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

Saturday, August 10, 2013

week ending Aug 10

U.S. Fed balance sheet grew in latest week  (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week as the Fed's holdings of U.S. Treasuries increased, 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 $3.542 trillion on Aug. 7, compared with $3.529 trillion on July 31. The Fed's holdings of Treasuries rose to $1.993 trillion as of Wednesday, Aug. 7, up from $1.982 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) was unchanged at $1.247 trillion. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $66.52 billion, unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $7 million a day during the week, compared with $11 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 8, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed’s Fisher: Central Bank Needs to Untangle ‘Monetary Gordian Knot’ - A senior Federal Reserve official on Monday turned to Greek myth to highlight his concerns over the central bank’s effort’s to unwind its long-running stimulus program.Federal Reserve Bank of Dallas President Richard Fisher said the Fed’s easy-money stance had left it with a “monetary Gordian knot” to untangle, with policymakers at a “delicate moment’ in considering when and how to dial back the stimulus.Mr. Fisher said the Fed’s $85 billion per month program of buying bonds and mortgage-backed securities has left it with a “significant slice of these critical markets” that it would have to “gingerly” unwind. He said in prepared remarks at a conference of state retirement administrators here that the Fed “must carefully remove the program’s pole pin… so as not to prompt market havoc.”

Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot" - "This is a delicate moment. The Fed has created a monetary Gordian Knot.  Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."

Fed Watch: Bits and Pieces -  Dallas Federal Reserve President Richard Fisher offered-up one of his typically colorful speeches. As should surprise no one, he is in favor of tapering at the next FOMC meeting. His choice of words was interesting: The challenge now facing the FOMC is that of deciding when to begin dialing back (or as the financial press is fond of reporting: “tapering”) the amount of additional security purchases. Chairman Bernanke made clear the parameters for dialing back and eventually ending the QE program. Should the economy continue to improve along the lines then envisioned by Committee, the market could anticipate our slowing the rate of purchases later this year, with an eye toward curtailing new purchases as the unemployment rate broaches 7 percent and prospects for solid job gains remain promising... ...Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the Committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months. It sounds as if Fisher takes seriously Bernanke's 7% marker regarding the end of balance sheet expansion. Also note that he is not saying that he thinks the FOMC should taper. He is saying they "are closer to execution mode," which sounds like an opinion from an insider. Moreover, he is also suggesting that the data doesn't need to get better to taper; it just doesn't need to get any worse.

Fed Watch: Septaper or not? - I spent a fair amount of the weekend puzzling over how we ended up at this tapering debate in the first place. After all, the data hasn't been terrible, but it hasn't been exactly blockbuster either. To be sure, we started the month with some promising data, but the employment report turned out to be yet another of the lackluster reports to which we have become accustomed. In short, nonfarm payrolls continue to grind upward: The twelve months haven't seen any huge disappointments, but also only one blowout month. Moreover, underemployment indicators are not improving at any rapid pace:  Plenty of slack on the labor market. Likewise, inflation isn't exactly trending toward the Fed's target:None of this is new, and none of this prevented Federal Reserve Chairman Ben Bernanke from outlining a QE exit path on June 19th of this year. But why outline that path in the first place? I suspect it comes down to this sentence from the FOMC statement:In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. Bernanke seemed firmly committed to a 7% unemployment rate as a trigger for ending asset purchases - that apparently represents progress toward meeting economic objectives. Indeed, at that current rate of decline, we will be hitting that target very early in 2014:

Fed’s Lockhart Says Reduction in Bond Buys Could Come in September - The Federal Reserve could begin to scale back its asset purchase program as early as September, although such a move depends on an improved economy and more robust job creation during the second half of the year, a central banker said Monday. Dennis Lockhart, in an interview with Market News International, published Tuesday, said that while a move to ease back on monetary stimulus could come in September, the move could come at any time before the end of the year. Mr. Lockhart, who is not a voting member of the Fed’s monetary policy setting committee, also cautioned that should gross domestic growth and job creation in the second half of the year disappoint, “I, for one, would be quite prepared to delay or even reconsider” removing the asset purchase program. Mr. Lockhart said he was hoping for a bigger non-farms payroll figure in July — 162,000 — indicating that if the figure were to rise to between 180,000 to 200,000 and growth pick up, then the Fed would be in a position to taper. “You have to sort of weigh the sense of imperative that has been established versus what the economic performance really turns out to be,”

Fed’s Evans Won’t Rule Out September Pullback in Bond Buying - Federal Reserve Bank of Chicago President Charles Evans said Tuesday that he wouldn’t rule out the central bank pulling back on its $85 billion-a-month bond-buying program at its September policy meeting. During a breakfast briefing with reporters Mr. Evans said, “I clearly would not rule that out,” when asked if the Fed might begin throttling back on its asset purchases at the Federal Reserve‘s Sept. 17-18 policy meeting. Mr. Evans’ view that the Fed could decide to begin reducing its bond-buying program in September is significant because he is part of the activist wing of the Fed that has supported unconventional policies like bond buying, which aim to drive down borrowing costs in the hopes of spurring investment, spending and hiring. In June, Fed Chairman Ben Bernanke said the Fed could begin pulling back from the bond-buying program “later this year” if the economy performs as well as the Fed expects. If the economy continues to improve as expected, those reductions would likely continue until the Fed wound down the program around mid-2014, at which point the unemployment rate would likely be about 7%, Mr. Bernanke said.

Fed Watch: Crazy Fedspeak -There are two interviews of note hitting the wires today. One is with Richmond Federal Reserve President Dennis Lockhart, in which he leaves open the possibility of a September beginning to the tapering process. Via the Wall Street Journal: Dennis Lockhart said that while a move to ease back on monetary stimulus could come in September, the move could come at any time before the end of the year. “I, for one, would be quite prepared to delay or even reconsider” removing the asset purchase program. This is crazy. By the September meeting we have at best only the earliest data with which to judge the second half of the year. If you really need to evaluate the second half of the year, you need to wait until October at the earliest. September should be out of the question. But it clearly isn't. The next paragraph: Mr. Lockhart said he was hoping for a bigger non-farms payroll figure in July — 162,000 — indicating that if the figure were to rise to between 180,000 to 200,000 and growth pick up, then the Fed would be in a position to taper. This is equally crazy. Is Lockhart really saying that 18,000 jobs - out of an economy with 136 million jobs - is meaningful from a policy perspective? And notice the low expectations. We don't even need 200,000 jobs any more to justify pulling back accommodation. I was wondering if Lockhart is being taken out of context. He generally has a very balanced, considered view. But then we see the comments of Chicago Federal Reserve President and noted dove Charles Evans. Again, via the Wall Street Journal: During a breakfast briefing with reporters Mr. Evans said, “I clearly would not rule that out,” when asked if the Fed might begin throttling back on its asset purchases at the Federal Reserve‘s Sept. 17-18 policy meeting.... ...The Fed is “quite likely to reduce the flow purchase rate starting later this year,”

Fed’s Pianalto: Ready to Scale Back QE if Labor Market Stays on Current Path - The president of the Cleveland Federal Reserve Bank said Wednesday she would be ready to scale back the central bank’s $85 billion-per-month bond-buying program if the labor market continues to improve as it has over the past year. The official, Sandra Pianalto, didn’t say when she thought the Federal Reserve would make its first reduction in bond purchases—a question of intense interest to stock and bond markets that have been buoyed by the program. Her remarks followed comments Tuesday by two other Fed bank presidents — Chicago’s Charles Evans and Atlanta’s Dennis Lockhart — that the first cut could come as soon as September. Messrs. Evans and Lockhart didn’t say they advocated a September pullback, but it was a possibility. Ms. Pianalto’s views are significant because she typically reflects the emerging consensus on the Fed’s divided policy committee, positioned in between the critics of the program and its strongest advocates. “In my view, there has been meaningful improvement in both current labor market conditions and in the outlook for the labor market” since the Fed launched its current round of bond buying last September, she said, according to a copy of remarks prepared for delivery to the Center for Community Solutions Annual Human Services Institute in Cleveland. “In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases,” she continued. Ms. Pianalto stressed that her support for a future reduction in bond purchases, known as quantitative easing, is not a sign that she believes the labor market has fully recovered. “It is not,” she said.

Fed’s Fisher Says Bond Purchases Should Slow in September - The U.S. Federal Reserve should begin the widely anticipated pullback of its multibillion dollar bond purchases in September, unless the economy worsens significantly, U.S. central banker Richard Fisher told a German newspaper in an interview published Thursday. “We should begin reducing bond purchases in September, as long as we don’t see a clear worsening of the economic data,” the president of the Federal Reserve Bank of Dallas told German business newspaper Handelsblatt. Mr. Fisher isn’t currently a voting member of the Federal Open Market Committee, which sets monetary policy for the United States. Fed Chairman Ben Bernanke has recently suggested that the Fed could begin to taper its $85 billion monthly bond purchases as soon as September, causing some market volatility. Mr. Fisher’s comments follow similar sentiments from other U.S. central bankers. Chicago Federal Reserve President Charles Evans also said Tuesday that he wouldn’t rule out the central bank pulling back on its bond-buying program at its September policy meeting.

Update: Four Charts to Track Timing for QE3 Tapering - We now have data to update all four charts that I'm using to track when the Fed will start tapering the QE3 purchases. At the June FOMC press conference, Fed Chairman Ben Bernanke said:  "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. The first graph is for GDP. The current forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013. The first and second quarters were below the FOMC projections (red), and GDP will have to pickup in the 2nd half of 2013 for the Fed to start tapering QE3 purchases in December. The second graph is for the unemployment rate. The current forecast is for the unemployment rate to decline to 7.2% to 7.3% in Q4 2013. We now have data through July, and so far the unemployment rate is tracking in the middle of the forecast. If the participation rate ends the year at 63.6% (level for the year), then job growth will have to pickup up a little in the 2nd half to meet the FOMC projections. This graph is for PCE prices. The current forecast is for prices to increase 0.8% to 1.2% from Q4 2012 to Q4 2013. So far PCE prices are below this projection - and this projection is significantly below the FOMC target of 2%. Clearly the FOMC expects inflation to pickup, and a key is if the recent decline in inflation is "transitory". PCE prices would have to increase at a 1.8% annual rate in the 2nd half to reach the upper FOMC projection.This graph is for core PCE prices. The current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013. So far core PCE prices are below this projection - and, once again, this projection is significantly below the FOMC target of 2%.

I need relief from the Fed - I was reeling with annoyance after reading this presidential statement about the dual mandate of the Federal Reserve: "The challenge is not inflation, the challenge is we've still got too many people out of work." (Read more here.) Now, just what does the Fed have to do with unemployment? Admittedly, the Fed has two goals mandated by Congress. First, it should stabilize prices. Second, it should do whatever possible to bring about full employment. I have to believe that Congress wasn't thinking straight when they gave the Fed these two jobs. Neither can be done without unintended consequences, and the second is quasi-impossible. The Fed is not in the business of making anything or creating businesses that employ people, and it can't force companies to do so. It has no influence on Congress, the debt, the President, or any particular market players except the banks. All it can do is pander to Wall Street and keep it solvent a bit longer.

Why the Fed should taper - Some Federal Reserve presidents are talking taper. Based on speeches this week, their apparent consensus may give Federal Reserve Chairman Ben Bernanke the support he needs to begin dialing back on the Fed’s $85 billion monthly purchases of Treasury bonds and mortgage-backed securities.  Although the number of Americans employed in 2013 has increased by about 1 million, 82% of these jobs have been part-time, according to data from the Labor Department’s Current Population Survey. There have been 4.5 part-time jobs created for every full-time job.The unemployment rate fell because fewer Americans participated in the labor force in July. The labor force participation rate declined from 63.5% to 63.4%, equivalent to 1978 levels, and the labor force declined by 37,000. Including population growth, an additional 240,000 Americans were counted as out of the labor force. The number of Americans who usually work part-time rose by 174,000. All told, it is puzzling that this employment report, which seems worse than the June report, would encourage Fed presidents to suggest dialing back on asset purchases. Their arguments should be the opposite. QE1, QE2, and QE3 are not achieving their stated goals of helping the economy, and are contributing to the possibility of inflation. So tapering should occur.

Fed Watch: Is Inflation a Consideration? -- The decision of the Fed to define a time line for tapering given the low inflation numbers has been something of a puzzle. Cleveland Federal Reserve President Sandra Pianalto provides a concise explanation of that puzzle in her speech today:  This policy was designed to drive some near-term momentum in the economy with the specific goal of achieving a substantial improvement in the outlook for the labor market. Labor market data comes in every month and is subject to different interpretations. In my view, there has been meaningful improvement in both current labor market conditions and in the outlook for the labor market since the FOMC launched the current asset purchase program. Employment growth has been stronger than I was expecting, and the unemployment rate today is more than half a percent lower than I projected it to be last September.In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.Thus, according to Pianalto, QE3 was never about inflation, but instead was always about the labor market. And, by her assessment, they can roll out the "Mission Accomplished" banner. In short, the improvement in the labor market - or, more specifically, the stability of the labor market in light of fiscal contraction - is a driving force in the tapering decision. Hence why officials are not willing to end speculation on a September taper despite no evidence that inflation is trending back toward the Fed's target in a timely fashion. Inflation management, it would seem, is a problem that many policymakers simply think is a task best left for interest rate policy.

Projecting the unemployment rate - Back in June, the Fed had made it quite clear that the FOMC is looking for the unemployment rate to hit 7% before fully ending the current securities purchase program. The bank still continues to be focused on this headline measure (even if it's not always a meaningful indicator of the health of the labor markets). CNN: - If unemployment falls to 7% by mid-2014, the Federal Reserve will stop buying U.S. bonds and mortgage backed securities, he said. That's the first hard number the Fed has given for when it may end its stimulus policy, known as quantitative easing. The July unemployment rate came in at 7.4%. The question now is - how long would it take for the number to fall another 0.4% ? It comes as a bit of a surprise to many, but the decline in the unemployment rate since the peak in 2009 has been remarkably linear. And a linear projection puts the 7.0% unemployment rate in Q1 of next year.That means if the Fed starts curtailing its purchases in September, the monthly reductions will need to be around $14 billion to hit that target. Of course another very realistic scenario is that the decline in the unemployment rate will slow. In that case we could see the target rate reached in Q2, 2014, making the monthly reduction requirement more gradual. What is clear is that the Fed does not want to spook the markets by suddenly ending the purchases. That makes the central bank more likely to start soon to make sure the FOMC doesn't end up with a 7% unemployment rate on their hands long before the purchases are wound down.

Some Thoughts on the Dual Mandate: Right Goals, Wrong Agency?Stephanie Kelton - The statutory objectives for monetary policy known as the “dual mandate” were imposed by Congress as part of the the Federal Reserve by Act of 1913.  The mandate charges the Federal Reserve with responsibility for achieving two broad macroeconomic goals: “maximum employment and stable prices.” Much has been made (especially by those on the left) of the benefits of having a dual mandate.  In contrast to the European Central Bank, which operates with a single mandate — price stability — the dual mandate is supposed to ensure a more balanced outcome in the public’s interest. As Matt Yglesias put it: The idea of a “dual mandate” to pursue both price stability and maximum employment is that even if a pure look at inflation would lead the Fed to want tighter money, it ought to check out the employment situation and think twice before tightening if joblessness is widespread. But not everyone is so enamored with the idea of requiring the Fed to care as much about fighting unemployment as it does about restraining inflation. For example, not a single Republican expressed support for the dual mandate when the issue came up during a presidential debate. Former Fed Chairman Paul Volker recently made a similar (but far more nuanced) argument with respect to the dual mandate. find that mandate both operationally confusing and ultimately illusory. It is operationally confusing in breeding incessant debate in the Fed and the markets about which way policy should lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic. .Anyway, my point is this.  Nearly everyone seems to believe one or both of the following: (1) high levels of employment and low rates of inflation are worthwhile goals; and (2) the Fed is the right agency to deliver on these goals. I don’t dispute the former, but I often wonder about the latter.  Heck, even the current Fed Chairman sometimes sounds unconvinced.  Here’s an exasperated Ben Bernanke confessing that, despite the extraordinary steps the Fed has taken to expedite the recovery, monetary policy is “not even the ideal tool.”

The Two-Headed Central Bankista Coin -- Stephanie Kelton -- Like all good Central Bankistas, Charles Evans (Chicago Fed) and Dennis Lockhart (Atlanta Fed) insist that if the Fed isn’t achieving its stated (employment and inflation) objectives, then it just isn’t doing monetary policy the right way.  The flip side of the Central Bankista position is that whenever the macro data are more-or-less consistent with Fed targets, it must necessarily mean that central bankers have gotten it right.  Nothing else, least of all fiscal stimulus/austerity, could possibly deserve credit (or blame) for whatever is happening at the macro level.  It’s heads monetary policy succeeded, tails monetary policy failed.  It also explains why Paul Volker’s policies are still widely credited for bringing an end to double-digit inflation, while President Carter’s deregulation of the natural gas industry (which finally brought energy prices down) doesn’t even merit a footnote in the textbooks.

Stephanie Kelton: Reading Between the Lines – A Memo from Fed Chairman Marriner Eccles - from naked capitalism - After I shared a few thoughts on the impending decision to replace Ben Bernanke as Chairman of the Federal Reserve, I couldn’t help revisiting the writings of Marriner Eccles, head of the Federal Reserve until 1948. The following memo – written May 19, 1938 – gives you a flavor of the way Eccles thought about important issues related to financial stability and macroeconomic policy. What he doesn’t say is at least as important as what he does. For those who struggle with econo-speak, my own plain-speak is interspersed throughout. As a general principle, deficit-spending by the government should only be undertaken in depressed times as a means of offsetting in part or compensating for the lack of private activity. Conversely, when private debt is rapidly expanding, there should be a contraction of public debt as a counterbalancing and stabilizing influence. KELTON: The government is a partner in the economy. When the private sector tightens its belt (i.e. borrows and spends less money), it is fiscally responsible for the government to compensate by loosening its belt. (This, by the way, is exactly what ended the Great Depression and, more recently, what halted the Great Recession.)

Fed Belongs to Everybody as Public Says It’s Our Money in Crisis - The unprecedented frenzy surrounding Federal Reserve Chairman Ben S. Bernanke’s potential successor shows that Americans won’t let the central bank go back to its opaque and secretive ways. The backlash that resulted from Bernanke’s bailouts during the financial crisis and his record expansion of the Fed’s balance sheet has pushed the central bank toward openness at the fastest pace in its 100-year history. His introduction of regular press conferences in 2011 is just one of his recent initiatives.That scrutiny has persisted as the U.S. economy has struggled to gain momentum and led to an unparalleled public debate over the next chairman, according to Sarah Binder, a senior fellow at the Brookings Institution in Washington who researches the relationship between the Fed and Congress. The central bank’s decision to adopt unconventional policies has “heightened consequences of what the Fed does and who leads it,” Binder said. Such action “has so much impact on the economy and people’s lives.”

The Federal Reserve System is nuts. Here’s how we could remake it. - The Federal Reserve System makes no sense. Oh, sure, you can understand why in a country as large as the United States you might want the central bank to be a bit, er, decentralized. That’s why most of the Fed’s work — regulating banks, clearing checks, making cash available to the banking system — is actually carried out by a dozen Federal Reserve banks across the nation. Here’s the map of where they are and the zones they cover: But the cities those banks are actually based in seems a little, er, idiosyncratic. Richmond, no banking capital, gets a reserve bank, but Charlotte, home of Bank of America, doesn’t. Plenty of states are divided in half, which just seems unnecessary; why should one Louisiana bank be regulated by the Atlanta Fed while one in the next county over is regulated out of Dallas? One state, Missouri, has two reserve banks (St. Louis and Kansas City), while highly populous Florida doesn’t have one at all. The San Francisco Fed, which covers the entire U.S. west of Colorado, served 19 percent of the population as of 2000, while the Minneapolis Fed served 3 percent. Here is the full breakdown of the relative populations of the 12 reserve districts:

As Wages and Hours Stagnate and Lag Inflation, Fed Declares Victory and Goes Home - As they wallow happily in their Fed generated stock market profits, employers continue to successfully squeeze the powerless US working class. The BLS reported Friday that average hourly earnings rose by 1.2%  on a yearly basis to $23.81 in July. The annual rate of increase fell from 2.8% in June and 2% in May.  The rate of increase in average wages has fluctuated from 1% to 2.9% since 2010, averaging around 2%. It is now below that level after mostly weaker readings over the post 10 months. Meanwhile the June CPI rose by 2.9% on an annual basis, showing just how badly workers are getting squeezed. Furthermore 2.9% grossly understates the real rate of inflation due to the way the government suppresses the inflation gauge. Contrast the wage gain with the 22% gain in equity prices over the past year and you where the Fed’s QE is working and where it isn’t. Average weekly earnings look even worse than the hourly rate. They fell by 0.2% year to year, down from a strong gain of 4.3% in June. The drop was exacerbated by a drop in average weekly hours worked. The reported job gains in July must be seen in that perspective. There were more jobs with less hours and lower pay. That’s been the pattern over the past two years.  The 12 month moving average in average weekly earnings has dropped from around 3% in 2011 to around 1.9% now. Contrast that with the 2.9% rise in reported inflation, which was actually much larger, and it paints a clear picture of just how badly the US economy is doing for the vast majority of Americans.

QE3: the act of doing the same thing and expecting different results - As we approach the first anniversary of the Fed's monetary expansion effort (QE3), it's worth comparing the success of the current program with that of 2010-11 (QE2). At this stage the two are roughly equivalent in growing bank reserves. >Note: The official start dates were a bit different but the announcements took place around the same time In fact just in the past few weeks the QE3-induced reserve growth exceeded that of QE2, as the total bank reserves (commercial banks' deposits with the Federal Reserve banks) move above $2 trillion (and the US monetary base moves above $3.2 trillion).The key to these programs' effectiveness is their impact on credit growth. Here is the comparison. One could presumably argue that QE2 resulted in stemming the credit contraction taking place in 2010. It's hard to make that argument for QE3.

Zombie Companies Live!… thanks to QE - Let me start by saying that I do not support the loose monetary policy of Quantitative Easing by the Federal Reserve. Supporters of QE say that it is required because there is so much slack in the economy. They say that we are far below the CBO projection of potential real GDP. Thus, the monetary policy must find a way to lower real interest rates to encourage investment. My problem with this view is that effective demand will put a limit on real GDP below the CBO projection of potential real GDP. (see prior post) The benefits they see from pushing loose monetary policy are much more than what I see as possible. The risks of QE are therefore relatively greater. Supporters of QE also point to high unemployment. The implication is that we need to support business in any way possible to create jobs. I have a problem with this view too. From my calculation, unemployment will be between 6.5% to 7.0% on a quarterly basis when the effective demand limit is reached.  The perceived benefits of QE to lower unemployment below 6.5% are not attainable in my view. On the other hand, people who do not support QE normally point to the danger of high inflation. I don’t agree with this view either. There simply isn’t enough wage growth to provide demand for higher inflation. Also there isn’t enough upside to capital utilization to support an increasing inflation. Capital utilization will also be limited at the effective demand limit in the 79% to 80% range.

Is it possible to raise the inflation target? - I want you to imagine that, after much analysis, a clear majority of the macroeconomics profession decided that it was a good idea. This post is about imperfections in representative democracy and what policy design can do about it, so I need you to go along with me in this thought experiment. You should be able to, for whatever your views on the optimal inflation target, you must be able to imagine the possibility that - for example - the frequency of ZLB episodes and their costs meant that a higher inflation target became optimal. [1] Like many economics seminars these days, before I get a chance to talk about this you could raise another objection. Has Japan not shown that it is possible to raise the inflation target? Of course it has, but think about the circumstances. Japan moved from a high growth economy to near stagnation in 1990. It has taken nearly 25 years for the political process to realise that maybe this might have something to do with having a monetary policy that seemed content with zero inflation. As Paul Krugman would be the first to remind you, it is not as if no one told them what the problem might be. So it seems to me Japan shows why my question is a very good one: despite what would appear to be a macroeconomic disaster, it took two decades before the political process tried a fairly obvious remedy (moving the inflation target to the same level as the US and UK!).

Remembering the Wrongness - Paul Krugman - I harp a lot in this blog on the wrongness of the inflation-and-soaring rates crowd — and I do so with a purpose. The reason Very Serious People have so much damaging influence is that they come across as, well, Very Serious; yet they have in fact been not just wrong but ludicrously so, and pointing that out, repeatedly, is one way to help get our economic conversation back on track. And it’s worth emphasizing, again, that we’re not talking about small errors — 1 percent growth when they said 2, or something. We’re talking about epic mistakes. So I was glad to be reminded by Brad DeLong of the fact that in early 2009 it wasn’t just gold bugs warning that hyperinflation was nigh; the same message was being conveyed by the likes of Morgan Stanley: With policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation. While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view.  Later that year Morgan Stanley issued an interest rate forecast: the 10-year Treasury yield to rise to 5.5 percent by the end of 2010. We shouldn’t forget these errors, and the people who made them; they are crucial in evaluating who’s credible now.

No Inflation Yet - Back on May 28th, I wrote an article entitled, Charts Imply the Threat of Deflation is Still Present. This is an update of the various charts that I am hoping will provide insight into the inflation/deflation debate. The interpretation of these charts should provide another gauge of inflation, and will complement the analysis of governmental reports. After reviewing these charts, it appears to me inflation remains in check. The first chart is the Goldman Sachs Commodity Index. The bearish trend channel pattern, shown in red, remains intact. It's hard to imagine inflation without commodities in a bull market. We should continue to watch this chart for any upside break-out.  The next chart is wheat futures. You can clearly see how wheat futures have indeed broken beneath bullish trend channel support. However, I will wait until wheat futures break $6.00 to call a bear market for wheat.As you'll next see, crude oil futures are inflation's only supporter in this analysis, and not a very strong one at that. The downward sloping bearish red trend line has been broken, but I think the more dominant trend is a sideways consolidation between $75.00/barrel and $115.00/barrel area. If I'm correct, then crude oil futures have consolidated sideways since the beginning of 2011, and are not yet forecasting inflation.

What Paul Krugman is getting wrong… Paul Krugman posted an article today… “What Janet Yellen — And Everyone Else — Got Wrong“. But there is something he is getting wrong too, or at least, doesn’t seem to be aware he is getting it wrong. He talks about the economic recovery having been so sluggish. And he offers this explanation…“The best explanation, I think, lies in the debt overhang… And I would argue that this debt overhang has held back spending even though financial markets are operating more or less normally again.”There is a deeper cause that he is not mentioning. What appears to be low demand is actually the symptom of lower labor share muting the money multiplier effect of investment. Paul Krugman knows that the “financial markets are operating more or less normally again”, as he says above. Yet, he seems unaware of how lowering labor share will lower the equilibrium level of real GDP, thus muting the ability of investment to expand through the economy.  I argue that the explanation has to do with labor share falling 5% since the crisis. I provided a simple model yesterday showing the dynamic of how a lower labor share leads to a lower equilibrium level of GDP… “Labor share affects the potential of investment to raise GDP“. The lower equilibrium level of real GDP creates a condition where investment returns to business with a smaller money multiplier. What we see then is sluggishness in the economy even though the financial markets are working fine.

Let’s Debase the Dollar! - A lot of people, especially conservatives, complain about the so-called debasement of the U.S. dollar. For example, Craig R. Smith wrote a book last year that claims the value of the dollar has fallen by 98% in the 100 years since the income tax and Federal Reserve were established in 1913. He predicts terrible economic calamity will be the result of this debasement. Smith is not alone in this view; evidently Rep. Paul Ryan shares it, too.  Mind you, this is a slight overstatement according to Bureau of Labor Statistics (BLS) inflation data (, series CUUR0000SA0, set date range for 1913 to 2013). This shows that the Consumer Price Index has increased from 9.8 in January 2013 to 233.5 in June 2013, which implies a decline in the dollar’s purchasing power of only 96%. To put it another way, according to the BLS, today’s dollar is worth 4 1913 cents, while Smith says it only worth half as much, 2 1913 cents. Either way, sounds pretty awful, right? Of course not. This is another example of something I wrote almost two years ago: “When someone tries to get you to focus on only one part of a complicated picture, it’s a safe assumption they are trying to mislead you.” The most obvious omission of the “debasement lobby” is the fact that pay levels have risen a lot since 1913. A single dollar does not buy as much as it did in 1913, but people get paid a whole lot more dollars per hour/week/year than they did, then, too!

Update: Recovery Measures - Following the release of the comprehensive revision for GDP, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments.  Note: The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. Two of the indicators are back (or close) to pre-recession levels (GDP and Personal Income less Transfer Payments), and two indicators are still below the pre-recession peaks (employment and industrial production). The first graph is for real GDP through Q2 2013. Real GDP returned to the pre-recession peak in Q2 2011, and has hit new post-recession highs for nine consecutive quarters. Real personal income less transfer payments surged in December due to a one time surge in income as some high income earners accelerated earnings to avoid higher taxes in 2013 (I've left December out going forward).   Real personal income less transfer payments declined sharply in January (as expected), and are now close to the pre-recession peak. The third graph is for industrial production through June 2013. Industrial production was off 16.9% at the trough in June 2009, and was initially one of the stronger performing sectors during the recovery. However industrial production is still 1.7% below the pre-recession peak.  The final graph is for employment and is through July 2013.  Payroll employment is still 1.5% below the pre-recession peak and will probably be back to pre-recession levels in 2014.

Q2 2013 GDP Details: Single Family investment increases, Commercial Investment very Low - The BEA released the underlying details for the Q2 advance GDP report this afternoon. The first graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, Brokers’ commissions and other ownership transfer costs, and a few minor categories (dormitories, manufactured homes). A few key points: 1) Usually the most important components are investment in single family structures followed by home improvement. However home improvement has been the top category for nineteen consecutive quarters, but that is about to change. Investment in single family structures should be the top category again soon.

  1. 2) Even though investment in single family structures has increased significantly from the bottom, single family investment is still very low - and still below the bottom for previous recessions. I expect further increases over the next few years.
  2. 3) Look at the contribution from Brokers’ commissions and other ownership transfer costs. This is the category mostly related to existing home sales (this is the contribution to GDP from existing home sales). If existing home sales are flat, or even decline due to fewer foreclosures, this will have little impact on total residential investment.

Investment in home improvement was at a $171 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (about 1.0% of GDP), still above the level of investment in single family structures of $167 billion (SAAR) (also 1.0% of GDP). Single family structure investment will probably overtake home improvement as the largest category of residential investment in the next quarter or so. The second graph shows investment in offices, malls and lodging as a percent of GDP. Office, mall and lodging investment has increased recently, but from a very low level.

U.S. Companies Thrive as Workers Fall Behind - AMERICAN companies are more profitable than ever — and more profitable than we thought they were before the government revised the national income accounts last week. Wage earners are making less than we thought, in part because the government now thinks it was overestimating the amount of income not reported by taxpayers. The major change in the latest comprehensive revision of the national income and product accounts — known as NIPA to statistics aficionados — is to treat research and development spending as an investment, similar to the way the purchase of a new machine tool would be treated by a manufacturer, rather than as an expense. That investment is then written down over a number of years. The result is to make the size of the economy, the gross domestic product, look bigger, and to appear to be growing faster, in years when new research spending is greater than the amount being written down from previous years. For the same reason, corporate profits also look better in those years. A lot of money is spent on research and development. Nicole Mayerhauser, the chief of the national income and wealth division of the Bureau of Economic Analysis, which compiles the figures, said that in 2012 the total was $418 billion, about one-third of which was spent by governments. That amounted to about 2.6 percent of G.D.P.  The other major conceptual change deals with pensions. Until now, corporate and government contributions to pension plans were counted as personal income only when the contributions were made. Under the revision, the government estimates how much should have been contributed to meet the promises made to workers, and counts that amount, whether it is higher or lower than the amount actually put into the pension plan. That causes personal income to appear larger in years when pension contributions are lower than they should be.

US GDP Growth Since June 2009; PCEs - According to the NBER, the recession ended in June 2009.  The above graph shows the quarterly percentage change in growth since 2009 and also shows how personal consumption expenditures have added to that growth.  What we see is a fairly consistent pattern of PCEs adding to GDP growth since 3Q09. Let's look at the components of PCEs: Above is a chart that shows the percentage change in the three main PCE components: durable goods (blue), non-durable goods (gold) and services (light green).  Service consumption (which accounts for about 65% of PCEs overall) has been strong since 1Q2010 while durables (which account for about 10% of PCEs) have been strong for five of the last six quarters.  Non-durables have been pretty weak throughout.  

U.S. GDP likely to get boost from smaller trade gap  (Reuters) - The U.S. economy likely grew faster than initially reported in the second quarter, thanks to a sharp narrowing in the trade deficit to its lowest in more than 3-1/2 years in June as exports touched a record high and imports fell. The Commerce Department said on Tuesday the trade gap fell 22.4 percent to $34.2 billion, the smallest since October 2009. The percentage decline was the largest since February 2009. The shortfall on the trade balance was $44.1 billion in May. When adjusted for inflation, the gap narrowed 17 percent to $43.2 billion, the smallest since January 2010. The deficit in June was far smaller than the government had estimated in its advance gross domestic product report last week. Economists, who had expected the trade gap to narrow only to $43.5 billion in June, said second-quarter GDP growth could be revised up to as high as an annual pace of 2.5 percent from the 1.7 percent rate initially estimated by the government. "Today's surprise implies a significant upward revision to second-quarter GDP," "Our calculations suggest an implied revision of roughly plus 0.8 percentage point and our tracking estimate of second-quarter GDP growth is now 2.5 percent." Economists had on Friday raised their growth estimates for the April-June period by a tenth of percentage point after data on factory orders showed a slightly higher pace of inventory accumulation in June than the government had assumed in its advance GDP growth estimate.

Inventories Drop Trims Some of Trade Bounce Off Q2 Growth Forecast -- Unexpected weakness in wholesale inventories in June has slightly tempered optimism toward upcoming revisions of U.S. economic growth for the second quarter. Wholesale inventories fell 0.2% to a seasonally adjusted $499.68 billion, the Commerce Department said Friday, a worse outcome than the 0.5% rise economists had been expecting. A rise in inventories represents an increase in unsold production and adds to gross domestic product. A fall in inventories means companies are selling goods that were produced in an earlier period, so production for the current period is lowered by a corresponding amount. Wholesalers account for almost one-third of all business inventories in the U.S., with manufacturers and the retailers making up the rest. The Commerce Department last week estimated GDP expanded at a 1.7% annual rate in the first quarter, but it will be revising that number in the coming weeks. Data released earlier this week, showing a substantial narrowing of the U.S. trade gap in June, indicated second-quarter GDP growth could get a healthy upgrade. But after the June wholesale inventory numbers, many analysts lowered their forecasts slightly. Economists at Barclays lowered their second-quarter GDP forecast to 2.4% from 2.5%, while J.P. Morgan lowered its forecast to 2.2% from 2.3%.

Will the Second Half Print Strong Growth? - There's a lot of very conflicting information on the US economy right now.  On the negative side we have the sequester and the potential for yet another government shutdown or threat thereof.  Wage growth is weak, higher interest rates are hurting the housing recovery and the employment situation is marginal at best. But two reports last week hint at a far stronger economic environment in the second half.  Let's start with the ISM manufacturing report. The PMI™ registered 55.4 percent, an increase of 4.5 percentage points from June's reading of 50.9 percent. June's PMI™ reading, the highest of the year, indicates expansion in the manufacturing sector for the second consecutive month. The New Orders Index increased in July by 6.4 percentage points to 58.3 percent, and the Production Index increased by 11.6 percentage points to 65 percent. The Employment Index registered 54.4 percent, an increase of 5.7 percentage points compared to June's reading of 48.7 percent. The Prices Index registered 49 percent, decreasing 3.5 percentage points from June, indicating that overall raw materials prices decreased from last month."  The chart above shows the overall trend for manufacturing was decreasing for about a year, with several recent readings below the 50 line the delineates between expansion and contraction.  However, the latest reading is incredibly strong relative to the recent trend.   Let's turn to the services index: "The NMI™ registered 56 percent in July, 3.8 percentage points higher than the 52.2 percent registered in June. This indicates continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 60.4 percent, which is 8.7 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 48th consecutive month. The New Orders Index increased significantly by 6.9 percentage points to 57.7 percent, and the Employment Index decreased 1.5 percentage points to 53.2 percent, indicating growth in employment for the 12th consecutive month.

Another Bad Story Bites The Dust - Paul Krugman  - One of the remarkable things about the ongoing economic crisis is the endless search for explanations of something that’s actually quite simple — the sluggish pace of recovery. You have a large overhang of private debt; you have a still-depressed housing sector; and you have contractionary fiscal policy. Add to this the well-established fact that recovery tends to be slow after recessions caused not by tight money but by private-sector overreach, and there’s just no mystery that needs explaining.Yet we’ve seen an endless series of analyses declaring that there is indeed a deep mystery, and it must be Obama’s Fault. Probably the most influential of these analyses was the claim that Obama was creating “uncertainty”, and this was holding everything back.  Larry Mishel did a thorough debunking of this meme almost two years ago. And sure enough, the index of uncertainty that everyone was pointing to has plunged, with no visible boost to the economy. Will anyone who bought into this story engage in some serious self-analysis? Why am I even asking?

Whatever Happened to the Economic Policy Uncertainty Index? - Jim Tankersley looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013. And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen? I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around. Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and "harmful rhetorical attacks on business and millionaires" were the cause of prolongued economic weakness.) As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well.

Uncertainty Isn't Killing the Recovery - Why do we know the slow recovery isn't about uncertainty? For one, investment other than residential investment has already recovered from the crash. It's the long shadow of the housing bust, not regulation, that's the problem. For another, as Jim Tankersley of the Washington Post points out, uncertainty has actually fallen a lot the past few months, but hiring hasn't picked up. Okay, but how do you measure uncertainty? That seems, well, uncertain. And it is. But Scott Baker and Nick Bloom of Stanford and Stephen Davis of the University of Chicago have tried to put a number on it. Their Economic Policy Uncertainty index looks at how many expiring taxes and new regulations there are, how often major newspapers talk about "uncertainty," and how much professional forecasters disagree about future inflation and spending to quantify it all. It's a simple enough idea, and there should be a simple enough relationship if it really does tell us anything useful: The more uncertainty there is, the less hiring there should be. And that's exactly what their data show going back to 1985 -- but not now. It's admittedly a tiny sample size, but as you can see below, there's actually been a very weak, but positive, relationship between the two since 2008. More uncertainty, more jobs? (Note: The yellow dots show the last six months since the fiscal cliff was sorted out).

Phony Fear Factor, by Paul Krugman - We live in a golden age of economic debunkery; fallacious doctrines have been dropping like flies. No, monetary expansion needn’t cause hyperinflation. No, budget deficits in a depressed economy don’t cause soaring interest rates. No, slashing spending doesn’t create jobs. No, economic growth doesn’t collapse when debt exceeds 90 percent of G.D.P. And now the latest myth bites the dust: No, “economic policy uncertainty” ... isn’t holding back the recovery. ...Actually, this happened in two stages. Soon after it became famous, the proposed measure of uncertainty was shown to be almost comically flawed; for example, it relied in part on press mentions of “economic policy uncertainty,” which meant that the index automatically surged once that phrase became a Republican talking point. Then the index itself plunged, back to levels not seen since 2008, but the economy didn’t take off. It turns out that uncertainty wasn’t the problem. The truth is that we understand perfectly well why recovery has been slow, and confidence has nothing to do with it. What we’re looking at, instead, is the normal aftermath of a debt-fueled asset bubble; the sluggish U.S. recovery since 2009 is more or less in line with many historical examples, running all the way back to the Panic of 1893. Furthermore, the recovery has been hobbled by spending cuts — cuts that were motivated by what we now know was completely wrongheaded deficit panic.

US debt six times greater than declared - study - The United States has accumulated over $70 trillion in unreported debt, an amount nearly six times the declared figure, according to a new study by University of California-San Diego economics Professor James Hamilton. The unique aspect of Hamilton’s study  is that he examines federal debt that has not been publicly released, specifically the government’s support for “housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds.” Since the global economy hit rock bottom in 2008, US federal debt has gone through the roof, increasing from $5 trillion to an estimated $12 trillion in 2013. Meeting the interest payments alone on that debt burden presents a formidable challenge for US taxpayers: In addition to the debt, Americans must pay back around $220 billion annually just in interest.  And with interest rates set to rise from their historic lows, Americans will be confronted with a significantly higher bill in the future. In fact, the Congressional Budget Office anticipates that net interest expense on US federal debt will exceed the entire defense budget by 2021.

Budget deficit reaches $606 billion for the year - The nonpartisan Congressional Budget Office on Wednesday estimated the federal budget deficit to be $606 billion through the first 10 months of fiscal 2013. That represents a decline of $368 billion from last year, when the deficit was already near $1 trillion by the end of July. The government is on track to record the lowest deficit of the Obama era and the first annual deficit below $1 trillion. The CBO said that by the time the fiscal year ends Sept. 30, the final deficit should clock in at less than the $642 billion level the CBO forecast in May. The continued downward path for the deficit has emboldened liberals to call for increased stimulus spending in order to combat unemployment, which stands at 7.4 percent. Republicans say spending remains too high and can point to the fact most of the deficit reduction comes from higher taxes that they say is hurting growth. For the first 10 months of 2013, tax revenue is up 14 percent. Revenue from October through July reached $2.3 trillion, an increase of $278 billion. Individual income taxes are up 17 percent in the wake of the New Year’s Eve "fiscal-cliff" deal that allowed Bush-era tax rates to expire for families making more than $450,000 annually.

Shrinking US deficit update, and a new debt ceiling projection | FT Alphaville:  From a note this morning by economists at Barclays: The US federal budget deficit has been improving at a dramatic pace in recent months. As a percent of GDP, the deficit peaked at 10.2% of GDP in the four quarters ending in Q4 09; over the past four quarters, it has totaled 4.2% of GDP, down from 7.7% one year earlier. The 3.5% of GDP improvement over the past year has been faster than at any point since the mid-1950s, when monthly data became available (Figure 1). In dollar terms, the Congressional Budget Office estimates for the July fiscal balance (which will be released next week) suggest that the deficit totaled $722bn in the 12 months ending in July, down from a peak of $1.471trn in December 2009; we now expect the deficit to total $650bn in FY 13 and $550bn in FY14, both down by $100bn relative to our previous forecast. The deficit narrowing driven by improving revenues and lower outlays What accounts for the dramatic recent narrowing of the deficit? It is a result of a number of factors. Revenues have risen from a Q4 09 trough of 14.2% of GDP to 16.5% in Q2 13, while outlays have fallen from a peak of 24.1% of GDP to 20.7% in Q2 13 (Figure 2). The increase in revenue is mainly driven by an improvement in individual income tax revenues (Figure 3), which are climbing for several reasons. Wage and salary income is rising moderately, due to growth in jobs and hours worked. Capital gains income is likely being driven higher by the rising stock market. Some wage, dividend, and capital gains income was probably shifted into late 2012 to avoid the tax increases that were put in place in January 2013.

Update: The Shrinking Deficit - An excerpt from a post by Cardiff Garcia at FT Alphaville: Shrinking US deficit update, and a new debt ceiling projection From a note this morning by economists at Barclays:The US federal budget deficit has been improving at a dramatic pace in recent months. As a percent of GDP, the deficit peaked at 10.2% of GDP in the four quarters ending in Q4 09; over the past four quarters, it has totaled 4.2% of GDP, down from 7.7% one year earlier.On Monday, the Treasury will release the monthly update of the Federal Government deficit for July. The report is expected to show that the deficit for the current calendar year will be close to the Congressional Budget Office's (CBO) projections in May.   The CBO already released their Monthly Budget Review for July 2013The federal government incurred a deficit of $96 billion in July 2013, CBO estimates, $27 billion more than the shortfall in the same month last year. But that comparison is distorted by quirks of the calendar: Because July 1, 2012, fell on a Sunday, certain payments that ordinarily would have been made in July were made earlier, reducing outlays in July 2012 by about $36 billion. No such payment shift occurred in July 2013. Without that shift in the timing of payments in 2012, the deficit for July 2013 would have been $10 billion less than the deficit for July 2012. Watch out for reports that don't mention the timing issue! This graph, based on the CBO's May projections, shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.

Paul Volcker Will Not Quite Say What He Means… - Brad DeLong - Paul Volcker wants to say six things:

  1. The Federal Reserve needs to become the single centralized boss regulator of the American financial sector.
  2. If the Federal Reserve has a single mandate to maintain price stability, it is highly likely to also be able to conduct effective countercyclical policy to achieve maximum employment.
  3. If the Federal Reserve takes its "dual mandate" seriously, it is likely to fail at both parts of the objective.
  4. Both Quantitative Easing and forward guidance promising extremely low interest rates need to end soon.
  5. The Federal Reserve cannot compensate for failures of policy outside its proper domain and fix the problem that the economy is depressed, and should not try.
  6. The fact that the economy is depressed is principally the fault of the Republicans in congress blocking sensible fiscal policies.

But only if you already know that Volcker believes (6) will you understand that this sentence: Asked to do too much--for example, to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth, and full employment--it will inevitably fall short. is (6).

Why Republicans Want Jobs to Stay Anemic - Robert Reich -  Job-growth is sputtering. So why, exactly, do regressive Republicans continue to say “no" to every idea for boosting it — even last week’s almost absurdly modest proposal by President Obama to combine corporate tax cuts with increased spending on roads and other public works?  It could be they just want to continue opposing anything Obama proposes, but that’s beginning to seem like a stretch. . The real answer, I think, is they and their patrons want unemployment to remain high and job-growth to sputter. Why? Three reasons:First, high unemployment keeps wages down. Workers who are worried about losing their jobs settle for whatever they can get — which is why hourly earnings keep dropping. Second, high unemployment fuels the bull market on Wall Street. That’s because the Fed is committed to buying long-term bonds as long as unemployment remains high. This keeps bond yields low and pushes investors into equities — which helps boosts executive pay and Wall Street commissions, thereby keeping regressives’ financial sponsors happy.  Third, high unemployment keeps most Americans economically fearful and financially insecure. This sets them up to believe regressive lies — that their biggest worry should be that “big government" will tax away the little they have and give it to “undeserving" minorities; that they should support low taxes on corporations and wealthy “job creators;" and that new immigrants threaten their jobs.

Budget Bedlam This Fall - As a federal budget wonk, I was especially and repeatedly put on the spot by friends, reporters and clients about what's going to happen after Labor Day. The basic answer is (1) I don't know, and (2) anyone who tells you he or she does isn't telling you the truth. Here are the key elements about what's ahead...or not ahead...on the budget when Congress returns to Washington in September.

  • 1. Debt Ceiling. I'm listing this first only because it's not something that that has to be dealt with immediately. Yes, the debt ceiling will have to be raised at some point, but the latest word from the Treasury is that the "extraordinary measures" it can take to delay the day of reckoning will last into November. In other words, as much as the White House might like to get this out of the way, there's no rush.That's not to say that Congress and the White House couldn't work something out on the debt ceiling in September. But the likelihood of them doing a deal before it's absolutely needed is as small as me not needing my air conditioner in Washington this month.
  • 2. Government Shutdown. It's important to note that I'm not labeling this "fiscal 2014 appropriations." The truth is that none of the individual appropriations bills -- the legislation that supposed to be signed into law before the fiscal year begins -- have any real chance of being enacted by October 1. That means we're talking about a continuing resolution...or a shutdown.

Government Shutdown? Odds Are Uncomfortably High - It's going to be another ugly fall in Washington.The federal government runs out of money on Oct. 1, unless spending authority is granted to agencies for the new fiscal year. If Congress can't pass its spending bills by then, most of the government will shut down.It's no empty threat. Many who watch the budget process closely think there's a very good chance that's exactly what's going to happen."I'm afraid it's more likely than not," says Scott Lilly, a former Democratic staff director on the House Appropriations Committee. "How much time has to pass before Congress finds out that people are really angry?"Action in both the Senate and House prior to the current congressional recess suggests that any sort of a deal is a long way away. And the two chambers will be in session together a total of only nine days before the deadline.The House and Senate are currently about $90 billion apart in terms of total spending. As if that wasn't challenging enough, Congress will also have to grapple with the politically charged issue of raising the nation's debt ceiling sometime in the fall.

The Sequester Impact - A common discussion in recent months and quarters has been the impact, or lack thereof, of the federal sequester. For the most part employment continues to grow nationally in the 150-200k range each month and while GDP has been sub-par, there generally haven’t been too many direct things one can point at and say the sequester is impacting it. On top of this remains the fact that most Americans do not know whether or not the sequester is a good or bad thing for the country. Well, if you dig a little bit deeper into the numbers, as the New York Times’ Catherine Rampell has in recent months, you can see clear signs of the sequester’s impact. Both in the public and private sectors. Ms. Rampell has been doing the best analysis I’ve seen out there on this and I have directly borrowed one of her graphs and one of her research ideas below. First there is the federal workforce. Two direct impacts are seen in the data here: actual employment reductions and more part-time workers due to furloughs. Both of these items have direct labor market and economic impacts as they result in less wages and less jobs immediately. Employment cuts at the Department of Defense averaged 1,200 per month in 2012 yet that has accelerated to 2,500 in the 3 months since the sequester officially has been in place. Across other federal agencies (excluding hospitals and the postal service) the cuts have accelerated even further, from 1,600 in 2012 to 5,100 in recent months.The second graph below, borrowed from Ms Rampell’s blog post the other day shows the dramatic increase in part-time federal workers for economic reasons (i.e. furloughs). All through 2013, these workers have been larger than in recent years and in June there were 3 times as many as in 2011 and 2012 and in July it was nearly 4 times as many.

More on Sequestration’s Effects on the Private Sector - Back in June I wrote about the private industries whose employment was most dependent on defense funds, and which were therefore most likely to suffer from sequestration.  Over at the Oregon Office of Economic Analysis blog, Josh Lehner has taken this analysis further. He calculated the share of the work force in each state that is employed in five defense-sensitive industries.   Chart courtesy of Josh Lehner, Oregon Office of Economic Analysis. “Military dependent” employment refers to employment in top five private industries whose employment is sensitive to changes in defense spending (facilities support services; ship and boat building; aerospace product and parts manufacturing; scientific research and development services; and navigational, measuring, electromedical and control instruments manufacturing). He found that Washington State is ranked first in terms of share of employment reliant on military-dependent industries, followed by New Mexico. (In sheer numbers of military-reliant employees, California and Washington State are the top two.) He also charted the changes in the private sector over all versus those in just the defense-sensitive industries:

The Right cuts food stamps to pass corporate farm welfare--where's the sense in that?- Linda Beale - The House has its priorities firmly in mind.  Those priorities involve making sure that the wealthy people and corporations keep their wealth while any and all possible cuts to any welfare or "entitlement" programs are made. All you have to do is look at the right's emphasis on passing a farm bill (mostly aiding corporate farmers and gentlemanly nonfarmers) and on cutting food stamps to the nation's food-insecure. In June, the House proposed slashing $20 billion from food stamps and ended up passing a separate farm bill because it was so determined to cut aid to food-insecure Americans.  Now, the media is all concerned that a farm bill won't pass at all, because the right is insisting on doubling the cut to food aide--slashing $40 billion from the program.  See GOP Rush to Slash Food Stamps Puts Farm Bill in Jeopardy. These proposed cuts are draconian.  As those legislators who took the "live a week on food stamps" challenge learned, it is extraordinarily difficult, time-consuming, and unsatisfying to try to find sufficient food on a budget of $3.00 a day. And there are literally millions of Americans without enough food to live decently, and millions whose well-being will be jeopardized if Congress does not fund food stamps at an adequate level.  Food stamp recipients already faced difficulties because of the expiration of the stimulus provisions. A report released Thursday by the Center on Budget and Policy Priorities, which studies federal spending, found that the 47 million people who currently receive food stamps will see their benefits reduced in November because of an expiring provision in the stimulus bill passed in 2009 by a Democratic-controlled Congress.

The Year of Living Stupidly - Paul Krugman  - To this day, one often hears pundits and establishment types in general talking as if we had a clear distinction between the elite, who know How Things Work, and the great unwashed who need to be led to elite wisdom. The reality, however, is nothing like this. It’s true that there are crank doctrines — goldbuggery, the Laffer curve,etc. — that play a substantial role in popular opinion but have no traction with the elite. But the elite itself has spent much of the past five years committed to economic doctrines — the prevalence of structural unemployment, the urgency of deficit reduction and entitlement reform, the destructive effects of “uncertainty” — that may not be quite as contrary to the evidence as fears of hyperinflation just around the corner, but are pretty bad. And the influence of these doctrines has remained almost unscathed even though this past year should have driven them completely out of respectable discussion. It has, after all, been quite a year — not just the sea-change in professional opinion on structural unemployment, but the collapse of the expansionary austerity doctrine and its replacement by the view that multipliers are quite large, the collapse of the 90 percent debt threshold view, the plunging deficit and the vanishing of medium-term debt concerns, and more. Yet policy hasn’t changed at all, and elite views have hardly shifted. How is this possible? Wren-Lewis hits the main points: politicians seek out economists who reinforce their prejudices; news media are either propaganda organs or desperately afraid of declaring, in any straightforward way, that politicians are wrong, no matter how much what they say is at odds with the truth.

Doctrine of Mathematical Impossibilities - Specifically, the most persistent and destructive myth of our current political times is that the U.S. government must collect taxes from its citizens—or borrow Dollars from them—in order for the federal government to have Dollars to spend. The simple mathematics of this story are as staggeringly improbable as the farmer’s attempt to eat his pig without killing it: The annual gross national product (GDP) of the U.S. citizens is around $15 trillion—but how much of that can the federal government reasonably tax, on average, without so severely dampening household buying power that the economy contracts? Twenty percent, maybe? But that only generates $3 trillion in annual taxes—and Congress has already committed the federal government to spending $3.6 trillion! So there’s a shortfall of $600 billion—money the government (since it has no other source of revenue) will have to borrow. And so it goes, year after year, building up an enormous “deficit” which soon has an an annual interest payment that eats up most of the tax revenues, requiring the government to borrow even more money to cover its spending requirements. And this calculus doesn’t even factor in the spending that’s going to happen when the baby-boomers begin (very soon) to retire in masses, demanding their Social Security payments and Medicare services while no longer paying FICA taxes. Not to mention the fact we need to repair or rebuild some 18,000 bridges, along with a few other pieces of critical infrastructure (like water-mains and sewer plants) that folks regularly utilize to live their everyday American lives. It’s pretty clear, in other words, the poor pig is close to death, and we’re not even close to paying for all the things we really need, or would like to have as a prosperous nation.

The Right's Goal--end the one tax expenditure that truly aids poor working families – Linda Beale - The Tax Foundation, that propaganda tank that masquerades as a "nonpartisan" "think" tank, is at it again.  Now it's pushing the right-wing agenda of ending any tax expenditures that redistribute resources down to those in the lower-income distributions. It's produced a study on the "benefits" of eliminating the Earned Income Tax Credit that often makes the difference between food security and living in your car for the working poor.  Erik Wasson, Tax Foundation Charts Benefits of Ending Earned Income Tax Credit,   The Tax Foundation "study" includes various right-wing assumptions about the working poor and the benefits of tax cuts that are not empirically supportable.

  • 1) While conceding that the EITC helps the "really" poor, the Tax Foundation repeats the old right-wing saw that those working poor who aren't "really" poor will be disincentivized to work by having the EITC, in essence making that old Romney claim that the EITC is a "bad" policy because it provides aid to the poor, which will keep them from taking "personal responsibility" and thus keep them from getting those multiple jobs that would provide them the same sustainability that the EITC provides.
  • 2) Instead of giving the money to the poor, the Tax Foundation calculates that we could use it instead to provide a rate cut for those who pay taxes of about 5.7%.  Now that is outright redistribution upwards. 
  • 3) Oh, and the Tax Foundation makes their End EITC Now agenda even rosier by assuming a dynamic scoring of the elimination of the EITC--with those poor families not receiving needed aid, the Tax Foundation says the economy should grow by an additional $29 billion above and beyond the dollars saved that currently go to the EITC!    Jobs would flow from just cutting out this assistance for poor people.

Tax Foundation Gets It Backwards: EITC Boosts Employment and Work Effort - Rigorous and extensive research tells a success story we have explained about the Earned Income Tax Credit (EITC):  it boosts employment, reduces poverty, and improves the lives of millions of hard working, poor families.  And, recently, research has shown that the EITC’s benefits extend to the next generation through better school performance and greater work effort in adulthood. Despite the consensus that such mainstream research has reached, the Tax Foundation, well known for its ideological leanings, has issued a flawed study that concludes that the EITC’s phase-out at higher income levels “depresses the labor supply by more than the phase-in bolsters the labor supply.” That gets the EITC’s positive effects backwards — and flatly contradicts established research.  Repeated studies have shown that the EITC affects people’s decision whether to work, with the overall trend that it pulls people into the labor market and increases their after-tax income.  In contrast to the Tax Foundation’s assertion, evidence shows that the EITC’s phase-out doesn’t substantially reduce the number of hours of those who are already working.

EITC refund withheld in student loan default -- Jared Bernstein writes about the EITC today (Earned Income Tax Credit), which is a program to help lift people out of poverty when they fall into low-paying jobs. I just want to add another wrinkle to the story. When a student defaults on their student loans, which is something that will happen more and more in the future, any tax refund they might receive, including an EITC refund, will be kept by the IRS. The money will then be used to pay back the lender of that student loan. EITC will not work for students running into a poor jobs market. Wages are low. GDP has a lower equilibrium level. Unemployment will stay higher than in the past. And students are now leading the household credit increases with new student loans, along with car buyers.  At a time when students are increasing their debt and the economy is much less favorable to pay off those debts in the future, EITC will not be there for them.

The Sacrosanct Mortgage Interest Deduction - When people talk about “sacred cows” in the tax code, the deduction for mortgage interest is usually at the top of the list. But it is just one of many tax expenditures benefiting homeowners. Other important ones include the deduction for property taxes and low taxes on the gains from sales of primary residences. Contrary to popular belief, the mortgage interest deduction wasn’t adopted to encourage home ownership. The original income tax enacted in 1913 allowed a deduction for all interest on the theory that it was largely business-oriented. Renting was a much more common form of housing before World War II. According to the Census Bureau, in 1940 just 44 percent of the population were homeowners. As I noted last week, only 3 percent of the population paid any income taxes at the time, rising to 30 percent by the end of the war. While the rising percentage of Americans owning a home has paralleled the broadening of the income tax, there is surprisingly little hard evidence that the mortgage interest deduction has encouraged home ownership. The Harvard economists Edward L. Glaeser and Jesse M. Shapiro have found that it has only a trivial impact. A major reason is that the deduction has long been capitalized into the prices of homes. That is, home prices are higher than they would be without the deduction. Thus to the extent that the deduction encourages home ownership, it is exactly offset by the extent to which high prices discourage home ownership.

Manufacturing Tax Break Gone Wild - Putting wrapped candy bars and wine bottles into gift baskets constitutes manufacturing and qualifies for a reduced corporate income tax rate, a federal district court judge has held in what he called a case of first impression. While the 20-page opinion dismissing an IRS lawsuit seeking to recover $326,000 of refunds and interest has no precedential value, it is sure to be cited by any company seeking the section 199 deduction. The IRS's recovery action was dismissed in May, and it did not appeal. The judgment was entered July 23. Kenneth Silverberg, a tax partner in Nixon Peabody's Washington office who represented the plaintiffs, said neither he nor the three clients would comment. The case was first reported in a post at OC Weekly, an alternative online newspaper. Making hamburgers would qualify for a lowered tax rate on "manufacturing, production, growth or extraction" profits in section 199, under the reasoning applied by Judge James V. Selna. He held that arranging candy bars, wrapped cheese, wine bottles, and other items "creates a new product with a different demand" than grocery items have individually.

The Three Biggest Lies about Corporate Taxes - Robert Reich  - Instead of spending August on the beach, corporate lobbyists are readying arguments for when Congress returns in September about why corporate taxes should be lowered. But they’re lies. You need to know why so you can spread the truth.

  • Lie #1: U.S. corporate tax rates are higher than the tax rates of other big economies. Wrong. After deductions and tax credits, the average corporate tax rate in the U.S. is lower. According to the Congressional Research Service, the United States has an effective corporate tax rate of 27.1%, compared to an average of 27.7% in the other large economies of the world.
  • Lie #2: U.S. corporations need lower taxes in order to make investments in new jobs. Wrong again. Corporations are sitting on almost $2 trillion of cash they don’t know what to do with. The 1000 largest U.S. corporations alone are hoarding almost $1 trillion.  Rather than investing in expansion, they’re buying back their own stocks or raising dividends. They have no economic incentive to expand unless or until consumers want to buy more, but consumer spending is pinched because the middle class keeps shrinking and the median wage, adjusted for inflation, keeps dropping.
  • Lie #3: U.S. corporations need a tax break in order to be globally competitive. Baloney. The “competitiveness" of American corporations is becoming a meaningless term because most big U.S. corporations are no longer American companies at all. The biggest have been creating way more jobs abroad than in the U.S

FBI Finds Holes in System Protecting Economic Data - The Federal Bureau of Investigation has discovered vulnerabilities in the government's system for preventing market-moving economic reports from leaking to traders before public release. Law-enforcement officials found "a number of operational vulnerabilities" involving "black boxes" used by several departments to control the release of sensitive economic data such as the monthly unemployment rate, according to a report by the inspector general at the Commerce Department. The report said it was possible to subvert the system, which was designed to prevent media companies from sending economic data to traders early. The report, which was reviewed by The Wall Street Journal, is part of a broad law-enforcement inquiry into whether media firms or any of their employees are sending government data to traders before the agreed-upon embargoes expire, which could violate insider-trading laws. The black boxes are key to the government's control of the data. Media firms in the business of reporting economic data are required to connect their computers to the black boxes, which operate like a trapdoor, releasing articles and data streams when the embargoes lift. In theory, all the data should be released at the same time

Billionaire-Media, the End Game of Cartel-Capitalism - It’s only Wednesday and two major American newspapers, in separate transactions, have been purchased for cash by billionaires – in a fashion reminiscent of how they might shop for a bauble at Cartier. On Saturday, John Henry, hedge fund trader turned owner of the Boston Red Sox, bought the Boston Globe from the New York Times for $70 million in cash. Forbes puts Henry’s net worth at $1.5 billion as of March of this year. On Monday came the news that Jeffrey Bezos, CEO of online retailer, is purchasing the Washington Post for $250 million in cash. Forbes puts Bezos’ net worth at $25.2 billion as of March. Included in the Washington Post deal is the Post’s web site, the Express newspaper, Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Times, the Spanish-language newspaper El Tiempo Latino as well as a production and printing plant. The Post’s real estate is not included. Former U.S. Supreme Court Justice Louis Brandeis famously said, “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

Why are there so few financial activists? - It has been an enduring enigma to me as to why there is so little public activism around finance, given that there is activism in domains such as energy and agriculture. Yesterday, Brett Scott, one of the few financial activists I think achieves anything, spoke as part of the Dangerous Ideas series. Brett and I have very different backgrounds, exemplified the fact that  I come from the oil exploration business while Brett has a background in “deep ecology activism. Our point of contact appears to be that we agree that the financial system is a useful (natural) technology that needs to be well managed, rather than an “alien” and unnatural  system that should destroyed. I think the focus of this contact is that we share the view that finance should be “open source”, open to public participation.  As an activist Brad shows how individuals can ’hack’ finance, as an academic I try to help individuals understand the financial system in a coherent manner.  After his talk a small group continued the discussion in the sunshine.  A post doc psychologist and I discussed why there weren’t more financial activists  It has long perplexed me why finance does not attract the sort of public scrutiny that the energy and agricultural domains (for example) do.  The technological threats associated with climate change and GMOs are abstract in that the risks are yet to materialise, the risks of finace repeatedly realise themselves causing actual discomfort to millions of westerners (i.e. there is no issue that “it doesn’t matter they’re Belgians”). It can’t be because finance is “complicated”, hydraulic fracturing, nuclear waste storage and genetic modification are not exactly trivial.  It cannot be that finance is too close to power, until recently the energy industry was much wealthier and tighter with governments than finance.

US regulators 'find evidence' of banks fixing derivative rates -  US regulators have reportedly been handed evidence that traders at some of the world’s biggest banks manipulated a key rate for derivatives, pocketing millions at the expense of pension funds in the process.  The Commodity Futures Trading Commission (CFTC) is probing 15 banks over allegations that they instructed brokers to carry out trades that would move ISDAfix, the leading benchmark rate for interest rate swaps.  Pension funds and companies who invest in interest rate derivatives often deal with banks to insure against big movements in the ISDAfix rate or to speculate on changes to interest rate swaps  ISDAfix is published each morning after banks submit bids for swaps via Icap, the inter-dealer broker, in a number of currencies. The CFTC has been investigating suggestions that the banks deliberately moved the rate in order to profit on these deals.  Given the hundreds of trillions of dollars worth of interest rate derivatives trades that occur annually, even the slightest manipulation can have a substantial effect. The CFTC, which started to investigate ISDAfix after last summer’s Libor scandal has now been handed emails and phone call recordings that show the rate was deliberately moved, according to Bloomberg.

Goldman Sued For Monopolizing US Aluminum Warehousing Market - Over two years after Zero Hedge first accused Goldman and JPMorgan of becoming monopolists in the commodity warehousing business (see "Goldman, JP Morgan Have Now Become A Commodity Cartel"), and two weeks after the NYT's reminder the world of just this leading to the latest Kangaroo Court congressional hearing on the matter, which may or may not have resulted in JPMorgan announcing it would exit the physical commodities business, the long overdue legal fight began this Friday when lead plaintiff Superior Extrusion sued Goldman and London Metal Exchange owner HKEx for engaging in "anticompetitive and monopolistic behaviour in the warehousing market in connection with aluminium prices" and accusing the firms of violating the Sherman anti-trust act. Precisely what Zero Hedge said, some 26 months ago.

Getting Big Banks Out of the Commodities Business – Simon Johnson - A debate has broken out over whether the country’s largest banks should be allowed to own physical commodities, including the facilities used to transport, store and process these goods. This may be the strangest debate we have had about banking in the United States in the last five years, because the answer is completely obvious: it is a new and very bad idea to allow big banks to also dominate any dimension of the commodities business. It is also not sustainable politically, and the big banks will soon have to divest themselves of these activities. The headlines are attention-grabbing and the investigations are substantive. Goldman Sachs is reported to be slow-walking aluminum out of warehouses that it controls. JPMorgan Chase is settling accusations that it manipulated energy prices and may also face pressure to get out of the metals and oil business more broadly. Big companies that buy aluminum, like MillerCoors, are not happy with the way banks have been operating, and these nonfinancial companies have an important political voice also. The political changes afoot may also affect Morgan Stanley and Barclays, which both have significant involvement in commodities. Senator Sherrod Brown, Democrat of Ohio and a leader among those who want a safer and better run financial system, asked recently, “What do we want our banks to do, make small-business loans or refine and transport oil? Issue mortgages or corner the metals market?”

Assessing the scale of metal warehouse trades - Earlier this week Morgan Stanley published an in depth look into the financing warehouse trades in metals — the ones most analysts have been in denial about (at least publicly) for at least five years — and why they are now, thanks to new LME proposals, finally easing.There were three notable observations. First, it’s not just banks that should be blamed for fuelling the queue and inventory over-financing problems. Part of the problem is related to the general demise of independent warehouse operators in the metals industry. That is to say, there aren’t enough warehouse owners who do not have conflicting interests as traders or bankers on top of their warehousing businesses:As has subsequently become clear, domination of a good delivery point through the ownership of the majority of multiple warehouse units licensed to receive a particular metal in a given location is a necessary condition for controlling metal inflow, outflow and associated rental cash flow that is the foundation of warehouse rental and financing deals.In addition, a sizeable balance sheet and an active involvement in physical trading as a means of engaging in inventory finance or warehouse incentive deals became a sufficient condition of this domination. Second, the number of cancelled (and un-cancelled) warrants in the system was a good clue to the scale of the issue for a long time (note the difference between the blue and the yellow):Third, all of this in many ways contributes to the scarcity amid plenty problem. That is… inventory games are by and large confusing curve signals. And above all, it is the yield-related incentive to lock inventory away for significant periods of time which is creating a situation in which it pays to store and hoard, even if the curve moves into backwardation on occasion (since everyone’s storage and financing costs are not the same).

The Fed Could Still Let Wall Street Sneak Back Into the Commodities Business - The Federal Reserve will soon make a decision that will determine whether big banks quit dealing oil, electricity, and metals—or expand their control over the flow of these essential goods. As guardians of the nation's credit supply, big banks have cheap access to money, and can pick and choose which companies get loans. Because of this, federal law long prohibited federally insured banks from directly entering other businesses—anything from running railroads to oil refining to trading grain—to prevent them from unduly influencing the real economy. When the law was loosened in 1999, banks jumped at the opportunity, expanding into markets for basic commodities, largely outside of public view. That all changed last month when the Beer Institute, which represents companies like MillerCoors, publicly accused Goldman Sachs of hoarding aluminum to manipulate prices. Soon after, the New York Times published a front-page story on how the bank uses its warehouses to distort the market and hike what we all pay for soda cans and cars. The events have sparked public outcry and spurred government officials to clamp down. The Justice Department is now investigating if banks inflated the price of metals, the Commodities Futures Trading Commission may follow suit, and the Federal Energy Regulatory Commission recently slapped JPMorgan Chase with a $410 million fine for manipulating electricity markets in California. The Senate Banking Committee has already convened two hearings on whether federally insured banks should own power plants and refineries. Most significantly, the Federal Reserve—the most influential regulator of big banks—announced it is reviewing its decision that allowed banks to start storing copper and selling oil in the first place.

The Spider and the Fly - Michael Lewis has written a riveting report on the trial, incarceration, release, and re-arrest of Sergey Aleynikov, once a star programmer at Goldman Sachs. It's a tale of a corporation coming down with all its might on a former employee who, when all is said an done, damaged the company only by deciding to take his prodigious talents elsewhere. As is always the case with Lewis, the narrative is brightly lit while the economic insights lie half-concealed in the penumbra of his prose. In this case he manages to shed light on the enormous divergence between the private and social costs of high frequency trading, as well as the madness of an intellectual property regime in which open-source code routinely finds its way into products that are then walled off from the public domain, violating the spirit if not the letter of the original open licenses.

Big Banks Conspiracy is destroying America— Imagine 100 Goldman Sachs banks running America and the world. It’s happening. Forget politicians, Big Banks rule the world. Today every bank is a Goldman Sachs wannabe. It was just a few years ago in “The Great American Bubble Machine,” a Rolling Stone feature, that Goldman was indicted by Matt Taibbi: “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Yes, till recently Goldman Sachs was boss, everywhere, the “world’s most powerful bank.” Taibbi: “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression.” What an indictment. Today every bank in the world is a Goldman wannabe. That’s capitalism at its peak. All competing to be the world’s most powerful bank. Seriously, look around: Your world really is dominated by this amazing new innovation emerging from capitalism — a bizarre conspiracy of Big Banks, maybe a hundred Goldman wannabes. These new Big Bank capitalists are rewriting the history of the world. But we’re getting ahead of the story. Let’s review Goldman Sachs role in creating this new Big Banks Conspiracy.

On the SEC’s Too Little, Too Late “Fabulous Fab” CDO Victory - Yves Smith -- Narrowly speaking, it’s good that the SEC won its case against ex-Goldman staffer Fabrice Tourre for his role in marketing a toxic CDO to bond insurer ACA. The SEC has been depicted, heretofore correctly, as the gang that couldn’t shoot straight when it comes to litigating anything much beyond its comfort zone of insider trading cases. The Tourre victory provides a badly needed boost to moral and may embolden the agency in future cases, particularly now that star litigator Mary Jo White heads the agency. But let’s not kid ourselves as to what this verdict amounts to. We had a meteor-hitting-the-planet-and-nearly-killing-the-dinousars level financial crisis, with the special part the meteor hitting the planet wasn’t an accident. As pundits, some candid current and ex regulators, deeply frustrated members of the public, and various interest groups, ranging from wonky (Better Markets) to broad-based (Occupy Wall Street) have said, individuals need to be held accountable to prevent this sort of disaster from happening again. CEOs doing the perp walk was what the public wanted to see. Instead, six years later, we have one young guy at Goldman who will disgorge some income and be barred from working in the industry (for how long yet to be determined). This is so far short of what needed to happen that it’s pathetic to see the SEC high-fiving over its win.

Department of Justice Has Six Ongoing Investigations of JPMorgan - If a major Wall Street firm is being investigated by the Securities and Exchange Commission (SEC), that’s one thing. The SEC has no criminal powers to prosecute. And when it comes to Wall Street mega banks, there is a long tradition of fines and slaps on the wrist rather than prosecutions. But when there is an open investigation by the Department of Justice, which does possess the power to criminally prosecute, there should be concern in the marketplace, if for no other reason than the fact that there is significant public attention being paid to the DOJ’s failure to prosecute big Wall Street firms. Yesterday, JPMorgan Chase filed its quarterly 10Q with the SEC. If ever there was a document making a convincing case for breaking up the big banks and restoring the Glass-Steagall Act, this is it. JPMorgan reported it is under investigation by the Justice Department in six separate areas; being pursued by multiple state attorneys general; Congress; at least five federal agencies; regulators around the world including the European Commission, the UK’s Financial Conduct Authority, the Canadian Competition Bureau, and the Swiss Competition Commission. In addition, in a trial in Italy, two of its employees were “found guilty of aggravated fraud with sanctions of prison sentences, fines and a ban from dealing with Italian public bodies for one year.” In the same matter, JPMorgan was fined €1 million and ordered to forfeit profit from the transaction of €24.7 million. (Both the individuals and JPMorgan are appealing the decision.)

JPMorgan Nears Settlement With SEC on London Whale Loss - JPMorgan Chase & Co. (JPM) is negotiating final terms of a deal with U.S. securities regulators to end a yearlong probe of derivatives bets that led to the bank’s biggest trading loss ever, two people briefed on the talks said. While JPMorgan is prepared to say it erred in how it oversaw a unit and London-based traders, executives aren’t likely to admit mistakes beyond what they already disclosed, one of the people said, requesting anonymity because the talks with the Securities and Exchange Commission aren’t public. How much the bank pays to settle is being debated, the people said. JPMorgan, led by Chief Executive Officer Jamie Dimon, is seeking to resolve U.S. and U.K. probes after botched trades by its chief investment office fueled more than $6.2 billion of losses last year. Senate investigators concluded in March that the bank dodged regulators and misled investors amid souring bets by Bruno Iksil, a trader dubbed the London Whale because his positions were so big. While the SEC may target some people involved in the trades, top executives at the New York-based company probably won’t face claims they lied or misled the public, the people said. Iksil won’t be charged, Reuters reported yesterday, citing a person familiar with the matter.

Exclusive: U.S. steps up probe of JPMorgan over Bear mortgage bonds(Reuters) - The U.S. Department of Justice has stepped up a probe in recent weeks into Bear Stearns & Co's mortgage dealings in the run-up to the financial crisis, according to two sources familiar with the situation, raising the possibility that JPMorgan Chase & Co may face yet another case over mortgage bonds. Justice Department lawyers in Washington have been interviewing people linked to Bear Stearns' mortgage securitization business, EMC Mortgage Corp, over sales of mortgage bonds going into the housing crisis, The probe, which Reuters first reported in February, has picked up steam in recent weeks and comes in addition to civil and criminal investigations of the bank by U.S. prosecutors in California over its offerings of mortgage bonds. A spokeswoman for the Justice Department declined to comment. A JPMorgan spokesman declined to comment. On Wednesday, JPMorgan disclosed the California-based investigations by the Justice Department and said the civil division has concluded that the company violated federal securities laws in offerings of subprime and Alt-A residential mortgage securities during 2005 to 2007. Those investigations, which are being run by the U.S. Attorney for the Eastern District of California, involve mortgage securities offered by JPMorgan itself, a source familiar with the matter said earlier on Thursday. JPMorgan is already being sued in nine cases by mortgage insurers that had guaranteed parts of 19 different EMC Mortgage offerings, according to company disclosures.

JPMorgan Under Criminal and Civil Investigation Over Mortgages - One of Wall Street’s Too Big To Fail banks is under criminal investigation for its practices in the mortgage market.  JPMorgan Chase & Co. disclosed in a SEC filing that it was under criminal investigation and had already been notified by the Department of Justice’s civil division that it had violated federal securities laws in offerings of subprime and Alt-A residential mortgage securities during 2005 to 2007. JPMorgan Chase & Co. (JPM), the biggest U.S. bank, said it’s under federal criminal investigation for practices tied to sales of mortgage-backed bonds that the Justice Department has already concluded broke civil laws. The department’s civil division told the bank in May of its preliminary finding after examining securities tied to subprime and Alt-A loans, which were sold to investors from 2005 through 2007, JPMorgan said yesterday. The office of U.S. Attorney Benjamin Wagner in Sacramento, California, has been conducting civil and criminal inquiries, the bank said. In terms of civil penalties for fraud in the mortgage market JPMorgan would be joining its Too Big To Fail colleagues as Citigroup, Goldman Sachs, and recently Bank of America have faced fines. But a criminal indictment would set JPMorgan apart. Though given Attorney General Eric Holder’s public statements on companies like JPMorgan being Too Big To Jail, it seems unlikely a criminal charge would ever actually be filed.

Did We Waste a Financial Crisis? - Remarkably, five years after the crisis, the health of the financial industry is just as hard to determine. A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I’ve spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates.

Private-Equity Payout Debt Surges - Private-equity firms are adding debt to companies they own to fund payouts to themselves at a record pace, as fears mount that the window for these deals will close if interest rates rise. So far this year, $47.4 billion of new loans and bonds have been sold by companies to pay dividends to the private-equity firms that own them, according to data provider S&P Capital IQ LCD. That is 62% more than the same period last year, which wound up being the biggest year on record, with $64.2 billion sold to fund private-equity payouts. Buyout firms acquire companies with a combination of cash and debt, which the acquired companies aim to pay back with earnings. In dividend deals, private-equity-owned companies add more debt so they can pay dividends to their owners. Ultimately, the payouts are distributed to the buyout firms' own investors, which include endowments, pension funds, wealthy families and the firms' executives. The added debt, known as a recapitalization, can increase companies' risk of default, according to a recent study by Moody's Investors Service.

Zombie Companies Live!… (cont.) - People see that corporate profits are up, way up. So they wonder, How can there be zombie companies out there if corporate profits are up so much? The answer is in the “rate” of profit, which had been growing since the crisis. But now we see profit rates slowing down. Robert Lenzner of Forbes wrote in April of this year that “4 of 5 corporations are warning of a negative trend in profits”. As the upward trend in profit rates reverses, zombie companies will be brought into the light. These zombie companies fed off of the business expansion, as profit rates were rising after the crisis. They generate a profit which is less than the market average for profit rates. When profit rates revert back to the mean, these zombie companies start losing money. As they struggle, they drag down other companies. Monetary policy is protecting these less profitable companies from being replaced by more efficient operations. When the eventual recession hits, it will be deeper as more zombie companies will be cleaned out… unless monetary policy and fiscal policy comes to their rescue.

Why the Shrinking Trade Deficit Will Choke U.S. Corporate Profits - That the U.S. trade deficit shrank to $34 billion in June is being presented as good news all around (no surprise there, as all news is presented as good news). The petroleum boom in the U.S. has pushed oil imports down by over $2 billion a month to $10 billion/month, and non-petroleum trade generated a deficit of $37 billion/month, down $5 billion. Slowing imports and modestly higher exports are being presented as reasons for stronger GDP growth going forward. Nice, except nobody is talking about the negative consequences of a shrinking trade deficit on U.S. corporate profits. The financial media doesn't talk about this because it doesn't understand the connection, which is based on Triffin's Paradox... All those counting on a weaker dollar and rising U.S. corporate profits will be doubly surprised.

The Definitive Fund Flows Heatmap: 10 Years Of Capital Flows - Those seeking the definitive, one-stop fund flow heatmap covering the key paper asset classes over the past 10 years, are advised to bookmark this page.

U.S. Gov’t Accuses BofA of Civil Fraud in Bond Sale - The U.S. government has accused Bank of America Corp. of civil fraud, saying the company failed to disclose risks and mislead investors in its sale of $850 million of mortgage bonds during 2008. The Justice Department filed a civil suit against the bank and two of its subsidiaries on Tuesday. The Securities and Exchange Commission filed a related suit against Bank of America. The authorities say Bank of America lied to investors about the risk of the mortgages underlying the investment.

Is B of A the Most Embarrassing Department of Justice Suit Ever? By William K. Black The Department of Justice’s (DOJ) latest civil suit against Bank of America (B of A) is an embarrassment of tragic proportions on multiple dimensions.  In this version I explore “only” seven of its epic fails. The two most obvious fails (except to the most of the media, which failed to mention either) are that the DOJ has once again refused to prosecute either the elite bankers or bank that committed what the DOJ describes as massive frauds and that the DOJ has refused to bring even a civil suit against the senior officers of the banks despite filing a complaint that alleges facts showing that those officers committed multiple felonies that made them wealthy by causing massive harm to others.   The next most obvious DOJ fail, also ignored, was that the DOJ compounded the first two fails by congratulating itself for holding the frauds “accountable” for their crimes.  One can only imagine the hilarity with which B of A senior officers in their mansions they bought with the proceeds of their frauds must have greeted the DOJ’s latest pratfall.  If DOJ’s leadership cannot find the intestinal fortitude to renounce their infamous “too big to prosecute” doctrine they can at least have the decency to stop praising themselves for violating their oath of office and their duty to the Nation. The fourth fail adds a new means by which DOJ has caused long-term harm to the Nation.  It is in paragraph 4 of DOJ’s complaint. “Unlike countless others at the time, the investors in the Certificates were not attempting to chase additional return by investing in risky “subprime” or “Alt-A” RMBS, which were collateralized by mortgages given to borrowers with shaky credit but that offered higher rates of return.”

So Why is the Administration Trying to Look a Smidge More Aggressive About Going After Banks?  Yves Smith -- In the last few days, the Department of Justice (as well as the SEC) filed a case against Bank of America over a 2008 prime mortgage securitization that takes breaks some new ground in fraud allegations and is also saber-rattling in the form of launching a criminal investigation into JP Morgan’s sale of mortgage backed securities. So what’s with the new-found religion? The Snowden effect? Perhaps, but given that cases take a while to gin up, this may be Holder trying to rebuild what little he has left in the way of a reputation after confirming remarks made by others in his office that some animals, um, banks, were more equal than others. From The Hill in March: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he said. “And I think that is a function of the fact that some of these institutions have become too large.”This statement was widely pilloried and a petition objecting to the “too big to jail” doctrine got over 300,000 signatures. And remember, the roughing up of Holder in the Senate was well-deserved, and at least in part the result of the outrage over the failure to prosecute HSBC or any individuals over large scale, institutionalized money laundering operations.

Online Lenders Told to Abide by Interest Rate Cap in New York - Government authorities are homing in on a lucrative loophole that allows online lenders to offer short-term loans at interest rates that often exceed 500 percent annually, the latest front in a crackdown on the payday lending industry. New York state’s financial regulator joined the effort on Monday as he sent letters to 35 of the online lenders, instructing them to “cease and desist” from offering loans that violate local usury laws, according to documents reviewed by The New York Times. The regulator, Benjamin M. Lawsky, ordered the lenders to halt the “illegal” loans within two weeks. Mr. Lawsky’s investigation is playing out as state and federal officials escalate a broader effort to rein in payday lenders and their practice of offering quick money, backed by borrowers’ paychecks, to people desperate for cash. It is an evolving battle. As New York and 14 other states have imposed caps on interest rates in recent years — New York outlaws any loans at rates above 25 percent — the lenders have migrated from storefronts to Web sites. From their online perch, where they reach consumers across the country, the lenders can skirt individual state laws. “Illegal payday lenders swoop in and prey on struggling families when they’re at their most vulnerable — hitting them with sky-high interest rates and hidden fees,” Gov. Andrew M. Cuomo said.

Fed Survey: Banks eased lending standards, "experienced stronger demand in most loan categories" -  From the Federal Reserve: The July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices The July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. The survey also contained special questions about changes in banks' lending standards on, and demand for, the three main types of commercial real estate (CRE) loans over the past year, and on the current levels of banks' lending standards for many types of business and household loans relative to longer-term norms. In the July survey, domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in most loan categories over the past three months. This summary is based on the responses from 73 domestic banks and 22 U.S. branches and agencies of foreign banks. Regarding loans to businesses, the July survey generally indicated that banks eased their lending policies for commercial and industrial (C&I) and CRE loans and experienced stronger demand for such loans over the past three months ...Here are some charts from the Fed. These two graphs shows the change in lending standards and demand for CRE (commercial real estate) loans.  Increasing demand and easing in standards suggests some increase in CRE activity going forward

Demand for Business Loans Increasing, Credit Eases - Demand for business loans has strengthened in recent months, and banks were more willing to provide the financing, a signal that companies are poised to make investments in the second half of the year. Almost a third of banks reported an increase in demand for commercial and industrial loans from small businesses and nearly 28% saw an uptick from larger and midsized firms, according to the Federal Reserve‘s July survey of senior loan officers, released Monday. Both measures improved from readings in the previous quarter’s survey. Stronger demand was attributed to businesses’ desire to invest in plants, equipment or inventories. The survey found banks were more willing to lend as well. Nearly 20% of respondents report that credit standards had eased at least somewhat for larger and midsized firms, though only 10% saw a loosening for small businesses over the past three months. From a year earlier, credit conditions improved, the Fed survey found. Most banks that eased their business-lending policies cited increased competition for such loans. Several also saw a more favorable economic outlook. Among households, demand for mortgage loans was similarly strengthening, but banks weren’t moving as quickly to ease their standards, especially for weaker borrowers.

Stores Cheer, Banks Fume as Judge Throws Out Fed’s Swipe-Fee Cap - Whatever metaphor you want to use, banks and merchants are at it again over debit interchange fees. Experts say we probably won’t see a repeat of banks’ disastrous 2011 attempt to slap monthly usage fees on debit cards, but consumers could be stuck paying even more for products and services at big banks. In 2011, the Federal Reserve implemented a roughly 24-cent cap per swipe over the protestations of both groups — banks wanted it higher, and retailers wanted it lower. (The cap consists of a 21-cent base cap, plus small, incremental increases based on the value of the purchase, which is why articles about it will use both 21 cents and 24 cents. No, nothing about this issue is simple.) Last week, a federal judge upended the uneasy truce, declaring in a strongly worded opinion that the Fed was “inappropriately inflating” the amount banks were allowed to earn from debit swipe fees. The Fed could appeal the decision, arguing for keeping the current cap. It hasn’t said whether or not it plans to do so, only that it’s reviewing the judge’s decision. The current cap will stay in place for now, so an appeal would mean status quo for a potentially long time. If the Fed goes back and rewrites its rule, swipe fees will probably be lower, although how much lower is anybody’s guess. The retail industry says it only costs about four cents per swipe to process debit card transactions, and the Fed had initially floated a range of seven to 12 cents per swipe. Prior to the Fed’s 2011 rule, merchants paid around 44 cents per swipe.

Unofficial Problem Bank list declines to 726 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for August 2, 2013. Changes and comments from surferdude808:  After a 56 day hiatus, the FDIC got back to closing a bank. The closing and some action terminations and an addition led to several changes this week to the Unofficial Problem Bank List. In all, there were four removals and one addition that leave the list with 726 institutions with assets of $259.1 billion. Last year, the list held 899 institutions with assets of $349.4 billion. There is nothing new to report on the remaining banks controlled by Capitol Bancorp, Ltd. Next week will likely be a light week in terms of changes.CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then.

 Obama to Seek Limited U.S. Mortgage Role  —President Barack Obama will call for a continued but limited government role to backstop the U.S. mortgage market, as part of a strategy to ultimately replace Fannie Mae FNMA +14.74%and Freddie Mac FMCC +13.10%with a bigger private-sector presence, according to White House advisers.In a speech Tuesday, Mr. Obama will begin making the case that a limited government guarantee is needed to preserve access to the long-term, fixed-rate loans that have become a staple of the U.S. housing market. But he also will call for ending the business model of Fannie and Freddie ... Mr. Obama is expected to outline other steps that can begin shrinking the federal government's outsized role in the mortgage market, including allowing loan limits in high-cost housing markets to gradually decline. Advisers said the president would also reiterate calls for long-stalled legislation that would help homeowners refinance even if they owe more than their homes are worth.

Freddie Mac takes the first step in transferring mortgage default risk to the private sector  = Mr. Obama will endorse bipartisan efforts in the Senate to wind down the two companies and end their longtime implicit guarantee of a federal government bailout. That dread prospect, once thought improbable, was realized in the fall 2008 financial crisis; Fannie Mae and Freddie Mac, then bankrupt, were made conservators of the government at great cost to taxpayers, who only now are being repaid. The president, according to administration officials, will make clear that he will only sign into law a measure that puts private investors primarily at risk for the two companies, which buy and guarantee many mortgages from banks to provide a continuing stream of money for lenders to provide to additional home buyers."Wind down the two companies and end their longtime implicit guarantee" is a hell of an undertaking, considering that transferring these agencies into private hands did not work so well the last time. What about simply getting rid of them?  The problem is that the US banking system simply can not absorb the mortgage loan volumes currently generated in the US. And with the new Dodd Frank-based capital constraints on banks, adding massive mortgage portfolios to their balance sheets will be even more difficult. The only way to reduce this reliance on the federal government is to involve private investors in underwriting mortgage credit risk. Currently the bulk of the default risk on mortgages is borne by the taxpayer (via Fannie, Freddie, FHA, etc.). Investors only assume the mortgage prepayment risk - via agency MBS securities (although they effectively pay the government some fees to take mortgage default risk). Do investors have any appetite for a security that allows them to take on credit risk as well - and get compensated in the process?

Winding down Fannie and Freddie - From the Daily Herald: Speaking Tuesday in Arizona, President Obama endorsed the bipartisan efforts of [Senator Bob Corker (R-TN) and Senator Mark Warner (D-VA)] to wind down Fannie Mae and Freddie Mac as a first step in making certain that the nation does not suffer again through a housing finance crisis."For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag," Obama said in Phoenix. "The good news is that there's a bipartisan group of Senators working to end Fannie and Freddie as we know them. I support these kinds of efforts."  Let me explain why I also endorse these recommendations.  Fannie Mae and Freddie Mac were both originally created by acts of the U.S. Congress, and have had an ambiguous and varied status as quasi-private, quasi-public entities ever since. The GSEs (for "government-sponsored enterprises"), as they are referred to, engage in two types of activities. First, Fannie and Freddie borrow money which they use to buy up mortgages and hold them on their own account.  Second, Fannie and Freddie would issue guarantees on securities they created out of bundles of individual mortgages. In return for providing these guarantees, the GSEs received fees on the basis of which they earned a profit. Mortgages held outright or guaranteed by GSEs and federal agencies increased by a factor of 22 over the last 30 years, growing from 9% of GDP in 1982 to 40% last year, and from 17% of all mortgages in 1982 to 47% last year. Agency and GSE debt and guarantees came to $7.5 trillion as of the end of fiscal year 2012, or 2/3 the size of the entire stock of U.S. Treasury debt held by the public.

Freddie Mac on Q2: $5.0 Billion Net Income, No Treasury Draw, REO Declines - From Freddie Mac: Freddie Mac Reports Net Income of $5.0 billion for Second Quarter 2013 Second quarter 2013 net income was $5.0 billion, compared to $4.6 billion in the first quarter of 2013 – the seventh consecutive quarter of profitability and second largest in company history... ...No additional Treasury draw required for the second quarter of 2013 Based on net worth of $7.4 billion, the company’s dividend obligation to Treasury will be $4.4 billion in September 2013. Including the September obligation, the company’s aggregate cash dividends paid to Treasury will total approximately $41 billion.  Senior preferred stock outstanding and held by Treasury remained $72.3 billion, as dividend payments do not reduce prior Treasury draws.  On Real Estate Owned (REO), Freddie acquired 16,418 properties in Q2 2013, and disposed of 19,763 and the total REO fell to 44,623 at the end of Q2.  This graph shows REO inventory for Freddie. From Freddie's SEC 10-Q:  we have recorded provision for credit losses associated with single-family loans of approximately $74.2 billion, and have recorded an additional $3.8 billion in losses on loans purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of June 30, 2013, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as increases in unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations. Our loan loss reserves for single-family loans declined in each of the last six quarters, which in part reflects improvement in both borrower payment performance and lower severity ratios for both REO dispositions and short sale transactions due to the improvements in home prices in most areas during these periods. Our REO inventory also declined in each of the last six quarters primarily due to lower foreclosure activity as well as a significant number of borrowers completing short sales rather than foreclosures.

Fannie, Freddie, FHA REO inventory declines in Q2 2013 -  Fannie released their second quarter results this morning.  In their SEC filing, Fannie reported their Real Estate Owned (REO) declined to 96,920 single family properties, down from 101,449 at the end of Q1. The combined Real Estate Owned (REO) for Fannie, Freddie and the FHA declined to 183,381 at the end of Q2 2013, down 3% from Q1, and down almost 10% from 202,765 in Q2 2012. The peak for the combined REO of the F's was 295,307 in Q4 2010. This following graph shows the REO inventory for Fannie, Freddie and the FHA. This is only a portion of the total REO. There is also REO for private-label MBS, FDIC-insured institutions, VA and more. REO has been declining for those categories too. Although REO was down for Fannie and Freddie in Q2 from Q1, REO increased for the FHA for the 2nd consecutive quarter - this is something to watch.

Mortgage Rule Debate Pits Dreams of Homeownership Against Market Fears - In the wake of the financial crisis, which led to a slew of housing foreclosures nationwide, legal experts and consumer activists felt a growing need to address this issue of uncertainty. The fact that lenders naively thought that the optimal market forces of 2005-06 would last - while the mortgage market remained over-leveraged and un-diversified – was not only delusional but also downright dangerous, they argued. The Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) standards of the Dodd-Frank Act served as a reassurance that mortgages, irrespective of market forces, would not continue to default as many did during the crash. QM was a way to limit credit risk. It mandated that lenders could only sell loans that could be repaid by borrowers, and adopted a number of rules pertaining to down-payments, fixed-interest rates, debt-to income ratios and other “ability to repay” criteria. QRM forced lenders and security holders to either retain risk on their products (roughly 5-10 percent) or adopt ability to repay rules that were even stricter than the normal QM standards. The key idea was that by realigning incentives, by emphasizing the importance of quality over volume, the private mortgage market could be regulated without being hindered or altogether shutdown. There is now a new debate brewing on QRM between those who insist on such standards and the large lobbying cohort of lenders, brokers, developers, and construction magnates who argue that QRM would curtail the ability of lower-income borrowers to access mortgage credit. Specifically, they argue that QRM should be more in line with QM, which has broader, less strict rules. “Failing to align these rules,” according to a report written by the Mortgage Bankers Association of America, “will further entrench the market’s dependence on federal programs,” and thus keep private capital from returning to the market.

MBA: Mortgage Delinquency Rates declined in Q2 - From the MBA: Mortgage Delinquencies, Foreclosures Continue to Drop - The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 6.96 percent of all loans outstanding at the end of the second quarter of 2013, the lowest level since mid-2008. The delinquency rate dropped 29 basis points from the previous quarter, and 62 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans on which foreclosure actions were started during the second quarter decreased to 0.64 percent from 0.70 percent, a decrease of six basis points and reached the lowest level since the first quarter of 2007 and less than half of the all-time high of 1.42 percent reached in September 2009. The percentage of loans in the foreclosure process at the end of the second quarter was 3.33 percent down 22 basis points from the first quarter and 94 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 5.88 percent, a decrease of 51 basis points from last quarter, and a decrease of 143 basis points from the second quarter of last year. However, as with last quarter’s results, the improvement in the seriously delinquent percentages may be slightly less than stated because at least one large specialty servicer that has received a number of loan transfers does not participate in the MBA survey.

MBA National Delinquency Survey: Judicial vs. Non-Judicial Foreclosure States -- Earlier I posted the MBA National Delinquency Survey press release and a graph that showed mortgage delinquencies and foreclosures by period past due. There is a clear downward trend for mortgage delinquencies, however some states are further along than others. From the press release:  States with a judicial foreclosure system continue to bear a disproportionate share of the foreclosure backlog. .... The rate of new foreclosures in New York hit an all-time high during the second quarter and is now essentially equal with Florida. The percentage of loans in foreclosure in New Jersey remains about the same as the rates in California, Arizona and Nevada combined. The foreclosure percentages in Connecticut are back to near all-time highs for that state.This graph is from the MBA and shows the percent of loans in the foreclosure process by state. Posted with permission. The top states are Florida (10.58% in foreclosure down from 11.43% in Q1), New Jersey (8.01% down from 9.00%), New York (6.09% down from 6.18%), and Maine (5.62% down from 5.80%).  Nevada is the only non-judicial state in the top 10, and this is partially due to state laws that slow foreclosures. California (1.64% down from 1.76%) and Arizona (1.51% down from 1.77%) are now well below the national average by every measure.

LPS: Seasonal Increase in Mortgage Delinquencies in June -  LPS released their Mortgage Monitor report for June today. According to LPS, 6.68% of mortgages were delinquent in June, up from 6.08% in May. The increase was in short term delinquencies, and most of this increase was seasonal (delinquencies usually increase in June). LPS reports that 2.93% of mortgages were in the foreclosure process, down from 4.09% in June 2012.  This gives a total of 9.61% delinquent or in foreclosure. It breaks down as:
• 1,983,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,345,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,458,000 loans in foreclosure process.
For a total of ​​4,785,000 loans delinquent or in foreclosure in June. This is down from 5,663,000 in June 2012.  The first graph from LPS shows percent of loans delinquent and in the foreclosure process over time.

LPS: Mortgage Delinquencies Shot Up In June - The national mortgage delinquency rate shot up dramatically in June, reversing five consecutive months of decline, according to Lender Processing Services' (LPS) June Mortgage Monitor report. However, the spike in delinquencies is merely a seasonal phenomenon that has presented before, the mortgage technology and services company said. The total loan delinquency rate rose to 6.68% in June, an increase of 9.91% over May, according to LPS. About 700,000 people who were current on their mortgages in May fell behind by 30 days in June, the Mortgage Monitor report found. The trend was broad-based, impacting all states. LPS noted, however, that the increase in total delinquencies for the second quarter compared to the first quarter was "below average" compared to prior years. The total U.S. foreclosure presale inventory rate was 2.93%, a decrease of 3.92% compared to May. Herb Blecher, senior vice president of applied analytics at LPS, said the spike, while large, should be viewed as a "seasonal phenomenon." "Over the last 18 years, similar changes occurred in June for all but four of those years," Blecher said. "And this month's increase was felt across all 50 states - from a roughly 14 percent month-over-month rise in 30-day delinquencies in Nevada to a nearly 32 percent upswing in Colorado." Blecher said LPS analyzed the data to see if rising interest rates were having any impact on delinquencies, but found "no significant impact thus far."

LPS' June Mortgage Monitor: Spike in Delinquency Rate Broad-Based Across Geography, Loan Type: -- The June Mortgage Monitor report released by Lender Processing Services (NYSE: LPS) found that the nearly 10 percent spike in the national delinquency rate reported in the company’s “First Look” at mortgage performance was based on approximately 700,000 newly 30-day delinquent loans in June. As LPS Applied Analytics Senior Vice President Herb Blecher explained, the spike -- while large -- should be seen in the proper context. “June’s increase in delinquencies is representative of a documented seasonal phenomenon,” Blecher said. “Over the last 18 years, similar changes occurred in June for all but four of those years. And this month’s increase was felt across all 50 states -- from a roughly 14 percent month-over-month rise in 30-day delinquencies in Nevada to a nearly 32 percent upswing in Colorado. Additionally, we examined the data to see the effect of recent increases in interest rates on delinquency rates and found no significant impact thus far. Adjustable-rate mortgages (ARMs), which one would expect to be impacted most by such interest rate changes, actually saw delinquency rates rise at a lower relative rate than those of fixed-rate mortgages.

LPS' June Mortgage Monitor: Spike in Delinquency Rate Broad-Based Across Geography, Loan Type; Quarterly Increase Still Low by Historical Standards - -- The June Mortgage Monitor report released by Lender Processing Services (NYSE: LPS) found that the nearly 10 percent spike in the national delinquency rate reported in the company's "First Look" at mortgage performance was based on approximately 700,000 newly 30-day delinquent loans in June. As LPS Applied Analytics Senior Vice President Herb Blecher explained, the spike -- while large -- should be seen in the proper context. "June's increase in delinquencies is representative of a documented seasonal phenomenon," Blecher said. "Over the last 18 years, similar changes occurred in June for all but four of those years. And this month's increase was felt across all 50 states -- from a roughly 14 percent month-over-month rise in 30-day delinquencies in Nevada to a nearly 32 percent upswing in Colorado. Additionally, we examined the data to see the effect of recent increases in interest rates on delinquency rates and found no significant impact thus far. Adjustable-rate mortgages (ARMs), which one would expect to be impacted most by such interest rate changes, actually saw delinquency rates rise at a lower relative rate than those of fixed-rate mortgages.

Huge Spike in Delinquencies Chalked up to Seasonal Factors: The headline news from the Lender Processing Services (LPS) Mortgage Monitor Report for June, that early mortgage delinquencies had surged 10 percent during the month, was released two weeks ago in LPS's regular "first look" at its monthly data. The full report, released this morning, added some details to that announcement. The sudden increase, which LPS Applied Analytics Senior Vice President Herb Blecher called "representatives of a documented seasonal phenomenon," brought the national delinquency rate from 6.08 in May to 6.68 percent in June, an increase of 9.9 percent. The rate is still down 6.9 percent from the beginning of the year and 6.5 percent from June 2012. The rate of foreclosures and of seriously delinquent loans continued their decline. There were 700,000 newly delinquent loans in June and they were widely dispersed geographically with every state but Vermont, for which no information was supplied, experiencing double-digit increases. The biggest jump occurred in two western states - Colorado which was up 31,7 percent and Utah with a 29.6 percent increase in 30+ day delinquencies.Delinquencies increased for both fixed rate and adjustable-rate mortgages. The former jumped 19 percent from May and the latter 18 percent. Blecher explained the seasonal nature of the increase. "Over the last 18 years, similar changes occurred in June for all but four of those years. And this month's increase was felt across all 50 states -- from a roughly 14 percent month-over-month rise in 30-day delinquencies in Nevada to a nearly 32 percent upswing in Colorado. Additionally, we examined the data to see the effect of recent increases in interest rates on delinquency rates and found no significant impact thus far. Adjustable-rate mortgages (ARMs), which one would expect to be impacted most by such interest rate changes, actually saw delinquency rates rise at a lower relative rate than those of fixed-rate mortgages.

Calling All California Lawyers (and Others Who Want to Help Abused Homeowners)! Please Ask California Court of Appeal to Publish an Important Pro-Borrower Chain of Title Ruling - Yves Smith -  Your humble blogger is in no position to speculate how this curious set of circumstances came about, but we have a good news, bad news situation, and hope readers can help remedy the bad news part. The good news part is the California Court of Appeal endorsed what we’ve called the New York trust theory in mortgage securitizations in a recent decision called Glaski v. Bank of America (ruling below). One of the big issues in mortgage securitizations has turned out to be whether the party seeking to foreclose on a delinquent borrower has the legal authority (“standing”) to do so. Advocates of the New York trust theory (the overwhelming majority of subprime mortgage securitizations elected New York law to govern the trust) argue that New York trust law is particularly unforgiving, that both statute and case law require that a trustee act only as specifically stipulated in the trust documents. Any other action is void, meaning it has no legal effect.  The wee problem is the documents that created these trusts, the pooling and servicing agreement, stipulated specific dates as to when all the mortgages had to be conveyed to the trusts (and conveyed means not just paid for, but endorsed through a chain of title and in the possession of the trustee or its custodian). The big reason for the fixation on getting everything done by a certain date was that the 1986 Tax Reform Act created REMICs (real estate mortgage investment conduits) and these trusts were intended to qualify as REMICs. The various cutoff dates were set up in order to conform with the REMIC requirements. But whoops, it appears that those carefully crafted procedures stop being followed in the 2000s by a lot of the industry participants. The Examiner provided a good layperson’s summary of the case:

Beware Private Equity Guys Bearing Gifts: Eminent Domain Mortgage Scam Hit with Well-Deserved Lawsuit - Yves Smith - Eminent domain, a well-established practice by which local governments forcibly purchase property to facilitate projects for the community’s good, could have been an elegant way to deal with long-standing problems facing distressed borrowers in mortgage securitizations. But as we’ve written, the private equity firm Mortgage Resolution Partners looks to be well on its way to getting the good uses of eminent domain torpedoed by getting some not-too-swift municipalities to sign up for its self-serving scheme. One indicator of how dubious the MPR program is that investors who have been complacent in the face of all sorts of abuses by originators and servicers, have roused themselves to act in a unified manner and push back against the MRP plan, in the form of a suit filed in Federal court in California on Wednesday. Key to understanding why this plan is a terrible idea and why investors are outraged is that there is a large gap between MRP’s well-funded messaging and how its program would actually work. The key thing to understand is that MPR’s plan isn’t about helping distressed borrowers. If communities wanted to condemn delinquent or defaulted mortgages, they don’t need MRP. It wouldn’t be hard to find dozens of hedge funds and other investors to bid on them and their aim would be to restructure the loans. And investors would be delighted to see this happen. Investors and homeowners lose in foreclosures. Both would do better with a modification, provided the borrower still has a reasonable income. It’s the servicers who win by continuing to wring servicing, foreclosure-related, and junk fees out of the securitizations.

Another Dumb Idea: "Eminent domain" for Underwater Mortgages - I haven't written about the use of "eminent domain" to buy mortgages because it seemed like such a dumb idea I didn't expect it to go anywhere.  An appropriate public policy to help underwater homeowners would be cramdowns in bankruptcy (see Tanta's Just Say Yes To Cram Downs), but having cities use "eminent domain" is obviously not.  I'll write more if this spreads ...   From the LA Times: Eminent domain proposal for mortgages gains traction in California Cities in the Golden State are once again testing a controversial mortgage relief plan that could use local eminent domain powers to help residents stung by the last housing crisis. ... the idea is gaining traction again, with the city of Richmond, Calif., last week becoming the first to press forward. The hardscrabble Bay Area city announced that it had asked the holders of more than 620 underwater mortgages — on which the borrower owes more than the home is worth — to sell the loans to the city at a discount. The city would then write down the debt and refinance the loans for amounts in line with current home values. From the WSJ: Freddie Mac Considers Legal Action to Block Eminent Domain PlanOur sense is that so-called voluntary loan sales would not be very voluntary. They are loan sales under pressure,” said William McDavid, general counsel of Freddie Mac, on a conference call with reporters Wednesday. “We would consider taking legal action” if it had the backing of its federal regulator, he said. ...

Firms Sue City Over Mortgage Plan - An investor group filed a federal lawsuit against Richmond, Calif., to prevent the city from using eminent domain to seize mortgages of local residents who owe more than their properties are worth in a bid to keep them in their homes. The lawsuit was filed on Wednesday in a Northern California court by the mortgage bond trustees Wells Fargo and Deutsche Bank on behalf of an investor group that includes Pacific Investment Management Company, or Pimco, BlackRock and DoubleLine Capital. The city recently sent notice to the holders of more than 620 so-called underwater home mortgages in the city, asking them to sell the loans to the city. It would buy the mortgages for 80 percent of the fair value of the homes, write them down and help the homeowners refinance their loans. The investor group said if the city of Richmond was allowed to go ahead with its plan, it might result in steeper down payment requirements and higher interest rates.

Feds Say No Way to Using Eminent Domain to Help Underwater Homeowners - On Thursday, the Federal Housing Finance Agency (FHFA) sent a strong message discouraging municipalities from using eminent domain to help bail out distressed homeowners — dramatically changing the tenor of a closely watched legal dispute over the maneuver currently taking place in California. The federal agency said it would direct Fannie Mae and Freddie Mac, which it oversees, to “limit, restrict or cease business activities” in any town using eminent domain to seize mortgages.

MBA: Mortgage Applications mostly unchanged in Latest Weekly Survey -- From the MBA: Mortgage Applications Slightly Increase in Latest MBA Weekly Survey Mortgage applications increased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 2, 2013. ... The Refinance Index was unchanged from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.61 percent from 4.58 percent, with points increasing to 0.42 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. ... The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.66 percent from 3.67 percent, with points increasing to 0.43 from 0.40 (including the origination fee) for 80 percent LTV loans The first graph shows the refinance index. With 30 year mortgage rates up over the last 3 months, refinance activity has fallen sharply, decreasing in 11 of the last 13 weeks. This index is down 57% over the last 13 weeks. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending up over the last year (but down over the last month), and the 4-week average of the purchase index is up about 7% from a year ago.

Obama Suggests Re-Examination of America's Renters Policy : The President talked housing on Tuesday in Arizona. Ezra Klein talks with Heidi Moore, U.S. finance and economics editor for The Guardian Newspaper, Mike Konczal, a fellow with the Roosevelt Institute, and Shahien Nasiripour, Chief Financial and Regulatory Correspondent for the Huffington Post, about what it all means.

A Dream Foreclosed: As Obama Touts Recovery, New Book Reveals Racist Roots of Housing Crisis (video interview and transcript) We are going to continue to look at this issue of foreclosures, as we turn now to a new book that documents those who are fighting back. Our guest is Laura Gottesdiener, author of A Dream Foreclosed: Black America and the Fight for a Place to Call Home, which was just published by Zuccotti Park Press. The book follows how people have dealt with the housing crisis within the context of the broader financial collapse, focusing on the story of four families who have pushed back against foreclosures at a time when more than 10 million people across the country have been evicted from their homes in the last six years. Laura is also associate editor at Waging Nonviolence. Laura, welcome to Democracy Now! It’s a really incredible book. Ten million people foreclosed on, the size of the state of Michigan.

Takeaways on Housing-Finance Reform From Obama’s Town Hall - So what does Mr. Obama plan to do with the companies? Here’s an overview:

  • 1. We’ll get rid of Fannie and Freddie as they currently exist…“You can’t have an institution in which the government is underwriting and guaranteeing all the mortgage lending that’s taking place around the country and big profits are being made by these quasi private institutions,” said Mr. Obama. “And then if things go wrong suddenly taxpayers are on the hook.”
  • 2. …but the government will still be there, in some fashion… The long-term goal is to “have the private market get in there and provide those loans,” said Mr. Obama. Still, the government should “step in” to provide enough support for financing long-term, fixed-rate mortgages and to make sure veterans and first-time buyers can still purchase homes. “The government can be a backstop,” he said, but it shouldn’t be “the dominant player.”
  • 3. …which means the future could end up looking something like the past—just not the very recent past. “In some ways, it’s a return to earlier models,” said Mr. Obama. Even before the housing bust, in which the U.S. government has backed the vast majority of new mortgages, federal entities have had a significant role in the housing market, beginning with the Federal Housing Administration in 1934 and Fannie Mae, which was a government agency created a few years later.

President Obama, Defender of the 30-Year, Fixed-Rate Mortgage --President Obama is availing himself of the bully pulpit again this week, with a speech in Phoenix on Tuesday and an online question-and-answer session hosted by real estate website Zillow, both of which focused on the real estate market and Administration plans to further encourage the housing recovery. During these events, the President focused on a variety of issues, from proposals aimed at helping underwater homeowners refinance their mortgages to how he believes immigration reform will help bolster the housing market. But of all the topics the President touched on, Congress currently seems most interested in addressing housing-finance reform — which means deciding what to do with Fannie Mae and Freddie Mac, the mortgage giants that the government took over during the height of the financial crisis.Two separate pieces of legislation are presently being debated in Congress: one put forward by House Republicans and another, the bipartisan Corker-Warner bill in the Senate. In short, the House bill would wind down the federal conservatorship of Fannie and Freddie within five years, replace it with a system of private finance, while maintaining a scaled-back version of the Federal Housing Administration to help first-time and moderate-income borrowers get mortgages. The Senate bill, on the other hand, would replace Fannie and Freddie with a new government entity called the Federal Mortgage Insurance Corp., which would provide insurance for mortgage issuers and investors, for a fee, on the condition that these private participants bear the first 10% of any losses. 

Do We Want High House Prices or Affordable Housing? Lessons on the Government Debt - Matt Yglesias asked this question of President Obama on his twitter feed. In case folks missed it, President Obama touted immigration reform as one of the actions he would do for housing. He said that this would raise house prices. There probably is some truth to this. Normalizing the status of 10-12 million immigrants living in the country will allow more of them to be homeowners, which should have some upward impact on house prices. (Don't get too carried away on this one. The incremental boost to homeownership will be modest. Furthermore, these people were living somewhere. If they had been living in rental units, these units would become vacant. Then rents would fall, other things equal. That would cause some would be homeowners to rent instead and for some rental units to be converted to ownership units.) However this raises a basic question, why would we think that high house prices are good? Obviously high house prices are good for people who own homes. But they are bad news for people who are renting and hope to become homeowners or young people just starting their own households. Saying that we want high house prices is in effect saying that we want to transfer wealth from those who don't own homes to those who do. That looks a lot like upward redistribution, which is not ordinarily an explicit goal of government policy, even if that is often an outcome.

Obama Should Stop Talking About How Great Homeownership Is - In his housing policy speech in Phoenix today, President Barack Obama sounded two discordant notes on whether people should rent or buy their homes.  He talked about the need for people to be responsible and only buy homes if they can afford to:  In the run-up to the crisis, banks and the government too often made everyone feel like they had to own a home, even if they weren’t ready. That’s a mistake we shouldn’t repeat. Instead, let’s invest in affordable rental housing. And let’s bring together cities and states to address local barriers that drive up rent for working families. Now, what could have made people feel like they had to own a home, even if they weren't financially ready? Maybe it was partly because politicians kept saying things like this:  I’ve come to Phoenix to talk about that second, most tangible cornerstone at the heart of middle-class life: the chance to own your own home. A home is supposed to be our ultimate evidence that in America, hard work pays off, and responsibility is rewarded. I think of my grandparents’ generation. To him, and to generations of Americans before and since, a home was more than just a house. A home was a source of pride and security. It was a place to raise children, put down roots, and build up savings for college, or a business, or retirement.  Americans want to be middle class, and if we keep telling them that homeownership is the "most tangible cornerstone" of middle classness, and the best available evidence of whether you've worked hard and been responsible, they're going to keep wanting to buy houses.  Why not instead emphasize that renting—that is, not taking all the money you have in the world and putting it into a highly leveraged real estate investment—is a perfectly valid life choice, even for people leading prosperous, middle-class lives?

Privatizer in Chief Obama Blames Reckless Homeowners - President Obama gave a speech on winding down Freddie Mac and Fannie Mae, the GSEs often blamed for the housing crisis and a darling of conservative ire.  Government sponsored enterprises, or GSEs buy up mortgages from private lenders and the theory is to loosen up funds to stir additional lending.  Right now, GSEs have guaranteed 87% of all mortgages.  Yet, the President's speech was spattered with lies, spin and blame.  Here are some lowlights. Did you know homeowners were reckless with no mention of the derivatives, those mortgage backed securities now being bought up by the Federal Reserve, that fueled the housing bubble?  Over time, responsibility too often gave way to recklessness – on the part of lenders who sold loans to people who couldn’t afford them, and buyers who knew they couldn’t afford them.  We’ve made it harder for reckless buyers to buy homes they can’t afford Foreclosure statistics are amazingly tricky with little accuracy.  Completed foreclosures estimates range from 4.5 million from January 2008 to over 20 million, counting the years of the start of the housing bubble collapse, 2006 and 2007.  Right now there are 3.1 million foreclosed homes listed in police auction sites and a new book claims over 10 million families have been displaced.  Regardless, blaming homeowners when jobs are low paying, non-existent, temporary and cannot pay for the rent of a cardboard box is unbelievably callous and just plain wrong.  People lost their homes primarily because they lost their income and ability to earn, not because they were reckless.  People were hoodwinked, lied to, given the runaround and sold a bill of goods, all the while getting their property and livelihoods sucked out right from under them. Obama also seems to be killing the American dream of owning property entirely.

Manhattan Housing Crisis Claims People With Millions In Cash, No Need For Mortgage As Victims - In recent times, when one spoke of housing crises and victims, it was generally in reference to those who’d found themselves homeless due to foreclosure proceedings; those who’d seen the value of their homes cut in half; and those who were not in default but nevertheless had a lock put on their front door, all their earthly possessions confiscated, and their best friends kidnapped due to a trigger-happy bank that, for the record, never apologized for setting off a chain of events that resulted in a person needing to be prescribed anxiety medication for emotional distress.  These people, with all due respect, have no fucking clue what it means to suffer.  In fact, they got off easy compared to the group profiled by Bloomberg today. A group of apartment-seekers who, despite being armed with loads of cash, have seen door after door after door slammed in their collective face. A group whose story shines a light on what it really means to feel real pain.  They are the multi-millionaires of Manhattan, many of whom already own homes and are simply seeking second or “weekday” pads, and this is their story.

CoreLogic: House Prices up 11.9% Year-over-year in June - The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic Reports June Home Prices Rise by 11.9 Percent Year Over Year Home prices nationwide, including distressed sales, increased 11.9 percent on a year-over-year basis in June 2013 compared to June 2012. This change represents the 16th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.9 percent in June 2013 compared to May 2013.  Excluding distressed sales, home prices increased on a year-over-year basis by 11 percent in June 2013 compared to June 2012. On a month-over-month basis, excluding distressed sales, home prices increased 1.8 percent in June 2013 compared to May 2013. Distressed sales include short sales and real estate owned (REO) transactions.  The CoreLogic Pending HPI indicates that July 2013 home prices, including distressed sales, are expected to rise by 12.5 percent on a year-over-year basis from July 2012 and rise by 1.8 percent on a month-over-month basis from June 2013.  This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 1.9% in June, and is up 11.9% over the last year. This index is not seasonally adjusted, and this is usually the strongest time of the year for price increases. The index is off 19% from the peak - and is up 20.7% from the post-bubble low set in February 2012. The second graph is from CoreLogic. The year-over-year comparison has been positive for sixteen consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

Trulia: "Asking Home Price Slowdown Amid Rising Mortgage Rates, Expanding Inventory, and Declining Investor Interest" - This was released earlier today: Trulia Reports Asking Home Price Slowdown Amid Rising Mortgage Rates, Expanding Inventory, and Declining Investor Interest Asking home prices are now starting to lose steam as mortgage rates rise, inventory expands, and investor demand declines. Nationally, asking prices dropped 0.3 percent in July – the first month-over-month (M-o-M) decline since November 2012. Seasonally adjusted, prices rose 3.3 percent quarter-over quarter (Q-o-Q), down from a peak of 4.2 percent in April. Year-over-year (Y-o-Y), prices are up 11 percent nationally; however, this change is an average over the past 12 months and is therefore slower to show changes than monthly and quarterly numbers. In 64 out of 100 U.S. metros, the quarterly asking home price gain was lower than in the previous quarter. This slowdown was most apparent in the West Coast where prices have rebounded strongly already. Among housing markets where asking prices rose sharply Y-o-Y, price gains dipped the most Q-o-Q in Las Vegas, Oakland, and San Francisco. ... Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests slower house price increases over the next few months on a seasonally adjusted basis.

Weekly Update: Existing Home Inventory is up 17.2% year-to-date on Aug 5th - 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 June).  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.

Lawler: Preliminary Table of Distressed Sales and Cash buyers for Selected Cities in July - Economist Tom Lawler sent me the preliminary table below of short sales, foreclosures and cash buyers for several selected cities in July. 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 significantly year-over-year.   Also there has been a sharp decline in foreclosure sales in all of these cities.    And now short sales are declining year-over-year too!  This is a recent change - short sales had been increasing year-over-year, but it looks like both categories of distressed sales are now declining. The All Cash Share is mostly staying steady.  The all cash share will probably decline when investors pull back in markets like Las Vegas and Phoenix (already declining).

Lawler: Builder Buying of Land/Lots Over Last Year to Boost SF Production “Soon” - Note: Tom Lawler mentioned in a previous note that the Census Bureau will probably revise down New Home sales for the first half. The table below is on starts and completions. Early this year I mentioned: "I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline)." That has shown up in the results (fewer communities), but will probably be resolved soon as Lawler notes below. From housing economist Tom Lawler:  While overall housing starts in the first half weren’t that different from consensus, the mix was different, with SF starts somewhat below but MF starts somewhat above consensus. SF starts were in all likelihood lower than what home builders would have liked, reflecting labor shortages, some materials’ shortages, and developed lot “shortages.” (Recall that the NAHB Housing Market Index dipped from January to April of this year, in part because of labor/other shortages as well as spikes in lumber costs). Home builders as a group have, however, increased their acquisitions of land/lots significantly, and as a group are planning a significant increase in active communities and homes for sale. E.g., for the nine publicly-traded builders I track who report on a “MJSD” basis their combined number of lots controlled at the end of this June was up 23.6% from a year ago, with only Pulte (with its “balanced approach” strategy) not showing an increase.

NAHB: Builder Confidence improves in the 55+ Housing Market in Q2 = This is a quarterly index from the the National Association of Home Builders (NAHB) and is similar to the overall housing market index (HMI). The NAHB started this index in Q4 2008, so the readings have been very low.  This is the first ever reading above 50. From the NAHB: Builder Confidence in the 55+ Housing Market Shows Significant Improvement in Second Quarter Builder confidence in the 55+ housing market for single-family homes showed strong continued improvement in the second quarter of 2013 compared to the same period a year ago, according to the National Association of Home Builders’ (NAHB) latest 55+ Housing Market Index (HMI) released today. The index increased 24 points to a level of 53, which is the highest second-quarter number since the inception of the index in 2008 and the seventh consecutive quarter of year over year improvements...All of the components of the 55+ single-family HMI showed major growth from a year ago: present sales climbed 24 points to 54, expected sales for the next six months increased 25 points to 60 and traffic of prospective buyers rose 26 points to 4. The 55+ multifamily condo HMI posted a substantial gain of 24 points to 43, which is the highest second-quarter reading since the inception of the index. All 55+ multifamily condo HMI components increased compared to a year ago as present sales rose 26 points to 44, expected sales for the next six months climbed 26 points to 46 and traffic of prospective buyers rose 19 points to 38. This graph shows the NAHB 55+ HMI through Q2 2013.  This is the first reading above 50, and this indicates that more builders view conditions as good than poor

What The 25% Collapse In Homebuilder Stock Prices Tells Us - Homebuilder stocks are heading into dangerous territory and investors need to take note—even if they don’t own these stocks—because the move to the downside for this barometer of activity in the U.S. housing market is significant. Right now, the U.S. housing market is being threatened by the mixed messages the Federal Reserve is sending to the marketplace.Our central bank has “helped” lower the interest rates by buying bonds and keeping interest on overnight lending artificially low. As a result of this, the conventional mortgage rates in the U.S. declined to record lows—this created an opportunity for those who were sitting on the sidelines to get involved in the housing market. This is what has happened over the past four years.Now, the Federal Reserve is sending mixed signals of its next action: will it pull back on quantitative easing, or will it continue to create new money and keep interest rates artificially low? There’s a significant amount of speculation around the Fed’s future actions, and this has created a major problem for the housing market, causing mortgage rates to skyrocket in a very short period of time. Take a look at the 30-year fixed-term mortgage rates tracked by Freddie Mac. In July, they stood at 4.37%. But this past January, the same rates were 3.41%—an increase of almost a third in just seven months.

Vital Signs Chart: Incomes Still 8% Below 2002 Peak - U.S. incomes remain far below prerecession levels. Real median household income rose a seasonally adjusted 0.7% in June from May, according to a study of census data. At $52,098, median income is above this year’s low point of $51,422 in February, yet 8% below its post-dot-com peak of $56,648 in February 2002. Stagnant incomes have prevented consumers from spending more.

Consumer credit numbers show the same frightening trend -  Today the Fed released the latest data on US consumer credit. Once again, student loans represent the dominant component of consumer debt growth (see post). This debt shows up as "non-revolving credit" owned by the federal government in the Fed's data.  Barclays Research: - .. since the start of 2011, total revolving consumer credit outstanding has risen by just $15.9bn while nonrevolving credit has increased by $312.6bn. Nonrevolving consumer credit held by the government, which is comprised of federal student loans, has risen by $266bn over that period, according to our seasonal adjustment process. ... we think that the costs of federal student loan programs are being understated and that they could pose a significant fiscal challenge to the US government in the future. This is not going to end well.

US Consumer Spending Flat Since March - Gallup - A Gallup Poll headline says "U.S. Self-Reported Spending Flat Since May" However, the charts show stagnation since March. Let's take a look.  U.S. self-reported daily consumer spending was $89 in July, unchanged from the $90 of June and May. The relatively flat spending levels of the past five months are consistent with the weak GDP reports of the past three quarters and the lack of improvement Gallup finds in its Payroll to Population employment rate over the past couple of years. Spending began the year at $80 in January and $83 in February. Consumers opened their wallets some more in March, spending an average of $89, reflecting the normally expected seasonal spring increase in sales. However, consumer spending has remained basically at that level since -- in the face of what are normally positive seasonal factors such as warmer weather, home improvement projects, and spring and summer travel. Longer-term, Americans' self-reported spending is much stronger than it was from late 2008 to late 2011, but continues to trail early 2008, before the recession gained momentum. Upper-income spending inched up to $158 in July, from $143 in June and $150 in May. But the upper-income spending data tend to be more volatile due to the smaller sample sizes involved, and the overall trend seems to be essentially flat over the past five months -- with a peak of $166 in March and a low of $140 in April.

Auto Loans Drive Consumer Lending Increase - Americans borrowed more money to finance cars in June, a sign of strengthening vehicle demand as consumers recover from the recession. Nonrevolving credit, which consists primarily of student loans and auto financing, rose by $12.6 billion in June to a nonseasonally adjusted $1.987 trillion, according to Federal Reserve data released Wednesday. Within this category, student loans from the federal government rose $3.3 billion, indicating that auto loans were responsible for the bulk of the $12.6 billion overall increase. The Fed doesn’t break out precise data on auto financing. Up until earlier this year, Americans borrowed for education and not much else, a sign of low consumer confidence and a weak labor market. Unable to find jobs, many people opted to continue studying. But consumers, feeling more optimistic about the economic recovery, have shown a greater willingness to buy new cars in recent months and borrow money to help them do so. Analysts are forecasting 2013 auto sales will return to prerecession levels, completing the reversal from a deep economic downturn that led many Americans to defer replacing their vehicles. The Fed data also showed that revolving credit, primarily credit cards, rose by $300 million in June to $816.7 billion. Growth of revolving credit, which is usually used for smaller discretionary purchases and carries higher interest rates than nonrevolving credit, has been largely flat in the aftermath of the Great Recession.

June Consumer Credit Rises Less Than Expected; Entire Increase Driven By Car And Student Loans - So much for hopes that US consumers were loosening the purse strings and starting to "charge it." Moments ago we got the latest, June, consumer credit which was expected to increase $15 billion following the May revised $17.6 billion. More importantly, there was an expectation that following the surge in May revolving credit which rose by $6.4 billion or the second most in the past three years (only matched by the comparable pre-summer surge in 2012). Sadly, neither expectation was met: total consumer credit rose by "only" $13.8 billion, but more importantly, the revolving component posted a $2.7 billion decline. This also matched last year's pattern when June saw a major reduction of $2.8 billion. In other words, the only credit creation in the month of June was, once again, entirely for student and car loans, which rose by a whopping $16.5 billion - the most since February and the second highest increase since July 2011. So much for US consumers seeking to relever for discretionary purchases.

Vital Signs Chart: Consumers Boost Borrowing for Cars, Education - Consumers continued to step up borrowing in June, namely for education and cars. Nonrevolving credit outstanding — including auto finance and student loans — rose $16.5 billion, a 10% annual rate, to a seasonally adjusted $1.99 trillion. Consumer credit is up as households repair balance sheets after the recession. Revolving credit, including credit cards, fell by $2.7 billion.

The Great Debate: Do Millennials Really Want Cars, Or Not? -- Why are young people less likely to purchase cars, or even have driver’s licenses nowadays? One theory has it that the generation that came of age with the Internet and smartphones thinks cars are pretty lame. Automakers prefer to see the situation differently—that young people today love cars just as much as any other group, but just can’t afford them right now. The auto industry has been in recovery mode over the past few years. Automakers sold 14.5 million new cars and trucks in 2012, a 13% increase over the prior year, and the highest total since 2007. Projected auto sales totals for 2013 should easily beat last year too, topping 15 million. Even so, the comeback has been called a “subpar recovery,” and a prime reason why sales haven’t truly taken off is that younger consumers today aren’t buying cars like younger consumers traditionally have in the car-crazed U.S.  Gen Y has been dubbed “Gen N”, as in Generation Neutral—which is the way some describe how millennials feel about car ownership. Studies have shown that fewer young adults have driver’s licenses, that this group hates the traditional car-buying process more than other demographics, and that they prefer urban living and socializing online and therefore have less need for cars.

Weekly Gasoline Update: Another Small Price Decline - 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 dropped one cent and Premium two. Regular and Premium are now 15 cents and 14 cents, respectively, off their interim highs in late February.  According to, Hawaii and Alaska are averaging above $4.00 per gallon, unchanged from last week. Four states (California and Connecticut) are in the 3.90-4.00 range, down from four states last week.

Trade Deficit decreased in June to $34.2 Billion - The Department of Commerce reported this morning: [T]otal June exports of $191.2 billion and imports of $225.4 billion resulted in a goods and services deficit of $34.2 billion, down from $44.1 billion in May, revised. June exports were $4.1 billion more than May exports of $187.1 billion. June imports were $5.8 billion less than May imports of $231.2 billion. The trade deficit was lower than the consensus forecast of $43.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through June 2013. Imports decreased in June, and exports increased. Exports are 15% above the pre-recession peak and up 3% compared to June 2012; imports are 3% below the pre-recession peak, and down 1% compared to June 2012 (mostly moving sideways). The second graph shows the U.S. trade deficit, with and without petroleum, through June. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $96.93 in June, up slightly from $96.84 in May, and down from $100.13 in June 2012. The trade deficit with the euro area was $6.1 billion in June, down from $6.9 billion in June 2012. The trade deficit with China decreased to $26.6 billion in June, down from $27.5 billion in June 2012. Most of the trade deficit is related to oil and China. And most of the recent improvement in the trade deficit is related to a decline in the volume of imported petroleum.

$191.2B U.S. exports, shrinking imports cut trade deficit 22.4 percent -  All-time-record monthly exports shrank the U.S. trade deficit to its lowest level in more than 3 1/2 years, the Commerce Department said Tuesday. Exports rose 2.2 percent in June from May to a seasonally adjusted $191.2 billion, the highest on record when adjusted for inflation, the department said. The biggest exports were in U.S.-made capital goods, consumer goods and industrial supplies and materials including telecommunications equipment, civilian aircraft engines and heavy machinery. This made up for export drops in other industries, particularly in automotive vehicles, parts, and engines. Imports fell 2.5 percent to $225.4 billion, mostly from a drop in imported foods, feeds, beverages and automobiles. Oil imports declined to the lowest level in more than two years. Services were virtually unchanged at $38 billion. The result was the deficit shrank 22.4 percent in June to $34.2 billion, the department said. Many economists expected a deficit of about $44 billion.

June Trade Deficit Narrowest Since ’09  - The U.S. trade deficit narrowed sharply in June to its lowest level in more than 3-1/2 years as imports reversed the prior month's spike, suggesting an upward revision to second-quarter growth. The Commerce Department said on Tuesday the trade gap fell 22.4 percent to $34.2 billion, the smallest since October 2009. The percentage decline was the largest since February 2009. May's shortfall on the trade balance was revised to $44.1 billion from the previously reported $45.0 billion. Economists polled by Reuters had expected the trade deficit to narrow only to $43.5 billion in June. When adjusted for inflation, the trade gap narrowed to $43.2 billion, the smallest since January 2010, from $51.9 billion in May. The smaller so-called real trade deficit in June suggests the government could raise its initial second-quarter gross domestic product growth estimate, published last week.

US Trade Deficit Plunges To $34.2 Billion, Lowest Since October 2009; Highest Exports On Record - If there was any doubt that the taper would take place shortly, it can be wiped out following the just released June international trade data, which showed a surge in exports to a record high $191.2 billion, an increase of $4.1 billion compared to May, even as imports declined by $5.8 billion to $225.4 billion, resulting in a trade deficit of just $34.2 billion, or 22.5% lower compared to the $44.1 billion in May, which is the lowest trade deficit since October 2009.  It is also the biggest beat to expectations of -$43.5 billion since March 2005. Whether this plunge in the deficit was the result of the new GDP methodology is unknown, however the resulting surge in revised Q2 GDP following this bean-counting addition to the last month of Q2, means that the economy grew even more than expected and that the Fed's tapering course is now assured. It also means Q3 GDP based on July trade data will be dragged down as there is no way this surge in the collapsing deficit can be sustained.

Trade Deficit Dramatic Shrink Will Boost Q2 GDP  - The U.S. June 2013 monthly trade deficit cliff dove -22.4% from last month to $34.2 billion.  This is the smallest trade deficit since October 2009 when the world was plunged into a global recession.  A combination of a dramatic drop in oil imports along with solid U.S. exports in fuel oil, capital goods and jewelry was the reason for the deficit decline.  Q2 GDP should be revised upward past 2.0% as shown below.  This month's trade deficit gives an annualized -$473.9 billion Q2 deficit, whereas the the Q2 GDP report gives a -$538.5 billion annualized trade deficit.  The original estimate for the nominal, or not using chained 2009 values, trade deficit resulted in an 12.3% annualized increase, while June's monthly figures now give a -32.6% annualized decline.  That's over 2.6 times lower than the estimated June trade deficit gave for the GDP report.  While price indexes and other adjustments have not been applied, it's a safe bet to assume the trade components to GDP will be revised upward on the significantly lower trade deficit.  We estimate that the June trade figures will result in a +1.3 completely unadjusted percentage point trade component contribution to GDP, thus raising Q2 from 1.7% to at least 2.5%, depending on import and export prices as well as the price index.  The original trade component to GDP was -0.81, although this is adjusted through real values as well as import and export price adjustments.  Bottom line, it is guaranteed the trade component of Q2 GDP will be positive and dramatically higher. Unlike 2009, the dramatic trade deficit shrink was not due to overall global trade collapsing.  Graphed below are imports and exports graphed and by volume, we can see there is not a dramatic decline in both directions as there was in 2009.  Exports increased 22% from last May while imports declined 2.5%.  The increase in exports also bodes well for increased real GDP in terms of price adjustments, although oil is in a category all its own.

Vital Signs Chart: Inflation-Adjusted Exports Hit Record - The U.S. trade deficit narrowed abruptly in June, as exports surged and imports declined. The total value of American exports of goods, adjusted for inflation, has been climbing for several years. The tally hit a record during June thanks to brisk demand by foreign consumers and businesses. Leading categories within those exports are capital goods, such as engines and aircraft, industrial supplies, consumer goods and cars.

ISM Non-Manufacturing Index at 56.0 indicates faster expansion in July  - The July ISM Non-manufacturing index was at 56.0%, up from 52.2% in June. The employment index decreased in July to 53.2%, down from 54.7% in June. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management:�July 2013 Non-Manufacturing ISM Report On Business® - July 2013 Non-Manufacturing ISM Report On Business® The NMI™ registered 56 percent in July, 3.8 percentage points higher than the 52.2 percent registered in June. This indicates continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 60.4 percent, which is 8.7 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 48th consecutive month. The New Orders Index increased significantly by 6.9 percentage points to 57.7 percent, and the Employment Index decreased 1.5 percentage points to 53.2 percent, indicating growth in employment for the 12th consecutive month. The Prices Index increased 7.6 percentage points to 60.1 percent, indicating prices increased at a significantly faster rate in July when compared to June. According to the NMI™, 16 non-manufacturing industries reported growth in July. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

Service Industries in U.S. Expand at Fastest Pace in Five Months -  Service industries in the U.S. expanded in July at the fastest pace in five months, a sign the world’s biggest economy will improve after slowing the last three quarters. The Institute for Supply Management’s non-manufacturing index increased to 56, exceeding all forecasts in a Bloomberg survey, from a more than three-year low of 52.2 in June, a report from the Tempe, Arizona-based group showed today. The median estimate called for a gain to 53.1. Readings higher than 50 indicate growth in the industries that make up almost 90 percent of the economy.The figures follow the group’s report last week that showed manufacturing advanced at the fastest pace in more than two years, indicating the expansion is broadening. The recovery in the housing market and record equity values are bolstering household finances, laying the ground for a pickup in consumer spending on goods and services that account for about 70 percent of the economy.

U.S. Services Sector Notches Stronger Expansion - The U.S. nonmanufacturing sector’s expansion picked up steam in July, according to data released Monday by the Institute for Supply Management. Employment, however, softened slightly. The ISM’s nonmanufacturing purchasing managers’ index increased to 56.0 in July from 52.2 in June. The July reading is the highest since February. Forecasters surveyed by Dow Jones Newswires had expected last month’s PMI to increase but only to 53.3. Readings above 50 indicate activity is expanding. “Comments from respondents include: ‘Large projects starting’ and ‘Volumes are slightly higher, mostly due to housing’,” the report said. Last week, the ISM’s survey of manufacturing also beat expectations showing a surprisingly strong level of factory activity in July. That report — along with some other solid job-related data — raised expectations for the July change in nonfarm payrolls, with some forecasts at 200,000 jobs. However, on Friday the Labor Department reported a modest gain of just 162,000 jobs added last month. For the nonmanufacturing sector, which comprises mainly private service providers, the ISM subindexes were mixed but expansionary. The new orders index bounced up to 57.7 in July from 50.8 in June. The business activity/production index jumped to 60.4 — highest since December 2012 — from 51.7 in June. The employment index, however, last month remained volatile. It slipped to 53.2 after it bounced back to 54.7 in June from a very weak 50.1 in May. The nonfarm payrolls report showed private-service jobs increased 157,000 last month, the smallest gain since March.

ISM Services Index - NMI 56.0% for July 2013 - The July 2013 ISM Non-manufacturing report shows the overall index increased, 3.8 percentage points, to 56.0%.  The NMI is also referred to as the services index and the increase indicates faster growth for the service sector.  The business activity index soared by 8.7 percentage points to 60.4%, a high not seen since December 2012. The healthcare services industry also is in contraction for the month.  Considering private health care's increasing take of the American economic pie, we don't think this is bad news.  The indexes rule of thumb is any index below 50% shows contraction for the non-manufacturing index, anything above 50% indicates expansion.  Below is a copy of the ISM services table, abbreviated. Below is the graph for the non-manufacturing ISM business activity index, or current conditions, what we're doin' now meter.  Business activity just roared up and is a very positive sign for the economy, as mentioned above.   Here is the ISM's ordered services sector business activity list: The industries reporting growth of business activity in July — listed in order — are: Arts, Entertainment & Recreation; Information; Utilities; Retail Trade; Construction; Wholesale Trade; Real Estate, Rental & Leasing; Finance & Insurance; Management of Companies & Support Services; Professional, Scientific & Technical Services; Accommodation & Food Services; and Public Administration. The industries reporting decreased business activity in July are: Educational Services; Health Care & Social Assistance; Transportation & Warehousing; and Mining.

ISM Non Manufacturing for July 56.0%, Up from 52.2% - Today’s report from the Institute for Supply Management completes a pair of positive reversals which would seem to bode well for the economy: Economic activity in the non-manufacturing sector grew in July for the 43rd consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. The NMI™ registered 56 percent in July, 3.8 percentage points higher than the 52.2 percent registered in June. This indicates continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 60.4 percent, which is 8.7 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 48th consecutive month. The New Orders Index increased significantly by 6.9 percentage points to 57.7 percent, and the Employment Index decreased 1.5 percentage points to 53.2 percent, indicating growth in employment for the 12th consecutive month. As with Manufacturing, two of the three main drivers of GDP shot up (Activity and New Orders, as seen above), while Backlog fell back. In the NMI’s case, backlog’s drop was from expansion (52.0) to pretty significant contraction (46.5). As was also the case in manufacturing, the accompanying comments were nowhere near as positive as the index’s upward movement.

ISM Non-Manufacturing Index: Faster Growth Than Forecast  -  Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 56.0 percent, signaling faster growth than last month's 52.2 percent. The July number matches the interim high in February and beat the forecast of 53.0 percent and's 53.2 percent consensus.  Here is the report summary:The NMI™ registered 56 percent in July, 3.8 percentage points higher than the 52.2 percent registered in June. This indicates continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 60.4 percent, which is 8.7 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 48th consecutive month. The New Orders Index increased significantly by 6.9 percentage points to 57.7 percent, and the Employment Index decreased 1.5 percentage points to 53.2 percent, indicating growth in employment for the 12th consecutive month. The Prices Index increased 7.6 percentage points to 60.1 percent, indicating prices increased at a significantly faster rate in July when compared to June. According to the NMI™, 16 non-manufacturing industries reported growth in July. Respondents' comments are mostly positive about business conditions and the overall economy.

Non-Manufacturing ISM Follows Manufacturing Surge Higher: Biggest One Month Move Since April 2009 -  Just like the incredulous surge in last week's Manufacturing ISM which exploded higher from 50.9 to 55.4 (as we predicted following the Chicago PMI plunge hours before that), so today its non-manufacturing cousin soared in a desperate attempt to give the "all clear" on the US second half economy (at least until the inevitable hangover of course): at 56.0, up from 52.2, and smashing expectations of 53.1 (supposedly the weather was neither too hot nor too cold this time), this was the biggest beat of expectations since January 2012, pushing the index to the highest since February 2011 (when as we now know GDP was negative) and the biggest sequential jump since April 2009. Those part-time workers must really be putting their shoulder into it even though the employment index actually declined from 54.7 to 53.2. New orders soared although at the expense of Backlogs which dropped sharply into contraction mode: pulling activity forward again to telegraph momentum? Long story short - until reality returns and the surge in various global PMIs is moderated, as happened in 2012 and 2011 before it - the Taper once again appears to be on. We expect the September number to plunge just to keep the Baffle with BS theme going strong.

Vital Signs Chart: Nonmanufacturing Expansion - The ISM Nonmanufacturing Index climbed in July, but service-sector businesses expressed reservations about their economic prospects. The index leapt to 56 last month from 52.2 in June; readings above 50 indicate expansion. July marks the 43rd straight month of growth for the sector. But the report also showed that cautious firms slowed their pace of employment and inventory accumulation in July.

Daddy, What Was a Truck Driver?  - Ubiquitous, autonomous trucks are "close to inevitable," says Ted Scott, director of engineering and safety policy for the American Trucking Associations. "We are going to have a driverless truck because there will be money in it," adds James Barrett, president of 105-rig Road Scholar Transport Inc. in Scranton, Pa. Roughly speaking, a full-time driver with benefits will cost $65,000 to $100,000 or more a year. Even if the costs of automating a truck were an additional $400,000, most owners would leap at the chance, they say. "There would be no workers' compensation, no payroll tax, no health-care benefits. You keep going down the checklist and it becomes pretty cheap," adds Mr. Barrett of Scranton, who says he can't find enough drivers. Safety is why so-called "closed-course" uses, which keep automated trucks away from the public, are happening first.  In an Australian mine, in a scorched, wretched area called The Pilbara, Caterpillar is today running six automated model 793f mining trucks. Stuffed with 2,650 horsepower and more than 25 million lines of software code, they haul away layers of rock and dirt, up and down steep grades. Traditionally, these trucks would require four drivers to operate 24 hours a day. Today the trucks use guidance systems to run on their own, only monitored by "technical specialists" in a control room miles away. If an obstacle appears in its path, the trucks have enough onboard brain power to decide whether to drive over or around it.

The Price of ‘Made in China’ - HERE is a symbol of China’s assault on the American economy: the Verrazano-Narrows Bridge, which connects Brooklyn and Staten Island. This landmark, which opened in 1964, is North America’s longest suspension bridge. It’s also in urgent need of renovation. Unfortunately, $34 million in steel production and fabrication work has been outsourced to China.  How did this happen? The Metropolitan Transportation Authority says a Chinese fabricator was picked because the two American companies approached for the project lacked the manufacturing space, special equipment and financial capacity to do the job. But the United Steelworkers claims it quickly found two other American bridge fabricators, within 100 miles of New York City, that could do the job.  The real problem with this deal is that it doesn’t take into account all of the additional costs that buying “Made in China” brings to the American table. In fact, this failure to consider all costs is the same problem we as consumers face every time we choose a Chinese-made product on price alone — a price that is invariably cheaper.

How Much Is Oil Supporting U.S. Employment Gains? - The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry's lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord. API commissioned a report from PricewaterhouseCoopers, which said the U.S. oil and gas industry supported more than 9 million jobs in 2011, a 6.5 percent increase from the last assessment in 2009. In a state like Texas, which hosts a significant portion of the U.S. onshore oil reserves, API said the industry supported 2 million jobs and made up 33 percent of the state's economy.

Random Thoughts On the Employment Report and the Employment Situation - First, thanks to NDD for covering the employment report on Friday.  I want to add my inflation-adjusted two cents to the conversation. As I noted last week, the overall employment situation is still weak.  Aside from the leading indicators (which are strong) confidence is low, employers are tentative in their actions and the labor force is horribly underutilized. This report adds to the overall impression that we are still in an economic malaise. First we have the downward revisions for the preceding two months, totaling 26,000.  While this is not a vast amount of people, it is still a downward move, which is never good news. The decrease in hours and pay is also troubling.  Some of this is to be expected as the economy is expanding so slowly as to indicate fairly depressed overall demand. Also adding downward pressure to wages is the still high unemployment rate, indicating employees just don't have much negotiating leverage. Let's look at some inner details of US employment growth since the end of the recession:

Why the mediocre U.S. July jobs report was worse than it looked -  Thomas Lam, chief G3 economist at OSK-DMG/RHB, says the underlying details of the report make employment conditions actually look worse than at first glance. Here’s why:The most striking aspect of the Jul employment report is that details of the release appear generally weaker than the uninspiring headlines figures.  The nonfarm payrolls print of 162k in Jul, while modestly softer than expectations, was accompanied by narrower gains in private payrolls (the weakest 1-month and 3-month diffusion data since Aug & Sep 2012), and net downward revisions of 26k in prior months (-19k in May and -7k in Jun, confined within private employment).  Moreover, the employment and workweek details from the Jul release imply that real GDP growth in early Q3 2013 might be tracking weaker than the advance Q2 2013 print of 1.7%. Our proprietary leading indicator of payrolls, the Forward-Looking Indicator of Payrolls (or FLIP), which foreshadowed a weaker trend in private payroll growth recently, continues to signal downside risks to private employment growth in the pipeline.  Similarly, our calculations also suggest that private job growth within the more cyclically-sensitive sectors slowed markedly in Jul to only 9k from roughly 60k in the prior two months (with the 3-month run-rate trending lower).  Essentially, the foregoing decomposition suggests that private employment growth has probably been driven by counter-cyclical and less-cyclical industries over the last two months.

Why The Unemployment Rate Is Irrelevant - The media, the financial markets and investors have become fixated on the unemployment rate, as reported by the Bureau of Labor Statistics, particularly since it was directly linked by the Federal Reserve to its current bond buying program. What is clearly evident is that, despite the headline reports, there is clearly an alarming divergence in employment from the long-term trend.  The structural shift in employment away from manufacturing and production to a service and outsourced based economy has clearly created a deviation that will not likely be corrected for decades to come.  The implications for the Federal Reserve, and the economy, should be concerning.  While the hope is that the economy will suddenly spark back towards stronger growth; the supply/demand imbalance suggests otherwise.

Update: When will payroll employment exceed the pre-recession peak? - About two years ago I posted a graph with projections of when payroll employment would return to pre-recession levels (see: Sluggish Growth and Payroll Employment from November 2011). In 2011, I argued we'd continue to see sluggish growth (back in 2011 many analysts were forecasting another US recession - those forecasts were wrong). On the graph I posted two lines - one with payroll growth of 125,000 payroll jobs added per month (the pace in 2011), and another line with 200,000 payroll jobs per month.  The following graph is an update with reported payroll growth through July 2013. The dashed red line is 125,000 payroll jobs added per month. The dashed blue line is 200,000 payroll jobs per month.  Both projections are from November 2011.So far the economy has tracked fairly closely to the blue line (200,000 payroll jobs per month). Right now it appears payrolls will exceed the pre-recession peak in early to mid-2014.    Currently there are about 2 million fewer payroll jobs than before the recession started, and at the recent pace of job growth it will take another 11 months to reach the previous peak.   Note: I expect another upward adjustment when the annual benchmark revision is released in January, so we will probably reach the previous peak in fewer than 11 months. Of course this doesn't include population growth and new entrants into the workforce (the workforce has continued to grow).

Job Growth Trends by Type of Job - Here is an interesting chart by reader Tim Wallace that shows growth on jobs in five distinct job categories: Construction, Manufacturing, Hospitality, Retail, and Government. Wallace Comments On Government Jobs: "Remember, this is only direct government payrolls, local, county, state and federal, and does not include the millions of contracted positions from privatization. I am still trying to find a reputable way to extract those numbers. Note the steady, steep growth in government jobs over the years, only dipping and then going flat in 2009. The growth in working age population since 1939 is about 150%, the growth in government jobs about 440%. This is more than a little skewed. On Construction Jobs: Construction staffing levels go back to May of 1997. Since then the working age population is up by 43 million, a 21% population increase, with no increase in construction jobs. On Manufacturing Jobs: Manufacturing jobs are now back to the levels of February 1946. Since then, working age population has increased by 144 million. Manufacturing jobs peaked around June of 1979 at 19.6 million and was about 17.3 million in early 2000. Manufacturing jobs now total approximately 12 million.

What is driving changes in the job market? - How much can the government do to help boost the number of jobs? The answer to that question depends on why labor markets are struggling. Here's one scenario: A recession causes a corresponding drop in demand for goods and services. In such a cyclical downturn, policymakers can help by replacing the lost demand. But if the changes are structural, such as when unemployment is due to skill mismatches, technological advances, or changes in what people purchase that require resources to be reallocated, policymakers are far less able to help. So an important question is whether the labor market is being hampered by demand-side cyclical problems, or supply-side structural issues. The recent Employment Situation Report from the Bureau of Labor Statistics for part-time work sheds light on this issue. Part-time employment grew to record levels during the recent recession, and while the number of workers on part-time has declined recently, the steady decline has been very slow -- even slower than the fall in unemployment. One possible explanation for the disconnect between the change in labor market conditions generally and changes in part-time employment is structural change in the market for part-time workers driven by technological change and globalization. However, a look at the underlying components of the overall part-time measurement casts doubt on the structural change explanation.

Mark Thoma, cyclical unemployment & insufficient effective demand - Mark Thoma posted an article about why labor markets are struggling, “What is driving changes in the job market?” at CBS Money watch. He basically says that the labor market problems are cyclical, which means a Keynesian demand-deficient unemployment. There isn’t enough demand to allow unemployment to fall more rapidly. The normal Keynesian solution to cyclical unemployment is for the government to provide deficit spending and for the Federal Reserve to provide expansionary monetary policy. The idea behind deficit spending is that the government provides the demand that is lacking in the economy. The idea behind the expansionary monetary policy is that low interest rates will increase non-government spending. And we see, Mark Thoma ended his piece in true Keynesian style… it means policymakers, if they choose to, could use fiscal as well as monetary policy to bolster the recovery of the labor market.”But there is a problem. From my work on effective demand, I showed that a low labor share of national income actually lowers the equilibrium level of GDP using a circular flow model. In that model, investment is increased, as is the intention with expansionary monetary policy. Real GDP grows at a certain rate to a certain equilibrium level of GDP. But if we lower labor share of income at the same time, real GDP grows at a slower rate and consequently the equilibrium level of real GDP is lowered. In fact, labor share has fallen a full 5% since the crisis. The effect of this is greater than people realize apparently.

Job Market Faces New Problem, Hitting One Unlucky Group Really Hard - It's not as if the job market is blazing hot for anyone lately, but new data shows that one key demographic group that has historically been a leader, is now badly falling behind. According to Nick Colas, the chief market strategist at ConvergEx Group, recent graduates under 25 years-old are in a particularly bad spot right now. "It's usually college grads that do well," Colas says in the attached video."They get the first time jobs, they're pretty cheap to employ, and generally have pretty high job satisfaction." But, he says since the recession new government data shows that this unlucky group stands out in three key ways like never before.

  • Overqualified: 52% of recent grads are in jobs where a college degree is not required. Colas calls this the "most startling" new problem and says it clearly leads to high job dissatisfaction, which itself leads to other problems.
  • Job Hunting at Work: Almost one in three recent grads admit to looking for a new job while on the clock at their current job. "While they're at work doing job A, they're looking for job B," he says.
  • Huge Pay Cuts: Despite ever increasing average tuition costs for a four-year degree ($63,000 public, $130,000 private), the pay-out when the cap and gown comes off is actually going down. In fact, Colas says recent grads now earn about $3,200 less today than they did in 2000. "It's much less, up to 30% less in many cases," he says.

The “New Economy” Is The No Jobs Economy - Official government statistics are make-believe. The government makes inflation and unemployment disappear by how it defines inflation and unemployment, and it makes the economy grow by how it defines Gross Domestic Product. The definitional basis determines the statistical result.For example, in his report on the official GDP revisions released July 31, John Williams ( writes that “academic theories, often with strong political biases, have been used to alter the GDP model over the years, resulting in “Pollyanna Creep,” where changes made to the series invariably have had the effect of upping near-term economic growth.” In other words, definitional changes produce economic growth whether or not the economy produces economic growth. Inflation is made to disappear by substituting lower priced items for higher priced items and by defining price rises as quality improvements. Thus, the higher prices don’t count as inflation.  Unemployment disappears by defining discouraged workers who cannot find employment as people who are no longer in the work force. They simply are disappeared out of the ranks of the unemployed. Despite the absurdity of the government’s data, Wall Street awaits with baited breath each new release to decide whether markets should go up or down or stay the same. In other words, the financial markets themselves take guidance from make believe numbers. In short, capitalism is rudderless. It has no reliable indicators. Everything is rigged to support the Matrix which keeps the population in a stupor.

Visualizing The Collapse In US Job Security - Day after day we are blessed with media prognostications on the employment data. We are incessantly fed 'facts' and data that shows how great this recovery is but more still needs to be done (so please don't taper quite yet). We have been vociferous in the exposure of facts about the 'quality' versus 'quantity' of jobs in the 'recovery' but there is another sentiment-sapping angle to the employment environment in the US. As Bloomberg's Rich Yamarone notes, the number of people with a job that were not at work in June or July because they were on vacation fell to 11.2 million this year from 11.59 million a year ago, a far cry from the 13.5 million vacationers in 2008 just prior to the Great Recession. Workers may be too uneasy with their situations to take off and enjoy the summer. Perhaps the need for a living real disposable personal income has kept them at their desks longer this year.

Out of Work Over 9 Months? Good Luck Finding a Job - Do the long-term unemployed face a stigma that keeps them from finding jobs? A new experiment suggests the answer is “yes” — at least for low-skilled workers. The scourge of long-term unemployment has been one of the defining characteristics of the recession and slow recovery. More than three million Americans have been out of work for more than a year, a figure that leaves out millions of others who have given up looking for work because they can’t find jobs. Economists worry many of them will never work again.Particularly troubling are suggestions that the long-term jobless bear a stigma that leads companies to reject otherwise qualified candidates. The National Employment Law Project has highlighted job postings that explicitly require applicants to be currently employed; many job-seekers have stories of interviews that ended shortly after the, “So, where are you working now?” questions. Beyond such anecdotal evidence, however, economists have struggled to determine how big an issue the so-called scarring effect really is. There’s no question that workers who have been unemployed longer have a much tougher time finding work. But stigma is only one possible explanation for that pattern. Job seekers might lose hope over time stop searching as hard for work. Perhaps their networks break down over time, meaning they miss out on job opportunities because they hear about them late, or not at all. Or perhaps the best candidates get hired first, so the ones left in long-term unemployment are less attractive to employers for reasons unrelated to their joblessness. Economists have tried to isolate the various factors, with limited success.

Employers Show "Strong Distaste" For The 3 Million Long-Term Unemployed - There are still more than 3 million Americans who have been unemployed for more than 52 weeks and, as WSJ reports, economists (via recent studies) worry they will never work again. Of course, with benefits at such heights (and work punished), it is not surprising but on the demand side, for the long-term unemployed, interview "callback rates decrease dramatically at 9 months of unemployment." Worst still, for those applying for medium-to-low skilled jobs (so the majority), being long-term unemployed reduced interview requests by 20% - the equivalent of shaving four years of work experience off their resumes. Critically, one study found employers showed "a strong distaste for applicants with long spells of non-employment."

Number of the Week: Teens Face Worst Labor Market - 12%: The share of the unemployed who are teenagers. The entire working population has suffered from a slow jobs recovery, but no group has had a harder time than teenagers. The unemployment rate for people 16 to 19 years old is 23.7%, compared to 7.2% for the population as a whole. In fact, when you take teens out of the equation, the jobless rate for people 20 years and older is just 6.8%. And while the overall unemployment rate is down 25% from its peak, the teen rate is down just 13%. Part of the reason that the unemployment rate for teens is so high is structural. In the 1940s more than half of teenagers were in the labor force, and that number grew as women started working in greater numbers. It peaked in 1978 at just shy of 60%. Today only about a third of 16-to-19 year olds are working or looking for a job, a historically low level. Most people in that age range are enrolled in school and not looking for work. But those who are looking for work face a daunting job market. Teenagers make up less than 4% of the labor force, but 12%, or about one in eight, of the 11 million unemployed is between 16 and 19 years old.

Summer Jobs 2013: Zero New Jobs for Teens - The most remarkable thing was documented in the July 2013 employment situation report. There was absolutely no change in the number of employed teens in the United States from June to July 2013.  Zero. Nil. Zip. Nada. Zilch.  Meanwhile, the number of young adults Age 20 through 24 who were counted as having jobs increases by 49,000, while the number of adults Age 25 or older rose by 178,000, for a total month-over-month increase in the number of Americans with jobs of 227,000, which was enough to lower the official unemployment rate in the U.S. to 7.4%. That increase puts the total number of employed Americans at 144,285,000. Of these, 126,162,000 are Age 25 or older and 13,654,000 are between the ages of 20 and 24. Meanwhile the number of teens with jobs in July 2013 is 4,469,000. Which just happens to be exactly the same number of U.S. teens that were reported as having jobs in June 2013.  It would seem that President Obama has once again failed to help teens get summer jobs, as both he and a large number of Democratic Party mayors across the nation who partnered with the President this past April appear to have been completely impotent in their efforts to create any notable improvement in summer job opportunities for U.S. teens in their communities this summer.

The Trend Toward Part-Time Employment: A Closer Look - The monthly employment report is among the most popular and controversial of the government's economic reports. The latest one released on Friday was no exception, with its weaker-than-expected new jobs but a 0.2% decline in the unemployment rate from 7.4%. One of the reasons the monthly employment report is so controversial is that it's an incredible hodgepodge of data from bipolar sources: the Current Population Survey (CPS) of households and the Establishment Survey of businesses and government agencies. For example, the Nonfarm Employment number comes from the establishment data, but the unemployment rate is calculated from household data. Additional complications are the substantial revisions to Establishment data, and the complexities of seasonal adjustment, which is available for many, but not all, of the data series. Full-Time vs. Part-Time Employment in the 21st Century Let's take a close look at some CPS numbers on Full and Part-Time Employment. Buried near the bottom of Table A-9 of the Household Data are the numbers for Full- and Part-Time Workers, with 35-or-more hours as the arbitrary divide between the two categories. The Labor Department has been collecting this since 1968, a time when only 13.5% of US employees were part-timers. Today that number has risen to 19.6%. Here is a visualization of the trend in the 21st century, with the percentage of full-time employed on the left axis and the part-time employed on the right. We see a conspicuous crossover during Great Recession.

ObamaCare Spurs Shift Away From 30-34-Hour Workweek - Something odd is happening to the workweek, unpublished data from the Current Population Survey show. Even as the number of people working has grown by 2.2 million, or 1.6%, over the past year, the number clocking 30 to 34 hours a week has shrunk. In the second quarter, the number of workers putting in 30 to 34 hours at their primary job fell by a monthly average of 146,500, or 1.4%, from a year earlier. By comparison, the number working 25-29 hours per week in their primary job rose by 119,000, or 2.7%. This oddity has an obvious explanation: ObamaCare's employer mandate applies only to full-time workers, which the law defines as 30 hours per week. As the White House and some liberal economists step up denials that the 2010 health law is messing with the work hours of modest-wage workers, these CPS data provide the clearest evidence yet that the employer mandate is having a measurable impact. Along with more workers clocking just below 30 hours in their primary jobs, CPS data show the number working 20-29 hours in secondary jobs rose 105,000, or 7.6%, from a year ago. Other Labor Department data also suggest an ObamaCare effect. The average retail workweek for nonsupervisors shrank to a three-year low of 30 hours in July, down from a post-recession peak of 30.8 hours in January 2012. That's the sharpest decline in the retail workweek since the early 1980s.

Is Obamacare Forcing You to Work Part-Time? - Here’s the next conservative argument against President Barack Obama's health care law: It’s causing employers to shift full-time workers into part-time. Too bad it’s wrong. The law requires employers to sponsor health insurance for all full-time employees. It defines “full-time” as 30 hours per week or more. To avoid that burden, conservatives are saying, businesses are replacing full-time positions with part-time ones. Christopher J. Conover, a researcher at the right-leaning American Enterprise Institute, and Jed Graham, an economic-policy reporter, have recently stated the case in Forbes and Investor’s Business Daily. (You can also find it in the seedier parts of the right-wing Internet, such as this post on Zero Hedge.) In the first sixth months of 2013, Conover finds, 4.3 part-time jobs were created for every one full-time one. That's unusual, he says, as the U.S. has historically created three full-timers for every part-timer. And Graham points to a 2.7-percent increase in the number of people working 25 to 29 hours per week and a 1.4-percent drop in the number working 30 to 34 hours per week. Both conclude Obamacare is to blame. Both analyses are flawed. There’s no substantial evidence yet that employers are switching from full-time to part-time in response to health-care law. I do think that will happen sometime -- the cutoff is indeed a strong incentive for employers to reduce work hours -- but Conover and Graham are misleading their readers.

Obamacare isn't destroying jobs - Friday’s employment report showed that the U.S. job market continues to add jobs at a moderate pace. Employers are creating enough jobs to slowly reduce the unemployment rate, which fell to 7.4 percent — the lowest it has been since December 2008.But many of the jobs added in recent months have been part-time, and this has led critics of Obamacare to argue that the implementation of health-care reform is the culprit. Because the legislation (officially the Affordable Care Act, or ACA) requires employers with at least 50 full-time workers to offer them health coverage or pay a penalty, the bill’s detractors claim that it creates a disincentive to hire full-timers and that you can already see the shift to part-time work in the data. We’ll get to the incentive in a moment, but the critics are mistaken: Recent data provide scant evidence that health reform is causing a significant shift toward part-time work. The share of part-time jobs rose sharply during the recession, as it always does — employers always cut workers’ hours in downturns. Here’s the question: Has this share continued to grow as we approach the start of the ACA’s employer mandate, which was recently pushed back a year to 2015? The answer is no. Part-time workers represent 19.0 percent of total employment — below the post-recession peak of 20.0 percent and exactly the same as a year ago. A more rigorous test, shown in the chart below, examines the recent trend in the share of involuntary part-timers — workers who’d rather have full-time jobs but can’t find them. If the ACA’s employer mandate were distorting hiring practices in the way critics claim, we’d expect the share of involuntary part-timers to be growing. Instead, it is down about one percentage point off of its peak.

Can We See the Effects of the Play-or-Pay Obamacare Mandate in the Data Yet? - I am confident that as ObamaCare is implemented we will see some firms reconfigure themselves to rely more on part-time and less on full-time workers--and that this distortion will be one of the costs of ObamaCare. But I don't expect this to be a large effect. And I do not believe that we are seeing it yet. The rise in the relative number of part-time workers looks to be, so far, due 100% to the depression plus statistical noise due to the small sample of the CPS.  Wunderkind Evan Soltas agrees with me: Is Obamacare Forcing You to Work Part-Time?: Here’s the next conservative argument against President Barack Obama's health care law: It’s causing employers to shift full-time workers into part-time. Too bad it’s wrong. The law requires employers to sponsor health insurance for all full-time employees. It defines “full-time” as 30 hours per week or more. To avoid that burden, conservatives are saying, businesses are replacing full-time positions with part-time ones.[But] there’s no substantial evidence yet that employers are switching from full-time to part-time in response to health-care law. I do think that will happen sometime -- the cutoff is indeed a strong incentive for employers to reduce work hours…

OBAMACARE,THE SEQUESTER and part time employment - There are widespread claims that firms are cutting hours worked and converting full time jobs into part time jobs because of Obama-care. So what does the data say. Below is a table of unpublished data from the Bureau of Labor Statistics (BLS) of part time employment by private and government employers. The government data includes state, local and federal part time workers but I have also broken out federal part time workers in a separate column. The data also is not seasonally adjusted, so generally month to month comparisons are meaningless and one should make comparisons between a month in 2013 and the same month in 2012. The data shows that private part time employment in 2013 is lower in every month but one than it was in the same month of 2012. Moreover, federal part time employment was just the opposite, rising in every month but January. In particular, in June and July, 2013, when firms were supposedly cutting hours worked to avoid having to pay for employee health insurance over 100% of the increase in part time employment stemmed from federal government employment. This in turn was generated by employee furloughs brought about by the sequestration.

Part Time Employment and the Sequester - Part of the reason employment and hours worked, in particular, have been so weak in early 2013 is the rapid growth of part-time employment. Part time employment is volatile and subject to many influences. From December to June part time employment rose 589,000. That is a 2.2% — almost 5% annualized – growth rate. Part time employment jumped from 18.4 % of total employment in December to 19.0% in July. The unusually large increase in part time employment is due almost exclusively to the sequester. For example, at the Department of Defense (DOD) some 650,000 civilians must take 11 days off in the second and third quarters. They have 26 weeks, but after adjusting for federal holidays, vacations, sick leave, etc., the effective time is 22 weeks. This works out that DOD employees must take an involuntary, unpaid day-off every other week. Consequently, on any given week about half of the DOD civilian workers (325,000) became part time employees. That is 55% of the 589,000 jump in part time employment in the first half of 2013.. But the sequester is impacting all federal employees and is spreading to federal contractors. Total federal civilian employment is 2,760,000. If half are now part time workers that would be 1,380,000, or 134% of the 589,000 jump in part time employment. Even if only 25% of non-DOD federal civilian workers are now part time, it would still mean that the sequester is converting over a million jobs into part-time work.

How Much Is Job Market Really Improving? - There were 2.99 job seekers for every open job in June, the Labor Department said Tuesday, the first time the ratio has dropped below three since October 2008. Unemployed workers still have it a lot harder than in the mid-2000s, when there were consistently fewer than two workers per opening, but their prospects are far better than in the depths of the recession, when there were more than six job seekers for every job. July data won’t be available for another month, but it likely showed further improvement: 19.8% of unemployed workers found jobs in July, according to Friday’s jobs report, the best mark of the recovery. But job seekers aren’t seeing their odds improve because employers are stepping up their hiring. Companies are posting somewhat more job openings — 3.9 million in June, up 144,000 from a year earlier — but they remain slow to fill them. Hiring actually fell to its lowest level of the year in June, and has been little better than flat over the past two years. Rather, unemployed workers are doing better because there are fewer of them competing for jobs. Layoffs have fallen back to pre-recession levels and are well below the number of hires. So as job seekers find work, they aren’t being replaced on the unemployment rolls by new job losers. New claims for unemployment benefits last week fell to a five-and-a-half-year low.

48% of Americans Hold Full Time Jobs, Same As In 1982 Recession - When the Fed began QE3 in late 2012, it added more fuel to an engine that was already running at its natural capacity. As a result, job growth has not accelerated in response to the flood of money printing.  House prices and stock prices have inflated, thanks to too many dollars chasing too few assets. The Fed is blowing massive asset bubbles while the economy plods along at a growth rate little different from when it was during a long pause in QE in 2011 and 2012. Money printing works to inflate asset prices, but it does nothing to stimulate job growth. Making matters worse, the data shows that full time jobs are growing even more slowly than the tepid growth rate of total jobs. The US is becoming a nation of part timers. Just 48% of Americans hold full time jobs today, down from 54% in 2000. The actual NSA (not seasonally adjusted) number of persons reported in the CPS as employed in July rose by 272,000 from June. Over the previous 10 years, July virtually always had an increase, except for July 2012, which had a decline of 76,000. The average gain for the last 10 Julys was 337,000. The year over year gain in total employment under the CPS was 1.4%, up from 1.1% in June. The annual growth rate has decelerated from 2.2% last October. The growth rates were actually stronger before the Fed started pumping money into the economy in November, when it settled its first MBS purchases in QE3.

BLS: Job Openings little changed in June - From the BLS: Job Openings and Labor Turnover Summary: There were 3.9 million job openings on the last business day of June, little changed from May, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.1 percent) and separations rate (3.0 percent) also were little changed in June. ...Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... The number of quits (not seasonally adjusted) was little changed over the 12 months ending in June for total nonfarm, total private, government, all industries, and all four regions.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  This series started in December 2000.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for June, the most recent employment report was for July.

The Lie Must Go On: BLS "Catches" BLS At Misrepresenting 2013 Job Gains By Over 40% - In April, according to JOLTS, there were 108K job additions. According to the NFP data, the job gain was 199K or 84% more than per JOLTS In May, according to JOLTS, there were 109K jobs additions. According to the NFP data, the job gain was 176K or 62% more than per JOLTS In June, according to JOLTS, there were 120K jobs additions. According to the NFP data, the job gain was 188K or 57% more than per JOLTS Adding across for all of 2013, JOLTS would have us know that only 837K jobs were added (or 140K per month average). Compare this to the 1,185K new jobs according to the Establishment Survey (198K per month average). -> A 42% difference!

Jobless Claims in U.S. Fall Over Month to Lowest Since 2007 - The fewest workers applied for U.S. unemployment benefits over the past month since before the last recession, indicating the labor market is making progress. The number of claims in the four weeks ended Aug. 3 declined to 335,500 on average, the least since November 2007, a Labor Department report showed today in Washington. Compared with a week earlier, claims rose by 5,000 to 333,000, in line with the median forecast of 50 economists surveyed by Bloomberg. The level of firings is settling into a lower range following swings in July caused by annual auto plant shutdowns, showing employers want to hold on to workers to meet sales. That may be a precursor to a pickup in hiring, which will sustain household spending, the biggest part of the economy, and underpin growth in the second half of 2013.

Weekly Initial Unemployment Claims at 333,000, Four Week Average Lowest since 2007 - The DOL reports:In the week ending August 3, the advance figure for seasonally adjusted initial claims was 333,000, an increase of 5,000 from the previous week's revised figure of 328,000. The 4-week moving average was 335,500, a decrease of 6,250 from the previous week's revised average of 341,750. The previous week was revised up from 326,000. The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 335,500. The 4-week average is at the lowest level since November 2007 (before the recession started). Claims were below the 336,000 consensus forecast.

The unemployment claims rate decline is slowing -  As Lee Adler points out, "claims data rings no bell to trigger central banker Pavlovian response" (see post). Today's unemployment claims number - without the unreliable seasonal adjustments - seems to follow the longer-term trend of ongoing declines.But unlike the unemployment rate number, which has been declining in a linear fashion (see post), the ongoing reduction in claims is gradually slowing. The slowdown is particularly visible in the continuing claims (insured unemployment) number.  Any type of nonlinear fit will result in a substantial curvature (with positive second derivative). Part of the issue of course is that, according to some sources, about a million new workers enter the US labor force each year.  At some point we could therefore see this trend begin to bottom out, as the job creation rate is offset by a growing labor force.

Vital Signs Chart: New Jobless Claims at Lowest Since 2007 -- One benchmark of the U.S. labor picture is looking up. The four-week moving average of initial claims for unemployment insurance has tumbled to a seasonally adjusted 335,500, its lowest point since late 2007. Initial claims rose by 5,000 in the week ended Aug. 3 to 333,000, but seasonal factors, such as factory closings, can skew the data. The trend reflects a slowly improving labor market.

Fewer Pink Slips Are Great. Now We Need More Offer Letters - U.S. businesses for the most part are no longer laying off large numbers of workers. Last week, 333,000 workers filed for jobless benefits, a small 5,000 gain from the nearly five-year low of the preceding week. The four-week-moving average which smooths out volatility fell to the lowest reading since November 2007. But while pink slips are fading, job offers remain sparse. Companies are basically maintaining their staffing levels. According to Labor Department data, the hiring rate–the gross number of hires as a percentage of employment–has hovered around 3.2% for the fiscal year ended in June while the rate of separations, including layoffs, firings and quits, has stayed near 3.1%. The close tracking of the hiring and separation rates is why the monthly net change in nonfarm payrolls–essentially the difference between gross hirings and job losses–remains modest. The demand for labor is behaving differently from the last expansion. After the 2001 recession and so-called jobless recovery, the hiring rate picked up from 3.4% in early 2003 to 4.1% in late 2005. The separation rate, while generally below the hire rate, ticked up a bit but that reflected more people quitting, confident of finding a better job quickly. The key difference to each period is the performance of output. Real gross domestic product expanded by 3.8% in 2004 and 3.4% in 2005. Real GDP increased a modest 2.8% in 2012 and only 1.4% in this year’s first half.

Real Hourly Wages and Hours Worked: Off Their Interim Highs  - Here is a look at two key numbers in the August monthly employment report for July: Average Hourly Earnings and Average Weekly Hours. The government has been tracking the data for Production and Nonsupervisory Employees for decades.  I want to look closely at a five-snapshot sequence. First, here is a chart of the Average Hourly Earnings. I've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward. But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, I've used the seasonally adjusted CPI, and I've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. As we see, the difference is amazing.

President Obama's Amazon jobs pitch is hard to buy with one click - President Barack Obama inadvertently foreshadowed July's mediocre employment numbers when he picked a new Amazon warehouse in Chattanooga, Tennessee, for a speech last week about the need to improve the quality of American jobs. Calling for stable middle class jobs from an Amazon warehouse is like announcing a fitness initiative in a grocery store's snack aisle, and nodding approvingly as unhealthy-looking Americans toss giant bags of potato chips into their carts. Over the course of his speech, Obama stumped for manufacturing jobs "Made in America", and for funding employment opportunities that upgrade our forever-crumbling infrastructure. He called for continued investment in wind, solar and natural gas, and all but begged Congress to raise the minimum wage. We all need "a good job with good wages", he said. The closest a job at an Amazon warehouse is likely to come to all this is that it is located in the United States.

Wages in the US remain suppressed - One of the key reasons for the mediocre economic growth in the US has been the ongoing weakness in household wages. As the chart below shows, US median inflation-adjusted household income (red line) remains well below pre-recession levels (the chart also appropriately shows U6 unemployment). A large part of this wage dislocation can be explained by significantly higher use of part-time labor in the US. The chart below shows the ratio of part-time to total payrolls which remains elevated.Furthermore, a good part of the US job creation over the past couple of years has been in the low wage sectors. That, combined with the part-time employment trend (above) keeps household wages from rising substantially in spite of lower unemployment figures. The cheaper labor costs in the US and the recent increased use of part-time workers have significantly improved corporate bottom lines. Some US labor advocates argue that over the years corporations have been able to participate in the overall economic growth in part at the expense of lower wages (chart below). The counterargument of course is that this wage compression is critical for US-based firms to remain competitive globally and should ultimately result in more US-based business activity and hiring, particularly in manufacturing (see post). While we've seen more firms moving facilities to the US, it has not been the panacea some have been hoping for.

Why Do So Many Jobs Pay So Little? - James Surowiecki - Historically, low-wage work tended to be done either by the young or by women looking for part-time jobs to supplement family income. As the historian Bethany Moreton has shown, Walmart in its early days sought explicitly to hire underemployed married women. Fast-food workforces, meanwhile, were dominated by teen-agers. Now, though, plenty of family breadwinners are stuck in these jobs. That’s because, over the past three decades, the U.S. economy has done a poor job of creating good middle-class jobs; five of the six fastest-growing job categories today pay less than the median wage. That’s why, as a recent study by the economists John Schmitt and Janelle Jones has shown, low-wage workers are older and better educated than ever. More important, more of them are relying on their paychecks not for pin money or to pay for Friday-night dates but, rather, to support families. Forty years ago, there was no expectation that fast-food or discount-retail jobs would provide a living wage, because these were not jobs that, in the main, adult heads of household did. Today, low-wage workers provide forty-six per cent of their family’s income. It is that change which is driving the demand for higher pay.

In search of higher wages -- James Surowiecki’s latest column examines the relentless and discouraging growth in America's low-wage economy. Five of the six fastest-growing job categories pay wages below the median, he says, and are increasingly home to skilled workers and primary earners, as opposed to teenagers or the unskilled. The contrast with the past is striking, he writes: In 1960, the country’s biggest employer, General Motors, was also its most profitable company and one of its best-paying. It had high profit margins and real pricing power, even as it was paying its workers union wages. And it was not alone: firms like Ford, Standard Oil, and Bethlehem Steel employed huge numbers of well-paid workers while earning big profits. Today, the country’s biggest employers are retailers and fast-food chains, almost all of which have built their businesses on low pay—they’ve striven to keep wages down and unions out—and low prices. Today some firms earn fat profit margins, like Apple, but employ relatively few workers. And Mr Surowiecki notes that the big employers like Walmart or McDonald's have skimpy profit margins which give them scant room to raise wages. He argues: The grim truth of those numbers is that low wages are a big part of why these companies are able to stay profitable while offering low prices. Congress is currently considering a bill increasing the minimum wage to $10.10 over the next three years. That’s an increase that the companies can easily tolerate, and it would make a significant difference in the lives of low-wage workers. But that’s still a long way from turning these jobs into the kind of employment that can support a middle-class family.

Low-wage America - Sixty-one percent of the jobs created so far this year have been in low-paying industries, even though employment in these sectors constitutes less than 40 percent of total jobs in the US, according to an analysis by Moody’s Analytics. The fastest job growth has been in retail sales, food preparation, freight and warehouse work, wait staff, and home health care—positions that pay less than $12 an hour. The Moody’s report noted that middle-income jobs have constituted less than 22 percent of new jobs added so far this year, while high-paying jobs have amounted to less than 17 percent.Partly as a result of the growth of low-wage employment, average hourly earnings fell by two cents last month, to $23.98. This is on top of an enormous erosion of wages over the past five years. Between 2007 and 2011, the US median household income plunged by 11.6 percent, from $57,143 (in 2011 dollars) to $50,502, according to Census Bureau figures. A 2012 report by the National Employment Law Project found that low-wage jobs, paying between $7.69 and $13.83, constituted the majority of jobs created in the US since the 2008 Wall Street crash. By contrast, medium-wage jobs—which made up 60 percent of the job losses during the economic downturn—represented only 22 percent of job growth during the “economic recovery.” The overwhelming growth of low-wage and part-time employment has contributed to a significant increase of poverty and social distress.

Myth and Reality: The Low-Wage Job Machine --  Atlanta Fed's macroblog -- In the wake of the July employment report released last week, an interesting graphic appeared in a Wall Street Journal article with the somewhat distressing title "Low Pay Clouds Job Growth." The graphic juxtaposed average wages by sector (as of July 2013) with changes in the numbers of jobs created by sector (from July 2011 through July 2013). I've reproduced that chart below, with a few enhancements: For the 17 sectors, the red circles represent the five sectors with the lowest average wage as of July. The green circles represent the five sectors with the highest average wages, and the blue circles represent those with average wages between the high and low groups. The size of each of the circles in the chart represents the share of employment in that sector during the July 2011 to July 2013 period. The clear implication of the article is that things are even worse than you think: Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. That situation may indeed be something worth worrying about, but if so it is nothing new. The following chart shows the percentages of job gains sorted by low-wage, middle-wage, and high-wage sectors for each of the U.S. expansion periods dating back to 1970: U.S. economists were generally disappointed with the net gain of 162,000 jobs last month, well below forecasts around 180,000 and market talk of a possible reading above 200,000. The jobless rate did fall to 7.4 percent from 7.6 percent, but labor force participation also resumed its recent descent.

40% Of US Workers Now Earn Less Than 1968 Minimum Wage - Are American workers paid enough?  That is a topic that is endlessly debated all across this great land of ours.  Unfortunately, what pretty much everyone can agree on is that American workers are not making as much as they used to after you account for inflation.  Back in 1968, the minimum wage in the United States was $1.60 an hour.  That sounds very small, but after you account for inflation a very different picture emerges.  Using the inflation calculator that the BLS provides, $1.60 in 1968 is equivalent to $10.74 today. According to the Social Security Administration, 40.28% of all workers make less than $20,000 a year in America today.  So that means that more than 40 percent of all U.S. workers actually make less than what a full-time minimum wage worker made back in 1968. That is how far we have fallen.

More Than a Quarter of Fast-Food Workers Are Raising a Child - Think of a typical McDonald's employee -- who comes to mind? A teenager working for extra cash between classes? Some guy who couldn't get himself past high school? A single mom trying to provide for her kid? Chances are your answer will say a lot about your feelings towards the fast food workers who've been striking these past months for a $15 hourly wage.  So, to help clarify any misconceptions out there, John Schmitt and Janelle Jones of the Center for Economic and Policy Research have gone ahead and combed through the most recent census data to create a portrait of the nation's fast food workforce (the tables below are all theirs). A few interesting stats:

  • Almost 40 percent of fast food workers are 25 or older.
  • More than 30 percent have at least some college experience.
  • More than a quarter are parents.

Now in a bit more detail, starting with the age breakdown. The fast food workforce does, in fact, skew young. Thirty percent are teens, and another 30.7 percent are 20-24, meaning they're at least in college range. That said, nearly 40 percent qualify by pretty much anybody's definition of an adult. (The Bureau of Labor Statistics, for its part, reports that median age of "combined food preparation and serving workers," a category that includes your average McDonald's hand, is about 29).

What should the minimum wage be? -Many fast food workers across the country are on strike demanding $15 an hour — more than double the federal minimum wage of $7.25. That $15 figure strikes some as egregiously high. Conservative groups like the Employment Policies Institute — founded by hospitality and restaurant lobbyist Rick Berman — have published editorials arguing that raising the minimum wage would cost the country jobs. For the most part, however, raising the minimum wage — at least a little bit — isn't particularly controversial. A recent Gallup poll found that 71 percent of Americans support President Obama's proposal to increase the minimum wage to $9. But how high should the minimum wage go? Richard Kirsch, senior fellow at the progressive Roosevelt Institute, approaches the problem from the perspective of what workers need to survive and thrive. As such, he agrees with the nation's fast food workers: $15. "If you look at a pretty basic economic living standard, that's about what one person has to make just to support themselves," Kirsch says. "We can't really move the economy forward when a growing sector of the workforce isn't making enough to support their families." The latest report by the Bureau of Labor Statistics found that 46.2 million Americans are living below the poverty line — defined as $11,484 for an individual or $23,021 for a family of four. If a minimum-wage worker puts in 40 hours a week, he or she would make $15,080.

SEIU backs $15 an hour minimum wage — Thousands of workers around the country are putting pressure on the fast-food industry to raise their wages by holding one-day strikes. The fast-food workers are pushing for a pay hike to $15 an hour—more than double what they’re making now. They say it’s impossible to survive on the minimum wage of $7.25 an hour. The Service Employees International Union is standing behind the workers’ demands. “We support the workers demand for $15 an hour and want to hear from the most profitable multinational companies in the world, why not?” said SEIU President Mary Kay Henry on Jansing & Co Monday. With union membership down to a low of just 11% of the workforce, critics argue that organized labor is only hoping to unionize fast-food workers and increase their membership. “This is not about growing unions,” Henry said to Chris Jansing, ‘It’s about the nation respecting the value of work again and helping workers come together and restore their ability to bargain with employers.”Watch the full interview with SEIU President Mary Kay Henry below:

Debunking the Minimum Wage Myth: Higher Wages Will Not Reduce Jobs - Many news stories seem to suggest that economists have decided a higher minimum wage will cause job loss. However, with more analysis, we undercover the truth: there is no clear link between a higher minimum wage and reduced employment. John Schmitt, a Senior Economist at the Center for Economic and Policy Research, reported in February 2013 that multiple meta-studies (studies that use statistical techniques to analyze a large amount of separate studies) found that for both older and current studies alike, there is no statistical significance in the effect of an increased minimum wage.  Accordingly, a few weeks ago, over 100 economists at organizations ranging from the Center for American Progress to Boston University signed a petition in support of increasing the minimum wage. They present current research from well-established organizations such as the National Bureau of Economic Research that shows there are no negative employment effects from minimum wage increases. This includes the most comprehensive data available, based on the increasingly accurate testing that has occurred as more and more states increase minimum wage levels. Even more importantly, this recent series of studies use cutting-edge econometric techniques to control for extraneous variables such as economic downturns and geographic effects. When economists do that, they find that minimum wage increases do not reduce employment.

The Economics of a Higher Wage Floor - There have been a number of recent articles and commentaries about daylong strikes by fast-food workers demanding higher wages.  That has brought out the usual arguments about why we should or shouldn’t increase the legal wage floor, which these days comes in various flavors.  There’s the national minimum wage, which President Obama would like to increase to $9 an hour, there are 18 states (and the District of Columbia) with their own minimums above the federal, and there are many cities with living-wage ordinances, which typically mandate a higher wage floor to workers in a particular sector. The strikers themselves have articulated why they need higher pay.  Many are single parents or second earners from low-income households working in an industry where the median wage is about $9 an hour (and they’re not kids; 73 percent of low-wage restaurant workers are at least 20 years old).  In speeches over the last few weeks, the president has argued for a higher minimum as a weapon against working poverty.  In a Gallup poll in March, 71 percent said the minimum should go up to $9; even 54 percent of conservatives agreed.  A recent study of economists, a group congenitally much less predisposed to price mandates (with the wage being the price of labor), also revealed that many were pretty much O.K. with the president’s proposal.  Less than half agreed that it would hurt low-skilled workers’ employment prospects (none “strongly agreed” with that possibility), and among those who professed high confidence in their responses, 62 percent agreed that the benefits of such an increase outweighed its costs.

Bill Moyers with Richard Wolff on Inequality, Wage Slavery, and Economic Justice from naked capitalism - Bill Moyers has a wide ranging and lively chat with Richard Wolff, Professor of Economics Emeritus at the University of Massachusetts and author of many books including Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It. Wolff is a fierce advocate of the need for policies for fairer wages for workers and argues why better pay is salutary not just for the employees but the broader economy. He also gives considerable historical detail as to how politics and policies evolved to short change ordinary workers. For the time pressed, you can read the transcript here.

Politics Counts: Explaining the Stalemate Over the Minimum Wage - For the last few weeks, the minimum-wage debate has turned to a simple question: Can the people behind the counter earn a living flipping burgers and helping customers? Fast-food workers in major cities around the country have gone on strike to say no. They say they need a “living wage” – a boost in pay that lets them scratch out a better life. In Washington, D.C., the living-wage fight has become an economic drama after the city council passed a special measure that would require “large retailers” to pay employees at least $12.50 an hour. Wal-Mart is threatening to abandon plans for stores in the city and Mayor Vincent Gray has to decide whether he will veto the measure.In some ways, the living-wage debate has developed a national reach. Recent federal employment reports have found that much of the nation’s job growth is coming from the lower end of the pay scale – in areas like food service. So the debate about what those jobs pay suddenly has new urgency.Politically, the living-wage debate follows the lines one would expect. House Republicans have generally been against increasing the minimum wage. PresidentBarack Obama and Democrats want to increase it from $7.25 an hour to $9. But the differences behind the debate run deeper than simple partisanship; they are based, in part, on different economic realities. The number of well-paying jobs has declined all over, but the higher costs of living in and near many big cities leaves those areas in a different place than other communities. And when you overlay the political dispositions of those places, the outlines of the wage fight make some sense, partisanship aside.

For millennials, leaving the nest is hard to do -  Despite an improving economy, many young adults struggling to get decent-paying jobs are increasingly seeking refuge at their parents' homes. Employment hasn't rebounded among Americans ages 18 to 31, the generation generally known as millennials. Marriage also has been pushed off. And what jobs are available often are lower-paying retail, fast-food and other service jobs. “When my parents were my age, they had their own place already, and they came from Mexico,”As the Federal Reserve considers weaning the nation from financial life support, a new study released Thursday by Pew Research Center shows that the number of young adults living with their parents in 2012 rose to a record 36%. Last year, 21.6 million millennials lived in their parents' homes, Pew found, up from 18.5 million in 2007, the start of the Great Recession. The numbers reflect the unsteady reality of millennials today. Some experts believe the rising numbers living with mom or dad could be another sign of changing attitudes toward adulthood, as millennials edge more slowly toward independence than their parents.

Record 21.6 Million Young Adults Live in Their Parents’ Home - In 2012, 36% of the nation’s young adults ages 18 to 31 the so-called Millennial generation—were living in their parents’ home, according to a new Pew Research Center analysis of U.S. Census Bureau data. This is the highest share in at least four decades and represents a slow but steady increase over the 32% of their same-aged counterparts who were living at home prior to the Great Recession in 2007 and the 34% doing so when it officially ended in 2009. A record total of 21.6 million Millennials lived in their parents’ home in 2012, up from 18.5 million of their same aged counterparts in 2007. Of these, at least a third and perhaps as many as half are college students.  The steady rise in the share of young adults who live in their parents’ home appears to be driven by a combination of economic, educational and cultural factors. Among them:

  • Declining employment: In 2012, 63% of 18- to 31-year-olds had jobs, down from the 70% of their same-aged counterparts who had jobs in 2007. In 2012, unemployed Millennials were much more likely than employed Millennials to be living with their parents (45% versus 29%).
  • Rising college enrollment: In March 2012, 39% of 18- to 24-year-olds were enrolled in college, up from 35% in March 2007. Among 18 to 24 year olds, those enrolled in college were much more likely than those not in college to be living at home – 66% versus 50%.
  • Declining marriage: In 2012 just 25% of Millennials were married, down from the 30% of 18- to 31-year-olds who were married in 2007.

 Boomerang Babies – Record Numbers of Young Adults Live with Parents at Terrible Cost - Lynn Parramore from naked capitalism - Yves here.  Recent media commentary on the state of the housing market has finally picked up on something that shouldn’t be news: that most young people are in lousy financial shape and therefore are in no position to buy a home. Many are burdened by student debt, and even if they’ve managed to dodge that bullet, it’s hard to find decently-paid work. Lynn Parramore describes the consequences for people in their 20s and 30s.  America’s young people have been hit so hard by the crappy economy that they can’t even get out the door. A fresh study from Pew Research reveals that 36 percent of Millennials — young adults ages 18 to 31 — are still living under their parents’ roofs. Not since the 1960s have so many young people resorted to couch surfing with mom and dad, a record 21.6 million young adults last year.This is a gigantic sign that something is going horribly wrong in our economy—something that will cost everybody. The U.S. has seen a significant uptick of young people unable to afford to move out on their own since the start of the Great Recession in 2007, when just 32 percent lived with their parents. And if you look beyond college years to the 23-28 range, the number living with parents leapt by more than 25 percent bewteen 2007 and 2011, according to the Census Bureau. Clearly, the ongoing jobs crisis is a major cause: 63 percent of Millennials had jobs in 2012, down from 70 percent in 2007. Young people continue to face a jobs crisis even as the economy improves.  Forty percent of young men are currently living at home, compared to just 32 percent of young women. Men suffered the biggest job losses in the financial crisis, but they also gained the most post-recession jobs. Even if a young person is lucky enough to have a job, the work may be temporary, part-time and/or poorly compensated. Many young people, particularly those eager to pursue careers in journalism, finance and other highly competitive fields, work as unpaid or underpaid interns. New research reveals that nearly half of graduating college students have done unpaid internships, and only 37 percent of them end up receiving job offers. The numbers of unpaid and paid internships — many of which offer only small stipends — are rising.

Food Stamp Use Rises; Some 15% of U.S. Gets Benefits - Food-stamp use rose 2.4% in the U.S. in May from a year earlier, with more than 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.) One of the federal government’s biggest social welfare programs, which expanded when the economy convulsed, isn’t shrinking back alongside the recovery. Food stamp rolls were up 0.2% from the prior month, the U.S. Department of Agriculture reported in data that aren’t adjusted for seasonal variations. Though annual growth continues, the pace has slowed since the depths of the recession. The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), is at 47.6 million, or nearly one in six Americans. Illinois and Wyoming registered double-digit year-over-year jumps in use, while Alaska, Arizona, Idaho, Maine, Michigan, Missouri, New Hampshire, North Dakota, Oregon, Pennsylvania, Utah and Washington state all posted annual drops. Mississippi was the state with the largest share of its population relying on food stamps — 22% — though Washington, DC was a bit higher overall at 23%. One in five residents in Oregon, New Mexico, Louisiana, Tennessee, Georgia and Kentucky also were food-stamp recipients. Wyoming had the smallest share of its population on food stamps — 7%.

Updates on the US Migration Puzzle - The migration puzzle is that while Americans tend to think of themselves as a country where migration is commonplace, the actual rate of migration has been falling since about 1980. William Frey presents some recent evidence on the within-the-U.S. migration rate in a short overview article in the Milken Institute Review, July 2013. He writes: "In 2011-12, 14 states (most of them in the Sun Belt) showed bigger gains than the previous year. Phoenix picked up 37,000 intranational migrants, compared with just 4,000 the year before. At the same time, 27 states, most in the Snow Belt, were losing migrants at an accelerated pace. Metro New York, for example, lost 128,000, compared to 99,000 in the prior 12 months. To be sure, Snow Belt to Sun Belt flows are not close to their peaks, or even to normal levels. In 2005-6 New York lost 290,000 migrants,while Phoenix gained a tad less than 100,000. But there is clearly a thaw."

What’s Bringing On The Apocalypse This Week? How About Immigration Reform? - Just in case plain old hating Messicans wasn’t enough reason to oppose immigration reform, Texas wingnut extraordinaire Cathie Adams, the former state GOP chair and current president of Texas Schlafly Rangers Eagle Forum, has found a new reason: on something called “End Times Radio” last week, she explained that the Senate’s immigration bill legislates the Mark of the Beast, and will bring about the End Times. Leaving aside the question of why that’s something Christianists want to delay — after all, it will get Jebus back here sooner — it feels like wingnuts are finding impending signs of the Apocalypse about as often as the House votes to kill Obamacare (which may or may not require you to have an RFID chip implanted in your butt, too).  So far, Adams has been a minor-league wingnut, but she’s got big dreams, and big ideas. There was her warning last December that smoking the marijuana will fry your brain and turn you into Barack Obama, and her more recent endorsement of the theory that Grover Norquist is a sekrit Muslim, and now we have her discovery of Devil Marks in immigration reform, because the Senate bill includes a requirement for “biometric scanning”: In a further explosion of derp, Adams also worried that the Senate’s immigration bill would promote “sharia law” by flooding America with scary refugees “from Muslim, Hindu, and Buddhist cultures [who] are not here because they love America but because they are fleeing countries, and yet, what kind of culture are they bringing here? They want sharia law, just like what they left that was causing them to be persecuted.” We aren’t sure whether to run screaming or adopt her as a mascot.

Monday Map: Growth in State Tax Collections (2001-2011) - Two weeks ago, we released a Monday Map called "Growth in State Government Direct Spending". This week's follow-up Monday Map shows the changes in state tax collections per capita, and the difference is interesting - most states actually had a decrease in tax collections per capita over the same time interval as the previous map. Given that most states require a balanced budget, what's going on? Two things - first, there's been a huge increase in federal aid to state governments in the past few years, and secondly, the state spending figures in the previous map include various things that aren't paid for directly from general funds, such as social insurance payments, pensions, etc., as well as state-run utilities and liquor stores. Alaska leads the pack with a 167.7% increase in state tax collections per capita, and on the other end, Georgia comes in with a 24.9% decrease.

Federal spending by state - There are many important channels through which the actions of the federal government affect the national economy, with varied effects among the states.[1] Among these channels, the direct disbursement of federal funds is sizable, amounting to $3.76 trillion in calendar year 2012. These disbursements include direct federal government programmatic spending for payroll and procurement; payments to individuals and businesses, including Social Security and farm subsidies; and grants to state governments for service programs such as Medicaid, as well as for various education programs.[2] The map below illustrates varied expenditure per capita by states for the last year in which such data were collected under a now-defunct statistical data program.[3] To a rough degree, this expenditure pattern reflects the geographic impact—the initial impact, that is—of any hypothetical across-the-board cuts or hikes in federal budgetary spending.[4] However, we should not take this pattern at face value. The allocation of federal funds to a given state may be misleading if the receiving authority “passes through” the allocation in spending to a subcontractor that is located in another state. And even if the funds are not passed through, the ultimate economic impacts of federal spending on households and firms in a state are likely to differ significantly following subsequent rounds of spending by firms and households. State economies are highly intertwined through diverse channels of trade, investment, and cross-state spending.

Could Superstorm Sandy Stimulate the Region's Economy? - NY Fed - The New York metro region’s recovery from Superstorm Sandy is well under way. Spending on restoration and rebuilding activities following a natural disaster is a potentially powerful economic stimulus to the affected area. Indeed, money from outside the region—in the form of federal aid and private insurance payments—flowing to the damaged areas in the region gives a temporary boost to economic activity. But does this mean that Sandy—along with the federal aid and insurance payouts associated with it—was actually good for the region’s economy? In this post, we examine the nature and magnitude of the stimulus the New York metro region is receiving as it recovers from Sandy and provide some thoughts on how the economy may be affected over the longer term by rebuilding activities.

Detroit Police and Fire departments face wage and benefit cuts Tuesday - - Detroit Police and Fire lieutenants and sergeants will receive wage and benefits cuts Tuesday. The cuts will impact 400 in the police department and hundreds more in the fire department. The new terms include a 10% wage reduction as well as cuts in overtime, court time and longevity pay. The wage and benefit cuts are part of a restructuring plan by Emergency Manager Kevyn Orr who faces the daunting task of relieving Detroit of it's $18 billion long-term debt.

Chapter 9 Hysteria in the Wall Street Journal - The Wall Street Journal ran a column on municipal bankruptcy that is straight out of fantasyland. According to the WSJ, if municipalities are not able to shed their pensions in bankruptcy, the result will be a stampede of bankruptcy filings as cities file in order to stiff their bondholders.  This argument is demonstrably wrong for two reasons. First, as bankruptcy law has been practiced for the last 80 years, pensions are inviolable in Chapter 9, yet we have never seen more than a handful of Chapter 9 filings.   I cannot find a record of any municipal bankruptcy filing since the 1930s that has resulted in an impairment of a pension plan, while many have impaired bondholders. Yet only a handful of municipalities have ever filed. That alone should show beyond any doubt how silly the WSJ argument is.  (I'll stay away from speculating on why it took such a preposterous position, but one will note, below, that the WSJ seems to see the issue as being about unions, rather than about pensions.) Second, chapter 9 bankruptcy isn't very useful for municipalities hellbent on stiffing their bondholders. This is because most municipal bond debt is not unsecured general obligation bonds. Instead it is either secured debt or revenue bonds, which are functionally secured.

The Ultimate Guide To Detroit's Chapter 9 Bankruptcy - Since Detroit’s Chapter 9 filing in late July, it has slipped off the front-pages to some extent. The Chapter 9 process is underway and Barclays provides a deep-dive look at the various liabilities involved in the bankruptcy. From the pension obligation certificates (POC), which they believe could be subject to the most volatility over the course of the bankruptcy process and will likely recover no more than 30 cents on the dollar, Barclays' muni team expands on the various aspects of the eligibility process, historical precedents (such as Stockton, CA), and the tough decisions that investors face in deciding between short-term goal of certainty of payment or a long-term goal of maximizing returns. The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment.

Detroit's misplaced $1M check bares inefficiency - In late February, cash-strapped Detroit received a $1 million check from the local school system that wasn’t deposited. The routine payment wound up in a city hall desk drawer, where it was found a month later. This is the way Detroit did business as it slid toward its bankruptcy filing, which it entered July 18. The move exposed $18 billion of long-term obligations in a city plagued by unreliable buses, broken street lights and long waits for police and ambulances. Underlying poor service is a government that lacks modern technology and can’t perform such basic functions as bill collecting, according to Kevyn Orr, Detroit’s emergency manager. “Nobody sends million-dollar checks anymore — they wire the money,” said Orr spokesman Bill Nowling. Except in Detroit. “We have financial systems that are three, four, five decades in the past,” Nowling said. “If we can fix those issues, then we’ll be able to provide services better, faster, more efficiently and cheaper.” Detroit doesn’t have a central municipal computer system, and each department bought its own machinery — much of which never worked properly, according to Orr, 55, who took over in March. The last such acquisition, 15 years ago, was of a system based on Oracle Corp. technology that wasn’t fully put to work.

Woes of Detroit Hurt Borrowing by Its Neighbors - Two weeks after Detroit declared bankruptcy, cities, counties and other local governments in Michigan are getting a cold shoulder in the municipal bond market. The judgment has been swift and brutal. Borrowing costs are up around the state, in some cases drastically. On Thursday, Saginaw County became the latest casualty when it said it was delaying a $60 million bond sale planned for Friday. It had hoped to put the proceeds into its pension fund. It was the third postponed bond sale in Michigan since Detroit dropped its bombshell on July 18. Earlier this week, the city of Battle Creek said it would postpone a $16 million deal scheduled for August because of concerns that investors would demand interest rates that were too high. And the previous week, Genesee County withdrew a $54 million bond sale from the market for the same reason. Article ToolsFacebookSaveTwitterE-mailGoogle+PrintSharePermalinkDetroit’s bankruptcy, the largest ever by a municipality, has raised fundamental concerns about the safety and security of municipal bonds, certainly in Michigan but potentially elsewhere in the country, too. The municipal bond market appears to be sending Michigan’s cities a message that no matter how well rated they are, they are going to have to postpone their plans and projects or pay more for them.

Snyder: Pontiac schools in financial emergency - Gov. Rick Snyder on Tuesday said the Pontiac School District is in a financial emergency, a declaration that could lead to the appointment of an emergency manager, bankruptcy or other state intervention. Snyder said he agreed with the findings of a state-appointed financial review team that determined the Oakland County school district ran up a $37.7 million deficit in the most recent school year. Nearly $33 million of Pontiac’s deficit is from unpaid vendor bills, including its union-affiliated health insurance carrier that dropped coverage for employees last month after the district failed to pay its bills consistently for the past 18 months. “We need to look out for the children and we want to make sure that Pontiac School District has the financial resources to open its doors next month,”

More layoffs hit Chicago public school system, 200 lunchroom employees terminated - Chicago Public Schools announced Friday that 200 cafeteria workers will receive layoff notices, bringing the total CPS employee cuts to more than 3,000. CPS said the reduction will save the school system approximately $4 million. “Given the historic $1 billion deficit facing our District due to the lack of pension reform in Springfield, we must make difficult decisions in order to keep cuts as far away from our classrooms as possible,” CEO Barbara Byrd-Bennett said in a statement. “We have reduced Central Office, administrative and operations spending by nearly $700 million since 2011 and today’s actions are among the reductions we are making outside the classroom in order to protect programs that support student learning.” Employees with 10 years of service and 50 years of age or older were offered a voluntary resignation opportunity. According to a CPS fact sheet, only 75 of 1,067 eligible employees took the offer.

City finance officials say no new funding for schools -  With pressure mounting from education advocates to find new funding for Philadelphia schools, Nutter administration officials made it clear Monday that the city likely would have nothing more to offer. The only aid will come from a recent state bailout package, no matter how imperfect, Finance Director Rob Dubow said. And Mayor Nutter and Council have work to do even to ensure that that money arrives in time. "We understand [Council members] have legitimate issues about what came out of Harrisburg, but these are the tools we were given," Dubow said. "We need to use them to make sure the district gets the funding it needs." The district, facing a $304 million deficit this year, laid off more than 3,800 employees on June 30. The district asked the city and the state to find $180 million to fill the gap, with the rest to come from union concessions. The bailout package hashed out in Harrisburg contains little new state money, but could provide as much as $140 million for the schools.

Philly Get Ready for Permanent Sales Tax Hike - Philadelphia City Council President Darrell Clarke's office said Monday that legislators will make permanent a 1 percent sales tax that was due to expire next budget year. "Council will pass an extension of the sales tax," said Jane Roh, a spokeswoman for Clarke. "There is just disagreement at the moment about what the final sales tax extension will look like." Earlier in the day, Mayor Michael Nutter's aides said that Council members should quickly get on board with a plan to extend the tax so that the city can borrow $50 million this year against future sales tax revenues for the cash-starved school. Superintendent William Hite also expressed urgency last week, when he said that he likely wouldn't be able to open schools on Sept. 9 without additional funding. He expected to have an extra $50 million in hand by now. The $50 million loan is part of Gov. Tom Corbett's plan to help fill the school district's $304 million budget gap.

Philly Schools Chief: I Need $50M To Open Schools — Students in the Philadelphia School District could get an extended summer vacation if the city doesn’t make funds available for the district’s operation costs for the upcoming year. If a written guarantee of $50 million in funding for bare bones operational costs is not given to the school district by August 16th, Superintendent Dr. William Hite says there’s a possibility schools may not open or there may be shortened class days. “We will not be able to open all 218 schools for a full day program without the funds to restore crucial staff members. We cannot open functional schools, run them responsibly, or provide a quality education for students.” Mayor Michal Nutter is hoping City Council will support the Governor Tom Corbett’s plan to make the temporary sales tax hike permanent so the city can borrow $50 million against that revenue for the school district.

Will liberals stand up to “corporate school reform” - An eloquent call to “reclaim the conversation” challenges leading liberal educators to repudiate their involvement in what’s being called “corporate school reform.” We finally see liberal activists opposing the bipartisan education project that has subjected school and teachers to “free market” policies. Liberals are starting to contest privatization, testing, and attacks on teacher unions, rather than accepting neoliberal assumptions and policies taken wholesale from right-wing think tanks and functions. Since last fall’s Chicago teachers strike, we’ve seen an acceleration of critique in traditionally liberal media about school reform — from Teach for America to charter schools and Michelle Rhee. There’s even been a whiff of real reporting in the New York Times on the common core curriculum. Why did liberals urge teachers unions to back down on contractual issues that protect kids and miss what the unions should have been doing, like mobilizing their members? And why do liberals who expose what’s wrong with standardized testing, as John Merrow has, continue to propagandize for charter schools, ignoring compelling research about the educational devastation in New Orleans because of “charterization”?

Science and Social Control: Political Paralysis and the Genetics Agenda - Variations in individual “educational attainment” (essentially, whether students complete high school or college) cannot be attributed to inherited genetic differences. That is the finding of a new study reported in Science magazine (Rietveld et al. 2013). According to this research, fully 98% of all variation in educational attainment is accounted for by factors other than a person’s simple genetic makeup. This implies that most of student success is a consequence of potentially alterable social or environmental factors. This is an important and perhaps surprising observation, of high interest to parents, teachers, and policymakers alike; but it did not make the headlines. The likely reason is that the authors of the study failed to mention the 98% figure in the title, or in the summary. Nor was it mentioned in the accompanying press release. Instead, their discussion and interest focused almost entirely on a different aspect of their findings: that three gene variants each contribute just 0.02% (one part in 5,000) to variation in educational attainment. Thus the final sentence of the summary concluded not with a plea to find effective ways to help all young people to reach their full potential but instead proposed that these three gene variants “provide promising candidate SNPs (DNA markers) for follow-up work”.

Half of $1 trillion in federal student loan debt not repaid -  About half of the outstanding $1 trillion in federal student loan debt in the U.S. isn’t being repaid. And 1 out of 8 borrowers are defaulting on their loans despite unprecedented federal attempts to help. An analysis released Monday by the CFPB shows borrowers are struggling to repay their loans and are seemingly unaware of options that could them help avoid default or forbearance. “That can have serious consequences for their economic future,” said Rohit Chopra, the bureau’s student loan ombudsman. “The troubling part is that many of those defaults could have been avoided if borrowers knew about their options and were able to easily enroll in them.”Only about 10 percent of borrowers are enrolled in any kind of income-based repayment program. The others are in either standard 10-year repayment programs or in extended programs, which stretch loan payments — and interest — out over many more years but don’t take borrowers’ financial situations into account.

Only 40% Of Federal Student Loan Borrowers Are Currently Making A Payment - While it is relatively well-known that there are about 28 million federal student loan borrowers in the US, and as we first covered a year ago, about 15% of these are deeply delinquent, what may not be known is that of the total borrowers, a tiny 40%, or 10.8 million of lenders are actually current and paying. Of the remaining 17 million, 7.9 million are still in school (and facing disastrous job prospects which almost certainly means millions more added to the delinquent list upon graduation), while a whopping 9 million, or almost the same number as those who currently repaying, are either in default, in their grace period, or in deferment or some other form of forebearance.  Said otherwise, of the 28 million Americans with federal student loans, 60%, or 17 million, don't pay the US government a single cent!

The curse of student loan debt: owe while you're young, live when you're old - Once upon a time, we invested in our young people so that they could enter the world without debt. Now, we turn them into deadbeat debtors before they're old enough to legally buy a drink, left far behind their financial betters.The truth this week came courtesy of the Consumer Financial Protection Bureau and the Wall Street Journal, whose data parsing revealed that about one in five college graduates who borrowed for tuition via the federal direct loans program are not paying the money back.In other words, a lot of people who recently attended college are in deep financial trouble. This should come as no surprise.The United States is suffering from a massive jobs shortfall. For years, we've parroted the line that more education will somehow buttress the economy, as if we expect the good jobs fairy to shower magic, well-paying employment sparkle over the land when she sees how many of our young people attended college.What really happens?More than half of all new jobs created this year in the US came in the low-wage sectors of retail, travel and restaurants. The consulting firm McKinsey & Company determined that only half of recent college graduates were working in fields that actually required a degree to perform well. The report's author dryly noted: "The cliche of the overeducated waiter or limousine driver seems to have some support." All this debt followed by low-paying gigs has serious consequences for our young people.

A Debt-Free College Education - Last Wednesday — almost a month after Congress failed to prevent student loan rates from doubling — Democrats and Republicans reached a compromise that will keep rates low, at least temporarily, for most graduates. From a body with a record of procrastinating on student debt worse than students procrastinate on term papers, this was welcome news. But let’s not get ahead of ourselves. Indeed, the price of higher education — and how that price is paid — is still a huge problem in this country. Federal and student loan debt now exceeds $1 trillion. Today, the average graduate leaves school with nearly $30,000 in debt. And those are just the students who actually graduate. For millions of students, America’s university system is not a pathway to success but a debt trap. As of 2011, nearly half the students enrolled in four-year programs — and more than 70 percent of students in two-year programs — failed to earn their degrees within that time, with many dropping out because of the cost. They leave school far worse than they arrived: saddled with debt, but with no degree to help them land a job and pay it off. What’s more, according to some experts, almost half of low-income college-eligible students don’t enroll in four-year colleges because of the sticker shock of tuition. And all of this is happening as state and community systems of higher education face unprecedented budget cuts, leaving students with even bigger bills. A stopgap reduction in loan rates won’t do anything to fix this. We need a whole new model for financing higher education.

"pensioners: 17 cents on the $; BoA, UBS 75 cents on the $" - The winners in the Detroit crisis are the banks who have reaped $millions in fees, avoided property taxes on partially foreclosed properties (the foreclosures were never completed after driving the owners out of the houses and left the uninformed former mortgage holders on the hook for back taxes), and moved to the front of the line of Detroit debt holders. Typically these Interest Rate swaps are of the variable interest rate variety and are often exchanged for fixed rate through the Swaps. When the Fed drove down the variable interest rates, cities found themselves on the hook for the higher fixed rates. Many of the Swaps are also tied to the London Interbank Offered Rate (LIBOR) which was being manipulated by the largest banks. As a result, the banks owe little due to low variable rates and the cities are on the hook for higher fixed rate costs. Just a measly $1.4 billion of the $3.8 billion Interest Swaps tied to Detroit Pension Funds to which pensioners are being asked to accept far less than what banks are being asked to accept. The losers?  Retirees who have pensions covered by the Interest Swaps. Workers who took and will take wage cuts. Detroit with thousands of partially foreclosed vacant houses which property taxes can not be collected on from the former owners or the banks. The state of Michigan; it will have a black eye for doing little to help the abandoned city over the decades. Without it and its trade with the US largest trading partner Canada, the state would be little more than a large vegetable farm. Banks may take a trim around the ears; but, it will not be anywhere as severe as the haircut the pensioners and workers will have taken when all is sorted out.

Fleecing Pensioners to Save the Banks - The Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In Cyprus, the depositors were “bailed in” (stripped of a major portion of their deposits) to re-capitalize the banks. In Detroit, it is the municipal workers who are being bailed in, stripped of a major portion of their pensions to save the banks. Bank of America Corp. and UBS AG have been given priority over other bankruptcy claimants, meaning chiefly the pensioners, for payments due on interest rate swaps they entered into with the city. Interest rate swaps – the exchange of interest rate payments between counterparties – are sold by Wall Street banks as a form of insurance, something municipal governments “should” do to protect their loans from an unanticipated increase in rates. Unlike ordinary insurance, however, swaps are actually just bets; and if the municipality loses the bet, it can owe the house, and owe big. The swap casino is almost entirely unregulated, and it is a rigged game that the house virtually always wins. Interest rate swaps are based on the LIBOR rate, which has now been proven to be manipulated by the rate-setting banks; and they were a major contributor to Detroit’s bankruptcy. Derivative claims are considered “secured” because the players must post collateral to play. They get not just priority but “super-priority” in bankruptcy, meaning they go first before all others, a deal pushed through by Wall Street in the Bankruptcy Reform Act of 2005. Meanwhile, the municipal workers, whose pensions are theoretically protected under the Michigan Constitution, are classified as “unsecured” claimants who will get the scraps after the secured creditors put in their claims. The banking casino, it seems, trumps even the state constitution. The banks win and the workers lose once again.

Pandemic of pension woes is plaguing the nation - Across the nation, cities and states are watching Detroit's largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole.  A analysis of more than 120 of the nation's largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement.  Thanks to a patchwork of accounting practices and rosy investment assumptions, it's not even clear just how big a financial hole many states and cities have dug for themselves. That may soon change, thanks to a new set of government accounting standards that could serve as a nasty wake-up call to states and cities relying on rosy scenarios and head-in-the-sand accounting. "Sadly, [Detroit] is not the only municipality in trouble," Glenn Hubbard, economist, Columbia University Graduate School of Business dean and Mitt Romney campaign adviser, told CNBC's "Squawk Box" on Monday. "A lot of state and local governments have too much debt, too generous public pensions. We need a national conversation on how to fix this."

Lawsuit Alleges Over 100,000 Retirees Misled Over Rate Hike By CalPERS - — A class action lawsuit filed Tuesday accuses CalPERS of intentionally misleading over 100,000 retirees over the past 18 years by selling them long-term insurance that turned out to be insufficiently funded and under duress for a decade. CalPERS is reportedly raising rates as a result of the underfunding, despite consistent promises to the contrary, and some policy holders will reportedly see their rates increase as much as 1000 percent over the duration of the policy. CalPERS began offering long term care (LTC) insurance in 1995 with approximately 119,000 people signing up. As of May 2012, there were 150,000 people enrolled in the program. CalPERS reportedly continued to promise that those who were insured through the program would have fixed rates, “reasonably priced” rates that would not rise based on age or health. In 2013, however, CalPERS announced that it would increase the premiums of most policy holders by 85 percent by 2015. As a result, 125,000 class members, the majority of whom are senior and are on fixed incomes, will be placed in untenable positions. “Wonderful people were duped into thinking they had purchased protection in the event they were no longer able to care for themselves. Unfortunately, the peace of mind so many sought turned out to be a worthless bill of goods,"

Chicago Sees Pension Crisis Drawing Near - Corporations are moving in, and housing prices are looking better across the region. There has been a slight uptick in population. But a crushing problem lurks beneath the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. Its plight threatens to upend the finances of President Obama’s hometown, now run by his former chief of staff, Rahm Emanuel.  The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red — as much as it would cost to pay 4,300 police officers to patrol the streets for a year.  “This is kind of the dark cloud that’s coming ever closer,” Mr. Emanuel said in a recent interview, adding that he had no intention of raising his city’s property taxes by as much as 150 percent — the price tag, he says, that it might take to pay such bills. “That’s unacceptable.”

Here’s a fat cat bragging about rigging IL bond ratings to kill pensions - Illinois isn’t the only state where this has happened. They do like to share their successful cons with each other:Fahner has tried a number of dirty tricks to attack pensions in his career. But his most recent admission is absolutely breathtaking in its brazenness: He boasted of working to scam the Illinois bond rating. During Fahner’s talk to the Union League Club, an unidentified person in the audience suggested that pressuring credit agencies to rig the state bond ratings in order to attack pensions might be a jolly good idea. Fahner gleefully replied that he had already thought about that — and his group has tried it. Fahner: “The Civic Committee, not me, but me and some of the people that make up the Civic Committee… did meet with and call – in one case in person – and a couple of calls to Moody’s and Fitch and Standard & Poors, and say, How in the hell can you guys do this?”Fahner went on to take credit for downgrades to Illinois credit ratings, saying, “If you watch what happened in the last few years, it’s been steadily down.”Check out the video at minutes 46:30 to 49:43 for the full remarks on the ratings scam: “ Fahner: Civic Committee helped jaw down state’s bond rating.”

Health Care Law Raises Pressure on Public Unions - Cities and towns across the country are pushing municipal unions to accept cheaper health benefits in anticipation of a component of the Affordable Care Act that will tax expensive plans starting in 2018. The so-called Cadillac tax was inserted into the Affordable Care Act at the advice of economists who argued that expensive health insurance with the employee bearing little cost made people insensitive to the cost of care. In public employment, though, where benefits are arrived at through bargaining with powerful unions, switching to cheaper plans will not be easy. Cities including New York and Boston, and school districts from Westchester County, N.Y., to Orange County, Calif., are warning unions that if they cannot figure out how to rein in health care costs now, the price when the tax goes into effect will be steep, threatening raises and even jobs. “Every municipality with a generous health care plan is doing the math on this,” said J. D. Piro, a health care lawyer at a human resources consultancy, Aon Hewitt. But some prominent liberals express frustration at seeing the tax used against unions in negotiations.

The Economics of the Affordable Care Act -Will the Affordable Care Act help or hurt the economy? At a time when economic growth remains mild and the employment outlook is mixed, answering this question is of fundamental importance.  The negative case is easy to understand. The law has a number of provisions that may inhibit employment and growth, including an employer mandate to pay for health insurance coverage (now delayed), increases in the Medicare contribution rate for high-income workers and taxes on medical device companies, health insurance companies and tanning salons. Many economists worry about the economic impact of these provisions (though fewer about the tax on tanning salons). Casey Mulligan has just presented the gloomy situation on this blog, and he did so well. Professor Mulligan is a serious and concerned analyst; his views are not the rant of those who see death panels lurking around every corner. Indeed, many issues that Professor Mulligan highlights are topics that have drawn public concern; for example, Darden Restaurants (owner of Red Lobster and other chains) drew immense attention – much of it negative – when it announced that it would increase use of part-time labor to avoid the payment requirements for full-time workers under the Affordable Care Act.  Interestingly, the most widely expected adverse effects of the Affordable Care Act have yet to materialize, despite the fact that it has been in place for nearly three years. As a recent chart released by the President’s Council of Economic Advisers shows, hours of work are up in the restaurant industry since March 2010. The same is true in the vast bulk of retail businesses where the option to move workers from full to part time is a real one. It may be that companies are waiting until the employer mandate kicks in – or it could be that the fears of significant adverse effects were overblown.

Under Obamacare, Will You Receive a Subsidy to Help You Buy Your Own Insurance? We Now Have Real Numbers That Will Let You Calculate How Much You Will Receive - Up until now, when Obamacare’s supporters and reform’s opponents squabbled over what insurance will cost in 2014, they had to rely on estimates and national averages. But now we have real numbers. Eleven states have announced the rates that insurers will be charging in their Exchanges-marketplaces where individuals who don’t have employer-sponsored coverage can shop for their own insurance. Subsidies Will Be Based On the Cost Of A Silver Plan Where You Live, Middle-income as well as low-income people buying coverage in the Exchanges will be eligible for government subsidies that will come in the form of tax credits. Anyone earning between 100 and 400 percent of the federal poverty level (FPL) (now $11,490 to $45,960 for a single person, and up to $126, 360 for a family of six) will qualify. Most people who are forced to buy their own insurance earn less than 400% of FPL. More affluent Americans usually work  for companies that offer comprehensive coverage. The graph below shows average Silver plan rates in the eleven states that have disclosed premiums. (Note that these are only state averages. Premiums vary widely within a state: In some cities and counties silver plan rates will be much lower, even before you apply the subsidy.It’s worth noting that in these 11 states the least expensive Silver Plan costs 18% less than the non-partisan Congressional Budget Office projected last year. 

Obamacare Opens for Business, Shuts Out Labor - When the Obama administration announced July 2 that it would give a breather to employers affected by the Affordable Care Act (ACA), angry unionists noticed a pattern. Even before this delay, “every corporate interest that’s asked for regulatory relief has gotten it,” said Mark Dudzic, chair of the Labor Campaign for Single Payer, “but the concerns of union plans have been overridden.” The requirement that employers provide health insurance or pay a fine will be postponed till January 2015 or later. “Looks like ordinary workers will be forced to pay for health insurance on the original schedule [starting January 2014], while big business is off the hook for at least a year,” said Chris Townsend, political director of the United Electrical Workers (UE). Justifying the delay, the Obama administration cited employers’ difficulties in reporting employee hours worked, pay, and their insurance offerings—all information needed to calculate whether a fine is due for not offering adequate insurance. The delay won’t be cheap. It means the government will forego $10 billion in employer payments for 2014, according to the Congressional Budget Office.

For Obamacare, Some Hurdles Still Ahead - In a couple of months the nation is set to experience a similar shock on a very large scale: the greatest change in how Americans pay for health care since the advent of Medicare nearly half a century ago. Come October, millions of uninsured people will be able to choose one of several health plans, offered at four different tiers of service and cost through new health exchanges coming onstream in every state. Cheap “bronze” plans will shoulder some 60 percent of patients’ medical expenses. Pricey “platinum” plans will cover at least 90 percent. But insurers will not be allowed to exclude people with pre-existing conditions, or charge more for the sick, or put a lifetime cap on medical costs. Their policies will have to cover a minimum standard of medical care. And the government will subsidize those who cannot afford to buy the policies. President Obama and his advisers hope the overhaul will do two things. The first is to extend coverage to tens of millions of Americans who today lack health insurance. The second is to hold the line on rising health care costs. “Over time, success will depend on what happens to the cost curve,” Professor Cutler told me. “If we don’t bend the cost curve, everything will fail. The government won’t be able to afford it. Nobody will be able to afford it.”

Obamacare months behind in testing IT data security: government (Reuters) - The federal government is months behind in testing data security for the main pillar of Obamacare: allowing Americans to buy health insurance on state exchanges due to open by October 1 The missed deadlines have pushed the government's decision on whether information technology security is up to snuff to exactly one day before that crucial date, the Department of Health and Human Services' inspector general said in a report. As a result, experts say, the exchanges might open with security flaws or, possibly but less likely, be delayed. "They've removed their margin for error," said Deven McGraw, director of the health privacy project at the non-profit Center for Democracy & Technology. "There is huge pressure to get (the exchanges) up and running on time, but if there is a security incident they are done. It would be a complete disaster from a PR viewpoint." The most likely serious security breach would be identity theft, in which a hacker steals the social security numbers and other information people provide when signing up for insurance.

For Obamacare to Work, Everyone Must Be In - Two beliefs continue to shape debate on Obamacare. First, pre-existing medical conditions shouldn’t prevent people from obtaining affordable health insurance. And second, people who don’t want health insurance shouldn’t be forced by the government to purchase it. These may seem to be reasonable positions. But they are incompatible. That’s been shown by historical events, and it’s now being strikingly confirmed by recent experience in the emerging Obamacare insurance exchanges.  We must ask those who would repeal Obamacare how they propose to solve the adverse-selection problem. That problem is not an abstraction invented by economists to justify trampling individual liberties. As experience in most countries around the world has confirmed, it is a profound source of market failure that renders unregulated insurance markets a catastrophically ineffective way of providing access to health care.

ObamaCare’s Relentless Creation of Second-Class Citizens (5) - In this series, we’ve been looking at how ObamaCare, through its inherent system architecture, relentlessly creates first- and second-class citizens; how it treats people who should be treated equally unequally, for whimsical or arbitrary reasons. It’s all in the luck of the draw! If you live in the right place or have the right demographic, you go to Happyville. If you don’t, you go to Pain City. We’ve looked at the whimsical differences between the citizens of Libby, MT, and all other citizens; the banked and the unbanked; those herded into Medicaid and those who are not; the arbitrary distinctions between creatures of the Beltway and all others, between the covered and the not covered, and between those who will be marketed to, and those who will not; the sheer bloody randomness of relying on credit reporting agency data for income validation; and discrimination based on jurisdiction and geography. In this installment, I’d like to look once more at geographical discrimination, give on update on the creatures of the Beltway, and look at “churn.”

Is Obamacare “Medicaid for the Middle Class?” –A Muddled Argument -  Yet another catchy phrase, “Medicaid for the middle class,” is popping up in conservative propaganda. What are Obamacare’s opponents trying to say? Those who have latched onto this catchphrase make two very different arguments. The arguments actually contradict each other, but they have one thing in common: Both are untrue. Obamacare isn’t good enough because the coverage families will receive in the exchanges will limit them to a tiny network of providers.Originally, conservatives claimed that Obamacare would be too expensive. Americans who tried to buy insurance in the exchanges would experience “Sticker Shock!”  Now that states have begun to announce premiums, it’s becoming apparent that this isn’t true.So conservatives have regrouped. In an about-face, they are acknowledging that some plans offered in the exchanges may be affordable, but this, they say, is because insurers are limiting their networks to providers who will accept lower fees.Reform’s critics insinuate that “narrow networks” will exclude top-notch doctors and hospitals. The Citizens’ Council on Health Freedom (CCHF) calls exchange coverage “second-tier Medicaid for the middle class.”Nevertheless, CHCF says, “Many people are expected to choose narrow-network plans that offer a limited choice of doctors, clinics and hospitals … because the cost will be less.”

Health Care Inflation and the Arithmetic of Labor Taxes - A modest reduction in health care inflation by itself might increase employment or number of hours worked, but the effect will be overwhelmed by new taxes coming into effect in the next two years. Health care and the labor market are connected because so much of the non-elderly population obtains health insurance through an employer or the employer of a family member. As the decades have gone by, Americans have been spending more and more on health care, largely through their health insurance premiums, to the point that many families cannot afford the kinds of health insurance plans in which middle- and upper-income families take part. So it’s reasonable to wonder whether the health expenditure trends affect the amount of employment in the economy, and thereby whether policy reforms that reduce the rate of health expenditure growth might reverse some of those employment effects. The direction of the employment effects of health care inflation is unclear, because it depends on the reasons for rising health care costs. To the degree that rising costs derive from new, valuable (but expensive) pharmaceuticals and medical procedures, rising costs may make people more attached to jobs with health benefits in order to have better access to medical innovations and to pay for them with pretax dollars.

Gain at the Price of Patient Pain by Big Pharma  - Many of us are aware of the TIME magazine investigation about hospitals charging us $12 for those little paper pill cups. Those little cups add up to millions of dollars a year; but those little red and blue pills that Big Pharma pushes on us add up to billions. And many times the taxpayers are illegally billed for those little cups and pills. But because of budget cuts, the Inspector General may no longer investigate these abuses and fraud. It seems the healthcare industry, just like the banks, will be left to police themselves -- so expect profits soar. Unless of course, the GOP shuts down the government.Health and Human Services Inspector General Daniel Levinson said the public should be "outraged" to hear that government warnings to avoid using the anti-psychotic drugs on people in nursing homes with dementia often went unheeded. He went on to accuse manufacturers of putting profits before safety by aggressively marketing these drugs for just such uses. An audit in 2011 found that almost 305,000 of over 2 million elderly persons who lived in nursing homes in the first six months of 2007 had a prescription for at least one atypical anti-psychotic drug. The OIG report said that 88 percent of these prescriptions were written "off-label," meaning the drugs were being used for purposes that had not been approved by the Food and Drug Administration. In some cases, pills were prescribed despite warnings from the FDA that using them for treating dementia patients could be dangerous. In all, unapproved uses and improperly documented claims for these drugs cost Medicare $116 million in one six-month period, the report found.

The rich really are different: Their bodies contain unique chemical pollutants – In a finding that surprised even the researchers conducting the study, it turns out that both rich and poor Americans are walking toxic waste dumps for chemicals like mercury, arsenic, lead, cadmium and bisphenol A, which could be a cause of infertility. And while a buildup of environmental toxins in the body afflicts rich and poor alike, the type of toxin varies by wealth.  People who can afford sushi and other sources of aquatic lean protein appear to be paying the price with a buildup of heavy metals in their bodies. Using data from the US National Health and Nutrition Examination Survey, Tyrrell et al. found that compared to poorer people, the rich had higher levels of mercury, arsenic, caesium and thallium, all of which tend to accumulate in fish and shellfish.  The rich also had higher levels of benzophenone-3, aka oxybenzone, the active ingredient in most sunscreens, which is under investigation by the EU and, argue some experts, may actually encourage skin cancer. Higher rates of cigarette smoking among those of lower means seem to be associated with higher levels of lead and cadmium. Poor people in America also had higher levels of Bisphenol-A, a substance used to line cans and other food containers, and which is banned in the EU, Malaysia, South Africa, China and, in the US, in baby bottles.  Previous research has established that rich Americans are more likely to eat their fruits and vegetables and less likely to eat “energy-dense” fast food and snacks, but this work establishes that in some ways, in moving up the economic ladder Americans are simply trading one set of environmental toxins for another.

Your Certified Organic Food Just Might Rely Upon Chinese Imports  - As policy would have it, our nation’s farmbelt keeps ramping up corn production to feed our automobiles, while our organic meat producers are left scrambling for a source of organic soybeans by importing them from China. Organic soybean imports more than doubled last year, with import growth coming from China, India, Canada, and Argentina.  Suppliers of organic milk, poultry, and other meats are concerned because the growth rate of farmers who are adding organic row crop acres is falling behind growing demand by the consumer. Organic fruit and vegetable production here in the U.S., which is nothing to boast about when you look at the graph which follows, is growing more quickly than the organic row crops. While organic food sales in the U.S. grew 35 percent in five years, production lags. Let’s blame the hassle factor. Let’s blame the economics. Farmers choose pesticides and GM seeds over organic because it takes three years to become certified organic, there is a paperwork burden, and there are greater risks. Potential income during the two required transition years is sacrificed. In recent years, the economics just does not entice the farmer to grow organic row crops instead of conventional, as inputs and labor for organic costs more while yields are lower. In addition, crop insurance has favored the conventional grower. Last month, however, the USDA announced that it will make crop insurance more available and friendly to organic producers in 2014.  The next graph shows the rapid adoption rate of GM soybeans by farmers in the U.S. since 1996.

‘Saudi Arabia of Milk’ Faces Challenges - New Zealand is the Saudi Arabia of milk, and has stepped up production in recent years to meet soaring demand from China. But a series of food-safety problems, most recently with a protein used in infant-milk formula, are shaking an industry on which New Zealand relies to power its economy and raising questions about the fast-paced growth of the sector. Wellington confirmed Monday that China has banned imports of whey powder and dairy base powder from Fonterra Co-Operative Group, New Zealand’s largest exporter of dairy products. At the weekend, Fonterra announced a “quality issue” with three batches of whey protein produced in May 2012 for use in infant formula and other products.It is the third quality issue with Fonterra products in recent years. The company owned a stake in a company involved in the melamine scandal in China in 2008. Earlier this year, the company acknowledged finding traces of the chemical dicyandiamide, or DCD, in its milk powder. Fonterra at the time said the government advised it the low levels found were not a safety concern to humans.

Life In A Toxic Country  - I RECENTLY found myself hauling a bag filled with 12 boxes of milk powder and a cardboard container with two sets of air filters through San Francisco International Airport. I was heading to my home in Beijing at the end of a work trip, bringing back what have become two of the most sought-after items among parents here, and which were desperately needed in my own household. China is the world’s second largest economy, but the enormous costs of its growth are becoming apparent. Residents of its boom cities and a growing number of rural regions question the safety of the air they breathe, the water they drink and the food they eat. It is as if they were living in the Chinese equivalent of the Chernobyl or Fukushima nuclear disaster areas.  The environmental hazards here are legion, and the consequences might not manifest themselves for years or even decades. The risks are magnified for young children. Expatriate workers confronted with the decision of whether to live in Beijing weigh these factors, perhaps more than at any time in recent decades. But for now, a correspondent’s job in China is still rewarding, and so I am toughing it out a while longer. So is my wife, Tini, who has worked for more than a dozen years as a journalist in Asia and has studied Chinese. That means we are subjecting our 9-month-old daughter to the same risks that are striking fear into residents of cities across northern China, and grappling with the guilt of doing so.

List of Foods We Will Lose if We Don’t Save the Bees - Many pesticides have been found to cause grave danger to our bees, and with the recent colony collapses in Oregon, it’s time to take a hard look at what we would be missing without bee pollination. In just the last ten years, over 40% of the bee colonies in the US have suffered Colony Collapse Disorder (CCD). Bees either become so disoriented they can’t find their way back to their hives and die away from home, or fly back poison-drunk and die at the foot of their queen. There are many arguments as to what is causing CCD, but the most logical and likely culprit is the increased usage of pesticides by the likes of Monsanto and others. A study by the European Food Safety Authority (EFSA) has labeled one pesticide, called clothianidin, as completely unacceptable for use, and banned it from use entirely. Meanwhile, the U.S. uses the same pesticide on more than a third of its crops – nearly 143 million acres. Two more pesticides linked to bee death are imidacloprid, and thiamethoxam. These are also used extensively in the US, while elsewhere, they have been taken out of circulation. While we don’t need bees to pollinate every single crop, here is just a brief list of some of the foods we would lose if all our bees continue to perish:

GM rice approval ‘edging closer’ - Scientists in the Philippines are weeks from submitting a genetically modified variety of rice to the authorities for biosafety evaluations. They claim it could be in the fields within a year, but national regulators will have the final say. Supporters say it will help the 1.7 million Filipino children who suffer vitamin A deficiency - which reduces immunity and can cause blindness. But campaigners say "Golden Rice" is a dangerous way to tackle malnutrition. They say that it threatens the Philippines' staple food.

Winning Our Hearts and Minds? Monsanto and Big Food Pull Out the Big Guns: Monsanto and Big Food are taking the battle for consumers' hearts and minds to the next level. And it's no coincidence that they're pulling out the big guns just as the Washington State I-522 campaign to label genetically modified organisms (GMOs) in food products is gaining steam. Can industry front groups and slick public relations firms convince us that the products they're peddling are not only safe, but good for us? Will the millions they spend on websites and advertorials pay off? We're guessing not, given the latest New York Times poll stating that 93 percent of Americans want labels on foods containing GMOs. Still, it can't hurt to know who's behind the latest salvo of lies and misinformation. In this case, it's a new front group. And a new website and forum, introduced by biotech trade groups no doubt with the help of a new PR firm. And a new front group. The freshly launched is funded by the biotech industry, which claims it just "wants to talk". And the recently formed Alliance to Feed the Future, representing more than 50 multinational food, agribusiness and biotech companies, wants to give us the "real" scoop on our food system.

Siberia, The Newest Hot Spot - It hasn’t been a typical summer in Siberia. High temperatures for this time of year are usually in the mid-to-low 60s Fahrenheit, but this July they hit 90 degrees, and didn’t drop much below a high of 80 until just this week. Meanwhile, potentially record-breaking wildfires continue to rage, with over 22,200 acres of active burning.  The Siberian Times emphasized the lighter side of the heat wave, with photos of young people playing beach volleyball in swimsuits, a rare sight in Novosibirsk.  But high temperatures are becoming more frequent, and they are an important factor in Siberia’s historic fires. And although the whole planet is warming, Russia has seen it happen particularly quickly, “about .51°C per decade compared to about .17°C globally,” according to NASA’s Earth Observatory. Even Verkhoyansk, a contender for coldest continuously-inhabited city in the world, posted an 82 degree day as recently as July 30.Some burning is typical for Siberia’s wildfire season, but 2013 is approaching 2012′s record of 74 million total acres burned. The years 2000 to 2008 averaged only 50 million acres burned each year. Fires are burning further north than usual as well, into the dense evergreen forest known as the “taiga” that usually remains safe from fire. Smoke was heavy enough to close airports in the cities of Omsk and Tomsk, and blanket the cities in smog.

Climate change pushing marine life towards the poles, says study : Rising ocean temperatures are rearranging the biological make-up of our oceans, pushing species towards the poles by 7kms every year, as they chase the climates they can survive in, according to new research. The study, conducted by a working group of scientists from 17 different institutions, gathered data from seven different countries and found the warming oceans are causing marine species to alter their breeding, feeding and migration patterns. Surprisingly, land species are shifting at a rate of less than 1km a year in comparison, even though land surface temperatures are rising at a much faster rate than those in the ocean. “In general, the air is warming faster than the ocean because the air has greater capacity to absorb temperature. So we expected to see more rapid response on land than in the ocean. But we sort of found the inverse,” said study researcher Dr Christopher Brown, post-doctoral research fellow at the University of Queensland’s Global Change Institute. Brown said this may be because marine animals are able to move vast distances, or it could be because it’s easier to escape changing temperatures on land where there are hills and valleys, rather than on a flat ocean surface.

Study: Today's Climate Change is 10X Faster Than Any Climate Shift Ever Recorded  The world's climate is changing 10 times faster than at any other point in the past 65 million years, Stanford climate scientists Noah Diffenbaugh and Chris Field have found in a new study published in Science. If climate change continues at this pace, temperatures will jump 5 to 6 degrees Celsius by the end of the century, placing ecosystems and species around the world under severe strain and forcing them into a struggle for survival, the researchers find. The study—a review of scientific literature on climate change—shows that the world is not only going through one of the greatest climate shifts in the past 65 million years but is hurtling towards this warming at a troubling speed. "We know from past changes that ecosystems have responded to a few degrees of global temperature change over thousands of years," Noah Diffenbaugh, an associate professor of environmental Earth system science, told Stanford News. "But the unprecedented trajectory that we're on now is forcing that change to occur over decades. That's orders of magnitude faster, and we're already seeing that some species are challenged by that rate of change."

‘American Carbon’ Enters World Economy And Atmosphere At Fastest Pace Ever -- The UK Guardian has a must-read piece for those who believe the shale gas revolution will save us from climate catastrophe, “The rise and rise of American carbon.” As illustrated in this chart, while U.S. carbon emissions have dropped somewhat in recent years — thanks to energy efficiency, renewables, the recession, and shale gas — America’s contribution to the global problem of ever-rising carbon production and consumption grows unabated.If this is a war on coal, I’d hate to see what appeasement looks like.Whatever benefit the shale-gas revolution has had in reducing US emissions — a benefit that would appear to be seriously vitiated by huge methane leaks according to yet another major NOAA study — it has also been vitiated by our continued coal extraction for export. And that is entirely separate from the issue of how much of our carbon emissions we have outsourced to China by virtue of our exploding trade deficit with the biggest carbon polluter in the world. We know in the case of Britain that that “the increase in carbon emissions from goods produced overseas that are then used in Britain are now outstripping the gains made in cutting emissions here.”

A Republican Case for Climate Action -  EACH of us took turns over the past 43 years running the Environmental Protection Agency. We served Republican presidents, but we have a message that transcends political affiliation: the United States must move now on substantive steps to curb climate change, at home and internationally.There is no longer any credible scientific debate about the basic facts: our world continues to warm, with the last decade the hottest in modern records, and the deep ocean warming faster than the earth’s atmosphere. Sea level is rising. Arctic Sea ice is melting years faster than projected. The costs of inaction are undeniable. The lines of scientific evidence grow only stronger and more numerous. And the window of time remaining to act is growing smaller: delay could mean that warming becomes “locked in.” A market-based approach, like a carbon tax, would be the best path to reducing greenhouse-gas emissions, but that is unachievable in the current political gridlock in Washington. Dealing with this political reality, President Obama’s June climate action plan lays out achievable actions that would deliver real progress. He will use his executive powers to require reductions in the amount of carbon dioxide emitted by the nation’s power plants and spur increased investment in clean energy technology, which is inarguably the path we must follow to ensure a strong economy along with a livable climate.

Dethroning King Coal - Earlier this year, the concentration of carbon dioxide in the atmosphere reached 400 parts per million (ppm). The last time there was that much CO2 in our atmosphere was three million years ago, when sea levels were 24 meters higher than they are today. Now sea levels are rising again. Last September, Arctic sea ice covered the smallest area ever recorded. All but one of the ten warmest years since 1880, when global records began to be kept, have occurred in the twenty-first century. Some climate scientists believe that 400 ppm of CO2 in the atmosphere is already enough to take us past the tipping point at which we risk a climate catastrophe that will turn billions of people into refugees. They say that we need to get the amount of atmospheric CO2 back down to 350 ppm. That figure lies behind the name taken by, a grassroots movement with volunteers in 188 countries trying to solve the problem of climate change.  Other climate scientists are more optimistic: they argue that if we allow atmospheric CO2 to rise to 450 ppm, a level associated with a two-degree Celsius temperature rise, we have a 66.6% chance of avoiding catastrophe. That still leaves a one-in-three chance of catastrophe – worse odds than playing Russian roulette. And we are forecast to surpass 450 ppm by 2038. One thing is clear: if we are not to be totally reckless with our planet’s climate, we cannot burn all the coal, oil, and natural gas that we have already located. About 80% of it – especially the coal, which emits the most CO2 when burned – will have to stay in the ground

EPA Confirms Coal Ash Contaminates Water Across The Country, House Republicans Try To Preempt Regulations - As the Environmental Protection Agency (EPA) prepares to regulate coal ash, the waste product of coal-burning power plants, it confirmed Thursday that ash is polluting local waters at 18 sites across the US. The Environmental Integrity Project (EIP) announced the EPA’s findings in a report that maintains there are at least 20 other locations where coal ash is contaminating local groundwater. In a statement, EIP Director Eric Schaeffer said, “EPA’s list of polluting coal ash dumps barely scratches the surface.”This comes after House Republicans successfully passed a bill in July, in a 265-155 vote largely along party lines, that would preclude federal regulation of ash and leave it to the states. Regulation is already largely left to the states, Lisa Evans, Senior Administrative Counsel at Earthjustice said in an email, and “as a result, the nation is a patchwork of programs, with many states imposing few, and sometimes, no, regulatory safeguards.” As ThinkProgress has reported, federal coal ash regulation would create jobs in addition to safeguarding health. The House bill, H.R. 2218, purports to give states greater authority to regulate coal waste but even its supporters recognize its aim of preventing EPA regulation.

US Wind Sector Booms, Driving Prices Down - Aside from the threat of losing a major federal tax incentive, 2012 was a great year for the U.S. wind industry. Wind energy installations soared to 13.1 gigawatts (a 90 percent increase over 2011) and average long-term wind power prices fell to their lowest point since 2005, according to a new report by the Department of Energy (DOE). The record amount of installed capacity not only made wind power the leading source of new U.S. electric-generating capacity in 2012, it also allowed the U.S. to narrowly overtake China as the global leader in capacity additions for the year (regaining the title it had lost in 2009). Though, as the table below shows, the U.S. still lags behind China in cumulative wind capacity. Due in part to the increased deployment of wind power, average levelized prices for wind power purchase agreements (PPA) have fallen about 43 percent since 2009 — going from a high of nearly $70 per megawatt hour (MWh) in 2009 to around $40 per MWh in 2012. According to the report:

Protectionist Clouds Darken Sunny Forecast for Solar Power - On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union.   China agreed to constrain its exports to a minimum price and a maximum quantity.   The solution is restrictive relative to the six-year trend of rapidly Chinese market share (which had reached 80% in Europe), and plummeting prices.  But it is less severe than what had been the imminent alternative:  EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been “dumping.”   The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar panel industry.  The China-EU dispute parallels a similar one running between China and the United States.  Last fall, tariffs went into effect against US imports of Chinese solar panels, at 24%-36%, after the Commerce Department “found dumping” into the American market.  China has already retaliated in a targeted way: imposing tariffs, which could reach prohibitive levels in excess of 50%, on imports from the US of polysilicon.  (It had not yet done the same on imports from the EU.)  China cited its own finding of US dumping of polysilicon into its market.  The material is a key input into the production of solar panels, which gives poetic justice to its choice as target of retaliation.

The Third Carbon Age – Drop the Fantasy of a Coming Era of Renewable Energy - Michael Klare - When it comes to energy and economics in the climate-change era, nothing is what it seems. Most of us believe (or want to believe) that the second carbon era, the Age of Oil, will soon be superseded by the Age of Renewables, just as oil had long since superseded the Age of Coal. President Obama offered exactly this vision in a much-praised June address on climate change. True, fossil fuels will be needed a little bit longer, he indicated, but soon enough they will be overtaken by renewable forms of energy. Many other experts share this view, assuring us that increased reliance on “clean” natural gas combined with expanded investments in wind and solar power will permit a smooth transition to a green energy future in which humanity will no longer be pouring carbon dioxide and other greenhouse gases into the atmosphere. All this sounds promising indeed. There is only one fly in the ointment: it is not, in fact, the path we are presently headed down. The energy industry is not investing in any significant way in renewables. Instead, it is pouring its historic profits into new fossil-fuel projects, mainly involving the exploitation of what are called “unconventional” oil and gas reserves.  The result is indisputable: humanity is not entering a period that will be dominated by renewables. Instead, it is pioneering the third great carbon era, the Age of Unconventional Oil and Gas.

Duke Kills Florida Nuclear Project, Keeps Customers' Money - The decision by Duke Energy (DUK) to scuttle a proposed nuclear reactor project in central Florida leaves utility customers in the state with a tab of more than $1 billion—most of it already paid to Duke—for unbuilt plants that may never produce a single kilowatt of energy. That’s proved a powerful irritant for customers in the Sunshine State, where air conditioning is a necessity for much of the year. The company said Thursday that it will halt construction on two reactors planned for Levy County, north of Tampa, after their estimated date of completion had stretched into 2024 at a projected cost of some $24 billion. Duke inherited the project as part of its purchase of Progress Energy last year, which made it the nation’s largest power utility. Duke’s decision also calls into question whether another large utility in the state, Florida Power and Light (NEE), will proceed with two new reactors it plans near Homestead, south of Miami.

Fukushima clean-up turns toxic for Japan’s Tepco (Reuters) - Two and a half years after the worst nuclear disaster since Chernobyl, the operator of Japan's wrecked Fukushima plant faces a daunting array of unknowns. Why the plant intermittently emits steam; how groundwater seeps into its basement; whether fixes to the cooling system will hold; how nearby groundwater is contaminated by radioactive matter; how toxic water ends up in the sea and how to contain water that could overwhelm the facility's storage tanks. What is clear, say critics, is that Tokyo Electric Power Co is keeping a nervous Japanese public in the dark about what it does know. The inability of the utility, known as Tepco, to get to grips with the situation raises questions over whether it can successfully decommission the Fukushima Daiichi plant, say industry experts and analysts. "They let people know about the good things and hide the bad things. This culture of cover up hasn't changed since the disaster," said Atsushi Kasai, a former researcher at the Japan Atomic Energy Research Institute. Tepco's handling of the clean-up has complicated Japan's efforts to restart its 50 nuclear power plants, almost all of which have been idled since the disaster over local community concerns about safety. That has made Japan dependent on expensive imported fuels for virtually all its energy.

Japan nuclear body says radioactive water at Fukushima an 'emergency' (Reuters) - Highly radioactive water seeping into the ocean from Japan's crippled Fukushima nuclear plant is creating an "emergency" that the operator is struggling to contain, an official from the country's nuclear watchdog said on Monday.This contaminated groundwater has breached an underground barrier, is rising toward the surface and is exceeding legal limits of radioactive discharge, Shinji Kinjo, head of a Nuclear Regulatory Authority (NRA) task force, told Reuters.Countermeasures planned by Tokyo Electric Power Co are only a temporary solution, he said. Tepco's "sense of crisis is weak," Kinjo said. "This is why you can't just leave it up to Tepco alone" to grapple with the ongoing disaster."Right now, we have an emergency," he said.Tepco has been widely castigated for its failure to prepare for the massive 2011 tsunami and earthquake that devastated its Fukushima plant and lambasted for its inept response to the reactor meltdowns. It has also been accused of covering up shortcomings. It was not immediately clear how much of a threat the contaminated groundwater could pose. In the early weeks of the disaster, the Japanese government allowed Tepco to dump tens of thousands of metric tons of contaminated water into the Pacific in an emergency move.

Japan Finally Admits The Truth: "Right Now, We Have An Emergency At Fukushima" -  Tepco is struggling to contain the highly radioactive water that is seeping into the ocean near Fukushima. The head of Japan's NRA, Shinji Kinjo exclaimed, "right now, we have an emergency," as he noted the contaminated groundwater has breached an underground barrier and is rising toward the surface - exceeding the limits of radioactive discharge. In a rather outspoken comment for the typically stoic Japanese, Kinjo said Tepco's "sense of crisis was weak," adding that "this is why you can't just leave it up to Tepco alone" to grapple with the ongoing disaster. As Reuters notes, Tepco has been accused of covering up shortcomings and has been lambasted for its ineptness in the response and while the company says it is taking actions to contain the leaks, Kinjo fears if the water reaches the surface "it would flow extremely fast," with some suggesting as little as three weeks until this critical point.

Official: Tepco Plan Could Cause Fukushima Reactor Buildings to “Topple” -  Tepco’s ill-considered efforts to change soil permeability and water flow have caused severe problems at the site … including highly radioactive groundwater bubbling up to the surface. NHK notes: Masao Uchibori told an official from the Nuclear Regulation Authority that some of Tepco’s measures have increased the risk of further leaks. The Wall Street Journal’s Michael Arnold says:Obviously this is a massive public health issue … if it gets into the ocean obviously this could be spread throughout the Pacific, could also get into the food supply. Background here and here.But there is another – stunning – threat. Specifically, BBC points out:Engineers are now facing a new emergency. The Fukushima plant sits smack in the middle of an underground aquifer. Deep beneath the ground, the site is rapidly being overwhelmed by water. What happens when you pour hundreds of thousands of tons of water (400 metric tons each day times 2.5 years times 365 days in a year equals 365,000 metric tons of water)  onto soil which sits above a massive aquifer? We noted last year: The spent fuel pool at Fukushima Unit 4 is the top short-term threat to humanity, and is a national security issue for America. As such, it is disturbing news that the ground beneath unit 4 is sinking.

Japan says Fukushima leak worse than thought, government joins clean-up  (Reuters) - Highly radioactive water from Japan's crippled Fukushima nuclear plant is pouring out at a rate of 300 tons a day, officials said on Wednesday, as Prime Minister Shinzo Abe ordered the government to step in and help in the clean-up. The revelation amounted to an acknowledgement that plant operator Tokyo Electric Power Co (Tepco) has yet to come to grips with the scale of the catastrophe, 2 1/2 years after the plant was hit by a huge earthquake and tsunami. Tepco only recently admitted water had leaked at all. Calling water containment at the Fukushima Daiichi station an "urgent issue," Abe ordered the government for the first time to get involved to help struggling Tepco handle the crisis. The leak from the plant 220 km (130 miles) northeast of Tokyo is enough to fill an Olympic swimming pool in a week. The water is spilling into the Pacific Ocean, but it was not immediately clear how much of a threat it poses. As early as January this year, Tepco found fish contaminated with high levels of radiation inside a port at the plant. Local fishermen and independent researchers had already suspected a leak of radioactive water, but Tepco denied the claims. Environmental group Greenpeace said Tepco had "anxiously hid the leaks" and urged Japan to seek international expertise.

300 Tons a Day of Nuclear Waste from Japan's Fukushima Nuclear Plant Pours Into Ocean - On Tuesday the BBC reported Fukushima Radioactive Leak a New Emergency Japan's nuclear watchdog has said the crippled Fukushima nuclear plant is facing a new "emergency" caused by a build-up of radioactive groundwater.A barrier built to contain the water has already been breached, the Nuclear Regulatory Authority warned.  This means the amount of contaminated water seeping into the Pacific Ocean could accelerate rapidly, it said. Last Friday, Energy News reported "Contaminated underground water may have moved above ground" at Fukushima plant TEPCO admitted during the [Friday] meeting that contaminated underground water may have moved aboveground along seawalls that were solidified to stop leakages. TEPCO’s proposals include construction of a new facility to gather underground water flowing toward the seaside of the plant and begin pumping water in late August. Experts in the group urged TEPCO to implement the measures ahead of schedule, citing the seriousness of the problem. [...] Asahi Shimbun, August 3, 2013: [...] The immediate concern is radioactive water seeping along the seaward side of the No. 1 to No. 3 reactors and spilling into the sea. [...] the water level in observation wells has risen sharply to about 1 meter from the ground’s surface, [...] the walls can only be built with their tops at 1.8 meters beneath the surface. That means the water levels in the observation wells have already risen above the top edges. If such a situation continues, the completed barriers will be unable to prevent the water from reaching the ocean. In addition, calculations show that if the water levels continue to rise at the current pace, contaminated water will flood the surface in about three weeks. [...]

Japan struggles with Fukushima water leaks - Japanese authorities are putting new pressure on the owner of the meltdown-stricken Fukushima Daiichi nuclear plant after its admission that highly radioactive water from the site has been seeping into groundwater and the harbor off the plant. A top official said Tuesday that the government wanted the problem solved "as soon as possible," while an official at Japan's nuclear regulatory agency told Reuters on Monday that the issue was an "emergency." Three reactors melted down at Fukushima Daiichi after the massive earthquake and tsunami that struck Japan in March 2011. The result was the worst nuclear accident since the Soviet Union's Chernobyl incident in 1986. The meltdown complicated an already historic disaster. Scientists have pointed to ongoing high radiation levels in the waters off the plant for more than a year to warn of an ongoing leak. The Tokyo Electric Power Company admitted to the problem in July, disclosing that it had found high concentrations of reactor byproducts tritium, cesium-137 and strontium-90 in test wells and in the harbor outside the coastal power plant. "It's a present reality that the contaminated water is seeping out to the bay without us being able to control it," Masayuki Ono, TEPCO's acting nuclear power chief, said this week. "This is an extremely serious issue we must tackle."

'Urgent' Fukushima Crisis Demands More Public Money, says Japan  - Officials in Japan have called the situation "urgent" as new revelations show that as much as 300 tons of "highly radioactive water" from the crippled Fukushima nuclear power plant are pouring into the Pacific Ocean on a daily basis. The nation's Prime Minister Shinzo Abe himself said the government would now step in where the plant's owner, TEPCO, has failed. Though the government has already stepped in to "bail out" the private energy compay, Abe now says even more public money will be necessary to fight the ongoing and seemingly growing disaster. "Stabilizing the Fukushima plant is our challenge," he said at a government task force meeting on Wednesday. "In particular, the contaminated water is an urgent issue which has generated a great deal of public attention." The Japan Times reports: The public must help fund Tokyo Electric Power Co.’s effort to freeze the soil around the reactor buildings at its Fukushima No. 1 nuclear plant, creating a barrier to prevent more groundwater from becoming radioactive, Chief Cabinet Secretary Yoshihide Suga said Wednesday. “There is no precedent in the world to create a water-shielding wall with frozen soil on such a large scale (as planned now at the Fukushima complex). To build that, I think the state has to move a step further to support its realization,” Suga told reporters.

Japan's Nuclear Nightmare - I had a terrible dream last night. I imagined it had been 29 months since a giant earthquake and tsunami wrecked the Fukushima Dai-Ichi nuclear plant, the reactor continued to spew radiation into the sea just 135 miles away from my home in Tokyo -- and the Japanese government was standing by and doing nothing. Wait! Sadly, until earlier today, that was reality.The real nightmare for me and the 126 million people who reside in Japan was that it took Prime Minister Shinzo Abe this long to step in to help Tokyo Electric Power -- the plant's owner -- to deal with tons of radioactive groundwater spilling into the Pacific Ocean. Stopping the leakage could cost tens of millions of dollars; Tepco, which continues to insist that the contamination is minor, would clearly not have been eager to pony up.Really, a little government intervention would have been even nicer two years ago, when Naoto Kan occupied Abe's office. Back then, scientists and academics urged Japan to nationalize Tepco and decommission that plants it ran with such abandon and arrogance.

Drought-Stricken New Mexico Farmers Drain Aquifer To Sell Water For Fracking - The bad news is that the terrible drought in New Mexico has led some farmers to sell their water to the oil and gas industry. The worse news is that many of them are actually pumping the water out of the aquifer to do so. The worst news of all is that once the frackers get through tainting it with their witches brew of chemicals, that water often becomes unrecoverable — and then we have the possibility the used fracking water will end up contaminating even more of the groundwater. The Albuquerque Journal reports: With a scant agriculture water supply due to the prolonged drought, some farmers in Eddy County with supplemental wells are keeping bill collectors at bay by selling their water to the booming oil and gas industry. The industry needs the water for hydraulic fracturing, known as fracking, the drilling technique that has been used for decades to blast huge volumes of water, fine sands and chemicals into the ground to crack open valuable shale formations. You may wonder why farmers would sell water to frackers when some 95% of the state has been under severe drought conditions for the entire year. The short answer is it pays the bills.  “Farmers right now are having to pump their supplemental wells, and we understand that. It’s their livelihood,” he said. “But the supplemental wells are drawing from the same water table we provide potable water to our customers (from).”

Between 6 and 12% of the Uinta Basin’s natural gas production escaping into the atmosphere - Between 6 and 12% of the Uinta Basin’s natural gas production could be escaping into the atmosphere, far more than commonly estimated, according to a new study led by the National Oceanic and Atmospheric Administration. These troubling findings emerged during experiments conducted in February 2012 to validate a new method for calculating how much methane is released from oil and gas fields. "The point of the paper was to show that we have a robust method for verifying emissions,"  "The method we’re going after is what is the actual impact to the atmosphere, rather than guesses based on discrete measurements from a few wells." Accepted for publication in the journal Geophysical Research Letters, the study was conducted by the Cooperative Institute for Research in Environmental Sciences, or CIRES, which Colorado runs jointly with NOAA in Boulder. The NOAA team piggybacked its work on a study funded in part by Utah examining ozone formation in the basin two winters ago. The team flew over the basin at about 1,000 feet gathering air samples and readings over several weeks.

Exclusive: Censored EPA PA Fracking Water Contamination Presentation Published for First Time - DeSmogBlog has obtained a copy of an Obama Administration Environmental Protection Agency (EPA) fracking groundwater contamination PowerPoint presentation describing a then-forthcoming study's findings in Dimock, Pennsylvania. The PowerPoint presentation reveals a clear link between hydraulic fracturing ("fracking") for shale gas in Dimock and groundwater contamination, but was censored by the Obama Administration. Instead, the EPA issued an official desk statement in July 2012 - in the thick of election year - saying the water in Dimock was safe for consumption.Titled "Isotech-Stable Isotype Analysis: Determinining the Origin of Methane and Its Effets on the Aquifer," the PowerPoint presentation concludes that in Cabot Oil and Gas' Dimock Gesford 2 well, "Drilling creates pathways, either temporary or permanent, that allows gas to migrate to the shallow aquifer near [the] surface...In some cases, these gases disrupt groundwater quality."   Other charts depict Cabot's Gesford 3 and 9 wells as doing much of the same, allowing methane to migrate up to aquifers to unprecedented levels - not coincidentally - coinciding with the wells being fracked. The PowerPoint's conclusions are damning.

Children given lifelong ban on talking about fracking - Two young children in Pennsylvania were banned from talking about fracking for the rest of their lives under a gag order imposed under a settlement reached by their parents with a leading oil and gas company. The sweeping gag order was imposed under a $750,000 settlement between the Hallowich family and Range Resources Ltd, a leading oil and gas driller. It provoked outrage on Monday among environmental campaigners and free speech advocates. The settlement, reached in 2011 but unsealed only last week, barred the Hallowichs' son and daughter, who were then aged 10 and seven, from ever discussing fracking or the Marcellus Shale, a leading producer in America's shale gas boom. The Hallowich family had earlier accused oil and gas companies of destroying their 10-acre farm in Mount Pleasant, Pennsylvania and putting their children's health in danger. Their property was adjacent to major industrial operations: four gas wells, gas compressor stations, and a waste water pond, which the Hallowich family said contaminated their water supply and caused burning eyes, sore throats and headaches. Gag orders – on adults – are typical in settlements reached between oil and gas operators and residents in the heart of shale gas boom in Pennsylvania. But the company lawyer's insistence on extending the lifetime gag order to the Hallowichs' children gave even the judge pause, according to the court documents.

Children Banned from Talking about Fracking as Reign of Silence Spreads - There are no official records of contamination caused by fracking. That is the story pushed by frackers, and other persons who support the fracking industry. However there is a twisted logic to this truth that is nicely highlighted in the case of the Hallowich family v Range Resources. The Hallowich’s lived in Mount Pleasant, Pennsylvania, just next to a site where Range Resources drilled for shale gas. Having suffered from burning eyes, sore throats, headaches, and earaches due to the contaminated air and water supplies, they were offered a $750,000 settlement to relocate their home. As with many such cases, the settlement deal included a non-disclosure agreement that prevented not just Stephanie and Chris Hallowich from speaking about the case or their experiences, for the rest of their lives, but also their young children, aged just 7 and 10.

HYDRAULIC FRACTURING: When 2 wells meet [downhole communication, frack "hits"], spills can often follow - When a geyser of oil and fracking fluid spewed out of an oil well on a farmer's field in Innisfail, Alberta, it coated 100 trees with a fine mist. About 20,000 gallons of oil and fluid collected on a snow-covered field and had to be cleaned up. The spill was caused by hydraulic fracturing -- not the activities surrounding drilling. A series of similar incidents are being reported across the United States and Canada. Drillers call it a "frack hit" or "downhole communication," and it could also contaminate groundwater aquifers. A basic review by EnergyWire of oil spill reports from various states, as well as phone interviews with regulators, revealed more than 10 cases of frack hits that have resulted in spills ranging from 300 gallons to 25,700 gallons. The events were recorded in states from Montana to Texas. The incidents are called frack hits because they happen when the fractures of two wells intersect. The communicating wells have, in cases, been as far apart as 1.8 miles, though it is more common for the wells to be less than 3,000 feet apart. That is too close for comfort because most states allow adjacent horizontal well bores to be about 600 feet from each other. "Our concern is where the communication results in a loss of well control," "In other words, there's a fluid spill on the surface or loss of well control underground that could lead to contamination of a water aquifer." "Everyone thinks cement is this magic; it's not," . "Cement is not 100 percent perfect, it cracks."

New Study Finds High Levels Of Arsenic In Groundwater Near Fracking Sites - A recently published study by researchers at the University of Texas at Arlington found elevated levels of arsenic and other heavy metals in groundwater near natural gas fracking sites in Texas’ Barnett Shale. While the findings are far from conclusive, the study provides further evidence tying fracking to arsenic contamination. An internal Environmental Protection Agency PowerPoint presentation recently obtained by the Los Angeles Times warned that wells near Dimock, Pa., showed elevated levels of arsenic in the groundwater. The EPA also found arsenic in groundwater near fracking sites in Pavillion, Wyo., in 2009 — a study the agency later abandoned. ProPublica talked with Brian Fontenot, the paper’s lead author, about how his team carried out the study and why it matters. (Fontenot and another author, Laura Hunt, work for the EPA in Dallas, but they conducted the study on their own time in collaboration with several UT Arlington researchers.) Here’s an edited version of our interview:

Exclusive: Chesapeake drops energy leases in fracking-shy New York  (Reuters) - Chesapeake Energy has given up a two-year legal fight to retain thousands of acres of natural gas drilling leases in New York state, landowner and legal sources told Reuters. Landowners in Broome and Tioga counties, who had leased acreage to Chesapeake over the past decade, had battled the pioneering oil driller in court to prevent it from extending the leases under their original terms, many of which were agreed to long before a boom in hydraulic fracturing swept the United States. But Chesapeake is now ready to walk away from the leases, according to a letter some landowners received two weeks ago from their attorney at Levene Gouldin & Thompson, potentially allowing the landowners to renegotiate new deals with other drillers at a higher rate, if New York state eventually ends a five-year fracking ban. The decision, expected to be finalized next week, is a sign of energy firms' growing frustration over operating in the Empire State, where most drilling is on hold, and also an indication of how Chesapeake is reining in spending after years of aggressive acreage buying left it with towering debt. Chesapeake had sought to extend the leases, many of which were signed in 2000, on existing terms, arguing that the fracking ban had allowed it to do so. Extending the leases meant it would avoid renegotiations, which would likely have raised the cost of the acreage. A moratorium on hydraulic fracturing imposed in 2008 continues to halt development in New York's portion of the Marcellus shale, one of the United States' biggest gas deposits, while neighboring states like Pennsylvania, Ohio and West Virginia experience an energy drilling renaissance.

Chesapeake Gives Up On New York Fracking -- It hasn’t been a great year for Chesapeake Energy, just coming down from a management meltdown and now giving up on its leases in New York over the state’s ban on high-volume fracking. It’s a battle that’s been on for two years over thousands of acres of natural gas leases in New York, where fracking has been banned for five years. The problem was that the landowners leased the acreage to Chesapeake before the advent of hydraulic fracturing, and now they don’t want these leases extended under the original terms, according to a report by Reuters. The report says that Chesapeake has now notified the landowners that it is giving up the fight, and that the decision should be finalized next week. But there’s more to this than a simple court case...

Meet the Town That's Being Swallowed by a Sinkhole - What could possibly go wrong when miners, frackers, and drillers reshape the geology beneath our feet? Talk to the evacuees of Bayou Corne, Louisiana.  Texas Brine's operation sits atop a three-mile-wide, mile-plus-deep salt deposit known as the Napoleonville Dome, which is sheathed by a layer of oil and natural gas, a common feature of the salt domes prevalent in Gulf Coast states. The company specializes in a process known as injection mining, and it had sunk a series of wells deep into the salt dome, flushing them out with high-pressure streams of freshwater and pumping the resulting saltwater to the surface. What happened in Bayou Corne, as near as anyone can tell, is that one of the salt caverns Texas Brine hollowed out—a mine dubbed Oxy3—collapsed. The sinkhole initially spanned about an acre. Today it covers more than 24 acres and is an estimated 750 feet deep. It subsists on a diet of swamp life and cypress trees, which it occasionally swallows whole. It celebrated its first birthday recently, and like most one-year-olds, it is both growing and prone to uncontrollable burps, in which a noxious brew of crude oil and rotten debris bubbles to the surface. But the biggest danger is invisible; the collapse unlocked tens of millions of cubic feet of explosive gases, which have seeped into the aquifer and wafted up to the community. The town blames the regulators. The regulators blame Texas Brine. Texas Brine blames some other company, or maybe the regulators, or maybe just God.

Obama’s Own Party Wages War on Energy Plans - The White House on Wednesday announced it was clearing out its in-box for liquefied natural gas export licenses by signing off on plans for a terminal in Lake Charles, La. The third such measure could lead to the delivery of as much as 2 billion cubic feet of natural gas to foreign markets for the next 20 years. The Obama administration has made a low-carbon economy a centerpiece of its second-term agenda. Republican critics of the president said his green plans are hurting the economy. This time, it’s the president’s own party expressing concerns about his decisions. The Department of Energy announced it authorized the delivery of domestically produced LNG from an export terminal in Louisiana. The permit is for the export of 2 billion cubic feet of natural gas per day for the next 20 years. The authorization extends to countries that do not have a free trade agreement with the United States. The International Energy Agency said it expects the global demand for natural gas to increase by 1.5 trillion cubic feet by 2016, which it said represents about 75 percent of what the U.S. market consumed in 2010. Last year, the Energy Department said LNG would lead to economic gain regardless of the market scenario.

$100M in natural gas being burned off monthly in ND — Oil producers are allowing nearly a third of the natural gas they drill in North Dakota's Bakken shale fields to burn off into the air, with a value of more than $100 million per month, according to a study to be released Monday. Remote well locations, combined with historically low natural gas prices and the extensive time needed to develop pipeline networks, have fueled the controversial practice, commonly known as flaring. While oil can be stored in tanks indefinitely after drilling, natural gas must be immediately piped to a processing facility. Flaring has tripled in the past three years, according to the report from Ceres, a nonprofit group that tracks environmental records of public companies. "There's a lot of shareholder value going up in flames due to flaring," said Ryan Salmon, who wrote the report for Ceres. "Investors want companies to have a more aggressive reaction to flaring and disclose clear steps to fix the problem." The amount lost to flaring pales in comparison to the $2.21 billion in crude oil production for May in North Dakota.

PN Bakken: Crude trains keep rolling - Canada’s two big railroads and oil producers are pressing ahead with plans to increase the use steel-wheels-on-steel-rails to move crude even as the small Quebec town of Lac-Megantic reels from what can go wrong with a crude-laden train. Canadian Pacific Railway, despite four derailments of trains carrying oil or petroleum products this year, posted a record second-quarter profit, crediting long-haul oil shipments for much of the gain, while Canadian National Railway cited oil transport as a key to its profits for the quarter. But, acknowledging the public and political demand for action, both have tightened their safety procedures for trains carrying hazardous materials, staying one jump ahead of the Canadian government and its transportation regulators. Jane O’Hagan, chief marketing officer for CP Rail, said the movement of oil will “form a larger part” of her company’s business, which is expected to account for 70,000 carloads this year and double that in 2015. “Crude-by-rail remains a complementary and important supply chain option for producers, refiners and transloaders looking to benefit from the flexibility of moving any type of crude to any North American market,”

Freedom Rider: Tar Sands Hell in Detroit - Black Agenda Report - If one picture is worth 1,000 words, then the pile of petroleum coke, petcoke, which sits along the Detroit River tells quite a story. Beginning in November 2012, the Koch Carbon company began dumping the petcoke, which is a byproduct of tar sands oil production and also a cheap fuel. Koch Carbon is owned by those Kochs, Charles and David, the incredibly wealthy right wing industrialists who play a very public role in bringing union busting Right to Work laws, Stand Your Ground, and other horrors to state legislatures across the country. But this is not just a story about the Kochs. It would be too simplistic to lay the blame at the feet of these obvious villains alone. The three story high pile of fossil fuel waste says quite a lot about the political and economic calamity that has ensnared Detroit and which moves more slowly but relentlessly to the rest of the country.  Petcoke has been called the dirtiest of dirty fuels because it emits more carbon dioxide than coal and contains more metal and sulfur. As a byproduct it costs nothing to produce yet can be sold at a high profit. Without seeking permits, with no public notification whatever, Koch Carbon began dumping the petcoke last year and it isn’t hard to figure out why Detroit was chosen as the location. Detroit as a sovereign public entity no longer exists. It is completely powerless, having been taken over by the “lords of capital” personified in this case by emergency manager Kevyn Orr. There is quite literally no one in Detroit’s government with the power to stand up to the Kochs, Orr, or to anyone else who can do the city harm.

Leak at Oil Sands Project in Alberta Heightens Conservationists’ Concerns - The oil company calls it “seepage.” Environmentalists describe it as a “blow out.” Either way, the leak at the oil sands project in Northern Alberta — which has spilled 280,022 gallons of oil across 51 acres since June — is stoking the controversy over the energy source. “This mess is a symptom of the problems with the reckless expansion of the tar sands,” said Anthony Smith, a lawyer in the international programs division of the Natural Resources Defense Council in Washington. “Environmental regulations have just not caught up.” The oil sands industry is booming in Canada, pumping billions of dollars into the economy and providing thousands of jobs. But critics contend that the processes for recovering the low-grade petroleum called bitumen are particularly harmful to the environment. President Obama is weighing climate concerns in his decision to approve — or not approve — the Keystone XL pipeline, which would link Canada’s oil sands with the American Gulf Coast. The cause of the oil spill at the Royal Canadian Air Force base in Cold Lake, Alberta, remains unclear. The company that owns the project, Canadian Natural Resources, blames abandoned wells in the area. Environmentalists point to fundamental flaws with the company’s process. Until they find the source of the problem, oil continues to leak at four locations. The spill, modest by historical standards, is manageable for the company, which says it expects to spend $60 million on cleanup and investigation. But already the leak is spoiling the landscape and hurting wildlife. It has killed 71 frogs, 27 birds and 23 mammals, including two beavers, according to the company.

Will Keystone XL Pipeline Create Many Construction Jobs? - The construction of Keystone XL, which would generate 3,950 person-years of work according to the U.S. Department of State, has a job creation potential on par with building a shopping mall or the campus renovations the University of Oregon announced last week. Moreover, after it's built, Keystone XL will only employ between 35 and 50 people — and some of those positions will be filled in Canada. That's a small fraction of the long-term employment benefits one could expect from a shopping mall. By pitching the tar sands industry's pet project as a national jobs generator in an economy of 150 million, Keystone XL's Congressional boosters are incurring a huge opportunity cost on behalf of constituents who need jobs, not empty promises from the oil industry. While the Keystone XL tar-sands pipeline is not a national jobs creator, it would be a significant new source of climate pollution, adding 1.2 billion metric tons of carbon pollution to the atmosphere over its estimated lifespan. For that reason it fails the President's climate test and should be rejected.

Keystone Light: The Keystone XL Alternative You’ve Never Heard of Is Probably Going to Be Built - One of TransCanada's rivals, Enbridge Inc., has quietly been moving ahead with a slightly smaller pipeline project that could be piping 660,000 barrels of crude per day to the gulf by 2015. (The Keystone line would carry 700,000 barrels per day.) For environmentalists hoping that blocking the Keystone pipeline would choke the carbon-intensive development of the Canadian tar sands, the Enbridge Eastern Gulf pipeline would be a disaster. The 774-mile pipeline would run from Patoka, Illinois, to St. James, Louisiana, alleviating a pipeline bottleneck in the Midwest, where the shale oil from North Dakota's Bakken formation meets the flow from Alberta's oil sands, overwhelming the capacity of the current pipelines. And although 200 miles of pipe destined for Keystone XL sits collecting dust in North Dakota with no shipping date in sight, the bulk of the Eastern Gulf project is already built—almost three quarters of it will be repurposed natural gas line. Without the public outcry that has bogged down Keystone, the project has flown along smoothly under the radar

New TransCanada Pipeline Plan Dwarfs Keystone XL - TransCanada Corp. announced yesterday they will proceed with plans to create a pipeline capable of shipping 1.1 million barrels per day (bpd) of oil and tar sands bitumen from western Canada to refineries and ports in Quebec and New Brunswick.  Called "Energy East," this west-to-east pipeline would dwarf the oil delivery capacity of TransCanada's proposed Keystone XL pipeline in the US (830,000 bpd). The premiers of Alberta and New Brunswick declared Energy East a "nation building" pipeline. The pipeline will pass through Alberta, Saskatchewan, Manitoba, Ontario, Quebec and New Brunswick. "This is an historic opportunity to connect the oil resources of western Canada to the consumers of eastern Canada, creating jobs, tax revenue and energy security for all Canadians for decades to come," said Russ Girling, TransCanada's president and chief executive officer, in a statement. It remains unclear how much of Energy East's oil will be exported outside of Canada and how much tar sands bitumen will be shipped through the pipeline.Energy East will be 4,400 kilometres of pipeline from Hardisty, Alberta to Saint John, New Brunswick. 3,000 kilometres of this pipeline already exists as a 55-year-old TransCanada natural gas line that will be converted to carry oil. Another 1,400 kilometres (the equivalent of building a Northern Gateway) of new pipeline will be constructed from the Quebec-Ontario border to Saint John.

Energy East Pipeline: Building a Nation on a Nightmare - TransCanada officially announced on August 1 a $12-billion Energy East tar sands pipeline project. If constructed, the pipeline would run from Alberta to the coast of St. John, New Brunswick, and would carry 1.1 million barrels of crude a day, which would enable a 50 per cent increase tar sands production. Alberta Premier Alison Redford called Energy East "truly a nation-building project." What does it say about our leaders and about us when the best dream we can think of is to build a nation on a tar sands pipeline? That extracting the bodies of long lost ancestors -- essentially that's what oil and bitumen are -- and pushing them through a pipe is cause for national platitudes?  Already approved projects in the tar sands are projected to blow past government-set limits for protecting air, water, and wildlife habitat. This pipeline would facilitate more projects being built, adding to the damage. Future projects would also be mostly in-situ, a pretty worrisome thought given that right now an in-situ project near Cold Lake, Alberta has been spilling tar sands into the environment for months and the government and the company can't seem to stop the spills. They just keep going.

BP CEO Says He’s Done Paying For The Deepwater Horizon Disaster -  BP CEO Robert Dudley told Businessweek in an interview Thursday that continuing to send millions of dollars to people who claim they were hurt by the 2010 disaster is “not good for America.” While BP is trying to halt its payments and reduce the amount owed to victims, Dudley claimed the company has been the wronged party: We are still committed to make sure that legitimate claimants and people who were true victims of the spill are paid. [...] Quite frankly, the results have been really strange. The claims going through a claims facility have resulted in absurd results, and millions of dollars are going out to pay people who suffered, in many cases, no losses from the spill. And this is just not right. I don’t think it’s right for America. We’re a big investor in the United States, and we’ve challenged this really strongly. It’s just not right.  Dudley’s claim that BP has in good faith agreed to all of the damages misrepresents the current state of affairs. The company has actually been working to reduce its debts. BP had asked a federal judge to halt spill payments, though the judge decided against BP yesterday. That will not prevent BP from fighting claims with its new hotline that pays watchdogs to report fraud.  Since scientists can’t quite quantify the true environmental or economic consequences of the Gulf Oil spill, exactly who was impacted is still unclear. For instance, tar continues to wash up onto the coast.

No More Spills? New Technology Could Transform The Pipeline Sector - What the Quebec tragedy demonstrates, says Banica, is that pipelines are a far better option than rail. “Whereas pipelines do not kill as many people as rail (or even truck transport, as more drivers die due to accidents), they do pose a bigger environmental risk than rail due to larger potential leaks and releases.” So the issue of pipeline leak detection will increasingly be on everyone’s radar. Most leaks are found eventually - but there is money to be saved and damage to be avoided by catching them at the smallest rupture. Right now, we rely on 'pigs' in the pipeline to do this, but there is new technology out there.

Despite boom, oil companies struggling  - New troves of oil have been found all over the globe, and oil companies are taking in around $100 for every barrel they produce. But these seemingly prosperous conditions aren't doing much for Big Oil: Profit and production at the world's largest oil companies are slumping badly. Exxon Mobil, Shell and BP all posted disappointing earnings this week. Chevron is expected to post a profit decline Friday. All of them face the same problem: The cost to get newfound oil from remote locations and tightly packed rock is high and rising. And it takes years and billions of dollars to get big new production projects up and running. The higher extraction costs could translate to higher oil and gasoline prices for consumers. . "Even though oil prices are $100 or higher, the returns on investment aren't what they used to be." The new oil being found and produced is in ultra-deep ocean waters, in sands that must be heated to release the hydrocarbons or trapped in shale or other tight rock that requires constant drilling to keep production steady.

Experts Expect Crude Oil Price Decline -  A flurry of new energy price forecasts released this week predicts the price of U.S. crude oil will retreat below $100 for the second half of the year. This, after the price of benchmark West Texas Intermediate (WTI) surged 16% to $108 between mid-June and mid-July. The August futures contract now stands at about $105. Here's the rundown of 2h2013 price calls: On Tuesday, the EIA forecasted WTI's oil price spread against London's Brent oil price would widen to $6 for the rest of the year, while predicting Brent itself would fall to an average of $104 from its current level of $108. Thus, the EIA expects WTI to average $98 for the rest of the year. UBS' Julius Walker says in a note that WTI will decline to $99 in Q3 and $91 in Q4. Goldman Sachs' Damien Courvalin has $99 for Q3 and $97 in Q4. And on Monday, Morgan Stanley's Adam Longson confirmed targets of $99 for Q3 and $94.50 for Q4

GDP Growth must Slow as Oil Limits are Reached -- We know the world economic pattern we have been used to in years past–world population grows, resource usage grows (including energy resources), and debt increases. The economy grows fast enough that paying an interest rate a little higher than the inflation rate “works” for both lenders and borrowers. Governments do fairly well, too, because they can tax the growing wages of the population sufficiently to get enough taxes to pay the benefits they have promised to constituents. In a finite world, we know that this model cannot work forever. At some point, we can expect to start reaching limits. What do these limits look like? I would argue that in the case of resource extraction, these limits look like increasingly high cost of extraction. We need to extract resources from increasingly deep locations, in increasingly out-of-the way places, using increasingly more energy intensive techniques. For a while, improved technology is sufficient to keep costs down, but eventually the cost of extraction begins to rise. When the cost of extraction begins to rise, it is as if we are pouring more manpower and more resources of many types (steel, fracking fluid, jet fuel, electricity, diesel fuel) into a deep pit, never to be used again. When we put more resources in, we get the same amount of resource out, or even less than in the past. If we want to continue to increase the amount we extract, we have to further increase the quantity of resources used in extraction. I have referred to this issue as the Investment Sinkhole problem. Obviously, if we put more manpower and other resources into this pit, we have less for other purposes.

Washington Threatens Pakistan with Sanctions if it continues with Iran Pipeline -- Earlier in the year Washington voiced concerns over plans to construct a gas pipeline from Iran to Pakistan, threatening Pakistan with their own set of sanctions if they continued with the project. Pakistan denies that the $7.5 billion ‘Peace Pipeline’, as it is being called, will violate any of the sanctions currently in effect against Iran, but Victoria Nuland, the old spokesperson for the US State Department, said that “we have serious concerns if this project actually goes forward that the Iran Sanctions Act would be triggered.” So far Iran has completed its 900 kilometre segment of the pipeline, and on the 11th of March 2013 Pakistan held a ceremony to mark the commencement of its section which will begin at the Iranian town of Chahbahar, on the border. Once it is completed in December 2014 the two countries hope that the new pipeline will deliver 21.5 million cubic metres of natural gas a day from the giant offshore South Pars field off the coast of Iran, to Pakistan. On Friday the 2nd of August 2013 the spokesperson for the Pakistani Foreign Office, Aizaz Chaudhry, announced that his government had supplied US Secretary of State John Kerry with a ‘non-paper’ over the pipeline, explaining that Pakistan were only involved in the project as providing a means of addressing the country’s energy deficit. On Sunday, Prime Minister Nawaz Sharif said that the US had once again warned that the Iran-Pakistan pipeline could invoke sanctions on Pakistan in the future.

Putin Laughs At Saudi Offer To Betray Syria In Exchange For "Huge" Arms Deal - One of the more surprising news to hit the tape yesterday was that Saudi Arabia, exasperated and desperate by Russia's relentless support of the Syrian regime and refusal to abandon the Syrian army thus facilitating the Qatari plan to pass its natgas pipeline to Europe under Syria, had quietly approached Putin with a proposal for a huge arms deal and a pledge to boost Russian influence in the Arab world if only Putin would abandon Syria's Assad. It will hardly come as a surprise to anyone that in the aftermath of yesterday's dilettante mistake by Obama which alienated Putin from the western world (and its subservient states such as Saudi Arabia of course), has just said no. It will certainly come as no surprise because as we explained previously, the biggest loser from Russia abandoning Syria (something we predicted would never happen) would be none other than Russia's most important company - Gazprom - which would lose its energy grip over Europe as Qatar replaced it as a nat gas vendor. What is shocking in all of this is that Saudi Arabia was so stupid and/or naive to believe that Putin would voluntarily cede geopolitical control over the insolvent Eurozone, where he has more influence according to some than even the ECB, or Bernanke. Especially in the winter.

Russia GDP figures raise fears of a deeper slowdown - Russia’s economy grew just 1.2 per cent between April and June, compared with the same period a year earlier, according to the state statistics service. The figure fuelled fears that the country’s slowdown could prove longer and deeper than expected. The service’s preliminary figure for gross domestic product growth was significantly lower than analysts’ forecast of 2 per cent, and an earlier estimate of 1.9 per cent by Russia’s economy ministry, which tends to be pessimistic in its forecasts. It compares with 1.6 per cent growth in gross domestic product that Russia reported in the first quarter. Russia’s economic growth has fallen for six consecutive quarters: the 1.2 per cent growth figure was the lowest quarterly number since the last three months of 2009. While economists and Russian government officials predict that the economy will pick up significantly in the third quarter thanks to a bumper harvest and other factors, the latest numbers will cause many to re-evaluate full-year forecasts and the direction the economy is heading in. “We thought it was going to be a first quarter trough, but the second quarter has been worse than the first quarter,” said Jacob Nell, chief economist for Morgan Stanley in Russia. “It challenges our story about the whole year.”

Russia’s Stimulus Plan: Open the Gulag Gates - More than 110,000 people are serving time for what Russia calls “economic crimes,” out of a population of about three million self-employed people and owners of small and medium-size businesses. An additional 2,500 are in jails awaiting trial for this class of crimes that includes fraud, but can also include embezzlement, counterfeiting and tax evasion. But with the Russian economy languishing, President Vladimir V. Putin has devised a plan for turning things around: offer amnesty to some of the imprisoned business people. “This can be understood in the Russian context,” Boris Titov, Mr. Putin’s ombudsman for entrepreneurs’ rights, said of what is, even by the standards of the global recession, a highly unusual stimulus effort. The amnesty is needed, he said, because the government had “overreacted” to the threat of organized crime and the inequities of privatization and over-prosecuted entrepreneurs during Mr. Putin’s first 12 years in power as president and prime minister. Russia’s economy does need help. In the first quarter, growth fell to a rate of 1.6 percent because oil prices are level. And in that economic climate, few Russians seem willing to risk opening a new business that might create jobs and tax revenue for the government.

PBoC tightening by stealth? - As we noted a week ago, there was some recent anxiety that Chinese interbank markets were again freezing up, with Shibor rates jumping again as the end of month neared. A couple of days later, several reports emerged that the People’s Bank of China was coming to the rescue by conducting reverse-repo operations for the first time since February, injecting a net Rmb17bn. Then Chinascope Financial wrote on Tuesday that a pile of PBoC bills were due to mature during that week – they put the value at Rmb85bn — which would, if the PBoC allowed it to, constitute a net injection of liquidity. Only, it seems like that didn’t happen: According to the Oriental Morning News today, the People’s Bank of China (PBoC) “re-issued” RMB184bn of three-year central bank bills in July. These bills were supposed to expire in July, but instead of letting them expire and issuing new bills, the PBoC “re-issued” these bills to large financial institutions that had “good liquidity and strong market influence” (quote from the Q2 monetary policy report issued on 2 August). This is the first time the PBoC has conducted a “re-issuance” operation. So what gives? The PBoC has had a track record of changing its favoured tools, especially over the past few years. Some of these moves — such as the decision in January to introduce regular short-term repo and reverse-repo operations — appeared to be part of a shift towards more market-based and transparent liquidity management, and away from relying on reserve ratios and lending and deposit rates

PBoC pushing the yuan lower; will infuriate US manufacturing lobby - While the yuan is trading around 6.13 to the dollar, the PBoC is guiding the currency weaker. The so-called PBoC "midpoint" is now at 6.1817 - a level not seen since May. The currency is allowed to trade 1% higher or lower than the level set each morning by the central bank. The current trading level is 0.8% stronger than the midpoint.Given the nation's recent weakness in exports (see post), the yuan appreciation policy is over for now. China's officials have hinted for a while that exporters need help, and setting the currency level is the primary tool used to help them. As discussed (see post), this is not going to resonate well in the US, especially given that 2014 is a midterm election year. The US manufacturing lobby is already raising the temperature on China's currency practices (on top of other complaints). The piece below was written last week by Scott N. Paul, President of the Alliance for American Manufacturing (AAM). Since we granted normalized trade relations to Beijing over a decade ago, we’ve traded production capacity, and about 2.7 million middle-class jobs (including more than 113,000 in Illinois) to China in order to live high on the consumption hog. Beijing fuels this trade gap through massive subsidies while also forcing American companies to transfer intellectual property, ignoring widespread counterfeiting and stealing everything from Coca-Cola trade secrets to Pentagon missile-defense plans. But ultimately, no single subterfuge does as much sustained damage to the American economy as Beijing’s policy of currency manipulation.

Why Hasn’t Loan Growth Generated Economic Growth? China’s Central Bank Explains -- For economists, the hot topic is why China’s growth is so much lower than its expansion of credit. Money supply has notched increases of close to 15% year-over-year in recent months, but economic growth for the second quarter was only half that rate. In its latest monetary policy report (in Chinese), China’s normally tight-lipped central bank offered various explanations, some more reassuring than others:

  • Loans going into areas that don’t immediately generate growth — like land needed for construction projects.
  • Hoarding of cash by businesses at a time of economic uncertainty, with some businesses using funds to make more loans at a higher interest rate.
  • Old industries fading away and new industries firing up both need credit, but neither generates stellar output.
  • A more sophisticated financial system takes longer to get credit to end users.

The central bank sees risks — especially with businesses sticking to their credit-hoarding ways despite a shift to lower potential growth. But overall they strike a reassuring tone. Wide gaps between growth in credit and the real economy are not uncommon, they say, especially during slowdowns.

China's Credit Crisis In Charts - The rapid pace of China credit expansion since the Global Financial Crisis, increasingly sourced from the inherently more risky and less transparent "shadow banking" sector, has become a critical concern for the global markets. From the end of 2008 until the end of 2013, Chinese banking sector assets will have increased about $14 trillion. As Fitch notes, that's the size of the entire US commercial banking sector. So in a span of five years China will have replicated the whole US banking system. What we're seeing in China is one of the largest monetary stimuli on record. People are focused on QE in the US, but given the scale of credit growth in China Fitch believes that any cutback could be just as significant as US tapering, if not more. Goldman adds that China stands to lose up to a stunning RMB 18.6trn/$US 3trn. should this bubble pop. That seems like a big enough number to warrant digging deeper

Nine cities’ debt ratio exceeds 100% - Nine of the country's provincial capital cities have seen their debt ratio reach over 100 percent, sources from the National Audit Office (NAO) were quoted by China Enterprise News as saying Tuesday. "After a two-year audit of the debts of 36 local governments, the audit office found that the highest debt ratio of a provincial capital city reached 189 percent," the sources said, without identifying the nine cities. Data from financial information portal shows that the top 10 heavily indebted provincial capital cities are Nanjing, Chengdu, Guangzhou, Hefei, Kunming, Changsha, Wuhan, Harbin, Xi'an and Lanzhou. The country's audit watchdog NAO published an audit report in June on the 36 local governments showing that their outstanding debt ­totaled 3.85 trillion yuan ($163.2 billion) by the end of 2012, up 12.94 percent from 2010. But this was not a nationwide audit, so it couldn't accurately reflect the entire picture of the country's local government debt. To audit the public debt more comprehensively, the NAO said that China will launch an ­official audit of public debt nationwide starting from August 1 at the requirement of the State Council.

Early Data, Economists Projections Suggest China's Economy Stabilized in July - China’s economic momentum has been faltering, but economists’ forecasts and early data releases for July suggest growth stabilized last month. China watchers are anxiously awaiting official data on growth, inflation and lending that come out later this month. However, high frequency indicators released earlier than the official figures show that July’s performance wasn’t the disaster some bears have been waiting for. Reading the tea leaves, economists reckon industrial production leveled out, loan growth slowed down after a marked tightening of banks’ liquidity conditions, and inflation edged up. Early indicators and economists’ forecasts don’t always tell the whole story. But they do help get ahead of the curve on developments in the world’s second-largest economy. China’s government has already rolled out targeted moves to support growth and employment, including cutting taxes for micro-businesses and promising subsidies to firms taking on more workers. Signs of stabilization reduce the need to push for a more aggressive stimulus like the one China deployed last year, when growth temporarily dipped below its 7.5% target.

China slowdown shows signs of abating - China’s economy appears to have stabilised amid fears that one of the world’s most important growth engines is close to stalling. A series of small targeted measures from Chinese policy makers in recent months seems to have at least temporarily reversed a growth slowdown with factory production, investment and real estate construction all picking up in July, according to official data released Friday. Most economists had expected the July figures to show stabilisation in the world’s second-largest economy, which has decelerated in nine of the past 10 quarters, but some numbers surprised on the upside, suggesting fears of an imminent collapse are unfounded. However, the composition of the mild rebound appears to rely heavily on construction and investment and undermines Beijing’s stated goal of rebalancing the economy more towards consumption and services. Industrial production at large enterprises, a closely watched measure that usually tracks China’s gross domestic product, increased 9.7 per cent from a year earlier in July, sharply up from 8.9 per cent growth in June and the fastest pace since February. The unexpectedly strong performance was driven mostly by rebounding production of steel, cement, power and nonferrous metals, underscoring the fact that China’s growth remains disproportionately reliant on credit-fuelled infrastructure and property construction. In contrast, growth in retail sales slipped slightly in July, increasing 13.2 per cent from a year earlier compared with 13.3 per cent growth in June. Fixed asset investment, a key driver of China’s investment-led economy, stabilised in July with a 20.1 per cent rise in the first seven months from a year earlier, the same pace as in the six months to the end of June, following four consecutive months of deceleration. Growth in real estate investment sped up in July, growing 20.5 per cent in the first seven months, compared with 20.3 per cent growth in the first six months. Power production, another closely watched indicator, increased 8.1 per cent in July from a year earlier, up from 6 per cent growth in June and the fastest increase since

Comments and quibbles on China’s mostly-strong July trade data - The China July trade data came in surprisingly strong, and even the detail holds up fairly well — apart from a few notable quibbles. Whether you interpret it as a sign that the growth rate has bottomed out, or just that external demand has stabilised, probably depends on how you already view Chinese growth. On to the good, the bad and the confusing in the trade data. Here’s how we summarised the headlines in the 6am Cut: Exports rose 5.1% for July, year-on-year, compared to a median forecast of 2%. Import growth was even stronger at 10.9%, while the median forecast was for only 1%. SocGen’s Wei Yao has some interesting observations. The year-on-year export growth rate, she says, benefits from a base effect — the July 2012 data displayed an unusual decline from the previous month. The import data, however, has no such obvious issues (apart from the little matter of Taiwan). Emphasis ours: In comparison, the bounce of import growth from -0.9% yoy to +10.9% yoy without any base effect was much more surprising and difficult to explain. By origin, there was improvement across the board and the major contributors were the euro area, Taiwan, Korea and Australia. Imports from the euro area rose 8.3% yoy in July, improving for two months in a row. However, we noticed that the difference between China’s data and Taiwan’s diverged again. Chinese imports from Taiwan grew 16.6% yoy in July (vs. 6.7% in June) using the mainland’s data, but increased only 1.1% yoy (vs. 8.6% in June) using Taiwan’s data.

Credit losses may hit $3 trillion, bank says - Goldman Sachs report warns of 'shadow banking' risk elements China might face credit losses of up to 18.6 trillion yuan ($3 trillion), because the speed of its credit expansion has exceeded that seen prior to other credit crises in history, Goldman Sachs Group Inc has warned. In a report dated Aug 5, it said the rapid pace of China's credit expansion, increasingly sourced from the inherently more risky and less transparent "shadow banking" sector, has become a top concern for global markets. "Our Asian economists and strategists recently published a comprehensive look at this concern and its implications for economic growth and asset performance in China, calculating that an extreme upper-bound for total China credit losses could amount to 18.6 trillion yuan," the report said. But actual credit losses are likely to be significantly lower than these worst-case figures, emerge gradually and be partially absorbed by bank earnings or other avenues, it added. "There is ample room on the sovereign balance sheet to provide support, if required," the report said.

Is China Trapped in Deflation? - Consumer price inflation remains but for 17 months the PPI (Producer Price Index) has been deflating year-over-year.  The latest CPI (Consumer Price Index) is up 2.7% for July from the same month in 2012, equaling the gain for June and higher than the 14-month average of 2.2%.  The CPI increase was dominated by food.  Without food prices (up 5%), the CPI would have been 1.6%.  The low inflation without food is causing some observers to call for China to cut interest rates and increase liquidity.  Such action would be contrary to recent actions by the government and the People's Bank of China to tighten credit available in a run-away shadow banking system. Follow up: The year-over-year comparisons will be especially biased against continued PPI deflation in August and September because in 2012 those two months printed the lowest readings in over 10 years, except for 8 months in the heart of the Great Financial Crisis.  If deflation continues for the coming two months the likelihood of a long-term deflationary risk for China will be greatly increased.  The multi-year over-investment in excess capacity could be a turkey coming home to roost. Is China trapped in deflation?  The next two months will go a long way toward giving a tentative answer to that question.

The $7 Trillion Problem That Could Sink Asia - Asia’s central banks engaged in a kind of financial arms race after a 1997 crisis, stockpiling dollars as a defense against turmoil. That altered the financial landscape in two ways: One, Asia now has more weapons against market unrest than it knows what to do with. Two, Asia is essentially America’s banker, with China and Japan having the most at stake. That might be less problematic if not for Capitol Hill’s propensity for shooting itself in the foot. A pointless squabble over the debt ceiling prompted Standard & Poor’s to yank the U.S.’s AAA credit rating in August 2011, sending panic through global markets. Asia is now bracing for months of posturing when the U.S. Congress returns from its August recess. In a perfect world, Washington’s bankers would threaten to call in their loans. Asian nations would sit White House and congressional leaders down and tell them to get their act together. We need to stop considering huge reserve holdings as a financial strength. They are a trap that is complicating economic policy making. It’s time Asia devised an escape. China isn’t without leverage. It’s no coincidence that new Treasury Secretary Jacob Lew’s first overseas visit in March was to his banker-in-chief, Xi Jinping, in Beijing. Nor did it go unnoticed that Lew was the new Chinese president’s first foreign-official meeting. Lew may have been sending Xi a signal this week by calling on Congress to act “in a way that doesn’t create a crisis” on fiscal matters. But that leverage is limited. Xi and Premier Li Keqiang are engaged in a risky rebalancing act, trying to wean the Chinese economy off exports without fanning social unrest. Another debt-limit tussle would fuel market volatility, strengthen the yuan as the dollar plunges, and result in the loss of tens of billions of dollars in China’s portfolio of U.S. Treasuries.

The manufacturing PMI divergence, charted - Compare, contrast, click to enlarge, etc — charts via Capital Economics: The consolidated global picture: And a few words from the Capital Economics economists:

  • •The global manufacturing PMI, published by Markit, edged up to 50.8 in July. Although this is an improvement on the reading for June, it is only marginally above the 50-mark which theoretically divides expansion from contraction. Moreover, it is consistent on past form with world GDP growth of only around 2½-3%.
    •Activity seems to have picked up in most advanced economies in July. The recoveries in the US and UK look particularly strong. Moreover, the euro-zone’s manufacturing PMI rose for a fourth successive month. But the manufacturing sectors of the key emerging economies have slowed further, with China leading the downturn.
    •The more forward-looking components of the global manufacturing PMIs suggest that growth will remain fairly subdued in the coming months, although the new export orders rebounded above the 50 mark. The OECD’s leading indicators also show a clear upturn in the major advanced economies this year. On the other hand, Japanese survey data suggest that the initial positive effects of “Abenomics” may already be fading.

Decade-Long Australia Mining Boom Turns to Bust - The Australian mining boom built over a decade on Chinese hunger for energy and raw materials is turning into bust for many business owners as China‘s cooling growth reverberates through a country accustomed to winning from the rise of an Asian economic giant.Endowed with vast mineral resources, Australia has been the envy of the Western world for avoiding recession during the global financial crisis while other wealthy countries drowned in debt. But the country now faces a potentially painful transition as it weans itself off a heavy reliance on its two biggest exports, coal and iron ore.Australia’s dilemma underscores that China’s long run of supercharged growth has given it enough weight in the world economy to create not only winners, but losers too when its own fortunes change. Trade between Australia and China equaled 7.6 percent of Australia’s $1.5 trillion economy last year, a dramatic threefold increase from a decade earlier, according to an Associated Press analysis of trade data. During that time, mining companies gushed multibillion dollar profits while jobs as mundane as maintenance commanded salaries above $120,000.

Australian central bank cuts key rate to record low - Australia’s central bank cut its benchmark interest rate by one-quarter of a percentage point to a record-low 2.5 percent yesterday because of slower growth and weakening commodity prices. The Reserve Bank of Australia’s decision was made at a monthly board meeting in the first week of a federal election campaign and was expected by most economists. The bank last cut the Official Cash Rate, which is a benchmark for commercial lending rates, by one-quarter of a point in May, following four cuts last year. In a statement, Reserve Bank of Australia Governor Glenn Stevens said economic growth was below the long-term trend level of 3 percent, as the economy adjusts to lower levels of mining investment, but added that there was a “reasonable prospect” of it picking up next year. Australia has enjoyed a decade-long boom in mining and related construction that helped it avoid recession during the global financial crisis. However, growth is now slowing as China’s economy cools and drags down prices for commodities such as iron ore and coal. The Australian government last week nearly doubled its budget deficit forecast for the fiscal year through June next year to A$30.1 billion (US$26.8 billion), as slowing growth weighs on tax revenues.

Housing A Bright Spot In Dull Australian Economy - Australia’s housing sector is responding well to the tonic of record low interest rates. But it’s not enough to save the economy from mediocre growth in the year ahead. Demand for housing loans rose a solid 2.7% on-month in June, its sixth consecutive month of gains. That follows news earlier this week that house prices rose in the second quarter at their fastest pace since 2010. Elsewhere, house auction sales in key markets like Sydney neared record levels in July, while data shows investors also are snapping up rental properties at a much faster pace. The rebound comes as the Reserve Bank of Australia cut its benchmark interest rate to a record low 2.5% Tuesday, citing a broad slowdown in the economy and forecasting more weak growth in the year ahead. It was the eighth cut since November 2011 as the RBA battles the end of a long mining boom. Even as housing improves, other areas of the economy are flat, keeping alive the prospect of further interest rate cuts this year. Financial markets have priced in at least one more cut by December.

The $4 Million Teacher - Mr. Kim works about 60 hours a week teaching English, although he spends only three of those hours giving lectures. His classes are recorded on video, and the Internet has turned them into commodities, available for purchase online at the rate of $4 an hour. He spends most of his week responding to students' online requests for help, developing lesson plans and writing accompanying textbooks and workbooks (some 200 to date).   I traveled to South Korea to see what a free market for teaching talent looks like—one stop in a global tour to discover what the U.S. can learn from the world's other education superpowers. Thanks in part to such tutoring services, South Korea has dramatically improved its education system over the past several decades and now routinely outperforms the U.S. Sixty years ago, most South Koreans were illiterate; today, South Korean 15-year-olds rank No. 2 in the world in reading, behind Shanghai. The country now has a 93% high-school graduation rate, compared with 77% in the U.S.

An Overview Of the World Economic Situation -- From the Reserve Bank of India: Since early May when the Reserve Bank issued its Monetary Policy Statement for 2013-14, global growth has been uneven and slower than initially expected. The tail risks to global recovery had eased in the early part of the year, but that improvement was overtaken by the turmoil in financial markets because of the ‘announcement effect’ of the likely tapering of quantitative easing (QE) by the US Fed. In advanced economies (AEs), activity has weakened. Emerging and developing economies (EDEs) are slowing, and are also experiencing sell-offs in their financial markets, largely due to the safe haven flight of capital. Market expectations of QE taper and the consequent increase in real interest rates in the US have translated into a rapid appreciation of the US dollar and consequent depreciation of EDE currencies. Commodity prices have generally softened, but the price of crude remains elevated. Although the inflation outlook in AEs is still benign, upside risks remain in several EDEs. Sober Look at the Markets has this chart to spotlight the issue: We can break the world down into to distinct groups:
1.) the south south trade -- countries that benefited from a rapidly growth Chinese economy by selling raw materials to them  T
2.) The non-S/S trade: countries that were largely purchasers of Chinese goods, namely the US and the EU.
Put differently, for the last 10-20 years, China has acted as the economic go between, effectively linking the developing world with the developed world. Let's turn to some charts to highlight the above:

Raghu Rajan Inherits Tricky Task as New Indian Central Bank Chief -- India has named Chief Economic Adviser Raghuram Rajan as the next governor of the central bank after current governor Duvvuri Subbarao steps down from the post in early September. Economists and investors welcomed the appointment but they said Mr. Rajan, who took over as chief economic adviser in India’s finance ministry in August last year, will have his work cut out. He inherits the tricky task of restoring faith in the Indian rupee, which hit an all-time low of 61.80 against the U.S. dollar on Tuesday morning, as well as reviving India’s slowing economic growth. In recent weeks, Mr. Rajan, a former economist for the International Monetary Fund, has had an active role in the government’s efforts to appease investors in the face of the rupee’s collapse. The currency has fallen by about 9.5% against the U.S. dollar this year, but recovered slightly late Tuesday to 61.14 rupees, partly on news of Mr. Rajan’s appointment. Mr. Rajan has been frequently interacting with the media and investors to convey the message that the government is considering all possible measures to try to stabilize the currency. He has reiterated several times that the rupee’s recent woes are linked to a strengthening in the U.S. dollar as U.S. assets have become more attractive lately.

Philippine Central Banker Hints at Rate Cuts Ahead - Once the sick man of Asia, the Philippines is now one of the best positioned economies in the region to weather the current global economic turmoil. As countries like India confront the dual challenge of slowing growth and high inflation, the Philippines signaled this week it’s ready to cut rates further even though its economy is already among the fastest-growing in Asia. “As inflation expectations remain well anchored, we foresee inflation over the policy horizon to be within target range,” central bank Governor Amando Tetangco Jr. said Tuesday. “This provides the [central bank] room to make any further adjustments to policy stance if needed to address possible effects of changes in the growth trajectory of our main trading partners including the U.S., Japan and China, and shifts in investor sentiment that could adversely impact the prices of international commodities and capital flows.” What’s the secret of the archipelago’s success? While some peers have seen their balance-of-payments positions erode as growth has slowed and currencies have fallen, the Philippines has ridden President Benigno Aquino III’s anti-corruption drive and reform agenda to blistering growth, a sterling government balance sheet and a series of ratings upgrades that have placed it at investment grade. The economy grew 7.8% in the first quarter of the year — outpacing even China’s –and is expected to expand 6%-7% this year, after posting 6.8% growth in 2012. That has drawn money to the Philippines like a magnet: The stock market’s benchmark PSEi tripled from 2008 to the end of 2012 and had tacked on another 27% through mid-May, when expectations of Fed tapering sparked a general selloff of emerging Asian assets.

Japan Near Stagnation Following 9 Months of Growth; Service Sector Prices Back in Deflation; Spotlight on Abenomics - The pace of growth in Japan slowed to a crawl as new orders stagnate as noted by the Markit Japan Services PMI™ for July. Key Points

  • Weakest rise in service sector activity in nine months
  • Services employment and new orders broadly stagnate
  • Ninth successive month of higher input prices in the service sector

The latest data for Japanese service providers indicated that the expansion evident in previous surveys continued in July, but the pace slowed. Business activity increased only marginally, whilst new business and employment stagnated, in each case ending eight-month sequences of growth.The headline seasonally adjusted Business Activity Index fell in July to 50.6 from 52.1 in June. Whilst this was the weakest increase so far in the current period of expansion, July marked the continuation of a nine-month run of growth, the longest ever recorded in the series.

Japan GDP Data May Spark Sales-Tax Guessing Game - The Japanese government has largely pegged the fate of a next year’s planned sales-tax hike on one number: the percentage the economy grew in the April-June quarter. While one might assume that preliminary gross domestic product data due Monday would contain that number, Prime Minister Shinzo Abe’s government has said it will instead wait for the revised GDP figures released in September to help decide whether the economy can withstand the fall in demand that would initially be expected when the tax goes up. The reason: the first draft of Japanese economic data is notoriously unreliable, and often gets heavily changed. Given the potentially large variance that often occurs between the preliminary and revised GDP, some economists say next week’s figures may end up triggering an elaborate guessing game over how the data will be redone, instead of making the government’s course of action clear.When Japan releases major economic data such as industrial production, it puts out a revised figure a few weeks later. For the GDP, its final figures come months after the preliminary ones, and have sometimes meant the difference between saying the economy is shrinking or is growing.Such inconsistencies have given Japan’s numbers a bad rap. International organizations like the Organization for Economic Cooperation and Development have pointed out that the revisions are much larger than in other developed nations.

Japan Debt in the ‘Quadrillion’ Zone - Japan’s central-government debt topped the quadrillion-yen mark for the first time ever in the second quarter, passing the unwelcome milestone just as a national debate heats up on whether the government should follow through with a controversial a plan to raise the sales tax. It adds up. The central government’s outstanding liabilities totaled ¥1.009 quadrillion ($10.44 trillion) at the end of June, up from Y991.601 trillion three months earlier. A Finance Ministry official said it’s the first time total debt has risen above ¥1 quadrillion since the yen became Japan’s official currency in 1871. The figure is more than 200% of what Japan’s economy, the world’s third-largest, produces per year. That’s by far the highest debt load among industrialized economies. Add some ¥200 trillion of outstanding long-term municipal debt and the ratio jumps to 250%. The quadrillion-yen level may be memorable but it isn’t a game changer. It was expected because Japan’s government continues to borrow heavily, financing nearly half of its spending with borrowed money as it pushes off tough reforms. Still, the data may provide fresh ammunition to those urging Prime Minister Shinzo Abe to follow through with a plan to raise the consumption tax. “Given that the fiscal deficit is running high and government debt outstanding has already reached extremely high levels, it’s quite important for the government to show a clear path toward fiscal consolidation, and implement it,” Bank of Japan Gov. Haruhiko Kuroda said Thursday.

Japan’s Debt Exceeds 1 Quadrillion Yen as Abe Mulls Tax Rise - Japan’s national debt exceeded 1,000 trillion yen for the first time, underscoring the case for Prime Minister Shinzo Abe to proceed with a sales-tax increase to shore up government finances. The country’s outstanding public debt including borrowings reached a record 1,008.6 trillion yen ($10.46 trillion) as of June 30, up 1.7 percent from three months earlier, the finance ministry said in Tokyo today. Larger than the economies of Germany, France and the U.K. combined, the amount includes 830.5 trillion yen in government bonds. The world’s heaviest debt burden will weigh on Abe when he decides next month whether to implement a two-step plan to double the tax on consumers in a nation with ballooning welfare costs. While boosting the levy would drag on growth, Moody’s Investors Service yesterday warned that a worsening of finances would erode confidence in government bonds. “Ballooning public debt underlines the need for Abe to push for a sales-tax increase,” “This is a minimum policy requirement for his government.”

Depopulation, or the Detroitification of Japan  There is a spectre haunting the developed world--the spectre of Detroitification.  It involves depopulation and industrial hollowing out destroying the tax base of locales barely able to provide basic public services. Aside from the highly questionable logic of Japan incurring more debt to "cure" problems arguably caused by an oversized debt overhang, I have a more fundamental doubt about its economy moving forward. Simply, demographics dictate that an ever-shrinking population places nearly-insurmountable pressure on enfeebling the economy. Too many seniors drawing on too many benefits compared to too few working-age persons--it's a bad situation only set to get worse: The estimate shows that Japan’s population in 2040 will stand at 107.276 million, a decline of about 20 million from 2010′s 128.057 million. A January 2012 estimate by the same [National Institute of Population and Social Security Research] institute had shown that in 2060, Japan’s population will number 86.737 million, about 30 percent less from the 2010 level. Japan has been experiencing a natural population decrease since 2007, with annual deaths topping births. In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels. Although the public sector has been taking steps to make it easier for women to have more children, it will be extremely difficult to improve the situation.

U.S. Trade Officials Take Aim at Japan Car Market - The biggest focus of trade talks this month in Tokyo appears to be Japan’s auto industry.“Right now all foreign penetration of the Japanese auto market is 6%, and so everyone believes there’s a long way to go before we can really say the Japanese market is open,” U.S. Trade Representative Mike Froman told reporters in Washington on Friday. The concern with Japan isn’t tariffs but “a number of voluntary measures that have been employed over the years that have had an adverse effect on auto imports, whether it’s from the U.S. or Korea or Europe.” Mr. Froman is traveling to Tokyo on Aug. 19 to discuss Japan’s entry into the Trans-Pacific Partnership, which includes many Asian and Pacific Ocean countries but not China. He’ll also gather with officials from TPP countries in Brunei on Aug. 22 and 23. Currently, other U.S. officials, including Acting Deputy U.S. Trade Representative Wendy Cutler, are holding bilateral talks with Japan on trade issues including beef, insurance and cars. Japan recently loosened restrictions on U.S. beef. Meanwhile, Japan Post Holdings Co., a government-controlled titan in financial services, last month announced an insurance alliance with American Family Life Assurance Co. Still, U.S. officials are seeking more progress in the insurance and agricultural sectors in Japan.But Japan’s auto market is the crown jewel, and Washington is under pressure from Michigan lawmakers and domestic automakers to improve conditions for U.S. cars there. Detroit is worried that the cheaper yen and moves to eliminate U.S. tariffs will boost sales of Japanese cars.

The Free-Trade Blues -President Obama publicly deplores growing economic inequality in the United States. At the same time, he is pushing for a new Trans-Pacific Trade Agreement on top of the trade agreements he won in 2011. Evidently, he sees no inconsistency here, but a growing body of economic research points to the adverse effects of lowered tariff barriers on manufacturing workers and their communities. Whether or not the losers are beginning to outnumber the winners, free trade is increasing the economic distance between the two.  Many economists continue to believe that increased foreign trade is a rising tide that will eventually lift all boats. Still, the discipline has been shaken by interpretations of trade theory that challenge this view, especially when articulated by highly respected scholars such as the late Paul Samuelson of the Massachusetts Institute of Technology.The persistence of high long-term unemployment – conveniently assumed out of existence by standard trade models – has also taken an ideological toll. Economists once celebrated the resilience of the United States labor market. Not any more. Employment remains lower than it was in December 2007. Whatever their political predilections, empirical researchers have a hard time isolating the effect of increased trade in an economy experiencing financial shocks, rapid technological change and forms of outsourcing that aren’t counted as either imports or exports. Effects spill over. In the long run, lower prices can lead to shifts in demand and expansion of employment in new sectors. Or not. Even relatively short-run effects are difficult to measure.

Malaysia Trade Data Adds to Unease - Malaysia’s exports continued to weaken Monday, another worrying sign for an economy facing increased investor scrutiny. In recent years Malaysia has drawn strong inflows of capital attracted by brisk growth, stable monetary policy and benign inflation in Southeast Asia’s third-largest economy. But as U.S. Treasury yields have risen in recent months, investors are taking a closer look at Malaysia’s fundamentals – and they don’t like what they see. Foreign investors sold MYR6.6 billion (US$2.04 billion) worth of Malaysian government bonds in June – the country’s largest-ever outflow in a single month – cutting foreign ownership of government debt to 46.8% from 49.5% in May. Data aren’t yet available for July, but Maybank Investment Bank expects such outflows to have continued. That has taken a toll on the Malaysian ringgit. Most Asian currencies have fared poorly since May, when the Fed began talking about winding down its massive bond-buying program, but the ringgit has been among the hardest hit, slumping to a three-year low against the dollar last week.

Brazil Faces Rare Trade Deficit, Record Current Account Gap - Brazil is hurtling toward a record current account deficit this year that could add fuel to an already pronounced foreign exchange depreciation. The country’s 12-month current account deficit, representing all of the country’s U.S.-dollar transactions except investments, was $72.5 billion as of June, or 3.2% of gross domestic product. Accounts have deteriorated fast. In calendar 2012, the gap was 2.4% of GDP. And it’s going to get worse before it gets better, beating last year’s record, in absolute terms, of $54.2 billion.  “At 3.0% of GDP, the current account deficit sets off alarms, at 4% you have to take action and, at 5%, you risk a balance of payments crisis.” Such a crisis means that a country doesn’t have enough hard currency coming in to pay its obligations. Consequences range from a drawdown in reserves to a foreign debt renegotiation and usually include a sharp depreciation of the currency.

Brazil Services Sector Shows Signs of Contracting - The services industry in Brazil showed signs of weakness in July, setting a worrying tone for growth in the second semester after a disappointing first half of the year. The HSBC bank purchasing managers’ composite index, or PMI, for July weighed in at 49.6 points, down from 51.1 in June. Any figure below 50 points indicates contraction in the sector. The Services Business Activity Index fell from 51.0 in June to 50.3 in July. The survey adds to the uncertainty that’s overshadowing a recovery in Latin America’s largest economy, as the services industry has been one of the few drivers of growth in recent quarters. Brazilian economists and analysts have again cut their forecasts for growth this year: while that’s mainly due to tepid performance expected for the industrial sector, weakness in services only adds to the gloom. The median forecast from some 100 respondents to the central bank’s weekly survey fell to 2.24% growth this year from 2.28% last week. For next year, they maintained their outlook at 2.60%. HSBC said that in July, growth of business activity at services companies eased, while production at manufacturers fell for the first time since last August. Slower rises in business activity were linked by panelists to weaker gains in new work, an increasingly fragile economy and national protests, it said. 

Brazil Struggles to Find Way Out of Economic Doldrums - Brazil’s tepid economic performance over the last two years has surprised many who believed Latin America’s largest economy would be one of the main drivers of the global economy in the wake of the savage financial and economic crisis. Increasingly, the country looks set to remain a drag on the rest of the world for the next few years. The economy remains reliant on consumption, mainly fueled by credit, both of which are showing signs of exhaustion. Industry remains stagnant, and, for the last four months, unemployment has crept up from historical lows. Most worryingly, the hefty investments needed to overhaul Brazil’s ramshackle infrastructure aren’t coming through. Economists have sharply reduced their forecasts for growth this year and next. The economy is now expected to grow 2.2% this year, and 2.6% next year, according to the latest central bank weekly survey of 100 economists and analysts. In a new report out Tuesday, Standard and Poor’s says it foresees three years of weak growth, based on modest exports, declining private-sector investment, and the possibility of lower household spending. The new scenario is undermining Brazil’s sovereign credit rating, S&P said. “Modest growth has contributed to a marginal weakening of the sovereign’s financial profile, including deteriorating fiscal performance and a rise in the government’s debt burden,” it said.

Brazil Inflation Data Deepen Dispute Over Direction of Prices - Brazilian inflation data Wednesday only deepened the dispute between those who argue prices are coming down, and those who say that price problems are getting worse. Caught in the middle is the central bank, which will soon have to pick sides. Inflation in July did retreat quite sharply, although not by as much as had been expected. Prices rose 0.03% from June, down from a 0.26% advance June-from-May, but that was above the outright decline in prices of 0.01% that had been expected. On a 12-month basis, inflation slipped to 6.27% from 6.70%. That, at least, brings inflation back below the 6.5% upper limit of the government’s target range for 2013. But it’s still well above the actual target of 4.5% — there’s a generous tolerance band of two percentage points. Many economists and investors argue that the midpoint of the target is itself very generous. The good news on July inflation was largely due to a seasonal reduction in some prices, such as food, which had spiked earlier in the year, as well as the decision by a number of city and state governments to retract fare hikes for public transportation, as a result of the huge protests held in a number of cities in June. The relief from lower bus fares will only be felt in the July inflation reading.

Millennials are hopeless, and it’s all our fault -   For decades now, America’s political leadership has pushed for our integration into the global marketplace, highlighting it as the central imperative for our national and planetary well-being. In this Darwinian model, anyone who was not poised for this transnational roller derby would find they perished because of their lack of ambition or relevance. With an inspired efficiency the global market would sort out who was of value and what was not. While the global trade model has made some individuals and corporations fabulously wealthy, it has also created a vast army of young people who are unemployed and not in school. In other words, we have failed our millennials. The World Economic Forum estimates that 40 percent of the planet’s young people, described in Mexico as “ninis,” are not employed or enrolled in school. The Organization for Economic Co-operation estimates 7.5 million Mexicans ages 15 to 29 fall in this category. Such a surplus of humanity offers the drug cartels their pick of young recruits and customers. The BBC regularly reports on the dimensions of youth unemployment rates in Europe: Greece at 62 percent, Italy at 40 percent, and the entire Eurozone averaging 24 percent. While global unemployment is at 4.5 percent, the World Economic Forum reports youth idleness is at 12.6 percent. That translates to 75 million disconnected young people, who with each passing month become increasingly unemployable. Analysts say that for close to half a billion young people, the work they do get is part-time and temporary, which classifies them as underemployed. That status makes them highly vulnerable to market fluctuations.

Jobs Gloom - Cyprus Daily - Unemployment scaled new heights in June, reaching a historic height of 17.3% as the Cyprus’ worst ever economic crisis buffeted the job market. Eurostat figures released yesterday showed Cyprus registered the highest jump in unemployment in the European Union, reflecting the drastic deterioration in the work market. It rose to 17.3% from 16.5% in May and 11.7% in June last year. Among men, unemployment stood at 18% while among women it was marginally lower at 16.4%. Young people continue to pay a high price, with 37.8% of under 25 year olds out of a job. Cyprus unemployment was well above the EU 27 average of 11% and higher than the eurozone average of 12.1%. An estimated total number of 26.4 million are unemployed in the EU, of whom 19.3 million in the eurozone. Austria had the lowest unemployment with 4.6%, followed by Germany (5.4%) and Luxembourg (5.7%). At the other end of the scale, unemployment was highest in Greece (26.9%) Spain (26.3%) and Portugal (17.4%). The highest increases were registered in Cyprus (11.7% to 17.3%), Greece (23.1% to 26.9% between April 2012 and April 2013) and Slovenia (8.8% to 11.2%).

EU Unemployment Rate Falls - The European Union's unemployment rate fell in June for the first time in almost 2½ years, while the number of jobless people in the countries that use the euro also fell, albeit modestly, for the first time in two years. Despite the signs of stabilization in the job market, figures also released Wednesday showed French and German consumers cut their spending in June. That suggests that the very high levels of unemployment are likely to hinder any recovery. Eurostat, the EU's official statistics agency, said that 10.9% of the workforce in the 27 nations that then formed the EU were unemployed in June, down from 11% in May. (Croatia, the 28th member, joined in July.) That is the first fall in the jobless rate since January 2011. The number of unemployed in the 17 euro-zone countries edged down to 19.27 million from 19.29 million, the first decline since April 2011. The fall wasn't sufficient to move the jobless rate overall, which held firm at 12.1%—its highest on record—for the fourth successive month.

Austerity Claims Victory in Europe - Another night of relatively strong data out of Eurozone with services and composite PMIs looking mostly stronger, the UK also screamed ahead. Eurozone economy stabilises as German recovery accelerates and downturns ease in France, Italy and Spain

• Final Eurozone Composite Output Index: 50.5 (Flash 50.4, June 48.7)
• Final Eurozone Services Business Activity Index: 49.8. (Flash 49.6, June 48.3)
• German recovery gains momentum while downturns in France, Italy and Spain ease further.

July marked a tentative return to expansion for the eurozone economy, as manufacturing output posted a solid expansion and the trend in services activity moved close to stabilisation. At 50.5 in July, the final Markit Eurozone PMI® Composite Output Index rose to a near two-year high and posted above the neutral 50.0 mark for the first time since January 2012. The headline index was marginally above its flash reading of 50.4. Manufacturing production rose at the fastest pace since June 2011, as the sector registered output growth for the first time in 17 months. Meanwhile, the rate of contraction in services business activity was negligible and the weakest during the current one-and-a-half year downturn in the sector

European Retail Sales Show Significant Dip For June 2013 - Retail trade fell by 0.5 percent in the euro zone in June from May, with retail sales falling 0.3 percent during the period in the wider European Union, the EU's statistics office Eurostat said on Monday. In June, retail sales fell in the 17-member single currency area by 0.9 percent from a year earlier, but sales rose slightly in the European Union by 0.1 percent. The latest figures come after a mixed performance for retail sales in recent months. In May, retail sales rose by 1.1 percent in the euro zone and 1.3 percent in the EU.  Retail sales in April were stagnant, while February and March saw slight declines of 0.1 and 0.2 percent, respectively. The drop in June, led by falling sales in food, drink and tobacco, was the largest since December 2012.

IMF advises Spain to cut wages by 10 percent - The International Monetary Fund (IMF) on Friday called on Spain’s unions and employers to work together to find solutions - including cutting workers’ wages - to tackle unemployment and stimulate growth so that more jobs can be created. In its latest report on Spain, the IMF said government reforms need to go further to increase companies’ “internal flexibility” and “enhance employment opportunities for the unemployed.”While lauding the government’s labor reform, IMF officials said the government should consider reducing taxes on companies that focus on hiring certain groups, such as the young and low-skilled.“A social agreement should be explored to bring forward the employment gains from structural reforms,” states the report. The accord could include a deal between employers, who would commit themselves to “significant employment increases,” and the unions, who would agree “to significant further wage moderation and some fiscal incentives.”

IMF pressures Spain to weaken labor laws -  Spain's unemployment rate will remain above 25 percent until 2018 unless there are significant changes to its hiring laws, according to an International Monetary Fund report. Currently, 26.3 percent of the nation's workforce is unemployed, down from an all-time high of 27.2 in the first quarter of 2013. That decrease was the first drop in two years. The unemployment rate for those 25 and under currently hovers around 55 percent, double that of the overall population. The IMF called on Madrid to give more flexibility to employers when it comes to hiring and firing by reducing the legal requirements for temporary and permanent workers. It also called for the government to push for changes in contracts between business and unions that would reduce wages, which the international lender said would "encourage" companies to hire more. "This is a complex issue and various interlocutors expressed misgivings," the IMF said in the report. "Some argued that a strong agreement would be difficult to negotiate and enforce, there being currently little common ground between the different stakeholders."Even with all these reforms, Spain's unemployment rate would still exceed 20 percent through 2018 and drop only to 18 percent by 2020, the report said.

Greek unemployment hit new record in May of 27.6 percent (Reuters) - Greece's jobless rate hit a new record high of 27.6 percent in May, official national data showed on Thursday as the country staggers under austerity linked to its international bailout. Record joblessness is a nightmare for Greece's two-party coalition government as it scrambles to hit fiscal targets and show there is light at the end of the tunnel after years of unpopular tax rises and cuts to wages and pensions. Unemployment rose to 27.6 percent from an upwardly revised 27.0 percent reading in April, according to data from statistics service ELSTAT and was more than twice the average rate in the euro zone which stood at 12.1 percent in June. The latest reading was the highest since ELSTAT began publishing monthly jobless data in 2006. Greece and Spain have been hit with similar levels of sky-high unemployment, with latest Eurostat data showing seasonally adjusted unemployment in June at 26.9 percent for Greece and 26.3 percent in Spain. Spain itself does not publish monthly jobless figures directly comparable to Greece's own data, but Madrid's quarterly data shows its rate peaked at 27.2 percent in the first three months of this year.

Greek Youth Unemployment Soars To Record 65% - What little hope there may have been that bad and/or deteriorating Greek economic data had peaked in the early part of 2013 and the country was set for a long overdue "recovery" was promptly extinguished following today's latest release of the Greek May labor force survey.  The headline news for the broader population was ugly:

  • The number of employed was 3,621,153, a decline of 14,889 from April, and down 171,356 from a year earlier
  • The number of unemployed was a record high 1,381,088, an increase of 43,467 from April, and up 193,668 from a year earlier
  • The unemployment rate was a record high 27.6%, up from 26.9% in April and 23.8% a year earlier

But that was the "good" news. The bad news? Greek youth (15-24 year old) unemployment halted its decline over the past few months only to explode higher from 57.5% in April to a whopping 64.9% in May! Needless to say this is a record high, and means that two thirds of all eligible for work youths can not find a job. That this is the most combustible combination for social upheaval if not war, is well known to anyone who has opened even one history book.

The Pangs of Summer for Greek Hungry - The correspondent in Athens for the British newspaper Guardian, Helena Smith, wrote an extended article on the Greek food crisis. Frontline Charities report that up to 90% of families in the poorest neighborhoods rely on food banks and soup kitchens. In crisis-stricken Greece, record unemployment, hunger and undernourishment are part of the country’s economic breakdown. For the growing number of people depending on soup kitchens, who will now be without outside support, August has turned into the toughest month. With its dedicated staff and can-do spirit, the Solidarity Club at Veikou Street, is similar to many other groups established by concerned citizens appalled by the austerity imposed measures. Panaghiota Mourtidou, 54, the organization’s co-founder, stated, “I had no idea and was shocked to learn that people in this neighborhood, on these streets, in all the buildings that I pass every day, were suffering so.” The articles also highlights that the Greek Orthodox church alone feeds an estimated 55,000 people a day while municipal authorities distribute another 7,000 meals at soup kitchens around Athens. According to a UNICEF report this year, it was estimated that nearly 600,000 children lived under poverty line in Greece, and more than half that number lacked basic daily nutritional needs.

Crossing The Rhine...To Escape 10% Unemployment - "Many people still refuse to work in Germany; it's the language and demons of the past," but for many, crossing the Rhine is now the only option to escape the dismal depression-like economic environment that is engulfing France (as we most recently discussed here and here). As one border-crossing employee noted, "in Germany, they take people more easily and train them for new work even if you have worked in a totally different area than the one asked for," and with unemployment in Alsace (France) at about 10% and the jobless rate in the bordering German state of Baden-Wuerttemberg at a mere 4%, it is little wonder that an increasing number - around 24,000 French people (from this 'symbolic' region) are crossing over for work.

IMF sees no end to French jobless crisis this decade -France’s economic reforms do not go deep enough to halt long-term decline and may not cut unemployment from double-digit levels by the end of this decade, the International Monetary Fund has warned. The IMF called on president Francois Hollande to slow the pace of fiscal tightening next year to avoid an economic relapse, pouring cold water on claims that a fresh cycle of healthy growth is now under way. “Given the still hesitant recovery, the government should ease the pace of adjustment,” it said in its annual healthcheck. It warned of “significant” contagion for surrounding states if French growth stalls again. A chorus of French economists has accused Mr Hollande of wishful thinking in proclaiming the crisis to be over. Partick Artus from Natixis said recent signs of stabilisation are largely due to restocking and should be treated with great caution. “This is not recovery,” he said. The Left-leaning Observatoire Economique said the EMU policy regime remains contractionary and risks pushing France’s economy into outright deflation next year.

‘Germany Is Critical’: IMF Calls on Berlin to Loosen Pocketbook - Germany has passed its annual fiscal health check by the International Monetary Fund, but the watchdog is warning that the country's overreliance on exports still makes it susceptible to external shocks.   The International Monetary Fund's latest annual country report on Germany, released on Tuesday, contains a lot more good news than bad. It's a reminder that the country appears to have escaped the worst of the euro crisis relatively unscathed.  "Germany's fundamentals remain strong, including public, household and corporate sector balance sheets," said Subir Lall, assistant director of the European Department and the IMF's mission chief for Germany. The country's economic strength, he added, underpins Germany's role as an "anchor for stability" in the European Union. But the good news also came with a warning. "In the current low-growth environment, the modest loosening of the fiscal stance this year is appropriate," Lall said. Germany has already achieved deficit goals at the federal level well ahead of schedule, and the general government balance is in line with European commitments. "However, given the weak growth environment and significant risks to the outlook, it will be important to avoid over-performing on consolidation, as has been the tendency in recent years" added Lall.

Italian Recession Becomes Longest On Record - Italy just released second quarter GDP figures, which showed that the country continued to contract last quarter. GDP fell 0.2% in the second quarter after contracting 0.6% in Q1, beating consensus estimates for a 0.4% decline. Year over year, GDP fell 2.0%, better than expectations for a 2.2% decline. However, at eight quarters running, Italy's recession is now the longest on record. "Italy's economy is no longer in freefall, but it continues to contract, dragged down by a collapse in domestic demand, a severe credit crunch and the adverse effects of a tax-driven fiscal consolidation programme,"  "The best that can be said about Italy's moribund economy is that it is stabilising and showing signs of a recovery of sorts. A quarterly contraction of 0.2% in the second quarter of this year is significantly better than a decline of 0.9% in the last quarter of 2012."

When Will Spanish Banking System Collapse? - The question on my mind today is "When will the Spanish banking system collapse?" Spain's exposure to Portuguese debt is one of many reasons a collapse in inevitable. The Spanish banking system passed a so-called "stress test" in 2012, but sovereign government bonds are are not included in the evaluation. We saw how well that worked with Greece (over and over again), and with Cyprus as well. It was Cypriot exposure to Greek bonds that collapsed the Cypriot banking system. With that backdrop, please consider Will Portugal Bring Down the Spanish Banking Sector? At its peak in the second quarter of 2008, France’s exposure to Greece totaled $86 billion. That exposure has since plummeted, partly because French banks took advantage of the ECB’s Securities Market Programme (SMP) during 2010-11 to fob off Greek bonds, effectively forcing a eurozone mutualization of the debt. SMP was terminated in September 2012.  What is much less widely known is that Spanish bank exposure to Portugal today, as shown in our Geo-Graphic, is higher than French bank exposure to Greece in early 2010, despite the fact that the Spanish banking sector is only 40% the size of the French. Spanish bank stress tests in 2012 suggested that the capital hole was more manageable than widely feared, but those tests looked only at the domestic lending books; foreign assets were excluded.

Defend Europe, if you still dare -- This from the ECB's monthly bulletin today: The youth jobless rate in Greece has just reached 64.9pc. Little to add. This is pure policy error. Europe has needlessly pushed the whole EMU bloc into a deep double-dip recession, and the longest unbroken contraction since World War Two. Keynesians warned them. Monetarists warned them. Anbody with any common sense warned them, but no, they believed in their quack theories of expansionary fiscal contraction — even when conducted without the anaesthetic of monetary stimulus. European policymakers are like the generals of Verdun, the Somme, and Passchendaele, sending their youth straight into the barbed wire Europe's leaders still blame this crisis on America. You can only laugh or cry. Is anybody on this comment thread really willing to defend EMU any longer?

Tough Love. Freight Train Style.Stephanie Kelton -- President Obama, who met with Greek Prime Minister Antonis Samaras at the White House yesterday, is reported to have said that while Athens can’t rely exclusively on austerity for its economic recovery, it will need to take tough action: It is important that we have a plan for fiscal consolidation, to manage the debt, but it is also important that growth and jobs are a focus,” said President Obama. I think Prime Minister Samaras is committed to taking the tough actions that are required, but also, understandably, wants to make sure the Greek people see a light at the end of the tunnel. The Greek people have already seen household incomes fall by a third as a consequence of three years of “tough action.” Unemployment stands at nearly 28 percent, and youth unemployment is a staggering 64.9 percent. A quarter of the population has trouble putting food on the table, public health is deteriorating, suicide is up 26 percent, etc. Worst of all, there’s no end in sight. The Greeks have served as Guinea Pigs in the most vile neoliberal macroeconomic experiment in modern history. From where I’m sitting, that light at the end of the tunnel looks like just another oncoming freight train.

Top Fed economist slams ‘incoherent’ ECB - The US Federal Reserve has launched a blistering attack on the European Central Bank, calling for quantitative easing across the board to lift the eurozone fully out of its slump. In a rare breach of central bank etiquette, a paper by the Richmond Fed said the ECB is hamstrung by institutional problems and acts on the mistaken premise that excess debt is the cause of the eurozone crisis when the real cause is the collapse of growth, which has, in turn, spawned a debt crisis that could have been avoided. “The ECB lacks a coherent strategy for creating the monetary base required to sustain the money creation necessary for a growing economy,” said the paper, written in July by Robert Hetzel, the bank’s senior economist. It called for direct action to buy “bundles” of small business loans, as well as “packages of government debt” across EMU states, including German Bunds. “The ECB will have to be clear that surplus countries will experience inflation above 2pc for extended periods of time,” and must be prepared to “explain to the German public” that this is desirable. “Most important, the ECB needs to start by recognising that Europe’s problems are more than structural. It needs to stop using monetary policy as a lever for achieving structural changes and to end its contractionary policy.” While the paper reflects the views of the author, there is no doubt that many Fed officials feel the same way.

UK trade deficit narrows as exports surge to highest on record - Britain's trade deficit narrowed in June, helped by a jump in art exports after big sales of impressionist and contemporary art at London's top auction houses. Art exports jumped from £335m to £645m between May and June in the wake of the London sales. Auction house Sothebys sold a Barbara Hepworth scultpure, a Ben Nicholson oil painting of St Ives harbour and several paintings by Wassily Kandinsky as part of a £127m haul. Rival Christie's generated more than £160m from its impressionist and contemporary art sales. Among its successes was Grand Vase aux Femmes Voiles, a Picasso ceramic, which went on the market with an estimated price of £250,000-£350,000 but achieved £980,275, a world auction record for a ceramic by the artist. It also sold a Kandinsky - Studie zu Improvisation 3 - for £13,501,875. The new trade data is the latest in a run of strong economic figures that show the UK economy recovering at its fastest rate since 2010. The near-doubling of art exports, together with a rise in aircraft sales, were pinpointed by the Office for National Statistics as playing a large part in the narrowing of the trade gap. Exports of goods in the second quarter of 2013 reached £78.4bn, the highest on record, spurred by a jump in sales to the US and China. Sothebys said it benefited from a rise in sales to Asia, though it was difficult to know the final destination of pictures bought by dealers. Trade with France and the Netherlands also improved in June, reducing the overall deficit in goods and services to £1.5bn from £2.6bn in May.

One swallow - The ONS has some good news about UK industrial production. Here are the summary points from its statement:

  • Production output rose by 0.6% between Q1 2013 and Q2 2013. Manufacturing rose by 0.7% over the same period.
  • By far the largest contribution to the quarterly growth in production came from manufacturing, which increased by 0.7% following a decline of 0.2% in Q1 2013.
  • Looking at the broader picture, production output was 1.2% higher in June 2013 compared with June 2012, reflecting a 2.0% rise in manufacturing; 7.8% rise in water supply, sewerage & waste management; 4.4% fall in mining & quarrying; and 3.3% fall in electricity, gas steam & air conditioning.
  • Production rose by 1.1% between May 2013 and June 2013. Manufacturing rose by 1.9% with reported rises in all of its sectors. The highest contributor to the rise was the manufacturing of transport equipment, which rose by 5.3% and contributed 0.7 percentage points to the rise in manufacturing.
  • The preliminary estimate of GDP, published on 25 June 2013, contained a forecasted rise of 0.6% for production in Q2 2013. This release of data also estimates production rose by 0.6% between Q1 2013 and Q2 2013 and therefore has no impact on the previously published Q2 2013 GDP estimate.
Looks great, doesn't it? I must admit, I was impressed: Fortunately someone was sharper than me: @Frances_Coppola really value your work but please read whole pdf first: "3 months on the same 3 months a year ago" manuf -0.6, prod -0.8

Guidance on forward guidance - TODAY was the day for Mark Carney. At last the new governor of the Bank of England and former top Canadian central banker could reveal what his big idea – providing a steer on future monetary settings – would mean in practice. The answer is that it is going to be quite complicated. The headline is fairly straightfoward. The base rate will not be raised from 0.5% (where it has stood since March 2009) until the unemployment rate, currently 7.8% of the labour force, has fallen to 7%. That 7% rate is not a trigger: it will not automatically lead to monetary tightening. Instead it is a threshold, marking the point at which the nine-strong monetary-policy committee (MPC) will reappraise the case for raising the base rate. Moreover, while the jobless rate remains above 7% the MPC will not reduce the extra monetary stimulus provided through quantitive easing - and may boost it. The committee is undertaking to maintain the current stock of assets purchased with central-bank money at £375 billion ($580 billion); and if necessary it will add to that pile. This is conditional rather than temporal guidance, related to an economic variable rather than binding policymakers for a period of time. But based on the MPC’s forecasts, which for the first time include one for unemployment, this suggests that the base rate will stay at 0.5% into 2016, an extraordinary length of time for it to remain at an extraordinary low

Carney and the death of unreasonable expectations - Yesterday, Mark Carney, the new Governor of the Bank of England, announced that there would be no rise in the Bank of England's base rate until unemployment (currently about 8%) is below 7%. At its current rate of fall, this wouldn't be expected until the back end of 2016. So if there is no improvement in the UK economy, UK interest rates are expected to remain very low for the next three years. Predictably, there was a storm of outrage from savers and their representatives. This tweet is typical: What Mark Carney said today is "Savers, I will continue to STEAL your money, as Mervyn King did", for the chancellor. #newsnight— liarpoliticians (@liarpoliticians) The idea that very low interest rates is "stealing" from savers is based on savers' expectations that: their capital will be protected from inflation. UK CPI is indeed running above the interest rates on most forms of savings, so savers are losing money as the purchasing power of their capital is eroded. But is it reasonable for savers to expect that the purchasing power of their capital should be preserved, or even increased, over time? I don't think it is. But to explain why, I need first to explain what inflation is.

It's the UK's turn to face the "taper fear" - Today we saw another confirmation that the UK's placement on the economic cycle curve (see post) in the "recovery acceleration" section is quite reasonable. The KPMG/REC employment report for the UK showed something we haven't seen in a while - strong hiring demand.Kevin Green of Recruitment & Employment Confederation (source: Markit): - “The jobs market continues to skyrocket with permanent employment and temporary placements at three and two year highs, and vacancy growth accelerating to a six year high. A combination of confidence returning to the UK economy and higher employer demand have contributed to this impressive set of figures. The chart below shows the spike in the KPMG/REC survey that is now also expected to show up in the Labor Force Survey (from the Office for National Statistics). Just like the Fed, the BoE now also has a target unemployment rate at which it will be ready to bring rates higher. According to a recent statement by Governor Mark Carney, the UK unemployment rate, which has been stubbornly stuck around 7.8% for a year now, needs to get down to 7% in order to get the BoE moving. The central bank has communicated that it expects to keep rates at current levels through 2016. But if next week's official employment report follows the KPMG/REC result, the BoE may be forced to reconsider.Bloomberg: - The Bank of England will probably need to raise interest rates before the late-2016 horizon currently implied in its new guidance, former U.K. policy maker Charles Goodhart said.“I think that the strength of the British recovery is probably somewhat underestimated,” Goodhart said in an interview today in London. “The strength of the upwards pressure on the British economy could well cause people to begin to be concerned whether reverting to normality a bit quicker might not be desirable.”

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