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

Saturday, July 20, 2013

week ending July 20

U.S. Fed balance sheet grows 7 straight weeks (Reuters) - The U.S. Federal Reserve's balance sheet grew for a seventh week in the latest week as the U.S. central bank increased its holdings of Treasuries and mortgage-backed securities, 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 $3.495 trillion on July 17, compared with $3.462 trillion on July 10. The Fed's holdings of Treasuries rose to $1.962 trillion as of Wednesday, from $1.953 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) increased to $1.235 trillion from $1.208 trillion from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $66.52 billion, down from $69.18 billion from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $13 million a day during the week, compared with $14 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 18, 2013 - Federal Reserve Statistical Release

Fed’s Tarullo: Policy to Remain Accommodative - Federal Reserve officials will not rush to raise interest rates when the central bank hits the unemployment and inflation targets it has set out, a top Fed official said Monday. Fed governor Daniel Tarullo echoed comments made last week by Fed Chairman Ben Bernanke in trying to calm investors and other financial market participants that the central bank does not plan to step away from its easy-money stance even as it contemplates slowing down its monthly large-scale asset purchase program. There has been considerable market volatility connected to uncertain perceptions about what the Fed plans to do as officials discuss how to eventually unwind the extensive accommodations made since the onset of the financial crisis. Mr. Tarullo said he was not surprised by the volatility, predicting more market swings in the future as investors gauge how to respond to the central bank’s plans. He said it was important to make clear the Fed will not immediately start to unwind or sell the billions in securities it has been buying as part of its $85 billion-a-month bond-buying program once it decides to start slowing its purchases. “What we’re talking about here is eventually a reduction in the number of purchases per month, and then eventually a cessation of new purchases. No one is talking about unwinding or selling the securities we’ve been buying,” Mr. Tarullo said.

Fed’s George: Time to Taper Fed Bond Buys, End in 2014 - The Federal Reserve‘s highest-profile internal critic on Tuesday renewed her call for the central bank to wind down its bond-buying program, amid an improving economic landscape. Federal Reserve Bank of Kansas City President Esther George told a conference at her bank that she would like to see the central bank “systematically” begin to slow the pace of its Treasury- and mortgage-bond buying very soon, and end the purchases some time in the first half of next year. “We are on a steady and sustainable growth path,” amid better news about the job market and a recovery in the housing sector that together will likely contribute to growth of around 2% this year, Ms. George said. The official allowed that the current unemployment rate remains high, but she said there are limits to what monetary policy can do for a jobs market that is in any case in the process of healing “I see the progression of this recovery and this gradual movement to a more normal interest rate environment as a welcome development,” she said, although she noted that change in direction for monetary policy could bring about some volatility in markets. Ms. George noted that higher bond market yields could bring benefits for banks and for savers, who have been hard hit by the Fed’s express desire to keep rates very low in a bid to push investment into riskier areas, in a bid to spur growth.

Some on Fed Want Thresholds Turned Into Triggers - As it stands now, the Fed says it will keep in place its zero-percent short-term rate policy so long as the jobless rate (now at 7.6%) is above 6.5%, provided expected inflation stays under 2.5%. If the jobless rate were to fall below that mark in a climate where future inflation was expected to be under 2.5%, many Fed officials say the central bank could well refrain from raising rates. The Fed adopted these thresholds in a bid to replace what had been a calendar-based guidance system. The Fed had been saying rates would likely stay very low for a fixed period of time, in a regime that increasingly left most central bankers cold due to its lack of responsiveness to changing economic circumstances. Fed officials believed the rate increase thresholds offered clearer guidance on the factors that would drive a tightening in policy, while granting them some discretion to act as they saw fit. And more broadly, central bankers thought when they can provide more concrete guidance about the future of rates, it can boost the potency of monetary policy now. Mr. Plosser thinks if the Fed wants to be clearer about the outlook, rate increase triggers are the key. “There is a fundamental tension between wanting to provide clarity as to the forward course of policy and wanting to maintain complete

The Fed's latest dilemma - The Fed continues to be divided over the next steps for its unprecedented monetary expansion program. Varying interpretations and conflicting headlines in the press leave the public bewildered and frustrated. But now the Fed has a new problem. The central bank's securities purchases are financed with bank reserves, which have been rising steadily in 2013 (chart below). And to many on the Fed that was justifiable as long as US commercial banks continued to expand their balance sheets. But recently that expansion has stalled. To some this calls into question the effectiveness of the whole program, since the transmission from reserves into credit is so weak. The Fed is now facing the following choices:
1. slow the purchases and run the risk of shrinking credit and rising interest rates or
2. continue with the program and risk QE "side effects" without the needed credit expansion (which has stalled).
That's why we are likely to see the Fed even more divided going forward, adding to more uncertainty and frustration by investors (including those outside the US) as well as the public

Bernanke: Semiannual Monetary Policy Report to the Congress - Federal Reserve Chairman Ben Bernanke testimony "Semiannual Monetary Policy Report to the Congress" Before the Committee on Financial Services, U.S. House of Representatives (starts at 10 AM ET): I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions--which have tightened recently--were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

Key Passages From Bernanke’s Testimony - Federal Reserve Chairman Ben Bernanke highlights risks to the Fed’s economic outlook in his prepared testimony to Congress Wednesday. Here is a look at key passages in the testimony and what they signal:

  • 1) WHAT HE SAID: “The risks remain that tight fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”
  • WHAT IT MEANS: Lots of focus on downside risks here, which is striking because the Fed said in its June policy statement that downside risks to the economy had diminished. That’s a slightly “dovish” tilt toward easy money.

Bernanke says tapering not on ‘preset’ path — The Federal Reserve’s proposed timetable for tapering its $85 billion-a-month bond-buying program is not set in stone, Chairman Ben Bernanke said on Wednesday in fairly dovish prepared remarks to a Congressional panel.  “I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Bernanke said in remarks prepared for delivery to the House Financial Services Committee. Bernanke repeated his guidance from mid-June that the Fed anticipates it will be appropriate to begin to moderate the pace of the $85 billion asset-purchase plan “later this year,” and end them “around midyear” in 2014, if the economy evolves as forecast. If economic conditions were to improve faster that expected, the pace of asset purchases could be reduced “somewhat more quickly.” “On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” Bernanke said.

Fed Watch: Bernanke Takes a Dovish Stance - Federal Reserve Chairman Ben Bernanke traveled to the House today to deliver his final Monetary Report to Congress. While he reiterated many of his previous comments surrounding quantitative easing and interest rates, Bernanke leaned on the dovish side of the equation in his testimony and Q&A. Bernanke continues to emphasize the distinction between asset purchases and interest rates as well as the data dependent nature of both. Overall, like his comments last week, Bernanke leaves me less confident of a September taper. Such uncertainty, I think, is one of his objectives.  At the onset of his testimony, Bernanke suggests that economic activity is broadly consistent with the Fed's forecast: The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy. But he quickly raises a red flag: Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully. Bernanke's assessment of the labor market is also mixed:  Conditions in the labor market are improving gradually...Despite these gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high. Then comes the decidedly dovish inflation outlook: Meanwhile, consumer price inflation has been running below the Committee's longer-run objective of 2 percent.

Bernanke: Broad Support on FOMC for 7% Jobless Rate Guidepost on QE - Federal Reserve Chairman Ben Bernanke said Wednesday that there was “broad support” among Fed officials for the 7% jobless rate he cited in mid-June as the level of unemployment there was likely to be when the Fed shuts down its $85 billion-per-month bond-buying program. At his June 19 press conference following a two-day Fed policy meeting, Mr. Bernanke sketched out a tentative timeline for the Fed to wind down and ultimately end the bond-buying program, if the economy continues to improve in the way the Fed expects. As part of that timeline, Mr. Bernanke said that the unemployment rate would likely be about 7% when the program is completed, which would be mid-2014, under the tentative timeline. There had been some curiosity about where the 7% figure came from since the number did not appear in the minutes from the June 18-19 policy meeting. Asked about it by Rep. Spencer Bachus (R., Ala.) during a hearing Wednesday, Mr. Bernanke said that at the meeting “there was good support for both the broad plan that I described and for the use of 7% as indicative of the kind of improvement we’re trying to get.” He stressed that the 7% is not a target the Fed is aiming for, but rather was meant to “be indicative of the amount of improvement we want to see in the labor market.”

Bernanke's Testimony - Profits are Ahead of Jobs - Profits over people is certainly the new America and Federal Reserve Chair Ben Bernanke just acknowledged that reality in testimony today. Profit Recovery Has Preceded Job Recovery Zerohedge picked up Bernanke's statement and generated this fast reality graph of the S&P versus jobs, copied below.  As the graph grotesquely shows, corporations are doing great while the American people suffer. Federal Reserve Chair Ben Bernanke testified before the House of Representatives Committee on Financial Services today and the world was all ears.  Bernanke was presenting the semi-annual monetary policy report and Wall Street wants to know if they continue to bet on free money, otherwise known as quantiative easing.  First, Bernanke acknowledged the terrible employment conditions. The jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high.  Then, the Fed is justifying continuing their quantitative easing based on the terrible employment conditions, which all things considered sure doesn't seem to be doing much for American labor. We intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. The quantitative easing end game hasn't changed either.  The below is just a reiteration of previous announcements. We expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective.

QE’s Fiscal Benefits Outweigh Any Fiscal Costs - The potential for future losses at the Fed is explored in a recent Fed study (Carpenter et al. 2013 [pdf]) and a study by staff at the International Monetary Fund (IMF 2013) [pdf], which show that Fed profits are likely to decline below normal for a few years in the future, especially if the Fed is forced to raise interest rates sharply to fight a surge in inflation.The Fed does not mark its assets to market value, and in any case, as the monopoly provider of legal tender, the Fed does not need to have a positive net worth.2 But, depending on how long interest rates remain at these levels, the Fed might not have any profits to remit to the Treasury for a long time. By itself, this would increase the federal budget deficit and gradually raise our national debt over time. But future losses to the Fed from this hypothetical event are only part of the picture. To gauge the overall effect of QE on the US national debt burden, one reinforcing factor and four offsetting factors must be considered. The reinforcing factor is that any rise in interest rates above the pre-QE level would raise Treasury’s borrowing cost temporarily. The offsetting factors are that (1) prior to any rise in interest rates, the Fed would have earned extraordinarily high profits from QE for several years; (2) prior to any rise in interest rates, the Treasury would have been able to borrow at extraordinarily low rates for long terms; (3) higher economic growth and higher inflation created by QE would raise tax revenues; and (4) higher inflation erodes the real value of the debt.

Central Banking Needs Rethinking - Bhidé and Phelps -- Monetary policy might focus on the manageable task of keeping expectations of inflation on an even keel—an idea of Mr. Phelps's in 1967 that was long influential. That would leave businesses and other players to determine the pace of recovery from a recession or of pullback from a boom.Nevertheless, in late 2008 the Fed began its policy of "quantitative easing"—repeated purchases of billions in Treasury debt—aimed at speeding recovery. "QE2" followed in late 2010 and "QE3" in autumn 2012. Fed Chairman Ben Bernanke said in November 2010 that this unprecedented program of sustained monetary easing would lead to "higher stock prices" that "will boost consumer wealth and help increase confidence, which can also spur spending." It is doubtful, though, that quantitative easing boosted either wealth or confidence. The late University of Chicago economist Lloyd Metzler argued persuasively years ago that a central-bank purchase, in putting the price level onto a higher path, soon lowers the real value of household wealth—by roughly the amount of the purchase, in his analysis. (People swap bonds for money, then inflation occurs, until the real value of money holdings is back to where it was.)

There Is No Liquidity Trap: Understanding 21st Century Monetary Policy - With short-term interest rates near zero in the major advanced economies, bloggers and pundits have argued about whether we are in a “liquidity trap,” in which monetary policy is no longer able to boost spending and economic activity. The liquidity trap hypothesis has some validity, but only if one arbitrarily restricts the definition of monetary policy to purchases of short-term risk-free bonds. There is no economic reason, and not even a historical precedent, for such a limited view of monetary policy. A broader view of monetary policy shows that we are far from any liquidity trap and it is difficult to imagine that we ever could be in a liquidity trap. Monetary policy consists of printing money to buy assets. This is true whether the aim is to lower the federal funds rate, the mortgage rate, or any other rate of return. Fiscal policy consists of selling assets to buy goods, cut taxes, or increase transfers. (Milton Friedman’s famous “helicopter drop” of money to fight deflation is really a combination of monetary and fiscal policy.) As long as there exist assets whose price would be pushed up (and rate of return pushed down) by extra demand, monetary policy remains effective and there is no liquidity trap. Fiscal policy may be a useful alternative or complement to monetary policy in certain circumstances, but it is not a necessary alternative even when the short-term risk-free interest rate is zero.

Fed Watch: Changing the Mix, Not Level, of Accommodation - Brad DeLong says that I confuse him, but nicely places the blame on Federal Reserve Chairman Ben Bernanke. And, truth be told, I have to admit to some confusion, as it it difficult to see how we arrived at this whole tapering debate in the first place. The data simply doesn't lead you to it. So how did the Fed get here?  It is difficult to say the path of activity has meaningfully accelerated. For all of the drama that can surround the quarterly GDP report, the economy has been growing at a pretty steady pace since the recession ended:And the improvement in the job market in recent months is really less than meets the eye. The twelve-month moving average of job growth is pretty stable and arguably lackluster:To be sure, with a hand from declining labor force participation, the unemployment rate is also on a steady downward marchBut at 7.6 percent still too high, as too are measures of underemployment. Moreover, one would think that the recent path of inflation would in and of itself end any discussion of tapering:  It looks as though we started the tapering discussion solely on the expectation that the data would soon improve as the impact of fiscal contraction waned. Yet that seems very premature given the levels of inflation and unemployment. There really doesn't seem to be a reason that we needed to have this discussion now rather than at least until after we saw third quarter GDP.

When you’re rattled by collateral, do the Fed taper talk - Tim Duy, professor of practice at the department of economics at the University of Oregon, is confusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fed seems to be striving to change the mix but not the level of outright accommodation. This, at least, seems to be the motivation for taper talk. We’re less confused, and quite like what Duy is saying.Note the following (our emphasis):Bernanke is talking as if the goal is to change the mix of monetary policy but not the level of accommodation, essentially trading some reduced accommodation from ending asset purchases for additional accommodation by extending the forward guidance on interest rates. But why? If the level of accommodation is the same, does the mix matter? That’s an interesting question - does the Fed have research saying the mix matters, and why?I can see two reasons. One is that somehow asset purchases have a more negative distortionary impact. Another is that there exists an internal bias in the FOMC against expanding the balance sheet. Arguably, some elements of both where on display in Bernanke’s testimony today: The second reason for increases in rates is probably the unwinding of leveraged and perhaps excessively risky positions in the market. It’s probably a good thing to have that happen, although the tightening that’s associated with that is unwelcome. But at least the benefit of that is that some concerns about building financial risks are mitigated in that way and probably make some FOMC participants comfortable with this tool going forward. The point is simple. For some reason, Bernanke and the Fed have opted to rein in asset purchases in favour of pure interest rate steering. In Duy’s opinion there are two possible reasons for this: one is that the Fed is aware of some sort of negative side-effect associated with asset purchases that it wishes to suspend, the other is that the body is getting uncomfortable with ongoing balance sheet expansion. This is a fair observation.

No tapering yet for global central banks - In the past decade, the world’s central banks – first in the emerging and then in the developed world – have embarked on a Great Expansion in their balance sheets which is unprecedented in modern times. This blog sketches the anatomy of the Great Expansion and attempts to project what will happen as the US Federal Reserve tapers its asset purchases in the next 18 months.The latest episode in the saga has, of course, involved the Fed’s attempt to distinguish between “tapering” and “tightening”, a distinction which the markets have been reluctant to recognise [1]. The US forward interest rate curve shows the first rate increase occurring very close to the time when the Fed is planning to stop buying assets in mid-2014. Whether it intended to do so or not, the Fed has de facto tightened US monetary policy conditions and will have to work hard to reverse this. However, more surprisingly, the Fed’s recent guidance has not only tightened US monetary conditions, but has also tightened conditions everywhere else in the world. Global bond yields are up by 70 basis points in the past two months and emerging market assets have fallen sharply. This would imply that the markets are expecting the overall amount of support from the world’s central banks, not just the Fed, to diminish in the period ahead.

Market Reaction to Fed Tapering Worries ‘Exaggerated,’ Sri Lanka Central Bank Head Says - The market reaction to the threat of the Federal Reserve tapering its stimulus program later this year has been “exaggerated,” especially since many policymakers have already prepared for the possibility, the head of Sri Lanka’s central bank said Wednesday. Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka, said it’s no surprise the Fed would need to scale down its asset purchases at some point. Sri Lanka’s central bank, for example, has been preparing for this eventuality since the second round of Fed bond-buying, also known as quantitative easing or QE, he said in an interview Wednesday. “It’s a bit of an exaggerated reaction particularly because we have seen the Fed’s measures…Those were all going to be temporary measures,” he said. “It’s not something which has to be taking people by surprise.” Sri Lanka starting preparing for the Fed’s stimulus unwinding by maintaining a limit on foreign investor holdings in its local currency government bond market, and only gradually increased the cap over time. Currently foreign investors can only hold about 12.5% of Sri Lankan local currency government bonds. That cap has helped maintain demand for these notes and drawn in long-term investors rather than hot money, he said. Of course, less Fed stimulus can still result in some capital outflows from the country, he added. Funds dedicated to Sri Lanka bonds, for instance, have seen net outflows of $106 million since May 29, though for the year they’ve taken in a total of $36.6 million in new money

JPMorgan: don't confuse dovish comments on rates with "tapering" - This was the gist of Bernanke's statement on July 10th:  MNI: - "We've said that we will not raise interest rates at least until unemployment hits 6.5% as long as inflation is well behaved," but, he stressed, "again, as I've said before, that 6.5% is a threshold not a trigger. There will not be an automatic increase in interest rates when unemployment hits 6.5%."  Rather, Bernanke said, "given weakness in the labor market - the fact the unemployment rate probably understates the weakness of the labor market - and given where inflation is, I would suspect it may be well some time after we hit 6.5% before rates reach any significant level.  Even though the Q&A came across quite dovish, JPMorgan's analysts are convinced that the Chairman was referring to the Fed Funds target rate only. The Fed is giving itself room to keep the overnight rates low even if the unemployment rate dips below 6.5%. JPMorgan: - We heard those comments as dovish on the outlook for interest rates, but doing little to counter the notion that tapering will occur relatively soon. Nothing in this week’s developments led us to question our view that tapering in September is coming, conditional on the data cooperating.

Fed Watch: Time To Move On - Looking back at the last month, it seems evident that we moved through a policy inflection point. Eventually, improving economic activity would prompt the Federal Reserve to begin normalizing policy. To be sure, the process is not likely to be quick, but it will happen. As labor markets improved, housing prices rose, and asset prices climbed, policymakers would start to believe that the costs of quantitative easing would be rising relative to the benefits. Thus the first stop on that journey to normalized policy would be to scale back the pace of asset purchases. At this point, market participants have largely absorbed the news the quantitative easing would be phased out in the months ahead. Once this became evident, US Treasury securities were no longer a one way bet, and thus the willingness to hold bonds at a sub-2% rate decreased somewhat. As should have been no surprise to anyone, Federal Reserve officials included, rates thus backed up, eventually settling in a range around 2.5%. Similarly, equities stumbled but then regained their footing. That, I think, marks the end of the tapering debate.  How could the debate be over before tapering even begins? I think Joe Weisenthal has the answer: Maybe the Fed will start slowing its pace of bond purchases in December. More likely it will be September. It doesn't make much of a difference. But really the story now, with respect to the Fed, is when the first interest rate hike will be...

Blogs review: The Bernanke doctrine and the separation between forward guidance and tapering - In the US, a somewhat forgotten intellectual distinction between forward guidance and asset purchases has resurfaced following the June 19 FOMC talks of tapering. Until recently, the Fed had a precise state-dependent threshold for the future lift-off in short-term interest rates, but wasn’t specific about the timing for the tapering of its asset purchases. By providing specific forward guidance about asset purchases, the Fed has attempted to establish a distinction between these two tools. This has proven easier said than done.

Checking in on the Taylor Rule and the Fed - Given the recent confusion as to the Federal Reserve’s current stance, it seems like a fine time for a quick look the “Taylor rule.”  That’s an equation economists and Fed watchers like to use to see what the central bank’s federal funds rate ought to be given broad conditions in the macroeconomy.  The inputs to the rule are inflation and unemployment and its output is the expected fed funds rate. A relevant advantage to the rule at a time like this is that since it’s just an equation it’s not bound by zero (as are nominal rates).  The fact that it’s been negative since 2009 has been a strong motivator for the Fed’s alternative measures, like quantitative easing.   Basically, unemployment is stuck a couple of percentage points above where it would be at full employment and inflation has been low and slow.  As you can see in the figure below, inflation has been decelerating.  The line for unemployment in the figure is actually the unemployment gap, or the CBOs estimate of the unemployment rate associated with full employment minus the actually unemployment rate.  Plug these values into the Taylor rule* and you get the figure below.  As the recovery has proceed it has drifted up, but it’s still a negative, implying that the zero-lower-bound on the federal funds rate is still a serious macroeconomic constraint on policy.  Moreover, it’s been camping out at between -1 and -2 percent for the past two years.

Funding securities purchases with reserves - We've received numerous e-mails regarding the comment (here) that the Fed (or any other central bank for that matter) finances securities purchases with reserves. It's unfortunate that the internet is full of misinformation, propagated by both bloggers and the mass media. The Fed's operations are not a mystery - it's just basic accounting. And the fundamentals of accounting tell us that if you increase your assets by purchasing something, your liabilities increase as well. The balance sheet "has to balance". When the Fed buys a security, any of the following could be taking place:
1. The Fed sells another security in the same amount (such as in Operation Twist).
2. The Fed can lend that security via repo. In this situation the increase in assets (security purchase) corresponds to increase in liability (the Fed borrows cash against the bond).
3. The Fed can accept time deposits (now it owes money on the deposit - thus increases its liability).
4. The Fed can in effect use the proceeds from the repayment of various emergency facilities to cover the purchase. This was the case during part of QE1 (see discussion from 2009).
5. The Fed can increase bank reserves (by simply crediting the seller's reserve account). Remember that reserves are liabilities on the Fed's balance sheet.
These are all different ways the Fed can finance securities purchases. Only number 5 represents outright quantitative easing. Unless 1-4 are involved, reserves are used to fund balance sheet expansion

Savers And The 'Real' $10.8 Trillion Cost Of ZIRP - The bad news 'reality' of the Bernanke-aided Main-Street 'recovery' is that savers have missed out on a whopping $10.8 trillion in earned interest usage. The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.

Interest rates are still a lousy indicator of monetary policy -- Paul Krugman recently criticized this view: 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! He’s right that even a small rise in short term rates can do a lot of harm, but I’d add that another problem with the conservative argument is that they don’t seem to realize that interest rates are a lousy indicator of the stance of monetary policy. When I studied economics that was a point that conservatives emphasized. Even small increases in interest rates in the US (1937), Japan (2000 and 2006), and Europe (2011) drove each economy right back into deflation and/or depression. Monetary policy has probably become easier over the past few months. I say ‘probably’ because we lack a NGDP futures market. But consider that stock prices have not changed much in the last few months, and the interest rate at which future cash flows are discounted has risen substantially. We can infer that expected future nominal cash flows are now larger than a few months ago. This doesn’t mean that expected future NGDP has risen, but that seems likely.

Bernanke Explains How Fed Views Inflation - Perhaps the most visible clash in the public’s view of inflation relative to central bank thinking is the showdown New York Fed President William Dudley when he pointed out a newly launched Apple iPad model had twice the power at the same price. The crowd revolted, with an audience member yelling, “I can’t eat an iPad.”  This disconnect persists to this day. It played a part in the Fed Chairman Ben Bernanke‘s appearance before the Senate Thursday, in his second and final leg of testimony on the economy and monetary policy. In an exchange with Sen. Tom Coburn (R., Okla.), the legislator said that if current inflation was calculated under older methods it would be much, much higher than the numbers currently reported. As measured by the consumer price index, overall prices are up 1.8% from a year ago. This gave Mr. Bernanke a chance to explain at least some of the disconnect between the central bank view on inflation, and how others might see things. “I would respectfully disagree inflation is badly undermeasured,” Mr. Bernanke said. He noted that wage gains in recent years have lagged behind price increases even as those inflation gains have been historically low, creating a difficult situation for many households. “The cost of living is high, it’s not going up,” Mr. Bernanke said, adding that when you work to understand the real level of inflation, you must bear in mind “there is a distinction between prices being high and prices rising.”

Inflation Is Too Low? Are You Kidding Us Bernanke? - Federal Reserve Chairman Ben Bernanke said this week that inflation in the United States needs to be higher.  Yes, he actually came right out and said that.  It almost seems as if Bernanke is trying to purposely hurt the middle class.  On Wednesday, Bernanke told the press that "both sides of our mandate are saying we need to be more accommodative".   Of course he was referring to the Fed's dual mandate to keep unemployment and inflation low, but Bernanke has a very unique interpretation of that mandate.  According to Bernanke, inflation in the U.S. is now "too low".  The official inflation rate is currently sitting at about 1 percent, and Bernanke insists that such a low rate of inflation is not good for the economy.  He would prefer that the rate of inflation be up around 2 percent, and he is hoping that more "monetary accommodation" will help push inflation up and the unemployment rate down. But what Bernanke will never admit is that the official inflation rate is a total sham.  The way that inflation is calculated has changed more than 20 times since 1978, and each time it has been changed the goal has been to make it appear to be lower than it actually is. If the rate of inflation was still calculated the way that it was back in 1980, it would be about 8 percent right now and everyone would be screaming about the fact that inflation is way too high.

Key Measures show low inflation in June - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in June. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (5.9% annualized rate) in June. The CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for June here. Motor fuel increased at a 104% annualized rate in June.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.8%, and the CPI less food and energy rose 1.6%. Core PCE is for May and increased just 1.1% year-over-year. On a monthly basis, median CPI was at 2.0% annualized, trimmed-mean CPI was at 1.6% annualized, and core CPI increased 2.0% annualized. Also core PCE for May increased 1.3% annualized.

BlackRock: Low Inflation Will Keep Interest Rates in Check -- BlackRock‘s latest weekly commentary should offer some reassurance to investors worried that this week’s two-day Ben Bernanke speak-a-thon in front of Congress could cause another jump in interest rates like, say, his last time speaking before Congress. Here’s Russ Koesterich, BlackRock’s global chief investment strategist:We expect fixed income markets to remain volatile, but we do not believe that we will see a precipitous drop in prices and overly dramatic advance in yields. For one reason, inflation still remains tame, which means the Fed is under less pressure to move quickly.Thanks to a strong US dollar, which lowers the cost of foreign imports, US import prices were up only 0.2% in June on a year-over-year basis. Stripping out oil prices (which have been rising recently ), overall import prices were actually down 0.5% over the last year. Additionally, last week’s data showed that June’s Producer Price Index (PPI) was reasonably well contained. The headline number did show a spike, but the core number (which excludes volatile energy and food prices) showed just a 1.7% increase, close to the lowest level seen since early 2011.

Commodity Prices and Inflation: The Perspective of Firms -Atlanta Fed's macroblog - We’ve been thinking a lot about commodity prices lately. In case you haven’t noticed, they’ve been falling. And with inflation already tracking well under the Federal Open Market Committee’s (FOMC) longer-term objective of 2 percent, it’s reasonable to wonder whether the modest downward tilt in commodity prices is likely to put even more, presumably unwanted, disinflation into the pipeline.We take some comfort from research by Chicago Fed President Charles Evans and coauthor Jonas Fisher, vice president and macroeconomist, also of the Chicago Fed. According to the authors,[I]f commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified. But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do.  Is the response of inflation different for commodity price increases compared to commodity price decreases? The idea here is that, for a time at least, firms will pass commodity price increases on to their customers but simply enjoy higher margins when commodity prices decline.So we reached out to our business inflation expectations (BIE) survey panel and put the question to them. Of the 209 firms who responded to the survey in July, half were asked how they would likely respond to an unexpected 10 percent increase in the costs of raw materials, and the other half were asked how they would likely respond to an unexpected 10 percent decrease.

This Is What Deflation Looks Like - Bruce Bartlett has a good piece on fears of inflation from the Great Depression. Bartlett has a chart showing the rate of deflation at the start of the depression. Prices fell by 2.3 percent in 1930, 9.0 percent in 1931, 9.9 percent in 1932, and 5.1 percent in 1933. These rates of a price decline are a serious problem. They hugely increase the real value of debt held by individuals and businesses. They also create an environment in which investment is virtually pointless. Why would anyone borrow to expand a business when they will end up repaying the debt in money that is worth 25 percent more.      While this may be pretty obvious, it is worth contrasting the rates of deflation at the start of the Great Depression with the rates that we may have plausibly seen in the United States in 2009-2010, if things had gone more poorly. In a worst case scenario, we might have seen Japanese style deflation, which has been less in absolute value than -1.0 percent in all but one year. This would have been unfortunate, since it would have implied higher real interest rates and some increase in the real burden of debts held by students and homeowners. However, this sort of deflation is bad in the same way that 0.5 percent inflation is worse than 1.5 percent inflation. In a time when the economy is operating well below full employment, higher inflation will encourage more spending than lower inflation, and lower inflation will encourage more spending than low rates of deflation.

Other central banks impacting US money supply - When the Fed prints reserves by buying MBS and Treasuries with money that did not exist previously, this increases bank deposits (liabilities) and cash assets pretty much dollar for dollar. I have run charts showing this relationship, but something went wrong beginning in January. That something was the breakdown in Treasuries holdings, as Eurozone banks began to unwind the LTRO trade at the first opportunity in January.  The Fed is not the only actor in this game. All the major central banks conduct operations with the Fed’s 21 Primary Dealers. US money supply data represents not just the US but is a pretty big slice of the whole world and reflects other central bank policies and the flows of capital between nations and banking systems.  Treasuries were liquidated to pay down the LTRO. At the same time we saw the echo of that in US commercial bank repo lending and other securities lending to nonbanks, extinguishing the offsetting deposits.The forced March liquidation of leveraged holdings by big Chinese shadow institutions also showed up here. The BoE has also been running tighter policy.  So the Fed and BoJ are fighting an uphill battle to keep money supply inflating. US money supply would still be increasing dollar for dollar with the Fed’s purchases, but their friends, the other central banks, are no longer cooperating.

Paul Krugman thinks low interest rates are behind the boom in paper currency. Not so fast! -- Last week, Paul Krugman offered a different reason than I had suggested for why the amount of U.S. currency in circulation has been skyrocketing. Rather than fear driven by financial uncertainty – as I argued, based on an essay by San Francisco Federal Reserve president John Williams and other research – Krugman suggested the driving factor is low interest rates. “What has changed is that with zero interest rates, the opportunity cost of holding cash has gone way down,” Krugman wrote. “[I]t’s not fear, it’s despair: there’s nothing to invest in, so why not keep stuff under your mattress?” It makes sense that both low interest rates and fear are driving holdings of U.S. currency – namely in the form of $100 bills – to historic levels.  So, yes, as Krugman says, interest rates are probably an important factor. But I’m not so sure they’re the most important factor — for a few reasons. For starters, a lot of the demand for U.S. currency is coming from abroad. If you’re in another country with high inflation or severe instability, one of your main concerns is going to be preserving your purchasing power.  About 70 percent of U.S. currency today – in the form of $100 bills – is abroad, compared to about 50 percent two decades ago, according to this landmark paper on this topic by Ruth Judson of the Federal Reserve.

Vital Signs Chart: Tracking the Dollar - The buck stops here? The WSJ Dollar Index, which measures the greenback against seven currencies, has risen about 6.5% this year as investors position for a gradual end to the Federal Reserve’s currency-weakening easy-money policies. Recent assurances that Fed officials remain committed to “accommodative” policy, however, have partly reversed the trend.

My Unpublished Letter to the Editor of the NYT - Stephanie Kelton - I submitted the following Letter to the Editor in response to Annie Lowrey’s July 4 article on Warren Mosler and MMT.  The Times chose not to run it.  So I will.Thank you for alerting your readers to the growing impact of the anti-austerity branch of economics known as MMT. More than a decade ago, Warren Mosler challenged the economics profession, insisting that the U.S. would be a far more prosperous nation if we stopped basing our fiscal and monetary policies on macroeconomic theories that were designed for a country whose currency was still tied to gold. I was among the first wave of academic economists to reach agreement on this point. Now hundreds of articles, book chapters and conference presentations later, the ideas have spread well beyond the ivory towers. Tens of thousands of professionals in finance, business, government, etc., many of them formerly self-proclaimed deficit hawks, now champion Warren’s insight that our fears about debt and deficits are based on a failure to understand how modern money works–and that it’s holding all of us back.

In a few minutes you do not learn much – Bill Mitchell - There was an article in the New York Times at the weekend – Warren Mosler, a Deficit Lover With a Following – which seems to have attracted some attention. The attention has spanned from the vituperative personal attacks on the article’s subject, all of which would seem to be factually in error, to claims that proponents of Modern Monetary Theory (MMT) are “just nuts”. The latter assessment apparently was drawn after a few minutes consideration by a US economist. I don’t think one learns very much in a few minutes. But the output over the years of the particular economist quoted by the NYTs tells me he hasn’t learned much after presumably many hours of study. I suppose that if you are mindlessly locked into the mainstream macroeconomics textbook models then that is to be expected. Dr Thoma was the mainstream stooge quoted by the NYTs article as its parting shot – to let the readers know that MMT is not a rival to the robust mainstream theories that dominate and have created a fanatical following of the likes of Dr Thoma. You can read what he said presently. But a few reflections set the scene.

Fed's Beige Book: Economic activity increased "at a modest to moderate pace" -- Fed's Beige Book "Prepared at the Federal Reserve Bank of St. Louis and based on information collected on or before July 8, 2013."  Reports from the twelve Federal Reserve Districts indicate that overall economic activity continued to increase at a modest to moderate pace since the previous survey. Manufacturing expanded in most Districts since the previous report, with many Districts reporting increases in new orders, shipments, or production. Most Districts noted that overall consumer spending and auto sales increased during the reporting period. Activity in a wide variety of nonfinancial services was stable or increased in most reporting Districts. Transportation was stable or increased in several Districts. Tourism remained strong in some reporting Districts, although several Districts noted softness from bad weather. Residential real estate and construction activity increased at a moderate to strong pace in all reporting Districts. Commercial real estate market conditions and construction continued to improve across the Districts. Banking conditions generally improved across the Districts. Credit quality improved, while credit standards remained largely unchanged. Agricultural conditions were mixed, as weather patterns varied, while extraction was generally stable or increased

Beige Book: District-by-District Summaries - The Fed’s latest “beige book” report Wednesday said overall economic activity continued to expand at a “moderate pace” throughout the nation. The following are highlights from a district-by-district summary of economic conditions for June and early July.

Q2 GDP tracking 1.0% - From Merrill Lynch:  Our tracking model now pegs 2Q GDP growth at just 1%, and we only get that high with some fairly generous bounce back assumed for some of the missing data. We don’t see anything fluky about this number: it is the third weak quarter in a row. From MarketWatchBarclays ... cut its second-quarter GDP trading estimate to 1.0% from 1.6% after the trade deficit widened in May. In a note to clients, Barclays blamed the larger-than-expected increase in imports in the month for the downward revision. J.P.Morgan also cut their Q2 forecast to 1.0% (from 2.0%). This mid-year slowdown has been expected due to the significant drag from fiscal policy. Last month I posted Four Charts to Track Timing for QE3 Tapering . Here is an update to the GDP chart.

Second Quarter Looking Uglier and Uglier - The first look at second-quarter gross domestic product won’t be released until July 31–the second day of the Federal Reserve‘s next Federal Open Market Committee meeting. But monthly data available make it clear the spring slump was, indeed, very very slumpy. Monday brought disappointing news on retail sales and business inventories. Retail purchases increased just 0.4% in June, not the 0.8% expected, and May’s sales were revised down. The control sales group, which goes into GDP and which excludes vehicles, building materials and gasoline, rose 0.15% in June, half the gain forecasted. In addition, businesses increased their inventories level by just 0.1% in May, and April’s increase was revised from 0.2% to 0.3%. The list of economic shops now estimating real GDP grew by less than a 1% annual rate last quarter include Goldman Sachs (0.8% as of Monday), Macroeconomic Advisors (0.6%), Royal Bank of Scotland (0.5%) and Barclays (0.5%). (One caveat to the upcoming GDP data is that the Bureau of Economic Analysis will be releasing benchmark revisions and new methodology at the same time the second quarter GDP data are released.) Forecasters at J.P. Morgan, who are sticking with a 1.0% estimate, highlight the dangers surrounding an economy that is barely treading water. They write, “Two questions that the really lousy Q2 GDP tracking raise are [one] how will the disconnect between weak GDP and solid payrolls be resolved and [two] how will the FOMC feel about pulling its foot off the gas while looking at what could be a zero-handle on the most recent GDP print.”

Economy skids dangerously close to contraction - U.S. economic growth has again slowed sharply, skidding dangerously close in the second quarter to an outright contraction in gross domestic product. Following the releases Monday of tepid reports on retail sales and inventory accumulation, forecasters marked down their GDP expectations from 1.4% to 1.1%. It’s probable that U.S. GDP rose less than 2% for the third quarter in a row, and it’s possible that growth was less than 1% for the second quarter in the last three. It’s not news that the global growth is sluggish, and that sluggishness is weighing on U.S. manufacturers’ export growth. And we know that the federal government is cutting back its spending. But we thought that the household sector was holding up a little better. The surprise Monday was that U.S. consumers were more cautious as well. Retail sales rose 0.4% in June, with most of the growth coming from automobile sales. Most retailers reported weak sales for the month. Because spending started the quarter on a weak note, it’s likely that consumer spending increased at less than a 2% annual rate in the quarter. Without stronger growth in consumer spending, businesses won’t invest as much. And investors are likely to be disappointed with flat revenue growth at their favorite companies.

Two more Q2 GDP Downgrades - From Reuters: Morgan Stanley cuts second quarter U.S. GDP forecast to 0.3 percent Morgan Stanley economist Ted Wieseman, but the softness in June nonetheless prompted him to cut Morgan Stanley’s Q2 GDP estimate to 0.3 percent from 0.4 percent.From Merrill Lynch: This week we are marking to market both our growth and inflation forecasts. On the growth side, the story is simple. With most of the data in, our tracking model pegs 2Q GDP growth at just 0.9%. ... Clearly, the fiscal shock and weak global growth are undercutting the recovery. The main reasons for the downward revision in 2Q are weaker inventory accumulation and a wider trade deficit.This weakness is not a fluke: it reflects weakness in many key growth indicators. ...And Mark Zandi of Moody's Analytics last week:  The thing that changed is the GDP number.... That is really coming in much weaker than anyone had expected. Certainly than I had expected earlier in the year. It's tracking slightly positive and it's possible that it could be a negative print in Q2.

Real GDP has an appointment to keep with Effective Demand - The subject of potential real GDP is important. As Paul Krugman had a post entitled, “Potential Mistakes”. Today Dean Baker had a post entitled, “GDP Growth Remains Below Potential Growth”. Paul Krugman said, “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. For one thing, it’s important for fiscal policy; … But it’s also important for monetary policy…” The key word in this quote is “could”. This post seeks to better define what the economy could produce. We are living through unusual economic times. The bubble popped and labor share has fallen to levels not seen in a very very long time. Economists don’t quite understand that we are in a different economic reality. Constraints never seen before are now influencing the economy. It appears economists are being frustrated by these invisible constraints, and can’t coherently acknowledge them yet either.My work in effective demand is revealing constraints is not yet formally acknowledged. It is generally viewed that potential real GDP is output at full-employment of all available labor and capital resources. My view is that potential real GDP is the output limited by potential demand, even if all available labor and capital resources are not employed. Thus, the economy “could” produce up to the potential demand limit.

The Big Four Economic Indicators: Real Retail Sales and Industrial Production - I've now updated this commentary to include today's Industrial Production data for June and yesterday's release of June Retail Sales, now adjusted for inflation with today's release of the June Consumer Price Index. As the adjacent thumbnails illustrate, Industrial Production rose in June but Real Retail Sales declined.  Here is the Industrial Production summary from the Federal Reserve: Industrial production increased 0.3 percent in June after having been unchanged in May. For the second quarter as a whole, industrial production moved up at an annual rate of 0.6 percent. In June, manufacturing production rose 0.3 percent following an increase of 0.2 percent in May. The output at mines advanced 0.8 percent in June, while the output of utilities decreased 0.1 percent. At 99.1 percent of its 2007 average, total industrial production was 2.0 percent above its year-earlier level. The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972–2012) average.  For some long-term snapshots the Industrial Production Index, see these charts. Nominal Retail Sales for June rose 0.4% Month-over-Month, about half the consensus expectation, but MoM Real Retail Sales fell 0.11%. See the chart history here. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data points are for the 48th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.

Forecasting GDP: A Look at the WSJ Economists' Collective Crystal Ball -- The last day of July will be a big one for economic news. That's the day we get the Advance Estimate of Q2 GDP -- a rear-view metric, to be sure, but the next release will include a tweaking of the calculation methodology and major historical revisions of the complete series. The 14th comprehensive revision of the NIPAs, covering the period 1929-2013QI, will be released beginning on July 31, 2013. This year's revision will include several major improvements to the accounts, including expanded capitalization of intellectual property products and a change to accrual accounting for defined benefit pension plans. For a detailed preview of the changes, see this PDF from the Bureau of Economic Analysis. Meanwhile the latest GDP forecasts from Wall Street Journal's monthly survey of economists are now available. This month's survey was conducted July 12-16. As a reminder, Q1 Real GDP underwent two downward revisions -- from the Advance Estimate of 2.5% to the Second Estimate of 2.4% and the Third Estimate of 1.8%. Their "guestimates" for Q2 no doubt reflects the weakness in some of the BEA's monthly data for the most recent three months. Back in January, the average forecast for Q2 GDP was of 2.2%. Here's a snapshot of the full array of opinions in the July survey. Leaving out the one bizarre outlier, the forecast range is a tad over two percent, with the median (middle), mode (most common) and average forecasts at dead center. has a forecast in the lower range at 1.0%.

Is This The Chart Reflecting The True State Of The US Economy? - Today we got the most recent, May, TIC data from the Treasury. On a snapshot basis, the monthly  data of capital flows into (and out) of the US indicated two things: following last month's record, $38.3 billion, outflow of US Treasurys, the buying in US paper returned, if only to see another major blow in June (we have to wait until August for that update). However, more notably, the bond optimism manifested itself in pessimism relating to Agency paper and corporate stocks, both of which saw outflows for a total of $19 billion.  Will this snapshot change next month? Certainly. But something else is becoming obvious: when one shows the trailing 12 month average of the gross flow data, a very disturbing pattern emerges: one which shows that in May, the 12MMA average foreign flow just hit the lowest it has been since 2009. Which begs the question: since the US is drunk in its own hopium, is the best indicator of US economic prospects an objective assessment from abroad, and if so, are foreign capital flows the only remaining objective indicator of US economic health.

Slow 2013Q2 Growth: The Shadow of the Sequester? - Macroeconomic Advisers estimates second quarter growth at around 0.6% SAAR. [0] Is it because of the sequester and the ending of the payroll tax rate reduction? In part, Jeff Frankel thinks so; see also [1]. Macroeconomic Advisers had predicted something over a 1% reduction in growth rate (SAAR) relative to baseline in the second quarter [2]Figure 1 depicts the stakes. Nowcasted GDP growth has slowed dramatically: Three quarters of the MA estimated 0.6% growth in Q2 is associated with personal consumption expenditures and net exports. What is the impact of reductions in government outlays and increases in receipts? CBO reports monthly data on the Federal series. In its June 2013 Monthly Budget Review, it’s noted that through the first nine months of the fiscal year, the deficit is $392 billion smaller than the corresponding time period in FY 2012. In principle, one would want to know what happened to the structural budget deficit, but this number is still informative. In fact, the Federal government ran a surplus in June 2013; adjusting for timing, the June 2013 balance was $102 billion less than recorded in June 2012. Of this, $75 billion was accounted for by reduced outlays.  For the first three quarters of FY2012, big contributors to the decline in outlays are defense and unemployment insurance. Note these numbers are not at annual rates (AR).

What Hurts Growth is Not-Growth - My point was simply that any growth agenda must include adequate financial market oversight and that’s where Sec’y Lew was coming from. I was once working on some high-speed rail legislation and getting some help from folks who knew how railroads work.  I recall one expert pointing out the following: “I know it sounds silly,” he said, “but the thing that keeps trains from going fast is when they have to go slow.”  It’s stuff like curves in the tracks, low-speed zones, going through cities, stopping a lot. There’s an economics lesson there.  Yes, economic growth obviously involves innovation, quality inputs, scale economies, and more.  And a demand constrained bottom 90% doesn’t help either.  But another thing that’s important for growth is avoiding not-growth. The fact that the last few recoveries ended with burst bubbles—real estate,, real estate again—has us stuck in the shampoo economic cycle: bubble, bust, repeat.  Especially in its latest iteration, that’s more than a curve in the track, it’s a derailment.

Fed Chief Calls Congress Biggest Obstacle to Growth -  The Federal Reserve’s chairman, Ben S. Bernanke, said Wednesday that Congress is the largest obstacle to faster economic growth, and he warned that upcoming decisions about fiscal policy could once again undermine the nation’s recovery.  Mr. Bernanke said that the Fed expected the economy to gain strength in the coming months, potentially allowing the Fed to decelerate its stimulus campaign not because it has changed its goals but because it has begun to achieve them.  But he warned that Congress itself remains the greatest obstacle to faster growth. Federal spending cuts are reducing growth this year by about 1.5 percentage points, he said. While the Fed expects the impact to diminish next year, he said there was a risk Congress would create new problems for the economy. “The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy,” Mr. Bernanke said in the opening line of his prepared remarks to a Congressional committee.  “The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he said. ...

The Fed and America’s Debt - Is the Federal Reserve part of the government? You might think so, but you wouldn’t know it from the way we talk about America’s debt. When it comes to the debt held by the public, for example, the Fed is just a member of the public. That accounting reflects the Fed’s unusual independence from the rest of government. The Fed remits its profits to the U.S. Treasury each year, but is otherwise ignored when thinking about fiscal policy. In the era of quantitative easing, that accounting warrants a second look. The Fed now owns $2 trillion in Treasury bonds and $1.5 trillion in other financial assets. Those assets, and the way the Fed finances them, could have significant budget implications. To understand them, we’ve calculated what the federal government’s debt and financial asset positions look like when you combine the regular government with the Federal Reserve, taking care to net out the debt owned by the Fed and Treasury cash deposited at the Fed:

Treasury: Debt Has Been Exactly $16,699,396,000,000.00 for 56 Days - According to the Daily Treasury Statement for July 12, which the U.S. Treasury released this afternoon, the federal debt that is currently subject to a legal limit of $16,699,421,095,673.60 has stood at exactly $16,699,396,000,000.00 for 56 straight days. That means that for 56 straight days the federal debt has remained approximately $25 million below the legal limit. Even though the portion of the federal debt that is subject to a legal limit has not changed in almost two months, the Treasury has continued to sell bills, notes and bonds at a value that exceeds the value of the bills, notes and bonds it has been redeeming.The “public debt subject to limit”--as the Treasury calls the portion of the federal debt that is legally limited by Congress--first hit $16,699,396,000,000.00 at the close of business on May 17. As of the close of business on July 12, the latest day reported by the Treasury, the Treasury had redeemed approximately $5,848,194,000,000.00 in debt and issued approximately another $6,477,293,000,000.00—meaning the publicly circulated debt has increased by a net of $629,099,000,000 so far this year. Thus, over the past 56 days, the net value of U.S. Treasury Securities circulating in the public has increased by $51.586 billion ($629,099,000,000 minus $577,513,000,000).

Moody’s Upgrades Outlook For U.S. Government Debt - Moody’s Investors Service upgraded the outlook for U.S. government debt to ‘stable’ from “negative” and affirmed the United States’ blue chip Aaa rating. The rating agency cited a surprising drop in the federal deficit — the difference between what the government collects in taxes and what it spends. The U.S. government is on track to report its lowest annual deficit in five years. Through the first eight months of the budget year, the deficit has totaled $509.8 billion, according to the Treasury. That’s nearly $400 billion lower than the same period last year. Moody’s had lowered the outlook to “negative” two years ago. But it never went as far as rival Standard & Poor’s, which stripped the U.S. of its top credit rating in 2011. S&P last month upgraded its outlook for long-term U.S. government debt but kept its rating at AA+, a notch below its top grade. An improving economy and tax hikes and spending cuts that took effect this year have narrowed the government’s budget gap.

Simpson and Bowles are wrong on US debt - According to the independent Congressional Budget Office, America’s national debt will fall to 71 per cent of gross domestic product by 2016 – barely a third the level of Japan’s and roughly half that of Europe’s Mediterranean countries. Because of rising revenues and the impact of steep cuts from sequestration, this year’s US fiscal deficit will halve to $642bn from $1.1tn in 2012. By any measure, this is a vertiginous drop. At 4 percentage points of GDP, the salient worry is whether it is falling too rapidly. Yet Alan Simpson and Erskine Bowles – the retired politicians who lead the “fix the debt” movement – remain as unwavering as before. Given such rectitude, perhaps their motto should be: “When the facts change, we do not change our minds.” The bipartisan duo, and their deep-pocketed backers, notably Pete Peterson, the founder of Blackstone, should pay heed to the fable of the boy who cried wolf. Exposure to false scares is only likely to inure the public to the debt crisis when it does arrive. But that looks to be an increasingly long way off. Even at the depths of the Great Recession, when the budget deficit was soaring – as it should have – rising national debt always posed a medium-term rather than a short-term threat.

Sorry, Deficit Hawks: The Debt Crisis Ended Before It Could Begin - The debate is over, and the deficit hawks lost. After years of warnings about trillion dollar deficits as far as the eye could see, it turns out they just couldn't see far enough: the budget is moving quickly -- too quickly -- towards balance even without a "grand" bargain. In other words, we are not Greece. The debt doesn't need to be "fixed." This isn't how it was supposed to be. There was supposed to be a fiscal crisis. That's what budget-cutting superfriends Erskine Bowles and Alan Simpson said would happen in around two years time ... over two years ago. Salvation from our fiscal sins would only come if we repented and cut social insurance programs like professional deficit scold Pete Peterson has been saying we urgently need to, well, for decades now. Of course, revenues also needed to go up to make this a "bargain" both sides could support -- and that's where things fell apart. Republican anti-tax absolutism made any kind of actual deal impossible. But deficit hawks dreamed a dream of a grand bargain, and don't want to admit it was just that -- a dream. Look at the Washington Post editorial board's recent call for a renewed focus on the deficit. Now, replacing the sequester with a backloaded mix of spending cuts and tax hikes would be good policy, but the deficit itself is solved for now. As you can see in the chart below from the Center on Budget and Policy Priorities (CBPP), we only need $900 billion more of savings to stabilize the debt over the next decade -- and that's assuming the sequester and its $1.1 trillion of additional cuts stop after this year.

What Is the Point of Budget Reporting? - Dean Baker - When a newspaper tells its readers that the government will spend $76 billion this year on food stamps, as the NYT did recently, the number is virtually meaningless to almost everyone who sees it. Most people, even the well-educated readers of the NYT, are not budget wonks. They know $76 billion is a big number, way more than they will ever see in their lifetime, but spending on food stamps would also be a really big number to most of us if were $7.6 billion or $760 billion. When the NYT tells us that we are spending $76 billion on food stamps it is not informing readers as to whether this level of spending is a big item in their tax bill or a major contributor to the budget deficit.It turns out that it is not just NYT readers who get confused by large numbers. Apparently NYT reporters and/or editors have the same problem. The NYT article on food stamps last month described food stamps as a $760 billion program. The NYT later printed a correction, but this was a pretty egregious error to slip by the editors. The paper went one step further this month when it reported Italy's debt as $2.6 billion. The correct number is $2.6 trillion, three orders of magnitude larger. Mistakes like these find their way into print because even NYT editors are not hugely familiar with the budget. It is highly unlikely that they would have printed that food stamp spending is 22 percent of the budget, as opposed to the actual 2.2 percent number for 2013. Editors would know that the food stamp program does not take up more than one fifth of the budget. Similarly, they never would have written that Italy's debt is 0.1 percent of GDP, as opposed to the actual number of approximately 130 percent. Reporting these huge budget numbers without any context is simply bad reporting. It's not a question of time or space. It takes less than one second for a reporter to put these numbers in percentages.

The Sequester Is a Failure— It has slowed the economic recovery, even if not dramatically (yet it may be too soon to tell). It is true as Becker points out that employment has continued to grow, despite the sequester, but it would have grown faster without it. The sequester has caused substantial layoffs both of federal employees and of employees of companies in the defense industry, which are dependent on federal financing that the sequester has slashed. Not all the laid-off employees have found equivalent jobs in state or local government or the private sector. (It is not like the aftermath of World War II, where the millions of soldiers released back into the civilian sector quickly found jobs—they were returning to the jobs they had held before being drafted, or to jobs opened up by massive conversion of military to civilian production.) Moreover, many federal employees not laid off have been furloughed without pay for several days a month, reducing their income and hence their spending. And slashes in a number of programs intended to assist the poor and semi-poor, programs such as Head Start and Meals on Wheels, have to have reduced consumer spending. As Keynes pointed out, consumption drives production, which drives employment. And to the extent the sequester had further increased the marked and growing inequality of income and wealth in America, it has done further harm to the country.

The Smart Bunny’s Guide to Debt, Deficit and Austerity: A Review - Arliss is very serious about communicating key insights to people who need to know about MMT, and she is doing that using humor, a vigorous style, simple assertive statements, and utter contempt for those who want to keep people in thrall to false narratives about the macroeconomy and Government fiscal policy. Her first e-book in the series, The Smart Bunny’s Guide To Debt, Deficit, and Austerity is now available at the link. It’s cheap (2.99 USD) and you’ll get some good laughs out of it, effective sound bites, and some new ways of putting MMT propositions you haven’t seen before. The Smart Bunny’s Guide To Debt, Deficit, and Austerity covers: the nature of fiat money; how households are different from Government, Government debt as a constraint, debt and deficit terrorism, the job of the Government in the economy, how government spending works, the relation between Federal debt and private sector financial assets, lies about debt and who benefits from them, gold standard thinking, the Fed as the representative of private interests, an inflation reality check, differences between the US, the Eurozone nations and a basket case like Zimbabwe, deficit spending, austerity, the fall of the Reinhart and Rogoff debt cliff hypothesis, austerity: cause or effect?, the role of business confidence, and what to do about austerity.

Defense Department Pleads For Money It Does not Need, Then Looks For Ways to Spend; 650,000 Defense Employees Furloughs Started Monday - The Washington Post has some interesting details of emails sent by Defense Information Systems Agency (DISA) contracting and budget officers to their colleagues. “Our available funding balances remain large in all appropriations — too large to spend” just on small supplemental funds often required by existing contracts, the June 27 e-mail said. DISA’s budget is $2 billion.“It is critical in our efforts to [spend] 100% of our available resources this fiscal year,” said the e-mail from budget officer Sannadean Sims and procurement officer Kathleen Miller. “It is also imperative that your organization meets its projected spending goal for June. . .”The Washington Post reports ... [The emails] appears to contradict a September 2012 memo from the Pentagon’s undersecretary for acquisition Frank Kendall, and comptroller Robert Hale, who urged that “spending money primarily to avoid reductions in future budget[s]” is not the way to go. A DISA spokesperson e-mailed to say that these e-mails are “common practice among government agencies” and that many congressional “financial and procurement timelines . . .are designed to ensure that agencies” spend 80 percent of their funds before the last two months of the fiscal year, or by August 1.

Proposed Cuts Undermine Treasury's Mission - The President has made it clear that Congress must work together to pass a budget that strengthens economic growth, creates new jobs, and makes government more efficient and accountable. The Financial Services and General Government appropriations bill before the House Appropriations Committee today does not meet these priorities and undercuts the Treasury Department’s ability to effectively and efficiently carry out its mission and serve the American public. The bill proposes a 24 percent cut to the Internal Revenue Service (IRS), which would have a real and significant impact on service to taxpayers and enforcement of the nation’s tax laws. Moreover, these cuts would result in significant staffing cuts, which would mean a crippling of IRS efforts to enforce the nation’s tax laws, an activity that yields $4 for the Treasury for every dollar spent. Put simply, this budget proposal means fewer critical resources to detect and prevent tax fraud. And with fewer IRS staff to complete audits, conservative estimates put the resulting revenue loss from the proposed reduction in enforcement capacity at $12 billion per year. In addition to lost revenue, the proposed cuts could mean delays to written IRS correspondence of several more months. For phone or walk-in customer service, millions of taxpaying individuals and small business owners could find the IRS unreachable. In fact, the percentage of taxpayer calls answered could fall to record low levels.

Value of tax expenditures by income group (bar graph)

Do Low-Income Taxpayers Cheat? - My blog last Tuesday on overblown concerns about people falsely claiming subsides under the Affordable Care Act’s insurance exchanges generated a lot of response. Much focused on my assertion that the income tax system operates remarkably well as a largely voluntary program. Their retort: I naively misjudged the willingness of low-income people to cheat. In the words of one reader  “I think you have substantially underestimated the ability and motivation of low income people to commit fraud when the opportunity arises. In light of the EITC and school lunch program experience, why should we expect the amount of overpayments on the Exchanges–especially in their very first chaotic year of operation–to be any smaller?” That’s a pretty powerful statement so I checked into the Earned Income Tax Credit (I don’t know anything about school lunches). And, it turns out, there is no evidence of widespread cheating. It is certainly true that some EITC taxpayers do cheat. But many others are simply baffled by the credit and make mistakes. The reality is that the EITC is enormously complicated. The IRS guide for the credit (publication 596) is 62-pages long. As Bob Greenstein and John Wancheck from the Center on Budget and Policy Priorities note, the  instructions for filling out the EITC form are twice as long as the instructions for the Alternative Minimum Tax.

The games the rich play to avoid tax are immoral and now, hopefully, will become illegal - Tax arbitrage, or moving operations and tax liabilities to low-cost jurisdictions, has been a game played by rich people and multinationals for years. But the game is ending finally. This will have implications in terms of government revenues to pay for social services but will also have a negative impact on the profits and share prices of giants such as Google, Amazon and virtually every multinational that’s a household name. Friday, the G20 in Moscow approved a strategy, commissioned on their behalf and prepared by the Organization of Economic Co-operation and Development, that will crack down on tax avoidance and secrecy globally. Here are the important points, outlined by the Guardian, in the manifesto to clean up global taxation. Each point provides a glimpse into the games that have been played, costing rich and poor nations tens of billions in tax revenues.

Fed Acknowledges Some Excessive Risk Taking Sparked by Its Policies -- Concerns that the Federal Reserve’s easy-money policies may be fueling excessive risk-taking in financial markets have occupied some Fed officials this year. In a report to Congress delivered Wednesday, the Fed acknowledged that there is some evidence its policies have led certain investors to take on excessive leverage, duration risk or other forms of risk in order to boost returns. However, the Fed also said that recent developments may have risk-hungry investors changing their tune. “[T]he recent rise in interest rates and volatility may have led some investors to reevaluate their risk-taking behavior,” the report said. Longer-term interest rates started increasing in May as investors reacted to news that the Fed could begin winding down its $85 billion-per-month bond-buying program. One area where the rise in interest rates has had an impact is among so-called mortgage real estate investment trusts, or REITs, which are investment vehicles that buy mortgage-backed securities. Other regulators and individual Fed officials have singled these companies as a potential threat to the U.S. financial system because they use large amounts of short-term debt — which can dry up in times of stress — to buy mortgage debt, offering returns to investors of as much as 15%. These funds have grown tremendously in the last few years. The Fed report said this industry is an area where investors have been “willing to take on risk to achieve higher returns” amid the long period of ultra-low interest rates engineered by the Fed.

Bankers Are Balking at a Proposed Rule on Capital - OUR nation’s largest banks have grown accustomed to regulators who are respectful, deferential and mindful of these institutions’ needs and desires. So, last week, when federal financial overseers unveiled a potent new weapon against too-big-to-fail banks, it seemed as if — just maybe — the winds in Washington were shifting.  If the rule goes into effect, it will require the nation’s largest banks, those whose parent companies have more than $700 billion in consolidated assets, to double the amount of capital they have on hand to cover losses. Under the new rule, for example, Chase Bank would have to hold capital equal to 6 percent of its assets, up from the current requirement of 3 percent. Its parent company, JPMorgan Chase, would also have to increase its capital from that level to 5 percent. Even better, the design of the new capital requirement would be much harder for bankers to game. They did just that with other types of capital rules, such as those issued under the Basel regime, the international system devised by regulators and central bankers. The proposal, which would raise what is known as a bank’s leverage ratio, was issued jointly by the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency. Naturally, the financial sector hates it.

Challenges in Bid to Revamp Banks - Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke said some U.S. banks remain “too big to fail” five years after the financial crisis, opening the door to even more aggressive regulation if current efforts fail to address the problem.In separate appearances, the two officials said policy makers haven’t fully dealt with the systemic risk posed by large Wall Street banks, adding to calls from U.S. lawmakers and others who say more may need to be done to ensure no bank remains so large its failure could hurt the U.S. economy.Mr. Lew, referring to a provision in the 2010 Dodd-Frank law that prohibits taxpayer-funded bailouts, said, “as a matter of law, Dodd-Frank ended the notion that any firm is ‘too big to fail.’ “At the same time, he said additional steps may be needed to ensure no bank is so big its failure could harm the broader financial system.“If we get to the end of this year and we cannot with an honest, straight face say we have ended ‘too big to fail,’ we’re going to have to look at other options,” Mr. Lew said in his first major policy speech on financial regulation, delivered at a financial conference in New York. He took over leadership of the Treasury Department from Timothy Geithner in February.Mr. Bernanke, testifying on Capitol Hill, also said efforts to eradicate “too big to fail” remain incomplete. “I wouldn’t be saying the truth if I said that the problem is gone,” Mr. Bernanke told a panel of lawmakers at the House of Representatives.

Regulatory Rift Develops Globally Over Financial System - Global regulators are pursuing disparate approaches to protecting the financial system against future shocks, fracturing an agreement forged in the wake of 2008 financial crisis to adopt a coordinated response. Policy makers, at odds over how to reduce risk in the financial system, are disagreeing over proper capital levels for banks, derivatives regulation, criminal prosecutions of bankers and even the appropriate forum for brokering agreement on financial-services issues. . Countries like the U.S., U.K. and Switzerland are demanding that banks build thicker capital cushions to absorb losses and bigger liquidity buffers than most other European countries are embracing. European and U.K. officials have shown a greater willingness than their U.S. counterparts to rein in bankers' pay and target bad behavior with criminal prosecutions. The U.K.'s banking supervisors also have urged some European and U.S. banks to restructure their U.K. operations and have pressured foreign branches of banks from many countries—from crisis-hit countries like Cyprus to Switzerland and the U.S.—to stockpile additional funds in their British arms. The different approaches have led to cross-border sniping, with European Union officials threatening retaliation if the U.S. imposes its rules abroad.

Grieving for Glass-Steagall - Glass-Steagall is dead.  But fast forward to 2008 and suddenly the Western world - not just the US - exploded in a paroxysm of grief over the demise of Glass-Steagall. Glass-Steagall, it seems, could have prevented the entire financial crisis. Never mind that Lehman, Bear Sterns and Merrill Lynch were pure investment banks, with no retail deposits to put at risk. Never mind that AIG was an insurance company and Fannie and Freddie were government-sponsored enterprises - none of which were subject to Glass-Steagall's provisions. Never mind that Countrywide and most of the other mortgage originators that together created the largest fraud in US corporate history were pure retail lenders and therefore ALSO not subject to Glass-Steagall's provisions. And never mind that the large universal banks in the US survived the financial crisis relatively unscathed - which might not have been the case if Glass-Steagall had prevented them diversifying.  Four years on, there is still an immense amount of nostalgia for the age of Glass-Steagall. And there are repeated attempts to bring it back in some form. The latest attempt is by Senators Warren, Cantwell, McCain and King. Warren admits that Glass-Steagall would not have prevented the financial crisis, and would not end "too big to fail", but none-the-less wants the large universal banks to be forced to divest their investment banking activities, apparently in order to improve the "culture" in retail banking. But as I've noted before, the cultural shift in retail banking away from service and towards aggressive product selling had nothing to do with investment banking: it long pre-dated the repeal of Glass-Steagall and was due to low margins and cut-throat competition in the retail banking sector.

Remember Citigroup -- On Thursday of last week, four senators unveiled the 21st Century Glass-Steagall Act.  The pushback from people representing the megabanks was immediate but also completely lame – the weakness of their arguments against the proposed legislation is a major reason to think that this reform idea will ultimately prevail. The strangest argument against the Act is that it would not have prevented the financial crisis of 2007-08.  This completely ignores the central role played by Citigroup. It is always a mistake to suggest there is any panacea that would prevent crises – either in the past or in the future.  And none of the senators – Maria Cantwell of Washington, Angus King of Maine, John McCain of Arizona, and Elizabeth Warren of Massachusetts – proposing the legislation have made such an argument.  But banking crises can be more or less severe, depending on the nature of the firms that become most troubled, including their size relative to the financial system and relative to the economy, the extent to which they provide critical functions, and how far the damage would spread around the world if they were to fall. Executives at the helm of Citigroup argued long and hard, over decades, for the ability to expand the scope of their business – breaking down the barriers between conventional commercial banking and all of forms of financial transactions, including the most risky.  In effect, the decline of the restrictions established by the original Glass-Steagall – at first gradual but ultimately dramatic – allowed Citigroup to increase the scale and complexity of gambles that it could take backed by deposits and ultimately backed by the government.

The consumer watchdog’s work will last–for now — Former Ohio attorney general Richard Cordray was confirmed by the Senate to be the director of the Obama administration’s new consumer watchdog, the Consumer Financial Protection Bureau, by a 66-34 vote Tuesday afternoon, ending a nomination battle that has raged for nearly two years. “We know this agency is here to stay. No more clouds over what it legally is entitled to do. No more attacks that say maybe we’re going to be able to undercut it in this way or weaken it in that way,” Massachusetts Democratic Senator Elizabeth Warren told MSNBC’s Chris Hayes Tuesday evening. “We’ve got a full fledged watchdog. The one we fought for, and [Cordray] is going to be there to fight for us. I love it!” The last-minute deal reached in the Senate Tuesday means that Democrats will not nuke the filibuster in exchange for votes on several of Obama’s executive branch nominees. It also prevents Republicans from destroying a key part of the Obama administration’s plan to avert another economic crisis.

The feds are finally cracking down on ratings agencies. What took so long?: Last week saw the first hearing in the U.S. government’s court case attempting to hold ratings agencies accountable for their role in the financial crisis. Reforming the ratings agencies has turned out to be a difficult process. One would think that such an obvious institutional failure should prompt quick and definitive reform, not just from the government but also from the private sector. Why does this matter now? The private-market securitization channel is completely frozen, in part because nobody trusts the ratings and the ratings agencies on these matters. With the ratings agencies obviously having serious problems, investors have had to rely on “representations and warranties” in order to get some accountability on their investments. Like a warranty for anything you buy, they are legal protections for investors that guarantee mortgage-backed securities have met basic, promised underwriting standards. And they allow investors to get their money back if it turned out those creating these securities followed bad practices. The reaction from Wall Street, as David Dayen noted, has been to try to exclude future securities from these legal protections.

U.S. Regulators File Charges Against Hedge Fund Billionaire Steve Cohen - The U.S. Securities and Exchange Commission has announced charges against billionaire hedge fund mogul Steven A. Cohen, alleging that he failed to supervise two of his employees who have been implicated in insider trading. The SEC’s civil action comes two weeks after reports emerged that Cohen was poised to avoid criminal charges in what the feds have called the largest insider trading scheme in U.S. history. As part of its order initiating administrative proceedings against Cohen, the SEC is seeking to bar the reclusive hedge fund titan from overseeing investor funds. If the case is successful, it could amount to a death sentence for SAC Capital, one of the most legendary hedge funds on Wall Street over the last two decades. “My guess is that the SEC will structure a settlement where Cohen will be prevented from managing customer funds,” said Bill Singer, a partner at New York–based securities-law firm Herskovits and a veteran Wall Street defense attorney. “They may let him trade his own money through the fund, but if they don’t, Cohen could fight the case and tie it up for one to three years on appeal.” Cohen retains an estimated $8 billion of his own money in the fund, which at one time managed more than $15 billion.

Two Sentences that Explain the Crisis and How Easy it Was to Avoid - Bill Black → Everyone should read and understand the implications of these two sentences from the 2011 report of the Financial Crisis Inquiry Commission (FCIC).“From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers…it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets”

NEP’s Bill Black Appears on CNBC Tonight - Bill Griffeth (filling in for Larry Kudlow) discusses high frequency trading and whether it creates unfair markets. Bill Black weighs in on the lack of merits for High Frequency Trading and impact of collocating servers to get milli-second trading advantages.

NEP’s Bill Black Appears on Peak Prosperity Discussing Financial Markets - The Banks Have Blood on Their Hands and the regulators are too fearful to act. Bill returned to Peak Prosperity to explain whether the level of systemic risk due to fraud in our financial markets has improved or worsened since the dire situation he painted for us in early 2012. Sadly, it looks like abuse by the big players has only flourished since then.

Bill Black: The Banks Have Blood On Their Hands -  We invited Bill Black to return to explain whether the level of systemic risk due to fraud in our financial markets has improved or worsened since the dire situation he painted for us in early 2012. Sadly, it looks like abuse by the big players has only flourished since then.In the US, our regulators have publicly embraced a "too big to prosecute" doctrine. Which as a criminologist, Black knows with certainty creates an environment where bad actors will act in their self-interest with assumed (and likely real, at this point) impunity. If you can steal with impunity, as soon as you devastate regulation, you devastate the ability to prosecute. And as soon as that happens, in our jargon, in criminology, you make it a criminogenic environment. It just means an environment where the incentives are so perverse that they are going to produce widespread crime. In this context, it is going to be widespread accounting control fraud. And we see how few ethical restraints remain in the most elite banks.  And so you have one of the largest banks in the world, HSBC, being the key ally to the most violent Mexican drug cartel, where they actually did so much business together that the drug cartel designed special boxes to put the cash in that they were laundering that fit exactly into the teller windows so that there would be no delay. This is the efficiency principle of drug laundering. So these banks figuratively have the blood of over a thousand people on their hands. They are willing to fund people that murder and torture and behead folks. And they are willing to do that year after year, despite warnings from the regulators that they are doing this. And the regulators are not willing to actually take serious action until there has been “true devastation.”

Why Spitzer’s Return Terrifies Big Finance - Thomas Ferguson - You didn’t have to be in New York to feel the shudder on Wall Street when Eliot Spitzer announced that he was running for New York City Comptroller. It was enough to read between the lines of just about any financial paper in the world.Suddenly, the Masters of the Universe were staring at their worst nightmare: the prospect of a comeback by the only major politician in the U.S. whose deeds — and not simply words —prove that he does not think corporate titans are too big to jail. Not surprisingly, the result has been a wave of high decibel attacks in the major media. Many concentrate on the events surrounding his sensational exit from the New York State Governor’s office. But others actually put forward substantive reasons why New Yorkers should prefer the status quo.  Some of these are ludicrous. A piece in the New York Times, for example, seriously advanced the idea that Spitzer had to be stopped because of an allegedly “out of control ego.” This, of course, is laughable, given that anyone with even a nodding familiarity with American politicians quickly realizes that elected officials in both political parties carry on like peacocks, strutting about with a sense of self-righteous importance that frequently borders on the grotesque.

Too much profit on Wall Street - The biggest US banks are wrestling with an intractable problem. It is not a surge in loan defaults, a wave of cyber attacks or mounting lawsuits. It is far more serious: they are on the verge of making too much money. JPMorgan Chase is on track to make $25bn or more this year – as much as the gross domestic product of Paraguay – with at least a 17 per cent return on common equity that takes the bank back to the heady levels of 2007. In a different political atmosphere this might be a moment for celebration. Not only have banks such as JPMorgan and Wells Fargo survived the crisis, they are thriving again, as they showed in their results on Friday. Even Citigroup and Bank of America, which took $90bn of bailout money between them, are out of the emergency room, working their way through bad assets and competing for new business. Their shares are up 95 and 78 per cent respectively in 12 months. At another time, excess cash would be handed over to shareholders and employees. Half of revenues from investment banking would be paid out to staff and up to – and sometimes more than – 100 per cent of earnings would be distributed to investors via dividends and share buybacks. But in the prevailing climate, the celebrations must remain muted and bank chiefs miserly. A meagre 31 per cent of revenues were set aside for remuneration from JPMorgan’s investment bank in its earnings on Friday. For their part, shareholders might appreciate the rapid stock price appreciation, but they are not expecting bumper dividends – partly because the Federal Reserve now blocks generous payouts.

High Profits Signal Danger for Big Banks - Simon Johnson - In their latest earnings reports, the biggest banks in the United States are reporting eye-popping levels of profitability that surprise even Wall Street analysts. Goldman Sachs’s profit doubled in the second quarter of this year from the comparable quarter a year ago. JPMorgan Chase could make $25 billion for the whole year. Bank of America reported that net income rose 63 percent. Even Citigroup, so often the sick man of American megabanks, managed its best results since 2007, with $4.2 billion in net income in the quarter. These results create a major political problem for the big banks, a point that Tom Braithwaite has made in The Financial Times (subscription required). Executives at these companies have spent most of the last four years asserting that stronger regulation in the United States, including higher capital requirements, will result in lower profits, a reduced ability to lend and a slower economic recovery for the nation. Yet higher capital requirements are already in place, with further steps in the works, including a tougher leverage ratio at the initiative of the Federal Deposit Insurance Corporation (so the country’s biggest banks would need to finance themselves with relatively more equity and relatively less debt). And regulation has tightened to some degree. There is also more political scrutiny – hence executive compensation is being held below the levels that were previously associated with this much profit. In Europe, regulation remains weak, and the banks are floundering. In the United States, the rules are tightening, and the big banks are doing great. Once American politicians and regulators reflect further on exactly why the banks have become so profitable, this will only reinforce the latest push for more reform.

Big Banks, Flooded in Profits, Fear Flurry of New Safeguards - The nation’s six largest banks reported $23 billion in profits in the second quarter, but they could end up victims of their own success. In recent weeks, the Treasury Department, senior regulators and members of Congress have stepped up efforts intended to make the largest banks safer. The banks have warned that more regulation could undermine their ability to compete and curtail the amount of money they have to lend, but the strong earnings that came out over the last week could undercut their argument. The most pressing concern for banks is a relatively tough new rule that regulators proposed last week that could force banks to build up more capital, the financial buffer they maintain to absorb losses. But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis. This was highlighted on Wednesday when the Treasury secretary, Jacob J. Lew, effectively issued an ultimatum to Wall Street, calling for the swift adoption of rules introduced through the Dodd-Frank financial overhaul law, which Congress passed in 2010. Mr. Lew also said that he might be open to stricter measures if enough had not been done to remove the threat that big banks can pose to the wider economy.

On Wall St., a Culture of Greed Won't Let Go - The firms all have painstakingly written codes of conduct, boasting, “Our integrity and reputation depend on our ability to do the right thing, even when it’s not the easy thing,” as JPMorgan Chase’s says, or, “No financial incentive or opportunity — regardless of the bottom line — justifies a departure from our values,” as Goldman Sachs says. And yet a new report on industry insiders about ethical conduct, to be released on Tuesday, disturbingly suggests that Wall Street’s high-minded words may largely still be lip service. Of 250 industry insiders from dozens of financial companies who responded to questions — traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisers, among others — 23 percent said that “they had observed or had firsthand knowledge of wrongdoing in the workplace.” If that’s not attention-grabbing enough, consider this: 24 percent said they would “engage in insider trading to make $10 million if they could get away with it.” As we approach the fifth anniversary of the onset of the financial crisis this September, it appears memories are shorter than ever. If the report is accurate, the insidious culture of greed is back — or maybe it never left.

Are Corporations Trying to Distract Us with Social Issues While They Take Control of Our Economy? - Let’s be clear: The term “social issues” is not used dismissively. These are human rights issues which speak to our core values of personal freedom and social justice. But are these just causes being exploited by corporate-backed politicians? The answer seems to be yes. Politicians in the “liberal Kansas” school are increasingly outspoken on issues like reproductive choice and gay marriage, while at the same time continuing to promote their corporate economic agenda. Many, if not most, of them are so-called "centrist" Democrats from the Bill Clinton wing of the party. New York City Mayor Michael Bloomberg, a Democrat turned Republican, is also a prominent member of the “personally liberal, economically conservative” clique. They’re not alone. I’ve known more than a few corporate leaders and Wall Street executives, and most of them were quite liberal on social issues too. It makes sense, when you think about it. When your goal is money, you’re not likely to care what people do with their bodies – as long you get their wallets. That’s the “liberal Kansas” strategy in a nutshell.

Barclays, Traders Fined $487.9 Million by U.S. Regulator - Barclays and four of its former traders must pay a combined $487.9 million in fines and penalties, the U.S. Federal Energy Regulatory Commission said in a final order stemming from its investigation of alleged manipulation of energy markets.  The agency directed the company and the traders to pay to the U.S. Treasury within 30 days $453 million in civil penalties, according to an 86-page order issued today. The London-based bank must also give up $34.9 million in profits, to be distributed to programs that help low-income homeowners pay energy bills in California, Arizona, Oregon and Washington, it said. “If Barclays and the traders do not pay the penalties assessed by FERC, then FERC may seek affirmation of the penalties from a federal district court,” the agency said today in a statement. The penalties, which the agency first proposed Oct. 31, stem from an investigation that is part of the FERC’s crackdown on market manipulation. Since the beginning of 2011, the agency has made public at least 13 probes of energy-market gaming, including investigations of trading units at Deutsche Bank and JPMorgan Chase.

Barclays fined for fixing US power prices - The US electricity market’s overseer has slapped Barclays with a record $470m penalty over manipulating power prices, in the latest heavy regulatory sanction against the UK bank. The Federal Energy Regulatory Commission’s fines matched the amount proposed last year when it accused four former Barclays traders of manipulating physical power prices in California and other western US states in order to fraudulently boost financial derivative positions. Barclays intended to fight the order, saying: “We believe that our trading was legitimate and in compliance with applicable law. The Order Assessing Civil Penalty is by its very nature a one-sided document, and does not reflect a balanced and full description of the facts or the applicable legal standard.”  The penalty may not be final. The bank and traders chose to forgo a hearing before an administrative law judge, Ferc said. If they do not pay penalties within 30 days, the case will be heard again in a federal court that could make its own findings, lawyers said.

Has Patent, Will Sue: An Alert to Corporate America - If you’re a corporate executive, this may be one of the last sentences you want to hear: “Erich Spangenberg is on the line.” Invariably, Mr. Spangenberg, the 53-year-old owner of IPNav, is calling to discuss a patent held by one of his clients, which he says your company is infringing — and what are you going to do about it?  Mr. Spangenberg’s company, based in Dallas, helps “turn idle patents into cash cows,” as it says on its Web site. A typical client is an inventor or corporation, with a batch of patents, demanding a license fee from what it contends is an infringer, usually a titan in the tech realm. His weapon of choice in this business — the brass knuckles of his trade, so to speak — is the lawsuit.  In the last five years, IPNav has sued 1,638 companies, according to a recent report by RPX, a patent risk management provider, more than any other entity in the patent field. “To get companies to pay attention, in some percent of the market, you need to whack them over the head,” Mr. Spangenberg said. “In our system, you can’t duel, you can’t offer to fight in the street, which would be fine with me.”

How Intellectual Property Reinforces Inequality - Joe Stiglitz -- In the war against inequality, we’ve become so used to bad news that we’re almost taken aback when something positive happens. And with the Supreme Court having affirmed that wealthy people and corporations have a constitutional right to buy American elections, who would have expected it to bring good news? But a decision in the term that just ended gave ordinary Americans something that is more precious than money alone — the right to live. At first glance, the case, Association for Molecular Pathology v. Myriad Genetics, might seem like scientific arcana: the court ruled, unanimously, that human genes cannot be patented, though synthetic DNA, created in the laboratory, can be. But the real stakes were much higher, and the issues much more fundamental, than is commonly understood. The case was a battle between those who would privatize good health, making it a privilege to be enjoyed in proportion to wealth, and those who see it as a right for all — and a central component of a fair society and well-functioning economy. Even more deeply, it was about the way inequality is shaping our politics, legal institutions and the health of our population.

Moves Toward Real Progress in Bank Regulation -With their simultaneous display of hubris, remorselessness, incompetence and corruption, the banks have finally ignited a modicum of courage in banking regulators. The postcrisis bad behavior — reckless trading at a JPMorgan Chase unit in London, the rampant mortgage modification and foreclosure abuses, manipulation of the key global interest rate benchmark — went just a tad too far. For the first time since the financial crisis, the banks are losing some battles on tougher regulation.Last week, banking regulators, led by the Federal Deposit Insurance Corporation, but including the Federal Reserve and the Office of the Comptroller of the Currency, proposed a rule to raise the capital at the largest, most dangerous banks. Separately, Gary Gensler, the head of the Commodity Futures Trading Commission, who has been waging an underfunded and lonely fight to tighten the markets for those side bets called derivatives, managed to push forward a rule to regulate the complex markets. Banks and his fellow commissioners had resisted, pushing for more delay and more study. Nothing is ever killed in Washington; it’s just studied into a perpetual coma.These moves are heartening, if only because financial regulation has been so parched in the years since the financial crisis. There are many caveats, and I will get to them. But it’s worth enumerating and celebrating some of the positives because reform advocates have been wandering this desert, searching futilely for honest regulators.

Unofficial Problem Bank list declines to 742 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 12, 2013.  Changes and comments from surferdude808:  Very quiet week for the Unofficial Problem Bank List with no closures, mergers or new actions to report. The only change was the Federal Reserve terminating an action against Buckeye Community Bank, Lorain, OH ($150 million). After removal, the list holds 742 institutions with assets of $271.3 billion. A year ago, the list held 912 institutions with assets of $352.9 billion. Next Friday, we anticipate for the OCC to release its actions through mid-June 2013.

Commercial Real Estate Recovery Accelerates in May  - The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—increased by 0.7% and 2.0%, respectively, in the month of May 2013, reflecting continued improvement in market fundamentals and increased investment activity. The value-weighted index, which is heavily influenced by larger transactions and typically tracks with high quality core real estate prices, has now increased by 41% from its most recent trough in 2010. For comparison, the equal-weighted index, which is influenced by smaller, more numerous opportunistic transactions, has improved by 10% from its bottom in 2011... The percentage of commercial property selling at distressed prices declined to an average of 14.1% in April and May, the lowest two-month average on record since 2008. The decline in the number of distressed trades continues to support higher, more consistent pricing and has enhanced market liquidity by giving buyers and sellers greater confidence to do deals.

House Republican GSE Bill Would Codify MERS, Pre-Empt Private Property Rights - The top Republican on the House Financial Services Committee has tucked a provision into his mortgage finance reform bill that would create a privately held “National Mortgage Data Repository.” The repository would basically look like MERS, the bank-owned electronic database tracking mortgage transfers. The difference is that, while MERS’ activities have drawn legal challenges across the country, the National Mortgage Data Repository would have the force of statute to carry out the exact same behavior. According to the bill text, any document arising from this repository would be seen as presumptively legal, pre-empting state and federal laws on demonstrating the right to foreclose. Jeb Hensarling, the chair of the House Financial Services Committee, introduced the bill last Thursday.  Financial interests donated over $1 million to Hensarling in the last election cycle. The bill is called the Protecting American Taxpayers and Homeowners (PATH) Act, and it’s the House Republican response to a series of bills and initiatives to resolve Fannie Mae and Freddie Mac, and set a course for the future of mortgage finance. Most of the bill deals with that: in Hensarling’s vision, Fannie and Freddie are totally dismantled within five years, and private actors take up the slack with virtually no government guarantee. While in the past I’ve trashed the idea of just reconstituting Fannie and Freddie under a different name, in reality, expecting private actors to recreate a secondary mortgage market without any guarantee (or even with one, in my view) is wishful thinking.

Bank of America's HAMP Foreclosure Problem Is Holding Back the Economy - Since its inception, the problem with HAMP has been that it is all carrots and no sticks for the banks involved in actually modifying mortgages. They can pocket federal payments for the mortgages they do modify, and face little to no repercussion for those they don't.  This has led the banks to engage in a game of runaround with many borrowers, stringing them along before dumping them out of HAMP and right back onto the road to foreclosure. And no bank has epitomized this approach more than Bank of America, which, from the beginning, has failed to get its borrowers successfully through the program. (Initially, it claimed the problem was that its borrowers were more incompetent than those who bank at other institutions; unsurprisingly, that turned out not to be the case.) To see just how terrible things got, ProPublica laid out last month, in excruciating detail, the allegations of former Bank of America employees who said in a federal court case in Massachusetts that the bank instructed them to mislead borrowers, reject modification applications en masse without cause and even paid incentives to increase foreclosures:

Improving Access to Refinancing Opportunities for Underwater Mortgages - New York Fed - Since the onset of the housing crisis, a focus of policymakers has been to help underwater homeowners lower their monthly mortgage payments by refinancing, principally through the Home Affordable Refinance Program (HARP). This enables households to commit more money to consumption, debt reduction, and saving. Lower monthly payments also decrease the risk of mortgage defaults, allowing homeowners to stay in their homes and reducing expected losses for mortgage guarantors Fannie Mae and Freddie Mac, which remain under conservatorship of the Federal Housing Finance Agency. Stanching the flow of defaults also helps to firm up the housing market and, therefore, the economy as a whole. In this post, we examine some simple adjustments to HARP that would help to continue the program’s recent success and provide additional support to the housing market recovery—in undertaking that has added significance with the recent increase in mortgage rates, which could hamper refinancing activity moving forward.

Lost in the desert: Proponents of eminent domain cause a political stir in N. Las Vegas - It’s no surprise to attorneys like Abran Vigil – who has been involved in the local eminent domain issue – that this desert city is the next to consider the use of eminent domain to seize mortgage notes for the purpose of restructuring them to help underwater homeowners.. But this desert town, like others before it, is reacting – with controversy brewing from all sides. Some advocacy groups are supporting the provision, while Realtors, property owners and even some new members of the city council view it as a big-brother grab in a state known for protecting property rights. The controversy sparked up when consultancy firm Mortgage Resolution Partners (MRP) came to town and gained the attention of city officials by proposing a plan that has already been brainstormed in areas such as San Bernardino County, Calif. The plan is not in effect since it still requires city council approval, but the mere consideration of an eminent domain proposal to save underwater homeowners sent the real estate industry into advocacy mode. "From our observation, there is no overwhelming support for it," Vigil said. The big problem, he adds, is that it’s unclear how the plan would actually work or how it would be funded.

Lawler: Update on June existing Home Sales and Table of Distressed Sales and Cash buyers for Selected Cities - From housing economist Tom Lawler:  Local realtor reports released since last Friday have been consistent with my early assessment that existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.99 million in June, down 3.7% from May’s pace. Limited data suggest that a mild slowdown in all-cash (and investor) buying may be a reason for the dip in June’s sales pace.  CR Note: The NAR is scheduled to report June existing home sales on Monday, July 22nd.  Based on Tom's earlier estimate, the NAR will report inventory at around 2.2 million for June, and months-of-supply around 5.3 (up from 5.1 months in May). This would still be a very low level of inventory - probably the lowest for June since 2002 or so - but a 6.3% year-over-year decline in inventory would be the smallest year-over-year decline since early 2011 (when inventory started to decline sharply).  Note: In May, inventory was down 10.1% compared to May 2012.   These smaller year-over-year declines suggest inventory bottomed earlier this year. Tom Lawler also sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in June.  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 except Springfield, Ill.  Even short sales are now starting to decline year-over-year.  Also, as Tom noted, the percent of cash buyers seems to be down a little in most areas.

MBA: Mortgage Purchase Applications increase slightly, Refinance Applications Decline in Latest Weekly Survey -- From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 4 percent from the previous week and is at its lowest level since July 2011. The seasonally adjusted Purchase Index increased 1 percent from one week earlier....The refinance share of mortgage activity decreased to 63 percent of total applications from 64 percent the previous week and is at its lowest level since April 2011. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) was unchanged at 4.68 percent, with points decreasing to 0.42 from 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. With 30 year mortgage rates above 4.5%, refinance activity has fallen sharply, decreasing in 9 of the last 10 weeks. This index is down 55% over the last ten weeks. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending

Freddie Mac: 30 Year Mortgage Rates Decline to 4.37% in Latest Weekly Survey - From Freddie Mac today: Mortgage Rates Cool Off - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates easing along with market concerns over the Federal Reserve's bond purchase program ... 30-year fixed-rate mortgage (FRM) averaged 4.37 percent with an average 0.7 point for the week ending July 18, 2013, down from last week when it averaged 4.51 percent. Last year at this time, the 30-year FRM averaged 3.53 percent.  15-year FRM this week averaged 3.41 percent with an average 0.7 point, down from last week when it averaged 3.53 percent. A year ago at this time, the 15-year FRM averaged 2.83 percent. This graph shows the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®. 30 year mortgage rates are up from 3.35% in early May, and 15 year mortgage rates are up from 2.56% over the last 2 months. The second graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index. The refinance index has dropped sharply recently (down 55% over the last 10 weeks)  and will continue to decline if rates stay at this level.

Will Rising Mortgage Rates Halt The Housing Rebound? -- Could rising mortgage rates derail the housing market’s slow healing? Economists in the latest Wall Street Journal survey are divided on the question. Among those surveyed, 40% said the rise “won’t have a noticeable effect,” 35.6% warned “it will slow sales” and 24.4% said “it will slow home-price gains.”There’s no doubting the housing market’s contribution to the overall recovery. Federal Reserve Chairman Ben Bernanke, in starting two days of congressional testimony, on Wednesday told lawmakers that  “housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy.” The Fed chief seemed to place himself within the no “noticeable effect,” camp, but added, “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully.”In the Fed’s periodic report on regional economic conditions, issued Wednesday, the central bank sounded a relatively upbeat note, saying “Residential real estate activity increased at a moderate to strong pace in most Districts.” The beige book continued, “Most Districts reported increases in home sales.” Interest rates on 30-year fixed-rate mortgages have jumped in the recent months, climbing in the most recent week to 4.37%, up more than a percentage point from the 3.35% level of early May. However, even with the climb, rates are lower than they have been in decades.

Weekly Update: Existing Home Inventory is up 18.1% year-to-date on July 15th - 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.

FNC: House prices increased 4.0% year-over-year in May - From FNC: FNC Index: Home Prices Continue to Rise Steadily; Up 0.5% in May The latest FNC Residential Price Index™ (RPI) shows that U.S. home prices continue to steadily improve, climbing another 0.5% in May in conjunction with continued improvement in housing market fundamentals. Notably, the FNC RPI shows that the pace at which home prices are rising is rather modest, averaging 0.4% per month in the last six months. Similarly, the rate of annual price appreciation appears to be much slower and sustainable than reported by a number of other closely watched price indices. Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that May home prices rose from the previous month at a seasonally unadjusted rate of 0.5%. The two narrower indices (30-MSA and 10-MSA composites) recoded a 0.4% increase. On a year-over-year basis, home prices were up a modest 4.0% from a year ago. Note: This increase is partially seasonal.  This year prices were up 0.5% in May (from April).  Last year, in May 2012, prices were up 1.0% - so this is slower seasonal price appreciation this year. The year-over-year change slowed in May, with the 100-MSA composite up 4.0% compared to May 2012. The FNC index turned positive on a year-over-year basis in July, 2012.

Report: Home Listed For Sales up 4.3% in June from May, Down 7.3% year-over-year From Nick Timiraos at the WSJ: Housing Listings Multiply in June The number of homes listed for sale increased by 4.3% in June to 1.9 million homes, the highest level in the last year, according to data released Monday by ... Listings typically climb heading into the spring and summer, when housing activity hits a seasonal peak. But inventories appear to be posting larger-than-usual gains in many markets right now as they rise from their lowest levels in at least a decade. ... Nationally, the number of homes listed for sale stood 7.3% below their levels of one year earlier. The year-over-year decline stood at 18.6% in February, by contrast. ...The question now is whether higher inventory will lead to higher sales volumes, and whether it will also slow the pace of home-price gains. Note: Here is the site (not updated with June data yet at posting time).  Last month, the NAR reported inventory was down 10.1% from May 2012. That was the smallest year-over-year (YoY) decrease since 2011, and it appears the YoY decrease will be in single digits for June (the NAR reports June sales and inventory next Monday). Tom Lawler's initial estimate is that the NAR will report a 6.3% YoY decline in inventory in June.

Southland home prices soar 28.3% in June — a year-to-year record - Southern California home prices skyrocketed more than 28% in June compared to a year ago, real estate information firm DataQuick reported Wednesday. The dramatic 28.3% jump was greater than any year-over-year pop seen during the housing boom and the most since January 1989, the first time DataQuick generated the figure. The Southland’s median sales price reached $385,000 last month, 4.6% more than May and the highest dollar amount in more than five years. “This market’s getting really interesting,” DataQuick President John Walsh said Wednesday in a news release announcing the figures. Walsh said there are signs the “blistering pace” of rising home prices won’t continue, citing rising mortgage rates and the belief that the price gains will spur more home owners to place their houses on the market. Sales in the six-county Southland region declined slightly in June — the first year-over-year decline since last September and an indication that inventory remains extremely tight.

Flipping returns to the US housing market - It’s back to the future for the US housing market, with CNBC reporting that flipping rates – i.e. the number of homes bought and sold within six months – are once again booming across the US, increasing by 19% from a year ago and 74% from the first half of 2011, according to a new report to be released on Friday by RealtyTrac. “Home-flipping business has keyed up quite a bit in the last 6 months,” . Jones, who has been flipping homes for five years, said the competition is really heating up. “There’s not a lot of inventory, and every time a listing comes up it’s like piranha in the water,” he said… The math is looking better and better to investors as prices rise, with one possible hitch: Rising mortgage rates. Investors largely use cash on the front end, but their buyers don’t. “On the flip side, when they are actually flipping the properties to the end-users, interest rates matter because those end-users will not be able to afford as much as interest rates go up”… Large-scale institutional investors have been swarming the distressed housing market since the height of the housing crash, buying homes in bulk, rehabilitating them and putting them up for rent. Companies like Blackstone, Colony Capital, Waypoint and hedge fund titan John Paulson have been reaping solid rewards on the trade.

Owning a Home Isn’t Always a Virtue, by Robert Shiller - Encouraging homeownership has been considered a national goal at least since “Own Your Own Home Day” was introduced in 1920 by various business and civic groups as part of a National Thrift Week. The newly popular word “homeownership” represented a goal and a virtue for every good citizen — to get out of the tenements and into one’s own home. Homeownership was thought to encourage planning, discipline, permanency and community spirit.  In the aftermath of the subprime mortgage crisis, our national commitment to homeownership is sure to be questioned as we consider what to do about Fannie Mae and Freddie Mac, the enterprises that are meant to increase the supply of money available for mortgages and are now under government conservatorship; the Federal Housing Administration, which directly subsidizes homeownership; and the Federal Reserve’s quantitative easing program, which was intended to lower interest rates. For both political and economic reasons, any or all of these encouragements for homeownership — not to mention the mortgage interest deduction — could be sharply curtailed.  Which is why this is a good time to ask a basic question: In today’s world, is it wise for the government to subsidize homeownership?

Housing Starts in U.S. Unexpectedly Fall to Lowest in a Year - Starts of new U.S. homes unexpectedly fell in June to the lowest level in almost a year, indicating a pause in the industry’s progress.  Work began on 836,000 houses at an annualized rate last month, the least since August 2012 and down 9.9 percent from a revised 928,000 pace in May, figures from the Commerce Department showed today in Washington. The reading was weaker than projected by any economist in a Bloomberg survey, and permits for future projects also declined.  The decline was led by a slump in multifamily projects, which can be volatile, and the level of permits remained higher than starts, which may point to a rebound this month. A limited supply of land is also a hurdle for housing, even as near record-low mortgage rates and improving job opportunities draw buyers.

Housing Starts declined in June to 836,000 SAAR - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in June were at a seasonally adjusted annual rate of 836,000. This is 9.9 percent below the revised May estimate of 928,000, but is 10.4 percent above the June 2012 rate of 757,000. Single-family housing starts in June were at a rate of 591,000; this is 0.8 percent below the revised May figure of 596,000. The June rate for units in buildings with five units or more was 236,000.  Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 911,000. This is 7.5 percent below the revised May rate of 985,000, but is 16.1 percent above the June 2012 estimate of 785,000. Single-family authorizations in June were at a rate of 624,000; this is 0.6 percent above the revised May figure of 620,000. Authorizations of units in buildings with five units or more were at a rate of 261,000 in June.The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) decreased in June (Multi-family is volatile month-to-month). Single-family starts (blue) decreased slightly to 591,000 SAAR in June (Note: May was revised down from 599 thousand to 596 thousand).The second graph shows total and single unit starts since 1968.

Residential Building Sector Growth Continues in June 2013 But Well Under Expectations - Residential building permits and construction completions in June 2013 continues to show the industry growth – but the rate of growth continues to moderate.

  • Our analysis paints a slightly different picture than the headline data – and shows the June data is much less good than the headlines even though it shows this sector expanding.
  • Apartment building permits comparing June 2012 to June 2013 (aka year-over-year) is a good part of the reason the data is so weak this month.
  • The rate of annual growth for building permits in the last 12 months for this sector has been mostly in a channel between 25% and 40%. This month is significantly below this channel.
  • Please note that the media concentrates on housing starts as a single metric for this data series – while Econintersect focuses on the general growth trends of the sector (permits versus completions) which are the best indicator of trends which show the health of this sector. Housing starts would give an indication of construction contribution to GDP.
  • Building permits have grown year-over-year for the last 26 months;
  • Construction completions have grown year-over-year for 20 of the last 21 months;
  • Building permits outpaced completions for the previous 18 months .

June Was A Rough Month For Housing Construction - Residential construction in the US tumbled last month, according to the Census Bureau’s June report. Housing starts dropped a hefty 9.9% to a seasonally adjusted annual rate 836,000, the lowest since last August. The decline was substantially below expectations, and the red ink is compounded by the fact that newly issued building permits also retreated, retreating by 7.5% vs. May. One theory for what happened is that wet weather in June played the spoiler and kept building activity low. A more ominous view is that higher interest rates are taking a toll. What's clear is that starts and permits have run into headwinds in recent months, and June was no exception.  The damage is also infecting the year-over-year comparisons. The annual pace for both starts and permits has fallen substantially this year. Indeed, the 10.4% gain in starts last month vs. the year-earlier level is the slowest rate of growth since 2011. Is the housing recovery over? Maybe, but it’s still premature to say so with much confidence, even if today's data looks like a smoking gun. A more plausible scenario, at least for now, is that the rebound in housing is transitioning to a lower speed. As I’ve noted in the past, it’s always been naïve to expect that the 20%-to-40% year-over-year increases in the recent past would be sustainable. Those hefty increases reflected an extraordinary period that was a largely a byproduct after a lengthy correction that probably went on for too long.

Farewell "Housing Recovery" - Housing Starts Miss Most Since January 2007, Permits Have Biggest Miss In History - In all the noise surrounding Bernanke's rehash of statements made countless times before, today's only relevant data point - June housing starts and permits - was largely ignored. And one can see why: printing at 836K, the starts number was the lowest since August 2012, the second largest sequential drop (down from 928K in May) since 2011 and the biggest miss to expectations of 957K since January 2007! And worse, permits which printed down from 985K to only 911K on expectations of a 1 million headline number, just posted their largest miss... in history.

What's behind the slowdown in residential construction? - Given yesterday's poor housing starts result, some economists are raising concerns about the sustainability of the positive trend in residential construction. The primary explanation for the latest decline seems to be the slowdown in apartment construction. NAHB: - “While demand for new homes and apartments has grown considerably over the past year, builders are still being very careful not to get ahead of the market, and today’s report reflects that cautious approach,” “The large dip in multifamily production in June follows a boost of activity in May, and is consistent with the volatility that has come to characterize that sector as well as the uneven pace of the housing recovery,” noted NAHB Chief Economist David Crowe. “That said, the fact that single-family starts and permits both rose in three out of four regions in June is a positive sign that’s in keeping with our forecast as well as recent surveys in which single-family builders have registered an increasingly positive outlook.” The annualized rate of multifamily production declined 26.2 percent to 245,000 units in June after a 28.2 percent gain in the previous month.  Some have also attributed the slowdown to weather conditions. There is another issue however that nobody wants to discuss. Anecdotal evidence suggests that the sudden rise in interest rates has spooked some developers who decided to cool things down a bit until there is more certainty around rates and economic growth (we saw glimpses of this earlier). There is no question that construction will resume on its upward path, if for no other reason than demographics. The US population is growing at a rate of some 2.3 million per year and construction rates are just not keeping up.  But even a temporary slowdown in construction - particularly if caused by policy uncertainty - is bad news for the fragile economic growth in the US.

Housing starts fall to 10-month low, weather blamed -  (Reuters) - U.S. housing starts and permits for future home construction unexpectedly fell in June, but the decline in activity was likely to be short-lived against the backdrop of bullish sentiment among home builders. The Commerce Department said on Wednesday housing starts dropped 9.9 percent to a seasonally adjusted annual rate of 836,000 units. That was the lowest level since August last year. Economists, who had expected groundbreaking to rise to a 959,000-unit rate, shrugged off the decline and said wet weather in many parts of the country had dampened activity. They noted that much of the drop was in the volatile multifamily segment.Permits to build homes fell 7.5 percent last month to a 911,000-unit pace. Economists had expected permits to rise to a 1-million unit pace. Though it was the second straight month of declines in permits, they remained ahead of starts. Economists said this, together with upbeat homebuilder confidence, suggested groundbreaking activity will bounce back in July and through the remainder of this year.

Housing Starts: A few comments - A few comments:
• Overall the housing starts report was disappointing with total starts at a 836 thousand rate on a seasonally adjusted annual rate basis (SAAR) in June. This was well below the consensus forecast of 951 thousand SAAR.   Most of the decline was related to the volatile multi-family sector.
• Single family permits were at the highest level since May 2008, and it appears single family starts will increase over the next few months.
• Also housing starts are up significantly from the same period last year. Over the first half of 2013, multi-family starts are up close to 34% from the same period in 2012, and single family starts are up 20%. Those are significant increases in activity. 
• Even with this significant year-over-year increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. This suggests significantly more growth in housing starts over the next few years.
Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

NAHB: Builder Confidence increases in July to 57, Highest in 7 Years - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 6 points in July to 57. Any number above 50 indicates that more builders view sales conditions as good than poor. From the NAHB: Builder Confidence Rises Six Points in July Builder confidence in the market for newly built, single-family homes rose six points to 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today. This is the index’s third consecutive monthly gain and its strongest reading since January of 2006. All three HMI components posted gains in July. The component gauging current sales conditions rose five points to 60 – its highest level since early 2006. Meanwhile, the component gauging sales expectations in the next six months gained seven points to 67 and the component gauging traffic of prospective buyers rose five points to 45 – marking the strongest readings for each since late 2005. All four regions also posted gains in their HMI scores’ three-month moving averages. The Northeast showed a four-point gain to 40 while the Midwest reported an eight-point gain to 54, the South posted a five-point gain to 50 and the West measured a three-point gain to 51. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the July release for the HMI and the May data for starts (June housing starts will be released tomorrow). This was well above the consensus estimate of a reading of 52.

U.S. Retail Sales Rise 0.4% in June on Autos — Americans spent more at retail businesses in June, although the gain was heavily driven by auto sales and higher gas prices. The Commerce Department says retail sales rose 0.4 percent in June from May, after a 0.5 percent increase the previous month. The June gain was mostly because of a 1.8 percent increase in auto sales, the biggest one-month gain since November. Higher gas prices pushed service station sales up 0.7 percent. Excluding the volatile categories of autos, gas and building supplies, so-called core retail sales rose just 0.15 percent, the weakest since January. The retail sales report is the government’s first look at consumer spending. Spending at retailers has helped drive job growth this year and has shown that consumers remain resilient despite higher taxes.

Retail Sales increased 0.4% in June - On a monthly basis, retail sales increased 0.4% from May to June (seasonally adjusted), and sales were up 5.7% from June 2012. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $422.8 billion, an increase of 0.4 percent from the previous month, and 5.7 percent above June 2012.This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 27.5% from the bottom, and now 11.8% above the pre-recession peak (not inflation adjusted) Retail sales ex-autos increased slightly. Retail sales ex-gasoline increased 0.3%. Excluding gasoline, retail sales are up 24.6% from the bottom, and now 12.2% above the pre-recession peak (not inflation adjusted). The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail Sales Slide, Miss: Biggest Drop And Miss In 12 Months - If the worst retail sales number in 12 months doesn't send the S&P to 1,700 nothing will. Because that is precisely the data point we got moments ago when the Census bureau reported June retail sales growth of 0.4%, missing expectations of a 0.8% print and down from a downward revised 0.5%. However, the only growth in the headline number was thanks to auto and gas sales. Ex autos retail sales were unchanged on expectations of a 0.5% increase, while ex autos and gas the print was down -0.1%, crushing hopes of a +0.4% increase. Any minute now, however, the Fed's S&P500 trickle down wil, with a 4 year delay, hit the end consumer: the entire Princeton economics department pinky swears.

Did Today’s Retail Sales Whiff Contain A Big Warning About The Housing Market? - Retail sales missed expectations today, as top-line sales came in at just 0.4% growth, vs. 0.8% expected.  Nomura finds one ominous nugget:  Building material sales were a major drag on overall sales, as they declined by 2.2% in June. This could be a result of the recent run-up in mortgage rates, but we have to wait for more housing data to conclude that this is actually the case. Housing starts and building permits data for June will be released on Wednesday. Note that the building materials category reflects home improvement items, and given that distressed sales have declined recently, demand for home improvement items could have fallen off leading to the drop in the building materials category. Sales of miscellaneous items (such as office supplies, stationeries, gifts, used merchandise), and retail sales at eating and drinking places also declined in June.

Big Disappointment On Retail Sales - The June U.S. retail sales figures are out, and they are disappoining. The headline sales figure climbed by just 0.4%, falling short of expectations for a 0.8% gain. Excluding autos and gas, sales unexpectedly fell 0.1%. Economists were looking for a 0.4% gain. Strong auto sales were expected to be the key driver to growth. Excluding autos, sales showed no growth. "The disappointing 0.4% m/m rise in US retail sales values in June increases the chances that GDP grew at an annualised rate of less than 1% in the second quarter," said Capital Economics' Paul Dales. "Looking ahead, the latest pick-up in jobs and earnings growth bode well for consumption in the third quarter. But it is disconcerting that retail sales growth lost more momentum as the second quarter progressed. "

Headline and Core Retail Sales Disappoint Expectations - The Advance Retail Sales Report released this morning shows that sales in June came in at 0.4% month-over-month, a slight dip below May's 0.5% (a downward revision from 0.6%). Today's headline number came in well below the forecast of 0.8%. Core Retail Sales (excluding Autos) were flat at 0.0% (to two decimal place, 0.04%), down from last month's 0.3%. was looking for 0.4%. The first chart below is a log-scale snapshot of retail sales since the early 1990s. I've included an inset to show the trend in this indicator over the past several months. Here is the Core version, which excludes autos.  Here is a year-over-year snapshot of overall series. Here we can see that, despite the upward trend since the middle of last year, the YoY series has been slowing since its peak in June of 2011.  Here is the same chart excluding the volatile gasoline component.

Retail Sales Came in a Little Weak in June 2013 - Retail sales came in less than anticipated.

  • the headline number was stronger than Econintersect‘s analysis;
  • backward revisions were slight;
  • motor vehicles and non-store retailers were the biggest strength in this months data.

Econintersect Analysis:

  • sales rate of growth decelerated 1.9% month-over-month, but up 3.7% year-over-year
  • sales 3 month moving year-over-year average improved from 3.9% to 4.4%
  • sales (inflation adjusted) up 2.7% year-over-year

U.S. Census Headlines:

  • sales up 0.4% month-over-month, up 5.7% year-over-year
  • the market was expecting growth of 0.7% to 0.9% month-over-month (versus the 0.4% reported)

Retail Sales 0.4% June Gain Shows Auto Dealers are Having a Good Year - June 2013 Retail Sales increased by 0.4% on auto sales, which increased 2.1% from last month.  Motor vehicle dealers are having a good year.  Their sales have increased 12.9% from a year ago.  Without motor vehicles & parts sales, June retail sales would have shown no change from last month.  Furniture had a surprise showing with a 2.4% increase in sales.  If one removes gasoline sales from retail sales, overall the increase would have been 0.3%.  Miscellaneous store retailers decreased -2.5% and building materials, garden equipment & supplies also had a poor showing with a -2.2% monthly decline.  Retail sales are reported by dollars, not by volume with price changes removed. For the three month moving average, from April to June (Q2) in comparison to January to March (Q4), retail sales have increased 0.8%.  The retail sales three month moving average in comparison to a year ago is up 4.6%.  This implies some fairly weak spending for Q2 overall as shown the below graph of quarterly annualized retail sales percentage change. Retail trade sales are retail sales minus food and beverage services.  Retail trade sales includes gas, and is up 0.6% for the month and has increased 13.8% from last year. Total retail sales are $422.8 billion for June.  Below are the retail sales categories monthly percentage changes.  These numbers are seasonally adjusted.  General Merchandise includes super centers, Costco and so on.  Online shopping making increasing gains, increasingly important in overall retail sales.  Online shopping continues to expand as nonstore retail sales have increased 13.8% from last year.

A Slower Rate Of Growth For Retail Sales In June, But The Annual Pace Rises -- Retail sales increased 0.4% in June, which is below the consensus forecast, but that shortfall is less about a weaker pace of spending vs. overly optimistic expectations among economists for this morning’s number. In any case, don't pay too much attention to one number, particularly one that has little relevance for assessing the broader macro picture. On the other hand, take note that the year-over-year trend in retail spending inched higher for the third month in a row, offering another clue for thinking that business cycle risk remains low. As for last month, consumption slowed a bit. The 0.4% gain in June compares with a monthly rise of nearly 0.5% over the past year. The main headwind last month was the sharp slowdown in the motor vehicles and parts category, which posted a relatively sluggish 1.8% advance. Then again, auto consumption surged more than 11% in May and so it’s not entirely surprising that consumers retreated in this corner of big-ticket spending. Monthly numbers are noisy, in other words, which is a reminder that the year-over-year change offers more insight. By that standard, things are looking up. Retail sales increased 5.7% for the year through June—the most in more than a year.

Spot The Grotesque Retail Sales Seasonal Adjustment Outlier - By now everyone knows that when all else fails with propaganda data manipulation, the US government goes right to Plan B: the X-12-ARIMA seasonal adjustment program (full 257 instruction manual here). It most certainly did that in June. The chart below shows the June difference between Seasonally Adjusted and Non-Seasonally Adjusted headline data: a positive number means that contrary to the empirical seasonal adjustment data of the past 15 years, NSA was lower than SA, implying an abnormal boost to seasonal adjustments to make June appear far, far better than the actual NSA data implies. Well, try to find which June of the past 15 is an outlier...

Big Miss in June Retail Sales vs. Expectations; Trend Change or Another "Soft Patch"? - Retail sales were up 0.4% in June compared to Bloomberg estimates of +0.8%. May retail sales were revised to +0.5% for an originally reported +0.6%. The increase seems healthy enough, until you dive into the details. Here are some retail sales comments from Bloomberg to help put things into perspective.

  • Restaurants and bars decreased 1.2 percent in June, the most since February 2008.
  • Sales dropped 2.2 percent at building materials outlets, the most since May 2012.
  • Purchases at department stores declined 1 percent in June.
  • Retail sales excluding autos and gasoline unexpectedly fell 0.1 percent.
  • Purchases rose 2.4 percent at furniture and home furnishing chains, the most since May 2012.
  • Automobile dealer sales rose 1.8 percent
  • Purchases excluding autos, gasoline and building materials, which render the figures used to calculate gross domestic product, rose 0.1 percent after a 0.2 percent increase in the previous month.
        That last bullet point explains why the next GDP number will be below stall speed. Yet economists still predict the US economy will expand at 2.3% in the third quarter. I will take the under (not that there is much meaning to these GDP numbers in the first place).

Stripping down US retail sales - June US retail sales came in nearly 6% above last year's figure. Yet economists and market participants were disappointed. In fact treasuries rallied in response to the number - a sign of a weak economic report.The report was disappointing for three reasons.
1. Given how strong the US consumer confidence indicators have been recently, economists expected a month over month gain of 0.8%. The actual number came in at half that amount. Consumer confidence no longer has the same impact (the same weight in economists' models) on spending that it used to have. Happy consumers no longer always turn into big spenders.
2. Auto sales have been quite good recently, which is reflected in the headline sales figure. If one strips out autos however, sales were actually flat compared to the previous month. In fact sales ex-autos have been lagging the headline number for a few months now.
3. Finally if one strips out both autos and gasoline expenditures, sales actually declined for the month.
The consumer represents over 70% of US GDP (see discussion), which is why treasuries rallied after the release of the report. After all, GDP growth can not be sustained by autos and gasoline sales alone.

Check Please? Restaurant Spending Plummets in June -- Sales at U.S. restaurants and bars took the largest one-month tumble since the recession, a possible source of concern for an industry that has been a jobs engine.  Food-service sales fell 1.2% in June, the largest decline since February 2008, the Commerce Department said Monday. Restaurant sales fell in May as well.From a year earlier, sales in the category are up 3.1%, a slower pace than the 5.7% gain for overall U.S. retail spending. Restaurants and bars account for only 11% of total retail sales. But spending at those locations is largely discretionary and could signal Americans’ confidence in the economy. Meals out can be skipped more easily than trips to the gasoline pump or grocery store. A continued slowdown in spending on dining could be worrisome for the labor market, too. The restaurant and bar industry has driven a disproportionate share of employment growth over the past three months, accounting for more than a fourth of all new jobs. It now accounts for nearly 1 in 10 jobs in America.

June Restaurant Spending Plunges By Most Since February 2008 - On one hand restaurants and bars have been a boon to the US economy. As first reported in June, and updated two weeks ago, America's waiters and bartenders (increasingly more of which are part-time) have made up a disproportionately large portion of job creation in the nation, rising by more than 50,000 on average each month in the last three, and hitting an all time high of 10.34 million workers in July, accounting for 9% of all private-sector payrolls. The surge was enough for Joel Naroff of Naroff Economic Advisors to conclude that "Apparently, people are eating out again like crazy." It turns out this conclusion was 100% wrong. According to this week's very weak retail sales report, Food-service sales fell 1.2% in June, the largest decline since February 2008 and the year over year change in "eating out" rose by just 3.1% - the lowest annual increase since June 2010. But at least all those empty restaurant seats have a record number of waiters catering to the non-existent clients which on the surface should mean the speediest service in history.

CPI increases 0.5% in June, Core CPI 0.2% - From the Bureau of Labor Statistics (BLS): Consumer Price Index - June 2013 The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment. The gasoline index rose sharply in June and accounted for about two thirds of the seasonally adjusted all items change... The index for all items less food and energy increased 0.2 percent in June, the same increase as in May.On a year-over-year basis, CPI is up 1.8 percent, and core CPI is up also up 1.6 percent.  Both are below the Fed's target. This was close to the consensus forecast of a 0.4% increase for CPI (due to gasoline prices), and a 0.2% increase in core CPI. Note: CPI-W (used for cost of living adjustment, COLA) is also up 1.8% year-over-year in June.  The COLA is calculated using the average Q3 data (July, August, and September).

Headline Inflation Rises, Mostly from Gasoline Prices - The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.75%, which the BLS rounds to 1.8%, up from 1.36% last month (rounded to 1.4%). Year-over-year Core CPI (ex Food and Energy) came in at 1.64% (rounded to 1.6%), little changed from last month's 1.68% (rounded to 1.7%). Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.  The gasoline index rose sharply in June and accounted for about two thirds of the seasonally adjusted all items change. Other energy indexes were mixed, with the electricity index rising, but the indexes for natural gas and fuel oil declining. The food index increased in June as the index for food at home turned up after declining in May.  The index for all items less food and energy increased 0.2 percent in June, the same increase as in May. Advances in the indexes for shelter, medical care, and apparel accounted for most of the rise, with increases in the indexes for new vehicles and household furnishings and operations also contributing. The indexes for airline fares, used cars and trucks, and recreation all declined in June.   More... The consensus forecast was for a 0.2% MoM for Core and 0.3% for Headline. Their YoY forecasts were 1.6% for Core and 1.7% for Headline. The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

CPI Jumps 0.5% on Higher Gas Prices for June 2013 - The June Consumer Price Index increased 0.5% from May.  CPI measures inflation, or price increases.  This is the largest monthly CPI increase since February where inflation rose 0.7%. The culprit this time is gasoline, which caused two thirds of the increase in CPI and by itself rose 6.3%.  Take food and energy items out of the index and core inflation rose 0.2% from May.  CPI is now up 1.8% from a year ago as shown in the below graph.  This is quite a jump from May's reported 1.4% annual increase in inflation.  Core inflation, or CPI minus food and energy items, increased 0.2%, the same as May.  Core inflation has risen 1.6% for the last year and is the lowest annual increase since June 2011.  Core CPI is one of the Federal Reserve inflation watch numbers and 2.0% per year is their boundary figure.  Those wanting the Fed to continue their quantitative easing will be pleased with these low annual inflation figures.   Graphed below is the core inflation change from a year ago. Core CPI's monthly percentage change is graphed below.  The ten year average for core inflation has been a 1.9% annual increase. Core inflation's components include shelter, transportation, medical care and anything not food or energy.    Shelter increased 0.2% and is up 2.3% for the year.  The shelter index is comprised of rent, the equivalent cost of owning a home, hotels and motels.  Rent increased 0.2% for the month as did the equivalent of owning a home.  Lodging away from home, or hotels and motels, has much less weight in the shelter index and decreased -0.8% for the month.  Apparel increased 0.9% and this was the largest price jump for clothing since August 2011.  New cars and trucks prices increased -0.3% while used autos declined by -0.4%.  Airfares dropped -1.7% balancing out last month's 2.2% rise.   Graphed below is rent, where cost increases hits people who can least afford it most.  Rent has increased 2.9% for the year.

CPI Jumps On Food, Energy, Apparel, Medical Care Costs - For those who don't eat or use energy: feel free to stop reading now - your inflation came in just as expected, at 0.2% up from May, and 1.6% higher compared to a year ago. However, those unlucky few who are forced to eat, use and A/C and/or commute, your inflation just saw its biggest monthly hedonically-adjusted jump (don't forget the deflationary impact of that 80 inch LCD TV you have zero intention of buying), or 0.5%, since February's 0.7% and well above the 0.3% expected. This was driven by a 6.3% surge in gasoline prices, and a nat gas price index soaring 11.7% leading to a 3.4% increase in Energy prices, even as the Food increase of 0.2%, tied for the highest since December 2012 was subdued. And while non-food and energy components did not see major spikes, June apparel prices jumped 0.9%, the highest since 2012, as did Medical Care Commodities and Services, rising 0.5% and 0.4% respectively, both posting the highest M/M jump since well into 2012.

How Concerned Should We Be About June’s Sharp Jump in Inflation? - U.S. consumer price inflation jumped to a seasonally adjusted annual rate of over 5.9 percent in June, according data released today by the Bureau of Labor Statistics. That was up from an inflation rate of just 1.8 percent in May. In March and April, the CPI actually decreased. How much do we need to worry about the sharp increase in inflation, or the increasing volatility of inflation over the past year, both of which are evident in the following chart? Here are some points to consider. First, the jump in the monthly inflation rate and the volatility of recent months are almost completely due to ups and downs in the seasonally adjusted price of gasoline. It rose 6.1 percent in the month of June alone after no change in May and decreases of 8.1 percent in April and 4.4 percent in March (all monthly changes, not annualized). The price of gasoline is notoriously volatile. It depends not only on world oil prices, but also on the dynamics of domestic refining and on driving habits. Other energy and food prices are also volatile, although not quite so much so. If we strip food and energy out of the CPI, we get the seasonally adjusted core CPI, which varies much less from month to month, as the next chart shows. Second, the price of gasoline really did not increase much in June. The reported seasonally adjusted price rise for June was 6.3 percent, but in reality, the price at the pump went up by only 0.6 percent. Seasonal adjustments depend on what usually happens to the price of a good in a given month. Usually, the price of gasoline rises in the spring, with the rate of increase peaking in May. The price then usually falls a bit in June. This year, for some reason, the usual June decrease in the unadjusted gasoline price did not occur. Instead, the seasonal adjustment factor made the failure of gasoline prices to fall look like a sharp increase. Gasoline has a large weight in the CPI, accounting for 5.6 of all consumer expenditures, so the misdirected seasonal adjustment skewed the whole CPI upward.

Is Inflation Running Hotter Than we Think? - Yesterday’s CPI report confirmed what most people think – inflation is running much cooler than most presume.  This isn’t shocking when we consider the high unemployment rate, the low capacity utilization, the substantial output gap and the generally sluggish conditions.  Producers just don’t have a huge amount of pricing power given the weakness of aggregate demand.   But inflation isn’t always an even phenomenon and asset price inflation has become an increasingly dangerous phenomenon in recent years. Of course, this has been nowhere more apparent than it is in the real estate market where soaring prices only just recently led to a near collapse in the US economy.  And while I became fairly bullish on housing last year I have to admit that the level of the rally in real estate has been very surprising.  Prices are up 12.2% year over year according to CoreLogic. Of course, this is a tricky way to view inflation because the BLS doesn’t count housing prices as consumption, but investment.  I don’t think the investment/consumption view of real estate is quite so black and white which is why I embed real estate prices in the Orcam Housing Adjust Price Index.  The latest reading on the OHAPI is showing 4% year over year inflation.  That’s more than double what the CPI is saying. Now, this might not accurately reflect a price basket as well as the CPI does, but inflation is always and everywhere an uneven phenomenon and asset price inflation in the consumer’s most important balance sheet item is worth keeping an eye on.  Had we tracked something like the OHAPI in the early 2000′s we would have never fallen for the idea that inflation was low during the biggest housing boom in US history. 

Analysis: Take Out Unusual Energy Jump, Inflation Is Tame - Consumer inflation appears to be tame with the exception of energy prices. Ryan Sweet of Moody’s Analytics and Wall Street Jounral’s Mathew Passy discuss the latest CPI figure and the impact of rising gas prices on the consumer.

What Inflation Means to You: Inside the Consumer Price Index - Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI.  The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link. The chart below shows the cumulative percent change in price for each of the eight categories since 2000.  Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. Another unique feature of Apparel is the obvious seasonal volatility of the contour.  Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For a closer look at gasoline, see my weekly gasoline updates

Inflation: A Five-Month X-Ray View: New Update - Here is a table showing the annualized change in Headline and Core CPI, not seasonally adjusted, for each of the past five months. I've also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components. Some of us have higher transportation costs, others medical costs, etc. A conspicuous feature in the table through the latest data is the volatility of energy, essentially the fluctuation in gasoline prices, which is also reflected in Transportation. The range from February to June is absolutely astonishing. Here is the same table with month-over-month numbers (not seasonally adjusted). The change in energy costs is clearly illustrated, reflected here too in transportation. The chart below shows Headline and Core CPI for urban consumers since 2007. Core CPI excludes the two most volatile components, food and energy. I've highlighted the 2% to 2.5% range that the FOMC targeted in their December 12, 2012 press release, although the Fed has traditionally used the Personal Consumption Expenditure (PCE) price index as their preferred inflation gauge.

Chained CPI Versus the Standard CPI: Breaking Down the Numbers -  The Consumer Price Index for Urban Consumers (CPI-U, or more generally CPI) is the most familiar gauge of inflation in the US. The data for the non-seasonally adjusted series stretches back a century to January 1913. But the news of late is about a relative newcomer to the inflation metrics of the Bureau of Labor Statistics (BLS), the Chained CPI for Urban Consumers (C-CPI-U). The BLS has a Frequently Asked Questions page on the Chained CPI that's been around for a while.   For a snapshot comparison of how the conventional CPI and Chained CPI stack up against each other, I've created a variation on the CPI chart I've been updating monthly for the past several years here. The chart illustrates the overall change in inflation for CPI, Core CPI, and the eight top-level components of CPI since the turn of the century (more here). I also include energy, which is a collection of subcomponents, and College Tuition and Fees, a subcomponent of one of the top eight.The BLS has published the data for these metrics for chained CPI from December 1999. The one missing element is College Tuition and Fees, a subcomponent of Education and Communication. The chart below pairs the two versions of each component showing the total change since December 1999. We can thus have a more educated sense of how the Chained CPI and conventional CPI differ from one another. Here is a bottom line comparison: Since December of 1999, the average year-over-year inflation calculated monthly based on the conventional CPI has been 2.41%. For equivalent calculation for the Chained CPI it is 2.14%, a difference of 0.27%.

Let's Not Invent New Ways to Measure Higher Inflation - Matthew Klein of Bloomberg View has just posted an interesting article called "A Better Way to Measure Inflation." He writes: Sooner or later, most people end up retiring. You may not be working, but you still need money to eat and live. In the U.S., retirees get some income from Social Security, while Medicare covers their healthcare expenses. These programs by themselves aren't enough for most people, which is why it's a good idea to take some of the money you earn during your working life and use it to buy assets that can be consumed later.  The amount of money you need to spend on assets to guarantee a given standard of living in retirement is determined by your assets' average yield. The higher the yield on your assets, the less money you need to spend today to get an equivalent amount of money in retirement. Falling yields therefore mean you need to spend more money today to guarantee the same amount of money in the future. In other words, the price of retirement, which is a price almost everyone is exposed to, goes up when yields go down. The Consumer Price Index calculates inflation as the percent change in the price of a "market basket" of goods and services. Klein implies that the Consumer Price Index understates inflation because retirement is left out of the market basket.

Consumers Most Penny-Wise in Almost 50 Years: Chart of the Day - Consumers in the U.S. are spending more closely in line with their incomes than in any expansion in the past 48 years, learning the lesson of the last recession that living beyond your means often ends badly. The CHART OF THE DAY shows the correlation between wages and purchases in the economic rebound that started in June 2009 is 94 percent, the highest of the seven expansions since 1965, according to data compiled by economists at RBC Capital Markets in New York. That’s 18 percentage points above the closest period, 1971-1973, and 88 percentage points higher than the 2002-2007 cycle, when consumers tapped home equity during the housing boom to finance spending. “The consumer has really cleaned up their balance sheet -- they’re growing consumption based on the rate of growth of their earnings, which at the end of the day builds a more solid foundation,” said Jacob Oubina, a senior economist at RBC. “We’d just like to see a little bit more credit usage, because it’s been non-existent.”

Oil and Gasoline Prices Increase, Spread between Brent and WTI Narrows -- From Mercury News: Gas prices expected to rise soon: Gas prices are back on the rise and could increase by 10 to 15 cents a gallon over the next couple of weeks, analysts say. The biggest culprit behind the anticipated surge is the price of crude oil, which approached $106 a barrel Friday. That's up from $97 on July 1. Each $1 increase typically turns into a 2.5-cent hike at the gas station. The average in California is hovering around $4 a gallon, up a few cents over the past week. But the national average reached $3.55 on Friday, seven cents more than a week earlier. Unfortunately we are seeing more refinery problems and gasoline futures are up sharply. From the WSJ: Gasoline Futures Hit Four-Month High After Refinery Glitches Gasoline futures shot to the highest level in nearly four months Friday, after a series of refinery glitches spurred concerns about the ready availability of fuel supplies.  Motiva Enterprises LLC on Wednesday shut a production unit at its Port Arthur refinery in Texas. ... Separately, Phillips reported a production shutdown at its refinery in Ponca City, Okla., after a power outage. The refinery had resumed normal operations by Friday afternoon, a company spokesman said. Oil prices were up this week, with WTI at $105.95 per barrel up from $93.69 three weeks ago, and Brent at $108.81, up from $100.91 three weeks ago.

Weekly Gasoline Update: Biggest Increases Since Early February - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for Regular is up 15 cents and Premium 13 cents from a week ago. Regular and Premium are now 15 cents and 14 cents, respectively, off their interim highs in late February.  According to, Hawaii, Alaska and California are averaging above $4.00 per gallon, up from only Hawaii and Alaska last week. Two states, Connecticut and Illinois, are in the 3.90-4.00 range.

DOT: Vehicle Miles Driven increased 0.9% in May -- The Department of Transportation (DOT) reported:Travel on all roads and streets changed by +0.9% (2.3 billion vehicle miles) for May 2013 as compared with May 2012. Travel for the month is estimated to be 262.1 billion vehicle miles.The following graph shows the rolling 12 month total vehicle miles driven. The rolling 12 month total is still mostly moving sideways.Currently miles driven has been below the previous peak for 66 months - over 5 years - and still counting.  The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were down in May compared to May 2012. In May 2013, gasoline averaged of $3.67 per gallon according to the EIA. In 2012, prices in May averaged $3.79 per gallon. However gasoline prices were up year-over-year in June and especially in July of this year, so I expect miles driven to be down year-over-year in July. Gasoline prices are just part of the story.  The lack of growth in miles driven over the last 5 years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.

Vehicle Miles Driven: Population-Adjusted Fractionally Off the Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through April. Travel on all roads and streets changed by 0.9% (2.3 billion vehicle miles) for May 2013 as compared with May 2012. Travel for the month is estimated to be 262.1 billion vehicle miles. Cumulative Travel for 2013 changed by -0.5%. Cumulative estimate for the year is 1,203.6 billion vehicle miles of travel. (PDF report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data are hovering just off their post-financial crisis lows.Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from earlier DOT spreadsheets.Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.Clearly, when we adjust for population growth, the Miles-Driven metric takes on a much darker look. The nominal 39-month dip that began in May 1979 grows to 61 months, slightly more than five years. The trough was a 6% decline from the previous peak.The population-adjusted all-time high dates from June 2005. That's 93 months — over seven years ago. The latest data is 8.91% below the 2005 peak, fractionally off the post-Financial Crisis low of -8.93% set two months earlier. Our adjusted miles driven based on the 16-and-older age cohort is about where we were as a nation in January of 1995.

Rail Traffic Continues to Muddle Along -- Nothing too exciting in this week’s rail traffic update.  Intermodal was up 1.1% which brings the 12 week moving average to 2.1%.  AAR has more details:“The Association of American Railroads (AAR) reported increased weekly rail traffic for the week ending July 6, 2013, with total U.S. weekly carloads of 247,896 carloads, up 2 percent compared with the same week last year. Intermodal volume for the week totaled 205,597 units, up 1.1 percent compared with the same week last year. Total U.S. traffic for the week was 453,493 carloads and intermodal units, up 1.6 percent compared with the same week last year.Five of the 10 carload commodity groups posted increases compared with the same week in 2012, including petroleum and petroleum products, up 36.3 percent, and nonmetallic minerals and products, up 11.6 percent. Commodities showing a decrease compared with the same week last year included motor vehicles and parts, down 13.8 percent. For the first 27 weeks of 2013, U.S. railroads reported cumulative volume of 7,465,261 carloads, down 1.4 percent from the same point last year, and 6,476,035 intermodal units, up 3.6 percent from last year. Total U.S. traffic for the first 27 weeks of 2013 was 13,941,296 carloads and intermodal units, up 0.9 percent from last year.”

LA area Port Traffic: More Export Weakness in June - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for June since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 1% in June, and outbound traffic down 3%, compared to the rolling 12 months ending in May. In general, inbound traffic has been increasing slightly, and outbound traffic has been declining slightly.The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year).This suggests an increase in the trade deficit with Asia for June.

Empire State Manufacturing Improves Modestly -  This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions beat expectations, posting a expansionary reading of 9.5, up from 7.8. The forecast was for 5.0. Here is the opening paragraph from the report. The July 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve modestly. The general business conditions index rose two points to 9.5. The new orders index rose ten points to 3.8, and the shipments index climbed twenty-one points to 9.0. The prices paid index fell four points to 17.4, pointing to a slower pace of input price increases, while the prices received index fell to 1.1, suggesting that selling prices were little changed. Employment indexes were mixed, and indicated little positive momentum in the labor market. The index for number of employees inched up to 3.3, while the average workweek index remained negative at -7.6. Indexes for the six-month outlook were generally higher -- a sign that optimism about future business conditions had strengthened. Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):

Philly Fed Surges To Highest Since March 2011 - When we reported on the Initial Claims print we said that "we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs." Well, we just got the all time highs, first in the DJIA for moments ago in the S&P cash as well, following news that the Philly Fed soared from 12.5 to 19.8, slamming expectations of a modest decline to 8.0, and despite a drop in New Orders from 16.6 to 10.2, and a crash in Inventories from -6.6 to -21.6, the headline print coming at the highest since March 2011.

Philly Fed Manufacturing Survey indicates Solid Expansion in July  - From the Philly Fed: July Manufacturing Survey Manufacturing firms responding to the July Business Outlook Survey indicated that regional manufacturing conditions improved this month. All of the survey’s broadest current indicators were positive, and most showed improvement from last month. The surveyʹs indicators of future activity also showed a notable rise, suggesting that firms expect a pickup in business over the next six months. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 12.5 in June to 19.8, its highest reading since March 2011.Labor market conditions showed a notable improvement this month. The current employment index, at 7.7, registered its first positive reading in four months. This was above the consensus forecast of a reading of 9.0 for July.  Earlier in the week, the Empire State manufacturing survey also indicated faster expansion in July. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through July. The ISM and total Fed surveys are through June. The average of the Empire State and Philly Fed surveys turned positive in June, and increased further in July.  This suggests a further rebound in the ISM report for July. 

Philly Fed Business Outlook: Manufacturing Conditions Improved -  The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity rose to 19.8 from the previous month's 12.5. The 3-month moving average came in at 5.0, up from 2.9 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's headline number is the highest since March 2011, and the 3-month MA trend is well above its interim low set in July of last year. Here is the introduction from the Business Outlook Survey released today: Manufacturing firms responding to the July Business Outlook Survey indicated that regional manufacturing conditions improved this month. All of the survey’s broadest current indicators were positive, and most showed improvement from last month. The survey’s indicators of future activity also showed a notable rise, suggesting that firms expect a pickup in business over the next six months....  The July Business Outlook Survey indicates a pickup of manufacturing activity this month, with most broad indicators, including employment, pointing to improvement over June. Firms’ responses suggest an improvement in the six-month outlook, and firms were more optimistic about adding to payrolls over the next six months. (Full PDF Report)  Today's 19.8 was substantially higher than the 7.8 forecast at  The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012. At this point the contraction in 2013 is shallower, thanks to positive monthly readings in March and April. The next few months will bear close watching.

Fed: Industrial Production increased 0.3% in June - Industrial production increased by 0.3% in June, in line with expectations. Although the advance was modest, last month’s rise was the highest since February, the Federal Reserve reports. The upturn was enough to boost the year-over-year gain to 2.0% through June, or slightly better than May's 1.7% annual rate. The cyclically sensitive manufacturing component also turned higher last month, gaining 0.3%, which is also the best monthly advance since February. The overall message is that industrial output continues to grind higher. The pace of growth remains sluggish, but the good news is that there’s no obvious signs of deterioration in the broad trend. The downturn in industrial activity in April and May seems to have passed, at least for now.  But it's also true that the year-over-year rate of growth in industrial production continues to bump along near the lowest levels seen over the last two years. That’s a reminder that there’s a thin margin of comfort if another bout of weakness strikes the industrial sector. It’s debatable at what point slower year-over-year growth would signal high risk for the business cycle, but for the moment the threat looks a bit lower compared with a month ago. This much is clear: when the annual rate of industrial production is falling, on a sustained basis, we'll have a compelling warning sign from this indicator. By that standard, the numbers still look mildly positive.

Fed: Industrial Production increased 0.3% in June - From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.3 percent in June after having been unchanged in May. For the second quarter as a whole, industrial production moved up at an annual rate of 0.6 percent. In June, manufacturing production rose 0.3 percent following an increase of 0.2 percent in May. The output at mines advanced 0.8 percent in June, while the output of utilities decreased 0.1 percent. At 99.1 percent of its 2007 average, total industrial production was 2.0 percent above its year-earlier level. The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972–2012) average.   This graph shows Capacity Utilization. This series is up 10.9 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.8% is still 2.4 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.8% in December 2007. The second graph shows industrial production since 1967. Industrial production increase 0.3% in June to 99.1 . This is 18.2% above the recession low, but still 1.8% below the pre-recession peak.

June 2013 Industrial Production Improves - The headlines say seasonally adjusted Industrial Production (IP) improved 0.3% in June 2013 and up 2.0% year-over-year. Econintersect‘s analysis using the unadjusted data is that IP growth accelerated 0.2% month-over-month, and is up 1.8% year-over-year.

  • The year-over-year rate of growth is trending down using a three month rolling average, and is down using any rolling average between 6 to 12 months.
  • Industrial production is being affected by large movements in utilities, but not significantly in June.
  • The market was expecting between -0.5% and +0.3% (vs the headline growth of 0.3%).
  • The seasonally adjusted manufacturing sub-index (which is more representative of economic activity) was up 0.3% month-over-month – and up 1.8% year-over-year .

IP headline index has three parts – manufacturing, mining and utilities – manufacturing was up 0.3% this month (up 1.8% year-over-year), mining up 0.8% (up 4.4% year-over-year), and utilities were down 0.1% (down 0.3% year-over-year). Note that utilities are 10.3% of the industrial production index.

Industrial Production Grows Only 0.6% for Q2 2013 -- The June 2013 Federal Reserve's Industrial Production & Capacity Utilization report shows a 0.3% increase in industrial production.  For Q2 industrial production rose an annualized 0.6%.  This is the lowest quarterly industrial production since Q3 2012 and before that, the height of the recession, Q2 2009.  The G.17 industrial production statistical release is also known as output for factories and mines.  The graph below shows quarterly annualized industrial production. Industrial production does have some correlation to GDP components, but not always.  Regardless, the poor quarter is not good news.  The below graph is the industrial production index. Total industrial production has increased 2.0% from June 2012 and is still down -0.9% from 2007 levels, going on past an incredible six years.  Here are the major industry groups industrial production percentage changes from a year ago.

  • Manufacturing: +1.8%
  • Mining:             +4.4%
  • Utilities:           -0.3%

Manufacturing output alone shows a 0.3% monthly change and grew 0.2% annualized for Q2.  For Q1 manufacturing grew at a 5.1% annualized rate.   Below is a graph of just the manufacturing portion of industrial production. Durable goods increased 0.5% for the month and for Q2 increased at a 1.5% annualized rate.  This is more bad news for in Q1 durable goods showed a 6.5% annualized increase.

Vital Signs Chart: Factory Demand Reviving? - Factories are finding their footing after an early spring slump. Manufacturing output rose 0.3% in June, after growing 0.2% in May and contracting in April. Global economic weakness and government budget cuts have weighed on U.S. manufacturers for months, following a big jump in activity early this year. June’s report suggests demand for U.S. goods may be gradually reviving.

Industrial Production In Line: Hardly Bad Enough To Send S&P Above 1700 - Those hoping that the Stalingrad & Propaganda 471 would soar above 1700 today on some abysmal Industrial Production will have to taper their hopes, as the number printed right on top of expectations, or at 0.3%, up from last month's 0.0%. This was driven by a better blend of Manufacturing (+0.3%), Mining (+0.8%), both the highest since February, and Utilities which dipped -0.1%, but far better than the prior two months' -1.6% and -2.8% declines on "cooler|warmer" weather. Parallel to the IP data the Capacity Utilization printed at 77.8, up from an upward revised 77.7 last month, and a fraction above expectations, leading to the first "beat" in the series since 2010 even though the headline number was 0.1 above the lowest print of 2013 to date. Alas, with the Old Normal average in the 80+ range, there is much room to go before the legacy manufacturing slack is absorbed. One thing is certain: QE is not helping.

The Path of Wage Growth and Unemployment - SF Fed Economic Letter: During the most recent recession the unemployment rate jumped 5.6 percentage points, but wage growth slowed only modestly. The economy has been recovering for four years and unemployment has declined considerably, but wage growth has continued to slow. These patterns contradict standard economic models that hold that unemployment and wage growth normally are tightly related and move in opposite directions. This Economic Letter argues that these patterns are consistent with the reluctance of employers to adjust wages immediately in reaction to changing economic conditions. In particular, employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions. This behavior, known as downward nominal wage rigidity, played a role in past recessions, but was especially apparent during the Great Recession. Wage rigidity kept nominal wage growth positive throughout the recession. This led to a significant buildup of pent-up wage cuts, that is, wage cuts that employers wanted, but were unable to make.

A Jobless Recovery Is a Phony Recovery - The longest and worst recession since the end of World War II has been marked by the weakest recovery from any U.S. recession in that same period. The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000—but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The survey also reported that in June full-time jobs declined by 240,000, while part-time jobs soared by 360,000 and have now reached an all-time high of 28,059,000—three million more part-time positions than when the recession began at the end of 2007. That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May. The 7.6% unemployment figure so common in headlines these days is utterly misleading. An estimated 22 million Americans are unemployed or underemployed; they are virtually invisible and mostly excluded from unemployment calculations that garner headlines. At this stage of an expansion you would expect the number of part-time jobs to be declining, as companies would be doing more full-time hiring. Not this time. In the long misery of this post-recession period, we have an extraordinary situation: Americans by the millions are in part-time work because there are no other employment opportunities as businesses increase their reliance on independent contractors and part-time, temporary and seasonal employees.

Labor Force Participation Is Not Coming Back - Don’t worry about labor force participation. It’s not coming back. That’s the conclusion of a new piece of economic modeling by the respected St. Louis firm Macroeconomic Advisers. And, if true, it has important implications for the Federal Reserve’s conduct of monetary policy over the next few years. Specifically, it means the monthly pace of job creation so far this year is ample to push the unemployment rate below 6.5 percent by mid-2015.L et’s take a step back. Lots of people lost jobs during the Great Recession. In the aftermath, the great surprise has been how few are looking for new jobs. Labor force participation, the share of adults working or trying to find work, has stagnated at about 63.5 percent, almost three percentage points below the pre-recession level. The unemployment rate has dropped almost entirely because of this decline in labor force participation. In other words, it has not fallen because people are finding jobs. It has fallen because fewer people are looking for jobs. The question is whether that’s a permanent condition. Some economists say that people who have stopped looking for jobs will start looking again as economic conditions improve.Macroeconomic Advisers says, however, that participation is unlikely to increase. Yes, some people will start looking for jobs. But it predicts that will be offset by other trends, like the aging of the population into retirement.  It also points to the growing popularity of federal disability benefits, a program many researchers say is functioning as a safety net for people who can’t find jobs – except that it tends to remove them from the workforce on a permanent basis.

Research: Labor force participation rate expected to stay flat through 2015 - I've written frequently about the participation rate (the percent of the civilian noninstitutional population in the labor force). The participation rate was expected to decline for structural reasons even before the great recession started (baby boomers retiring, younger Americans staying in school longer, etc.). A key question is how much of the recent decline in the participation rate was due to long term trends, and how much was cyclical (economic weakness)? Here is some research from Macroeconomic Advisers: Where’s Labor Force Participation Heading?

• Fifty-five percent of the recent decline in the participation rate is due to structural factors that, on balance, will continue to exert downward pressure on participation through 2015.
• The other forty-five percent is cyclical and will gradually abate. However, the cyclical decline in participation has been larger and more persistent than in past cycles due to the unusually large increase in the average duration of unemployment during this cyclical episode.
• Going forward, the cyclical rebound in participation will roughly offset the continuing downward push of structural forces. Consequently, we project that in 2015, when the FOMC will be contemplating the first increase in the federal funds rate, the participation rate will be 63.4%, the same as in the second quarter of this year..
That projection for the participation rate implies that monthly changes in household employment averaging about 114,000 will be sufficient to stabilize the unemployment rate through 2015. Anything faster will push the unemployment rate down. To reach the FOMC’s threshold unemployment rate of 6.5% in the second quarter of 2015, as shown in our forecast, requires monthly changes in household employment averaging roughly 170,000 over the next 24 months, consistent with our forecast that monthly changes in establishment employment will average roughly 190,000 over that same period.

The Jobs Number Is BS Says Former Head Of BLS -- After every non-farm payroll report we provide our own breakdown of what the real unemployment rate is in a country in which the labor force participation rate has not been adjusted to normalize for the Second Great Depression. In the most recent such endeavor we found the "Real Unemployment Rate" to be 11.3%. To wit: As of May, assuming realistic LFP assumptions, the real U-3 unemployment rate should have been not 7.6% but 11.3%. Today, courtesy of the Post's John Crudele we find that our estimate was spot on not just from anyone, but the former head of the BLS himself: Keith Hall. Keith Hall believes the US economy is a lot sicker than the 7.6 percent unemployment rate would lead you to believe. And he should know.  Hall was, from 2008 until last year, the guy in charge of Washington’s Bureau of Labor Statistics, the agency that compiles that rate. “Right now [it’s] misleadingly low,” says Hall, who believes a truer reading of those now wanting a job but without one to be more than 10 percent. The fly in the ointment is the BLS employment-to-population ratio, which is currently at 58.7 percent. “It’s lower than it was when the recession ended. I think that’s a remarkable statistic,” says Hall, a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Va.

The "Strongest Start" for Teen Summer Jobs in Seven Years - In June 2013, the number of people Age 16 or older in the United States who were counted as having jobs rose by 160,000 to 144,058,000. The biggest gains were claimed by Americans between the ages of 20 and 24, who saw their numbers in the workforce increase by 193,000 to 13,605,000, while American teenagers between the ages of 16 and 19 saw their seasonally-adjusted number in the workforce rise by just 24,000 to 4,469,000.  Unfortunately, the number of adult Americans (Age 25 and older) who were counted as having jobs fell by 57,000 to 125,984,000 in June 2013, which is why the net change in the number of employed Americans only rose by 160,000 from the previous month.  Our chart below shows the change in the number of employed Americans for each of these age groups since November 2007, which marked the most recent peak for the total number of employed Americans of 146,595,000:

There Is No "True" Unemployment Rate - Krugman - In my last post I compared food stamp use with U6, a broad definition of unemployment — and I saw some commenters claiming that U6 is the “true” unemployment rate, even that I was for the first time admitting this fact. Um, no. There is no “true” unemployment rate, just various indicators of the state of the labor market. Fortunately, these indicators pretty much move in tandem, so we’re not usually confused about whether the market is getting better or worse. But they do measure somewhat different things, and which one you want to look at depends on what questions you’re asking. After all, what do we mean when we say someone is unemployed? We don’t just mean “not working”, because that applies to retirees, the disabled, playboys on yachts, etc.. We mean someone who wants to work but can’t find that work — a useful notion. But there’s some unavoidable fuzziness about both what it means to want to work and what it means to be unable to find work.  Suppose you have an expensively acquired degree, and the only jobs out there are part-time gigs at minimum wage. You might not take those jobs; in that case, is it really true that you can’t find work? Alternatively, you might indeed take such a job; is it really right in that case to say that you did find work?

America Is Flat - Krugman - I’ve long had a small bee in my bonnet about the line — which you hear all the time — that portrays long-distance travel, trade, and so on as something new. You know: back in the day people lived in the same place all their lives, they only did business with their immediate neighbors, each village was self-sufficient, but now we’re in a world of global globalizing globaloney and all that. Obviously if you go back far enough the caricature was true. But we’ve had a lot of international migration and trade ever since steam engines and telegraphs came in. There has been a recent huge increase in the value of manufacturing trade, tied to vertical disintegration of production; but aside from that, to what extent is the world really getting smaller or flatter or whatever? Well, there’s one trend we know about that runs completely counter to the usual perception: within the United States, at least, people are moving less — a lot less. Greg Kaplan and Sam Schulhofer-Wohl (pdf) say that interstate mobility has been cut in half over the past 20 years.  This story actually matches up with what the new economic geography literature says, which is that regional specialization peaked around a century ago and has been declining since. Once upon a time steel came from Pittsburgh, butchered hogs from Chicago, pencils from Pennsylvania, coats from North Dakota, and all that; nowadays we’re all cubicle rats doing whatever it is we do:

Weekly Initial Unemployment Claims decline to 334,000 - The DOL reports: In the week ending July 13, the advance figure for seasonally adjusted initial claims was 334,000, a decrease of 24,000 from the previous week's revised figure of 358,000. The 4-week moving average was 346,000, a decrease of 5,250 from the previous week's revised average of 351,250. The previous week was revised down from 360,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 346,000.

Jobless Claims Fell Last Week, Close To A 5-1/2 Year Low -New filings for unemployment benefits skidded last week by a healthy 24,000, settling at a seasonally adjusted 334,000 through July 13. That leaves new claims near the lowest level in more than five years. The year-over-year decline continues to look encouraging as well, with last week’s unadjusted claims data (before seasonal adjustment) dropping more than 10% vs. the year-earlier level. The main takeaway: the labor market continues to heal and this leading indicator suggests that modest economic growth is still on track for the near term. The pace of the decline in new claims has more or less flatlined lately, but today’s drop holds out the possibility of new five-year lows in the weeks and months to come. With the exception of yesterday’s weak report on housing starts for June, which looks a bit shaky at the moment, most of the other key economic and financial indicators are still trending positive through last month in a cyclically convincing manner. (For example, see my discussions of this week’s reports on industrial production, retail sales, and the Macro-Markets Risk Index.) Today’s claims update hints at a repeat performance for July for the overall macro profile.

Jobless Claims plunge to 334K, But July Seasonal Adjustment Is Problematic -  The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 334,000 new claims number was a 24,000 decrease from the previous week's 358,000 (a downward revision from 360,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell by 5,250 to 346,000. Many analysts are skeptical of the July numbers because of seasonal adjustments based on unpredictable schedules of factory shutdowns for annual retooling, especially in the auto industry. Here is the official statement from the Department of Labor: In the week ending July 13, the advance figure for seasonally adjusted initial claims was 334,000, a decrease of 24,000 from the previous week's revised figure of 358,000. The 4-week moving average was 346,000, a decrease of 5,250 from the previous week's revised average of 351,250.  The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending July 6, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending July 6 was 3,114,000, an increase of 91,000 from the preceding week's revised level of 3,023,000. The 4-week moving average was 3,019,250, an increase of 37,000 from the preceding week's revised average of 2,982,250.  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

Don't Get Too Excited On the 24,000 Initial Unemployment Claims Drop -- The DOL reported people filing for initial unemployment insurance benefits in the week ending on July 13th, 2013 was 334,000, a 24,000 decrease from the previous week of 358,000.  While Wall Street jumps on these figures, not so fast, initial claims are still elevated, going on six years since the start of the recession.  While this is the largest decline since April, initial claims is always revised.  For example, last week's initial claims was revised down by 2,000.  During the summer months, there are shutdowns of plants for retooling, which changes in terms of the scheduling.  The unadjusted initial claims data from July 6th does show high layoffs in manufacturing, yet there are no significant temporary layoff retooling announcements. Temporary layoffs can throw off seasonal and statistical smoothing adjustments which are based on historical data.  Distortions should be no surprise on a weekly statistical release, which is a very short time window.  States being late with processing this week's claims can also throw off the weekly figures. Bloomberg managed to dig out some retooling layoff announcements,  If Ford temporary layoffs were only one week instead of two, this alone could have easily thrown off the initial claims seasonal adjustment. Auto plants typically shut down to retool for the new model year, often playing havoc with the claims data in July. Michigan, Pennsylvania and Ohio were among the states reporting the biggest jump in claims two weeks ago, and all cited dismissals at manufacturing plants.

Brooks’s Recovery Gender Swap - How are men doing in our anemic economic recovery? David Brooks, after discussing his favorite Western movie, argues in his latest column, Men on the Threshold, that men are "unable to cross the threshold into the new economy." Though he'd probably argue that he's talking about generational changes, he focuses on a few data points from the current recession, including that "all the private sector jobs lost by women during the Great Recession have been recaptured, but men still have a long way to go." Is he right? And what are some facts we can put on the current recovery when it comes to men versus women? Men had a harder crash during the recession, but a much better recovery, when compared with women.Indeed, during the first two years of the recovery expert analysis was focused on a situation that was completely reversed from Brooks' story. The question in mid-2011 was "why weren't women finding jobs?" Pew Research put out a report in July 2011 finding that "From the end of the recession in June 2009 through May 2011, men gained 768,000 jobs and lowered their unemployment rate by 1.1 percentage points to 9.5%. 1 Women, by contrast, lost 218,000 jobs during the same period, and their unemployment rate increased by 0.2 percentage points to 8.5%."How does that look two years later? Here's a graph of the actual level of employment by gender from the Great Recession onward:

Higher productivity used to mean higher wages. Has that broken down? - For a long time in America, earnings and productivity went hand and hand: The more productive workers got, the more they made, on average. That relationship appeared to break down starting in the early 1970s, as productivity increased but wages flat-lined, and economists have spent several decades debating why.But what if the mystery was always an illusion – and it distracted experts and policymakers from a more important productivity problem? That’s the argument James Sherk, a senior policy analyst at the conservative Heritage Foundation, makes in a new paper. Sherk contends total compensation, properly adjusted for inflation, has kept pace with properly-measured productivity, on average. The real problem, he says, is that far too many workers are stuck in low-productivity jobs, particularly in the health-care sector; he argues policymakers should be focused on helping those workers gain more skills and move into more productive sectors — specifically, by looking for ways to reduce the cost and increase the accessibility of higher education. The productivity-wages divergence chart typically looks something like this:

Is Productivity Being Translated Into Pay Increases? - Jim Tankersley has a post in Wonkblog asking whether there has been a divergence between pay and productivity over the last three decades. The post notes a study from James Sherk at Heritage which makes several valid points. First, part of the gap between average pay and productivity is explained by a growing share of compensation going to health care benefits. Second part of the gap is the result of the fact that productivity is measured in gross output, whereas only net output is available for consumption. Third, we use different deflators to measure output than consumption. The consumer price index, which is used to measure real wages, shows a higher rate of inflation than the implicit price deflator. If we use the same deflator to measure real wages and output, then this also eliminates much of the seeming gap between productivity and pay.I had made these points myself a few years back. My conclusion was that we were really looking at a story of upward redistribution from middle and lower income workers to those at the top, doctors, lawyers, and especially Wall Street types and CEOs. Distribution from wages to profits was not a big part of the picture.But that was back in 2007. The picture looks a bit different today. The graph below shows the labor share of net income in the corporate sector. This is a bit simpler than constructing productivity and pay data, but it should get at the same issue. I have pulled out depreciation and also indirect taxes, so the division is simply between labor income and capital income. I also show the share of labor compensation in after-tax income in the corporate sector.

The Compensation/Productivity Link Is Indeed Broken for the Vast Majority of American Workers - On Wednesday, Jim Tankersley reported on a new study from the Heritage Foundation claiming that the apparent broken link between wages and productivity is actually just a statistical artifact. Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity. All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on. At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters;  when, say, LeBron James walks into a bar average compensation rises a lot even though  the compensation of the median person in the bar is likely unaffected. So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation  track productivity.

Dancing with Robots: Human Skills for Computerized Work -  On March 22, 1964, President Lyndon Johnson received a short, alarming memorandum from the Ad Hoc Committee on the Triple Revolution. The memo warned the president of threats to the nation beginning with the likelihood that computers would soon create mass unemployment: The cybernation revolution has been brought about by the combination of the computer and the automated self-regulating machine. This results in a system of almost unlimited productive capacity which requires progressively less human labor. Cybernation is already reorganizing the economic and social system to meet its own needs. There was no mass unemployment— since 1964 the economy has added 74 million jobs. But computers have changed the jobs that are available, the skills those jobs require, and the wages the jobs pay. For the foreseeable future, the challenge of “cybernation” is not mass unemployment but the need to educate many more young people for the jobs computers cannot do. Meeting the challenge begins by recognizing what the Ad Hoc Committee missed—that computers have specific limitations compared to the human mind.

BLS: State unemployment rates were "little changed" in June - From the BLS: Regional and state unemployment rates were little changed in June Twenty-eight states had unemployment rate increases, 11 states had decreases, and 11 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today.... Nevada had the highest unemployment rate among the states in June, 9.6 percent. The next highest rates were in Illinois and Mississippi, 9.2 percent and 9.0 percent, respectively. North Dakota again had the lowest jobless rate, 3.1 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan and Nevada have seen the largest declines and many other states have seen significant declines (California, Florida and more).This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession.The size of the blue bar indicates the amount of improvement - Michigan and Nevada have seen the largest declines and many other states have seen significant declines (California, Florida and more).  The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is at or above 9% in only three states: Nevada, Illinois, and Mississippi.  This is the fewest states with 9% unemployment since 2008. The second graph shows the number of states with unemployment rates above certain levels since January 2006.

Four years into the recovery, high unemployment haunts much of the country - The June 2013 Local Area Unemployment Statistics (LAUS) report released this morning by the Bureau of Labor Statistics marks four years since the official start of the recovery.  However, most states still have yet to reclaim their pre-recession employment levels, and high unemployment continues to haunt much of the country. From March 2013 to June 2013, 40 states saw gains in employment, with California (+56,800), Texas (+55,000), and Missouri (+28,200) experiencing the largest net increases in jobs. Missouri (+1.1 percent), Mississippi (+1.0 percent), and Idaho (+0.9 percent) recorded the largest percentage gains. During the same period of March to June, 8 states and the District of Columbia lost jobs. Vermont and North Carolina essentially had no change in employment. Overall, 34 states still have employment levels below their pre-recession peaks, and even those that have reached pre-recession levels still lag in the job growth needed to keep up with population growth since the recession began. From March 2013 to June 2013, unemployment declined in 30 states and the District of Columbia, with California (-0.9 percentage points), West Virginia (-0.9 percentage points), New York (-0.7 percentage points), and Alabama (-0.7 percentage points) seeing the largest declines. However, West Virginia’s drop in unemployment is driven entirely by people giving up the job search, as its labor force shrunk and total employment level declined over the same period. Unemployment rose significantly in New England and the West South Central regions, with Louisiana (+0.8 percentage points) and Massachusetts (+0.6 percentage points) seeing the largest increases. Tennessee’s unemployment rate also rose substantially, by 0.7 percentage points. Unchanged from last month, there are still three states—Nevada, Illinois, and Mississippi—with unemployment rates of at least 9.0 percent, and seventeen states have unemployment rates above the national average of 7.6 percent. In contrast, only eight states have unemployment rates below the pre-recession national average of 5.0 percent.

Western States Lead In Job Creation - Of the 10 states with the fastest employment growth over the past year, nine are west of the Mississippi. Payrolls in Idaho grew 3% in June compared to a year earlier, the strongest gain of any state, the Labor Department said Thursday. Following the “famous potatoes” state are Texas, Colorado and North Dakota, whose total employment all advanced better than 2.5% in June from a year earlier. Payrolls nationwide grew 1.7% over that period. Every state but Alaska added jobs over the past year, but many at a much slower pace. In Maine, payrolls increased 0.1%. The gain was just 0.3% in Ohio. Wyoming bucked the western trend, with employment there advancing just 0.3% as well. Some states, particularly North Dakota and Texas, are benefiting from a booming energy industry. Growth elsewhere was more broad-based. Idaho saw solid improvement for jobs in the trade, transportation and utility and education and health services categories. Those gains helped push down the unemployment rate in Idaho to 6.4% in June, compared to 6.9% a year earlier. The national unemployment rate was 7.6% last month. The July reading for the U.S. will be released August 2. .

The Global Race for Inventors - naked capitalism -  Yves here. I wonder if the pattern described in this article, which is basically a brain drain of inventors to the US, is playing a meaningful role in the degradation of public education in the US. Why do the elites need to care about home-grown “talent” if they exploit the investments in schooling made by other countries?  This column summarises new evidence on the patterns of skilled-worker migration, focusing on the specific case of inventors. A novel data source that traces worldwide migration flows for inventors suggests that, excluding a few nuances, the economic incentives for general migration also seem to influence inventors’ migration decisions.

Provision in Senate Immigration Bill Makes It Tough to Hire High-Skilled Workers - An obscure provision in the Senate immigration bill that makes it tougher for some firms to tap high-skilled, foreign workers could sharply reduce the economic boost the legislation provides, a new study shows. The analysis by Kevin Hassett, director of economic policy studies at the conservative American Enterprise Institute, says the Senate’s immigration bill would be twice as nice for the U.S. economy if it relaxed provisions that limit the ways certain companies can use foreign hires. The provisions were designed to protect American workers. The Senate legislation would make up to 180,000 high-skilled visas, known as H-1Bs, available. But the more generous allotment of visas comes with stricter requirements, particularly for companies with high shares of foreign workers. Under those requirements, companies with a lot of foreign workers – mostly Indian outsourcing companies – would have to pay higher fees to bring in additional foreign labor and some could be barred from receiving new visas.  That’s sure to be bad news for Indian outsourcing firms but Mr. Hassett said there’s a downside for American companies, too. Another provision in the Senate bill says any company that has a workforce with 15% or more foreign workers can’t act as an outplacement firm for H-1B workers. That means hundreds of Fortune 500 companies (think Wal-Mart Stores Inc. and J.P. Morgan Chase & Co.) that contract with Indian firms to find high-skilled foreign workers may have to find another way of doing business.

An Upgrade for the Senate Immigration Bill - Compared with the system in place now, the Senate's immigration reform is a big improvement. But the bill has flaws that make it less likely that the people with the most to contribute to U.S. society can get here legally. Still, the flaws can be fixed by the House.  The Senate bill uses a point system to decide who can get in legally. Almost 40% of the immigration slots in the Senate bill are allocated strictly by family preference—which means this category of immigrant would remain dominant. Just under 30% of the slots in the Senate bill are allocated for employment reasons and around 10% are allocated on a merit basis. Clearing the backlog of applicants for permanent resident status accounts for most of the rest, some of that being family-sponsored as well. The Congressional Budget Office estimates that the Senate bill will result in about 100,000 more immigrants per year initially, leveling off at slightly over one million additional immigrants per year by 2018. Family-preference slots for spouses, children and parents of those already in the U.S. are clearly desirable. Yet points are awarded on the basis of family status even to those whose application is based on merit considerations such as work experience or education.

Is Senate Immigration Bill Better Than the Status Quo? - Senate passage of immigration reform legislation, S 744, begs the question: Is it better than current law? Probably, but the answer could change. Parts of the bill do improve both the immigration system and the labor market. New rules limit abuses of internationally recruited workers, make union organizing easier and protect immigrants from employer retaliation. S 744 also prioritizes permanent immigrants with skills over family connections and creates a Bureau of Immigration and Labor Market Research that would make the system more data-driven. And regularizing unauthorized migrants would bring exploitable workers and their families out of the shadows, allowing them to assert their rights and bargain collectively. Both immigrants and Americans would benefit as wages rise, and law-abiding employers would no longer have to compete in a race to the bottom.  But much more should have been achieved.

Fed Surveys Highlight Job Risk in Healthcare Reform - Surveys released this week by two regional Federal Reserve banks highlight how the Affordable Care Act may have the unintended consequence of keeping the labor market’s share of part-time workers historically high. Within their monthly factory surveys, both the New York Fed and Philadelphia Fed asked a series of special questions about staffing plans and new healthcare regulations. In both surveys, the vast majority of area manufacturers have not made or plan no changes because the firms already offer health insurance or are too small–under 50 employees–to be covered under the mandate that requires insurance. What’s interesting for the future of work is what the other firms plan to do. In New York state, 7.6% plan to fire or refrain from hiring in order to stay under the mandate, and 6.5% plan to shift from full time to part-time workers. In Philly the answers are 5.6% and 8.3%, respectively. Many also planned to outsource work.  Whether companies carry out these strategies will depend greatly on the level of demand in coming years. But the shift to part-time workers would carry on a trend started in the last recession that has been slow to reverse in this recovery. The vast majority of part-time workers prefer shorter hours because of school and family obligations. But another segment work part-time “involuntarily” because work is slack or part-time work was the only job available. These employees would prefer a full-time job.

Obamacare does NOT create part-time jobs - A report from the Bureau of Labor Statistics titled Comparing benefit costs for full- and part-time workers says, "Health insurance appears to be the only benefit representing a true quasi-fixed cost to employers, meaning that the cost per hour worked is greater for part-time employees than it is for full-time employees." Employers create part-time and temp jobs to lower their overhead --- to save payroll costs on the their bottom lines. Let's first look at a few numbers and the current job market. Then we'll look at ObamaCare™ and its alleged relationship to creating part-time jobs.  According the Bureau of Labor Statistics JOLTS reports, during this same period of time, most hiring and separations where because of temporary jobs (hiring > involuntary separations > rehiring) and not because of actual churn (quits) in the labor market, where people would voluntarily leave their permanent jobs to seek out employment elsewhere. And it has absolutely NOTHING to do with ObamaCare™. * Temporary jobs might include tax preparation in the Spring, fast-food service in the Summer and retail help during the Holiday season in the Fall and Winter. According to the Bureau of Labor Statistics (PDF), prior to 10,898,757 layoffs between 2008 and 2013, from 1996 to 2004 there were also a total of 9,404,601 tech jobs lost to offshoring ("overseas relocation"). Over the course of the last 17 years, the U.S. lost 20,303,358 jobs --- about the same number of Americans who can't find full-time work today.

Prepare for the New Permanent Temp - The fastest-growing segments of America's job market — by far — are temporary and part-time employment. According to the Bureau of Labor Statistics, the number of US part-time employees hit a record high of 28 million. Temporary employment has jumped 50% since the depths of the financial crisis. This "ephemeral workforce" phenomenon isn't just American; the UK has also set records in the contingently employed. Something profoundly structural is going on. Even healthier economic growth won't make it go away.  More companies want far greater flexibility with far fewer people. Their greatest human capital concerns have shifted. They seem increasingly focused on productively cultivating that core 20% to 25% of people who reliably generate the 70% to 80% of enterprise value. They're rethinking their economic relationships with the rest. Have people been commoditized? Of course not. But the ways people's knowledge, skills and expertise get plugged into the workplace has been. For roughly half of America's workforce, the role, rules and requirements of "the job" are dramatically different than they were even a decade ago. Just ask anyone working in the health care, financial services, automobile, retail, media, publishing, education, advertising, real estate or defense industries.

Behold The Part-Time Worker Society: "We Won't Start Hiring Full-Time People" - Once again, as always happens with a very substantial delay, two themes that have been covered extensively on these pages in the past much to the ridicule of the mainstream media, namely that while the US may have "No Manufacturing Jobs But More Waiters And Bartenders Than Ever" and that Obamacare has finally struck as "Part-Time Jobs Surge To All Time High; Full-Time Jobs Plunge By 240,000" are now begrudgingly covered and in fact, endorsed, by the very same MSM. Enter the Wall Street Journal which blends the two themes well known to our readers, and writes that "More Restaurants Replace Full-Timers, Concerned About Insurance." To wit: "Ken Adams has been turning to more part-time workers at his 10 Subway sandwich shops in Michigan to avoid possibly incurring higher health-care costs under the new federal insurance law. He added approximately 25 part-time workers in May and June as he reduced some employees' hours and replaced other workers who left. The move showed how efforts by some restaurant owners and other businesses to remake their workforces because of the Affordable Care Act may be turning the country's labor market into a more part-time workforce." In other words, the already worst paying jobs in the US are getting even more of the shaft, downgraded from full time to part time status. Precisely the New "part-time worker society" that we predicted would happen back in 2010...

McDonalds Tells Workers To Budget By Getting A Second Job And Turning Off Their Heat - McDonalds has partnered with Visa to launch a website to help its low-wage workers making an average $8.25 an hour to budget. But while the site is clearly meant to illustrate that McDonalds workers should be able to live on their meager wages, it actually underscores exactly how hard it is for a low-paid fast food worker to get by.  The site includes a sample”‘budget journal” for McDonalds’ employees that offers a laughably inaccurate view of what it’s like to budget on a minimum wage job. Not only does the budget leave a spot open for “second job,” it also gives wholly unreasonable estimates for employees’ costs: $20 a month for health care, $0 for heating, and $600 a month for rent. It does not include any budgeted money for food or clothing.

McDonalds Tells Workers to Toil 70 Hours a Week, Use Ripoff Payroll Cards as Part of “Financial Literacy”-  Yves Smith  - The poor have to endure not just the indignity of struggling to survive, but also from having to listen to pious lectures on how they really can proper on their meager incomes.  The McDonalds/Visa/”Wealth Watchers” version of this “let them eat cake” comes in the form of a website that drives home the message that if low wage workers like McDonalds employees just mustered up enough budget discipline, they can achieve “financial freedom”. The use of math, one imagines, is intended to make the advice seem objective rather than cynical and self serving. ThinkProgress, which pounced on this spreadsheet, pointed out how unattainable this sanitized, prettily-formatted elite fantasy is.  Now it’s not hard to notice that these lovely patronizers anticipate, in a super duper high unemployment economy, that the industrious budget-preparer will have TWO jobs. And how much time might that entail? ThinkProgress tells us that McDonalds pay “averages” $8.25. I’m not sure where they got that, since other reports (Glassdoor) show McDonalds’ jobs postings paying well under $8, and a Bloomberg story recounted how a 20 veteran was still getting only minimum wage in Chicago…which is $8.25. So we’ll used $8.25 even though this looks like creative accounting from McDonalds’ PR department.

Every Day, Low Wages -- On Wednesday, the Washington, DC, City Council passed the Large Retail Accountability Act (LRAA), a bill that will require large retail corporations—specifically businesses with more than $1 billion in sales and retail locations of at least 75,000 square feet—to pay their workers a minimum wage of $12.50 per hour.  It’s hard to view Walmart’s threat to scuttle the three stores, made literally the day before the Council vote, as anything but outright bullying by the largest and one of the most profitable corporations in the world. Walmart does deserve special scrutiny because of their unique track record in driving out smaller retail businesses, depressing wages (pdf), and siphoning off public tax dollars. To be clear, Walmart is not the only big-box retailer that has shut down smaller competitors, but Walmart’s market dominance in many regions, and their role as the largest private employer in the United States, gives them a unique ability to affect living standards for significant segments of the population. Unfortunately, their typical wages are abysmally low. The minimum wage of $12.50 required under the LRAA is just below the average wage of Walmart employees nationwide: $12.67 per hour. And when companies like Walmart don’t pay sufficient wages for workers to make ends meet, the American taxpayer picks up the tab. In nearly every state where it operates, Walmart has more employees on Medicaid than any other company. In some states, its employees are also the largest groups of food stamp and other cash assistance recipients.

The Case for Paying People More - McDonald's and Walmart, the two biggest private-sector employers in the U.S., don't pay their workers much. This more or less eternal truth is making one of its increasingly frequent appearances in the news this week. McDonald's is catching flak for a "sample monthly budget" for employees that sets aside $20 a month for health insurance and no money at all for heat. (Hey, it's July.) Walmart, meanwhile, is threatening to cut back on plans to open stores in Washington, D.C., after the D.C. council voted to impose a "super minimum wage" of $12.50 an hour on big retailers. For decades, most discussions of pay levels and income disparity in the U.S. have been accompanied by a pronounced economic fatalism. Pay is set by the market and the labor market has gone global, the reasoning goes — and when a Chinese or Mexican worker can do what an American can for less, wages have to go down. In explaining what's happened to autoworkers, say, that story makes some sense (although it doesn't explain why German autoworkers have for the most part kept their high pay and their jobs while Americans haven't). But McDonald's burger-flippers and Walmart checkout clerks can't be replaced by overseas workers. Both companies have been understandably loath to depart from their low-pay traditions, so conflict and criticism are pretty much inevitable.

Real Wages Still Below June 2009 Level - Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession. The flat result stemmed from a 0.4% increase in average hourly earnings being offset by a rise in the consumer price index. Over the last 12 months, inflation-adjusted hourly wages have risen by just 0.4%. Standard economic models hold that wages should increase during times of economic recovery and falling unemployment. But new research from economists at the Federal Reserve Bank of San Francisco finds that normal wage models don’t apply during and after recessions. The researchers examined data from the last three U.S. recessions and found that wages held steady or didn’t decline by very much, despite spikes in unemployment, during the downturns. Then, as the economy emerged from recession and unemployment fell, wages didn’t recover much either. After the last recession, the fraction of U.S. workers whose wages were frozen reached a record high. The researchers concluded that when companies lower their labor costs to adjust to declining output, they find it easier to lay off workers than to lower wages. Nevertheless, they typically fail to adjust labor costs as much as they think they need to during the downturn, so they continue the adjustment after the recovery takes hold by keeping a lid on wages.

Five measures of median wage stagnation -Have real wages been stagnating or actually declined? I've been following up with research as to that issue for several weeks. I've already examined four measures of average real, inflation adjusted wages, which showed stagnating to slightly rising wages since the turn of the Millennium.  But what about median wages, i.e., the wage earned by those exactly in the middle of all wage earners? In this post I'll examine specifically median measures, one from the Social Security Administration, measured two ways, and three from the Bureau of Labor Statistics. As it turns out, whether median real wages are declining or not depends very much on your starting point. To cut to the chase, I found that
1. The stories that claim that real median wages have declined during the recovery are correct, but
2. Those same measures show that median wages actually rose during the great recession, and by roughly the same amount, and for the same reason.
3. Meaning that median wages measured from any period from 2007 or earlier up until the start of the Millenium have generally stagnated.

The Top One Percent Take Home 20 Percent of America’s Income - Economic inequality is one of the most serious challenges we face, and it’s getting worse. As CEOs, executives, financial professionals and others take home more and more, ordinary Americans are taking home less. Today, the top one percent of earners are taking home 20 percent of America’s income. The graphic below is based on, EPI’s new website devoted to explaining economic inequality and what it means to ordinary Americans. It shows the shares of income for the top one percent and the bottom 99 percent of income earners in the United States. Income growth between 1948 and 1979 was strong and broadly shared, as shown by the relatively stable shares of income going to the top and bottom, respectively. The inequality found in 1948 generally persisted over the 30 year period, but did not worsen. But between 1979 and 2011, income growth slowed and favored those at the top. Since 1979, the total share of income claimed by the bottom 99 percent has steadily decreased. By 2011, the top one percent had captured an additional 10 percent of the nation’s income. This was the result of intentional policy decisions on taxes, trade, labor, macroeconomics, and financial regulation.

The Sequester's Devastating Impact on America's Poor - The federal government's across-the-board sequestration cuts, which began taking effect in March, may seem like an overhyped piece of political theater--that is, unless you're an unemployed adult living in Michigan. There, roughly 82,000 people, like Kristina Feldotte of Saginaw, have watched their federal unemployment checks dwindle by 10.7 percent since late March. That's as much as a $150 per month from payments that, at most, clock in at $1,440.  "With the air-traffic controllers, Congress fixed that right away because it affected the planes going in and out of Washington. But they're not doing anything that benefits the people."  That's especially true of poor people since Congress and the White House failed to reach a deal to undo the cuts in March. Air-traffic controllers and meat inspectors, represented by powerful unions and lobbyists, got reprieves. Agencies such as the Justice and Homeland Security departments found wiggle room in their budgets to stave off furloughs. But programs outside of D.C. for low-income or distressed people -- such as Head Start, Meals on Wheels, or federal unemployment benefits -- have suffered as the cuts kicked in, leading to cancellations, fewer meals, smaller checks, and staff layoffs.

Poverty has moved to the suburbs - Americans tend to think of poverty as urban or rural—housing estates or shacks in the woods. And it is true that poverty rates tend to be higher in cities and the countryside. But the suburbs are where you will find America’s biggest and fastest-growing poor population, as Elizabeth Kneebone and Alan Berube of the Brookings Institution explain in their book “Confronting Suburban Poverty in America”. Between 2000 and 2010 the number of people living below the federal poverty line ($22,314 for a family of four in 2010) in the suburbs grew by 53%, compared with just 23% in cities. In 2010 roughly 15.3m poor people lived in the suburbs, compared with 12.8m in cities (see chart). Suburban poverty began to rise before the recession. As American cities have grown safer and richer, homes there have become less affordable. During the subprime bubble, many people with bad credit scores got mortgages and moved to the suburbs. A shift towards housing vouchers and away from massive urban projects encouraged people in subsidised housing to make the same move. Immigrants, too, chased the American dream of neat lawns and picket fences. Now 51% of immigrants (who are more likely than the native-born to be poor) live in suburbs, compared with just 33% in cities.When the bubble burst, the suburbs suffered. Construction and manufacturing, two of the most suburban industries, lost more jobs between 2007 and 2010 than any other sector.

Pain on the Reservation - “More people sick; fewer people educated; fewer people getting general assistance; more domestic violence; more alcoholism,” said Richard L. Zephier, the executive director of the Oglala Sioux tribe. “That’s all correlated to the cuts from sequestration.” On the Pine Ridge reservation, home to around 40,000 members of the tribe, the unemployment rate is estimated at as much as 85 percent. Shannon County, home to the town of Pine Ridge, has a per-capita income of less than $8,000. The local economy is not just reliant on transfers from the federal government; it in no small part consists of them. Over all, the tribe’s budget is about $80 million a year, of which $70 million comes from federal sources, said Mason Big Crow, the tribe’s treasurer. The tribe still did not know how much money it would lose, waiting on word from Washington, he said, but the number would be in the millions. The tribe is cutting the size of a program that delivers meals to the elderly, many of whom are housebound. The school budget, Head Start program and health service are shrinking, too. The tribe has no choice but to cut everywhere, Mr. Big Crow said. Despite the reservation’s extraordinary problems with crime — alcohol and methamphetamine abuse are rampant, many of the tribe’s youth are involved in gangs — its police force is absorbing more than a million dollars in cuts. 

The Food Stamp-Out: Yesterday, the House of Representatives voted to pass a farm bill—a bill that influences everything from your lovely weekend farmers market to the subsidies that have led every food in America to be made from corn—without what is normally its biggest component: nutrition programs, including food stamps. It introduces a new wrinkle into a two-year fight over the farm bill, a sleepy piece of legislation that must be passed every five years and is normally uncontroversial. Senate leadership, which passed a farm bill earlier in June, has said it won’t pass one without the food stamp portion. Senator Debbie Stabenow, the chair of the Senate agricultural committee, released a statement with a reminder of that yesterday: “The bill passed by the House today is not a real Farm Bill and is an insult to rural America, which is why it’s strongly opposed by more than 500 farm, food and conservation groups.”

Yes, You Should Be Totally Outraged By the Farm Bill - The farm bill passed by the House of Representatives yesterday is pretty much a disgrace. Republicans took legislation that had historically been 80 percent food stamps and 20 percent mostly awful and antiquated agribusiness subsidies. And they passed something that is 0 percent food stamps and 100 percent mostly awful and antiquated agribusiness subsidies.  "Billions for farmers, nothing for the poor" is a stark assessment, but a fair one. Food stamps -- or, as they are now officially called, the Supplemental Nutritional Assistance Program (SNAP) -- went out to more than 46 million people in 2012 with the average individual receiving just over $130 in benefits. That's 73 percent of the monthly grocery bill for men under the USDA's "thrifty" plan, as the Washington Post explains in the graph below. The current program lapses at the end of September. The GOP's aversion to funding food stamps is cultural and deeply ideological. But the less obvious background music playing here is the powerful and pernicious role of money in politics.

March of the Munching Moochers - Paul Krugman - Or, you know, maybe people desperately need help: SNAP participation is the percentage of the population receiving food stamps. U6 is the unemployment measure that includes the underemployed and those who aren’t currently searching because no jobs are available. SNAP participation normally follows U6 with a lag, and is in that sense behaving normally.

Hunger Games, U.S.A., by Paul Krugman - Something terrible has happened to the soul of the Republican Party. We’ve gone beyond bad economic doctrine. We’ve even gone beyond selfishness and special interests. At this point we’re talking about a state of mind that takes positive glee in inflicting further suffering on the already miserable.  The occasion for these observations is the monstrous farm bill the House passed last week. For decades, farm bills have had two major pieces. One piece offers subsidies to farmers; the other offers nutritional aid to Americans in distress, mainly in the form of food stamps...  Long ago, when subsidies helped many poor farmers, you could defend the whole package as a form of support for those in need. Over the years, however,... farm subsidies became a fraud-ridden program that mainly benefits corporations and wealthy individuals. Meanwhile food stamps became a crucial part of the social safety net.  So House Republicans voted to maintain farm subsidies — at a higher level than either the Senate or the White House proposed — while completely eliminating food stamps from the bill.

Report: Disability Claims and Awards Declined - From FY2011 to FY2012 (in the aftermath of the Great Recession) it was reported that there were actually less Social Security disability claims, less awards and more SSDI terminations. By the end of 2012, total disabled workers numbered 8.8 million --- not 14 million that the NPR consistently reports. Key Findings:

  • By the end of George W. Bush's term in 2008 there were 7,427,203 disabled Americans on SSDI --- and by the end of 2012 there were 8,827,795 receiving monthly SSDI benefits.
  • Over the span of four years during Obama's first term as President (2009, 2010, 2011 and 2012) there was a net gain of 1,400,592 Americans on SSDI (for an average net gain of 350,148 people per year added to the SSDI rolls.)
  • In the aftermath of the Great Recession, from 2011 to 2102, there were actually less Social Security disability claims, less awards and more terminations.
  • From 2011 to 2012 the net number of disabled workers receiving disability benefits rose by only 251,728
  • By the end of 2012, total disabled workers numbered 8.8 million and had an average monthly benefit of $1,130.34
  • 50% of disability beneficiaries were between the ages of 56 and 66.
  • The NPR has falsely and consistently reported that there are 14.0 million disabled workers.

Comptroller says Illinois’ unpaid bills will grow by $1 billion in coming weeks - Illinois is notorious for ignoring its financial obligations and racking up billions in unpaid bills. When it sits on those unpaid bills long enough, the state has to pay a penalty. Illinois is required by law to pay interest of 1 percent a month on its unpaid bills, also called invoices, when they become more than 90 days old. According to the state comptroller’s most recent numbers, Illinois paid $186 million in interest payments on its unpaid bills in fiscal year 2013. That’s 215 times higher than the state’s interest payments of $866,000 in fiscal year 2003. Illinois Comptroller Judy Baar Topinka announced on July 1 that Illinois’ unpaid bills will grow by $1 billion in the coming weeks. That backlog is expected to grow to approximately $7.5 billion by August, $8.1 billion in September, $8.7 billion in October – and about $9 billion in November and December.

Ratings agency downgrades Pa.'s $10.9B in debt - Credit agency Fitch Ratings is downgrading Pennsylvania's $10.9 billion in outstanding general obligation debt because it says policymakers haven't adequately addressed rising costs that are outpacing tax collections. The downgrade, dated Tuesday, comes three years after Fitch put Pennsylvania on a negative outlook. The downgrade takes Pennsylvania from AA plus to AA and puts it in the bottom one-third of states Fitch rates. Fitch cites Pennsylvania's failure to boost funding for public employee pension obligations and its lack of a cash reserve. The ratings agency says that signals an inability or unwillingness on the part of political leaders to make difficult fiscal decisions. Gov. Tom Corbett's proposal to cut future pension benefits of current employees by $12 billion over 30 years collapsed in the Legislature. The current budget is draining the state's cash reserve and cutting business taxes. .

North Carolina Pretty Much Just Selling Poor People For Dog Food Now - Arizona and Texas need to step up their game, because North Carolina is going balls to the wall to be the most batshit crazy state. In the duel categories of “Moneylingus for the Rich” and “Dicking Over the Poors,” North Carolina is about to take a commanding lead. And, in order to get bonus points, they are doing it with minimal time for debate, lest all the little people try to have their so-called “voices” heard. According to ThinkProgress: North Carolina lawmakers rammed through massive tax reforms on Tuesday that would disproportionately benefit higher-income earners, bringing the measure to a vote in the House after approximately 25 minutes of debate. The legislative compromise, which was formally unveiled on Monday, represents some of the biggest most regressive changes to North Carolina’s tax code in eight decades. The Senate will take up the measure on Tuesday afternoon, both chambers will hold final votes Wednesday, and Gov. Pat McCrory (R) is expected to sign it by the end of the week. If you are going bring about the most massive change in a state’s tax code in 80 years, why would you need more than 25 minutes to debate it? Does it benefit the rich to the detriment of the poor? Yes? Nuff said. Find a motorcycle bill to attach it to, and let’s move on, there’s plenty of other people just aching to be screwed. So how does this bill fuck the poor, exactly? This helpful chart shows how the new taxes make those making $12,000 pay MORE while those making $940,000 pay LESS. 

ACLU: Inhumane for Ohio to shut off prison power in exchange for payments - The American Civil Liberties Union (ACLU) of Ohio is urging state officials to stop accepting payments from energy companies in exchange for temporarily shutting off power to prisons during peak periods. The Ohio Department of Rehabilitation and Corrections has said that 24 of 26 prisons are participating in a program where KOREnergy pays the department to switch to generator power when demand is at the highest.  The Columbus Dispatch reported that “power for lights, fans, televisions and other electrical devices was shut off on two afternoons for three to four hours” during the heat wave this week.

US bridges decay, while politicians focus on ribbon cutting - When it comes to America's dilapidated infrastructure, political spectacle is taking precedence over common sense, and drivers and businesses are suffering. Politicians are pushing to use scarce public funds to build new bridges, experts say, instead of spending that money on repairing and maintaining existing structures. "It's a lot harder to cut a ribbon on a pothole repair project," said Roger Millar, a vice president at Smart Growth America, an advocacy group that focuses on sustainable development. America's bridges, once a symbol of the nation's engineering and construction prowess, are crumbling. Every day, millions of Americans drive over thousands of bridges that the government says are in lousy shape. In recent years, two have already collapsed, causing deaths, slowing transport and harming local businesses. Despite the recent infusion of $26 billion in federal "stimulus" spending, the problem is expected to worsen as tens of thousands of bridges built nearly 50 years ago for the national Interstate highway system reach the end of their useful life.

As Detroit breaks down, scourge of arson burns out of control (Reuters) – On the night of July 4, some Detroit residents watched fireworks, and others just watched fires, more than a dozen in a space of two hours. The Independence Day blazes marked the latest flare up of a longtime scourge in Detroit – arson. It is a problem that has festered in the city for decades and has persisted even as the population declined. With the city now teetering on the verge of bankruptcy, the futile struggle to contain arson is an insistent reminder of the depths of Detroit’s decline. “It’s not safe here. It’s a war zone,” "This whole neighbourhood is going to burn down one day, I’m afraid.” As firefighters attacked flames raging in two adjacent vacant houses, they called for backup equipment that never came. Five blazes had broken out in 25 minutes, all suspected arsons, and the Detroit Fire Department, where budget cuts have led to a crippling shortage of equipment and manpower, could provide no extra help.

Detroit files for bankruptcy - CBS News: Once the very symbol of American industrial might, Detroit became the biggest U.S. city to file for bankruptcy Thursday, its finances ravaged and its neighborhoods hollowed out by a long, slow decline in population and auto manufacturing. The filing, which had been feared for months, put the city on an uncertain course that could mean laying off municipal employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed. "Only one feasible path offers a way out," Gov. Rick Snyder said in a letter approving the move. Kevyn Orr, a bankruptcy expert hired by the state in March to stop Detroit's fiscal free-fall, said Detroit would continue paying its bills and employees. But, said Michael Sweet, a bankruptcy attorney in Fox-Rothschild's San Francisco office, "They don't have to pay anyone they don't want to. And no one can sue them."

Detroit Files for Bankruptcy -From the WSJ: Detroit Files for Chapter 9 Bankruptcy The city of Detroit filed for federal bankruptcy protection on Thursday afternoon ... the country's largest-ever municipal bankruptcy case. ... The financial outlook has never been bleaker for the Motor City, which has shrunk from its peak of nearly two million people in 1950 to 700,000 today. ... Most at risk under the bankruptcy case is the city's $11 billion in unsecured debt. That includes almost $6 billion in health and other benefits for retirees; more than $3 billion for retiree pensions; and about $530 million in general-obligation bonds. The prediction of “hundreds of billions” of dollars in municipal bond defaults in 2011 never happened, however this one has been in the works for some time. A shrinking population makes the situation very difficult. More from Brad Plummer at the WaPo: Detroit just filed for bankruptcy. Here’s how it got there. To get a better sense of just how Detroit got into such dire straits, it’s worth browsing through the city’s official “Proposals for Creditors” from June and a separate May report on the city’s finances.  Emergency manager Kevyn Orr laid out all the problems and economic headwinds facing Detroit ...

Welcome to Chapter 9, Detroit - Here’s the City of Detroit’s filing to become the largest ever US city bankruptcy, filed late Thursday (seemingly timed to trigger a stay on imminent lawsuits by creditors). Beyond the list of derelict buildings and brownfield sites owned by the city — you’ll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A. It’s strong stuff.

There Goes Detroit! - Detroit just filed for bankruptcy.  This is the largest city bankruptcy in U.S. history and much of it has to do with the banks. Legions have fled Detroit over the last decade. Detroit lost a quarter-million residents between 2000 and 2010. A population that in the 1950s reached 1.8 million is struggling to stay above 700,000. Much of the middle-class and scores of businesses also have fled Detroit, taking their tax dollars with them. Yet the Detroit bankruptcy details show the desire to slash city pensions and health benefits while too big to fail banks are first up to get their derivatives paid off.  Sources agree that Orr’s deal with creditors, widely reported to be Bank of America Corp. and UBS AG, to pay a $344-million swap with a $255-million debtor-in-possession loan, is instrumental in the timing of the potential bankruptcy filing. The deal gives the city access to $11 million a month in casino tax revenues that Orr has said is key to maintaining city services while negotiations, in or out of bankruptcy court, take their course with other creditors and unions. There are other reports that banks and their swaps will be paid first in any bankruptcy proceedings.  Wall Street firms that sold interest-rate swaps to Detroit as part of $1.4 billion of pension-bond issues stand to get paid before investors and the retirees the borrowings were supposed to help. In 2009, the companies -- UBS AG (UBSN) and SBS Financial Products Co. -- could have forced the city to pay a fee to end the agreements, which were designed to cut the cost of the debt. Instead, the firms struck a deal giving them a claim on Detroit’s gambling-tax revenue, guaranteeing they’ll get paid $50 million a year. Under Emergency Manager Kevyn Orr’s proposal last week to restructure the insolvent city’s finances, the payments get priority over promises to retirees and holders of unsecured debt, including the pension borrowings. Being ranked among secured creditors gives the banks the same protection as investors in water and sewer bonds or general obligations secured by liens on state aid.  While the banks are going to get theirs, guess who gets the shaft, public workers of course.  The bankruptcy filing protects the city against their claims.

Detroit files for bankruptcy - Detroit became the largest US city to ever file for bankruptcy on Thursday, seeking protection from its creditors as it restructures more than $18bn in debt.  “Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing. Kevyn Orr, who Mr Snyder appointed in March to serve as Detroit’s emergency manager, has stirred controversy by putting the claims of holders of general obligation bonds – which are backed by taxes – on the same footing as those of pension funds and retirees. Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.  “To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market,” said Peter Hayes, head of municipal bonds at BlackRock, which owns $25m of Detroit’s debt. Mr Orr said the city’s total debt was at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.

Detroit Files Largest Municipal Bankruptcy In History - Late today, the City of Detroit filed the largest bankruptcy by a municipality in American history: Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, has filed for bankruptcy, an official said Thursday afternoon, the largest American city ever to take such a course.The decision to turn to the federal courts, which required approval from both the emergency manager assigned to oversee the troubled city and from Gov. Rick Snyder, is also the largest municipal bankruptcy filing in American history in terms of debt.Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager who was appointed by Mr. Snyder to resolve the city’s financial problems, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.For Detroit, the filing comes as a painful reminder of a city’s rise and fall.. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma it would carry. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on future borrowing.

Detroit, Detroit It's a Helluva Town... Detroit's bankruptcy filing today is obvious grabbing some headlines. It's not clear, however, how much bankruptcy can do to fix Detroit. Bankruptcy is really good at dealing with problems created by overleverage.  If there's too much debt, a debtor, municipal, corporate or consumer, can use bankruptcy to slough it off.  Similarly, if the problem is some bad contracts outstanding, bankruptcy's got that covered too.But bankruptcy can't fix everything.  If a business doesn't have a viable operating model, well, bankruptcy doesn't solve that. This principle also applies to municipalities.  It isn't clear at this point whether Detroit would be able to operate in the black going foward even if it were delevered and lowered its labor costs.  Put another way, it isn't clear at this point that there is an effective reorganization possible. The city is straddled with a much larger footprint than its tax base can easily support, and to the extent it increases the costs of the services it provides or decreases service provision, it risks losing the more affluent and therefore more mobile part of its tax base.  Basically, Detroit needs to have its population consolidated in about a quarter of the city's square mileage. I don't know how that can be accomplished. It's one thing to consolidate operating divisions of a company to effectuate cost savings from reduced overhead. But that move just doesn't work with municipalities. 

Detroit’s Creditors and Unions Prepare for Bankruptcy Fight — A day after Detroit became the largest American city ever to seek bankruptcy protection in court, the size of the battle this city now faces was growing clear, as creditors vehemently objected to the way Detroit is asking to repay them pennies on the dollar and as representatives of city workers, who face benefits cuts, said the city had failed to truly negotiate before heading to court. “The fiscal realities confronting Detroit have been ignored for too long,” Gov. Rick Snyder said on Thursday. “I’m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future.” By Friday, many in this city, including some elected leaders, said bankruptcy seemed unfortunate but also inevitable. But those representing tens of thousands of city employees and retirees said they intended to fight the case, particularly for the thousands of retirees who depend on city pensions. “Apparently Governor Snyder and Kevyn Orr want Detroit’s public service workers to rely on their children for food and shelter, or have to work until they die,” said Lee Saunders, president of the American Federation of State, County and Municipal Employees.

Michigan State Judge Rules Detroit Chapter 9 Unconstitutional; Ruling Being Appealed -- Less than twenty-four hours after we learned that the City of Detroit was filing a petition under Chapter 9 of the Bankruptcy Code, a Michigan state court Judge issued an order purporting to find the filing unconstitutional under state law and ordering it being withdrawn, but the matter is already being appealed:An Ingham County judge says Thursday’s historic Detroit bankruptcy filing violates the Michigan Constitution and state law and must be withdrawn.But Attorney General Bill Schuette said he will appeal Circuit Judge Rosemarie Aquilina’s Friday rulings and seek emergency consideration by the Michigan Court of Appeals. He wants her orders stayed pending the appeals, he said in a news release.In a spate of orders today arising from three separate lawsuits, Aquilina said Gov. Rick Snyder and Detroit emergency manager Kevyn Orr must take no further actions that threaten to diminish the pension benefits of City of Detroit retirees.“I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred,” Aquilina said.“Plaintiffs shouldn’t have been blindsided,” and “this process shouldn’t have been ignored.

Legal battle brews over Detroit bankruptcy filing -- While Detroit emergency manager Kevyn Orr on Friday was offering short-term reassurances to thousands of city pensioners whose benefits are in jeopardy, his lawyers were waging a whirlwind legal battle over the constitutionality of the bankruptcy filing that could land both sides before a federal judge early next week.On Friday, Michigan Attorney General Bill Schuette said he will appeal an Ingham County judge's ruling that Detroit's bankruptcy filing must be withdrawn because it violates the Michigan Constitution and state law.However, the order from Ingham County Circuit Judge Rosemarie Aquilina ultimately could have little effect because the bankruptcy case already was filed in federal court, and federal law generally trumps state law. The city filed a motion requesting to include the state as a party in the bankruptcy code's provisions that put on hold all lawsuits against the city, a clear attempt to fight the Ingham County ruling by preventing the state from being sued in similar fashion. The city is asking U.S. District Judge Steven Rhodes to hold a hearing on Tuesday, or earlier, to decide this and other matters. Friday's legal wrangling marks the beginning of what is expected to be a lengthy bankruptcy process that will involve more than 100,000 creditors, which include the Police and Fire Retirement System and the General Retirement System and its 20,000 retirees.What is the long-term impact of incarcerating juveniles? - The US imprisons more young people at a higher rate than any other nation. This column argues that, at a tremendous cost, incarcerating juveniles only serves to reduce their educational attainment and increase the probability of incarceration as an adult. New research suggests that using the numerous available alternatives will probably not only save the US money in the short run – as well as giving juvenile criminals better prospects in the future – but will also reduce future crime and thus future expenditures in the long run.

Going, in Uncertainty, Where No Other Big City Has - This city awoke on Friday in bankruptcy proceedings, a place no American city of its size has ever been, and reminders of the uncharted, uncertain nature of the circumstance were all around. Well into the workday, the morning after a state-appointed emergency manager filed for Chapter 9 bankruptcy protection for the city, a woman paused outside the Detroit municipal building, inquiring whether the place was closed. The receptionist at the mayor’s office (which, like the rest of city offices, was open as usual) said she had received a few calls from similarly puzzled residents, not to mention a caller from Texas who said he wanted to make an offer to buy the city. And one resident on the East Side, told of the city’s bankruptcy filing in federal court, wondered aloud whether she now ought to move away. “Mostly what we’re getting are questions,” said Saunteel Jenkins, the president of Detroit’s City Council. “City employees want to know whether they’ll get paid. Constituents want to know what it means for services. People want to know, what does this mean for me?”

More Cities Should Go Bankrupt - Yesterday, Detroit’s Chapter 9 bankruptcy filing was greeted with sadness by those with personal or emotional attachments to the city. But while you wouldn’t want to call it a cause for celebration, there’s no need for mourning either. The genuinely sad thing about Detroit is not the bankruptcy but the circumstances that induced it—decades of economic and population decline amid deteriorating public services and civic conditions. The bankruptcy itself, however, is not the decline. It’s a sensible step forward that at least gives the same city some chance for the future. And it raises the question of why more local governments with fiscal problems don’t file for bankruptcy. After all, in the corporate world, while no CEO is excited to take his firm through bankruptcy, it’s widely recognized as a valid strategic move. If the appropriate legal framework were in place, it’s also a move that could be advantageous for cities like Providence, R.I. and Baltimore as well as smaller Michigan municipalities rocked by the same large economic trends as Detroit.

In Detroit We Glimpse America's Future - I have been to Detroit and it is not an experience I fondly remember. So, I do not question the motives of the protagonist in the Journey song above in leaving. Still, it was with some sadness that I heard this once-great American city declare bankruptcy only yesterday. In many respects it was the conclusion of the inevitable: years of outmigration and industrial decay had taken their toll on municipal finances. Contrast its decrepit state today with what it used to be. Despite the occasionally dodgy (non-)narrative, the documentary Detropia does a fine job of visually contrasting the city in its heyday with its present state. (PBS also has a neat photo essay on its faded grandeur.)  From a broader perspective, Detroit is also a microcosm of what ails America. Some will of course say that it's inevitable for unattractive cities to decay as these people forever on the move seek better fortunes elsewhere--such as in the non-unionized South. However, I would argue that removing yourself from Detroit only rewinds the clock by a few years from an inescapable American fate. That is, you can take the "midnight train" elsewhere, but you'll still end up in the US of A with all its woes. Let us now count the ways "Detroitification" is a portent for this country's future...

Chicago Public Schools announce 2,100 layoffs, blame $1 billion deficit, failed pension reform — The Chicago public school district announced Thursday that it was laying off about 2,100 teachers and support staff — a figure more than twice as large as the teachers union head was expecting and one the district blamed on the Legislature's failure to reach a deal on pension reform. The Chicago Public Schools layoffs are in addition to the approximately 850 teachers and support staff who were laid off in June, which the district attributed to its planned closures of about 50 schools that it considered underutilized. Among those laid off Thursday are 1,036 teachers, the remainder are support staff, including teacher assistants, food service employees and janitorial staff. School district spokeswoman Becky Carroll said the district is facing a $1 billion budget deficit, much of it driven by an increase in its pension obligations. "We were hoping to get pension reform in Springfield," she said. "That did not happen. That has brought the pension crisis to the doorstep of our schools," she said.

Chicago schools lay off 2,100 while city puts $55 million into college basketball arena - Chicago, like Philadelphia, is pairing school closings affecting mostly poor and non-white kids with massive layoffs in the schools: Citing a $1 billion budget deficit, Chicago Public Schools will lay off more than 2,000 employees, more than 1,000 of them teachers, the district said Thursday night.  About half of the 1,036 teachers being let go are tenured. The latest layoffs, which also include 1,077 school staff members, are in addition to 855 employees — including 420 teachers — who were laid off last month as a result of the district's decision to close 49 elementary schools and a high school program. While Mayor Rahm Emanuel insists there's no money for the schools, he's planning to use $55 million in taxpayer funds for a new basketball arena for DePaul University (a private Catholic university) and a new hotel. If that sounds bad, it's actually worse. The theory of the Tax Increment Funding program is that property tax money is taken from schools and public services and invested in things that will improve the city's tax base. But: But once the city owns it, this land will move off the property tax rolls because publicly held property is exempt. So instead of investing your property tax dollars in developments that create more property tax dollars, Mayor Emanuel has decided to invest them in a scheme that will yield no property tax dollars whatsoever. Think of it as spending $55 million to lose money.

Let Your Rich Uncle Pay for College -- If you borrow money to go to college, you should be able to pay it back from your higher post-graduation income. Rather than a loan, you could offer an equity investment — a share of your future earnings.. Most education in modern economies is financed either through debt or equity. The big issue is who’s making the investment and on what terms.  The Oregon state legislature dramatized this issue with its decision to develop a pilot program to eliminate tuition and fees for students in the state university system who agree to pay about 3 percent of their income for the next 20 years to help finance the education of future students.  The “pay it forward” scheme, proposed by students at Portland State University and building on a model developed by the Economic Opportunity Institute, has re-energized debate over ways of alleviating the burden of student debt. As it happens, the Oregon legislature voted to pursue it on the same day that federal student loan interest rates doubled to 6.8 percent from 3.4 percent. Would you be better off paying 3 percent of your income for 20 years, or 6.8 percent on a specific loan amount? The answer depends both on your projected income and the amount you need to borrow. In general, students from low- and middle-income families would fare better than students from rich families under the Oregon plan, because they are more dependent on loans to pay for college.

Universities in U.S. Besieged by Cyberattacks From Abroad - America’s research universities, among the most open and robust centers of information exchange in the world, are increasingly coming under cyberattack, most of it thought to be from China, with millions of hacking attempts weekly. Campuses are being forced to tighten security, constrict their culture of openness and try to determine what has been stolen. University officials concede that some of the hacking attempts have succeeded. But they have declined to reveal specifics, other than those involving the theft of personal data like Social Security numbers. They acknowledge that they often do not learn of break-ins until much later, if ever, and that even after discovering the breaches they may not be able to tell what was taken. Universities and their professors are awarded thousands of patents each year, some with vast potential value, in fields as disparate as prescription drugs, computer chips, fuel cells, aircraft and medical devices. “The attacks are increasing exponentially, and so is the sophistication, and I think it’s outpaced our ability to respond,” “So everyone’s investing a lot more resources in detecting this, so we learn of even more incidents we wouldn’t have known about before.”

The Victims of Washington's Deficit Obsession - When, a couple of weeks ago, the interest rate on subsidized Stafford loans (the loans that the federal government offers to college students) doubled, going from 3.4 per cent to 6.8 per cent, the expectation was that Congress would reach a quick deal to reverse—or at least reduce—the increase. After all, making college more affordable is one of the rare issues on which the differences between Democrats and Republicans seem bridgeable. Members of Congress on both sides of the aisle promised an immediate fix, and last week it appeared that a deal was about to be reached. Then Washington’s obsession with deficits got in the way. And that same obsession explains why, even if Congress does finally agree to a deal, college students are guaranteed to be paying more for loans, come the fall. What we’re likely to end up with is what’s called a market-based system, under which the rate on student loans would be tied to the interest rate on ten-year Treasury bonds. (Currently, Congress simply decides what the interest rate will be.) The deal that the Senate appeared ready to accept last week, for instance, would set Stafford rates at the ten-year Treasury rate plus 1.8 per cent, along with a small additional charge to cover administrative costs.

Warren: Profits from student loans are ‘obscene’: Speaking to young activists on Wednesday, Sen. Elizabeth Warren (D-Mass), didn’t mince words when describing the money the government makes off student loans.“The federal government will make $51 billion in profits off student loans,” she said at Generation Progress’s Make Progress National Summit . “That’s more than wrong. It’s obscene.” Warren used her address at the conference of young activists to make the case for her Bank On Students Loan Fairness Act, which she has said would provide a one-year fix to the Stafford loan interest hike that went into effect on July 1. The bill, she said, would allow students to borrow at the same rate that big banks do, a rate around 0.75 percent. The interest rate on federally subsidized Stafford loans has increased from 3.4 to 6.8 percent, while Congress continues to try to come to agreement on the issue. The rate increase will only affect loans that were issued after July 1, 2012, but overall, educational debt is an issue for approximately 37 million student loan borrowers, with the majority of borrowers in 2012 with outstanding balances less than $10,000.

New agreement on student loan interest rates reached in Senate - Senate Majority Leader Harry Reid says that a deal on student loan interest rates has been reached, and could be voted on this week in the Senate. "The legislation as presented to me isn't everything I want, but it's the work of a number of Democratic and Republican senators working long, long hours," said Reid, D-Nev. The deal was announced late Wednesday, and although it has lukewarm support among liberal Democrats, it is likely to pass Congress and be signed by President Obama because without action students will face higher interest rates on loans this school year. [...] Under the agreement, federal student loans will be calculated and fixed to the 10-year Treasury bill. Undergraduates will pay an additional 2.05% with an 8.25% interest rate cap; graduate students will pay an additional 3.6% with a 9.5% interest rate cap; and PLUS loans, which mainly affect parents of college students, will pay an additional 4.6% with a 10.5% interest rate cap.

Senate strikes student loan deal; not good enough, says U.S. Student Association - A deal to stop the doubling of federal student loan rates for the upcoming school year has been reached in the Senate, adding just a small increase to last year’s rates but likely bringing higher costs to students in future years, USA TODAY reported late Wednesday. But the bill still isn’t what the United States Student Association (USSA) is looking for from Congress, said Tiffany Loftin, USSA’s president and recent alumna of University of California — Santa Cruz. “We were really disappointed for this bill,” said Loftin, who leads the Washington, D.C., lobbying group. “We don’t need a long-term solution that’s going to put us deeper in the hole, that’s going to make it harder for people to get into college.” Senate Majority Leader Harry Reid said the bill would finally put an end to partisan back-and-forth over how to prevent the loan rates from doubling, USA TODAY reported. “The legislation as presented to me isn’t everything I want, but it’s the work of a number of Democratic and Republican senators working long, long hours,” said Reid, D-Nev. The USSA has called for a short-term solution that would keep rates low in coming years before creating more permanent policy in the future. In a letter to Reid and Senate Minority Leader Mitch McConnell, R-Ky., the student association joined other education advocacy groups in asking the leaders to revisit the costs of running a student loan program and lending before creating a long-term plan for student loan rates.

Thoughts on Student Debt - My friend Robert Brokamp, one of the stalwarts at The Motley Fool, called my attention to an interesting Atlantic article published earlier this week: A Mystery Behind the Rise of Student Debt. The mystery is embedded in this set of observations: "...out-of-pocket spending started to slide during the '90s. Adjusted for inflation, students contributed about $4,000 of their own money a year towards tuition at the start of that decade. By 2000, though, student contributions were down to about $3,000. They roughly stabilized until the recession, at which point they plunged once more. Today, students are paying just $2,125 out of pocket."  The mystery, it seems, is how to explain the 25% decline in real (inflation-adjusted) out-of-pocket funding during the roaring '90s, when real household incomes actually rose, unlike the 21st century (more on household income here). The Atlantic article comes to no conclusion, and I have nothing definitive to offer in that regard. However, it's useful to consider the out-of-pocket trend in the context of the historical trend college tuition and fees. Here is a chart of data from the Consumer Price Index subcomponents reaching back to 1978, the earliest year Uncle Sam provides a breakout for College Tuition and Fees. As an interesting sidebar, I've thrown in the increase in the cost of the purchase of a new car as well as the more substantial increase for the broader category of medical car, both of which pale in comparison. During that decade of the '90s, when real out-of-pocket funding declined 25%, tuition and fees rose 92%. Since the days of my own modest private college expenses (a decade before the timeframe in the chart above) paying for college was sort of like buying a car. But in recent decades, it has become more like buying house, for which the strategy of a minimum down payment is relatively commonplace.

$1 trillion tab: Federal student loan debt outpacing credit cards - Americans now owe the federal government more than $1 trillion in student loan debt, the Consumer Financial Protection Bureau projects. That debt is higher and growing faster than credit card debt. Add in the money owed to private banks for student loans and the amount of debt related to attending college is now $1.2 trillion. The news, released today in a speech by Rohit Chopra, the student loan ombudsman for the federal agency, comes as Congress continues to try find a deal that would push interest rates back on new federal subsidized Stafford loans closer to 3.4%, the rate until July 1. Because no action was taken before July 1, the rate automatically doubled to 6.8%. There are various plans floating in Congress to lower the subsidized loan rate. Most would tie the rate to the cost of the federal government borrowing, plus an additional charge. Some of the plans have caps on how high the rate can get, others do not.

College students defaulting at record rate - Student loan defaults have risen for the fifth straight year, as students from traditional non-profit universities have an increasingly difficult time paying off their college debt. Numbers released by the Department of Education Friday show that of the 4.1 million borrowers who began making payments in late 2009 and early 2010, 9.1% defaulted within two years, up from 8.8% the year before. "Student loan defaults still continue to plague too many borrowers," said Debbie Cochrane, research director for the Institute for College Access & Success. "The numbers are distressing, and they needn't be so high." Experts credited the combination of skyrocketing student debt, the poor economy and a lack of borrower education for the increase. Unlike previous years, when default rates rose because borrowers at for-profit universities were having trouble paying off their loans, this year's rise was attributed to borrowers who attended more traditional non-profit public and private universities. Public school borrowers defaulted at a rate of 8.3%, up from 5.9% just four years ago.

Retirement crisis: Growing older, 38 million with no assets - As more Baby Boomers continue to retire, a new research report has found that the nation is facing a trillion-dollar retirement savings crisis. According to the National Institute on Retirement Security (NIRS), 38 million Americans — 45 percent of working age households — have no retirement account assets at all. Among all working households, 92 percent do not meet conservative retirement savings targets for their age and income. As a result, the collective retirement savings gap among working households ages 25-64 ranges from $6.8 to $14 trillion, depending upon the financial measure used. NIRS analyzed the readiness of all working-age households using data from the U.S. Federal Reserve. “The heart of the issue consists of two problems: lack of access to retirement plans in and out of the workplace — particularly among low-income workers and families — and low retirement savings,” states the report. “These twin challenges amount to a severe retirement crisis that, if unaddressed, will result in grave consequences.”

U.S. public pensions weaken, but deterioration slowing (Reuters) - The ability of U.S. public pensions to cover their liabilities weakened again, although the deterioration is slowing, two major rating agencies said on Tuesday. Both Fitch Ratings and Standard & Poor's Ratings Service added that they expect improvements in pension finances in the near future. Since most systems use an accounting mechanism known as "smoothing" to spread changes in assets over many years, losses related to the 2007-09 recession have persistently hurt pensions' funded levels, they said. Recent stock market gains will likely bolster improvements, but the agencies warned that public pensions still face large obstacles, namely state budget strains, an aging population, accounting rule changes and legal challenges to reforms. The average funded ratio for all 50 states' pension plans was 72.9 percent in 2011, a drop of 1 percent from the previous year, and the median ratio was 69.8 percent, 2.2 percent lower than the year before, according to S&P. The funded ratio represents how much in assets pensions have to cover liabilities.

Health Plan Cost for New Yorkers Set to Fall 50% - Individuals buying health insurance on their own will see their premiums tumble next year in New York State as changes under the federal health care law take effect, state officials are to announce on Wednesday.  State insurance regulators say they have approved rates for 2014 that are at least 50 percent lower on average than those currently available in New York. Beginning in October, individuals in New York City who now pay $1,000 a month or more for coverage will be able to shop for health insurance for as little as $308 monthly. With federal subsidies, the cost will be even lower. Supporters of the new health care law, the Affordable Care Act, credited the drop in rates to the online purchasing exchanges the law created, which they say are spurring competition among insurers that are anticipating an influx of new customers. The law requires that an exchange be started in every state.

Not Much Movement in Share of Workers With Health-Care Coverage - If employers shifted the health-care benefits they offer workers much in the past year, such changes thus far appear to be more tweaks than sweeping overhauls. A report Wednesday from the Labor Department shows the health-benefits picture for U.S. workers changed little between March and the same month a year ago.In March, 85% of full-time workers in private industry had access to medical care through their employers, compared with 86% in March 2012. The share of part-time workers offered such benefits from their employer held steady at 24%. Businesses with 100 or more workers were more likely to offer employee health benefits than smaller businesses, as was the case last year. And full-time state and local government workers continue to have greater access to employer-provided medical and retirement benefits than their counterparts in private industry. The latest findings capture the health-benefits picture for U.S. workers in March 2013, less than a year before most provisions of the Affordable Care Act take effect in January. The very slight changes in the report show that some concerns about the effect of the ACA on employer-provided health benefits aren’t warranted. Although some companies “are perceiving the end of the world,” Mr. Hughes-Cromwick said. “I think this kind of stability runs counter to those sorts of fears.”

Health Care Thoughts: ACA – reality sets in - A letter from union leaders to Sen. Reid and Rep. Pelosi Dear Leader Reid and Leader Pelosi:When you and the President sought our support for the Affordable Care Act (ACA), you pledged that if we liked the health plans we have now, we could keep them. Sadly, that promise is under threat. Right now, unless you and the Obama Administration enact an equitable fix, the ACA will shatter not only our hard-earned health benefits, but destroy the foundation of the 40 hour work week that is the backbone of the American middle class. Like millions of other Americans, our members are front-line workers in the American economy. We have been strong supporters of the notion that all Americans should have access to quality, affordable health care. We have also been strong supporters of you. In campaign after campaign we have put boots on the ground, gone door-to-door to get out the vote, run phone banks and raised money to secure this vision. Now this vision has come back to haunt us. As you both know first-hand, our persuasive arguments have been disregarded and met with a stone wall by the White House and the pertinent agencies. This is especially stinging because other stakeholders have repeatedly received successful interpretations for their respective grievances. Most disconcerting of course is last week’s huge accommodation for the employer community—extending the statutorily mandated “December 31, 2013” deadline for the employer mandate and penalties. Time is running out: Congress wrote this law; we voted for you. We have a problem; you need to fix it. The unintended consequences of the ACA are severe. Perverse incentives are already creating nightmare scenarios:

The Path to Complexity on the Health Care Act - In contemplating the one-year delay in the Affordable Care Act’s employer penalty, I was reminded that the health care law is an awfully complicated piece of work. I’m a supporter of the bill, and someone who was working for the administration when health legislation was designed, so let’s be clear: the fact that it’s complex doesn’t mean its implementation is anything like the train wreck that conservative Republicans (and Max Baucus) like to call it.In fact, as I read the recent report from the Government Accountability Office on setting up the state exchanges — the most complex part of the bill’s implementation — I’d say it’s proceeding apace despite train wreckers trying to derail it. I suspect most state exchanges will be up and running on Oct. 1 (the federal government is setting up and will operate most of them), and when you consider the magnitude of this challenge amid the blowback and underfunding of the effort, if I’m even close to correct, that will be a very impressive outcome.

Number of the Week: As Mandate Looms, Millions Turn Down Health Insurance - In recent months, public attention on the Affordable Care Act(better known to some as “Obamacare”) has tended to focus on two elements of the law: the employer mandate and health insurance exchanges. The employer mandate requires that most companies offer health insurance to full-time employees. It was originally meant to take effect next year, but the Obama administration recently announced it would delay implementing the rule for another year. The delay turned attention back to the so-called individual mandate, which requires that all Americans have health insurance starting next year or pay a penalty. Those who can’t get insurance through their employers will be able to buy it through government-run marketplaces known as “exchanges,” which are now being set up across the country. But not all the uninsured will need to turn to the exchanges for coverage. According to data released by the Labor Department this week, the “take-up rate” on employer-provided health insurance was 75% in March. That means that one out of every four workers who was offered coverage—some 22.5 million people—turned it down. Not all those workers are uninsured. Many of them likely receive coverage through a spouse or parent’s employer or through a government program such as Medicare or Medicaid. According to Census data, 82.6% of Americans (including children and retirees) had health insurance in 2010, four-fifths of them through private sources.

ObamaCare Rollout: Will the All the State Exchanges Launch on Time, by October 1? - Will the state Exchanges launch on time? Even if the Exchanges (now also called “marketplaces”) will only cover 7 million of the 56 million uninsured in 2014, this answer to this question is still important to some; and the political fortunes of the Democratic nomenklatura are not necessarily their first concern.  Katiebird writes: [T]his implementation issue is not a trivial thing. Many, many, many people are counting on it. They expect to have access to health insurance and for that health insurance to give them access to actual health care. I repeat: This is not trivial. It is not a game. The answer given by administration officials is “Yes!” Just this week:“The marketplaces [note plural; she includes all the states] will be ready,” Health and Human Services spokeswoman Joanne Peters said Thursday in a typical statement. “We are on schedule with the testing that began in October 2012. Any discussion to the contrary is pure speculation.”  In fact, there’s not even a Plan B. HHS Secretary Kathleen Sebelius, back on April 12:“No,” Sebelius said when asked whether there’s a backup plan in case that deadline slips. “We are determined and on track to meet the Oct. 1 deadline.”

What Makes U.S. Health Insurance Exchanges So Complicated - There is much coverage and commentary on news Web sites about whether the health insurance exchanges called for in the Affordable Care Act will be ready by Oct. 1 for enrollment by individuals seeking health insurance in the nongroup market. Insurance bought there takes effect on Jan. 1. I sense that many of those commenting would like the exchanges to fail.  Why is setting up these exchanges so difficult? After all, they are not a novel invention. The Web site, for example, has since 1997 functioned as an electronic exchange for private health insurance products sold in the nongroup United States market. That exchange and similar existing private exchanges, however, are not suitable models for the exchanges envisaged in the Affordable Care Act. There have been many reports on how coverage gaps in the fine print of such policies can leave people who believe they have health insurance in serious financial distress once they fall ill. See, for example, an analysis by Consumer Reports. More relevant as a model in this context might be the health insurance exchanges in several European countries that operate social health insurance systems with multiple competing private insurers — Germany, the Netherlands and Switzerland prominent among them.  Let us therefore pretend that we are residents of Switzerland and rummage around in a Swiss health insurance exchange.

Obamacare penalties spawn ‘skinny’ plans - Employers heaved a sigh of relief when the Obama administration announced it would not enforce Obamacare’s mandate that large companies provide insurance to their workers next year.  But some companies plan to offer “skinny plans” designed to duck the biggest penalties anyway, according to industry consultants. And the Obama administration has extended its blessing to this limited coverage, even though it would not protect individuals from medical bills that could cause financial ruin in the case of severe injury or illness.  The health law spells out in detail the comprehensive coverage that insurers have to provide on the new insurance marketplaces or exchanges. But it’s nearly silent about what the employers who provide insurance to a majority of Americans need to include in their health plans.  “There are no rules on how good that coverage has to be,”

Health Care Thoughts: Obesity Again -- According to NBC News this week up to 5000 air ambulance flights (out of about 600,000 per year) are being cancelled because the patient is too large to fit in the copter and/or too heavy for safe flying. Typically some of the medical specialists will transfer to a ground ambulance, but the transport takes more time. Some cities are buying special ground ambulance equipment with capacity up to 1000 pounds. Hospital and nursing home equipment safety rated at 400 pounds is inadequate. Whatever the cause/s, this problem (no pun intended) is getting bigger by the day.

Why isn’t health care employment slowing? - We’ve all heard a lot about the slowing of health care cost inflation. Yet, coming from Dan Diamond of The Advisory Board, here are some very interesting points of relevance to the topic: “A lot of people have noted that health care spending has slowed,” Amitabh Chandra, an economist and the director of health policy research at the Harvard Kennedy School, told me last week. “Many of us would like to think that this is a more permanent slowdown,” he added. “[But] we see absolutely no slowdown in employment growth in health care. And if that is not slowing, then it’s very difficult to believe that there will be a sustained slowdown in health care spending.” Health care gained more than 320,000 jobs in 2012—the sector’s strongest year in five years. …”One hypothesis is that only lower-paying jobs in health are growing,” the Altarum Institute’s Ani Turner told me via email. But “we don’t think that’s true.” Altarum researchers have reviewed BLS data and found “stable growth” for the most highly paid health care workers—i.e., doctors and nurses—if somewhat lower growth for health care support roles. The full article is here, and the entire discussion is of interest.  You will note for instance that capital spending does seem to be down. 

How the AMA Engages in Government-Sanctioned Price Fixing -  Yves Smith - An article in Washington Monthly, Special Deal by Haley Sweetland Edwards, deep dives into one big and largely hidden reason why medical costs in the US are out of control and are unlikely to be reined in any time soon.  I can’t stress enough that you need to read this well-researched and written article in full. I’ll nevertheless recap some of its main points.  Per Edwards:…it’s the committee members’ job to decide what Medicare should pay them and their colleagues for the medical procedures they perform. How much should radiologists get for administering an MRI? How much should cardiologists be paid for inserting a heart stent?While these doctors always discuss the “value” of each procedure in terms of the amount of time, work, and overhead required of them to perform it, the implication of that “value” is not lost on anyone in the room: they are, essentially, haggling over what their own salaries should be. “No one ever says the word ‘price,’ ” a doctor on the committee told me after the April meeting. “But yeah, everyone knows we’re talking about money.”….In a free market society, there’s a name for this kind of thing—for when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It’s called price-fixing. And in any other industry, it’s illegal—grounds for a federal investigation into antitrust abuse, at the least.

Why Are Americans’ Life Expectancies Shorter than Those of People in Other Advanced Economies? - Yves Smith - The high social cost of inequality – the fact that it shortens the lives the people at the top of the pecking order along with the lower orders – has long been excluded from discussion in polite company in the US. Michael Prowse took note of the lifespan cost of income inequality in the Financial Times in 2007, and this information wasn’t new in public health circles even then: There is a strong relationship between income and health within countries. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes. Yet, if you look for differences between countries, the relationship between income and health largely disintegrates. Rich Americans, for instance, are healthier on average than poor Americans, as measured by life expectancy. But, although the US is a much richer country than, say, Greece, Americans on average have a lower life expectancy than Greeks. More income, it seems, gives you a health advantage with respect to your fellow citizens, but not with respect to people living in other countries…. Sam Pizzigati puts a renewed focus on his post on America’s lagging life expectancy. He makes an argument that some readers may question, namely, that Americans generally lived unhealthier lives in the 1950s than now. I’m not sure I agree. I grew up in the 1960s, and standard work weeks were shorter and kids were much more active. There were fewer pollutants (some scientists contend that many chemicals interact in the human body, and so much lower doses may have adverse effects in combination than they do when they are tested in isolation). Similarly, when I was young, a soda with all its high fructose corn syrup, was a treat, not a staple. And don’t get me started on our large portion sizes, or how much processed food is in the typical American diet. So while inequality is clearly a big culprit in American’s relatively decline in life expectancy, I’m not so certain I’d write off other lifestyle factors so quickly.

Birth defects linked to bad water in California’s San Joaquin Valley - An extensive new study confirms a long-suspected link between crippling birth defects and the nitrate contamination that threatens drinking water for 250,000 people in the San Joaquin Valley. The study took place in the Midwest, but its findings hit hard in the Valley, where research last year showed farm-related nitrate pollution is extensive and expanding in the underground water of Fresno, Tulare and Kern counties. The birth defects involved include spina bifida, cleft palate and missing limbs. Valley clean-water advocates say the study again raises the profile of safe drinking water as a human right. Bureaucratic and funding delays have slowed fixes for years in many small towns. The study from Texas A&M was published last month in the peer-reviewed journal Environmental Health Perspectives, making the strongest case to date about nitrates and birth defects.

Drug Shortages are Killing - The shortages of injectable drugs that I have been writing about since 2011 (e.g. here and here) are continuing and they are extending to ordinary nutrients needed by premature babies: Because of nationwide shortages, Washington hospitals are rationing, hoarding, and bartering critical nutrients premature babies and other patients need to survive.  ..At the time of this writing—some shortages come and go by the week—Atticus’s hospital is low on intravenous calcium, zinc, lipids (fat), protein, magnesium, multivitamins, and sodium phosphate; it’s completely out of copper, selenium, chromium, potassium phosphate, vitamin A, and potassium acetate. And so are many other hospitals and pharmacies in the country, leading to complications usually seen only in the developing world, if ever. The article in the Washingtonian covers problems with GMP regulations and the FDA, as I did earlier. The article also makes the following point. Many of these products, especially the simpler ones, are available in Europe but it is illegal to import them to the United States. Many doctors are pinning their immediate hopes on Congress’s forcing the FDA to form a global pipeline to import an emergency supply. “I have friends in other countries who could get me some, but that would be illegal,” one doctor says. In fact, pharmacists note that the phosphorous Europe uses is a better product than that in the US because it’s organic and doesn’t interact with calcium in the PN, meaning more phosphorous could be included in the IV bag.

School Lunch Kills 22 Children in Eastern India - At least 22 Indian children died and 25 others are being treated in the hospital after eating a contaminated lunch at a state-run primary school in the eastern state of Bihar, prompting violent protests.  The students, many of them less than 10 years old, and a cook fell ill yesterday after having eaten at the school in the province’s Chhapra region, local administration official Abhijit Sinha said by phone. All those being treated had been moved to the Patna Medical College, Manish Sharma, a local magistrate said. There were conflicting reports over whether the cook had also died.  The tragedy may have been caused by the presence of organophosphorus in the food, P.K. Sahi, Bihar’s education minister, said at a press conference in the provincial capital of Patna, citing the initial findings of doctors treating survivors. The school’s cook had expressed concern over the quality of the oil used to prepare the meal, Sahi said without saying where he got the information from. Organophosphorus compounds are commonly found in pesticides.

Shocking Photos of Mutated Fruit and Vegetables from Fukushima - In June, CBC reported that high levels of radiation had been discovered in the groundwater, as much as 30 times over the standard deemed safe by the government, and an article on iScience Times described a study that found that 12% of moths in the area were suffering from serious mutations. And an article on Grist has actually displayed some photos taken by local Japanese residents near to Fukushima to show the state of the mutated crops that have grown since the disaster. It appears that the agricultural sector has taken a severe hit due from the radiation, with some fruits and vegetables appearing twisted and bloated. It is unknown what affect eating any of the produce would have on the body.

Pollution: Under a cloud - Up to 95 per cent of EU city dwellers are still exposed to levels of fine particulate matter – one of the most dangerous types of pollution – that exceed World Health Organisation guidelines, European Environment Agency data show. That is worrying news for people in those parts of the world that are just embarking on the industrialisation that created so much wealth in Europe and then the US. Their pollution is now an increasingly international concern as it blows over to countries with cleaner skies. One of the most important environmental questions today is whether these countries can learn from the experience of their western counterparts to combat a pollution problem that researchers say is causing the premature deaths of more than 2m people each year. One thing is certain: there is a need to act quickly. Following an unprecedented movement of people away from farms, more than half the world’s 7bn people live in urban areas, increasingly in so-called mega-cities with a population of 10m or more. The UN predicts the number of huge cities will increase to 37 from 23 during the next 12 years and most will be in Asia.

Malaysia declares state of emergency over smog in south: Malaysia has declared a state of emergency in two southern districts after smog triggered by forest fires in Indonesia reached hazardous levels. The coastal towns of Muar and Ledang are in shutdown, and residents have been advised to stay indoors. Air pollution has also worsened in the capital, Kuala Lumpur, shrouding its landmark Petronas Towers in hazy smoke. Malaysia's environment minister is to meet his Indonesian counterpart on Wednesday to discuss the problem. Smog has become an annual problem in Malaysia, but this is the first time in eight years that a state of emergency has been called, the BBC's Jennifer Pak, in Kuala Lumpur, reports. People are angry that the authorities have not been able to address the health hazard, our correspondent says. Officials on Sunday confirmed the Pollutant Standards Index (PSI) had exceeded 700 in two districts. A reading above 300 indicates that air pollution has reached dangerous levels. Schools in the region have been ordered to remain closed. Local authorities have distributed face masks to residents.

1,600 Die Prematurely in Hong Kong As Smog Spikes - this year, according to a new study out by the Clean Air Network, which blames such deaths on surging levels of local pollution. Many in Hong Kong have long liked to blame the city’s poor air quality on noxious fumes wafting from the maze of factories across the border in mainland China. However, air quality data for the first-half of this year show that not only have Hong Kong’s smog levels worsened, but the fault largely lies with local pollution sources such as the city’s ageing vehicles. Clean Air Network, a Hong Kong-based environmental non-profit organization, says the city’s old, dirty vehicles are causing its residents to choke. In the crowded commercial districts of Central and Western, which include the city’s financial center as well as some of its most congested streets, levels of nitrogen dioxide, a key air pollutant, jumped 22%, according to their review (in Chinese) of the city’s air quality. Their analysis found that such levels of pollution exceed World Health Organization-recommended safe limits by more than 60%.

Graphene the ‘Miracle Material’ may be Deadly to Humans - Graphene has been described as a ‘miracle material’. It is basically just a one atom thick sheet of carbon that is immensely strong and has incredible electronic, mechanical, and photonic properties. It has the potential to revolutionise fields such as electronics, solar energy, batteries, and medical devices, yet because it was only discovered around ten years ago there are still many aspects of its use that are unknown. New research from Brown University has revealed that grapheme may in fact be very toxic to human cells, throwing into doubt manufacturing techniques, and real world applications. It turns out that the sharp edges on grapheme micro-sheets are able to easily pierce cell membranes, from whence on they are then absorbed by the cell and once fully inside begin to disrupt the cells normal functions.

'Drunken' Weather Pattern Leads to Deadly Heat - animation - The heat wave that has built across the eastern U.S. — roasting cities from Memphis to Washington to Boston in a stifling blanket of heat and humidity — has had one strange characteristic that meteorologists cannot yet explain in a long-term climate context. Rather than moving west to east, as typical weather patterns do in the Northern Hemisphere, weather systems across the country have moved in the opposite direction, like a drunken driver on a dark stretch of highway, drifting from east to west during the past two weeks. And like drunk driving, the weather pattern is having serious — even deadly — consequences, with at least one death being blamed on the heat, according to the Associated Press.  The "Bermuda high" that often pumps warm and humid air into the East Coast during July and August decamped around July 11 from Bermuda and came ashore, eventually migrating all the way to the Midwest by July 15. The summertime high pressure ridge, sometimes referred to as a “heat dome,” has set air pressure records as recorded by weather balloons in Pittsburgh and Virginia, and has been responsible for sending air temperatures rocketing into the mid- to upper-90s, and even the lower triple digits, in some parts of the East.

Drought Turns the Rio Grande Into The "Rio Sand" - Continuing profound drought has left New Mexico so severely parched that the irrigation season along the lower Rio Grande Valley has ended just a month and a half after it started, making it the shortest on record.This has prompted the Las Cruces Sun-News to proclaim a new name for the river: the “Rio Sand.” In the animated images above, you can see a part of a massive reservoir along the river, Elephant Butte, literally turning into sand. Look for the blue lake in the middle of the frame. This is an image captured in early July 2012 by NASA’s Terra Satellite. The second image in the animation was captured on Tuesday (June 14th). The water just disappears…Elephant Butte Reservoir, now down to 3 percent of capacity, is supposed to provide irrigation water to south-central New Mexico and west Texas. But it won’t be doing that at least for the rest of this summer.If relief doesn’t come in the form of monsoon rains (see my post about that phenomenon here), and winter snows in the upper part of the basin, farmers in southern New Mexico and Texas will have no water to grow their crops next summer. The waterbank is simply depleted.

Invasion Of The Lionfish - Humans fuck up ecosystems in a variety of ways. Introducing new, "invasive" species into ecosystems in which they do not belong is a common example of our shameless interference with nature. One of the worst examples in recent memory is getting more attention. Let's start with the brief UPI science report Invasive lionfish in Caribbean, Atlantic growing in numbers. — A voracious, invasive fish is out-eating all competitors in the Caribbean and predators appear unable to control its impact on local reef fish, researchers say. Lionfish, a long-popular aquarium fish native to the Indo-Pacific region, are invading both Caribbean and Atlantic waters and threatening local fish populations, they said.Native predators seem to have little effect on the numbers of lionfish, researchers say."When I began diving 10 years ago, lionfish were a rare and mysterious species seen deep within coral crevices in the Pacific Ocean," said Serena Hackerott, lead study author and graduate student at the University of North Carolina. "They can now been seen across the Caribbean, hovering above the reefs throughout the day and gathering in groups of up to ten or more on a single coral head." Native reef predators such as sharks and groupers appear unable to control the population growth of red lionfish in the Caribbean, either by eating them or out-competing them for prey, the researchers said.

NASA: Globally, June Was Second Warmest On Record -- How hot was it in June? So hot that NASA reports the only warmer June in the global temperature record was 1998, a year juiced by both global warming and a super El Niño. By contrast, 2013 has been hovering between a weak La Niña and ENSO-neutral conditions, which would normally mean below-average global average temperatures — if it weren’t for that pesky accumulation of heat-trapping greenhouse gases. NASA’s Goddard Institute for Space Studies reports the June 2013 surface temperature anomalies (compared to the 1951-1980 average): Yes, parts of Antarctica were nearly off the charts. What could go wrong with that?

Black Carbon: Golden Opportunity? - On many maps of the world, Greenland appears as a winter-white wedge floating in a dark blue sea. But in recent summers, some parts of Greenland would be better depicted in various shades of gray. Greenland is growing darker, even in areas covered in ice and snow.This is a problem, and not just an aesthetic one. When light hits white, freshly fallen snow, it’s bounced about by the snow’s crystals, and most of its energy — up to 90 percent — ends up reflected away. But darkened snow and ice absorb more sunlight, warming ice sheets and speeding the rate at which glaciers melt. Between 2000 and 2011, glaciologist Jason Box estimates that darkened ice caused the Greenland ice sheet to absorb an extra 172 quintillion joules of energy — enough to double melt rates.In one of the troubling feedback loops of the changing climate, dark ice is partially caused by the warmer Arctic summers climate change has brought us: More warmth means less fresh snowfall to cover areas of accumulated sediment, changes to the shape and size of ice grains that make them less reflective, and more liquid near the surface. But warming isn’t enough to explain all of Greenland’s darkness. Another culprit is black carbon, better known as soot.Black carbon is a by-product of burning biomass, coal, diesel and gas. It comes from, among other things, inefficient stoves, diesel trucks, campfires and fires in forests and savannas. Black carbon particles are most concentrated over cities, but wind carries them all over the world before they settle out of the atmosphere or are washed to Earth by precipitation. When they fall in the Arctic, they help turn bright snow gray — just as snowbanks on roadsides turn dingy by winter’s end.

DMI's Surface Mass Budget of the Greenland Ice Sheet - The link to this site will go up in the left-hand column of this blog, for our convenience. Here you can follow the daily surface mass balance on the Greenland Ice Sheet. The snow and ice model from one of DMI’s climate models is driven every six hours with snowfall, sunlight and other parameters from a research weather model for Greenland, Hirlam-Newsnow. We can thereby calculate the melting energy, refreezing of melt water and sublimation (snow that evaporates without melting first). The result of this is a change in the snow and ice from one day to the next and this change is shown below. All numbers are in water equivalent, that is, the amount of water the snow and ice would correspond to if it was melted. In the above figure, we show the daily surface mass balance (on the left) and you can see where it has snowed and melted (incl. sublimate) on the ice sheet over the last 24 hours. For comparison, the map to the right shows the average value for the same calendar date over the period 1990-2011. This historical average is based on weather from a somewhat different model and the two are therefore not always strictly comparable

Like Butter: Study Explains Surprising Acceleration Of Greenland’s Inland Ice - In 2011, scientists explained that the Greenland Ice Sheet “could undergo a self-amplifying cycle of melting and warming” that is “difficult to halt.”  Last November, a major international study in the journal Science found that the Greenland ice sheet’s melt rate was up nearly 5-fold since the mid-1990s. This acceleration has put ice sheet loss far ahead of what most climate models had predicted several years ago. Now a new study by scientists at the Cooperative Institute for Research in Environmental Sciences (CIRES) in the Journal of Geophysical Research: Earth Surface explains at least one key factor the models have missed: Surface meltwater draining through cracks in an ice sheet can warm the sheet from the inside, softening the ice and letting it flow faster. The study notes that not only has the Greenland ice sheet accelerated at the edges where they flow into the ocean, but the “interior regions are also flowing much faster than they were in the winter of 2000-2001.”. The team found that meltwater warms the ice sheet, which then—like a warm stick of butter—softens, deforms, and flows faster.Previous studies estimated that it would take centuries to millennia for new climates to increase the temperature deep within ice sheets. But when the influence of meltwater is considered, warming can occur within decades and, thus, produce rapid accelerations.

Massive ice sheets melting 'at rate of 300bn tonnes a year', climate satellite shows - A satellite that measures gravity fluctuations on Earth due to changes in the massive ice sheets of Greenland and Antarctica has detected a rapid acceleration in the melting of glacier ice over the past decade, which could have a dramatic impact on sea levels around the world. The sheets are losing around 300 billion tonnes of ice a year, the research indicates. However, scientists have warned that the measurements gathered since 2002 by the Gravity Recovery and Climate Experiment (Grace) flying in space are still too short-term for accurate predictions of how much ice will be lost in the coming decades, and therefore how rapidly sea levels will rise.

Snow cover and Arctic sea ice extent plummet suddenly as globe bakes -- NOAA and NASA both ranked June 2013 among the top five warmest (NOAA fifth warmest, NASA second warmest) Junes on record globally (dating back to the late 1800s).  But, more remarkable, was the incredible snow melt that preceded the toasty month and the sudden loss of Arctic sea ice that followed. The amazing decline in Northern Hemisphere snow cover during May is a story few have told, but is certainly worth noting.  In April, hefty Northern Hemisphere snow cover ranked 9th highest on record (dating back to 1967), but then turned scant, plummeting to third lowest on record during May. Half of the existing snow melted away.“ The snow extent shrunk from 12.4 million square miles to 6.2 million square miles in a month’s time. By June, just 2.3 million square miles of snow remained in the Northern Hemisphere (a decline of 63 percent from May), third lowest on record. You may recall, late last summer the Arctic sea ice extent dropped to its lowest level on record, 49 percent below the 1979-2000 average. It’s not clear if 2013 levels will match 2012′s astonishing record low, but – with temperatures over the Arctic Ocean 1-3 degrees above average – the 2013 melt season has picked up in earnest during July. “During the first two weeks of July, ice extent declined at a rate of 132,000 square kilometers (51,000 square miles) per day. This was 61% faster than the average rate of decline over the period 1981 to 2010 of 82,000 square kilometers (32,000 square miles) per day,” the National Snow and Ice Data Center writes on its website.

Ice, ice, maybe: Snow and ice melting at record speed - June temperatures were above average across the world, and both NASA and NOAA ranked the month among the top five warmest since record keeping began in the late 1800s.Not surprisingly, snow extent in the Northern Hemisphere was at its third-lowest on record by June. But what makes the current paltry snow cover more significant is the fact that, just a few months ago, the Northern Hemisphere was unusually snowy — April 2013 had the ninth-highest snow extent since 1967. A month later, half that snow had melted away. The Washington Post reports:“This is likely one of the most rapid shifts in near opposite extremes on record, if not the largest from April to May,” The snow extent shrunk from 12.4 million square miles to 6.2 million square miles in a month’s time. By June, just 2.3 million square miles of snow remained in the Northern Hemisphere (a decline of 63 percent from May), third lowest on record.“In recent years it hasn’t seemed that unusual to have average or even above average winter snow extent rapidly diminish to below average values come spring,”  It’s the same story for ice. Although Arctic sea ice extent is not as low as it was in mid-July of 2012 (the year that Arctic ice dropped to its lowest level on record), over the last two weeks, the ice has melted 61 percent faster than average, with 51,000 square miles disappearing every day. The Arctic Sea Ice Blog writes that despite the slower start to this year’s ice-melting season, 2013 could still approach 2012’s record.

Models point to rapid sea-level rise from climate change: Sea levels could rise by 2.3 metres for each degree celsius that global temperatures increase and they will remain high for centuries to come, according to a new study by the leading climate research institute. Anders Levermann said his study for the Potsdam Institute for Climate Impact Research was the first to examine evidence from climate history and combine it with computer simulations of contributing factors to long-term sea-level increases: thermal expansion of oceans, the melting of mountain glaciers and the melting of the Greenland and Antarctic ice sheets. Scientists say global warming is responsible for the melting ice. A U.N. panel of scientists, the IPCC, says heat-trapping gases from burning fossil fuels are nudging up temperatures. A small number of scientists dismiss human-influenced global warming, arguing natural climate fluctuations are responsible.

As Good as a Stopped Clock: The House Does Transparency -- One day in May, climate change got a lot more expensive. The price tag on emissions – the value of the damages done by one more ton of CO2 in the air – used to be a mere $25 or so, in today’s dollars, according to an anonymous government task force that met in secret in 2009-2010. Now it’s $40, according to an anonymous government task force that met in secret in early 2013. Lots of people had comments and criticisms after the first round – and in response, the anonymous task force redux changed nothing whatsoever in its methodology. The increase in the estimated cost of emissions is entirely due to revisions in the three chosen models. Most of this year’s increase in the U.S. government’s social cost of carbon comes from decisions by one modeler, who recently made particularly large changes in his model. This state of affairs is disturbing to two groups of people: fans of democracy and openness; and climate change deniers and fossil fuel apologists. Guess which group is holding a hearing on the subject on Capitol Hill. A bipartisan bill, introduced in the House by Representatives Duncan Hunter (R-science denial) and Nick Rahall (D-coal industry), calls for an opportunity for extensive public comment on the benefits (but not the costs) of any proposed regulation before it is adopted. The very brief text of the bill shows no great familiarity with regulatory language or procedures, but singles out any process involving the phrase “social cost of carbon” as particularly in need of review.We do need better review of key regulatory decisions, but this bill isn’t even a useful first draft of appropriate, impartial procedures. No surprise: that’s not what it was designed for.

Chris Hedges on Whether We Can Change Trajectory and Avert Collapse video via naked capitalism - Yves here. Chris Hedges opens a new series on Real News Network by discussing how dire our current situation is, particularly from an ecological perspective, and the reluctance to acknowledge it and take corrective measures. Hedges incorporates a religious perspective, which I anticipate will resonate with some readers and not with others. But absent religion, it appears to be surprisingly difficult to get most people to worry about the consequences of their actions if they think they are likely to occur after their death. Personally, I think we are already seeing the impact (Hedges points to the efforts of the rich to isolate themselves from the rest of society). And with scarcity of potable water estimated to become a large-scale problem by 2050, and climate disruption affecting agricultural production now, the runway is likely to be shorter than many people anticipate.

Collision Between Water and Energy Is Underway, and Worsening - IEEE - When a heat wave spread across the Midwest in the summer of 2012, the Powerton coal plant in central Illinois had to temporarily shut down a generator when its water supply became too warm to effectively cool the plant. Although 2012 was a year of severe drought in the U.S., the problems seen at various coal, nuclear, and hydropower facilities last summer are  only likely to increase in coming years unless the power sector quickly changes its way of doing business, according to a new study from the Union of Concerned Scientists (UCS) [PDF]. The problem is that the power sector is not known for moving quickly. Power generation in the United States relies heavily on water. For some plants, like the ones that run on coal or nuclear power, the water is needed for cooling, while hydro directly uses water for energy production. More than 40 percent of fresh water used in the United States is withdrawn to cool power plants. Renewable energy generally uses far less water, but there are glaring exceptions, such as geothermal and concentrating solar.The report, part of UCS’s Energy and Water in a Warming World Initiative, noted that even though the oldest and most water-hungry, coal-fired power plants are being retired, the shift to cleaner energy isn’t happening fast enough to overcome increasing water shortages.

Fix infrastructure on the cheap while you still can -  Our electrical grid consists mostly of wires strung between wooden poles, which may have been innovative in 1850 but is somewhat past its sell-by date today. After Hurricane Sandy, much of New Jersey, Long Island and Connecticut lost electrical service for two weeks. The entire grid needs to be hardened, upgraded against cyberattack — and buried underground.Bridges that are well past their life expectancy should not simply wait to fail. We should be actively replacing these. The alternative is waiting for random events — like the truck crash that caused the Washington state Skagit River bridge collapse — to cause a disaster. The United States’ cellular network is a decade behind Europe’s and Asia’s coverage and reliability. Mandate better minimum service requirements and make available cheap financing to wireless providers to do so. We can do the same with broadband as well. The interstate highway system has been one of the lasting legacies of the Eisenhower administration. It is time for a full upgrade of this economic multiplier. The United States once enjoyed what venture capitalists like to call “first mover advantage.” We innovated in these areas and were often the first to deploy these infrastructures and technologies. By virtue of being first, our systems tend to be older and in greater need of repair than in most of the world. Not bringing them up to date leaves us at an economic disadvantage vs. the rest of the world.

Ideas to Bolster Power Grid Run Up Against the System’s Many Owners - Bill Richardson often denigrated America’s power transmission network as a “third-world grid” when he was President Bill Clinton’s energy secretary, but the more current description of it is “balkanized,” with 500 separate owners. “To call the U.S. grid balkanized would insult the Macedonians,” When President Obama presented his plans last month for executive action that would cut emissions of greenhouse gases, one item on his list was strengthening the power grid. It was on the lists of President George W. Bush and Mr. Clinton, too. But for the most part, experts say the grid is not being changed, at least not on a scale big enough to make much difference.  Their view is reflected in what they say is a largely hypothetical three-year effort by hundreds of engineers to redraw the grid for the eastern two-thirds of the United States. Engineers in the project, which is now drawing to a close, have proposed a basic redesign for beefing up the Eastern Interconnection, the part of the grid that stretches from Nova Scotia to New Orleans.  The redesign would reduce carbon dioxide emissions by replacing coal with wind energy and give the United States something it has never had, a grid designed for shipping bulk amounts of electricity across the continent. The planning, which cost $16 million, shows a substantial carbon emissions reduction.  But the project is covered with footnotes that assert that it does not represent the position of the participants.

Increased U.S. coal consumption met by burning through stockpiles - Coal inventories at power plants dropped below the monthly five-year average in April, the first time this has happened since December 2011. The decline in stockpiles occurred as coal burn increased across much of the nation during a winter that was colder than the previous winter. In addition, rising natural gas prices prompted some power plants to burn more coal and less gas to generate electricity. Total coal consumption was up 11% in first-quarter 2013, compared to the same period in 2012. However, the increase in coal consumption did not translate into increased sales by coal producers. Receipts of coal at electric power plants actually decreased 5% between first-quarter 2012 and first-quarter 2013 as plant operators chose to meet rising demand by drawing down the historically high levels of stockpiles. Last spring, when natural gas prices were near ten-year lows, coal consumption for electricity declined and stockpile levels increased. Coal consumption has since increased, but most power plants are burning down the record stockpile levels rather than increase purchases of coal. Because electric power plants appear set to burn down the record coal stocks rather than buy new supply, the weak domestic market for coal producers is expected to continue throughout 2013.

Foreclosing the Future: The World Bank and the Politics of Environmental Destruction - In 2011 UN Secretary General Ban Ki-Moon shocked an audience of bankers and corporate executives in Davos Switzerland when he declared that the current economic system was “a recipe for disaster” and “a global suicide pact.” Over the last two decades the world’s institutions have largely failed to deal with the ecological crises of climate change, destruction of species, and pollution of fresh water and oceans. These failures have been accompanied by growing economic inequality in many nations. The World Bank Group proudly proclaims “our dream is a world without poverty.” It claims to be a leader in promoting environmental standards for development, as well as in finance for environmental purposes, such as mitigating climate change. In reality it is a microcosm of the failures of its 188 member countries to address the challenges of economic development. Internal Bank studies reveal that the Bank’s incorporation of environmental concerns into its lending decisions has actually decreased since the turn of the millennium. Over the past decade, as the U.S. and other rich countries gave the Bank many extra billions to fight global warming, it actually increased its lending for giant coal power plants and oil development–including two of the 50 biggest new single sources of greenhouse gas emissions on earth.

World Bank to limit financing of coal-fired plants (Reuters) - The World Bank's board on Tuesday agreed to a new energy strategy that will limit financing of coal-fired power plants to "rare circumstances," as the Washington-based global development powerhouse seeks to address the impact of climate change. The Bank will amend its lending policies for new coal-fired power projects, restricting financial support to countries that have "no feasible alternatives" to coal, as it seeks to balance environmental efforts with the energy needs of poor countries. The impact of this energy strategy may not be seen immediately, since bilateral donors and the private sector will still continue to finance coal. Some analysts hope the new strategy could send a signal that coal is a risky investment and prompt countries to turn to alternative energy sources. In its "Energy Sector Directions Paper," updated every 10 years, the Bank also backed increased support for hydro electric power, reversing its decision to abandon those projects in the 1990s under pressure from aid groups that warned they would displace people. For full report, see Large-scale dams provide the Bank with a way to balance global energy needs with its pledge to help scale down greenhouse gas emissions.

Oilprice Weekly Report - This week in energy in Washington DC, the House defeated a proposal to cut out funding for uranium enrichment technology under the aegis of the American Centrifuge Project led by Ohio energy firm USEC. This project is either a huge waste of money or vital to national security, depending on who you ask. The proposal would have cut $48 million in federal funding for USEC from a pending energy and water appropriations bill. The amendment was sponsored by Rep. Michael Burgess, Republican-Texas, who views the project’s funding as essentially a bailout package for a languishing uranium enrichment company. The project receives bipartisan criticism and support. Current funding for the project ends on 30 September 2013, but the project is slated for completion on 31 December. The USEC is working with the Energy Department to research, develop and deploy test centrifuge technology. The $48 million from the energy and water appropriations bill would cover the remaining three months of needed funding. The goal is to have USEC’s Piketon plant produce enough fuel to power dozens of nuclear power plants across the country. Proponents also argue that producing enriched uranium domestically will strengthen national security. At the same time, the House rejected a series of Republican-led proposals to slash money for renewable energy research in what appears to be retaliation for the Obama administration’s move to close the Yucca Mountain nuclear waste repository. The House proposal called for only $30.4 billion ($3 billion less than last year) for Energy Department programs, including nuclear weapons maintenance. Essentially, the proposal sought to cut renewable energy spending in half.

Black Stuff Found Around Eastern Japan May Be Fukushima Nuclear Fuel - We at have reported extensively on the highly radioactive “black stuff” being found around eastern Japan, as far away as Tokyo. Citizens initially found the substance, usually concentrated in gutters and low spots. Some superficial analysis had been done on the substance, again by citizens. The government has refused to acknowledge the issue or  publicly acknowledge testing of the substance. Marco Kalofan, an environmental engineer in the US was able to obtain a sample for detailed analysis. What was found was quite unusual. The substance isn’t a sand but an aggregate of radioactive substances, metals and rare earth materials. The materials for some reason clumped together into an aggregate rather than dispersing as tiny particles.What the detailed analysis showed was that the material may have come from inside failed fuel assemblies from the damaged reactors. The high level of uranium daughter isotopes like radium 226 are seen as an indicator of amounts of unburned uranium fuel. The sample also has a mix of other substances like cesium 134 & 137 and cobalt 60 that are reactor emissions as they do not exist in nature. The specific combination of substances found and the aggregate nature of the pieces confirm it is not organic in nature. The sample also contains a number of things expected to be found in used nuclear fuel.

Contaminated Water has been Leaking into Ocean for Two Years at Fukushima - Shunichi Tanaka, the head of the Nuclear Regulation Authority in Japan, and the country’s chief nuclear regulator announced on Wednesday, that the nuclear power plant at Fukushima, has been leaking contaminated water into the ocean for the two years since the accident that saw three of the plants six reactors suffer a meltdown. Tanaka explains that neither his staff, nor those working for the plant’s operator have discovered where the leaks are coming from, and therefore have not been able to stop them. Tokyo Electric Power (Tepco), the power plants operator, has constantly denied that any of that water heas been leaking into the Ocean, but in the last few days it has switched its position and finally admitted that it can’t actually say for sure that the water is not leaking into the sea.Tepco has also admitted that the amounts of radioactive cesium, tritium, and strontium detected in groundwater around the plant has been growing, making the job of sealing the leaks even more urgent. Cesium and Strontium are especially dangerous to humans.

“Who Could Trust Such A Company?” – The Big Fat Lies About Radiation Exposure Of Workers At Fukushima - Wolf Richter - Latest revelation: the number of workers at the plant who had cancer-inducing radiation doses in thyroid glands from inhaling radioactive substances during the early stages of the crisis was elven times higher than disclosed last December. Not 178 workers, as TEPCO, the bailed out and now partially state-controlled owner of the nuke had said, but 1,973 workers, as the Asahi Shimbun has “learned.” Despite its erstwhile omniscience and omnipotence, TEPCO has been publically baffled by an endless series of mishaps, surprises, and occurrences that left it mostly helpless. For example, in mid-March, it disclosed that a month earlier (!), a greenling with 740,000 becquerels of radioactive cesium per kilogram had been caught near the plant. That’s 7,400 times the government’s food safety limit, highest ever measured by TEPCO’s testing program. Then, early last week, researchers determined that several Japanese sea bass caught off the coast of Hitachi, a city about 60 miles south of the plant – halfway toward Tokyo – had radioactive cesium levels of 1,037 becquerels per kilogram, over ten times the government’s food safety limitAlas, cesium-134 and cesium-137 in groundwater at the plant suddenly started soaring in early July. When measured on July 8, levels were 90 times higher than those found on July 5 and reached 200 times the legal limit for groundwater. TEPCO was baffled. “It is unclear whether the radioactive water is leaking into the sea,” a company official said.

The Gas Is Greener - In late June, the British Geological Survey announced the world’s largest shale-gas field. The Bowland Shale, which lies beneath Lancashire and Yorkshire, contains 50 percent more gas than the combined reserves of two of the largest fields in the United States, the Barnett Shale and the Marcellus Shale. The United Kingdom has been reluctant to join the fracking revolution. Yet tapping the Bowland Shale could reignite the U.K. economy and deliver huge cuts in CO2 emissions. At the same time, Parliament has approved stringent new measures to reduce carbon emissions by 2020, with the biggest CO2 cuts by far to come from an increase of more than 800 percent in offshore wind power over the next seven years. But offshore wind power is so expensive that it will receive at least three times the traded cost of regular electricity in subsidiesmore than even solar power, which was never at an advantage in the U.K. For minimal CO2 reduction, the U.K. economy will pay dearly.

Exclusive: China in $5 billion drive to develop disputed East China Sea gas (Reuters) - Chinese state-run oil companies hope to develop seven new gas fields in the East China Sea, possibly siphoning gas from the seabed beneath waters claimed by Japan, a move that could further inflame tensions with Tokyo over the disputed area. Beijing had slowed exploration in the energy-rich East China Sea, one of Asia's biggest security risks due to competing territorial claims, but is now rapidly expanding its hunt for gas, a cheaper and cleaner energy to coal and oil imports. State-run Chinese oil and gas firm CNOOC Ltd will soon submit for state approval a plan to develop Huangyan phase II and Pingbei, totaling seven new fields, two industry officials with direct knowledge of the projects told Reuters. The approval would bring the total number of fields in what is called the Huangyan project to nine. China is already working on Huangyan I which has two fields approved. The Huangyan project is expected to cost more than 30 billion yuan ($4.9 billion), including 11 production platforms now under construction at Chinese shipyards.

Study finds fracking chemicals didn't pollute water: AP -  A landmark federal study on hydraulic fracturing, or fracking, shows no evidence that chemicals from the natural gas drilling process moved up to contaminate drinking water aquifers at a western Pennsylvania drilling site, the Department of Energy told The Associated Press. After a year of monitoring, the researchers found that the chemical-laced fluids used to free gas trapped deep below the surface stayed thousands of feet below the shallower areas that supply drinking water, geologist Richard Hammack said.Although the results are preliminary -- the study is still ongoing -- they are a boost to a natural gas industry that has fought complaints from environmental groups and property owners who call fracking dangerous.Drilling fluids tagged with unique markers were injected more than 8,000 feet below the surface, but were not detected in a monitoring zone 3,000 feet higher. That means the potentially dangerous substances stayed about a mile away from drinking water supplies.

EPA to Allow Consumption of Toxic Fracking Wastewater by Wildlife and Livestock - Millions of gallons of water laced with toxic chemicals from oil and gas drilling rigs are pumped for consumption by wildlife and livestock with the formal approval from the U.S. Environmental Protection Agency (EPA), according to public comments filed yesterday by Public Employees for Environmental Responsibility (PEER). Contrary to its own regulations, EPA is issuing permits for surface application of drilling wastewater without even identifying the chemicals in fluids used for hydraulic fracturing, also known as fracking, let alone setting effluent limits for the contaminants contained within them. The EPA has just posted proposed new water discharge permits for the nearly dozen oil fields on or abutting the Wind River Reservation in Wyoming as the EPA has Clean Water Act jurisdiction on tribal lands. Besides not even listing the array of toxic chemicals being discharged, the proposed permits have monitoring requirements so weak that water can be tested long after fracking events or maintenance flushing. In addition, the permits lack any provisions to protect the health of wildlife or livestock. “Under the less than watchful eye of the EPA, fracking flowback is dumped into rivers, lakes and reservoirs,” stated PEER Executive Director Jeff Ruch, pointing out that in both the current and the new proposed permits the EPA ignores its own rules requiring that it list “the type and quantity of wastes, fluids or pollutants which are proposed to be or are being treated, stored, disposed of, injected, emitted or discharged.”

DOE study: Fracking chemicals didn't taint water - — A landmark federal study on hydraulic fracturing, or fracking, shows no evidence that chemicals from the natural gas drilling process moved up to contaminate drinking water aquifers at a western Pennsylvania drilling site, the Department of Energy told The Associated Press.After a year of monitoring, the researchers found that the chemical-laced fluids used to free gas trapped deep below the surface stayed thousands of feet below the shallower areas that supply drinking water, geologist Richard Hammack said.  Although the results are preliminary — the study is still ongoing — they are a boost to a natural gas industry that has fought complaints from environmental groups and property owners who call fracking dangerous. Drilling fluids tagged with unique markers were injected more than 8,000 feet below the surface but were not detected in a monitoring zone 3,000 feet higher. That means the potentially dangerous substances stayed about a mile away from drinking water supplies.

Water companies raise shortage fears over shale gas fracking - Fracking for shale gas will raise the risk of water shortages and could contaminate drinking supplies, Britain's water companies have claimed.  In a blow for shale gas explorers and government alike, Water UK, which represents all major water suppliers, has published a series of concerns about fracking and warned that failure to address them could “stop the industry in its tracks”.  Ministers hope the controversial process, which involves pumping water, sand and chemicals into the ground to extract gas trapped in rocks, could unlock a major new source of gas for Britain and bring down household energy bills.  Chancellor George Osborne on Friday unveils details of tax breaks for the shale gas industry, pledging the most generous tax regime in the world so that Britain becomes “a leader of the shale gas revolution”.  But Water UK, which is demanding an urgent meeting with shale companies to discuss its fears, warns: “Shale gas fracking could lead to contamination of the water supply with methane gas and harmful chemicals if not carefully planned and carried out.” It suggests aquifers could be contaminated by fracking, by leaks from wells, or by poor handling of chemicals or waste water on the surface.

Josh Fox on Gasland Part 2, the Fracking-Earthquake Link & the Natural Gas Industry’s Use of PSYOPs | NationofChange: Scientists are warning that the controversial practice of natural gas hydraulic fracturing, or fracking, may lead to far more powerful earthquakes than previously thought. Fracking injects millions of gallons of water, sand and chemicals deep into the earth in order to break up shale rock and release natural gas. A new study published Thursday in the journal Science by a leading seismology lab warns that pumping water underground can induce dangerous earthquakes, even in regions not otherwise prone to tremors. The new report comes as Academy Award-nominated director Josh Fox has released the sequel to his highly acclaimed documentary "Gasland," which sparked a national discussion on fracking. The new film, "Gasland Part II," exposes how the gas industry and the government’s portrayal of natural gas as a clean and safe alternative to oil is highly suspect. He also discusses how drilling companies have admitted to having several former military psychological operations, or PSYOPs, specialists on staff, applying their skills in Pennsylvania to counter opponents of drilling. "What’s really disappointing about this is that this is a moment when an American president has come forward and spoken about climate change and exhibited his obvious and earnest desire to take on the problem; however, the emphasis on fracked gas makes this plan entirely the wrong plan," says Fox, noting that methane released from fracking sites is more potent than other greenhouse gases. "Moving from coal to fracked gas doesn’t give you any climate benefit at all. So the plan should be about how we’re moving off of fossil fuels and onto alternate energy."

Treatment Plants Accused of Illegally Disposing Radioactive Fracking Wastewater – A Pennsylvania industrial wastewater treatment plant has been illegally accepting oil and gas wastewater and polluting the Allegheny river with radioactive waste and other pollutants, according Clean Water Action, which announced today that it is suing the plant. “Waste Treatment Corporation has been illegally discharging oil and gas wastewater since at least 2003, and continues to discharge such wastewater without authorization under the Clean Water Act and the Clean Streams Law,” the notice of intent to sue delivered by Clean Water Action reads. Many pollutants associated with oil and gas drilling—including chlorides, bromides, strontium and magnesium—were discovered immediately downstream of the plant’s discharge pipe in Warren, PA, state regulators discovered in January. Upstream of the plant, those same contaminants were found at levels one percent or less than those downstream, or were not present at all. State officials also discovered that the sediments immediately downstream from the plant were tainted with high levels of radium-226, radium-228 and uranium. Those particular radioactive elements are known to be found at especially levels in wastewater from Marcellus shale gas drilling and fracking, and state regulators have warned that the radioactive materials would tend to accumulate in river sediment downstream from plants accepting Marcellus waste.

Shale Shocked: Sharp Rise In U.S. Earthquakes Directly Linked To Fracking Wastewater Reinjection - This double repost excerpts the releases for two new important articles in the journal Science. The first is “Enhanced Remote Earthquake Triggering at Fluid-Injection Sites in the Midwestern United States” (subs. req’d). The second is a review article, “Injection-Induced Earthquakes” (subs. req’d) by U.S. Geological Survey geophysicist William Ellsworth. The first release, from Columbia University’s Lamont-Doherty Earth Observatory, explains: A surge in U.S. energy production in the last decade or so has sparked what appears to be a rise in small to mid-sized earthquakes in the United States. Large amounts of water are used both to crack open rocks to release natural gas through hydrofracking, and to coax oil and gas from underground wells using conventional techniques. After the gas and oil have been extracted, the brine and chemical-laced water must be disposed of, and is often pumped back underground elsewhere, sometimes causing earthquakes. Earthquakes induced by fracking wastewater reinjection are a major concern because those wells are already prone to fail and leak (see “Natural Gas, Once A Bridge, Now A Gangplank“). The Propublica exposé in Scientific American, “Are Fracking Wastewater Wells Poisoning the Ground beneath Our Feet?” quoted engineer Mario Salazar, who worked for a quarter century as a technical expert with the EPA’s underground injection program: In 10 to 100 years we are going to find out that most of our groundwater is polluted. A lot of people are going to get sick, and a lot of people may die.”

Six Tech Advancements Changing the Fossil Fuels Game: One of the greatest drilling developments of the last decade is multiple well pads, which some like to refer to as “Octopus” technology. Imagine gaining access to multiple buried wells at the same time, from a single pad site. This is what “Octopus” technology is doing, first in a canyon in northwestern Colorado in the Piceance Shale Formation and then in the Marcellus shale. It’s definitely not your traditional horizontal drilling. Traditionally, to drill a single well, a company needs a pad or land site for each well drilled. Each of these pads covers an average of 7 acres. The Octopus allows for multiple well drilling from a single pad, which can handle between 4 and 18 wells. So, a single pad on 7 acres can now be used to drill on up to 2,000 acres of reserves. More than anything, it means that drilling will be faster, faster, faster … And less expensive in the long run once it renders it unnecessary to break down rigs and put them together again at the next drilling location. It’s simple math: 4 pads usually equals 4 wells; now 1 pad can equal between 4 and 18 wells.

The U.S. oil and gas boom is straining the country’s infrastructure: Over the past few years, the U.S. fracking boom has taken a great many people by surprise. Companies have been producing so much oil and gas that it’s now putting a strain on America’s energy infrastructure.

Case in point: The Energy Information Administration recently put out a report showing that U.S. transport of crude oil by rail, truck, and barge has soared by 57 percent between 2011 and 2012, surpassing 1 million barrels per day. Out in North Dakota, for instance, companies are now producing far more shale oil from the Bakken formation than existing pipelines can handle. So the producers are instead shipping it by rail to the refineries that will turn it into gasoline and other fuel. Here’s a chart showing the surge:

The high cost of railroading unconventional crude -- timeline, photos, history - The derailment and explosion of a shale oil train in Canada highlights desperate attempts by refineries along the US/Canada East coast to offset the conventional oil peak of Atlantic basin producers who traditionally supplied them with Brent type crude.  A run-away crude oil train travelling at 100 km/h derailed at a bend in the small Canadian town of Lac Megantic and burst into flames, destroying part of the town centre and killing many people.

Failing To Build Pipelines Is Criminal Negligence- The Canadian Royal Mounties now believe that the mile-long runaway oil train that killed 15 and left 35 people missing in a small Quebec town may have been an act of criminal negligence for failing to set the brakes properly. But the real criminal negligence is that oil from booming fracking operations in North Dakota must be shipped by trains over a thousand mile to refiners in Nova Scotia, because regulators fought building American pipelines and refineries to protect and subsidize railroads, such as Burlington Northern Railway Company that controls half the business. Every day, an average of ten trains with up to 100 tank-cars leave North Dakota carrying 3.35 million gallons of raw crude oil to journey over a thousand miles to refineries in Nova Scotia and Texas. Railroads carry 75% of North Dakota oil and are the prime reason oil hauled by tank cars in the U.S. rose over the last three years by 2,000% to a total of 6.5 billion gallons. Railroads claimed to average only thirteen spills per year over the last ten years, but 60% oil shipments by rail was in the last two years. Railroads are designed to go to where people are, whereas pipelines go to refineries that are specifically located a safe distance way from populated areas. Only good fortune prevented Lac-Megantic level disaster from occurring sooner.

Enbridge seeks swift approval of 600-mile Midwest oil pipeline, pitches project at open houses - The Washington Post: — A Canadian company’s plan to build an oil pipeline that will stretch for hundreds of miles through the Midwest, including through many sensitive waterways, is quietly on the fast-track to approval — just not the one you’re thinking of. As the Keystone XL pipeline remains mired in the national debate over environmental safety and climate change, another company, Enbridge Inc. of Calgary, Alberta, is hoping to begin construction early next month on a 600-mile-long pipeline that would carry tar sands from Flanagan, Ill., about 100 miles southwest of Chicago, to the company’s terminal in Cushing, Okla. From there the company could move it through existing pipeline to Gulf Coast refineries.The company is seeking an expedited permit review by the U.S. Army Corps of Engineers for its Flanagan South pipeline, which would run parallel to another Enbridge route already in place. Unlike the Keystone project, which crosses an international border and requires State Department approval, the proposed pipeline has attracted little public attention — including among property owners living near the planned route.

Federal Judge Allows Chevron to Track Environmental Advocates: After a 20-year battle, Ecuador's court ruled against Chevron in the world's biggest environmental lawsuit, but the company isn't giving up and has indeed settled on a new strategy to avoid paying $18.2 billion in damages for 30 years of pollution in the Amazon. Chevron is attempting to fight back by claiming it is a victim of conspiracy and incredibly, a US federal judge has given the company access to email and internet use by environmental advocates in order to build its case. A federal judge ruling enforces Chevron's subpoena for Microsoft to provide IP usage records and identity information for email accounts owned by over 100 environmental activists, journalists and attorneys. Chevron has also subpoenaed Yahoo! and Google. The subpoena requires personal information on each account holder and IP addresses for every log-in over a nine year period, which could be used to map individuals' locations and associations over nearly a decade, note the Electronic Frontier Foundation and EarthRights International, which are fighting the decision.

US Oil Rig Count and Oil Production - The above shows the most recent weekly oil rig counts for the United States (the data are from Baker Hughes).  The huge boom in drilling peaked in the middle of 2012.  There was then a small decline through the early months of 2013.  That has since been partly made up - rig count is still not back to the level  of mid 2012.So at least for the time being, the US rig count appears to have stabilized around the 1400 level.  It seems this is unlikely to be consistent with large further increases in US oil production.  However, production was still increasing as of the most recently available data from the EIA (April):To get a better sense of the relative timing of things, here's the data just since the beginning of 2009, with both rig count and production in the same graph: You can see (via the black line) that there's about a two year offset between the start of the drilling boom and the start of the production surge.  If the leveling off in the drilling boom is similar, we might expect production to level off some time in 2014.

Oil Prices - The last few weeks oil prices have been moving higher and few analysts seem to understand the full story. If there is any commodity that trades at a one world price it is oil.  So the recent weakness in West Texas Intermediate ( WTI)  is very unusual and stems from temporary bottlenecks.  Over the last few years a new major source of oil has emerged from fracking in North Dakota and other interior locations. The problem was that over the years pipelines and other supply chains for oil had been built to move crude from  coastal ports to interior locations  and refiners like Cushing, Oklahoma, not from the interior to ports. A s a consequence, when mid-western oil supplies expanded it created local surpluses and price weakness.  But now these bottlenecks are being eliminated.  In particular, two pipelines from Cushing to the Gulf Coast have been reversed and large quantities of oil are now flowing from Cushing to the Gulf ports and refiners.  As a consequence the spread between  WTI and Brent crude is  collapsing. Since the June low, Brent crude has risen some 6.5% while WTI has jumped some 15.7%.  This has caused the spread to collapse back to near its old pre-2011 values.  Butt in evaluating the impact of the Egyptian unrest on world oil prices the number to watch is the 6.5% increase in Brent crude, not the 15.7% increase in WTI.  But the impact on domestic gas prices is more complex.  On  the coast gas prices are experiencing small price increase in line with the move in Brent while in the interior gas prices are moving up some 10% to 20% in line with the jump in WTI.

Brent-WTI Spread Collapses To Lowest Since QE2 Began - In the decade before the Fed announced QE2, the average Brent-WTI spread was around 90c. In the 14 months following the inception of that 'healing' easing, the spread exploded to around $28 by October 2011, bounced back up to around $25 in late 2012 and has been sliding since the start of the year driven by WTI's inexorable rise (amid Brent's relative stability). It seems no matter how hard they try to control the exuberant thrusting outgrowths of a liquidity spigot held wide-open, it eventually overwhelms and between Egypt, infrastructure, and RINs, the price of gas at the pump is about to cross its all time high for the time of year as WTI drops to its closest in price to Brent since QE2 was 'announced' at Jackson Hole. Brent-WTI is now at 35c as WTI tops $108.30 (highest in 17 months).

WTI Tops $109; Surges Above Brent For First Time In 3 Years - For the first time since QE2 was announced (August 2010), the price of WTI Crude oil is now more expensive that Brent crude. The Brent-WTI spread has collapsed from over $23 in Feb 2013 and is now negative and notably below the long-run average level of around $0.98. At $109, WTI is the highest since March 2012. Gas prices - at the pump - continue to rise significantly reaching the highest since March, but given the lag to production, are set to reach well over $4.00 per gallon on average.

Senators Grill Refiners Over High Prices Amid Oil Boom - Lawmakers grilled representatives of oil producers and refiners seeking an explanation for a rise in gasoline prices at the pump amid a boom in U.S. oil production. Senators at an Energy and Natural Resources Committee hearing today complained that fuel exports and refinery shutdowns for maintenance cause regional price surges, while the head of refiner Valero Energy Corp. (VLO) said local prices reflect global shifts in crude markets and blamed higher costs on the Renewable Fuel Standard, which mandates ethanol use. “Our people want to know why the flood of new domestic crude oil isn’t lowering prices at the pump,” said Ron Wyden, an Oregon Democrat and chairman of the Senate Energy and Natural Resources Committee. “There is no question that the lower oil costs are not getting through to Americans’ wallets.” Advances in drilling technology, including hydraulic fracturing, has revived U.S. oil production in states such as North Dakota and Texas, which reached 7.4 million barrels a day in April, a two-decade high, according to the U.S. Energy Information Administration. Amid rising supplies, pump prices are rising. Gasoline jumped to a four-month high, as unplanned refinery outages may crimp fuel supply. Gasoline for delivery next month rose 3.17 cents, or 1 percent, to $3.1346 a gallon at 11:57 a.m. on the New York Mercantile Exchange.

The Case for Allowing U.S. Crude Oil Exports - Federal lawmakers should overturn the ban on exporting crude oil produced in the United States. As recently as half a decade ago, oil companies had no interest in exporting U.S. crude oil, but that has changed. Oil production has grown more in the United States over the past five years than anywhere else in the world, even as domestic oil consumption has declined. With these changes has come a widening gap among the types of oil that U.S. fields produce, the types that U.S. refiners need, the products that U.S. consumers want, and the infrastructure in place to transport the oil. Allowing companies to export U.S. crude oil as the market dictates would help solve this mismatch. Under federal law, however, it is illegal for companies to export crude oil in all but a few circumstances. Over the past year, the Department of Commerce granted licenses to several oil companies to export a small amount of U.S. crude oil. But these opaque, ad hoc exceptions are insufficient. Removing all proscriptions on crude oil exports, except in extraordinary circumstances, will strengthen the U.S. economy and promote the efficient development of the country's energy sector.

The danger in wishful thinking on oil - James Howard Kunstler knows a lot of people think he's a fool right about now. He's OK with that. Just wait, he says. Back in 2005 Kunstler published "The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century." Such a brief description is inadequate, but rode the "peak oil" wave that argued that humanity was on the verge of a massive crisis when the era of cheap petroleum came to an end. I called Kunstler and wrote a column headlined, "Oil Peak? Uh-Oh" that ran in the May 8, 2005, Daily Camera. In it I wrote, "Is Kunstler just our era's Paul Erhlich, whose dire 1968 prediction of a 'population bomb' hasn't gone off yet?" Fast forward eight years and things have changed unexpectedly; tricky thing, history. According to a new Carnegie Endowment report, humanity has to date consumed 1.2 trillion barrels but "Calculations of today's economic reserves -- those that are technologically recoverable at current prices -- are on the order of 6.5 trillion barrels. As the report noted, "Nobody predicted the extraordinary surge in North American oil production." It's all being done through new technologies, including horizontal drilling, hydraulic fracturing -- fracking -- methods of extraction for oil sands, gas-to-liquid and coal-to-liquid processes and deep-water drilling. "What the heck!" and -- to quote the artist formerly known as the artist formerly known as Prince -- let's go crazy! The stuff will never run out! Par-tay!

Why crude oil inventories continue to decline? - US crude oil inventories fell sharply for a third week in a row, dipping materially below the levels from the same time last year. As a result WTI crude price remains firmly above $106. This drop in supplies is surprising because US crude production has recently spiked. BW: - U.S. crude inventories were forecast to decrease by 2 million in the week ended July 12, according to a Bloomberg News survey of analysts. Stockpiles dropped more than three times that much, even as production surged to the highest since December 1990. The supply gain was offset as refineries processed 16.2 million barrels a day, the most since August 2005... US refineries, particularly in the Gulf Coast, are operating at record volumes. While this time of the year is near peak production for refineries, this year's crude oil demand is clearly outstripping last summer's. And the nation's inadequate oil transport system in the US is not helping matters. EIA: - Crude runs at U.S. refineries have increased steadily since early March to reach some of the highest levels on record. At 16.1 million barrels per day (bbl/d) for the week ending July 5, U.S. crude oil runs were the highest for any week since 2007. This level represented a 2.1-million-bbl/d increase from the first week of March, the low point for the first six months of 2013. As the EIA points out, the refinery demand is driven by larger capacity and "healthy margins". Indeed the gasoline to Brent spread is near recent record. At these levels refineries are quite profitable and will try to sell as much gasoline as possible.

Will Central Asia Replace The Middle East As Prime Oil Source? - One of the prime reasons why the Middle East holds such importance to the West is partiality because it is the main supplier of oil and natural gas to countries in the West. Over the past several decades Western countries had few, if any, options other than to purchase its oil and gas from Middle Eastern oil producing nations despite the headaches that came with it. Headaches, for example, that’s included political unrest, turmoil and strife.But now with the newly found fields of oil and gas in Central Asian countries such as Kazakhstan and more recently Turkmenistan, as well as the oil from Azerbaijan are only the beginning of what may lie in these vast oil fields of the steppes and the Caucuses. But the Middle East comes with more than its fair share of problems. Wars, uprising, conflicts, civil wars, kidnapping and a rising anti-Americanism in the region makes it indeed very difficult to conduct business as usual, where there seems to be perpetual strife in some part of the region at any given moment

Is the West Turning Away from Middle East Energy? - In January, militants with ties to al-Qaida in the Islamic Maghreb attacked the In Amenas natural gas facility in Algeria, leaving employees from BP and Norwegian energy company among the dead. The attack had the logistical support of Islamic fighters who traveled across the western border from Libya. Austrian energy company OMV said this week it was restarting some of its work in Libya following disruptions "due to the political situation." Dana Gas, meanwhile, said it remained committed to Egyptian natural gas production, though that's seemingly a rare show of full-fledged support. Oil prices in general have escalated in part because of the Egyptian coup and, according to OPEC, many of the major producers in the region are struggling to survive. Workers from BP and Statoil have yet to return to Algeria since the January attack on In Amenas. That leaves Algeria without some of its major foreign sponsors to help support a budget that relies on oil and natural gas production for 60 percent of its revenue. But the situation extends beyond just Algeria. The Security Council said it was "gravely concerned" about the presence of al-Qaida in the region. BP and Statoil have been sidelined so far and it remains to be seen what Gazprom can, or will, do to fill the void. Two years after the Arab Spring, it seems few foreign investors from the West have the stomach to handle the region's post-revolutionary climate.

Oil May Determine South Sudan's Future - Oil exports from South Sudan are expected to gain steam in the coming months. The country last week celebrated its second anniversary as an independent country and only recently resumed crude oil exports. A former international banking chief said the international community's newest nation could emerge as a regional economic success story with the right policies in place. For now, however, advocacy groups are warning the South Sudanese administration that it needs to get its house in order or risk complete failure. South Sudan marked its second Independence Day last week. A peace deal that ended 20 years of civil war helped pave the way to a separation from the government in Khartoum. Independence was backed enthusiastically, though a series of border skirmishes, ethnic fighting and spats over oil revenue with the Sudanese government have threatened the fragile peace deal. Last year, both sides nearly went to war over the disputed Heglig oil field, which straddles the border separating the two Sudans.  South Sudan resumed oil exports in June, roughly 18 months after disputes over pipeline fees began with the Sudanese government. South Sudan gained control over most of the oil reserves with independence, though Sudan maintained authority over export infrastructure. South Sudan has pursued various pipeline proposals through neighboring countries and just recently called on the United States to start examining the oil potential there.

In Rare Delinquency, Iran’s World Bank Loans Overdue As Sanctions Bite - The World Bank said late Thursday Iran is more than six months overdue on loan repayments, making it only the second nation delinquent on development finance owed to the Washington-based institution. The default could deal another blow to Iran’s economy–already squeezed by international sanctions–by potentially raising another major barrier to financing and pushing up borrowing costs for the country. The World Bank’s International Bank for Reconstruction and Development said Iran is more than six months overdue on $81 million in loans, including penalties. Iran’s total outstanding debt to the bank is $697 million for old development loans. The bank issued low-interest loans in the early 1990s for irrigation, flood control, electricity and education projects. In compliance with international sanctions, the bank hasn’t approved any new loans to the country since 2005. There is only one other country currently on the bank’s non-performing loan list: Zimbabwe, a country that has also faced heavy international censure.

An upcoming dehoarding effect in metals? - An interesting bit of news, by way of the FT’s Jack Farchy and Daniel Schäfer this week: JPMorgan Chase and Goldman Sachs are seeking to sell their metal warehousing units just three years after their controversial entry to the industry, even as a proposed rule change by the London Metal Exchange is likely to reduce the attractiveness of the business. The two US banks got in to the niche warehousing business in 2010 at a time when a build-up in stocks following the financial crisis had triggered a boom for storage companies. But their ownership of warehouses struck a nerve when metal users began complaining that warehousing companies were profiting from bottlenecks in the system that have distorted prices. Most base metals curves are still in contango, so if banks were prompted to buy into warehousing businesses specifically to exploit store-and-forward-sell strategies, now may seem an odd time to start shedding warehousing interests. The FT suggests the exit is being prompted by the LME’s decision to tackle the phenomenon of unprecedented warehouse queues. The delays had been profitable for warehouse owners because they continued to receive rent until the metal actually left the building. The greater the delay, the more rent. But the LME is now looking to prevent the practice, something that will hit warehouse profits significantly.

China's GDP slows as forecast - — China’s economic growth slowed to 7.5% in the second quarter compared to a year earlier, the National Bureau of Statistics said Monday, with stocks gaining as the result matched expectations despite fears to the contrary.  While the gross domestic product result was down from the first quarter’s 7.7% advance, it matched projections from separate Dow Jones Newswires and Reuters surveys of economists. That level of 7.5% is also the government’s official growth target for the year.  While the GDP number may have offered relief for those expecting a sharp downside miss for the data, some economists said the result was a sign of trouble.  “As of now, China’s GDP has been staying under 8% for five straight quarters, a clear sign of distress,”  “We are especially concerned about the rather significant downslide of investment growth, led by real-estate investment. Construction sector could see lots of headwinds coming forth in the second half, if there is no marked change in policy course,” Ren wrote.

China Growth Slows to 7.5% as 2013 Target Under Threat -- China’s economy slowed for a second quarter as growth in factory output and fixed-asset investment weakened, adding to risks that the government will miss its expansion target as Premier Li Keqiang reins in a credit boom. Gross domestic product rose 7.5 percent in April-to-June from a year earlier, the National Bureau of Statistics said in Beijing, equaling the median forecast in a Bloomberg News survey and down from 7.7 percent in the first quarter. June production growth matched the weakest pace since the 2009 global recession. The slowdown may increase speculation that policy makers will act to safeguard their growth goal of 7.5 percent for the year even as Li signals reluctance to boost stimulus and tries to reduce financial risks. With the International Monetary Fund last week cutting its outlook for global expansion, Li’s administration faces limits on turning to exports for support. “The new government under Mr. Li should be seriously worried about the prospect as to whether they can meet the growth target,”

Some observations and oddities in China’s Q2 GDP -- A few thoughts on China’s second-quarter GDP, which came in at 7.5 per cent, in line with expectations:

  • - The seasonally-adjusted rate is 1.7 per cent. If annualised — ie the way that most countries present their quarterly GDP data — is it just under 7 per cent. On the same basis, Q1 was 6.6 per cent, and Q4 2012 was 7.8 per cent (see table below for more).
  • - The headline rate of 7.5 per cent for Q2 was in line with expectations — but those expectations had fallen fairly rapidly from 7.8% about a month ago (at least on the Bloomberg survey).
  • - Using the official method, first-half growth was 7.6 per cent. Analysts are increasingly wondering if China may actually miss its forecast (7.5 per cent) for the full year — that would be the first time in 15 years, says the FT’s Simon Rabinovitch. (See also Bloomberg on fears of a target miss.)

Societe Generale’s Wei Yao notes several ‘puzzling details’. First is the way that capital formation conveniently soared to make up a decline in export growth: First, the year-to-date contribution of gross capital formation rebounded strongly to 4.1ppt from 2.3ppt in Q1 and also a touch higher than the 4ppt in Q2 2012, which nearly offset the 1ppt decline in the contribution from net exports (0.1ppt ytd).And then there’s the deflator: Second, nominal GDP growth decelerated much more sharply from 9.6% in Q1 to 8%, as the deflator increased just 0.5% yoy (1.7% yoy in Q1). We find this deflator somewhat too low given the monthly inflation data published over the quarter. In comparison, Q4 2009 had much lower CPI, similar PPI, lower export price inflation and higher import price inflation, but yet the GDP deflator was significantly higher at 1.4% yoy.

Hitting China’s Wall, by Paul Krugman -  All economic data are best viewed as a peculiarly boring genre of science fiction, but Chinese data are even more fictional than most. ... Yet the signs are now unmistakable: China is in big trouble.China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.  Start with the data, unreliable as they may be. What immediately jumps out at you when you compare China with almost any other economy, aside from its rapid growth, is the lopsided balance between consumption and investment. All successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. China, however, seems to invest only to expand its future ability to invest even more. America, admittedly on the high side, devotes 70 percent of its gross domestic product to consumption; for China, the number is only half that high, while almost half of G.D.P. is invested.

China defies IMF on mounting credit risk and need for urgent reform - If you think China's Communist Party fully understands the mess it has created by ramping credit to 200pc of GDP and running the greatest investment bubble know to man, read its shockingly complacent response to warnings from the International Monetary Fund. The IMF's Article IV report on China states - as clearly as the IMF dares - that excess credit has been pushed to the outer limits of sanity, and that there is a growing risk of an "adverse feedback loop" as the financial system and the economy take each other down in a mutually reinforcing spiral. As you can see from the first chart, total credit has jumped from 129pc to 195pc of GDP since 2008, and has completely departed from its historic trend. The great mistake, plainly, was to keep the foot on the floor in 2010 and 2011, long after the Lehman crisis had subsided. The deeper thrust of the IMF report is that the growth model of the past 30 years is exhausted. The low-hanging fruit has been picked. If the Communist Party fails to take radical action, it will soon be caught in the middle income trap.

China to add tunnel to “world’s biggest” list - China’s “field of dreams”, “build it and they will come”, approach to construction shows no signs of slowing. In 2011, China opened the the world’s longest sea bridge and an underground tunnel in Quingdao (pictured below). The bridge stretches 42.4 kilometres and links historic Qingdao with the city’s industrial zone Huangdao. The 9.47 kilometre tunnel also links these two cities, but at a different location (see below map). At the time of its opening, the efficacy of the project was called into doubt by a range of commentators, who questioned: the logic of building both a tunnel and bridge simultaneously; why the bridge was built at the widest part of the bay; and why they were built when they only provide a 10 minute improvement in travel time? Concerns were also raised over the seeming lack of cost-benefit analysis attached to the project.Now China plans to add the world’s longest, most expensive, and arguably most dangerous underwater tunnel to its list: a $US42.4 billion 76 miles (123km) long submarine tunnel linking the northern ports of Dalian and Yantai. According to Quartz, the tunnel would surpass the combined length of world’s two longest underwater tunnels—Japan’s Seikan Tunnel and the Channel Tunnel between the UK and France – and would even drill through two earthquake fault zones.

China Adds 7.25 Million Jobs This Year  -  China added 7.25 million jobs in the first half of this year, slightly higher than the number created in the same period a year earlier, and the job market remains stable, the official Xinhua news agency said on Tuesday. The Xinhua report quoted Yin Weimin, minister of human resources and social security, as also saying that the services sector would play a big role in absorbing new labor, as each percentage point of growth in that industry would create about 700,000 jobs. More efforts will be made to create jobs in services as well as emerging businesses and the private sector, Xinhua quoted Yin as saying at a meeting. It did not give details of the meeting. "Maintaining a steady job market will be a long-term and arduous task," he said, adding that the number of workers between the ages of 20 and 59 will peak around 2020. China's leaders have been at pains to say employment remains stable, even as the economy slows, citing a growing services sector and a demographic shift that reduces surplus rural workers. They are worried that if the slowdown leads to high unemployment, there could be social unrest.

China’s Most Famous Ghost City Busts from naked capitalism - Yves here. Just as the people who saw the US housing bubble early were treated like negative know-nothings until they were proven right, so too have the China skeptics had a tough go of it, as the middle kingdom pulled out all stops on the fiscal stimulus front during the crisis. Since then, commentators have gotten increasingly concerned about its unheard-of dependence for an economy of its size on exports and investments, with the two combined accounting for over 50% of GDP. And the evidence also for years has been that these investments are less and less productive. The most recent figures I’ve seen (I hope readers can provide an update) is that it took $7 of debt to generate $1 of GDP growth in China in 2008. That contrasts with $4 to $5 to $1 in the US on the eve of the crisis.  The Chinese government, as has been widely reported, is trying to cool growth, in large measure to take the hot air out of its shadow banking sector. Another scary factoid is estimates of the size of this sector (as much as $5.8 trillion) and the fact that a big chunk consists of wealth management products that are repo financed. So while most commentators take the point of view that Chinese government, which exercises more control over its economy and banks than is the case in the West, can engineer a soft landing, I recall similar cheery views in 2007 (notice, however, that the Chinese financial system is not well integrated into the rest of the world’s, so the risk of transmission of any problems in China to advanced economy financial players won’t take place via tightly coupling. But China is a big enough economy that an overly rapid slowdown and/or financial trembles would have broader ramifications given the background of tepid and weakening global growth).

Pitfalls Abound in China’s Push From Farm to City - “These people are moving out of here,” he said, gesturing to the mountains that dominate the province’s south. “And they’re moving here,” he said, pointing to the farmer’s newly built concrete home. “They are moving into the modern world.”  Mr. Li is directing one of the largest peacetime population transfers in history: the removal of 2.4 million farmers from mountain areas in the central Chinese province of Shaanxi to low-lying towns, many built from scratch on other farmers’ land. The total cost is estimated at $200 billion over 10 years. It is one of the most drastic displays of a concerted government effort to end the dominance of rural life, which for millenniums has been the keystone of Chinese society and politics. While farmers have been moving to cities for decades, the government now says the rate is too slow. An urbanization blueprint that is due to be unveiled this year would have 21 million people a year move into cities. But as is often the case in China, formal plans only codify what is already happening. Besides the southern Shaanxi project, removals are being carried out in other areas, too: in Ningxia, 350,000 villagers are to be moved, while as many as two million transfers are expected in Guizhou Province by 2020.

The Chinese Slowdown, in Charts - As eagerly awaited as the first sight of Kim Kardashian’s baby, but probably less attractive, China’s second quarter economic data have arrived. With the world’s second largest economy careening toward its slowest growth in more than 20 years, China Real Time charts it out:

China Slump Ripples Globally - Growth in China, the world's second-biggest economy after the U.S., has been slowing since 2007's peak, but that slowdown has accelerated recently. This year, according to the government's target and economists' estimates, China is likely to see its weakest growth since 1990, around 7.5%.  China is trying to pull off a tricky rebalancing. It hopes to reshape its economy to be less reliant on construction and heavy industry, and more reliant on consumer spending. To boost domestic consumption, the government has raised minimum wages to put more money in people's pockets and loosened controls on interest rates to give household savers better returns. It has tilted tax and land incentives toward industries that cater to consumption, such as food and autos, and away from heavy industries suffering from overcapacity, such as steel making and ship building.

When does a Chinese growth deceleration become a crisis? - It’s clear to everyone that something big is happening in China. Double-digit growth is long forgotten and even high single-digit growth is above the consensus (for whatever that’s worth). The implications of this alone are quite massive and you could throw around any number of predictions about what it might mean for commodities, global imbalances, and more. Nomura sees a 30 per cent chance of growth falling below 7 per cent later this year, and Barclays are talking about the odds of growth slowing to as little as 3 per cent growth. Even entertaining the possibility of an outright economic contraction would not get you accused of being a crazed permabear these days. We had to get here eventually: the signs are only increasing that China’s economy can’t and won’t continue as it has for the past few years. That’s both the composition of the growth and, as we’ll explore below, the rate itself. The central government leaders recognise things can’t go on as they have been, and talk openly of rebalancing away from the extremely investment-heavy economic mix. They’ve also been keen of late to declare they are comfortable with slower growth — although they seem to be increasingly tentative about that particular message.

How Much Should We Worry About A China Shock? - Krugman - Suppose that those of us now worried that China’s Ponzi bicycle is hitting a brick wall are right. How much should the rest of the world worry, and why? I’d group this under three headings:

  • 1. “Mechanical” linkages via exports, which are surprisingly small.
  • 2. Commodity prices, which could be a bigger deal.
  • 3. Politics and international stability, which involves some serious risks.

So, on the first: this is what many people immediately think of. China’s economy stumbles; China therefore buys less from the rest of the world; and the result is a global slump. Or, maybe not so much. Some quick, rough, but I think useful math: In 2011, the combined GDP of all the world’s economies not including China was slightly over $60 trillion. Meanwhile, Chinese imports of goods and services were about $2 trillion, or around 3 percent of the rest of the world’s GDP.  Commodity prices are a potentially bigger story. China is a major consumer of raw materials — for example, about 11 percent of world oil consumption. And because the supply and demand of commodities tend to be relatively unresponsive to prices in the short run, a sharp drop in Chinese demand could lead to sharp falls in commodity prices. So the Ponzi bicycle shock could be a bigger deal for countries that sell raw materials, whether they sell to China or not, than it is to China exporters. Finally, politics and international relations. I am obviously no kind of expert here. But it’s obvious, first, that China’s political regime is remarkable, even given the annals of history, for the hypocrisy of its position: officially it’s building the socialist future,in practice it’s presiding over a crony capitalist Gilded Age. Where, then, does the regime’s legitimacy come from? Mainly from economic success. Let that success falter,and then what?

U.S. Firms Mostly Shrug Off China’s Slowing Growth - China’s economy expanded 7.5% from the year earlier during the second quarter, slower than the 7.7% growth in the first. American businesses already are feeling the effects of slowing growth in China—the largest market for U.S. goods outside North America.China’s gross domestic product figures, released this week, match the government’s full-year growth target of 7.5%, a rate that would make this year the slowest since 1990. Some economists figure China will grow even slower than that — but that possibility doesn’t seem to be fazing many large American companies.“American companies have already seen some moderation in their revenue growth,” because of China, said John Frisbie, president of the U.S.-China Business Council, a nonprofit that consists of hundreds of American companies doing business in China. “The bottom line is, China is going to remain an important growth market.”That was echoed by senior executives at Minneapolis-based food processor Cargill, Inc., who said, “While some may see a near-term slowing of China’s economy, we see long-term growth. China’s commitment to agricultural modernization and better diets for its people is consistent with our view that China is an attractive place for further Cargill investment.”

Singapore’s GDP Surprise - China’s numbers may have captured most investor interest, but Singapore delivered the biggest surprise among the latest economic growth data from Asia.Just days after the International Monetary Fund delivered a warning on global growth, the city-state announced Friday a speedy 15.2 percent quarter-on-quarter growth rate for the June quarter, marking its fastest quarterly expansion in more than two years. Singapore’s surge compared to the previous quarter’s 1.8 percent increase, and bettered all 12 estimates compiled by Bloomberg News in its survey of economists, which predicted a median expansion of 8.1 percent.On a year-on-year basis, the Southeast Asian state’s economy grew by 3.7 percent, ahead of Bloomberg’s median forecast of 2 percent and in line with government predictions of a 1 to 3 percent GDP gain for 2013. According to Singapore’s Ministry of Trade and Industry (MTI), manufacturing led the way, growing by 38 percent in the second quarter of 2013 compared to the previous quarter due to strong output from the biomedical manufacturing and electronics industries.

South Korea says U.S. must consider global effects of QE exit (Reuters) - South Korea said on Tuesday it will press the United States at G20 meetings in Moscow this week to consider the repercussions for the global economy when the Federal Reserve decides to wind down its quantitative easing program. The issues surrounding an "exit from unconventional monetary policies" would be discussed at the meeting of finance ministers and central bank governors from Wednesday to Friday, the Ministry of Strategy and Finance said in a statement. "The United States must carefully decide on the timing, speed and method of its exit strategy considering not only its domestic conditions but also the global effects," the finance ministry said. South Korea and other countries are concerned that they could suffer rapid capital outflows if the U.S. Federal Reserve begins tapering its massive bond-buying program and global interest rates are pushed higher. Many emerging market economies, including South Korea, have suffered sharp declines in their currencies and financial markets during the past month after comments by Fed officials fuelled speculation that the U.S. central bank would begin winding down its stimulus program later this year. The South Korean finance ministry said the United States should clearly communicate its policy direction to markets to minimize uncertainty.

BoJ Minutes: Determined To End Deflation - The members of the Bank of Japan's monetary policy board reiterated their dedication to end the deflationary pressures that has plagued the country for 15 years, minutes from the bank's meeting on June 10 and 11 revealed on Wednesday. Japan's economy is expected to return to a moderate recovery path, the members said - but they cautioned that there remains a high degree of uncertainty. "The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate," the minutes said. At the meeting, the BoJ decided to retain its target of doubling the monetary base in two years, but stopped short of announcing any new steps to curb bond market volatility. Meanwhile, the central bank upgraded its view of the economy. It also kept the nation's benchmark interest rate at the record low 0 to 0.10 percent. "Japan's economy is expected to return to a moderate recovery path, mainly against the background that domestic demand increases its resilience due to the effects of monetary easing as well as various economic measures, and that growth rates of overseas economies gradually pick up, albeit moderately," the minutes said.

Japan Tells Firms "Stop Sitting on Cash", Ignore the Lack of Customers - If you are looking for idiotic policies in action, the theories of Japanese Prime Minister Shinzo Abe should be right in your spotlight. Abe now tells Japanese firms "Stop Sitting on Cash" Okuma, a Japanese machine-tool maker, has seen its stock price rise around 30% this year. Its customers have outdated machinery that needs replacing. But, for now, the company isn't investing. Instead, it is sitting on a pile of cash worth about $280 million—50% higher than its pile a decade ago, equivalent to one-fifth its annual sales, and more than twice the level required for the firm to be deemed loan-worthy by a bank. Why? Senior director Chikashi Horie says the answer is simple. Okuma's clients "are not investing, not even to raise efficiency, so we are not investing either," he says. Okuma's thinking embodies one of the key challenges for Prime Minister Shinzo Abe's ambitious growth plan: persuading Japan's famously stingy companies to stop stashing their earnings in the bank, and putting the money to more productive use, helping complete—rather than short-circuit—the virtuous economic cycle.

Economic Shocks Reverberate in World of Interconnected Trade Ties - Dallas Fed Economic Letter: Renewed debate about currency wars and the question of global trade imbalances are part of a longer-running economic discussion about what drives a country’s exports and imports.  More specifically, what determines international trade flows? ... Studies of the current account—the balance of goods and services traded internationally, plus net income from abroad and net cross-border transfer payments—have long emphasized the role of the exchange rate in adjusting to excessive current account surpluses and deficits. In the context of global imbalances, several efforts have been made to estimate the magnitude of the dollar depreciation needed to reduce the U.S. trade deficit, which reached around 6 percent of gross domestic product (GDP) in the year preceding the 2008 financial crisis.[1] However, it’s also important to take into account the role of demand because its fluctuations at home and abroad can offset relative price movements.

TransPacific Partnership to Let Foreign Investors Gut Regulations, Keep Big Ag Subsidies - The nature and effects of free trade agreements has become a topic of public discussion, especially with the round of talks of the Trans-Pacific Partnership Agreement (TPPA) about to take place in Malaysia.Not much is known about the TPPA drafts. Actually, only a small part of the TPPA is about trade as such. Most chapters are on other issues, like services, investment, government procurement, disciplines on state-owned enterprises and intellectual property.Joining the TPPA or similar FTAs will mean the country having to make often drastic changes to existing policies, laws and regulations, which will in turn affect the domestic economy and society.On trade itself, the TPPA countries will have to remove tariffs on almost all products coming from one another. Perhaps only one or two products can still be protected.The main implication is that local producers and farmers would have to compete with tariff-free imports from other TPP countries. This may lead to loss of market share or closure of some sectors.Ironically, agricultural subsidies, which is the main trade-distorting practice of developed countries like the US, have been kept out of the agenda of the TPPA or other FTAs involving Europe.The developed countries are clever not to include what would be damaging to them. Thus the developing countries are deprived from what would have been the major trade gain for them.On services and investments, we can expect that TPP countries will have to open all their services and investment sectors to the entry and establishment of companies, in manufacturing as well as services including finance, commerce, telecoms, utilities, professional and business services.

Thailand's central bank cuts growth forecast - The Bank of Thailand joined the Finance Ministry and International Monetary Fund in cutting the country's economic growth forecasts for this year, a reflection of how slow global demand is hitting Asia's export-oriented economies. In its quarterly report Friday, the Thai central bank lowered its gross domestic product forecast for 2013 to 4.2%, from a 5.1% forecast issued just three months ago. "The main factor that led us to predict a significantly slower growth is the Asian economic condition, particularly the Chinese economy, which has been and will be affecting Thai exports and the industrial sector," Assistant Gov. Paiboon Kittisrikangwan said at a news briefing. In addition, he said, "domestic consumption has started to slow down after the boost from the government stimulus measures wound down at the end of the first quarter, which was sooner than expected."

India’s Rupee Declines Most in a Week as Inflation Quickens - India’s rupee dropped the most in a week as a report showed inflation accelerated, limiting the central bank’s scope to ease monetary policy. Wholesale prices rose 4.86 percent in June from a year earlier, compared with a 4.7 percent increase in May, official data showed today. Price-increases had slowed in the four months through May. Consumer price-inflation quickened to 9.87 percent last month from 9.31 percent, while industrial output unexpectedly contracted in May, official figures showed July 12. The rupee will weaken in the coming months as the U.S. will pare stimulus this year, The dollar-rupee exchange rate is “likely to remain underpinned in the short term in line with other emerging-market currencies,” Tim Fox, chief economist at Emirates NBD in Dubai, wrote in a research report today. The increase in the inflation rate is ’’something that the authorities may be sensitive to while the rupee weakness remains.’’

India Joins Brazil to China in Tightening Liquidity: Economy - India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets. Bond yields and the rupee surged.  The central bank announced the decision late yesterday after Governor Duvvuri Subbarao earlier in the day canceled a speech to meet the finance minister. The RBI raised two rates by 2 percentage points, and plans to drain 120 billion rupees ($2 billion) through open market sales of government bonds.The rupee rose as much as 1.3 percent today, and the RBI’s move left Russia as the only BRIC economy to not have reined in funds in its financial system. Brazil has raised its benchmark rates three times this year and a cash squeeze in China sent interbank borrowing costs soaring to records last month. “The importance of this move is that it signals that the RBI is willing to act and make it much more costly to short the rupee,”

India Bill Sale Fails as Money Rates Jump Most in a Year on RBI - India failed to sell treasury bills at a weekly auction after the central bank tightened policy for the first time since 2011, driving up interbank funding costs by the most in more than a year. The Reserve Bank of India, which held the sale, rejected bids worth 293 billion rupees ($4.9 billion) received for a combined 120 billion rupees of 91- and 182-day notes offered, it said in an e-mailed statement. The overnight interbank borrowing rate in Mumbai surged 170 basis points to 8 percent today after the RBI increased on July 15 two of its interest rates by 2 percentage points each, while keeping the benchmark repurchase rate unchanged, to arrest a slide in the rupee. The failure of the bill sale follows an offering of bonds yesterday by state governments, where the borrowers met only 26 percent of an 86 billion rupee target. With this week’s rate increases, RBI Governor Duvvuri Subbarao joins policy makers from Brazil to China in reining in money-market liquidity to stem currency losses and ensure stability in the financial system. The rupee has lost 8.7 percent since March 31 in Asia’s worst performance.

Can the world cope with a trigger-happy Fed? - After weeks of utter confusion, the result of Fed taper talk is clear enough. Long-term borrowing rates are much higher across the world regardless whether the underlying economies are in any fit condition to absorb this shock. The rise in 10-year sovereign yields by basis points has been: Japan (25), Germany (35), France (62), UK (63), Norway (63), Australia (66), Korea (66), Spain (70), US (70), Italy (74), Poland (120), Mexico (122), Turkey (131), Brazil (135), and Indonesia (170). As you can see, the emerging market bloc has suffered the worst hit, especially those countries caught when the tide went out with big current account deficits – the CADs as they are called in the trade. Basically, the whole world has just suffered a credit shock, even as the global economy weakens and the IMF downgrades its forecasts. What a mess. A rate rise of 70 basis points or more is nothing short of catastrophic for Italy, Spain, Portugal, all in the grip of nominal GDP contraction, and all at risk of surging debt ratios as the denominator effect does its worst. The ECB must take action immediately to offset this "passive" tightening. It does nothing, paralysed by German central bankers with Austro-liquidationist proclivities. The emerging market central banks do not all have the luxury of countering the Fed with looser policy. India, Turkey, Brazil, and others are have to tighten pro-cyclically to head off a currency rout. This is how trouble happens.

Student debt soars, incomes fall below poverty line - More Australians are attending university than at any time in the past 150 years, but most now struggle to live on incomes that are below the poverty line while their levels of debt have soared by almost 30% in the past six years. Many students graduate owing so much money that it will take years to repay and leave them facing a life without ever owning a home. A report released on Monday by Universities Australia on the financial circumstances facing local and overseas students, from newcomers to postgraduates, says most are experiencing far greater levels of financial distress than ever before, with more than two-thirds reporting being worried about their financial situation. The report says the situation is worse for students from poorer families and indigenous backgrounds, with the great majority experiencing severe financial distress. Based on a survey of nearly 12,000 students across the university sector, the report says the financial demands on almost half of all students outstrip their earnings. The survey found that 80% of full-time undergraduates work an average of 16 hours a week; a third regularly miss classes because of their jobs; and 17% said they often went without food or other necessities.

Canadian house prices set new record - Back in February, the Canadian housing market looked to have hit a wall. The Government had recently implemented a range of macroprudential controls on high loan-to-value ratio mortgage lending, including shorter maximum loan amortisation periods (i.e. 25 years instead of 30 years), and house prices had fallen for six consecutive months according to the Teranet repeat sales index. Since then, Canadian house prices have struck back hard, with house prices registering four consecutive months of gains (see next chart). In fact, June’s house price results, released over the weekend, showed house prices nationally rising by 1.0% over the month to a new record high. Values are now 28% higher than their April 2009 low.

Record junk bond refinancing wave looms - Sub investment grade companies face a record $101 billion refinancing wave next year, raising fears of a shake out among debt-burdened companies. The amount of debt owed by companies in Europe, the Middle East and Africa rated as below investment grade, or 'junk', that is due in 2014 has risen to $101 billion, up from $84 billion this year, according to Moody's, the ratings agency. Nearly half of that debt carries a negative outlook compared to 34 percent a year earlier. In contrast U.S. high yield companies will see their total debt maturities decline to $79 billion next year from $168 billion. Chetan Modi, managing director of corporate finance at Moody's, said lower-rated, riskier companies with high debt burdens would suffer when interest rates rise. "At this stage we are not particularly worried - the amounts [of debt] have risen because the size of the market as a whole is bigger," he said.

The mercantilist threat to global rebalancing - My latest at Pieria: "Bill Mitchell has been doing a series of posts on the circumstances leading to the UK's request for aid from the IMF in 1976. They give a fascinating insight into the economics of a time when trade balance and the international exchange value of the currency were the most important drivers of national economic policy. Since the great monetarist revolution of 1979 we have largely forgotten about this: nowadays it is fiscal, not trade, balance that concerns us, and we happily devalue our currencies and force down labour costs in search of elusive export-led growth. I believe we are chasing a dream.For the last 40 years the world has been gradually rebalancing, as the West abandoned empire and colonialism in favour of free trade. Dismantling barriers to trade and freeing up world markets has not been easy, and it is fair to say that many Western countries have been more interested in ensuring that developing countries open their markets to imports than removing the tariffs and subsidies that protect their own precious industries. But the growth of supra-national companies, supported by (largely) free movement of capital around the world, has transformed the world economy. And from the point of view of the millions in developing nations who enjoy a standard of living of which their grandparents could only dream, this transformation has unquestionably been positive."The remainder of the post can be read here.

The Trade Deal with Europe: Don’t Buy the Hype - Dean Baker - There has been a big push out of Washington to convince the public that an economic bonanza awaits us if we can just complete a trade deal with the European Union. This is complete nonsense, unless we define down bonanza to mean finding a quarter on the street.  The first point to recognize is that the promised pot of gold from this trade deal is illusory. Last week the media held out the promise of an increase of U.S. GDP of $122 billion from the trade agreement. The fact that this referred to GDP in 2027, and the $122 billion was in 2027 dollars, was absent from the discussion.It also might have been worth mentioning that this $122 billion was a best-case scenario in the study that was cited. This figure assumed that the trade agreement included all plausible reductions in tariff barriers.The study also gave numbers for a deal that it described as “less ambitious” and presumably more realistic. Its projection of the increase in 2027 GDP in this scenario is 0.21 percent of GDP. That is roughly equal to a normal month’s growth. Since it will take 14 years to achieve this gain, the boost to growth would be just 0.015 percentage points annually.If that sounds too small to notice, you’ve got the picture. And just to be clear, this study was produced by an organization in the United Kingdom, the Centre for Economic Policy Research (CEPR), that is for the most part very supportive of the trade deal.

OECD Doesn’t See Unemployment Falling Until Late 2014 - The rate of unemployment across developed economies won’t start to fall until “well into” 2014, while disparities among rich countries are likely to widen further, the Organization for Economic Cooperation and Development said Tuesday. In its annual report on the outlook for employment, the Paris-based research body also said governments must ensure those suffering long-term unemployment do not suffer financial hardship and concluded that older workers have not held onto their jobs at the expense of younger workers. The OECD said that as of April, 48 million workers were without jobs across its 34 members, 16 million more than in 2007, the year before the onset of the financial crisis that led to a sharp slowdown in global economic growth and contractions in most developed economies. “The global recovery in the past four years has been generally weak and uneven,” the OECD said. “Aggregate demand remains depressed in many countries and the labor market in most OECD countries still bears the scars of the financial and economic crisis.” The research body said it expects the jobless rate across its 34 members to remain “broadly constant” at 8% until the end of next year, just half a percentage point below its 2009 peak.

The euro zone's sick labour markets - TODAY'S Employment Outlook from the OECD, an intergovernmental think-tank based in Paris, makes depressing reading, above all for the euro area. This annual health-check of labour-market trends highlights the abysmal performance of the single-currency zone. Unemployment will remain around 8% across the OECD’s 34 mainly rich countries until the end of 2014 as continuing rises in some euro-zone states offset falls elsewhere. Whereas the jobless rate in the United States will fall from 8.1% last year to 7.0% in 2014, it will rise in the euro area from 11.2% to 12.3%. The findings are a tacit rebuke to European leaders like François Hollande, the French president, who hailed the end of the euro crisis in early June.  The political wavering in Lisbon reflects the economic and social pain that Portugal is suffering most notably in high unemployment, as its jobless rate has more than doubled from a pre-crisis average (for the years 2005-08) of 7.7% to a a projected 18.6% in 2014.The unemployment figures for Greece and Spain are even more dispiriting, if that is possible. The jobless rate for Greece has risen from a pre-crisis average of 8.7% to a forecast 28.4% next year. That of Spain has jumped from 9.3% to 28.0%. A particular worry is that some of these increases are structural (ie, affecting the unemployment rate consistent with price stability) as well as cyclical (ie, in the portion related to slack demand). The OECD estimates that the structural rate rose between 2008 and 2012 by five percentage points in Spain, and by two points in Greece and Portugal; and it is expected to rise further in all three countries by 2014.

Forward guidance and the communication mess -  We have expressed some criticism towards the specific ECB brand of forward guidance last and it seems that on all the points that we raised, the situation is worse than we thought. The ECB has apparently not only failed to learn from the Fed’s early mistakes about communicating on forward guidance, but also seems stuck in internal wranglings within the Governing Council that undermines the effectiveness of its new instrument. At the last meeting, forward guidance was put forward by the doves in the board as an alternative to a 25bps rate cut, something almost acknowledged in the July Monthly Bulletin: Forward guidance has been provided before exhausting the scope for further reductions in the key ECB interest rates. The uncertainty surrounding the expected conditional path of monetary policy can be reduced, independently of the level of the very short-term interest rates. The hawks agreed but imposed a few conditions that were reflected later in the various speeches. Benoit Coeure not only minimized forward guidance (see our original post), but eventually confirmed that it was not really breaking the no pre-commitment rule of the ECB since forward guidance would be reassessed at every meeting. Jens Weidmann confirmed that “it is not an absolute advanced commitment of the interest rate path” in a speech that also minimized the importance of the move.

The dangers of Europe’s technocratic busybodies - I hear it all the time in European policy discussions: we have done so much more than you ever thought possible.  This familiar argument made by EU officials goes as follows: would you have thought three years ago that the EU would create a rescue umbrella to protect weaker members against a run on their sovereign debt markets? That the European Central Bank would offer a lender-of-last-resort bond purchase guarantee? Or that we are now creating a banking union? Come on, give us some credit here. Of course, there are problems. But you have got to realise that we can only fix this mess one step at the time. It all sounds pragmatic, realistic, responsible. Statements such as these are often interlaced with some disdain for economists, and the inevitable comment that whatever isolated economic problems the eurozone may have, they are surely structural, meaning they are someone else’s problem.  It is not just the view of some hard-nosed policy makers. It carries support among many lobbyists, academics and journalists. Depending on the extent that your university institute or think-tank enjoys funding from European institutions, national governments or central banks, that would be your official view as well. One problem here is what optical engineers would describe as perspective distortion. If you work in Brussels, you get obsessed with those inter-institutional dogfights – the European Commission versus the European Council versus the European parliament. In the policy circles of Brussels, the economic depression is not near the top of your to-do-list. You are more likely to be obsessed with the question of who is going to be the next president of the commission, and whether it can make up the political ground it has lost under its current head, José Manuel Barroso.

The Eurozone is on the verge of repeating Japan's lost decade - Recently the IMF made it clear that the current euro area leadership needs to address its ongoing banking problems. The Eurozone's banks are continuing to deleverage, with total loan balances to euro area residents at the lowest level in 5 years. What makes the situation even more troubling is that many Eurozone banks banks are repeating the Japanese experience of the 90s. They are carrying poor quality and often deteriorating assets on their balance sheets, refusing to take writedowns that will require recapitalization. The IMF: - Faced with high funding costs, weak [Eurozone] banks are unable to recognize losses. This perpetuates uncertainty about the quality of their assets, hinders fresh private capital injections, and ultimately restrains credit. To reverse these dynamics, bank losses need to be fully recognized, frail but viable banks recapitalized, and non-viable banks closed or restructured.  This is exactly what created the "lost decade" in Japan by stifling credit growth for years. Loss recognition was not part of Japan's banking culture, as loan officers consistently kept bad loans at par and refused to move to workout/liquidation. There was little room for new credit creation in that environment.

Draghi Impotent as Fed Trumps ECB on Yield Curve - The widest gap between two- and 10-year German yields in more than a year suggests the European Central Bank is struggling to protect the region’s economy from a U.S.-led surge in borrowing costs.  ECB President Mario Draghi pledged last week to keep interest rates low for an “extended period of time,” capping yields on bonds with maturities of three years or less. Longer-dated borrowing costs tracked Treasury yields higher after the U.S. Federal Reserve signaled it may scale back its bond-buying program. Borrowing costs for companies in the euro region rose to the most in eight months in June.  “The steeper yield curve in the euro area effectively means an increase in funding costs for both sovereign and corporate borrowers without an associated change in inflation or growth,” . “What Draghi did will influence shorter-dated rates. They don’t have an efficient tool at the moment to deal with long-term yields which are being driven by the Fed.”

More On Not-So-Miserable France - Krugman - Following up a bit further on my earlier discussion. The French economy gets extraordinarily bad press in this country, and this attitude spills over into some allegedly serious economic analysis too. I don’t have time to dig up examples now, but not that long ago quite a few investment banks etc. were pegging France as the next crisis country, about to go the way of Italy or even Portugal any day now. And there was actually a spike in French borrowing costs for a while. Here’s the France-Germany long-term interest differential: You can see the surge from mid-2011 to mid-2012. In retrospect, however, it’s clear that this was a De Grauwian liquidity panic, arising from the fact that France didn’t have its own currency and that it wasn’t clear whether the ECB would act as a lender of last resort. Once the ECB sorta kinda indicated that it would, in fact, do its job, the panic subsided, and France is no longer under severe financial pressure. True, there’s still a French premium, which may reflect some lingering solvency concerns. In reality, however, France does not have a large structural deficit. And while it has an aging population, the demographic problem is actually much less in France — with its relatively high fertility — than in the rest of Europe, Germany in particular. But hasn’t the French economy performed poorly in the crisis? Yes, compared with the United States or Germany. But it’s not in the crisis camp, at all. Here’s a comparison:

Greeks Wait Tables and Hope for Economic Dawn - For Prime Minister Antonis Samaras, the tangible signs of Greece’s recovery are the tourists pouring into Athens from cruise ships and airplanes. Olympia Angeli says she’s lucky those tourists keep her employed. The 28-year-old is clinging to the security of working as a waitress even as her wages have fallen by half in three years. Nor does she know when she can return to her studies in tourism management: She can’t afford to lose her 500-euro ($652) monthly take-home salary, needed to support her aging parents. Not becoming one of the 1.3 million people out of work is an abiding concern for the 3.6 million Greeks still holding a job in the sixth year of the slump, now being called one of the deepest peacetime recessions of any industrialized economy. Gross domestic product has dropped 22 percent since 2008. The ancient marble streets and squares of Athens, many now inhabited by beggars and once thronged by angry protesters, show the price citizens are paying for their leaders’ policy mistakes. Even as exports rise in Italy, Portugal and Spain and investment by U.S. companies returns to Ireland, Greece remains the poster child for the euro’s three-year existential struggle.

Greece Hit by General Strike to Protest Austerity - — Thousands of Greeks walked off the job Tuesday in a 24-hour general strike called by unions opposing a new round of austerity measures that the government has vowed to enact at the urging of the country’s foreign creditors. The sorest point is a much-delayed overhaul of the Civil Service involving thousands of layoffs and wage cuts, which is set for a vote in Parliament on Wednesday night. The package must be passed if Athens is to secure the first installment of $9 billion in rescue loans approved last week by euro zone finance ministers.  The nationwide walkout, called by the country’s two main labor unions, which represent some 2.5 million workers, shut tax offices and other government services, reduced hospitals to emergency staff and disrupted travel. Trains remained in depots and international flights were suspended between noon and 4 p.m. as air traffic controllers joined the action. Public transport workers were running a reduced service to allow Greeks to join protest rallies planned for Athens and other major cities.

Greece on the Brink: Athens May Need 10 Billion More - According to a report by German daily Süddeutsche Zeitung, the beleaguered country needs another massive influx of money if it is to avoid insolvency. The paper cites an unnamed official at the European Commission as saying that the "financial gap" could be as large as €10 billion. The news comes at a difficult time for Greece and its relations with Germany. German Finance Minister Wolfgang Schäuble is set to visit Athens this Thursday for consultations with his Greek counterpart Yannis Stournaras and with Prime Minister Antonis Samaras. Schäuble is highly unpopular in Greece for his consistent insistence on austerity. And with German elections looming in September, it seems unlikely that additional aid money for Athens will be forthcoming anytime soon.  Concerns that Greece could be in need of additional assistance are not new. France, for example, recently called for direct EU assistance for wobbly Greek banks. In addition, Greek Economy Minister Kostis Hatzidakis told German daily Die Welt earlier this month that he expects Europe to agree to another debt haircut for the country, a conjecture with which he is not alone. Indeed, senior economists in Schäuble's own ministry told the daily Frankfurter Allgemeine Zeitung on Tuesday that a further reduction in the country's debt load is necessary.

Greece approves scheme to fire thousands of public workers - Greece’s shaky coalition government scraped through a vote on Wednesday on a bill to sack public sector workers as thousands chanting anti-austerity slogans protested outside parliament. The vote was the first major test for Prime Minister Antonis Samaras’s two-party coalition since losing an ally over the abrupt shutdown of the state broadcaster last month, which left it with a scant five-seat majority in the 300-seat parliament. After midnight on Wednesday, 153 lawmakers out of the 293 present voted in favor of the bill, whose passage was required to unlock nearly 7 billion euros ($9.2 billion) in aid from European Union and International Monetary Fund lenders. The bill includes deeply divisive plans for a transfer and layoff scheme for 25,000 public workers – mainly teachers and municipal police – that had triggered a week of almost daily marches, rallies and strikes in protest.

Greece approves austerity measures to fire 25,000 public workers and secure bailout - Greece has unlocked access to nearly €7 billion in European aid by sacking 25,000 public sector workers, in a move which has sparked a new surge of anti-austerity protests outside parliament. The measures are part of a bill which was voted through successfully yesterday, and included a new luxury tax on houses with swimming pools and owners of high performance cars. The European Union and International Monetary Fund lenders said they would only be willing to bail out the struggling company if it complied with a set of demands, including the controversial job cuts and tax rises. Thousands of teachers and policemen have now been told they have eight months to find a new job before they get laid off, meaning being thrown into a job market where there is 27 per cent unemployment. It is nonetheless being seen as a success story for the brittle coalition government of Prime Minister Antonis Samaras, which has just a five-seat majority in Greece’s parliament of 300 and lost many allies over the decision to shut down the state broadcaster last month.

Just How Low Can Spain Go?  from naked capitalism. Yves here. Last week, we used a the latest release of an every-other-year report by Transparency International on corruption to discuss the need to come up with more granular descriptions of the many forms it takes. One of the interesting things about questionable wheel-greasing is the way it’s considered to be perfectly acceptable in some societies if there are enough steps inserted between the action and the payoff.  Social psychologists have found a gift as minor as a can of soda predisposes someone towards a sales pitch. Just imagine what a few million dollars does. This post on a major bribery scandal in Spain will hopefully elicit reader comment on the common forms of corruption in the EU and how they’ve changed over time. Curiously enough, Spain got one of the best scores of all the countries included in the Transparency survey as far as the amount of bribery in day-to-day life. Only 2% of the respondents reported having to pay a bribe in dealing with the government in eight different categories, versus 7% in the US and Switzerland, 5% in the UK and Italy, and 4% in Belgium. Of the countries surveyed, only Denmark, Japan, and Australia scored lower, all at 1%. Yet Spain also scored poorly on the perceived corruption of its political parties, with a 4.4 ranking on a scale of 5 (the US was 4.1). The way to square the circle, as this post explains, appears to be that the buckraking takes place at senior levels.

Expect Another "Bad Bank" Bailout in Spain - Spain's bad bank, Sareb, has plans to unload 45,000 distressed properties in five years, over 7,500 of them in 2013. In theory it is easiest to dump more properties in the beginning because there are likely some relative bargains for the early property hunters. The actual results are laughable. Sareb unloaded 550 home in January-March, then and only anther 150 in the next two months, a grand total of 700 through June 1.  Here are some details excerpts (translated) from Guru'sBlog report Havoc in the Bad Bank (SAREB).

  • The bad bank has 400,000 real estate assets but tens-of-thousands of the properties have no address. 
  • It's difficult to value a home when you don't know where it is.
  • Investigators have discovered cases where 150 loans have the same property as collateral.
  • There are no keys to 107,000 properties.
  • Many supposedly empty flats are occupied.
  • Under the chairmanship of Belén Romana, Sareb had planned to sell 45 thousand properties in the first 5 years, about 7,528 in 2013. Until June 1, Sareb had managed to sell 700 properties (550 in the first 3 months).
  • Sareb has sold so few properties because it wants and needs to sell them for more then they are worth.

Spain's public debt rises to nearly 90 per cent of GDP - Spain‘s public debt rose by 23.3 billion euros to 937.3 billion euros (102 trillion dollars) in May, or 89.6 per cent of its gross domestic product, the central bank said Wednesday. Spain‘s public debt was below 40 per cent of GDP before the global crisis hit the country in 2008 and sparked a meltdown of its once-booming construction sector. Debt is now expected to reach 91.4 per cent of GDP by the end of 2013. That would bring it close to the expected eurozone average of 95.5 per cent. The International Monetary Fund expects Spain‘s GDP to shrink by 1.6 per cent this year and to stagnate in 2014.

Hallelujah, Spain is recovering - Spanish Finance Minister Luis de Guindos assures us that his country has beaten the crisis and will soon be recovering nicely. "The recession is already behind us," he said. I wish him the best, but this is what loan growth looks like in Spain (courtesy of Miguel Navascues at Ilusion Monetaria): The IMF has downgraded its economic growth forecast for Spain to minus 1.6pc this year, and zero next year. The depression grinds on, and on, and on. I nothing further to say other than to note that property prices fell 7.8pc in the second quarter from a year earlier, and are now back to 2004 levels (nominal, minus 30pc real). Bargain hunters are emerging, but bear one thing in mind. Property Consultants RR de Acuna in Madrid say there is now an overhang of 2.2m homes either on the market, or held by banks, or in foreclosure proceedings, or still being built (presumably mostly in the less depressed areas liked the Basque country or Navarre). I can't vouch for these figures, but the firm has been much more accurate about the true disaster in the property market than the cheerleaders in the banks, or the government. 2.2m is a lot for a country with annual market of 240,000, and a shrinking population (down 0.7pc last year as the young emigrated). Give it a decade.

Portugal's socialists walking the nation toward debt restructuring - The situation in Portugal has taken a turn for the worse. Given the deepening political crisis, last week the finance ministry has requested a delay in the next progress review by the nation's creditors.Reuters: - Portugal's government has requested a delay in the next regular review of the country's bailout by its creditors due to the "current political situation," the finance ministry said on Thursday.  The delay is one of the first direct effects on the country's 78-billion-euro bailout caused by a political crisis which erupted last week with the resignation of the finance and foreign ministers. Surprisingly the request was granted. This could be a sign of yet another deviation from the current bailout plan. Furthermore on Friday new anti-austerity rhetoric was heard from the opposition leadership. The socialists are pushing hard to renegotiate Portugal's bailout terms. CNBC: - ... the leader of Portugal's socialist opposition, Antonio Jose Seguro, told parliament that Portugal must end its commitment to austerity.  "We have to abandon austerity politics. We have to renegotiate the terms of our adjustment program... The prime minister has to recognize publicly that his austerity policies have failed," Seguro said.

Constitutional crisis pushes Portugal closer to the brink - Portugal's borrowing costs have spiked dramatically after key political parties failed to agree on a national salvation front, raising the risk of a snap election and an anti-austerity revolt. Yields on 10-year Portuguese bonds jumped more than 100 basis points to 7.85pc in a day of turmoil, kicked off by a government request to delay the next review of the country’s EU-IMF Troika bail-out until August. President Anibal Cavaco Silva set off a constitutional crisis on Thursday when he vetoed a reshuffle by the two conservative coalition parties, insisting on a red-blue national unity government with greater legitimacy to see through austerity cuts until mid-2014. Socialist leader Antonio José Seguro has so far refused to take part, demanding fresh elections to clear the air. “We must abandon the politics of austerity, and renegotiate the terms of our adjustment programme. The prime minister must accept that his austerity policies have failed,” he said. Some Socialist leaders have threatened debt repudiation as a way of fighting back at Germany and the creditor powers, though that is not the party position.

Portugal’s public debt totals 127.1 pct of GDP in the first quarter - Portugal’s public debt totalled 127.1 percent of the country’s Gross Domestic Product (GDP) in the first quarter of the year, according to figures published Wednesday in Lisbon by the Public Finance Council (CFP). According to the CFP, this figure is higher than the target set for 2013 (122.3 percent of GDP) and follows a rise of 3.799 billion euros (3.4 percentage points of GDP) against the figure for the previous quarter.” Central government was the main reason for the rise (3.887 billion euros) and, despite the “slight drop” in debt of reclassified state companies, there was a rise in the state funding of these companies (711 million euros or 0.5 percentage points of GDP).”

Italy's public debt hits new record of 2.0747 trillion - Italy's huge public debt reached a new record of 2.0747 trillion euros in May, up 33.4 billion euros on April, the Bank of Italy said on Tuesday. Italy's national debt first crossed the two-trillion-euro mark in October last year and rose to 127% of gross domestic product (GDP) in 2012 despite government cost-cutting and tax rises. The debt, the main reason Italy has been exposed to the eurozone crisis, is forecast to climb to around 132% of GDP by the end of this year. According to commitments with Europe, Italy must cut the debt to 60% of GDP within 20 years. The Bank of Italy added Monday that tax revenues in recession-hit Italy amounted to 143.171 billion euros in the first five months of 2013, up 0.7% on the same period last year.

Italy's Banks NPLs Continued To Increase In May-ABI --The total amount of non-performing loans held by Italian banks continued to rise in May, data published Tuesday by the country's banking association ABI showed, a sign that the country recession continues to impact banks' asset quality and profitability. Gross NPLs grew by 22.4% to 135.7 billion euros ($177.8 billion) compared with the same period last year, ABI said. Non-performing loans net of impairment grew by 31.5% to EUR68.5 billion in the same period. Both figures are the highest in more than two years. ABI previously said it expects NPLs to peak in the first half of this year. The Bank of Italy urged the country's banks to make provision for higher coverage of bad loans, resulting in several banks' earnings being severely affected by higher loan-loss provisions in the last quarter of 2012. ABI's data reflected this. While gross NPLs have consistently risen for more than two years, net NPLs showed slight declines during the first quarter of this year, especially in January and February. However, in March they again rose to levels similar to those at the end of last year and in April they reached a new peak in more than two years.

Italy's First Black Minister Greeted With "Nooses On Lampposts" - While the US has had its share of race-related social issues in recent days, nothing compares to Italy where not only was the country's first black minister (of integration!) of Congolese origin, Cecile Kyenge, compared to an orangutan two days ago by Roberto Calderoli, vice president of Italy's Senate and a senior parliamentarian in the anti-immigration Northern League, but following a visit to the city of Pescara she was met with a "protest" where nooses were hung from lammposts. And just so the message was not lost, "the nooses appeared on lampposts with posters signed by far-right group Forza Nuova: "Immigration, the noose of the people!" read one of the slogans on the posters. Another said: "Everyone should live in their own country." Nothing like Italy, whose economy has been ravaged by the worst depression in decades, developing its own Golden Dawn movement to really help with integration issues and globalized worker mobility.

Italy's central bank sees even steeper decline for economy - Italy is heading for an even more severe economic downturn than previously forecast, and will contract by 1.9 percent this year, the country's central bank said on Wednesday. In its July bulletin, the Bank of Italy downgraded its 2013 outlook for the country, forecasting a contraction of 1.9 percent, after projecting a 1 percent slump in January. The Italian economy shrunk by 2.4 percent in 2012. The bank attributed its downgrade to weaker-than-expected economic activity in the first half of the year, following a slowdown in international trade and continued tensions in the credit market. The move follows a downgrade from credit ratings agency Standard & Poor's, which earlier this month cut its rating on Italy's sovereign debt to BBB from BBB-plus, two notches above junk status. Also on Wednesday, Italy's official statistics office revealed that poverty had surged across the country in 2012. It found that 12.7 percent of the population lived in relative poverty last year, compared to 11.1 percent in 2011. Plus, 6.8 percent lived in absolute poverty, a rise from 5.2 percent the year before.

The European Central Bank Is a Much Bigger Problem for Italy’s Young Than the Elderly - Dean Baker - A New York Times article reported on the aging of Italy’s population and bizarrely implied that this was the cause of high youth unemployment. The piece tells readers:  With older people in the Mediterranean living longer and longer lives — and with fertility rates low and youth unemployment soaring in Italy, Greece, Spain and Portugal — experts warn that Europe’s debt crisis is exacerbating a growing demographic crisis. In the coming years, they warn, there will be fewer workers paying into the social security system to support the pensions of older generations. This paragraph came immediately after a paragraph telling readers: Many of their children [of today's elderly] have high school or university degrees and are now retired from public or private sector jobs. And their children, the ones born after 1970, generally have university degrees — and are struggling to find work.The claim that Italy is suffering from too few young to support the retired population and that the young cannot find jobs are directly contradictory. This is like telling us that Italy is suffering from a heat wave and sub-zero temperatures. The problem of not enough young people is a problem of lack of supply — too few young people to provide the goods and services the country needs. This should manifest itself in a labor shortage. Companies are trying to get workers but cannot find them.  By contrast the high unemployment rate, even for university grads, is evidence of lack of demand. In this situation there is no shortage of available workers, the problem in the economy is not enough demand. In this story, if Italy had a few more million centenarians, who were spending pensions without working, then it could create the demand needed to employ the young.

ECB Changes Collateral Rules as It Seeks to Boost Lending - The Frankfurt-based ECB will reduce the risk premium, or haircut, applicable to asset-backed securities to 10 percent from 16 percent, according to an e-mailed statement today. It’ll also lower the quality threshold for six ABS classes that are subject to loan-level reporting requirements to two A- ratings from two AAA ratings. At the same time, the central bank will tighten rules for retained covered bonds so the total effect on eligible collateral will be “overall neutral,” it said.  Policy makers will “continue to investigate how to catalyze recent initiatives by European institutions to improve funding conditions” for SMEs, according to today’s statement, which marks a biennial review of the bank’s risk-control framework. The focus will be on “the possible acceptance of SME-linked ABS guaranteed mezzanine tranches as Eurosystem collateral in line with established guarantee policies,” it said. The central bank also changed the haircuts it applies to sovereign bonds pledged as collateral in refinancing operations. While it reduced the risk premium on most securities rated at least A-, it raised haircuts on bonds rated from BBB+ to BBB-, the lowest three investment grades. That shift will affect banks that use government bonds issued in countries including Italy and Spain

US blocks crackdown on tax avoidance by net firms like Google and Amazon - France has failed to secure backing for tough new international tax rules specifically targeting digital companies, such as Google and Amazon, after opposition from the US forced the watering down of proposals that will be presented at this week's G20 summit. Senior officials in Washington have made it known they will not stand for rule changes that narrowly target the activities of some of the nation's fastest growing multinationals, according to sources with knowledge of the situation. The Organisation for Economic Co-operation and Development (OECD) has been told to draw up a much-anticipated action plan for tax reform at the gathering of G20 finance ministers this Friday, but the US and French governments have been at loggerheads over how far the proposals should go. While the Americans concede that the rules need to be updated, they are understood to be pushing for moderate change. They are believed to want tweaks to the existing wording of international tax treaties rather than the creation of wholly new passages dedicated to spelling out how the digital economy should be taxed. This has put the US at odds with several G20 nations, particularly France, which in January published radical proposals for new concepts in international tax treaties designed to counter some of the avoidance measures deployed by internet firms. Officials at the G20 governments have been working closely with the OECD, a club for the world's industrialised nations, over the proposals.

European car sales sink to 20-year low in first half (Reuters) - European car sales slumped to their lowest six-months total in 20 years in the first half of 2013, with a 6.3 percent drop in June suggesting no let up for an industry battered by overcapacity and weak demand. European automakers have been suffering for months from the effects of record unemployment and government austerity measures in the euro zone, with some such as Peugeot seeking to close factories and lay off workers to counter heavy losses. Italy's Fiat saw the biggest drop in sales among major manufacturers last month, suffering a 13.6 percent slide, followed by a 10.9 percent fall at France's Peugeot, while Ford bucked the trend with a 6.9 percent rise. "Even if there is a recovery in the second half of the year, it's hard to see how it could be strong enough to offset the bad results we've registered so far this year," said Quynh-Nhu Huynh, economics and statistics director at the Association of European Carmakers (ACEA), which compiled the figures. ACEA said car registrations in European Union countries plus those in the European Free Trade Association (EFTA) fell 6.7 percent in the first half year to 6,436,743, the lowest six monthly total since 1993. Sales in June were the lowest for that month since 1996.

European Car Sales Plunge to 20-Year Low - Despite hopes that the European market might have finally bottomed out, car sales for the first half of 2013 plunged to a 20-year low, according to industry data, with little sign that the downturn is about to reverse itself. According to new data from the European Automobile Manufacturers Association, or ACEA, new vehicle registrations continued to slip with a decline of 6.3% in June, bringing total sales for the first six months of the year to just 6.44 million, a 6.7% drop. Among the five largest markets, only the U.K. was up, a countervailing 13%, while the other regional powerhouses, Germany and France were down 4.7% and 8.4%, respectively.  The United Kingdom, in fact, has been running counter to the downward slide all year, so far gaining 10%. Among smaller markets, sales plunged 42.7% in Cypress, the latest European country to receive a bailout aimed at helping restructure its lopsided sovereign debt load. Even the traditionally strongest manufacturers have been struggling this year, Volkswagen AG declining 4.4%, with its high-line Audi brand down 8.8%, according to industry figures. Italy Fiat SpA was off 10% for the first half, with France’s Peugeot off 13.3%, one of the worst declines of any major brand and a further worry for a company desperate to reverse mounting, multi-billion dollar losses. Honda was the rare winner among mainstream brands, with a sale gain of 6.4%.

European Car Sales Double-Dip, Lowest Since 1993: "No Recovery Until Late 2014" - Following the hopes and dreams of green-shooters everywhere with April's +0.6% YoY growth in European car sales, the last two months have been a bitter disappointment as sales have collapsed once again - down 6.3% YoY in June. Sales have been negative year-over-year for 18 of the last 19 months - longer than the 18 months during the financial crisis in 2008/9. Car manufacturers are not amused and are demanding action, as Reuters reports, "What is the government waiting for to enact measures to support investment in this key sector?"

Euro-Zone Exports Slump in May - Exports from the 17 countries that share the euro slumped in May, as did imports, an indication that the currency area's longest postwar contraction may have continued into a seventh straight quarter. The European Union's statistics agency said Tuesday that adjusted for seasonal factors, exports from the euro zone to the rest of the world fell 2.3% from April, while imports were down 2.2%. It was the second straight month in which exports fell sharply, and the largest month-to-month fall since June 2011. With rising unemployment, low wage growth and government cutbacks damping domestic demand, rising exports are essential if the euro zone is to return to growth. But with growth in many other parts of the global economy faltering, a significant pickup in overseas sales appears unlikely in the months ahead. The euro-zone economy shrank in the first quarter of the year as exports declined. Eurostat won't release its first estimate of gross domestic product in the three months to June until mid-August, but business surveys and economic data releases suggest output fell again.

Euro-Zone Exports Slump in May - The European Union's statistics agency Eurostat said Tuesday that adjusted for seasonal factors, exports from the euro zone to the rest of the world fell 2.3% from April, while imports were down 2.2%. It was the second straight month in which exports fell sharply, and the largest month-to-month fall since June 2011. Eurostat said that before seasonal adjustments, the euro zone had a trade surplus of €15.2 billion in May, up from €6.6 billion in May 2012 and €14.1 billion in April. The widening of the trade balance over the year was entirely because of a 6% drop in imports, a sign of weak domestic demand. The drop in exports to countries outside the EU was particularly sharp in Germany, falling by 9% from April. By contrast, Italian exports to non-EU countries rose by 3.6% while Spanish exports rose by 0.8%.

Europe: It’s Going to Get a Lot Worse Before It Gets Any Better - At the heart Europe’s political malaise is the very poor state of the European economy and the growing popular discontent with externally imposed policies of budget austerity and painful structural economic reform. As an extreme case, the Greek economy has now been in recession for the past five years and has seen an economic contraction exceeding 20 percent. However, even Italy and Spain have now been in economic recession these past two years with the result that their current level of output is more than 7 percent below the peak it reached in 2008. Further feeding popular discontent is the growing realization that the European economy is going to get considerably worse before it gets any better. It is also dawning on an increasingly vocal minority across the European periphery that IMF-imposed policies are all too likely to lead these countries down a blind alley with little relief in prospect from their present economic misery. Even the IMF is now conceding that, despite the unrelenting economic and social pain that the Greek population has already endured, the Greek economy will contract by a further 4-1/2 percent in 2013. As for Portugal, the IMF now acknowledges that the battered Portuguese economy will decline by at least 3-1/4 percent in 2013, while the IMF is projecting that GDP in an already depressed Italy and Spain will decline by more than 1-1/2 percent in 2013.

OECD unveils plan to end tax avoidance - David Cameron has called on the world’s leaders to get behind a global crackdown on tax avoidance and “break down the walls of corporate secrecy”. The Prime Minister was throwing his support behind proposals to stamp out sophisticated tax dodging strategies unveiled by the Organisation for Economic Co-operation and Development (OECD) at the G20 in Moscow yesterday. The Paris-based think-tank has drawn up a 15-point action plan to stop multi-nationals moving profits from one country to another to reduce their tax bill. In future, the OECD pledged, tax will be largely paid where the original economic activity takes place. The crackdown follows public outrage in the UK, the US and across Europe about the minimal amounts of tax paid by big businesses. In Britain, Google, Amazon and Starbucks have been accused by politicians of being “immoral” for not paying their “fair share”. In response, companies have argued they are simply playing by the rules and that politicians should change the tax laws if they don’t approve.

Quantitative Easing: Can it Be Unwound? - naked capitalism - Yves here. This post looks at the unwinding of quantitative easing in the UK and raises some concerns. The first is that the Bank of England will incur explicit losses due to the inevitable “buying high” and having to sell assets, which will result in lower prices. Note that the Fed has said it will effectively finesse this issue by virtue of not selling the assets it purchased during its QE program. Since a significant portion of the bonds the Fed bought were high-quality mortgage-backed securities, which amortize fairly quickly (due to home sales as a result of moving, death, disability, plus scheduled principal amortization), the Fed’s balance sheet will shrink appreciably over the next five years if it simply sits pat. Remember that a central bank, unlike a conventional bank, is not loss constrained by its nominal equity but by inflation. If a central bank’s losses become too large, it can’t continue to monetize its losses but must obtain an explicit recapitalization (this was discussed regularly by former central banker Willem Buiter in 2007 and 2008). However, a second concern is that several central banks are planning to halt or reverse QE on similar time frames. Since the one thing QE does appear to have accomplished is goose asset prices, the authors have reservations about the impact of its reversal on financial stability.

BOE voted unanimously to keep QE unchanged - The Bank of England's Monetary Policy Committee earlier in July voted unanimously to keep both interest rates and the asset-purchase program unchanged, according to minutes of the meeting published Wednesday. The interest rate was kept at a record low 0.5%, while the quantitative-easing program stayed at 375 billion pounds ($566 billion). The vote comes after three members, including former Governor Mervyn King, at the June meeting voted in favor of increasing the size of the asset purchases by £25 billion to a total of £400 billion. This means that two doves, Paul Fisher and David Miles, changed their position on boosting the easing program. The July meeting marked the first meeting with new Governor Mark Carney at the helm. The pound rose to as high as $1.5245 after the minutes, up from $1.5115 on Tuesday.

Stimulus tapering years away, says BoE’s Paul Fisher - Paul Fisher, the Bank of England’s head of markets, reinforced the central bank’s new policy of jawboning to get market interest rates down, telling MPs on Tuesday that any unwinding of monetary stimulus was likely to be “years in the future”. Although classed as a dove for voting for a resumption of quantitative easing since February, the executive director’s views reflect the BoE’s new stance under Mark Carney – namely that rises in market interest rates since May are “not warranted”. Mr Fisher also confirmed that the BoE had noticed some suspicious trading surrounding some of the gilts purchased by the central bank and had passed on concerns to the Financial Conduct Authority.

Currency to Oil Rates Targeted for Tougher Rules After Libor - Benchmarks underpinning markets from oil to currencies face tougher oversight under plans by global regulators to prevent any repeat of Libor-style fraud. Rates should be based as much as possible on real transaction data, rather than estimates, and banks should tackle conflicts of interest, the International Organization of Securities Commissions, a Madrid-based group that harmonizes global market rules, said in guidelines published today.Authorities are grappling with a growing number of rate-setting scandals. Global regulators have fined UBS AG (UBSN), Barclays Plc (BARC) and Royal Bank of Scotland Group Plc about $2.5 billion for distorting the London interbank offered rate, known as Libor, and similar benchmarks. The measures are “an important step” in restoring the credibility of tarnished benchmarks, Martin Wheatley, chief executive officer of the U.K. Financial Conduct Authority and a co-head of the Iosco benchmark task force, said in a statement. “These principles set out clear and robust standards.”

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