great Recession.

Four Years Into the Recovery and We’re Just a Fifth of the Way Out of the Hole Left by the Great Recession - The June 2013 employment report, released this morning by the Bureau of Labor Statistics, marked four years since the official start of the recovery in June 2009 with stronger job growth than we have been seeing. The economy added 195,000 jobs in June and an upward revision to prior months’ data brought the average monthly job growth of the last three months to 196,000. The average growth rate for the previous 12 months was 169,000, so the current rate is an improvement. However, the current pace of job growth is still slower than what’s needed for the economy to return to full employment any time soon. At this pace, it will be more than five years until we get back to the prerecession unemployment rate. The numbers show that we have made surprisingly little progress over the last four years undoing the damage caused by the Great Recession. One of the best measures for assessing that progress is the employment-to-population ratio (EPOP), which is simply the share of the working-age population with a job. The EPOP is currently 58.7 percent, up one-tenth of a percentage point from May but still 4.6 percentage points below the EPOP of 63.3 percent in early 2007. Some of the lack of progress in the EPOP can be explained by demographic trends such as retiring baby boomers and increasing college enrollment of young people. To get a cleaner read of trends in job opportunities we look at the EPOP after removing young people and people near or above retirement age. As the figure below shows, the employment-to-population ratio of “prime-age” workers—workers age 25–54—dropped from over 80 percent in early 2007 to 74.8 percent at the end of 2009, and has since increased to 75.9 percent. In other words, we are four years into the recovery, and we have climbed only about one-fifth of the way out of the hole left by the Great Recession.

A jobs crisis stuck on the back burner - Turmoil in Egypt. Edward Snowden’s travel plans. Immigration reform’s fortunes. Obamacare’s troubles. There’s no shortage of items absorbing political energy and media bandwidth. But simmering below all of this is a crisis that goes without the immediate attention it demands. Last Friday morning, the Bureau of Labor Statistics reported yet another month of lackluster jobs numbers. While Washington has long since lost any sense of urgency regarding the jobs crisis, this is an issue that continues to poll at the top of Americans’ concerns. Our economy is stuck at just over 2 percent growth, and the rate of productivity is worse than anemic. We have hit a point where an unemployment rate of 7.6 percent inspires cheers of “it could’ve been worse!” The result is a painful “new normal” for too many of our fellow Americans. Few commentators even mention that most of the 195,000 jobs added last month, as well as the ones added in the last few years, are low-paying, temporary, part time and usually without benefits. Much of the job growth we have seen is in restaurant, retail and temporary work — the sort of jobs that rarely offer basic security, let alone a foothold for people to climb into the middle class. For working families, the struggle is painful, persistent and real: Hourly wages have plummeted to record lows, while executive pay has soared to record highs. There is no longer an income gap; there is now an income gulf. In 1978, the average American chief executive earned 26.5 times more than the average worker. Today, that gap is four times larger, with chief executives taking home 206 times more than average workers.The crisis is disproportionately affecting minorities and younger Americans. Youth unemployment is at a staggering 16.1 percent, while African Americans are at 13.7 percent and Latinos are at 9.1 percent. The picture we are left with is of a severe shortage of jobs, in which millions of Americans drop out of the labor force in frustration and despair.

Exposing The Lie Behind The Nonfarm Payroll Numbers - While we have already extensively deconstructed the quality components of jobs in the US, showing first that in June 240K full time jobs were lost, even as 360K part-time jobs were "gained", and second that so far in 2013 only 130K full time jobs have been added offset by 557K part-time jobs, we had sinking suspicions that there was something off with the quantity component as well: after all, at an average monthly gain of precisely 201.8K jobs in the past six months (or in 2013), this number seemed just a little too perfect considering the Fed's implicit target of generating just over 200K jobs in a half year period before it begins tapering, which in light of declining gross issuance and less monetizable instruments, has been the Fed's goal all along. Today, courtesy of the monthly JOLTS survey we got just the confirmation we needed that, indeed, the official non-farm payroll number as per the Establishment Survey has been substantially off to the tune of a whopping 40% above what is quantitatively happening in reality.

Stunning Demographic Trends in Employment - The Labor Force Participation Rate (LFPR) is a simple computation: You take the Civilian Labor Force (people age 16 and over employed or seeking employment) and divide it by the Civilian Noninstitutional Population (those 16 and over not in the military and or committed to an institution). The result is the participation rate expressed as a percent. The first chart below splits up the LFPR data since 1948 in two ways: by age and by gender. For the former, I chose the 25-64 age cohorts to represent what we traditionally think of as the "productive" (pre-retirement age) work force. The BLS has data for ages 16 and over, but across this 64-year time frame college attendance has surged dramatically. So I opted for age 25 as the lower boundary to reduce the college-years skew. Note the squiggly lines for the productive years and jumbled dots for the older cohorts. These result from my use of non-seasonally adjusted data. The BLS does have seasonally adjusted data for many cohorts, but not the older ones, so I used the non-adjusted numbers for consistency.The next chart eliminates the squiggles with a simple but effective seasonal adjustment suitable for long timeframes, a 12-month moving average. I've also added some callouts to quantify the data in 1948 and the present. It doesn't take Ph.D. in sociology to recognize some significant changes in the chart above.As for the age 25-64 cohorts, the participation rate for men peaked way back in May 1954 at 95.9%; for women it was fifty years later in October 2004 at 72.8%, and for the combined cohort is was in March 1998 at 80.2%. The dotted lines representing ages 65 and over also illustrate some dramatic changes. However, the LFPR for the "elderly" (a term I use respectfully as a member of that cohort) flattened out in the mid-1980s and then began increasing -- slowly at first and more significantly around the turn of the century, as the numbers for the productive cohort continued to decline. The next chart gives us a clearer look at the relative patterns of growth and contraction.

Amazing Demographic Trends in the 50-and-Older Work Force -- In yesterday's update on demographic trends in employment, I included a chart illustrating the growth (or shrinkage) in six age cohorts since the turn of the century. In this commentary we'll zoom in on the age 50 and older Labor Force Participation Rate (LFPR). But first, let's review the big picture. The overall LFPR is a simple computation: You take the Civilian Labor Force (people age 16 and over employed or seeking employment) and divide it by the Civilian Noninstitutional Population (those 16 and over not in the military and or committed to an institution). The result is the participation rate expressed as a percent. For the larger context, here is a snapshot of the monthly LFPR for age 16 and over stretching back to the Bureau of Labor Statistics' starting point in 1948, the blue line in the chart below, along with the unemployment rate.The overall LFPR peaked in February 2000 at 67.3% and gradually began falling. The rate leveled out from 2004 to 2007, but in 2008, with onset of the Great Recession, the rate began to accelerate. In January of 2012 it dropped below 64% and is now hovering around the 63.4% level. The demography of our aging workforce has been a major contributor to this trend. The oldest Baby Boomers, those born between 1946 and 1964, began becoming eligible for reduced Social Security benefits in 2008 and full benefits in 2012. Job cuts during the Great Recession certainly strengthened the trend. It might seem intuitive that the participation rate for the older workers would have declined the fastest. But exactly the opposite has been the case. The chart below illustrates the growth of the LFPR for six age 50-plus cohorts since the turn of the century. I've divided them into five-year cohorts from ages 50 through 74 and an open-ended age 75 and older. The pattern is clear: The older the cohort, the greater the growth.

U.S. Job Openings, Hiring Rise Slightly in May -- U.S. employers advertised slightly more jobs in May and hired more workers, further signs of steady improvement in the job market. The Labor Department said Tuesday that job openings rose 28,000 to 3.83 million in May from April. That’s close to February’s 3.9 million, which was the highest in five years. A measure of overall hiring increased 46,000 to 4.4 million. That’s still lower than a year ago. The job market remains competitive, despite stronger hiring this year. There are nearly 3.1 unemployed, on average, for each open job. That’s down from a peak four years ago of nearly 7 to 1. In a healthy economy, the ratio is typically 2 to 1. The Job Openings and Labor Turnover survey comes after the government said last week that employers added 195,000 net jobs in June. Last week’s report showed all jobs added, minus the number of people who were laid off, quit or retired. The unemployment rate was unchanged at still-high 7.6 percent. In May, nearly all the openings were at retail businesses, a sign that many of the jobs being created are low paying. Openings in retail rose nearly 80,000. Government and construction firms also posted more jobs: Each advertised 4,000 new positions. Most other industries cut openings, including manufacturing, hotels and restaurants, and health care.

BLS: Job Openings little changed in May - From the BLS: Job Openings and Labor Turnover Summary There were 3.8 million job openings on the last business day of May, little changed from April, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.3 percent) and separations rate (3.2 percent) also were little changed in May. ... Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ...The number of quits (not seasonally adjusted) was little changed over the 12 months ending in May for total nonfarm, total private, government, and in all four regions.The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.

Still Not Enough People Willing to Quit Jobs -- The labor market has strengthened this year, yet Americans are still scared to quit their jobs — a sign they have yet to regain their confidence in the economy. Around 2.2 million Americans voluntarily quit their jobs in May, up slightly from March and April but barely more than a year ago, the Labor Department said Tuesday. Before the recession, three million employees tended to quit their jobs a month. The “quits rate” — the number of people quitting as a share of the employed — has now stayed stuck at 1.6% for three months in a row. The data, from the government’s monthly Job Openings and Labor Turnover Survey, known as Jolts, are for May, when the economy added a healthy 195,000 jobs. Including June’s equally-strong job growth, U.S. employers have now added an average of about 200,000 jobs a month this year, reaching a benchmark that some Federal Reserve officials have cited as an indication of economic progress. Yet Tuesday’s report shows that at least one measure of labor-market health — the level of “churn” — remains weak. Employees still aren’t jumping ship and seeking higher pay in new jobs, probably because they aren’t confident they can quickly find something after leaving their current employer. As more workers move in and out of jobs, the logic goes, the economy becomes more efficient at matching workers and jobs. The main reason Americans aren’t seeking greener pastures is probably because hiring remains both modest and patchy. The number of hires edged up in May to 4.4 million, below the 4.5 million mark seen a year ago and the 5 million-a-month level common before the recession. Looking over the past year, hiring also has been uneven across the economy: The number of hires in May at hotels, bars and restaurants is up 13% from a year earlier, but other sectors like manufacturing and construction are actually down.

JOLTS Report Shows Job Openings Static Again for May 2013 - The BLS May JOLTS report, or Job Openings and Labor Turnover Survey shows there are 3.1 official unemployed per job opening, the same as the last three months.  Every month it is the same story, a static dead pool job market with employers clearly not hiring and this is in spite of the revisions to jobs gained.  Job openings didn't change, a measily 0.7% increase from last month to a total of 3,828,000.  Hirings didn't change much either, a 1.0% change to 4.441 million.  Real hiring has only increased 22% from June 2009.  Job openings are still below pre-recession levels of 4.7 million.  Job openings have increased 76% from July 2009.  Every month JOLTS reports the same bleak labor market conditions.  There is never enough actual hiring in addition to not enough openings. There were 1.8 official unemployed persons per job opening at the start of the recession, December 2007.  Below is the graph of the official unemployed per job opening.  The official unemployed ranked 11.76 million in May 2013. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 5.7 unemployed people per each job opening.  The May U-6 unemployment rate was 13.8%.  Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening.We have no idea the quality of these job openings as a whole, as reported by JOLTS, or the ratio of part-time openings to full-time.  The rates below mean the number of openings, hires, fires percentage of the total employment.  Openings are added to the total employment for it's ratio.  The hires rate changes for industry sectors with currently leisure & hospitality, the lowest paying jobs of all, having the highest rates.

• openings rate:   2.7%
• hires rate:  3.3%
• separations rate:   3.2%

Vital Signs Chart: More Than 3 Unemployed Per Job Opening -Competition for jobs has eased noticeably since the recession. For every job opening in May, there were slightly more than three people — 3.07 — looking for work. That is up from the previous month, but well below the 3.37 level seen in May 2012. Back in July 2009, when the recovery began, there were more than six job seekers for every job opening.

Gender Gaps Appear as Employment Recovers From the Recession - ALL the jobs lost by women during the Great Recession have been recovered, at least in the private sector. But men still have a way to go before that happens. The Bureau of Labor Statistics reported last week that women held 54,623,000 private sector jobs in June, an increase of 116,000 from the previous month and 63,000 more than they held in December 2007, when the previous high was set. The gap between records — 65 months — was the longest such period since the government began keeping track of the gender of job holders in 1964. Men have been gaining jobs as well, but the 59,428,000 jobs they now hold is 1.8 million jobs below the previous high, reached in June 2007. The relatively better performance of women does not appear to be the result of employer preference for female employees. In fact, the opposite may be true. In most industries, women’s share of the labor force is down from what it was when the recession began. But some professions with a predominantly female work force have done better than the economy as a whole.

Weekly New Unemployment Claims at 360K, Much Higher Than Forecast - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 360,000 new claims number was a 16,000 increase from the previous week's 344,000 (an upward revision from 343,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose by 6,000 to 351,750. Here is the official statement from the Department of Labor:In the week ending July 6, the advance figure for seasonally adjusted initial claims was 360,000, an increase of 16,000 from the previous week's revised figure of 344,000. The 4-week moving average was 351,750, an increase of 6,000 from the previous week's revised average of 345,750. The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 29, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 29 was 2,977,000, an increase of 24,000 from the preceding week's revised level of 2,953,000. The 4-week moving average was 2,970,750, a decrease of 3,500 from the preceding week's revised average of 2,974,250.  Today's seasonally adjusted number was well above the Investing.com forecast of 340K and Briefing.com's 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.

Jobless Claims Rose Last Week, But The Trend Is Still Favorable - New applications for unemployment benefits unexpectedly increased during the first week of July, although the pop is probably noise. July data tends to be distorted by so-called retooling activity in the auto sector, and so week-to-week comparisons at this time of year are suspect--more so than usual. Even if you take today's number as gospel, there's still plenty of room for optimism. Reviewing year-over-year comparisons, which strips out most of the seasonally volatility, suggests that moderate growth in the labor market remains intact and may even be set for something better in the months ahead. Granted, a steady-as-she-goes diagnosis isn’t obvious if we focus on recent numbers. Last week’s claims increased 16,000 to a seasonally adjusted 360,000, the highest since mid-May. The four-week average also ticked higher.  A recap of the latest data points implies that the labor market is treading water at best. But that interpretation looks weak when we consider unadjusted claims data (i.e., before seasonal adjustment) on an annual basis. This perspective is considerably more reliable for assessing the big-picture trend. As the next chart shows, new filings for jobless benefits fell 13% last week from the year-earlier level. That’s the biggest year-over-year decline by this accounting since mid-January.

Furloughs Have Begun for Nearly 50,000 Full-Time Guardsmen Nationwide, Including Guam - The National Guard Association of the United States today released the following statement by retired Maj. Gen. Gus L. Hargett Jr., the NGAUS president: “The National Guard in all 50 states, Guam, Puerto Rico, the U.S. Virgin Islands and the District of Columbia this week will begin furloughing nearly all of its dual-status military technicians one day a week through the end of the September. “These soldiers and airmen perform day-to-day administrative, logistical and maintenance functions. The Pentagon exempted in the name of military readiness all other uniformed personnel from furloughs due to automatic budget cuts, yet curiously extended no such protections to a nearly 50,000-member force critical to National Guard readiness. “The National Guard provides significant portions of the overseas war-fighting capability for the U.S. Army and the U.S. Air Force. The Guard also is the military’s first responder at home. Fulfilling these many and varied obligations could become increasingly difficult as the furloughs continue. “There also is a human cost here. The nation is telling men and women who serve their state and nation—most of whom have deployed into harm’s way at least once and remain subject to future deployment—to take a 20 percent pay cut over the next 11 weeks. This is not how a great and appreciative nation supports its troops.

United States Lost Output Clock (Dean Baker) - We have a modern epidemic of unemployed and underemployed workers in the United States. Since the 2008 financial crisis, the labor market has reached a tipping point, and the middle class has received its final blow. Every time there's a business with machines or facilities idle due to low sales, or a worker unable to find a way to contribute, it's money being lost and wasted in our economy. This untapped production from unemployed workers and unused facilities will never come back. You can't go into a time machine and fix the misery caused over the years by unaddressed economic strife. You can't put together families torn apart by broken careers and home foreclosures. The pain can't be undone.If you are unemployed, seeking work and unable to find adequate fulfillment, or you're a business owner with sluggish sales and idle capital, it is not your fault.

Potential Mistakes and the Case for Doing Nothing - In Potential Mistakes (Wonkish), Paul Krugman wrote "It is important to have an idea of how much the economy could and should be producing, and also of how low unemployment could and should go." Much of the rest of the post is indeed "wonkish", complete with charts. Taking "wonkishness" at least an order of magnitude higher, Edward Lambert writing for the Effective Demand blog actually attempts to determine True Potential Real GDP by looking at previous recessions. Here is chart number 6 in an 8 chart series. I am not going to bother explaining the chart, nor do I think anyone should spend any time studying it. Rather, let's discuss Lambert's two-paragraph conclusion.  The global economy has been made unstable by low interest rates. I have my doubts that the economy can push against the effective demand limit like it did from 2006 through 2007. The Fed raised rates during that time to control a bit of inflation. Yet, this time around, if the Fed tries to regulate the economy in any way, the global reaction will be tremendous. Like Paul Krugman says, it is important to know what the economy is really capable of producing in order to set appropriate fiscal and monetary policy. And if my analysis above is correct, monetary policy is based on a false notion of potential real GDP. This is too dangerous to get wrong. The global economy is hanging in the balance.

US productivity growth, back to form -"Overall, we conclude that the U.S. productivity resurgence is likely to continue and is unlikely to revert to the sluggish pace of the 1970s and 1980s. This optimism reflects the observation that the fundamental drivers of the productivity gains—such as technological progress in information technology, a growing share of IT production, and a more competitive and deregulated economy—remain firmly in place. …" – NY Fed research note, December 2004 Nope. Instead this happened: The Great Stagnation had been rudely interrupted, not ended. The chart is from a note last week by Lombard Street Research, which adds:When it comes to the most comprehensive measure of productivity, shown in the chart above per-hour, not per employee as in the earlier charts, the cyclically adjusted, 7½-year rate is clearly eroding, its latest reading being 1.4%. But the more recent, though perhaps cyclically unrepresentative, 3-year rate was down to 0.7% p.a., a number that will ease down a touch more when the third version of Q1 GDP with its significant downward revision is fed into the data. These are discouraging data, suggesting the trend growth rate could be distinctly below 2%, perhaps as low as 1½%.

Beveridge Curve still indicates reduced labor market efficiency - Here is an updated Beveridge Curve for the US labor markets (discussed here). Just as a reminder, it's a plot of job vacancy rate vs. the unemployment rate. The period prior to and during the Great Recession has the typical hyperbolic shape, showing the declining job vacancies corresponding to higher unemployment rate. The post-recession plot however follows a different path, which implies lower efficiency of the labor market. It indicates that we have mismatches between the job openings and the unemployed workers. It may for example be the result an immobile labor force due to underwater mortgages and workers' inability to sell their home in order to relocate for a job opening. It may also indicate a skills mismatch in the post-recession jobs market. Researchers at Barclays felt that it has to do with high levels of long-term unemployment, because those who have been out of work for too long have a tougher time returning into the workforce - even if there are more openings. All these factors point to structural rather than cyclical labor force adjustments.

Second Largest Employer In America Is Temp Agency -  If we keep saying recovery over and over again, maybe it will become true. Until then the facts are harsh. The job market is atrocious with most Americans coming off the unemployment rolls by either giving up working or taking low-paying part time and temporary jobs. This phenomenon is perhaps best exemplified in that the second largest employer in America is a temp agency. The largest employer in America is, of course, Walmart. Behind Wal-Mart, the second-largest employer in America is Kelly Services, a temporary work provider. Friday’s disappointing jobs report showed that part-time jobs are at an all-time high, with 28 million Americans now working part-time. The report also showed another disturbing fact: There are now a record number of Americans with temporary jobs. Approximately 2.7 million, in fact. And the trend has been growing.After bank bailouts and endless tax breaks for the 1%, the 99% get fewer and worse jobs. This is America today. Temp jobs made up about 10 percent of the jobs lost during the Great Recession, and because of high turnover (the average length of temp employment is 3 months before a worker moves on to a permanent job), one in 10 non-farm workers were employed by a US staffing firm at some point during the past year, according to ASA. In fact, nearly one-fifth of all jobs gained since the recession ended have been temporary. Good luck building a future on such a precarious economic foundation. Precarious labor is not only difficult to plan around, it is highly stressful as workers and their families are forced to constantly wonder what they will do next – they are constantly reacting to circumstance which creates a sense of powerlessness and eventually demoralization. But maybe that’s the point

Recovery woes: America's second-largest employer is a temp agency -- Behind Wal-Mart, the second-largest employer in America is Kelly Services, a temporary work provider.  Friday's disappointing jobs report showed that part-time jobs are at an all-time high, with 28 million Americans now working part-time. The report also showed another disturbing fact: There are now a record number of Americans with temporary jobs.Approximately 2.7 million, in fact. And the trend has been growing.In the first quarter of 2013, U.S. staffing companies employed an average of 2.86 million temporary and contract workers, or 2 percent of all non-farm employment in the United States, according to the American Staffing Association. This represents a 2.9 percent growth from the same period in 2012. For just the month of June, there was a 6.7 percent growth in the number of staffing jobs than last year. Temp jobs made up about 10 percent of the jobs lost during the Great Recession, and because of high turnover (the average length of temp employment is 3 months before a worker moves on to a permanent job), one in 10 non-farm workers were employed by a US staffing firm at some point during the past year, according to ASA. In fact, nearly one-fifth of all jobs gained since the recession ended have been temporary.

The wastefulness of automation - My latest at Pieria: "Chris Dillow observes that "one function of the welfare state is to ensure that capital gets a big supply of labour, by making eligibity for unemployment benefit conditional upon seeking work." And despite noting that when jobs are scarce, paying some to "lie fallow" so others can work might be a good thing, he concludes that "this is certainly not in the interests of capitalists, who want a large labour supply - a desire which is buttressed by the morality of reciprocal altruism and the work ethic." (emphasis mine). Basic Income, therefore, is not going to happen because capitalist interests, claiming the moral high ground, will ensure that it never gains political traction. "But what if capitalists DON'T want a large labour supply? What if automation means that what capitalists really want is a very small, highly skilled workforce to control the robots that do all the work? What if paying people enough to live on simply is not cost-effective compared to the running costs of robots?  In short, what if the costs of automated production fall to virtually zero?  "I don't think I am dreaming this. I've noted previously that forcing down labour costs is one of the ways in which firms avoid the up-front costs of automation. But as automation becomes cheaper, and the efficiency gains from automation become larger, we may reach a situation where employing the majority of people at wages on which they can afford to live simply is not worthwhile. Robots can produce far more for far less."

Quelle Surprise! Crappy Labor Market Leads to Rise in Public Perception of Unions - Yves Smith - In a new article at the Prospect, Harold Meyerson tells us that unions are getting higher marks than they did a few years ago:Gallup and Pew concur: Just over one-half of Americans approve of labor unions.In late June, the Pew Research Center released the results of its biennial poll on unions and corporations, and reported that 51 percent of Americans had a favorable view of unions—up from just 41 percent in 2011, the last time Pew popped the question. Pew’s new number is almost identical to Gallup’s, which found that 52 percent of Americans approved of unions when it last asked that question in August of 2012. Gallup polls on union approval every year and has reported a 52 percent approval rating each of the past three years. Before then, union approval had hit an all-time low for Gallup surveys, with just 48 percent in 2009. It’s worth looking at the long term trend in the Gallup results: Even with the persistent long-term PR campaign against unions (it dates back to the early 1900s but intensified in the 1970s as business groups made a renewed, well-funded and successful effort to move the US to the right), their approval level held in the 60% range until the crisis produced a new salvo against public unions, which looked like an easy target when state and local governments were desperately looking for costs to cut and public employees could be made to look cushily paid (we won’t recover this ground; suffice it to say that there has been a lot of cherry picking and apples to stinky fruit comparisons in many of the attacks). Funny when someone actually makes a good career bet (public employees opted for what at the time were lesser paid but more secure jobs than private sector workers of comparable skills), they get demonized for it.

Which Is Greater: Full Time Jobs Or Americans On Food Assistance And Disability?  -- Over the past week there has been some speculation whether the number of Americans who receive food assistance and/or are on disability, outnumber full-time employed workers in the US.  Here is the answer:

• There are 116 million Americans with full-time jobs according to the BLS (source), which includes 21.9 million government workers (source).

So far so good. Now the flip side showing how many Americans are reliant on the USDA's Food and Nutrition Services program or on Disability payments, i.e., food assistance in some form:

• There are 47.5 million Americans on Foodstamps
• There are 30.4 million Americans participating in the National School Lunch Program
• There are 13.2 million Americans participating in the School Breakfast Program
• There are 8.6 million Americans participating in the Special Supplemental Nutrition - Women, Infants and Children program Participants
• There are 3.4 million Americans participating in the Child and Adult Care Food Program and the Food Donation Program
• There are 0.6 million Americans participating in the Commodity Supplemental Food Program
• There are 0.1 million Americans participating in the Food Donation Program
• There are 8.6 million Americans on Disability

For a grand total of 112.5 million Americans on Food assistance (sources here and here).End result: there are 3.5 million more Americans with full-time jobs than there are Americans who are reliant on the government for their daily bread: a tiny 3% delta.

Time to Kill The Immigration Bill -- As expected, the Senate betrayed workers everywhere and passed the corporate cheap labor laden immigration bill and now lobbyists are pushing it to pass the House before voters can react in 2014.  America's workers only hope now lies with Republicans, not exactly known for their labor friendly agenda.  The situation is bleak.  Even the AFL-CIO has sold out U.S. technical workers as well as low wage workers and endorsed the Senate bill.  The cheap labor agenda is wrapped in a pack of come out of the shadows and legal status for the millions here illegally.  Yet if one reads the bill, it is much more about globalization and labor arbitrage of the U.S. worker.  Lobbyists and Congress simply uses illegals to pass their real agenda, which is corporate demanded cheap labor.  The undocumented are in fact getting quite the raw deal.  It would take at least 13 years to obtain citizenship and during that period, they become guest workers. It is estimated that 1.6 million additional foreign guest workers will be added to the labor force in the first year alone if S.744 is passed.  That is cloase to the total jobs created in the U.S. each year.  Not a single Democrat voted against the bill, a incredible sell-out, including Vermont Senator Bernie Sanders.  The excuses from these Senators is laughable.  Youth unemployment gets $1.5 billion, assisting 400,000 to find jobs, while the Senate just flooded the labor market with 35 million more workers over the next decade.  Senators carve out minor token amendments to justify their vote even though thousands of their state residents have been displaced by foreign guest workers.

Robert Reich: Reverse Mathematics on Immigration - When I hear people arguing for more immigration (such as the esteemed Robert Reich) they always espouse how much immigrants have previously contributed to this country, and lists a host of examples. They remind us that we are nation of immigrants. Yes, my great-grandfather was an immigrant in 1870 and was a farmer. When a glass is only have full (like it was back in 1870) there were many ingredients one could add to concoct a wonderful cocktail. But that was then, this is now. As of today in 2013, our glass has runneth over. If my great-grandfather had wanted to immigrate to the U.S. today, he wouldn't be a farmer and he couldn't find a job. While I agree with Mister Reich on many things, the topic of immigration is definitely not one of them. Robert Reich arguing for more immigrants: "The American population is aging rapidly. Forty years ago there were five workers for every retiree. Now there are three. If present trends continue, there will be only two workers for every retiree by the year 2030. No economy can survive on a ratio of 2 workers per retiree..." Bud Meyers: "...and no economy can survive with 3.1 unemployed workers for every one job opening. Now Mister Reich wants what --- 4 or 5 unemployed Americans for every one job opening?"

Republicans in House Resist Overhaul for Immigration — Meeting for the first time as a group to hash out their approach to immigration, House Republicans on Wednesday came down overwhelmingly against a comprehensive overhaul of the nation’s immigration laws, putting in jeopardy the future of sweeping legislation that includes a path to citizenship for undocumented immigrants. House Republicans huddled in a crucial two-and-a-half-hour session in the basement of the Capitol as their leaders tried to devise some response to the demand for immigration legislation, especially the Senate provision that would grant a path to citizenship for the 11 million undocumented immigrants already in the country. The bill also mandates tough border security provisions that must be in place before the immigrants can gain legal status.  The bottom line was clear: The Republican-controlled House does not plan to take up anything resembling the Senate bill, which many believe is bad policy and smacks of an amnesty strongly opposed by the conservatives who hold sway over much of the rank and file. The House also does not intend to move very quickly, and some Republicans are wary of passing any measure at all that could lead to negotiations with the Senate, talks that could add pressure to the House to consider a broader plan.

Jobless about to take big hit from sequester -  The 11.7 million Americans still unemployed are finding their wallets getting even lighter as the sequester federal spending cuts kick in. While the mandated decreases have been slow to trickle into the real economy, the unemployed are feeling the first big jolt. As of July 1, the average weekly benefit of $289 will fall by $43 a week, adding pressure at a time when the labor market is trying to find its bearings but has yet to generate the kind of employment that would indicate a strong recovery. Sharon MacGregor, a 43-year-old graphic designer by trade, lost her job about a year ago when the medical education company she worked for went under. Since then, she's struggled to find work and now has to contend with less unemployment compensation. MacGregor joins the ranks of 120,100 unemployment insurance recipients in New Jersey who will see their average compensation drop 22.2 percent, according to the National Employment Law Project.

Wages Have Fallen Fastest In The Lowest Paid Jobs - Even though low-wage jobs are becoming an increasingly large share of the economy, the compensation for those workers has fallen even more rapidly than for better paid jobs, a new report released on Tuesday by the National Employment Law Project shows.  Between 2009 and 2012, wages fell by 2.8 percent for all occupations, even though productivity actually increased by 4.5 percent — meaning workers were producing more goods and services but earning less. But most of that decline was felt at the bottom rungs. Real median wages fell by 5 percent or more in five of the top ten low-wage jobs: restaurant cooks, food preparation workers, home health aides, personal care aides, and maids and housekeepers. Overall, pay for jobs in the bottom three quintiles dropped by 3 percent or more, while those in the top two quintiles declined by less than 2 percent on average — while nearly a third actually saw wage growth. Low-wage jobs have been the majority of those added since the recovery began, replacing the middle class jobs that were lost in the recession. They accounted for 62 percent of the jobs added in June and overall have amounted to about half of those created since 2009.Meanwhile, the minimum wage hasn’t been raised in nearly five years, leading to increasing income inequality as executive pay has far outpaced that of workers. President Obama has proposed raising it to $9 from the current $7.25. If it had kept pace with inflation since 1968, it would actually be closer to $10.50 an hour.

16 Senators Seek Inquiry of A.T.M.-Style Pay Cards - Sixteen Democratic senators are asking regulators to examine the use of A.T.M.-style cards to pay hourly employees. In a letter on Thursday, the senators urged Richard Cordray, the director of the Consumer Financial Protection Bureau, and Seth D. Harris, the acting secretary of the Labor Department, to “take swift action to protect American workers.”Across the country, a growing number of companies are doing away with paper paychecks and, in some instances, direct deposit, to offer prepaid cards. The problem, though, according to consumer lawyers and employees, is that in the vast majority of cases, using the cards can generate large fees — 50 cents for a balance inquiry and $2.25 for an out-of-network automated teller machine, for example. For part-time and low-wage workers, the fees, which can be difficult to escape, quickly devour much of the money deposited on the cards. Worried about drawing unwanted scrutiny that might threaten their jobs, some employees say they are reluctant to request another option. Other employees say that while there is a choice, they are automatically enrolled in the payroll-card programs. Getting out, these employees say, can be difficult and confusing.

Wal-Mart says it will pull out of D.C. plans should city mandate ‘living wage’ - The world’s largest retailer delivered an ultimatum to District lawmakers Tuesday, telling them less than 24 hours before a decisive vote that at least three planned Wal-Marts will not open in the city if a super-minimum-wage proposal becomes law. The company’s hardball tactics come out of a well-worn playbook that involves successfully using Wal-Mart’s leverage in the form of jobs and low-priced goods to fend off legislation and regulation that could cut into its profits and set precedent in other potential markets. In the Wilson Building, elected officials have found their reliable liberal, pro-union political sentiments in conflict with their desire to bring amenities to underserved neighborhoods. Mayor Vincent C. Gray (D) called Wal-Mart’s move “immensely discouraging,” indicating that he may consider vetoing the bill while pondering whether to seek reelection. Alex Barron, a regional general manager for Wal-Mart U.S., wrote in a Washington Post op-ed piece that the proposed wage requirement “would clearly inject unforeseen costs into the equation that will create an uneven playing field and challenge the fiscal health of our planned D.C. stores.”

Wal-Mart Won’t Open 3 D.C. Stores Due to Wage Law: Video - Bloomberg: -- Columbia University Professor Dorian Warren discusses Wal-Mart's plans to abandon opening stores in Washington D.C. with Erik Schatzker on Bloomberg Television

Economic Inequality Is Not An Accident, It Was Created - Inequality is real, it’s personal, it’s expensive and it was created. Today, 1% of Americans are taking home nearly 20% of the country’s total income and own nearly 35% of the country’s wealth. This didn’t happen by accident. As former Secretary of Labor Robert Reich explains, we allowed it to happen. We can’t have a prosperous economy without a strong and prosperous middle class. Inequality can be fixed. So, let’s fix it.  inequality.is, a new interactive site from the Economic Policy Institute, explains the causes of and solutions to income inequality. The recent past has seen greater economic inequality in America than at any time since the Great Depression. In the three decades after World War II American incomes grew quickly and equally, but starting in the late 1970s things began to change. Today, 1% of Americans are taking home nearly 20 percent of the country’s total income, and own more than 35% of America’s wealth. And it didn’t happen by accident. It’s the result of policy decisions on taxes, education, trade, labor, macroeconomics, and financial regulation — all of which shifted economic power away from low and moderate-income American families.

How BIG is BIG Enough: Would the Basic Income Guarantee Satisfy the Unemployed? - L. Randall Wray -- (This is a prequel, Part 1 on BIG; I already did Part 2. Sorry it is longish, but not technical.) Last week I criticized an article by Allan Sheahan who argued that “Jobs Are Not the Answer” to America’s unemployment problem. The thesis was based on two propositions. First, labor productivity has grown so we’d never be able to find sufficient work for all. Second, we don’t need jobs anyway because: “When we say we need more jobs, what we really mean is we need is more money to live on. One answer is to establish a basic income guarantee (BIG), enough at least to get by on — just above the poverty level — for everyone. Each of us could then try to find work to earn more.” I devoted most of the space in my response to the first point. Labor productivity has been rising since caveman first grabbed a club. Productivity’s importance as a cause of unemployment is at best of second order importance and certainly not new. The real cause is money. To be more specific, it is because we choose to organize a huge part of our social provisioning process through the monetary system, with much of our production controlled by capitalists. It is a monetary production economy—capitalists will not employ labor if they do not believe it will be profitable. (Note that is a statement of fact, not a criticism.) The problem is not that we cannot find useful things for people to do. Any one of the readers of this blog could come up with a list of hundreds of useful things to do that are not being done because no one can think of a way to make profits at them. So we can use the JG/ELR to put people to work doing useful things without worrying about profiting off their labor.

Economic equivalence: job guarantee and basic income - Recently there has been much discussion about whether a basic income [guarantee] or a job guarantee (JG) is the better option when unemployment is high, under-employment is pervasive and wages are low. Chris Dillow, Izabella Kaminska, Paul Krugman and I have all argued for basic income on the grounds that modern capitalism either is, or will be, incapable of generating sufficient work to provide a living wage for everyone: while the Modern Money Theorist (MMT) school argues strongly for a JG, claiming not only that it meets the moral objective of ensuring that everyone who wants to work can, but that the public sector providing jobs for the "reserve army of unemployed" can act as a form of automatic stabiliser. I do not propose to discuss here the moral arguments for job guarantees versus basic income. Chris Dillow has addressed the argument that basic income encourages "mass skiving" very well in this post, while various papers from MMT theorists have identified the fact that most people want to work - that providing for oneself rather than being dependent on others is important for human dignity. However, MMT make claims for JG schemes that go beyond moral arguments and disagreements over the best method of delivering work. In this post on Economonitor, Randall Wray claimed that basic income was inflationary, and produced evidence from Alaska in support of his argument. And he and his colleagues in the MMT movement have adopted the concept of a Job Guarantee as the principal counter-cyclical fiscal policy tool in their macroeconomic theory. When unemployment is rising, so the theory goes, the public sector will buy up all the idle labour and put it to use in public sector or not-for-profit projects. This supports demand and therefore acts as a form of fiscal loosening. As the economy returns to health and the private sector starts hiring again, the excess labour hired under the job guarantee scheme finds private sector jobs, shrinking the public sector and acting as a form of fiscal tightening.

Wage deflation charts of the day - NELP, the National Employment Law Project, has taken a detailed look at what happened to wages during the recovery — specifically, between 2009 and 2012. They looked at the annual Occupational and Employment Statistics for three years — 2007, 2009 and 2012 — and created a list of wages for 785 different occupations. They then split those occupations into five quintiles, according to income; the lowest quintile made $9.49/hr, on average, last year, while the highest quintile averaged $40.23/hr. But let’s not look at averages, let’s look at the actual disaggregated data. Here are some charts which Ben Walsh laboriously constructed, and which need a little bit of explanation. Each thin line is one occupation, with nominal wages rebased to 2007=100. As a result, these charts show increase in wages, rather than absolute wages: the lines which rise the most are the ones with the biggest pay raises, not the ones with the highest pay. (Although, as you’ll see, the two are highly correlated.)The two green lines show inflation: the dark-green line is CPI, while the light-green line is CPI-U, the urban index used by NELP. As a result, all the jobs below the green lines saw real wage declines between 2007 and 2012, while all the jobs above the green lines saw real wage gains.

New York fast food worker: ‘I think I deserve to eat lunch’ - New York's fast food workers kicked off the series of one-day strikes we've seen in cities across the nation in recent months, and while the city hasn't seen another such walkout since April, the workers aren't done fighting. What's more, the New York Times' Michael Powell reports: There is good news to be heard here. Workers who earn minimum wage realize their employers have no real hold on their tongues.  “I’m making the minimum wage plus 50 cents,” notes Ms. Simon. “I definitely can find another job.” What's more, some workers are realizing that in addition to wanting more, or even needing more, there's another word to describe their situation as they're paid poverty wages and often cheated out of hours of pay they've earned: Naquasia Legrand, a 22-year-old from Canarsie, Brooklyn, works at two KFCs. She washes dishes at one for $7.75 and mops floors at the other for $8. She says she must work four or five hours each week off the clock.  She needed to buy a MetroCard last week so she skipped lunch. She shakes her head. “I think I deserve to eat lunch.”

Nearly 1 in 6 Americans Receive Food Stamps -- Food-stamp use rose 2.8% in the U.S. in April from a year earlier, with more than 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.) One of the federal government’s biggest social welfare programs, which expanded when the economy convulsed, isn’t shrinking back alongside the recovery. Food stamp rolls increased on a year-over-year basis, but were 0.4% lower from the prior month, the U.S. Department of Agriculture reported. Though annual growth continues, the pace has slowed since the depths of the recession. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), is at 47.5 million, or nearly one in six Americans. Illinois and Wyoming registered double-digit year-over-year jump in use, while Alaska, Arizona, Idaho, Maine, Michigan, Missouri, New Hampshire, North Dakota, Pennsylvania and Utah all posted annual drops. Mississippi was the state with the largest share of its population relying on food stamps — 22% — though Washington, DC was a bit higher overall at 23%. One in five residents in Oregon, New Mexico, Louisiana, Tennessee, Georgia and Kentucky also were food-stamp recipients. Wyoming had the smallest share of its population on food stamps — 7%.

Seniors find it harder to get home-delivered meals - South Florida seniors who are frail, disabled or living alone will find it harder to get home-delivered meals now that long-predicted federal cuts in aging service dollars have reached the local level. Broward Meals on Wheels, which serves more than 1,300 seniors a week, instituted a waiting period this month for the first time in many years. Some families who had filled out paperwork and were expecting their meals to start arriving soon are being told their start date is unknown. The recent cuts will only make the situation worse in Palm Beach County, which already was dealing with a home-delivered meals waiting list this year. Now the line will get longer as programs struggle to serve the most needy and stretch their shrinking dollars, said Jaime Estremera-Fitzgerald, CEO of the Area Agency on Aging of Palm Beach/Treasure Coast, which plans and manages services for a five-county area.

Puerto Rico sees surge in homeless population - Puerto Rico's homeless population has risen sharply in the past two years amid an ongoing economic crisis that includes a nearly 14 percent unemployment rate, higher than any U.S. state. Officials say they expect the problem will only grow worse. More than 1,650 homeless people were estimated to be living just in the less-populated half of the U.S. territory's this year, up from 980 two years ago, according to the nonprofit Puerto Rico Pro Homeless Coalition of Coalitions. Officials say they are finding a similar increase in the more-populated San Juan metropolitan area, though that report is still being completed. "This is the most dramatic number we've seen," Across the island of 3.7 million people, homeless people can be seen sleeping on park benches, under bridges or in doorways. Many are addicted to drugs, and it is common to see them begging at stoplights in and around San Juan.

State and Local Jobs: Stuck in a Deep Hole - State and local governments had 703,000 fewer employees in June 2013 than in August 2008, according to the jobs numbers released on Friday.  That number has barely budged since January 2012 (see chart), meaning that in the last year and a half, states and localities essentially have made no progress in refilling the giant workforce hole that the recession caused.  Although the days of drastic employment cuts seem over, state and local governments aren’t replacing the teachers, firefighters, police officers, sanitation workers, and many other critical employees that they lost in recent years. Though the jobs haven’t grown in the last 18 months, the needs have.  State populations continue to grow.  From July 2011 to July 2012 (the most recent data available), the populations of 48 states grew — for many states, by tens of thousands of new residents. The losses in education jobs are particularly concerning.  The number of teachers, principals, school support staff, as well as college professors and administrators, has flatlined since the start of 2012, while K-12 schools have added over 200,000 additional students and colleges and universities have added 100,000 additional students.  A flat workforce combined with rising enrollments means cuts to programs, larger classrooms, and less ability to invest in promising school reforms.

State GDP shows a manufacturing rebound in 2012 - Rebecca Wilder - State GDP shows the following in 2012: durable goods manufacturing and finance and insurance are primary drivers of cross-sectional growth. This confirms the national story, according to the BEA. A state-level breakdown shows strong (a surge in) economic activity in North Dakota, Oregon, Texas, and Utah, as 2012 real GDP was the highest in these economies compared to a long-term average (since 1997): 55%, 33.2%, 26%, and 25.3%, respectively (see Table in appendix). In contrast, 2012 real GDP in Missouri, Ohio, Michigan, and Connecticut were the worst performers compared to their long-term averages at 5.6%, 4.2%, 2.3%, and -2.4%, respectively.   A couple of articles from My San Antonio and Money paint of a picture of an oil/gas boom driving capital investment in Texas and North Dakota. Tech manufacturing is adding to Oregon’s GDP to the tune of a 2.87% contribution in 2012. Texas and North Dakota are benefiting from the oil and investment boom. However, in looking at the accounts for these two states, the economic improvement is rather broad based. In North Dakota, for example, construction and real estate added 2.37% to the total 13.4% annual growth – striking. Connecticut is an interesting case – apparently the consolidation of the hedge fund industry is having a large and adverse effect on the economy, as finance and insurance pulled the economy down -0.57% and more than offset the positive gains from durable goods manufacturing (+0.46% in 2012). And perhaps Ohio stands to gain from the shale gas boom. On jobs at the aggregate level, we saw last week that growth in manufacturing correlated with growth in manufacturing jobs in 2012. Likewise for finance and insurance industries – see graph below and here. But in 2013, manufacturing jobs have been dropping.

Report: OH debt causes higher taxes for employers - Ohio employers have been paying millions in higher taxes for the state's failure to repay a federal loan to cover unemployment benefits during the recession, a newspaper reported Sunday. The state's failure to repay the $1.5 billion federal debt has left Ohio employers with a $272 million tax increase over the past 18 months, The Columbus Dispatch (http://bit.ly/15odJ6L) reports. Ohio taxpayers have paid an additional $136.5 million in interest on the debt since 2011, with another interest payment of $48.5 million due in September. Employers pay state and federal payroll taxes to fund jobless benefits. But Ohio was among 36 states that didn't have enough reserves when the recession hit and were forced to borrow from the federal government to keep paying jobless benefits. U.S. Department of Labor figures show Ohio is among 22 states owing a combined $21 billion. While Ohio has repaid about $1 billion in principle the past two years, its $1.5 billion debt is bigger than every state but California, New York and North Carolina, the newspaper reported. A panel of business, labor and legislative leaders created to oversee the state's unemployment trust fund hasn't met in more than three years and the lone remaining member's term expired Sunday. The Unemployment Compensation Advisory Council is to include six representatives of business and labor appointed by the governor and six lawmakers named by House and Senate leaders, but no appointment has been made in at least two years. 

Rent-a-Paramilitaries Freak Out Wisconsin - Here’s a fascinating little story. There’s been a battle royale up in Wisconsin over an effort to establish a big iron mining operation near Lake Superior, to be owned and operated by a company called Gogebic Taconite. The Republican legislature approved the mine in March over environmentalists’ objections. Some protests have been staged since the operation got started. But people started to get freaked out over the weekend when the company brought in what the Wisconsin State Journal calls “masked security guards who are toting semi-automatic rifles and wearing camouflaged uniforms.”  Now masked guards in camoflage carrying assault rifles do seem a bit more mid-80s Latin American death squad than protecting some mining equipment in Wisconsin. So I started looking into the security company behind the paramilitaries, an outfit called Bulletproof Securities out of Scottsdale, Arizona that Gogebic brought in for the job.  Here’s the Bulletproof website which lists all sorts of security/paramilitary type services. Indeed, as the site notes, “BPS has at its disposal the latest cache of specialized equipment for border security operations, not typically found in the private sector. As example, BPS owns heavily armored Joint Light Tactical Vehicles (JLTV’s), Tactical All Terrain Vehicles (T-ATV’s), FLIR (mobile thermal systems), mast equipment (eye in the sky), and many other state-of-the-art assets … The presence of BPS will prevent criminal organizations from posing a threat to your personnel or your mission.”

Kevyn Orr to load bankers in a bus, show them Detroit’s worst neighborhoods - Detroit emergency manager Kevyn Orr, locked in a tense standoff with creditors whom he has asked to accept a fraction of the $11.4 billion they’re owed, will load a group of about 25 bankers on a city bus next Wednesday, and lead them on a tour of some of Detroit’s most desperately blighted areas. They’ll start downtown at Grand River Avenue, and travel out to Brightmoor, where hundreds of abandoned homes and businesses populate gap-toothed blocks that used to teem with residential and commercial activity. Then the tour might also cut across 7 Mile to the east side, and come back down Gratiot, a hollowed thoroughfare that runs through the 48205 ZIP code, which led the city in shootings and homicides in 2011. “If they can see what it’s like for Detroiters, what they endure every day in this city, I think they’ll begin to understand what’s at stake,” Orr said after an interview he gave during a taping of the Detroit Public Television show “MiWeek.” “Imagine what it’s like to be a mother riding that bus with no air-conditioning, that shows up late and takes an hour and a half to get you where you need to go. See what these neighborhoods look like, what you travel through and go home to every day. I think people don’t really believe it when I describe it. Even my friends in Washington say it can’t be as dire as what I’m describing. But it is.”

Financial Crisis Just a Symptom of Detroit’s Woes - A question unimaginable in most major American cities is utterly commonplace in this one: If you suddenly found yourself gravely ill, injured or even shot, would you call 911? Many people here say the answer is no. Some laugh at the odds of an ambulance appearing promptly, if ever. In Detroit, people map out alternative plans instead, enlisting a relative or a friend.  “The city is past being a city now; it’s gone,” said Kendrick Benguche, whose family lives on a block with a single streetlight, just down from a vacant firehouse that sits beside a burned-out home. The Detroit police’s average response time to calls for the highest-priority crimes this year was 58 minutes, officials now overseeing the city say. The department’s recent rate of solving cases was 8.7 percent, far lower, the officials acknowledge, than clearance rates in cities like Pittsburgh, Milwaukee and St. Louis.

Detroit bankruptcy decision could come as early as Wednesday -- There is no doubt that Detroit Emergency Manager Kevyn Orr is dead serious about bringing Detroit back to life, with or without the help from its creditors both secured and unsecured. Orr knows everyone won’t be happy and some won’t come on board, but he and Michigan Treasurer Andy Dillon say they need concessions or else. As we've been reporting, the next few days will be key concerning whether Detroit goes into Chapter 9 bankruptcy. We could learn as early as Wednesday if Detroit will be headed into bankruptcy. The city employee pension boards and retirees will meet on Wednesday. Creditors will take a bus tour on Wednesday night. Orr says he is hoping it will be an eye opener. The emergency manager says he will know within days, whether he gets concessions from all creditors or if he's taking Detroit into bankruptcy court.

As Detroit teeters on bankruptcy, creditors are left holding the bag - After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar. A decision about whether to file for bankruptcy is widely expected this month. Detroit’s dire fiscal condition is sending ripples of concern through the normally placid capital markets that all state and local government rely on to raise cash for everything from road improvements and school roofs to libraries and parks. Holders of Detroit’s municipal bonds — always touted as among the safest investment vehicles — are being asked to take on staggering losses. It also has worried the city’s 9,500 employees and nearly 20,000 retirees, who have much to lose. Under the plan put forward by emergency manager Kevyn D. Orr, a former D.C. bankruptcy lawyer, retirees will have to absorb significant reductions in pension and health benefits. The choice before bondholders and retirees is stark, given that both groups would inevitably face steep cuts in a bankruptcy. The city’s massive debt is matched only by a devastating loss of revenue and residents — a long-term condition that has escalated in recent years.

Potentially hundreds of women wrongly sterilized in California prisons - The California Department of Corrections and Rehabilitation wrongly sterilized nearly 150 women between 2006 and 2010, The Center for Investigative Reporting (CIR) has learned. CIR reporter Corey G. Johnson obtained a database of contracted medical procedures that showed 148 women who were confirmed to have been given tubal ligations, but the report noted that there may be another 100 or more dating back to the 1990s. Advocates for female prisoners in the state told Johnson that most of the sterilizations were coerced and inmates thought most likely to be jailed again were targeted.

A Deeper Dive into Sequestration’s Impact on Head Start - Each Monday, we run a series of links to articles showing the impact of sequestration across the land.  Often, these are localized impacts that don’t readily show up in GDP, enabling the chin-strokers on cable TV (yes, I’m one) to protest that the budget cuts have had no impact at all.  As our weekly links reveal, that’s wrong, but here’s a much deeper dive into the impact of cuts to Head Start, the pre-school program for low-income kids (from a new HuffPo series on the sequester’s impacts).  The piece follows a few of the parents and kids directly affected by the closures, providing a tangible feel of what it’s like for a low-income parent to lose this important service: “parents benefitting from the program say it keeps their lives afloat.” At least three things happen when you cut these programs (and this isn’t my first post on these cuts).  First, some kids lose their slots, interrupting not only basic early learning, but also nutritional and medical services.  Nationally, an advocacy group expects 65,000 slots to be victims of the sequester. Second, Head Start staff lose jobs, about 11,500 nationally.   Third, working parents in particular lose a vital support system, and if they want to keep their jobs—and remember, these are low-income families–immediately start digging for alternatives to care for their kids during work.

Schools Seeking to Arm Employees Hit Hurdle on Insurance - As more schools consider arming their employees, some districts are encountering a daunting economic hurdle: insurance carriers threatening to raise their premiums or revoke coverage entirely.During legislative sessions this year, seven states enacted laws permitting teachers or administrators to carry guns in schools. Three of the measures — in Kansas, South Dakota and Tennessee — took effect last week. But already, EMC Insurance Companies, the liability insurance provider for about 90 percent of Kansas school districts, has sent a letter to its agents saying that schools permitting employees to carry concealed handguns would be declined coverage. “We are making this underwriting decision simply to protect the financial security of our company,” the letter said.

Protests Sparked in Detroit Over the Dumping of Black History Books - A Detroit area school district has erupted in protest over the discarding of a historic book collection that is said to contain more than 10,000 black history volumes, included films, videos, and other artifacts. The outcry began when a small portion of the volumes in question was discovered in a dumpster three weeks ago by Paul Lee, a local historian who helped assemble the collection. According to USA Today, the collection was largely the result of civil rights-era demands to incorporate African-American studies into school curriculums—especially in communities like Highland Park, whose population is about 93% African-American. Jackson hopes to place the books in a community center, but Weatherspoon has instead expressed interest in donating those with historical value to a library or museum. (Of course, the majority of the collection has already been lost to the dumpster.)

Are private schools really better? Not for everybody and not everywhere - VoxEU - School voucher programmes that are meant to allow students who could not otherwise afford private schools to attend them are often hotly, and often emotionally, debated. This column presents findings based on the PISA survey of private education in 72 countries and regions. Evidence suggests that in countries with basic government-provided education, private schools occupy a high-quality market niche. Overall, the education policy menu should include improvement of public education standards as well as vouchers, which policymakers in countries with better public education should not adopt without considering their distributional and efficiency implications. While they can be beneficial, voucher schemes do not enhance overall equality of opportunities and efficiency in countries where governments supply high-quality education.

Oregon Legislature Approves Tuition-Free College Pilot Program - ABC News: The Oregon state legislature unanimously approved a plan to provide free tuition to students while they attend community college and public university. In return, they'll pay back the state with a percentage of their incomes after graduation. Called "Pay it Forward, Pay it Back," the plan passed unanimously in Oregon's Senate on Monday and in the House the previous week. The state's Higher Education Coordinating Commission will next develop a pilot program and in 2015 lawmakers will decide whether to implement the program. The bill was approved on the same day that interest rates on federally subsidized Stafford loans doubled to 6.8 percent after Congress failed to pass legislation preventing the automatic rate hike. Though the pilot will determine the specifics, the premise is that it will allow students to go to a public university or community college tuition-free with a binding contract that they will pay a small, fixed percentage of their annual adjusted gross incomes after they graduate. The average amount of college loan debt from the class of 2013 was $35,200, according to Fidelity.

Universities shouldn’t be tax exempt - I have a piece up at Architect Magazine on Cooper Union, and the real (if slim) possibility that it will lose the tax break from which most of its current income flows.  Do the math, and that works out to about $18,200 per enrolled student — a much greater subsidy than New York City provides to any of the students being educated at its own colleges. Doug Turetsky, of New York State’s Independent Budget Office, says that if Cooper is going to start charging tuition, then “the public purpose of the unusual tax breaks now mostly a thing of the past,” and New York should start collecting property tax on the Chrysler Building rather than letting Cooper Union use all that money for itself. So far, there’s no indication that the attorney general agrees with him;  Still, in an ideal world, Cooper Union wouldn’t get this tax break — and neither would NYU be exempt from paying property tax on its buildings, and neither would Harvard be able to invest its endowment tax-free. The tax exemptions that universities receive cause them to behave in a manner which would otherwise be quite irrational: NYU’s expansionism, for instance, is driven in part by the fact that it can extract more economic value out of property than other actors, thanks to all property it buys automatically becoming tax-exempt. And if you look at Harvard’s balance sheet, it has for decades now been a hedge fund with an educational institution attached, the educational institution more than paying for itself in the tax exemption it confers upon the entire endowment.

Student Loan Deal Reached In Senate Threatens To Raise Future Costs -- A bipartisan group of senators struck a deal late Wednesday to overhaul the federal student loan program, tying interest rates on new loans to the U.S. government’s cost to borrow in a move that immediately reduces the cost to finance higher education, but is forecast to raise borrowing costs for millions of graduate students and parents in about three years. Rates on new student loans from the Department of Education, the dominant source of college loans, would be pegged to the yield on the 10-year Treasury note. Undergraduates would pay 1.8 percentage points above the government’s cost to borrow for 10 years. Graduate students would pay 3.8 percentage points above the rate. Parents would pay 4.5 percentage points above the benchmark, officials said. The yield on the 10-year note was 2.57 percent late Wednesday, according to Bloomberg. Assuming the measure is signed into law as is, most students starting school this fall and their parents would enjoy lower borrowing costs than the rates that prevailed during the last school year.But their savings would effectively be subsidized by future borrowers, who would pay more relative to current law as the economy improves and interest rates rise.

Deal on student loans stumbles on $22 billion obstacle -- An emerging deal to lower interest rates on student loans hit a major obstacle Thursday after lawmakers were told it carried a $22 billion price tag over the next decade. The proposal was designed to offer Democrats the promise that interest rates would not reach 10 percent and to give Republicans a link between borrowing terms and the financial markets that they sought. But at that cost, the bipartisan coalition behind it decided to push pause and return to negotiations to bring that cost down. The estimate was described by a congressional aide involved in the negotiations. The aide was not authorized to discuss the proposal by name and insisted on anonymity because the Congressional Budget Office report had not yet been widely released. The unexpected cost estimate was unlikely to end talks among lawmakers about how they might reduce rates on subsidized Stafford loans, which doubled to 6.8 percent last week in the wake of congressional inaction. Efforts to restore those rates to 3.4 percent were abandoned in favor of a new compromise that bears many similarities with a bill that House Republicans have passed, and with President Barack Obama's budget proposal.

Student Loan Debt Will Exceed Median Annual Income For College Grads By 2023 - In 10 years, the average amount of debt college students leave school with will equal what the median graduate will earn in just a year, an analysis exclusive to The Huffington Post revealed. This conclusion was drawn from a study conducted by the policy and communications consulting firm Hamilton Place Strategies. The study found that while average student debt at graduation has skyrocketed by 200 percent since 1993, income growth has stagnated. In 2012, the median income for all college graduates was $46,412 while average student loan debt was $28,720, the study found.HPS's analysis comes as student loan interest rates doubled for new college students taking out subsidized Stafford loans due to Congressional inaction. Many experts have warned that outstanding student debt -- which has surpassed $1 trillion by some estimates -- may hurt the economic recovery. Indeed, college graduates are already having a difficult time balancing ever-growing student loan payments against declining wages. Between 2000 and 2011, the wages of college graduates actually dropped by 5.4 percent, according to a 2012 report from the non-partisan think tank Economic Policy Institute. HPS found that from 1993 to 2010, the typical graduate's monthly student loan payments grew roughly 300 percent, from $100 to nearly $300.

Study: State's pension debt spiked since February - A new case study highlights the issues that still plague the state of California’s fiscal future, even after the celebratory high-fiving that happened after Gov. Jerry Brown signed the state’s third straight timely budget in June. The governor generally has received praise for his role in erasing the state’s seemingly perpetual budget deficits. Brown has been featured in the New York Times, the Atlantic and also by Real Clear Politics, a wonky online news site. But California Common Sense, a nonprofit and nonpartisan watchdog group, recently released a study pointing out that despite glowing reviews for Brown’s 2013-2014 budget — which predicts a $1.7 billion general fund surplus — the state’s unfunded retirement liability has increased 5 percent since February.

Pension Proposal Aims to Ease Burden on States and Cities - As states and cities wrestle with mounting pension woes, some even seeking refuge in bankruptcy, Washington has mostly stayed on the sidelines. By law, the 50 states are sovereigns, so even though federal officials have regulated company pension plans for decades, they have had little interest in telling the states how to run theirs. Now, one United States senator wants to change that. Orrin Hatch of Utah, the senior Republican on the Senate Finance Committee, has devised a way for states and cities to exit the pension business while still giving public workers the type of benefits they want. It involves a tax-law change that would enable governments to turn their pension plans over to life insurers. Big players like MetLife and Prudential, to cite just two, might thus step into shoes now occupied by the likes of Calpers, California’s giant state pension system. Any such change would be voluntary, said Mr. Hatch, who plans to introduce enabling legislation on Tuesday. He and the Finance Committee’s Democratic chairman, Max Baucus of Montana, are committed to working on a tax overhaul package this year, and the public-pension change could be one part of that.

Social Security Stupidity from MoneyWatch - Suppose you wanted to take a couple of months off relying on those funds you accumulated in our savings account? Can you bank tell you that your can’t pay your current bills using the funds in your savings account? Jonelle Marte must think this is right: “Long-term deficit? We can hardly afford our bills today. … In 2010, the Social Security Administration began collecting less revenue in taxes than it needs to cover benefit payments, forcing the agency to tap its $2.7 trillion trust fund sooner than some had expected. It was the first time since 1983 that expenditures had exceeded noninterest income With this beginning, you might wonder whether it is worth your time to read the rest of the post. Save your time and don’t bother. I hope Jonelle has saved up funds in a bank that is reasonable as this post was so incredibly dumb – one has to wonder how long she’ll keep her current job. Or am I overestimating the standards at MoneyWatch?

Medicaid Expansion in Michigan - States refusing to expand Medicaid to 133% of FPL has repercussions for those making less than 100% FPL. The PPACA was intended to setup State Exchanges where people could buy healthcare insurance and if they had an income beyond 133% FPL (Federal Poverty Level). Subsidies in the form of a tax credit would be given to each participant (sent to insurance carrier) based on their income. Remember, I said the PPACA was designed for those with incomes >133% FPL? While those with incomes >100% FPL can get subsidized healthcare insurance in the Exchanges, those with incomes “the expanded program would cover as many as 450,000 Michiganders, according to projections. Michiagn State Senator Hune said there is evidence that about half of those in the expanded income category already have coverage of some kind” State Senator John Hune (my district) is worried about adding 450,000 more uninsured people to Medicaid if they expand it under the PPACA . I could understand the concern if:

• It was not funded. The Medicaid expansion is fully funded up to 100% for the first 3 years and gradually drops to 90% in 2020. The 90% still exceeds the unenhanced Federal Government Medicaid funding of 66% presently given to Michigan for Medicaid.
• The State of Michigan already covered adults with and without children up to 100% of FPL. Michigan does not cover up to 100% of FPL for any adult. Jobless Adults with children are covered under Medicaid if they are Adult Income Eligibility Limits at Application as a Percent of the Federal Poverty Level (FPL),

Hospital Debt Proves Worst Casualty in Sick Market - Bonds sold by hospitals are turning into the biggest losers in the municipal market as a delay in a provision of President Barack Obama’s health-care overhaul converges with near-record withdrawals from high-yield funds. Hospital and health-care debt has lost 3.8 percent this month, making it the market’s weakest segment, Standard & Poor’s data show. The slide marks a reversal, after the bonds beat all local borrowings in the first four months of 2013. The debt is being punished by diminished demand for high-yield munis, which have dropped 4.6 percent in July. Almost half of stand-alone hospitals are rated junk or within three levels of it, according to S&P.Amid the worst quarter for local debt since 2010, investors pulled about $1.2 billion from high-yield muni funds in the week through June 26, the second-biggest loss since Lipper US Fund Flows data began in 1992. Then last week, the administration delayed the part of its health-care law that would fine companies for not offering workers affordable insurance.

ObamaCare Rollout: Punts on Income Verification and Employer Insurance Checks, Setting Stage for Insurers to Call Mistakes “Fraud” and Rescind Policies - Obama’s career transition from selling hope and change to selling insurance seems to be, at least so far, a wee bit rocky. Kudos to WaPo’s Sarah Kliff and Sandhya Somashekhar for breaking the story of the newest #FAIL, which required them to process 600 pages of dense HHS prose on July 5; a classic Friday document dump, with bonus points for the holiday weekend, and super double bonus sparkle pony points for following hard on the heels of another huge #FAIL, Obama’s triage of the employer reporting mandate (chirped White House apparatchick Valerie Jarrett: “We are full steam ahead for the Marketplaces [exchanges] opening on October 1.” Right onto the rocks, Val!). Kliff and Somashekhar write: After encountering “legislative and operational barriers,” [nice...] the federal government will not require the District and the 16 states that are running their own marketplaces to verify a consumer’s statement that they do not receive health insurance from their employer.…“The exchange may accept the applicant’s attestation regarding enrollment in eligible employer-sponsored plan . . . without further verification,” according to the final rule. … While initial regulations had proposed an audit of each consumer who reported an income significantly lower than what federal records indicated, the final rule scaled that back to an audit of a statistically significant sample of such cases. For individuals who are not part of that sample, “the Exchange may accept the attestation of projected annual household income without further verification,” it said. This really is an epic #FAIL, technically, politically, and morally. Let’s take a look at how ObamaCare was supposed to work:

Taxing Employers and Employees - The delay of the Affordable Care Act’s employer mandate is a favorable development for the labor market, but the employer mandate is only the tip of the iceberg in terms of the labor-market distortions that the law has scheduled to come on line next year. The Affordable Care Act’s employer mandate will eventually levy a penalty on large employers that do not offer affordable health insurance to their full-time employees. The penalty is based on the number of full-time employees and adds about $3,000 to the annual cost of employing each person. Employers have been complaining about the penalty, saying it will reduce the number of people they hire and cause them to reduce employee hours. Even economists and commentators supporting the law acknowledge that per-employee penalties reduce hiring by raising the cost of employment. Economists have traditionally recognized that it hardly matters whether a tax is levied on employers or on employees, especially in the long run. In the employee-tax case, the employee pays the tax directly. In the employer-tax case, the employee pays the tax indirectly through reduced pay, because employer penalties reduce the willingness of employers to compete for people (Jonathan Gruber of the Massachusetts Institute of Technology has provided some good evidence in support of this widely accepted economic proposition).Among other things, employment, employer costs and employee take-home pay would be essentially the same if the government levied a $3,000 fine on workers for having a full-time job with a large employer that does not offer health benefits, rather than levying the fine on employers on the basis of their full-time personnel, as the Affordable Care Act does.

Wegmans cuts health benefits for part-time workers - Et tu, Wegmans? The Rochester-based grocer that has been continually lauded for providing health insurance to its part-time workers will no longer offer that benefit. The company said the decision was related to changes brought about by the Affordable Care Act. Part-time employees may actually benefit from Wegmans’ decision, according to Brian Murphy, a partner at Lawley Benefits Group, an insurance brokerage firm in Buffalo. “If you have an employee that qualifies for subsidized coverage, they might be better off going with that than a limited part-time benefit,” Murphy said.That’s because subsidized coverage can have a lower out-of-pocket cost for the insured employee while also providing better benefits than an employer-paid plan.Under the Affordable Care Act, part-time employees are not eligible for health insurance subsidies if their employer offers insurance. “It’s a win-win. The employee gets subsidized coverage, and the employer gets to lower costs,” Murphy said. Wegmans employs roughly 1,433 full-time employees and 4,304 part-time employees in the Buffalo Niagara region.

HHS Ruling Helps Workers But Spells Trouble for Employer Mandate - In my post last week, after the announcement that the employer mandate would not be enforced for a year, I wrote that it was vital that the Obama administration show as much concern for the workers who might be denied health insurance as it did for employers. Specifically, I asked the administration to make clear that a worker would be able to get subsidized health coverage through the new exchanges based on filling out an application, without having to get proof from an employer. On Friday, HHS issued that ruling.The decision not to enforce the employer mandate for a year is certain to cost some people health coverage as some employers decide to postpone complying with the law. Their workers, possibly also confused by the delay, may not apply for subsidized coverage. But if they do apply, the new ruling will be a big help to them. As noted, the HHS ruling made it clear that the exchanges should rely on the information workers provide rather than proof from their employers. Workers can ask their employer to help provide the information, but that is not a requirement. And the exchanges can try to verify the information if possible, but that will be difficult and again is not a requirement. Under the new ruling, a worker who reports that he or she is not offered affordable health coverage at work will qualify for subsidized coverage. (Affordability is measured by the employee share of premiums being no more than 9.5 percent of their income.)

Health Care Thoughts: Obamacare Fail -- The Obama administration has delayed a key portion of the program, the 50+ regulations for employers on providing insurance and on the quality of insurance provided. So why the delay?

1) The administration could not explain its’ own rules and definitions, especially on seasonal workers
2) The proposed reporting and data collection system was a mess
3) The proposed enforcement system was still in its’ infancy, also see #2
4) The restaurant and retail sector told the administration what this would do to employment and hours
5) The 2014 election is looming already
Complexity is the enemy of smooth implementation.
(Interesting political theory among morning talking heads. The Democratic leaders intended to fix and improve ACA in conference committee, but the election of Scott Brown in Massachusetts made that unnecessary, so the unpolished version was passed.)

News Flash: Obamacare Haters Hate Obamacare - Last week, the Obama administration announced that it would postpone until 2015 enforcement of the Affordable Care Act’s so-called employer mandate, which will require employers with more than 50 employees to provide health insurance or face significant financial penalties. Emphasizing that the underlying reporting requirements are unusually complicated, the administration said that a one-year delay would allow the government to try to simplify those requirements while creating more flexibility for the private sector.  The vast majority of large employers already provide health insurance, and a one-year delay is unlikely to have significant adverse effects on workers. The administration’s effort to postpone and simplify reporting requirements is in line with recent steps to eliminate redundancy and streamline paperwork burdens, including those placed on the health-care system.  To the critics of the health-care law, however, the real lesson of the announcement is clear: OBAMACARE IS A DEBACLE. And to those critics, that is the real lesson of essentially every development in health-care reform.  If governors decline to establish state exchanges, leaving that task to the federal government, then Obamacare is a debacle. If the administration releases a complex application form for the coming exchanges, then Obamacare is a debacle (even if the application is just a draft). If states opt out of the Medicaid expansion, then Obamacare is a debacle. 

Another look at Obamacare, the employer mandate, and the rise of part-time America - Goldman Sachs has some thoughts on the implementation delay of Obamacare’s employer mandate — and whether the health care reform law has been nudging employers to hire part time rather than full time: The delay should have modest near-term labor market implications. Some employers have indicated that they either have or will shift to more part-time workers in response to the health law. If this were occurring, it would have a positive effect on payrolls (assuming one full-time job is replaced with multiple part-time jobs) but would show up as a greater number of part-time workers in the household survey. This is to some degree what we have seen in recent employment reports, where part-time workers as a share of the population have risen since the start of the year, while full-time employment has been essentially flat.The reference period for determining full-time employment is determined by the individual employer so the timing will vary, but to meet federal requirements it is likely that most employers would need to start their reference period in Q3 if they had not already.While it is possible that the trends over the last few months might reflect the approaching onset of the now-delayed employer mandate, it is also important to note that the shift toward part-time labor pre-dates enactment of the health law and is much more clearly associated with the economic downturn, as shown in Exhibit 1.

ObamaCare Train Wreck on the Twitter: Administration PR Team Launches Google Hangout to Online Derision, Part I - On Tuesday, Pravda informed us that the White House was “ramping up” its efforts to market ObamaCare, and that among those efforts would be “a Google hangout Wednesday to promote its enrollment Web site,” www.healthcare.gov [sic*]. Some of us also received a mail blast giving the event details, and inviting us to submit questions via twitter to #HCgovHangout. Needless to say, many of us noted the date and submitted questions, and when the time came, we were not disappointed…. I grabbed the live stream off Google['s proprietary site]; here it is: The two talking heads in the video are Julie Bataille (left), Director of CMS’ Office of Communications, and Kristin Rowe-Finkbeiner (right), Executive Director/CEO and Co-Founder of MomsRising.** (The other co-founder is Joan Blades, also a co-founder of MoveOn.org.) Rowe-Finkbeiner’s presence explains something Donna Brazile said on ABC’s This Week, working her kayfabe routines with George Will and some other Sabbath Day gasbags (clip):

ObamaCare Train Wreck on the Twitter: Administration PR Team Launches Google Hangout to Online Derision, Part II --- In Part I, we looked that the first Google hangout organized by HHS, with Julie Bataille, Director of CMS’ Office of Communications, and Kristin Rowe-Finkbeiner, Executive Director/CEO and Co-Founder of MomsRising, at #HCgovHangout. We concluded, after categorizing and color coding the twitter stream, that the event was a public relations debacle. Today, we’re going to color code the transcript, helpfully provided, on virtually no notice, by the transcriber: Bataille and Rowe-Finkbeiner in their own words. I’m going to color code the transcript using the same scheme I used for Obama’s April 30 presser on health care, with a definitional change: Vast swathes of the transcript are bathos in Webster’s second sense: Trite and sentimental. So I changed the definition of Bathos to include that sense. I also expanded the definition of Secular Religion

The state of US health ain’t so good: There’s a ridiculously fantastic manuscript over at JAMA that you should go read right now. “The State of US Health, 1990-2010: Burden of Diseases, Injuries, and Risk Factors“: ... This study specifically looked at the burden of disease, injuries, and risk factors in the US versus other countries. The methods are amazingly detailed. So how did we do compared to other countries? Not well. Between 1990 and 2010, among the 34 countries in the OECD, the US dropped from 18th to 27th in age-standardized death rate. The US dropped from 23rd to 28th for age-standardized years of life lost. It dropped from 20th to 27th in life expectancy at birth. It dropped from 14th to 26th for healthy life expectancy. The only bit of good news was that the US only dropped from 5th to 6th in years lived with disability. There’s a chart I’d like to highlight. This is the rank of age-standardized years of life lost rates among the 34 OECD countries in 2010.  The numbers in each cell show the rank of the country in years of life lost for each cause (1 is best). The countries are sorted overall on age-standardized all-cause years of life lost.  The colors show if the age-standardized years of life lost for a country is significantly lower than the mean (green), indistinguishable from the mean (yellow), or higher than the mean (red) for all OECD countries (click to enlarge):

Life Expectancy in Some U.S. Counties Is No Better Than in the Third World - There's little good news in a report on American life expectancy from the Institute of Health Metrics and Evaluation at the University of Washington. We'll begin with the silver lining: Between 1985 and 2010, life expectancy in the U.S. climbed from 78 to 80.9 years for females and from 71 to 76.3 for men. Dig into the numbers of the report and two troubling trends become apparent. One: Compared with the rest of the industrialized world (OECD countries), America is falling behind. "These improvements are much less than what countries of similar income per capita have seen," the report states. The U.S. now ranks 39th and 40th out of 187 countries for life expectancy for males and females respectively.  But here's the thing. The United States isn't uniformly underperforming in life expectancy.  There's a huge disparity between the country's highest- and lowest-performing areas. For men, the difference in longevity in the top and lowest counties is 17.77 years. For women, that number is 12.37 years. Progress in national longevity can be attributed to increases in the highest-performing counties (and mainly among men). "Many counties have made no progress," the report states, "or for the period 1993 to 2002, there have been declines for females in several hundred counties." Life expectancy for males in 11% and for females in 14% of US counties was below that of Nicaragua. In some counties, such as McDowell County, WV and Sunflower County, MS, life expectancies are lower than Bangladesh for males and Algeria for females.

Why is the rich US in such poor health? - AMERICANS die younger and experience more injury and illness than people in other rich nations, despite spending almost twice as much per person on healthcare. That was the startling conclusion of a major report released earlier this year by the US National Research Council (NRC) and the Institute of Medicine (IOM). It received widespread attention. The New York Times concluded: "It is now shockingly clear that poor health is a much broader and deeper problem than past studies have suggested." What it revealed was the extent of the US's large and growing "health disadvantage", which shows up as higher rates of disease and injury from birth to age 75 for men and women, rich and poor across all races and ethnicities. The comparison countries – Australia, Austria, Canada, Denmark, Finland, France, Germany, Italy, Japan, Norway, Portugal, Spain, Sweden, Switzerland, the Netherlands and the UK – generally do much better, although the UK isn't far behind the US. The poorer outcomes in the US are reflected in measures as varied as infant mortality, the rate of teen pregnancy, traffic fatalities and heart disease. Even those with health insurance, high incomes, college educations and healthy lifestyles appear to be sicker than their counterparts in other wealthy countries. The US Council on Foreign Relations, a non-partisan think tank, described the report as "a catalog of horrors".

Long-Term Care Services - As America's population ages, many more elderly people are going to need services and supports, ranging from a little help at their own home to community based care, residential care facilities, and skilled nursing home care. The Congressional Budget Office usefully lays out the issues in its June 2013 report, "Rising Demand for Long-Term Services and Supports for Elderly People." The starting point, of course, is that the U.S. population is aging. At present, the majority of the value of the provision of long-term care services is provided by "informal care"--that is, care provided without compensation by family and friends. The CBO estimated the value of this care by looking at estimates of the number of hours involved, and then valuing that time at $21/hour, which is roughly the average cost of hiring someone to provide this kind of care. As the proportion of older adults climbs, especially those over 85, many of them are going to need greater assistance. Here's an estimate of the need for assistance among elderly people living in the community--that is, not those who need residential or skilled nursing home care. With more people living longer and with fewer children than previous generations, informal care is unlikely to be able to meet the growing need for these services.

CDC Says Doctors Overprescribe Painkillers -As described by the Los Angeles Times, Dr. Tom Frieden, director of the U.S. Centers for Disease Control and Prevention (CDC), criticized doctors for treating aches and pains with narcotics. Too many doctors prescribe these dangerous drugs too soon, too frequently and for too long. Such practice, he said, puts patients at risk of addiction and overdose. In a conference call with reporters last week, Frieden referred to a study by the CDC showing that deaths due to prescription pain pill addiction have quadrupled among women since 1999.  Although more men die of overdoses from drugs like OxyContin, women are catching up quickly; according to the CDC, since 2007, more women have died from drug overdoses than from motor vehicle–related injuries. The problem is more acute among white women than black women, and among older women harder than younger ones.  The rise in overdose deaths among middle-aged women might be attributable to the fact that they are more likely to suffer from chronic pain and to be prescribed painkillers."Mothers, wives, sisters and daughters are dying at rates that we have never seen before," Frieden said. "These are really troubling numbers."

America Is No Longer the Most Obese Country in the World - Bad news, patriots: According to a new UN study, America is no longer the most obese country among more populous nations. That honor, which, according to another study, Americans held as recently as March, now belongs to Mexico. Roughly 70 percent of Mexicans are overweight and almost one-third are obese. Nearly a third of Mexican teenagers are also obese, a number that has tripled in the last decade alone. The vast majority of those teenagers will remain overweight for their entire lives, the study said, which could lead to weight-related health issues such as diabetes. As many as 70,000 people in Mexico die each year from diabetes, a number "roughly equal to the deaths authorities say are caused by more than six years of the country's gangland wars."

Meat industry doesn’t want to tell you where your meat comes from -Multinational meat medley, anybody? Industry groups are suing the U.S. government because they don’t want to have to tell you the origins of your meat. The U.S. Department of Agriculture implemented new rules in May that require packages of meat to be sold with labels that identify the country in which the animal was born, raised, and slaughtered. The rules also outlaw the mixing of cuts of meat from different countries in the same package. That pleased food-safety advocates, environmentalists, and some farmers. But it angered large meat importers and producers and grocery chains. On Tuesday, some of those groups announced they were suing to have the rules overturned. From the AP: The American Meat Institute, a trade group for packers, processors, and suppliers, and seven other groups said segregating the meat is not part of the law Congress passed and the USDA is overstepping its authority. They also claim the rule will be costly to implement and that it offers no food safety or public health benefit.

What happens when you split a farm bill? - House legislators from farm-heavy districts have maintained substantial agriculture subsidies for the last 40 years. They traditionally cut deals with urban district representatives, exchanging support for the nutrition programs (for urban areas) for commensurate support of their subsidy regime (for farm-heavy districts). That jig may now be up. House Republican leadership is clearly interested in giving  the Supplementary Nutrition Assistance Program (SNAP) its own legislation and letting agriculture legislation stand on its own merits. The rifts over food stamps lead many to believe that breaking up the questionable marriage between farm programs and nutrition programs improves the chances that a farm programs bill will pass, and the impulse to pass farm program legislation seems to be driving the divorce. he question is: why would Republicans want to pass farm legislation, the most wasteful and inequitable part of the existing Farm Bill?  The answer leads back to the wealthy farmers, insurance companies, and agri-business lobbies that benefit most from farm programs — and their influence in farm-heavy districts. They hope to preserve and expand agricultural entitlements that pay them billions. Reforming the program to make it economically efficient, equitable, and effective seems to have taken a back seat. How else could one explain the following aspects of the House Agriculture Committee’s farm legislation

House Republicans finally pass a farm bill — with no money for food stamps - After a failed attempt earlier, the House GOP has finally passed legislation to fund U.S. farm policy for the next five years. The only catch? This new legislation is missing the $743 billion for food stamps that had been in previous bills. Instead, House Republicans decided to focus solely on passing a package of subsidies for farmers and agribusinesses worth about $195 billion over the next 10 years. (The final vote was 216 to 208.) Unlike the Senate farm bill, the House version has no funding whatsoever for food stamps for the poor. The House leadership has said it will come back later this month and try to scrounge up money for food aid in a separate piece of legislation.So what happens now? There are a few possibilities:

• 1) The House could try to reconcile its ag-only bill with the Senate’s broader farm bill. Note that the Senate has already passed its own farm legislation that will cost $955 billion over 10 years.
• 2) The House could pass its own food-stamp bill later this month. Alternatively, the House could approve its own separate bill to reauthorize the food-stamp program.
• 3) Congress might not agree on any food-stamp bill at all.

House Passes Farm Bill Without Food Stamps - House Republicans have approved a farm bill sans food stamps, leaving a gaping hole in the middle of the measure for the first time in 40 years.The 216-208 vote was largely on party lines, with no Democrats supporting it. Twelve Republicans also voted against it.The decision to cleave food stamps — formerly called the Supplemental Nutrition Assistance Program, or SNAP, from the rest of the farm bill gives Republicans a victory after GOP lawmakers in the House turned down the full measure last month.According to The Associated Press, Republicans said the food stamp part of the legislation would be dealt with separately at a later date, and House Majority Leader Eric Cantor said after the vote that Republicans would "act with dispatch" to get that legislation to the floor.

Is the 2013 US Farm Bill "WTO Legal"? Nope - Ho hum--another US Farm Bill, another round of fat agricultural subsidies for American producers that hurt farmers in the developing world. Just as Brazil successfully sued the US for its cotton subsidies a couple of years back [DS 267], the 2013 Farm Bill under consideration does not do away with actionable subsidies in the form of price supports if crop prices drop significantly. Senator Pat Roberts (R-Kansas) recognizes this, although it should be pointed out that his state is not a major producer of the most-contested crops--rice and peanuts: I also have longstanding WTO concerns. The United States lost the cotton WTO case to Brazil in part because of the decoupled target price program. It simply isn’t right to force that same risk onto other commodities when we already know the potential pitfalls. The WTO stove is hot. We should not reach out to touch it again.The domestic debate over the inclusion of food stamps aside that is still holding up the Farm Bill, the bone of contention with America's international critics remains. Sure they may have renamed the price supports, but in this case it truly is a case of old whine in new bottles: Both bills retain a counter-cyclical price program that makes a farm payment when prices for covered crops decline below certain levels.It is renamed Adverse Market Payments or AMP in S. 954 and Price Loss Coverage or PLC in H.R. 1947. To better protect producers in a market downturn, the price guarantees (called “reference prices” in both bills) that determine payment levels are set in statute and increased relative to current parameters (called “target prices”). 

Peak Water: What Happens When the Wells Go Dry? – Peak oil has generated headlines in recent years, but the real threat to our future is peak water. There are substitutes for oil, but not for water. We can produce food without oil, but not without water. We drink on average four liters of water per day, in one form or another, but the food we eat each day requires 2,000 liters of water to produce, or 500 times as much. Getting enough water to drink is relatively easy, but finding enough to produce the ever-growing quantities of grain the world consumes is another matter. Grain consumed directly supplies nearly half of our calories. That consumed indirectly as meat, milk and eggs supplies a large part of the remainder. Today, roughly 40 percent of the world grain harvest comes from irrigated land. It thus comes as no surprise that irrigation expansion has played a central role in tripling the world grain harvest over the last six decades. During the last half of the twentieth century, the world’s irrigated area expanded from close to 250 million acres (100 million hectares) in 1950 to roughly 700 million in 2000. This near tripling of world irrigation within 50 years was historically unique. But since then the growth in irrigation has come to a near standstill, expanding only 10 percent between 2000 and 2010. In looking at water and our future, we face many questions and few answers. Could the world be facing peak water? Or has it already peaked?

Cost of water share nearly doubles in northern Colorado - The price for a share of northern Colorado's largest water-supply project has nearly doubled this year, and such upswings in prices create a tough situation for anyone in the agriculture industry in need of more water. In January, a unit of the Colorado-Big Thompson Project was selling for $9,500. Last month, units sold for as much as $18,500, according to officials at the Northern Colorado Water Conservancy District, which oversees the C-BT Project's 12-reservoir system. Brian Werner, a spokesman and historian who's been with Northern Water for more than 30 years, said the recent price marks an all-time high for C-BT Project shares. Regional water experts say the skyrocketing water prices are partly attributed to recent profitability in agriculture and farmers' increased reluctance to sell their water rights. Seeing fewer farmers sell their water is good news for northern Colorado's robust agriculture industry, which has watched its ownership of water decline over the years. The minimal amount of water on the market is pushing already high prices to a point where farmers could have even more trouble affording water if they're looking for it. "It's certainly not farmers who are paying these high prices right now,"

“Peak water” for the Middle East - The situation is most serious in the Middle East. According to [Lester] Brown: “Among the countries whose water supply has peaked and begun to decline are Saudi Arabia, Syria, Iraq and Yemen. By 2016 Saudi Arabia projects it will be importing some 15m tonnes of wheat, rice, corn and barley to feed its population of 30 million people. It is the first country to publicly project how aquifer depletion will shrink its grain harvest. “The world is seeing the collision between population growth and water supply at the regional level. For the first time in history, grain production is dropping in a geographic region with nothing in sight to arrest the decline. Because of the failure of governments in the region to mesh population and water policies, each day now brings 10,000 more people to feed and less irrigation water with which to feed them.” Brown warns that Syria’s grain production peaked in 2002 and since then has dropped 30%; Iraq has dropped its grain production 33% since 2004; and production in Iran dropped 10% between 2007 and 2012 as its irrigation wells started to go dry.“Iran is already in deep trouble. It is feeling the effects of shrinking water supplies from overpumping. Yemen is fast becoming a hydrological basket case. Grain production has fallen there by half over the last 35 years. By 2015 irrigated fields will be a rarity and the country will be importing virtually all of its grain.” The article also offers a pessimistic assessment for China, India, and parts of the United States. 

Arctic melt hits food security in bitter taste of life on a hotter planet - In the UK and Ireland,  wet summer and autumn followed by a cold winter and spring have hit wheat yields, potato production and cattle feed, a foretaste of how climate change can affect food security, even in the developed economies. And the culprit in this drama is rapid Arctic melting, which has destabilised the Jet Stream and brought extreme weather – unusual cold, heavy snowfall, record rain and hot spells — to much of northern Europe and North America, and record heat to the Arctic. Following Superstorm Sandy’s battering of the US north-east coast in 2012, flooding in June across central Europe was the worst in 400 years. Rapid Arctic melting – sea-ice volume in September 2012 was down by four-fifths compared to the summer average 30 years ago – has helped change the Jet Stream, the river of high altitude air that works to separates Arctic weather from that of northern Europe, Russia and Canada, and which governs much northern hemisphere weather. The ice loss has added to ocean and atmospheric heat, pushing the Jet Stream into a more meandering, S-shape pattern, dragging down and stalling cold and wet conditions over Europe, and bringing record heat to the Arctic, as was dramatically experienced in Alaska last month.

Who is going to bring the food when things collapse? - (photos) Readers, you should go to the link to view these photos cuz they are twice as large as they are displayed here. Epic Shanty Towns From Around the World In 2009 photographer Noah Addis began working on a series titled “Future Cities” about squatter communities in densely populated cities around the world. Addis first became aware of the issue of informal urban development while traveling to Lagos, Nigeria, for his first foreign assignment as a newspaper photographer in 1999. “I remember passing by miles and miles of these communities on my way from the airport into town,” Addis wrote via email. “At the time I was unaware that so many people in the world live on land they don’t own with no land tenure and no real security.”Fourteen years later, Addis has traveled and photographed squatter communities in Sao Paulo and Rio de Janeiro; Lima, Peru; Mexico City; Mumbai, India; Cairo; and Dhaka, Bangladesh. Addis said that originally he was more serendipitous with the project, “running around with a small camera and sort of looking for moments.” As the project progressed, he became interested in focusing on the architecture and landscape of the areas, examining the almost organic way the communities develop in conjunction with the needs of the inhabitants.

Pesticide Use Spikes as GMO Failure Cripples Corn Belt - Pesticide use is skyrocketing across the Midwestern U.S. corn belt, as biotech companies like Syngenta and AMVAC Chemical watch their pesticide sales spike 50 to 100 percent over the past two years, NPR reported Tuesday.The culprit? Bt corn—a type of genetically engineered corn with insecticide built into its genes.  Variations of this corn strain—peddled across the world by large multinationals including Monstanto and Syngenta—are giving rise to Bt resistant insects and worms, studies show. NPR reports that resistant 'pests' are decimating entire cornfields across Illinois, Iowa, Minnesota and Nebraska.Yet, now that the targeted insect killings are not working, big agribusiness is simply throwing pesticides at the problem instead of moving away from GMOs. This is despite warnings last year from the Environmental Protection Agency that unrestrained use of Bt corn will off-set the balance of the ecosystem.

Air pollution 'kills more than 2 million people every year' - More than 2 million deaths occur globally each year as a direct result of air pollution from human activity, a team of international scientists has said. But climate change has only made a small contribution to the lethal effects, according to the study published on Friday in the journal Environmental Research Letters. It suggests that 2.1 million people die after inhaling fine sooty particles called PM2.5s generated by diesel engines, power plants and coal fires. Another 470,000 are thought to be killed by high levels of ozone, created when vehicle exhaust gases react with oxygen. Dr Jason West from the University of North Carolina said: "Our estimates make outdoor air pollution among the most important environmental risk factors for health. "Many of these deaths are estimated to occur in east Asia and south Asia, where population is high and air pollution is severe."

Suing For The Right To Pollute -- Polluting utilities are now suing for their right to pollute our air with poisons. And as usual, they claim that the controls are too expensive to adopt. But they’re telling their investors a completely different story. I’ll let Mandy–the analyst–explain: As power plant pollution control projects continue, we are seeing–yet again–that the cost of meeting clean air standards, like the Mercury and Air Toxics Standards for power plants (MATS), has fallen. This past quarter, American Electric Power (AEP) and FirstEnergy each told their investors that their anticipated costs for meeting environmental standards dropped.AEP has lowered its estimated costs of following environmental standards by half, from a high of $8 billion down to $4 to $5 billion. AEP was the top emitter of mercury, carbon dioxide, nitrogen oxide, and sulfur dioxide in 2011 among the top 100 power producers in the U.S. And … AEP is a leader in the lawsuit to halt the Mercury and Air Toxics Standards.FirstEnergy has dropped its estimated costs of following environmental standards from a high of $3 billion down to $925 million (which is $50 million lower than they estimated last quarter).FirstEnergy was the sixth highest emitter of mercury in 2011 among the top 100 power producers.And …First Energy is challenging the Mercury and Air Toxics Standards in court.”

Canadian megafires send smoke round the globe - Massize forest fires are raging beyond control in Quebec, sending huge plumes of smoke to the east. The Eastmain fire — top left in this image from NASA’s Earth Observatory — is spreading towards the east coast of James Bay, the southernmost extension of Hudson Bay, and is currently estimated to cover an area of 656,000 hectares (1.6 million acres). Smoke from the huge fires has already caused smog problems in Montreal and Maine, and is heading round the globe. On July 8 NASA’s Terra satellite spotted a great swathe of Canadian smoke crossing Norway and Sweden, and heading across the Baltic towards Finland.

Homes Keep Rising in West Despite Growing Wildfire Threat - The death of 19 firefighters in Arizona this week highlights what has become a fact of life in the West: Every summer, smoke fills the big skies yet people continue to build in the places that burn most. More people live in these areas, and many balk at controls on how and where to build.  “There’s a self-selection factor in there — people who don’t want the government to do things tend to move to places where the government isn’t around to do things,” Just as many Easterners resist stepping back from their increasingly flooded coast, Westerners build where they want to build.  In a report last September, CoreLogic, a business analytics company, estimated that 740,000 homes in 13 Western states, with a total value of $136 billion, were at high or very high risk of burning up. Nationwide, Oregon and Wisconsin researchers found, 98.5 million people lived in 43.7 million homes in what is known as the wildland-urban interface or WUI (pronounced woo-ee) in 2010.  The sentiment that people should build where and how they choose is embedded in the Bitterroot Valley of western Montana, where a series of infamous 2000 blazes helped usher in the era of ever-more-dangerous Western wildfires.

With Rising Temperatures, Infrastructure Falters : NPR: A road in Wisconsin buckled so badly from the heat that it sent cars flying. Well, this year, the buckling continues. But if you're in certain parts of the country, you don't need me to tell you that. It's hot, and I'm not going to use that but-it's-a-dry-heat line, either.The very infrastructure of our roads is having problems with the heat, and it's not just softening the tar and the asphalt. There are less obvious effects, such as droopy power lines, buckling highways, as I mentioned, and railroad tracks even, and less-efficient airplane takeoffs. These are all among the problems that may spoil your day. Joining me now to talk about the heat and how cities are dampening the infrastructures for warmer temperatures is Vicki Arroyo. She's executive director of the Georgetown Climate Center, part of the Georgetown University Law Center in Washington.

Threatened coastal stretch of Louisiana Highway One needs funding: The lower section of LA Highway 1, which runs from Grand Isle in south Louisiana up to Shreveport, is "at-risk infrastructure" in Lafourche and Jefferson Parishes, LA 1 Coalition executive director Henri Boulet said last week. Speaking at a Gulf Coast Restoration Summit in New Orleans last Monday, Boulet urged officials to continue elevating LA 1 before it's too late. Barely above sea level in spots, the highway is sinking near the coast as the state's wetlands suffer from erosion and ground subsidence. Boulet's group is a non-profit working for LA 1's improvement. "Hurricane Isaac cut into the roadbed in 21 places last August," Boulet said last week. "LA 1 now floods even in low-level storms, and road closures after storms are becoming longer and longer. Sometimes the road, which is the only one into Grand Isle, Port Fourchon and the Louisiana Offshore Oil Port, is shut for five or six days at a time." LA 1 has been designated by the U.S. Congress as "critical energy infrastructure," he said. Port Fourchon is the inland hub for the Gulf's offshore oil and gas industry. The adjacent Louisiana Offshore Oil Port or LOOP offloads supertankers, pipelining crude to half of the nation's refineries.

Study: Global Warming Has Increased Australia’s Chances Of Extreme Summers Five-Fold - Researchers at the University of Melbourne have concluded that Australia is much more likely to see extremely hot summers thanks to human-driven global warming. This finding is based on a raft of climate measurements, plus over 90 climate model simulations.  The context for the study is the record-smashing “Angry Summer” Australia just endured, which brought heat waves, brush fires, and both the hottest month and the hottest day the country has ever seen. According to the paper, by Sophie Lewis and David Karoly, the odds of such summers occurring have increased five fold between now and 2020 — and half the blame can be laid at the door of greenhouse gas emissions. Climate always involves lots of natural variability, and Australia is no exception. The El Niño, a band of unusually warm water that cyclically develops across the Pacific Ocean, has historically been associated with unusually hot Australian summers. But the Pacific Ocean was recently almost in La Niña conditions — the opposite, colder extreme of the oscillation. That was the initial clue for Lewis and Karoly that connected the “Angry Summer” to human activity. As The Guardian reports: “We cannot categorically ascribe the cause of a particular climate event to anthropogenic climate change; however, the roles of various factors contributing to the change in odds of an event occurring can be identified,” the two scientists write.

How people are disrupting the climate (part 1 of 4) - I have completed a four-part lecture on how people are disrupting the climate. It’s told from my perspective, from that of Physics, and steers away from paleoclimatic justifications of climate change and disruption. It’s not that those aren’t good or valid, it’s just that there are many excellent lectures out there, some of which I have linked here myself, and I wanted to do one more or less from first physical principles. There are a couple of other online courses which go into this material in greater technical detail, but that is not what I want to do here.This is not a YouTube lecture. I have limited software and facilities for doing movie lectures, so I produced four PDFs files and embedded audio in theme. You should be able to download the PDF and then step through it, clicking on the obvious sound boxes to get the accompanying audio.  If you do not have Adobe Flash Player on your system, in principle, the Adobe Reader should automatically go out and grab the player and install it for you, with your answering the usual prompts as it goes..

Macro, Multipliers and the Environment - A little follow up from my post the other day:  It's probably going too far to say investment to curb climate change, if made during a depression, is a free lunch.  But certainly the basic benefit-cost analysis for what constitutes the most efficient policy with respect to climate change, or any other environmental or public good, changes when there is another massive market failure at play.  Spending to reduce emissions would seem to have two benefits: reduced externalities plus closing the macro output gap.  In some ways it feels a little like the so-called "double-dividend" hypothesis: the idea that taxing pollution can solve the environmental externality while raising revenue that can reduce distortionary income or sales taxes.  That rather compelling idea still gets kicked around a lot, and there is probably a small truth to it, although the calculation turns out to be more subtle (see Goulder's review, for example). At first blush, the macro double dividend seems like it could be much larger.  As the late James Tobin apparently used to say, it takes a lot of Harberger triangles to fill and Okun gap.   Still, if environmental policy were to be structured with macro multipliers in mind, it could change the entire calculus about the relative benefits of standards versus prices, especially if one would induce more spending in the near term.  It might also alter the implications of uncertainty.  Standard micro analysis, which is fashionable in environmental economics, favors delayed timing of investments, but with small economic values at stake.  The macro effect would strongly favor investment now, with presumably big economic stakes.

We keep moaning about population, but ignore consumption habits - At any public meeting on the environment over the past decade , there's one question that almost always came up. It is a variation of 'Why will no one talk about population?' As a result, population is discussed endlessly while people grumble that no one ever talks about it. The same oddly circular conversation happened in the Observer Review section in an article relating to the new book, 10 Billion, by Stephen Emmott, head of Microsoft's Research Lab. Five full pages of extract and interview warned, 'we're ignoring … the biggest crisis in human history.' Yet it's hard to ignore, in the circumstances. We have World Population Day, the UN Population Awards, numerous organisations dedicated specifically to the issue, and just two weeks ago the UN published its latest, and widely reported, update on global population figures. Government policies around the world on population are untiringly controversial and debated, from countries in Europe (like Germany) worried about declining populations, to those in Asia (like China) worried about the opposite.

Politically Fashionable Carbon Gradualism vs. Reality - The recent re-entry of the Obama Administration into public discussions and advocacy for climate change action has been a mixed blessing for the climate action movement. On the one hand, President Obama possesses the (U.S.) bully pulpit as President and thus can broadcast messages, which can be heard around the country and the world. Furthermore he leads the executive branch of the US federal government, where his Administration can enforce existing regulations, negotiate international business and political relationships, and set climate and energy targets for the functioning of the federal government’s internal operations. On the other hand, Obama has had a now long history of attracting the electoral or moral support of, and then frustrating or working against, reform and progressive movements. In numerous policy arenas including climate, after exciting “hope” that change was imminent, Obama has supported corporate friendly actions by government often against the public interest. In numerous speeches, Obama has reinforced in a seemingly self-defeating manner, the deficit hawk creed that the US government is running out of money. His signature reform, the Affordable Care Act, attempts to extend health coverage by institutionalizing the roles of large profit-minded corporations within the already excessively expensive and profit-oriented American healthcare system. Despite a few critical remarks directed at Wall Street, the Obama Administration has been a steadfast friend to the bloated FIRE sector of the economy, favoring mere cosmetic reforms of the banking and financial system, the industry that blew up the world economy in 2007-2008. Obama’s climate speech on the 25th and the policy prescriptions accompanying it stoked in equal measure, the first idea that Obama is an ultra-timid liberal/progressive genuinely concerned about his legacy or, alternatively, that Obama is just playing another game with those who actually care about the content of policy as it impacts real people, the real economy and the environment.

Should There Be a Carbon Emissions Tax? Posner - In my book Catastrophe: Risk and Response, published in 2005, I discussed at some length man-made global warming and what might be done about it. Although atmospheric global warming has slowed in the last few years, ocean temperatures have become warmer at a rate that has resulted in the globe as a whole continuing to warm; and ocean warming is no less ominous than land warming—it can melt methane sheets in the oceans (and atmospheric methane is a considerably more potent greenhouse gas than carbon dioxide, the principal agent thus far of global warming) and it melts arctic and antarctic ice, which raises ocean levels. The consensus of scientific opinion is that unless effective remedial measures are taken, global warming will continue, eventually (quite possibly within this century) reaching levels at which, largely because of rising ocean levels, the cumulative effects on human society, mainly through inundation of coastal regions (where about a third of the world’s human population lives) and destruction of agriculture and plant and animal species, will be catastrophic.  There is some scientific dissent from the scientific consensus on the catastrophic effects of continued global warming, but most of the dissent is not scientific; it is by businesses that burn fossil fuels and by rightwingers who believe that global warming is a myth propagated by liberals.  As long as global warming is gradual, and catastrophic effects are not felt for the next 50 to 100 years, there is room for hope that geoengineering will limit or even reverse global warming. Ways of trapping the carbon dioxide produced by burning oil, coal, natural gas, and forests may be developed or sunlight may be blocked by injecting sulfur compounds into the atmosphere, which would reduce the amount of sunlight that reaches the earth (though could create other forms of pollution—sulfur dioxide, for example, creates acid rain). Or safe means of piping carbon dioxide emitted from electrical generating plants underground might be developed. There are even suggestions for “whitening” roofs (on a very large scale) to increase earth’s reflection of the sun’s rays.

What Should a Carbon Tax Look Like? Becker - I agree with Posner that the evidence for global warming is serious enough to warrant actions, and that a carbon tax is much more effective than regulations of carbon emissions, such as those recently proposed by President Obama. Yet even if the case for a carbon tax was accepted, and there is powerful opposition in the United States, many issues remain about how carbon taxes should be implemented. My discussion deals with a few of these issues.Although I believe that the evidence on global warming is sufficiently strong to warrant a carbon tax, the magnitude and timing of the threat from warming is still an open question. For this reason it is wise to start with a low tax rate that can be ramped up over time if the evidence on the damages from warming becomes clearer. Economic theory also implies that the tax should start relatively low and rise over time even if one knew for certain that a catastrophe would occur when the amount of CO₂ in the atmosphere exceeded a certain concentration level. The reason is that with a positive interest rate, equalization in the present value of a tax on present and future emissions requires a rising tax rate over time. This is an application of the so-called Hotelling Rule for optimal exploitation over time of depletable resources, such as oil. As it were, the remaining space in the atmosphere for CO₂ before disaster strikes is the stock of an exhaustible resource.In addition, research should be supported on the development of methods and techniques to sequester and mitigate emissions into the atmosphere of CO₂ and other greenhouse gases if a major disaster from global warming appears likely. It might even be possible to develop ways to extract some of these gases out of the atmosphere. Expensive methods of carbon removal and extraction would be implemented only when the damage from greenhouse gases looked to be sufficiently serious and imminent.

Politics of Climate Change: A Well-Oiled Machine -  Polling in 2013 shows that 87 percent of Americans would like their national government to make clean energy a priority; only 12 percent think that this should be a low priority. The same poll showed that 70 percent of Americans believe that climate policy should be a priority, and 59 percent think the US should reduce its own greenhouse gas emissions even if other nations do not. Yet year after year, our national policy mechanisms have stalled efforts to do both. What’s holding us back? Special interests are, and more specifically, fossil fuel interests are.

Climate change to strain water supplies used by power plants: study: Waterways warmed by climate change will increase electricity prices by as much as a third in southern Europe as producers struggle to cool power stations, a study showed. Countries from Romania to Bulgaria and Slovenia face the biggest price increases, according to research today from the Laxenburg, Austria-based Institute for International Applied Systems Analysis. Dutch, German and Spanish scientists participated in the study. “The combination of increased water temperatures and reduced summer river flow under climate change is likely to affect both hydropower and thermoelectric power generating capacity in Europe,” wrote the authors, led by Michelle van Vliet, whose research focuses on how warming climate will affect world river flows. Freshwater is becoming more scarce as the globe copes with climate change that shrinks glaciers, aquifers get depleted and some regions become dryer as the world population rises to 9 billion by 2050. In addition to providing hydropower, water is an essential cooling function inside nuclear and coal-fired plants. The European report follows calls on US energy providers to boost climate-change adaptation.

How Water Scarcity From Climate Change Could Jack Up Europe’s Power Prices - Many European countries could see a decrease in electricity generating capacity and an increase in electricity prices thanks to climate change. That’s the overall finding from a new study which looked at how higher water temperatures and reduced river flows could affect hydropower plants, as well as the nuclear and fossil fuel power plants that draw off much of that water for cooling.  As of now, 91 percent of Europe’s electricity is produced from those three sources, and nuclear and fossil fuel plants are the continents single biggest consumer of water — accounting for 43 percent of all surface water withdrawal. Given that reliance, it’s an open question how well the power industry can continue to function in climate changes’ new realities. The researchers focused on 29 European countries, developing a model of river flow and water temperatures using observed data from 1971 to 2000. The conclusion is that over half of the countries studied will see some amount of price increase, with the big hits in the summer, and mainly for central and southern Europe. Slovenia saw an 12 to 15 percent increase in the model; Bulgaria a 21 to 23 percent increase; and Romania a 31 to 32 percent increase. Countries like Ireland, Denmark, and the U.K. will escaped unscathed, and Norway and Sweden actually saw a price drop. But for the most part, a hike in costs would be the order of the day:

The Rise of The Science Philistines: Canada’s Chief Science Regulator Announces That “Scientific Discovery Is Not Valuable Unless It Has Commercial Value.” - The appointment of National Research Council president John MacDougall in Canada — effectively the country’s top scientist — is being received by scientists the way James Watt was received by environmentalists in the Reagan Administration as head of the national park system. Like Watt, MacDougall seems antagonistic to the field that is supposed to be fostering with federal funds. Recently, MacDougall announced that “Scientific discovery is not valuable unless it has commercial value.” It turns out that all of that stuff by Galileo was just academic crap. Gary Goodyear, minister of state for science and technology, announced that the NRC will shift its focus away from basic research to “large-scale research projects that are directed by and for Canadian business.” That will mean little or no funding for basic research under the $900 million annual budget. It is part of the conservative governments shift toward industry despite protests from leading scientists that the approach is simplistic and shortsighted. Those commercial applications are built on a foundation of basic research.

Biofuel Investments at Seven-Year Low as BP Blames Cost - Europe’s biggest oil companies are scaling back work on the next generation of biofuels, a setback for the effort to create a gasoline substitute that doesn’t drain the food supply. BP and Royal Dutch Shell have halted funds for four separate ventures because the technology to produce fuel from woody plants and waste won’t be economical until 2020 or beyond, executives at both companies said in interviews.The decisions helped cut global investment in biofuel production to $57 million in the first quarter, the lowest since 2006, from its peak of $7.6 billion in the last quarter of 2007, according to data compiled by Bloomberg. That makes it less likely the industry will meet the ambitions of U.S. and European leaders to help reduce fossil fuel pollution and wean motorists off crude oil-based fuel.

Climate change will disrupt energy supplies, DOE warns: U.S. energy supplies will likely face more severe disruptions because of climate change and extreme weather, which have already caused blackouts and lowered production at power plants, a government report warned Thursday. What's driving these vulnerabilities? Rising temperatures, up 1.5 degrees Fahrenheit in the last century, and the resulting sea level rise, which are accompanied by drought, heat waves, storms and wildfires, according to the U.S. Department of Energy. "It (climate change) is a very serious problem and it will get worse," says Jonathan Pershing, who oversaw the report's development. While impacts will vary by region, "no part of the country is immune," he says. He adds that climate change is exacerbating extreme events. "Sea level rise made Sandy worse," Pershing says, noting that it intensified flooding. When the superstorm slammed the East Coast last year, it took down power lines, damaged power plants and left millions of people in the dark.

Report: Use of coal to generate power rises: Power plants in the United States are burning coal more often to generate electricity, reversing the growing use of natural gas and threatening to increase domestic emissions of greenhouse gases after a period of decline, according to a federal report. Coal's share of total domestic power generation in the first four months of 2013 averaged 39.5 percent, compared with 35.4 percent during the same period last year, according to the Energy Information Administration, the analytical branch of the Energy Department. By contrast, natural gas generation averaged about 25.8 percent this year, compared with 29.5 percent a year earlier, the agency said in its most recent "Short-Term Energy Outlook." With coal prices dropping and gas prices rising, the agency said it expected the use of coal to remain on the upswing, accounting for 40.1 percent of electricity generation through 2014. Natural gas would fuel about 27.3 percent.

House GOP: We Love Us Some Coal, Let’s Burn Even More -- Republicans on a House energy subcommittee held a love-in for western coal Tuesday, calling on the Obama administration to increase production from federal lands in Wyoming and Montana despite evidence that the Department of Interior’s coal program is a giveaway to private industry that cheats taxpayers out of a fair return for the public resource. Without even a mention of coal’s role in driving climate change (28 percent of U.S. carbon emissions), or its well documented impacts on public health and the environment ($345 billion a year in hidden costs, according to a Harvard study), Rep. Doug Lamborn (R-CO) and his colleagues on the energy and mineral resources subcommittee of the House Committee on Natural Resources couldn’t say enough good things about the dirty fuel.  “The United States has the world’s largest coal reserves,” Lamborn said. “It would be the height of folly to throw this resource away.” “What is needed is a war on unemployment, not a war on coal,” added Rep. Steve Daines (R-Mont.), accusing the president of “declaring war on American jobs and American consumers” through his recently announced program to attack climate change.The focus of the hearing was on coal in the Powder River Basin of northeast Wyoming and southeast Montana, which supplies about 40 percent of the coal mined in the U.S. Nearly all of that production in the two states is from federal lands, and is overseen by the Bureau of Land Management in the Interior Department.

The coal industry v everyone else: who will win? - A mighty political struggle is dividing Australia, but it is not the mêlée taking place in Canberra. It is the battle that pitches the kids on my street: bouncy Jack, serious Cristiana, little toddling Lily and all of their mates, and every other child from across Australia, against a gigantic industry that menaces their future. It is the epic fight that is taking place between the fossil fuel companies and the rest of us. The politics of climate change is often seen as complicated, but in one sense it is all very simple. On the one side we’ve got those who leading UK analyst Tom Burke calls "the climate makers – the small number of large businesses who produce and burn fossil fuels". On the other side is everyone else. In Australia, the arch climate makers are the coal mining companies, with up to 91 coal projects planned for Queensland and New South Wales alone. If they are allowed to proceed, burning the coal from these new projects could add an additional 1.5 bn tonnes of carbon dioxide to the atmosphere each year after 2018.

Radioactive Tritium At Record High Levels In Fukushima Ground- And Sea-Water - With the Western (and Japanese) media focused almost entirely on the actions of their central-planners-in-chief and how effective they are, it seems human's omnipotence over complex systems is being greatly challenged by the ongoing Fukushima disaster.  The Japan Times reports that TEPCO said Sunday that 600,000 becquerels per liter of tritium has been detected in groundwater at the crippled Fukushima No. 1 nuclear plant - 18% higher than levels a week earlier. Furthermore, the utility also said it had measured a seawater tritium level of 2,300 becquerels per liter - the highest so far - near the water intakes of reactors 1 to 4. So it is that in a nation already suffering from a dreadfully declining demographic dilemma, the citizens are being exposed to highly cancerous substances still.

Fukushima radioactive groundwater readings have rocketed over the past three days - Toxic radioactive substances in groundwater at Japan’s crippled Fukushima nuclear plant have rocketed over the past three days, its operator said, admitting it did not know where the leak was coming from. Samples taken on Monday showed levels of possibly cancer-causing caesium-134 were more than 90 times higher than they were on Friday, at 9,000 becquerels per litre, Tokyo Electric Power (TEPCO) revealed. Levels of caesium-137 stood at 18,000 becquerels per litre, 86 times higher than at the end of last week, the utility said. “We still don’t know why the level of radiation surged, but we are continuing efforts to avert further expansion of contamination,” a TEPCO spokesman stated. Government guidelines permit caesium-134 and -137 at 60 becquerels per litre and 90 becquerels per litre respectively. Once ingested, the substances accumulate in muscle and bone and are believed to cause cancers.

Fukushima Spiking All of a Sudden - Perhaps you've heard that radiation levels of the water leaving the Fukushima, Japan, nuclear power plane and flowing into the Pacific Ocean have risen by roughly 9,000 per cent. Turns out, that's probably putting a good face on it.   By official measurement, the water coming out of Fukushima is currently 90,000 times more radioactive than officially "safe" drinking water.   These are the highest radiation levels measured at Fukusmima since March 2011, when an earthquake-triggered tsunami destroyed the plant's four nuclear reactors, three of which melted down. As with all nuclear reporting, precise and reliable details are hard to come by, but the current picture as of July 10 seems to be something like this: 

• "   On July 5, radiation levels at Fukushima were what passes for "normal," which means elevated and dangerous, but stable, according to measurements by the owner, the Tokyo Electric Power Company (TEPCO). 
• "   On July 8, radiation levels had jumped about 90 times higher, as typically reported.  TEPCO had no explanation for the increase. 
• "   On July 9, radiation levels were up again from the previous day, but at a slower rate, about 22 per cent.  TEPCO still had no explanation. 
• "   On July 10, Japan's Nuclear Regulation Authority (NRA) issued a statement saying that the NRA strongly suspects the radioactive water is coming from Fukushima's Reactor #1 and is going into the Pacific. 

Japan atomic watchdog suspects Fukushima ocean leak -: Japan's nuclear watchdog said Wednesday the crippled Fukushima reactors are very likely leaking highly radioactive substances into the Pacific Ocean. Members of the Nuclear Regulation Authority voiced frustration at Tokyo Electric Power (TEPCO), which has failed to identify the source and the cause of spiking readings of radioactive materials in groundwater."It is strongly suspected that highly concentrated contaminated waste water has leaked to the ground and has spread to the sea," the authority said in its written review of TEPCO's recent announcements.The giant utility that services Tokyo and its surrounding regions has said groundwater samples taken at the battered Fukushima Daiichi plant on Tuesday showed levels of possibly cancer-causing caesium-134 were more than 110 times higher than they were on Friday.TEPCO has failed to identify the exact reasons for the increased readings but has maintained that the toxic groundwater was likely contained at the current location, largely by concrete foundations and steel sheets.

The US Fears the World will Discover its Big Nuclear Secret - Ever since the Fukushima nuclear meltdown the US has taken a close interest in Japan’s nuclear program, and wields its geopolitical mite to influence that program as much as possible. As Mitsuhei Murata, the former Japanese ambassador to Switzerland, said in August last year: “In the US there are 31 [sic] units the same type of that of Fukushima nuclear plant [23 are virtually identical to Fukushima]. So, if the accident be spread too far that really embarrasses the US. So that is why the crisis of Unit 4 has been toned down recently. The USA is actually the main reason.”  So the US has been determined to play down the negative press about the Fukushima disaster, in order to avoid any close analysis of its own nuclear power plants back home, and protect its nuclear industry from facing a similar public backlash to Japan’s poor industry. One of the ways that the US tried to calm the furore over the Fukushima disaster, was to help Japan to raise the acceptable radiation levels, so that any leak of radioactive particles would be deemed less serious. And ex-Secretary of State Hillary Clinton was thought to have signed an agreement with her Japanese counterpart to promise that the US would continue to buy seafood from Japan, as proof that all is well, even though the FD has so far refused to actually test the sea-food for any radiation and determine that it is safe for consumption.

Use of coal to generate power rises; greenhouse gas emissions next? -  — Power plants in the United States are burning coal more often to generate electricity, reversing the growing use of natural gas and threatening to increase domestic emissions of greenhouse gases after a period of decline, according to a federal report. Coal's share of total domestic power generation in the first four months of 2013 averaged 39.5%, compared with 35.4% during the same period last year, according to the Energy Information Administration, the analytical branch of the Energy Department. By contrast, natural gas generation averaged about 25.8% this year, compared with 29.5% a year earlier, the agency said in its most recent "Short-Term Energy Outlook." With coal prices dropping and gas prices rising, the agency said it expected the use of coal to remain on the upswing, accounting for 40.1% of electricity generation through 2014. Natural gas would fuel about 27.3%. Power plants are the single largest source of greenhouse gases that drive climate change. The growing use of coal is occurring against the backdrop of President Obama's announcement of a sweeping plan to reduce greenhouse gases, including curtailing emissions from power plants. His initiative has already sparked opposition from the coal industry, congressional Republicans and coal-state politicians.

Goldman Slashes Its Forecasts For Natural Gas Prices : Goldman Sachs is lowering its forecast for natural gas prices on an unexpected surge in production. The revision sees Q3 prices at $3.85/mmBtu and Q4 at $4.25/mmBtu, from a previous estimate of $4.50/mmBtu for both. Analysts Damien Courvalin, Jeffrey Currie, and Samantha Dart write in a note this morning that two consecutive EIA storage reports reflect "stronger than expected production growth, in part because of debottlenecking in the Marcellus shale." Prices have dropped about $0.50 — 12% — since May. Futures were around $3.66 Monday. They also note coal-to-gas switching has slowed, though they argue this is bullish long-term and reflects a structural tightening shift in the demand curve.

The shale gas revolution: is it already over?  -  The production of natural gas in the US has not been increasing for about two years. Fitted with a Gaussian function, it shows a peak in the second half of 2012 and, from then on, a tendency to decline. Decoupled in its various components, the data show that shale gas production is still increasing, but not fast enough to compensate for the decline of conventional gas production. Are we already seeing the end of the "shale gas revolution"? It is too early to say but, surely, these data agree with the viewpoint of those who had been seeing the whole story as a short lived financial bubble. (see, e.g., a recent series of statements by Arthur Berman)

What’s going on with shale gas in China (and Poland)? - Both countries were seen as great early hopes for replicating the success of shale gas in the US: Poland for its geology and enthusiastic government; China for its apparently vast reserves and for, well being China and getting things done. Both countries, clearly, are motivated to improve their domestic supply and hence their energy independence. Yet both are taking longer than expected to reach material amounts of shale gas production. The FT’s Leslie Hook last week reported that few believe China will meet its 2015 production target of 6.5bn cubic metres – a modest amount, equivalent to 2 per cent of the country’s total gas production. From Hook’s report:“At the beginning we all thought it would be quite easy to meet that goal,” said Lin Boqiang, an energy economist at Xiamen University, pointing out that the goal was relatively low to begin with. “But judging from the situation now it doesn’t look that easy to achieve.” Fingers are pointed at the usual combination of above- and below-ground factors. (See also: Poland, where 46 exploration wells have so far failed to lead to commercial production levels.) In China’s case, there’s particular frustration over technological expertise, the lack of pipelines and the ‘complicated geology’. One of the interesting things about shale is that formations vary greatly from one area to another, never mind between different countries — so just shipping in a few people with expertise in another, more successful shale play (ie, one in the US) won’t necessarily do the trick.

Must-See Gasland Part II on HBO Monday: Natural Gas, Once A Bridge, Now A Gangplank - If you liked the Oscar-nominated fracking exposé “Gasland” by Josh Fox, you’ll love the sequel Gasland, Part II, which is being broadcast on HBO Monday night. think it’s a better movie, more entertaining and even more compelling in making a case that we are headed on a bridge to nowhere — a metaphorical gangplank — with our hydraulic fracturing feeding frenzy. uture generations living in a climate-ruined world will be stunned that we drilled hundreds of thousands of fracking and reinjection wells:

• Even though we knew that fossil fuels destroy the climate and accelerate drought and water shortages;
• Even though we knew that leaks of heat-trapping methane from fracking may well be vitiating much of the climate benefits of replacing coal with gas; and
• Even though each fracked well consumes staggering amounts of water, much of which is rendered permanently unfit for human use and reinjected into the ground where it can taint even more ground water in the coming decades.

Shale oil Ponzi scheme: Harvard study confirms shale is a fracking treadmill - Harvard has released a new study with a hyped up headline about America becoming a No. 1 oil producer due to fracking. But, in order to get that number one designation,  they will need to drill 100,000 more wells in North Dakota and Texas because “Shale oil wells reach peak output almost immediately but quickly decline, so new wells are constantly needed.”  He noted that the Bakken-Three Forks region in North Dakota required 90 new wells per month to maintain production of 770,000 barrels per day Now where have I heard that before? tap, tap, tap…thinking… Oh yeah! This pretty lady , Deborah Rogers, has been saying that for several years now. HERE is her report. Leonardo Maugeri, a former oil industry executive from Italy”  is the author of the report. He also said only the U.S. is capable of drilling with this “intensity.” And because this type of drilling is so intense they shouldn’t do it in populated areas.  Maugeri said this drilling intensity required for shale oil will limit production in densely populated areas, especially in Europe.

Pumping water underground could trigger major earthquake, say scientists - Pumping water underground at geothermal power plants can lead to dangerous earthquakes even in regions not prone to tremors, according to scientists. They say that quake risk should be factored into decisions about where to site geothermal plants and other drilling rigs where water is pumped underground – for example in shale gas fracking. Prof Emily Brodsky, who led a study of earthquakes at a geothermal power plant in California, said: "For scientists to make themselves useful in this field we need to be able to tell operators how many gallons of water they can pump into the ground in a particular location and how many earthquakes that will produce." It is already known that pumping large quantities of water underground can induce minor earthquakes near to geothermal power generation and fracking sites. However, the new evidence reveals the potential for much larger earthquakes, of magnitude 4 or 5, related to the weakening of pre-existing undergrounds faults through increased fluid pressure. The water injection appears to prime cracks in the rock, making them vulnerable to triggering by tremors from earthquakes thousands of miles away. Nicholas van der Elst, the lead author on one of three studies published on Thursday in the journal Science, said: "These fluids are driving faults to their tipping point."

Distant quakes trigger temblors in the oil patch - study - Wells filled with waste injection fluids at oil and gas fields across the United States are at risk of small earthquakes triggered by larger temblors across the globe, according to a new study published Thursday.  Waste injection wells are on the rise as domestic energy production soars and companies increasingly use water and chemicals to unlock natural gas from shale or force oil from wells, a process known as hydraulic fracturing, or fracking. As oil and gas industries pump waste into sub-surface wells, the pressure can weaken nearby faults and leave them vulnerable to seismic waves passing by from other earthquakes – even ones on the other side of the Earth, according to a new study published in the journal Science. Waves from major shakers travel enormous distances through Earth's crust. As they do so, said lead author Nicholas van der Elst, a researcher at Columbia University's Lamont-Doherty Earth Observatory, they "squeeze rock formations like a sponge." This opens up new passageways for fluids to get into faults and weaken them, he said.Van der Elst and colleagues found that a large earthquake in February 2010 in Chile set off a mid-size earthquake and a series of tremors in the oil fields around Prague, Okla. – 5,000 miles distant. A year and a half later, in Nov. 2011, a magnitude 5.7 earthquake rattled the region that researchers say was also linked to the Chile quake. They also linked earthquakes in Japan in 2011 and Sumatra in 2012 to mid-size tremors near waste injection well fields in western Texas and southern Colorado.

Late Night: Fire Sales - Hard to believe, but yet another corporate malefactor turns out to be a hollow shell, devoid of assets and accountability, and this time half of a town got obliterated because of it. With every emerging detail, the derailment and explosion of an unmanned (!) train in Lac Megantic, Quebec turns out to be the same old plot with new characters. A larger concern with assets to protect “spins off” its shoddiest and riskiest parts, and any attendant liabilities, and leaves it alone to flame out, usually not so literally, but still leaving everyone but the con artists at the top holding the conveniently empty bag just the same. Corporate personhood, it turns out, vanishes into thin air when the shit hits the fan, and the fleeced, injured, or dead might as well try to sue a soap bubble. Thus, even dying industries can make a some people rich, and as death be not proud, they really don’t much care how they go about it. The “railroad,” if you want to call it that, was a formerly near-dormant short line, once part of the US-based Rail World network, suddenly became potentially profitable again when North Dakota Bakken shale oil appeared as the latest filthy carbon flash in the pan. Of course, the rolling stock was unsafe and had to be grandfathered in, and a few arms had to be twisted to allow trains to operate with one engineer instead of two, but all this was necessary because once it was spun off its larger corporate parents, the poor little company couldn’t afford to do any better.

Canadian train disaster sharpens debate on oil transportation : The railroad put the small lakeside town of Lac-Mégantic on the map. And over the weekend, the railroad wiped part of the town off the map. Founded in 1884 when the Canadian Pacific Railway began construction on the final leg of track linking Montreal and the Port of Saint John in New Brunswick, Lac-Mégantic was shaken Saturday when an oil-laden train bound for a Saint John refinery derailed and exploded, leaving at least 13 dead and dozens unaccounted for. The Montreal Maine & Atlantic Railway train, with 72 cars of crude oil from North Dakota’s Bakken basin, was left unattended by its conductor and rolled downhill, blowing a hole in downtown Lac-Mégantic, likened to “a war zone” by Canadian Prime Minister Stephen Harper. The dead found Monday were burned beyond recognition, officials said. The explosion near the border of Maine also reverberated in the rest of Canada and the United States, where people are hotly debating what mode of transportation is safest and most economical for carrying the steadily growing output of crude oil from North Dakota and northern Alberta’s oil sands. And it reignited calls for tougher standards for ethanol and crude oil tank cars. U.S. railroads are already carrying more than 1 million barrels of crude oil a day, bolstered by new shale-oil boom regions such as North Dakota and Texas. Proponents of the controversial Keystone XL pipeline may now be bolstered by arguing that pipelines are safer and more fuel-efficient than trains.

'Significant' Destruction of Canadian Wildlife Serves 'Public Interest,' says Govt Panel - A panel of government regulators in Canada has determined that a proposed multi-billion dollar expansion of Royal Dutch Shell's tar sands project in Alberta would cause 'significant' damage to the ecosystems of the region and that the oil giant's proposed cleanup plans are likely to be ineffective. So they blocked the project, right? No. Instead they have called the expansion vital to the "public interest" and said the nearly forty percent expansion of Shell's Athabasca tar sands project can now proceed to its next phase. According to its official review, the panel found "that the project would likely have significant adverse environmental effects on wetlands, traditional plant potential areas, wetland-reliant species at risk, migratory birds that are wetland-reliant or species at risk, and biodiversity."In addition, they continued, "there is also a lack of proposed mitigation measures that have been proven to be effective."

State Department's out-sourced Keystone XL environmental impact evaluation performed without knowing pipeline's route!!! - The State Department's decision to hand over control to the oil industry to evaluate its own environmental performance on the proposed Keystone XL tar sands pipeline has led to a colossal oversight. Neither Secretary of State John Kerry nor President Barack Obama could tell you the exact route that the pipeline would travel through countless neighborhoods, farms, waterways and scenic areas between Alberta's tar sands and oil refineries on the U.S. Gulf Coast. A letter from the State Department denying an information request to a California man confirms that the exact route of the Keystone XL export pipeline remains a mystery, as DeSmog recently revealed.  Generic maps exist on both the State Department and TransCanada websites, but maps with precise GIS data remain the proprietary information of TransCanada and its chosen oil industry contractors.

Obama’s Remarks Offer Hope to Opponents of Oil Pipeline - Just weeks ago, the smart money in Washington had President Obama approving the cross-border oil pipeline later this year, perhaps balanced with a package of unrelated climate change measures. The seemingly inevitable decision would leave the pipeline’s opponents — a group that includes a large number of Mr. Obama’s most ardent supporters and generous donors — dispirited and disillusioned by what one called the president’s half-a-loaf centrism.  But Mr. Obama threw that calculation into doubt last week when he unexpectedly added a brief passage on the pipeline project to a major address laying out his second-term climate change agenda. Mr. Obama said he would approve the remaining portion of the 1,700-mile pipeline from Alberta to Gulf Coast refineries only if it would not “significantly exacerbate” the problem of carbon pollution. He added that the pipeline’s net effects on the climate would be “absolutely critical” to his decision whether to allow it to proceed.  The president had never before attached such explicit climate-related conditions to the fate of the project.  The project’s opponents were thrilled, saying the president had finally recognized the threat to the global climate posed by the pipeline and the accompanying expansion of Canadian oil sands development. They also crowed that citizen activism and vocal opposition by many of the president’s strongest supporters had altered the political calculus.

Protecting a Drowning Man from Sunburn -  I want to follow up on last week’s post The Increasing Irrelevance of the Keystone XL Debate. With few exceptions, the post was well-received by people on both sides of the debate. There was some reasonable debate on the post on my Twitter feed, and much less rancor. I think only one person accused me of being an “enemy combatant” while most recognized that I am sincerely trying to shine a light on a problem that I see as orders of magnitude worse than Keystone XL. The primary objection to my argument over the irrelevancy of Keystone XL is the same one that has been voiced in the past. It is that the Keystone XL project itself may be relatively insignificant, but add up many Keystone XL projects and you get a big effect. The only problem is that this really isn’t even true. In last week’s article I referenced a 2012 paper which contained a graphic that I shared on Twitter, and it got quite a bit of commentary. The graphic shows the relative potential warming contributions of various fossil fuel resources. Note that the bottom contributor is all of the oil-in-place (OIP) in the Alberta oil sands. It will never be technically or economically possible to extract all of the oil in place.  Keystone XL is a much smaller subset of that. If we assume that Keystone XL transports the full 830,000 bpd for 30 years, that amounts to only 5% of the tiny pink line representing the reserve, or 0.5% of the OIP line at the bottom. :

Fracking Pushes U.S. Oil Output to Highest Since January 1992 - U.S. oil production jumped last week to the highest level since January 1992, cutting consumption of foreign fuel and putting the U.S. closer to energy independence. Drilling techniques including hydraulic fracturing, or fracking, pushed crude output up by 134,000 barrels, or 1.8 percent, to 7.401 million barrels a day in the seven days ended July 5, the Energy Information Administration said today.Rising crude supplies from oilfields including North Dakota’s Bakken shale and the Eagle Ford in Texas have helped the U.S. become the world’s largest exporter of refined fuels including gasoline and diesel. The shale boom has also helped cut world reliance on OPEC oil even as global demand gains. The U.S. met 89 percent of its own energy needs in March, the highest monthly rate since April 1986, EIA data show. Net imports of crude oil and petroleum products will fall to 5.7 million barrels a day by 2014, down from 12.5 million in 2005, the EIA said yesterday in its Short-Term Energy Outlook.

Rising refinery demand meets challenged delivery system -- US crude oil inventory unexpectedly declined again (see post), driven by a particularly strong refinery demand on the Gulf Coast. WTI futures jumped in response, with gasoline futures following, and prices at the pump expected to rise in the next few days.This strong refinery demand and higher prices will increase pressure on firms to deliver more crude to the Gulf Coast. While certain pipeline projects have been helpful in supplying the market with more crude, a good chunk of the delivery in North America has been via rail. But after the horrific train accident in Quebec this weekend (the train was bringing US crude to a Canadian refinery) we will likely see new political pressure on rail transport firms, potentially resulting in lower volumes and/or more expensive delivery. BW: - The question now is whether the devastating accident will poison the oil industry’s burgeoning love affair with the railroads. Since 2011, billions have been invested by refiners, railroads, and oil and gas companies to extend existing tracks into the mouths of refineries on the coasts. According to analysis done by Citigroup, the amount of oil that refiners are able to take from trains increased by a factor of 16 from 2011 to 2013. Just three years ago, refineries along the Gulf Coast were able to take delivery of only about 85,000 barrels of oil per day by rail. By the end of this year, refineries on all three coasts (East, West, and the Gulf) will be able to take 1.4 million barrels of oil per day.With the pipeline system clearly inadequate to meet this massive (and now rising) demand, could a slowdown in rail delivery force fuel prices higher? Also is this potentially a game changer for the Keystone XL project, as "pipeline vs. rail" environmental impact may now be reconsidered?

Let’s Talk about Oil -- Atlanta Fed's macroblog - Given its role in touching nearly every aspect of life across the globe and given the higher and volatile prices over the past half-decade, oil supply has been an incessant topic of conversation for much of our recent memory. Yet the tone of the conversation has dramatically pivoted recently from arguments about whether peak oil or sky-high oil prices could spur a global economic meltdown (anyone remember 2008?) to the shifting energy balance as a result of rapidly growing oil production from North America. .This chart helps demonstrate how quickly the oil landscape in the United States has indeed changed. The U.S. Energy Information Administration (EIA) expects national crude oil production to exceed net oil imports later this year, marking a rapid turnaround from the trend of ever-increasing reliance on imports.  However, despite the increase in U.S. oil production, global oil prices have stabilized at relatively high levels, as the chart below shows. However, the two seemingly opposing narratives—that of high oil prices and that of an emerging oil and gas abundance—are fundamentally linked. In fact, if it hadn’t been for such high oil prices, this new surge in North American oil production may not have happened. It is much more difficult to rationalize drilling activity in deep offshore areas, hard shale, or tar sands—from which, by nature, oil is expensive to produce—without high oil prices. (West Texas Intermediate, or WTI, oil averaged $31 per barrel in 2003, which, even in real terms, is only about 2/5 of today’s prices.) Analysts at Morgan Stanley estimate that the break-even point for Bakken (North Dakota) crude oil is about $70 per barrel and that even a price of $85 per barrel could squeeze out many of the unconventional producers.

Oil Spills: U.S. well sites in 2012 discharged more than Valdez -- It went up orange, a gas-propelled geyser that rose 100 feet over the North Dakota prairie.But it was oil, so it came down brown. So much oil that when they got the well under control two days later, crude dripped off the roof of a house a half-mile away. "It had a pretty good reach,"  "The wind was blowing pretty good. Some of it blew 2 miles."  It was one of the more than 6,000 spills and other mishaps reported at onshore oil and gas sites in 2012, compiled in a months-long review of state and federal data by EnergyWire.That's an average of more than 16 spills a day. And it's a significant increase since 2010. In the 12 states where comparable data were available, spills were up about 17 percent.

Monthly Oil Supply Graphs - For discussion, see here.  Very little has changed.

IEA Sees 20-Year Supply Peak Outpacing Demand in 2014 -  Oil supply will outstrip an acceleration in demand growth next year as production outside of OPEC expands at the fastest pace in 20 years, the International Energy Agency predicted. World oil consumption will climb by 1.2 million barrels a day next year, up from 930,000 a day in 2013, the IEA said in its first monthly report with forecasts for 2014. Supplies from outside the Organization of Petroleum Exporting Countries will jump by 1.3 million barrels a day amid booming output in North America, shrinking the need for crude from the 12-member producer group, according to the report.The assessment should “give bulls some cause for alarm,” the Paris-based adviser to oil-consuming nations said. “While demand growth is also forecast to pick up momentum,” this “will still fall short of forecast non-OPEC supply growth.” Brent crude has lost about 2 percent this year, trading today near $109 a barrel on the London-based ICE Futures Europe exchange, as economic stagnation in Europe, slowing expansion in China and threats to recovery in the U.S. constrain fuel consumption. Dependence on OPEC is dwindling as new drilling techniques enable the U.S. and Canada to unlock reserves from rock formations deep underground. Global demand will average 92 million barrels a day in 2014, advancing by 1.2 million barrels a day, or 1.3 percent from this year, according to the IEA report.

More Signs of ‘Peak Us’ in New Study of ‘Peak Oil Demand’ - Back in 2010, I asked this question: “Which Comes First – Peak Everything or Peak Us?” My focus was whether humans could use the gift of foresight to curb resource appetites in ways that would avoid having the peak imposed on us by shortages or human-induced environmental shifts like climate disruption.There are growing signs the answer is yes. First came work pointing to “peak travel.” Then I wrote about a study foreseeing “peak farmland” — an end to the need to keep pressing into untrammeled ecosystems to expand agriculture. Now comes this fascinating paper in Environmental Science & Technology: “Peak Oil Demand: The Role of Fuel Efficiency and Alternative Fuels in a Global Oil Production Decline.” I asked the lead author, Adam R. Brandt of Stanford University, to write an “abstract for the common man” and he kindly complied. Here it is, with a followup question and answer:  Oil depletion studies commonly focus on the supply of conventional petroleum without as much attention to the other side of the equation, which is petroleum demand. In this study, we examine the trends affecting demand for conventional oil in the future to see under what conditions “peak demand” for oil might arise. We find that historical trends in oil use lead to a peak in demand for oil by well before mid-century. If concerted effort is made to shift to oil alternatives and promote efficiency, a demand decline may arise even sooner.

The Set Up For a Collapse of Oil Prices - Twice in the last six weeks FT Alphaville has referred to Philip Verleger's call for lower oil prices. The thesis is higher interest rates would cause currently financialized inventories to come out of storage. I agree but I wish to heck it hadn't been Verleger making the argument. See: Izabella at Dizzynomics: "Fed, QE and commods" for a couple of his prognostications gone horribly wrong, along with her Alphaville posts "What have inventories got to do with QE?" and "WTI and the taper effect". All that being said, here's a voice in agreement with Verleger. THE oil price is heading for a crash reminiscent to the 1986 collapse, when world oil prices fell by over 50%, an energy economics expert from UK think tank Chatham House warned.  Professor Paul Stevens, who is also a specialist on the political economy of the Gulf States, told the Australian Petroleum and Exploration Association (APPEA) conference that the oil price is heading for a big fall over the next one to two years.

Rail delivery of U.S. oil and petroleum products continues to increase, but pace slows - With U.S. crude oil production at the highest level in two decades, outstripping pipeline capacity, the United States is relying more on railroads to move its new crude oil to refineries and storage centers. The amount of crude oil and refined petroleum products transported by rail totaled close to 356,000 carloads during the first half of 2013, up 48% from the same period in 2012, according to Association of American Railroads (AAR). U.S. weekly carloadings of crude oil and petroleum products averaged nearly 13,700 rail tankers during the January-June 2013 period. With one rail carload holding about 700 barrels, the amount of crude oil and petroleum products shipped by rail was equal to 1.37 million barrels per day during the first half of 2013, up from 927,000 barrels per day during the first six months of last year. AAR data do not differentiate between crude oil and petroleum products, but it is generally believed that most of the volume being moved in the 2006-10 period was petroleum products and most of the increase since then has been crude oil. Crude oil accounts for about half of those 2013 daily volumes, according to AAR. The roughly 700,000 barrels per day of crude oil, which includes both imported and domestic crude oil, moved by rail compares with the 7.2 million barrels of crude oil the United States produces daily, based on the latest 2013 monthly output numbers from the U.S. Energy Information Administration.

Crude Oil Inventories See Record Two-Week Decline - Make that two straight weeks of big declines in crude oil inventories.  After last week's decline of more than 10 million barrels, crude oil inventories from the Department of Energy dropped by close to 10 million barrels again this week.  With a two week total decline of 20.194 million barrels, the last two weeks have seen the largest two week drawdown in crude oil inventories since at least 1983. Ahead of this week's report, traders were expecting a decline of 3.2 million barrels, while the actual decline was more than three times that at 9.847 million barrels.  It is typical for crude oil inventories to fall at this time of year, but not by this much.  Ironically, even after the record decline of the last two weeks, US crude oil stockpiles are still well above their historical average for this time of year.Gasoline inventories also declined this week, but not by nearly as much as crude oil.  While traders were looking for a build of a million barrels, inventories actually declined by 2.634 million barrels.  Here again, it is typical for inventories to decline at this time of year, so this week's drop is nothing out of the ordinary.  While current levels of gasoline are not as far above normal as they are for crude oil, they too are still above average.

WTI Oil Surges to 15-Month High on U.S. Supply Decline - West Texas Intermediate crude surged to a 15-month high after U.S. inventories tumbled for a second week, signaling that a glut in the central part of the country is dissipating. Oil advanced 2.9 percent after the Energy Information Administration said supplies fell 9.87 million barrels to 373.9 million, three times more than was forecast by analysts surveyed by Bloomberg. WTI has moved into backwardation, with futures closest to expiration more expensive than those for later delivery. The gain accelerated after minutes from the Federal Reserve’s last meeting showed many officials want employment to pick up before slowing stimulus. “There’s no incentive to hold supplies with the market in backwardation,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “You are seeing big drops in inventories and that should continue.” WTI crude for August delivery climbed $2.99 to $106.52 a barrel on the New York Mercantile Exchange, the highest settlement since March 27, 2012. The volume of all futures traded was double the 100-day average at 2:35 p.m. The August contract was 90 cents more expensive than the September one, the steepest premium since October 2008. Brent oil for August settlement increased 61 cents, or 0.6 percent, to $108.42 a barrel on the London-based ICE Futures Europe exchange at 2:35 p.m. in New York. The volume for all contracts was 34 percent above the 100-day average.

The WTI carry unwind = The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.They put the backwardation down to three things.First, there’s genuine seasonal demand for light sweet crude, which is always strongest in the summer months. The trend started at least a month ago. Second, they believe there is a very strong possibility that a lot of the oil that’s stored at the WTI delivery point at Cushing is not necessarily made up of high-quality, low-sulfur, light crude oil — which is what is being demanded by the market — but of a wider category of oil.Third, the WTI low-interest rate carry trade is being unwound. It’s this that’s worth your time:Beyond the fundamentals, recent changes in positioning also matter. For the last two to three years, just as the Federal Reserve drove investors to look ever harder for yield, WTI’s steep contango provided a neat carry trade, allowing it to be a fairly steady provider of decent (if unspectacular) returns.

Coal pollution in China is much deadlier than anyone realized - Here’s a stunning statistic: A government policy to promote coal use in Northern China may have cut the life expectancy of 500 million people by more than five years on average. That comes from a big new study in the Proceedings of the National Academies of Sciences, which uses a quasi-natural experiment to quantify the effects of air pollution from China’s coal use in recent decades. The study concluded that nearly 500 million people living north of the Huai River will lose an estimated 2.5 billion life years because of pollution from widespread coal burning, compared with those south of the river. The study is based on analyses of health and air-quality data from 1981 to 2000.

Steel: An inferno of unprofitability  - THE importance of steel is in no doubt. Governments everywhere regard a strong steelmaking business as a sign of economic virility, and thus hover anxiously over their domestic producers.  Despite a weak world economy, global production of steel rose by 1.2% last year to a record 1.55 billion tonnes. Yet importance does not always translate into financial success. Steelmaking scrapes by on microscopic margins that make even airlines look like paragons of profitability. This is most apparent in Europe, whose steelmakers are the most beleaguered. Yet China, where the industry is booming—it has enjoyed almost all of the global production growth in the past decade—faces many of the same problems.The most pressing concern is an old one: overcapacity. In Europe especially, the drive to build lots of vast steelworks in the post-war reconstruction effort continued into the booming 1960s, only for demand to hit a wall in the oil shocks of the 1970s. Too little was done to adjust capacity to the meagre growth rates that followed. The financial crisis delivered the latest blow. Around half of steel output is used in construction, an industry that took a heavy battering. Steel consumption in Europe, at around 145m tonnes in 2012, is nearly 30% below its pre-crisis level and demand is still falling.

Cash for copper in China (or whack-a-mole financing) - Kate’s post on the June China trade data mentions that commodities imports were the only bright spot (although it’s a somewhat dubious bright spot if it indicates a resurgence in investment). It turns out that copper imports were particularly strong, recording a 9.7 per cent year-on-year increase in June, a rather large change compared to a 14.6 per cent decline in May. Goldman point us to one compelling reason why that might be the case. It’s basically another case of whack-a-mole financing in China. Hit over-invoicing over the head and up pops ‘Cash For Copper’ (CFC) financing. This differs from more traditional Chinese Copper Financing Deals in that CFC financing involves moving physical copper from offshore to onshore; and there is no circulation of warrants. But the point of the two mechanisms is the same — getting access to CNY through cheap FX funding. In essence, some Chinese market participants – particularly those that are highly leveraged – are buying non-domestic copper material in order to raise CNY cash, in a development we have not seen since mid- 2011. Specifically, CFC financing – which is allowed by SAFE, and has been a factor in the copper market for years – involves the purchase and importation of non-domestic copper into China, the immediate sale of this copper into the Chinese domestic market post-importation (for immediate CNY cash), and a 3-6 month loan at foreign interest rates issued by an onshore bank. In this way CFC’s are a combination of the China/ex-China price and interest rate differentials.

China slowdown predictions, metals and oil edition - Now that the possibility of a sharp slowdown in Chinese growth, or even an outright contraction, is getting some serious airplay, we can expect a ramp up in forecasts about what this will mean. Here’s one from Barclays commodities analysts, Sudakshina Unnikrishnan and Jian Chang. They note that their China economics colleagues, having gifted us with the awkward ‘Likonomics‘ neologism, are also canvassing the possibility of a big drop in the country’s GDP growth rates. Barclays’ base forecast is for 7.4 per cent GDP growth this year and next, but they think there’s an “increasingly likely” chance of a brief drop to rates as low as 3 per cent in the next three years. They write that in 2008 — ie, before China had quite stimulated its way out of a slowdown — aluminium and nickel consumption were hardest hit. But this was due to big inventories, both downstream and upstream, which have since thinned out. Therefore, they don’t expect such a dramatic reaction to another sharp slowdown:

Unintended consequences made the PBOC’s strategy fail to work - As overnight and 7-day repo rates fell back to the range of 3-4%, the so-called “interbank crunch” in China’s interbank market, which looked like a TV series to me, seems to be finally over, at least temporarily.  However, there were a couple of unintended consequences of the PBOC’s hawkish action. First, more than 1 trillion wealth management products would mature in the end of June and the banks had to meet regulatory requirements at quarter end. As interbank rates soared, the banks had to issue more wealth management products at higher returns which would attract more money to the shadow banking sector and the banks would have to do more risky business because of higher funding cost. Therefore, the idea of cracking down shadow banking by lifting interbank rates failed to work. Second, the interbank crunch became so severe that it received a much bigger attention than the PBOC imagined. MNI’s report of Everbright bank failing to pay 6 bn first put it under the spotlight and it was on the top headline of global media from June 20 to June 25. If the default rumors were still not shocking enough, when people started to question whether it was the Chinese version of “Lehman moment” and the mysterious payment accidents of ICBC and BOC took place, the panic rose to a higher level and it went beyond the central bank’s control. In the end no bank was allowed to fail.  Third, the PBOC’s communication with the public failed to work properly this time and it severely undermined the credibility of the central bank. The PBOC did not make any comment when the rates started to hike which made people very panic and on June 24th PBOC officials interviewed by Caixin said that overall liquidity was sufficient which implied that the policy would not ease because of the pressure. However, the PBOC failed to keep hawkish as it promised and an official announcement was released on the next day saying that the central bank had injected liquidity into the market.

China Cash Squeeze Seen Creating Vietnam-Size Credit Hole -- China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey.  The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan. The majority of respondents also said they approve of the government’s handling of the credit crunch and said the episode reinforces their expectations for policy reforms such as loosening controls on interest rates.

China faces a difficult credit bubble workout - FT.com: The financial shock which has recently hit the emerging markets stemmed in part from a period of severe stress in the Chinese money markets, which has now been brought under control. But the challenges facing China are chronic, not acute. And since the country is much more than “first among equals” in the Brics, a prolonged slowdown in its economy would keep all emerging market assets under pressure for a long while. Although China is probably not facing anything as dramatic as a “Lehman” moment, it will need to spend several years tackling the combination of excess credit and over-investment that has followed the Rmb4tn ($652bn) stimulus package of 2008. Hailed at the time as a masterstroke, the package has caused a hangover that has now been implicitly acknowledged by the new administration under reformist Premier Li Keqiang. China is in the midst of a classic credit bubble. The ratio of total credit to gross domestic product has risen from around 115 per cent in 2008 to an estimated 173 per cent, an acceleration in credit expansion that has spelt danger in many other economies. Much of this has come in the poorly regulated shadow banking sector, where the annual rate of credit expansion exceeds 50 per cent. The Chinese authorities are signalling, correctly, that this must slow sharply. The credit explosion has massively increased the debt service ratio in the economy, an indicator that the Bank for International Settlements says “reliably signals the risk of a banking crisis” (see BIS Quarterly Review, September 2012). The danger point for the debt service ratio, in a cross-country analysis of developed and emerging economies, was found to be around 20-25 per cent, while increases in the ratio of five percentage points or more were problematic. Official figures for China are hard to find, but analyst Wei Yao at Société Générale says the ratio stands at about 39 per cent of GDP. This is considerably above the danger level, and much of the recent increase in credit is widely believed to have been used to extend the maturity of previous debts, another classic warning sign.

Chinese Cash Squeeze Causes Auto Dealer Panic, Group Says - China’s cash crunch is spreading to the nation’s auto dealerships as they become increasingly reluctant to ship their vehicles to neighborhood car lots without upfront payment.  “With the cash squeeze, authorized dealers are no longer willing to hand over their cars on good faith,” Chi Yifeng, general manager of a car shopping plaza, said in an interview yesterday. “They’re holding tighter to their capital and are more cautious about their business plans.” While money-market rates have fallen from last month’s highs, Chi’s comments show that funding concerns in China aren’t over. The squeeze will probably dry up 750 billion yuan ($122 billion) in credit this year, an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey of 15 analysts.  “The cash crunch has led to psychological panic among dealers over access to financing,” Luo Lei, deputy secretary-general of the China Automobile Dealers Association, said in a phone interview from Beijing yesterday. “So far, it hasn’t caused any real damage to the industry, but if the cash crunch continues, the impact will spread to auto dealers.”

China forecasts are being cut ahead of Q2 release - That’s from Bloomberg Briefs’ Michael McDonough (and yes, he does allow his Twitpic charts to be republished, provided attribution is correct). Consensus forecasts are for 7.5 per cent (see Xinhua and WSJ reports) which is also the government’s target for this year’s growth rate. We seem to recall that until quite recently, it was generally assumed that target rate would always be exceeded. Here’s another from McDonough, showing how the full-year forecasts are moving: Still plenty of hope still around for a nice, gentle descent. Anyway. The GDP is due out next Monday.

Barclays Sees An "Increasingly Likely Scenario" Of A 3% Growth "Hard Landing" In China - Japan may have its Abenomics, which is about reversing deflation and restarting growth using a shock and awe approach of qualitative and quantitative easing, simplified as a doubling its monetary base in a few short years, but that is old news. The latest -nomics is that of China and, as Barclays calls it, Li Keqiang's Likonomics which is about "about deceleration, deleveraging and improving growth quality." Of course, since the deleveraging involved in credit-starved China will be measured in the trillions of yuan, we wish them all the best. Because as Barclays also adds, "The fate of both policies, however, will be determined by the success of structural reforms in each country." Alas, if there is one thing the modern world has shown is that while implementing aggressive monetary policy is simple, following through with sustainable, fiscal and structural reforms has proven impossible (see Europe and the US). Maybe what failed everywhere else will work in Japan and China. But if it doesn't, things for China are about to get very ugly. So ugly that the hard landing scenarios of yesterday will seem like a walk in the park. From Barclays: "China could experience a temporary ‘hard landing’ (quarterly growth dropping to 3%) in the next three years." If that happens, all global growth (and stability bets) are off.

China's finance minister signals growth may fall below 7% - China's finance minister has hinted that economic growth may fall far below 7% in the second half of the year. Speaking in Washington, Lou Jiwei thought growth for 2013 as a whole would be 7%, but said that even this may not be the "bottom line". That figure is below Beijing's official 7.5% target, and below most economists' forecasts for the country. Mr Lou's comments highlight how rapidly the country is slowing down, as Beijing seeks to rein in a construction boom. He also caused some confusion by implying that 7% was now the government's target, even though the target was set at 7.5% in March. Mr Lou said he expected growth for the first half of this year to come in at just under 7.7%, implying that he believes growth will slow to just above 6% in the second half. Until last year, China had grown at an average rate of 10% a year for over three decades.

China growth of 6.5%? Um, not a problem! - Well, not a problem apart from all that confusion that arises when a senior Chinese official apparently contradicts official GDP targets and expectations…Chinese Finance Minister Lou Jiwei said a 6.5 percent economic-growth rate wouldn’t be a “big problem,” signaling the government may tolerate a slower pace of expansion than officials have previously indicated.That’s from Bloomberg, and Lou made the comments at a press conference in Washington, so he knew it would be picked up by the western media. Xinhua also has a report that paraphrases Lou as saying he expects 7 per cent growth this year. (The official target, remember, is 7.5 per cent). Here’s the state-controlled Xinhua:He added that China’s expected GDP growth rate this year is seven percent. In the first quarter the growth rate was 7.7 percent, and the rate in the first half of this year will be slightly lower than 7.7 percent. There is no doubt that China can achieve the growth target, though the seven-percent goal should not be considered as the bottom line. What can it mean?Well, really, who knows? Li himself said just a couple of weeks ago that China could meet its 2013 GDP target, and indeed 7.5 per cent was reiterated in the state media with no mention of it changing targets then.

China Back in Recession, U.S. Economy Sluggish - Now that we're well past the statistical anomalies associated with the timing of the Chinese New Year/Spring Festival holiday, the year-over-year growth rates of the value of trade between the U.S. and China indicates that China's economy has likely fallen back into recession, while the U.S. economy is growing, if sluggishly, through May 2013:  The data in the chart above has been adjusted to reflect what each nation's economy "sees" in terms of its own currency. For the most recent trends in the overall data, the value of the U.S. dollar has been falling steadily with respect to the value of the Chinese Yuan since May 2010, as the relative value of U.S. goods in China has fallen while the relative value of Chinese goods in the U.S. have become more expensive.

China suspends PMI detail - Regular readers will know that I track the steel sub-component of the official Chinese PMI each month. Well, no longer, from Bloomie: China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses. “We now have 3,000 samples in the survey, and from a technical point of view, time is very limited — there are many industries, you know,” Cai Jin, vice president of the China Federation of Logistics & Purchasing, which compiles the data with the National Bureau of Statistics, told reporters yesterday in Beijing. The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. The manufacturing Purchasing Managers’ Index also omitted readings on export orders, imports and inventories without any explanation from the government. …Cai said the suspension wasn’t permanent. He didn’t elaborate on the reason for the decision beyond rejecting the idea that it was because the data showed too much weakness.

China Posts Surprise Drop in Exports: --China Premier Li Keqiang repeated his commitment to steer clear of stimulus for the world's second-largest economy, even as contracting exports added to fears of a slowdown. China's export sector shrank 3.1% in June compared with a year earlier, down from 1% year-on-year growth in May and the first contraction in a non-holiday month since the height of the financial crisis in November 2009. Imports fell 0.7% year-on-year, pointing to weak demand at home as well as abroad. Coming after a raft of disappointing data in April and May, June's weak trade results add to fears that economic growth in the second quarter has continued to slow. The median forecast of 18 economists surveyed by The Wall Street Journal tips gross domestic product growth of 7.5% year-on-year in the second quarter, down from 7.7% in the first. Financial markets appeared to shrug off the negative data, with stock indexes in Shanghai and Hong Kong up in trading through mid-afternoon. Even as growth edges perilously close to the government's 7.5% target for the year, Mr. Li--who holds the reins on China's economic policy--reiterated his commitment to steer clear of any fresh stimulus.

China June Trade Surplus Widens to $27.13 Billion: China's trade surplus widened in June to $27.13 billion from $20.43 billion in May. The median forecast of 20 economists in a Dow Jones survey was for a $27.75 billion surplus. Exports fell 3.1% in June from a year earlier, data from the General Administration of Customs showed Wednesday. This was worse than May's 1% rise and below the economists' median forecast of a 3.3% expansion. Imports also fell 0.7% from a year earlier, compared with the 0.3% decline in May and missing the economists' median forecast of a 5.5% increase.

China trade numbers suggest deeper slowdown - FT.com: Chinese exports and imports both fell in June, underlining the economy’s weakness and raising the prospect of a deeper slowdown in the months ahead. Exports fell 3.1 per cent from a year earlier, compared with a 1 per cent increase in May, and far below the 10.4 per cent average increase for the first half of 2013. Imports slipped 0.7 per cent from a year earlier, an indication of sluggish domestic demand. Imports were down from a 0.3 per cent decline in May and also far below the 6.7 per cent average increase in the first half. That left China with a $27.1bn trade surplus in June. For the first half, China’s overall surplus was 58.5 per cent larger than a year earlier. That normally would have provided a boost for the economy, but the numbers were exaggerated by grossly inflated export invoicing earlier in the year, a trick to sneak capital into the country that the government has now cracked down on. “Exports were too strong earlier in the year, now it’s a payback,” said Wei Yao, an economist with Société Générale. “But it does show that external demand for Chinese goods is really suffering and that leads to the point that Beijing needs to rethink its currency policy. There is no doubt that the renminbi is too strong.” China will report its second-quarter gross domestic product data on Monday. Growth is widely expected to have slowed to about 7.5 per cent, its second consecutive quarterly slowdown.

China warns of 'grim' trade outlook after surprise exports fall (Reuters) - China warned on Wednesday of a "grim" outlook for trade after a surprise fall in June exports, raising fresh concerns about the extent of the slowdown in the world's second-largest economy and increasing the pressure on the government to act. China's reform-minded new leaders, including Premier Li Keqiang, have shown a tolerance for slower growth, while pressing ahead with efforts to revamp the economy for the longer term, but any continued slide in economic performance could test their resolve. The customs data showed that exports fell 3.1 percent in June against forecasts for a rise of 4 percent, casting a shadow over second-quarter GDP figures due on Monday that are already expected to show growth slowed down to 7.5 percent as weak demand dented factory output and the pace of investment. "Next week will be a testing time for the government in revealing just how much of a growth slowdown it is willing to tolerate," The fall in exports was the first since January 2012. Imports fell 0.7 percent versus expectations for an 8 percent rise, while China had a trade surplus of $27.1 billion, the customs administration said, in line with the $27.0 billion expected. The Australian dollar fell about a third of a cent after the data, reflecting worries about Chinese demand for Australia's commodities, such as iron ore and coal.

Why China’s June trade data are almost unremittingly bad -  The short answer: the June trade numbers missed expectations by a long way, and the details did nothing to provide reassurance. Here’s a long-ish term view, courtesy of SocGen: Coming so soon before the Q2 GDP data, which is due next Monday, the data have raised the possibility — noted by the FT’s Simon Rabinovitch — that China might actually miss its growth targets for the first time in 15 years. The 3.1 per cent contraction in exports, compared to June 2012, was in stark contrast to expectations of 3.7 per cent growth. Imports fell by 0.7 per cent and expectations were for 6 per cent growth. Some of this could well be due to the crackdown on mis-invoicing, used to disguise illegal capital flows, which had been artificially boosting trade data and which SAFE cracked down on in early May. Last month’s trade data showed, for example, that exports to Hong Kong — one of the key destinations for the invoicing ruse — were down 7.7 per cent. This month, exports to Hong Kong fell 7 per cent. US-destined exports also fell more than in May, but exports to Japan and Europe were slightly better compared to May (albeit both were still negative year-on-year).

China's exporters' FX trading game is over - A big decline in China's export numbers took analysts by surprise yesterday. MarketWatch: - China’s exports last month fell 3.1% from a year earlier, swinging from May’s slim 1% gain, and coming in well below a forecast 4% rise from a Reuters survey of economists.  It marked the first year-on-year drop for exports since January 2012, and, according to the Financial Times, was the worst performance since October 2009. But as discussed earlier (see post) the numbers reported by the General Administration of Customs have been dramatically off earlier this year and are now falling in line with reality. The accuracy of these reports is easy to check. What a nation reports as exports should be the same figures that the trading partners report as imports. And up until recently that hasn't been the case.But why would China's Customs office report inflated trade numbers? The answer has to do with fake invoicing. If an exporter presents a bogus invoice for Hong Kong dollars for example, she can then legally short that amount of HK dollars against the yuan (converting the "expected" receipt of HK dollars into domestic currency). As the yuan appreciates against the HK dollar, the exporter makes money - and China's gradual appreciation of the yuan made this a "sure bet". If you can't sell your product, why not make money on a currency trade. Now the embarrassed authorities in China put an end to this game, as China's exports and other nations' imports from China converge. Bloomberg: - The report follows May’s collapse in export gains after a crackdown on fake invoices that inflated data in the first four months of the year. One reason for the weak trade figures might be that the customs agency “had to deflate trade data in June to neutralize previous over-reporting,”  Appreciation in the yuan this year may also be making Chinese exports less competitive, they said.

Another entrant into currency wars? China halts the yuan appreciation - China's policy of gradual appreciation of its currency has been put on hold. Since the currency is not freely convertible, the authorities generally have a great deal of influence over the exchange rate. Typically when China's growth was deemed to be at risk, such as during bouts of Eurozone-driven financial stress, the renminbi would flat-line or even depreciate against the dollar. Given that the renminbi strength puts China's exporters at a disadvantage, particularly when Japan has been in a devaluation mode, the authorities are probably somewhat concerned. The fact that China's exports have stopped growing (see discussion) is clearly not helping. Reuters: - An unexpected slump in exports in June marked the latest worrying sign of a slowdown in the world's second-biggest economy and raised the prospect that regulators may be forced to drag the yuan back down after a massive rally this year.  Unfortunately for policymakers, while a weaker yuan might improve the price of Chinese goods sold abroad, it will not be the cure all for exporters. Other factors are driving up production costs at Chinese companies and undermining their competitiveness abroad.  Still, economic reformers at the People's Bank of China (PBOC) will come under pressure to use brute-force exchange rate manipulation to stave off a potentially destabilizing round of factory layoffs.  Liu Ligang, Greater China chief economist at ANZ bank in Hong Kong, said some sort of adjustment - including pushing the currency lower - was likely since policymakers were behind the curve in dealing with a longer downturn in exports demand than expected.

IMF’s Blanchard: No Replacement for China’s Growth Engine - China, once considered the engine of global growth, will slow this year, and there isn’t a ready replacement, IMF Chief Economist Olivier Blanchard said this morning on WSJ.com’s MoneyBeat show. Blanchard said he isn’t worried about a hard landing, but “China made too much investment [in its economy], and they want to tune it down,” he said. That’s going to lead to slower growth in China, and by extension the emerging markets. That slowdown, as well, will be felt in developed markets, and the U.S., he said. A drop of two percentage points in emerging markets, he said, would drag U.S. growth by about 0.5%. But there isn’t anything else right now that can pick up the slack of China and the other emerging markets, he said. “You have to realize, this is the mother of all crises,” he said, “the way out is far from obvious.”

U.S. Intellectual Property and China -  I'm not someone who calls for ever-tighter protection of intellectual property. Even when intellectual property raises profits for innovators and producers in the short-run, the ultimate goal is lower prices and new products for consumers in the long run. I've even speculated that the very term "intellectual property" may be a misnomer, encouraging an inappropriately strong idea of what patents and copyrights are intended to accomplish.   But that said, it clearly makes little sense in a global economy to seek tight enforcement of intellectual property rights within U.S. borders when such protections for innovators are often being extensively broken in other parts of the world--and especially in China. The Report of the Commission on the Theft of American Intellectual Property was recently published by the National Bureau of Asian Research, a Seattle-based think tank, and it lays out some troubling evidence. "It is difficult to overstate the importance of intellectual property to U.S. economic prosperity and difficult to gauge the full extent of the damage done by IP [intellectual property] theft. ... A 2012 study by the Department of Commerce found that protection and enforcement of IPR around the globe directly affects an estimated 27 million American jobs in IP-intensive industries, which is roughly 19% of the U.S. workforce, producing over one-third of America’s GDP.

Managing an interest rate rise in Japan - S&P has a report out arguing that if Japanese rates rise by 3 percentage points from 2012 levels and Japanese banks’ unrealised gains on equity holdings are taken into account, they see “most of the banks able to meet the required capital levels by a wide margin”. Reassuring.But if we don’t take those unrealised gains into account there might be some trouble…. Notably it’s the regional banks which are most reliant on JGBs, with the major banks having gradually reduced their holdings since March 2012. Back when JGB volatility was really jumping we wrote about the chances of a repeat of the 2003 VaR shock in Japan and said that “the big banks have almost certainly gotten more sophisticated in their risk management making a 2003 repeat less likely. Unfortunately, the regional and Shinkin banks are probably still lagging.” Now we get this from S&P (our emphasis): Japan’s financial institutions have enhanced their interest rate risk management by implementing a variety of stress tests and analyzing changes in yield curves. Nevertheless, only a few banks have analyzed the scenarios that incorporate the behavior of other banks, although they have calculated their own risk volume.

Hikikomori: Why are so many Japanese men refusing to leave their rooms?: In Japan, hikikomori, a term that's also used to describe the young people who withdraw, is a word that everyone knows. Tamaki Saito was a newly qualified psychiatrist when, in the early 1990s, he was struck by the number of parents who sought his help with children who had quit school and hidden themselves away for months and sometimes years at a time. These young people were often from middle-class families, they were almost always male, and the average age for their withdrawal was 15. "They are tormented in the mind," he says. "They want to go out in the world, they want to make friends or lovers, but they can't."  Symptoms vary between patients. For some, violent outbursts alternate with infantile behaviour such as pawing at the mother's body. Other patients might be obsessive, paranoid and depressed.

Secret TPP Deal Would Void Democracy - Congress will soon debate whether to “fast-track” a trade deal that would make job-killers like NAFTA look puny. The Trans-Pacific Partnership would give corporations the right to sue national governments if they passed any law, regulation, or court ruling interfering with a corporation’s “expected future profits.”They could also sue over local or state laws they didn’t like. The TPP would cover 40 percent of the world’s economy. Existing laws and regulations on food safety, environmental protection, drug prices, local contracting, and internet freedom would all be up for challenge. And the decision-makers on such suits would not be local judges and juries; they’d be affiliated with the World Bank, an institution dedicated to corporate interests.

Stopping the Trans-Pacific Partnership: Global Revolt Against Corporate Domination: We are in the midst of an epic battle between the people of the world and transnational corporations. Wealthy governments and corporations are merging in a global system in which private corporations have absolute power over your life. This is a battle the people can win and when we do it will show that we can defeat corporate power on issue after issue.The Obama administration is currently mired in an ambitious project to accomplish both the continuation of the WTO’s agenda and a restructuring of NAFTA in ways that place corporate property rights over protection of people and the environment. Using the friendly term, ‘partnership,’ the administration is negotiating a sweeping free trade agreement, the Trans-Pacific Partnership (TPP), which could potentially involve the entire Pacific Rim as well as a sister agreement with European nations. This is being done largely in secret and in a way that subverts the democratic process. Former US Trade Representative Ron Kirk, who now has a lucrative job in the private sector advising transnational corporations for the law firm Gibson Dunn, said that if people knew what was in the TPP, there would be no way to get it signed into law. As he told one interviewer, if the text were made public negotiators would be walking away from the negotiations because they would be very unpopular.

Rupee Rout Spurs Biggest SBI Risk Jump Since 2008: India Credit - Bond risk for State Bank of India (SBIN) has surged the most since 2008’s credit crisis as a plunging rupee threatens to hurt company finances and boost loan defaults. The cost to insure debt of the nation’s largest lender against non-payment for five years rose 86 basis points in June, the most since October 2008, to 275, according to data provider CMA. Credit-default swaps on Bank of China Ltd. climbed 43 basis points to 157. The average swap price for five Indian lenders jumped 93 basis points to 295 last month, as the rupee slid 4.9 percent and touched a record low of 60.765 per dollar. Fitch Ratings and Moody’s Investors Service’s Indian unit said the highest exchange-rate volatility in a year could lead to losses in overseas trade and borrowings for firms, eroding their ability to meet repayment obligations. Non-performing debt as a proportion of total lending rose to 3.7 percent in December, the most in at least five years, amid the slowest economic growth in a decade, according to the central bank.

Rupee's weakness may help exports but could do damage elsewhere - Indian rupee's slide to record lows has been extraordinary. It's been driven by weakness across emerging markets and rising rates in the US. As foreign investors exit (accompanied by domestic accumulation of dollars), India's central bank has been reluctant to intervene in order to halt the rupee's slide.While this is expected to help companies in service export sectors (IT services, etc.), it will compress margins for other firms. Weaker currency raises input prices for firms that import parts, materials, etc. who are often not in a position to increase their output prices. The divergence between input and output prices in India is already visible. Moreover, firms such as Reliance and Bharti Airtel who borrowed in other currencies, are watching their liabilities rise when converted into rupees. Perhaps the most troubling aspect of this rupee weakness is the chart below which shows Brent crude oil denominated in rupees. For India, oil prices currently stand at recent record highs (except possibly the oil India buys from Iran at a discount). Given that domestic petroleum is generally subsidized by the government, this spike is sure to put significant pressure on India's fiscal balance.

India's foreign reserves declining - Barclays Capital had a sobering update on India today. Apparently June saw the largest outflows on record from India bonds and equities portfolios.As a result, declines in India's foreign reserves are becoming material. Moreover, India's gold holdings constitute a significant portion (more than other countries) of the nation's reserves. And the recent declines in gold price have not yet been included in the official numbers (not in the chart above).While the reserves a currently sufficient to defend the currency if the RBI chooses to use them, these recent declines will probably make them hesitate. India has other tools it can deploy, should the officials decide to become more aggressive in defending the currency.Barclays Capital: - ... government officials are likely to use other policy options to stem INR weakness, including further liberalisation of the financial account (eg,reducing restrictions on debt purchases by foreign investors and relaxing FDI limits) in an effort to support sentiment. Most recently the Securities and Exchange Board of India (SEBI) announced measures to reduce speculative INR trades “in view of the recent turbulent phase of extreme volatility”, which are likely to help stabilise the currency to some degree. In consultation with the RBI, SEBI has instructed relevant exchanges to reduce client position limits and increase margin requirements for currency derivatives. Therefore for those concerned that the central bank will be forced to sell gold, at this stage there are a number of other alternatives. And given the nation's cultural attitude toward gold, politically that's just not an option.

Singh Seen Risking Fiscal Aims on $21 Billion Food Plan - Indian Prime Minister Manmohan Singh’s $21 billion-a-year program to provide cheap food for the poor threatens to impede the nation’s efforts to pare the widest budget deficit in major emerging countries. The Food Security Bill enacted last week entitles about two-thirds of India’s 1.2 billion people to low-cost grains, boosting food subsidies to as much as 1.2 percent of gross domestic product yearly from 0.8 percent, Nomura Holdings Inc. said. The policy could pose a risk to Singh’s goal of cutting the fiscal gap to 4.8 percent in 2013-2014, Morgan Stanley said.

India to overtake U.S. on number of developers by 2017 -The U.S. may be the global center of the IT universe, but India will exceed the U.S. in the number of software developers by 2017, a new report notes.  There are about 18.2 million software developers worldwide, a number that is due to rise to 26.4 million by 2019, a 45% increase, says Evans Data Corp. in its latest Global Developer Population and Demographic Study.Today, the U.S. leads the world in software developers, with about 3.6 million. India has about 2.75 million. But by 2018, India will have 5.2 million developers, a nearly 90% increase, versus 4.5 million in the U.S., a 25% increase though that period, Evans Data projects.  India's software development growth rate is attributed, in part, to its population size, 1.2 billion, and relative youth, with about half the population under 25 years of age, and economic growth.India's services firms hire, in many cases, thousands of new employees each quarter. Consequently, IT and software work is seen as clear path to the middle class for many of the nation's young.For instance, in one quarter this year, Tata Consultancy Services added more than 17,000 employees, gross, bringing its total headcount to 263,600. In the same quarter of 2010, the company had about 150,000 workers. Its real GDP growth has been about 8% over the last decade, but there are signs that growth rate may fall and that could lead to adjustment in the projections, the report said.

Who is affected by big currency movements? - Some of the largest economies in Asia have seen big movements in the value of their currencies in recent months. Other than domestic factors, the potential tapering off of the US Federal Reserve's cheap cash injections is partly responsible for the volatility. The US central bank's moves had allowed billions of dollars of inflows into emerging economies, and now that money is leaving and it is having an impact on their economies. For some countries in the region which rely on exports to drive growth, it helps to have a weaker currency. For others that have to import a lot of what the country needs, it is not beneficial. Our correspondents around the region have been finding out how the currency movements are affecting people and businesses.

Which Countries Are Economic Winners and Losers? - Economic growth in the U.S. and Japan is set to pick up in the months ahead, while Russia and Brazil appear set for slowdowns, according to the Organization for Economic Cooperation and Development‘s composite leading indicators. Released Monday, the composite leading indicators for May underlined the multispeed nature of the global economic recovery, with Germany expected to lead a modest revival in the euro zone, while growth in France is set to remain weak. Among other large developing economies, China is set to grow at around its long-term trend rate, while the outlook for India is uncertain. “Composite leading indicators…point to diverging growth patterns in major economies,” the OECD said. The divergence in growth prospects among major economies is proving a headache for policy makers and a source of high volatility in global financial markets. With the U.S. set to grow more strongly, central bankers in Europe last week told investors that the weaker growth prospects faced by the euro zone and the U.K. mean the European Central Bank and the Bank of England won’t move as rapidly as the U.S. Federal Reserve to reduce and begin to withdraw stimulus. That guidance was intended to prevent rising U.S. government bond yields from leading to an increase in borrowing costs in Europe that would hinder what is already likely to be a tepid recovery.

I.M.F. Cuts Global Growth Forecast - The International Monetary Fund trimmed its global growth forecast on Tuesday for the fifth time since early last year due to a slowdown in emerging economies and the woes in recession-struck Europe.  In its mid-year health check of the world economy, the Washington-based lender also warned global growth could slow further if the pull-back from massive monetary stimulus in the United States triggers reversals in capital flows and crimps growth in developing countries. The IMF shaved its 2013 forecast for global growth to 3.1 percent, as fast as the economy expanded last year and below the Fund's 3.3 percent projection in April. It also lowered its forecast for 2014 to 3.8 percent after earlier predicting a 4 percent expansion. The Fund has trimmed its growth forecast for 2013 in every major report since April 2012 after initially projecting the global economy would expand by as much as 4.1 percent this year, a sign of the unexpectedly bumpy recovery from the global financial crisis.  In an update of its World Economic Outlook report, the IMF said it underestimated the depth of the recession in Europe, and had not expected the United States to go ahead with growth-stunting spending cuts.

IMF update highlights global economic slide -  The IMF cut its forecast for global growth to 3.1 percent for 2013, after projecting a 3.3 percent expansion in April, and lowered its forecast for 2014 to 3.8 percent, after previously predicting a 4 percent expansion.It pointed to three major factors as being responsible for the slowdown: disappointing growth in emerging market economies, a deeper than expected recession in the euro area as a result of low demand and depressed confidence, and slower than expected growth in the US economy, due to cuts in government spending.The update noted that while “old risks” to global growth remain “new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies.” In other words, there is no prospect of growth in these economies compensating for the low growth in the United States and the continued recession in Europe. The euro area is expected to contract by 0.6 percent in 2013 and grow by just 1 percent in 2013.The contraction in Europe is not only the product of the slump in the so-called periphery countries. IMF chief economist Olivier Blanchard said that even in the core economies of France and Germany “there seems to be a general lack of confidence in the future”—a remark that was borne out the next day when German industrial output fell by 1 percent in May, twice the expected drop.

IMF cuts growth forecast for U.S., world economies -- The International Monetary Fund is predicting tougher times for both the U.S. and world economies, in part because of possible actions by the Federal Reserve. In its latest quarterly World Economic Outlook report, the IMF cut its global growth outlook for 2013 and 2014 by 0.2 percentage points from the April report. The fund now expects this year's growth to be 3.1 percent and next year's, 3.8 percent. The report said new risks had emerged since April in three areas. First, growth continued to disappoint in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support. Second, the recession in the euro area was deeper than expected, as low demand, depressed confidence, and weak balance sheets interacted to exacerbate the effects on growth and the impact of tight fiscal and financial conditions. Third, the U.S. economy expanded at a weaker pace, as stronger fiscal contraction weighed on improving private demand.

Revised Down: Shifting Forecasts in Emerging and Advanced Economies - The International Monetary Fund cut its global growth outlook for this year and next.. The IMF explained its lower forecasts: “Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals.” The following are the Fund’s forecasts for year-over-year growth in developing economies, and how they have shifted from their previous forecasts in April.

Economic crisis lowers birth rates - - The economic crisis has put measurable pressure on birthrates in Europe over the last decade. On average, the more the unemployment rose, the greater the decrease in fertility compared to the number of children per women expected without the crisis. This is the result of a new study performed by the Max Planck Institute for Demographic Research (MPIDR) in Rostock, Germany. The largest effect was seen in young adults. Europeans under the age of 25 have especially refrained from having children in the face of rising unemployment rates. The drop of children per woman was strongest for first births. That means, over the last decade young Europeans have particularly postponed family formation. Whether this leads to fewer children throughout their life is an open question. Right now most might just intend to postpone when they have children, not if they have children. "Fertility plans can be revised more easily at younger ages than at ages where the biological limits of fertility are approaching," . In fact, among those over 40, birth rates of first children didn't change due to rising unemployment.

Aging Demographics to Crunch Global Growth - Yves Smith - I don’t mean to make an object lesson of the author of this piece, van Onselen, since the point he is making, about demographics as a driver of growth, is valid from the vantage point he is taking. But this perspective is simultaneously frustrating to contend with. First, the discussion of dependency ratios (the ratio of people in the income-producing part of the economy versus those no longer earning a paycheck, such as children, students, and retirees) assumes that people of normal working age can actually find work. In virtually all advanced economies, that still is not the case, and is not going to be the case any time soon. So worrying about dependency ratios shouldn’t even be a first order concern; what about getting people who want a job some employment? And the dirty secret there in the US, and I suspect again in a lot of advanced economies, was that there was a lot of un and under-employment even prior to the bust. I can tell you in my cohort I know of way too many people who retired early (as in far more modestly than they wanted to) or were working part time not by choice. These were all people with advanced degrees and strong to very impressive resumes. Basically, if you are older and have any real skills and fall off the corporate/big institutional ladder, the drop is far indeed.  Second is I’m not sure we’d see lower dependency ratios if we had enough jobs. While there are a lot of jobs that are still taxing enough physically to necessitate retirement by 65, and rising diabetes will also curtail some career lengths, lots of people who comment on the blog clearly intend to work past 65 if they can because they must. They don’t have enough stashed away to retire. Another issue is we really DO need to figure out, at least for one or probably several transitional generations how to live with higher dependency ratios, because that’s what you get if you stabilize or shrink the global population which we desperately need to do if we are to have anything resembling civilization 150 years from now.

Eurozone jobless rate worse than OECD average - - The unemployment landscape in the eurozone worsened slightly in May, diverging further from the overall rate of 8.0 percent in advanced countries, the OECD said on Tuesday. The rate in OECD countries was 8.0 percent in May for the third month running but in the eurozone it edged up to 12.2 percent, the highest level for about 20 years, the OECD said. Overall, 48.5 million people were unemployed in the 34 OECD countries in May, regular monthly and harmonised OECD data showed. This meant that 100,000 people had swelled the total of unemployed in the month, and that 13.8 million people had joined the mass of unemployed people since July 2008 when the financial crisis began.The Organisation for Economic Cooperation and Development noted that the gap between the average OECD unemployment rate and the situation in the eurozone was widening, to 4.2 percentage points from 1.7 percentage points in July 2008.

Dispatch From Europe: Learning, or Not, From Policy Mistakes - In contemplating American political gridlock, I’ve often written that one of the most disconcerting aspects of our current economic policy is an inability, or at least an unwillingness, to diagnose what’s wrong and prescribe solutions. Still, our economy is resilient and flexible, our central bank has been aggressively applying monetary stimulus (while fruitlessly importuning Congress to help), and our currency is our own and the one other countries hold in reserve.It’s worse in Europe. In France, growth is flat-lining if not slightly negative, and unemployment is creeping up on 11 percent. But at least among economic elites, many continue to defend the fiscal consolidation, or austerity measures, that have reduced the French budget deficit, e.g., from 7.5 percent of gross domestic product in 2009 to 4.8 percent last year (according to Eurostat). These numbers came up in a discussion with one French economist who insisted the nation’s main economic problem was politicians’ refusal to lower the deficit. When these declining deficit values were pointed out, her response was, “It should be 3 percent.” Another prominent economist argued that my criticisms of austerity measures must be wrong because the American budget cuts prescribed by sequestration don’t appear to be hurting our economy. Except for the fact that (a) they are, and (b) “not hurting” is not equal to “helping.” In fact, the essential problem with the debate in Europe is the same as in the United States: reducing deficits and debt is seen as a solution in and of itself, not as the outcome of actual solutions. Let me explain.

What’s behind the ECB’s flat “learning curve”? - Yesterday I complained that the ECB learning curve was too flat. This summer – as in that of the two previous years – it has taken action to ease the crisis in response to rising fears of implosion. This time it offered “forward guidance” that rates would stay low (and the ECB would not follow the Fed in embarking on tighter policy). But at no point has it taken the decisive action needed to put the crisis behind us or – at the risk of mixing metaphors – to get ahead of the curve.Of course, to speak of a “learning curve” when referring to a whole institution is a sort of poetic licence. In fact each of the constituent parts of that institution has its own state of knowledge, its favoured interpretation and its own interests. And so it is no surprise to learn from today’s SPIEGEL  (auf deutsch) that the ECB’s governing Council is divided. More specifically, Bundesbank President Weidmann is apparently continuing his campaign to prevent the central bank from effectively acting to acting to bring about economic recovery. Monetary policy has already done  more than it should. Instead: efforts are needed on two fronts: structural reforms as well as the abolition of implicit guarantees for banks and sovereigns.

Germany's Recovery in Question as Exports Decline Significantly - German exports declined in May at their fastest pace since 2009 because of the slowdown in key European and China markets, adding to worries that the country's recovery was losing momentum. The Federal Statistical Office said that exports declined by 2.4% in calendar-adjusted terms from the previous month to €90.4bn ($116bn/£78bn). Economists expected a 0.1% increase in exports. Germany's trade surplus declined to €13.1bn from €18bn in Apil. The surplus in the current account, a measure of all trade including services, was €11.2bn in June, down from €16.7bn. On a year-on-year basis, exports declined by 4.8%, primarily due to a 9.6% decline in demand from other countries in the euro area. Imports declined by 2.6% from the year-ago month.  Exports to the eurozone, where Germany sends 40% of its shipments, declined by 9.6% from the year-ago month, and exports to the European Union (EU) fell by 7.1%. Export demand from countries outside the EU declined by 1.6%, with the slowdown in China have an impact on trade. With the slowdown in the EU, many German manufacturers had looked at China, the second largest economy, as an alternative. The economy returned to modest growth of 0.1% in the first quarter and is expected to pick up further. The eurozone contracted in the first quarter of 2013, a sixth consecutive quarterly fall.

Europe's Cleanest Dirty Shirt Sees Exports Collapse & Production Plunge - Just when the jawboning from Europe is reaching its climax that Portugal is fixed again, Greece is fixed, and the core is showing green shoots from the near-depression, Germany (the corest of the core) comes out with its worst exports data since 2009. While imports remained stable - suggesting domestic demand is sustained for now - YoY export growth collapsed 3.2%, the worst tumble since November 2009 "illustrating that Germany's economy still has difficulties shifting into higher gear." The details are a horror-story. Exports to the euro-zone, where 40% of Germany's exports are sent, fell by a stunning 9.6% (while exports to the rest of the world dropped 1.6%). To add to the misery for the 'things are getting better' crowd, Germany's industrial production data missed expectations are dropped back into the negative YoY following the 'hope' inspiring positive YoY print in April that signaled all-is-well.

Wolf Richter: Blinded By Optimism, German Economy Now Below Stall Speed - The financial crisis was brutal for Germany, but the recovery was steep, and in 2011, the gloating started. They called it the German “success recipe,” a system that was somehow superior to any other. A key element in that “success recipe”- much to the chagrin of Germany’s beleaguered neighbors – is the relentless drive to export. The whole political and economic machine is geared that way. Foreign policy decisions are made on that basis. As are domestic policy decisions. In return, the economy has become dependent on exports and outsized trade surpluses. But exports tumbled 4.8% in May from a year earlier, to €88.2 billion, the worst month so far this year. For the first five months of 2013, exports were below the same period last year. Exports to non-euro EU countries, such as the UK, dropped 2.4%. Exports to Eurozone countries – in a magnificent display of the fiasco that the euro has become – plummeted 9.6%. For the month, the Eurozone bought 36.6% of Germany’s exports and the non-euro area 20.0%. While periphery countries have been struggling for years, with demand collapsing in some, it’s France that Germany is most worried about. It buys about 10% of Germany’s exports, more than any other country, but it’s slithering deeper into a full-blown economic crisis with unemployment at record highs, with the auto industry – a key export sector for Germany – in a death spiral, and with consumer demand flagging. Even exports to the rest of the world skidded 1.6%. It was the worse May decline since 2009.

Austerity Won’t Work if the Roof Is Leaking - I Recently spent a week in Berlin, where the entire city seemed under construction. In every direction, cranes and other heavy equipment dominated the landscape. Although many projects are in the private sector, innumerable others — including bridge and highway repairs, new subway stations and other infrastructure work — are financed by taxpayers.  But wait. Hasn’t Germany been one of the most outspoken advocates of fiscal austerity after the financial crisis? Yes, and that’s not a contradiction. Fiscally responsible businesses routinely borrow to invest, and so, until recently, did most governments.  . The Germans, of course, yield to no one in their distaste for indebtedness. But they also understand the distinction between consumption and investment. By borrowing, they’ve made investments whose future benefits will far outweigh repayment costs. There’s nothing foolhardy about that.  The German experience suggests how we might move past our own stalled debate about economic stimulus policy. In the aftermath of the economic crisis, the policy discussion began with economists in broad agreement that unemployment remained high because total spending was too low. Keynesian stimulus proponents argued that temporary tax cuts and additional government spending would bolster hiring. Austerity advocates countered that additional government spending would merely displace private spending and that we already had too much debt in any event. And the debate has languished there.

Euro zone's low growth to last some time: Nowotny - Ewald Nowotny, member of the European Central Bank's governing council, said Monday the current period of low growth in the euro zone will probably last for "some time." "We have had several years with low growth, and it is unfortunately so that in the euro zone there are several states where clear, positive growth can be seen, but also states where we already have two, three years of negative developments," Mr. Nowotny told journalists after a press conference at the Austrian Central Bank. Mr. Nowotny also said that should the global economy worsen, this would definitely have an effect on Europe, especially the weaker states. Mr. Nowotny's comments come after ECB executive board member Benoit Coeure said on Friday that a persistent slowdown in the euro-zone economy is a "worrisome possibility."

ECB cannot solve euro zone crisis: Bundesbank chief - The European Central Bank cannot solve the euro zone crisis, Bundesbank chief Jens Weidmann told economists on Sunday, pressing the bloc's governments to get their economies in shape and tighten their fiscal rules. Weidmann addressed an economists' conference in Aix-en-Provence, southern France, only three days after the ECB broke with precedent by declaring that it intended to keep interest rates at record lows for an extended period and may yet cut further. "Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis," Weidmann said in his speech. "This is the consensus of the Governing Council. The crisis has laid bare structural shortcomings. As such, they require structural solutions." Weidmann, widely recognized to be the most hawkish member of the ECB's 23-man Governing Council, does not want the bank to intervene too strongly in tackling the bloc's economic crisis, thereby allowing governments to soft-pedal reforms.

IMF Warns Euro Zone Risks Reviving Stress -- The International Monetary Fund on Monday warned that euro-zone officials risk reviving financial and economic stress amid a prolonged recession with a halting response to Europe’s crisis. Without assertive action, the IMF warned that progress made repairing the currency union could stall, potentially sending the economy back into a tailspin. “The centrifugal forces across the euro area remain serious and are pulling down growth everywhere,” the IMF said in its annual economic review of the currency union. “With unemployment especially among the youth at record levels, there is a risk of long-term damage to potential growth and to political support for reforms, including for further progress on [European Monetary Union] architecture,” the fund said. Prompt action on multiple fronts is required, the IMF said. Specifically, stronger support is needed by the European Central Bank, officials must implement a banking union as a soon as possible, and recapitalize weak banks with euro-zone bailout funds. The fund acts as the world’s emergency lender and economic counselor. Most of the fund’s current lending reserves are tied up in a handful of joint European bailouts. Coordinated and aggressive action could help fuel desperately needed growth. Unemployment levels continue to top record highs, particularly in the hardest-hit countries such as Greece, Portugal and Spain.

Euro zone grants multi-billion euro lifeline for Greece (Reuters) - Greece secured a 6.8 billion euro (5.8 billion pounds) lifeline from the euro zone on Monday, officials told Reuters, but was told it must keep its promises on cutting public sector jobs and other reforms in order to get all the cash. The deal, which spares Greece defaulting on debt that falls due in August, will see Athens drip fed support under close watch from its international creditors to drive through unpopular reforms.Under the terms of the deal, euro zone finance ministers agreed to make staggered payments of aid to Greece starting with a 2.5 billion euro instalment from euro zone countries in July, said officials close to the talks. The agreement foresees a further payment from euro zone countries of 500 million euros in October. Central banks in the Eurosystem will contribute 1.5 billion euros in July and 500 million euros in October, the officials said. The International Monetary Fund will give 1.8 billion euros in August. "That's the way it will be done," said one of the officials. 

Athens to receive staggered bailout funds in return for more job cuts - Greece is to be drip fed its next installment of bailout funds as long as it keeps cutting public sector jobs and implementing tax reforms. Athens has secured a 6.8 billion euro lifeline from the eurozone and International Monetary Fund (IMF), but as Eurogroup President Jeroen Dijsselbloem explained, it will only get the first installment if it shows creditors later this month that it is serious about further cuts. “Greece needs to carry out further work….to fully implement the required prior actions, before July 19, so that when national procedures are concluded, the next EFSF (European Financial Stability Facility) disbursement of 2.5 billion can be approved,” Dijsselbloem told reporters. Greece is expected to return to growth in 2014, albeit an anaemic 0.6 percent. But that is not enough for a country buckling under austerity measures. “Well, now the challenge is how to combine further fiscal adjustment with economic growth. I think all the effort now is there,” said Greece’s Finance Minister Yannis Stournaras

The unilateral extension of trade credit to the Italian government - An ongoing issue is that the government is simply delaying payments to private suppliers: Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector. The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers. There is also this: …[government] expenditures rose 1.3% in the first quarter, while revenues remained flat. You can read more here, hat tip Fabrizio Goria.  Right now the Italian state is taking an average of about six months to settle private bills, longest in the EU.  You can think of these delayed payments as a form of anti-stimulus of course.

The Italian Job - On Friday the IMF published the result of its Article IV consultation with Italy, where growth for 2013 is revised downwards from -1.3% to -1.8%.  In terms of public finances, a crude back-of-the-envelop estimation yields a worsening of deficit of 0.25% (the elasticity is roughly 0.5). This means that in the calculation I made based on the Commission’s numbers, the 4.8 billions available for 2013 shrink to 1.5 once we take in the IMF numbers. It is worth reminding that besides Germany, Italy is the only large country who can could benefit of the Commission’s new stance. And while we are at Italy, the table at page 63 of the EC Spring Forecasts (pdf) is striking. The comparison of 2012 with the annus horribilis 2009 shows that private demand is the real Italian problem.  The contribution to growth of domestic demand was of -3.2% in 2009, and -4.7% in 2012! In part this is because of the reversed fiscal stimulus; but mostly because of the collapse of consumption (-4.2% in 2012, against -1.6% in 2009). Luckily, the rest of the world is recovering, and the contribution of net exports, went from -1.1% in 2009 to 3.0% in 2012. This explains the difference in GDP growth between the -5.5% of 2009 and the -2.4% of 2012.

Crisis-Struck Europeans Losing Faith in Governments -Less than 10 percent of people in the European countries hardest hit by the sovereign debt crisis believe that their leaders are doing a good job at fighting corruption, reflecting a crisis of faith in government since the crisis crippled much of the euro zone in 2008, an anti-corruption group has found.  A global survey of people’s views on corruption by Transparency International, released on Tuesday, revealed a deep disconnect between elected leaders and the people they govern. Roughly half of the 114,000 people surveyed viewed political parties as the most corrupt institutions, and more than half think their governments are run by special interest groups, the survey showed.  The ‘'Global Corruption Barometer'’ is the widest survey conducted to date by the international corruption watchdog organization, based in Berlin. It asked people in 107 countries about their opinions of their governments and which institutions they see as the most corrupt.

German politicians likened Brussels bank powers to Nazi ‘enabling acts’ - The head of a Bavarian banking association compared the European Commission’s plan to grant itself the final say on winding up troubled banks to the type of law that allowed the Nazis to seize power. The comments by Stephan Götzl, head of the GVB, the Bavarian association of co-operative banks, underscore the depth of German opposition to the plans presented on Tuesday by Michel Barnier, EU commissioner for internal market and services.  “We in Germany have had a bad experience with enabling acts,” he said, appearing to refer to the 1933 constitutional amendment that handed the Nazis sweeping powers to enact legislation, unchecked by parliament. The remarks were first reported by the Wall Street Journal and confirmed later by a spokesman. The spokesman noted Mr Götzl had not specifically mentioned Hitler or the Nazis. “In our view, this proposal gives the commission powers it does not possess according to current [EU] treaties,” chancellor Angela Merkel’s spokesman said on Tuesday. Wolfgang Schäuble, Ms Merkel’s finance minister, also warned Brussels to respect the limits of the law or “risk major turbulence”.

Europe Resorts to Authoritarianism to Paper Over Banking and Austerity Failures - Yves here. Because the European slow-motion train wreck is turning out to be particularly slow, it’s almost become background noise in the US, almost a lesser version of the now two lost decades in Japan. But what is happing in Europe is less benign and less likely to be able to continue anywhere near that long.  Japan, despite its economic malaise, continues to rank at or near the top of advanced economies in social wellbeing indicators. Part of that may be that the island nation exaggerated how bad things were so as to allow it to run a really cheap currency (at least until the financial crisis induced the unwind of the yen carry trade) and maintain a robust export sector. But another big element was that Japan opted for a model of shared sacrifice (particularly an even further narrowing of the gap between average worker and executive pay) in order to maintain employment levels. By contrast, the Troika has lurched from the verge of crisis to verge of crisis so often that it’s not hard to adopt a “wake me when it’s about to be really over” posture. One can credit the Eurocrats with having perfected the art of doing the bare minimum to get them through successive emergencies without resolving any of the underlying issues. For instance, I’ve been remiss as far as commenting on the European plan, such as it is, for resolving failed banks. You might understand why after reading the money section of today’s discussion of it by Delusional Economics: Reuters has more on this point……the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. In practice, this means it could be very difficult to demand any such closure.Officials say the plan foresees tapping banks to build a war chest of 55 billion to 70 billion euros ($70 billion to $90 billion) but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.

Les Not So Miserables - Krugman -- Roger Cohen has a nice piece making, impressionistically, a point I’ve been meaning to make quantitatively: things are not as bad in France as a lot of Anglo-Saxon reporting would have you believe.  Dean Baker touched on one aspect the other day: youth unemployment. Yes, the unemployment rate among young French people is much higher than the rate here. But as Dean points out, the fraction of young people who are unemployed is about the same here and there. How is that possible? Because many fewer French college students have to seek work, thanks to vastly more generous scholarships.But there’s an even more striking comparison — one I learned from Dean. Let’s not look at unemployment rates, which can be distorted in the way we’ve just seen. Instead, look at employment rates — the fraction of the population that has a job. And break it down by age (pdf): Young French are much less likely to be working, as we’ve already mentioned. So are older French, because of policies that made early retirement financially attractive. But in prime working years, surprise! The French employment picture, at least as of late last year, was significantly better than ours.

Greek unemployment rate rises again in April --Unemployment has again topped records in Greece, as the government presses on with spending cuts and companies recoil from investment in a country stuck in recession for nearly six years. The Greek statistics agency Elstat Thursday said unemployment rose to 26.9% in April from 26.8% in March and 23.1% a year earlier. Young people continue to bear the brunt. Unemployment among those between 15 and 24 years of age rose to 57.5% in April from 51.5% in April 2012. The government is struggling to meet fiscal targets set by the European Union and the International Monetary Fund as a condition for continued financial assistance.

Portugal president’s call for national unity backfires - Silva’s call for a “national salvation” agreement between the ruling coalition and the main opposition party, leading to early elections in June 2014, was intended to restore calm following a government crisis triggered by the resignation of two senior ministers. But the president’s appeal for a cross-party deal in support of the country’s €78bn bailout programme prompted a fresh increase in bond yields on Thursday and hit share prices that had only just recovered from last week’s political turmoil. “Portugal is in a deeper crisis than it was a week ago,” said Ricardo Santos, an analyst with BNP Paribas. “The president sought to ease volatility, but he has almost certainly increased it.” Silva ruled out holding an immediate snap election, saying this would significantly increase the risk of Portugal needing a second bailout. But he called on the three parties to agree on holding an early ballot next June, a year ahead of schedule. Agreeing to Mr Cavaco Silva’s proposal would require António José Seguro, the opposition PS leader, to support €4.7bn in planned spending cuts and the potential laying off of tens of thousands of state workers, measures that he vehemently rejected until now. “It’s difficult to see how the president’s proposal can work given that the concessions involved could end the political careers of both the opposition leader and the prime minister,” said Mr Santos.

European Peripheral Bonds Plunge Most In A Year As Portugal Risk Flares - Following a handsome bounce driven by Draghi, Carney, and various Fed officials promising moar, peripheral European bonds and stocks are having a bad day (and week). Greece, Portugal, Spain, and Italy are all ending the week lower (after solid performance mid-week) with Germany's DAX seeing the benefits of a rotation from high-beta momo with a 5.1% rise on the week (the best week in 20 months!). Safe-haven flows dominated in bonds; Bunds rallied slightly more than Treasuries on the week but once again Peripheral nations collapsed. Spanish bond spreads jumped the most in a year. Italy was notably weak, but Portugal has seen spreads jump 28% in the last 2 weeks (the worst in over 3 years!). EURUSD had its best week in 5 weeks - and despite the peripheral collapse, Europe's VIX had its best (drop) week in 4 months ending at 19%.

Italy's Parliament Shut Down By Berlusconi's People Of Freedom Party Over Court Ruling - Silvio Berlusconi's party boycotted a summit of Italy's fragile coalition government and blocked parliamentary activity on Wednesday in protest against a supreme court decision to fast track a ruling that could ban him from public office. Legislative activity in both chambers of parliament was suspended for a day because of the protest by Berlusconi's People of Freedom (PDL) party, one of the two main partners in Enrico Letta's left-right coalition government.The court decision has aggravated tension in the squabbling coalition which was already under fire for the slow pace of reforms desperately needed to boost recovery from the worst recession since World War Two.  Beppe Grillo, leader of the populist 5-Star Movement which stunned Italy by winning an unprecedented quarter of the vote in a February election, said Italy was heading for catastrophe because of the government's failure to take extraordinary measures to tackle the economy.  He said Italy was like a pressure cooker "on the verge of blowing up" and called on President Giorgio Napolitano to call an election as soon as possible.

Italy's Parliament Shut Down By Berlusconi's People Of Freedom Party Over Court Ruling - Silvio Berlusconi's party boycotted a summit of Italy's fragile coalition government and blocked parliamentary activity on Wednesday in protest against a supreme court decision to fast track a ruling that could ban him from public office. Legislative activity in both chambers of parliament was suspended for a day because of the protest by Berlusconi's People of Freedom (PDL) party, one of the two main partners in Enrico Letta's left-right coalition government. The court decision has aggravated tension in the squabbling coalition which was already under fire for the slow pace of reforms desperately needed to boost recovery from the worst recession since World War Two. Beppe Grillo, leader of the populist 5-Star Movement which stunned Italy by winning an unprecedented quarter of the vote in a February election, said Italy was heading for catastrophe because of the government's failure to take extraordinary measures to tackle the economy. He said Italy was like a pressure cooker "on the verge of blowing up" and called on President Giorgio Napolitano to call an election as soon as possible.

Italy, desperation as every statistic heads the wrong way - In the past two quarters, for instance, hirings in Greece have exceeded firings, even though the economy remains in recession. French manufacturing has apparently stopped contracting and Spanish unemployment, the highest in the Western World, has fallen a bit. The exception is Italy. Almost every number is going in the wrong direction and a sense of desperation is hitting everyone from retailers and cabinet ministers, who have gone begging to the European Union for job-creation funds, to consumers and manufacturers, whose factory output has fallen by a quarter since the European crisis started in 2008. Italy matters because it is the euro zone’s third-biggest economy, with a gross domestic product about 20 per cent bigger than Canada’s. Its national debt load, at €2-trillion ($2.7-trillion), is Europe’s biggest. Jobs are vanishing by the minute. Youth unemployment is 40 per cent; it’s 50 per cent in southern Italy, to the delight of crime syndicate recruiters. Confederscenti, the Italian retailers’ association, says that three shops close for every one opening. Parts of some of Italy’s normally vibrant cities are becoming retail deserts. On May 31, Bank of Italy Governor Ignazio Visco said the recession “threatens to erode social cohesion.” He is evidently worried that Rome could burn like Athens did in the infamous riots of 2012.

The wheels are coming off the whole of southern Europe - Europe’s debt-crisis strategy is near collapse. The long-awaited recovery has failed to take wing. Debt ratios across southern Europe are rising at an accelerating pace. Political consent for extreme austerity is breaking down in almost every EMU crisis state. And now the US Federal Reserve has inflicted a full-blown credit shock for good measure. None of Euroland’s key actors seems willing to admit that the current strategy is untenable. They hope to paper over the cracks until the German elections in September, as if that is going to make any difference.  A leaked report from the European Commission confirms that Greece will miss its austerity targets yet again by a wide margin. It alleges that Greece lacks the “willingness and capacity” to collect taxes. In fact, Athens is missing targets because the economy is still in freefall and that is because of austerity overkill. The Greek think-tank IOBE expects GDP to fall 5pc this year. It has told journalists privately that the final figure may be -7pc. The Greek stabilisation is a mirage. Italy’s slow crisis is again flaring up. Its debt trajectory has punched through the danger line over the past two years. The country’s €2.1 trillion (£1.8 trillion) debt – 129pc of GDP – may already be beyond the point of no return for a country without its own currency. Standard & Poor’s did not say this outright when it downgraded the country to near-junk BBB on Tuesday. But if you read between the lines, it is close to saying the game is up for Italy.

Europe’s rich ‘could face uprising similar to Peasants’ Revolt’ - Europe’s rich Baby Boomers are behaving like the nobility in the Peasants’ Revolt, and could face an uprising by the younger generation if the situation doesn’t change, HSBC’s chief economist has warned. Stephen King warned that the widening wealth gap and sense of “entitlement” between older generations and cash-strapped youths had echoes of the conditions which led to the 1381 uprising of British peasants against the aristocrats who ruled them. “In those days, public spending was about warfare … resources had been severely curtailed as a consequence of the Black Death,” said Mr King. “The nobility wanted to continue as they had done previously. They did not change their ways even though there had been this terrible disease come through … there was an attempt to try and clamp down on tax evasion which led to the Plantagenet equivalent of men with baseball bats coming along to raise funds. “Those entitlements the Boomer generation are stuck to are imposing a significant cost to the younger generation … which over the long term is very disruptive to the performance of economies.” He said the Occupy movement and the London riots two years ago were the beginnings of what could develop into more widespread protests by youths, who feel they have been short-changed.

Mad Latvia defies its own people to join the euro - EU finance ministers have just given the go-ahead for Latvia to join the euro in January 2014. No matter that the latest SKDS poll shows that only 22pc of Latvians support this foolish step, and 53pc are opposed. This is a very odd situation. The elites are pushing ahead with a decision of profound implications, knowing that the nation is not behind them. No country has ever done this before. The concerns of the Latvian people are entirely understandable. Neighbouring Estonia found itself having to bail out Club Med states with a per capita income two and a half times as high after it joined EMU. Latvia may find itself embroiled in an even bigger debacle if the contractionary fiscal and monetary policies of the eurozone push Slovenia, Portugal, Spain, and Italy over a cliff, and push Greece and Cyprus into yet deeper crisis.

Rationality and the Euro - Paul Krugman  - Simon Wren-Lewis, for once, has a happy story to tell. He looks back at Britain’s fateful decision, ten years ago, not to join the euro, and argues that the decision was made on the basis of — gasp! — actual analysis. Gordon Brown (who deserves a much better rap than he gets) brought in real economic experts, who used a real economic framework — optimum currency area theory — and concluded that the case for euro membership was not good. And boy, was that a good call; despite the best efforts of Osborne and Co. to mess it up, there’s no comparison between British woes and those of other European nations that had large capital inflows and housing booms. Partly this is because of the De Grauwe point, which was imperfectly grasped in 2003 — the crucial importance of having your own central bank as lender of last resort for sovereign borrowing. But it’s also largely because of a point that was perfectly well understood in 2003 and has been confirmed by experience: “internal devaluation”, reducing relative prices with a fixed exchange rate, is really hard compared with just devaluing your currency. Here are BIS estimates of the Spanish and UK real exchange rates, 1999-01 = 100:

‘When the facts change, the IMF won’t change its mind’ - Beyond detailing an upgrade to the growth forecast, the United Kingdom goes completely unmentioned in the International Monetary Fund's update, published on Tuesday, to its World Economic Outlook. No reason it should be mentioned; there are more important economies in the world. Yet there is perhaps another reason for the omission, which is to spare the IMF's blushes at having been proved basically wrong about the UK. Only last April at the IMF spring meeting, the IMF's chief economist, Olivier Blanchard, singled the UK out for special criticism for "playing with fire" by imposing too fierce an austerity programme. The message was repeated in slightly more diplomatic form in the IMF's later "Article IV" assessment of the UK economy. Quite how he figures this for a country which will continue to run a Budget deficit in excess of £100bn a year for the next three years on current plans is anyone's guess, especially as the strictures were not repeated for some other, less fiscally challenged major economies. With growth coming in better than predicted, the IMF is now being forced to eat its words. Not that there was any sign of it at the IMF's later press conference. No, the IMF was not changing its advice, Thomas Helbling, divisional chief for the IMF's world economic studies, told The Daily Telegraph's Philip Aldrick. The upgrade to the forecast apparently only reflected better data for the year to date, rather than any fundamental improvement in the UK outlook, he said.

‘Debt peril’ awaits 1.25m UK households if rates rise - FT.com: Up to 650,000 more UK households face “debt peril” if mortgage rates rise unexpectedly before the economy returns to full strength, a think-tank warns. The Resolution Foundation said on Thursday that 1.25m households would have to spend half their disposable income on repayments by 2017 if the Bank of England’s official rate rose 2 percentage points higher than forecast without a recovery in wage growth. While more people between 35 and 50 borrowed heavily than other age group, a surprise rise in mortgage rates would hit younger borrowers disproportionately, according to the research. Families with children were more at risk from “debt peril” than childless couples and single adults. The poor were also more vulnerable – 7 per cent of the poorest fifth of households would see more than half their income eaten up by debt repayments if rates rose unexpectedly, compared with 3 per cent of the richest fifth. The study highlights the threat to recovery posed by UK households’ high debt burden, accumulated during the boom years.