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

Saturday, August 17, 2013

week ending Aug 17

U.S. Fed balance sheet expands for second week (Reuters) - The U.S. Federal Reserve's balance sheet grew for a second straight week on a rise in its holdings of U.S. Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which are a broad gauge of its lending to the financial system, stood at $3.603 trillion on Aug. 14, up from $3.542 trillion on Aug. 7. The Fed's holdings of Treasuries rose to $2.001 trillion as of Wednesday, up from $1.993 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) jumped to $1.3 trillion from $1.247 trillion a week ago. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $65.713 billion from $66.521 billion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $15 million a day during the week, compared with $7 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 15, 2013: Federal Reserve statistical release

What The Fed Owns: Complete Treasury Holdings Breakdown - As everyone knows (since the data is public), in the most recent week the Fed's balance sheet rose to a record $3.646 trillion, an increase of $61 billion in the past week, and a record increase of $813 billion over the past year, a whopping 30% rise in the balance sheet in 12 short months. What may not be known is the exact distribution of Fed Treasury holdings by maturity. So without further ado, here it is. Of note, observe that what once was a predominantly 'short-end' balance sheet (consisting mostly of no-coupon, money equivalent Bills), has become almost entirely a "5 and over" current coupon carry affair. Which also is why the Fed now takes over the entire bond market at a rate of 0.25% per week.

Fed’s Lockhart: Initial Reduction in Bond Purchases Should Be ‘Cautious First Step’ - The president of the Federal Reserve Bank of Atlanta said central bank policy makers should move cautiously this fall in dialing back the central bank’s stimulus. Atlanta Fed chief Dennis Lockhart said the central bank could make its first reduction in its $85 billion per month bond buying program any time before the end of the year, but isn’t locked into to doing so following its September meeting, according to prepared remarks Tuesday. He stressed that the initial reduction is only the beginning of the process and officials will make adjustments based on the latest economic data.“A decision to proceed — whether it is in September, October, or December — ought to be thought of as a cautious first step,” Mr. Lockhart said, according to the text of his speech to the Kiwanis Club of Atlanta.

The FOMC running out of excuses to maintain current policy - The retail sales measure from the Commerce Department survey came in below expectations today with 0.2% month-over-month change vs. 0.3% expected. Given that the numbers missed the forecast, why then did treasuries sell off sharply after the release?The answer is that while retail sales growth has not been spectacular, it is sufficiently strong for the Fed to begin reducing its securities purchases shortly. Sales ex-autos were up 0.4% (auto sales are volatile and other recent indicators of auto sales have been strong.) The year-over-year ex-auto retail sales number is historically on the lower end, but falls within the 2.5%-5% range that some view as stable. Given that the consumer is such a large part of the GDP, some economists are already revising their GDP forecasts up. The FOMC now has only one key potential showstopper: the ultra-low inflation rate scenario.  As James Bullard pointed out in his June speech, inflation measures were collapsing earlier this year (see post), raising the specter of deflationary risks. If that trend were to continue, the Fed would go into a holding pattern. But inflation indicators in the US seem to have stabilized. Commodity prices have bottomed out (for now), as copper bounced (see post) and energy prices remain elevated.  With deflation no longer a high probability near-term threat, the FOMC has run out of excuses. Unless the labor market suddenly takes a material turn for the worse this month, we should see the beginning of the end for QE3 shortly.

Fed Seen Tapering Quantitative Easing Next Month -- Federal Reserve Chairman Ben S. Bernanke next month will probably reduce the central bank’s $85 billion in monthly bond purchases, according to 65 percent of economists surveyed by Bloomberg. The Federal Open Market Committee’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the median estimate in a survey of 48 economists conducted Aug. 9-13. The Fed will end the buying by mid-2014, they said. In a survey last month, half of economists predicted a Fed reduction in bond buying at the next scheduled FOMC meeting Sept. 17-18. “They want to wind this down in an orderly way and get it done in a reasonable period of time.” Bernanke and his policy-making colleagues are contemplating how to finish a third round of so-called quantitative easing that has swelled the Fed’s balance sheet to a record $3.59 trillion. The unprecedented bond buying is aimed at combating unemployment and bolstering an economy that expanded by only 1.4 percent in the 12 months through June.

Fed’s Bullard: Need More Data Before Deciding to Scale Back QE -- Federal Reserve Bank of St. Louis President James Bullard Wednesday reiterated his stance that the Federal Reserve still needs to see more data on the economy’s performance for the second half of the year before it can decide when to pull back on the central bank’s $85 billion-per-month bond-buying program. The message is the same Mr. Bullard delivered a few weeks ago. Mr. Bullard is a voting member of the monetary-policy-setting Federal Open Market Committee. In an outline of his prepared remarks, Mr. Bullard listed the degree of improvement in the jobs market, growth of real gross domestic product, the level of inflation and the size of the Fed’s balance sheet as four elements Fed officials are looking at as they decide when to start pulling back on the bond-buying program. Known as quantitative easing, the program aims to push down long-term interest rates, spurring investment, hiring and spending.“It is especially important to see if better macroeconomic growth materializes in the months and quarters ahead, and whether inflation naturally returns toward target,” he said. Inflation has been running at about 1%, well below the Fed’s 2% target and has been a particular concern for Mr. Bullard.

Fed Watch: Fall Tapering in the Air - Today is a "taper-on" day as financial market participants reacted to the initial claims report by sending Treasury yields up over 2.8% before they settled back to just a few basis points below that mark. If you didn't believe tapering was coming as early as September, and by December at the latest, the initial claims report was something of a wake-up call. Claims moved decisively lower in the last few weeks: and are pushing into a range consistent with stronger job growth: One might respond that other data has been lackluster. Industrial production, for example, is edging forward at an anemic pace: Retail sales were up in recent months, but like industrial production, given the noticeable slowing trend since late last year, it is difficult to call the growth gangbusters: Moreover, the Philly Fed report, while not a disaster, disappointed on the downside. On the upside, builder confidence rose in August despite the increase in interest rates. The Fed will interpret this as a sign that higher rates have yet to meaningfully derail the housing recovery. How might all of these pieces fit together for the Fed? They might decide that there is no evidence the economy is falling off a cliff, thus there is no reason to abandon their baseline forecast. Moreover, declining initial claims will support the contention that labor markets are poised to strengthen further in the months ahead, leading them to discount the softness in the most recent employment report. A solid report for August will be given greater weight than a weak report for July. And when it comes to tapering, progress in reaching "stronger and sustainable" labor markets is the most important benchmark.

Fiscal divisions on Capitol Hill prompt Fed tapering concerns - The growing threat of a political stand-off over fiscal policy in Congress could limit the Federal Reserve’s drive towards slowing asset purchases in the coming months, some economists say. US central bank officials are weighing a tapering of bond buys as early as the next meeting of the Federal Open Market Committee on September 17-18 and are expected to approve such a move as long as the economic data remain relatively strong. But while figures on employment, inflation, factory activity and housing are expected to be the main drivers of the Fed’s decision, officials will also be monitoring developments on Capitol Hill. Divisions on fiscal policy between Republicans and Democrats have widened, heightening the risk of a possible government shutdown as early as October 1, and even a crisis over raising the US borrowing limit between mid-October and mid-November, possibly leading to another brush with a debt default. A relative minority of economists believe an acrimonious fiscal environment could contribute to a delay in the first tapering move, especially if the economic data are mixed and Fed officials are on the fence. Many economists and investors still believe the Fed will start curbing the pace of its support for the recovery, now worth $85bn in monthly bond buys, in September. But some suggest that it may have to either pause after the first reduction or even begin asset purchases again if the fiscal outlook deteriorates in the autumn.

Foreigners Stampede Out of U.S. Securities Ahead of Fed Tapering - Private foreign investors sold U.S. bonds, equities and other long-term securities at record levels in June, spooked by news that the Federal Reserve would likely start cutting back its cash injections into the American economy later this year. Private foreign investors sold a net $81.6 billion in long-term securities in June, nearly double the previous record selloff in May, according to a U.S. Treasury Department report released Thursday. That included net selling of $25.5 billion of U.S. equities–the biggest monthly pullout since August 2007—and $40.1 billion of U.S. Treasury bonds and notes. The figures are not adjusted for inflation. Markets calmed in July after Fed officials reassured investors they wouldn’t start reducing their $85 billion per-month in bond purchases unless they saw more signs of economic strength, and that a pullback on that program didn’t mean they would move any sooner to raise short term interest rates, which are now near zero. Fed Chairman Ben Bernanke sparked the market exodus in May when he said the central bank could start reducing its bond purchases at one of its “next few meetings.” That movement turned into a stampede when he said in mid-June that Fed officials could end the program completely by mid-2014 if the economy improves as they expect. The program aims to lower long-term interest rates, in hopes that will boost asset prices and economic growth.

Central banks and asset prices - Alien economics students find the reverence in which central bankers are held on planet earth puzzling. Zog textbooks clearly state that one of the biggest ever financial crises occurred during Ben Bernanke’s chairmanship of the US Federal Reserve. Alan Greenspan, his predecessor, watched over the prior boom and bust and was “shocked” at the next meltdown that began within two years of him stepping down. Meanwhile, Jean-Claude Trichet was president of the European Central Bank from 2003 to 2011 as eurozone imbalances grew and then finally collapsed. And why are the English so besotted with their new Bank of England chief given the mother of all housing bubbles in Canada? Sure there are critics, but central bankers are mostly said to have had a “good crisis”. Indeed, the recovery in America, optimism in Japan and Thursday’s data that showed 0.3 per cent growth in the eurozone have central bankers feeling pretty good about themselves. But the reality is that a number of themes that have arisen in recent days would benefit from more rigorous debate about central banker blame. The first is the increasing vitriol surrounding the candidates to replace Mr Bernanke. Second is Mark Carney’s supposed mini-revolution with forward guidance. Third is that house and equity markets are elevated again on both sides of the Atlantic. All three issues are linked by the question of whether or not central banks should extend their remits to include asset prices, particularly equities and housing. At present, these markets are ignored, the logic underpinned by a belief in efficient markets. Yet a strong case can be made that central banks should have acted earlier to deflate soaring prices in the late 1990s and mid-2000s that ended in meltdown and stagnation. Why this matters now is the risk that history is repeating itself for the third time in less than two decades. Yet few are interrogating the Fed candidates on asset prices. Likewise, Mr Carney’s new linking of policy to unemployment was analysed in depth, but whether he should tackle the UK’s housing bubble was not.

Financial Integrity, the First Requirement for the Fed - The current debate over the Fed Chairmanship displays the ethical emptiness at the top of U.S. political and financial power. We have just had a near-death experience in the world economy thanks to the unprincipled behavior on Wall Street. You might think that financial integrity would therefore loom large in the selection of the new Fed Chair. Yet among the elites weighing in on this issue, including the president, the concept of financial integrity doesn't even enter the discussion.  Financial ethics are indeed a quaint topic for the people in power. Why should they care about financial ethics when their own money and power are at stake? The answer, for the rest of us, is that the unprincipled behavior of the great and greedy on Wall Street has been our worst nightmare. Good macroeconomic analysis is relatively easy to obtain. Financial ethics are not so easy to find.  President Obama's description of his criteria for Fed Chairman is alarming. He describes the job of the Fed Chair as a "dual mandate" of low inflation and full employment. That's a quaint, and woefully incomplete, description of a job that actually has a triple mandate, including the regulation and supervision of the banking system. (A description of that role can be found here). The Fed "works with other federal and state supervisory authorities to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions." Equally important, the Fed is crucial not only for national regulation and supervision but also for global regulation and supervision.

Obama’s dangerously heroic view of the Fed -- The trial balloon, it seems, has floated: Albert Hunt, today, puts Larry Summers’s chances of getting nominated as Fed Chair at 65%, saying that he has the support of just about everybody in the Obama administration not named Valerie Jarrett. The Summers camp includes several top Obama economic advisers: Gene Sperling,  Jason Furman, Sylvia Burwell and Treasury Secretary Jack Lew… When Obama discusses the choice, in private as well as public, he stresses the importance of selecting a chairman who can handle a financial crisis similar to 2008-09. Insiders believe that’s code for Summers. This argument is of utmost importance: it is pretty much the only argument that Summers has going in his favor, and as such, if Summers does end up getting Obama’s nod, it will be thanks to this particular piece of logic. So, how compelling is Obama’s argument here? The answer is, not very. It is worth applauding Obama’s decision to concentrate on potential fat tails — such things are notoriously easy to ignore. That said, the chances of the next Fed chair encountering a financial crisis similar to 2008-9 are pretty slim: realistically, Obama’s appointee will not have to deal with such a crisis. In order for this argument to carry water, then, you need to believe either that the job of Fed chairman is essentially a firefighter role, which has very little importance when there isn’t a crisis, or else that it is so easy enough to do the right thing as Fed chair when there isn’t a crisis that it doesn’t really matter, most of the time, whom you appoint.

Why is Obama So Keen to Appoint Larry Summers to the Fed? - Yves Smith - Felix Salmon pointed out today that Larry Summers is now being touted as the odds-on favorite (65%, to be precise) to be Obama’s nominee as the next Fed chief. Felix stresses that Obama’s reason for favoring Summers is based on the sole criterion on which Summers could conceivably be depicted as preferable to the other widely-touted contender, Janet Yellen: he is believed to be better than Yellen would be in handling a crisis.  Felix kneecaps this argument: This is actually the exact opposite of the truth. The actions of the Fed chair during normal times are of paramount importance… That said, however, there’s one time that it doesn’t really matter who the Fed chair is — and that’s when you’re in the midst of a fully-blown financial crisis…when there’s a crisis, it really doesn’t matter whether you’re Ben Bernanke or Mervyn King or Jean-Claude Trichet — or Janet Yellen or Larry Summers or pretty much anybody else bar Rand Paul. The central banker’s crisis playbook is a thin document, and easy enough for anyone to master. It’s what central bankers do when there isn’t a crisis that matters, since they’re all going to do exactly the same thing when there is one. Summers is a no-lose proposition for Obama. Think about it. If Obama nominates Summers (and Wall Street is exceedingly eager to have Summers rather than Yellen in), he curries favor with all the right people. There is no personal upside for him to support Yellen. So the question really isn’t whether he nominates Summers; it is how hard he goes to the mat for him. There is considerable, well-justified opposition to Summers. So whether Obama really has a strong preference for Summers or not, he has every reason to sponsor him. If the opposition beats Summers back, Obama can say he gave it a good try. Recall that the less controversial Bernanke reappointment elicited considerable pushback, with five holds plus a filibuster, and Obama had to whip personally the weekend before to get the nomination through. Even then, Bernanke passed with the thinnest margin of any Fed chair ever.

Urgent debt lessons from a forgotten framework – Steve Keen - I was delighted to see, in Paul Krugman’s post – 'What Janet Yellen – And Everyone Else – Got Wrong', a title almost the same as mine – that he now identifies 'the debt overhang' as the reason this economic downturn has persisted for so long.  The best explanation, I think, lies in the debt overhang. For the most part, even those who correctly diagnosed a housing bubble failed to notice or at least to acknowledge the importance of the sharp rise in household debt that accompanied the bubble. And I would argue that this debt overhang has held back spending even though financial markets are operating more or less normally again. In short, getting the bubble right, while no small thing, wasn’t enough; Yellen (and many other people, myself included) underestimated the fragility of the financial system, but also the importance of household debt. This is progress: economists are starting to acknowledge the importance of private debt in macroeconomics. There’s just one feature of his post I’ll quibble with: the proposition that “Yellen and Everyone Else” got this wrong before the crisis. There was at least one economist who did get it right, and who did so long before the crisis erupted. Arthur Cecil Pigou.

More Than Meets the Eye: Some Fiscal Implications of Monetary Policy - NY Fed - In 2012, the Fed’s remittances to the U.S. Treasury amounted to $88.4 billion. The vast majority of these remittances originated as income from the SOMA portfolio (see the second post in this series for an account of the history of SOMA income). While net income has been high in recent years because of the Fed’s large balance sheet, it is likely to drop in the future as the Fed normalizes interest rates. This is because the Fed will likely face increased interest expense on its reserve balances and possibly realize losses in the case of asset sales. A recent paper by economists at the Board of Governors of the Federal Reserve System (Carpenter et al.) shows that under some scenarios the Fed may be forced to decrease its remittances to zero for a few years (see also the related work by Hall and Reis and by Greenlaw, Hamilton, Hooper, and Mishkin). The fact that remittances may vary more over the next few years than they have in the past has highlighted the fact that monetary policy has fiscal implications.    This post tries to cast the fiscal implications of monetary policy for public finances in a broad context. Like every household or firm, the federal government has a budget constraint: if it spends more than its revenues, it needs to accumulate debt (see the federal government’s flow of funds, Table F.105 of the Financial Accounts of the United States, Federal Reserve Z.1 statistical release).

Hawks, Doves, and Ostriches, by Paul Krugman: More than four years ago Allan Meltzer issued a dire prediction: the Fed’s policy of expanding its balance sheet will lead to high inflation. We’re still waiting for that to happen. So it might behoove Meltzer to admit that he was wrong and ask where his analysis went wrong. What Meltzer does, instead, is complain that the Fed has undermined his perfectly fine analysis. You see, those dastardly officials are paying interest on reserves – a hefty 0.25 percent – and this has led to something totally unexpected:The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that. So the money supply broadly defined hasn’t taken off – a complete surprise! – and hence no inflation. Except that this isn’t at all a surprise; it’s exactly what those of us who had analyzed the liquidity trap predicted would happen when you expand the monetary base in an economy at the zero lower bound. ...Anyway, I do get kind of annoyed here. Some of us came into the global crisis with a well-worked-out theory of monetary and fiscal policy in a liquidity trap; the predictions of that theory have been completely consistent with actual experience. People like Meltzer chose to disregard all of that, insisting that terrible inflation (and high interest rates) were just around the corner. You almost never get that clear a test of rival economic views, and the results should be considered decisive.

Inflation isn’t everywhere and always a problem -Economist Ken Rogoff on why every once in a while, the Fed needs a dove. Like now: My own research in 1985 on inflation and central-bank independence showed that, in normal times, one generally wants a central banker who places greater emphasis on price stability relative to unemployment than an ordinary informed citizen might do. Installing a “conservative” central banker helps to keep inflation expectations in check, thereby holding down long-term interest rates and mitigating upward pressure on wages and prices.For the past 25 years, the mantra of “inflation targeting” (introduced in my 1985 paper) has served as a mechanism for containing inflation expectations by reassuring the public of the central bank’s intentions. But excessive emphasis on low inflation targets can be counterproductive in the aftermath of the worst financial crisis in 75 years. Rather than worrying about inflation, central bankers should focus on reflating the economy. The real problem is that they have done such a good job convincing the public that inflation is the number-one evil that it is difficult for them to persuade anyone that they are now serious about reflation. That is why appointing a “dove” would not be a bad thing at all. If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight deflation expectations

Key Measures Show Low Inflation in July - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.0% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (1.9% annualized rate) in July. The CPI less food and energy increased 0.2% (1.9% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for July here. Motor fuel increased at a 2% annualized rate in July, but will probably show a decrease in August. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.8%, the CPI rose 2.0%, and the CPI less food and energy rose 1.7%. Core PCE is for June and increased just 1.2% year-over-year. On a monthly basis, median CPI was at 2.0% annualized, trimmed-mean CPI was at 1.7% annualized, and core CPI increased 1.9% annualized. Also core PCE for June increased 2.6% annualized.

Two Measures of Inflation: CPI and the PCE Price Index and Fed Policy - The BLS's Consumer Price Index for July, released yesterday, shows core inflation below the Federal Reserve's 2% long-term target range at 1.70%. The Core PCE price index, at the end of last month, is significantly lower at 1.22%. The Fed is on record as preferring Core PCE as its inflation gauge. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. . [Source]  Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of "core" inflation (less food and energy).  This close-up comparison gives us clues as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is considerably less volatile than CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that in the past the less volatile Core PCE has been their metric of choice. On the other hand, the disinflationary trend over the past year has given PCE additional significance as support for a sustained policy of quantitative easing.The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

Inflation, Deflation and Quantitative Easing - Wall Street is on edge, placing bets when their crack cocaine, quantitative easing will be removed.  The Federal Reserve said they would have to taper quantitative easing if inflation went past their target rate.  As a result, Wall Street goes nuts over the Producer Price Index and the July Consumer Price Index, writing wrong interpretation after wrong interpretation, all trying to figure out what will happen at the next FOMC meeting. First, let's look at CPI and PPI for this month.  CPI increased 0.2% for the month.  CPI measures inflation, or price increases at the retail level.  PPI measures wholesale inflation and is often a precursor to CPI in the coming months as those price increases are passed onto consumers. PPI had no change for July. From a year ago, CPI is now up 2.0% while PPI has increased 2.1%. The below graph shows the change from a year ago for CPI, in blue, scale on the left, against PPI, in maroon, scale on the right. What this graph shows is PPI and CPI do mirror each other somewhat and the graph also shows the deflation experienced in the recession, brought in part by the collapse in global demand as well as gasoline and energy prices. Core inflation, or CPI minus food and energy items, increased 0.2%, for the month. Core inflation has risen 1.7% from a year ago. Graphed below is the CPI core inflation change from a year ago and we can see it is low historically. The above results show first and foremost, inflation isn't a problem. St. Louis Federal Reserve President James Bullard gave a speech outlining criteria to taper quantitative easing. They are GDP, employment, inflation and the outrageously growing Fed asset purchase balance sheet. The Fed actually pays much closer attention to the price indexes of personal consumption expenditures, or PCE. The change from a year ago in the PCE price index is 1.3%. The core PCE price index yearly change is 1.2%. Graphed below are both the PCE price index, in maroon, and the core PCE price index, in blue and their percentage change from a year ago. Here again we see prices being too tame for the 2.0% long run average target quantitative easing criteria goal.

Schroedinger's Price Index - Krugman - Apparently Republicans are trying, once again, to extract chain-linking of Social Security benefits as the price of some kind of deal. I have no idea whether this will go anywhere; my guess, or maybe just my hope, is that Obama the Grand Bargainer has vanished from the scene. But there’s a funny point I hadn’t thought of until Matt O’Brien pointed it out. The alleged justification for chain-linking is that the conventional consumer price index overstates true inflation; it might overall, but probably not for seniors. In any case, however, as Matt points out, the very same Republicans who claim that Social Security benefits should be cut because the CPI overstates true inflation also insist that the Fed must stop quantitative easing, despite the absence of any visible inflation threat, because the real inflation rate is much higher than the official statistics indicate. But Matt, I think, fails to grasp the subtlety of the GOP position here. He accuses them of not knowing what they’re talking about. But surely what’s really happening is that they have a quantum-mechanics view of the situation: the state of the world in which the CPI overstates inflation and the state in which it understates inflation coexist in a condition of superposition, and what happens when you collapse the wave function depends on the position of the observer — that is, whether he’s trying to slash Social Security or bash Ben Bernanke.

The Revisionist National Income And Product Accounts - The Bureau of Economic Analysis has revised the National Income and Product Accounts all the way back to 1928.  With the release of Q2 GDP, Gross Domestic Product magically added $559.8 billion to 2012 GDP in current dollars.  Additionally the chained dollar base year was changed from 2005 to 2009, a very funky year where some deflation from 2008 was still present.  Below is a graph of real valued GDP before and after revisions.  The red line presents the new values after revisions, the blue line the old. Below is the change of GDP and what the revisions brought.  We can see the quarterly revisions below.  2012 alone gained 0.6 additional percentage points to annual GDP.  For the decade of 2002-2012 the new methodology gave an additional 0.2 percentage points on average per year to GDP.  Below is a comparison of the GDP price deflator.  The index based on 2005 values in is maroon, scale on the left, and the new one introduced with Q2 GDP, based on 2009 values, scale on the right.  The price index is the main divisor by which we get real values, so one can compare past years and not attribute GDP growth or contract to inflation or deflation.  That's quite a different slope between the two. One of the biggest changes is adding R&D as an investment instead of treating it as an expense.   Basically we went from the minus to the plus column in accounting and pumped up GDP by $314 billion as a result.  Below is a graph showing all fixed investment before these sweeping changes and after.  In all of the following graphs, the red line presents the new values after revisions, the blue line the old.

No Growth for Inventories Should Lower Q2 GDP  - Business Inventories, or Manufacturing and Trade Sales and Inventories, show a no change in June inventories and a -0.1% change for May.  Sales increased 0.2% for June and 1.1% for May.  This is really bad news for Q2 GDP. This Census economic report covers Retail, Manufacturing and Wholesale inventories, which is pretty much most of the non-farm inventories the BEA uses for their change in private inventory calculations in the GDP report and national accounts. There are a host of adjustments, including inventory valuation that the BEA does to changes in private inventories for national accounts. NIPA is the big, gigantic "ledger" of the national books and from where GDP is calculated.  The change in non-farm private inventories contributed +0.28 percentage points of the 1.7% Q2 GDP , annualized, quarterly in real 2009 dollars.  The change for Q2 nonfarm private inventories, nominal, was $36.6 billion, as listed in the GDP advance estimate report.  For Q1 the nominal change in nonfarm inventories was $24.5 billion.   From just today's business inventories report, in nominal amounts, not annualized and not adjusted for valuations, we get a $2.5 billion change in Q2 business inventories.  Compare that to Q1, where business inventories saw a $15.4 billion dollar change. What does this imply? That the Q2 GDP contribution for changes in private inventories will be less than Q1 and as it stands right now, it was estimated to be more. In other words, expect to see changes in non-farm private inventories be close to zero for Q2 2012 GDP.

Goldman: "Without The Boost From Housing, Real GDP Growth Would Fall Below 1% This Year" - Wonder why the Fed and the banks are so desperate to reflate the second housing bubble, to the delight of flippers and taxpayer consequences (deja vu) be damned? Simple: as Goldman points out in a note released last night, "without the boost from housing, real GDP growth would fall below 1% this year." That's the revised GDP by the way, the one that now includes iTunes song sales and underfunded pension plans in the sumtotal. Which in reality means that ex housing, GDP would almost certainly be negative. So the bigger question is what happens to housing which has already seen a shock to the system following the surge in interest rates in the past month and which hobbled both homebuilders and mortgage applications? This is what Goldman sees there: "On house prices, we have started to see the first signs of deceleration and expect a slowdown from the 10%+ pace observed over the past year. Our bottom-up house price model projects 4-5% annual growth rate in the next two years." Alas, since prices moves from top and bottom inflection point never happen in a straight line as everyone rushes to buy, or sell as the case may be, resulting in a skewed and pronounced move, once the reality seeps in that the artificial housing 'recovery' is over, watch what happens when everyone rushes for the door. That goes for GDP as well.

The Great Stagnation: JP Morgan declares US potential GDP growth just half of what it used to be - It wasn’t so long ago, like the 1990s, the potential US growth rate was thought to be around 3.5% a year. But in a stunning new report, JP Morgan economists Michael Feroli and Robert Mellman say those days are over. The summary of their research note “US future isn’t what it used to be: potential growth falls below 2%” from the bank:

  • 1. The long-run growth potential of the US economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era
  • 3. Within labor supply, the growth in the population is slowing, due to well-known long run demographic trends, and more recently a sharp slowing in immigration
  • 4. Added to this, the aging of the population will likely exert downward pressure in labor force participation rates, which will likely further depress the trends in hours worked
  • 5. The demographic slowing has been well-telegraphed; what is more striking is the recent slowdown in productivity growth, some of which is cyclical, but much of which is structural
  • 6. Information technology drove much of the recent (1995-2005) productivity boom, and price measures indicate the trend in the pace of technological gain in this sector is slowing
  • 7. This in turn has reduced the incentive of firms to heavily invest in ever more recent vintages of IT equipment, slowing the pace at which workers are equipped with newer and better machines
  • 9. Slower trend GDP growth means the large amount of slack resources in the economy can be absorbed relatively quickly, and thus a quicker normalization of monetary policy can be achieved

The Big Four Economic Indicators: Industrial Production and Real Retail Sales - I've now updated this commentary to include today's release of July Industrial Production and the July data for Real Retail Sales, which we can now calculate with today's release of the Consumer Price Index. As the adjacent thumbnails illustrate, both indicators were flat month-over-month. Industrial Production was unchanged from June and the 0.2% increase is Retail Sales was essentially erased by the 0.2% increase in the seasonally adjusted CPI. For a fractionally more optimistic spin (pun intended), if we round to two decimal places Real Retail Sales were up 0.04%.  The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data points are for the 49th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.

Economists Trim 2013 GDP Growth Forecasts - Economists cut their expectations for 2013 U.S. economic growth but lifted hiring forecasts for the rest of the year, according to a survey of forecasts released Friday. The third-quarter survey of 41 forecasters done by the Federal Reserve Bank of Philadelphia shows the consensus view on gross domestic product expects growth of 1.5% for all of this year, down significantly from 2.0% expected when the survey was last done in May. Part of the downward revision reflects the refiguring of historical GDP reported last month by the Commerce Department. But the economists in the Philadelphia Fed survey also expect the second half of 2013 will be less robust than they expected three months ago. The median forecast thinks real GDP will grow 2.2% this quarter and 2.3% in the fourth quarter, down from 2.3% and 2.7%, respectively. For 2014, forecasters expect real GDP to grow 2.6%, down from 2.8% projected in May. “The outlook for the labor market remains nearly unchanged,” the report said. The median forecast for the unemployment rate expects the rate to fall to 7.3% in the fourth quarter. That would be little change from the 7.4% expected in May and July’s level of 7.4%. The jobless rate is projected to average 7.1% for all of 2014. The forecasters, however, expect hiring will pick up for the rest of the year. Nonfarm payrolls are forecast to average a monthly increase of 174,000 in the second half, up from 158,000 projected earlier. Job growth in 2014 is expected to average 180,100 a month, little different from 180,400 expected earlier.

Comment: The Key Downside Economic Risk - S&P's David Blitzer was on CNBC this morning and said:  "The big issue is the debt ceiling, the budget deficit, the U.S. Congress," Blitzer said in a "Squawk Box" interview. "It's the whole fiscal policy side that's the huge problem. ... I don't think we're going to default but I think we're going to have one of these crazy 11th-hour skirmishes." "Everybody will decide the U.S. Congress is even worse than their worst nightmare and the markets will get hit as a result," Blitzer added At the beginning of the year, I wrote Question #1 for 2013: US Fiscal Policy "[U.S. fiscal policy] is probably the biggest downside risk for the US economy in 2013." If anything I was too optimistic. I thought there would be some sort of compromise on the sequester budget cuts - I was wrong, although I was correct on the debt ceiling. Now here we go again ...If we all lived in a sane world, the "debt ceiling" would be eliminated (see discussion here), we'd all recognize that the deficit is declining quickly (probably too quickly), and that the sequestration cuts are crazy (OK, on the last one, just about everyone admits the cuts are dumb). Unfortunately we live in the real world, and politics trump reality.  Note: For a discussion of many of the budget issues this year, see Stan Collender's Budget Bedlam This Fall

China, Japan lead record outflow from Treasuries in June - China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday. China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows. Comments from Federal Reserve Chairman Ben Bernanke on May 22 that the central bank could reduce its four-year asset buying or quantitative easing (QE) program by September fueled a sell-off in U.S. Treasuries. "China's net selling of U.S. treasury could be a reaction to the possible QE exit," said a senior economist at the Chinese Academy of Social Sciences (CASS), a top government think-tank. Speaking on condition of anonymity, he said China's currency reserves management had become much more pro-active.

A History of SOMA Income - NY Fed - Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet increased dramatically, a result of both the various liquidity facilities and the Large-Scale Asset Purchase programs (LSAPs) (see yesterday's post on the history of the Fed’s balance sheet). Second, this expansion of the balance sheet was financed in large part by issuing interest-bearing reserves instead of additional noninterest-bearing currency. As a consequence of these changes, future net income from the Fed’s portfolio will depend on a wider range of factors and may be more variable for a period of time—a topic that has generated increased discussion This post aims to provide historical perspective to this debate by showing how the Fed’s income has evolved over time. We’ll focus on income from the domestic System Open Market Account (SOMA) portfolio, that is, the portion of the portfolio held in U.S. dollar assets and used to support implementation of the Federal Open Market Committee’s (FOMC) monetary policy objectives. The Fed also maintains a portfolio of foreign currency reserves, but at approximately $24 billion as of March 31, 2012, it comprises a much smaller portion of the total SOMA portfolio, and therefore a much smaller fraction of the total income generated.

Treasury Ran $98 Billion Deficit in July--But Debt Stayed Exactly $16,699,396,000,000 - The Treasury Department's Financial Management Service (FMS), which publishes both the federal government's official Daily Treasury Statement and its official Monthly Treasury Statement, is reporting that in July the federal government ran a deficit of $98 billion but that the federal government's debt remained exactly $16,699,396,000,000 for the entire month.The FMS said that the deficit went up $98 billion ($97,594,000,000) in the Monthly Treasury Statment for July, which it released on Monday.At the same time, the FMS said the debt stayed at exactly $16,699,396,000,000 in its Daily Treasury Statements, which are published every business day. The Daily Treasury Statements show the daily value of the federal government debt that is subject to a legal limit set by Congress. At the static $16,699,396,000,000 level that the Treasury reported for every day of July, the debt was just $25 million below the legal limit of $16,699,421,000,000 that was set in a law passed by Congress and signed by President Barack Obama.

U.S. Budget Deficit Shrinks as Revenues Rise - —The U.S. government is posting the strongest revenue since before the recession, buoyed by higher tax rates and a slowly improving economy, leaving the federal budget on track for its narrowest deficit in five years. Revenue from October to July, the first 10 months of the government's fiscal year, totaled $2.287 trillion, the Treasury Department said Monday. That is up about 14% from a year earlier and about 8.1% from the first 10 months of 2007, the next highest year for revenue. Meanwhile, government spending is down slightly, largely due to across-the-board cuts called the sequester that went into effect March 1. Overall, the government is still spending well more than it collects, albeit at a slower pace. The budget deficit for the 10 months reached $607.42 billion, 38% narrower than a year earlier. For the fiscal year ending Sept. 30, the Congressional Budget Office estimates a deficit of $642 billion, compared with $1.087 trillion a year earlier and the smallest gap since 2008's $458.55 billion shortfall. The improving budget numbers this year have eased pressure on the White House and Congress to resolve long-term fiscal problems and postponed the point at which Congress will have to raise the government's borrowing limit. The Treasury said this month that point would come after Labor Day. The Bipartisan Policy Center, a Washington think tank founded by a group of Republican and Democratic former Senate leaders, forecasts a deadline between mid-October and mid-November. That is unchanged since their July forecast.

All At Sea On Fiscal Policy - Paul Krugman - I don’t think it’s worth doing a detailed rebuttal of Hubbard and Kane’s attempt to convince us that the deficit is too scary, and we must therefore implement a right-wing agenda. I was, however, struck by the opening sentence: TWO years ago, Adm. Mike Mullen, at the time the chairman of the Joint Chiefs of Staff, said that debt was the “single biggest threat to our national security” — not some rogue nation, or terrorist group, but debt.  Well, I disagree; I believe that the single biggest threat to our national security is Chinese submarines. Now, you may ask what I know about naval strategy — and the answer is, not a blessed thing. (And actually I have no idea how much threat Chinese submarines pose). But hey, I’m a well-known person with some fancy credentials. That makes me an expert on everything, whose judgment is not to be questioned. Right? Even in the best of times, argument from authority is generally a bad idea. Mullen, we know, likes to hang out with Bowles and Simpson; it has been about two and a half years since B&S predicted a severe fiscal crisis within two years.

What People (Don’t) Know About The Deficit - Krugman - A little while back I expressed a desire to see a poll of voters asking whether they knew about the plunging federal budget deficit. Just as a reminder, here’s what the CBO numbers for the recent past and projections for the near future look like:  Well, Hal Varian of Google got in touch with me, and said,”We can do that!” So he put together a Google Consumer Survey; it’s still ongoing — results here — but here’s what it looked like this morning: I’m sure someone will quibble about the wording; and yes, the CBO numbers are as % of GDP rather than nominal values (but those would look the same). But I don’t think there’s any real question here: the public has no idea that the deficit has been falling like a stone. A solid majority of voters think it’s still going up, and hardly anyone knows that it’s going down.

Obamacare debt ceiling: The new hostage crisis. - Rather than on insisting on Obamacare repeal as a condition for funding the discretionary portions of the federal budget (the busted old Senator Mike Lee extremism) the new idea is to pass a 60 day continuing resolution so that appropriations expire after the Treasury runs out of "extraordinary measures" and needs congress to raise the debt ceiling. Then "House leadership wants to combine Democratic desires to roll-back sequestration with conservative desires to delay/defund Obamacare into the debt limit fight."Now recall that we've had two go-rounds of this. During the First Debt Ceiling Crisis, Republicans insisted on $1 of spending cuts for every $1 of new borrowing authority. The Obama administration, rather than sweeping this aside, decided to try to play some clever political jujitsu aimed at boxing Republicans into agreeing to a "balanced" deficit reduction package. After a lot of twists and turns what we ended up with was sequestration.During the Second Debt Ceiling Crisis, Republicans said they were going to once again insist on the 1:1 forumula. They ultimately settled for the faux-concession of a "no budget no pay" rule. Senate Democrats responded to that by duly passing a budget, and then once they'd done so Republicans realized that they'd negotiated for something worthless and started refusing to hold a conference committee to reconcile the House and Senate budgets. Now comes the Third Debt Ceiling Crisis in which, allegedly, the country will be pushed into default unless Obama agrees to repeal his signature domestic policy initiative.

Permanent Stimulus? - Paul Krugman - During the debate over fiscal stimulus, one line you heard over and over again was the claim that spending programs designed to fight the slump would inevitably become permanent fixtures. This claim was often made with an air of worldly wisdom — we all know what politicians are like, right? The truth, however, was that this wasn’t the voice of experience talking; it was the voice of right-wing fantasy. Historically, stimulus programs — unlike social insurance programs, which do indeed have staying power — have shown no tendency at all to become permanent. No, the WPA didn’t endure into the Eisenhower years. And in fact the historical tendency is for stimulus to go away too soon. So let’s take a look at Obama-era spending.  So here’s federal spending as a percentage of potential GDP, as estimated by the Congressional Budget Office: Sure enough, spending is most of the way down to pre-recession levels. The slight remaining elevation reflects a couple of factors: spending on safety-net programs is still elevated thanks to a still-depressed economy,and the arrival of the baby boomers is already having a significant impact on retirement programs. But there has definitely not been anything like the spending ratchet stimulus opponents claimed was inevitable.

The Deduction for State and Local Taxes - The federal deduction for state and local taxes, in the tax world often called the Salt deduction, is among the largest in the tax code, reducing federal revenues $77 billion this year: $25 billion for property taxes on owner-occupied homes and $52 billion for state income and other taxes. Conservatives have long had special enmity for this deduction, and it is one that Republicans are likely to include in their tax reform plans.The Salt deduction is among the oldest in the tax code. The first income tax law enacted 100 years ago this year provided a deduction for all state, county, school and municipal taxes paid within the last year. It is not known why it was adopted, but lawmakers may have felt that it was fundamentally unfair to tax a tax.A crucial reason that the Salt deduction is on the tax reform radar is that Congressional leaders have promised to maintain the current progressivity of the tax code and also reduce the top income tax rate to 25 percent. This means that they have to go after those deductions that primarily benefit the well-to-do. As one can see in this table from Congress’s Joint Committee on Taxation, the vast bulk of returns claiming the Salt deduction and the greatest proportion of the dollars deducted are from those with higher incomes. Almost half the dollar amount of the deduction is claimed by those with incomes above $200,000.

Paying for Corporate Tax Rate Cuts is Hard - Covering the revenue loss from deep individual income tax rate cuts while maintaining the income tax’s current progressivity is difficult, as Howard Gleckman explained here last week. It turns out that paying for corporate tax rate cuts is even harder. And new Tax Policy Center estimates show that lowering corporate tax rates without paying for lost revenue would be highly regressive. Calls for reducing the top corporate tax rate from the current 35 percent have come from a wide array of sources, ranging from the president to members of Congress on both sides of the aisle to the business community and many economists. Our top rate is higher than that of any other developed country. That discourages investment in the U.S., and encourages income-shifting to avoid tax. Cutting our corporate tax rate makes economic sense.But, as is the case with the individual income tax, proposals to reduce corporate taxes haven’t included specific provisions to replace the lost revenue.That cost isn’t small: The Joint Committee on Taxation recently estimated that cutting the rate to 25 percent—and eliminating the corporate alternative minimum tax—would reduce revenue by $1.3 trillion over the next decade. Proponents of rate cuts generally imply that they would cover the lost revenue by paring back or eliminating corporate tax expenditures. The problem with that is there aren’t enough of the latter.On paper, the sum of Treasury estimates of corporate tax expenditures appears to be big enough that eliminating them could pay for the rate cut. But a closer look suggests otherwise.

Death by Corporation: America's Corporate Deathstar -- In Parts I and II of Mankind: Death by Corporation, we looked briefly at what amounts to ruthless, psychopathic behavior of our largest corporations spanning most major industries.  But aided and abetted by "sincere" government officials, corporations are working behind the scenes, rapidly assembling the corporate "Death Star" to be unleashed upon citizens throughout the world, allowing them virtually unchecked control of our food supply, our land, air, water, wallets and our future. This new corporate giveaway is a bill in the Senate sponsored by Democrats and Republicans that would, for all intents and purposes, end the "independence" of independent regulatory agencies, including the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Consumer Product Safety Commission and the National Labor Relations Board.   On paper, the Senate bill's "benign" goal is to ensure that new rules appropriately balance costs and benefits. But this is simply a euphemism for more deregulation, which itself is a euphemism for unleashing the corporate hounds on a hapless public. The bill would hollow out protection for investors, patients, consumers and workers.  This bill is just a warm-up act. While the public and the media sleep, the real corporate "Death Star," the TransPacific Partnership (TPP), is being forged in secret. The term "partnership" hardly sounds ominous. But for the last two years TPP negotiations that could have unprecedented consequences to citizens throughout the world have been going on among a dozen Pacific Rim nations. No information has been made available to the press or the public - and only extremely limited access has been allowed to a few members of Congress. But last year a document was leaked to the watchdog group, Public Citizen, revealing the current US position and the reason for the secrecy. The contents are surreal and shocking, and prima facie evidence for how corporations have become the master puppeteers of government.

Subpoenas issued over metals warehouse probe - The US commodities watchdog has subpoenaed companies including Goldman Sachs, JPMorgan Chase and Glencore as it ramps up its probe into the metals warehousing industry. The subpoenas come amid a barrage of criticism in the US of banks’ activities in commodity markets. In particular, Goldman Sachs and JPMorgan have come under fire for their ownership of metals warehouses after a Senate hearing last month where MillerCoors, the brewer, suggested that its costs had been inflated by long queues to take delivery of aluminium from London Metal Exchange warehouses. Ownership of the LME warehouse network is concentrated among a handful of companies, including Glencore and Trafigura, the commodities trading houses; Goldman Sachs and JPMorgan, the Wall Street banks; and the independent C Steinweg of the Netherlands. Since the financial crisis, warehouses have accumulated towering stocks of industrial metals. But the quantity of metal that warehouses must deliver each day is limited by LME rules. Bottlenecks have created delivery delays at some warehouses of a year or more. These queues have helped to drive up physical premiums – the cost of metal over and above the LME benchmark – to record levels, creating a disconnect between the LME price and the physical market that has angered consumers from Coca-Cola to General Motors. Goldman, JPMorgan and Glencore have received subpoenas from the Commodity Futures Trading Commission in recent days, according to people familiar with the matter. Previously the regulator sent “do not destroy” letters to metal warehouse owners directing them to retain documents.

London Whale Resurfaces in Potential U.S. JPMorgan Case - Iksil, the Frenchman who became known as the London Whale because of his trading book’s size, has been cooperating with the Federal Bureau of Investigation and the Manhattan U.S. Attorney’s Office for months in their probe of the New York-based bank’s biggest trading debacle ever, said three people with direct knowledge with the matter. Iksil won’t face charges as long as he cooperates and testifies, the people said.  Prosecutors may announce charges as early as this week against former London-based JPMorgan employees, accusing them of trying to mask losses on a complex derivatives portfolio, said another person who asked not to be named because the investigation isn’t public. The episode has already sparked a Senate subcommittee hearing and prompted JPMorgan’s board to cut Chief Executive Officer Jamie Dimon’s pay in half.

Ex-JPMorgan Employees Charged in NY in $6B Loss - Two former JPMorgan Chase & Co. employees were charged with conspiracy for trying to conceal the size of the investment bank’s $6 billion trading loss last year, authorities said in court papers unsealed Wednesday. Javier Martin-Artajo, Julien Grout and their co-conspirators were accused of “artificially increasing the market value of securities to hide the true extent of hundreds of millions of dollars of losses,” according to court papers. Martin-Artajo, who supervised JPMorgan’s trading strategy in London, and Grout, who recorded the value of the bad investments, are accused of wrongdoing related to a surprise loss by a trader who has become known as the “London Whale,” a name referring to the trader’s location and to the supersized bets that he made. The two are accused of conspiring to hide more than a half-billion dollars of losses in a credit derivatives trading portfolio that ultimately lost over $6 billion.

Two JP Morgan traders charged over ‘London Whale’ incident -- Two former London-based traders of JP Morgan have been charged by US prosecutors in relation to the "London Whale" trading incident that cost the US bank more than $6bn (£3.9bn) last year. Setting out the state's case at a press conference in New York, the city's attorney general, Preet Bharara – referring to JP Morgan boss Jamie Dimon's initial dismissal of the potential losses – said: "This was not a 'tempest in a teapot', but rather a perfect storm of individual misconduct and inadequate internal controls." Bharara refused to comment on whether other JP Morgan bankers would face charges. "The investigation remains open," he said. Javier Martin-Artajo and Julien Grout were charged in the southern district court of New York with four counts of falsification of books, wire fraud and making false statements to the US regulator the Securities and Exchange Commission. Bruno Iksil, the French-born trader dubbed the London Whale for his large trading position, is not being charged, according to documents issued by the US department of justice on Wednesday and sent to Iksil's lawyer on 20 June. Iksil, also nicknamed "Voldemort" by other traders because of the impact his huge bets were having on the market, is co-operating with the US authorities as they build their case. His agreement with the justice department does not exempt him from other potential actions but officials said they would "bring the co-operation of Iksil" to the attention of any prosecutor who might pursue him.

The Government is Finally Arresting Wall Street Bankers...For Losing Wall Street's Money - Video interview (and transcript) with Bill Black.

The Incredible Con the Banksters Pulled on the FBI -  Bill Black - This is the second in my series of articles based on the FBI’s most (2010) “Mortgage Fraud Report.”  In my first column I began the explanation of how many analytical conclusions one can draw from a close reading of what is left out of the FBI report. In particular, I emphasized the death of criminal referrals by the SEC and the banking regulatory agencies.  The FBI report implicitly confirms the investigative reporting of David Heath that first quantified the death of criminal referrals by the banking regulatory agencies. Because banks will not make criminal referrals against their own CEOs, this means that criminal referrals have virtually vanished against the “accounting control frauds” that drive our recurrent, intensifying financial crises.  As George Akerlof and Paul Romer explained in their famous 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) the death of prosecutions of the controlling officers of banks will lead to accounting control fraud becoming a “sure thing.”

How The ‘World’s Dumbest Idea’ Killed The US Economic Recovery - Readers know that short-term shareholder value, which is still pervasive in large organizations, has led to “bad profits” that have destroyed customer loyalty. It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy. And it has even undermined US capacity to compete in international markets. Now the Financial Times reports that the short-term shareholder value theory has a new feather in its cap: it is responsible for killing the economic recovery that should have occurred after the financial meltdown of 2008. In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?In standard economic theory, this makes no sense. When profits go up, companies should be seizing investment opportunities to lay the groundwork for even more profits in future. In turn, that investment should create jobs, generate more capital goods and lead to higher wages. That’s how capitalism is meant to work. So why isn’t it happening? Mr. Harding explores systematically why all the leading scapegoats for what’s gone wrong—regulations, Obamacare, tax policy, fear of another financial crisis and so on—and shows why they don’t add up. Then he comes up with the kind of thing that you rarely see in economics—a study that enables us to pinpoint the problem by offering “with” and “without” data.A brilliant study by economists entitled “Corporate Investment and Stock Market Listing: A Puzzle?” compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.

Profitless stocks, Underinvestment, and the cannibalization of labor, and levitating stock prices - Yves Smith - As this trend has accelerated, we’ve also seen falling levels of corporate investment. As I noted in a 2005 article, companies were net savers, which was unheard of at any time other than in a recession (the corporate sector is normally a net borrower in order to help fund expansion), as well as the rise in profit share of GDP relative to the amount of GDP growth paid to workers. It turns out those two developments were not unrelated. Not sharing wage gains with workers makes it less attractive to invest, leading to lower GDP levels. I’d argued in 2005 that companies were like neurotic bodybuilders, creating perfect-looking outsides while ruining their health. In an important Angry Bear post, Edward Lambert modeled that these two behaviors are intrinsically linked: lower labor share lowers investment returns. And at lower investment return levels, companies will indeed invest less (even before you get to the fact that short-termism also leads them to seek inappropriately high return levels).

Markets Aren’t That Stupid - Activist hedge fund managers, like Daniel Loeb or Bill Ackman, buy large blocks of stock in a target company and agitate for change (new board members, asset sales, dividends or buybacks, etc.). The idea is that either they will get their way, or the company will respond to the pressure by doing a better job for shareholders; either way, the stock goes up, and they sell at a big profit. Entrenched CEOs and boards (and their lawyers) don’t like this because, well, they don’t like outsiders telling them what to do and stirring up shareholders to vote against them. They have responded by trying to make life more difficult for activist shareholders, both in the courts and with the SEC. Of course, they can’t come out and say that activist investors are bad for them as people, because that would seem too self-interested. Instead, they say that activists are bad for the companies they invest in and their other, “long-term” shareholders.* But they have to make this claim despite the fact that news of an activist investment typically causes a company’s share price to go up—which, if you believe in more or less efficient markets, means that activists are good or companies. So they have fallen back on another claim: that activists are bad for the company and the stock price in the long term, even though they appear to be good in the short term.

Is Selling Bonds the Taste of Things to Come? - Treasury yields are on the rise as I have noted on numerous occasions recently. The action has prompted the world’s largest hedge-fund manager, to throw in the towel on treasuries and inflation-linked TIPS. Please consider Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell As the bond market plunged in late June, Ray Dalio convened the clients of Bridgewater Associates LP, the world’s largest hedge-fund manager, to tell them that a fund designed to withstand a broad range of market scenarios was too vulnerable to changes in interest rates.Bridgewater, citing months of study, said it had underestimated the interest-rate sensitivity of various assets in its All Weather fund and was taking steps to mitigate the risk, according to clients who listened to or read a transcript of the June 24 call. By the end of the month, the Westport, Connecticut-based firm had sold off enough Treasuries and inflation-linked bonds to help reduce the fund’s most rate-sensitive assets by $37 billion, according to fund documents and data provided by investors.  The move, disclosed to investors five days after the Federal Reserve said it’s prepared to phase out its unprecedented bond purchases, was unusual for the fund. As its name suggests, All Weather is designed to produce returns in most economic environments and avoid altering asset allocations when the outlook changes. All Weather incurred a second-quarter loss of 8.4 percent that was primarily tied to its $56 billion portfolio of inflation-linked debt, said the clients, who asked not to be named because the fund is private. ‘A Foretaste’

Finance: Balance sheet battle - Regulators are reviving an old measure to gauge banks’ ability to withstand a crash but bankers are crying foul.  Officials were supposed to be putting the finishing touches on a new system, named Basel III after the Swiss city where it was agreed in 2010, that subjects global banks to higher capital requirements, making them better able to absorb losses in future financial crises. On this measure, a small club, including Deutsche, BNP Paribas, Citigroup and UBS, makes up the world’s strongest banks today, with a ratio of equity to risk-weighted assets of more than 10 per cent. They are well ahead of the target: regulators have demanded that the world’s biggest banks have 9.5 per cent ratios by 2019. But this summer officials around the world have upped the ante again. Suspicious that banks are finding dubious ways to comply with Basel III, they are leaning more heavily on an older, less sophisticated measure of debt levels: the leverage ratio.

Payday, Title, and Installment Lenders Show Signs of Strain - Given the many ways in which payday lenders have been able to transform themselves into title lenders and installment lenders, and to otherwise avoid state law,  l try not to get too optimistic that high-cost lending practices  will be curbed. Yet I feel a bit hopeful after reading Paul Kiel’s recent ProPublica article  The Payday Playbook: How High Cost Lenders Fight to Stay Legal.  In this piece,  Kiel continutes his superb coverage of these products by chronicling the citizen’s ballot initiative undertaken by  Missouri consumers once they realized that their legislature was “bought and paid for” and would not be outlawing high-cost credit in Missouri. According to this article, citizens leading and participating in the ballot initiative, which included many religious organizations and non-profits, were tracked down, sworn at and yelled at by employees of  Missourians for Equal Credit Opportunity (“MECO”), a non-profit formed by the high-cost credit industry. And that is not the half of it. Clergy organizing the ballot initiative (many from African- American churches) received a “legal notice” in the mail from  MECO, threatening criminal sanctions for “the collection of signatures for an initiative petition.”

Bank Of America Continues Deducting Fees, Even After Death - Perhaps showing its firm belief in the afterlife, Bank of America has continued to charge fees to the bank account of a man it knows died nearly half a year ago. According to the L.A. Times’ David Lazarus, the account holder passed away in March. Before then, his disability checks had been direct-deposited to his BofA account on a regular basis. The bank even acknowledged in writing that it had been notified of the customer’s death, but that didn’t stop it from charging $12 monthly fees to the account, which only had around $1,175 in it when the man passed away. "Is it wrong morally? Yes,” one probate attorney explains to Lazarus. “Legally? No. The law says they can get away with it.”

Credit as percentage of banks' balance sheets lowest in 40 years - Loans and leases (of all types) as percentage of US banks' total balance sheets continue to decline and are now at the lowest levels in at least 40 years (since this data has been kept). Credit is being displaced by cash (reserves), as the Fed's securities purchases result is further dilution of US banks' balance sheets. While some believe this will motivate banks to accelerate lending, as the chart below shows, it hasn't. Credit expansion in the US has been slowing and is well below pre-recession levels.

Unofficial Problem Bank list declines to 723 Institutions -- This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for August 9, 2013.  Changes and comments from surferdude808:  Not that many changes were made to the Unofficial Problem Bank List this week as anticipated. In all, there were three removals that lower the institution count to 723 with assets of $255.0 billion. Assets declined this week by $4.1 billion with $3.1 billion of the decline coming from updating assets through the second quarter. A year ago, the list held 900 institutions with assets of $348.6 billion.  This week Capitol Bancorp, Ltd was in the news as they "lashed out at the FDIC" in an August 2nd filing with the bankruptcy court for not granting cross-guaranty waivers that supposedly prevented the sale of some units before they failed according to a report published by SNL Securities (A Capitol offense? BHC blasts FDIC for 'undermining' sale efforts, 'unnecessary' seizures). Perhaps the resolution of the remaining units is nearing an end. Next week we anticipate the OCC will release its action through mid July 2013. 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.

Commercial Real Estate Prices See Midyear Surge  - On the strength of improving market fundamentals, the two broadest measures of aggregate pricing for commercial properties within the CCRSI — the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index — continued their upward trend in June. The value-weighted index, which is influenced by larger transactions and generally tracks with high quality core real estate properties, gained 5.9% in the second quarter, its best quarterly showing since 2011. Meanwhile, the equal-weighted index, which is comprised of smaller, more numerous transactions representative of the lower end of the market, jumped by an impressive 9.1% in the second quarter, its strongest quarterly gain on record.  Stronger consumer spending and a near dearth in new construction helped to bolster pricing gains for retail properties as reflected in the 16% gain in the CCRSI Retail Index over the past 12-month period ending in the second quarter, the strongest performance of the four major property types. Meanwhile, pricing in the Office Index advanced by 11.4%, while the Multifamily Index gained a more modest 11.1% year over year. The percentage of commercial property selling at distressed prices dropped to just 13.6% in June 2013, down from nearly 24% one year earlier, the lowest level of distress recorded since the end of 2008. The long-term average for distress trading is less than 1% of total volume, so the recovery still has a ways to go, but the recent declines have helped to boost liquidity and pricing by giving lenders more confidence to do deals.

White-collar fraud expert proves ‘mortgage-backed securities’ neither mortgage-backed nor secure - Obama’s recent proposal to wind down Fannie Mae and Freddie Mac and give the private sector a monopoly on issuing mortgage-backed securities came under fresh scrutiny on Monday after previously-sealed court documents in USA et al v. American Home Mortgage Servicing Inc et al revealed that many mortgage-backed security issuers never had legal title to the mortgages backing their securities, David Dayen at Salon reports. According to Dayen, the lawsuit claims that a key step in the securitization process, the physical delivery and endorsement of the promissory note and mortgage, never occurred in many cases, “forcing the production of a stream of false documents, signed by ‘robo-signers,’ employees using a bevy of corporate titles for companies that never employed them, to sign documents about which they had little or no knowledge.” The forged documents were endorsed by employees of companies long bankrupt, executives who signed their name eight different ways, or “people” named “Bogus Assignee for Intervening Assignments” so that the banks could establish standing to foreclose in courts. The end result, according to white-collar fraud expert Lynn Szymoniak, is that over $1.4 trillion in mortgage-backed securities are still, to this day, based on fraudulent mortgage assignments.

The FBI’s 2010 Mortgage Fraud Report Reveals Why the Banksters Love Holder - William K. Black -The Obama administration’s continuation of the Bush administration’s refusal to prosecute the elite banksters (or even the vastly lower status CEOs of the fraudulent mortgage bank) that drove the crisis has made it clear that the rule of law no longer applies to wide ranges of life and that crony capitalism will continue to reign. One of the difficulties we have is that because the last two administrations have fanatical devotees of the cult of the Virgin Crisis – the myth that the ongoing crisis was the first in modern times conceived without sin (control fraud) – that it is exceptionally difficult to know what their creed is.  DOJ has refused to prosecute any elite banker for mortgage loan origination fraud.  The rare prosecutions it has brought against senior officials of fraudulent loan originator (a large, but obscure regional mortgage bank: Taylor Bean) did not prosecute the officials for their fraudulent origination (or sale) of loans.    With zero prosecutions of the massively fraudulent home lenders that drove the crisis to we are left with no information on why committing hundreds of thousands of frauds via the twin epidemics of loan origination fraud (inflating appraisals and making endemically fraudulent “liar’s” loans) is no longer a crime that the FBI investigates and DOJ prosecutes.  No senior DOJ or FBI official, of course, is stupid enough to state openly why we no longer prosecute even the CEOs of long-bankrupt mortgage banks that led these accounting control frauds.  The U.S. Attorney for Sacramento, one of the epicenters of accounting control fraud, was foolish enough to attempt to explain why he did not investigate or prosecute the banksters:. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.

In One Bundle of Mortgages, the Subprime Crisis Reverberates - Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy. In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era. Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond. Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value. Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy. This is the story of one of those bonds, GSAMP Trust 2007 NC1.

Quelle Surprise! Administration Lied About Mortgage Fraud Results, Numbers 4 to 10 Times Too High -- Yves Smith - Normally I’d relegate a good job of news spadework to the daily Links feature, but Bloomberg caught out Attorney General Eric Holder in such an egregious lie that this failed con job merits ample, widespread publicity and well-deserved derision. So remember that Mortgage Fraud Task Force? No? There’s a really good reason the name doesn’t ring a bell. It’s been missing in action. As we wrote last September: I’m sure the banksters are quaking in their boots. Eric Schneiderman, is now making noises that really, truly, he and his Federal best buddies are gonna nail some baddies really soon. As we pointed out in older posts, this “task force” is merely a new unit in an interagency Financial Fraud Enforcement Task Force established in 2009 which looks to have done precisely nothing since its inception. That post was in September. In October, Eric Holder announced publicly, au contraire, this task force had really been busting chops! And he cited figures of activity since October 2011 to prove it. To be honest, I didn’t regard the October announcement as credible, since not had this group launched a case against either a meaningfully large player or at conduct that was central to the crisis.  But what actually occurred was even worse than my reflexively cynical take.  Weil recounts how he kept after the DoJ flack and got all sorts of promises and excuses. Finally, presumably hoping no one cares about mortgage abuses any more now that housing prices are up, the Administration came clean in the most backhanded way possible… issuing a corrected press release.  And how big were the corrections? You be the judge: Originally the Justice Department said 530 people were charged criminally as part of a year-long initiative by the multi-agency Mortgage Fraud Working Group. It now says the actual figure was 107 — or 80 percent less. Holder originally said the defendants had victimized more than 73,000 American homeowners. That number was revised to 17,185, while estimates of homeowner losses associated with the frauds dropped to $95 million from $1 billion. So get this: the number of people charged criminally was originally exaggerated more than five times. The amount of people victimized was overstated by over four times, and the dollar losses, more than ten times. And the original dollar losses were bupkis relative to the harm mortgage borrowers suffered, and the revised number, $95 million, is a pathetic joke.

DOJ Compounds Stat Screwup by Whitewashing Old Eric Holder Speech - Matt Taibbi - It turns out that Barack Obama's Justice Department, in the person of Attorney General Holder, didn't just grossly overstate the success of its Mortgage Fraud Task Force. In what at best is a bonehead mistake, the Department channeled 1984 and whitewashed a web page, re-transcribing an old speech of Holder's to better reflect the "updated" version of the mortgage facts.By now most people who follow white-collar crime know the backstory. Last year, on October 9th, Mr. Holder gave a press conference in which he touted the efforts of Barack Obama's Mortgage Fraud Task Force, claiming that in a year's time, the Department had secured "285 federal criminal indictments and informations against 530 defendants for allegedly victimizing more than 73,000 American homeowners --and inflicting losses in excess of $1 billion."Two days after that appearance, a pair of pain-in-the-ass Bloomberg reporters, Phill Mattingly and Tom Schoenberg, reported that at least one of the cases Holder was citing was a Bush-era prosecution, and multiple others had been filed long before the Task Force existed. "There is no attempt to fudge the numbers," an FBI spokesman grumbled lamely at the time. Subsequently, Bloomberg writer Jonathan Weil continued to follow up, pestering the DOJ for a list of the cases Holder was talking about. He repeatedly asked a DOJ spokesperson for the list, and whether the delay was coming from the FBI (which had the information) or the DOJ, he never got the information he was after.

Your mortgage documents are fake! - If you know about foreclosure fraud, the mass fabrication of mortgage documents in state courts by banks attempting to foreclose on homeowners, you may have one nagging question: Why did banks have to resort to this illegal scheme? Was it just cheaper to mock up the documents than to provide the real ones? Did banks figure they simply had enough power over regulators, politicians and the courts to get away with it? (They were probably right about that one.) A newly unsealed lawsuit, which banks settled in 2012 for $95 million, actually offers a different reason, providing a key answer to one of the persistent riddles of the financial crisis and its aftermath. The lawsuit states that banks resorted to fake documents because they could not legally establish true ownership of the loans when trying to foreclose. This reality, which banks did not contest but instead settled out of court, means that tens of millions of mortgages in America still lack a legitimate chain of ownership, with implications far into the future. And if Congress, supported by the Obama administration, goes back to the same housing finance system, with the same corrupt private entities who broke the nation’s private property system back in business packaging mortgages, then shame on all of us.

The Real Foreclosure Scandal: Why Have Virtually No Lawyers Been Disbarred? -  Yves Smith -- Even now, years after the subprime market’s death in 2007, new stories of mortgage chicanery or accounts providing more evidence of known abuses keep surfacing. David Fiderer flagged a new one yesterday: Colorado’s two biggest foreclosure mills are under investigation the state attorney general. The Denver Post summarized the complaint: Because the firms for years controlled the bulk of the foreclosure work in Colorado, they could profit handsomely and easily on a state law requiring legal notices to be posted on homeowners’ properties by steering that work to companies they owned or had a heavy interest in. The law firms allegedly leveraged their stranglehold on the foreclosure market — estimates are that they control about 90 percent of the cases filed in Colorado — and conspired to fix the price to post those notices at $125, an amount five times more than what other companies charged for the same service, investigators said in court papers that included e-mail exchanges between the two firms. Now this is only one particularly creative example of bad behavior by foreclosure mills. NC regulars may have seen the article by Dave Dayen yesterday in Salon, Your mortgage documents are fake! It was based on the unsealing of Lynn Szymoniak’s qui tam suit against 28 banks, mortgage servicing companies, and document processors. That means pretty much every one you heard of in mortgage land. And her allegations, which led to a $95 million settlement (mind you, for actions filed in just two states, North and South Carolina), are familiar to anyone who has read this blog: mortgage documents (meaning the most importantly, the borrower promissory note) were not transferred to the securitization trusts in a timely manner as stipulated in the governing agreements. Trying to transfer after the cut-off date is a no-no for reasons we’ve discussed at nauseating length in the past. The last thing the mortgage-industrial complex wanted to admit was that it had sold investors non-mortgage-backed securities.

Thousands of Marylanders are losing homes in second wave of foreclosures - Maryland is getting a second dose of the housing crisis — a sequel that foreclosure experts and state officials knew was coming but no one wanted to see. Between January and June, Maryland went from having one of the lowest foreclosure rates in the nation to the third highest as banks worked their way through a backlog of delinquent loans, created in part by the state’s long foreclosure process. In the first three months of the year, there were 9,339 foreclosure filings in Maryland, more than twice the total of a year earlier but still far below the peak of 16,788 during the last three months of 2009, state data shows. That year, there were about 50,000 foreclosure filings. Foreclosure hot spots, once concentrated in Prince George’s County and Baltimore, are suddenly appearing across the state, in communities from Baltimore County to the Eastern Shore, especially in areas that have yet to recover from the recession and where unemployment rates remain high. For many Marylanders battling to keep their homes, it might as well still be 2008.Housing experts had been bracing for a second wave of foreclosures since 2010, when lenders were forced to halt all foreclosures while they addressed massive documentation problems. Many kept the brakes on until last year, when they reached a nationwide settlement with state attorneys general over their practices.

Obama Puts “Private Capital” at Center of Housing Plan  --The Obama administration is working on a plan to liquidate Fannie Mae and Freddie Mac so that future profits from housing sales and secondary market activity flow exclusively to privately-owned banks and financial institutions. President Obama made the announcement last week in a speech in Phoenix saying that he wanted to “wind down” the two Depression-era Government Sponsored Enterprises (GSEs) and put “private capital” at the center of his housing finance reform strategy. He reassured investors and bondholders that the government would still underwrite the pools of loans that are bundled into bonds and sold to investors as mortgage-backed securities (MBS) despite the fact that US taxpayers will receive zero compensation for the explicit guarantee. Obama has abandoned the pretense that economic policies have a public purpose. What matters is profits, Wall Street’s profits. Here’s an excerpt from Obama’s speech: “The thing I’m here to talk about today: laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again. That begins with winding down the companies known as Fannie Mae and Freddie Mac.” Obama is being disingenuous. Fannie and Freddie were not responsible for the financial crisis, although the claim is frequently made by right-wing extremists. Private capital caused the Crash of ’08 as this clip from Forbes points out: “It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending institutions. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations..”

Fannie, Freddie, and the Destructive Dream of the 'Ownership Society' - What's missing from the story is crucial, however. Often neglected is the degree to which so many felt that they needed to own a home. That wasn't created by banks and government, even though it was encouraged. The "ownership society" had been touted not just by President Bush in the 2000s, but by Clinton, Reagan, and by Americans of all parties and ideologies since the founding of the republic. There is nothing more "Jeffersonian" than owning your own land and home (and slaves...but that is another issue). The United States pulled immigrants in part because of the availability of land and the promise of independence that owning land afforded. After World War II, agencies such as the Federal Housing Administration along with other New Deal creations such as Fannie Mae (the Federal National Mortgage Association) spurred more widespread home ownership, with returning GIs both swarming into colleges and then into vast new housing developments in the suburbs. Freddie Mac (the Federal Home Loan Mortgage Corporation), founded in 1970, was meant to augment that process with even more quasi-government intervention in the mortgage market, with the goal of reducing the risk local banks might incur in making new home loans.These programs then combined with banks to produce the increase in home ownership, from 62 percent in the 1950s to almost 70 percent in the 2000s. The programs worked not because the docile masses were convinced to own homes but because the drive to have a home is deeply embedded in American culture. Government and banks facilitated the realization of these desires, but it is beyond a stretch to claim that they created those desires. They stoked them, and often took advantage of them, but they did not implant and create them.

No, Lending To Poor People Did Not Cause The Financial Crisis - Despite the multiple times the right wing’s arguments have been debunked, they are once again repeating the false narrative that the financial crisis was caused by government policy and lending to low-income borrowers. The latest to weigh in is former-Senator Phil Gramm. On the Wall Street Journal op-ed page, he trots out the idea that government regulators used the Community Reinvestment Act (CRA) to force banks to make loans to undeserving poor people and that Fannie Mae and Freddie Mac purchased doomed subprime mortgage backed securities to meet the affordable housing goals. This, he says, was the main cause of the crisis. But this idea has been thoroughly discredited. The Community Reinvestment Act requires banks and savings associations to meet the credit needs of all segments of the community in their service areas, consistent with standards of safety and soundness. This legislation counteracted historically widespread “redlining” practices, where banks would deny credit to low-income or minority neighborhoods. The Fannie and Freddie affordable housing goals require them to ensure that a certain percentage of the loans they buy serve low-income homebuyers and neighborhoods.  The argument that CRA and the affordable housing goals caused the crisis have been debunked time and time (and time and time and time and time and time) again. The CRA has been in place since 1977, while subprime lending only skyrocketed in the 2000s. Even if one concentrates on the changes in enforcement of the act in 1995 (as Gramm does), the Act does nothing to explain the massive uptick in subprime lending concentrated from 2004 to 2006. What’s more, most subprime lenders weren’t banks and therefore weren’t even subject to CRA. That’s why only 6 percent of the high-cost mortgages at the time (a proxy for subprime) could even potentially qualify for CRA credit.

Don’t Kill Fannie Mae - Could it get any worse for Fannie Mae and Freddie Mac? Last week, even President Obama joined the growing chorus of those who want to put them out of business.  He did so in a speech in Phoenix, outlining — at long last — his ideas for reshaping the country’s housing finance system. He called for the housing finance market to be primarily driven by private capital, with a “limited” federal role. He said that the 30-year fixed-rate mortgage should remain a mainstay of the mortgage market. And he essentially endorsed a recent bipartisan Senate bill — a complex piece of legislation that calls for winding down Fannie and Freddie over five years.  Let’s just call this what it is: capitulation. Every since the financial crisis, Republicans have insisted that Fannie and Freddie — private companies that also have a government role, and that guarantee and securitize mortgages — were the root problem. According to their theory, the two companies drove the country off the subprime cliff, primarily because of their federal mandate to help make it possible for low-income borrowers to own homes.  The truth is pretty much the opposite. When the banks first jumped into subprime mortgages, Fannie and Freddie hung back. Only after they began losing significant market share did Fannie and Freddie decide, belatedly, to get into the game. Because they were so thinly capitalized, they had almost no cushion when the losses began to pile up.

In defense of the 30-year mortgage - When writers are forced to discuss the complicated world of housing reform, as they have had to do after President Obama’s recent housing speech, they usually rush to one of two meta-conversations. The first is whether or not we emphasize homeownership too much, and whether we should encourage more people to rent.The second is whether or not the 30-year fixed-rate mortgage, which President Obama and many approaches to Fannie/Freddie reform want to preserve, is a luxury, and a subsidy not worth preserving after the crisis. Given the complexity of the debate, I don’t blame anyone for going meta. The Center for American Progress put out a document that charts out the minor differences between 26 (!) different plans to reform Fannie Mae and Freddie Mac (the GSEs). But readers should know that GSE reform does impact them even if they are a renter, and be aware of the strong arguments for why a 30-year fixed-rate mortgage is worth preserving.

Foreclosures Distort Home-Price Measure -- The housing bust obviously depressed the real estate market, but a new study shows that a big jump in distressed sales during the worst of the downturn may have exaggerated swings in at least one key measure of house prices. Federal Housing Finance Agency economists William Doerner and Andrew Leventis examined markets in Miami and Tampa, Fla., to gauge the impact of bank-owned property and short sales on the FHFA’s house price index. The findings, released in a new paper: distressed sales dragged the index down as housing bottomed out and now are boosting numbers a bit. “The presence of distressed sales in the standard HPI had a depressing effect on measured price changes. In more recent periods, when distressed sales comprised a shrinking percentage of real estate transactions, the Working Paper reveals the opposite effect. As the ‘weight’ of distressed sales on the standard index decreased in recent periods, the depressing effect lessened over time. This meant that the price appreciation observed in the standard FHFA index was somewhat above what the distress-free measures reported.”

Richmond’s Seizure Plan Complicated by Size of Mortgages - The city of Richmond, Calif., is seeking to acquire mortgages as large as $1.1 million under its plan to invoke powers of eminent domain to purchase and restructure underwater mortgages.Some 43 of the mortgages the city wants to purchase or seize have balances over $600,000, according to data that analyst Marc Joffe received through a California public records request and shared with The Wall Street Journal. Mr. Joffe is a consultant to PF2 Securities Evaluations, a New York-based firm that advises on structured-finance valuations and lawsuits.The data show the largest of the mortgages Richmond has proposed seizing has a balance of $1.12 million, and the city has offered nearly $680,000 to buy the loan out of a mortgage-bond pool that was issued by Countrywide. The second largest loan the city would purchase has a balance of $962,307 and the third, $888,361. The hefty price tag for some of these loans could complicate the argument made by Richmond city officials that they need to seize the mortgages to help homeowners who owe more than their homes are worth, putting them at risk of foreclosure.

Report: Homes Listed For Sales up 1.4% in July from June, Down 5.2% year-over-year - From the WSJ: Housing Inventory Rose in July The number of homes being offered for sale is rising heading into the softer part of the summer, a sign that higher home prices could be encouraging more sellers to test the market, according to a report released Tuesday. Nationally, the number of homes for sale stood 5.2% below the levels of a year earlier. But inventories rose by 1.4% from June, an indication that the inventory crunch could finally be easing, data from showed.  Note: Here is the site (not updated with July data yet at posting time). The year-over-year decline is getting smaller each month. As an example, reported that the year-over-year decline was 16% in February, and declined to 7.3% in June - and is now at 5.2%.  Last month, the NAR reported inventory was down 7.6% from June 2012. That was the smallest year-over-year (YoY) decrease since 2011, and it appears the YoY change will turn positive soon.  My guess is the YoY change for inventory will probably turn positive in September and that inventory bottomed in early 2013.

FNC: House prices increased 3.7% year-over-year in June -- From FNC: FNC Index: Home Prices Up 0.6% in June; Signs of Sustainable Recovery At Large The latest FNC Residential Price Index™ (RPI) shows that the U.S. housing recovery continues to take hold with home prices nationwide rising a modest 0.6% in June. The index is reaching a two-year high after rising 16 straight months. The 16-month rising streak has lifted home prices by 7.6% since February 2012─the month in which the housing market bottomed out. Housing market fundamentals continue to improve amid a moderately improving economy. Foreclosure sales have dropped to the 2007 levels before the collapse of the housing market—a strong indicator of strengthening conditions on the supply side. In June, foreclosure sales accounted for 13.5% of total home sales, down from 14.3% in May and 18.6% a year ago... Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that June home prices increased from the previous month at a seasonally unadjusted rate of 0.6%. 1On a year-over-year basis, home prices were up a modest 3.7% from a year ago. This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. Note: The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.  Even with the recent increase, the FNC composite 100 index is still off 27.9% from the peak.

Is housing demand driven by fear of higher rates? - According to the National Association of Home Builders, US builders are ecstatic these days. The housing market index (builder optimism) hit the highest level in nearly 8 years. The question now is whether the strength in demand for homes can be sustained. One possibility is that potential buyers who were sitting on the sidelines are realizing that mortgage rates could go even higher and waiting for rates to decline may end up being costly.  The chart below from JPMorgan shows part of the survey by UMichigan that asks if this is a good time to buy a house because of rising rates. The "time to buy" crowd has risen sharply. Other than family formation, limited housing inventory and new FHA loans (see post), could this be what's boosting demand for homes? The latest UMichigan results are out tomorrow, so we should know more.

Affording a home harder for average buyer - Stagnant incomes, higher home prices and climbing mortgage rates made affording a home a lot more difficult for the average homebuyer during the second quarter. Of all homes sold between April and June, 69.3% were affordable to a family earning the median income of $64,400, according to an index compiled by the National Association of Home Builders (NAHB) and Wells Fargo. That's down significantly from the first quarter, when 73.7% of homes sold were affordable and from late 2011, when affordability peaked at 78%."Housing affordability has been hovering near historic highs for the past several years, largely due to exceptionally favorable mortgage rates and low prices during the recession," But all of that is starting to change now that both home prices and rates have been on the rise. The median price of all new and existing homes sold during the second quarter was $202,000 during the second quarter, up 9.2% from $185,000 a year earlier, NAHB/Wells Fargo reported. Meanwhile, interest rates for 30-year fixed-rate mortgages averaged 3.99% over the three month period, compared with 3.68% in the second quarter of 2012. San Francisco was the least affordable metro area, where the average family could only afford 19.3% of homes, even though the median income there was a hefty $101,200. Los Angeles, Santa Ana, Calif., New York, and San Jose rounded out the top five unaffordable major cities.

“Wealth Effect” Mucks Up Housing, Costs Homeowners Dearly - Home prices have jumped around the country, in many cities over 10%, and in some over 20% on an annual basis. “Recovery of the housing market,” is what this phenomenon has been called. Everyone from President Obama on down has taken credit for it, particularly the Fed, whose handiwork this is. The nearly $3 trillion that the Fed has printed since the financial crisis had to find a place to go, and some of it went to private equity firms and hedge funds and REITs, and they’ve been gobbling up vacant single-family homes from foreclosure sales as fast as they could. And this has driven up prices. It’s part of the concept of the “wealth effect” that the Fed has been citing as one of the reasons for the waves of QE. It has worked wonderfully – assets values ballooned across the board. And it fixed the housing market. But there is a very ugly fly in this illusory ointment. Mortgage applications have been on a brutal decline that started in early May. For the week ending August 9, the Mortgage Bankers Association’s Composite Index dropped 4.7%, with the Refinance Index down 4% and the Purchase Index down 5%. It isn’t a fluke. Mortgage applications have plunged 50% from early May and have hit a level not seen since April 2011. Average interest rates for 30-year fixed-rate mortgages, at 4.56%, are nearly a full percentage point higher than in early May. These higher rates have been colliding with much higher home prices. Result: a dizzying jump in mortgage payments. Sticker shock for prospective buyers.

Vital Signs Chart: Watch Realtor Commissions for Home-Price Signals - It’s easy to overlook the producer price index report since inflation is so low and the Federal Reserve is focused on unemployment right now. But tucked within the PPI data are series covering prices for certain business services from trucking to legal advice. Jonathan Basile, director of economics at Credit Suisse, noticed that the index for prices paid to real estate agents and brokers for property sales and leases has been soaring as home prices are on the mend. Moreover, the index is a good indicator to how home prices behaved last month. That’s important because one criticism of the widely followed home price indexes is that they come out months after the fact (The latest S&P/Case-Shiller home price index covers May).  The realtor/broker PPI is up 8.2% for the year ended in July, a bit slower than the 9.1% gain in June, but it still suggests home prices increased at a healthy clip last month. Mr. Basile thinks higher mortgage rates and more sellers coming into the market will start to limit price appreciation. But that’s not a bad development, he says, “When prices rise too fast, it prices people out. “

30-Year Fixed Mortgage Rates Rise for Third Consecutive Week - Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 4.31 percent, up from 4.28 percent at this same time last week. The 30-year fixed mortgage rate hovered between 4.2 and 4.27 percent early last week before rising to the current rate this morning. “Rates remained steady for the second week in a row, alleviating some concerns that they would continue the upward surge that began early this summer,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This week, although we expect continued volatility, we expect rates will remain fairly steady until a clearer picture emerges about the strength of the U.S. economic recovery.”

MBA: Mortgage Applications decrease in Latest Weekly Survey -- From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey Mortgage applications decreased 4.7 percent from one week earlier, according to data for the week ending August 9, 2013. ... The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.60 percent from 3.66 percent, with points decreasing to 0.35 from 0.43 (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 12 of the last 14 weeks. This index is down 59% over the last 3 months. The last time the index declined this far was in late 2010 and early 2011 when mortgage increased sharply with the Ten Year Treasury rising from 2.5% to 3.5%. We've seen a similar increase over the last few months with the Ten Year Treasury yield up from 1.6% to over 2.7% today. 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 couple of months), and the 4-week average of the purchase index is up about 7% from a year ago..

US Mortgage Lending is Tumbling from naked capitalism - Yves here. We had predicted that the sharp rise in mortgage rates precipitated by the Fed’s taper talk would put a damper on the housing “recovery” and could even send it into reverse if rates continued to increase. They’ve in fact fallen over the past few weeks but are still markedly higher than in the spring. The central bank has been sending mixed signals over the last week or so, on the one hand seeming more inclined to taper based on its cheery view of the fundamentals, but concerned over what a budget slugfest might do to the confidence fairy.  MacroBusiness provides a good overview of the latest releases. It’s important to notice its comments on consumer deleveraging. That’s a decided negative for growth, particularly in combination with the ongoing effects of the sequester.  As Wolf Richter pointed outMortgage applications have been on a brutal decline that started in early May. For the week ending August 9, the Mortgage Bankers Association’s Composite Index dropped 4.7%, with the Refinance Index down 4% and the Purchase Index down 5%. It isn’t a fluke. Mortgage applications have plunged 50% from early May and have hit a level not seen since April 2011. Average interest rates for 30-year fixed-rate mortgages, at 4.56%, are nearly a full percentage point higher than in early May. These higher rates have been colliding with much higher home prices. Result: a dizzying jump in mortgage payments. Sticker shock for prospective buyers.

Bye-Bye Refi? - After wiggling around in the 1.5% to 2% range over the past year, the yield on the 10-year Treasury bond is now in the mid-twos and higher, closing at 2.7% today.  There are numerous reasons for this, including the specter of the Federal Reserve beginning to taper its asset purchases next month, a possibility that markets viewed as boosted when unemployment insurance claims hit a six-year low on Thursday. Monetary stimulus lasts not forever, the Fed should be expected to unwind, and yields should rise; the average of the 10-year since 2000 is 4%.  And while my own view is that the underwhelming US recovery still needs considerable support from monetary stimulus, in no small part because fiscal policy is pushing the other way, there are, of course, risks associated with leaving rates too low for too long.  But we must also pay attention to the risks associated with higher rates, and one that I keep an eye on these days is the interaction between mortgage rates and refis.  And as the figure below reveals, there’s been sharp, inverse movements in those series in recent weeks. For obvious reasons, they move in opposite directions as refinancing homeowners replace a higher mortgage rate with a lower one as rates come down.

Mortgage Activity Plunges 50% To April 2011 Levels - For the 12th week of the last 14, mortgage applications in the US fell this week. Despite the ongoing (though quietening) exclamation that the housing 'recovery' will continue, it is hard for even the most ardent 'believer' to still think that a rise in interest rates will have no effect on housing when mortgage actvity has collapsed by ove 50% in the last 3 months. At the lowest level since April 2011, back well below the lowest levels of the 2000s boom with home purchase and refis plunging, we suspect a few 'investors' will be rethining their theses (or finding another pillar to base their 'buys' on).

Report: Half of All Homes Are Being Purchased With Cash -   More than half of all homes sold last year and so far in 2013 have been financed without a mortgage, according to an analysis by economists at Goldman Sachs Group. The analysis estimates that around 20% of all homes sold before the housing crash were “all-cash” sales (or around 30% of sales by dollar volume). But over the past seven years, the all-cash share of sales has more than doubled, increasing by more than 30 percentage points, according to economists Hui Shan, Marty Young and Charlie Himmelberg. The Goldman study analyzed home sales figures from the Census Bureau and the National Association of Realtors and mortgage-origination data from the Mortgage Bankers Association and Lender Processing Services. The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index. There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.The Goldman analysis also estimates that around 44 cents of every $1 of homes sold currently is being financed, compared to 67 cents before the crisis.

Flipping a Home for Profit Is Back?: When I turn on the TV or read a newspaper, reporters are touting how robust the U.S. housing market has once again become. Voices on the radio "sing" a similar tune. Some are saying the "rebound" in the housing market will continue for a while. Charts of home prices rising in Phoenix, Arizona and Las Vegas, Nevada are all over the media. It seems like flipping a home for profit is back! When I look at and hear all this, I keep asking myself, "Am I missing something here? Is the housing market actually as great as we are being told?" I'm on the opposite side of the fence: when I hear about the housing market in the U.S. economy these days, it reminds me of years past. I remember going to parties and functions and all you heard was how home prices were rising ... seemed like everyone was getting either a vacation home or a second home. Back then, this prompted me to look at the fundamentals of the housing market and, as most of my long-term readers know, I turned bearish on the housing market in 2006, advising my readers to jump from real estate in 2006. Now when I look at the fundamentals, the conclusion of my analysis is different from what we are being told by the mainstream. For the housing market to improve and have sustainable growth, we need first-time home buyers to be active in the marketplace. Investors and speculators are there to profit—they'll run quickly when returns diminish. A first-time home buyer stays in the house he/she buys for the long term. We are not seeing this.In 2012, institutional investors jumped into the U.S. housing market and bought vast amounts of empty homes to rent. This created demand and caused home prices to go up—economics 101. But why aren't first-time home buyers entering the housing market? First-time home buyers are struggling to the point where they can't keep up with their own expenses; forget thinking about buying a home.

Lawler: July Existing Home Sales "up significantly" from June; Updated Table of Distressed Sales and Cash buyers = Economist Tom Lawler noted today:  While I have not seen enough local realtor/MLS reports to derive an accurate estimate of existing home sales as measured by the National Association of Realtors, the data I have seen so far strongly suggest that July existing home sales on a seasonally adjusted basis will be up significantly from June’s disappointing pace. Lawler also sent the updated 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 decline in foreclosure sales in all of these cities, except Springfield, IL .    And 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 appears to be starting to decline.  The all cash share will probably decline further as investors buying declines

Lawler: Early Look at Existing Home Sales in July

  - From housing economist Tom Lawler:  Based on local realtor association/board/MLS reports I have seen across the country, I estimate that existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of 5.33 million in July, up 4.9% from June’s disappointing pace. Local data indicate that existing home sales on an unadjusted basis almost certainly showed substantially faster YOY growth in July than in June. Some acceleration was to be expected, as there were more business days this July than last July, while there were fewer business days this June than last June. However, most regional home sales reports showed YOY growth rates well in excess of any “business-day” effects.On the inventory front, the vast bulk of realtor reports showed a monthly gain in listings. Other “listings trackers” also point to a monthly increase in the number of homes for sale. While NAR inventory estimates don’t always match reported changes in listings, I estimate that the NAR’s estimate of the inventory of existing home sales in July will be 2.26 million, up 3.2% from June and down 5.8% from last July. It is worth noting that a faster home sales pace in July does not mean that the jump in mortgage rates has had little or no effect on home sales. Existing home sales are closed sales, and many folks who settled in July locked in rates a few months ago. In addition, there is evidence that when interest rates first started moving higher – just not by a boatload – there was an increase in contracted sales reflecting home buyers’ fears of rates rising further. And, some closings may have been accelerated to beat rate-lock expirations.

While Others Sell, Landlord Blackstone Doubles Down On Rentals With Biggest Purchase In Two Years - The last time a big financial firm rushed into buying rental exposure (just as others were quietly leaving the sector in droves and when the ingenious Wall Street was coming up with such derivatives as Rent-Backed Securities to dump their exposure to dumb yield-starved Germans and Asians), it had a very unhappy ending for the buyer. That transaction of course was Lehman Brothers' rushed acquisition of landlord Archstone, which as many have noted over the years, was a big contributor to the Lehman bankruptcy once the rental payments dried up. But then again, as others have pointed out, Lehman was so deep in its real estate exposure by then it really had no choice but to keep doubling down all the way to the bitter end. Which may explain why while most other brand name hedge funds and P/E firms are now cashing out of the US housing market whose second bubble may already have peaked (only last night Goldman said that "On house prices, we have started to see the first signs of deceleration and expect a slowdown"), Blackstone, which is now the US' largest landlord, is digging in its heels and is not letting go. In fact, it is adding to its exposure - as the WSJ reported overnight, Blackstone has invested another $1 billion to purchase GE's stake in 80 apartment complexes amounting to 30,000 apartment units, located in Dallas, Atlanta and other parts of Texas and the Southeast.

Housing Starts increased in July to 896,000 SAAR - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in July were at a seasonally adjusted annual rate of 896,000. This is 5.9 percent above the revised June estimate of 846,000 and is 20.9 percent above the July 2012 rate of 741,000. Single-family housing starts in July were at a rate of 591,000; this is 2.2 percent below the revised June figure of 604,000. The July rate for units in buildings with five units or more was 290,000.  Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 943,000. This is 2.7 percent above the revised June rate of 918,000 and is 12.4 percent above the July 2012 estimate of 839,000.Single-family authorizations in July were at a rate of 613,000; this is 1.9 percent below the revised June figure of 625,000. Authorizations of units in buildings with five units or more were at a rate of 303,000 in July. The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) decreased in July (Multi-family is volatile month-to-month). Single-family starts (blue) decreased slightly to 591,000 SAAR in July (Note: June was revised up from 591 thousand to 604 thousand). The second graph shows total and single unit starts since 1968.

Housing Starts in U.S. Rise on Multifamily Properties - Builders started work on fewer single-family homes in July, marking a pause in the residential construction rebound that’s helping to propel the U.S. economy. Work began on 2.2 percent fewer individual homes last month, taking them to a 591,000 annualized rate, the least since November, Commerce Department data showed today in Washington. Total housing starts climbed to an 896,000 pace, propelled by a rebound in the multifamily category, which can be volatile.The slowdown contrasts with a surge in builder confidence, indicating firms may be limiting supply amid a shortage of lots and materials as they try to boost prices and revenue. Another report today showing consumer sentiment slumped this month signals rising interest rates may be shaking American households, making a pickup in hiring even more crucial in boosting the outlook for spending. “Things are still far better than they were a year ago, but it feels like progress has stalled out for a little while,” Building permits for single-family projects climbed to a 613,000 pace in July, the report also showed, exceeding the number of starts and signaling a possible pickup in construction in coming months.

Housing Starts, Permits Miss; Single-Family Housing Market Weakest Since November 2012 - That Housing Starts and Permits both missed expectations modestly is not a surprise: after all, NAHB hopium confidence aside, the builders have realized which way the interest-rate wind blows and grasp very well that in a rising rate environment demand for housing will go the inverse of up. Sure enough, housing starts rose from an upwardly revised 846K to 896K, missing expectations of a 900K print, while Permits rose from 918K to 943K, also missing the expected 945K print. Both misses were neglibile and largely covered by seasonal adjustments. However what really captures the dynamic behind the housing situation is the read-through into single (family) and multi-unit (investment rental properties). It is here that the divergence was most profound and tells a tale of one housing bubble which has popped, and another which is still going strong, if tapering.

Housing Expansion May Be Getting Scaled Back -- The roof is not falling in on the housing recovery, but expansion plans may need to be scaled back. Housing starts increased by a less-than-expected 5.9% in July, to an annual rate of 896,000. Strength came solely in the volatile multiunit sector. Starts of projects with 5 or more units jumped 25.5% in July–but that followed a 25.7% plunge in June. Of bigger concern to the overall economic outlook is the stutter step in single-family home construction. Those starts dropped 2.2%, to their lowest level since last November. And permits for single homes also declined last month. To be clear, the homebuilding sector is not at risk of collapsing again, thanks to the solid level of units already started plus the high level of confidence among builders. But hopes that residential construction would make a robust contribution to gross domestic product growth in the second half looks less likely. After seeing the starts data, as well as an earlier report on residential improvements, economists at J.P. Morgan Chase & Co. wrote, “It now looks very unlikely that we will be able to reach the 17% [annual rate of] growth in residential investment in 3Q we have penciled into our 2.5% real GDP forecast.” Higher mortgage rates are probably the biggest drag on the housing sector, but not the only one. Some builders report a shortage of buildable land, and potential homebuyers who expected to cash in stockholdings for downpayments may be holding off now that stock prices are dropping.

Quarterly Housing Starts by Intent compared to New Home Sales - In addition to housing starts for July, the Census Bureau also released the Q2 "Started and Completed by Purpose of Construction" report this morning. It is important to remember that we can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report released this morning showed there were 131,000 single family starts, built for sale, in Q2 2013, and that was below the 135,000 new homes sold for the same quarter, so inventory decreased a little (Using Not Seasonally Adjusted data for both starts and sales). This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

NAHB: Builder Confidence increases in August to 59, Highest in almost 8 Years - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 3 points in August to 59. Any number above 50 indicates that more builders view sales conditions as good than poor. From the NAHB: Builder Confidence Rises Three Points in August Builder confidence in the market for newly built, single-family homes rose three points to 59 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, released today. This fourth consecutive monthly gain brings the index to its highest level in nearly eight years.... Two of the HMI’s three components posted gains in August. The component gauging current sales conditions rose three points to 62, while the component gauging sales expectations in the next six months gained a single point to 68 and the component gauging traffic of prospective buyers held unchanged at 45.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the August release for the HMI and the June data for starts (July housing starts will be released tomorrow). This was above the consensus estimate of a reading of 57

The US housing recovery has not produced the economic boom some had expected - Many economists have been expecting the housing boom to provide a visible lift to the US economy. So far the results have been underwhelming. In spite of strong homebuilder optimism (see post), housing starts remain subdued. The momentum we saw in late 2012 has dissipated and last year's forecasts (for example Goldman and ISI Group) turned out to be too optimistic. The direct impact on jobs has been almost nonexistent, as the number of residential construction jobs has barely budged (still below the level it was in January of 2010).The hope of course is that in addition to the jobs created in construction, the indirect impact of the housing market improvement would provide a much needed boost to the economy. But the so-called "housing services" sector (mostly rent and utilities), which is typically 12-13% of the GDP, grew by about 0.7% over the past 4 quarters. That's roughly the growth rate of the US population. Clearly the "knock-on" effect of the housing recovery isn't there just yet - other than more people in the US resulting in more rent and utilities payments... There is another trend that is probably not helping with conversion of new home activity into the economic growth some were expecting. Multi-family units represent an increasing proportion of total housing starts.It is possible that because these units are more likely to be rentals, the "multiplier effect" of housing just isn't as strong. Homeowners (living in a single-family unit) will probably spend considerably more in house-related purchases than multi-family unit renters (or even condo owners). This combination of factors has so far resulted in a disappointing impact of the housing recovery on the US economy. Some economists are saying that the best is yet to come. Perhaps.

Why Housing “Recovery” Spurring Economic Growth Is A Lie --Last week we saw clear evidence of raging inflation in the bubble in existing home sales. But (recovery) it ain’t, in terms of the single family housing development industry. While builders have expressed that they think the market is doing just great, the truth revealed today in the Commerce Department’s new home sales data for June is that the market is only back to 2008 levels. The market was in the late stages of the housing crash then. Then we called it a crash or collapse. Today the Wall Street media establishment calls those same levels “recovery.”  That establishment seeks to hook you via its use of such propaganda terms. It is critical to look beyond Wall Street’s puffery at the actual data in ways that tell a clear story of what is really going on.Yes, the direction of housing development is up, but from a minuscule base. Historically, the level of sales activity is terrible. Contrary to the conventional Wall Street wisdom that housing is driving the “recovery,” the housing development industry’s contribution to the economy, while positive, is too small to be significant.  Maybe the economists are talking about all those realtor commissions spawned by the bubble activity in existing home sales.

Fed Says U.S. Household Debt Declined 0.7% During Second Quarter - U.S. household debt fell 0.7 percent during the second quarter as a drop in mortgage balances outpaced a rise in borrowing to finance cars and education, according to a Federal Reserve Bank of New York survey. Consumer indebtedness declined $78 billion to $11.15 trillion, according to a quarterly report on household debt and credit released today by the Fed district bank. Mortgage balances decreased $91 billion to $7.84 trillion and home-equity lines of credit fell by $12 billion to $540 billion.Rising stock prices and a rebounding housing market have bolstered household finances, boosting confidence and consumer spending. Retail sales rose 0.2 percent in July, the fourth consecutive monthly increase, Commerce Department figures showed yesterday in Washington. Americans have slashed their debt from a peak of $12.68 trillion in the third quarter of 2008, according to the New York Fed. “Although overall debt declined in the second quarter, households did increase non-housing debt, led by rising auto loan balances,” Andrew Haughwout, vice president and research economist at the district bank, said in a statement. “Furthermore, households improved their overall delinquency rates for the seventh straight quarter, an encouraging sign going forward.” Non-housing borrowing increased by 0.9 percent as car-loan balances rose by $20 billion, and student-loan and credit-card borrowing each increased by $8 billion, the report said. Auto-loan debt has grown by $108 billion in the last nine quarters, according to the New York Fed.

NY Fed: Household Debt declined in Q2 as Deleveraging Continues - From the NY Fed: Auto Loan Balances Increase for Ninth Straight Quarter, New York Fed Report Shows In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that outstanding household debt declined by $78 billion from the previous quarter, due in large part to a decline in housing-related debt. Total auto loan balances increased $20 billion from the previous quarter, the ninth consecutive quarterly increase and the largest quarter over quarter increase since 2006. ... In Q2 2013 total household indebtedness fell to $11.15 trillion; 0.7 percent lower than the previous quarter and 12 percent below the peak of $12.68 trillion in Q3 2008. Mortgages, the largest component of household debt, fell $91 billion from the first quarter. Here is the Q2 report: Household Debt and Credit Report Mortgages, the largest component of household debt, fell in the second quarter of 2013, although the fall was in part due to reporting gaps associated with the servicing transfer of a higher-than-usual number of loans. Mortgage balances shown on consumer credit reports stand at $7.84 trillion, down $91 billion from the level in the first quarter of 2013. Balances on home equity lines of credit (HELOC) dropped by $12 billion (2.2%) and now stand at $540 billion. Household non-housing debt balances increased by 0.9%, bolstered by gains of $20 billion in auto loan balances, $8 billion in student loan balances, and $8 billion in credit card balances. Here are two graphs from the report: The first graph shows aggregate consumer debt decreased in Q2. Although overall debt is decreasing, Student debt (red) is still increasing. From the NY Fed: Outstanding student loan balances increased to $994 billion as of June 30, 2013, a $8 billion uptick from the first quarter The second graph shows the percent of debt in delinquency. In general, the percent of delinquent debt is declining, but what really stands out is the percent of debt 90+ days delinquent (Yellow, orange and red).

US Consumer Bankruptcies Jump By Most In Three Years; Third-Party Collections At All Time High - Something funny happened on the road to the epic consumer balance sheet cleansing and subsequent releveraging (without which there can be no actual non-Fed sugar high fueled recovery): the second quarter. And specifically, as the Fed just disclosed in its quarterly Household Debt and Credit Report, the number of consumer bankruptcies during the second quarter, just jumped by 71K, to 380K from 309K in Q1, the biggest quarterly jump in precisely three years - on both an absolute and relative basis - and the most since the 158K jump recorded in Q2 2010. It appears that when the "releveraging" US consumer isn't busy buying stuff on credit, they are just as busy filing for bankruptcy. Healthy consumer-led recovery and all that.

Just Released: Who Is Driving the Auto Lending Recovery? - NY Fed -- This morning, the New York Fed released its Quarterly Report on Household Debt and Credit for the second quarter of 2013. It shows a $78 billion decline in overall household debt from the previous period. Delinquency rates improved considerably, with the overall ninety-plus day delinquency rate falling to 5.7 percent, the lowest it has been since mid-2008. The Quarterly Report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.  This quarter, we provide some additional analysis on auto loans, whose balances have increased as the economy has recovered. Bureau of Economic Analysis data indicate that light motor vehicle sales, which fell sharply during the Great Recession to levels that hadn’t been seen since the early 1980s, made a V-shape recovery. Data released in today’s Quarterly Report show newly originated auto loan balances, used to finance both new and used motor vehicle purchases, also declined during the recession, and have just recovered to 2008 levels, driven in part by historically low interest rates. Data from the FRBNY Consumer Credit Panel enables us to further analyze who is getting these new auto loans.

More Car Loans Than Mortgages in U.S. -- There are now more auto loans than mortgages in the U.S., but most of them are going to older Americans, according to new data from the Federal Reserve Bank of New York. Americans were holding 84 million auto loans in the second quarter of 2013, compared with 80.6 million mortgages, the New York Fed’s Household Debt and Credit Report showed. Borrowing for vehicles reached $814 billion in the second quarter, an increase of $20 billion from the previous quarter. The 2.5% jump was bigger than any other loan category in the quarter. Most auto loans go to older borrowers, with the greatest share going to people aged 30 to 49. That trend predated the recession, but the recovery has come faster for older Americans. The only group originating more loans than before the recession are people over 60, likely a result of aging Baby Boomers. But 18 to 25 year olds haven’t seen much of a recovery. Young people “are simply borrowing less frequently,” Andrew Haughwout, et al of the New York Fed wrote in a blog post. “While their average origination amount has caught up to prerecession levels, they are borrowing far less frequently for car purchases than they had in the past, still averaging under one million new loans per quarter.”

Auto Loans and Risky Borrowers - Auto lending is up, which has brought concerns about whether risky loans are driving the trend. A new analysis from the Federal Reserve Bank of New York finds new auto loans to borrowers with low credit scores have indeed risen, but are still well below the levels seen during the credit bubble years leading up to the financial crisis.. In the second quarter of this year, about 23 percent of new auto loans were issued to borrowers with credit scores under 620. Historically, the share of newly issued auto loans going to this riskier group was about 25 to 30 percent. The share of newly issued auto loans going to the borrowers with the best credit – scores over 720 – peaked at more than half during the recession. It’s about 45 percent now.

Vital Signs Chart: Tempered Credit Card Use --Despite feeling more confident about the economy, shoppers are not ready to go on spending sprees nor to pull out the credit card to make purchases. According to Steve Blitz the average consumers is charging about $174 per day through most of July. That’s up 2.4% from the pace of July 2012, “little more than inflation” says Blitz. What’s driving retail activity this summer is not credit availability, but the spring increase in home sales, says Blitz. That’s because homebuyers typically start to buy new items for a home about 6 weeks after the contract is closed. As higher mortgage rates start to slow home sales, he thinks consumer purchases of furniture, electronics and textiles could also ease down the road.

I Can't Get No Satisfaction - Following several months of 30% readings (not that 30% is anything to brag about), U.S. Satisfaction Sinks to 22% in August  U.S. satisfaction suffered a setback this month, after a two-month upswing. Twenty-two percent of Americans say they are satisfied with the direction of the country, down from 28% in July and 27% in June. Three-quarters of Americans are now dissatisfied with the nation's course, up from 68% in July.Given the decline, America's mood is now on par with the lowest readings seen since early 2012, including March of this year, when 21% were satisfied.. Democrats maintain higher satisfaction than either political independents or Republicans, a pattern seen throughout President Barack Obama's White House tenure. Nevertheless, their satisfaction fell seven percentage points this month (from 44% to 37%), consistent with the six-point drop among Republicans (from 14% to 8%), and slightly greater than the four-point drop among independents (from 25% to 21%).Gallup expressed the opinion the drop in satisfaction levels was political rather that economic. I suggest otherwise, but it's hard to say given the up and down fluctuation this year.

Retail Spending’s Growth Rate Slows In July - US retail sales increased 0.2% in July, in line with expectations, albeit a touch lower than some forecasts anticipated. Nonetheless, that’s a sluggish gain and well below June’s 0.6% rise. On the other hand, let’s not overlook the fact that retail spending advanced for the fourth month in a row through July. In fact, save for March, retail sales have increased every month this year.  But no one will confuse the latest numbers as robust growth. Indeed, July’s momentum slowed considerably. Although you can expect the usual suspects to jump on today’s release as the new new sign of the macro apocalypse (it's going to arrive one of these days, right?), stepping back and considering the broader trend suggests that a moderate rate of expansion is very much alive and kicking, or so the numbers available at this point suggest. Retail sales increased 5.4% in July vs. the year-earlier level. That’s well above the 4.7% annual average for the past year, based on the year-over-year comparison in each of the past 12 months. It’s also a sign that nothing much has changed for the primary trend in retail spending relative to recent history: Moderate growth rolls on.

Retail Sales increased 0.2% in July -- On a monthly basis, retail sales increased 0.2% from June to July (seasonally adjusted), and sales were up 5.4% from July 2012. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $424.5 billion, an increase of 0.2 percent from the previous month, and 5.4 percent above July 2012. ... The May to June 2013 percent change was revised from +0.4 percent to +0.6 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 28.1% from the bottom, and now 12.2% above the pre-recession peak (not inflation adjusted) Retail sales ex-autos increased 0.5%.  Excluding gasoline, retail sales are up 25.1% from the bottom, and now 12.6% above the pre-recession peak (not inflation adjusted). The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.5% on a YoY basis (5.4% for all retail sales). This was below the consensus forecast of 0.3% increase in retail sales, however this was above the forecast ex-autos - and the June retail sales were revised up from a 0.4% gain to a 0.6% gain.

Retail Sales Were a Bit Light, But Core Sales Were Strong - The Advance Retail Sales Report released this morning shows that sales in July came in at 0.2% month-over-month, a decline from June's 0.6% (an upward revision from 0.4%). Today's headline number came below the forecast of 0.3%. However, Core Retail Sales (which excludes Autos) were up 0.5%, a substantial improvement over last month's 0.1% (an upward revision from 0.0%). was looking for 0.4%. The first chart below is a log-scale snapshot of retail sales since the early 1990s. I've included an inset to show the trend in this indicator over the past several months.Here is the Core version, which excludes autos. Here is a year-over-year snapshot of overall series. Here we can see that, despite the upward trend since the middle of last year, the YoY series has been slowing since its peak in June of 2011. Here is the same chart excluding the volatile gasoline component. Here is an overlay of the two since 2000, which gives us a better sense of the added YoY volatility that gasoline is responsible for in the overall retail sales number

Third-quarter US retail sales on right track - US retail sales rose 0.2 percent month-on-month in July following an upward revision to June to 0.6 percent from 0.4 percent. While this was a small miss compared to expectations of 0.3 percent, focus should be on the control group retail sales*, which rose 0.5 percent - beating expectations in the process. Consumption, as related to GDP, has in other words gotten off to a solid start in the third quarter. Details: Retailers in the US saw sales grow by 0.2 percent in July, narrowly missing expectations of 0.3 percent. June was revised up to 0.6 percent from 0.4 percent. The blame for the miss can be attributed to weak auto sales, which dropped 1 percent. Removing autos, sales rose 0.5 percent vs 0.4 percent expected. June was also revised up from flat to 0.1 percent.Due to the strong end to the second quarter, the starting point in Q3 for control group retail sales - which is used in the GDP report - is strong. Put differently, because of strong sales on the second quarter and the robust increase of 0.5 percent in July, retail sales are on track for a 0.6 percent gain this quarter even if August and September are flat on average. This translates into annualised growth of 2.5 percent should this be the outcome. Private consumption rose 1.8 percent in the second quarter and judging by today's retail sales report chances are that consumption will be higher in the third quarter. This is in line with our base case for strong growth in the second half.

Modest Retail Sales Miss Means Taper On Deck, Furniture Sales Slide - While today's retail sales headline data was the second miss in a row (the "longest stretch" of misses going back to january 2012), printing at 0.2% on expectations of 0.3% (with last month's 0.4% miss revised to 0.6%), the internal data was modestly better, printing at 0.5% ex autos (exp. 0.4%), and in line ex autos and gas which came right on top of the expected 0.4% increase. So overall, a wash report, and one which doesnt tip the scales in either direction. Since this was the most important August report left ahead of September, any hopes the Fed's taper would be delayed based on this data point can now be dashed. And yet, there was some other data inside the retail sales report which showed that the real weakness for the economy, that focusing on the marginal provider of "net worth" housing may be tapering, with sales at both Furniture and Home Furnishing Store Sales and Building Material and Garden Equipment suppliers declining by -1.4% and by -0.4%, further confirming that the second housing bubble has not only peaked by but going forward will be deflating ever faster.

Retail Sales Stronger Than Headline Numbers Showed - Retail sales were sharply higher in July, contrary to media reports featuring the headline seasonally adjusted data. That data was misleading, due to the vagaries of seasonal adjustment methodology. We’ve had the discussion of the problems with seasonally adjusted data many times. The focus of this post is on the actual data, adjusted for CPI inflation, or in other words the actual unit volume of retail sales (see Note at end). On the basis of actual sales volume, this July was much stronger than July 2012, and was the strongest July gain since 2004. According to the Commerce Department’s Advance Retail Sales Report, “advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $424.5 billion, an increase of 0.2 percent (±0.5%)* from the previous month, and 5.4 percent (±0.7%) above July 2012. Total sales for the May through July 2013 period were up 5.2 percent (±0.5%) from the same period a year ago. The May to June 2013 percent change was revised from +0.4 percent (±0.5%)* to +0.6 percent (±0.2%).”The seasonal adjustment factor played havoc with the year to year comparison. On an actual, not seasonally adjusted basis, the year to year gain was 6.76%. The seasonally adjusted data understated the actual gain by 1.4%. In June, the seasonally adjusted data overstated the year to year gain by 2.0%. These mistakes momentarily mislead the market as it reacts to inaccurate data. The median forecast of economists in mainstream media surveys was for sales to be up 0.2% month to month on a seasonally adjusted basis.  For a change, the economists’ consensus was a good guess this month.  More importantly however, while they guessed what the headline number would be, the annualized gain of 2.5% grossly understated the actual year to year gain giving the market the misimpression that sales were somewhat soft when they were actually very strong.

Vital Signs Chart: Consumers Show Some Lift in Spending - The monthly 0.2% increase in July retail sales was a bit below expectations, but when looked at year-ago levels, store purchases are accelerating slightly. Consumers had to adjust to a tax hike and volatile energy prices in the first half of the year, which slowed the gain in store receipts. But more optimism about the labor markets and overall economy are making shoppers a bit more willing to open their wallets so far this summer.  Also check a new interactive look at retail sales by category:

Number of the Week: 1-in-5 Electronics Sales Are Online -- 21%: The share of electronics and appliance retail sales made online. Wal-Mart blamed its disappointing earnings in part on electronics makers’ failure to introduce new technology for consumers. But maybe more Americans are getting their toys and gadgets on the Web.  This year hasn’t been particularly kind to retailers who sell electronics and appliances. Commerce Department data show their sales are down about 0.5% since the end of 2012 through the end of the second quarter. General merchandise stores, such as Wal-Mart that sell electronics among other things, haven’t fared much better with their sales up just 0.5% over the same period.But the first half of 2013 has been much better for e-commerce. Sales of goods and services online are up 8.8% from the end of last year, according to the Commerce Department. Internet sales accounted for 5.8% of total retail sales in the second quarter. That’s up from 3.5% just five years ago, and has been moving consistently higher with only a slight slowing during the recession. Of course, sales of electronics and appliances aren’t the biggest share of online purchases. Clothing and automotive parts continue to make up a greater percentage of total sales, but technology purchases are growing. In 2011, the most recent year for which data are available, 18% of sales of electronics and appliances were arranged over the Web. If the 10-year trend continues, more than 1-in-5 electronics purchases this year will be online and it would rise as high as 1-in-3 within another 10 years.

Consumer Sentiment Dips - U.S. consumers began August feeling less positive about the economy, according to data released Friday. The Thomson-Reuters/University of Michigan preliminary August consumer sentiment index fell back to 80.0 from 85.1 at the end of July, which had been the highest reading since before the recession, and a preliminary July reading of 83.9, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires expected the early August index to edge slightly higher to 85.5. The current conditions index dropped to 91.0 from 98.6 at the end of July. The expectations index declined to 72.9 from 76.5. Inflation expectations were little changed, according to the Michigan report. The one-year inflation expectations reading for early August remained at the 3.1% reading at the end of July. Inflation expectations covering the next five to 10 years stayed at 2.8%.

Michigan Consumer Sentiment: A Disappointing Decline -  The University of Michigan Consumer Sentiment preliminary number for August came in at 80.0, down from the 85.1 July Final. Today's number is below the forecast of 85.5 and is the lowest level since April. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 6 percent below the average reading (arithmetic mean) and 5 percent above the geometric mean. The current index level is at the 34th percentile of the 428 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us 10.7 points above the average recession mindset and 7.6 points below the non-recession average. It's important to understand that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Consumer Confidence Misses Expectations By Most On Record - For the first time in 2013, UMich consumer confidence missed expectations dropping from a cyclical high 85.2 to a 'mere' 80.0. However, the miss from an expectation of 85.0 is the big news - this is the biggest miss since records began in 1999. The US Consumer (so in the news this week on the back of the retail earnings) appears have finally woken up to soaring mortgage rates, rising gas prices, and only part-time job growth. We warned this might happen - just as it has happened in the previous two cycles... Both the current and future conditions indices collapsed to their lowest in 4 months.

Shipments of Home Appliances Rise -- U.S. shipments of home appliances from manufacturers in July edged up 1.1% in July, held back by a sharp fall in room air conditioners. Reuters Wholesale shipments totaled about 4.54 million units in the four weeks ended July 27, the Association of Home Appliance Manufacturers reported Thursday. Most types of appliances showed gains from the year-earlier month but air conditioners were down 39%. For the first seven months of this year, overall shipments were up 2.7%. Shipments of the so-called Big Six appliance categories — washers, dryers, dishwashers, refrigerators, freezers and ranges and ovens — surged 10.8% in the latest month to 2.76 million units. These categories were up 8.1% in the first seven months. A recovering U.S. housing market has spurred appliance sales in recent months, but many consumers remain cautious amid high unemployment.

Vital Signs: Shelter Costs Are Keeping Service Inflation in Check - Mirroring the budget of most Americans, the biggest part of the consumer price index is the cost of putting a roof over one’s head. Shelter accounts for about 24% of the entire CPI and roughly 42% of the nonenergy service sector which is the main source of price pressures in the U.S. Housing dynamics, including tight supplies and rising home prices, were expected to support an acceleration in the main component of the shelter CPI category: owners’ equivalent rent — the price a homeowner would pay to rent his own home. That was the trend in 2011 and through early 2012. But in the past year, yearly OER inflation has held at about 2.1%. The holding pattern in OER has kept service inflation also on a tight leash. Nonenergy service prices were up 2.4% in the year ended in July, not much different from 2.5% pace in July 2012. That pace is probably within the Fed’s comfort zone, keeping a September move toward tapering on the table.

Headline Inflation Rises Driven by a Several Components - The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.96%, which the BLS rounds to 2.0%, up from 1.75% last month (rounded to 1.4%). Year-over-year Core CPI (ex Food and Energy) came in at 1.70%, up from last month's 1.64% (rounded to 1.6%). Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.  The rise in the seasonally adjusted all items index was the result of increases in a broad array of indexes including shelter, gasoline, apparel, and food. Despite the gasoline increase, the energy index rose only 0.2 percent as the natural gas and electricity indexes declined. The increase in the food index was caused by a sharp rise in the fruits and vegetables index; other food indexes were mixed. The index for all items less food and energy rose 0.2 percent in July, the third straight such increase. Along with the advances in the shelter and apparel indexes, the indexes for medical care, tobacco, and new vehicles all rose. In contrast, the indexes for household furnishings and operations, airline fares, and used cars and trucks all declined in July.  The all items index increased 2.0 percent over the last 12 months. The index for all items less food and energy has risen 1.7 percent over the last year; this compares to 1.6 percent for the 12 months ending June. The energy index has risen 4.7 percent over the last 12 months, its largest increase since the 12 months ending February 2012. The food index has risen 1.4 percent, the same figure as in May and June.  More... The consensus forecast was for a 0.2% MoM for both Headline and Core. Their YoY forecasts were spot-on at 2.0% for Headline and 1.7% for Core. The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

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

Prices for Imports From Japan Decline Sharply -- Prices for Japanese imports into the U.S. posted their largest annual decline in more than a decade, a sign that Japan’s efforts to weaken its currency and stimulate growth are influencing American inflation. Import prices from Japan declined 2.4% in July compared with a year earlier, the sharpest 12-month drop since December 2002, according to Labor Department data released Tuesday. The cost of imports from America’s fourth-largest trading partner have trended down for six consecutive months. Prices U.S. consumers pay for imported computers, cars and other consumer durable goods — all products that are made in Japan — have fallen in the past year. Japan’s government has implemented policies that caused the yen to weaken sharply since late last year. The drop makes goods and services exported from Japan become cheaper compared with global rivals.

June 2013 Business Inventories and Sales Are Mixed - Econintersect‘s analysis of final business sales data (retail plus wholesale plus manufacturing) for June 2013 is inconsistent in general with the headline data.

  • The three month rolling average of business sales again improved marginally after declining all of 2013 until the May data.
  • The inventory levels are not sending any warning signals, although high.
  • This is a record current dollar month for sales.
  • sales rate of growth decelerated an 0.7% month-over-month, and up 2.7% year-over-year
  • sales (inflation adjusted) up 0.7% year-over-year
  • sales three month rolling average compared to the rolling average 1 year ago is up 3.0% year-over-year.
  • business inventories are down 0.1% month-over-month (up 3.5% year-over-year), inventory-to-sales ratios 1.26 which is historically average for Junes.

The Billion Dollar Copper Theft Industry: For years now, the US has been plagued by an illegal industry driven by a reddish-brown industrial metal. Copper, one of the world's most popular and demanded metals, has been the subject of an underground movement that has created an incentive to steal. Thieves all across the country have been harvesting the metal in homes and highways, and other structures that are under construction; some even go as far as to steal the metal from already built establishments.  The last decade has seen copper prices spike, as the commodity supercycle helped propel a number of hard assets to new levels. Approximately 10 years ago, copper went for 80 cents a pound on the CME, that price has now jumped to $3 a pound (during a period where prices actually touched $4/pound during the height of the recession). The chart below shows the price of copper over the last 25 years.

July 2013 Producer Price Index Moderates - The Producer Price Index has moderated after two previous months of significant jumps in inflation. This index is becoming very volatile (noisy). The BLS reported that the Producer Price Index (PPI) finished goods prices year-over-year inflation rate fell from 2.5% in June to 2.1% in July 2013 – with the month-over-month growth unchanged. The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.The market had been expecting finished goods price inflation of 0.3% month-over-month. It was energy cost fall which drove the moderation this month. The manufacturing supply chain:

  • finished goods annual inflation = 2.1%
  • intermediate goods annual inflation = 0.0%
  • crude goods annual inflation = 1.2%

In the following graph, one can see the relationship between the year-over-year change in crude good index and the finish goods index. When the crude goods growth falls under finish goods – it usually drags finished goods lower. In June, crude goods year-over-year price growth is higher than finished goods.

Producer Price Index: No Change in Headline Inflation, Core Rises 0.1% - Today's release of the July Producer Price Index (PPI) for finished goods shows no change month-over-month, seasonally adjusted, in Headline inflation had posted a MoM consensus forecast of 0.3%. Core PPI rose 0.1% (which the BLS rounded up from 0.05%). was looking for a 0.2% increase in Core PPI. Year-over-year Headline PPI is at 2.12% (rounded to 2.1% by the BLS), down from last month's 2.5%, which was the highest since March 2012. In contrast, Core PPI at 1.20% is at its lowest YoY since June 2010.Here is the essence of the news release on Finished Goods: The index for finished goods was unchanged in July as a 0.1-percent rise in prices for finished goods less foods and energy was offset by a 0.2-percent decrease in the index for finished energy goods. Prices for finished consumer foods were unchanged. Finished core: The index for finished goods less foods and energy edged up 0.1 percent in July, the ninth consecutive increase. The July advance was led by prices for pharmaceutical preparations, which rose 1.0 percent. Increases in the indexes for light motor trucks and for communication and related equipment also contributed to higher finished core prices. (See table 2.) Finished energy: Prices for finished energy goods moved down 0.2 percent in July after climbing 2.9 percent a month earlier. This decline is mostly attributable to a 3.9-percent decrease in the index for residential natural gas. Lower prices for gasoline and finished lubricants also were factors in the decline in the index for finished energy goods. Finished foods: Prices for finished consumer foods were unchanged in July following a 0.2- percent advance in June. In July, a 5.6-percent increase in the index for pork offset a 10.6- percent decline in prices for fresh vegetables, except potatoes.   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increase in 2011 and then began falling in 2012. Now, as we approach mid-2013, the YoY rate is about the same as in mid-2010. The more volatile Headline number has remained in a relatively narrow range over the past 17 months.

July PPI Unchanged, Pork Surge Offset By Plunge In Vegetables Prices -- Over the past several years, alongside the increasingly more "hedonically" doctored government inflation data, the Producer Price report has slowly but surely lost its significance. Today's report was no different: according to the BLS' seasonal adjustments, July PPI data was unchanged, dropping from the 0.8% increase in June and missing expectations of a 0.3% increase. This was driven by a -0.2% drop in energy finished good prices after a surge of 2.9% and 1.3% in energy prices in June and May, with food prices unchanged on the month. Core PPI excluding food and energy was also virtually unchanged at 0.1% on expectations of a 0.2% increase. And while the tapering in PPI inflation will likely be concerning to the Fed, the reality is that the unadjusted Y/Y increase was 2.1%, or in line with where it should be. Of course, we use the term "reality" loosely: anyone who thinks prices have increased only 2% over the past year, doesn't drive, eat or rent.

Why Are Wholesale Car Prices Falling? -- Thursday’s producer price index showed that prices for passenger cars fell a seasonally adjusted 1.1% in July from June, marking the sharpest drop in four years. It was the second time in three months that wholesale vehicle prices fell. The decline in wholesale car prices is a key reason why the overall producer-price index was flat in July. The reason for the falling car prices isn’t entirely clear. But a Labor Department economist said such drops in car manufacturers’ selling prices are typical this time of year, as companies seek to get rid of vehicles from the prior model year to make way for newer ones. Car makers typically offer financial rebates and other incentives that effectively lower the selling price for purchases, the economist said. George Magliano, an analyst at IHS Automotive, said another possible factor — albeit a smaller one — is weak prices for raw materials, which cut manufacturers’ costs for producing vehicles. While car manufacturers might not be inclined to pass those savings on to their customers, it does relieve pressure on them to raise prices. “It’s a reflection of what’s happened in China and the emerging markets–the slack that’s in the global economy right now,” Mr. Magliano said of the weak raw-materials prices. Whatever the case, Thursday’s government report on consumer prices will reveal whether lower wholesale prices for cars are leading to lower prices for consumers. Car dealers may not be inclined to lower their prices with demand still strong

Weekly Gasoline Update: Biggest Price Drop in Six Weeks -  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 seven cents and Premium six, the biggest drop since my July 1 update. Regular and Premium are now 22 cents and 20 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. One state (Connecticut) is in the 3.90-4.00 range, down from two states last week.

How Washington Could Push Gas Prices Higher - Most Americans don’t realize that, when they gas up their car, up to 10% of what goes into the tank is ethanol distilled from corn. Congress required refiners to blend ethanol into gasoline in laws passed in 2005 and 2007, which were intended to spur the production of renewable fuels and reduce U.S. dependence on foreign oil.What they failed to anticipate was a grueling recession that cut into gas purchases, along with more efficient cars that simply require less gas. If the ethanol targets were defined as a percentage of the fuel supply — say, 10% — there wouldn’t be a problem. But since the targets are set in gallons, adding more ethanol to a shrinking pool of gasoline can push the ethanol content beyond a level that automakers say is safe in cars. Hitting this “blend wall” has now created a fresh standoff between supporters and opponents of ethanol, which is controversial to start with. The Environmental Protection Agency, which administers the ethanol rules, recently provided some temporary relief by scaling back the 2013 ethanol target and signaling new flexibility on the 2014 target, which hasn’t been set yet. But it’s not clear the EPA can legally change the target on its own, without Congressional approval. Some in Congress recognize the need to revise the law, but the possibility of changing the ethanol mandate has already set in motion the fierce lobbying, by parties on both sides of the issue, that often generates gridlock in Washington and makes inaction the path of least resistance.

Industrial Production Misses For 4th Month In A Row -  Industrial production was unchanged in July, missing expectation of a modest 0.3% rise (making this the 4th miss in a row). Under the surface things are not much better as Consumer goods and non-industrial supplies production both fell their most in 3 months (with only Materials production rising). Capacity Utlization also missed expectations (77.6% vs 77.9% exp.) and has seen the biggest 4 month slide since October 2012 as manufacturing production fell 0.1% on the month (the first drop in 3 months). So how's that H2 recovery shaping up?

Fed: Industrial Production unchanged in July -- From the Fed: Industrial production and Capacity Utilization Industrial production was unchanged in July after having gained 0.2 percent in June. In July, manufacturing production declined 0.1 percent. The output of mines advanced 2.1 percent, its fourth consecutive monthly increase, and the production of utilities fell 2.1 percent, its fourth consecutive monthly decrease. At 98.9 percent of its 2007 average, total industrial production in July was 1.4 percent above its year-earlier level. Capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent in July, a rate 0.3 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972-2012) average This graph shows Capacity Utilization. This series is up 10.7 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.8% is still 2.6 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.8% in December 2007.The second graph shows industrial production since 1967. Industrial production was unchanged in July at 98.9. This is 18.1% above the recession low, but still 1.9% below the pre-recession peak. The monthly change for both Industrial Production and Capacity Utilization were below expectations. The consensus was for a 0.3% increase in Industrial Production in July, and for Capacity Utilization to increase to 77.9%.

Industrial Production Flatlines for July 2013 - The July 2013 Federal Reserve's Industrial Production & Capacity Utilization report shows no change in industrial production.  Manufacturing alone declined -0.1% for the month.  Utilities dropped -2.1% and is the 4th monthly decline in a row.  The G.17 industrial production statistical release is also known as output for factories and mines.  The graph below shows industrial production index, still not recovered to pre-recession levels, going on five years and seven months. The second quarter showed Industrial production at a Q3 2012 low and this month starting off the third quarter is no better.  Industrial production does have some correlation to GDP components, but not always, so this month's no change is just more bad news for industrial production.  The below graph is the industrial production index by quarters, up to Q2 2013. Total industrial production has increased 1.4% from a year ago and is still down -1.1% from 2007 levels, that's over half a decade.  Here are the major industry groups industrial production percentage changes from a year ago.

  • Manufacturing: +1.3%
  • Mining:             +5.7%
  • Utilities:           -3.7%

Below is a graph of just the manufacturing portion of industrial production.  Durable goods decreased -0.2% for the month and has barely budged since February.  This month primary metals shot up 2.6% but could not wipe out the dramatic decrease in motor vehicles & parts output, a decline of -1.7% for the month.  Nondurable goods manufacturing flatlined, unchanged for the second month in a row.  Printing and support were the culprits with a -1.2% decline.  Food & beverages also declined -0.5% while Petroleum and coal shot up 2.0% for the month.  The decline in printing generally speaking should be a technological shift, as more and more people utilize digital media.

One bright spot from today’s report on industrial production: Oil and gas extraction increased to a record high in July - Today’s report from the Federal Reserve on Industrial Production for July was rather lackluster, see a Reuters report here. Output at US factories, mines and utilities was unchanged in July from June, and was up only 1.4% on a year-over-year basis. Overall manufacturing output in July at the nation’s factories increased only 1.3% from the same month last year, although durable manufacturing posted a year-over-year gain of 2% and motor vehicles and parts increased by 2.6%. Output at utilities fell by 3.7% from last July, while mining output increased 5.7%, and continued to be the bright spot in America’s industrial sector.Among all of the individual industrial sectors, the strongest growth in output over the last few years has consistently been recorded by the “Oil and Gas Extraction” sector, thanks to the shale oil and gas boom, and July was no different. Oil and gas extraction led America’s industrial output again with the highest monthly increase (2.8%) and the highest annual gain of 10% of any individual sector in July, bringing oil and gas extraction activity in the US to the highest level since the Federal Reserve started reporting sectoral output in 1972 (see chart above).

Philly Fed Misses Expectations; Industrial Production Unchanged; Manufacturing Declines - Bloomberg reports Manufacturing in Philadelphia Regions Expands for Third Month The Federal Reserve Bank of Philadelphia’s general economic index fell to 9.3 this month from a reading of 19.8 in July that was the highest since March 2011. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.  The median forecast of 54 economists surveyed by Bloomberg called for a reading of 15. Estimates ranged from 7 to 23.  Manufacturing in the Philadelphia regain may be up, but overall manufacturing is negative while industrial production is unchanged for July.  Industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining. The reading for output at factories, mines and utilities followed a 0.2 percent gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of 82 economists called for a 0.3 percent rise in July.  Manufacturing, which makes up 75 percent of total production, declined for the first time in three months.

Philly Fed Drops Most In 9 Months - From last month's cycle-leading 19.8 print, Philly Fed printed a disappointing (but rather preduictably cyclical drop to 9.3). The same pattern we have seen in economic data (post QEs) has happened once again for the fourth year in a row as the headline print dropped the most since November 2012. Missing expectations after such a cognitively reassuring pront last month is hard for some take we are sure but under the surface things are even worse as the average workweek sub-index turned negative, new orders dumped, and both current and futures expectations for number of employees collapsed.

Philly Fed Business Outlook: Manufacturing Activity Expanded - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity came in at 9.3, down from the previous month's 19.8. The 3-month moving average came in at 13.9, up from 9.0 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's headline number is the third month of expansion but lower than the two previous months. The 3-month MA trend is the highest since May 2011. Here is the introduction from the Business Outlook Survey released today: Manufacturing firms responding to the August Business Outlook Survey indicated that regional manufacturing activity expanded this month. The survey's broadest indicators for general activity and new orders were positive for the third consecutive month, although they fell back from higher readings last month. Responses indicated flat shipments and only slight increases in overall employment this month. The survey's indicators of future activity, although not as high as in July, continue to suggest that firms expect continued growth over the next six months. Summary The August Business Outlook Survey indicates growth in manufacturing activity this month, with most broad indicators pointing to positive growth. However, employment growth is still lackluster. Firms' responses suggest some deterioration of optimism this month, but the six-month indicators over the past two months remain well above those of the previous year.  (Full PDF Report) Today's 9.3 came in below the 15.0 forecast at The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.. The next few months will bear close watching.

LA area Port Traffic: Import Traffic Increases in July - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for June since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 2% in July, and outbound traffic down 3%, compared to the rolling 12 months ending in June. In general, inbound traffic has been increasing slightly, and outbound traffic has been declining slightly. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Small Business Optimism Ticks Up -- Feeling slightly more confident in July, a growing share of small businesses plan to create new jobs in coming months, says a report released Tuesday. The National Federation of Independent Business‘s small-business optimism index increased to 94.1 in July, up from 93.5 in June and just shy of the 12-month high of 94.4 hit in May. The index has changed little since April. The report showed mixed results in how small-business owners view the future. The expected real sales subindex increased two percentage points to 7% in July, but the expected business conditions subindex slipped two points to -6%. Despite the mixed readings, an increasing share of small-business owners are thinking about expanding their staff or facilities. The subindex covering new job creation plans increased two points to 9%, the highest share since August 2012. The net percentage of owners who say now is a good time to expand also increased two points to 9%, the best reading since January 2012. Actual hiring, however, remains weak. Comparing the gross percentage of firms hiring versus the share that are laying off workers, the NFIB said net hiring over the three months ended in July was almost zero and slightly negative.

NFIB: Small Business Optimism Index increased in July  - Earlier this morning from the National Federation of Independent Business (NFIB): Small Business Optimism Up Marginally  Small business optimism [increased] in July, with NFIB’s monthly Index increasing just over half a point (0.6) for a total reading of 94.1. ... On the positive front, while the two labor market indicators remained weak, both improved and are beginning to push into "normal" territory. ... Credit continues to be a non-issue for small employers, five percent of whom say that all their credit needs were not met in July, unchanged from June and May, and the lowest reading since February 2008. Small business hiring plans increased in the July survey to a reading of 9 from 7 in June (zero is neutral). This was the 2nd highest reading since 2008. In another small sign of good news, only 16% of owners reported weak sales as the top problem (lack of demand). This was down from 18% last month, down from 20% a year ago, and half the peak of 33% during the recession. During good times, small business owners usually complain about taxes and regulations - and those are now the top problems again. This graph shows the small business optimism index since 1986. The index increased to 94.1 in July from 93.5 in June.   This is still low, but just below the post-recession high.

Tight Inventories Might Spell Good News for Third Quarter -- Businesses were misers when it came to inventory levels last quarter. New readings on business inventories out Tuesday show companies barely added to stockpiles last quarter. That strategy was a drag on spring economic activity but should provide a small lift to growth in the second half.The Commerce Department reported all inventories held at manufacturers, wholesalers and retailers were unchanged in June, and May data were revised to show a 0.1% drop, instead of the 0.1% gain reported earlier. The monthly numbers indicate the assumptions Commerce made about the inventory sector for second-quarter gross domestic product were too robust. Commerce is scheduled to release its second look at GDP on Aug. 29. The 0.41-percentage-point contribution from inventories to GDP growth last quarter will probably be pared down by about a 10th of a point. That downward revision will partly offset the expected upward refiguring to the net exports sector. Although more data will become available in coming weeks, a sharply smaller trade deficit in June has many forecasters expecting GDP growth will be revised to 2% or better from the modest annual rate of 1.7% now on the books. Tight inventory controls mean businesses entered the second half without a worrisome overhang of merchandise and supplies on hand. If demand solidifies, companies will be more willing to stow more goods in their warehouses. Inventory building and the production involved with it will lift GDP growth. (To be sure, some of the inventory will come from overseas, subtracting from GDP.)

Productivity Advanced in Second Quarter - The productivity of U.S. workers rose in the second quarter, reflecting a faster pace of economic expansion. U.S. nonfarm productivity, defined as output per hour worked, rose at an 0.9% annual rate in April through June, the Labor Department said Friday. That was higher than economists’ forecasts of 0.6% growth. The government’s latest productivity estimates reflect the recent revisions to gross domestic product. As part of a broad review, the Commerce Department revised its estimates of output to reflect intangibles like investment in research and development. It estimated gross domestic product expanded by an 1.7% annual rate in the second quarter, after rising 1.1% in the first quarter. Still, U.S. growth rates remain subdued, largely the result of historically weak productivity. The reasons for this weakness are the object of much debate. In a report released earlier this week, economists at J.P. Morgan said U.S. productivity is settling into a new long-term trend of low productivity growth as the result of declining investments in technology and in research and development. Others, including officials at the Federal Reserve, see short-term factors at play. These economists believe that during the recession and its

Vital Signs: Productivity Growth Comes To A Halt -- Labor productivity growth skidded to a halt in the first half of 2013, according to data released Friday by the Labor Department. Compared to year ago levels, output per hour do not grow in either the first or second quarter. Nonfarm businesses satisfied the modest increases in output in the first half by adding more workers, not from greater productivity. In fact, the Labor data show output per job was down slightly in the first half compared to 2012’s same period. That could reflect the fact that new workers tend to need to trained and consequently are less productive than existing employees. The question is whether businesses now expect to satisfy the gains in demand expected in the second half by getting better productivity out of those recently hired workers. If so, then hiring could soften in coming months.

GDP, Jobs, and Growth Accounting ---The latest on productivity, from the Associated Press via USA Today:U.S. worker productivity accelerated to a still-modest 0.9% annual pace between April and June after dropping the previous quarter.The second-quarter gain...reversed a decline in the January-March quarter, when the Labor Department's revised numbers show productivity shrank at a 1.7% annual pace. Labor costs rose at a 1.4% annual pace from April through June, reversing a revised 4.2% drop the previous quarter.Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.Annual productivity growth averaged 3.2% in 2009 and 3.3% in 2010. In records dating back to 1947, it's been about 2%. Though not quite in the category of spectacular—and coming off revisions that if anything made things look weaker than previously thought—last quarter's uptick is a welcome development. Earlier this week, in a speech to the Atlanta Kiwanis club, Atlanta Fed President Dennis Lockhart laid out several scenarios with materially different implications for how the GDP and employment picture might play out over the next several years:As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms.[I] believe that the recent low growth of productivity is probably just a temporary downdraft after the rather strong productivity growth when the economy emerged from recession.

Weekly Initial Unemployment Claims at 320,000, Four Week Average Lowest since 2007 -- The DOL reports: In the week ending August 10, the advance figure for seasonally adjusted initial claims was 320,000, a decrease of 15,000 from the previous week's revised figure of 335,000. The 4-week moving average was 332,000, a decrease of 4,000 from the previous week's revised average of 336,000. The previous week was revised up from 333,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 332,000. The 4-week average is at the lowest level since November 2007 (before the recession started).  Claims were below the 330,000 consensus forecast.

Fewest Americans Since 2007 Seek Jobless Benefits = The number of Americans seeking unemployment benefits dropped 15,000 last week to a seasonally adjusted 320,000, the fewest since October 2007 — a sign of dwindling layoffs and steady if modest job growth.The Labor Department said Thursday that the less volatile four-week average fell 4,000 to 332,000, the fewest since November 2007 and the fifth straight decline. Applications, which reflect layoffs, have fallen 14 percent this year. That’s a sign that companies are cutting fewer workers. But hiring is still sluggish, resulting in only modest net job gains. Employers have added an average of 192,000 jobs a month this year. The unemployment rate has declined to 7.4 percent, a 4½ year low. That’s still well above the 5 percent to 6 percent range associated with a normal economy. At the depth of the recession in March 2009, applications for unemployment benefits numbered 670,000. They have fallen steadily ever since.

Initial Unemployment Insurance Claims Goes to Pre-Recession Levels-- The DOL reported people filing for initial unemployment insurance benefits in the week ending on July 13th, 2013 was 320,000, a 15,000 decrease from the previous week of 335,000.  This is the second time in three weeks initial claims has hit pre-recession levels and the last time levels were this low is October 2007. The more important statistic is the four week moving average on initial unemployment claims.  The four week moving average decreased 4,000 to 336,000.   In the below graph we can the four week moving average is now at pre-recession November 2007 levels.  If anyone recalls, even before the Great Recession the job market was not so hot, yet this is finally, a positive sign, going on five years and eight months.  The four week moving average is graphed below from January, 2007. Below is the mathematical log of initial weekly unemployment claims.  A log helps remove some statistical noise, it's kind of an averaging and gives a better sense of a pattern.  As we can see, we have a step rise during the height of the recession, but then a leveling, then a very slow decline, or fat tail.  That fat tail has taken over six years to return to early recession levels, so the time it has taken to drop might still be a concern.   There are a lot of people out there who are not counted in labor force statistics who need a job. 

Five Reasons Congress Should Be Deeply Ashamed About Jobs -- Congress' unwavering support of big business donors shows a callous disregard for the needs of the millions of Americans they're supposed to be representing. Here are five of the paralyzing consequences.

  • 1. They've stifled the growth of millions of young adults. In the U.S., more than half of college graduates were jobless or underemployed in 2011. Over the last 12 years, according to a New York Times report, the United States has gone from having the highest share of employed 25- to 34-year-olds among large, wealthy economies to having among the lowest.
  • 2. They've mocked the concept of a "living wage." At the very least, one would think, workers should be able to sustain their lifestyles over the years, to keep from falling backward in earnings. But they've lost 30 percent of their purchasing power since 1968.  It has been estimated that a minimum wage tied to productivity should now be $16.54 per hour, but the current $7.25 is less than half of that, and below poverty level. It's been getting worse in the last five years.
  • 3. They've allowed nearly half of America to go into debt. Our young adults are not only underemployed, but the college graduates among them are dealing with an average of $26,600 in debt, which translates, according to Demos, into $100,000 of lifetime wealth loss. Total student debt has quadrupled in just 10 years.
  • 4. They've persisted with the trickle-down "job creator" myth. The "low tax = job creation" argument is absurd. Congress need only look at four of its pet projects: Bank of America, Citigroup, Pfizer, and Apple. Each of the first three made much of their revenue in the U.S. over the last two years, but claimed billions of dollars of U.S. losses (big foreign gains, though). Yet with almost zero U.S. taxes among them, all three companies are among the top 10 job cutters.
  • 5. They've aligned against the one area that would ensure jobs and a safer future.A study at the University of Massachusetts concluded that at least 1.7 million jobs could be generated by a commitment to clean energy, about three times as many as in the fossil fuel industry. Half of them would be labor-intensive jobs requiring at most a high school education. And all these new employees would help to reduce their own home heating costs. A recent report by a Kansas energy group, which analyzed data from 19 wind projects, concluded that wind energy generation "is equivalent to, or in some cases significantly cheaper than, new natural gas peaking generation."

With So Many Job Openings, Why So Little Hiring? -- An odd puzzle is taking shape in the labor market: Over the past three years, the number of job openings has risen almost 50 percent, but actual hiring has gone up by less than 5 percent. Companies are advertising a lot more jobs, in other words, but not filling them.  To get some sense of how significant this is, consider that if, since June 2010, hiring had risen a third as much as advertised jobs have (rather than only a 10th), and nothing else were different, job creation would be roughly 500,000 higher each month, and the unemployment rate would already be back to normal levels.  One possibility is that there is a mismatch between the work that companies need done and the skills that workers have. Such a structural mismatch may well explain part of the gap, yet it seems unlikely that it explains most of it. After all, job openings in the retail trade have doubled over the past three years, while hiring has been flat. Is it plausible that we lack qualified workers for these jobs?   A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. Alan Krueger, a labor economist at Princeton University who recently stepped down as chairman of President Barack Obama’s Council of Economic Advisers, believes this to be an important piece of the puzzle. He argues that the unemployment rate for those just recently out of work has now returned to roughly pre-crisis levels, and that people who have been out of the labor force for an extended period are exerting little downward pressure on wage rates. This combination means that, although the long-term unemployed still face a tough road ahead because they are essentially on the margins of the labor market, pressure is growing for higher wages for everyone else.

Smart Policies Can Restore a Thriving Middle Class: When I was younger, I lived in an agricultural area in Northern California where one of the crops grown widely was tomatoes. They are harvested mechanically, and in my early years the tomato farmers hired a lot of people to prepare the tomatoes for market. But the harvester manufacturers began installing electric eyes on the harvesters to sort the tomatoes.  The electric eyes displaced quite a few sorting jobs across all the fields and all the harvesters, and I can remember wondering what will happen to all those people? Where will they go and how will they support their families? The answer, of course is that the labor freed up through technological change is supposed to find its way into other industries and increase the overall production of goods and services. We can produce more goods and services with the same amount of labor as before, and that should allow growth that makes us all better off. But does it make us all better off? I had always imagined that technology would free us from the drabbest, most repetitive, unproductive, lowest paying, and least valuable jobs. Workers who had previously stood all day in the hot sun sorting tomatoes would be freed to, perhaps, work on the production line of the electric eyes that replaced them. The new work would be more productive and valuable than before, and hence the workers would be paid better. They would be better off.

More on Job Growth Quality - Lately there has been an amazing amount of pixels spent on describing the quality and pay of the job growth. Most recently both the Wall Street Journal and the Federal Reserve Bank of Atlanta compare industry sectors by average pay and lament the fact that most of the jobs are in lower-paid industries. I want to push back on these conclusions a little bit and also expand upon them. In short, yes, the U.S. economy is adding a large number of low-paying jobs, however we are also seeing relatively strong growth at the top end of the employment scale as well. We are missing the growth in jobs at the middle of the income distribution. If this all sounds familiar, it is. This is the continuation of the job polarization process analyzed, described and researched extensively by MIT’s David Autor. I am borrowing from his work (along with Acemoglu), the great work the Federal Reserve Bank of New York has done and also Jaimovich and Siu. I have a forthcoming research paper on job polarization in Oregon and will presenting on the subject at Tim Duy’s Oregon Economic Forum in October. What follows is a very brief overview of some of these trends at the national level.

Once Again, American Manufacturing Suffers from Lots of Things, but Excess Blue-Collar Pay Isn’t One of Them - In a NYT column today titled “What Really Ails Detroit,” Stephen Richter repeats a common story much beloved by serious-sounding pundits who don’t know much economics: that the thirty year run of broadly-shared growth after World War II was only possible because of “the absence…of any real competition from other nations,” and that American workers’ troubles since then are their own fault for not getting smart enough to compete on the global stage. He asserts that even as this international competition increased, “companies like General Motors continued to shower blue-collar workers with handsome pay and benefits,” hobbling their ability to compete, even as they refused to upskill sufficiently to compete in the global economy.This narrative is really common—common enough to see if it holds up to any serious data scrutiny. Start with claims that excessive blue-collar pay destroyed manufacturing.  For a paper examining those claims, check this out (pdf). Spoiler alert: it’s not. Inflation-adjusted hourly wages for production workers in U.S. manufacturing peaked in 1978 and were about 8 percent lower in 2007, while manufacturing productivity rose by well over 100 percent in that period. More generally, one really shouldn’t be allowed to just hand-wave about “global competition” as an inevitable destroyer of American living standards without mobilizing some evidence that you understand either what determines these living standards or the economic mechanisms through which globalization affects them.

Report: 97 percent of new US jobs are part-time -  - US employers added 162,000 nonfarm jobs in July according to the government’s Establishment Data Survey, an anemic number considerably below predictions. However, a closer look reveals another serious problem.“Over the last six months, of the net job creation, 97 percent of that is part-time work,” said Keith Hall, a senior researcher at George Mason University’s Mercatus Center quoted by McClatchy Washington Bureau. Hall was head of the US Bureau of Labor (BLS) Statistics from 2008 to 2012.Citing the BLS Household Survey, Hall said that over the past six months 963,000 more people reported that they were employed while 936,000 of them reported they were in part-time jobs. Hall continued, “That is a really high number for a six-month period. I am not sure that has ever happened over six months before.”In an interview last month on Fox’s “Your World,” Hall argued that the real unemployment rate was significantly higher than the official number, at least 3 percentage points more. While 11.2 million people are now considered officially unemployed, Hall said a more realistic number was around 18 million. He prefers to use the employment ratio, which shows the proportion of the population that has a job. That number fell from 63 percent before the recession started in December 2007 to 59.4 percent when the recession officially ended in June 2009. Since that time it has fallen even further, to just 58.7 percent.

Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That? - Inquiring minds are digging into average weekly hours of workers looking for Obamacare effects on which to place blame.Since this data series began in 1964, the average weekly workweek has been trending lower. Note the tendency following each recession. 1990-1998 is the only exception to the general rule that hours never recovered to the previous pre-recession level. Last Five Observations •2013-07: 33.6 Hours •2013-06: 33.7 Hours •2013-05: 33.7 Hours •2013-04: 33.7 Hours •2013-03: 33.8.  Hours Lets' zero in to a tighter timeline for a closer look.The second chart shows that in spite of Obamacare, average weekly hours has been bouncing between 33.6 and 33.8 for quite some time. Several readers emailed such data is proof that Obamacare is not having the effect that I have repeated stated that it has. They are wrong. Just because hours have stabilized does not mean there is no Obamacare effect. It simply means some industries have not been impacted as much as others. You just have to know where to look.

No, Walmart doesn’t create jobs - Because it’s a such a slow news day, and because the DC big box living wage bill is still in the news, I thought I’d write about the Walmart piece I published in earlier this week. One of the most compelling-seeming arguments that the pro-Walmart forces have been making is that DC should reject the bill and welcome Walmart into the community, because Walmart would create many much-needed jobs. So I decided to look at what the research says about Walmart’s impact on employment. Guess what? Contrary to the happy talk, Walmart does not create jobs. Actually, it kills them.  Here’s why: first, at the local level, all Walmart does is put mom-and-pop stores out of business. The overwhelming body of evidence, including the most rigorous peer-reviewed studies, suggest that when Walmart enters a community, the result is a net loss of jobs, or at best, that it’s a wash. In fact, the biggest, best scholarly study about the impact of Walmart on local employment was done by an economist at University of California at Irvine named David Neumark, who is not exactly a wild-eyed liberal. He’s the kind of economist, actually, who writes anti-minimum wage op-eds for the Wall Street Journal.

Fast Food Wage War: Thousands of Protests Coming This Year, Says Movement Leader - After making their case for the first time last November and then again in March, the so-called Fast Food Forward movement has just wrapped a third round of walkouts in seven cities. So far, they have little to show for their efforts, other than a slew of press clippings, but movement organizers say they'll be back at it again in a couple of months. "It has now spread all over the country and thousands of workers [are] taking action," says community organizer Jonathan Westin, who spearheads the protests in New York City. "I would venture to say there will be thousands more later on this year. The movement is picking up." With the undisclosed backing of SEIU (Service Employees International Union) — the nation's self-proclaimed fastest growing union, with over 2.1 million members — there's little doubt that there will be a fourth effort to get to $15 an hour, and probably a fifth and sixth attempt too, as Fast Food Forward pushes for better wages and benefits, as well as the right to organize.

Fast food strikes to massively expand: “They’re thinking much bigger” - Fast food strikers will escalate their campaign within the next week and a half, according to the key union backing their recent walkouts. In a Monday interview in her Washington, D.C., office, Service Employees International Union president Mary Kay Henry told Salon that SEIU members “see the fast food workers as standing up for all of us. Because the conditions are exactly the same.”  “I think they’re thinking much bigger, and while the iron’s hot they ought to strike. No pun intended.” As Salon has reported, SEIU has been the key player behind the past year’s wave of fast food strikes, which began with a surprise walkout in New York City last November, spread this year to cities in the Midwest and West Coast, and escalated last month with strikes in seven cities over four days — by far the largest mobilization of fast food workers in the history of the United States. In each city, workers are demanding a raise to $15 an hour and the chance to unionize without intimidation. With fast food jobs becoming increasingly prevalent in — and representative of — the U.S. economy, and embattled unions exploring and experimenting with tactics like those the fast food workers have taken up, their showdown has far-reaching consequences. SEIU, one of the largest U.S. unions, has devoted millions of dollars and dozens of staff to the campaign, which is also supported by a range of local and national progressive groups. In contrast to some past union efforts, said Henry, “It’s more about, ‘How do we shift things in the entire low-wage economy?’”

The Many, Many Jobs That Won't Earn You Enough to Live in Your City - Fair-market rent for the average two-bedroom apartment in the San Francisco metropolitan area will run you about $1,795 a month (that's for the metro area, not the city proper; the latter number is even more absurd). That makes San Francisco the second most expensive rental metro in the country, behind Honolulu. And the number has two major implications: Increasingly, only certain occupations can afford to live in the region. Meanwhile, all kinds of workers any city needs – bank tellers, parking lot attendants, fire fighters – cannot.So what happens when a city becomes unaffordable to the people who keep it running?Full-time fast-food workers famously have a hard time getting by wherever they live. But the same is true in many metropolitan areas for decidedly less-maligned jobs like child-care worker, home health aid... and urban planner. Details from the depressing intersection of high housing costs and low wage growth come from an updated database by the Center for Housing Policy that runs the numbers on 76 occupations in 207 metro areas. A full-time income for a housekeeper or a waitress with intermediate-level experience won't cover fair-market rent for a two-bedroom in any one of these metro areas (should said housekeeper or waitress be, say, a single mom). Drill in to a metro like San Francisco, and all kinds of occupations won't even cover a one-bedroom:

Inequality hinders economic growth - Everyone has heard that tackling poverty and inequality is bad for the economy. This is the dilemma that economist Arthur Okun, writing in the 1970s, called "The Big Trade-Off" — equality and efficiency are at odds. Yet more and more research and real-world experience suggest just the opposite. If there is a "Big Trade-Off," it is not between equality and efficiency. It is between policies that enrich the most fortunate and a broader distribution of opportunity that helps all Americans.The notion of a Big Trade-Off between equality and growth has been a mostly silent but sometimes explicit assumption of Washington policymakers. Today, for example, many argue we don't have the capacity to reduce economic divisions. Instead, we need to immediately slash public spending. Since the 1970s, political leaders have drastically cut tax rates on the wealthiest and deregulated large swaths of the economy, especially finance, in the name of faster growth. Okun was right on one front: Cutting taxes and deregulating finance do increase inequality. During the expansion of the 2000s, for example, more than half of all household income gains after taxes and benefits accrued to the richest 1 percent of Americans. Today, the U.S. has greater levels of inequality than any peer nation.

An Important Picture Re the Inequality and Growth Debate - This one’s pretty weedy but worth it for those of us interested in the important question of whether our high levels of income inequality are affecting macroeconomic growth.  I laid out the basic issues in this earlier post and elaborate on them in a forthcoming piece from CAP, but the part I want to get into in this post relates to inequality and consumer spending. One hypothesis you hear a lot—and it’s one with legit theoretical grounding—is that as more growth and income is concentrate at the top of the scale, consumer spending should slow because high income households have lower consumption propensities (they’re more like to save than spend the marginal dollar) than lower income households. But you don’t see that in the macrodata on consumer spending.  Take, as an instructive example, the 2000s, when inequality was growing, middle-class incomes were stagnant, yet consumer spending generally held up well.  In fact, there was an intervening variable in play: quickly—and bubbly—appreciating housing wealth.  I was reminded of this dynamic this morning while gazing upon the figure below from a GS research note, showing the contribution to real GDP from housing, decomposed into the investment part, the wealth effect, and MEWs (mortgage equity withdrawals).In the figure, the wealth effect—the extra spending you do when your assets appreciate, even if you don’t realize the gains—is scored at four cents on the dollar.  That implies that if your home value goes up $50,000—no great shakes at all in the bubble years—you’ll spend an extra $2,000.  And, sorry to say, visa versa, as the figure clearly reveals.

Why Is Inequality So Much Higher in the U.S. Than in France? -  The rich aren't just different from you and me. They're different from the rich in other countries too -- they have more money as a share of the economy. Now, all societies are unequal, but some are more unequal than others. The question is why the U.S. has become more so than just about any other rich country the past 30 years. After all, if rising inequality is mostly about universal factors like technology and globalization, we would expect the rise of inequality to be, well, universal. It hasn't. As you can see in the chart below from a new paper by Facundo Alvaredo, Anthony Atkinson, Thomas Picketty, and Emmanuel Saez (AAPS), the top 1 percent have risen and risen in the U.S., but have only just risen, if that, most everywhere else. How's that for exceptionalism?  This chart is a little tricky, so take another look. It compares the change in the top 1 percent's share of pre-tax income with the change in top marginal tax rates across the developed world the past half-century. And it sure looks like there's some kind of relationship here. The more taxes fell on the rich, the more the rich made before taxes. And it's not clear why. It could be that the rich work more when they get to keep more of what they earn. Or it could be that they negotiate for more. Or that lower taxes mean less tax avoidance.

'Why We Might Care About Inequality' -- Tim Harford:... I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But ... the two reasons are not actually distinct... The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them. At the very top of the scale, plutocrats can shape the conversation by buying up newspapers and television channels or funding political campaigns. The merely prosperous scramble desperately to get their children into the right neighbourhood, nursery, school, university and internship – we know how big the gap has grown between winners and also-rans. ... This is what sticks in the throat about the rise in inequality: the knowledge that the more unequal our societies become, the more we all become prisoners of that inequality. The well-off feel that they must strain to prevent their children from slipping down the income ladder. The poor see the best schools, colleges, even art clubs and ballet classes, disappearing behind a wall of fees or unaffordable housing.

U.S. budget cuts hitting long-term unemployed hard - Kennedy, 57, had her $380 weekly unemployment check cut by $85 at the end of June. Just when she was coming to terms with the blow, she learned her benefits would end altogether in three weeks, more than two months earlier than she had anticipated. She is among the 4.3 million in the United States who are officially counted as being unemployed for more than six months. According to the U.S. Labor Department, only 37 percent of that group received benefits in July compared with a peak of 93 percent in February 2010 when there were 6.2 million long-term unemployed. The economy's slow recovery and federal and state cuts to unemployment insurance programs have slashed the numbers receiving benefits. "For people that are on their own, like me, a cut like this is devastating," said Kennedy, who lost her job as a mental health center administrator, and a $32,000 salary with it, more than a year ago. "I have very little emergency money left." Thousands of miles away in Las Vegas, John Payne is also reeling from benefit cuts, which reduced his weekly check by a third to about $250. The 55-year-old commercial glass installer has not had regular work since late 2009.

Municipal Workers in Bankrupt Cities Facing Financial Nightmare - Yves Smith -  Georgetown law school professor and bankruptcy expert Adam Levitin in a must read article in Salon parses how municipal workers, who on paper should actually be well protected in the event of a municipal bankruptcy, are likely to be butchered.  As much as it has become fashionable to pin the blame for municipal bankruptcies on municipal workers, Levitin reminds us that the collapse in tax revenues was the result of the financial crisis. The weaker municipalities may still have gone critical, but less catastrophically. As he points out: Municipal finance problems are not due only to pensions. The collapse of the housing bubble seriously damaged many cities’ finances. Property tax and income tax revenue suffered, while municipalities were saddled with increased costs of tending to abandoned properties. While the banks that fueled the housing bubble got bailed out, local governments had to bear the costs of the crisis on their own. Now, with cities in their weakened state, the fair-weather pension promises that cities made to their employees are coming home to roost. It seems that unlike banks, cities will not get bailed out. The banks came first in the bailouts, and again they will come first in the bankruptcies.

The Wrong Lesson From Detroit’s Bankruptcy - Joe Stiglitz - When I was growing up in Gary, Ind., nearly a quarter of American workers were employed in the manufacturing sector. There were plenty of jobs at the time that paid well enough for a single breadwinner, working one job, to fulfill the American dream for his family of four. He could earn a living on the sweat of his brow, afford to send his children to college and even see them rise to the professional class. Cities like Detroit and Gary thrived on that industry, not just in terms of the wealth that it produced but also in terms of strong communities, healthy tax bases and good infrastructure. Today, fewer than 8 percent of American workers are employed in manufacturing, and many Rust Belt cities are skeletons. The distressing facts about Detroit are by now almost a cliché: 40 percent of streetlights were not working this spring, tens of thousands of buildings are abandoned, schools have closed and the population declined 25 percent in the last decade alone. The violent crime rate last year was the highest of any big city. In 1950, when Detroit’s population was 1.85 million, there were 296,000 manufacturing jobs in the city; as of 2011, with a population of just over 700,000, there were fewer than 27,000. So much is packed into the dramatic event of Detroit’s fall — the largest municipal bankruptcy in American history — that it’s worth taking a pause to see what it says about our changing economy and society, and what it portends for our future.

We Are All Detroit - In principle, a bankruptcy proceeding is a system for fairly allocating claims when a debtor can't service all of its debts. The Michigan state constitution guarantees that Detroit pensioners will be paid what they are owed. Even Michigan's Republican attorney general, Bill Schuette, agrees that the constitutional protection is binding. But the most recent changes (2005) in the federal bankruptcy law, lobbied for by Wall Street, put bankers in line ahead of pensioners. As attorney, author and debt expert Ellen Brown explains, this special-interest provision gives credit default swaps held by banks priority over other forms of debt. So banks that speculated in Detroit's debt stand to get paid ahead of ordinary bondholders and pensioners. As Brown writes: 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. The average pension owed to Detroit municipal workers, incidentally, is just $1,900 a month, and only 4 percent of Detroit's general revenues go to pensions. According to AFSCME President Lee Saunders, Detroit's non-uniformed public workers have already had pensions cut by 40 percent.

Parents Losing Jobs a Hidden Cost to Head Start Cuts -  A U.S. preschool program for low-income families allowed single mother Kelly Burford to take a $7.25-an-hour job as a department store clerk in Maryland. Her son, Bradyn, 2, spent the day with friends listening to stories, singing and drawing pictures -- at no cost to Burford. That ended in June, when Bradyn’s school in Taneytown, seventy miles north of Washington, closed after losing $103,000 because of automatic government spending cuts. Without support from the federal Head Start program, Burford, 35, said she had to quit her job and has seen her son’s progress slip. While President Barack Obama advocates expanded education for all children under five, the budget deal he cut with Republicans in Congress is throwing poor children out of existing programs. The across-the-board reductions, made through a process known as sequestration, removed about $400 million from Head Start this year, the deepest cut in dollar terms since its 1965 creation. As a result, about 60,000 slots in the preschool program for poor children are expected to disappear, according to the National Head Start Association, an Alexandria, Virginia-based nonprofit that advocates more funding for the program. The cuts must take place by the Sept. 30 end of the U.S. fiscal year.

Governor: Pontiac Schools In Financial Emergency - Gov. Rick Snyder confirmed Wednesday that Pontiac’s public schools are in a financial emergency, leaving district officials seven days to choose one of four government options to correct the problems. The options include accepting a consent agreement with the state, appointment of an emergency manager, a neutral evaluation process or a Chapter 9 bankruptcy filing.“We need to make sure that Pontiac School District can open its doors and be ready for students,” Snyder said in a release. “Our goal here is to set a course that restores financial stability in the district so Pontiac students can get the education they need. I’m looking forward to working with district leaders to determine that path.” Snyder received a report earlier this month from an independent, six-member team that reviewed the district’s finances. He determined Aug. 6 that a financial emergency existed in the district that serves more than 5,500 students. That was confirmed Wednesday.

Philadelphia Schools Should Remain Closed Until Fully Funded, Some Parents Say - Philadelphia's Superintendent William Hite said Thursday if he doesn't get an additional $50 million by Aug. 16, the city's beleaguered 218 public schools will be unable to open their doors on schedule on Sept. 9. At the time, Hite said, $50 million would be "not sufficient, but necessary" for starting the school year. His comments were the culmination of massive layoffs, state budget cuts, financial mismanagement and pension liabilities. Sources say Hite is meeting with Gov. Tom Corbett (R) Monday evening in Harrisburg to hash out a resolution. (Corbett spokesman Tim Eller said later in an email he could not confirm the meeting). "I am in the unfortunate position today of having to announce that if we do not receive at least $50 million by Friday, August 16, the School District of Philadelphia will be forced to consider alternatives to starting the 2013-14 school year on Monday, September 9," Hite said in a statement. "This means that we may not be able to open any schools on September 9, that we may only be able to open a few, or that we might be open for a half-day. We will not be able to open all 218 schools for a full-day program."  The announcement came after blistering layoffs of 3,800 employees in June and the closure of over 20 schools. "Without the funds to restore crucial staff members, we cannot open functional schools, run them responsibly or provide a quality education to students," he said. The $50 million, he said, would enable him to bring 1,000 of those workers back.

Philadelphia Borrows So Its Schools Open on Time - Just a month after Detroit became the largest American city to file for bankruptcy, and with major cities like Chicago and Los Angeles struggling, this former manufacturing behemoth is also edging toward a financial precipice. But here the troubles are centered on the cash-starved public schools system.The situation is not as dire yet as Detroit’s. There is no talk of resorting to bankruptcy. But the problem is so severe that the city agreed at the last minute on Thursday to borrow $50 million just to be able to open schools on time. Even with that money, schools will open Sept. 9 with a minimum of staffing and sharply curtailed extracurricular activities and other programs. “The concept is just jaw-dropping,” said Helen Gym, who has three children in the city’s public schools. “Nobody is talking about what it takes to get a child educated. It’s just about what the lowest number is needed to get the bare minimum. That’s what we’re talking about here: the deliberate starvation of one of the nation’s biggest school districts.” Superintendent William R. Hite Jr. had been threatening to delay opening schools if the city did not come through with the $50 million, which he said was necessary to provide the minimum staffing needed for the basic safety of the district’s 136,000 students. In June, the district closed 24 schools and laid off 3,783 employees, including 127 assistant principals, 646 teachers and more than 1,200 aides, leaving no one even to answer phones.

“Chicago issues RFP for more charter schools” - As my Chicago friend Mike points out in Facebook, the City has just issued RFPs for additional Charter Schools. This comes after Chicago Public Schools closed 50 schools throughout the city causing students to travel farther and over crowding other schools. The Chicago Teachers Union sees it as a union busting tactic and predicted it as such as Charter School teachers can not be represented by the union (CTU). “Without fanfare, the district posted an official ‘request for proposals’ to its website Monday that invites charter schools to apply to open shop in what the school district has identified as priority neighborhoods—large swaths of the Southwest and Northwest sides.Those heavily Latino areas have struggled with overcrowded schools. The district wants what it’s calling ‘next generation’ charter schools, which could combine online and traditional teaching. It also wants proposals for arts integration charter schools and dual language charters. The Chicago Teachers Union and others have argued for years that school closures are about making way for charters and weakening the union.

When Schools Become Dead Zones of the Imagination: A Critical Pedagogy Manifesto - If the right-wing billionaires and apostles of corporate power have their way, public schools will become “dead zones of the imagination,” reduced to anti-public spaces that wage an assault on critical thinking, civic literacy and historical memory.1 Since the 1980s, schools have increasingly become testing hubs that de-skill teachers and disempower students. They have also been refigured as punishment centers where low-income and poor minority youth are harshly disciplined under zero tolerance policies in ways that often result in their being arrested and charged with crimes that, on the surface, are as trivial as the punishment is harsh. 2 Under casino capitalism’s push to privatize education, public schools have been closed in cities such as, Philadelphia, Chicago and New York to make way for charter schools. Teacher unions have been attacked, public employees denigrated and teachers reduced to technicians working under deplorable and mind-numbing conditions. 3 Corporate school reform is not simply obsessed with measurements that degrade any viable understanding of the connection between schooling and educating critically engaged citizens. The reform movement is also determined to underfund and disinvest resources for public schooling so that public education can be completely divorced from any democratic notion of governance, teaching and learning. In the eyes of billionaire un-reformers and titans of finance such as Bill Gates, Rupert Murdoch, the Walton family and Michael Bloomberg, public schools should be transformed, when not privatized, into adjuncts of shopping centers and prisons. 4

Ripping Off Young America: The College-Loan Scandal - Taibbi - Flash-forward through a few months of brinkmanship and name-calling, and not only is nobody talking about the IRS anymore, but the Republicans and Democrats are snuggled in bed together on the student-loan thing, having hatched a quick-fix plan on July 31st to peg interest rates to Treasury rates, ensuring the rate for undergrads would only rise to 3.86 percent for the coming year. Though this was just the thinnest of temporary solutions – Congressional Budget Office projections predicted interest rates on undergraduate loans under the new plan would still rise as high as 7.25 percent within five years, while graduate loans could reach an even more ridiculous 8.8 percent – the jobholders on Capitol Hill couldn't stop congratulating themselves for their "rare" "feat" of bipartisan cooperation. "This proves Washington can work," clucked House Republican Luke Messer of Indiana, in a typically autoerotic assessment of the work done by Beltway pols like himself who were now freed up for their August vacations. Not only had the president succeeded in moving the goal posts on his spring scandals, he'd teamed up with the Republicans to perpetuate a long-standing deception about the education issue: that the student-loan controversy is now entirely about interest rates and/or access to school loans.

Record Student Loan Debt Crushes American Enterpreneurial Spirit -- Freshly-minuted MBAs "are willing to sleep on a couch for a year or two, but they can't do it with the burden of student loans," is how on senior lecturer describes the entrepreneurial-spirit-sucking debt loads that college-leavers face in the new normal. Faced with mounting monthly payments, the WSJ reports that would-be-Bezos have little choice but to look for the steady paychecks that accompany a regular job. Recent surveys find that "the single largest inhibitor to entrepreneurship is the student loan" burden and it seems states are beginning to realize this growth-inhibiting reality. In order to tamp down ambition-busters such as "I would be a serial entrepreneur if it weren't for my student loans," California (and Rhode Island) are enacting legislation to reduce college costs and looking at the feasibility of temporary forbearance. While some see their student-loans as a motivator, it seems many more are forced down a different path due to the "real responsibilities."

Forget Student Loans…Introducing Day Care Loans - Now that enough college age Americans have been stuffed with over a trillion dollars in student debt only to get a job a McDonalds and live with their parents, folks in New York City have come up with a brilliant new concept to ensure the production of an entirely new generation of debt slaves. Introducing day care loans…and here’s the best part, they are “interest only” from childcare to kindergarden!  Of course it makes sense that these loans would originate in my hometown of NYC, which has in the past 15-20 years fully transformed itself into a corporatized, generic and unaffordable Wall Street whorehouse. From CBS: (CBSNewYork) — After housing, child care is one of the largest expenses for families in New York City.But now, there is an option for parents to get their kids into some of the city’s top pre-kindergarten programs with loans just for day care.As CBS 2’s Janelle Burrell reported Monday, tuition without room and board for undergrads at Harvard University is $38,891 for the 2013-2014 school year. For Princeton University, it is $40,170.  Pre-school in Manhattan is not far behind, with some elite day care costing families more than $35,000.The pilot program is the first of its kind in the country, offering a 6 percent interest rate to borrow up to $11,000 for families with kids between 2 and 4 years old.

A New Look at State and Local Pension Liabilities - What if state and local government deficits doubled over night and nobody noticed? That’s what happened last Wednesday when the Bureau of Economic Analysis released its comprehensive revision of the National Income and Product Accounts. As my TPC colleague Donald Marron noted, the new BEA numbers downsized the federal government relative to GDP.  They assigned economic value to intellectual property (such as a TV show about nothing).  The numbers also brought about some soul searching on what GDP should be measuring. But few people noticed that the numbers included a new measure of defined benefit (DB) pension obligations, which remain a big deal in the public sector even as most private employers have switched to 401(k)s.  Largely because of this accounting change, what the BEA calls state and local government “net savings”– or the difference between current revenues and expenditures – fell from -$129 to -$252.7 billion. Given attention to state and local pensions lately, especially in Detroit, one would think this news would have been met with cries of alarm or at least mild curiosity.  But alas, no.  That oversight is unfortunate because the new data shed light on an important issue. Previously, the National Accounts measured DB pensions on a cash basis.  The only spending that counted was cash out the door when employers made pension contributions.  The only income that showed up for employees was pension fund dividends and interest.  Promises of future benefits didn’t appear anywhere on the ledger, as household income or business and government expenses.

Ripping Off Pensioners is Wrong --  Stephanie Kelton - Brad DeLong has a post up today in which he advocates an expansion of the Social Security system.  He opens with the following: Companies turn out not to be long-lived enough to run pensions with a high enough probability. And when they are there is always the possibility of a Mitt Romney coming in and making his fortune by figuring out how to expropriate the pension via legal and financial process. Since pension recipients are stakeholders without either legal control rights or economic holdup powers, their stake will always be prey to the princes of Wall Street. Ripping off pensioners is indeed reprehensible, and we should be prepared to call out anyone who schemes the pension system at the expense of the powerless. And we should do it even if it means calling out a certain would-be-Fed-Chairman whom DeLong has championed: Summers said he obtained insights based partly on working part-time for the hedge fund D.E. Shaw and Company where he earned over $5 million in just one year. Summers said the experience gave him “a better sense of how market participants sort of think and react to things from sort of listening to the conversations and listening to the way the traders at D. E. Shaw thought.” One young female quant who worked with him had this to say on her blog, “But when I think about that last project I was working on, I still get kind of sick to my stomach. It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds. There’s no real way to make that moral, or even morally neutral.”

Don’t take my pension!: The looming public worker nightmare - We are now on the cutting edge of a wave of municipal bankruptcies fueled by pension obligations that cities cannot afford. Cities made workers promises in good times based on optimistic assumptions that did not always hold true. Yet it is far from clear that bankruptcy provides any solution to municipal pension problems. No city has ever reduced its pension obligations in bankruptcy without pensioner consent. While municipal bankruptcy has been around since the 1930s, pension-driven bankruptcies are a new phenomenon. Few of the local government units that have filed for bankruptcy since the 1930s have even been true municipalities. Most have been sewer, water and hospital districts plus oddballs like county fairs and NYC Off-Track Betting or the Las Vegas Monorail. The cities that have filed for bankruptcy are generally tiny towns that find themselves in economic distress for mundane or ridiculous reasons, not because of pensions: The town treasurer absconded with a million dollars; the city’s tax on strip clubs was an unconstitutional violation of freedom of express; the state shut down the illegal speed trap the town was operating on the interstate. Nor were the largest and most famous municipal bankruptcy cases resolved to date about pensions: Orange County, Calif., and Jefferson County, Ala., both ended up in bankruptcy because of bad investments in financial derivatives. Pensions were one of many factors in New York City’s financial crisis in 1975, but the bankruptcy law at the time made filing impractical because it would have necessitated the city first soliciting the consent of thousands of unknown holders of its bearer bonds. 

Look Who’s Locking Horns Over Retirement Accounts - As early as October, the U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts. Those assets are a giant honey pot, with $5.41 trillion in IRAs, according to the Federal Reserve. The Dodd-Frank financial-regulation law of 2010 authorize the Securities and Exchange Commission to establish a “no less stringent” fiduciary standard for brokers than the duties that investment advisers must follow. How that will play out may depend largely on the ferocious lobbying battle raging over the Labor Department’s plan. The period for public comment on what an SEC rule should look like officially ended in July.  Meanwhile, the Labor Department is charging full speed ahead—and raising hackles in the brokerage industry. “The DOL is clearly moving forward on a track that’s inconsistent with where the policy should end up,” Judd Gregg, the former Republican U.S. Senator from New Hampshire who serves as chief executive of the Securities Industry and Financial Markets Association, Wall Street’s main trade group, told me. “It’s a dangerously large expansion that will chill all kinds of activity.”

First Look at 2014 Cost-Of-Living Adjustments and Maximum Contribution Base - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.0 percent over the last 12 months to an index level of 230.084 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. Since the highest Q3 average was last year (2012), at 226.936, we only have to compare to last year.  This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year. Currently CPI-W is above the Q3 2012 average. If the current level holds, COLA would be around 1.4% for next year (the current 230.084 divided by the Q3 2012 level of 226.936). 

ObamaCare Rollout: Kaiser Explains to Poor People in Non-Medicaid Expansion States How to Game the System by Lying -- Kaiser Health News: Some of the millions of poor people expected to lose out on Obamacare coverage next year because their states are not expanding Medicaid might have a way to get help, but the strategy carries risk.Experts say the key is for them to project their 2014[*] income to at least the federal poverty level, about $11,500 per person or $23,500 for a family of four.  We explained how those income calculation works — and the ethical problems with it — here. Everyone applying for subsidies must estimate their 2014 income. For the poor, the difference between qualifying — or not — could be $1,000 or less a year. Since many rely on hourly or seasonal work, their incomes often fluctuate by a few thousand dollars each year. That’s one reason why people often lose eligibility for Medicaid, the state federal insurance program for the poor. While there are steep fines for knowingly lying on a government application for financial assistance, if someone merely miscalculates their income above the poverty level in 2014, and is later found to have made less than the poverty level, they won’t have to pay any money back, according to the Treasury Department. So, Kaiser is recommending that poor people “merely miscalculate” their income. Just on the high side.  Maybe I’m just old-fashioned, but that sounds to me a lot recommending that people lie. (And never mind that you fill out the ObamaCare form under penalty of perjury.) Will Kaiser also recommend that people “merely miscalculate” to avoid being forced into Medicaid? How about if they “merely miscalculate” a few dollars low to get into the Exchanges at 400% the poverty level, minus a dollar? Would that be OK? Why or why not?

The Power of Incumbency, Health Care Edition - Paul Krugman - President Obama is finally making a strong case for his own health reform, mocking Republicans for their obsession with denying insurance to 30 million Americans. It’s about time; and many of us still feel that he did a remarkably bad job of explaining the reform in the past.Still, Brian Beutler has a good point here: the long delay in implementation made Obamacare hard to campaign on, because people had no experience of how it works in practice. Republicans could tell all kinds of lies, promulgate all kinds of misconceptions, and if the law’s defenders tried to refute these claims, well, who was telling the truth? Remember how Medicare was going to destroy American freedom? But now the reality of Obamacare is just months away. It may have a rocky start, especially in red states where the local government is doing all it can to disrupt the implementation, but pretty soon many Americans will have first-hand knowledge of how the system really works. And if Massachusetts is any guide, they’re going to like it a lot.

Opposition to ObamaCare Considered Rational on Grounds of Equity - From his latest presser, Obama’s partisan perspective on ObamaCare: [OBAMA:] Now, I think the really interesting question is why it is that my friends in the other party have made the idea of preventing these people from getting health care their holy grail, their number-one priority.  However, from the public purpose perspective, the really interesting question is why our “friends” in both parties refuse to put truly universal coverage — for example, single payer Medicare for All — on the table at all. Remember, ObamaCare is, pathetically, projected to enroll only 7 million people in its first year, and when fully implemented will leave about as many uninsured as newly insured — 25 or 30 million, but with “these people,” who’s counting? Be that as it may, we’re stuck with ObamaCare for now. And no matter what Obama says, the real problems with ObamaCare are not “glitches” and can’t be solved with “adjustments” or “administrative changes”‘; they are fundamental to its system architecture, which demands that every American be thrown into one eligibility bucket or another, with the number of possible buckets being 1 (Federal) x 50 (states) x 9 (the number of income levels) = 450. At least I think so.* Maybe somebody smarter than me wants to calculate the combinatorial explosion, taking the differences between the actual plans offered in each jurisdiction into account. Anyhow, as I’ve been relentlessly documenting, ObamaCare’s complex, confusing, and Rube Goldberg-esque system of eligibility determination mean that people inevitably get thrown into the wrong buckets, or there aren’t even the right buckets for them. Worse, people are thrown into buckets for whimsical and arbitrary reasons, leading to a fundamental lack of equity, of common fairness, for the entire program. Today I’d like to ObamaCare’s fundamental lack of equitable treatment for all citizens by using Kaiser’s Subsidy Calculator** for people at “the margins”: Those at the top, too well-off to participate in the Exchanges, and those at the bottom, too poor to do so. For continuity with this (conservative) example, the test case will be a family of two 56-year old non-smokers, with two children under 20.***

Are 3 million young Americans really going to give up $1000 by signing up for Obamacare? --- From my guy Philip Klein:A 25 year-old earning less than $24,000 could save $1,000 next year by going without insurance and paying a penalty rather than purchasing coverage on an Obamacare health insurance exchange, according to a new study from the National Center for Public Policy Research.In the study, which took a detailed look at the choices facing younger consumers once President Obama’s health care law kicks in, author David Hogberg concludes that the program is going to be a rotten deal for the very Americans whose participation is necessary for it to succeed.According to his analysis, 3 million 18 to 35 year-olds would save at least $1,000 annually by paying a penalty and going without insurance once the law kicks in, while 3.7 million would save at least $500. As Phil rightly notes, if an insufficient numbers of young, healthy, and, apparently, financially illiterate Americans don’t buy Obamacare insurance and enter the risk pools, it becomes a lot tougher for insurers to offer “affordable coverage to older and sicker Americans, especially those with pre-existing conditions, as required by the law.”

Health Law Success Hinges on Combating ‘Misinformation’ -  The U.S. government needs to offset “misinformation” about the health-care law being circulated in states led by Republican governors, according to the Obama administration official responsible for implementation. Kathleen Sebelius, the secretary of Health & Human Services, said the Affordable Care Act will succeed in states run by Democrats who have embraced the law. In states such as Georgia where the governor and legislature are in Republican hands, “the job is made doubly difficult,” Sebelius said in an interview today during a visit to Atlanta to meet with supporters of the law. The comment further drives a wedge between the Obama administration and Republicans who have opposed the 2010 health-care system overhaul and continue to undermine next year’s core implementation. Republicans in Indiana, Ohio, Georgia and Florida have said people who buy insurance for themselves face huge premium increases -- as much as triple in Georgia, the state’s insurance commissioner, Ralph Hudgens, said on July 30. “We know that there will be states where things will go very well because the states are all in,” Sebelius said. For residents in other states, “getting correct facts to them, drilling down through the misinformation, is going to be more complicated. That’s where a lot of my time and effort is going to be spent, on the markets that are really federal markets.” 

A Limit on Consumer Costs Is Delayed in Health Care Law - In another setback for President Obama’s health care initiative, the administration has delayed until 2015 a significant consumer protection in the law that limits how much people may have to spend on their own health care. The limit on out-of-pocket costs, including deductibles and co-payments, was not supposed to exceed $6,350 for an individual and $12,700 for a family. But under a little-noticed ruling, federal officials have granted a one-year grace period to some insurers, allowing them to set higher limits, or no limit at all on some costs, in 2014. Under the policy, many group health plans will be able to maintain separate out-of-pocket limits for benefits in 2014. As a result, a consumer may be required to pay $6,350 for doctors’ services and hospital care, and an additional $6,350 for prescription drugs under a plan administered by a pharmacy benefit manager. A senior administration official, speaking on condition of anonymity to discuss internal deliberations, said: “We knew this was an important issue. We had to balance the interests of consumers with the concerns of health plan sponsors and carriers, which told us that their computer systems were not set up to aggregate all of a person’s out-of-pocket costs. They asked for more time to comply.”

Medical Costs Bankrupt Patients; It’s the Computer’s Fault - "Don't get cancer until 2015. The Obama health reform is supposed to limit out-of-pocket costs to $12,700. But the Obama Administration has delayed its implementation until 2015. The insurance companies told them that their computers weren't able to add up all their customers' out-of-pocket costs to see whether they had reached the limit. For some common diseases, such as cancer or heart failure, treatment can cost over $100,000, and patients will be responsible for the balance. Tell me, Slashdot, how difficult would it be to rewrite an insurance billing system to aggregate a policyholder's out-of-pocket costs? 'A senior administration official, speaking on condition of anonymity to discuss internal deliberations, said: "We knew this was an important issue. We had to balance the interests of consumers with the concerns of health plan sponsors and carriers, which told us that their computer systems were not set up to aggregate all of a person's out-of-pocket costs. They asked for more time to comply."'"

Controlling Health Care Spending, Revisited - A hotly debated question among health policy wonks is whether the decline in the year-to-year growth in health spending in the United States, which started in 2002 (see Figure 1), will leave that growth rate at a permanently lower level. I had  a blog post on this question in January 2012, drawing no conclusion but noting that over the longer term the growth rate just had to come down closer to the level of growth in gross domestic product.  An intriguing question is what drives the fluctuations in the growth of health spending clearly visible in Figure 1. It was a topic at a recent symposium convened by the Altarum Center for Sustainable Health Spending. In a joint effort, Thomas Getzen, professor emeritus of economics at Temple University; Gary Claxton and Larry Levitt, senior vice presidents of the Henry J. Kaiser Family Foundation, and Charles Roehrig, vice president of the Altarum Institute, developed a statistical model in which the annual growth rate in nominal national health spending (not adjusted for inflation) in any given year over the long period 1965-2012 is assumed to be driven primarily by two macroeconomic variables: (1) the inflation rate in the current and the previous two years, measured by the G.D.P. deflator, and (2) the growth rate in real G.D.P. in the current year, as well as in the previous five years. The approach is called “lagged regression analysis.” The model was able to explain 85 percent of the observed variation in the annual growth of national health spending, as is illustrated in the authors’ chart, which depicts the actual and the predicted growth rate in nominal health spending.

Conflicted Care: Physicians With a Financial Stake in the Medical Devices They Use - In reflecting on five years of “reading medical journals and writing to inform patients of the hazards of medical care,” patient safety advocate John James says he has “learned some difficult realities.”  Our blog posts frequently mirror his observations. “Perhaps foremost is that when people want to believe that their health-care system is safe and just, their opinions are not going to be easily swayed by data and facts, regardless of how reliable the source may be. Secondly, people want to believe that physicians always have their interest at heart; this naïve supposition is not easily replaced by caution when seeking medical care. Thirdly, most people are less interested in preventing their own poor health than getting treatment when a preventable disease has gotten the best of them. Finally, most people cannot view the health-care industry in terms of how it affects less fortunate Americans – for them it is about me and my health care.” In a poignant example of his second point, consider a recent fraud alert issued by the Department of Health and Human Services’ Office of the Inspector General. It addresses physician-owned businesses that market implantable medical devices “ordered by their physician-owners for use in procedures the physician-owners perform on their own patients at hospitals or ambulatory surgical centers (ASCs).”

How nurse practitioners can help save US healthcare -- It’s the oldest story in business. Large, established player tries to use government to protect itself against upstart, entrepreneurial rival. Once you begin to look for these crony capitalist power plays, you see them all around. My pal Tim Carney, for instance, has done standout work highlighting how taxi cab cartels have tried to quash Uber, the smartphone-based limo service. Here’s another instance of such crony capitalism, with far bigger implications. From the WSJ: Nurse practitioners in five states are fighting for the right to treat patients without oversight from doctors, as they can in many parts of the country. The battle is particularly pitched in California, where a bill that would let some nurse practitioners do their work independently passed a key legislative committee this week. California doctors strenuously oppose the idea, arguing that it could jeopardize patient safety. Other nonphysician health professionals around the country also are lobbying to expand their roles, citing the shortage of doctors in some areas and the expected onslaught of millions of patients newly insured under the Affordable Care Act next year.

Scientists Plan to Create New Bird Flu Strain in Lab - Scientists who sparked an outcry when they created easier-to-spread versions of the bird flu want to try such experiments again, this time using a worrisome new strain known as H7N9. Since it broke out in March in China, the bird flu strain has infected more than 130 people and killed 43. Such research is allowed only in high-security labs, but the U.S. government promises extra oversight and says a special review panel will weigh the pros and cons before deciding if certain flu projects are worth the risk.

'Golden rice' GM trial vandalised in the Philippines - A trial plot of genetically modified rice has been destroyed by local farmers in the Philippines. "Golden Rice" has been developed by scientists to combat vitamin A deficiency, which affects millions of children in the developing world. The crop was just weeks away from being submitted to the authorities for a safety evaluation. But a group of around 400 protestors attacked the field trial in the Bicol region and uprooted all the GM plants.  Golden Rice field trials are currently being carried out in the Philippines under the auspices of the International Rice Research Institute (IRRI), together with PhilRice, the local research body. Five small test plots have been planted with the idea that there would shortly be a submission to the regulatory authority of the Philippines. It was hoped that initial releases to farmers could happen in 2014.

Photographer Captures Waves of Trash in Indonesia -Waves for days. Trash for eternity. That’s what photographer Zak Noyle discovered on a recent trip to Java, Indonesia. The waves of Java, always known for being pristine and barreling, were now rolling swells of disgusting trash and debris. Noyle was shooting Indonesian surfer Dede Surinaya in a remote bay when he and Surinaya discovered the water to be covered in garbage, according to GrindTV. The bay was miles from any town, yet strong currents had carried the trash of the world’s most populated island, Java, to its once pure waters. “It was crazy. I kept seeing noodle packets floating next to me,” Noyle told GrindTV. “It was very disgusting to be in there; I kept thinking I would see a dead body of some sort for sure.”

L.A. Restaurant Has New 45-Page Water Menu, and We Are Doomed - In case you missed it, Ray's and Stark Bar, a restaurant and bar at the Los Angeles County Museum of Art, today unveiled the city's most extensive water menu, offering twenty varietials of water listed by their ten countries in a 45-page menu - complete with tasting notes, mineral content, bottle price, and photos, including a page for water sommelier Martin Riese's  9OH2O, retailing for $14 "in limited editions of 10,000 individually numbered glass bottles - from which staff suggest water pairings to complement the executive chef's thoughtful, Mediterranean-inspired menu. In case you missed it, almost 800 miillion people across the world lack access to clean water, Africans spend 40 billion hours a year carrying water from its source to their homes, and 3.4 million people, roughly the population of L.A., die each year from water-related causes. Here is even more evidence that rich people have way too much money. Criminal.

A Texan tragedy: ample oil, no water - "The day that we ran out of water I turned on my faucet and nothing was there and at that moment I knew the whole of Barnhart was down the tubes," she said, blinking back tears. "I went: 'dear God help us. That was the first thought that came to mind." Across the south-west, residents of small communities like Barnhart are confronting the reality that something as basic as running water, as unthinking as turning on a tap, can no longer be taken for granted. Three years of drought, decades of overuse and now the oil industry's outsize demands on water for fracking are running down reservoirs and underground aquifers. And climate change is making things worse. In Texas alone, about 30 communities could run out of water by the end of the year, according to the Texas Commission on Environmental Quality. Nearly 15 million people are living under some form of water rationing, barred from freely sprinkling their lawns or refilling their swimming pools. In Barnhart's case, the well appears to have run dry because the water was being extracted for shale gas fracking. 

How Two Reservoirs Have Become Billboards For What Climate Change Is Doing To The American West -- Lake Powell is the giant reservoir on the Utah-Arizona border that backs up behind Glen Canyon Dam and is the linchpin for managing the Colorado River. The Colorado basically makes modern life possible in seven western states by providing water for some 40 million people and irrigating 4 million acres of crops. It is also depended upon by 22 native American tribes, 7 national wildlife refuges and 11 national parks. As soon as Monday, the federal government’s Bureau of Reclamation will announce the results of some very serious number crunching and model running focused on falling water levels in Lake Powell. It is widely expected that the bureau will announce that there is a serious water shortage and that for the first time in the 50-year-history of the dam, the amount of water that will be released from the reservoir will be cut. Not just cut, but cut by 750,000 acre feet — an acre foot being enough water to cover an acre one foot deep. That’s more than 9 percent below the 8.23 million acre feet that is supposed to be delivered downstream to Lake Mead for use in the states of California, Nevada and Arizona and the country of Mexico under the 81-year old Colorado River Compact and later agreements.

Water Shortages Pose Greatest Threat to US Economic Growth -- Paul B. Farrell of MarketWatch, has warned that by 2024, water shortages and pollution will pose the greatest threats to the US, potentially ending all economic growth and the future security of the US. Scientific American undertook a study to research this idea, and determined that in order to prevent this from happening, the government would have to invest $60 trillion; a bit of a tall order, seeing as though global GDP is only 70 trillion. As the planet slowly warms, a giant reservoir of methane begins to thaw under the East Siberian Sea permafrost, an event that if allowed to worsen, would act as an economic time bomb with the potential to devastate the global financial system. Unfortunately, despite the fact that 97% of scientists now agree that climate change is real, many big oil supporters, and their pet politicians, refuse to accept the truth. Clive Hamilton, the Australian Professor of Ethics, wrote that “sometimes facing up to the truth is just too hard. When the facts are distressing it is easier to reframe or ignore them. Around the world only a few have truly faced up to the facts about global warming ... It’s the same with our own deaths; we all ‘accept’ that we will die, but it is only when our death is imminent that we confront the true meaning of our mortality.”

China heat wave: Beware of 'spontaneously' combusting trees and billboards - For the past few weeks Beijing has been either a furnace or a sauna, depending on the rain, as China endures its hottest summer in more than half a century. The press is full of the most alarming stories as the country sweats through its second major heat wave this year. In the southern city of Wuhan, witnesses last weekend reported seeing a willow tree spontaneously burst into flames, “which rarely happens under normal circumstances,” according to a local forestry expert. In the eastern province of Zhejiang the same thing happened to a billboard, which presumably is equally unusual. I myself have sometimes felt I was about to go up in flames recently, and I am not alone. The Chinese National Meteorological Center announced on Monday that temperatures had exceeded 95 degrees Fahrenheit in eight provinces on more than 25 of the previous 41 days. It hasn’t been that hot here since 1961. For the first time ever the government has declared the heat to be a level two weather emergency – a warning normally reserved for typhoons and floods – amid reports that more than 40 people have died from the high temperatures. 

Weather Extremes : Japan Breaks National Heat Record. Chinese Heat Wave Continues  - An all-time national heat record was set in Japan today (August 12th) when the temperature peaked at 41.0°C (105.8°F) at the Ekawasaki site in Shimanto (part of Kochi Prefecture). The previous record of 40.9°C (105.6°F) was recorded at Tajima and Kumagaya on August 16, 2007. Tokyo endured its warmest daily minimum on August 11th with a low of 30.4°C (86.7°F). This was the 2nd warmest minimum on record for Japan following a minimum of 30.8°C (87.4°F) at Itoigawa on August 22, 1990. On Sunday, August 11th, the temperature peaked at 42.7°C (108.9°F) at Shengxian, its hottest temperature measured so far during the heat wave. At Hangzhou the temperature reached 41.1°C (106.0°F) on August 11th and 40.3°C (104.5°F) on August 12th marking the 12th day since July 24th that the city surpassed or tied its previous all-time record high of 40.3° set on August 1, 2003. Eastern China, where about 30% of the population of the country and 5% of the global population reside (approximately 400 million people) has undergone a heat wave unprecedented in its history. No one really knows how many have died as a result of the heat wave (Chinese news sources claim ‘about two dozen’), but statistically it is almost certain that many thousands must have perished as the result of the heat over the past month. 

A Song of Flood and Fire: One Million Square Kilometers of Burning Siberia Doused by Immense Deluge - About a week and a half ago, I reported on a great burning event in which a massive region of Russian Siberia erupted in hundreds of wildfires blanketing it in a sea of smoke clearly visible in the NASA Aqua Satellite record. Today, reports from Interfax/Radio Russia describe an immense flood emergency in which over 1 million square kilometers of Russia’s Yakutia region have been submerged by a catastrophic rain event. From the Interfax report: “It is a unique situation in the sense that it has spread over more than 2,000 kilometers if one looks from west to east, while its depth or width is more than 500 kilometers,” Vladimir Stepanov, head of the National Crisis Management Center of the Emergency Ministry, told a news conference in Moscow. According to the report, hundreds of villages in this, thankfully, sparsely populated region have been inundated by water putting hundreds of thousands of people in amongst a swirling flood. According to reports from Russian government, the region is now the site of a massive and major rescue operation. As of August 11, the operation composed an army of 20,000 personnel — a force that is likely to have greatly swelled as this major climate disaster expanded through today.

Hot Century Ahead: Study Finds Onslaught of Heat Waves Now Inevitable -- A new study dishes out some very bad news about the global warming crisis.  It is too late to stop a "several folds" increase of deadly heat waves caused by greenhouse gases—and the floods, fires, and storms they bring.The report comes as a record heat wave hits North Asia, killing dozens and sickening far more, flooding hospitals with heatstroke victims amid power shortages that are cutting off air conditioning in some areas.  Published Thursday in the Environmental Research Letters, the study tracks trends in heat increases, finding that "3-sigma" heat wave events, in which climates are warmed to 3 times their normal temperature for over 3 weeks in a row, have been on the rise since the 1950s and today cover approximately 5 percent of the earth's land surface.No amount of emissions mitigation can stop this frequency from doubling by the year 2020 and quadrupling by 2040, and by the latter year, extreme heat events will cover 20 percent of the globe. Furthermore, 5-sigma events, which do not occur presently, are expected to ravage 3 percent of the world's surface by 2040.

Sea life relocating fast in response to climate change - Many fish and plankton are relocating towards the North and South poles at an astonishing rate of hundreds of kilometres per decade in response to climate change, a new study has found. That is shaking up ecosystems and forcing the fishing industry to adjust. Fish are moving an average of 277 kilometres per decade, zooplankton at 142 kilometres per decade and phytoplankton at a whopping 470 kilometres per decade. In some cases, the movements are bringing together species that have never had contact before. For example, Antarctic waters were traditionally free of predators with jaws capable of crushing their prey. "Now that it's warming, those predators including sharks and big crabs are expanding into Antarctica, and they're eating things that evolved without crushing predators," O'Connor said. "It's probably going to lead to extinctions of prey."

Sharp rise in Antarctic seawater’s acidity - The acidity of Antarctic seawater has risen dramatically, new research shows. The study, published in The Journal of Marine Chemistry, reveals changes in ocean chemistry over the past 16 years that – while influenced by natural variability – are consistent with increased carbon emissions. Nick Roden, the lead author of the study, says the results are concerning. “The surprise was that the change in acidity was so large, indicating that natural and human induced changes have combined to amplify ocean acidity in this region,” he said.

Last intact ice shelf in Canadian Arctic may be slipping away [Milne ice shelf, Ellesmere Island] - The last fully intact ice shelf on northern Ellesmere Island in Canada’s Arctic may soon be slipping away. Ice shelves found in the north of the island are formed from sea ice and glacier ice, measuring some 100 yards thick. While other ice shelves nearby have long since broken up, the Milne Ice Shelf remained intact, blocking the mouth of the Milne Fjord. But this year, scientists have noticed fractures to the Milne ice shelf that indicate it may be reaching the end of its life cycle. “It’s become a maze or a network of many different crevasses, which very much indicates that the ice shelf is reaching its structural-integrity limit,” says Andrew Hamilton, a PhD candidate at the University of British Columbia in Vancouver, Canada, who studies the Milne ice shelf. “In the coming years it will most likely continue to break up and eventually float away as icebergs or ice islands into the Arctic Ocean.”

Greenland Ice Is Melting — Even from Below: Heat Flow from the Mantle Contributes to the Ice Melt - The Greenland ice sheet is melting from below, caused by a high heat flow from the mantle into the lithosphere. This influence is very variable spatially and has its origin in an exceptionally thin lithosphere. Consequently, there is an increased heat flow from the mantle and a complex interplay between this geothermal heating and the Greenland ice sheet. The international research initiative IceGeoHeat led by the GFZ German Research Centre for Geosciences establishes in the current online issue of Nature Geoscience that this effect cannot be neglected when modeling the ice sheet as part of a climate study. The continental ice sheets play a central role in climate. Interactions and feedback processes between ice and temperature rise are complex and still a current research topic. The Greenland ice sheet loses about 227 gigatonnes of ice per year and contributes about 0.7 millimeters to the currently observed mean sea level change of about 3 mm per year. Existing model calculations, however, were based on a consideration of the ice cap and considered the effect of the lithosphere, i.e. Earth's crust and upper mantle, too simplistic and primarily mechanical: the ice presses the crust down due to its weight. "We have run the model over a simulated period of three million years, and taken into account measurements from ice cores and independent magnetic and seismic data," says Petrunin. "Our model calculations are in good agreement with the measurements. Both the thickness of the ice sheet as well as the temperature at its base are depicted very accurately. "

Timing a Rise in Sea Level - Dr. Mercer pointed out the unusual topography of the ice sheet sitting over the western part of Antarctica. Much of it is below sea level, in a sort of bowl, and he said that a climatic warming could cause the whole thing to degrade rapidly on a geologic time scale, leading to a possible rise in sea level of 16 feet.  While it is clear by now that we are in the early stages of what is likely to be a substantial rise in sea level, we still do not know if Dr. Mercer was right about a dangerous instability that could cause that rise to happen rapidly, in geologic time. We may be getting closer to figuring that out. An intriguing new paper comes from Michael J. O’Leary of Curtin University in Australia and five colleagues scattered around the world. Dr. O’Leary has spent more than a decade exploring the remote western coast of Australia, considered one of the best places in the world to study sea levels of the past.  Examining elevated fossil beaches and coral reefs along more than a thousand miles of coast, Dr. O’Leary’s group confirmed something we pretty much already knew. In the warmer world of the Eemian, sea level stabilized for several thousand years at about 10 to 12 feet above modern sea level.  The interesting part is what happened after that. Dr. O’Leary’s group found what they consider to be compelling evidence that near the end of the Eemian, sea level jumped by another 17 feet or so, to settle at close to 30 feet above the modern level, before beginning to fall as the ice age set in.

President Obama’s Climate Action Plan: Not Even Close - In June, after more than five years as president, President Obama finally proposed a climate action plan for America. True to form, the president gave an eloquent speech, with strong words for those still in denial about the severity of the crisis we face: “We don’t have time for a meeting of the Flat Earth Society.” Unfortunately for all of us, the blueprint he presented is more PR than plan, and has zero chance of stabilizing the climate. To the contrary, it promises even more climate chaos by promoting fracking, mountaintop removal coal mining, offshore and Arctic oil drilling and tar sands exploitation. It also threatens future generations with the specter of more radioactive nuclear power. Instead of calling out Obama on his hollow words, big national environmental groups—many with deep ties to the Democratic Party establishment and the Obama White House—fell over themselves congratulating the president on his speech. This, despite the fact that neither of America’s two corporate political parties has any intention of giving up their oil-soaked campaign contributions to take on the fossil fuel lobby.

10 Years After Blackout, US Grid Faces New Threats - The U.S. electrical grid is better managed and more flexible a decade after its largest blackout but remains vulnerable to increasingly extreme weather, cybersecurity threats, and stress caused by shifts in where and how power is produced. Many worry the grid isn't fully prepared for the new and emerging challenges, even though an analysis conducted for The Associated Press shows maintenance spending has steadily increased since North America's largest blackout. "This job of reliability is kind of impossible, in the sense that there's just so many things that could happen that it's hard to be sure that you're covering all the bases," said William Booth, a senior electricity adviser with the U.S. Energy Information Administration. The industry has mostly addressed the failures blamed on a tree branch in Ohio that touched a power line and set off outages that cascaded across eight states and parts of Canada the afternoon of Aug. 14, 2003, darkening computer screens, halting commuter trains, and cutting lights and air conditioners for 50 million people. Grid operators who didn't initially realize what was happening now have a nearly real-time view of the system and are better equipped to stop problems from growing. Utilities share more information and systematically trim trees near high-voltage power lines.

America’s Electric Grid Is Far Too Vulnerable To Extreme Weather, And Needs An Update - Work on America’s electrical grid has slowed to a crawl, even as the power outages caused by severe weather are on the upswing. That’s the takeaway from a new report out of the President’s Council of Economic Advisers and the Department of Energy. It found that economic damage from weather-related power outages now averages between $18 and $33 billion per year — and went as high as $75 billion in 2008 and $52 billion in 2012 thanks to Hurricanes Ike and Sandy, respectively. The backstory to this is a decades-long slowdown in construction and upkeep on the nation’s electrical grid. The Obama Administration report compiled data showing that transmission line construction began as early as the 1880s, and peaked at nearly 10,000 miles built per year in the late 1960s. But it’s been a long drop since then to about 1,000 miles per year in the mid-2000s, leaving 70 percent of the nation’s transmission lines and power transformers over 25 years old.

NASA Scientist Explains How Technology Is Vulnerable to Solar Flares (CMEs) In 1859, a massive coronal mass ejection (CME) known as the Carrington Event slammed into Earth. The then-new global telegraph systems in Europe and America were brought down. Reports of sparking pylons and operators receiving electric shocks abounded - there were even accounts of people being able to send and receive messages over wires that had been disconnected from their power supplies. Fast-forward to 2013. Our planet is orders of magnitude more dependent on its technology systems. And a solar event the size of the Carrington Event has not recurred since. How vulnerable are we, should another one arrive? A geomagnetic storm causes a disturbance in all magnetic fields. You can have all your satellites become vulnerable to a single event upset from solar energetic particles, which is essentially anything electronic that interacts with these particles. You can have complication with navigation, causing problems with high altitude aircraft, especially in the polar route. They can’t fly in that zone. High altitude aircraft and crew are exposed to radiation hazards. Astronauts can be exposed to radiation hazards.Most importantly, these magnetic fluctuations essentially lead to induced ground current that can actually cause significant fluctuations in our power grids. And power grids become quite vulnerable. There have been occasions where we haven’t had Carrington-type events, but even smaller events have led to failure or damage of transformers, which then leads to wide-scale blackouts without power.

US calls for increased electric grid spending — The Obama administration is calling for more spending on the nation's aging electric power system as storms grow more severe and their damage, including power outages, becomes more expensive. Power outages cost the economy $18 billion to $33 billion per year, according to an administration report released Monday. That figure has been rising steadily over the past 20 years. That can rise to $40 billion to $75 billion in years with severe storms such as last year's Superstorm Sandy. Seven of the 10 most expensive storms in U.S. history occurred between 2004 and 2012. Eleven times last year weather-related outages led to losses of $1 billion or more, the second most on record, behind 2011, according to the report. Climate scientists expect more intense and destructive weather as climate change increases global temperatures, adding more energy to storms and shifting patterns of drought and precipitation. Thunderstorms, hurricanes, blizzards and other extreme weather caused 58 percent of all U.S. outages studied since 2002 — and 87 percent of outages affecting 50,000 or more customers. At the same time, the U.S. electric grid is getting old. The average U.S. power plant is 30 years old, and 70 percent of the grid's transmission lines and transformers are at least 25 years old, making them weaker and more susceptible to failure in storms.

Solar power to trump shale, helped by US military - US marines go to war in Afghanistan with solar cells embedded in their rucksacks, efficient enough to recharge lithium-ion batteries for radios and greatly lighten loads. Field patrols will soon have almost weightless solar blankets as well. These will be able to capture a once unthinkable 35pc of the sun's light as energy with thin membranes, a spin-off from technology used in satellites. This new kit is a military imperative. Taliban ambushes of supply convoys are a major killer. The Pentagon says the cost of refueling forward bases is $400 a gallon. The US Naval Air Weapons Station already relies on a 14 megawatt array of solar panels in California's Mojave desert for a thrid of its power. Pearl Harbour will soon follow as the Pentagon goes off-grid, better shielded from enemies. The US Navy will derive half its energy supply from renewables by the end of this decade, according to a report entitled Enlisting the Sun: Powering the U.S. Military with Solar Energy, by the US solar industry (SEIA). It may be a stretch to say that the US Naval Research Laboratory is the vanguard of the world's green revolution, but not a big stretch.

Coal Ash Bill Would Prohibit EPA From Protecting Americans - There’s a move afoot in Congress to block the U.S. Environmental Protection Agency (EPA) from passing the first-ever national rule for power plants to properly dispose of coal ash—all 125 million tons of it produced every single year. Coal ash, left over from burning coal for electricity, contains toxins like arsenic, lead and mercury. Coal ash sometimes goes into concrete mixes, wallboard materials and even into golf course construction. But usually, it’s mixed with water and stored in huge impoundments, often near rivers and streams where the coal-fired power plants are located. Because there are no federal rules for handling coal ash, it’s up to the states to oversee disposal, and most states treat it with less care than common household garbage.This arrangement has proven to be utterly ineffective to protect communities from disastrous impoundment failures and toxic contamination of groundwater from coal ash. Despite these known dangers, the House of Representatives has passed yet another bill—HR-2218—that would prevent the EPA from acting to protect Americans from coal ash contamination. Here’s how your representative voted.

Who needs all that power capacity anyway? - From JBC Energy on Wednesday, a short tale of power market disruption in Germany (our emphasis): Two major European electric utilities E.ON and RWE have both announced that they are planning further cuts in their power generation capacity, with E.ON announcing yesterday that it might be closing more than the previously announced 11 GW of capacity, while RWE stated that it will take 3.1 GW of power plant capacity offline. Low electricity demand and the boom in renewable supply has pushed German forward electricity prices to an eight-year low, while the priority given to solar and wind energy in the grid sharply lowered demand for gas and coal power generation outside peak periods. Moreover, given the legislative support for renewables and their dominance in the mix, E.ON admitted it does not expect its announced closures to support electricity prices, as those units are hardly price-setters in the current environment. Based on our calculations of the 6.5 GW of capacity E.ON plans to shut between 2013 and 2015, 65% is accounted for by coal plants, with plants powered by gas and fuel oil only at 11% and 5% respectively, despite the fact that dark spreads in Germany remain in positive territory, contrary to spark spreads (see chart). Thus natural gas is not expected to bear the brunt of demand reduction. However, according to BDEW, the renewables share of power generation in Germany last year stood at 22%, with the natural gas share being only half that much and dropping 3pp on the year.

Radioactive Water Spills Over Fukushima Barrier, Flooding Surroundings -- It was only last week that yet another conspiracy theory became fact when we learned, for the first time after nearly three years of lies, that Tepco had been deceitful and wrong with its "all clear" message about Fukushima, and that instead some 300 tons of contaminated, irradiated water had been flowing into the Pacific ocean every day. So now that the opportunity cost of telling more lies is zero, and the radioactive cat is out of the bag, so to say, the news about the absolute, unmitigated disaster that Fukushima is, and will be for decades, are coming fast and furious. Sure enough, moments ago Tepco reported, and Kyodo confirmed, that radioactive water has risen above the protective barrier and is freely leaking into the surrounding environment.

Dangerous Operation at Fukushima's Reactor No. 4 Could Ignite "Atomic Chain Reaction" : Threatening to trigger a new—and possibly more devastating—nuclear disaster than the original or ongoing one at the Fukishima plant in Japan, a risky plan to remove fuel rods from a damaged reactor building could unleash an "unprecedented" level of radiation, according to experts, if things go wrong. According to reporting by Reuters, the radioactive material within the fuel rods slated for removal are equivalent to 14,000 times the amount released in the atomic bombing of Hiroshima and the plan to move them "has never been attempted before on this scale." The 400 tons of highly irradiated spent fuel and other nuclear materials will be taken from the crippled building and moved to a safer location, but the manner of the operation should be put in serious doubt, say the experts. "They are going to have difficulty in removing a significant number of the rods," said Arnie Gundersen, a veteran U.S. nuclear engineer and director of Fairewinds Energy Education. The fuel rods are being stored in a cooling pool, but if a reaction begins, Gundersen expressed serious concern to Reuters about the company's ability to respond. "To jump to the conclusion that it is going to work just fine," said Gundersen, "is quite a leap of logic."

Fukushima's Radioactive Water Leak: What You Should Know -- Tensions are rising in Japan over radioactive water leaking into the Pacific Ocean from Japan's crippled Fukushima Daiichi nuclear plant, a breach that has defied the plant operator's effort to gain control. Prime Minister Shinzo Abe on Wednesday called the matter “an urgent issue” and ordered the government to step in and help in the clean-up, following an admission by Tokyo Electric Power Company that water is seeping past an underground barrier it attempted to create in the soil. The head of a Nuclear Regulatory Authority task force told Reuters the situation was an "emergency." (See Pictures: The Nuclear Cleanup Struggle at Fukushima.”) It marked a significant escalation in pressure for TEPCO, which has come under severe criticism since what many view as its belated acknowledgement July 22 that contaminated water has been leaking for some time. The government now says it is clear that 300 tons (71,895 gallons/272,152 liters) are pouring into the sea each day, enough to fill an Olympic-size swimming pool every eight days.  (See related, “One Year After Fukushima, Japan Faces Shortages of Energy, Trust.”) While Japan grapples with the problem, here are some answers to basic questions about the leaks:

More Bad News for the Pacific – Taiwanese NPP Leaking Radioactive Water - Two years on, the crippled NPP has yet to be stabilized and its radioactive contents are being spread by – water. On 22 July TEPCO spokesman Masayuki Ono told a regular news conference that plant officials believed that radioactive water that leaked from the wrecked reactors probably seeped into the underground water system and accordingly was likely leaking contaminated water into the sea, acknowledging for the first time a problem long suspected by experts.The Japanese government’s Agency for Natural Resources and Energy estimates that 400 tons of groundwater contaminated with radioactive materials are now leaking into the ocean daily from the crippled plant. Moving southwards, Taiwan’s First Nuclear Power Plant on the island’s northern coast, operating since 1979, has spent fuel rod storage pools that have leaked since December 2009.  How much? According to the Taiwanese government’s watchdog, Control Yuan, the pools of the two reactors leaked 15,370 milliliters and 4,830 milliliters respectively, with the water containing radioactive materials including Caesium-137, Cobalt-60, Manganese-54, and Chromium-51. The most ominous aspect of the report notes that the NPP operator Taiwan Power Co had failed to find the causes and the leaks continue.

Appeals Court Says It’s Time To Approve Or Deny Yucca Mountain Once And For All - A U.S. appeals court handed down a 2-1 decision today that the Nuclear Regulatory Commission (NRC) is legally obligated to finish the application process for the Yucca Mountain site, and to deny or approve the license. The Nevada mountain, proposed as a permanent storage facility for the United States’ nuclear waste, has long been the focus of political controversy. The suit to force the NRC to finish the process was brought by the National Association of Regulatory Utility Commissioners and other parties including Washington state and South Carolina. The three-judge panel for the U.S. Court of Appeals for the District of Columbia Circuit concluded the NRC violated federal law by not delivering a decision by the federal deadline, and that lack of sufficient funds cited by the agency did not justify the delay. The Department of Energy (DOE) first submitted the license application for the Yucca Mountain storage site to the NRC in 2008. According to the Nuclear Waste Policy Act of 1983, the NRC had three years to complete the application process and deliver a definitive “yes” or “no.”  Meanwhile, the White House has not requested funding for the project since President Obama took office, nor did Congress pass funding for Yucca Mountain’s budget in the last few years. Between the lack of appropriations and the agency deadlock, the Yucca Mountain project was left in limbo with a limited amount of holdover funds — a little over $10 million — that the NRC concluded was too small to keep the application process going.

Fracking Vs. The Drought: They Call It Texas Tea, But You Can’t Drink Oil - How dry is it in Texas? So dry some residents are wishing for a hurricane to replenish the aquifer. So dry that many Texans are now against using water to frack for oil, which is famously called Texas Tea. Every fracking job requires several million gallons of water. “Only about 20 percent to 25 percent on average of the water is recovered, while the rest disappears underground, never to be seen again.” Fracking is probably not the wisest use of water anywhere, but in a drought it’s downright self-destructive. In one South Texas county, fracking was nearly one quarter of total water use in 2011, a fraction that is expected to hit one third soon. The Texas Water Development Board estimates frackers used 13.5 billion gallons water used in 2010, a number they project to more than double by 2020! Back in June, CP’s Tom Kenworthy reported on a Ceres study of 25,000 shale oil and shale gas wells that found nearly half these wells were in places “with high or extremely high water stress” because of large withdrawals for use by industry, agriculture, and municipalities. In Texas more than half were in high or extremely high water-stress areas. Of course the warming-worsened drought in Texas has left much of the state parched. The town of Barnhart actually ran out of water. And the Texas Commission on Environmental Quality projects some 30 communities could run out of water by year’s end.

Texas Towns Frack Their Way To Drought Conditions - Real News Network video & interview transcript - Antonia Juhasz: Fate of Texas is a reminder of the dangers of hydro-fracking techniques now embraced by President Obama

Oil and gas drillers rob elderly of royalties they owe retired landowners - Don Feusner ran dairy cattle on his 370-acre slice of northern Pennsylvania until he could no longer turn a profit by farming. Then, at age 60, he sold all but a few Angus and aimed for a comfortable retirement on money from drilling his land for natural gas instead. It seemed promising. Two wells drilled on his lease hit as sweet a spot as the Marcellus shale could offer - tens of millions of cubic feet of natural gas gushed forth. But Chesapeake Energy, the company that drilled his wells, was withholding almost 90 percent of Feusner’s share of the income to cover unspecified “gathering” expenses and it wasn’t explaining why. “They said you’re going to be a millionaire in a couple of years, but none of that has happened,” Feusner said. “I guess we’re expected to just take whatever they want to give us.” From Pennsylvania to North Dakota, a powerful argument for allowing extensive new drilling has been that royalty payments would enrich local landowners, lifting the economies of heartland and rural America. The boom was also supposed to fill the government’s coffers, since roughly 30 percent of the nation’s drilling takes place on federal land. Over the last decade, an untold number of leases were signed, and hundreds of thousands of wells have been sunk into new energy deposits across the country. But manipulation of costs and other data by oil companies is keeping billions of dollars in royalties out of the hands of private and government landholders, an investigation by ProPublica has found.

Fracking the Ocean and California's San Andreas Fault  - To be clear, fracking has been going on in California for decades. What’s changed in recent years is the technology—which is newer, more powerful and more controversial—and the areas in which the oil and gas industry seek to drill. Here’s where fracking is already happening:

  • The Inglewood Oil Field in Baldwin Hills (that’s right in LA; New Yorkers, imagine an oil field in Park Slope) where more than one million people live within five miles of the site. Some residents of the neighborhood have observed cracks in pavement and on their property.
  • Offshore, more than a dozen fracking jobs have taken place, many to stimulate further oil production in the Santa Barbara Channel, though the jobs have “yielded mixed results” for oil companies, according to the Monterey Herald. This year, the EPA affirmed the exemption for the industry from the Clean Water Act, allowing them to continue disposing of fracking fluid at sea unimpeded.
  • The North Shafter oil field, also atop the Monterey Shale, has been newly fracked despite its location above California’s agricultural heartland, the Central Valley. Recently, between six and 10 barrels of “frack fluid” leaked into an open, unlined pit, an incident under investigation by the Central Valley water board. Presently, California is the top agricultural producer in the U.S. and the water quality of the Central Valley is key to keeping food on all of our plates.

Trouble in fracking paradise - The shale revolution is “a little bit overhyped,” Shell CEO Peter Voser said last week as his company announced a $2.1 billion write-down, mostly owing to the poor performance of its fracking adventures in U.S. “liquids-rich shales.” Which of its shale properties have underperformed, Shell didn’t say, but CFO Simon Henry admitted that “the production curve is less positive than we originally expected.” Shell was a latecomer to the tight oil game. As late as 2010 it was acquiring mineral rights at inflated prices, predicting that those properties would produce 250,000 barrels per day in five years. Three years down the road, they are yielding only 50,000 barrels per day, and the company intends to sell half of its shale gas and tight oil portfolio. Second-quarter earnings were dismal for the so-called oil supermajors. Shell, BP, Exxon Mobil, Chevron, Total SA, Statoil, and Eni SpA all reported sharply lower profits.Production was also down nearly across the board, with only Total SA reporting an increase. Of course, none of this would be a surprise for those who read my article from March, “Oil majors are whistling past the graveyard.” The declining profitability and production primarily owed to lower oil prices and rising costs. As Platts reported in June, total capital spending for the top 100 U.S. producers in 2012 rose 18 percent year on year. Costs will be higher still this year. Rising costs are partly due to the tight oil boom itself. Producers that invested heavily in tight oil production are struggling to maintain output against the accumulating undertow of existing wells, where output declines rapidly. Geologist David Hughes finds an average decline rate of 60 percent to 70 percent for the first year of production in new wells in the Bakken shale of North Dakota. And a new statistical analysis by Rune Likvern at The Oil Drum shows production from most Bakken wells falls by 40 percent to 65 percent in the second year.

Forecasting shale oil production - Oil & Gas Financial Journal: Shale oil wells typically decline 10% to 15% faster than shale gas wells over the first year (Fig 2). In the high-pressure zone of the Bakken, decline rates above 90% over the first year of production are common. But since the decline is also highly hyperbolic, the ultimate reserves can still correspond to more than 500 days of the initial production rate. Artificial lift by using pump-jacks also contributes to long flat tails as the downhole pressure falls. Hyperbolic decline curves, with IP from 400-2,000 boe/d, Di from 2-5% per day and b values of 1.5-2.5 fits nicely with most normalized curves from wells within one specific area, and the fit improves when adjusting for the number of stages. The discounted net present value for the wells and the acreage is highly sensitive to small variations in these parameters. The shape parameters are also strongly correlated; a high IP typically implies a high initial decline and also a higher hyperbolic b value. A detailed analysis of "heat maps" and empiric well production rates are crucial to achieve accurate forecasts. Rystad works bottom-up from individual wells for all shale analysis and pays close attention to individual subsurface characteristics and official production data.

Natural Gas Pipeline Causes Cornfield To Explode In Western Illinois -- A little after 11 p.m. local time in the western Illinois town of Erie, residents heard a massive blast and then saw flames shooting 300 feet into the air, visible for 20 miles.  A cornfield had just exploded. Underneath the cornfield, a natural gas pipeline carrying gas byproducts ethane and propane had somehow ruptured, caught fire, and exploded, sending gouts of smoke into the air. Around 80 families within a one-mile radius of the blast were initially evacuated, though by Tuesday morning, all but two had returned to their homes.  This eyewitness video of the fire following the blast reported that air traffic controllers in Kansas City, Missouri heard from overflying aircraft that they could see this fire in Pawnee, Illinois — more than 160 miles from Erie. He says he is 3-4 miles away and “you can hear the roar of the pressure at this time.” Scott Melton, the assistant fire chief in Erie, said that the operators of the pipeline had reduced the flow of natural gas by remotely closing a valve, and were letting the gas burn off. “It’s not much of a fire now, but there’s still some fuel left in the pipe and they’re going to let that burn off, because it’s the safest way to handle it,” he said.

London Is Fracking, And I Live By The River - Ilargi - Just last week, I wrote  an article named Shale Is A Pipedream Sold To Greater Fools, a title which of course kind of gives away my position on the shale issue. Still, if you read it you can see that position isn’t primarily based on environmental issues; I simply looked at the numbers and started questioning the assumptions.  People assume all too easily that what is produced today will be also be produced well into the future, maybe because of how conventional oil and gas typically play out, but the 40% depletion rates for the average well at the Bakken play today, put together with the undoubtedly worsening future rates, for ever more, and inevitably ever more marginal, wells, don’t paint a rosy picture. It may all look fine today, but looking at the numbers I don’t see how it can still look good even a few years from now. On to Britain. A few months ago, the Telegraph reported: UK chancellor George Osborne pledges most generous tax regime for shale gasChancellor George Osborne has pledged to make Britain’s tax regime the “most generous for shale in the world” as the Treasury pressed ahead with promised tax breaks for fracking firms. “I want Britain to be a leader of the shale gas revolution – because it has the potential to create thousands of jobs and keep energy bills low for millions of people,” Mr Osborne said. A new tax allowance will see a certain portion of income from each shale gas “pad” — or production site – receive an effective tax rate of 30%, rather than 62%. The tax break is similar to those on offer to oil and gas explorers in technically-challenging and less economic fields in the North Sea, where they have been credited with revitalising interest. [..]That made the cabinet’s position plenty clear, but apparently protest groups like Frack Off! have been so successful in drawing attention to their take on matters that today PM Cameron himself got involved, with a letter to the people, also published in the Telegraph. Let’s take a look at it. But first, here’s the parts of Britain the government considers fit for drilling:

Obama Administration Rushes To Expand Fracking On Public Lands, Despite Frightening Evidence -- A significant milestone in the future of fracking in the United States is fast approaching, as the public comment period closes next week for industry-approved plans to open 600 million acres of public lands to the controversial drilling practice. According to President Barack Obama, fracked natural gas “can provide not only safe cheap power, but it can only help reduce our carbon emissions.” Unfortunately, the facts of fracking tell a different story: poisoned water supplies, degraded land, air pollution. And we don’t even know how bad the climate impact is, because the U.S. Environmental Protection Agency (EPA) is relying on self-reporting from the natural gas industry to claim that as fracking has increased, pollution has declined. Independent testing and modeling of the greenhouse threat from fracking has repeatedly given results that are as bad as or worse than burning coal. As acclaimed climate scientist Ken Caldeira told Climate Progress, natural gas “is a bridge to a world with high CO2 levels, melting ice caps, acidified oceans…”

Greenwashing Fracking’s Devastating Climate Impact  Several years ago, Utah public health officials realized they had a big problem on their hands—one with national implications as other states were racing to increase oil and gas drilling. Smog levels in the state’s rural Uintah basin were rivaling those found in Los Angeles or Houston on their worst days. The culprit, an U.S. Environmental Protection Agency (EPA) report concluded earlier this year: oil and gas operations. The industry was responsible for roughly 99 percent of the volatile organic compounds found in the basin, which mixed under sunlight with nitrogen oxides—at least 57 percent of which also came from oil and gas development—to form the choking smog, so thick that the nearby Salt Lake City airport was forced to divert flights when the smog was at its worst. But the haze over the Uintah isn’t the most dangerous air pollutant coming from the oil and gas fields in the valley. A string of studies by the National Oceanic and Atmospheric Administration (NOAA) show that the core ingredient in natural gas, methane, is leaking at rates far higher than previously suspected. This methane has climate change impacts that, on a pound-for-pound basis, will be far more powerful over the next two decades than the carbon dioxide emissions that have been the focus of most climate change discussions. In Washington D.C., pressure is mounting to ignore these methane leaks. The oil and gas industry says there is no time to waste. We must proceed immediately with the “all-of-the-above” national energy strategy they say, code for “drill baby drill”. This pressure is coming not only from the natural gas industry itself, but also from a surprising ally: the Environmental Defense Fund (EDF), which has supported natural gas development as a “bridge” from coal to renewables.

Does Acidizing Pose a Greater Threat to the Environment than Fracking? - A report from Next Generation stated that “politically, it’s the same fight as elsewhere – environmental regulations have been drafted, legislation written and fought over, Hollywood films made, coalitions pro and con organized -- all focused on the potential benefits, and threats, of widespread fracking. But in California, at least, the obsession with fracking may be misplaced.”That is because their report has revealed a new technique that is preferred in the Monterey shale due to the plays complex formation and low-permeable rocks that make traditional fracking much less effective.The new technique is known as acidizing, and it involves pouring huge amounts of hydrofluoric or hydrochloric acid, incredibly powerful solvents, into the wells to dissolve the rock and release the trapped oil and gas.Acids are very dangerous substances, and whilst there have been no major accidents in the US so far, the huge volumes being transported around to oil fields in the back of trucks could result in a deadly accident similar to the tragedy in Korea last year, when hydrofluoric acid leak killed 5 workers. One of the major concerns that the report highlights is that “there appears to be no research or other publicly available information about HF’s use in oil and gas production or its potential effects on groundwater supplies. But the risks are clear.”

Obama Patron Warren Buffett Buys Over $500 Million of Suncor Tar Sands Stock - Warren Buffett — the fourth richest man on the planet and major campaign contributor to President Barack Obama in 2008 and 2012 – may soon get a whole lot richer. That’s because he just bought over half a billion bucks worth of Suncor Energy stock: $524 million in the second quarter of 2013, to be precise, according to Securities and Exchange Commission filings. Suncor is a major producer and marketer of tar sands via its wholly owned subsidiary Petro-Canada (formerly Sunoco) and this latest development follows a trend of Buffett enriching himself through dirty investments and deal-making. Referred to as one of 17 “Climate Killers” by Rolling Stone‘s Tim Dickinson in a January 2010 story, Buffett’s making a killing – while simultaneously killing the ecosystem – through one of its most profitable wholly-owned assets: Burlington Northern Santa Fe (BNSF). BNSF hauls around frac sand for the controversial horizontal oil and gas drilling process known as “fracking.” The rail company also moves fracked oil from North Dakota’s Bakken Shale basin, tar sands logistical equipment and tar sands crude itself and tons of coal. And not only does Buffett’s BNSF haul around ungodly amounts of coal, he actually owns coal-burning utility companies, too. “BNSF is the nation’s top hauler of coal, shipping some 300 million tons a year. That’s enough to light up 10 percent of the nation’s homes — many of which are powered by another Berkshire subsidiary, MidAmerican Energy,” Dickinson explained. Beyond MidAmerican Energy, Buffett also owns the coal-burning PacifiCorp and his BNSF freight trains are largely responsible for the coal export boom unfolding in the northwest corridor of the United States.

BP Sues to Get New Contracts After Oil Spill — BP is suing the U.S. government over a decision to bar the oil giant from getting new federal contracts to supply fuel and other services after the company pleaded guilty to manslaughter and other criminal charges related to the 2010 Gulf of Mexico oil spill. The Houston Chronicle reports BP filed the lawsuit Monday in Houston federal court. BP says it is seeking an injunction that would lift an order by the Environmental Protection Agency that suspends the company from such contracts. The newspaper reports an EPA spokesman declined to comment on BP’s court action, referring questions to the Justice Department, which also declined to comment.

BP sues U.S. over ban from contracts after spill - British energy giant BP is suing the U.S. government for banning it from federal contracts after the deadly 2010 Deepwater Horizon disaster in the Gulf of Mexico, documents showed Tuesday. The U.S. Environmental Protection Agency last year barred BP from competing for new federal contracts following the catastrophic accident three years ago, which left 11 people dead and sent millions of barrels of oil churning into the gulf. The EPA decision, citing BP’s “lack of business integrity,” came after BP agreed to pay a record $4.5 billion last November to settle criminal charges arising from the case. The suit filed this week in federal court in Texas has challenged the EPA ban, arguing it surpassed the agency’s authority and constituted an abuse of power. “EPA’s decision to suspend did not address the overwhelming evidence and record of BP’s present responsibility as a government contractor and leaseholder,” the suit said. It “did not attempt to explain how or why immediate suspension was necessary to protect the public interest, as federal law requires.”

Mexico to Liberalize Oil Industry --  From the FT: President Enrique Peña Nieto will take a leaf out of the history books when he reveals a long-awaited energy reform this week that aims to attract private companies to invest in Mexican oilfields for the first time since they were nationalised 75 years ago  According to the story, there is sufficient political support in the Mexican Congress for this.  But only time will tell if it actually goes through.  If it does, it will be one of the most important developments in the oil market over the last 50 years.

Ecuador Seeks Crude in Amazon Rainforest as Economy Slows -  OPEC-member Ecuador, where the rights of nature are recognized in the constitution, plans to develop crude deposits in an Amazon area declared a biosphere reserve by the United Nations as existing fields age and economic growth slows.  President Rafael Correa will ask the country’s congress to allow drilling in the Ishpingo-Tambococha-Tiputini oil fields in eastern Ecuador’s Yasuni National Park, he said yesterday in a speech broadcast on public television station ECTV. The area’s estimated oil reserves could be worth more than $18 billion, Correa said.The decision reverses a policy to preserve nature in an area eight times bigger than Los Angeles, estimated by Correa to hold 920 million barrels of crude, or about 20 percent of Ecuador’s reserves. The proposal to develop the area comes as economic growth is forecast to slow for a third year.

Monthly Oil Supply Update -- The IEA is reporting a new high of global liquid fuel production in July, only a little shy of 92mbd (see graph above). OPEC does not agree, and of course the figures are often revised, so we'll have to see how this shakes out. At a minimum, it gives us something to think about, global oil supply having been a deadly dull flat series for the last couple of years. Maybe it's about to increase again? The picture above only covers since 2008, and is not zero-scaled, to best show recent changes (during and since the great recession). The slightly longer term picture, since 2002, is below. That chart also includes the EIA's figures for crude and condensate (C&C), a narrower definition of oil that excludes biofuels and natural gas liquids that are debatable as to whether or not one wants to consider them in oil supply trends. Global C&C production has been almost flat since 2005 - a bumpy plateau that slopes only very slightly upward. Finally, this last picture shows the various oil production series, together with Brent oil prices (inflation adjusted, on the right scale). Prices bumped up very slightly in July. They have mostly been going down since the Arab spring, but, in my opinion, cannot go much below $100 because that will trigger Saudi/OPEC production cutbacks to support the price.

Forecasts: Oil and Gasoline Prices expected to decline - From USA Today: Relief at the pump: Gas prices on the decline The federal Energy Information Administration forecasts 2014 will average $3.37 a gallon vs. an estimated $3.52 a gallon in 2013. That would be the lowest national average since 2010, when gasoline averaged about $2.80. "Once we get to mid-September, we'll see prices drop 10 to 20 cents a gallon,'' says Tom Kloza, chief oil analyst for price tracker "Typically, demand drops the last 100 days of the year and bottoms out in December." Here is the current EIA forecastThe U.S. Energy Information Administration (EIA) expects that the Brent crude oil spot price, which averaged $108 per barrel over the first half of 2013, will average $104 per barrel over the second half of 2013, and $100 per barrel in 2014. . WTI oil prices have been moving sideways over the last month after increasing in early July, with WTI at $105.97 per barrel.  Brent is at $108.22. A year ago, WTI was in the low $90s, and Brent was around $113 per barrel - so the spread has narrowed considerably, although the EIA expects the spread to widen a little later this year. Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.54 per gallon. That is just below the current level according to The following graph is from Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent.

Saudi Arabian Oil Production - The above graph shows Saudi production of crude and condensate (ie oil) from 1995 through July. There are several data sources, but the black line is the average. The red curve is the number of oil rigs working in the country, and is a rough proxy for the level of effort being made to maintain or increase production. In the middle of the price spike in 2005-2008, Saudi Arabia began to reduce production, rather than increasing it, and at the same time increased drilling over the very low level they had traditionally maintained. This suggested to some of us difficulty maintaining production (probably due to long-standing under-investment in developing new resources to replace aging fields). Then in late 2008, Saudi Arabia sharply reduced production in response to falling demand due to the great recession. Simultaneously, the drilling program was allowed to fall off. Then, several months after the Libyan revolution, Saudi Arabia increased production again to almost 10mbd, and began increasing rigs again, which has continued since, with some bumps along the way. However, they decreased production in late 2012 (possibly to offset US production increases), and have only partially restored that production again. It is unclear how much further Saudi Arabia could increase production - they never provide sufficient detail to verify claims as to spare capacity. The conservative view is that they can only increase to previously demonstrated levels - in this case, that is only a few hundred kbd above the present level. If that were the case, a fairly modest disruption in oil supply anywhere on the planet would be enough to trigger sharp price increases (much as the Arab Spring did)..

U.S. Energy Independence Doesn’t Mean a Thing - Libyan oil production is at its lowest level since the onset of civil war in 2011. In Iraq, oil production is down below the 3 million barrel mark for the first time in five months. Much of the region was highlighted in a global security alert issued recently by the U.S. State Department. For struggling OPEC members in the region, the International Energy Agency said oil production from North America was providing relief for the global marketplace. Some U.S. lawmakers have been banging the drum of energy independence amid record-setting levels of oil and natural gas production. While reducing foreign imports is a source of domestic appeal, it does little to address the ripple effects of international turmoil. In its market report Friday, the IEA said oil production from Iraq fell below 3 million barrels for the first time in five months. The Paris-based agency blamed insurgent attacks on Iraqi oil pipelines for much of the decline in oil production in July.  The IEA said production from members outside OPEC was helping address supply issues in the Middle East and North Africa. Non-OPEC output should reach 55.4 million bpd by the fourth quarter of 2013 with the help of North American production. The U.S. Energy Department said domestic crude oil production reached 7.5 million bpd, the highest monthly level of production in more than 20 years.

The Social Implications Of Energy Return - Fuels carry energy. Some, like gasoline, diesel, natural gas and wood, carry energy stored in their chemical bonds, and we release this energy as heat by burning these fuels. Uranium, on the other hand, carries energy in the attractive forces between its nuclear particles, and by breaking-up those nuclei we can harness that energy, again as heat. Fuels that generate heat can boil water, and the resulting steam can be sent through a turbine to generate electricity, a secondary fuel that carries energy as a flow of charged particles.  All of these fuels have one thing in common: it takes effort on our part to release their stored energy in a way that serves a useful purpose.  The reality that it takes energy to get energy underlies the concept of energy return. A fuel’s energy return is calculated as a ratio, with the energy it carries in the numerator and the direct and indirect energy inputs required to produce it in the denominator. Energy return can be thought of as an efficiency measure, a ratio that quantifies the relationship between the outputs of a fuel production process and its required inputs. Fuels that carry more energy than is required for their production yield energy returns above one, delivering a positive energy return. Those that require more energy inputs than the energy they carry yield a negative energy return, and are energy sinks. Fuels only yield energy returns greater than one by virtue of an accounting convention that leaves out inputs associated with solar radiation and the geologic processes that trapped ancient biological materials deep enough beneath Earth’s surface to form crude oil, natural gas and coal. Were it not for these conventions, the laws of conservation of energy and of entropy would prohibit any fuel from yielding a positive energy return.

China set to pass U.S. as top oil importer -- The rapid redrawing of the world's energy map is about to hit another milestone, with China overtaking the U.S. as the biggest importer of oil. The Energy Information Agency expects China's monthly net oil imports to exceed those of the U.S. by October, and by next year on an annual basis. "The imminent emergence of China as the world's largest net oil importer has been driven by steady growth in Chinese demand, increased oil production in the United States, and a flat level of demand for oil in the U.S. market," the EIA said in its latest outlook. A boom in U.S. oil production is being driven by new technologies, such as hydraulic fracturing -- or fracking -- which are opening up huge reserves for development. The Paris-based International Energy Agency has forecast that the U.S. could become energy independent by 2030, and the world's biggest producer seven years from now. The U.S. oil boom is boosting the nation's level of reserves, reshaping global oil trade flows and driving up demand and salaries for experienced engineers. And while China's breathtaking pace of economic expansion has slowed, its demand for oil to fuel a massive manufacturing sector is set to continue growing at a much faster pace than it can ramp up its own production.

China slowdown exposes debt stress in raw materials (Reuters) - China's slowing economy has hammered businesses supplying the raw materials for growth, with coal and aluminium firms at risk of defaults and closures after clocking up at least $490 billion of debt in a rush to expand. The debt mountain highlights the systemic threat posed by China's smokestack industries, which Beijing wants to slim down after a stimulus-fuelled investment boom launched in 2009. Some recent data has raised hopes that China's economy is stabilising, but growth has slowed for nine straight quarters, piling pressure on these sprawling sectors, just as China has pushed banks to tighten credit to companies. "The inevitable is that we do see liquidity issues and failures for some of these companies and I think that will happen over the next six to 12 months," said Andrew Driscoll, head of resources at CLSA Asia Pacific. Nearly 90 percent of mainland-listed coal firms posted a profit drop in 2012, with total profits at a five-year low. Once market darlings, the financial position of Chinese-listed coal firms has deteriorated. Falling revenue has forced some miners to either delay payments or borrow money to pay salaries, according to the China Coal Association. With new mines coming onstream and imports still growing, the outlook for the coal sector, where prices have fallen to four-year lows, looks grim.

Pollution Economics -- WITH more than a million people in China dying prematurely each year from breathing its dirty air, and with warming temperatures portending rising sea levels and disruptions to food production, the centrally planned Communist country is experimenting with a capitalist approach to address the problem: it is creating incentives so that the market — and not the government — will force reductions in emissions.  China, the world’s largest emitter of carbon dioxide, has begun its effort in the southern city of Shenzhen, paving the way for a national Chinese market in a few years. Like Europe, which voted to extend and improve its emissions market, and Australia and New Zealand, Shenzhen chose a carbon market as the most efficient way to lower its greenhouse gas emissions.  Under the Shenzhen program, the government will set limits on carbon dioxide discharges for 635 industrial companies and 197 public buildings that together account for about 40 percent of the city’s emissions. Polluters whose emissions fall below the limit can sell the difference in the form of pollution allowances to other polluters. These companies must decide whether it is cheaper to reduce emissions or pollute above their limit by buying allowances, whose price will be set by supply and demand. But the pressure will be on, because the limits will decrease over time. Six more regional pilot programs are planned over the next year.

How Fast Can China Grow? Not as Fast as Most Analysts Think - Via Email, Michael Pettis at China Financial Markets quantifies various growth and investment scenarios. Pettis maintains 6% or higher growth is not plausible and that even 3-4% growth may be optimistic. What follows is from Pettis ... Under specified rebalancing assumptions for China it is possible to calculate arithmetically the annual growth rate for consumption and investment under different GDP growth scenarios. This allows us to decide whether these scenarios are plausible or not.To read the table, let us start by assuming, as an example, that we believe the average GDP growth rate over the ten-year period will be 6%. For China to do a minimal amount of rebalancing that gets consumption to 50% of GDP and investment to 40% of GDP, we can quickly figure out what the corresponding growth rates of consumption and investment must be. Consumption must grow by 9.9% a year and investment must grow by 4.5% a year to get us there. Notice  I start with an assumed GDP growth rate and then calculate what the implicit growth rates in consumption and investment must be in order for rebalancing to take place. I am not making predictions, in other words. I am simply working out logically what any GDP growth rate must imply in terms of consumption and investment growth rates in order for China to rebalance.

Dodgy data may add $1 trillion to Chinese economy - China may be exaggerating the size of its economy to the tune of $1 trillion by releasing "willfully fraudulent" inflation and GDP [gross domestic product] data, according to a study out this week. Numbers from the world's second largest economy are treated with skepticism by some economists, but this latest report has attempted to quantify the scale of discrepancy."There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated," said Christopher Balding, associate professor at Peking University's HSBC Business School, and the report's author.Through "significant and systematic irregularities", official estimates overstate China's true GDP by 8 to 12 percent, or $1 trillion, according to Balding.  In particular, the report focused on housing inflation data, which is one of the biggest items in the Consumer Price Index (CPI). China's booming economy has caused people to migrate from rural areas to the expanding cities, causing house prices to rocket in industrialised areas. Yet official statistics showed rural house prices increasing more than those in urban areas, said Balding.

Does China have too many unpopular cities? - A little over half of China’s population is urbanised, and the country’s leaders plan to urbanise vast numbers of people over the next decade – although both the time frame and the number of people in the plan vary, depending where you look — both 260m and 400m have been widely reported. A city can certainly be sustainable if businesses start to pop up — but how does that happen, and what if it doesn’t? Jobs, naturally, can be a problem in this situation; a fact illustrated in the NY Times report on the recently-designated town of Qiyan, where high-rise housing for 6,000 replaced a village of about 200 households (residents from surrounding areas were encouraged to move there, too). A lack of jobs meant residents in newly-constructed Qiyan homes huddled around open fires for warmth because they couldn’t afford electricity. Okay, then, maybe Tieling and Qiyan are messed up, but so what — we’ve heard it all before, right — maybe they, along with the famed case of Ordos, are just outliers? China’s build-first approach hasn’t always gone drastically wrong. As the WSJ notes, “the towering new Pudong business district” was empty when built a decade ago, but later became a “symbol of China’s success”. On the other hand, is it Pudong that is the exception and Ordos that is the norm, or at least a more common scenario in China’s many smaller cities? Hard data is hard to come by, but the WSJ asserts that the build-now-wait-for-growth strategy has “thrown up empty suburbs and ghost cities like Tieling New City across the country”.

Easy Credit Dries Up, Choking Growth in China — As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China. Top luxury clothing stores in this city’s downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city’s business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions. But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted. Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city’s car dealerships have failed. Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of broader troubles that are beginning to afflict the entire Chinese economy. Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets.

What’s going on with China’s bad banks? - We’ve been pondering for a while here how China might avert or delay a full-blown financial crisis (or worse). Or, if you want to put it in a different light, how China might make its growth sustainable. Either way, cleaning up bad debts from a bygone crisis might be a place to start. Chen Long at the INET China Economics Blog has noticed something interesting happening with China’s big Asset Management Companies — the four “bad banks” that were created in 1999 to buy Rmb1.4tn of distressed assets at book value from the four big state banks — equivalent to about 20 per cent of their combined loan books, or 18 per cent of China’s GDP in 1998, according to this BIS paper. While the financing arrangement is somewhat mysterious, the AMCs issued bonds worth about Rmb840bn to the banks in exchange for the assets, with the remainder paid mostly by the Peoples’ Bank of China.As Chen and the BIS authors note, the AMCs were apparently only intended to last for 10 years. Yet by 2009, only Rmb100bn of the Rmb800bn-plus in bond issues had been repaid to the banks, according to a PBoC official. So the bonds were rolled over. Chen noticed that the holdings of bonds reported by the large banks began to fall sharply after 2009, having remained near their original amount for about a decade.However, the payments have suddenly accelerated since 2009. According to the 2012 annual reports of CCB and ICBC, their holding of the AMC bonds have declined substantially.

China's $1 Trillion GDP Lie - From goal-seeked GDP, manipulated inflation, liquidity-flow-exaggerated trade data, and hidden (and divergent) PMI details, the question of the unreliability of Chinese data is not a new one. However, anecdotes aside, a new study from Peking University finds, conservatively, correcting for housing price inflation in the Chinese CPI data adds approximately 1% to annual consumer price inflation in China, reducing real GDP by 8-12% or more than $1 trillion.  Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China data on the components of consumer price inflation, I attempt to reconcile the official data to third party data. Three problems are apparent in official NBSC data on inflation.  First, the base data on housing price inflation is manipulated. According to the NBSC, urban private housing occupants enjoyed a total price increase of only 6% between 2000 and 2011. Second, while renters faced cumulative price increases in excess of 50% during the same period, the NBSC classifies most Chinese households has private housing occupants making them subject to the significantly lower inflation rate.  Third, despite beginning in the year 2000 with nearly two-thirds of Chinese households in rural areas, the NSBC applies a straight 80/20 urban/rural private housing weighting throughout our time sample. This further skews the accuracy of the final data.

Economic Expansion Slows Down in Japan - Japan’s economic growth slowed in the quarter that ended in June to an annualized rate of 2.6 percent, government data showed Monday, clouding the outlook for the economic policies of Prime Minister Shinzo Abe and raising concerns that he may put off moves to tackle the country’s enormous public debt. This was the third consecutive quarter of growth for Japan’s gross domestic product of about $5 trillion, the third-largest in the world, after those of the United States and China. Still, the expansion fell short of analysts’ expectations for Japan, whose economy grew at a robust pace of 3.8 percent in the previous quarter, helped by the Abe government’s monetary and fiscal stimulus drive. Economists polled by Reuters had expected Japan’s economy to grow at a similarly healthy clip in the April-to-June quarter. But weak capital expenditure, reflecting continued caution among Japanese corporations about the country’s long-term prospects, slowed growth, according to figures released by the Cabinet Office. Compared with the previous quarter, the Japanese economy grew 0.6 percent.

With Exports At 4-Year Low, Is Japan Missing Boat to China? - Those hoping that trade between China and Japan would recover from the sharp drop last autumn caused by the flare-up of a territorial dispute have reason to be disappointed. New figures released by Japan’s government-affiliated trade promotion body show that not only is trade falling, officials expect the downturn to be prolonged. Data from the Japan External Trade Organization showed that exports to China for the first half of the year fell to the lowest level in four years, as slowing infrastructure investments added to ongoing diplomatic tensions. The figures showed that the pace of year-on-year decline in Japanese exports to China accelerated to 16.7% for January-June from 14.8% in July-December, a period that includes September 2012 when anti-Japanese protests hit many Chinese cities after Japan nationalized a group of small islands claimed by both countries. With China relations strained, Japan is again back in the arms of the United States, its main strategic ally. The U.S. has retaken its traditional place as Japan’s largest export market for the first time in five years, with a total of $66 billion against China’s $61 billion in January-June. But even as emotions have calmed, Jetro officials say China’s suddenly weaker economy has led to continued reductions in exports. Lackluster private consumption in China contributed to a 47.7% drop in exports of digital cameras and other audio-visual equipment, the figures showed. Japan’s imports of Chinese goods also fell, but a much smaller 6.1% to $86 billion. As a result, Japan’s trade deficits with China jumped 38.1% to $24 billion, a record for the first half. Jetro predicts Japanese exports to China will stay keep declining, and deficits will widen further.

Yen Surges As Japanese GDP Misses By Most In A Year -- There goes the tax hike (and any expectation of fiscal balance). Japanese GDP grew at a miserly 0.6% QoQ, missing expectations of +0.9% (the biggest miss in a year) and slowing from an already revised lower 0.9% growth in Q1. So much for Abenomics breathing life back into a balance-sheet-recessed nation. Typically this kind of miss would be met with cheers as bad is good but in the case of Japan where they are so far down the rabbit hole, there is no moar left. The already collapsing JPY-carry trade is unwinding in a hurry as JPY surges to a 95 handle on the news; the USD is dropping, Nikkei futures are down 200 points, S&P futures are down a few handles, and gold is holding notable gains.

What is causing the summer economic slump in Japan? - As discussed previously (see post), Japan's recent economic momentum has weakened. With the economy rebounding strongly earlier in the year, many had hoped growth will accelerate. But the industrial production pullback in June did not turn out to be simply an aberration and other reports started signaling a slowdown in economic activity. As the service PMI data shows (below), the slowdown is not dramatic but is certainly noticeable. What's causing this sudden summer slump? Here are a few thoughts.
1. The Japanese remain uneasy with the growing government debt problem (see story of quadrillion yen), which is not helping with corporate and consumer sentiment. Elaine Kurtenbach of the Associated Press put it quite well: CTV: - A central concern is a potential loss of confidence in Japan's ability to service its debt, given that repaying just the interest on government bonds is consuming a growing share of limited tax revenues. Japan's parlous fiscal situation is compounded by surging health and welfare costs from the fast-expanding share of elderly in the population. Rising inflation would inevitably push interest rates on government bonds higher, adding to the burden.

2. The looming sales tax hike (which is meant to address the above) remains a major risk to spending and growth, as the debate about its impact continues (see story).
3. While economists tend to think that inflation is quite healthy for Japan after years of deflationary pressures, it may be difficult for the consumer to adapt to the new regime. Wages have been declining for some time (see discussion), which is less of a problem when prices are falling.  It becomes a problem when prices rise and are combined with the new sales tax.

Japan GDP Clouds Tax Debate - Japan watchers were hoping today’s GDP figure would give some clarity to whether Prime Minister Shinzo Abe’s government will push ahead with a sales-tax hike to bring rapidly-increasing debt under control. But the number – an annualized 2.6% growth in the three months through June – has further clouded the debate over the sales tax.The number came in lower than the 3.6% rate economists expected and is likely to give firepower to those who contend the economic recovery is too fragile to withstand such a hike at this juncture.The GDP number is “not a bad figure, but superficially it probably won’t be enough to convince the sales-tax skeptics,” Mr. Abe’s administration has said the latest GDP figures are key in deciding, probably in the fall, whether to double the tax to 10% in stages by 2015. Proponents of the tax hike, including Japan’s central bank and the International Monetary Fund, argue the levy is essential to curb mounting public debt – worth more than the size of the Chinese economy – and prevent a loss of confidence in Japanese bonds.  Others, including senior aides to Mr. Abe, fear it could tip the nation back into recession. Many in Japan blame a decision in the late 1990s to push the sales tax up to 5% – its current level – for an ensuing downturn. (Although others say the Asian crisis of 1997-98 was a larger motor.)

The Yen's Progress and Japanese Exports -- I'm just back from Japan, where disappointing GDP statistics have reinforced the fact that the economy is still far from full recovery. However, like in the US, first reads on GDP statistics are often very noisy, so one shouldn't get too worked up (while revisions have tended to be downward, post-2008, just like in the US, successful prediction of direction of and acceleration in growth has increased post-2008 [0]). Still, with exports accounting for a notable share of growth [1] [2], this led me to wonder how much of the exchange rate depreciation that occurred several months ago has remained, and has led to declining export prices faced by other countries. From today's WSJ RTE, "Prices for Imports From Japan Decline Sharply": Import prices from Japan [to the US] declined 2.4% in July compared with a year earlier, the sharpest 12-month drop since December 2002, according to Labor Department data released Tuesday. The cost of imports from America’s fourth-largest trading partner have trended down for six consecutive months.  Prices U.S. consumers pay for imported computers, cars and other consumer durable goods — all products that are made in Japan — have fallen in the past year.  For more on exchange rate pass through, see here.  Figure 1 depicts the course of the exchange rate against the US dollar (down is a yen depreciation). This depreciation is not merely a US-Japan phenomenon; the yen has also depreciated on a broad basis, as measured by the BIS's nominal trade weighted (broad) index.

Machinery Orders Bright Sign For Japan Sales Tax Advocates - Japan watchers betting that weaker-than-expected second quarter growth will throw cold water on the government’s plans to raise the nation’s sales tax next year might be rethinking their assumptions after a key measure of capital spending came in strong. Reuters Data released Tuesday showed that core machinery orders jumped 6.8% in the April-June from a quarter earlier, with the overall value of orders the highest since 2008. The government has staked the future of the sales tax hike partly on gross domestic product data, which has been weighed down by weak capital expenditure figures. Tuesday’s data seems to be a win for those who say the government shouldn’t hesitate on the tax hike as it tries to shore up its tenuous finances. Japan is the most indebted nation among its industrialized peers, with public debt worth over two times its economic output. Economists say it’s not strange to see capex lagging behind, especially with the outlook for the U.S. and Chinese economies still up in the air.

Japan’s Net Buying of Foreign Bonds Highest in 3 Years - Japan-based investors continued to pour into foreign debt last week, yet fund managers and economists aren’t convinced that boost of liquidity overseas will help the global economic recovery just yet. Japanese investors bought a net Y1.6 trillion ($16 billion) in overseas bonds and notes in the week of Aug. 4-10, according to Japan’s Ministry of Finance. That was the biggest net weekly purchase in three years, and represents a turnaround from Y7.7 trillion worth of selling in the three months through June. Most of the buying was in U.S. Treasurys as Japanese investors –mostly local banks – look to benefit from rising rates in the U.S. But the net amount of purchases — $16 billion – is small compared to the $550 billion average daily trading volume of U.S. Treasurys this year.“It’s just a tiny part” of factors that influence overseas rates. For now, Japan’s massive stimulus program, an attempt to end years of deflation, has failed to lift global or regional economies. Japan’s economy has rebounded, with signs emerging that deflation is over. But the main beneficiaries are Japanese firms, as the weak yen pushes consumers to buy locally-made goods and makes Japanese goods produced at home cheaper and more competitive abroad. Overseas investors have eagerly awaited the Bank of Japan’s massive bond-buying program to push Japanese investors out of domestic debt and overseas. If Japanese financial institutions moved the equivalent of even just 1% of their 633-trillion-yen Japanese-sovereign-bond holdings abroad, that could provide liquidity to global financial markets, keeping borrowing costs low.

Indonesia Ignores Calls For Rate Hike -- Indonesia – not long ago a golden boy of emerging markets – is struggling to combat the triple threat of slowing growth, rising inflation and an exodus of foreign exchange that is slamming the county’s currency. Its central bank solution Thursday: do little more for now and hope for the best. While some economists had predicted an additional rate hike on top of Bank Indonesia’s two increases in the last two monthly meetings, the central bank left its key lending rate unchanged Thursday. Instead, it decided tweak lending requirements for banks, hoping to slow loan growth. “They need to do it like Brazil (raising key rates) 50 basis points at a time for people to notice them,” and to rein in inflation and foreign outflow said Prakriti Sofat, a Singapore based vice president of research for Barclays Bank PLC. “The trend is concerning.” Indonesia also said Thursday that its foreign exchange reserves had slipped to $92.7 billion on July 13. That is more than $5 billion down from a month earlier and $15 billion down from the end of April. Economists said they needed to see the latest balance of payment numbers, scheduled to be announced today, before they can figure out exactly what is sucking the billions of dollars out of country but the broad strokes of what has been happening are already clear.

Australian Central Bank Walks Fine Line - The Australian dollar is rising Monday, following signals last week from the Reserve Bank of Australia that its rate-cutting cycle may be winding down.The central bank has to balance concern about rising real-estate prices with Australia’s fragile commodities-focused economy, which is suffering from China’s slower growth. On Friday the central bank made a crucial change to its quarterly policy outlook. The RBA—which three days earlier had cut rates for the eighth time in a string dating to November 2011—removed long-held language about the “scope” to cut rates further, instead saying instead rates will be adjusted “as needed.”

How the Pending Trans-Pacific Partnership and EU-US Trade Deals Will Gut National Regulations, Hurt Budgets, and Undermine Sovereignity - Yves Smith  -- Yves here. We’ve written from time time about the latest plans underway to further degrade the lives of ordinary citizens in order to fatten the bottom lines of major multinationals, namely, two major US-led international trade pacts. Even though the US media has given these pending deals scant attention, they represent a far-reaching effort to restructure basic legal and regulatory frameworks. As we wrote earlier this year: By way of background, the Administration is taking the unusual step of trying to negotiate two major trade deals in the same timeframe. Apparently Obama wants to make sure his corporate masters get as many goodies as possible before he leaves office. The Trans-Pacific Partnership and the US-European Union “Free Trade” Agreement are both inaccurately depicted as being helpful to ordinary Americans by virtue of liberalizing trade. Instead, the have perilous little to do with trade. They are both intended to make the world more lucrative for major corporations by weakening regulations and by strengthening intellectual property laws. The TPP has an additional wrinkle of being an “everybody but China” deal, intended to strengthen ties among nations who will then be presumed allies of America in its efforts to contain China… The article below describes the likely mechanism by which international investors will be able to vitiate national laws and regulations. Notice also that Australia has managed to get an exception to the Trans-Pacific Partnership on this issue. Who there has the 5×7 glossies on Obama? Will he share?

When Foreign Investors Sue the State- In the recent public debate surrounding the Trans-Pacific Partnership Agreement (TPPA), an issue that seems to stands out is the investor-state dispute settlement system (ISDS). It enables foreign investors of TPPA countries to directly sue the host government in an international tribunal. In most US free trade agreements, the tribunal most mentioned is ICSID, an arbitration court hosted by the World Bank in Washington. The ISDS is a powerful system for enforcing the TPPA’s rules. Any foreign investor from TPPA countries can take up a case claiming that the government has not met its relevant TPPA obligations. If the claim succeeds, the tribunal could award the investor financial compensation for the claimed losses. If the payment is not made, the award can potentially be enforced through the seizure of assets of the government that has been sued, or through tariffs raised on the country’s exports. The ISDS is related to relevant parts of the TPPA’s investment chapter. One of the provisions is a broad definition of “investment” which includes credit; contracts; intellectual property rights (IPRs); and expectations of future gains and profits. Investors can make claims on losses to these assets. Under the national treatment provision, foreign investor can claim to be discriminated against if the local is given preference or other advantage. Under the clause on fair and equitable treatment, investors have sued on the ground of non-renewal or change in terms of license or contract; and changes in policies or regulations that the investor claims will reduce its future profits. Finally, investors can sue on the ground of “indirect expropriation”. Tribunals have ruled in favour of investors that claimed losses due to government policies or regulations, such as tighter health and environmental regulations. The arbitration system has come under heavy criticism, including that the tribunal decisions are arbitrary and can contradict decisions of other tribunals in similar cases.

How the wealthy keep themselves on top - When the world’s richest countries were booming, few people worried overmuch that the top 1 per cent were enjoying an ever-growing share of that prosperity. In the wake of a depression in the US, a fiscal chasm in the UK and an existential crisis in the eurozone – and the shaming of the world’s bankers – worrying about inequality is no longer the preserve of the far left. There should be no doubt about the facts: the income share of the top 1 per cent has roughly doubled in the US since the early 1970s, and is now about 20 per cent. Much the same trend can be seen in Australia, Canada and the UK – although in each case the income share of the top 1 per cent is smaller. In France, Germany and Japan there seems to be no such trend. (The source is the World Top Incomes Database, summarised in the opening paper of a superb symposium in this summer’s Journal of Economic Perspectives.) But should we care? There are two reasons we might: process and outcome. We might worry that the gains of the rich are ill-gotten: the result of the old-boy network, or fraud, or exploiting the largesse of the taxpayer. Or we might worry that the results are noxious: misery and envy, or ill-health, or dysfunctional democracy, or slow growth as the rich sit on their cash, or excessive debt and thus financial instability.

India Plans Curbs on Some Imports as Record Deficit Hurts Rupee -- India said it plans to curb some non-essential imports to narrow a record current-account shortfall and boost foreign capital inflows to stem a plunge in the nation’s currency. The measures are needed to “contain the current-account deficit to reduce the volatility in the currency market and to stabilize the rupee,” Finance Minister Palaniappan Chidambaram said in parliament in New Delhi today. Imports of gold, silver and some non-essential items, as well as demand for oil, would be compressed under the proposed steps, he said. State-owned financial companies would be permitted to issue “quasi-sovereign” bonds for infrastructure investment as part of the effort to attract capital, Chidambaram said. Rules for overseas commercial borrowings and certain deposit programs for non-residents would be eased, he added. The Reserve Bank of India raised two interest rates last month and curbed the supply of cash in the banking system to tackle the rupee’s 10 percent slump against the dollar in 2013. The trade imbalance and the prospect of reduced Federal Reserve monetary stimulus have weighed on the currency.

India’s Quick-Fix Steps Aren’t Helping the Rupee - India this week announced several steps aimed at shrinking its large current-account gap and stabilizing the rupee, but economists and markets have reacted with a shrug.  The rupee has continued to slide. On Wednesday, it was trading at 61.57 rupees for one U.S. dollar, versus 60.80 for a dollar, before India outlined its plans late Monday. It is not far from a record low of 61.80, reached last week.  The measures, outlined by Finance Minister Palaniappan Chidambaram late Monday, are meant to reduce India’s import bill by buying more oil from Iran in rupees rather than from the international market in dollars. On Tuesday, India raised taxes on gold and silver to make these more expensive in the domestic market, in an attempt to reduce imports. Mr. Chidambaram expects these steps to help cut the country’s current-account gap from a record $87.8 billion or 4.8% of gross domestic product, for the year that ended March 31 to $70 billion, or 3.7% of GDP, for the current fiscal year. Economists are also expecting India’s deficit to fall, to around 4% of GDP.  Mr. Chidambaram also announced steps to increase capital inflows to fund this gap. These include raising money via a quasi-sovereign bond issue, allowing Indian companies to raise more debt overseas and making it more attractive for non-resident Indians to park their savings in India.

India Fighting Worst Crisis Since ’91 Seeks to Buoy Rupee - India increased efforts to stem the rupee’s plunge and stop capital outflows that are pushing the economy toward its biggest crisis in more than two decades.  The Reserve Bank of India, whose Governor Duvvuri Subbarao steps down next month, cut the amount local companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent, according to a statement late yesterday. Residents can remit $75,000 a year versus the previous $200,000 limit. Rupee forwards rose for the first time this week.  Policy makers’ moves since July to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee’s slump to record lows as they struggle to attract capital to fund a record current account deficit. The rupee has weakened 28 percent in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991.

Fight the flight - YESTERDAY we blogged about India’s worrying imposition of new capital controls, announced on the evening of August 14th to stop cash flowing out of the country and stem the decline of the rupee. I’ve just had a briefing from local officials about the policy. The local media has been uncharacteristically quiet about the measures, but foreign investors and well-off Indians should be watching closely. Our colleagues at the Financial Times are. They published a well-judged leader in today’s paper. To recap, on the 14th the central bank clamped down on Indians’ ability to take money out of the country in two ways. The limit on personal remittances has been cut to $75,000 per year, from $200,000 per year. And companies are now barred from spending more than their own book value on direct investments abroad, unless they have specific approval from the central bank. Previously they could spend up to four times their own net worth. Both changes reverse the gradual liberalisation of India’s balance of payments over the last decade.The restriction on personal outflows is, apparently, to deal with incipient signs of capital flight by India’s rich. Brokers, bankers and assorted hustlers, mainly based offshore, have been rushing to offer wealthy Indians cash extraction services. Marketing emails from them have been circulating widely. The pitch is primitive: take your dough out now, convert it into a hard currency, wait for the rupee to fall to 70 against the dollar, then bring it back into the country and convert it back to rupees at the more favourable rate. Outbound personal remittances by Indians have been small historically—perhaps $1bn a year, a drop in the ocean given India’s current-account deficit of $70-80 billion. But the Indian authorities’ aim is to crack down on these schemes before they cause a much bigger speculative outflow and a self-fulfilling panic.

Rajan Calls Krugman “Paranoid” for Criticizing Reinhart and Rogoff’s Research By William K. Black - This article discusses a simmering feud among five of the most prominent economists in the world (two of them Nobel Laureates).  It was prompted by the August 8, 2013 article by Raghuram Rajan, who has just been selected to run India’s Central Bank, entitled: “The Paranoid Style in Economics.”  (Note: I have deliberately “buried the lead” in my last section.) The personalities involved have a great deal to do with the feud, but as Paul Krugman wrote on May 23, 2013, “It’s Not About You.” I will ignore the personalities and discuss what it is about – economic policies that continue to cause devastating harm to the public all over the globe.  Krugman and Joe Stiglitz are critics of the International Monetary Fund’s (IMF) imposition of austerity as a cure for severe recessions.  Ken Rogoff, Carmen Reinhart, and Rajan were the leading economists at the IMF who championed the imposition of austerity.

The submerging economies - A FEW weeks ago we identified an ongoing "Great Deceleration" across the emerging world. A new Bridgewater Associates analysis seconds our conclusions, and finds that a remarkable and somewhat surprising growth hand-off seems to have occurred. The Wall Street Journal reports: For the first time since mid-2007, the advanced economies, including Japan, the U.S. and Europe, together are contributing more to growth in the $74 trillion global economy than the emerging nations, including China, India and Brazil, according to an estimate by investment firm Bridgewater Associates LP, You can compare their assessment here: With our own, at right. You might notice that where the Journal says advanced economies last contributed most to growth in 2007 our own figures (borrowed from a Goldman Sachs analysis) show that emerging markets have been by far the biggest driver of global growth for at least a decade. The difference would appear to be down to the use of purchasing-power parity rather than market exchange rates. A case could be made for either; I rather prefer our decision for the somewhat unscientific reason that the PPP-based figures seem to better capture the way the world economy "felt" in the 2000s.

Is it time for an ‘International Supply Chain Agreement’? - As the Doha Round of trade negotiations under the WTO continues to stagnate, mega FTAs – such as the Trans-Pacific Partnership (TPP), the economic partnership agreement between Japan and the EU, and the Transatlantic Trade and Investment Partnership between the US and the EU – will likely play the leading role in trade rulemaking for some time to come. At the same time, however, mega FTAs are meant to set rules for and enhance value chains within specific geographic regions, and they will not directly lead to the creation of global trade rules. They even pose a significant risk of creating a 'spaghetti bowl' of conflicting trade rules. This column argues that we should multilateralise the results of mega FTAs on an issue-by-issue basis, starting with an International Supply Chain Agreement.

The long road to Eurozone bank deleveraging - RBS’ analysts have revisited predictions made in 2011 that eurozone banks would have to shed €5.1tn of assets. The good news is they have managed to get through almost half of that, or €2.9tn, since May 2012. The bad news being there remains another €3.2tn to go, including €661bn from the biggest banks — of which Deutsche Bank, Credit Agricole and Barclays need the most capital, followed by Societe Generale and Commerzbank.The deleveraging picture, both to-date and in future estimates, varies a lot between different tiers of banks. Much of the reduction in assets so far has been through run-offs, but less so in the bigger banks. It’s been uneven, too, between countries – lending activity in peripheral countries falling about €250bn while lending in the core has been stable or slightly higher, say RBS’ Alberto Gallo and team:

The Euro: A Pre-Mortem - Paul Krugman - Alan Taylor and Kevin O’Rourke have a very good analytical survey of the euro’s problems (pdf), putting it in historical perspective. I’d summarize their piece as saying that the euro suffers from all the problems euroskeptics warned about, plus one they didn’t — the dangers of lacking banking union. There’s a particularly good discussion of the problems of “internal devaluation”, with the demonstration that only in Greece, which is undergoing a full-blown depression, has there been any significant fall in wages:   Downward nominal rigidity is a real, important thing.

Italy: Public debt reaches new record high of €2.075 trillion in June -- The country's public debt rose 600 million euros from May, the Bank of Italy said. The increase in the Italian treasury's liquidity was to cover public administration costs, the bank noted. On a more positive note, June tax revenues rose by 21.5 percent to 46.3 billion euros from the same period of 2012, according to the bank. Since the onset of the eurozone crisis, Italian governments have been seeking cut Italy's vast sovereign debt load - currently around 130 percent of national economic output (GDP) and the second highest in the eurozone after Greece. The public debt hit 127 percent of GDP last year and the outgoing technocrat government of Mario Monti in April worsened its forecast saying the ratio would would hit 130.4 percent in 2013.

Greek Economy Contracts for 20th Quarter Amid Record Joblessness - Greece’s economy contracted for a 20th quarter, extending an economic slump that has left more than six in 10 young Greeks out of work. Gross domestic product shrank 4.6 percent in the three months through June from the same period last year after dropping 5.6 percent in the previous quarter, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. The median of six economist estimates in a Bloomberg News survey was for a 4.9 percent contraction. Greece doesn’t publish seasonally adjusted or quarter-on-quarter GDP data. Greece is in the sixth year of a recession deepened by budget cuts linked to a 240 billion-euro ($319 billion) bailout from the euro area and the International Monetary Fund. The unemployment rate reached a record 27.6 percent in May, with a jobless rate of 64.9 percent for Greeks aged 15 to 24. GDP fell 6.4 percent last year and economic output has contracted by more than a fifth since the start of Greece’s slump. IMF staff said in a report on July 31 that GDP will drop by 4.2 percent this year before the economy grows again in 2014.

Better economic news out of Greece mask clouds on the horizon - The latest GDP number out of Greece looks more promising than in the past (assuming it is to be trusted). The GDP contracted by only 0.2% (SA) from the previous quarter and 4.6% on a year-over-year basis.The Greek government wants to use this opportunity to obtain yet another bailout loan from the EU/IMF. In spite of this slowdown in GDP contraction and a somewhat better fiscal deficit, the Greek government is expected to run out of money by the end of next year. Barclays Research: - ... the programme could very likely run out of funds before the end of 2014 as lower-than-expected growth last year, extra costs for buybacks and the delays in implementing reforms have opened up a funding gap. In addition, at this stage, we don’t see how Greece could be in a position to return to market funding by the end of 2014, meaning that it will also need its bailout programme extending. Finally, long-term sustainability is still far from obvious and reaching the magical 120% debt-to-GDP ratio by 2020 will require substantial debt-relief measures. A rift is developing within the IMF over the fund's ongoing disbursements to Greece from funds that have already been committed (see story). The IMF has been pressuring the EU for some time to provide Greece with some "debt relief/extension" - possibly including outright "haircuts" to public sector loans. That means the Eurozone nations will need to accept worse terms and possibly a write-down of some sort in order to make the bailout plan more "sustainable".

Spending Cuts in Line With Commitments to Creditors But Economy Continues to Contract - Budget data from Greece's central government showed Monday a primary surplus for the first seven months of the year, turning around a steep deficit seen the previous year, according to the country's Finance Ministry. The data showed that the primary surplus reached €2.6 billion ($3.47 billion) against a deficit of €3.1 billion a year earlier. The data, which don't include payments on debt interest, local government and social security fund budgets, show that Greece is likely to secure a primary budget surplus for the year, for the first time in more than a decade. Greece's improving fiscal performance, however, has taken a toll on its economy, which is contracting for a sixth straight year under the weight of austerity....Greece expects the economy to shrink by 4.2% this year, though government officials have indicated that a stronger-than-expected tourism season this summer could provide some relief to the economy and result in a milder contraction of some 4% for the year. Many private-sector economists believe that this is too optimistic and that the economy could shrink for another year after the country's jobless rate hit 27.6% in May.

Bundesbank Says Greece Needs New Bailout -- According to the confidential report of Bundesbank, cited by the German magazine Spiegel, Greece will need another rescue package in 2014. In an internal document of the German Central Bank it said that that the European leaders must start immediately all these processes after the German elections in September, in order for the new loan for Greece to be ready to be disbursed early next year.  No amount was specified. Greece is surviving on two bailouts of 240 billion euros ($320 billion) from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) and Germany is the biggest contributor.

Euro Zone Returns to Growth - The euro-zone economy emerged more strongly than expected from its longest postwar contraction in the three months to June, but a resolution to its banking and fiscal crises remains a distant prospect. The European Union's official statistics agency Wednesday said the combined gross domestic product of the currency area's 17 members was 0.3% higher than in the first three months of the year, but 0.7% lower than in the second quarter of 2012. It was the fastest quarterly expansion since the first three months of 2011. The median forecast offered by 19 economists who were surveyed by The Wall Street Journal last week was for a quarter-to-quarter expansion of 0.2%, and a year-to-year decline of 0.8%. The euro zone's return to growth after six straight quarters of contraction was driven by Germany, its strongest and largest economy. It recorded the fastest expansion among large developed economies during the quarter. The French economy also played its part, with a 0.5% expansion, according to statistics bureau Insee. But an even greater source of surprise was Portugal, where economic activity picked up by 1.1%—by far the strongest growth rate recorded in Europe. Portugal is in the third year of an international bailout, and its economy hadn't grown since the fourth quarter of 2010. Its return to growth in such a decisive manner will encourage euro-zone policy makers to believe it can become financially self-reliant next year, as planned. It may also ease pressure on Prime Minister Pedro Passos Coelho's government to soften austerity ahead of local elections in September.

Euro Zone’s Recession Ends, at Least for Now - Bolstered by stronger consumption and investment in Germany as well as growth in France, Europe broke out of recession in the second quarter, ending its longest postwar contraction, official data showed on Wednesday. But the weak upturn, high unemployment and other problems on the Continent left open the question of whether the nascent recovery can last.The two biggest economies in the 17-nation euro zone each helped pull the region as a whole out of its doldrums, with Germany posting 2.8 percent annualized growth in the second quarter and France 2.0 percent. Over all, gross domestic product in the zone grew 1.2 percent, according to Eurostat, the official statistics office of the European Union. The second quarter’s growth slightly exceeded the 0.8 percent growth forecast by economists. The euro zone’s growth fell short of the 1.7 percent second-quarter showing by the United States and 2.6 percent in Japan. But even modest growth is a relief in a region where unemployment has risen to 12.1 percent and there are still fears of a new debt crisis and existential questions about the euro. The meager growth rate will not make a serious dent in the problems of the 26 million people Eurostat says cannot find work, said Ralph Solveen, an economist at Commerzbank in Frankfurt.

Europe Returns To "Growth" After Record 6-Quarter Long "Double Dip" Recession; Depression Continues -- The amusing news overnight was that following slightly better than expected Q2 GDP data out of Germany (0.7% vs 0.6% expected and up from 0.0%) and France (0.5% vs 0.2% expected and up from -0.2%), driven by consumer spending and industrial output, although investment dropped again, which meant that the Eurozone which posted a 0.3% growth in the quarter has "emerged" from its double dip recession. The most amusing thing is that on an annualized basis both Germany and France grew faster than the US in Q2. And they didn't even need to add iTunes song sales and underfunded liabilities to their GDP calculation - truly a miracle! Or perhaps to grow faster the US just needs higher taxes after all? Of course, with the all important loan creation to the private sector still at a record low, and with the ECB not injecting unsterilized credit, the European depression continues and this is merely an exercise in optics and an attempt to boost consumer confidence.

Europe’s False Recovery - On Wednesday, Europe officially vaulted out of its longest recession since the creation of the single currency, growing 0.3% after shrinking exactly that much in the first quarter. While that still only adds up to 0% growth, European officials are already lauding their “success” and attempting to rebrand their much maligned economic formula of austerity. “The data … supports, in my view, the fundamentals of our crisis response: a policy mix where building a stability culture and pursuing structural reforms supportive of growth and jobs go hand in hand,” said Olli Rehn, the E.U.’s Commissioner for Economic and Monetary Affairs. But  if you look closely as the last quarter recovery, it’s built on shaky foundations, like a one-off weather-related rebound (German and French construction picked up after a long, slow, cold winter), as well as a boost in export demand from outside Europe that German manufacturers themselves say probably won’t continue. Credit is still tight, which will constrain business investment, and while consumer spending has picked up a bit, French and German shoppers can’t make up for a lack of demand in countries like Spain, Italy and the Netherlands, which are still in recession. Meanwhile, some 20 million people in the euro zone are still out of a job — a record 12.1%. That’s unlikely to change anytime soon.

European Recovery Means Little for Jobless Generation - Carrasco is one of the legion of unemployed across Europe’s southern periphery who are seeing little benefit from an economic recovery that pulled the euro region out of its longest-ever recession in the second quarter. More than a third of the bloc’s jobless are in Greece and Spain. In Greece, 64.9 percent of those aged between 15 and 24 are without work. “The European recovery needs to be significantly stronger before it starts to reduce unemployment,” said Michael Saunders, chief western European economist at Citigroup Inc. in London. “Unemployment is going to be stuck at extraordinarily high levels.” Europe’s statistics office said yesterday that the euro region’s economy expanded 0.3 percent in the second quarter, ending a recession that started during the depths of the debt crisis at the end of 2011. The European Central Bank in June forecast a contraction of 0.6 percent this year before growth of 1.1 percent in 2014.

Doctors Report Assault Victim Feeling Better, Attribute Improvement to Vicious Beating -- Readers of the Financial Times will undoubtedly be looking for this headline in future editions after seeing that: "Berlin and Brussels credit fiscal discipline and reform for euro zone recovery." As predicted by non-members of the flat earth society everywhere, the "fiscal discipline" pushed by Berlin and Brussels has led to severe recessions across much of Europe.The story is very simple. In the middle of a severe downturn, cutting back government spending and/or raising taxes lowers demand. There is no reason to think that firms will invest more or consumers will buy more simply because the government is spending less. Recent research from the IMF has confirmed this to be the case. But just as any non-fatal beating eventually ends, the decline in GDP due to government cutbacks may finally have reached an endpoint.  Apparently in Berlin and Brussels they consider it cause for celebration that their policies did not lead to a permanently declining economy. This is known as the soft bigotry of incredibly low expectations.

Annals of Austerity FAIL, Eurozone Redux - July 31 saw the latest release of European Union unemployment numbers, and Monday's gross domestic product figures brought no joy, especially for Greece. As Think Progress reports, Greek unemployment hit a new record of 27.6 % in May, while Spain's June unemployment figure was 26.3%, according to Eurostat. As the world's biggest experiment in austerity, the European Union continues to prove a failure. Below is the Eurostat figure for unemployment in member states for June, including new (as of July 1) member Croatia, designated HR. As reported at first at Reuters, Greece's gross domestic product has fallen by 23% since January 2008. Anyway you slice it, that's a depression, not a recession. Despite austerity, the Greek economy has gotten sicker and sicker. But, wait! you say. What about Ireland? Its unemployment rate has dropped an estimated 1.5 percentage points from its January 2012 peak of 15.1% to just 13.6% in June 2013. Isn't austerity finally paying off there? If only that were so. What actually is happening is that Ireland has returned to its historical solution of substantial out-migration to reduce the number of unemployed workers that show up in the official data. And yes, the numbers are way more than enough to wipe out the apparent 1.5 point drop.

The Low Countries sinking lower: new economic data on the Netherlands - Yesterday, Paul Krugman already did a quick comparison between Belgium and the Netherlands (link here in Mark Thoma’s blog). His conclusion was: And in general, it’s hard to escape the impression that Belgium has been better served by political paralysis than the Netherlands has by its unified, effective determination to do exactly the wrong thing. I am not sure if that is the only thing that is relevant (e.g. the Netherlands has thrown a lot more money around to save banks than Belgium, I think) but today a handful of new economic data has come out for the Netherlands, and it doesn’t look pretty. See also here. First, GDP growth/decline: the Dutch economy has shrunk for four quarters; GDP is 1,8% less than last year in the same period. Investment has shrunk 9,4%, private consumption 2,3% and exports declined by 0,3%. Government consumption shrunk by 0,5%. Second, jobs/unemployment: in one year’s time, 147.000 jobs have been lost (1,9% since last year and the biggest decline since 1995). Unemployment jumped from 6,5% last year to 8,7% this July. Unemployment has been rising rapidly since 2011. Also the number of job vacancies is at the lowest level in ten years.  Currently, there are 694.000 unemployed. Youth unemployment stands at 17%.

Germany's Exposure To Debt Crisis Above Govt Estimates: Press- Data provided by Finance Minister Wolfgang Schaeuble on Germany's liabilities in the European debt crisis underplay the country's risks, the Frankfurter Allgemeine Zeitung newspaper reported Friday, citing government sources. In a report to a parliamentary finance committee last week, Schaeuble included only the risks from German contributions to the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). He did not include German's 20% contribution to the E60 billion European Financial Stability Mechanism (EFSM), or bilateral credits to Greece via the KfW Development Bank that amount to E15.2 billion, FAZ reported. Taken together, the extra contributions bring Germany's total liability to E122 billion, according to FAZ. The Finance Ministry, it its latest online report, put the country's total exposure to the Eurocrisis at E95.3 billion.

Europe’s Slow Financial Reforms - Simon Johnson - Europe accounts for more than a quarter of the world’s gross domestic product and its banks are big, with more than $25 trillion in total assets.  There are two perspectives on what is happening. The first is that of the European Commission and others who spend time in continental conference rooms: “We have done a lot” and “we are making progress.” The second view is more widely held among skeptical outsiders: there is a great more deal to do; Europe is at risk of falling behind even the United States, where reforms have hardly been carried out with alacrity; and, most worrying, Europe may be on course to settle for lower equity capital in its banks than the United States ultimately will. Without question, the European Commission and its allies have guided through a great deal of change. The question is not the diligence or hard work of the people involved but rather the obstacles they face, particularly at the national level, including some in France and Germany. The European Commission has an extensive set of materials on its Web site, with this colorful chart that shows reforms in progress and on the planning board (the font is small but it is highly informative). And there are helpful lists of initiatives and reforms with regular updates (e.g., on financial supervision). Without doubt, it makes complete sense to set up a Single Supervisory Mechanism for the euro zone, as is now under way. And in July the European Commission proposed a Single Resolution Mechanism for the Banking Union. Resolution in this case means how the failure of banks is handled, to ensure losses are fairly allocated while the system as a whole is not disrupted

UK wages fall among sharpest in EU - The value of UK workers' wages has suffered one of the sharpest falls in the EU, House of Commons library figures show. The 5.5% reduction in average hourly wages since mid-2010, adjusted for inflation, means British workers have felt the squeeze more than those in countries hit by the eurozone crisis. Spanish workers's wages dropped by 3.3% over the same period and in Cyprus salaries fell by 3% in real terms. Only Greek, Portuguese and Dutch wages suffered a steeper decline than the UK, the analysis showed, while they rose by 2.7% in Germany and 0.4% in France. Across the EU as a whole the average fall in wages, adjusted for the European Central Bank' s harmonised index of consumer prices, was 0.7% and in eurozone area 0.1%. The shadow Treasury minister, Cathy Jamieson, said: "These figures show the full scale of David Cameron's cost of living crisis. Working people are not only worse off under the Tories, we're also doing much worse than almost all other EU countries. "Despite out of touch claims by ministers, life is getting harder for ordinary families as prices continue rising faster than wages. People on middle and low incomes have also seen tax rises and cuts to tax credits, while millionaires have been given a huge tax cut.

U.K. inflation rate falls but outpaces wage growth - The annual rate of inflation in the U.K. fell in July but continues to outpace wage growth, squeezing consumers' spending power, official figures showed Tuesday.  The Office for National Statistics said the annual rate of inflation fell to 2.8% in July from 2.9% in June, aided by smaller rises in prices for items including air fares and clothing than a year earlier.  Economists were expecting the annual rise in consumer prices to decline further, to 2.7%. Between June and July, prices stayed flat, the ONS said. The U.K. economy appears to be experiencing a fledgling recovery after several years of near-stagnation but growth in household incomes remains subdued, which analysts say limits the prospects for a durable economic revival. The Bank of England expects annual inflation to slow to close to its 2% target by early 2015. A continued cooling of inflation will reinforce expectations the central bank will stick to its pledge to keep its benchmark interest rate at a record low until joblessness declines at least to 7%. The unemployment rate averaged 7.8% in the three months to May. The BOE doesn't expect unemployment to hit the 7% target until 2016.

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