Fed's Balance Sheet 09 October 2013: Record Growth Continues Despite Government Shutdown - Fed's Balance Sheet is $3,715 trillion (up from the last week's record $3,703 trillion). The complete balance sheet data and graphical breakdown of the cumulative and weekly changes follows
FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, October 10, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks
Key Passages From Fed Minutes Show Officials Torn on Tapering - Federal Reserve officials struggled with a decision to press forward with their $85 billion-per-month bond-buying program at their Sept. 17-18 policy meeting, minutes of the meeting showed. Officials understood that many market participants were expecting them to pull the program back, but they worried that the economic data weren’t living up to expectations, that threats loomed in financial markets and in Washington fiscal policy and that they might unsettle matters even more if they started to wind down the program in the face of such uncertainty. Despite their angst, many officials still want to start winding down the program this year and end it next year.Below are key passages from the minutes:“Questions were raised about the effects on the housing sector and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy.” “The announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy. As a result of such concerns, a number of participants thought that risk-management considerations called for a cautious approach and that, in light of the ambiguous cast of recent readings on the economy, it would be prudent to await further evidence of progress before reducing the pace of asset purchases.”
FOMC Minutes: "Considerable risks surrounding fiscal policy"- There was a significant debate on asset purchases at the last FOMC meeting. Those who didn't want to reduce asset purchases expressed several reasons including "Considerable risks surrounding fiscal policy" (no kidding!). Even those who wanted to reduce asset purchases "indicated that they favored a relatively small reduction to signal the Committee's intention to proceed cautiously".From the Fed: Minutes of the Federal Open Market Committee, September 17-18, 2013 . A few excerpts on asset purchases: In their discussion of the path for monetary policy, participants debated the advantages and disadvantages of reducing the pace of the Committee's asset purchases at this meeting, focusing importantly on whether the conditions presented to the public in June for reducing the pace of asset purchases had yet been met. In general, those who preferred to maintain for now the pace of purchases viewed incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program's inception in September 2012, were not yet adequately confident of continued progress. Many of these participants had revised down their forecasts for economic activity or pointed to near-term risks and uncertainties. For example, questions were raised about the effects on the housing sector and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy.
FRB: FOMC Minutes, September 17-18, 2013: Minutes of the Federal Open Market Committee
Fed Minutes Show Deepening Divide - — The decision by Federal Reserve officials last month to continue the stimulus campaign came down to this: their anxiety that the economy might falter outweighed their anxiety that waiting to pull back would surprise and confuse investors.The mounting fiscal crisis in Washington suggests that some months will pass before the Fed will have cause to reconsider. The Fed came close to sounding a retreat in September, according to an official account of its meeting published Wednesday. Officials were united that the bond-buying campaign begun last year had produced the desired improvement in job growth. Most officials also agreed that the Fed should start pulling back by the end of 2013. But during an unusually fractious meeting, some officials worried that the gains might not be sustainable and argued that it was “prudent” to postpone retreat, according to the account. A number of officials, “pointed to heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate,” the account said. Any differences were papered over in a 9-to-1 vote to keep adding $85 billion a month to the Fed’s holdings of Treasury securities and mortgage-backed securities, with the goal of reducing borrowing costs for businesses and consumers.
Fed Watch: FOMC Minutes Overtaken by Events - Out of the contentious meeting evident in the most recent FOMC minutes comes a narrative of the tapering debate, a debate that, for the moment, the hawks lost. The opportunity to take even a baby step to ending asset purchases slipped away. Because after the September meeting, the door closed on tapering for at least three more months, and probably longer. Back in February Governor Jeremy Stein presented an important speech on the interplay between monetary policy and financial stability. Notably: The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to "reach for yield." While Stein emphasizes separating monetary policy tools from financial stability tools, he concludes: Nevertheless, as we move forward, I believe it will be important to keep an open mind and avoid adhering to the decoupling philosophy too rigidly. In spite of the caveats I just described, I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability. Let me offer three observations in support of this perspective. One such reason:Third, in response to concerns about numbers of instruments, we have seen in recent years that the monetary policy toolkit consists of more than just a single instrument. We can do more than adjust the federal funds rate. By changing the composition of our asset holdings, as in our recently completed maturity extension program (MEP), we can influence not just the expected path of short rates, but also term premiums and the shape of the yield curve. Once we move away from the zero lower bound, this second instrument might continue to be helpful, not simply in providing accommodation, but also as a complement to other efforts on the financial stability front.
Fed’s Plosser: FOMC Missed ‘Excellent Opportunity’ to Taper in September -Federal Reserve Bank of Philadelphia President Charles Plosser said Tuesday that the central bank made a fairly big mistake when it didn’t slow the pace of bond buying last month, as many in the markets had expected. “We missed an excellent opportunity to begin this tapering process in September,” Mr. Plosser said, in reference to the Fed’s ongoing $85 billion-a-month bond-buying program. Failing to ease back on the easy money policies meant officials “undermined our own credibility as well as the public’s confidence in the economy. These were not the messages that I wanted to send,” Mr. Plosser said. The weeks since the September FOMC meeting have been difficult ones for Fed officials. Heading into the gathering last month, markets broadly expected the Fed to trim the pace of purchases. Market participants cited comments by Chairman Ben Bernanke from June that indicated the pace of bond buying likely would slow later in the year. Mr. Bernanke and other Fed officials who share his outlook have said the biggest reason for not pulling back on bond purchases was the unexpectedly soft performance of the economy over recent months. At the same time, they worried a rise in interest rates seen over the summer was creating a new headwind to growth, at a time when political uncertainties due to Washington’s budget battles were on the rise. Mr. Plosser long has opposed continuing forward with the Fed’s bond-buying program, and he is part of a vocal minority of regional central-bank heads who have advocated winding up the effort. He said in his speech that “there is little evidence that continued efforts to increase accommodation through asset purchases will lead to any significant improvement in the labor markets or economic growth.”
Fed’s Pianalto Could Have Supported September Taper - Federal Reserve Bank of Cleveland leader Sandra Pianalto said she could have supported the central bank cutting its bond buying program at the meeting it held in September. “For me the improvement in labor markets seemed substantial enough to support a scaling back of the asset purchase program at last month’s [Federal Open Market Committee] meeting,” Ms. Pianalto said in the text of a speech that was to be given Tuesday before a local group in Pittsburgh. The official was referring to the Fed’s controversial decision last month to press forward with its $85 billion per month program of buying Treasury and mortgage bonds, in a bid to stimulate growth. Financial markets had broadly expected the Fed to trim the pace of its purchases at the gathering. Fed Chairman Ben Bernanke and others justified their move by arguing economic data ahead of the meeting had proved weaker than expected, amid a worrying rise in market rates that was creating fresh headwinds to growth.
Fed’s Rosengren: Decision Not to Taper Was ‘Fully Warranted’ - Pursuing a monetary policy path that is driven by incoming economic data is difficult to communicate, a veteran Federal Reserve official said Friday in a speech that also defended the central bank’s decision to press forward with its easy-money policies last month. The official, Eric Rosengren of the Boston Fed, was addressing the deep challenges his institution has been facing as it pursues an open-ended bond-buying stimulus program whose ultimate fate is tied to how the economy performs. The Fed shocked financial markets last month when it decided to stay the course on its $85 billion-a-month bond-buying program. Officials said they held steady because of disappointing data ahead of the meeting, combined with a rise in market-based interest rates. Market participants, however, felt central bankers had sent very strong hints that bond-buying cutbacks were in the cards, and many have criticized the Fed for what they see as a head fake that could diminish confidence in future Fed commitments. Mr. Rosengren said “continuing the asset-purchase program was warranted, and fully consistent with seeking to return to full employment and 2% inflation within a reasonable timeframe,” in remarks prepared for delivery before a gathering held at the Council on Foreign Relations in New York. “Asset purchases are not on a preset course,” and “we saw weaker economic data emerge between the June and September [Federal Open Market Committee] meetings, and a higher than anticipated jump in market interest rates, along with the risk in September of possible fiscal-policy disruptions,” Mr. Rosengren said. Each presents an argument against a cut in stimulus.
IMF warns Fed on effects of tapering - The International Monetary Fund has called on Western central banks to move with extreme care as they wind down emergency stimulus, warning that a botched exits risk setting off an asset crash in emerging markets and worldwide contagion. “A repricing of risk could induce a run by investors holding speculative positions, especially if these are highly leveraged using short-term funding,” said the Fund in a study of global fall-out from the radical policies of the US Federal Reserve, the Bank of England, and the European central bank. The report said a witches’ brew of sliding currencies and excess credit could spin out of control. “Thin markets could amplify price movements and kick off sale spirals. Contagion effects could both amplify and broaden asset price movements and capital outflows as investors flock out of emerging market economies,” it said. Exit must be “very carefully managed”, said Karl Habermeier, the IMF’s head of capital markets, advising countries at most risk of capital flight to beef up their defences before it is too late. The report is the latest warning from the IMF that the return to calm in Brazil, Turkey, India, and South Africa among others may not last once the Fed begins to taper bond purchases, a move likely to push US bond yields yet higher and force up the global cost of borrowing. The Fed delayed tapering in September but the imminent withdrawal of dollar liquidity from global markets still hangs like a Sword of Damocles over the `BRICS’ bloc, especially those that have exhausted their own credit cycles and are grappling with structural problems.
Fed’s Bullard: Shutdown Makes Tapering ‘Less Likely’ in October - A senior Federal Reserve official said Thursday that the effects of the government shutdown made a reduction in its bond buying program less likely at the upcoming policy meeting. St. Louis Fed President James Bullard cited the shutdown’s effect on the economy and an absence of official data – such as the closely followed unemployment numbers – much of which hasn’t been collected because of staff furloughs. He said the damping effect of the shutdown and the debate over the debt ceiling and federal budget – rather than data availability – was the more pressing reason for not expecting a tapering of the $85 billion a month bond program. “Monetary policy has to go on, regardless of the data available,” he said, citing regular discussions with business leaders that gave “a good sense” of the state of the economy. Mr. Bullard dialed back his expectations for second-half economic growth last month, and doesn’t expect to revise them until the Fed’s December meeting. He continued to see no evidence of building inflationary pressures. The official, a voting member of the Federal Open Market Committee, said the budget crisis “changed the odds” about a decision to trim the stimulus efforts at the upcoming Fed gathering on Oct.29-30, though emphasized it remained a “live” meeting.
Fed’s Williams: Economic Data Will Determine Timing of Taper- A veteran Federal Reserve official said Thursday the U.S. central bank will trim back its easy money policies when the economy is ready, but offered little guidance about when that might happen. When the Fed reduces its bond-buying program, “it will be in response to economic developments and the progress we have made towards our dual goals of maximum employment and price stability,” said Federal Reserve Bank of San Francisco President John Williams. He explained, “I expect economic growth to pick up somewhat next year,” and added, “as the economy continues to get better, the highly accommodative stance of monetary policy will need to be gradually adjusted back to normal.” Mr. Williams said that when the Fed does ease back on what is currently an $85 billion-per-month bond-buying program, “This won’t be a slamming on the brakes, it will be an easing off the gas.” Central bankers have long argued smaller amounts of bond buying is simply less stimulus, whereas many in financial markets see any cut in asset buying as a tightening in monetary policy, a view Mr. Williams rejects. The official still sees no imminent signs the Fed needs to raise short-term rates from their current zero-percent level. “Even though I expect the unemployment rate to fall below 6 1/2% early in 2015, I don’t currently expect that it will be appropriate to raise the federal funds rate until well after that, sometime in the second half of 2015,” the official said
All Of The Confusion Over Tapering QE May Have Been Because The Fed Was Looking At Inaccurate Jobs Data - The monthly nonfarm payrolls report put out by the U.S. Bureau of Labor Statistics is perhaps the single most important report in determining the Federal Reserve's outlook for monetary policy at the moment. However, a new paper by Johns Hopkins economist Jonathan Wright has sparked a lot of chatter about how the seasonal adjustments used by the BLS in the report have become seriously distorted in the wake of the financial crisis of 2008, causing the agency to systematically overestimate job creation from October to April every year since then, while at the same time underestimating job creation over the May-September months. That's why, every year since 2008, the economy has appeared to stage a "recovery" in the winter months, only to weaken again over the summer. In May — right at the end of that October-April period that gets an artificial boost from seasonal adjustment errors — the Fed signaled its intent to taper back its quantitative easing program later in the year, based on improvement in the data. By September, Wall Street was convinced that this monumental shift in policy was imminent, and had priced such an outcome into financial markets. Then, the Fed shocked markets by refraining from tapering, citing a lack of substantial improvement in the underlying economic data.
IMF: Premature Fed Exit Could Fuel $2.3 Trillion in Global Bond Losses - A premature exit by the U.S. Federal Reserve from its easy-money policies could cause $2.3 trillion in global bond portfolio losses, the International Monetary Fund warned Wednesday.Although the IMF assumes in its latest economic forecasts that the U.S. central bank will unravel its policies at a tempered pace, the fund said the market's volatile reaction to Fed exit comments earlier this year show there is still a risk of moving too fast."Engineering a smooth transition to monetary normalization will require a clear and well-timed communication strategy by the Federal Reserve to minimize interest rate volatility," said Jose Vinals, the IMF's top financial counselor. "Containing longer-term interest rates and market volatility has already proven to be a substantial challenge, as shown by the sharp rise in bond yields and volatility since May," he said.
Will Unconventional Policy Be the New Normal? – SF Fed - Unconventional monetary policies such as asset purchases and forward policy guidance have given the Federal Reserve much-needed tools when the traditional policy interest rate is near zero. Looking ahead to normal times, certain types of unconventional policies are best kept in reserve. If another situation arises where the Fed needs to call on these tools, it is ready and prepared to do so. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the UC San Diego Economic Roundtable in San Diego, California, on October 3, 2013.
A Federal Reserve clown show - THE Wall Street Journal's Jon Hilsenrath has written a nice piece on the Fed's internal battle over when and how to taper, and it's filled with one groan-inducing moment after another.One concerns the revelation that three Fed governors, rather than the more vocal regional Fed presidents, led the push the begin winding down the Fed's programme of ongoing asset purchases. It comes as no surprise that Jeremy Stein, a member of the tightening troika, would be anxious to pare down purchases; since beginning his term last year he has spoken repeatedly about the threat of financial instability. But one can't help but notice that two of the three governors leading the charge to taper were appointed by Barack Obama. Who also left seats on the Board of Governors unfilled for an extended period of time despite the rickety state of the economy. And who has also completely misplayed the process of nominating a successor to Ben Bernanke as chair of the Board of Governors. One is tempted to conclude that Mr Obama simply doesn't care much about monetary policy, and when he does turn his attention in that direction is mainly concerned with bubble prevention. This is an egregious error, especially given the state of fiscal policy over the past two years (and the cost of economic weakness to his popularity and agenda, for that matter). He obviously had his opponents on Capitol Hill to deal with. Yet the administration's failure to take monetary policy seriously looks increasingly culpable in America's lousy recovery.
Fed Watch: Credibility on the Line - I was pleased to see this morning that at least one other person was as appalled as me by the Jon Hilsenrath WSJ story this morning. Below I will cover some of the same ground as Ryan Avent, but the story deserves to be told more the once. Simply put, the Hilsenrath piece reveals that monetary policy and communication are in complete disarray and speaks poorly to the ability of the Federal Reserve to smoothly exit this period of extraordinary accommodation. I have long suspected the Federal Reserve was increasingly biased against QE, suggesting the bar to tapering was much lower than would have been implied by the data flow. This is particularly the case with inflation, which has remained well below the Fed's official target. Moreover, the talk of tapering seemed ill-timed given the calendar. It was basically impossible to believe that the Fed could even begin to have sufficient evidence about the impact of fiscal tightening to justify tapering within the Fed's framework of "stronger and sustainable" before the final quarter of this year. The data flow simply didn't permit it. Now we know, however, that a cadre of governors was pushing for the end of QE due to financial market concerns. From Hilsenrath: Privately, Mr. Stein and two other governors, Jerome Powell and Elizabeth Duke , were a driving force behind efforts to limit the program's growth, according to people involved in the deliberations. All three supported Mr. Bernanke's efforts to charge up a weak economy but were uneasy about the program's potential side effects and the growing size of the Fed's holdings.
Fed Watch: Kind of a Clown Show -- Matthew Klein rebuts Ryan Avent (my sympathetic position here), and makes some good points. That said, I still think the FOMC is kind of a clown show right now. A significant problem is that they can't communicate effectively, either internally or externally, that the Fed is now operating under a triple mandate. They are struggling with the resulting trade-offs and while the struggle is public, it is not explicit. Klein does a much better job than the totality of the FOMC in bringing this issue to light.Klein summarizes his objection to Avent with: After reading this narrative, the Economist’s Ryan Avent concluded that the U.S. central bank is a “clown show.” While there are plenty of legitimate criticisms one can make about Fed policymaking over the years, Avent’s misses the mark. This sort of simplistic reasoning assumes central bankers only need to manage a single trade-off between the rate of consumer price inflation and the level of joblessness. The real world, however, is far more complex. Why is it more complex than the dual mandate?While the precise meanings of “maximum employment” and “stable prices” remain undefined, the biggest source of ambiguity is the time-frame. Certain policies might temporarily suppress the unemployment rate but end up sowing the seeds of trouble down the road. High unemployment and sluggish increases in consumer prices would suggest that the Fed should step on the gas. On the other hand, risk-takers in the financial sector may end up overextending themselves and sow the seeds of another crisis. And there lies the communication problem. The Fed has largely communicated its policy objective on the basis of two variables, inflation and unemployment. And note that Yellen's much heralded optimal control strategy explicitly reduces policy to a near-term inflation/unemployment trade-off:
Monetary policy: Burying the economy to save it - ON MONDAY, I discussed a Wall Street Journal piece in which Jon Hilsenrath took readers behind the scenes of Federal Open Market Committee deliberations on the decision to taper asset purchases, or not, at the September meeting. The discussions were not, I noted, the Fed's finest hour: Here we have members of America's monetary-policy-making body urging a significant change in monetary policy without reference to any of the Fed's general goals, but instead in response to Wall Street whispers and by following the guidance of a movie someone saw once. This struck me as clownish behaviour, as if the FOMC were some sort of clown show. Matt Klein says that I was uncharitable to the FOMC, however. Look beneath the rubber nose and floppy shoes, he reckons, and one sees a rather more sophisticated and judicious debate taking place. He writes: Mr Klein is arguing that Fed officials are actually very concerned about the financial stability risks of their policy actions. They are pushing for tapering, he suggests, because they believe that any employment gains generated by maintaining policy at the current stance may prove fleeting. There is a risk that they will be reversed when the financial instability generated by current policy leads to a new financial crisis. That sort of hypothesis is not absurd on its face. But it does fall apart on careful scrutiny.
Gold Befuddles Bernanke as Central Banks’ Losses at $545 Billion - Ben S. Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011. Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.” Central banks, which own 18 percent of all the gold ever mined, will add as much as 350 tons valued at about $15 billion this year, the London-based World Gold Council estimates. They purchased 535 tons in 2012, the most since 1964. Russia is the biggest buyer, expanding reserves by 20 percent since prices reached a record $1,921.15 an ounce in September 2011. Gold slumped 31 percent since then. As policy makers were buying, investors were losing faith in the metal as a store of value. The value of exchange-traded products dropped by $60.4 billion, or 43 percent, this year, saddling hedge fund manager John Paulson with losses, according to data compiled by Bloomberg. Billionaire investor George Soros sold his holdings in the biggest gold-backed ETP this year and mining companies wrote down the values of their assets by at least $26 billion.
Needed at The Fed: A New Age of Boring - It is being reported that the President will nominate Janet Yellen to be the next Chair of the Federal Reserve Board of Governors. Yellen is a highly professional economist and central banker. She appears to be driven primarily by a commitment to public service and a concern for sound policy, not by greed or vainglory. And so I am sincerely hoping that Yellen puts her professionalism into practice by fashioning herself into the least well-known and most unexciting Fed Chair in recent memory. We need to end the barmy “maestro” system that has transformed Fed Chairs into rock stars, and turned every inadvertent nose-scratching by the Fed chief into a Page One story feeding hyper-reflexive and erratic market responses to real or imagined Fed signals. The maestro system, with its cult of superstitious fawning and slack-jawed wonderment at the Banker-In-Chief, has veered into extreme depths of perversity lately, as too-clever-by-half market practitioners attempt to outthink themselves at every turn, neglecting fundamentals and clinging to dotty theories about quantitative easing that turn good news into bad news and bad news into good news. The markets sometimes seem to have become nothing but free-floating postmodern casinos driven by arbitrary assignments of importance to Fed policy statements – and that’s a very dangerous thing for our economy. It will be interesting to see if Yellen is able to use her nomination hearings to make some suggestions about how to turn market attention back toward fundamentals, and away from self-accelerating monetary policy fantasies, pipe dreams and delusions. It will also be interesting to see if she is able to use the hearings to call on a derelict Congress to do its economic policy job.
Calling on Yellen: Time for a Modest, Dull Fed - Yves Smith - Most of the news accounts of Obama’s nomination of Janet Yellen as the next Federal Reserve Chairman focused either on what type of monetary stance she was likely to take or on biographical details. But some writers have used the upcoming changing of the guard at the Fed to look at the bigger question of the Fed’s role, particularly now that it has continues to intervene in financial markets to an unprecedented degree, a full four years after the worst of the financial crisis had passed. Two particularly commentaries, one from a progressive stance, the other a much more conservative position, call for a more modest Fed, one more focused on the nuts and bolts of banking regulation and less bedazzled by the power of monetary policy. Dan Kervick, who most readers know well from his writing at New Economic Perspectives on MMT and economic policy, wants a Fed that will stick to bank supervision and take a much less interventionist approach to monetary policy: We need to end the barmy “maestro” system that has transformed Fed Chairs into rock stars, and turned every inadvertent nose-scratching by the Fed chief into a Page One story feeding hyper-reflexive and erratic market responses to real or imagined Fed signals. Amar Bhidé, in Project Syndicate, manages to annoy the right and left. He invokes the Hayekian preference for decentralization to argue for bank regulation, albeit of a very different type than we’ve seen of late, which has increased concentration in the banking system. Bhidé prefers smaller institutions that aren’t hostage to simple-minded rules, like using FICO as a primary tool for evaluating mortgage borrowers, but can also use local market knowledge to make lending decisions. That’s similar to the stance of Andrew Haldane, executive director of financial stability of the Bank of England, who has, among other things, looked at biological systems to see which are more robust. Needless to say, ones with a dominant species aren’t very stable.
Yellen Needs to Tell Politicians to Stop Passing the Buck to the Fed - Evan Soltas is hoping that President Obama’s appointment of Janet Yellen signifies a new administration commitment to jobs and economic growth. Unfortunately, Soltas seems to be one of those folks who is convinced that our failures over the past five years have much to do with a monetary policy that has been insufficiently “accommodative”, and he strongly suggests that the national plague of mass joblessness and stagnation could be alleviated if the Fed would only do more aggressive quantitative easing without political pressure to taper prematurely. But there is no reason that aggressively pro-growth, demand-side policies need promote bubbles and financial instability. Targeted, committed and sustained federal spending could drive powerful, innovative growth and job creation without promoting bubbles. The United States could launch a new program of mission-oriented public investment in which the government bears much more of the economic risk as the financier of last resort, while the risks to the private sector are greatly lessened as private firms are able to get their own investments in line with a clear and predictable national strategy. And given the government’s nearly infinite capacity to absorb financial burdens, the risks that the public sector bears on this approach are just the risks of inadequate investment outcomes, not the risks of financial fragility, collapse and debt deflation. The downside can be covered with stabilization programs if the public consumption and investment programs don’t succeed as well as hoped. But such programs have succeeded in the past, and continue to succeed in hungry countries with a “developing country” mentality. The US could use a lot more of this attitude.
Fed’s Evans: Budget Showdown Gives Him ‘Great Pause’ - Federal Reserve Bank of Chicago President Charles Evans said Wednesday that the current fiscal situation in the U.S. gives him “great pause in looking at things.” Mr. Evans didn’t elaborate on the situation that concerned him, but it was clear he was referring to the current budget showdown happening in Washington, which has led to a partial government shutdown. The political stalemate has also raised concerns that Congress won’t raise the nation’s borrowing limit in time for the government to keep paying its bills. Mr. Evans also said that mortgage rates, which have risen since the spring, are “a bit of a disappointment.” Mortgage rates started climbing in May when Fed Chairman Ben Bernanke first hinted the central bank could begin pulling back on its $85 billion-per-month bond-buying program. Mr. Evan’s remarks are important because the Fed is current locked in debate over when it should start dialing back that program. Fed officials surprised many investors at their September meeting when they decided to keep the program steady. Many market participants expected the Fed to announce a small cut to its monthly purchases. Mr. Evans expressed frustration over investors’ misunderstanding of the Fed’s efforts to communicate its plans. Mr. Evans said he believes the Fed is being clear on the fact that any decisions to pull back on the $85 billion-per-month bond-buying program are separate from decisions on short-term interest rates. But he acknowledged that market participants don’t seem to understand that winding down the bond-buying program doesn’t signal the Fed is poised to raise rates sooner than expected.
U.S. Treasury, Fed planning for possible default -source (Reuters) - U.S. Treasury and Federal Reserve officials worried about the growing possibility of a catastrophic default are crafting contingency plans to mitigate the economic fallout if Congress fails to extend America's borrowing authority, a source familiar with the plans said. With just eight days before the Treasury Department says the U.S. will hit its $16.7 trillion borrowing limit, lawmakers and the White House remain far from a deal to extend it. Officials are examining what options might be available to calm financial markets if a U.S. debt payment is missed. The specifics of their planning remain unclear, but the source said an area of special focus is a key bank funding market known as the tri-party repurchase agreement, or repo, market, where banks often use Treasury bills, notes and bonds as collateral for short-term loans from other banks and big money market funds. Some of the earliest alarm bells for the 2008 financial crisis emerged from this market, and on Wednesday interest rates demanded for accepting some T-bills as collateral shot to the highest in five months. Were the repo market to seize, easy access to cash by banks to meet short-term funding needs could be jeopardized, and that could have far-ranging implications for credit markets and the economy. The source, who asked not to be identified, said officials refused to divulge details of the plans because they do not want to suggest to investors and Republican Congress members that the U.S. government can muddle through if the debt limit is not raised. Officials insisted there was no way to avoid an eventual default if the debt limit is not raised.
IMF cuts US growth outlook, warns on budget paralysis - The International Monetary Fund warned Washington Tuesday that the political showdown over the budget could damage the global economy, as it cut its US growth forecast. The Fund, in its new World Economic Outlook, projected the US economy would grow 1.6 percent this year and accelerate to 2.6 percent in 2014, down respectively 0.1 and 0.2 percentage points from its July forecast. It said the reduction was due to the impact of the sharp sequester spending cuts instituted by the government earlier this year that were aimed at trimming the federal deficit. But it said things could turn worse if the week-old government shutdown, due to lack of agreement by warring political parties over the budget, continues much longer. And it warned that if the political paralysis prevents an increase in the US borrowing ceiling, the government could be forced to default on its debt, which would rock the global economy. Not raising the debt ceiling "will lead to an extreme fiscal consolidation and almost surely derail the US recovery," said IMF chief economist Olivier Blanchard at a press conference. If the US then defaulted on debt payments, he added, it "will be felt right away, leading to potential major disruption in financial markets both in the US and abroad."
The Real Crisis Caused By Our Government - The inability of the media and politicians to focus on the real issues never ceases to amaze. The real crisis is not the “debt ceiling crisis.” If the shutdown persists and becomes a problem, Obama has enough power under the various “war on terror” rulings to declare a national emergency and raise the debt ceiling by executive order. The real crisis is that jobs offshoring by US corporations has permanently lowered US tax revenues by shifting what would have been consumer income, US GDP, and tax base to China, India, and other countries where wages and the cost of living are relatively low. On the spending side, twelve years of wars have inflated annual expenditures. The consequence is a wide deficit gap between revenues and expenditures. Under the present circumstances, the deficit is too large to be closed. The Federal Reserve covers the deficit by printing $1,000 billion annually with which to purchase Treasury debt and mortgage-backed financial instruments. The use of the printing press on such a large scale undermines the US dollar’s role as reserve currency, the basis for US power. Raising the debt limit simply allows the real crisis to continue. More money will be printed with which to purchase more new debt issues needed to close the gap between revenues and expenditures. The supply of dollars or dollar denominated assets in foreign hands is vast. (The Social Security system’s large surplus accumulated over a quarter century was borrowed by the Treasury and spent. In its place are non-marketable Treasury IOUs. Consequently, Social Security is one of the largest creditors to the US government.) If foreigners lose confidence in the dollar, the drop in the dollar’s exchange value would mean high inflation and the Federal Reserve’s loss of control over interest rates.
Why the level of government debt may not matter - The following is the conclusion from an NBER paper. Published in September, it looked at the relationship between taxes, debts and wealth transfers, and how economic context effects them.In other words, when it can, or cannot, be helpful to run high debt. What’s interesting, of course, is that the paper’s findings contradict those of the famous Reinhart and Rogoff paper of 2010: The principal message of our paper is that without exogenous restrictions on transfers, the level of government debt doesn’t matter. What does matter is how government debt is distributed among people relative to society’s attitudes toward unequal allocations of consumption and work. Using a recursive representation that employ correct state variables — a vector of marginal utility adjusted net asset positions and a vector of pairwise ratios of marginal utilities — we have presented a sequence of examples designed to show how agents net positions aff ect optimal government policies for choosing distorting tax rates, transfers, and government issues or holdings of risk-free bonds. We find that a signi ficant determinant of an optimal asymptotic government debt or government debt-GDP ratio is how interest rate risks are correlated with risks to fundamentals that threaten to widen or narrow inequality in after-tax and after-transfer incomes.
One-month T-bill yield hits highest since 2009 - -- The ongoing debate over a hike to the debt ceiling pushed yields higher on the Treasury securities most sensitive to the borrowing limit Tuesday. Yields on one-month Treasury bills, which are most at risk of a technical default if the debt ceiling doesn't get raised, were on track for their highest close since February of 2009, according to FactSet. The yield was up 8 basis points at 0.2360% Tuesday, up from 0.0253% on September 30. The 1-month bill due October 31 had a yield of 0.2410%, according to Tradeweb. The Treasury Department has said the U.S. will bump up against the debt ceiling on October 17.
Are T-bills cash, or aren’t they? - Anyway, there are those keeping their cool and telling us that the current debt-ceiling noise in US T-bills is just that, noise: it “isn’t terrifying in the slightest”. Well it’s not yields shooting to 8.5 per cent, that’s for sure. In fact what we have is one auction of 28-day T-bills for a mere 35bps, and in the market at pixel time, the October 17 T-bill at just under 40bps. The October 31 bill (a more likely date for when Uncle Sam starts having to choose between grandma’s Social Security check and paying his bondholders, surely — if there’s no debt limit increase by then and if it’s even possible) was around 30bps. Get out to late November and the yield is a mere 5bps.But here is one perhaps slightly terrifying thought. Let’s say T-bills are treated like cash in a zero-rate environment. If you’re a corporate treasurer, it might therefore be just prudent cash management (not an assessment of credit risk) to avoid nailing your need for liquidity to holding one of those handful of T-bills maturing in late October or early November. Perhaps park the payroll money (or whatever it is) with an investment-grade corporate. These are, surely, noteworthy effects — some T-bills are not being treated as equivalent to cash, or so it seems to us. That’s maybe not terrifying in the grand scheme of things — it’ll probably become swiftly forgotten once there’s a deal this time.
The (political) failure of safe assets - No, you aren't imagining it. The yield curve has inverted. The yield on 1-month treasuries is higher than the yield on 1-year treasuries. It seems markets think the USA might default on its short-term debt. This is all because of the standoff between President Obama and Congress regarding funding Obama's "health care for the poor" (the legislation for which Congress has already passed). If the USA were Argentina this perhaps wouldn't matter too much. Argentina has a history of debt default, it is currently going through an interesting series of cases in the international courts regarding whether or not it is obliged to pay debts it defaulted on a decade ago, and it is probably going to default again even if it doesn't win the case. But the US is not Argentina. It is the largest economy in the world, its currency is the world reserve currency and its debt is the world's most widely traded safe asset. Short-term debt (T-bills) are prime collateral in the global secured lending markets, and the yield on the 3-month UST is regarded as the closest proxy to the risk-free rate for pricing calculations. For the US even to contemplate defaulting on its debt is destabilising: if it actually did default, the result could be catastrophe. Hence the inverted UST yield curve. And hence, also, the anger from countries around the world at the US Government's behaviour. The BBC reports that China and Japan, the USA's two largest foreign creditors, have both expressed concern at the prospect of the US not honouring its commitments to them. Not being able to meet commitments because of financial mismanagement is bad enough. But failing to do so because of political gridlock is frankly appalling. The USA needs to get its act together. Playing brinkmanship with the world economy to achieve domestic political objectives is unacceptable.
Lower Interest Rates and Lower Investments - It is widely assumed that investment will increase if interest rates are lowered. But what if that isn't true? Here's a graph of corporate investment versus interest rates, and I don't see an inverse correlation. Instead there is a strong direct correlation. Lower interest rates are correlated with lower investment. Maybe investment as a percentage of profit is a bad measure because a high level of investment will lower contemporaneous corporate income. But when we measure investment as a percent of GDP we see a similar cycle (below). In fact higher investment rate isn't correlated with lower interest rates but with higher profits, at least until recently. Corporate profits are at all time highs, so why is the investment rate at levels historically associated with recessions? Probably because recent profits aren't generally created by corporations selling so much, but that their labor, interest, and tax expenses are relatively low. nHigh interest rates are correlated with high investment rates, but they don't cause them (if anything the inverse is true). Therefore in spite of the graph, central banks really shouldn't raise interest rates to stimulate the economy. On the other hand, lowering interest rates below market clearing rates isn't all it is cracked up to be, though it can marginally increase household disposable income by reducing mortgage payments. That also explains why QE, despite all its hype, hasn't been that effective.
A Truth Slips Past MSM Gatekeepers - A key rationale for this blog has been to help, along with many others, to impart basic knowledge about the policy scope available to a government that issues its own flex-rate currency. Leading modern monetary theorists have been plugging away at this task for a couple of decades now, and over time a growing number of people have joined the efforts. Recognition that a currency issuer is not revenue constrained, that it sets the terms on which it issues its own liabilities, that its spending and lending logically precede its taxing and borrowing, and that such policy space does not spell inevitable inflationary problems, is slowly on the increase. Another round of the U.S. debt-ceiling circus has prompted many to re-emphasize these elementary but important points. I did so in my previous couple of posts, here and here. Among more high-profile efforts, however, is a much needed contribution at the New York Times by James Galbraith. Were the gatekeepers sleeping, or is the 0.01 percent getting irritated by the GOP's antics? In his article, Government Doesn't Have to Borrow to Spend (published 2 October 2013), Galbraith makes clear that "the debt ceiling is an anachronism … based on the idea that the government must raise money from elsewhere, before it spends." As he rightly points out, the government has no such need. For the U.S. and most other national governments (though not the hapless common-currency using governments of the eurozone), there has been no such need since the abandonment of the gold standard.
Shutdown Leads Economists to Lower Growth Forecasts - The government shutdown, which is nearly two weeks old, has already taken a small but noticeable bite out of the U.S. economy. Associated Press Two forecasters on Friday pared back their estimates for fourth quarter growth solely based on the first 11 days of the shutdown. The damage could get worse of lawmakers can’t strike a deal. Macroeconomic Advisers cut 0.2 percentage points off its fourth quarter gross domestic product growth projection, which is now at a 1.9% annual pace. The firm expects government spending to contract at 2.0% pace during the quarter, a deeper pull back than the 0.7% previously forecast. (See their shutdown calculator.) Across the board budget cuts known as the sequester already caused federal spending to drag on growth during the first half of the year. The shutdown appears to be pressing the breaks further. Bank of the West Chief Economist Scott Anderson similarly slashed his expectation for fourth quarter GDP gains to 1.9% from 2.1%. He also shaved a 0.1 percentage point off his first quarter forecast. “Additional cuts are likely if the shutdown drags on into next week,” Mr. Anderson said. “The imminent threat of Federal government default appears to have eased – but damage to U.S. economic growth has already been done.”
There Is No Government Shutdown - It’s nothing but a political charade. I’ll start with a quick review of how government money works, and how the central government wants to use it. A government sovereign in its own currency has no debt issues as long as it spends constructively and its spending doesn’t grossly exceed the productive capacity of the economy. That’s the basic premise of greenbackerism, including its current version, Modern Monetary Theory (MMT).What we have today, however, are lies about alleged debt constraints. This is the deficit scare-mongering which is meant to conjure the right political environment for “austerity”. To the credit of the people, they haven’t let themselves be stampeded by this propaganda. The people consistently consider the deficit and debt to be lesser issues, compared to the quality of government spending. I.e., that it should be on programs which benefit the people as a whole, rather than which benefits corporations. We see how the Washington class and their corporate media simply impose this deficit-terror program against the will of the people. Which leads to the second point, that US government spending is almost all corporate welfare, and simply goes down a destructive rathole. The only exceptions are pre-existing programs like Social Security, which the elites, including both Washington parties, want to gut.I’m writing about this today to highlight again how the government’s ploys are all simply setting us up for further austerity assaults, when in fact there’s zero reason why the quantity of the deficit or debt, as opposed to its quality, ought to be an issue at all. The so-called “government shutdown” needs to be seen in this light.
Hitting the Ceiling: Disastrous or Utterly Disastrous? - Paul Krugman - Obama won’t, can’t negotiate over the debt ceiling, and Republicans still haven’t figured that out. So you have to say that it’s pretty likely that we will indeed hit the ceiling. Suppose that Obama’s lawyers tell him that extraordinary measures like just ignoring the ceiling or minting the coin are out. Then what? Well, Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world’s key safe asset into default. They don’t sound too confident. But even if they’re right, the government would still go into arrears on many other payments, from contractor bills to medical bills. And it would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time. I think this is important. Lots of people have been focusing on the possibility of a mega-Lehman event, but even if we somehow avoid that, this will be a catastrophe.
A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall - A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen. Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse. The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway Inc.’s Warren Buffett to Goldman Sachs Group Inc.’s Lloyd C. Blankfein have warned that going over the edge would be catastrophic. “If it were to occur -- and it’s a big if -- one would expect a series of legal triggers, potentially transmitting the default to many other markets,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest fixed-income manager. “All this would add to the headwinds facing economic growth. It would also undermine the role of the U.S. in the world economy.”
Goldman Fears "Rapid Downturn In Economic Activity" If Debt Limit Breached - As the shutdown continues, the political focus has begun to shift to the next deadline: the Treasury expects to exhaust its borrowing capacity by October 17. Goldman expects the Treasury’s cash balance to be depleted no later than October 31 and possibly quite a bit sooner. After October 17, the Treasury can keep conducting auctions to roll over maturing securities, but it cannot increase outstanding debt. Goldman fears it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. They estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly. Via Goldman Sachs,However, the Treasury’s cash balance is likely to be so low after about October 25 that, depending on revenue fluctuations, the cash balance could be depleted on any day. At that point, it is possible that the Treasury would need to cease making payments in order to conserve the little remaining cash they would still have on hand.
Hitting the Debt Ceiling: An Anti-Stimulus at Least Twice as Large as the Stimulus in the Recovery Act - Paul Krugman makes a good point—while it’s really hard to be precise about how much it would hurt to slam into the constraint of the debt ceiling, we do know clearly that it would indeed hurt. Say that Treasury decided to prioritize debt payments (and even say that interest on the debt doesn’t increase at all, which is unlikely), and cutback on other spending to levels that can be supported by incoming revenues rather than borrowing. This would by itself lead to a shock to GDP of well over 5 percent of GDP (annualized) when accounting for both the decline in spending (about 4 percent of GDP) and a modest multiplier. To put this in some perspective, this negative shock is twice as large as the positive boost given the economy during the absolute peak year of the Recovery Act (ARRA’s addition to the deficit was just over 2.5 percent of GDP in 2010). So, just the purely mechanical fiscal drag of being constrained by the debt ceiling would be equivalent to an anti-stimulus that was twice as large as the biggest stimulus package ever passed. And, of course, the non-mechanical impacts of hitting the debt ceiling that would result from chaos in financial markets make this a very conservative lower-bound estimate of what could happen.
A debt default’s calamity transmission mechanism - Dick Bove's note on the potential effects of a US treasury default is every bit as apocalyptic as the warnings coming out of the Treasury department. While the latter is naturally focussed on the possible economic impact, Bove gets into the immediate consequences for the financial sector. The how behind the what, we suppose. HT Alphaville alum Tracy Alloway for passing along the note, and here’s a suitably horrifying excerpt: Should the United States government default virtually every money market mutual fund (MMMF) in the country would “break-the-buck” – i.e., be unable to pay investors 100 cents on every dollar invested. At present, MMMFs that do not actually earn enough money to pay back 100 cents on the dollar are subsidized by the fund management company. A Treasury default would make this virtually impossible and millions of Americans would lose billions of dollars. The indentures of most bond and balanced mutual funds require that they immediately divest their holdings of defaulted securities. This could cause hundreds of billions in Treasuries to be sold immediately when the default was announced. Here are some data points:
- • FDIC-Insured American banks own $166 billion in Treasury securities (the FRB claims $194 billion).
- • They own an estimated $1.68 trillion in agency guaranteed debt (the FRB claims they own a bit more than that $1.73 trillion).
A reasonable estimate would be that the U.S. banking industry owns $1.85 trillion in government backed securities. It has $1.63 trillion in equity. If the Treasury and related securities were in default, one does not know what they would be worth. Assume a Latin American valuation of 10 to 20 cents on the dollar and an estimated $1.28 trillion in U.S. banking equity would be wiped out.
Raise your hand if you know how the Treasury’s payment systems work… Anyone? - Begin with a snippet from the rates crew at Credit Suisse: As we understand it, there are three main systems – the Department of Defense Disbursing Offices, the Bureau of the Fiscal Service (which deals with Treasury security related payments), and the Financial Management Service (which makes all other payments). The way that they are set up, they can either be set to “on” or “off” – i.e., a system either makes all of its payments or it doesn’t make any at all. There is a clear unwillingness to prioritize payments, and doing so would be politically messy, but if push comes to shove and Congress cannot strike a deal in time, the ability to pick and choose who gets paid does exist, if only on a broad basis. In 2011, the press reported that there was some contingency planning going on, but the details of those plans were unknown. The idea is that the Treasury would keep on the Fiscal Service and maybe the Department of Defense systems while shutting down the system that pays everything else. Default would be avoided, while pressure for a resolution to the standoff would quickly build — especially after the nation’s grandparents respond to their canceled retirement checks by knife-sharpening the tips of their walkers and thrusting them like lances at the nearest members of Congress. But I’m not yet convinced that “if push comes to shove and Congress cannot strike a deal in time, the ability to pick and choose who gets paid does exist, if only on a broad basis”. Strategists and other observers have given conflicting accounts over whether prioritising interest and principal payments on Treasuries is possible.
Imagine the Fed bought defaulted Treasuries -- Every Federal reserve bank shall have power… …To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States. – Section 14.2(b)2, Federal Reserve Act Now, reading that carefully… Does that mean the Fed can’t buy defaulted US government debt? Deutsche reckon the central bank could, if it came to the debt-ceiling worst (H/T Tracy Alloway):What could the Fed do to promote financial stability? First, the Fed could purchase defaulted Treasury securities. There is nothing immediately evident in the Federal Reserve Act that would preclude the Fed from this action. That is, these securities would still qualify for purchase under Section 14 of the Federal Reserve Act because they would still be guaranteed by the US Government, even if that guarantee weren’t able to be acted on fully for a time. Those securities and accumulated interest would be redeemed at some point. The specific Fed reaction would depend on market circumstances. If prices fell sharply because of reduced confidence in repayment, we would expect the Fed to intervene by purchasing more defaulted Treasury securities. At the very least, they would continue QE purchases so as not to spook the markets. If market stress increased substantially because severe shortages of collateral arose, the Fed might act to inject quality collateral into the financial system by selling securities or through reverse repo operations.
Democrats and Republicans Pedal to the Metal in Debt Ceiling/Shutdown Game of Chicken - Yves Smith - Watching the shutdown/debt ceiling impasse is increasingly like living next door to an abusive couple. You hear the screaming through the wall, and you pick up enough snippets that you think you know what the fight is about, but you aren’t hearing enough to be sure. So on the one hand, Norquist has been making the rounds trying to give everyone, meaning those Democrats who need to get the message that they need to whack all sorts of spending, especially Medicare and Social Security, the outlines of where Republicans think a budget deal lies. This is supposed to be a sane-looking Republican ask. On the other, the Republicans are looking increasingly in disarray, hence the concern about the screaming through the wall. House Speaker Boenher’s stance appears to have changed since Friday, or it may simply be that he’s been required to posture harder. The New York Times reported Friday that Boehner told party members privately that he wouldn’t let the US default. Even though a majority of Republicans in the House are against passing a continuing resolution (ending the shutdown while the two sides work out a bigger budget deal) and putting the debt ceiling on hold, Boehner is widely believed to have enough votes to join with Democrats and vote through agreements that would provide for a longer negotiating runway.
The White Man’s Last Tantrum? - American pundits are missing the bigger point about the Republican shutdown of the U.S. government and the GOP’s threatened default on America’s credit. The real question is not what policy concessions the Tea Partiers may extract, but rather can a determined right-wing white minority ensure continuation of white supremacy in the United States? For years, political scientists have been talking about how the demographic changes in the United States are inexorably leading to a Democratic majority, with Hispanics and Asian-Americans joining African Americans and liberal urban whites to erode the political domains of white conservatives and white racists.But those predictions have always assumed a consistent commitment to the democratic principle of one person, one vote – and a readiness of Republicans to operate within the traditional standards of democratic governance. But what should now be crystal clear is that those assumptions are faulty. Instead of accepting the emergence of this more diverse and multi-cultural America, the Right – through the Tea Party-controlled Republicans – has decided to alter the constitutional framework of the United States to guarantee the perpetuation of white supremacy and the acceptance of right-wing policies.
Wishing for US debt ceiling train wreck - How long will it take for the US Treasury to run out of funds if the October 17th deadline comes and goes without an increase in the debt ceiling? The answer is - less than a couple of weeks. Fitch Ratings: According to official comments by the US Treasury secretary, extraordinary measures could be exhausted by 17 October. In such a scenario, the Treasury would be forced to dramatically cut back on current spending with adverse implications for the economic recovery. Even if it were to prioritise debt service - something the Treasury has repeatedly stated it has neither the legal authority nor logistical capability to do - it would likely incur arrears on a range of payment obligations and thus continue to incur debt, but in a disorderly and disruptive manner. Amazingly, there seem to be countless Americans who are rooting for this to happen. Emails are pouring in arguing that a US default in fact is a good thing. They really believe this will magically solve the US fiscal deficit problem and/or somehow "punish" the Obama administration. They don't seem to realize that this is akin to wishing for another 2008, while US government deficit would only worsen as a result (with tax revenue collapsing while entitlement liabilities growing just as fast). Alternatively these people just don't seem to value their jobs, homes, pensions, and bank accounts - all of which will be at risk should the US government fail on its obligations.
These Are The Key Debt Ceiling Choke Points -- As we noted earlier there are some 'possible' scenarios that enable payments to be made on Treasuries prioritized over other payments but it would appear the short-term Treasury Bill market is becoming not just increasingly anxious about a technical default but is bringing that "X" date closer and closer. The 10/31/13 bill had been the "most risky" of the short-term bills until this weekend but the lack of a deal and no indication of a resolution any time soon has seen risk piling up in the 10/17/13 and 10/24/13 bills - the latter now at 16bps (that is 4 times the yield on the 11/21/13 bill). The 1-month-1-year spread is still inverted (even as USA CDS compresses on the day). Evidently, the "X" date is getting closer... 10/24/13 appears to be the new X-date now.
White House openly threatens US default as debt fight escalates - US Treasury Secretary Jacob Lew has issued a categorical warning that the United States will default on its $16.7 trillion debt and throw the world into turmoil unless Congress agrees to raise the legal debt ceiling by October 17. “Congress is playing with fire. If the US government, for the first time in its history, chooses not to pay its bills on time, we will be in default,” said Mr Lew. “Anyone who thinks that the United States government not paying its bills is anything less than default hasn’t thought about it very clearly,” he told NBC’s Meet the Press. Mr Lew said the treasury had already exhausted its normal funds in May and has been “creating room” by resorting to one-off tricks, but these, too, have run dry. The government will have just $30bn by October 17, half what is needed to cover immediate needs over subsequent days. “That is a dangerously low level of cash, and we’re on the verge of going into a place we’ve never been. Even getting close to the line is dangerous,” he said. Mr Lew’s dramatic comments mark a further escalation in the game of chicken on Capitol Hill. They suggest that the White House has for now ruled out a drastic fiscal squeeze to balance the books if there is no deal, and is unwilling to contemplate exotic loopholes – such as a $2 trillion platinum coin – to circumvent the will of Congress.
The Danger In Playing "Debt Ceiling Chicken": $440 Billion In Debt Maturing Before November 15 - With everyone's attention turning to the debt ceiling X-Date of October 17 (or sooner now that the Pentagon is once again spending money like a drunken sailor following the recall of 400,000 workers or half of the total number fuloughed), some are wondering why is the stock market not reacting more violently. The generic response that has formed is that despite all the feamongering by Obama and the Treasury, even crossing the X-Date will hardly result in the apocalyptic outcome that so many predict as the Treasury can "prioritze payments", i.e., paying some bills and not others, which as we explained before, means paying down debt obligations first, and everything else - whose non-payment does not constitute an event of default under US debt - last. In other words, if the US were to merely live within its means, it should have no problem remaining current on its interest expense even if that means slashing most other government programs. While superficially this is correct, there is one issue that few are discussing, namely the mountain of short-term debt maturities between October 24 and November 15, which if unable to be rolled over - something that would hardly be able to happen in a time of quasi-technical default - would imply redemption and maturity of the debt without a subsequent rolling over.The chart below lay outs the amount of Bill, Note and Bond maturities between October 18 and November 15: it totals a whopping $441 billion.
China tells US to avoid debt crisis for sake of global economy - A senior Chinese official has warned that the "clock is ticking" to avoid a US default that could hurt China's interests and the global economy. China, the US's largest creditor, is "naturally concerned about developments in the US fiscal cliff", vice finance minister Zhu Guangyao said. Washington must agree a deal to raise its borrowing limit by 17 October, or risk being unable to pay its bills. He asked that "the US earnestly take steps to resolve" the issue. US Treasury Secretary Jacob Lew has said that unless Congress agrees an increase in the debt ceiling by 17 October, Washington will be left with about $30bn (£18.6bn) in cash to meet its obligations - about half the $60bn-a-day needed. For many governments and investors the approaching deadlock over the debt ceiling is far more critical than the current impasse over the federal shutdown caused by Congress's failure to agree a new budget. On Sunday Republican House Speaker John Boehner reiterated that Republican lawmakers would not agree to raise the debt ceiling unless it included measures to rein in public spending. Mr Zhu said that China and the US are "inseparable". Beijing is a huge investor in US Treasury bonds.
If the U.S. defaults, benchmark rates could drop: J.P.Morgan - Pop quiz: if the unthinkable were to happen, and the U.S. entered into technical default on its debt, which direction would the benchmark 10-year Treasury yield go? Considering the unprecedented nature of such an outcome, it’s hard to know for sure. But as the U.S. federal government lurches toward the mid-October deadline for reaching a deal to raise the debt ceiling and avert a potential default, it’s a question worth considering. A J.P. Morgan survey of investors found that sentiment is divided about whether the 10-year yield would rise or fall, but slightly more participants thought the yield would move lower following a technical default. They define such a default as one in which a coupon or principal payment is delayed by a short amount of time. That’s one indication that the Treasury market’s place as a haven for investors could outweigh any diminishing credit quality that comes from the stain of default. J.P. Morgan Strategist Alex Roever concludes that any reaction would probably be fairly tepid:
We Are Now At War With Eastasia, I Mean The Deficit - Paul Krugman - This morning, for my sins, I found myself involuntarily watching bits and piece of the morning talk shows, and it seemed clear that Republicans have been given a new talking point. Suddenly, the shutdown/debt ceiling confrontation isn’t just about Obamacare; it’s about curbing runaway spending growth and exploding debt. I’m a bit surprised. I didn’t expect Republicans to worry about the facts that federal spending has been flat in nominal terms, and falling fast in real per capita terms, for several years, or that the deficit is plunging. But I did think they might worry that the public has moved on from the debt scare, and also that some people might balk at the sudden attempt to rewrite history. And they should balk. This was never about controlling the deficit. It started as an attempt to stop health reform before it could get started; it has now morphed into an attempt to extract something, anything from Obama to save face (which he can’t give them, because he needs to take a stand against extortion.) And it’s still looking grim.
First Week Of Great Shutdown of 2013 Went Exactly As Boehner Wanted - House Speaker John Boehner (R-OH) pretty much got what he wanted from week 1 of The Great Shutdown of 2013. Boehner demonstrated to his caucus what he was willing to do for it -- allow the government to be shutdown -- and it seems to be very appreciative of his efforts. For that matter, the White House and congressional Democrats also got what they wanted in week 1. The White House and House and Senate Ds held firm to their no negotiating strategy and appear to be more unified than they've been in years. And the polls showed that, as expected but hardly guaranteed, it is the GOP rather than the Democrats that are being increasingly blamed for the shutdown. All sides are now in a better position to cut a deal. Boehner, President Obama and Senate Majority Leader Harry Reid (D-NV) have all now amply demonstrated to their respective constituencies that they are indeed the hard asses they wanted them to be. All of the leader are, therefore, are in a better position to convince their colleagues that a shutdown-ending deal is acceptable. But the irony of the situation is that their hard line positions in week 1 have also made it harder for Boehner, Obama and Reid to come together in week 2.
Why the government shutdown is bad for Americans’ health - On the brink of this year’s flu season, the Centers for Disease Control and Prevention (CDC) has been forced to shut down its disease-monitoring systems, significantly limiting its ability to identify and stymy outbreaks ranging from mutant seasonal flus to E. coli and more. Shuttering of the monitoring system represents just one of several federal-government programs intended to safeguard Americans that are partially or completely out of commission as a result of the government shutdown. Food inspection, clinical trials and medical research are also on hold, possibly putting millions of Americans at risk while Republican lawmakers continue to keep all “nonessential” federal workers furloughed in their effort to delay implementation of the Affordable Care Act.The CDC has already manufactured this year’s flu vaccine and distributed it to state and local health departments, but flu surveillance — one of the key tasks the CDC performs every year — was cut due to the shutdown. According to Barbara Reynolds, the CDC’s director of public affairs, 85 percent of the agency’s flu division has been furloughed. The CDC has retained just 32 percent of its staff.
The Punishers Want To Run The Country or We Are All Tipped Waitstaff Now- Republicans are the dissatisfied and angry diners at the table of life. We've seen a lot of weird reactions on the right wing to the Government Shut down. These range from "it doesn't matter" to "its terrible" but one thing that really strikes me is the rage and antipathy that has been displayed towards Federal Workers themselves. It doesn't strike me as unusual, but it does strike me as significant. Yesterday's on air rant by Stuart Varney makes it pretty explicit: Federal Workers and, indeed, the entire Government are failing Stuart Varney. They cost too much and they do too little. In fact: they are so awful they don't even deserve to be paid for the work they have already done. Contracts, agreements, and labor be damned. If Stuart Varney isn't happy then they deserve to be fired. Here's the quote if you haven't seen it:
- HOWELL: Do you think that federal workers, when this ends, are deserving of their back pay or not?
- VARNEY: That is a loaded question isn't it? You want my opinion? This is President Obama's shutdown. He is responsible for shutting this thing down; he's taken an entirely political decision here. No, I don't think they should get their back pay, frankly, I really don't. I'm sick and tired of a massive, bloated federal bureaucracy living on our backs, and taking money out of us, a lot more money than most of us earn in the private sector, then getting a furlough, and then getting their money back at the end of it. Sorry, I'm not for that. I want to punish these people. Sorry to say that, but that's what I want to do.
Feds Try to Close the OCEAN Because of Shutdown: Just before the weekend, the National Park Service informed charter boat captains in Florida that the Florida Bay was "closed" due to the shutdown. Until government funding is restored, the fishing boats are prohibited from taking anglers into 1,100 square-miles of open ocean. Fishing is also prohibited at Biscayne National Park during the shutdown. The Park Service will also have rangers on duty to police the ban... of access to an ocean. The government will probably use more personnel and spend more resources to attempt to close the ocean, than it would in its normal course of business. This is governing by temper-tantrum. It is on par with the government's ham-fisted attempts to close the DC WWII Memorial, an open-air public monument that is normally accessible 24 hours a day. By accessible I mean, you walk up to it. When you have finished reflecting, you then walk away from it. At least that Memorial is an actual structure, with some kind of perimeter that can be fenced off. Florida Bay is the ocean. How, pray tell, do you "close" 1,100 square miles of ocean? Why would one even need to do so?
Shutdown Hitting Private Sector As Defense Contractors Furlough Workers - The effects of the government shutdown are starting to be felt in the private sector: Lockheed Martin became the latest government contractor to announce furloughs due to the federal government shutdown.The defense contractor said it will furlough 3,000 workers starting Monday, Oct. 7.Lockheed Martin has 120,000 employees, 95% of whom are based in the United States. Its contracts with the federal government accounted for nearly $39 billion in 2012, which represented more than 80% of its overall revenue.Earlier this week United Technologies announced 2,000 of its workers will likely be furloughed starting next week. Those affected make Black Hawk helicopters through its Sikorsky Aircraft subsidiary, as well as aircraft control systems and a variety of other high-tech products. United Technologies said furloughs could grow to 4,000 if the shutdown continues through next week, and 5,000 if it goes into next month. The impact of the shutdown are also starting to be felt outside the defense contracting industry, including at Boeing where the delivery of aircraft to airlines around the world will likely be delayed due to the fact that the FAA inspectors that must certify the aircraft are all currently on furlough. Boeing is saying that the slowdown in deliveries won’t impact production or lead to furloughs, although that obviously may not be the case for the military work that Boeing does
House Approves Back Pay for Furloughed Workers - The House, in a rare Saturday session, voted unanimously to guarantee that federal workers will receive back pay once the government shutdown ends, offering a promise of relief if not an actual rescue to more than 1 million government employees either furloughed or working without pay. The 407-to-0 vote, on a measure backed by President Obama, followed a morning debate in which lawmakers from both parties extolled government doctors and nurses saving lives, emergency relief workers braving disasters to rescue citizens, and NASA scientists exploring space. In 2011, many of those same lawmakers, swept to power on a Tea Party wave, pressed for legislation imposing a hard freeze on government salaries and held hearings on a federal work force they said was overpaid and bloated. After the vote, Representative Eric Cantor of Virginia, the House majority leader, criticized Mr. Obama for what he called a failure of leadership for refusing to negotiate a way out of the impasse. But he said Republican leaders would not allow a vote to reopen the government without delivering a blow to the president’s health care law, with a delay in the mandate that individuals purchase health insurance and a prohibition on federal subsidies for members of Congress, White House leaders and their staff, who must purchase policies on the law’s new insurance exchanges.
Boehner: House to demand spending cuts to avoid default – The partial government shutdown headed into its second week with no sign of resolution to the bitter stalemate as key Republicans in Congress on Sunday linked the current budget impasse to the looming confrontation over a potential default on the nation's debt. House Speaker John Boehner said he would not allow the GOP-led House to move forward with a bill to increase the government's borrowing authority without broader talks about curbing federal spending. "I don't want the United States to default on its debt," the Ohio Republican said on ABC's This Week. "But I'm not going to raise the debt limit without a serious conversation about dealing with problems that are driving the debt up. " President Obama, he said, "is risking default by not having a conversation with us." Asked how the stalemate would end, Boehner said: "If I knew, I would tell you." The government will reach the limit of its borrowing authority on Oct. 17, and Obama has called for lawmakers to pass a bill increasing the limits with no conditions attached.
Boehner: 'The Path We're On' Leads to Default -- If you stopped thinking about stashing money under your mattress when reports emerged last week that John Boehner said privately that he would let Democrats vote for a bill to raise the debt ceiling, be advised that the Republicans are learning how threats work. "We're not going to pass a clean debt limit increase," Boehner told George Stephanopoulos on This Week. "The votes are not in the House to pass a clean debt limit. And the president is risking default by not having a conversation with us." Boehner and other House Republicans don't want to cause an economic meltdown, but since there aren't enough Republican votes in the House, they really have no choice. "That's the path we're on," said Boehner. "[Obama] knows what my phone number is. All he has to do is call." Boehner continued to insist that when House Republicans repeatedly voted to shut down the government unless President Obama defunded or delayed his own health care law, they were just trying to "provide fairness to the American people under Obamacare." Dismissing reports that there may be enough Republican support to pass a "clean" continuing resolution, Boehner said the president agreeing to negotiate is the only way out of the shutdown. "The American people expect in Washington, when we have a crisis like this, that the leaders will sit down and have a conversation," he said. "I told my members the other day, there may be a back room somewhere, but there's nobody in it."
Debt ceiling crisis would be a catastrophic success for GOP - Republicans shouldn’t delude themselves. Failure to raise the US debt limit would almost certainly be a very, very bad thing. And that assumes Treasury Department computers are better programmed than Obamacare’s and can prioritize debt interest payments. A weekend research note from Goldman Sachs makes that very assumption and still arrives at this disastrous conclusion:If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly. But tell that to US Representative Ted Yoho. In an interview with The Washington Post, the tea party Republican from Florida said he doesn’t ever want to raise the debt limit. And he doubts there would be any sort of financial market reaction if America suddenly couldn’t pay its bills and had to slash spending. Just the opposite in fact. Yoho: “I think, personally, it would bring stability to the world markets,” since they would be assured that the United States had moved decisively to curb its debt.
Now Republicans Want a ‘Dialogue’ – NYTimes Editorial - Republicans are now simply flailing. Because they lack any plausible explanation for their irresponsible conduct in creating and prolonging the government shutdown, they are inventing new demands by the hour. “Defund Obamacare!” they cried at the beginning, stating their condition for reopening the government. Then they moved to delaying health care reform, delaying the individual mandate and repealing one of the health care law’s taxes. Then they started talking about another grand bargain on the budget, tax reform and entitlement cuts. When nothing worked, they simplified their ransom note, saying President Obama and the Democrats had to sit down with them and negotiate something, or anything. “All we’re asking for is to sit down and have a discussion,” Speaker John Boehner said Friday. Cathy McMorris Rodgers, chairwoman of the House Republican Conference, put it even more broadly, asking for the beginning of a “dialogue.” The real goal of these demands, however, is not an agreement but instead the perception that it is Mr. Obama who is being intransigent, not the House. A “dialogue,” now? With 800,000 federal employees furloughed, vital government services cut off and the economy slowing? This is a moment for immediate action to reopen government’s doors, not the beginning of a conversation that Republicans spurned when they lacked the leverage of a shutdown.
Boehner, White House harden stances as shutdown continues, potential default nears -- House Speaker John A. Boehner on Sunday defiantly rejected calls to reopen the government and raise the federal debt limit, warning that the nation is headed for a first-ever default unless President Obama starts negotiating with Republicans. Sitting for his first television interview since congressional gridlock shut down most federal agencies nearly a week ago, Boehner sought to dispel the perception that he has been cornered by right-wing rebels and is desperately looking for a way out. In recent days, rank-and-file Republicans have said Boehner has told them he will not let the nation default on its obligations, even if that means raising the nation’s borrowing limit primarily with Democratic votes. On Sunday, Boehner said he has no intention of collapsing in unconditional surrender. “We are not going to pass a ‘clean’ debt-limit increase” — one without additional concessions from Democrats — he said. “I told the president, there’s no way we’re going to pass one. The votes are not in the House to pass a clean debt limit,” Boehner said. “And the president is risking default by not having a conversation with us.”
Continued Shutdown Would Spell The End Of U.S. Scientific Research In Antarctica This Year - The National Science Foundation (NSF) will have to evacuate its Antarctic research centers if the shutdown persists through mid-October, a move that would mean the end of this year’s research season in the region. So far, the NSF has kept open its three Antarctic research centers — the McMurdo, Amundsen–Scott and Palmer stations — during the shutdown. But Lockheed Martin, the NSF’s Antarctic operations contractor, says it will run out of money by mid-October, at which point the centers will be forced to evacuate all but the most essential staff if the shutdown is still going on. This would mean that hundreds of scientists’ studies in glaciology, ecology and climate-related fields would grind to a halt, ending a season of research that usually stretches from October to February.If that happens, it would strike another blow to NSF scientists, who have already had to reevaluate their studies and cut members of their staff after across-the-board 5.1 percent sequestration cuts went into effect in March. Projects like Operation IceBridge, an initiative that’s working to map ice sheets across Antarctica, would be harmed — as Nature points out, even a delayed start in this year’s research season could put a major kink in Ice Bridge’s schedule. A project studying Antarctica’s pristine subglacial lakes would also be affected — and that’s after the project had to eliminate eight scientists and cut the planned days for research this year in half because of sequestration cuts.
90 Percent of Seafood Imports Go Uninspected Due to Shutdown - Thanks to the shutdown, food safety inspectors at the Food and Drug Administration, which monitors 80 percent of the U.S.’ food supply, are on furlough until the budget gets passed, as Food Safety News reports. That means the FDA isn’t carrying out some of its most critical responsibilities. First is the FDA’s oversight of food imports. The furlough means more than 90 percent of the foreign seafood Americans eat is coming through unchecked, as well as half the fruit and one-fifth of the vegetables. One of the big ways the FDA protects consumers is by blocking shipments from companies with a history of tainted foods, monitoring them through what it calls ”red alerts.” These include categories like filthiness (meaning excrement),fruits covered in pesticides, drug-doped seafood, dairy products with melamine, dietary supplements that might have mad cow disease, e. coli-containing seafood and candy laced with lead.
To prevent a debt default, it's time for a *REAL* government shutdown - Like a runaway train, the US is hurtling towards a debt default, only about 10 days away, with no signs that the pepretators - the extremist anti-government gerrymandered GOP in the House of Representatives - is going to surrender to responisibility before then. At least one reason why the impasse is dragging on in on is that we've only had a "faux" government shutdown, not a real one. True, the national parks have been shut down, and over half a million federal workers have been sent home, but the average citizen hasn't been inconvenienced in the slightest by this. And that only feeds into the narrative that the federal government really doesn't do anything. I have a more honest proposal: instead of ignoring a law, actually enforce the lack of funds to pay for federal services. Obama should announce that, as of twenty-fours from now, the federal government will shut down, for real. That means:
- No National Weather Service - so no weather forecasts.
- No customs bureau - i.e., the borders are closed.
- No cargo inspections - i.e., the ports are closed.
- No FAA - so airports are closed
- No FDA inspections - so the food supply stops in its tracks
- If the workers who ensure that federal checks aren't paid, then no Social Security or Medicare checks either
CBO Report on Fiscal 2013 Deficit - The CBO monthly budget report for September (and fiscal 20131) that was due today has been delayed. From the CBO: CBO's Monthly Budget Review Will Not Be Published Today Because a lapse in appropriated funds has caused CBO to largely shut down its operations, the Monthly Budget Review, which ordinarily would be issued this morning, will not be published today or during the duration of the government shutdown.The CBO has been projecting the deficit would decline significantly this year: [T]he budget deficit will shrink this year to $642 billion, the Congressional Budget Office (CBO) estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.Flying blind. Time to end the shutdown.
On Knowing What You Don't Know - Paul Krugman - Brad DeLong catches Niall Ferguson making another whoopsie. And while chasing NF isn’t worth the effort for its own sake, I think there is a broader lesson here: namely, the importance of knowing what you don’t know.My own unpleasantness with Ferguson began when he tried to weigh in on monetary versus fiscal policy without understanding basic macroeconomics. Later, he tried to critique official inflation numbers without knowing enough about that subject to tell the difference between the experts and the cranks. Now he’s demonstrating, rather embarrassingly, that he doesn’t know how to read CBO reports. What I find amazing is the failure to learn the meta-lesson here, which is not to wade into such matters without being quite sure you know what you’re doing. In particular, if you think you’ve found a massively important fact that somehow all the economists have missed — like a drastic deterioration in CBO’s estimate of the long-run US budget outlook, somehow missed by everyone else reading the agency’s reports — you really, really want to be sure that you’re not just misreading the numbers. Knowing what you don’t know is very important.
Shut Down, Debt Ceiling Round Up: All The Latest News And Developments - From Bloomberg:
- President Obama calls on House Speaker John Boehner to vote today on "clean" CR to prove he doesn’t have votes to pass it, calls on Congress to raise debt limit next week
- Obama backs Senate plan for 1-yr debt limit hike
- White House National Economic Council Director Gene Sperling says a 2-3 week debt-limit extension is feasible, that Obama wants to set precedent of never negotiating when nation’s "full faith and credit" is on line
- Treasury Sec. Lew says U.S. will lose its ability to borrow on Oct. 17th if Congress doesn’t act to raise debt limit
- Lew set to testify before Senate Finance Cmte hearing on Oct. 10
- Rep. Hoyer says as many as 160 Republicans in House think shutdown is irrational
- Spokesman for Senate Majority Leader Harry Reid says Boehner has a "credibility problem"
- Boehner’s spokesman says govt shutdown is because "Democrats refuse to negotiate"
- Sen. Schumer says he thinks Boehner will break with the Tea Party on the debt ceiling
- House deal to avoid default may come as late as Oct. 21, Bloomberg Industries says
- Reid says Boehner has votes to open govt
- ABC News/Washington Post poll finds Republicans are losing ground in "shutdown blame game"
Shutdown Costs at $1.6 Billion With $160 Million Each Day - The shuttering of large parts of the federal government on Oct. 1 amid a fight over funding President Barack Obama’s health-care law is hurting businesses big and small. Some, such as Thevenin’s, have already taken a hit to their bottom line. Others will suffer from slowed economic activity -- stocks declined yesterday, with the Standard & Poor’s 500 Index at almost a one-month low, and a Gallup poll released Oct. 4 showed consumer confidence had dropped to its lowest point since December 2011. The shutdown cost $1.6 billion last week in lost economic output, according to IHS Inc. (IHS), a Lexington, Massachusetts-based global market-research firm. As the showdown enters its eighth day, the office closures are now draining an average of $160 million each workday from the $15.7 trillion economy. Man-Made Disaster Two more days of the Washington-made calamity would put the shutdown’s financial harm on par with a natural disaster last month. September’s heavy rains, flash floods and mudslides across 17 Colorado counties caused at least $2 billion in economic damages, according to Equecat Inc., an Oakland, California-based catastrophe-risk modeler. Based on the IHS estimate, the shutdown costs will surpass $2 billion on Oct. 9. Congress’s failure to approve a federal budget or a stopgap spending measure sidelined an estimated 800,000 federal employees last week. As many as 350,000 of those employees returned to work yesterday, with regular pay schedules. Active-duty military employees also are collecting checks. Yet the economic impact of the shutdown goes beyond the federal workforce.
Debt Limit Taking Center Stage in Impasse - Senate Democrats this week are planning a vote to extend the nation's borrowing authority through 2014, the latest sign that the focus of the budget impasse is shifting toward preventing a U.S. debt default. Democrats are still debating their opening bid, but the most likely scenario is to advance a debt-limit bill free of extraneous policy amendments, as President Barack Obama has demanded. The bill would put the need for the next debt-limit increase after next year's midterm elections. House Republicans say they won't pass any such debt-limit extension unless it is accompanied by deficit-reduction measures or other priorities. The Treasury says the debt ceiling must be raised this month, or else it wouldn't be able to pay all the country's bills. With that prospect approaching, the standoff over increasing the country's borrowing limit has merged with a related impasse over terms for funding the government, so that it can fully reopen. On Monday, White House officials said they were willing to accept a short-term measure to extend the ceiling, possibly for a few weeks, to allow lawmakers to work out a longer-term resolution. But they said that wasn't their preferred course. "It is the responsibility of Congress to decide how long and how often they want to vote," White House adviser Gene Sperling said Monday at a breakfast organized by Politico. "The important thing is that they not threaten default."
Obama, Senate Dems hope to break logjam soon with debt ceiling bill - President Obama and Senate Democrats tried Monday to break a political logjam that could threaten the U.S. economy, advancing legislation that would raise the federal debt ceiling as soon as possible. Democrats said they will attempt to force Republicans to agree to a $1 trillion debt-limit increase to ensure that the government does not reach a point this month where it may be unable to pay its bills, risking its first default. They said they also may accept a short-term bill, perhaps lasting only weeks, to avoid going over the brink. The Democratic push on the debt limit came as a partial government shutdown entered its second week with no solution in sight. New polling showed that the fiscal standoff is hurting Republicans far more than it is Obama, although no party is faring particularly well.
Debt-Ceiling Standoff Threatens America’s Global Leadership - There is always a lot of proud boasting in Washington about “American exceptionalism” — the idea that the U.S. was created for some higher purpose, to bring democracy and prosperity to a needy world. Perhaps in no way is the U.S. more “exceptional” than in its role in the global economy. The dollar remains the unrivaled No. 1 currency in the world and the basis for international trade. Everything from oil to corn is priced in the greenback. The U.S. economy is still the world’s largest by far, and what happens within it has an outsize impact on the rest of the world. U.S. government bonds are the bedrock of global investment, perceived in every corner of the globe as an unmatched store of wealth. All that is being threatened by the embarrassing arm wrestling in Washington over the debt ceiling. The U.S. Treasury Department has warned that if Congress doesn’t raise the ceiling on U.S. government debt by Oct. 17, its coffers will be dangerously low, potentially leading to a default on the country’s $16.7 trillion of debt. Such a dire consequence has done little to move Republican Congressmen, who are refusing to raise the ceiling without concessions from the White House on budget cuts and other issues. “The nation’s credit is at risk because of the Administration’s refusal to sit down and have a conversation,” Republican House Speaker John Boehner said on Sunday. When asked if that meant the U.S. was headed for default, Boehner said: “That’s the path we’re on.”
Budget Brinksmanship: American Exceptionalism Gone Bad - The budget stalemate in Washington looks to be going from bad to worse. Here we are, ten days from hitting the debt ceiling limit, and by the reckoning of Wall Street’s watchful analysts, only about three weeks away from default (Treasury can do some creative footwork for a couple of weeks until some large payments must be made, in particular, Social Security disbursements), and both sides are digging in. As we wrote earlier, House Speaker John Boehner had reportedly said privately last Friday said he would not push the US into default. Over the weekend, in public, he took a much harder line. And new reports indicate, as we speculated yesterday, that he could well decide to align with the apocalyptic Republican majority on the assumption that Obama will have to do what it takes to avoid default. And since Obama and his mouthpieces have repeatedly foresworn using sensible routes out of this impasse, like invoking the 14th Amendment or more creative devices, the Republican hard core believes its brinksmanship will force concessions from Obama. From the National Republic: In private, Boehner has told his allies that he won’t bring up a clean CR, and he’s hopeful that as the deadline nears, President Obama will deal. “There’s no way the president holds firm,” a House GOP insider predicts. “Once that crack opens, I don’t know how the debt limit will be addressed, but it won’t be by Republican capitulation.”The New York Time similarly reports that both sides are hardening their positions. Both sides are trading barbs; there’s no sign that anyone is interested in talking, nor any indication that terms are being discussed privately while the public mudslinging continues:
Shutdown could hurt millions of veterans; $6 billion in disability, pension payments would stop - About 3.8 million veterans will not receive disability compensation next month if the partial government shutdown continues into late October, Veterans Affairs Secretary Eric Shinseki says. Some 315,000 veterans and 202,000 surviving spouses and dependents will see pension payments stopped. Shinseki is spelling out some of the dire consequences of a longer-term shutdown in testimony Wednesday for the House Committee on Veterans Affairs. The short-term consequences have meant that disability claims production has slowed by an average of about 1,400 per day since the shutdown began Oct. 1, and that has stalled the department's efforts to reduce the backlog of disability claims pending for longer than 125 days. In all, more than $6 billion in payments would be halted with an extended shutdown.
Air Force, after spending $500 million, sending fleet directly into storage - The US Air Force has sent a dozen brand new cargo planes that cost American taxpayers hundreds of millions of dollars directly from the assembly line into a storage facility in the Arizona desert, according to a new report. At least twelve C-27J Spartans, a medium-sized military transport plane, have been removed from military service and sent to Davis-Monthan Air Force Base in Tucson, Arizona. The base was given the nickname “boneyard” after years of inactivity. Five more planes are expected to be built and sent to the base by 2014, according to an investigative report by Ohio’s Dayton Daily News. “They are too near completion for a termination to be cost effective,” said Air Force spokesman Darryl Mayer. The Air Force has spent $567 million on 21 Spartans since 2007. While 16 of that 21 have been built, 12 of them now sit at Davis-Monthan alongside thousands of NASA and military flight vehicles exceeding $35 billion in value.
New Air Force Planes Go Directly to ‘Boneyard’ - New cargo planes on order for the U.S. Air Force are being delivered straight into storage in the Arizona desert because the military has no use for them, a Dayton Daily News investigation found. A dozen nearly new C-27J Spartans have already been taken out of the US Air National Guard service and shipped to the so-called ‘boneyard’ at Davis-Monthan Air Force Base in Tucson. Five more are expected to be built by April 2014, all of which are headed to the boneyard unless another use for them is found. The Air Force has spent $567 million on 21 C-27J aircraft since 2007, according to purchasing officials at Wright-Patterson Air Force Base. Sixteen had been delivered by the end of September. The Air Force almost had to buy more of the planes against its will, the newspaper found. A solicitation issued from Wright-Patterson in May sought vendors to build more C-27Js, citing Congressional language requiring the military to spend money budgeted for the planes, despite Pentagon protests.
The 13 reasons Washington is failing: The government is shut down. Confidence in Congress is at all-time lows. The American people haven't believed the country to be on the right track in almost a decade. Congress might do something truly crazy and default on the national debt. At this point, it's almost cliche to say Washington isn't working. But the truth is harsher: Washington is actively failing. It's failing to craft policies that make the country better. And it's failing to avoid disasters that make the country worse. It's nice to imagine these failures are temporary or aberrational. It's comforting to believe that they're the result of bad people, or dumb people, or incompetent people. But the truth is more unnerving: The American political system is being torn apart by deep structural changes that don't look likely to reverse themselves anytime soon. A deal to reopen the government won't fix what ails American politics. And so we need to look deeper than just this battle. The sooner we recognize that something is wrong with Washington, the sooner we can begin the hard work of fixing it. Here, then, are 13 of Washington's problems — ordered, subjectively, from small to big — and there are, of course, many more.
Blame the Deficit Scolds - Paul Krugman - If we have a debt-ceiling crisis in a couple of weeks, with dire economic effects, don’t just blame Boehner’s Bunglers; you should also blame the deficit scolds — the Committee for a Responsible Peterson Budget and so on, and all the Very Serious People who have lent them support. For as Jonathan Chait reminds us, these organizations all cheered the Republicans on in 2011, as they made the first-ever use of the debt ceiling to blackmail a sitting president. If they are now horrified by the prospect of a financial crisis, well, guys, you’re the ones who insisted that extortion was OK as long as you thought it served your goals.
The Deficit Scolds Include the President - Paul Krugman writes: If we have a debt-ceiling crisis in a couple of weeks, with dire economic effects, don’t just blame Boehner’s Bunglers; you should also blame the deficit scolds — the Committee for a Responsible Peterson Budget and so on, and all the Very Serious People who have lent them support. For as Jonathan Chait reminds us, these organizations all cheered the Republicans on in 2011, as they made the first-ever use of the debt ceiling to blackmail a sitting president. If they are now horrified by the prospect of a financial crisis, well, guys, you’re the ones who insisted that extortion was OK as long as you thought it served your goals. But Krugman neglects to mention that the deficit scolds include the President, who turned deficit hawk way back in February 2009 immediately after passing the inadequate stimulus package, and then told the country we are “out of money”, appointed the Simpson-Bowles commission, angled incessantly for a deficit-slashing grand bargain even in the midst of the moribund post-2008 economy, and helped co-engineer the fiscal cliff deal and the sequester.
IMF Warns Washington Over Debt Impasse - We already know that the International Monetary Fund thinks an ongoing debt impasse in Congress could be “catastrophic.” But just to make sure Washington gets the message, the IMF’s top economist Olivier Blanchard, kicked off his press briefing on the World Economic Outlook with another alert. The topic’s likely to be the central focus this week as finance ministers and central bankers meet in the capital this week. While the fund says a government shutdown is likely to have a limited impact on the U.S. economy, but “failure to lift the debt ceiling, would, however, be a major event,” Mr. Blanchard said. “A prolonged failure would lead to an extreme fiscal consolidation and almost sure derail the U.S. recovery,” he said. That would have immediate impacts, with major disruptions in financial markets, both in the U.S. and abroad. “It could well be that what is now a recovery will turn into a recession or something worse,” Mr. Blanchard added. In its latest economic outlook, the IMF assumes Washington sorts out the mess before the gridlock forces government to default on its obligations.
What are Conservative Experts Saying About the Debt Ceiling? - Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first. There have been really great pieces written lately about going through the debt ceiling and what it would mean for the economy; Kevin Roose, Greg Ip, and Matthew O’Brien have pieces that are particularly worth your time.At a baseline, what they tell us is that even if that kind of prioritizing is possible, the legality is in doubt, we could still miss a payment, the economy would go into a recession from the sudden collapse of spending, and even flirting with this possibility has a bad effect on the economy. We also simply don’t know if prioritizing would work. But I wanted to get a sense of what the right wing is hearing on this topic. In order to do that, I contacted three major conservative think tanks to ask for a comment from their experts “about the economic consequences of the government defaulting on its debt if it goes through the debt ceiling.” Here’s what I got.
When the Treasury Runs Out of Cash - It is common to hear Republicans pooh-pooh the danger of default by saying that the Treasury has much more cash coming in from tax withholding on a monthly basis than it owes bondholders. It can simply prioritize payments, they say. Those who say this are either ignorant or mendacious. They make the point that the debt limit is a public law, not a part of the Constitution with higher standing over other public laws. Appropriations are also public laws, as are entitlement programs like Social Security and Medicare. And of course those who sell goods and services to the federal government, as well as those who bought its bonds, have contractual rights to be paid. Moreover, there is a law called the Prompt Payment Act, which requires the government to pay its obligations when they come due.Therefore, if the Treasury lacks the cash on hand to pay the bills that are due, which it says will happen on Oct. 17, something has to give; one law or another must be broken on that day. On Day 1, it probably won’t be the bondholders who will suffer. That is because the first big Treasury interest payment isn’t due until Oct. 31, according to the Congressional Budget Office. But on Oct. 17, there will be somebody who would otherwise be paid that day who won’t because there will not be enough cash to pay everyone. Contrary to popular belief, the Treasury can’t sift through the various bills due each day and decide which to pay and not to pay. In many cases it lacks the information to know what a bill is for. Payments are initiated by the departments and agencies, which forward invoices electronically to the Treasury’s Financial Management Service, which has no idea what the invoice is for. All it can do is check to see if the payment is valid and there are sufficient funds in the relevant account to pay it.
Biggest U.S. Foreign Creditors Show Concern on Default Risk - China and Japan, which together hold more than $2.4 trillion in U.S. Treasuries, raised pressure on the U.S. to resolve a political impasse on its debt ceiling that threatens to destabilize global financial markets. Japan must consider the impact of any default on its bond holdings, even as the U.S. will probably avoid a fiscal crisis, Japanese Finance Minister Taro Aso said today in Tokyo. Chinese Deputy Finance Minister Zhu Guangyao said yesterday that the U.S. should prevent a default, the People’s Daily reported. Any failure by the U.S. to honor its debt obligations would damage the dollar’s status as the world’s reserve currency. A shift in asset allocation by China, Japan or other major holders of Treasuries could push up U.S. interest rates and cause swings in global currency markets. “If a default on U.S. debt occurs, there will be a huge impact on markets,” “In the long run, some nations could review the allocation of their foreign reserves and shift to a better-balanced portfolio.”
If a Default, Who Gets Paid First? - China. When the tax payer bailed out Freddie Mac and Fannie Mae in 2008, foreign central banks never lost a dime. At that time China had $376 billion in bond holdings. China was paid in full. According to Bloomberg, China is the largest foreign owner of Treasuries: $1.28 trillion. Japan is second with $1.14 trillion. The U.S. has run a sizable trade deficit with China; a much smaller one with Japan. Altogether, the U.S. Trade Deficit has been mind boggling. China used its trade surplus money to buy Treasuries from the U.S. In short, every month we owe our trading partners a great deal of cash. Via multinationals like Apple, IBM, Nike (you name the company), we outsourced our production to third world countries. We then bought those goods, making a handsome profit for the companies and China. China took its share and bought bonds and T-Bills. Yes, China will get paid first. Japan will get paid second. Other foreign banks will be paid. Social Security will be paid after bond payments. The rest of us will have to stand in line. And hope.
What Economists Think About a Possible Debt Default - As my colleague Jonathan Weisman wrote on the front page of Wednesday’s editions, some Republican leaders are arguing that a debt default would not be so terrible. Economists do not agree.The Initiative on Global Markets, established by the Booth School of Business at the University of Chicago, recently queried a panel of 36 economic experts on the subject, asking if they agreed or disagreed with the following statement: “If the United States fails to make scheduled interest or principal payments on government debt securities, even as an unintended consequence of political brinkmanship, U.S. families and businesses are likely to suffer severe economic harm.” Here is the distribution of responses from the 31 people who answered: Of those who responded, only one — Pinelopi Goldberg at Yale — disagreed with the statement. She submitted a comment with her response: “Unlikely, if they pay a week later.” In other words, she’s saying a default isn’t a big deal to most Americans — assuming it’s reversed almost immediately. That’s different from saying a default isn’t a big deal, period.
How One Likely Budget Compromise Will Promote More Congressional Corruption - Yves Smith - The current posturing by both the Democrats and Republicans over the debt ceiling impasse is that both sides are digging in for a long shutdown. Whether that proves to be the case or not, the resolution is likely to involve some face-saving concessions offered by each side. One that is up for grabs is the provision that allows Congressmen and their staffers to continue to have their own Congressional policies. The basic deal is as follows. If you pay cops terribly, you’ll get cops who take bribes. If you pay members of Congress or regulators way less than first year law school graduates in large New York or DC law firms, you’re going to get members and regulators who take bribes. If you cut health care subsidies for Congressional staff, you’ll get lobbyists writing the laws. It’s not that all poorly paid cops are corrupt, it’s just that it’s more likely for corruption to flourish where the public sector is radically unequal compared to the private sector. That’s just the way it works. And that’s why the movement to get rid of health care subsidies for members of Congress and Congressional staffers is so pernicious. Some staff aren’t young, but many of them are working the hill (especially in committees) for a few years before heading back to law partnerships to get what is effectively deferred income. We are constantly hearing the argument that members of Congress need their pay cut, or need to be replaced, or the latest incarnation, they should have their health subsidies for Obamacare cut. . The technical part of this is unimportant, suffice to say that this is purely about making it so that only the wealthy can affford to serve in Congress. This seemingly minor change is another plank in a long-term campaign to make Congress every more hostage to big business and other monied interests.
If Congress only reopens the government piece by piece, it could take until next spring - Ever since the government shutdown began, there's been a flurry of headlines about the agencies and people affected. Cancer patients are getting turned away from the National Institutes for Health. National parks have shuttered. Food inspectors are furloughed. Democrats in Congress say there's an easy fix: Pass a funding bill to reopen the entire government. Republicans in the House, for their part, have taken a different approach. They've passed a few bills to fund some of the more popular and visible parts of government, while keeping the rest closed until additional negotiations take place. (Democrats, by and large, have rejected this "piecemeal" approach — with the exception of a bill to pay active-duty military, which passed into law before the shutdown.) Since Oct. 1, House Republicans have approved six bills to reopen specific parts of government and have at least eight more on the way. That includes a bill to reopen the national parks, a bill to fund the National Institutes of Health and a bill to fund the Food and Drug Administration. In all, these bills from the Republican House would provide about $83.1 billion in funding, or about 18 percent of the government. That would still leave much of the government closed however, including the Centers for Disease Control and Prevention, the Environmental Protection Agency and the Small Business Administration (to name a few).
This Graph Explains Why Obama Rejected the Piecemeal Approach to Funding Government - The government is still shut down, as thousands of workers go without pay, food goes without inspection, and sick patients go without clinical trials. Meanwhile, Republicans have offered to restore funding on a piece-by-piece basis that would pay some of those workers and treat some of those patients. The president has said no. But why, CBS White House Correspondent Mark Knoller asked at the press conference today. There is a graph for this, of course. Michael Linden counts up the six piecemeal non-defense appropriations bills passed by the House (and unsigned by the president) and the eight other bills the House wants to pass in the coming weeks. "Together, these 14 bills allocate approximately $83.1 billion in funding," Linden writes. That would leave 82 percent of the $470 billion non-defense discretionary government unfunded. In other words (and colors), Obama wants to fund the whole pie below. The GOP, which would like to pair government funding with Obamacare's defunding or delay, is asking him to fund the blue slices only. The White House's logic is that passing the blue stuff makes it more likely that we go even longer without the larger, redder part of the pie.
Stephanie Kelton’s Appearance on All In with Chris Hayes - NEP’s Stephanie Kelton appeared on Chris Hayes’ All In on Monday evening, (10/8/13). The topic of discussion was “Why the debt ceiling isn’t your family budget” examining the fallacy of comparing the debt ceiling to a family budget. See the full show here
Default Deniers - Paul Krugman - You knew this would happen, didn’t you? As we close in on the debt limit, with Obama insistent that he will not give in to hostage-taking, there is a growing chorus of voices on the right insisting that the whole debt limit thing is scare tactics from the administration, and that hitting the limit will be no big deal. And the truth is that there is some real uncertainty about exactly what happens if we hit the ceiling. I think the administration has made a tactical error by putting all the weight of its warnings on the financial consequences; we might have a Lehman-type event, but we might not, and if it turns out not, the administration will have hurt its credibility. What sane people should be emphasizing is that in addition to the risk of financial disruption, there’s the certainty of huge pain from spending cuts and a crippling hit to economic growth.
As Budget Stalemate Hostilities Escalate, Obama Starts to Brandish Default Threat - Yves Smith - The confrontation underway in Washington DC isn’t as deadly as the Cuban Missile crisis. But in many ways, a misstep could be would produce collateral damage is hard to estimate but would unquestionably be large. So given the stakes, it’s remarkable to see Obama prove his manhood by telling those Republicans he is not intimidated by the possibility of default; it may be presented in “no drama Obama” lecturing, but his message remains that he’s not going to be the one to steer out of this game of chicken. From the Financial Times: Barack Obama said the White House was “exploring all contingencies” in the event that Congress failed to increase the country’s borrowing limit, but warned that there was no “magic wand” to brush away the threat of a default on US debt. “No options are good in that scenario,” the US president told reporters on Tuesday, shrugging off the possibility that the White House could use creative solutions to keep borrowing. The president did not rule out the possibility that the US would prioritise debt payments over other government outlays, but said it would put the Treasury in the difficult position of having to choose which creditors to satisfy.And Politico tells us that, as we anticipated, both sides are simply digging in harder in their entrenched positions: Speaker John Boehner said President Barack Obama’s desire to negotiate after the debt ceiling is lifted and government is funded amounts to “unconditional surrender by Republicans.”The message, delivered outside the speaker’s office on Tuesday afternoon as a response to Obama’s earlier press conference, does not bode well for solving the government shutdown or debt default this week… As this stalemate progresses, the ugly truth is becoming more and more obvious: there is no bargaining space where the two sides’ interests overlap, short term or long term. On the
Grand Bargain Great Betrayal, as we said before, Obama and the Republicans could not reach a deal last year because Obama insisted on at least some tax increases on the rich and the Republicans were not willing to yield on that issue. Neither side has budged an iota.
Matt Y on the Debt Ceiling - Here’s a useful collection of reasons from Matt Yglesias why debt prioritization won’t work, ranging from it’s illegal to it’s impossible. For those of you lucky enough not to know what I’m referring to, some Republicans are arguing that failing to raise the debt ceiling is no big deal, because the Treasury will have enough cash flow to pay its (our) creditors–everyone else, from contractors to Medicare docs to retirees on Social Security can just suck it up for awhile. It’s only a default, they say, if you stiff your creditors. Matt disagrees, and so do I. Not paying your bills is analogous to defaulting, and as he points out, it’s likely that there will days when the cash flow<interest or principal payments. But I’m not sure he’s right about this part: Stepping back a little, I’d also note that House Republicans can’t have it both ways here. Either the debt ceiling is a major leverage point to extract concessions from the president, or else it’s no big deal. If it’s no big deal, there’s no leverage. If there’s leverage, then it’s because failing to raise the debt ceiling would be very damaging. I get the logic, but I fear the way they think about this is a) it’s really is no big deal, but b) the President mistakenly thinks it is. Thus, we have massive leverage over that poor, economically misguided dude. Remember, many of these folks live in thick information bubbles, where “facts” are what they say they are. Kinda makes them a bit tough to work with.
Few Things Are Impossible - Buffett supposedly once said something like, “We’re paid to think about things that can’t happen.” What would be examples of this?
- The Housing Bust, and the ensuing funk with banks.
- Hurricane Katrina, and the flood that it helped create.
- The Tohoku Earthquake, with the surprising damage to the nuclear reactor
- Long US interest rates would fall below 5%.
This will be a short piece, but what I want to stress is that things that pundits say can’t happen sometimes do happen. The application is that it is not impossible that the US Government defaults for political reasons. Brinksmanship is a tough and heady thing, and it is possible for all parties to miscalculate and be intransigent. Pride brings out the worst in mankind.
Burning Down the House - Lest we forget, the bi-partisan cuts in public spending under sequestration were already underway when the current partial government shutdown began. And the disinformation campaign by Republicans against ‘Obamacare’ only serves to shift that wholly inadequate debacle into the realm of ‘reasonable’ in the spectrum of public policy debate. In fact, getting liberals and progressives to heartily endorse health care ‘reform’ designed by the right-wing Heritage Foundation with the intent of precluding universal health care ties to the decades old move rightward by ‘liberal’ Democrats under the guise of pragmatism. Democrats play the good natured but ineffectual sops—the good cops, while Republicans play the crazies with their guns to our foreheads to divert attention away from the fact that actual policy differences between the two are but marketing ploys. The economic pain caused the poor and vulnerable by the government shutdown is real. But the assertion that Democrats object to this is ludicrous on its face. President Barack Obama has spent his last five years in office studiously ignoring the plight of the poor and unemployed while he has actively pursued policies that benefit America’s richest through unconditional bailouts of corrupt bankers, mortgage ‘settlements’ that allowed banks to steal the entirety of accumulated black wealth, secret trade agreements (TPP– Trans-Pacific Partnership) that reconstitute predatory political economy and intricate state spying on citizens by the NSA to secure and maintain corporate-state control over us. President Bill Clinton before him ended ‘welfare as we know it’ without providing offsetting economic empowerment for America’s most vulnerable, ‘freed’ the banks to destroy the global economy, brought to fruition the NAFTA ‘free-trade’ agreement that has decimated middle class jobs and he pushed for cuts to Social Security. The illusion that the plight of the poor and vulnerable is a lever to which the political class will respond is now forty years past its expiration date.
Beware the Pivot to a 'Grand Bargain' - It would appear that one of Washington’s tried-and-true political maneuvers — the “pivot” — is now actively underway in the unfolding budget drama. For those who may not be familiar with the pivot, it’s a sophisticated tactic employed by skilled political pros that might go by the name of “changing the subject” in the rest of America. The basic idea is to get everyone talking about something that they weren’t talking about just a few days ago so that they will stop talking about what they were talking about a few days ago. In this case, the pivot is being orchestrated by House speaker John Boehner. He has everyone talking about the possibility of striking a “grand bargain,” or at least a “down payment on a grand bargain,” as the GOP’s condition for keeping the government open and for raising the debt limit. This “ask,” floated late last week in the press and then confirmed by Boehner himself over the weekend, comes after key Republicans, including the speaker, had spent weeks and months letting it be known that the No. 1 fight underway this fall would be over the future of Obamacare. Which is why “defunding” and then “delaying” the implementation of the health-care law were the critical provisions attached by the GOP to the first versions of the continuing resolution (CR) passed by the House in September. The GOP has been demanding a significant concession on Obamacare — not on the budget in general — as its key objective in the political struggle of recent weeks, and the Senate and the White House have been refusing to cede any ground. Hence the week-long — and counting — partial government shut down.
Obama Rejects Call to Use 14th Amendment to Fix U.S. Debt Fight - President Barack Obama rejected calls for him to invoke the Constitution’s 14th Amendment to skirt Congressional approval for issuing new debt, as both political scholars and legal experts said such a crisis-aversion plan would be risky and potentially illegal. “If you start having a situation in which there’s legal controversy about the U.S. Treasury’s authority to issue debt, the damage will have been done even if that were constitutional, because people wouldn’t be sure,” Obama said in a news conference with reporters yesterday. “It’d be tied up in litigation for a long time. That’s going to make people nervous.” “There are no magic bullets here,” he said. The president’s comments further dim the prospect that he could use what amounts to an 11th-hour emergency exit if the White House and Congress are unable to reach a deal to raise the debt ceiling by Oct. 17. His stance places the onus on Congress to strike a deal ending the week-old government shutdown and raising the debt limit, or else risk triggering a U.S. default and global financial crisis. The rationale for such presidential authority has been pushed by some constitutional scholars who argue that a default on the country’s debt violates the Constitution’s 14th Amendment, which states that the “validity of the public debt of the United States” authorized by law “shall not be questioned.”
Obama Signals Openness to Short-Term Debt Limit Increase - President Barack Obama said he could accept a temporary reprieve from the partial government shutdown and threat of a U.S. default while he negotiates with Republican leaders over fiscal and health policy. Speaking at a news conference today at the White House, Obama said he’s willing to talk to Republicans about anything, including changes to his health-care law, once lawmakers end the shutdown and increase the country’s borrowing authority. He said he would accept a list of topics for discussion from Congress. Lawmakers in Congress began taking the first tentative steps toward resolving the standoff. Both sides are exploring actions that will be needed to end the week-old shutdown and raise the debt limit before U.S. borrowing authority lapses on Oct. 17.
As Pressure Mounts, House G.O.P. Weighs Short-Term Debt Deal - House Republicans, increasingly isolated from even some of their strongest supporters more than a week into a government shutdown, began on Wednesday to consider a path out of the fiscal impasse that would raise the debt ceiling for a few weeks as they press for a broader deficit reduction deal.That approach could possibly set aside the fight over the new health care law, which prompted the shutdown and which some Republicans will be reluctant to abandon. In a meeting with the most ardent House conservatives, Representative Paul D. Ryan of Wisconsin, the chairman of the House Budget Committee, laid out a package focused on an overhaul of Medicare and a path toward a comprehensive simplification of the tax code. “We’re more in the ideas stage right now,” “There is a developing consensus that this is a lot bigger than an Obamacare discussion.” At the same time, Congressional leaders from both parties began some preliminary discussions aimed at reopening the government and raising the statutory borrowing limit. And President Obama, who invited House Democrats on Wednesday, asked all House Republicans to the White House on Thursday, an invitation Speaker John A. Boehner whittled down to a short list of attendees he wants to negotiate a compromise.
Mitch McConnell, Senate GOP search for way out - After taking a back-seat role in this fall’s fiscal battles, Senate Minority Leader Mitch McConnell and fellow Republican senators are quietly seeing whether they can break the political impasse between House Republicans and Senate Democrats. Behind the scenes, the Kentucky Republican is gauging support within the Senate GOP Conference to temporarily raise the debt ceiling and reopen the government in return for a handful of policy proposals. Among the ideas under serious consideration are a repeal of medical device tax in the health care law, a plan to verify that those seeking subsidies under Obamacare prove their income level and a proposal to grant additional flexibility to federal agencies to implement sequestration cuts. The under-the-radar effort is the latest sign that Republicans in the Senate are actively looking for a new way out of a fiscal crisis that polls show is causing their party more harm in the eyes of voters. Since Republicans refuse to accept Democratic demands for a straight extension of the debt ceiling and a stop-gap spending measure, Republican senators are trying to more clearly spell out what it wants out of the fight — after the party was badly divided on whether to make the fight about gutting Obamacare.
Some in GOP ready to back down on this Obamacare fight - Key GOP figures on Wednesday sent their clearest signals that they are abandoning their bid to immediately stop the federal health-care law — the issue that forced the government to shut down — and are scrambling for a fallback strategy. Republican Party leaders, activists and donors now widely acknowledge that the effort to kill President Obama’s signature initiative by hitting the brakes on the government has been a failure. The law has largely disappeared from their calculus as they look for a way out of the impasse over the shutdown and for a way to avoid a possible default on U.S. debt. Instead, they are regrouping for a longer battle over the health-care law. They also are trying to refocus the upcoming debt-ceiling showdown on fiscal issues, including entitlements and tax reform. The strategy to defund the Affordable Care Act “needed a Plan B, and its authors, if they had one, didn’t share what it was,” said Heather R. Higgins, head of the Independent Women’s Forum and founder of a coalition of conservative groups seeking repeal of the health-care law.
Obama, Republican Leadership Groping to Break Shutdown Impasse, Revive Grand Bargain-Type Deal - Yves Smith - The two sides in the budget staredown have finally agreed to talk. Obama, after meeting with Democrats on Wednesday, will confer with House Republicans on Thursday to see if they can resolve the impasse over the Federal budget and avoid hitting the debt ceiling on October 17. Note that despite the fixation on that date, the US would move in steps into an intensified crunch. . The acute danger date is around October 31-November 1, when the US faces big bond and Social Security payments. But while the official meeting, and the fact that the two sides are also talking behind the scenes, represents progress, don’t labor under any delusions. Obama is looking for a stopgap deal that will keep pressure on in the hope that he can cinch his long-sought
Grand Bargain Great Betrayal. Remember, Obama was disappointed that the sequester didn’t inflict enough pain to force Democrats and Republicans to the negotiating table. One indicator of the lack of mutual understanding is that Obama wanted to meet with all the House Republicans. The leadership instead is sending 20 representatives to the session. Obama is clearly unduly impressed with his powers of persuasion. Many of the Tea Partiers have a visceral antipathy for him. The Republicans did him a big favor by keeping the hotheads out of the room. Nevertheless, efforts to broker a deal are already underway. For instance, per Politico: After taking a back-seat role in this fall’s fiscal battles, Senate Minority Leader Mitch McConnell and fellow Republican senators are quietly seeing whether they can break the political impasse between House Republicans and Senate Democrats. Behind the scenes, the Kentucky Republican is gauging support within the Senate GOP Conference to temporarily raise the debt ceiling and reopen the government in return for a handful of policy proposals. Among the ideas under serious consideration are a repeal of medical device tax in the health care law, a plan to verify that those seeking subsidies under Obamacare prove their income level and a proposal to grant additional flexibility to federal agencies to implement sequestration cuts… Those proposals could be paired with a two-month increase of the national debt ceiling and a six-month continuing resolution to reopen the government at a $986-billion funding level that both parties have agreed to,
Obama’s Hardline Budget Stance Rooted in Anger Over 2011 Impasse - Shortly before President Barack Obama was re-elected, he confided to John Podesta, an informal adviser, a vow he was making for his second term: He would never again bargain with Republicans to extend the U.S. debt limit. The precedent, set in the agreement that ended a 2011 budget standoff, “sent a signal that this was fair game to blackmail over whether the country would default,” said Podesta, a onetime chief of staff to President Bill Clinton and co-chairman of Obama’s 2008 presidential transition, in an interview. “He feels like he has to end it and end it forever.”The stand Obama has taken on the latest fight over the government shutdown and borrowing limit -- refusing to tie policy conditions to raising the debt ceiling -- is an attempt to repair some of the damage that he and his aides believe he sustained by making concessions to Republicans to avert a default two years ago, according to former top administration officials and advisers. The resolution of the showdown with House Republicans will be critical to maintaining Obama’s capacity to wield his clout in Washington during the three years left in his presidency and protect the political initiatives of his first term, they say. The outcome will probably help determine his leverage to press for new priorities such as a revamp of immigration law, expanded access to pre-kindergarten education and infrastructure funding. It may also stave off attacks on his health-care law and the Consumer Financial Protection Bureau.
Obama’s Credibility Problem - If a huge swath of the American people weren’t suffering, I might actually be able to enjoy President Obama being forced to finally struggle with the credibility issue he has cultivated over the past four years. It would appear the basis of Obama’s legislative tactics has been to try to be too clever by half. Instead of directly going out stating his preferred position and accepting/rejecting whatever compromise could be reached, Obama seems to have always thought he could get more through subterfuge. He has repeatedly feigned weakness, created needless crises, called for bipartisanship and used artificial legislature hurdles to try to claim he was “forced” into doing what he really wanted. During health care reform, instead of saying he actively opposed the public option and direct drug price negotiations because he cut a deal with the drug lobby, Obama tried to pretend these were in fact big concessions to Republicans. This ended up causing Obama to waste months trying to get any Republicans on board to make this excuse work. When no Republicans agreed to go along Obama ended up look like a terrible negotiator for still giving up “big concessions” — without getting any votes. When the Bush tax cut deal was reached, Obama again thought it would be clever to needlessly “fold” and only accept an tax on incomes over $400,000. In reality what Obama has always wanted most was a grand bargain. If he fought harder and got a full repeal on the Bush tax cuts for the rich, there would probably be nothing for congressional Democrats to get from a grand bargain. That would have ended up being a long term “lose” from Obama’s perspective. So he chose to look weak and leave some revenue on the table
Boehner Proposes Six-Week Extension on Debt Ceiling Limit but Shutdown Continues - Republican leaders have backed away from their immediate threat to freeze US debt limits, offering the first real hope of a wider solution to the budget crisis that continues to paralyse much of the federal government. Wall Street markets surged on Thursday after House speaker John Boehner emerged from a party meeting to announce a proposal that would allow a six-week extension to the debt limit that would otherwise be reached by 17 October. But Republicans refused to bring an end to the separate impasse over the government shutdown that has dragged on since the beginning of October, repeating their insistence that they will only pass a resolution to authorise continued government spending if Barack Obama agrees to negotiate an array of concessions. Until now, the president has said he would only negotiate if Republicans agreed to lift both threats – extending the debt limit and passing a continuing resolution without strings attached. Boehner and other Republicans are due to meet Obama at the White House on Thursday afternoon, and hope that their short-term offer on the debt ceiling might enough to persuade the president to drop his demand to end the shutdown first.
Latest House Debt Limit Plan Will Accomplish Nothing - Washington may be about to do what it does best–kick the can down the road. House Republicans have tentatively agreed on a plan to extend the debt limit for about six weeks while keeping the government partially shuttered. Their idea: use the shutdown as a stick to get Democrats to negotiate over “pressing problems,” including more reductions in federal spending. The White House hints that it might agree to a short-term debt limit extension. Like many ideas that win bipartisan support these days (remember the sequester), this one is terrible. We’ll know more after the GOP leadership meets with President Obama later this afternoon. But the deal would briefly put off what has become an ugly and dangerous confrontation over the nation’s ability to pay its bills. That buys time—something pols love to do—but accomplishes nothing else. Somewhere along the line, Democrats will insist on also reopening the government for the same six weeks and the GOP may, in the end, go along. But then what? The still-incomplete House GOP idea is accompanied by vague talk about Democrats and Republicans reopening bigger fiscal negotiations. Maybe this would happen through some sort of super committee or by resuming the long-stalled budget process. Don’t get me wrong. Talking policy is good. But these discussions will accomplish nothing and leave us in pretty much the same place six weeks from now as we are today. Except that we’ll have had six more weeks of uncertainty.
White House Responds To Boehner: "Congress Needs To Pass A Clean Debt Limit Increase" - Below is the full White House statement released in reaction to House Republican proposal to extend debt limit by 6 weeks, to Nov. 22. "The President has made clear that he will not pay a ransom for Congress doing its job and paying our bills. It is better for economic certainty for Congress to take the threat of default off the table for as long as possible, which is why we support the Senate Democrats’ efforts to raise the debt limit for a year with no extraneous political strings attached. The President also believes that the Republican Leadership in the House should allow for an up or down vote on the clean continuing resolution passed by the Senate that would pass with a bipartisan majority to reopen the government. Once Republicans in Congress act to remove the threat of default and end this harmful government shutdown, the President will be willing to negotiate on a broader budget agreement to create jobs, grow the economy, and put our fiscal house in order. While we are willing to look at any proposal Congress puts forward to end these manufactured crises, we will not allow a faction of the Republicans in the House to hold the economy hostage to its extraneous and extreme political demands. Congress needs to pass a clean debt limit increase and a funding bill to reopen the government." So... Obama agrees to a six-week can kicking? The answer is not exactly clear:Dem leaders knew Boehner would do this, but they're not yet ready to nod along, will demand CR if Boehner wants backing
White House, Republican Meeting "Inconclusive", To Continue Throughout The Night - In what can at best be described as a "fluid" situation, one in which according to initial press reports the White House and the GOP couldn't even compromise on what had actually been said, it seems that while both sides are eager to move on with the debt ceiling extension, the GOP is still hoping in trying to preserve some political capital, of which it will be left with virtually nil if it caves to every last demand by the democrats, namely "reopen the government and then we can negotiate" losing all leverage in the process. And a loss of all capital and leverage is precisely what the GOP will "achieve" according to Politico, which clarified that "House Republicans told Obama that they could reopen the federal government by early next week if the president and Senate Democrats agree to their debt-ceiling proposal" - a proposal which Obama has already said he would accept. In other words, full capitulation by Boehner appears imminent. Politico adds: "President Barack Obama and House Republicans clashed in a meeting Thursday afternoon over how soon the government can be reopened, even as the GOP offered to lift the debt limit for six weeks, according to sources familiar with the session. Aides will continue the discussion through the night to see if they could find common ground on how to move forward on the debt limit and government funding."
White House: Talks Continue On Debt Ceiling -The White House, following a more than hour-long meeting between President Barack Obama and House GOP leaders, signaled it was working with Republicans on a short-term debt ceiling proposal party leaders presented on Thursday. “The president looks forward to making continued progress with members on both sides of the aisle,” the White House said in a statement. The White House also said the two sides had made no “specific determination” about how to proceed to solve the impasse over funding the government and raising the debt limit. The statement said Mr. Obama and his staff listened to the GOP about the its proposal to raise the debt ceiling for six weeks and discussed possible ways forward. GOP leaders, including House Speaker John Boehner (R., Ohio) and House Majority Leader Eric Cantor (R., Va.), left the White House without making any statement to the press. Following the meeting, House Republicans sounded similar notes of optimism. “He didn’t say yes, he didn’t say no,’’ said House Budget Committee Chairman Paul Ryan (R.Wis.) “We’re continuing to negotiate this evening.” Full text of the statement follows:
Is There a Thaw in the Budget Fight? And, If So, What Was That About?!!? - No point in going into great detail since things could quickly change course, but a few notes to consider.
- –The House R’s went to the White House with an offer for a clean, short-term debt ceiling extension, but the President did not appear to accept the deal, as he and Reid continue to strongly advocate for a clean debt ceiling increase and a refund-the-government bill.
- –So did the R’s storm out and complain that the WH won’t negotiate? Not at all.
- In statements afterward that struck the most positive tone in weeks of acrimony, House Republicans described their hour-and-a-half-long meeting with Mr. Obama as “a useful and productive conversation,” while the White House described “a good meeting,” though “no specific determination was made” about the Republicans’ offer. Both agreed to continue talks through the night.
- –Larry K interviewed Rep Steve Scalise, a Tea Party lieutenant who’s been a vicious opponent of Obamacare. But he’s morphed from tiger to pussycat, suggesting that maybe some changes to the health care could be part of deal…you know…whatever…
- –Various R’s and other conservative commentators on the show suggested that they’re ready to conference with D’s on the budget.
- –There is an increasing awareness that the polls are turning sharply against the R’s on all this obstructionism (and even maybe helping Obama); also, the strong reaction of the financial markets today did not go unnoticed.
Talks Over Debt Showdown Finally Underway, but Acrimony, Republican Divisions Impede Dealmaking – Yves Smith - In the hostage negotiations otherwise known as the budget deal, the movement on Thursday, that of the Republicans meeting with Obama and offering the idea of a limited extension of the debt ceiling with some thin conditions attached, is indeed progress. But don’t confuse progress with much progress. Republicans pitched the skimpiest solution possible, that of extending the debt ceiling limit for six weeks, till right before Thanksgiving, while keeping the shutdown going. White House spokesmen ‘fessed up that if the Republicans made that proposal “clean”, as in with no strings attached, the President would likely reluctantly accept it. Even though I am highly confident that this Administration would not default on Treasuries even if the debt ceiling constraint kicked in (see Felix Salmon for one good technical discussion as to why), the further damage to the economy of further cuts to other spending and probable default on other obligations would still do a tremendous amount of damage. The government shutdown remains on, meaning the toll to the economy rises in the fourth quarter, which is critical for consumer spending. Retailers bought for the Christmas season on the assumption the economy was on a slow path of improvement. That was already kicked in the head by the shutdown, and six weeks is going to do even more damage. And that is as god as it might get.
Short-term T-bill yield slides on debt proposal -- Reports of a proposal to temporarily raise the debt ceiling for six weeks on Thursday have helped pull the yield on Treasury bills maturing around that time-frame down. T-bills maturing on October 17 traded at a yield of 0.304% on Thursday, down from 0.451% in the previous session, as the fear of a missed payment on those bills eased. Yields move inversely to prices. Meanwhile, Treasury bills maturing on November 29 -- roughly six weeks away -- were trading at a yield of 0.112% on Thursday, up from 0.053% in the previous session, according to Tradeweb. If approved, a deal to raise the debt ceiling for six weeks would push back any threat of delayed payments on T-bills.
US debt stand-off provokes ire among China’s officials - FT.com: Washington’s debt brinkmanship has provoked deep anger in Beijing and bolstered its resolve to lessen the world’s reliance on the dollar, according to current and former Chinese government advisers. Political leaders in the US have intensified talks about their fiscal stand-off, fuelling hopes that Washington will raise its debt ceiling before next week’s deadline. However, the prospect of last-minute negotiations will test already-frayed nerves in China, the biggest foreign holder of US government debt. “You can’t hijack the global economy through political struggles. It’s not responsible,” says Yu Yongding, a member of the Chinese Academy of Social Sciences, a leading government think-tank. “We are angry but are not panicked. The consequences are bad for the reputation of the US because the credibility of debt is so important,” says Mr Yu, who is also a former adviser to the central bank’s monetary policy committee. In public, Chinese officials have been restrained in their comments about the US debt debate. Li Keqiang, China’s premier, has said Beijing is paying “great attention” to the issue. Opinions expressed in private have been more blunt. “They are pretty peeved. That is the short answer,” says an adviser to the central bank, speaking on condition of anonymity. In the short term, Mr Yu and other top Chinese academics say Beijing’s hands are tied. With $1.3tn invested in US Treasuries, any sudden move to sell those holdings would by itself shake global markets and undermine the value of China’s remaining US assets – the very outcomes that the country’s currency reserve managers want to avoid.
Yes the Shutdown Will Slow the Economy -- From the Washington Post: Beginning next week, thousands of home buyers will be unable to get approvals for their mortgages because of the government shutdown, potentially undercutting the nation’s resurgent housing market.Without paperwork from the Internal Revenue Service, the Social Security Administration and in many cases the Federal Housing Administration, banks and other mortgage lenders will be less willing to make loans, if they can make them at all. For instance, lenders rely on the IRS to confirm borrowers’ income and on Social Security to confirm their identity. Every day that government offices remain shuttered will delay an ever-larger fraction of mortgage closings, industry leaders say, jeopardizing mortgage and interest-rate approvals and spooking sellers. About 15,000 new home mortgages and 18,000 refinancings on average are completed across the country each day. And the reason? When the economy is weak, fiscal multipliers are higher: We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis.
Why “The Sky Hasn’t Fallen Yet” is a Bad Standard for Judging Policy Choices | Center for Effective Government - There are many who are downplaying concerns about the October 17 deadline for approving a routine measure that allows the U.S. to manage its finances and pay the bills it already owes. Without approving an increase in the debt ceiling, it will be difficult for the U.S. federal government to pay its bills on time – likely leading to default. Because of the central role these regular payments play in the U.S. and global financial system, many experts say a default on U.S. debt, even it is for a short period of time and only on some bills, could create negative economic effects. Some believe it could be quite bad and could throw the U.S. economy and others back into a recession. The Treasury Department last week stated, “default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.” Yet some, especially conservatives, are taking another tack and are stating it would not be a big deal, dismissing the opinions of financial experts and economists. Mike Konczal, a fellow with the Roosevelt Institute, interviewed conservatives at some of the main right-leaning think tanks in D.C. Michael Strain of the business-oriented American Enterprise Institute said he thought a default would be bad. But he also had this insightful comment: When I do interviews with right-wing media there does seem to be a story that goes like this: they said the sequester would be horrible and the sky didn’t fall, they said that the government shutdown would be horrible, and the sky didn’t fall, and now they are saying going through the debt ceiling date would be horrible and why would we believe them this time?
Does The US Have A "Sane" Government? - The dollar is the world’s go-to currency. But for how much longer? Will the dollar’s status as the only true global currency be irreparably damaged by the battle in the US Congress over raising the federal government’s debt ceiling? Is the dollar’s “exorbitant privilege” as the world’s main reserve currency truly at risk? To be sure, the purveyors of dollar doom and gloom have cried wolf before. But a default on US government debt precipitated by failure to raise the debt ceiling would be a very different kind of shock, with very different effects. In response to the subprime disruption and Lehman’s collapse, investors piled into US government bonds, because they offered safety and liquidity – prized attributes in a crisis. These are precisely the attributes that would be jeopardized by a default. The presumption that US Treasury bonds are a safe source of income would be the first casualty of default. Even if the Treasury paid bondholders first – choosing to stiff, say, contractors or Social Security recipients – the idea that the US government always pays its bills would no longer be taken for granted. . Fedwire, the electronic network operated by the US Federal Reserve to transfer funds between financial institutions, is not set up to settle transactions in defaulted securities. So Fedwire would immediately freeze. The repo market, in which loans are provided against Treasury bonds, would also seize up.For their part, mutual funds that are prohibited by covenant from holding defaulted securities would have to dump their Treasuries in a self-destructive fire sale. Money-market mutual funds, virtually without exception, would “break the buck,” allowing their shares to go to a discount. Indeed, the entire commercial banking sector, which owns nearly $2 trillion in government-backed securities – would be threatened. The result would be a sharp drop in the dollar and catastrophic losses for US financial institutions.
Reid: Everything Is On The Negotiating Table: Senate Democrats are willing to compromise unconditionally with Republicans in order to end the government shutdown, according to a report by the Real News Network. “Open the government, allow us to pay our bills,” said Senator Harry Reid at a recent press conference. “And at that time we'll be happy to negotiate about anything they want to talk about.” Some in the Progressive Caucus warn that further cuts to entitlements should not be on the table. The Democratically controlled Senate have already agreed to temporary funding levels that are far closer to the Republican-controlled House budget plan. For example, the Senate's 2014 proposed budget was for over $1 trillion. The Republican budget proposed $967 billion. The continuing resolution passed by the Senate came up to $986 billion. “They agreed to accept the much lower Republican budget figure, the House figure,” said investigative journalist Robert Parry. “They surrendered the Senate position. This was a proposal that Boehner had presented to them back in July. They accepted this deal.”
Business leaders tell Obama extended default threat is damaging - (UPI) -- The White House said Friday a government default on its debts is not an option, and the threat of default should not be a weapon in budget negotiations. House Republican leaders earlier Friday offered a new plan to raise the U.S. debt limit and reopen the government after meeting with President Barack Obama, a GOP aide said. The offer, made late Thursday, would allow the House to vote as early as Friday on a six-week extension of the debt ceiling and set up immediate negotiations to end the government shutdown that began Oct. 1, The Hill reported. The GOP leadership aide said the offer calls for two sets of high-level talks -- one to reopen the government and one on a broader budget deal that would fund the government through 2014 and raise the debt ceiling. "We are waiting to hear back from The White House," said Rep. Fred Upton, R-Mich., chairman of the House Energy and Commerce Committee who was among the House GOP contingent that met with Obama Thursday. "My sense is we are getting close to getting it done." But White House press secretary Jay Carney said such a plan would only threaten the U.S. economy through the holiday season. "A proposal that puts a debt ceiling increase at only six weeks tied to budget negotiations would put us right back where we are today in just six weeks, on the verge of Thanksgiving and the obviously important shopping season leading up to the holidays, and that would create enormous uncertainty for our economy," Carney told reporters. "The president, speaking with small business owners, heard from them that the continued threat of default into that season would be very damaging to them. And we don't think that's the right way to go."
In budget and debt fight, White House finds unlikely alliance in business community - The White House has enlisted the business community to pressure GOP lawmakers to reopen the government and raise the debt ceiling, forging an unlikely alliance with traditionally Republican-leaning groups in response to growing fear that the country could default on its debt. President Obama, Treasury Secretary Jack Lew and senior adviser Valerie Jarrett spoke to nearly 150 business executives on a conference call Friday with an update on their efforts to avoid a default, according to a White House summary of the call. When the call ended, Jarrett entered the Roosevelt Room of the White House to meet with lobbyists for the U.S. Chamber of Commerce, the National Association of Manufacturers, the Financial Services Roundtable and other business groups representing aerospace and technology companies. During the meeting, Jarrett and Brian Deese, deputy director of the Office of Management and Budget, asked the business groups to encourage their member companies to communicate with lawmakers on the urgency of finding a negotiated solution, according to a person at the meeting who spoke on the condition of anonymity because the conversation was private. Many firms have already begun such efforts. Alarmed by the standoff in Washington, companies such as Caterpillar are encouraging their employees to call and write lawmakers to reopen the government and raise the debt ceiling. Trade groups such as the U.S. Chamber are also discussing an unprecedented step: supporting more moderate candidates in primaries. In the past, the groups have gone to enormous lengths to support mostly Republican campaigns — but only to beat Democrats, not other Republicans.
Republicans Narrow Demands for Increasing U.S. Debt Limit - House and Senate Republicans are starting to narrow their demands for health-care law changes in the U.S. fiscal impasse as they prod President Barack Obama to attach such revisions to a bill to end the government shutdown. Obama and House Speaker John Boehner spoke today by telephone about Boehner’s offer, which would extend U.S. borrowing authority to Nov. 22 from Oct. 17. Language to curb the Patient Protection and Affordable Care Act would be attached to a stopgap spending bill. “The president has a number of concerns with the proposal,” Jay Carney, the White House press secretary, told reporters today after Obama and Boehner talked. Carney said Obama is concerned that extending the debt ceiling for a short period while budget talks occur would lead to a replay of the same brinkmanship the U.S. is experiencing now. “They agreed that we should all keep talking,” said Michael Steel, a spokesman for Boehner.
Divide Narrows as Talks to Resolve Fiscal Crisis Go On - Political divisions over the nation’s finances appeared to narrow on Friday as President Obama and Congressional Republicans showed greater flexibility in their negotiations. But officials headed into the weekend without a deal to end the shutdown and avert what could be a devastating default after the government reaches the current borrowing limit on Thursday. While the outlines of an agreement that would involve a temporary fix followed by longer-term budget talks came into view, the president and lawmakers faced the challenge of framing such a deal in a way that all sides could accept politically. “We’re obviously in a better place than we were a few days ago in terms of the constructive approach that we’ve seen of late,” Jay Carney, the White House press secretary, said late in the day after the president met with the entire Senate Republican conference and consulted by telephone with Representative John A. Boehner of Ohio, the Republican speaker of the House. “But there’s not an agreement.” Both houses of Congress were scheduled to meet over the weekend. But White House officials and senior lawmakers cautioned against expecting a quick deal, although much of the incendiary speech that has characterized the fiscal fight had given way to words like “constructive” and “progress.”
Congressional Republicans rush to develop plan to reopen government - Congressional Republicans rushed late Friday to develop a new plan for reopening the government and avoiding a first-ever default in hopes of crafting a strategy that can win the support of the White House before financial markets open Monday. Talks on Capitol Hill advanced with a new urgency after President Obama rejected House Speaker John A. Boehner’s (R) offer to raise the debt limit through late November to give the parties time to negotiate a broader budget deal. Briefing reporters after financial markets closed for the week, White House press secretary Jay Carney praised a “new willingness” among Republicans to end the government shutdown — now in its 12th day — and to acknowledge that default on the national debt “would be catastrophically damaging.” But with the Treasury Department due to exhaust its borrowing authority in just six days, Carney said the president would not agree to go through another round of economy-rattling talks in six weeks, just before the Christmas shopping season. “It at least looks as if there’s a possibility of making some progress here,” Carney said. But, “we have to remove these demands for leverage essentially using the American people and the American economy.”
Holders of U.S. government debt draw up contingency plans for default (Reuters) - No one expects it to happen, but everyone's making sure they're prepared for it. Banks, funds and asset management firms holding U.S. government bonds are drawing up contingency plans on how to deal with potentially the most cataclysmic financial and economic event of all - a default by the United States. The overwhelming consensus among all the firms contacted by Reuters is that Republicans and Democrats will come together at the 11th hour and avert disaster. But the closer Washington's budget funding impasse gets to preventing the country's $16.7 trillion debt ceiling from being raised later this month, the more worried they are becoming. A default by what has long been viewed as the world's safest credit would be such a seismic event that there appears to be no accepted play-book for its eventuality, despite the trillions of dollars of investments that would be affected. "You can literally tear up every textbook you've ever read on finance. You could quite literally reverse that entire world view in the space of a day," said Ramin Nakisa, global asset allocation strategist at UBS. "We are going to have to completely rethink the way we assess risk if U.S. Treasuries suddenly become a risky asset." Fund managers will first have to communicate a strategy or contingency plan to their clients.Zandi Testimony: Economy Poised for Growth, Congress must Fund the Government and Pay the Bills -- Economist Mark Zandi is providing testimony this morning to the Joint Economic Committee: Written Testimony of Mark Zandi Chief Economist and Co-Founder Moody’s Analytics The impasse in Washington over funding the federal government and increasing the Treasury debt ceiling is significantly damaging the economy. Stock prices are grinding lower and consumer confidence is weakening. The economic harm will mount significantly each day the government remains shut and the debt ceiling is not raised. If policymakers are unable to reach agreement on these issues by the end of October, the economy will face another severe recession.To resolve the budget impasse, policymakers should not add to the significant fiscal austerity already in place, which is set to last through mid-decade. Tax increases and government spending cuts over the past three years have put a substantial drag on economic growth. In 2013, this fiscal drag is as large as it has been since the defense drawdown after World War II. Moreover, because of fiscal austerity and the economic recovery, the federal government’s fiscal situation has improved markedly. The budget deficit in just-ended fiscal 2013 was less than half its size at the recession’s deepest point in 2009. Under current law and using reasonable economic assumptions, the deficit will continue to narrow through mid-decade, causing the debt-to-GDP ratio to stabilize.
Obama Says Real Boss in Default Showdown Means Bonds Call Shots - President Barack Obama knows who is the boss: the bond market. “Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt. Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That’s why Obama is so sensitive to what investors will tolerate. “The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism,”
Treeing the full faith and credit - That’s from Nomura, do click to enlarge. They remain optimists even if they do think a solution will only come in the 11th hour:
- Base Case – Solution ahead of October 17 One can debate the sort of solution that will be reached, but our central case (70%) remains that a solution will be found before the deadline, similar to events in 2011. We would not be surprised, however, if both sides agree to a short-term extension of one to three months. Although this would be better than a default, we would argue that an extremely short extension (of one to two 2 weeks) would be far from optimal .
- Second-best Case – Deadline breached but a solution is in progress We pass the October 17 deadline but there is no solution in place simply because of a procedural delay – such as getting a bill through Congress and having the President sign it. If there is no formal solution in place by October 17, but there is a clear framework and political agreement in place, with formal approval to follow shortly thereafter (say by October 18-20), this would not be a terrible state of affairs, in our view. This is the “No-Yes” branch on our decision tree (20%).
- Dangerous Option – Deadline is breached but cash on hand buys time If we pass October 17 without a clear path in place towards a solution (10% likelihood) then the key question becomes when the cash balance at the Treasury runs out. If the Treasury is put in this situation default (and not falling behind on any payments) could still be averted as a number of estimates believe the Treasury will have sufficient resources to avoid non-payment up to the end of October.
- Worst Case – Treasury resorts to emergency solutions as cash runs out The worst case is where the Treasury runs out of resources and is unable to fulfill all of its obligations (2%). This is the “No-No-No” branch. On this part of the tree, it is still conceivable that the Treasury can avoid a default on interest and principal payments, either by prioritizing debt payments ahead of other expenditure (“No-No-No-Yes-A”), or by a so-called “legal fix”, whereby the president somehow raises the debt ceiling unilaterally (“No-No-No-Yes-B”). The worst of all options is the one where no prioritization or legal fix is implemented and the Treasury enters arrears on all expenditure, including principal and coupon payments.
The Debt Ceiling and the Housing Bust - Paul Krugman - Suppose that we hit the debt ceiling, and that the Treasury manages to engage in “prioritization” — paying interest on bonds, so that all the burden falls on other kinds of spending. How should we think about the economic impact?Well, here’s one thought. Right now, the cash-flow deficit is a bit more than 4 percent of GDP: This deficit would have to be closed immediately, cold turkey, in the event of a debt-ceiling breach. Probably the default — because it would be a default, even if interest payments are being made — would take the form of a “delayed payment regime“, with the government falling ever further behind on its bills. So, when did we last see a spending shock this big? As it happens, we’re looking at something just about the size of the post-bubble housing bust, which was also about 4 percent of GDP: You can argue that these spending cuts wouldn’t have as much impact as the housing bust, because payment would be delayed, not cancelled, and at least some players would continue to expect eventual payment. On the other hand, as I pointed out in my last post, this time around we would have disconnected the automatic stabilizers — as GDP fell, revenues would fall, forcing another round of spending cuts, and so on.
Dealing With Default, by Paul Krugman -- Some advocates of prioritization seem to believe that everything will be O.K. as long as we keep making our interest payments. Let me give four reasons they’re wrong. First, the U.S. government would still be going into default, failing to meet its legal obligations to pay. You may say that things like Social Security checks aren’t the same as interest due on bonds because Congress can’t repudiate debt, but it can, if it chooses, pass a law reducing benefits. But Congress hasn’t passed such a law, and until or unless it does, Social Security benefits have the same inviolable legal status as payments to investors. Second, prioritizing interest payments would reinforce the terrible precedent we set after the 2008 crisis, when Wall Street was bailed out but distressed workers and homeowners got little or nothing. We would, once again, be signaling that the financial industry gets special treatment because it can threaten to shut down the economy if it doesn’t. Third, the spending cuts would create great hardship if they go on for any length of time. Think Medicare recipients turned away from hospitals because the government isn’t paying claims. Finally, while prioritizing might avoid an immediate financial crisis, it would still have devastating economic effects. We’d be looking at an immediate spending cut roughly comparable to the plunge in housing investment after the bubble burst, a plunge that was the most important cause of the Great Recession of 2007-9. That by itself would surely be enough to push us into recession.
US could hit $16.7 trillion borrowing limit before October 17, says Jack Lew - America could hit its $16.7trn borrowing limit even sooner than October 17, US Treasury Secretary Jack Lew has warned, as the political stand-off in Washington finally showed signs of thawing. His testimony came as the White House and the Republicans reached a critical breakthrough in their game of brinkmanship, which has already forced the US government to shut down for nine days, and now threatens to push America into a default. Mr Lew had told Capitol Hill that they had until October 17 to come up with an agreement to raise the country’s debt ceiling, and many politicians were working on the assumption that there would be a bit of leeway even then. However, the finance chief told the Senate on Thursday that the ongoing government shutdown is making it unusually difficult to establish exactly when America is likely to breach its debt ceiling, and that the date it had been working to was now looking optimistic. Mr Lew warned that the government is already relying on extraordinary measures to keep up with its debt repayments. He added that there is a “real risk of miscalculation” about the amount of cash the government will have on hand, which could lead to “unintended and serious consequences” for America’s economy. Estimates about the amount of money the US government will have available to pay its bills vary by as much as $20bn, he said.
Should We Eliminate the Extraordinary Measures? - You’ve probably heard that Treasury will hit the debt limit on October 17 and soon thereafter it won’t be able to pay all of America’s bills. That second part is true: Congress needs to act soon—preferably before the 17th—so Treasury doesn’t miss any payments. But the first part isn’t: Treasury actually hit the debt limit way back on May 19. So how did Treasury keep paying our bills? Extraordinary measures. When money gets tight, Treasury uses several accounting gimmicks and cash flow sleights of hand—the extraordinary measures—for extra financing. The easiest to explain involves the G-Fund, which is offered to federal employees through their equivalent of a 401(k) plan. As its name implies, that fund invests in government bonds. But the Treasury Secretary has a special power: he can replace those bonds with IOUs. Those IOUs don’t count against the debt limit, but they will eventually be repaid with interest once the debt limit gets increased. Employees don’t lose anything, and Treasury gets some extra financing room. Such budget gimmickry used to inspire outrage. In 1995, pundits accused Treasury Secretary Robert Rubin of violating his fiduciary duty and robbing federal employees when he did this. Today, the same action generates nary a peep; stuffing the G-fund with IOUs is standard operating protocol. So it is with the other extraordinary measures (for a full list, see here). Once extraordinary, they are now merely ordinary. No one takes the debt limit seriously until the extraordinary measures are running on fumes, as they are today. That’s what makes a new proposal from House Republicans intriguing. News reports indicate that they want to permanently eliminate some extraordinary measures as part of a debt limit deal.
Movements in Short Term Treasurys "Short-term U.S. debt prices tumbled again Tuesday amid rising investor concern about the prospect of a government-debt default, sending the yield on one-month U.S. Treasury bills to its highest level since the financial crisis."That's from the WSJ today. Here's a graph from Irwin/Wonkblog depicting recent movements in yields. The WSJ article continues: In the market for derivatives known as credit-default swaps, which some traders use to bet that a debt issuer will default, investors now are pricing in a 3% probability the U.S. won't pay its obligations in timely fashion. Traders were asking Tuesday for €58,800 ($79,856) to insure €10 million of U.S. debt for a year, up 9.7% from Monday and up tenfold from Sept. 20 levels. U.S. credit-default swaps trade in euros to help users hedge the risk of a depreciating dollar in the event of a default. Much of the belief that there is not much issue with breaching the debt ceiling seems to stem from the belief that interest payments can be prioritized so as to be only in technical default. As many have noted (including the GAO), it's not clear that either legally or technically such prioritization could be implemented (think about all those government computers still running COBOL ...and Treasury makes about 4 million payments per day, many more than undertaken in 1957 when prioritization last occurred). Finally, even if Treasury were able to implement prioritization, the reduction in spending would exert a contractionary impact on output. How big an impact would depend upon when the Treasury runs out of money and borrowing authority headroom, and how prioritization was implemented (payments to debt subject to debt ceiling, not subject, etc.).
Are Treasuries Terrifying? - Paul Krugman - Neil Irwin says yes. Felix Salmon says no. I say, yes and no. Here’s what we’re actually looking at so far: The yield curve has been upward-sloping — that is, interest rates on longer-term bonds have been higher than on shorter-term — ever since we hit the zero lower bound, for two reasons. First, markets expect interest rates to go up eventually when the economy recovers. Second, option value: short-term rates can go up but they can’t do down, so you need a premium on anything longer-term.Right now, however, rates on very short-term debt — one-month T-bills — have gone up even as longer rates are down a bit. This clearly reflects fears of a default, so that short-term claims won’t be paid on time; the markets are still unworried about the longer term. This has only happened in the last few days, and it is scary — it means that people with money on the line are no longer sure that default will be avoided. On the other hand, Salmon is right to say that we’re talking about movements that are just a fraction of a percentage point. If you’re thinking that people holding 1-month T-bills have taken a loss, you need to bear in mind that a 100 basis point rise in the interest rate (which would be far bigger than what we’ve seen so far) would reduce the price by only about 8 basis points, that is, 0.08 percent. This is not big stuff, yet.
For The First Time On Record, The US Government Is 'Riskier' Than US Banks - During the European crisis, we saw sovereign debt yields rising way above their domestic banking sector's yields as investors feared systemic crisis and technical flows dominated the price action amid aggressive hedging. Now, with Washington looking increasingly likely to crash upon the shores of a US Treasury technical default, for the first time on record the yield on short-term Treasury-Bills is above the yield on US interbank loans. T-Bill yields (the US government's "risk") have surpassed short-term LIBOR (US Banks' "Risk")...
Fidelity Sells All Debt-Ceiling Maturing Treasuries Despite Blogosphere's "All Clear" Call - Many market-watching prognosticators have dismissed the spike in T-Bill rates on the basis of "well it's only a few pennies, why worry..." missing entirely the 50-100x leverage in TRS and the almost inifinite rehypothecation risk implicit in a missed payment (even if temporary). It seems, despite these views, Fidelity Investments - the largest manager of money-market mutual funds - said, according to AP, that it no longer holds any US government debt maturing around the time of the nation could hit ist borrowing limit. Action - it would seem - speaks louder than words. Via AP,The nation's largest manager of money market mutual funds said Wednesday that it no longer holds any U.S. government debt that comes due around the time the nation could hit its borrowing limit. Portfolio managers at Fidelity Investments have been selling off their government debt holdings over the last couple of weeks, said Nancy Prior, president of Fidelity's Money Market Group. While Fidelity expects the debt ceiling issue to be resolved, the Boston-based asset manager said it is taking steps to protect investors.Prior said that Fidelity no longer holds any U.S. debt that comes due in late October or early November, the window considered by many investors to be the most exposed if the government runs out of money and defaults on its obligations.
Fidelity Sells Off Short-Term U.S. Government Debt — The nation’s largest manager of money market mutual funds said Wednesday that it no longer holds any U.S. government debt that comes due around the time the nation could hit its borrowing limit. Money market portfolio managers at Fidelity Investments have been selling off their government debt holdings over the last couple of weeks, said Nancy Prior, president of Fidelity’s Money Market Group. While Fidelity expects the debt ceiling issue to be resolved, the Boston-based asset manager said it is taking steps to protect investors.Prior said that Fidelity no longer holds any U.S. debt that comes due in late October or early November, the window considered by many investors to be the most exposed if the government runs out of money and defaults on its obligations.“We expect Congress will take the steps necessary to avoid default, but in our position as money market managers we have to take precautionary measures,” Prior said.
JP Morgan Money Market Funds Join Fidelity, Sell Bills "In Light Of Possible U.S. Government Default" - Yesterday, it was Fidelity who in conducting its fiduciary duty, announced it was getting out of any and all near-term risky Bill insturments, namely those that mature just around the time of a possible technical debt default. Today, while the stock market was soaring on hope that a Washington debt ceiling deal was imminent, it was another firm that was quietly doing the opposite, and was taking "action in light of a possible US government default), and as highlighted earlier when we showed the ongoing divergence between stocks and Bills, was quietly "boosting" liquidity (i.e. selling short-term securities) in order to avoid breaking the buck (which as we also learned yesterday had been breached by not only the Reserve fund but by 28 other heretofore unknown money market funds). The firm: JPMorgan. From JPMorgan's Investment Management (JPMIM) group:J.P. Morgan takes action in light of possible U.S. Government defaultAlthough J.P. Morgan Investment Management Inc (JPMIM) continues to believe that the probability of a U.S. Government default is low, it has taken certain precautionary measures with respect to the money markets (the “Funds”) These actions were taken in an attempt to manage the Funds in line with their objectives to seek to maintain a net asset value of $1.00 per share.
Blackrock Joins JPMorgan And Fidelity - Sells All October And November T-Bills - Yesterday it was JPMorgan's money-market funds adjusting to their fiduciary duty and following Fidelity's lead in getting out of any and all short-term non-risk-free Treasury Bills. Today, another massive money-market fund provider sells it all...It seems remarkable that all three of these funds would ignore the advice of blowhard bloggers who suggested this was nothing. But, as Barack Obama himself said yesterday, "Ultimately, what matters is: What do the people who are buying Treasury bills think?" It seems only the Fed (and PIMCO) is left.
Primary Dealer Bill Holdings Plunge To 2013 Lows - While one after another money market fund quietly announces they are liquidating "cash equivalent" Bill holdings, be they the mid/late October vintage or, now that a can kicking negotiation is in process, the Bills in close proximity to the Thanksgiving day 6 week extension period, over buck breaking concerns that the debt ceiling extension may be snagged due to political manoeuvering, someone was once again ahead of the curve. That someone are the 20 Primary Dealers, which as the NY Fed reports, sold out of the bulk of their Bill holdings in the last two weeks of September in the process taking their Bill holdings to the lowest in all of 2013. The last time Dealers sold off near-term Treasurys with such gusto: July 13 of 2011, just before the last debt ceiling extension fiasco, when Bill holdings dropped to a net negative ($10) billion position.
Treasury Bills Risk Triggers Higher Margin Discount in Hong Kong - Hong Kong’s futures and options market operator said traders will need to put up additional collateral when using some U.S. Treasury bills to back their positions, citing concern the U.S. is at risk of a default. Hong Kong Exchanges & Clearing Ltd. (388) will impose a “haircut” of 3 percent on Treasuries with maturities of less than one year in margin requirements for index futures and options, it said today in a circular. That’s up from 1 percent previously, and charges for Treasuries with longer maturities aren’t affected, according to the circular. An impasse in Washington over raising the U.S. debt ceiling is rippling through global financial markets as the Oct. 17 deadline for increasing the borrowing authority approaches. Rates on Treasury bills due Oct. 24 climbed as high as 0.50 percent today before falling to 0.31 percent. China and Japan, the biggest foreign creditors of the U.S., have urged action to head off the risk of a default. The decision in Hong Kong preceded a three-day holiday. “Other countries may follow Hong Kong’s decision if the U.S. government stalemate continues next week,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. A default “is not our base case as we expect lawmakers will reach a last-minute deal,” he said.
Key creditor China begins acting to hedge against US default - Hong Kong has sent the first sign from Asia that the region is creating extra financial buffers against a possible default in the US. China said some US short – term Treasury bonds appear to be more risky to hold as collateral than previously thought. The clock is ticking for the US to make a decision on its spending bill and the massive $16.7trln debt. The country’s key foreign lender China has shifted from words to actions and said it has taken two steps to reflect the increased difficulty of valuing certain short-term US Treasuries, the Financial Times reports. One of the steps includes a so-called “haircut”, or a discount, on the value of US Treasuries held as collateral against futures trades. The interest rate for bonds held with maturity of less than one year would be raised to 3 percent from 1 percent.
Industrial Production Data Delayed by Shutdown -- The Federal Reserve’s industrial production report is the latest U.S. economic data to fall victim to the government shutdown. The Fed announced Wednesday that it won’t release the September gauge of manufacturing, utility and mining output as scheduled on Oct. 17. Instead, it will delay the report until after the government reopens.The central bank has continued to produce economic data during the shutdown because its staff isn’t affected. However, the Fed relies on other agencies that have furloughed nearly all their statistical workers to produce the industrial production report.Also on Wednesday, the Labor Department said it is pushing back the release of several inflation measures due out over the next week. Thursday’s import price report, Friday’s producer price index and the consumer price index scheduled for Oct. 16 have all been delayed. Alternative dates have not been set. The Labor Department continues to produce the weekly unemployment claims report but has scrapped all other data, including last week’s September jobs report. The Commerce Department has also delayed all reports, including this week’s trade data.
Big US data gaps start to unsettle market - FT.com: Idle federal workers are not the only ones feeling the strain from the US government shutdown, now in its second week. Investors are, too. Washington’s role as official data provider, regulator and policy maker is on hold. That, as well as the separate risk of failure to raise the debt ceiling possibly triggering a US default, is beginning to unsettle financial markets. Holes in the economic calendar have robbed traders of opportunities, causing volumes in some areas of the markets to nosedive. CME eurodollar futures volume totalled just 1.5m contracts on Friday, when the government’s employment report would normally have been released. Some 3.8m contracts were traded when the monthly report was last released in early September. The disruption has wider implications. Since the monthly payrolls data also inform the Federal Reserve’s decisions on monetary policy, a sustained absence could lead to delays in any slowing – or “tapering” – of the central bank’s emergency asset-buying programme. In corporate debt markets, too, new offerings have fallen sharply. Borrowers have sold about $11.5bn of investment-grade bonds in the US in the first week of October, down from $35bn in the preceding week, according to Dealogic. In the “junk” bond market, sales have collapsed, with only four deals worth $1.1bn taking place, down from $17.8bn in the last week of September. Analysts say the shutdown has made it harder to gauge the future path of interest rates, a crucial consideration for investors and companies wanting to borrow large sums.
Flying Blind - The House Republicans' insistence on keeping the government closed means that it is likely that we will be conducting macroeconomic policymaking with increasingly sparse or mismeasured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decisionmaking, it is. So far, we have missed the employment situation, the international trade, wholesale trade, and import/export prices releases. As of Friday, we will have missed the PPI, retail sales, and business inventories releases. Assuming the shutdown continues through Wednesday (Monday is a holiday), the CPI and Treasury International Capital figures will be missed. The Longer the Shutdown Goes on, the Blinder We Will Be It’s well known that we don’t have a read on the September figures, although the underlying statistics are sitting in computers at the BLS. What is less well known is that surveys regarding the October employment situation begin the week of October 13. If the current trajectory is for sustained closure of the Federal government, then these surveys will be delayed, so as to distort the resulting output. ... Now, it might be that the intent behind the government closure is to hobble information gathering, so that people can make the craziest statements (I can already hear “inflation is soaring – we just don’t know it!”). But I remain hopeful that ignorance is not the objective, and that the current data blackout is merely collateral damage.
Spike in bill rates rippling through money markets - Yields on treasury bills with near-term maturities have spiked to multi-year highs as the debt ceiling deadline approaches. While market participants are generally expecting to see a resolution (albeit a temporary one), some are not taking any chances. USA Today (AP): — Fidelity Investments, the nation's largest money market mutual fund manager, has sold all of its short-term U.S. government debt — the latest sign that investors are increasingly nervous about the possibility of a government default.Institutional investors have rolled a chunk of their holdings into cash during September but in the last week or so started pulling out of government money market funds - moving funds into bank deposits instead. Investors fear that their accounts will be frozen, as money fund managers who don't receive timely payments on bills are unable to meet redemptions. Many money market funds also use repo (collateralized loans) with treasuries or agency MBS as collateral. These short-term loans usually yield slightly more than treasury bills, giving money markets a few extra basis points. But with bills under pressure and investors getting out, repo rates have suddenly risen as well. Bloomberg: - “We’ve seen some rise in repo rates in sympathy with the broad move higher in money-market yields, most dramatically in the near-term Treasury bills, given concerns over the debt-ceiling,” said Andrew Hollenhorst at Citigroup. “October futures contracts have had a sharp yield rise, signaling expectations for significant moves higher ahead, consistent with the sharp spike we saw in 2011 before the August debt-limit deadline.”
Breaking the full faith and credit, vs breaking the buck - Just for the record, FT Alphaville thinks of ‘technical’ default as one of those weasel words.Still, some interesting comment from Fitch on Wednesday, on whether defaulted US Treasuries could still call the $2.694trn money market fund industry a home: Importantly, MMFs would not be required to sell U.S. Treasury securities in the event of a technical short-term default under Rule 2a-7 of the 1940 Investment Act and under Fitch’s MMF rating criteria. Thus, any liquidity pressures would more likely arise from increased redemption activity. So far there is no evidence that investors are taking money out of U.S. MMFs, although this might change as the deadline to raise the debt ceiling nears…Some government MMFs only invest directly in UST securities and, therefore, are more reliant on a liquid, well-functioning market in order to meet redemptions. If government MMFs were to face heavy outflows, a failure by the U.S. government to rollover maturing UST securities would have a liquidity impact and require the funds to sell longer-dated securities. MMFs with heavy exposure to UST securities maturing in October and early November could be pressured in the face of heavy redemption activity. Fitch understands that many MMF managers have shifted out of US Treasury securities maturing in October that could be most at risk to a debt ceiling impasse.
Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses during the 2008 Crisis - New York Fed - During the financial crisis in 2008, just one money market fund (MMF) “broke the buck”—that is, its share price dropped below one dollar. The Reserve Primary Fund announced on September 16 that the value of its shares had dropped to 97 cents. As we discussed in a previous post, Reserve’s announcement helped spark a widespread, damaging run on MMFs that slowed only when the federal government intervened three days later to backstop the funds. But new data that we first published in a New York Fed staff report and discussed in a Brookings paper show that at least twenty-nine MMFs had losses large enough to cause them to break the buck in September and October 2008 despite significant government intervention and support of the sector. Five funds or more experienced losses exceeding the 3 percent reported by Reserve, and one fund reported a loss of nearly 10 percent. Among the twenty-nine funds that would have broken the buck without sponsor support, the average loss was 2.2 percent. Yet, the losses for twenty-eight of these MMFs may have gone unnoticed during the crisis, as neither their shareholders nor almost anyone else could have observed their magnitudes at the time. As in other episodes in which MMFs suffered significant losses, the losses were absorbed—and hence obscured—by voluntary financial support from MMF sponsors (the MMFs’ asset management firms or their parent companies). The extensive record of sponsor support for MMFs does allow us to look back to the 2008 crisis and other periods of strain for indirect evidence about funds’ losses. In a 2010 report, Moody’s found 144 cases in which U.S. MMFs received support from sponsors between 1989 and 2003.
The shadow banking system, crunched one way or another - Here’s a useful assessment of both shadow banking’s relationship to the real economy and how it will be affected by forthcoming regulatory reforms, by strategists at Barclays. A few thoughts of our own follow the excerpt: Shadow banking continues to attract a fair amount of regulatory scrutiny, mainly geared toward shrinking it and reducing its capacity to create and transmit systemic risk. Along these lines, the Fed last Thursday published its comments on the SEC’s money market fund proposal, coming out in support of floating NAVs. Most analysts reckon that a shift to floating NAV-style money funds would sharply reduce the size of the money fund industry and simultaneously reduce the demand for bank repo and commercial paper.A month ago, the Financial Stability Board recommended tougher rules and minimum haircuts on repo transactions between banks and non-banks. And several weeks ago, the Fed and other regulators published new supplemental bank capital rules that, among other things, are expected to push dealers and banks to shrink their repo matched book operations. But will a smaller shadow banking sector – and the attendant reduction in credit – have an effect on the real economy akin to the credit crunch experienced by borrowers in more traditional bank lending such as home mortgages? As a starting point, we define shadow banking as the intermediation that takes place between borrowers and lenders at short tenors outside of insured bank deposits. As a rough proxy, it is the sum of broker-dealer repo, bank commercial paper, and money market holdings (net of repo and CP). This definition – like others – mixes the instruments of shadow banking with its providers.
Financial Regulator Shutdown, Halts Investigations of Wall Street Crimes - Bill Black on theReal News Network - The main U.S. regulatory agency responsible for monitoring commodity markets has ceased most of its operations during the government shutdown. The Commodity Futures Trading Commission (CFTC) oversees commodity markets, like oil and corn. It adopts regulatory rules, and monitors markets and trading activity in order to identify manipulation of commodity prices. It also is involved in investigations such as the LIBOR scandal, “the largest antitrust violation in world history by multiple levels of magnitude,” said Black. “And all three of those functions have been taken off-line.” Many regulatory and enforcement agencies are now closed due to the government shutdown. The Security and Exchange Commission, Federal Energy Regulatory Commission, and Food and Drug Administration, are either closed or have limited their operations. “It is open season on the public,” said Black.
World's One-Time Largest FX Hedge Fund On Verge Of Shutdown - There is a reason why John Taylor of FX Concepts, founded in 1981 and which once upon a time was the world's largest FX hedge fund, has kept a very quiet profile lately despite his often bombastic prognostications in 2011 and 2012: the firm may be on the verge of shut down following a recent surge in redemptions resulting from woeful performance in the past three years. FX Week reports that AUM at FX Concepts "have continued to fall and the fund's chief strategist confirms the board's ideas haven't worked so far." It adds that the hedge fund is in "dangerous territory after the departure of several major clients and falling assets under management, prompting the firm's board to rethink its strategy, officials have confirmed." As a result of a surge in redemptions, assets under management have declined from a peak of $14.2 billion in 2007 to less than $1 billion this year, having been at $4.5 billion in early 2012. Earlier this year, FX Concepts saw the exit of two major clients – the Pennsylvania Public School Employees' Retirement System and the Bayerische Versorgungskammer pension fund – but further clients are understood to have left in recent weeks. The culprit: the same affliction that is currently impairing all other hedge funds in a centrally-planned market - underperformance. FX Concepts' flagship multi-strategy fund is down 11.35% this year through August. It was down 14.47% in 2011 and down 3.11% in 2012. Overall, the fund's annualized returns since January 2002 are a paltry 3.74%, CNBC reports.
JPMorgan’s Dimon Posts First Loss on $7.2 Billion Legal Cost - JPMorgan Chase & Co. reported its first loss under Chief Executive Officer Jamie Dimon after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes. The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, a year earlier, the New York-based company said today in a statement. The last time the bank failed to report a profit was the second quarter of 2004, when William Harrison was CEO. “Over the last few weeks the environment has become highly charged and very volatile,” Chief Financial Officer Marianne Lake said on a conference call. “Things have been very fluid and the situation escalated to the point where we are facing very large premiums and penalties, the level of which have gone far beyond what we reasonably expected.”
Whistleblower Suit Confirms that the New York Fed is in the Goldman Protection Racket -Yves Smith - On Thursday, a former bank examiner at the Federal Reserve Bank of New York, Carmen Segarra, filed a suit (embedded at the end of this post) against the New York Fed and several of its employees alleging, among other things, improper termination. The complaint is a doozy and some of the additional details supplied by Segarra to ProPublica make an already ugly picture look even worse. Segarra was an experienced attorney who had spent her entire career working in banking in the corporate counsel’s office of large financial firms, most recently as a senior counsel at Citi. In other words, she is not a naif or a theoretician. She was hired as part of an effort to increase bank examination functions to meet Dodd Frank requirements. But Segarra wound up on a collision course with the old guard at the New York Fed, which is particularly deeply tied into Goldman. Segarra was tasked to assess whether Goldman’s conflicts of interest policies were adequate in three separate cases: Solyndra, the El Paso/Morgan Kindler acquisition, and a bank acquisition by Sandanter. What is stunning if you read the complaint, which we’ve embedded below, is how high-handed Goldman was in its responses to Segarra’s inquiries. It’s not hard to imagine that they viewed this as a pro forma exercise that given their cozy relationship with the New York Fed, would go nowhere. They didn’t just stonewall, they told egregious lies. That sort of cover-up usually winds up being worse than the crime, but not if you are in a privileged class like Goldman. Segarra was fired abruptly after refusing to change her recommendations and destroy supporting documents, which was in violation of regulatory policy (bank examiners are not “fire at will” employees; they need to be put on notice and given the opportunity to correct deficiencies in their performance before they can be dismissed). I’ve read other wrongful termination suits and Segarra’s looks very strong. It’s going to be awfully hard for the New York Fed to talk its way out of this one.
The Big-Bank Subsidy - Simon Johnson - The debate on very large financial institutions has reached an important moment. At the instigation of Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana, the Government Accountability Office is assessing the extent to which big banks and others receive advantages because they have implicit backing from the government. The stakes are high, as a strong report from the G.A.O. could influence policy. Not surprisingly, representatives of the big banks are pushing back as hard as they can on the notion that they receive subsidies of any kind. So far, however, this is not going well for the big banks – as is made clear in the papers presented at a conference earlier this week at New York University. (These materials are now on the Web site of the university’s Salomon Center.) A large amount of implicit – and explicit – government support for some big companies was an undeniable feature of the financial crisis as it developed in fall 2008 and early 2009. But the big banks assert that these subsidies have been curtailed or perhaps even eliminated by the Dodd-Frank financial reform act of 2010 (see my post on the subject in March). Advocates for the status quo, like the Clearing House, a banking association, consequently say there is no need for any additional policy change – like measures that would impose an effective size cap on big banks or require them to be financed with more equity (and therefore less debt) than is the case for smaller companies.
US loan-to-deposit ratio the lowest in 30 years and falling - The chart below shows US total loan balances relative to bank deposits over the past couple of years. The total loan growth rate continues to deteriorate while deposits grow. In fact the ratio of these two measures, the so-called loan-to-deposit ratio is now at the lowest level in some 30 years. This creates material headwinds for economic growth. Unfortunately there is no evidence that the current monetary policy will reverse the trend of weakening loan growth. And as we all know, the US fiscal policy (if one could call it that) is not going to help much either...
The Fed now holds more securities than all US banks combined -- As discussed previously (see post), US commercial banks have been scaling back on their loan portfolio growth. Banks have been even more aggressive however in reducing growth of their securities holdings. The year over year growth is at the lowest level since the financial crisis. The reasons vary. In some cases it was simply about trimming treasury and MBS holdings as rates rose sharply this summer. In other cases, such as with corporate bonds, it is due to the various regulatory pressures, e.g. the Volcker Rule. And while banks are cutting their securities inventory, the Fed keeps buying. Recently the Fed' holdings of securities (mostly treasuries and MBS) materially exceeded that of all US banks combined. Prior to the financial crisis banks owned 2.5 times the amount of securities held by the Fed. The chart below puts it in perspective. Before the securities buying program is over however, the differential is expected to widen even further.
Banks Are Still Failing At Ten Times the Pre-2008 Crash Rate - Since January 2008 through today, the Federal Deposit Insurance Corporation shows 487 banks have failed, with 22 failures just so far this year. With an average of two bank failures per year in the five years before the crash, that means banks are still failing at 10 times the pre-crash rate. But the numbers get worse from there. While the FDIC shows 487 banks have failed, other data at the FDIC show that a total of 1,306 banks have disappeared since March 31, 2009, along with $1.5 trillion in deposits. The difference is that 819 banks or savings associations have merged, typically to survive. The missing deposits likely went to pay down debts, moved to uninsured money market funds, into the stock market or bond mutual funds to earn extra yield. According to March 31, 2009 data from the FDIC, there were 8,246 FDIC insured institutions with total domestic deposits of $7.5 trillion. Four institutions, Bank of America, JPMorgan Chase, Wells Fargo & Co. and Citigroup, four institutions out of 8,246, controlled at that time 35 percent of all the insured domestic deposits. Now fast forward to June 30, 2013. According to FDIC data, the 8,246 banks and savings institutions have melted away to a new total of 6,940. Bank of America, JPMorgan Chase, Wells Fargo & Co. and Citigroup, now control a combined $3.511 trillion in domestic deposits, a stunning 58.8 percent of all 6,940 U.S. banks’ domestic deposits of $5.966 trillion. The market share of these four giants has increased by an astonishing 24 percent in just 4 years. But it gets even worse. Each of these four banks that have cumulatively gained a 24 percent increase in market share are the same banks charged by the Federal regulators in swindle after swindle against the American public. As many have long suspected, this data conclusively proves that crime pays on Wall Street.
Unofficial Problem Bank list declines to 685 Institutions, Q3 Transition Matrix - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for October 4, 2013. Changes and comments from surferdude808: The FDIC released its enforcement action activity through August 2013 on Monday , September 30th, which was a change in the timing of the release as they usually release on the last Friday of the month. In this case, that would have been Friday, September 27th. We are unsure if this a permanent change going forward or one-off because of some technical issue. The release did contribute to many changes to the Unofficial Problem Bank List. Moreover, it allowed us to update the quarterly transition matrix. This week there were eight removals and three additions that leave the list holding 685 institutions with assets of $238.7 billion. A year ago, the list held 873 institutions with assets of $334.9 billion. With the passage of the third quarter of 2013, we have updated the Unofficial Problem Bank List transition matrix. Full details may be found in the accompanying table. Also, we have added a time series chart depicting the disposition status of banks whose presence has graced the list. In all, there have been 1,659 institutions that have made an appearance on the list. So far, nearly 59 percent or 1,064 of the banks that have appeared on the list have been removed. Action termination has now solidly overtaken failure as the largest manner of exit. Actions have been terminated against 441 banks. During the latest quarter, the banking regulators accelerated action terminations as 64 were removed. At the start of the quarter, the list had 701 banks, so the removal rate was 9.1 percent of the start balance. The list was first published in August 2009 with 389 banks, so after more than four years, 90 still remain, indicating that its taking many banks a long time to rehabilitate themselves.
How the Foreclosure Crisis Made the Rich Even Richer - Yves Smith - Catherine Rampell has a short but compelling piece on how the foreclosure crisis was wealth transfer from lower and middle income families to the rich. Her points are simple: the typical person who lost their home wasn’t a greedhead who bought too much house or refied to buy flat panel TVs and go on cruises (if you hang out with mortgage types, you’ll get a big dose of profligate consumer urban legend). The people who were like that (and there were some) for the most part were in subprime loans that reset in 2007 and 2008 and were in the early wave of foreclosures. The people who’ve lost their homes in later foreclosures were overwhelmingly people who had the bad fortune to buy late in the housing bubble (so when the bust hit, they had negative equity and couldn’t use lower rates to refi into cheaper payments) and took economic hits as a direct result of the crisis (hours cuts and job losses; other people who were hurt were in the more typical “shit happens” categories, like suffering medical problems, with their situation made much worse by their inability to sell or refinance their home). Rampell’s contribution is to look at the phenomenon of investors, both big and small, and how they’ve bought properties at foreclosure and then flipped them. Separately, Josh Rosner recently released the astonishing statistic: that sales of owner-occupied properties showed only a 1% gain in the last 12 months. The gains that have been driving the indexes were all in investor owned properties. Some flipped to other investors. In hot markets, local investors have been doing “mini-bulks,” acquiring small portfolios to sell to private equity investors, some without renovating them, others with modest fix-ups. Others sold them to homebuyers.
Richmond’s rules: Why one California town is keeping Wall Street up at night: Very early on a Wednesday morning in September, the city council of Richmond, Calif., did something that no American city had yet managed: It voted for a plan to wrest underwater mortgages from the hands of Wall Street, depriving investors of tens of millions of dollars in order to save borrowers from foreclosure. For communities across the land -- North Las Vegas, San Bernardino County, Calif., Chicago -- where too many are stuck with house payments beyond what they can afford, this was the nuclear option. While those cities backed away, Richmond hit the button. The mechanism? Eminent domain, the power of the government to seize private property for public use, which has not typically been used to help poor neighborhoods. After five years of the federal government gently nudging banks to forgive homeowners debt they took on in better days, cities have found a legal weapon the financial industry truly fears. The stability of those housing markets, and the banks that profit from it, could depend on the fallout.In short, here's how it would work: Richmond condemns mortgages on homes that are now worth far less than what the borrower owes. The note holders -- investors such as pension funds and mutual funds - are forced to settle for the current fair market value. The city pays for this with cash from a new set of investors, who now own the mortgage. The new price is set by the current market, and the homeowner settles into a more manageable loan.
LPS: Mortgage Delinquencies Decline in August, Prepayment Activity Declines Sharply - LPS released their Mortgage Monitor report for August today. According to LPS, 6.20% of mortgages were delinquent in August, down from 6.41% in July. LPS reports that 2.66% of mortgages were in the foreclosure process, down from 4.04% in August 2012. This gives a total of 9.23% delinquent or in foreclosure. It breaks down as:
• 1,836,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,288,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,341,000 loans in foreclosure process.
For a total of 4,465,000 loans delinquent or in foreclosure in August. This is down from 5,450,000 in August 2012. LPS has found that prepayment activity declined sharply (no surprise with higher rates). LPS also thinks we might see a pickup in home equity borrowing:
The August Mortgage Monitor report released by Lender Processing Services found that prepayment activity (historically a good indicator of mortgage refinance activity) declined sharply in August as mortgage rates continued to rise. In conjunction with those rate increases, a large portion of borrowers has been effectively shifted out of the “refinancible” population. However, at the same time, according to analysis done by LPS, rising home prices and corresponding levels of equity for many borrowers may translate into opportunity for the home equity loan and lines of credit market.
Notices of default spiked in days before Homeowners Bill of Rights kicked in - Banks, title companies and processors used September’s waning days to mount a record-setting foreclosure push before a Homeowners Bill of Rights took effect Tuesday.Companies submitted more than 440 local notices of default on Friday alone — four times the number they filed in all of June and nearly the number they filed in July, according to both data-crunching website LVDEFAULT.com and analysis firm Home Builders Research.They set a one-day high on Monday for Clark County filings, at 934 notices, said Tony Martin, director of LVDEFAULT.com. In the last two days of September, filings roughly equaled notices from June, July and August combined.Official figures won’t be in until mid-October, but early stats show roughly 3,700 notices of default, which start the foreclosure process, in September. That is the highest number since September 2011, the month before a state law imposed new legal liabilities on banks that foreclosed. The law puts new limits on banks, including mandates to give homeowners 30 days’ notice before starting foreclosure and to tell owners about alternatives to default. The law also requires banks to assign a single contact person to a homeowner in default. Nor can banks dual-track, or try to foreclose while working out a short sale. And they have to meet timelines for requesting additional paperwork and answering modification requests.
Lawler: Preliminary Table of Distressed Sales and Cash buyers for Selected Cities in September - Economist Tom Lawler sent me the preliminary table below of short sales, foreclosures and cash buyers for several selected cities in September. First, on short sales from CR: Look at the first two columns in the table for Short Sales Share. Short sales are down sharply from a year ago, and will probably really decline in early 2014. It appears that the Mortgage Debt Relief Act of 2007 will not be extended again next year. Usually cancelled debt is considered income, but a provision of the 2007 Debt Relief Act allowed borrowers "to exclude certain cancelled debt on [a] principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." (excerpt from IRS). This relief expires on Dec 31, 2013. Complete all short sales by the end of this year!Total "Distressed" Share. In most areas that have reported distressed sales so far, the share of distressed sales is down year-over-year (Hampton Roads is an exception). Also there has been a decline in foreclosure sales in all of these cities except Springfield, Ill. The All Cash Share is declining in some cities (Phoenix and Las Vegas), but steady in other areas. When investors pull back in markets like Phoenix (already declining), the share of all cash buyers will probably decline. In general it appears the housing market is slowly moving back to normal.
Modified seriously delinquent loans hold strong during mortgage crisis - At least 31% of loans that were seriously delinquent during the mortgage crisis were modified and performed better when compared to unmodified seriously delinquent loans, according to new data from Moody's Investors Service. Not surprisingly, seriously delinquent loans in 2008 that servicers subsequently modified performed much better than did loans that were not modified given that servicers are going to try to keep the loan current for as long as possible, explained Hope Now executive director Eric Selk. "From a servicer's standpoint, there’s a lot of upswing solutions that are being required by various investors, so early intervention is being required by everyone now," Selk explained. As of June, approximately 1.1 million loans were 60-plus days delinquent and in foreclosure as of December 2008. The large volume of seriously delinquent loans that were already in some stage of foreclosure during the mortgage crisis contributed to a high percentage of unmodified loans, as it is difficult for servicers to stop a foreclosure process once started —especially when the loan is in the latter stages of the legal process, according to Moody’s.
LPS' August Mortgage Monitor: Interest Rate Hikes Shrinking 'Refinancible' Population; Home Price Increases Potentially Opening New Home Equity Loan Market - The August Mortgage Monitor report released by Lender Processing Services (NYSE: LPS) found that prepayment activity (historically a good indicator of mortgage refinance activity) declined sharply in August as mortgage rates continued to rise. In conjunction with those rate increases, a large portion of borrowers has been effectively shifted out of the "refinancible" population. However, at the same time, according to analysis done by LPS, rising home prices and corresponding levels of equity for many borrowers may translate into opportunity for the home equity loan and lines of credit market. "We have seen prepayments decline by more than 30 percent since May, when mortgage interest rates began climbing approximately 100 basis points to where we are today," LPS Senior Vice President Herb Blecher said. "As a result, the percentage of borrowers currently in loans with interest rates high enough for refinancing to make fiscal sense has decreased significantly. Over half of borrowers are now 'out of the money' with respect to refinancing. In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August. "While higher interest rates may certainly have the effect of tamping down refinance activity, they may actually wind up contributing to a new appetite for home equity loans among homeowners," Blecher continued. "After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes.
Battle looms over mortgage guarantee threshold - FT.com: Investors, law firms and banks are facing off against homebuilders and real estate agents in a battle over the US government’s role in guaranteeing home loans. The American Securitization Forum, which represents the financial industry dedicated to packing and selling loans, is writing to the Federal Housing Finance Agency Friday to urge it to drop the threshold that the government guarantees mortgages from $417,000 to $400,000. Writing that “this level of government involvement is neither sustainable nor advisable”, Tom Deutsch, head of the ASF, said that “reducing the conforming loan limits would push more mortgages out of the GSE [government-sponsored enterprise] market and into a functional private-label securitization market”. The FHFA, run by acting director Edward DeMarco, proposed in August reducing the size limit for loans that can be purchased by Fannie Mae and Freddie Mac, the GSEs that were seized by the government to stop their failure during the financial crisis. Mortgages above this limit – which is higher in more expensive coastal areas such as New York and San Francisco – are known as “jumbo” loans and typically have higher interest rates. Some Obama administration officials have long seen reducing the conforming loan limit, coupled with increasing the “guarantee fees” paid by banks for government insurance on the loans, as the best way of encouraging private capital back into the market. But many Democrats, community banks, credit unions, homebuilders and mortgage bankers oppose reducing the loan limit, and some actually think it should be increased to help spur the housing recovery.
Lawler: Fannie Mae on Government Shutdown and Government Verifications - From housing economist Tom Lawler: “In some instances, Fannie Mae requires validation through a government agency, such as the Internal Revenue Service (IRS) and the Social Security Administration (SSA) for certain documentation or information provided by the borrower. During the government shutdown, these requests may not be processed. Fannie Mae is implementing the following temporary policies with regard to these two agencies. “IRS Transcripts: Fannie Mae requires lenders to have each borrower (regardless of income source) complete and sign a separate IRS Request for Transcript of Tax Return (Form 4506-T) at or before closing. Lenders are only required to execute the Form 4506-T prior to closing for loans originated and underwritten with the policies pertaining to borrowers with five to ten financed properties. This policy requires the lender to obtain the IRS copies of the tax returns or transcripts to validate the accuracy of the tax returns provided by the borrower prior to the loan closing. Because these requests may not be processed during the shutdown, Fannie Mae is temporarily revising this policy to enable lenders to obtain the transcripts and complete the validation after closing but prior to delivery of the loan. “Social Security Number Validation: When data integrity issues pertaining to the borrower’s Social Security number are identified, a lender may be required to validate the Social Security number with the SSA using SSA Form 89. Because these requests may not be processed during the shutdown, Fannie Mae is temporarily revising this policy to enable lenders to obtain the verification prior to the delivery of the loan. If the Social Security number cannot be validated with the SSA prior to delivery, the loan is not eligible for sale to Fannie Mae.”
Freddie Mac: Fixed Mortgage Rates Little Changed - From Freddie Mac today: Fixed Mortgage Rates Little Changed - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates changing little for the week amid the federal debt impasse in Washington, D.C. and a light week of economic data releases. ... 30-year fixed-rate mortgage (FRM) averaged 4.23 percent with an average 0.7 point for the week ending October 10, 2013, up from last week when it averaged 4.22 percent. A year ago at this time, the 30-year FRM averaged 3.39 percent. 15-year FRM this week averaged 3.31 percent with an average 0.7 point, up from last week when it averaged 3.29 percent. A year ago at this time, the 15-year FRM averaged 2.70 percent. The high this year for 30 year rates in the Freddie Mac survey was 4.58%, and the high for 15 year rates was 3.60%. Here is an update to a graph that shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey.
MBA: Mortgage Applications Increase in Latest Weekly Survey, Mortgage Rates Lowest since mid-June - From the MBA: Mortgage Refinance Applications Increase in Latest MBA Weekly Survey: Mortgage applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 4, 2013. ... The Refinance Index increased 3 percent from the previous week and is at its highest level since the week ending August 9, 2013. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. ... For the second consecutive week, the unadjusted Purchase Index was lower compared to the same week one year ago. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.42 percent, the lowest rate since mid-June, from 4.49 percent, with points increasing to 0.44 from 0.34 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is up over the last four weeks as rates have declined. However the index is still down 61% from the levels in early May. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has fallen since early May, and the 4-week average of the purchase index is only up slightly from a year ago.
Vital Signs: Mortgage Activity Falls but Not to Cellar - The urge to buy a home has softened now that mortgage rates have increased from the generational lows seen in May. But home demand hasn’t tumbled into the basement.The Mortgage Bankers Association reported Wednesday that applications to purchase a home slipped slightly in the week ended October 4, but the smoothed four-week moving average edged higher. Applications are not as strong as back in the spring, but they haven’t collapsed either.One reason is that mortgage rates are falling again. Market expectations that the Federal Reserve would slow its bond-buying program in September had pushed bond yields higher. When the Fed did not taper, rates fell back. The 30-year fixed mortgage rate is back below 4.5%. What remains to be seen is how the government shutdown slows the mortgage approval process in coming weeks. Delays could weaken home sales in the fourth quarter.
Read This Story and Your Opinion of Where Housing Is Headed Will Change - Let's face it: the U.S. housing market is still under severe stress. No matter how the bulls may spin their argument, it's far from a real recovery. The historical fundamental factors behind a typical housing market recovery are still missing. According to real estate information company Zillow, in the second quarter of this year, almost 24% of all homes with a mortgage in the U.S. housing market had negative equity (the homes were worth less than the mortgage issued on them). More than 12 million home owners in the U.S. economy remain "underwater." And in some geographical pockets, the spread between the mortgages and the values of the homes is very wide; in the Las Vegas area, almost 13% of home owners with a mortgage owe two times the amount of their home's current value! Sadly, the misery in the U.S. housing market doesn't just end there.The delinquency rate on single-family residential mortgages at all commercial banks stood at 9.41% in the second quarter of 2013. Yes, it has declined a little from 9.7% in the first quarter of this year, but it still remains very high compared to the historical average. The average delinquency rate on single-family residential mortgages from 1991 to 2006 was only 2.2%. These negative factors working against the housing recovery are just a few of many.Since 2012, the majority of activity in the housing market has been the result of investors buying up homes, renovating them, and renting them out. We didn't really see the average American Joe buying a house to live in, as the activity in one indicator of the housing market I follow -- first-time home buyers -- has been lagging.Since U.S. homebuilder stocks reached their peak earlier this year, they have declined almost 25%. The chart below shows their demise.
Blackstone, big investors slow their $800 million Tampa Bay home-buying binge -After an $800 million binge on Tampa Bay homes, big investors are finally catching their breath, pulling back on buying due to rising prices and market doubts, a Tampa Bay Times analysis has found.The seven biggest investment groups buying homes here spent half as much cash in August as they did in March or April, when their shopping sprees peaked at about 500 homes a month. Invitation Homes, the brainchild of multinational investment giant Blackstone, continues to lead the pack with more than $300 million in homes, but even its spending has plunged. The firm spent $40 million locally on homes in March but only about $20 million every month since. Deep-pocketed hedge funds, private-equity firms and investment trusts parachuted last year into neighborhoods hardest hit by the housing crash, aiming to scoop up foreclosures and other single-family homes sold at "distressed discount." But in an untested twist to the buy-fix-flip model, investors joined small-time speculators and mom-and-pop landlords by turning their homes into rentals. Since then, they've built a shadow industry of agents, carpenters and managers to find, repair and run the homes. With more than 5,000 local homes on their books, these seven risk-capital titans from New York, California and elsewhere have become some of the most influential forces during Tampa Bay's housing recovery.
Boom, Bust, Flip - There’s a popular perception that so-called McMansions and Garage-Mahals brought down the housing market. Yet more than half of all homes that went into foreclosure between 2007 and 2012 were actually in the lowest price tier when they were purchased, and most were located in middle- and lower-income areas. As foreclosures mounted and home prices plummeted, observers have noted, it was disparately the wealthier investors who bought them up at bargain prices. (Credit was hard to come by, after all, which benefited cash buyers.) Blackstone, the private-equity giant, bought almost 30,000 homes around the country and now has a nationwide single-family-home rental platform. Others were smaller outfits, like AKA, which bought around 25 homes in the Seattle area. Now, five years after the start of the financial crisis, the housing market has come back, and many of these investors are cashing in. According to tabulations by Redfin, an online real estate listings site, banks have already sold about 1.5 million of the nearly 2 million homes that were foreclosed on during the past half-decade. Resales are becoming more common and can be hugely profitable. A house in Redwood City, Calif., for instance, was sold in a foreclosure auction in 2011 for less than half what the evicted owner paid in 2006. Ten months later, it was flipped for close to its previous price. Another house in Los Angeles went into foreclosure in 2012 and was flipped seven months later for a markup of $254,000, or 66 percent. Of the 87,062 foreclosures in the last five years that were bought by corporate investors and have been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid, according to Redfin.
Weekly Update: Existing Home Inventory down only 1.3% year-over-year on Oct 7th - Here is another weekly update on housing inventory: One of key questions for 2013 is Will Housing inventory bottom this year? Since this is a very important question, I'm tracking inventory weekly in 2013. There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for August). However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012 and 2013. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. Inventory in 2013 is increasing, although still 1.3% below the same week in 2012.
Surge in Home Equity Loans Coming? - With mortgage refinancing activity down 30% between May and September, will homeowners turn to home equity lines for cash? That is a possibility suggested by the LPS Mortgage Monitor. Via email ... "We have seen prepayments decline by more than 30 percent since May, when mortgage interest rates began climbing approximately 100 basis points to where we are today," LPS Senior Vice President Herb Blecher said. "As a result, the percentage of borrowers currently in loans with interest rates high enough for refinancing to make fiscal sense has decreased significantly. Over half of borrowers are now 'out of the money' with respect to refinancing. In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August. "While higher interest rates may certainly have the effect of tamping down refinance activity, they may actually wind up contributing to a new appetite for home equity loans among homeowners," Blecher continued. "After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes. Based upon LPS' analysis of historical borrowing patterns and home value trends, it is possible that we could see an increase in second-lien borrowing among those who have locked in their first mortgages at very low rates and who wish to tap their equity without refinancing into a higher rate." Charts from the September LPS Mortgage Monitor
Number of the Week: Housing Affordability Hits Four-Year Low - 16%: The average mortgage payment on the median priced home in August as a share of the median income, according to data compiled by the National Association of Realtors. Housing affordability hit a four-year low in August amid steady gains in home prices during the spring and higher interest rates during the summer. While the data released earlier this week show affordability has been dented, homes are still more affordable than any time between 1989 and late 2008, according to the NAR’s figures. At prevailing interest rates in August, the mortgage payment on the median priced home stood at $851, or around 16% of the median U.S. income. By contrast, the equivalent mortgage payment one year earlier, at $683, accounted for 13.3% of the median income. The NAR data isn’t adjusted for seasonal factors. Median home prices tend to peak in June, when there are more home transactions, particularly at the more expensive end of the market. Because the affordability figures are pegged to median home prices, the data typically show housing becoming more affordable during the winter and less affordable in the summer. But the affordability figures show unmistakable evidence of how rising interest rates hurt housing affordability in July and August because median prices didn’t rise in those months, even as the average monthly payment went up due to rising rates. The average monthly payment rose from $787 in June to $851 in August — even though median prices fell slightly from June to August.
Families hoard cash 5 yrs after crisis - Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still hunkered down, too spooked and distrustful to take chances with their money. An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation. "It doesn't take very much to destroy confidence, but it takes an awful lot to build it back," says Ian Bright, senior economist at ING, a global bank based in Amsterdam. "The attitude toward risk is permanently reset." A flight to safety on such a global scale is unprecedented since the end of World War II. The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy. Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. But even people with good jobs and little fear of losing them remain cautious.
Consumer Credit in U.S. Rises $13.6 Billion on Car Purchases - Consumer borrowing rose more than projected in August as Americans took out more loans for motor vehicle purchases and education. The $13.6 billion increase in credit followed a $10.4 billion gain in July, the Federal Reserve said today in Washington. The median forecast in a Bloomberg survey of economists called for a $12 billion advance. Non-revolving debt, which includes financing for college tuition and motor vehicles, climbed $14.5 billion. The boost to household wealth from improved home values and stock-market gains has put consumers in a position to take advantage of cheaper borrowing costs for major purchases such as automobiles. Credit-card lending declined for a third month, showing Americans are being deliberate in taking on more debt to finance other purchases. “The auto industry has done quite well, and student loans from the federal government have been on the rise,” said Gregory Daco, senior U.S. economist at Oxford Economics USA in New York, who projected a $13 billion increase in overall credit. “Consumers are willing to spend, but they’re more cautious about ensuring they have sufficient income.”
Consumers’ Credit Card Balances Decline - U.S. consumers’ credit card balances declined for the third consecutive month in August, evidence that Americans may be growing more cautious about the economy. Consumers’ revolving credit, which primarily reflects money owed on credit cards, fell by a seasonally adjusted $883.4 million in August, or at a 1.25% annual rate, the Federal Reserve said Monday. Over the past 3 months, revolving balances have declined by more than $6 billion. However, consumers stepped up other types of borrowing in August. Nonrevolving debt, a category dominated by automotive and student loans, increased by $14.51 billion, or at an 8.0% annual rate, in August. That type of debt has risen steadily for two years. The gains caused total consumer debt outside of home loans to advance by $13.63 billion in August. The data is consistent with other trends in the economy showing that Americans are willing to make big-ticket purchases, such as buying homes, cars and investing in their education, yet are easing spending on everyday items.
August 2013 Consumer Credit Growth Remains Soft - Econintersect analysis is that total consumer credit growth has decelerated 0.3% month-over-month, and the year-over-year growth is 5.9% – relatively unchanged from last month. The seasonally adjusted consumer credit headlines are showing a growth of only 5.5%. There was significant backward revision to the data, but the overall “feel” of the revised data does not negate past analysis. In all events, consumer credit is not expanding at a rate which would suggest an accelerating economy, nor is there evidence that the economy is stalling. When student loans are backed out, the rate of expansion of consumer credit is consistent with the current growth of GDP. The headline said:Consumer credit increased at an annual rate of 5-1/2 percent in August. Revolving credit decreased at an annual rate of 1-1/4 percent, while nonrevolving credit increased at an annual rate of 8 percent. The last five months were one of the lowest student loan growth months seen since mid 2012 (see red line on the Flow of Funds into Consumer Credit graph below). The market expected consumer credit to expand $11.8 to $12.0 billion versus the seasonally adjusted expansion of $13.6 billion reported.
Consumer Credit Rises 5.4% on Student Loans Again for August 2013 - The Federal Reserve's consumer credit report for August 2013 shows a 5.4% annualized monthly increase in consumer credit, driven by student loans. Once again student loans increased, while credit card debt declined. Revolving credit declined by -1.2%, and non-revolving credit jumped another 8.0%. This is the third month in a row revolving credit has declined. Consumer credit matters due to personal consumption being the driving force in economic growth. Revolving credit are things like credit cards and non-revolving are things like auto loans and student loans. Mortgages, home equity loans and other loans associated with real estate are not included in this report. Overall consumer credit increased $13.6 billion dollars to $3,036.9 billion, seasonally adjusted. Revolving credit declined by -$0.9 billion, or -$10.6 billion annualized, to $848.9 billion while non-revolving credit is huge, $2,188.0 billion. Seasonally adjusted non-revolving credit increased by $14.5 billion, or $174.1 billion annualized. The report gives percent changes in simple annualized rates, also known as a continuously compounded annualized rate of change. Consumer credit contractions correlate to recessions. The consumer credit report does not include charge offs and delinquencies. Graphed below is total consumer credit. To get a feel for how much of non-revolving credit was student loans, unfortunately we must deal with not seasonally adjusted data for the report does not break down credit reported with seasonal adjustments. Not seasonally adjusted non-revolving credit increased $31.7 billion and has increased every month since August 2011. Subtracting the not seasonally adjusted Federal Government non-revolving credit, which primarily is student loans, we get a $9.8 billion increase in non-revolving loan debt. There was a $21.9 billion increase in Federal Government non-revolving credit, so sans seasonal adjustments, once again consumer credit was driven by student loans. Below is non-revolving credit, seasonally adjusted, annualized percentage change.
Fed Magically Creates $180 Billion In Student And Car Loans Out Of Thin Air - Normally, we would report the change in total consumer debt (revolving and non-revolving) in this space, but today we will pass, for the simple reason that the number is the merely the latest entrant in a long series of absolutely made up garbage. It appears that in the "quiet period" of data releases, when the BLS realized its "non-critical", pre-update 8MHz 8086-based machines are unable to boot up the random number generator spreadsheets known as "economic data", Ben Bernanke decided to quietly slip a modest revision to the monthly consumer credit data. A modest revision, which amounts to a whopping $180 billion cumulative increase in non-revolving credit beginning in January 2006. So add that to the GDP, to Personal Income, to Household Net Worth, to the BLS' JOLTS "data", and of course, to last year's repeat revision of consumer credit data, as a data set, which while present, is absolutely meaningless following recent arbitrary revisions which meant all prior data contained therein was just as irrelevant. To summarize: for whatever reason, the Fed decided to recast its entire non-revolving credit data series starting in January 2006, and has magically created $188 billion in student loan and car debt that previously "did not exist." Old vs Revised series shown below.
U.S. Consumers Falling Behind on Bills after Years of Improvement - Consumer delinquency rates rose for the first time in two years in the second quarter, possibly showing that the broad household deleveraging seen since the recession concluded in 2009 may be coming to an end.The American Bankers Association’s composite delinquency ratio, which tracks eight types of debt including auto and home-equity loans, increased to 1.76% in the second quarter from 1.70% the prior period. Similarly, the delinquency rate on credit cards issued by banks inched up 0.1 percentage point to 2.42%.The leveling off of delinquency rates reflect that at least some households are starting to have trouble keeping up with their bills. The ABA counts accounts as delinquent if the payment is 30 days or more overdue. Eight of 11 loan types the ABA tracks recorded increased delinquency rates during the second quarter, including personal loans, boat loans and home-equity loans with fixed terms.“Consumers may find it difficult to further improve their financial positions,” . “Stagnant incomes and a weak job market aren’t going to help change that trend.” Consumer delinquency rates peaked near the end of the recession when many Americans were out of work. The composite index reached 3.35% in the second quarter of 2009. Delinquencies declined since, in part because low interest rates and rising home prices have allowed consumers to free up funds pay off debt, including credit cards with higher interest rates, and in part because banks have written off loans they believe will never be repaid. Delinquency rates are now well below historic levels. Bank credit-card delinquency is 37% below its 15-year average, the association said.
Economic Confidence Posts Fastest Drop Since 2008 Crisis - Americans’ confidence in the economy has tumbled more since the government shutdown began a week ago than in any week since the global financial crisis started in September 2008, according to Gallup‘s daily survey. Gallup’s economic confidence index fell 12 points to -34, the polling organization said Tuesday. The 2008 drop was 15 points, to -56, in the week after Lehman Brothers filed for bankruptcy. As the Journal reported Monday, confidence gauges by Gallup and other private organizations will take on greater importance in gauging the economy’s direction as long as most official economic data remains halted by the government shutdown. Gallup’s daily confidence gauge, which started in January 2008, is based on the public’s assessment of current economic conditions and perceptions of whether the economy is improving or worsening. “While the economy is, in many respects, stronger than it was during the 2011 debt-ceiling crisis, the current budget debate and government shutdown clearly show that partisan brinksmanship and the uncertainty it causes on Wall Street can negatively affect consumer confidence,” The latest drop was faster than the weekly declines tied to other fiscal fights, including the mid-2011 debt-ceiling battle that ultimately hammered the stock market and weighed on consumers and businesses into 2012. Gallup’s confidence index has plunged 19 points since mid-September, putting it near a two-year low. About 67% of Americans say the economy is getting worse, the highest share since December 2011. Only 28% say it’s getting better
Preliminary October Consumer Sentiment decreases to 75.2 - The preliminary Reuters / University of Michigan consumer sentiment index for October was at 75.2, down from the September reading of 77.5. This was close to the consensus forecast of 75.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011. This decline is probably due to the government shutdown and another threat to "not pay the bills".
Consumer Sentiment Dropped in Early October --In a possible reaction to the federal government shutdown, U.S. consumers turned less optimistic about the economy in early October, according to data released Friday. The Thomson-Reuters/University of Michigan preliminary October sentiment index slipped to 75.2 from an end-September level of 77.5, according to an economist who has seen the numbers. The index reached 85.1 at the end of July–which had been the highest reading since before the recession. Economists surveyed by Dow Jones Newswires expected the early October index to fall to 75.0. The current conditions index was little changed at 92.8 from a final-September reading of 92.6. The expectations index declined to 63.9 from 67.8. With government data postponed by the shutdown, the sentiment numbers is one of a few private reports to offer details on the state of the current economy. The October reading suggests the wrangling in Washington has not yet caused consumers to turn extremely downbeat about the future. That means a quick resolution should buoy economic confidence. Within the Michigan survey, short-run inflation expectations eased. The one-year inflation expectations reading in early October fell to 2.9% from 3.3% at the end of September. Inflation expectations covering the next five to 10 years declined to 2.8% from 3.0%.
Consumer Confidence Misses Expectations; Slumps To Lowest Since January - With Gallup indicating the biggest 3-week decline in economic confidence since Lehman, it is hardly a surprise that UMich consumer confidence slumped to its lowest since January having fallen 3 months in a row. This is the 2nd monthly miss in a row - and biggest 3-month drop in 25 months - and appears to confirm the cyclical turn we have been discussing for a few months. And remember, the exuberance of multiple expansion relies on the ever-rising confidence of the people to lift it back to nebulous heights. As we have noted previously - this move in confidence is key...But, it's all about confidence... investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable... And simply put, the current levels of Consumer Sentiment need to almost double for the US equity market tp approach historical multiple valuation levels...
Retailers Report Modest September Sales Gains - Several retailers reported modest sales gains for September as shoppers who were worried about a partial government shutdown and the overall economy pulled back their spending from the prior month. The results increase concerns about how shoppers will spend for the crucial holiday season, the largest shopping selling period for retailers. Revenue at stores opened at least a year — a measure of a retailer’s health— rose 2.7 percent in September, according to a preliminary tally of 9 retailers by the International Council of Shopping Centers. That was a slower pace than the 3.5 percent increase posted in August. Only a sliver of retail chains report monthly sales figures, and the list doesn’t include Wal-Mart Stores, Macy’s Inc. and many other large chains. But it offers some clues into consumer spending heading into the holiday shopping season.
First signs of federal government mess impacting consumer spending - While data is difficult to come by, there are signs that the sharp drop in consumer confidence since the federal goverment shutdown (see post) is translating into weaker consumer spending. For example the ICSC-Goldman same store sales index is starting to exhibit slower growth. Econoday: - In the first indication on the economic effect of the ongoing standoff in Washington, ICSC-Goldman's same-store sales index slipped 0.1 percent with the year-on-year rate slipping to plus 1.8 percent from 2.1 percent. The report cites weakness across most segments. The Johnson Redbook same store sales index has weakened recently as well.Moreover, the ISI Restaurants Sales Survey has been quite sluggish, though it's too early to tell if this is related to poor consumer confidence. Typically we have a lag between a major shift in consumer sentiment and its impact on spending. Perhaps a more timely indicator of consumer behavior is the stock market. And the stock market is telling us there is a real risk of slower spending growth. The chart below compares the Consumer Discretionary Select Sector (XLY) with the overall market (SPY). The underperformance of consumer discretionary shares just in the last 3 days is quite clear. The government shutdown and the upcoming debt ceiling uncertainty is expected to be negatively impacting US consumer spending.
Are “We” Broke? - In an op-ed in today’s New York Times Stephen King, chief economist for HSBC, writes a deeply confused column that seems designed solely to sound serious and informed while scaring readers into thinking the U.S. economy cannot “afford” decent living standards for most Americans. Dean Baker notes a bunch of problems with the column here, but there are a couple of other things worth pointing out. King lists globalization as the first influence that allowed rapid living standards growth in the past. He contends, however, that the pace of global integration will begin slowing and will provide less of a spur to growth in the future. I’m not sure what it is about international economics that makes people think they can make wild claims and no evidence must ever be brought to bear, but, there is a deep literature on the gains from international trade, and it’s just not true that they were a first-order driver of (aggregate) American income growth in recent decades. To put it simply, a reduction in the pace of American integration through trade and investment into the global economy would actually be good for most workers’ living standards (if not good for aggregate U.S. income). After globalization, King lists financial innovation as a key boost to growth that will no longer help in the future. However, it seems clear that financial innovation has not boosted growth for decades now, so, again, a slowdown in the pace of this can really only be good news (pdf) going forward. King’s discussion of the fiscal past and future of the U.S. is odd. He seems to think only spending, not revenue, is amendable to policy, and argues for higher retirement ages and other cutbacks to social insurance.But, besides strangely ignoring the policy lever of taxes, he’s also just plain wrong on the facts. The graph below shows federal tax revenues and public debt as a share of GDP between 1973 and 2007. In the early 2000s, revenues did indeed fall. But this is, surprise, partly because tax rates were cut.
The "Hard" Data Doesn't Lie - Over the last several months, “hard” economic data have been telling a much different story than “soft” economic data. On the one hand, soft surveys such as the ISM manufacturing index have pointed to robust economic growth. On the flip side, hard economic data have been disappointing. We previously pointed out Goldman's view of the "soft" surveys relatively weak ability to project growth, but as BofAML warns, even before the government shutdown cut off the flow of hard economic data, they were tracking just 1.6% qoq saar for third quarter growth. Confidence is already taking a nose-dive as the shutdown continues and BofAML warns of the potential for significant and lasting shocks to growth if things do not improve quickly.
Hotels: Occupancy Rate tracking pre-recession levels- We will probably see some impact on travel over the next week or two from the government shutdown. The data below is before the shutdown. From HotelNewsNow.com: STR: US results for week ending 28 September In year-over-year comparisons, occupancy rose 5.8% to 67.8%; ADR was up 8.3% to $115.47; and RevPAR increased 14.5% to $78.31.The 4-week average of the occupancy rate is close to normal levels. Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.
Report: Hotel Occupancy Rate declines due to Government Shutdown - From HotelNewsNow.com: STR: US results for week ending 5 October In year-over-year measurements, the industry’s occupancy declined 1.2% to 64.7%; ADR edged up 1.4% to $111.67; and RevPAR increased 0.1% to $72.29. The relatively flat performances across the board can be attributed to the partial shutdown of the U.S. government on 1 October, said Brad Garner, senior VP for STR. ... Washington D.C. and Norfolk-Virginia Beach, Virginia, were among the markets most affected during the week. Garner said each market experienced a progressive decline in occupancy during the week. Washington ended the week with a 12.1 percent decline in occupancy, a flat ADR and a 12.1-percent drop in RevPAR. The Norfolk-Virginia Beach market finished the week with a 9.9-percent fall in occupancy, a 2.4-percent decrease in ADR and a 12.1-percent decline in RevPAR. “Several variables factor into the performance for the week, and overall there were challenges for a number of markets,” Garner said. “Long-term effects of the shutdown remain to be seen, but in the early going it clearly had an impact on the overall hotel industry.”The 4-week average of the occupancy rate is close to normal levels.
U.S. Gas Prices Drop 14 Cents Over Past 2 Weeks - The average U.S. price of a gallon of gasoline has dropped 14 cents over the past two weeks. The Lundberg Survey of fuel prices released Sunday says the price of a gallon of regular is $3.38. Midgrade costs an average of $3.58 a gallon, and premium is $3.71. Diesel was down 4 cents at $3.92 gallon. Of the cities surveyed in the Lower 48 states, St. Louis has the nation’s lowest average price for gas at $3.01. San Francisco has the highest at $3.88. In California, the lowest average price was $3.74 in Sacramento. The average statewide for a gallon of regular was $3.83, a drop of 14 cents.
Weekly Gasoline Update: Down Another Six Cents - 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 and Premium both fell six cents. Regular and Premium are 42 cents and 38 cents, respectively, off their interim highs in late February. According to GasBuddy.com, Hawaii is the only state averaging above $4.00 per gallon, unchanged from last week. For the second week, no states are reporting average prices in the 3.90-4.00 range.
Vital Signs: A Tiger in the Economy’s Tank - While all the focus is on the government shutdown’s potential cut into economic activity, one positive development has slipped into the outlook. Cheaper gasoline should provide a lift to consumer finances. Gasoline prices fell throughout most of the third quarter, to about $3.50 a gallon at the end of September, says the U.S. Department of Energy. The decline contrasts with an increasing trend at the same time last year. According to AAA’s measure of fuel costs, prices fell further in the first week of October and could drop another 25-30 cents through December, barring any unexpected refinery problems or higher oil costs. Economists at the Royal Bank of Canada say if prices can stay low at about $3.30 a gallon this quarter, the price cut could translate to an extra $30 billion (at an annual rate) that consumers can spend elsewhere, offsetting the potential drag from a protracted shutdown.
ISM Services Index Slows - NMI 54.4% for September 2013 - The September 2013 ISM Non-manufacturing report shows the overall index decreased by -4.2 percentage points, to 54.4%. The NMI is also referred to as the services index and the decrease indicates slower growth for the service sector. The business activity index dropped by -7.1 percentage points to 55.1%. Both indexes are still above June 2013 levels. The comments from survey respondents can be described as varied, yet the instability of the government is clearly throwing a monkey wrench into some service's growth projections. Some comments which stood out: "The turmoil and uncertainty of the current state of politics and the U.S. involvement overseas continues to drag on the economy Clients still unsure about the economy and business costs" - "Budgets are uncertain for fiscal year 2014, so some items requiring funding in future years are not being purchased. " Generally speaking a value above 50 for NMI indicates growth, below indicates contraction. Below are the ISM non-manufacturing indexes reprinted for a quick view.
NFIB: Small Business Optimism Index "Dips" in September - From the National Federation of Independent Business (NFIB): Small Businesses Skeptical About Future; Optimism Dips Small-business owner optimism did not “crash “ in September, but it did fall, dropping 0.20 from August’s reading of 94.1 and landing at 93.9. The largest contributing factor to the dip was the significant increase in pessimism about future business conditions, although this was somewhat offset by a notable increase in number of small-business owners expecting higher sales. Overall, four Index components improved, four fell and two remained unchanged from August. While it is premature to measure the impact of the government shut-down on the small-business sector, it’s possible that the pending “crisis” impacted economic outlook. ... Job Creation. Job creation was down in September. NFIB owners reduced employment by an average of 0.1 workers per firm in September after August’s slight gain (0.08 workers added on average) following three months of negative numbers. Small business hiring plans decreased slightly in the September survey to a reading of 9 from 10 in August (zero is neutral). This is a solid reading. In another small sign of good news, only 17% of owners reported poor sales as the top problem (lack of demand). This was down from 21% a year ago, and half the peak of 34% during the recession. During good times, small business owners usually complain about taxes and regulations - and those are now the top problems again.
Small-Business Optimism Index Slips - Confidence among small businesses remained virtually flat in September, says a report released Tuesday. The National Federation of Independent Business‘s small-business optimism index fell to 93.9 last month from a revised 94.1 in August that was first reported as 94.0. The revision to the August data reflected errors in data processing. “Our March data were plugged into the August seasonal adjustments, producing a few anomalous changes in seasonally sensitive Index components,” the NFIB said. Among the corrections, the August readings on new job creation and sales expectations were revised sharply lower, while business-condition expectations and earnings trends were revised much higher. Even after correction, “the news was not upbeat,” the report said. “It is possible that the pending ‘government shutdown’ weighed on the economic outlook,” said the report that referred to the Washington budget standoff as “a game of thrones.” The NFIB subindexes were mixed last month. The expected business conditions index plunged eight percentage points to -10% but real sales expectations improved three points to 8%. The earnings-trend index fell another two points to -23%. The labor indexes suggest little movement in either hiring or job cuts among small businesses. The job creation index fell one point to 9% while the NFIB’s subindex covering “job openings hard to fill” rose one point to 20%. The report said 11% of firms cut workers over the past three months, the third-lowest reading since October 2007. But an equally low 11% reported adding workers. On net, NFIB owners cut employment by an average of 0.1 worker per firm.
Without Services, Small Businesses Feel the Pinch - The Small Business Administration says it backs an average of $96 million in small-business lending each day. Having that financing stream frozen sets off a chain reaction of economic pain, said Anthony R. Wilkinson, who heads the National Association of Government Guaranteed Lenders, a trade group. “There are restaurants that aren’t being opened and contracts that aren’t being fulfilled,” he said. “As this drags on into Week 2, people are getting pretty worried.” The toll may not be conspicuous yet in the broader economy, but at the local level, the ripples are spreading. At many banks, direct small business lending is stalled too, because much of the Internal Revenue Service is closed, preventing lenders from checking tax information provided by applicants. Business owners are also grappling with the absence of other crucial government services, like E-Verify, the online system companies use to confirm the eligibility of prospective employees to work in the United States.
Prospect of Longer Federal Shutdown Worries Workers, Firms - Many workers and businesses, including thousands with no direct government funding, are now bracing for a stark reality: protracted financial pressure if the federal government remains closed for longer. The prospect of an extended disruption—as House Republicans' latest proposal Thursday could allow—is starting to sink in as people across the U.S. already face lost wages and profits from the nearly two-week shutdown. More than 400,000 government employees remain furloughed despite the return this week of some civilian defense and intelligence workers. Those still out of work have only a pledge from Congress to give them back pay once the government reopens. Beyond that, thousands of private-sector workers and their employers—contractors, suppliers and others that count, directly or indirectly, on federal dollars—are also wondering how they will recover from the effects of the shutdown. Many of them say they will never recoup lost money. The risk of a prolonged shutdown has brought more intense lobbying in recent days from business groups in Washington, including several representing smaller firms, in a bid to change the course of the standoff. But the GOP's latest effort—to maintain the shutdown while giving ground over the debt-ceiling battle for now—would leave countless businesses anxious about the fallout.
Why Obamacare is Good for Small Businesses - Of the countless reasons that congressional Republicans hate the Affordable Care Act enough to shut down the government, the most politically potent is the claim that it will do untold damage to the economy and cripple small companies. The G.O.P.’s case hinges on the employer mandate, which requires companies with fifty or more full-time employees to provide health insurance. Republicans argue that this will hurt companies’ profits, forcing them to stop hiring and to cut workers’ hours, in order to stay below the fifty-employee threshold. But the overwhelming majority of American businesses—ninety-six per cent—have fewer than fifty employees. . And more than ninety per cent of the companies above that threshold already offer health insurance. Only three per cent are in the zone (between forty and seventy-five employees) where the threshold will be an issue. Meanwhile, the likely benefits of Obamacare for small businesses are enormous. To begin with, it’ll make it easier for people to start their own companies—which has always been a risky proposition in the U.S., because you couldn’t be sure of finding affordable health insurance. Purely for the sake of health insurance, people stay in jobs they aren’t suited to—a phenomenon that economists call “job lock.” “With the new law, job lock goes away,” . “Anyone who wants to start a business can do so independent of the health-care costs.” Studies show that people who are freed from job lock (for instance, when they start qualifying for Medicare) are more likely to undertake something entrepreneurial, and one recent study projects that Obamacare could enable 1.5 million people to become self-employed.
Obamacare won’t be a job-killing catastrophe - Well, here’s what the law requires: All firms that employ 50 or more full-time workers — or the equivalent in part-time workers — must provide health-care coverage to all of their full-time employees. If they do not, starting in 2015 the government will assess a fine based on the number of employees the businesses have. The fear is that companies on the cusp of hiring their 50th full-time employee might hold back. Other businesses might try to cut their employees’ hours. The potential for some reduction in the availability of low-wage work is real. But mainstream economists aren’t seeing anything like the catastrophe Republicans have foretold, and they don’t anticipate a calamity, either. That is because only 3 percent of small businesses — those with fewer than 500 employees — have more than 50 workers, so 97 percent of small employers are exempt from the law’s mandates. Meanwhile, virtually all large companies already offer health insurance to their employees. Aside from things such as reporting requirements, Obamacare’s mandates will directly obligate only about 1 percent of American businesses to do anything different.
Workers Stay Put, Curbing Jobs Engine --Gridlock in Washington delayed last week's jobs report. But blame gridlock of a different kind for holding back the job market itself. . Economists expected the report to show that the pace of hiring held roughly steady at 181,000 jobs in September, but no one will know for sure until the shutdown ends. Even when the numbers are released, however, there is a strong argument that they aren't the most important gauge of the health of the labor market, at least right now. That's because the headline figure measures net growth—all the new jobs that were created in a month minus all the ones that were destroyed. By that measure, the job market is showing steady improvement. More than four years after the recession officially ended, layoffs are back below precrisis levels. New claims for jobless benefits—one of the few pieces of official data unaffected by the government shutdown—are near a six-year low. Job creation has been slow but steady: Private employers have added an average of about 190,000 jobs per month over the past year, a pace that has stayed remarkably consistent amid uneven economic growth. But focusing on net growth masks what's going on beneath the surface—or rather, what isn't going on. Workers aren't quitting their jobs to pursue better opportunities. Companies aren't filling positions when they do open up.
Weekly Initial Unemployment Claims increase sharply - The DOL reports: In the week ending October 5, the advance figure for seasonally adjusted initial claims was 374,000, an increase of 66,000 from the previous week's unrevised figure of 308,000. The 4-week moving average was 325,000, an increase of 20,000 from the previous week's unrevised average of 305,000. The previous week was unrevised at 308,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 325,000. Some of this sharp increase is related to the government shutdown.
U.S. Jobless Claims Jump to 374,000 Due to Backlog - The number of people applying for U.S. unemployment benefits jumped by 66,000 last week to a seasonally adjusted 374,000. But the spike was largely because California processed a huge backlog of claims and the partial government shutdown prompted some companies to cut jobs. The Labor Department said Thursday that the less volatile four-week average rose 20,000 to 325,000. The sharp increase in both the weekly figures and the four-week average comes after applications hovered near a 6-year low the previous week. A government spokesman said that about half the weekly increase occurred in California, where officials processed applications that were delayed several weeks by a computer upgrade. One-quarter of the increase reflected applications from employees at government contractors and other workers affected by the shutdown. Applications are a proxy for layoffs. Before last week, they had declined steadily over the past three months. That’s a sign companies are cutting fewer workers. “The broader picture is still that labor market conditions are improving, albeit not quite as much as we previously thought,” Federal workers temporarily laid off by the shutdown may also file for benefits. But their numbers are reported separately and published a week later than the other applications.
Stubborn Skills Gap in America’s Work Force - One of the few things that nearly everyone in Washington agrees on is that American workers are the best. Even the United States Chamber of Commerce — not always a worker’s best friend — asserts that, along with the nation’s entrepreneurs and companies, America’s workers “are the best in the world.” Fact is, they are not. To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind. The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening. Though we possess average literacy skills, we are far below the top performers. Twenty-two percent of Japanese adults scored in the top two of six rungs on the literacy test. Fewer than 12 percent of Americans did. We are also about average in terms of problem-solving with computers. Paradoxically, our biggest deficits are in math, the most highly valued skill in the work force. Only Italians and Spaniards performed worse.
This Week: Disposable Workers - In this week's issue, we take a close look at the booming dollar-store business, where the labor comes almost as cheap as the off-brand laundry detergent. A new dollar store opens every six hours in America. Unfortunately, the jobs they bring look to be some of the worst our economy has to offer. Dave Jamieson speaks to dollar-store workers across the country, finding that the major players in the industry -- Dollar General, Dollar Tree and Family Dollar -- have grown their businesses by squeezing all they can out of their employees. The hours are brutal, the pay is low, and workers who happen to get hurt have a way of suddenly losing their jobs. And those workers who rise to become dollar store managers too often find their lives become even more difficult as a result. Dawn Hughey, a former Dollar General employee, told Dave that dollar-store managers work up to 80 hours a week but aren't eligible for overtime pay. Many supervisors are earning close to the minimum wage, doing everything from stocking shelves to manning the cash register -- at least until they happen to get injured.
All Regions Added Private-Sector Jobs Last Month, ADP Says - Private businesses across all regions of the U.S. added workers in September, according to a survey of payrolls released Wednesday. The South Atlantic region added the largest number of private jobs at 38,000, in September, according to payroll processor Automatic Data Processing in conjunction with Moody’s Analytics. New England added the fewest number of jobs at 4,000. The ADP regional employment report released Wednesday adds geographic detail to the widely-followed ADP national tally of jobs. Last week ADP said the U.S. added 166,000 private sector jobs in September. Because the government shutdown delayed the Labor Department‘s payrolls report, the ADP number is one of the few private-sourced estimates for job growth last month. “At the state level, Florida, Texas, South Carolina, Washington State, North Carolina, Indiana, Ohio and Utah were among the best-performing U.S. states last month,” the ADP report said. The ADP regional report tracks employment within the nine geographic regions defined by the U.S. Census Bureau, as well as employment in 29 states and Washington D.C. Employment by state is determined by the location of work, not the employee’s residence.
New EPI Economic Indicator: Monthly Updates of the Number of “Missing Workers” and What the Unemployment Rate Would Be If They Were Looking for Work - More than four years since the Great Recession officially ended in June 2009, the unemployment rate stands at 7.3 percent. This is still a percentage point above the highest unemployment rate of the early 2000s downturn, 6.3 percent. However, 7.3 percent is a big improvement from the high of 10.0 percent in the fall of 2009. Unfortunately, most of that improvement was for all the wrong reasons. As part of its ongoing effort to create the metrics needed to assess how well the economy is working for America’s broad middle class, EPI is introducing its “missing workers” estimate. Our estimate shows there are currently nearly 5 million missing workers. These are workers who would be in the labor force if job opportunities were significantly expanded but, given the state of the labor market, are sidelined. Exactly how many missing workers macroeconomic policymakers believe there are has enormous implications for their assessment of the strength of the job market, and therefore for their policy decisions. For example, if they underestimate the number of missing workers, they will overstate the strength of the labor market, and be less likely to provide the economy with the support it needs. As shown in the figure below, if the nearly 5 million missing workers were looking for work and thus counted as unemployed, the unemployment rate in August would have been 10.1 percent instead of 7.3 percent.
Discouraged Workers and Unemployment - As the unemployment rate has drifted down from its peak of 10% in October 2009 to its current level at 7.3%, a number of commenters have noted that the labor force participation rate has also been falling, from about 66% in late 2007 before the start of the recession to a current level of around 63.2%. Thus, is the drop in the unemployment rate nothing more than a drop in the share of adults seeking to participate in the labor market in the first place? More specifically, what do the statistics tell us about whether those who are outside the labor force are seeking to work?Just to be clear on the basics, the unemployment rate is calculated as part of the Current Population Survey, which defines unemployment in this way: "Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed. Receiving benefits from the Unemployment Insurance (UI) program has no bearing on whether a person is classified as unemployed." The same survey asks people who are not in the labor market various questions, and divides them up into categories. As of August 2013, there were about 90 million adults not in the labor force. However, many of them were out of the labor force by choice: for example, they were retired, or full-time students, or spouses staying home with children. The survey asks those who are out of the labor force if they want a job, and in August 2013, about 6.3 million answered "yes." Here's a graph from the Bureau of Labor Statistics website showing the number of those out of the labor force who tell the survey that they want a job. The number has clearly risen substantially, by about 2 million, since the start of the recession in 2007. However, it's interesting to note that the total of those out of the labor force who want a job is not that different now than it was back in 1994, in the aftermath of the 1990-91 recession and before the dot-com boom of the mid- and late 1990s had taken hold.
Strong Enough for a Man, Effective Enough For A Woman - Senator Kirsten Gillibrand (D-N.Y.) has emerged as a leader within the Senate on what are commonly regarded as “women's issues:” everything from sexual assault in the military to preserving funding for Planned Parenthood. But in unveiling her five-point family and economic policy plan at the Center for American Progress on September 27 in Washington, D.C., Gillibrand stressed that almost every part of the plan applies to all workers, not just women. Ensuring families have access to quality child care, family leave, decent (and equitable) wages and pre-kindergarten education would benefit a large portion of the workforce. Talking about family policy can be a double-edged sword. Gillibrand hasn't shied away from issues of particular concern to women—she told one reporter, “Sometimes people say, 'Well, why do you just focus on women's issues?' Well, why do you focus on issues that pertain to 52 percent of the population? It's pretty important.” And yet to assume that family policy is only a woman's issue is to accept the stereotype that caring for children and family members is women's work, not men's, and to allow people to write it off as something that just pertains to the ladies. Even though, as Gillibrand pointed out in her speech, only a fifth of American households have the 50s model of a male breadwinner and a stay-at-home mother, U.S. family policy acts as though they all do—and women continue to do a disproportionate share of the caring work. We haven't kept up with other countries when it comes to family policy, especially paid family leave. And as I wrote recently, true gender equality requires good family policy that encourages an equitable distribution of labor, both at the office and in the home.
Growing Divide Between Young People Able to Go It Alone and Those Who Live at Home -- The gap between America’s best-off and worst-off is widening—and driving a wedge between young people with the resources to strike out on their own and those for whom living with family or friends has become, at least for now, an economic necessity. The odds that a young adult in the U.S. will become the head of a household, whether as an owner or renter, has fallen more between 1990 and 2010 than in previous decades, accelerating a trend that began with the Baby Boomers, according to an analysis of Census Bureau data by Emily Rosenbaum, a demographer at Fordham University.At the same time, more young people are living with their parents, despite the gradual improvement of the economy. As the Journal noted in August, 13.6% of Americans ages 25 to 34 were living with their parents in 2012, up very slightly from 13.4% in 2011. “Income inequality is affecting young adults’ ability to become independent,” The result, she argues, is a “growing divide between those young adults with the means to establish and sustain independent living arrangements, and those without such resources.” The findings show how growing income inequality in the U.S., exacerbated by the 2007-2009 recession, is reshaping the fabric of American society. Fewer young people renting or buying homes also has big implications for the nation’s housing market and economy. The best-off 20% of Americans received 51% of the nation’s overall household income last year, up from 47% in 1992 and 44% in 1972. America’s worst-off 20%, by contrast, took home 3.2% in 2012, compared with 3.8% 20 years earlier and 4.1% 20 years before that.
5 Years After the Crisis: Why the Income Gap Is Widening - Recent U.S. income inequality data published by economists Emmanuel Saez and Thomas Piketty show that the top 1 percent of households by income has captured a staggering 95 percent of total income gains between 2009 and 2012, compared with 68 percent of gains between 1993 and 2012. Rather than sharing in the gains, the bottom 90 percent of households have seen income fall steeply – by an amount equivalent to 16 percent of all the income gains between 2009 and 2012. By comparison, between 1993 and 2012, the bottom 90 percent lost income equivalent to 5 percent of gains. In other words, the vast majority of households have been falling behind even faster than before. Income gains have accrued almost exclusively to the very top of the income distribution, while the broad middle class and lower-income households are losing ground. At the broadest level, rising income inequality essentially reflects an increase in compensation going to the top 1 percent, coming at the expense of other worker’s paychecks. A large part of the story is the rise in investment income (capital gains, dividends and business income) as a share of national income, as productivity gains and profits are increasingly passed on to shareholders. And shareholders’ gains come at the expense of workers—a declining share of income has been going to labor (wages and salaries). Investment income accrues overwhelmingly to households at the very top of the income distribution, while the vast majority of households overwhelmingly derive their income from labor.
Getting Older, Growing Poorer - At last count, 46.5 million people were poor — 15 percent of the population. Women and children, especially in single-mother families, were, as always, hit hardest. Another group, people 65 and older, now seems vulnerable as well. In analyzing the recent Census Bureau report on poverty, researchers at the National Women’s Law Center found that from 2011 to 2012, the rate of extreme poverty rose by a statistically significant amount among those 65 and older, meaning that a growing number of them were living at or below 50 percent of the poverty line. In 2012, this was $11,011 a year for an older person living alone. An additional 135,000 older women became extremely poor in 2012, raising the extreme-poverty rate in that group to 3.1 percent, And 100,000 older men were extremely poor in 2012, raising the extreme-poverty rate in that group to 2.3 percent In all, nearly 1.2 million people age 65 and up were classified as extremely poor in 2012. The increase in extreme poverty requires utmost attention. For the most part, Social Security has protected older Americans from poverty. In cases where older people are poor, the afflicted often have been very old women, who have long outlived their spouses and any nest egg. In the law center’s research, however, the increase in extreme poverty was concentrated in the 65-to-75 age group. Some of them could be among the long-term unemployed, whose jobless benefits have been cut or run out. Or they might be people who would generally qualify for public assistance in addition to Social Security but are having trouble getting those benefits in the face of administrative cutbacks at the state and federal levels.
Why Isn't Poverty Falling? Weakening of Unemployment Insurance Is a Pivotal Factor - The poverty rate remained unchanged at a high 15.0 percent in 2012, the third full year of an economic recovery that officially began in June 2009. One key reason why poverty has remained virtually frozen despite continued economic growth is the weakening of unemployment insurance (UI). If UI had not become less effective at reducing poverty among unemployed workers between 2010 and 2012, the poverty rate would have fallen over that period to 14.7 percent, CBPP calculations show. UI benefits kept 1.7 million above the poverty line in 2012... This was 600,000 fewer than in 2011 and 1.5 million fewer than in 2010. (see Figure 1). To be sure, the decline partly reflects a positive development: fewer workers are unemployed, so fewer are eligible for UI benefits. But that explains only a small part of the decline. ...The chief reason for the decline is the dwindling likelihood that an unemployed worker will receive UI. The number of UI recipients for every 100 unemployed workers fell from 67 in 2010 to 57 in 2011 and 48 in 2012.In fact, while the number of jobless workers has been falling, the number of jobless workers who receive no UI benefits has been rising and is higher now than at the bottom of the recession in 2009
Why a war on poor people? - American conservatives for the past several decades have shown a remarkable hostility to poor people in our country. The recent effort to slash the SNAP food stamp program in the House (link); the astounding refusal of 26 Republican governors to expand Medicaid coverage in their states -- depriving millions of poor people from access to Medicaid health coverage (link); and the general legislative indifference to a rising poverty rate in the United States -- all this suggests something beyond ideology or neglect. The indifference to low-income and uninsured people in their states of conservative governors and legislators in Texas, Florida, and other states is almost incomprehensible. In total, 26 states have rejected the expansion, including the state of Mississippi, which has the highest rate of uninsured poor people in the country. Sixty-eight percent of uninsured single mothers live in the states that rejected the expansion, as do 60 percent of the nation’s uninsured working poor. (link) These attitudes and legislative efforts didn't begin yesterday. They extend back at least to the Reagan administration in the early 1980s. Here is Lou Cannon describing the Reagan years and the Reagan administration's attitude towards poverty: Despite the sea of happy children’s faces that graced the “feel-good” commercials, poverty exploded in the inner cities of America during the Reagan years, claiming children as its principal victims. The reason for this suffering was that programs targeted to low-income families, such as AFDC, were cut back far more than programs such as Social Security.
The War On The Poor Is A War On You-Know-Who - Paul Krugman - Lots of people have been referencing this Democracy Corps report on focus-group meetings with Republicans, and with good reason: Greenberg has basically provided a unified theory of the craziness that has enveloped American politics in the last few years.What the report makes clear is that the current Republican obsession with attacking programs that benefit Americans in need, ranging from food stamps to Obamacare, isn’t about some philosophical commitment to small government, still less worries about incentive effects and implicit marginal tax rates. It’s about anxiety over a changing America — the multiracial, multicultural society we’re becoming — and anger that Democrats are taking Their Money and giving it to Those People. In other words, it’s still race after all these years. One irony here is that at this point it’s the liberals who believe in America, while the conservatives don’t. I believe in our ability to change while retaining our essential nature; I believe that today’s immigrants will be incorporated into the fabric of our society, just as Italian and Jewish immigrants — once regarded as fundamentally incompatible with American ways — became “white” by the middle of the 20th century. Another irony is that the great right-wing fear — that social insurance programs will in effect buy minority votes for Democrats, leading to further change — is becoming a self-fulfilling prophecy. The GOP could have tried to reach out to immigrants, moderate its stances on Obamacare, and stake out a position as the restrained, sensible party. Instead, it’s alienating all the people it needs to win over, and quite possibly setting the stage for the very liberal dominance it fears.
Unpaid Intern Is Ruled Not an ‘Employee,’ Not Protected From Sexual Harassment - There’s plenty for unpaid interns to complain about—mainly, the lack of money—but apparently it gets worse. Because they’re not paid and don’t receive remuneration such as pension and life insurance, interns don’t always count as employees, which means they’re not always entitled to certain employee protections. For one former unpaid broadcasting intern at Phoenix Satellite Television U.S., that means not being able to bring a sexual harassment claim against her former supervisor, according to a Bloomberg BNA report. The intern alleging harassment, Lihuan Wang, filed a suit against Phoenix in January. The U.S. District Court for the Southern District of New York found that because Wang was an unpaid intern, not an employee, she could not bring a claim under the New York City Human Rights Law. This discrepancy’s not new: Unpaid interns aren’t covered by Title VII of the 1964 Civil Rights Act, and while local laws can protect them, New York’s state and city laws do not.
Disability, USA (60 Minutes video)
CBS News 60 Minutes Joins the Disability Bashing Bandwagon - It looks like CBS News can no longer afford to do their own news reporting so they are picking up material from other sources. There seems no other way to explain the piece it ran last night on the Social Security disability program on Sixty Minutes which is best described as a spinoff of an earlier This American Life piece. The remarkable aspect of this story is that it completely ignored all the comments from experts in the field in response to the This American Life piece pointing out that fraud is in fact not rampant in the disability program (e.g. here and here). There were any number of experts who could have been interviewed on this topic to counterbalance the views of a far-right senator who is best known as a denier of global warming (Tom Coburn). But Sixty Minutes apparently could not be bothered to present a more balanced picture of the disability program. The basic fact, which may be painful for CBS News and Sixty Minutes, is that it is not easy to get on Social Security disability. Close to three quarters of applicants are turned down initially and even after appeal, 60 percent of applicants are denied benefits. If Sixty Minutes was actually interested in the incidence of fraudulent claims it might have turned to the authors of a University of Michigan study. This study identified a group of applicants who it considered marginal since they might be either approved or turned down, depending on the hearing officer who dealt with their case. Of this group (which comprised 23 percent of all applicants), 28 percent were working two years later if they were turned down. Furthermore, the portion of this marginal group who were working after four years had fallen to just 16 percent. Their earnings averaged just 25-50 percent of their earnings in the years before they filed for disability. This hardly suggests widespread fraud.
Welfare Isn’t Too Generous—Wages Are Too Low - NPR recently published a story that gives undue credence to a Cato Institute study lamenting the generosity of US safety net programs. An important part of Cato’s assertion is that these programs offer a higher level of income than do many low-wage jobs. The real problem here is that wages for the vast majority of Americans are too low, and haven’t kept up with the increased productivity of the labor force. When the study was first released, we pointed out some of the problems with their analysis. Here’s a quick summary of why their study was so misleading: The Cato Institute recently released a wildly misleading report which essentially claims that what low-wage workers and their families can expect to receive from “welfare” dwarfs the wages they can expect from working. Using state-level figures, their paper implies that single mothers with two children are living pretty well relying just on government assistance, with Cato’s “total welfare benefit package” ranging from $16,984 in Mississippi to $49,175 in Hawaii. . Tanner and Hughes find that welfare benefits exceed what a minimum wage job would provide in 35 states, and suggest that welfare pays more than the salary for a first year teacher or the starting wage for a secretary in many states. So what makes this so misleading? For one, Tanner and Hughes make the assumption that these families receive simultaneous assistance from all of the following programs: Temporary Assistance for Needy Families (TANF), Supplement Nutrition Assistance Program (SNAP), Medicaid, Housing Assistance Payments, Low Income Home Energy Assistance Program (LIHEAP), Women, Infants, and Children Program (WIC), and The Emergency Food Assistance Program (TEFAP). But it’s absurd to assume that someone would receive every one of these benefits, simultaneously, and it ignores the fact that some programs have time limits.
Majority of US executions stem from 2 percent of counties, study finds - More than half of all executions carried out in the U.S. stem from cases in just two percent of counties, yet taxpayers nationwide have shouldered the estimated $25 billion cost of death row sentences since 1973, a new study found.Death sentences are at their lowest level in four decades – 85 percent of all counties have not had a single person executed in more than 45 years according to the study – but criminal offenders in the states of California, Texas, Oklahoma and Florida have a disproportionate chance of ending up on death row, with a small number of counties responsible for a majority of death penalty sentences across the country. Research also revealed that just 62 of the 3,143 counties in the U.S. were responsible for 52% of all death row inmates executed since 1976.The authors of the study say the results dispel the view that the death penalty is widely practiced across the U.S. and that the use of execution is well supported.The South accounts for more than 80 percent of executions, with Texas leading the fray at 38 percent. But even within these states, great internal disparities exist.
Vital Signs: City Budgets on the Mend - The National League of Cities reports that 72% of city finance officers say their cities are better able to meet fiscal needs this year than in 2012. Back in 2009, only 12% of finance officers thought that. The positive response rate is the highest percentage since 2000. Cities had to cut spending sharply during the recession. Since then, progress has come on both sides of the ledger. Sales and income taxes have picked up, and the financiers report that the steep declines in property taxes—the result of the collapse in property values—is receding. Cities have also increased fees charged for public services. On the 2013 spending side, about one-third of cities reduced the size of the municipal workforce in order to cut total expenditures. Other personnel-related cuts included a hiring freeze, reduced healthcare benefits or reduced pension benefits.
Cities Have Made Hard Choices Federal Government Keeps Putting Off -- While Washington politicians continue to dither about federal finances, city officials have already made some hard fiscal decisions. Consequently, after years of pain, city finances look healthier than Uncle Sam’s. According to the city fiscal report released Thursday by the National League of Cities, 72% of local finance officers say their cities are better able to meet their fiscal needs in 2013 than they were in 2012. The percentage has been rising since hitting 12% in 2009 and is the highest since 2000, when a strong economy meant both federal and local finances were doing well. How much has changed since then. Washington leaders continue to argue about future trends in spending and taxes in order to reduce the federal budget. The NLC survey shows city officials have already cut spending and looked for more revenue sources in order to balance their budgets as is typically required by law. State leaders have also had to make difficult choices. Certainly, a reviving economy has helped public coffers. According to the NLC survey, city sales tax and local income tax revenues increased last year and are expected to expand further this year. Cities also raised fees charged for services. Property taxes–the bulk of general revenues for most municipalities–are still weak, but are no longer plunging as they did after the housing bust. Cities also laid off workers and cut back entitlements such as healthcare costs and pensions. While many cities, most notably Detroit, still face more pain, the sector as a whole should contribute to U.S. economic growth in coming quarters, as long as the recovery stays in place.
Detroiters Living Amid Ruins Resist Moving as City Reorganizes - Detroit, which filed the largest U.S. municipal bankruptcy on July 18, has almost 150,000 vacant parcels and 700,000 people on 139 square miles (360 square kilometers) after losing more than half its population since the 1950s. Planners envision farms and other nonresidential uses for empty land, and creating population-dense areas where it’s easier to offer services. Yet residents such as Wafer have kept gracious homes, put down roots and don’t want to move. The Motor City is considering incentives, such as those New Orleans used after Hurricane Katrina, to encourage people to relocate rather than forcing them to. It’s among the many challenges of creating functional neighborhoods in what was once the fourth-largest U.S. city, one that since March has been run by a state-appointed emergency manager. Avant Garde While U.S. cities such as Boston and Pittsburgh redeveloped after depopulation, Detroit’s situation is more similar to migration from East German cities including Leipzig and Dresden after the fall of the Berlin Wall, “We’ve obviously never done anything of this scale in the United States,”
Billions in Debt, Detroit Faces Millions in Bills for Bankruptcy - Even as it wrestles with the $18 billion of debt that has overwhelmed it, Detroit has already been billed more than $19.1 million by firms hired to sort through that debt, search for ways to restructure it, and now guide the city through court. That does not include more costs that the city is expected to bear for the support staff for its state-appointed emergency manager, and for another set of lawyers and consultants to represent city retirees. “It’s just ridiculous,” . “The only thing that’s getting done is that these people are getting paid big-time while the citizens of Detroit are getting ripped off.” The uncharted scale of Detroit’s bankruptcy — it is the largest municipal bankruptcy filing in the nation’s history in terms of both the city’s population and its debt — suggests that it may also become the costliest, experts say. City officials offer no estimate for a final tab, but some bankruptcy experts say the collapse could ultimately cost Detroit taxpayers as much as $100 million. As of last week, 15 firms had contracts with the city that could total as much as $60.6 million, city records show. Some lawyers and other consultants are accepting discounted fees, and a fee examiner has been appointed to ensure that bills stay within reason. Still, the soaring costs are a jolt to retirees and creditors bracing for cuts to payments they once expected. Some lawyers from the firm Jones Day, which charged the city $3.6 million for four months of work this year, bill for as much as $1,000 an hour, documents filed with the city show.
Worsening Debt Crisis Threatens Puerto Rico - While Detroit has preoccupied Americans with its record-breaking municipal bankruptcy, another public finance crisis on a potentially greater scale has been developing off most Americans’ radar screens, in Puerto Rico. Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable in the long run. The biggest concern is that the territory, which has bonds that are widely held by mutual funds, will need some sort of federal lifeline, an action for which there is no precedent. In a meeting with bond analysts in New York on Monday, the president of the Puerto Rican Senate, Eduardo Bhatia, said officials in the United States Treasury and White House had been analyzing the situation carefully, “wondering how they can help Puerto Rico send a very strong signal of stability right now.” “We are waiting for some sort of an announcement from the Treasury and the White House,” he said without clarification. He also complained that analysts and investors did not appreciate the tough austerity measures that Puerto Rico pushed through in recent months. Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.
Puerto Rico Yields Above Venezuela’s in Worst Rout: Muni Credit - Puerto Rico’s borrowing costs are at a record high as the self-governing commonwealth’s revenue trails forecasts, calling into question the island’s ability to tackle a debt load greater than that of all but two U.S. states. Investors in the $3.7 trillion municipal market are punishing Puerto Rico even after the nine-month-old administration of Governor Alejandro Garcia Padilla boosted pension contributions and raised taxes to keep the territory’s obligations from being cut to junk. His challenge is compounded by a shrinking local economy. The island’s financial health is a concern for the U.S. fixed-income market because about 77 percent of municipal-bond mutual funds hold Puerto Rico debt, which is tax-exempt nationwide, according to Morningstar Inc. The commonwealth of 3.7 million people has about $58 billion of gross tax-supported debt, trailing only California and New York, Moody’s Investors Service data show.
$10 Million Gift to Help Head Start Through Shutdown - A wealthy Houston couple have donated $10 million to Head Start to keep its programs running through this month despite the government shutdown. John and Laura Arnold, who made billions in a hedge fund founded by Mr. Arnold, gave the money to the National Head Start Association. Head Start, the government-financed program that provides meals, medical screenings and preschool training for nearly a million children from low-income families, has been facing severe shortages because of the stalemate over federal funding in Washington. Programs serving about 7,200 children were awaiting grants that would normally have been issued Oct. 1. In announcing their gift, the Arnolds expressed frustration at the shutdown. “Our representatives’ inability to resolve their differences has caused severe disruptions in the lives of many low-income Americans,” they said. “We believe that it is especially unfair that young children from underprivileged communities and working families pay the price for the legislature’s collective failures.” The money will go directly to programs in six states — Alabama, Connecticut, Florida, Georgia, South Carolina and Mississippi — that have closed for lack of funding or are about to run out of money.
All Students In The Dallas School District Will Now Get Free Meals - Dallas and Boston are the latest to participate in a national program called “Community Eligibility Option” that waives meal fees for all students. Atlanta, Detroit, Chicago, and parts of New York City are also implementing it. Yet across the country just half of the students who are eligible for free breakfast receive it.The ability to opt into free meals for all students comes at a time when many are going hungry. All told, more than one in five children lack steady access to food, and that problem shows up at school. Three-quarters of the country’s teachers say they have students who routinely come to class hungry. Half of them say hunger is a serious problem in their classrooms. Yet hunger has a huge impact on students’ academics. Students who struggle with hunger fall quickly behind their classmates. If 70 percent of the children who are eligible for free breakfasts actually received them, 3.2 million students would achieve higher test scores, there would be 4.8 million fewer absences, and 807,000 more students would graduate high school. Hunger also leaves them far more susceptible to mental illness, a more significant factor that poverty or the education level of their families.
Why do public school teachers send their own children to private schools at a rate 2X the national average? - In his latest weekly column, economist and GMU professor Walter E. Williams presents these facts about where various groups of parents send their own children – private or public schools:
- General public: Nationally, 11% of all parents enroll their children in private schools, and 89% of American students attend public schools.
- Public School Teachers: Nationally, more than 20% of public school teachers with school-age children enroll them in private schools, or almost twice the 11% rate for the general public.
Walter concludes that:The fact that so many public school teachers enroll their own children in private schools ought to raise questions. After all, what would you think, after having accepted a dinner invitation, if you discovered that the owner, chef, waiters and busboys at the restaurant to which you were being taken don’t eat there? That would suggest they have some inside information from which you might benefit.
Financial Literacy, Beyond the Classroom - EVEN if we grade on a very generous curve, many Americans flunk when it comes to financial literacy. Consider this three-item quiz:
- • Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have if you left the money to grow? More than $102, exactly $102 or less than $102?
- • Imagine that the interest rate on your savings account was 1 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money?
- • Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”?
Anyone with even a basic understanding of compound interest, inflation and diversification should know that the answers to these questions are “more than,” “less than” and “false.” Yet in a survey of Americans over age 50 conducted by the economists Annamaria Lusardi of George Washington University and Olivia S. Mitchell of the Wharton School of the University of Pennsylvania, only a third could answer all three questions correctly.
How Do U.S. Reading and Math Skills Compare to Other Countries? - Workers in Spain and Italy were the least skilled among the 24 developed countries surveyed by the OECD for proficiency in literacy and numeracy. See rankings for the percentage of adults, age 16-65, scoring above average on the two measures in the study. Click for interactive graphic.
US adults score below average on worldwide test— It's long been known that America's school kids haven't measured well compared with international peers. Now, there's a new twist: Adults don't either. In math, reading and problem-solving using technology — all skills considered critical for global competitiveness and economic strength — American adults scored below the international average on a global test, according to results released Tuesday. Adults in Japan, Canada, Australia, Finland and multiple other countries scored significantly higher than the United States in all three areas on the test. Beyond basic reading and math, respondents were tested on activities such as calculating mileage reimbursement due to a salesman, sorting email and comparing food expiration dates on grocery store tags. Not only did Americans score poorly compared to many international competitors, the findings reinforced just how large the gap is between the nation's high- and low-skilled workers and how hard it is to move ahead when your parents haven't. In both reading and math, for example, those with college-educated parents did better than those whose parents did not complete high school. The study, called the Program for the International Assessment of Adult Competencies, found that it was easier on average to overcome this and other barriers to literacy overseas than in the United States
U.S. Adults Fare Poorly in a Study of Skills - American adults lag well behind their counterparts in most other developed countries in the mathematical and technical skills needed for a modern workplace, according to a study released Tuesday. The study, perhaps the most detailed of its kind, shows that the well-documented pattern of several other countries surging past the United States in students’ test scores and young people’s college graduation rates corresponds to a skills gap, extending far beyond school. In the United States, young adults in particular fare poorly compared with their international competitors of the same ages — not just in math and technology, but also in literacy. More surprisingly, even middle-aged Americans — who, on paper, are among the best-educated people of their generation anywhere in the world — are barely better than middle of the pack in skills. The organizers assessed skills in literacy and facility with basic math, or numeracy, in all 23 countries. In 19 countries, there was a third assessment, called “problem-solving in technology-rich environments,” on using digital devices to find and evaluate information, communicate, and perform common tasks. In all three fields, Japan ranked first and Finland second in average scores, with the Netherlands, Sweden and Norway near the top. Spain, Italy and France were at or near the bottom in literacy and numeracy, and were not included in the technology assessment. The United States ranked near the middle in literacy and near the bottom in skill with numbers and technology. In number skills, just 9 percent of Americans scored in the top two of five proficiency levels, compared with a 23-country average of 12 percent, and 19 percent in Finland, Japan and Sweden.
It's Official: American Adults Are Dumber Than Average - The study is called the Program for the International Assessment of Adult Competencies and it tested 166,000 people aged 16 to 65 in more than 20 countries. It found that in math, reading and problem solving, American adults scored below the international average.I can’t say this is surprising, after all, the public allowed the big banks that destroyed the economy to gift themselves trillions in the aftermath of the financial crisis with barely a peep in response. You don’t have to be a problem solving genius to figure that one out. Finally, there is some proof behind our long-held suspicions. From the Associated Press via the New York Post: It’s long been known that America’s school kids haven’t measured well compared with international peers. Now, there’s a new twist: Adults don’t either. In math, reading and problem-solving using technology – all skills considered critical for global competitiveness and economic strength – American adults scored below the international average on a global test, according to results released Tuesday. Adults in Japan, Canada, Australia, Finland and multiple other countries scored significantly higher than the United States in all three areas on the test. Beyond basic reading and math, respondents were tested on activities such as calculating mileage reimbursement due to a salesman, sorting email and comparing food expiration dates on grocery store tags.
The Central Issue at the Heart of America's Growing Education Gap - As the evidence mounts discrediting much of the movement for “education reform” (including the proliferation of charter schools), and as more of the public discourse recognizes the power of that evidence, we may at last be poised for a thorough rethinking education reform – and a detailed consideration of what the plausible alternatives to our current efforts might be. Broadly, new ways of thinking about public education must occur before the U.S. can fulfill its obligation to the promise of universal public schools. We must first understand that:
- We have failed public education; public education has not failed us.
- Education has never, cannot, and will never be a singular or primary mechanism for driving large social change.
- And, thus, public education holds up a mirror to the social dynamics defining the U.S. In other words, achievement gaps in our schools are metrics reflecting the equity and opportunity gaps that exist in society.
One aspect of these new ways of thinking about public education that is rarely discussed is that seeking laudable goals (such as closing the achievement gap in schools and the income and upward mobility gaps in society) requires that we address both privilege and poverty—the top and the bottom. Historically and currently, our gaze remains almost exclusively on the bottom.
Higher Education and the Opportunity Gap - America faces an opportunity gap. Those born in the bottom ranks have difficulty moving up. Although the United States has long thought of itself as a meritocracy, a place where anyone who gets an education and works hard can make it, the facts tell a somewhat different story. Children born into the top fifth of the income distribution have about twice as much of a chance of becoming middle class or better in their adult years as those born into the bottom fifth. One way that lower-income children can beat the odds is by getting a college degree. Those who complete four-year degrees have a much better chance of becoming middle class than those who don’t — although still not as good of a chance as their more affluent peers. But the even bigger problem is that few actually manage to get the degree. Moreover, the link between parental income and college-going has increased in recent decades In short, higher education is not the kind of mobility-enhancing vehicle that it could be. The obvious solution would seem to be this: First, encourage more low-income children to go to college; and second, finance their education in order to narrow the opportunity gap — a strategy that policymakers have been pursuing for the past few decades. This prescription is fine as far as it goes, and indeed some success has been achieved in both motivating the less advantaged to aspire to college and in providing the financial assistance enabling them to do so. Most high school graduates say that they plan on getting a degree, and spending on Pell grants has risen sharply in recent years, even as deficits have constrained other types of spending.
Online Education and the Tivo Revolution- Here’s a TV schedule from 1963. If you wanted to watch Hootenanny you needed to be in front of the television on Saturday night between 7:30 and 8:30 pm. Have something else to do that night? Too bad. No pause or rewind either. Here’s a college class schedule from 2010 If you want to learn Accounting with Ms. Gettler you need to be in class on Mondays and Wednesdays between 11:25 am and 12:50 pm (bring your lunch). If you need another class that’s scheduled at the same time, too bad. No pause or rewind either. A TV Guide looks quaint. Tivo has liberated us from the dictates of the networks. Today we can get entertainment on demand. Next up, education on demand.
Fair Market Valuation; CBO, Student Loans, Food Stamps, Etc. - Earlier in 2013, CBO’s Douglas Elmendorf’s forecasted return on Student Loan’s resulting in a positive return for the Government. Later Elmendorf reversed the forecast claiming student loans would cost the government and the taxpayers by generating a negative return. Using one cost model (FCRA) to estimate the return, the government will make $184 billion on student loans in the next 10 years. Using another cost model (Fair Market Valuation ) to estimate return, the government will lose $95 billion over the same period. So why the difference? Utilizing the Fair Market Valuation methodology would necessitate additional compensation for investors to accept the risk that losses may exceed those already reflected in the cash flows. A premium for the possibility that debtors will default in large numbers is added into the calculation. Wait a minute, these are students locked in by signature to these loans which can not be discharged through bankruptcy. So why? I happened upon a New America Foundation article by a former senior analyst in the Republican staff of the U.S. Senate Budget Committee Jason Delisle, who proclaims much the same as the CBO’s Douglas Elmendorf positing the Fair Market Valuation methodology being a fairer and more accurate way to assign risk to student loans. Beneath Jason’s article and within the comments section associated with the article by Jason were comments by Alan Collinge of the Student Loan Justice Org disputing Jason’s assumptions on Fair Market Valuation (The New America Foundation agreed to a discussion with Alan and reneged. Alan has gone unanswered by Jason and The New America Foundation). Alan’s argument is the Fair Market Valuation methodology uses the less abundant commercial data to evaluate the return on student loans as opposed to the more readily available and abundant Department of Education student loan data (which has been used in the past by the CBO). The difference between the two databases is the Fair Market Valuation uses commercial loan data reflecting riskier loans than what occurs from the Federal Direct Loans program.
Reasons Why Student Loan Debts Are Only Increasing - It used to be that government was helpful to a person who wanted a college education. In fact, as early as the mid-1940s, the U.S. Government all but pushed high school students as well as war veterans into higher education, particularly with the offering of incentives such as the G.I. bill. However, these days, even with a president who maintains the middle class cannot be priced out of an education, the American student has become more of a pawn in a political tug-of-war of sequestration and cuts in offerings such as Pell Grants. This translates into the projected interest rate rise of government-provided student loans from their current 3.86 percent to as high as 8.8 percent in five years, most of this due to a student-loan system that has allowed both state run and private learning institutions go unchecked as tuition rises to higher and higher levels. Some have even gone as far as to say both the government and the learning institutions are in cahoots when it comes to tuition rates, this due to the fact that with the higher cost of education, the more money the government lends to students. In the end, both sides win with the government potentially netting in a projected $184 billion in the next ten years. Speaking of tuition, it’s hardly imaginable that tuition rates are the one instance in the American economy that has outpaced health care costs, mortgage rates, and even Wall Street. But Moody’s claims that since 1990, college tuition has risen on average over 300 percent versus the Consumer Index, regardless if the institutions are private or state run.What’s more troublesome, particularly with state-run colleges, is that with their tuition increases, they have also undergone budget cuts. All-in-all, this makes for a truly lopsided circumstance, where the student is getting less for more toward their degree.
A $1000 per month pension equals $300,000 in savings - Too much recent travel, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) “revolution” was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion. Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the “rule” that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.The flip side of that rule, which I haven’t seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings (in terms of retirement income), as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example.This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.
A look at pension problems, solutions in US cities - Bigger and bigger pension costs were draining the city's general fund until a new law helped the city to set aside more assets for future benefits. The city also created a new plan providing less generous benefits for new police and fire employees.
- CHICAGO: The city's four pension funds were 36 percent funded as of Dec. 31, 2012, and had an unfunded liability of $19.5 billion. The city estimates that without changes, its required contribution to the funds will grow from $479.5 million in 2013 to $1.087 billion in 2015 and to $1.26 billion by 2020.
- NEW YORK: Changes to the pension system mean new workers will contribute a greater amount toward their own pension, and many workers will no longer be able to use overtime hours in the calculations of pension amounts.
- OMAHA, Neb.: The city has nearly $800 million in unfunded pension liabilities, mostly because of shortfalls in the police and fire fund.. The city hopes to fully fund its pension system by 2055.
- PHILADELPHIA: The city's unfunded pension liability was $5 billion as of March _ and the amount it must set aside each year has doubled in the last decade.
- PORTLAND, Ore.: A big chunk of Portland's pension system is supported by a dedicated property tax. This unusual arrangement ensures that the retirement system doesn't strain the city's day-to-day revenues.
- PROVIDENCE, R.I.: With the city on the brink of bankruptcy, the mayor negotiated concessions with unions and retirees to reduce its unfunded liability of more than $900 million by nearly $180 million
Social Security Warns Benefits Could Get Cut - The Social Security Administration has begun warning the public it cannot guarantee full benefit payments if the debt ceiling isn’t increased. When asked by the public, the agency is notifying beneficiaries that “Unlike a federal shutdown which has no impact on the payment of Social Security benefits, failure to raise the debt ceiling puts Social Security benefits at risk,” according to a person familiar with the agency directive. The warning was assembled after the agency consulted with the Treasury Department, which would play a lead role in determining how the government handles payments if the borrowing limit isn’t raised soon. “Our employees started receiving questions from the public, so the agency worked with Treasury to provide an answer they could use when asked about the debt ceiling by the public,” a Social Security Administration spokesman said.
Health Act Embraced in California - And as the exchange, known as Covered California, has begun the painstaking effort to enroll potential customers in the subsidized insurance plans or expanded Medicaid, the public outreach effort here can seem akin to a huge political campaign. The state is spending $94 million to help local health clinics, community groups and labor unions reach residents — many who have lived without health insurance for years — and have them complete the often bewildering process of signing up for coverage. “It’s going to take a little bit of everyone doing a lot of different things to get this all together,” said Lisa Hubbard, a director at St. John’s Well Child and Family Clinic in South Los Angeles, which has one of the highest rates of uninsured in the country. “We’re really going to have to try anything and everything.” The Obama administration is heavily invested in California’s success. It has poured more than $910 million into the effort because California’s uninsured represent an estimated 15 percent of those without insurance nationwide. The state and federal efforts here are yielding results. More than 16,000 applications were completed in the first five days, state officials said, covering more than 29,000 people. An additional 27,000 people have begun filling out applications, numbers that “blew the socks off” initial expectations, said Peter Lee, the executive director of Covered California. While the state initially resisted releasing preliminary numbers, Mr. Lee said officials now planned to provide weekly enrollment updates in an effort to counter the “continued drumbeat of doubters and misinformation.”
The Color of Affordable Care - Shortly after House Republicans shut down the federal government in an effort to halt implementation of the Affordable Care Act, Sabrina Tavernise and Robert Gebeloff of The New York Times reported that many Republican-controlled states have already strangled an important feature of the legislation by denying extension of Medicaid eligibility to the working poor. Since the federal government committed to shouldering most of the cost of such extensions, the officials running these states seem to be cutting off their own noses to spite their faces. Then again, perhaps the noses they are cutting off are not their own.Neither Republican officials nor their most valuable constituencies need help paying for health insurance. When they say they oppose government spending what they really mean is that they oppose spending on programs like Medicaid that – unlike universal programs such as Social Security – target low-income families.The disparate racial impact is striking: 68 percent of poor and uninsured blacks live in states that are not extending eligibility, compared with 58 percent of poor and uninsured persons in other racial categories. The concentration of negative effects in Southern states that also represent the stronghold of Congressional opposition to the law itself is not surprising. This episode of political history fits neatly into an established line of research that shows how federal efforts to extend protections to the disadvantaged have repeatedly fallen prey to a toxic blend of racial and regional politics. From civil rights to health insurance, white political leaders from states with large numbers of African-Americans — especially but not exclusively in the South — have cast new federal protections in apocalyptic terms and mounted a powerful opposition.
Some families left out in the cold by Obamacare - Obamacare is designed to make health care affordable for everyone, but several million families could get caught in a loophole in the law that leaves them out in the cold. Those families will find themselves ineligible for Obamacare subsidies to buy their own insurance on the state-based exchanges, even though their coverage at work is considered unaffordable. That's because the way the Affordable Care Act is written, employers only have to provide "affordable" coverage to their workers, but not to their dependents. An affordable policy is one where premiums total no more than 9.5% of household income. If a worker's employer-sponsored insurance costs more than that, he can opt to apply for federal subsidies to buy a policy on the Obamacare insurance exchanges. Companies, however, don't have to meet this criteria when extending coverage to spouses and children. Since employers often subsidize a smaller share of dependents' premiums, many families could pay hefty bills for on-the-job policies. And they're in for a rude awakening when they turn to the exchanges, which could also be very expensive without the help of a federal subsidy. Nearly 2 million adults and 450,000 children may find themselves in this situation,
Obama paying foreigners to build Obamacare exchange websites - Despite millions of Americans being out of work, the Obama administration apparently decided that the job situation is not that dire and contracted with a Canadian tech firm to construct the healthcare exchange site healthcare.gov, which has been plagued with a series of glitches since its launch on Tuesday. While critics have been sounding the alarm for months that the health-care exchanges, a key linchpin of the president’s “crown jewel” of Obamacare, the president dismissed all concerns insisting that the system would be ready on Oct. 1. However, when the system went live it reinforced what the critics were saying as the system has been plagued with numerous glitches. The glitches have been so severe that the media went out of their way to show their excitement over a single individual who was able to sign up using the website healthcare.gov. The president has attempted to downplay all of the issues saying that even companies such as Apple have had technical problems when they unveil a new device. However, critics have pointed out there are several key differences, noting that no one is forced to buy an Apple iPhone. They also point out that the federal government has had to 3 ½ years and nearly unlimited resources to get the systems up and running and they still have a multitude of problems. Critics of Obamacare have cited this as an example of government inefficiency and highlighted why the government should not be take over the healthcare industry which will involve them taking over approximately 1/6 of the US economy.
Obamacare: I Have the Dish - Miracle of miracles, I was finally able to comparison shop on New York State’s healthcare marketplace. If you’re like me, and you have a suffix (Sr., Jr., III, IV, V) in your name, the website does not know what to do. It kind of explodes. All the plans offered by New York State do not allow you to go “out of network” for healthcare. In other words, you have to use a doctor in each private insurer’s list, or they don’t pay a cent of reimbursement. But — Catch-22 — there’s no way to find out whether your doctor, or your local hospital, or clinic — is on the list because the site’s primitive search function is “disabled” “due to overwhelming response.” Call me underwhelmed. So that’s that. Then there’s the rates: not low. Not affordable. Not, as Obama said, comparable to your cellphone bill. New York State’s healthcare plans range from Fidelis Care’s “Bronze” plan at $810.84 per month to $2554.71 per month for something I didn’t bother to look up because if I had $2500+ a month to spend on doctors, I’d buy a doctor and have him/her live with me and dole out pills like I was Michael Jackson. The deductibles — the amount you pay out of pocket every year before you the insurer has to give you anything at all — are outrageously high. Fidelis Care Bronze has a $3000/year deductible per person. I’m in pretty good health; it’s a rare year I spend that much on doctors. After the $3000/year deductible, they pay 50% of your bills. So if you rack up $5000/year in medical bills, you pay $4000 and they pay $1000. Pretty damned crappy.
Early warnings failed to prepare Obamacare site - Major insurers, state health-care officials and Democratic allies repeatedly warned the Obama administration in recent months that the new federal health-insurance exchange had significant problems, according to people familiar with the conversations. Despite those warnings and intense criticism from Republicans, the White House proceeded with an Oct. 1 launch. A week after the federal Web site opened, technical problems continued to plague the system, and on Tuesday people were locked out until 10 a.m., although some applicants were able to sign up as the day went on. Officials said they were working 24 hours a day to improve the system and that they were confident it would soon be able to meet the demand. They added that there was ample time to correct the site to allow consumers to get insured by Jan. 1. “This is a question of volume and demand exceeding anything that people anticipated,” said White House strategist David Simas, who is helping to oversee the law’s implementation. “I am confident people are working through these issues. . . . It is steady improvement.”
How Obamacare's Exchanges Turned Into A 'Third World Experience' - Back in March, at an insurance industry conference in Washington, the problems were apparent. Henry Chao, chief information officer at the Centers for Medicare and Medicaid Services, openly fretted that the exchanges wouldn’t be ready by October. “I’m pretty nervous—I don’t know about you,” he told the crowd. “Let’s just make sure it’s not a third-world experience.” At the time, Chao’s comment seemed like an attempt at dark humor. One week into the launch of Obamacare, however, it’s not a joke: it’s literally easier to blog from the Kenyan border than to sign up for insurance on Obamacare’s federal exchange. Why is this happening? Politics. The Obama administration was more afraid of delaying the launch of Obamacare, than they were of botching it. All you need to know about the rollout of Obamacare’s subsidized insurance exchanges is that, so far, the toughest questions posed to the Obama administration have come from Comedy Central. “We’re going to do a challenge,” Jon Stewart told Kathleen Sebelius on the Daily Show. “I’m going to try and download every movie ever made, and you are going to try and sign up for Obamacare, and we’ll see which happens first.”
Health-care Web site’s issues tied to federal IT policies, buggy technology - Problems with the federal government’s new health-care Web site have attracted legions of armchair analysts who speak of its problems with “virtualization” and “load testing.” Yet increasingly, they are saying the root cause is not simply a matter of flawed computer code but rather the government’s habit of buying outdated, costly and buggy technology. The U.S. government spends more than $80 billion a year for information-technology services, yet the resulting systems typically take years to build and often are cumbersome when they launch. While the error messages, long waits and other problems with www.healthcare.gov have been spotlighted by the high-profile nature of its launch and unexpectedly heavy demands on the system, such glitches are common, say those who argue for a nimbler procurement system.They say most government agencies have a shortage of technical staff and long have outsourced most jobs to big contractors that, while skilled in navigating a byzantine procurement system, are not on the cutting edge of developing user-friendly Web sites. These companies also sometimes fail to communicate effectively with each other as a major project moves ahead. Dozens of private firms had a role in developing the online insurance exchanges at the core of the health-care program and its Web site, working on contracts that collectively were worth hundreds of millions of dollars, according to a Government Accountability Office report in June..
Health-care site confuses insurers, too - The federal health-care exchange that opened a dozen days ago is marred by snags beyond the widely publicized computer gridlock that has thwarted Americans trying to buy a health plan. Even when consumers have been able to sign up, insurers sometimes can’t tell who their new customers are because of a separate set of computer defects. The problems stem from a feature of the online marketplace’s computer system that is designed to send each insurer a daily report listing people who have just enrolled. According to several insurance industry officials, the reports are sometimes confusing and duplicative. In some cases, they show — correctly or not — that the same person enrolled and canceled several times on a single day.The ability of consumers to sign up for a health plan, and the ability of the insurers to know who they are covering, is key to the success of the federal law that will for the first time require most Americans to have health insurance starting Jan. 1. The Web site www.healthcare.gov is the main path for millions of Americans in 36 states to purchase new coverage. The flawed enrollment reports illustrate that the site is bedeviled by problems that go beyond what the Obama administration has acknowledged in explaining the creaky performance of the exchange so far.
40 Percent Of Doctor Practices Unsure About Obamacare Exchanges - Two in five physician practices are unsure about whether they will participate on the government-sponsored marketplaces known as exchanges, according to new research from the Medical Group Management Association. Less than a week after consumers began signing up for healthcare coverage on exchanges under the Affordable Care Act, the uncertainty of this key segment of physicians comes as health insurance companies attempt to offer a menu of choices for individual consumers during the six-month open enrollment period that runs through March 2014. To obtain benefits effective Jan. 1, 2014, individuals must select a plan by Dec. 15. “It’s troublesome that there is so much uncertainty about ACA implementation this late in the game” said Dr. Susan Turney, president and chief executive officer of the Medical Group Management Association, which is meeting this week in San Diego for its annual conference. Nearly 30 percent of doctors responding to the MGMA survey said they planned to participate in the exchanges. Another 14 percent said they would not participate and 16 percent said they did not know. MGMA research included responses from more than 1,000 medical groups in which more than 47,500 physicians participate. Physicians said they saw opportunities to provide care to the uninsured and a medically underserved population, but more than 80 percent of doctors worried about what they will be paid from the plans participating on the exchanges.
Courts Hold the Key to Obamacare's Future, Again - Congress and President Obama are engaged in a great battle to determine whether Obamacare and its individual mandate will be implemented in 2014. But the answer to that question may rest with neither Congress nor the president, but with courts in Washington D.C. and Virginia. Later this month two judges are poised to deliver rulings on whether Americans who buy insurance on federal health exchanges qualify for subsidized premiums. The essence of these cases is whether the Americans who purchase health insurance on federally-run exchanges are eligible to receive premium subsidies. The IRS says yes. Some others say no. The implications are immense. Family plans will cost $20,000 a year in 2016, according to the IRS. If Americans on the 34 federally-run exchanges do not qualify for health insurance subsidies, few will sign up. Plans will be simply unaffordable. Obamacare will collapse not because of Congress, but due to flaws in the structure of the law. According to the law, subsidies are available to those who get their health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” Or, in another section, those “enrolled in through an Exchange established by the State under section 1311.” The subsidies were put in place to encourage states to set up exchanges. Only sixteen states and the District of Columbia have set them up, fewer than forecast by the Congressional Budget Office. A different section of Act (Section 1321) allows the federal government to set up exchanges in states that have not set up their own web-based portals. Uncle Sam has set up exchanges for an additional 34 states. But nowhere does the law state that people on federal exchanges can receive tax subsidies.
The Dubious Case for Professional Licensing - A recent brouhaha in California surrounding a bill introduced by State Senator Ed Hernandez, would have allowed qualified nurse practitioners to offer a defined scope of primary care services in independent primary care practices, without supervision by a licensed physician. That is already permitted in 17 states. The politically powerful AARP had endorsed that version of S.B. 491, a free-market approach that Friedman would have enthusiastically endorsed as well. Not so the California Medical Association, which vehemently opposes the proposed intrusion on the medical profession’s economic turf. To meet the association’s objections, the bill was subsequently amended, on Aug. 14, to let nurse practitioners work without direct supervision by a physician only if they are part of a medical team in a group practice or clinic but not in independent practices managed by the nurse practitioners themselves. In a strongly worded statement, the AARP then opposed this watered-down version. Eventually, the bill did not make it to the floor of the California Assembly for a vote; it may be reintroduced next year for yet another fight with organized medicine. I predict that eventually the nurse practitioners will prevail, with support from the public.
Drugmakers pay to attend FDA advisory panel’s meetings, emails show — A scientific panel that shaped the federal government’s policy for testing the safety and effectiveness of painkillers was funded by major pharmaceutical companies that paid hundreds of thousands of dollars for the chance to affect the thinking of the Food and Drug Administration (FDA), according to hundreds of emails obtained by a public-records request. The emails show that the companies paid as much as $25,000 to attend any given meeting of the panel, which had been set up by two academics — one from the University of Washington — to provide advice to the FDA on how to weigh the evidence from clinical trials. A leading FDA official later called the group “an essential collaborative effort.” Patient-advocacy groups said the electronic communications suggest the regulators had become too close to the companies trying to crack into the $9 billion painkiller market in the United States. FDA officials who regulate painkillers sat on the steering committee of the panel, which met in private, and co-wrote papers with employees of pharmaceutical companies. The FDA has been criticized for failing to take precautions that might have averted the epidemic of addiction to prescription drugs including OxyContin and other opioids. “These emails help explain the disastrous decisions the FDA’s analgesic division has made over the last 10 years,”
Prescription drug abuse now more deadly than heroin and cocaine - More people are dying in the US from prescription drugs than from heroin and cocaine combined, a new study says, signaling that pill abuse is not just the leading cause of drug overdose deaths, but that it also requires more oversight and training by both doctors and state health agencies. Deaths involving prescription pills have quadrupled between 1999 and 2010, according to a report released Monday by Trust for America’s Health, a nonprofit organization in Washington that studies health policy. About 6.1 million people abuse prescription pills, and overdose deaths have at least doubled in 29 states, where they now exceed vehicle-related deaths. In 10 of those states, rates tripled; in four of them, they quadrupled. “We’ve been struck how quickly this probably has emerged … it warrants a strong public health response,” “We’re concerned about preventing misuse or overdoses, which are very real and heart-wrenching problems that have been skyrocketing recently.” Prescription-drug overdose rates are highest in the poorest regions of the US: Appalachia and the Southwest. West Virginia has the highest rate, at 28.9 deaths per every 100,000 people – a 605 percent increase since 1999. Following close behind are New Mexico, Kentucky, Nevada, and Oklahoma.
Shutdown Imperils Costly Lab Mice, Years Of Research - The government shutdown is likely to mean an early death for thousands of mice used in research on diseases such as diabetes, cancer and Alzheimer's.Federal research centers including the National Institutes of Health will have to kill some mice to avoid overcrowding, researchers say. Others will die because it is impossible to maintain certain lines of genetically altered mice without constant monitoring by scientists. And most federal scientists have been banned from their own labs since Oct. 1."I'm sure it's chaos at the NIH for anyone doing mouse experiments," says Roger Reeves, a researcher at Johns Hopkins University in Baltimore who uses hundreds of so-called transgenic mice in his work on Down syndrome.NIH officials say they aren't doing media interviews. So Reeves and other scientists at Johns Hopkins agreed to talk about what a shutdown would mean for their lab animals and the research these animals make possible.The loss of so-called transgenic mice, many of which have genes that cause them to develop versions of human diseases, is especially troubling, scientists say. A single animal can cost thousands of dollars to replace, they say. And some cannot be replaced at any cost.
Amid Big Salmonella Outbreak, USDA Says It's On The Job - The U.S. Department of Agriculture has issued a health alert warning that an estimated 278 illnesses caused by Salmonella Heidelberg are associated with raw chicken produced by Foster Farms at three facilities in California.The Centers for Disease Control and Prevention says illnesses have been reported in 17 states, with the vast majority — 78 percent — in California. The outbreak is ongoing, so it's possible that people are still being sickened by the chicken.The CDC says about 42 percent of the people who've gotten sick (among those for whom information is available) have been hospitalized. The strains of Salmonella Heidelberg that have made people sick are resistant to several commonly prescribed antibiotics. And according to the CDC, the resistance may increase the risk of hospitalization or make the illness tougher to treat.News of the outbreak has gotten a lot of attention since it comes during the federal government shutdown. Many stories have raised the specter that no one's on the job at a critical time. But the USDA tells The Salt that its work has not been at all slowed down — since its inspectors and investigators have stayed on the job.
Versilia’s killer incinerator - Beppe Grillo - Versilia is in a state of shock after the p8ublication of an investigation carried out by the Viareggio health authorities indicating the Falascaia incinerator (located between Pietrasanta and Camaiore), as the cause of thousands of deaths. In the last few decades, various international research projects have shown that there’s a positive correlation between the incineration of waste products and an increase in cancer. However, the Viareggio investigation, is particularly relevant because although Versilia is not an industrial area, it has the highest cancer rate in Tuscany. The research project tried to identify the connection between dioxins produced between 1974 and 1988 and the nearly 3000 patients suffering from cancer and living in Pietrasanta and Camaiore. More than a thousand of these have died. But research also covered the period from 2004 to 2010 while the new incinerator was in operation. It was closed in 2010 after the judicial authorities in Lucca discovered that the French multinational Tev Veolia had falsified the data relating to emissions of carbon dioxide. In this second research project the health authorities are investigating connections between problems relating to pregnancies and the nanoparticles emitted by the incinerator.
The Ethanol Enforcers - In its zeal to impose the ethanol boondoggle, Congress has mandated it, subsidized it, and protected it from competitors. Now some Senators are siccing prosecutors on those who still won't get on their ethanol cornwagon. That's the gist of a recent letter from Iowa Republican Charles Grassley and Minnesota Democrat Amy Klobuchar, demanding the Justice Department and Federal Trade Commission investigate the oil industry for "anticompetitive practices aimed at blocking market access for renewable fuels." That's Senatorial Cornspeak for saying oil companies should have to put their gas stations in the service of Big Ethanol. Congress's 2007 Renewable Fuels Standard mandates the blend of 36 billion gallons of renewable fuels (ethanol) annually into the nation's gasoline supply by 2022. But gasoline consumption remains flat. Refiners are thus crashing against the 10% "blend wall"; beyond that concentration in gasoline, ethanol begins to damage motors. So now ethanol's promoters are scrambling for new outlets, pushing for more pumps that supply straight 85% ethanol, or "E85." Problem is, few retailers want to sell it. Installing E85 equipment is costly, while "flex-fuel" cars that can use E85 account for less than 3% of the U.S. fleet.
Ocean In Critical State from Cumulative Impacts - Results from the latest International Programme on the State of the Ocean (IPSO)/IUCN review of science on anthropogenic stressors on the ocean go beyond the conclusion reached last week by the UN climate change panel the IPCC that the ocean is absorbing much of the warming and unprecedented levels of carbon dioxide and warn that the cumulative impact of this with other ocean stressors is far graver than previous estimates. Decreasing oxygen levels in the ocean caused by climate change and nitrogen runoff, combined with other chemical pollution and rampant overfishing are undermining the ability of the ocean to withstand these so-called ‘carbon perturbations’, meaning its role as Earth’s ‘buffer’ is seriously compromised.“The health of the ocean is spiraling downwards far more rapidly than we had thought. We are seeing greater change, happening faster, and the effects are more imminent than previously anticipated. The situation should be of the gravest concern to everyone since everyone will be affected by changes in the ability of the ocean to support life on Earth.” The findings, published in the peer review journal Marine Pollution Bulletin, are part of an ongoing assessment process overseen by IPSO, which brings together scientists from a range of marine disciplines.
Shift to a new climate likely by middle of the century, study finds - Temperatures by the middle of the century will enter a 'new normal' as global warming takes hold, scientistst said. Billions of people could be living in regions where temperatures are hotter than their historical ranges by mid-century, creating a "new normal" that could force profound changes on nature and society, scientists said on Wednesday. Temperatures in an average year would be hotter by 2047, give or take 14 years, than those in the warmest year from 1860-2005 if the greenhouse gas emissions continue to rise, with the tropics the first affected area, a new index indicated. "The results shocked us. Regardless of the scenario, changes will be coming soon," lead author Camilo Mora of the University of Hawaii said. "Within my generation whatever climate we were used to will be a thing of the past." The data suggested the cities to be hit earliest included Manokwari in Indonesia, which could shift to a new climate from 2020 and Kingston, Jamaica, from 2023 under the fastest scenario of change. At the other extreme, Moscow would depart from historical variability only in 2063 and Anchorage in 2071. In all, the scientists found that between 1 and 5 billion people would be living in regions outside such limits of historical variability, underscoring the impact already under way from a build-up of man-made greenhouse gases.
Global warming – a world of extremes and biological hotspots -- An article just published in the journal Nature has helped advance our understanding of climate extremes and how the Earth of the near future will differ from our world as we have come to know it. We all know that as the climate warms, we will see more extremes – extreme heat and drought, storms and flooding – depending on where you live. Regardless of the cause, it would be useful for policy makers and city planners to know when the future climate will depart from its normal variability. How much time do we have to act? A decade? A century? This very question was the focus of the recent paper. They looked at seven different climate variables, including temperature, precipitation, and ocean acidity. According to their results, the climate of the Earth will depart from its normal variability about 35 years from now (in approximately 2050) under business as usual human activity. On the other hand, if we take seriously the threat of climate action, we can push that date by some 20 years. But this global average threshold is only part of the story. The authors recognized that climate change will occur more rapidly near the poles (for instance, temperature changes will be greater near the poles than in the tropics). However, the present climate in the polar regions is already more variable, and biologic systems and humans living there are more adapted to climatic shifts. In contrast, in the tropics, given their more stable climate, it is easy for even small changes to surpass historical extreme records. In other words, the tropics will face unprecedented climates sooner. The problem is that these small climate changes pose serious challenges for people and species that are not equipped to adapt.
Study: Temperatures go off the charts around 2047: — Starting in about a decade, Kingston, Jamaica, will probably be off-the-charts hot — permanently. Other places will soon follow. Singapore in 2028. Mexico City in 2031. Cairo in 2036. Phoenix and Honolulu in 2043.And eventually the whole world in 2047.A new study on global warming pinpoints the probable dates for when cities and ecosystems around the world will regularly experience hotter environments the likes of which they have never seen before.And for dozens of cities, mostly in the tropics, those dates are a generation or less away."This paper is both innovative and sobering," said Oregon State University professor Jane Lubchenco, former head of the National Oceanic and Atmospheric Administration, who was not involved in the study.To arrive at their projections, the researchers used weather observations, computer models and other data to calculate the point at which every year from then on will be warmer than the hottest year ever recorded over the last 150 years.For example, the world as a whole had its hottest year on record in 2005. The new study, published Wednesday in the journal Nature, says that by the year 2047, every year that follows will probably be hotter than that record-setting scorcher.Eventually, the coldest year in a particular city or region will be hotter than the hottest year in its past.
IPCC: Apocalypse not - The Intergovernmental Panel on Climate Change (IPCC) is releasing over time its fifth assessment report (AR5), and chapter 12 of the Working Group I section The Physical Science Basis makes for some fascinating reading, of a kind rather underreported in the recent news accounts of the AR5. Consider for example Table 12.4 (p. 12-78), bearing the snappy title “Components in the Earth system that have been proposed in the literature as potentially being susceptible to abrupt or irreversible change.” Here is what IPCC has to say about nine such potential apocalypses (all italics in the original, percentage definitions added).
- Collapse of the Atlantic Meridional Overturning Circulation (a circulating current in the north Atlantic in which waters at high latitudes are cooled, sink and flow toward the equator, are warmed, rise to the surface, and then flow once more toward higher latitudes): Very unlikely (0-10%) that the AMOC will undergo a rapid transition (high confidence).
- Ice sheet collapse: Exceptionally unlikely (0-1%) that either Greenland or West Antarctic Ice sheets will suffer near-complete disintegration (high confidence).
- Permafrost carbon release: Possible that permafrost will become a net source of atmospheric greenhouse gases (low confidence).
- Clathrate methane release: Very unlikely (0-10%) that methane from clathrates will undergo catastrophic release (high confidence).
- Disappearance of summer Arctic sea ice: Likely (66-100%) that the Arctic Ocean becomes nearly ice-free in September before mid-century under high forcing scenarios such as RCP8.5 (medium confidence).
- Long-term droughts: Low confidence in projections of changes in the frequency and duration of megadroughts.
- Monsoonal circulation: Low confidence in projections of a collapse in monsoon circulations
Inconvenient Uncertainties - Global atmospheric levels of carbon dioxide passed 400 parts per million earlier this year — higher than at any time in the last three million years. Even at these concentrations, we are facing enormous uncertainties. Roughly three million years ago, global sea levels were 50 to 80 feet higher than today, and camels lived in Canada, which just goes to show how large the uncertainties truly are. We aren’t anywhere close to turning this around. The atmospheric concentrations of greenhouse gases are still going up, and that increase is still accelerating. What this will mean for future temperatures is hard to pinpoint with precision, but we estimate that without further action to reduce emissions, the planet is on track to see the eventual global average rise by at least 3 degrees Celsius (5.4 degrees Fahrenheit) above preindustrial levels. This is most likely past the point when we will see the melting of the ice sheets in Greenland and West Antarctica, raising sea levels by dozens of feet. But putting too much emphasis on one particular temperature figure is like zeroing in on the year 2047. What is scarier still is the uncertainty about the truly extreme outcomes. Our own calculations estimate that there is a roughly 5 percent to 10 percent chance that the eventual average temperature could be 6 degrees Celsius higher, rather than 3. What this would mean is outside anyone’s imagination, perhaps even Dante’s. We can obsess about all of these scenarios. A rise of three degrees would be bad enough. But when you factor in the uncertainty, there is even more reason to put global warming on an even more sharply decreasing path.
IPCC Report Contains ‘Grave’ Carbon Budget Message - Within the voluminous report from the U.N. Intergovernmental Panel on Climate Change (IPCC) published on Sept. 27 is a conclusion as sobering as any climate change warning to date. The world is currently on track to emit enough greenhouse gases by about 2040 to exceed the globally agreed upon temperature target of 3.6°F (commonly referred to in international negotiations as the 2°C target), beyond which the risks of “dangerous” consequences of global warming escalate. In laying out a global cumulative carbon budget, the IPCC has for the first time endorsed the view of climate activists and scientists who have warned that countries cannot burn the world’s known reserves of fossil fuels without sending the climate system into a tailspin.If climate change exceeds the temperature target, scientists warn, there is a greater risk that the world’s ice sheets will be destabilized, leading to sharply rising seas, and increasing climate extremes such as droughts, heat waves and floods, which could pose daunting challenges for food and water availability for growing populations. In less likely worst-case scenarios, feedback loops within the climate system could disrupt ocean currents.Staying under that temperature target is a daunting challenge, given the lack of progress to date in arresting emissions of climate-warming greenhouse gases. In order to meet the temperature target, the IPCC report made clear, the reality is that much of the planet’s known and economically recoverable supply of fossil fuels will need to be left in the ground.
OECD: 'No bailout' for climate threat - Governments forced to rescue the world's banking system are being warned there will be no bailout if there is a crisis in the Earth's climate system. That is the view of the head of the Organisation for Economic Co-operation and Development (OECD). Angel Gurria is expected to rebuke nations failing to curb CO2 emissions in a speech on Wednesday. He will say the analysis of the climate threat is far clearer than were the warning signs for the financial crisis. Mr Gurria is due to address the topic of climate change, investment and energy policies in a London lecture co-organised with the London School of Economics and the Climate Markets & Investors Association (CMIA)The talk coincides with a report in The Independent newspaper that claims UK Chancellor George Osborne is about to reject the recommendations of government advisers by slowing the drive to tackle global warming. In his speech, Mr Gurria will ask if leaders overseeing the financial system that led to the "train wreck" of the banking crisis would have been happy to take the risks if they had known the consequences. “Unlike the financial crisis, we do not have a 'climate bailout option' up our sleeves,” he will say.
Report Says a Shortage of Nuclear Ingredient Looms — Most nuclear reactors in the United States rely on a type of lithium that is produced only by China and Russia, and the supply may be drying up, according to a study to be released on Wednesday. The Government Accountability Office said the looming shortage of a material critical to the operation of 65 out of 100 American nuclear reactors “places their ability to continue to provide electricity at some risk,” a conclusion echoed by outside experts. The problem reflects the withering away of the American industrial infrastructure of all things nuclear, and the nation’s dependence on distant places for “energy-critical materials,” including “rare earth” materials used in high-efficiency motors, and other materials used in solar cells. Producing these generally involves environmentally damaging processes, one reason that production has moved abroad. The material in potentially short supply is specifically lithium-7, which is what is left over when it is separated from another form, lithium-6, which can be used to make tritium, the hydrogen in the hydrogen bomb. The two forms, called isotopes, are chemically identical, although lithium-7 has one additional neutron. The equipment needed to separate lithium-6 from lithium-7 is mostly a cold war leftover. The United States shut down almost all of its machinery in 1963, when it had a huge surplus, now mostly consumed. It has not had to make much tritium in the last few years because its nuclear weapons inventory is shrinking.
Alaska is world's laboratory for climate change research - The Arctic has heated up twice as fast as the rest of the planet in the past three decades. By August 2013, sea ice had lost 76 percent of its volume compared to 1979, according to the University of Washington's Polar Ice Center.And the three main gases blamed for global warming -- carbon dioxide, methane and nitrous oxide -- are at their highest level in at least 800,000 years, the Intergovernmental Panel on Climate Change reported Sept. 27. The United Nations group cited core samples taken from ice sheets.On Alaska's Arctic coast, 30-foot-high cliffs that haven't budged since the last ice age are tumbling into the ocean overnight and village coastlines are eroding. Lightning-sparked forest fires have charred more than 1 million acres in five of the past 10 years. By midcentury, the average area burned by wildfires each year is likely to double, the EPA says. Heat waves are getting hotter and longer, and winters are producing more rain and less snow as the carbon-damaged atmosphere soaks up moisture, said Rick Thoman, a climate analyst for the National Weather Service in Fairbanks."Alaskans are living through climate change in ways people have not experienced in many thousands of years," he said. "Alaska is a laboratory for everybody in the sense that this is the kind of thing you can expect in your region down the road."
Vast streams found beneath Antarctic ice sheet - The streams of water, some of which are 250m in height and stretch for hundreds of kilometres, could be destabilising parts of the Antarctic ice shelf immediately around them and speeding up melting, researchers said. However, they added that it remains unclear how the localised effects of the channels will impact on the future of the floating ice sheet as a whole. The British researchers used satellite images and radar data to measure variations in the height of the Filchner-Ronne Ice Shelf in West Antarctica, which reveal how thick the ice is. Writing in the Nature Geoscience journal, they described finding large rivers of meltwater beneath the floating ice shelf which had not previously been identified. These channels lined up with areas where similar flows of water are thought to exist under the ice sheet, the ice formation which sits on solid ground, at the point where the land meets the sea. The findings indicate that streams of water which form beneath ice on solid land are trickling down to sea and forming channels beneath the floating ice shelf, researchers said. When the cold meltwater arrives at the ice shelf it causes warmer sea water to plume upwards, which carves large streams into the underside of the ice, they explained.
Energy leaders warn of blackouts across Europe - The European Union needs to change its policies toward energy subsidies, regulations and emissions targets, the chief executives of Europe's leading energy companies told CNBC on Friday, warning that increasing operational difficulties could lead to "blackouts" across Europe. Energy companies say they were pushed to invest heavily in renewable energy and technology by the 28-country European Union but have since run into rules that differ from country to country, an inadequate Europe-wide emissions-trading system and problems with subsidies. Peter Terium, chief executive German electric utilities firm RWE AG told CNBC that he and other executives meeting in Brussels were there to urge European Union policymakers to dangers facing the energy industry. "We want to send an a SOS to Europe, not for the companies, not for the sector, but for Europe as a whole. A prosperous society cannot be prosperous without proper energy infrastructure and our infrastructure is in jeopardy", Terium told CNBC in Brussels.
Tepco’s Claim Radiation Leaks Confined to Coast Called ‘Silly’ -- Tokyo Electric Power’s claim that radioactive water leaking into the sea from the wrecked Fukushima nuclear plant is confined to the coast doesn’t make scientific sense, according to a U.S. researcher who surveyed waters off the site last month. Japan’s government has supported the utility’s statement that the irradiated groundwater flowing into the Pacific Ocean at a rate of some 400 tons a day remains in an area of 0.3 square kilometers (0.12 square miles) within the bay fronting the atomic station. “These statements like a 0.3 square-kilometer zone are silly,” Woods Hole Oceanographic Institution senior scientist Ken Buesseler said in an interview. “It’s not true to the science,” said Buesseler, who was on a Japanese research vessel 1 kilometer (0.6 miles) off Fukushima from Sept. 8 to Sept. 14. The growing stockpile of radioactive water stored in tanks at the plant and leaks from the tanks into the sea is an increasing threat to ocean ecosystems, said Buesseler, who holds a joint Ph.D in marine chemistry from the Massachusetts Institute of Technology and Woods Hole. Founded in 1930, Woods Hole is the world’s largest private non-profit oceanographic research institution, according to its website. The Fukushima atomic station has more than 1,000 tanks holding more than 380,000 tons of water irradiated from contact with melted reactor fuel. Three hundred tanks are of a bolted variety, at least one of which leaked about 300 tons of water. Additional contaminated groundwater has been seeping into the Pacific Ocean and one of the tanks overflowed last week.
Fukushima worker accidentally switches off the crippled nuclear plant’s cooling systems in latest blunder - A worker at the Fukushima nuclear plant accidentally pushed a button turning off power to the four badly damaged reactors yesterday. Japan's Nuclear Regulation Authority said that a worker carrying out inspections had turned off pumps injecting cooling water into the unstable reactors. The plant operator, Tokyo Electric Power Co, or Tepco, pours hundreds of tonnes of water a day over the reactors to keep them cool after a devastating earthquake and tsunami in March 2011 triggered meltdowns and explosions. A worker at the Fukushima plant accidentally turned off power to key cooling systems yesterday, but Japan's nuclear regulator sought to reassure people that a backup system had immediately kicked in Despite the employee's blunder, officials say a backup system kicked in immediately. It is just the latest in a string of worrying mishaps which reveal just how vulnerable the power plant still is, two years on from the disaster.
Starting tomorrow, we’re down 90 percent of our nuclear safety regulators -The Nuclear Regulatory Commission — the agency that watches over the country’s 100 nuclear reactors — announced on Monday that the government shutdown would soon force it to furlough 3,600 employees, or about 90 percent of its staff. The deadline it gave was Thursday. As in, tomorrow. Sure enough, Allison Macfarlane, the agency’s chairwoman, confirmed today in a blog post that the agency is shutting down. “Yes, I am worried,” Ed Lyman told CNN, nicely embodying his role as a senior scientist with the Union of Concerned Scientists. Here, via CNN, is what we’ll be left with (note that this is written in the conditional tense, because on Monday we could still pretend this wouldn’t actually happen): The 300 essential personnel who would stay on include about 150 so-called “resident inspectors.” They serve as the NRC’s eyes and ears at nuclear plants. They also include employees who support emergency response, investigators, a skeleton management team, the five NRC commissioners and a few commission staff members, the NRC said. The retained group would also include employees who support emergency response, investigators, a skeleton management team, the five NRC commissioners and a few commission staff members, the NRC said.
Oilprice Intelligence Report: Welcome to the US Shale Reshuffle: This week we are watching with great interest what will be a reshuffling of US shale assets that paints an interesting picture of the emerging playing field. Anglo-Dutch supergiant Shell is planning to sell off its entire 106,000-acre holding in the Eagle Ford Shale and another 600,000 acres in the Mississippian Lime play in Kansas. The knee-jerk reaction to this is to ask why would this supergiant sell off these prime producing assets—especially the liquids-rich assets? On the surface, Shell is making up for a $2.1 billion after-tax impairment charge that recently came out in its second-quarter earnings statement. When it comes to US shale, Shell simply isn’t meeting its size and profitability targets, and the after-tax impairment charge is primarily related to these North American assets. Shell isn’t the only major player getting rid of US shale assets—but it is the only one so far to divest of the more profitable liquids-rich acreage. Most notably, BG Group and BHP Billiton (BHP) have reduced their North American shale holdings, but those divestitures have been gas-heavy assets. For Shell, this seems to be the right move: It will see better returns in the Gulf of Mexico and offshore Malaysia, for instance. At the same time, its Eagle Ford liquids-rich assets are very attractive to prospective buyers and the proceeds will boost development in the Gulf of Mexico and Malaysia.
Making money from the Eagle Ford Shale - Newly exploited tight oil formations account for more than 100% of the increase in U.S. field production of crude oil since 2005. But that doesn't mean it's easy to make money getting oil out of the ground this way. The Wall Street Journal reported last week:Royal Dutch Shell (RDSA) plans to sell its stake in the Eagle Ford Shale in South Texas, following a $2 billion write-down of North American assets that the company announced in August. Shell's sale of leases on 106,000 acres in the oil-and-gas-rich region illustrates the struggles major oil companies have had in places where smaller energy firms have thrived. Shell said the Eagle Ford holdings didn't meet the company's targets for size and profitability. An August analysis by Reuters of the company's write-downs cautioned:However, writedowns by Shell and some other majors are a sign they came to the shale boom late in the day, overpaying for lower-quality and less well-explored assets-- not that the shale revolution is stuttering. The most successful company in the Eagle Ford has been EOG, which produced 94,000 barrels a day from the Eagle Ford in 2012. That's almost a quarter of the 399,000 b/d that the Texas Railroad Commission reported was produced by all the Eagle Ford producers put together in 2012, and a 150% increase over EOG's 2011 Eagle Ford production. But it's interesting that even though EOG reported an average price received around $98/barrel in 2012 compared to $93 in 2011, the company's operating income for the year was down 30% from 2011. Gains in revenue were outweighed by increases in marketing and depletion charges.
About That Shale Oil & Gas Miracle - Not a day goes by without a story in the MSM by some industry shill like Daniel Yergen about the imminent energy independence of the Great American Empire. Shale oil and gas will revolutionize the American energy prospects. We have hundreds of years of oil and gas under our feet. We will be a net exporter in the next few years. A glorious future awaits. Politicians tout the billions of barrels to be extracted from Bakken, Eagle Ford and the hundreds of untapped shale formations across the country. Wall Street puts out glowing investment analysis papers promoting the latest IPO. There’s just one little problem. It’s all hype. Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. They have already written off $2.1 billion. They are trying to sell huge swaths of land in the Eagle Ford area. They are losing money in the shale oil and gas business. If Shell can’t make it profitable, who can?The flow rates are too low. The extraction costs are too high. Companies will only invest in ventures where they have a reasonable chance to make money. Shell is a rational company, led by a rational man. He says they can’t make money. Of course, if oil prices reach $150 and natural gas prices reach $8, then companies can make money. All of the cheap easily accessible oil and gas have been accessed. Only the expensive hard to access oil and gas are left. The shyters never mention these facts when they tout our future energy independence.
Shale drillers must report chemicals - Oil and gas companies are being told for the first time to give county officials and local fire departments information about the toxic chemicals drillers use to fracture shale. Ohio officials sent a memo this month notifying companies that a federal right-to-know law trumps a 2001 state law that allowed them to send the information exclusively to the Ohio Department of Natural Resources. The memo “puts oil and gas companies on notice that they will have to comply with the federal requirements,” said Chris Abbruzzese, a spokesman for the Ohio Environmental Protection Agency. The decision marks a victory for environmental advocates, who have long demanded that more light be shed on the chemicals used in fracking, a process in which millions of gallons of water, sand and chemicals are pumped underground to crack shale and free oil and gas trapped within it. Oil and gas companies won’t have to disclose everything, however. The right-to-know law allows companies to list some chemicals as trade secrets.
US Fracking Industry has Used 250 Billion Gallons of Water Since 2005 - The fracking boom has been applauded by many as the saviour of the US, dragging its economy out of recession, and bringing in a new era of oil and gas production that could see the country become energy independent in the coming years. Fracking has also attracted attention as a source of pollution and threat to the environment. More than 80,000 fracking wells have been drilled since 2005, and various studies have shown that horizontal drilling and hydraulic fracturing have a number of negative consequences, such as contaminating wells and streams, and the release of large amounts of methane at all parts of the production train. A new concern that people are starting to take notice of is the billions of gallons of waste water that is returned to the surface along with oil and gas after a well is fracked, and its safe disposal.A new report by Environmental America, a campaign group, found that last year fracking in the US produced 280 billion gallons of toxic waste water, enough, according to the report, to flood the whole of Washington DC in 22 feet.
The Hard Numbers on Fracking: Radiation, Toxic Wastewater and Air Pollution - Researchers have found elevated levels of radioactive material and other pollutants in Pennsylvania's scenic Blacklick Creek, and they say fracking is to blame. Researchers at Duke University announced this week that samples collected from 2010 to 2012 near a fracking wastewater treatment facility that discharges into Blacklick Creek had up to 200 times the amount of radium than samples just upstream, as well as elevated levels of salts and heavy metals. "The radioactivity levels we found in sediments near the outflow are above management regulations in the United States and would only be accepted at a licensed radioactive disposal facility," said Robert B. Jackson, professor of environmental science at Duke. Hydraulic fracturing, aka "fracking," involves forcing high volumes of water and chemicals into underground formations to release fossil fuels. Advances in fracking technology triggered an oil and gas rush in Pennsylvania and across the country, and after several years of heavy fracking, researchers are now beginning to quantify the environmental damage. The heavily-fracked Marcellus Shale formation under Pennsylvania is naturally high in radioactive material. In 2011, the state asked fracking firms to voluntarily stop sending wastewater to facilities like the one on Blacklick Creek until they upgraded treatment equipment, but wastewater is still discharged into the environment in some other states, according to the Duke team.
Robert F. Kennedy Jr. calls fracked natural gas a “catastrophe” - As an environmental activist, Robert F. Kennedy Jr. is one of the nation’s most vocal opponents of coal, but he thinks natural gas is just as bad. Speaking to a crowded auditorium today at Franklin and Marshall College in Lancaster, Kennedy says it’s a “false choice” to weigh economic concerns against environmental protection. Although his speech mainly focused on reducing the nation’s reliance on coal and shifting to renewable energy sources like wind and solar, he sat down with StateImpact Pennsylvania to talk about his views on natural gas development. Note: this interview has been edited for length and clarity
Special Report: U.S. builders hoard mineral rights under new homes - In golf clubs, gated communities and other housing developments across the United States, tens of thousands of families like the Davidsons have in recent years moved into new homes where their developers or homebuilders, with little or no prior disclosure, kept all the underlying mineral rights for themselves, a Reuters review of county property records in 25 states shows. In dozens of cases, the buyers were in the dark. The phenomenon is rooted in recent advances in extracting oil and gas from shale formations deep in the earth, fueling the biggest energy boom in modern U.S. history. Horizontal drilling and the controversial practice of hydraulic fracturing, or "fracking," have opened vast swaths of the continental United States to exploration.As a result, homebuilders and developers have been increasingly - and quietly - hanging on to the mineral rights underneath their projects, pushing aside homeowners' interests to set themselves up for financial gain when energy companies come calling. This is happening in regions far beyond the traditional American oil patch, which has a long history of selling subsurface rights.
Canadian-Based Company Sues Canada Under NAFTA, Saying That Fracking Ban Takes Away Its Expected Profits - We've written several posts about a growing awareness of the dangers of investor-state dispute settlement (ISDS), which lets foreign companies sue entire countries for the alleged loss of future profits. One of the most egregious examples of ISDS concerns Canada, which is being sued by Eli Lilly & Co for $500 million after refusing to grant it a couple of pharma patents. Now The Huffington Post has details about another ISDS case involving Canada: Free trade critics say a $250-million damage suit being pursued as a result of Quebec's moratorium on fracking is proof Canada needs to be careful in negotiating trade pacts around the world. That's because TPP and TAFTA/TTIP, as well as Canada's bilateral treaty with Europe, CETA, all have ISDS clauses in them -- at least as far we know, given the obsessive secrecy that surrounds their negotiation. Here's the key issue in this latest case involving Canada: Quebec has yet to decide whether fracking can be conducted safely under the St. Lawrence. "If a government is not even allowed to take a time out to study the impact without having to compensate a corporation, it puts a tremendous chill on a governments' ability to regulate in the public interest," That is, the company concerned is trying to pressure Quebec to lift its moratorium before the latter has had a chance to evaluate all the scientific evidence on fracking, and come to a reasoned decision. That seems to be a typical effect where ISDS clauses are in operation: with the threat of huge claims hanging over them, governments often choose to capitulate and give companies what they want, rather than risk losing before the secretive tribunals that are used to adjudicate such ISDS cases.
EU methane warning threat to UK fracking - The EU authorities have opened a new front in efforts to clamp down on shale gas, warning that the carbon footprint from methane emissions may be high enough to call into question the whole future of fracking in Europe. “Methane is a much more powerful greenhouse gas than CO2,” said Jos Delbeke, director-general of the European Commission’s climate divisions. “The level of methane emissions tilts the balance for or against the development of shale: it is the central issue. We don’t want to copy and paste what happened in the US. We will do things differently in Europe,” he told the Daily Telegraph. Mr Delbeke said drilling firms will have to come up with plans to track methane emissions or face EU legislation forcing them to do so. “Either the companies put it on the table or a regulation is going to come at the European level,” he said. The Intergovernmental Panel on Climate Change (IPCC) says methane is 86 times more damaging than CO2 over a 20-year period, and risks triggering a dangerous “feedback loop” for global warming. Mr Delbeke’s warnings come as Brussels draws up its framework law for shale by the end of the year, shaping rules that could make or break the industry in Europe. A tough code risks a cathartic showdown with Britain just as the country gears up for a referendum on EU membership. Any sense that Brussels was obstructing the UK’s economic revival could prove the last straw for many voters.
France’s Ban On Fracking Is 'Absolute' - France’s ban on fracking was finally completed Friday, as its constitutional court upheld a 2011 law prohibiting the practice and canceling all exploration permits. The decision posted on the court’s website said the ban “conforms to the constitution” and is not “disproportionate,” effectively protecting it from any future legal challenge. U.S. driller Schuepbach Energy brought its complaint to the court after two of its exploration permits were revoked due to the ban. Schuepbach attempted to argue that since no study had established fracking risks, there was no cause for the ban, and that since fracking isn’t banned for geothermal energy projects, it was unfair. The court didn’t find that convincing, citing the differences between geothermal and shale gas exploration. Environment Minister Philippe Martin framed the decision as a victory in the larger effort to limit fossil fuels and carbon emissions. “Beyond the question of fracking, shale gas is a carbon emitter,” he said in a statement. “We must set our priorities on renewable energies.” And that’s not just talk. France has ambitious goals for a low-carbon future and is currently considering a tax on carbon emissions and a nuclear tax. Revenue would go to renewables and energy efficiency standards. France plans to cut fossil fuel use by 30 percent by 2030, at the same time that it de-emphasizes the nuclear power that provides three quarters of the nation’s energy.
Shell: New Leaks Close Major Nigerian Oil Pipeline -- Shell Nigeria says new leaks have forced it to close the Trans-Niger Pipeline that carries 150,000 barrels of crude daily, 10 days after the pipeline was reopened following repairs for leaks. Spokesman Precious Okolobo said in a statement Wednesday night that a team has been dispatched to repair leaks at three places in the southern Niger Delta’s Ogoniland. A joint investigation including community leaders will determine the cause and impact of the spills. Shell Nigeria said in July the pipeline is safe despite suffering 25 leaks in two years — most blamed on theft estimated at 60,000 barrels a day. Human rights groups say the company sometimes blames theft to avoid paying damages to local communities and to avert criticism about corrosion on the 48-year-old pipeline.
ND Pipeline Breaks, Spews 20,600 Barrels of Oil — More than 20,000 barrels of crude oil have spewed out of a Tesoro Corp. oil pipeline in a wheat field in northwestern North Dakota, the state Health Department said Thursday. State environmental geologist Kris Roberts said the 20,600-barrel spill, among the largest recorded in the state, was discovered on Sept. 29 by a farmer harvesting wheat about nine miles south of Tioga. “The farmer was harvesting his wheat and started smelling oil,” Roberts said. “It went from there.” The spill has been contained and no water sources have been contaminated, Roberts said. Cleanup crews have recovered about 1,285 barrels of oil, officials said. A barrel is 42 gallons.
Steve Horn: Over 865,200 Gallons of Fracked Oil Spill in ND, Public In Dark For Days Due to Government Shutdown - Over 20,600 barrels of oil fracked from the Bakken Shale has spilled from aTesoro Logistics pipeline in Tioga, North Dakota, in one of the biggest onshore oil spills in recent U.S. history. Though the spill occurred on September 29, the U.S. National Response Center - tasked with responding to chemical and oil spills - did not make the report available until October 8 due to the ongoing government shutdown. "The center generally makes such reports available on its website within 24 hours of their filing, but services were interrupted last week because of the U.S. government shutdown," explained Reuters. The "Incident Summaries" portion of the National Response Center's website is currently down, and the homepage notes, "Due to [the] government shutdown, some services may not be available." At more than 20,600 barrels - equivalent to 865,200 gallons - the spill was bigger than the April 2013 ExxonMobil Pegasus pipeline spill, which spewed 5,000-7,000 barrels of tar sands into a residential neighborhood in Mayflower, Arkansas. So far, only 1,285 barrels have been cleaned, and the oil is spread out over a 7.3 acre land mass.Kris Roberts, environmental geologist for the North Dakota Department of Health Division of Water Quality told the Williston Herald, "the leak was caused by a hole that deteriorated in the side of the pipe."
U.S. Refiners Export More Fuel Than Ever - U.S. refiners are selling more fuel abroad than ever before, effectively exporting the American energy boom to the four corners of the world. As crude production soars in places like the Eagle Ford shale formation in Texas, U.S. refiners along the Gulf Coast are increasingly using local oil, which is less expensive than the North Sea crude that European refiners use. That often means diesel and other fuels made in the U.S. are a bargain abroad even after adding the shipping costs.While federal law bars overseas shipments of most U.S.-produced oil, refiners can export petroleum products created from that crude, including gasoline, diesel and jet fuel.In July, U.S. refiners shipped a record 3.8 million barrels of products a day to places as far flung as Africa and the Middle East, according to the latest monthly data from the Energy Information Administration. That volume is nearly 65% above the 2010 export level, when the U.S. oil boom was still in its infancy.The bottom line is U.S. refiners are pushing product everywhere," said Francisco Blanch , head of global commodity research at Bank of America Merrill Lynch. "They can. They have a lot to sell."That's in part because drivers in the U.S. are buying less gasoline, largely thanks to more energy-efficient automobiles and even though the price of gasoline has fallen over the past year to about $3.35 a gallon, according to AAA, down from $3.82 a year ago.
Brazil's Second Largest Oil Company On Verge Of Latin America's Biggest Corporate Bankruptcy Filing - When on October 1, fallen billionaire Eike Batista's OGX Petroleo & Gas, missed a $45 million bond coupon payment, some were surprised but most had seen the writing on the wall. After all, Brazil's second largest oil company after Petrobras, and the crowning jewel of Batista's EBX Group, had been under the microscope of investors and certainly creditors (and if it wasn't it certainly should have been) after oil deposits that Batista had valued at $1 trillion turned out to be commercial failures. And so the countdown to the inevitable bankruptcy filing began. Overnight, Bloomberg reports that the wait should not be long (in fact it may coincide with the default of that other insolvent mega-creditor: the United States), and will mostly certainly take place before the end of the month, following the retention of bankruptcy specialist law firm Quinn Emanuel. From Bloomberg: OGX Petroleo & Gas Participacoes SA (OGXP3) is considering filing for bankruptcy protection by the end of this month, two people with direct knowledge of the matter said last week. The filing would be done in Rio de Janeiro where OGX is based, said the people, asking not to be identified as discussions are private. While Batista is negotiating with creditors to avoid the same process for shipbuilder OSX Brasil SA (OSXB3), the most likely outcome is that both companies will seek legal protection, they said.
The Battle over Ecuador’s Oil Takes a New Twist - The announcement by Ecuador’s president, Rafael Correa, that he has abandoned a ground-breaking scheme stopping oil operations in the Amazon has led to a wave of protests across the country and speculation about why it failed. The stated aim of the scheme, now widely known as the ‘Yasuni-ITT Initiative’, was to permanently forgo exploiting 100s of millions of barrels of oil in the Ishpingo, Tambococha and Tiputini fields under the Yasuni National Park in return for compensation for at least half the unearned revenues, estimated at $3.6bn. The Yasuni-ITT initiative grew out of Ecuador’s civil society and was publicly adopted by Correa in 2007, with a trust established in 2008 to collect contributions and another trust administered by the UNDP. However, it was brought to an abrupt end in mid-August when Correa announced he had signed a decree liquidating both trusts and wanted to drill. This has triggered protests involving thousands, severe criticism in social and non-state media, condemnation from indigenous organisations, and a petition to the Constitutional Court to force a referendum to reverse Correa’s decision. efore the announcement, over 80% of Ecuadorians supported the initiative, but an intense government media campaign has shifted opinion. "Most recent polls show 50% of people in favour, 50% against,’ ‘Obviously, there’s some state media which is pro-extractive industry, pro-president, but practically all of the independent, private media have been critical. There’s news about it every day.’ According to reports, the government has moved to expel students rallying for Yasuni, censor Yasuni media coverage, and erase the ‘isolated’ indigenous peoples from its Block ITT maps in an attempt to avoid violating Ecuador’s Constitution protecting such people from ‘ethnocide'.
Bubble May Burst for Fossil Fuel Giants - —The financial and economic muscle of the global fossil fuel industry’s corporate behemoths will not protect them from the costly effects of negative stigmatisation if they ignore climate change pressures, according to a new academic study. The influence wielded on world stock markets by such corporations is enormous, with oil and gas companies alone making up about 20% of the value of the London financial index and about 11% of that in New York. However, if any meaningful action is to be taken on climate change in the years ahead, the activities of the fossil fuel industry will have to be severely curtailed and the bulk of assets frozen, inevitably leading to a sharp decrease in corporate valuations – what some analysts refer to as a bursting of the “carbon bubble”. Not only are such corporations coming under increasing pressure from regulators and from climate legislation limiting CO² emissions, but a high-profile campaign is also under way to persuade investors to withdraw from companies involved with the fossil fuel industry.According to the new study by academics at the Smith School of Enterprise and the Environment at Oxford University, the fossil fuel companies cannot afford to ignore such campaigns. If they do, they will – at the very least – risk severe damage to their reputation, but they could also face increasing problems raising finance for their work. The study, Stranded Assets and the Fossil Fuel Divestment Campaign, compares campaigns going on in the fossil fuel sector with other similar movements that have taken place ? such as the campaign against corporations with investments in apartheid South Africa, and tussles with the tobacco, munitions and gaming industries.
Japan’s Fuel Costs May Rise to 7.5 Trillion Yen, Meti Estimates - The combined fuel costs for Japan’s nine regional power companies will almost double to 7.5 trillion yen ($77 billion) this fiscal year from three years earlier, the Ministry of Trade, Economy, and Industry predicted. Tokyo Electric Power Co. (9501) and eight other power companies will have to pay 3.6 trillion yen more in combined fuel costs this fiscal year than in fiscal 2010 to make up for lost nuclear power output, the ministry known as Meti estimated in a report today. The forecast assumes Japan won’t restart any of its nuclear reactors by the end of March 2014, it said. Kansai Electric Power Co.’s Ohi No. 3 and No. 4 reactors were shut for planned safety checks in September, leaving the country with no nuclear power output for the first time since July 2012. An increase in fossil-fuel imports would force Japan to have a third consecutive annual trade deficit in the year ending in March, the government-affiliated Institute of Energy Economics, Japan, said in an August report.
IMF Official Doubts Japan Can Meet Inflation Target in Two Years - A senior official at the International Monetary Fund said Wednesday that it will be difficult for the Bank of Japan to meet its 2% inflation goal within its two-year time horizon, noting that inflation expectations aren’t growing significantly. Underscoring the tight spot the BOJ is now in, IMF deputy managing director Naoyuki Shinohara also said in an interview that the BOJ won’t be able to increase its asset purchases without creating “significant negative side effects” on the economy. In the World Economic Outlook released on Tuesday, the IMF said that further monetary easing may be needed in Japan to drive up inflation to 2% by 2015. Mr. Shinohara said any further easing should be considered only as a last resort, calling it a “Plan B,” saying any additional asset purchases could turn out to be harmful for Japan’s asset markets. Mr. Shinohara cited expanded purchases of exchange-traded stock funds and real-estate investment funds as examples of additional easing. The current easing program centers around purchases of Japanese government bonds, with only limited purchases of equity and real-estate funds. Mr. Shinohara pointed out that the markets for these funds are thin and could easily be distorted by increased purchases by the BOJ. He also said that such operations would run the risk of creating moral hazard and fueling bubbles in the markets.
As Debt Deadline Nears, Japan Nervously Sticks With Treasurys - As the world’s second-largest holder of Treasurys, Japan has a lot at stake in the American debt ceiling showdown. But the $1.135 trillion investment as of July — behind only China’s $1.277 trillion — is seen more as trapping Tokyo in the middle of the fight, rather than giving it any clout to help resolve it. Japanese officials see no gain in even threatening to sell the American debt — since such a move would only push down the value of the dollar against the yen, undermining one of their key economic policy goals. (A weaker yen makes Japan’s exports more competitive, a big factor behind the past year’s stock market boom). Treasurys dumping could also end up forcing losses on the Japanese banks that remain large holders of U.S. sovereign debt. Japanese officials are in constant touch with the Treasury Department, but have no ties with Congress. Perhaps the most effective thing they can do would be to join the growing global chorus of public concern, especially at the upcoming G20 meetings in Washington. That may be openly welcomed by the Treasury as a not-so-subtle way of pressuring Congress to the negotiating table. The consensus view among Tokyo policymakers: the next week will be nerve-wracking, but Washington will, in the end, find a way to avoid default.
Japanese sell record $23 billion of foreign bonds last week amid U.S. jitters - Japanese investors sold a record amount of foreign bonds on a net basis last week, offloading nearly $23 billion worth, amid concerns over whether U.S. lawmakers would reach a deal to raise the federal debt ceiling by mid-October and avoid a historic default. Japanese investors sold a net 2.226 trillion yen ($22.9 billion) in foreign bonds in the week through October 5, Ministry of Finance data released on Thursday showed. That was the largest amount since the ministry began collecting the data in 2005
Japan Machine Orders Jump to Highest Since Lehman Sank - Japan’s machinery orders jumped to 819.3 billion yen ($8.4 billion) in August, the highest since the collapse of Lehman Brothers Holdings Inc. in 2008 and a sign of a strengthening economic revival. Orders excluding ships and power generation rose 5.4 percent from the previous month, more than double the 2.5 percent median forecast in a Bloomberg News survey of 28 economists. While large bookings can make the numbers volatile, Credit Suisse Group AG. said today’s data confirm an “upward trend” in capital spending. Prime Minister Shinzo Abe is gambling that the economy’s momentum and 5 trillion yen of extra stimulus will be enough to prevent a sales-tax increase scheduled for April from derailing a recovery driven by the policies called Abenomics. Today’s numbers build on a Tankan report released Oct. 1 that showed confidence among large manufacturers at the highest since the early stages of the global credit crisis in 2007. “Capital spending is on a recovery trend,”
Japanese Machinery Orders Belie Underlying Fragility - Core machinery orders, which exclude volatile ones from utility companies and for ships, jumped 5.4% in August. That was significantly higher than the 2.0% forecast by The Wall Street Journal and the Nikkei. It also the put the total value of core orders at their highest since 2008. Yet economists say the underlying story is that Japan’s recovery is still being crimped by tepid overseas demand, and any change in the domestic picture could throw Prime Minister Shinzo’s economic program, or “Abenomics,” off track. The data showed manufacturing firms, like paper makers, chemical companies and such, are still lagging behind companies not in manufacturing — those in agriculture, construction, insurance and real estate — as demand for Japanese exports remains subdued. Bookings at non-manufacturers, excluding volatile orders, rose 6.2% on month, compared with a 0.8% rise for manufacturing firms. But Barclays Research economist Yuichiro Nagai said the lag in the manufacturing sector was the only concern in the otherwise upbeat data. “The figure shows there is no change in that trend, and is the latest sign the current economic recovery is mainly driven by domestic demand.” Norinchukin Research Institute economist Takeshi Minami pointed to the looming increase in the sales tax — set to rise to 8% from 5% in April — as a separate concern.
With Snide Remarks Toward U.S., Asia Summit Steams Ahead With Free Trade Deal - As the United States remains mired in political gridlock at home, a similar show was on view between the 21 global powers gathered at the second day of the Asia-Pacific Economic Cooperation (APEC) in Bali, Indonesia. The group of nations was assembled more than two decades ago to promote trade and economic growth in the region, and there was plenty of wheeling and dealing to be seen as heads of state and business leaders jostled over how best to knock down barriers and disparities to foment prosperity.The stakes are certainly high given the stats: The participating nations boast three billion people, 44 percent of global GDP and 45 percent of global direct investment. But with U.S. President Barack Obama choosing to withdraw from the summit in order to deal with a government shutdown at home, and Secretary of State John Kerry arriving in his place, there was not much love on show for American policies. At one point, Indonesian Trade Minister Gita Wirjawan joked that “people in the U.S. are more likely to believe in a UFO than free trade.” Central to the day’s discussions was the prospective Trans-Pacific Partnership (TPP) free trade agreement that is currently being negotiated between the U.S. and eleven other APEC nations. TPP has been touted as a “21st century free trade agreement,” slashing red tape and streamlining regulations around the fringe of the world’s largest ocean. But the partners remain unable to agree on certain principles regarding intellectual property, labor rights and the environment, as well as the possibility of nations stockpiling commodities for re-export at future times.
Disputes Cloud Asia-Pacific Summit Focus on Trade — Asia-Pacific leaders vowed Tuesday to cooperate on stabilizing a global economic recovery threatened by resource scarcity and bottlenecks to growth. Leaders of the 21-member Asia-Pacific Economic Cooperation forum wrapped up their annual summit with a pledge to protect security of food, energy and water from threats posed by climate change and population growth. “As our region increasingly becomes the main engine of global growth, we are called by the duty to look ahead, to adapt to our changing needs, and to reinvigorate the path toward progress in the Asia-Pacific,” the group said in its declaration. It also pledged cooperation on improving infrastructure such as roads, bridges and ports to make the region seamless for commerce. Most of the APEC declaration was a reiteration of longstanding goals. Later Tuesday, leaders of the dozen countries involved in U.S.-led free trade negotiations called the Trans-Pacific Partnership are set to report on their progress. They hope to seal an agreement by the end of this year. Soured ties between China and Japan bubbled beneath the surface of the summit after Beijing was announced as the host of next year’s meeting, putting renewed focus on the testy relationship between the two Asian powers. The official agenda for the meeting was mainly about forging a consensus on freer trade, but in speeches and meetings, territorial tangles between China and most of its neighbors were a constant subtext.
TPP pact requires regulated financing | Bangkok Post: opinion: World leaders who are gathering for the Apec summit in Indonesia had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific Rim countries into a trading bloc that the United States hopes could counter China's growing influence in the region. But talks remain stalled. Among other sticking points, the US is insisting that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have none of it — and for good reason. Not only does the US stand on the wrong side of experience and economic theory, it is also pursuing a policy that runs counter to the guidelines issued by the International Monetary Fund. That is especially noteworthy, as the IMF used to be considered the handmaiden of the US government in such matters for quite a few decades. Unfortunately, its newfound independence and insight has not yet rubbed off on the US government. That surprising development aside, the US government could learn a few lessons from the TPP countries when it comes to overseeing cross-border finance.
If TPP Is Difficult, What About Doha? - Leaders at the Asia-Pacific Economic Cooperation summit pledged their commitment to getting long-stalled global trade talks off the ground, but slow progress in buckling up a much smaller Pacific Rim agreement highlights the hurdles to reaching a broader pact.Trade negotiators are striving to reach agreement by December on less-contentious elements of the World Trade Organization’s long-stalled Doha round – named after the city where it was launched more than a decade ago – as a means of injecting life back into the long-moribund negotiations.Wrapping up their annual meeting Tuesday in Bali, Indonesia, APEC’s 21 members renewed their commitment to the global trade round. More attention was focused on a set of negotiations on the sidelines, however, between 12 of their number trying to finalize their own Trans-Pacific Partnership, one of the many bilateral and multilateral free-trade agreements that have proliferated since Doha stalled.“We recognize that Doha is at an impasse,” the APEC leaders said in a joint statement. “We are now at the 11th hour to put the negotiating function of the WTO back on track. Thus, the next step we take will be critical to the multilateral trading system and the role of the WTO.” Indonesia, which isn’t part of the Trans-Pacific Partnership, has put considerable effort into hosting a summit in December aimed at getting Doha going again. The hope is that trying to reach agreement on a less-contentious package of issues – including measures on customs procedures and development issues – might get the first global agreement in nearly a generation.
Who are the Biggest Trans-Pacific Currency Manipulators? How Great is the Threat? - Recently a bi-partisan group of 60 U.S. Senators made headlines with a letter to Treasury Secretary Jack Lew. The letter urged him to add a clause to the proposed Trans-Pacific Partnership (TPP) trade agreement prohibiting currency manipulation. The Senators cited a Peterson Institute study that claimed currency manipulation had cost the United States 5 million jobs. Subsequent discussion of the issue focused on China and Japan as the biggest manipulators. How big is the threat? What should we do about it? There is no doubt that China is a currency manipulator in the traditional sense that it treats its exchange rate as an explicit goal of economic policy. It shares this distinction with other countries whose currency regimes are of the “fixed” or “managed float” varieties. We could quibble about which of these categories China belongs to. Its currency regime is less rigidly fixed than, say, the currency boards of Bulgaria and Hong Kong, but less flexible than the managed float of, say, Russia. Either way, as the following map shows, currency manipulators—the light green and blue countries—are clearly in the majority among the world’s economies. What is at issue, then, is not whether China is a currency manipulator, but rather, how effective its manipulation is and whether and how that manipulation poses a threat to the United States. Over the past three years, I have written a series of posts    arguing that China’s currency manipulation has not been highly effective and that the harm done to the United States is often exaggerated.
U.S. Business Community Not Thrilled With Pacific Trade Pact Progress - The dozen Asian and Pacific countries negotiating an ambitious trade pact this week in Bali, Indonesia, failed to report much concrete progress toward a year-end goal, an outcome that is disappointing some in the U.S. business community. President Barack Obama failed to attend the gathering of Asia-Pacific leaders where trade negotiators were working on the Trans-Pacific Partnership, or TPP, because of the U.S. government shutdown and Washington political stalemate. The U.S. and other countries are seeking not only to reduce or eliminating tariffs among the 12 countries, but also at to limit the activities of state-owned companies, to boost protections for intellectual property and to pave the way for international investment, all priorities for the business community. “There is a range of issues where I don’t think we’ve heard that there’s been any real breakthrough, although they were all discussed,” Business leaders are eager to reap the benefits of a trade deal that would encompass a significant part of the global economy, but they have said in recent weeks that it would be better for the U.S. to miss its 2013 goal in order to gain a “comprehensive” deal that avoids deep compromises on key priorities. U.S. Trade Representative Michael Froman reiterated the year-end goal for concluding negotiations on the TPP but said talks would be extended if necessary to achieve a satisfactory deal. The absence of Mr. Obama weighed on the talks in recent days, since face-to-face conversations between a U.S. president and other national leaders can help drive talks forward when there are political sensitivities on either side, several trade experts said.
The TPP Is Not About "Free Trade" and Growth - The Washington Post finds it impossible to write about trade agreements without calling them "free-trade" agreements. It used the term twice in an article on the Trans-Pacific Partnership (TPP). Of course the TPP is not about free trade, in most cases the formal trade barriers between the countries negotiating the pact are relatively low. The main thrust of the negotiations is to impose a regulator structure in a wide range of areas -- health, safety, environmental -- which will override national and sub-national rules. This has little to do with trade and in some cases, such as the increased patent protection for prescription drugs being pushed as part of the deal (which is noted in the article), will actually involve increased barriers to trade.
Will China’s Gambit to Undermine the Trans-Pacific Partnership Succeed? - Yves Smith - While eyes in the US have remained focused on the budget cliffhanger in Washington, in Bali, two sets of meetings were taking place. The first was the latest set of Trans-Pacific Partnership negotiations. The US, led by John Kerry (Obama was supposed to make an appearance but the budget drama kept him away) met with representatives of the 12 nations it is pressing to agree to this deliberately mis-branded “trade deal”. The reason the label is misleading is that trade is already substantially liberalized; the real point of the TPP and its cousin, the pending EU-US trade agreement, is to weaken the power of nations to regulate, which will allow multinationals to lead a race to the bottom on product and environmental safety. As we wrote earlier this year: 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 second meeting in Bali this week was for Asia-Pacific Economic Cooperation (APEC). And the two intersected in intriguing ways. Remember, the terms of the TPP are shrouded in secrecy that is utterly inconsistent with the notion of democratic rule. Draft chapters have not been released. In the US, the US Trade Representative has given briefings on the general terms of the pact’s chapters, but as anyone who has worked on contracts or legislation, reading the detailed terms is critical to understanding an agreement, and those are being kept firmly secret. Consider this stunner from the Japan Times in August: In a related development Friday, government officials briefed LDP lawmakers on the current status of the negotiations.The Diet members were told that Japan has joined in time for negotiations on market access and other fields the country is keen to discuss. They were also informed that the talks involve a strict nondisclosure agreement prohibiting members from releasing information for four years after the conclusion of a deal.
World Bank cuts China, East Asia growth forecasts (Reuters) - The World Bank lowered its 2013 and 2014 economic growth forecasts for China and most of developing East Asia on Monday, citing slower growth in the world's most populous nation as well as weaker commodity prices that have hurt exports and investments in countries such as Indonesia. "Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand," the World Bank said in its latest East Asia Pacific Economic Update report. "Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports," it added. The Washington-based development bank now expects developing East Asia to expand by 7.1 percent this year and by 7.2 percent in 2014, down from its April estimate of 7.8 percent and 7.6 percent, respectively.
Chinese Think Tank Puts Shadow Banking at 40% of GDP - As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago. The sector grew from almost nothing a few years ago to the equivalent of 40% of gross domestic product at the end of 2012, the Chinese Academy of Social Sciences said in a report published Tuesday. The undisciplined grey lending source that exists alongside the traditional banking system has become vital to sustaining growth in the world’s second-largest economy, although some might argue it is more effective in keeping alive factories in industries with overcapacity and a property bubble. Despite a consensus on its fast-growing nature and increasing importance to the economy, there are disagreements over the exact size of China’s shadow-banking sector, given different calculation standards and lack of a unified definition. The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.
Why China may not be over-investing - Here’s a refreshingly different view on China, courtesy of Karen Ward, senior global economist at HSBC. Her key point: it’s not that China is necessarily over-investing (as is frequently argued) but that the rest of EM may be under investing. As she notes:…when comparing whether investment is ‘excessive’ it is surely necessary to consider an investment rate with countries that are at a similar stage of development. If a country has few roads, railways and other forms of infrastructure and its level of urbanisation is low, then it will require a higher rate of investment to catch up with the productivity, income and infrastructure of developed nations. So we need to narrow down the sample to compare China either with countries that are at a similar stage of development or to consider historical periods of development.It would be reasonable to compare China today to the US at the start of the 20th century or Japan in 1950. Chart 2 shows that it was at this point, prior to urbanisation and development, that these countries had roughly 40% of their workers in primary industry as we see in China today. Although the detailed data on the US in the 1900s isn’t available, Chart 3 shows that investment-to-GDP in Japan in the 1960s wasn’t too far from that seen in China in the most recent decade.
On premature deindustrialization - Traditional economies grow and develop first by industrializing, and then by moving into services. This has been the classic path to economic and political modernity. A few non-Western countries have been able to replicate this path: Japan, Taiwan, and South Korea are examples that come immediately to mind.I have been concerned for some time that for most latecomers this path has become increasingly difficult to traverse. It is not that industrialization has gotten entirely out of reach. Most poor countries do experience some industrialization, and China has become the world's manufacturing factory. But the vast majority of developing countries are not attaining industrialization levels reached by early industrializers. What's even more striking, the onset of deindustrialization is now taking place much sooner, at lower levels of industrialization and lower incomes. This shown in the chart below, which depicts the peak level of industrialization (measured by manufacturing's share total employment) in a sample of early and late developers. For each country, the income per capita at which deindustrialization began is also shown.
India Factory Output Misses Estimates as Domestic Demand Falters - India’s industrial output rose less than economists estimated in August as consumer spending moderated, adding pressure on Prime Minister Manmohan Singh’s government to intensify efforts to revive the economy. Output at factories, utilities and mines advanced 0.6 percent from a year earlier after a revised 2.75 percent climb in the previous month, the Statistics Ministry said in a statement in New Delhi today. The median of 33 estimates in a Bloomberg News survey was for a 2 percent gain. Singh’s steps, ranging from fewer restrictions on foreign investors to faster approvals for road and power projects, have so far failed to stem a slowdown in economic growth. India also faces consumer-price inflation of almost 10 percent, which led central bank Governor Raghuram Rajan to raise the benchmark interest rate last month even as investment moderates. “Investment in infrastructure has to be revived,” Soumya Kanti Ghosh, an economist at State Bank of India in Mumbai, said before the data. Supply bottlenecks also have to be eased to reduce price pressures and give the central bank room to loosen monetary policy,
India's Bipolar Monetary Policy Continues: RBI Cuts Marginal Facility Rate Another 50bps To Boost Liquidity - It was less than four weeks ago that the Reserve Bank of India, under new head Raghuram Rajan, stunned the world on September 20 when it announced that it would both hike its repo and cash reserve rates in an inflation fighting step, while lowering its marginal standing facility rate by 75 bps to 9.5% in order to boost banking sector liquidity, hence "bipolar policy" of the kind most recently seen in Europe. Moments ago, the RBI once again showed that when faced with the option of consumer pain, i.e. runaway inflation, and preserving a banking status quo, i.e. liquidity, the central bank will always choose the latter, when in a surprising move the RBI cut its Marginal Standing Facility rate by further 50 basis points, from 9.5% to 9.0%. From the RBI: Starting with the Mid-Quarter Review of September 2013, the Reserve Bank of India (RBI) began a calibrated withdrawal of exceptional measures undertaken since July 2013. This was done with a view to normalising liquidity conditions. Accordingly, the marginal standing facility (MSF) rate was reduced by 75 basis points from 10.25 per cent to 9.5 per cent. Furthermore, open market purchase operations of Rs. 9,974 crore were conducted today to inject liquidity into the system. On a review of evolving liquidity conditions and in continuation of this calibrated unwinding, it has been decided to: Reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9.0 per cent with immediate effect.
India Will Be Prepared for Tapering, Finance Minister Says - India’s Finance Minister P. Chidambaram on Thursday expressed confidence in his country’s ability to deal with the expected slowing of U.S. Federal Reserve asset purchases, a move that buffeted the emerging markets earlier in the year, saying India will be prepared for it. “The May 22 announcement took everybody by surprise. Therefore the consequences were rather harsh — there was a rush of capital out of emerging economies,” Mr. Chidambaram said in a seminar hosted by the Carnegie Endowment for International Peace. But he added that the United States has realized that’s not the way to make such a move. “The U.S. was roundly criticized in many fora, that they should have clearly communicated their policy and have consulted with other countries.” He stressed that the market has now “more or less entirely factored the consequences of tapering.” “It’s now clear that the taper will happen, perhaps with a smoother curve,” he said. “We have enough warning and notice that we have to build our defenses, which we are doing. We have to take reformist measures and build our own foreign reserves. I think India will be prepared for the taper,” he said. “I hope other countries will also take steps to prepare for the taper.”
U.S. debt default? Asian policymakers ready $6 trillion forex safety net (Reuters) - As the U.S. struggles to avert a debt default, Asia's policymakers have trillions of reasons to believe they may be shielded from the latest financial storm brewing across the Pacific. From South Korea to Pakistan, Asia's central banks are estimated to have amassed some $5.7 trillion in foreign exchange reserves excluding safe-haven Japan, much of it during the last five years of rapid money printing by the U.S. Federal Reserve. Data this week showed those reserves continued to pile up, with countries having added an estimated $86.7 billion in the July-September quarter, according to data for 12 Asian countries whose reserves are tracked by Reuters. China is by far the biggest holder of reserves, with an estimated $3.57 trillion according to a Reuters poll of analysts, which shows Asia's largest economy probably accumulated $68 billion alone in the previous three months. "The level of external reserves of Asian countries continues to be healthy," said Philippine central bank governor Amando Tetangco. "We are in a better position to meet the challenges that may be brought about by external shocks. But having said that, we have to remain vigilant. We should not be complacent."
Southeast Asian Consumers Shrug Off Rising Food Prices - Consumers in Southeast Asia are much more relaxed about rising food prices than policymakers, judging from a survey by the research company Nielsen, even in Indonesia where food inflation peaked in August. Bloomberg News A vendor arranges mangos at a fruit stall in the Pasar Badung market in Bali, Indonesia, on Oct. 8. Food price inflation soared there in August but, surprisingly, it hasn’t caused a panic among consumers, notes a recent Nielsen survey. Nielsen’s research found that 70% of consumers in Indonesia said they could handle further price rises and would choose to cut back on dining out and entertainment if they were really pushed. That’s despite food inflation rising 15.1% in August from a year earlier, according to figures from FactSet, a market data services firm. It’s a similar story for the rest of the region, where more than two-thirds of consumers in Vietnam, Singapore, Thailand and Malaysia said their household budgets could absorb higher food costs–well above the global average of 50%. Food is a central pillar of daily life in the region, where street food is ubiquitous, word-of-mouth reviews about new restaurants spread like wildfire and it’s not unusual to spontaneously send a freshly prepared dish to a neighbor. Just last week, Singapore’s Deputy Prime Minister Tharman Shanmugaratnam said he would like to see the city state become an Asian culinary capital—a title many Thais would say is held by Bangkok.
Hunger, Metrics, and SOFI 13 -- Last week, the Food and Agriculture Organization of the United Nations (FAO) published the 2013 version of its annual State of Food Insecurity Report (SOFI 13). The SOFI reports provide important insight into trends regarding the extent and distribution of hunger around the world, and their findings are widely reported in the media, typically with a headline announcing how many people on the planet are hungry (this year it is 842 million, down slightly from last year, meaning roughly one in eight people is chronically undernourished). This year’s SOFI report is in many ways an improvement over SOFI 12. Last year’s report received criticism because, in introducing its revamped methods for counting hunger, the FAO made crystal clear just how narrow its key measure for hunger, the Prevalence of Undernourishment (PoU), actually is, raising questions about its usefulness in policymaking. A group of scholars and activists coordinated by Frances Moore Lappé (in which I took part) published an academic article and a longer framing paper outlining our concerns about continuing to rely on such a narrow measure and using it to track global progress on the fight against hunger. Among our concerns was the fact that the PoU only gives an indication of chronic undernourishment—i.e., those falling below the minimum caloric requirement for a sedentary lifestyle continuously for over a year. The measure thus excludes episodes of hunger that last for less than a year, and underrepresents the hunger that is experienced by those who have higher energy expenditures (e.g., due to physical labor). The problem, however, is that the PoU, although explained by the FAO in terms of its limitations, has been widely equated with “hunger” both in the media and by policymakers. The FAO itself has used PoU as shorthand for hunger in its own outreach materials.
Global wealth inequality: top 1% own 41%; top 10% own 86%; bottom half own just 1% - Just 8.4% of all the 5bn adults in the world own 83.4% of all household wealth (that’s property and financial assets, like stocks, shares and cash in the bank). About 393 million people have net worth (that’s wealth after all debt is accounted for) of over $100,000, that’s 10% own 86% of all household wealth! But $100,000 may not seem that much, if you own a house in any G7 country without any mortgage. So many millions in the UK or the US are in the top 10% of global wealth holders. This shows just how little two-thirds of adults in the world have – under $10,000 of net wealth each and billions have nothing at all. This is not annual income but just wealth – in other words, 3.2bn adults own virtually nothing at all. At the other end of the spectrum, just 32m people own $98trn in wealth or 41% of all household wealth or more than $1m each. And just 98,700 people with ‘ultra-high net worth’ have more than $50 million each and of these 33,900 are worth over $100 million each. Half of these super-rich live in the US. All this is in a new global wealth report published Credit Suisse Bank and authored by Professors Anthony Shorrocks and Jim Davies – see the report here (global wealth report and the database wealth database). The professors find that global wealth has reached a new all-time high of $241 trillion, up 4.9% since last year, with the US accounting for most of the rise. Average wealth hit a new peak of $51,600 per adult but the distribution of that wealth is wildly unequal.
More Than Billion People Live on Less Than $1.25 a Day - The last three decades have seen unprecedented progress when it comes to reducing extreme poverty around the world—but there’s still an awful lot more to do.Roughly 721 million people were lifted out of extreme poverty — defined internationally as living on less than $1.25 a day — between 1981 and 2010, according to a new report by the World Bank released Thursday. The United Nations’ Millennium Development Goal of halving the share of people in extreme poverty between 1990 and 2015—an aim set at a summit in 2000—was reached in 2010, five years early.But, as the World Bank points out, that still leaves roughly 1.2 billion people completely destitute, including about 400 million children. One of every three extremely poor people is a child under the age of 13. (To put all this in perspective, America’s own poverty line amounts to about $60 a day for a family of four — as the Economist noted in June. People around the world in “extreme poverty” tend to lack enough food to meet basic physical and mental needs.) The World Bank report zeros in on the relative lack of progress in the world’s 35 “low income” countries — places like Bangladesh, Chad, Haiti and Kenya. Progress in these countries will need to pick up if international goals to eliminate extreme poverty by 2030 are to be reached.
Advanced Economies Strengthening, Emerging Weakening - IMF - Olivier Blanchard The issue probably foremost on everyone’s mind, is the fiscal situation in the United States, and its potential implications. While the focus is on the shutdown and the debt ceiling, we should not forget the sequester, which is leading to a fiscal consolidation this year which is both too large and too arbitrary. The shutdown is yet another bad outcome, although one which, if it does not last very long, has limited economic consequences. Failure to lift the debt ceiling would, however, be a game changer. Prolonged failure would lead to an extreme fiscal consolidation, and surely derail the U.S. recovery. But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad. We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences. Fiscal risks in the United States, as worrisome as they are, should not however lead us to lose sight of the bigger picture. Behind the daily news, the world economy has entered yet another transition. Advanced economies are slowly strengthening, more or less as forecast. At the same time, emerging market economies have slowed down, more so than we had forecast in July. Let me give you some numbers. We forecast growth in advanced economies to be 1.2% this year, 2.0% next year, the same as our July forecasts. We forecast growth in emerging markets and developing economies to be 4.5% this year, 5.1% next year, a downward revision of 0.5% and 0.4% respectively relative to our July forecasts. These two evolutions are leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions
IMF: Weaker Emerging Markets to Slow Global Growth — The International Monetary Fund on Tuesday cut its global economic growth forecasts and warned that the U.S. would harm the world economy if it fails to raise its borrowing limit. The international lending agency said the global economy will grow 2.9 percent this year and 3.6 percent in 2014. Both are 0.2 percentage point lower than the group’s July forecasts. The main reason for the downgrade was slower growth in China, India, Brazil and other developing countries.But the IMF also lowered its outlook for U.S. economic growth this year to 1.6 percent and next year to 2.6 percent. Those are 0.1 percentage point and 0.2 percentage point lower than in July, respectively. The fund’s forecasts assume the U.S. partial government shutdown would last only a short period. But it warned that failure to raise the U.S. government’s borrowing limit later this month could lead to a default on U.S. debt. That would push up interest rates, disrupt global financial markets and possibly push the U.S economy back into recession. “Failure to lift the debt ceiling would be a major event,” Olivier Blanchard, the IMF’s chief economist, said at a news conference.
Global Economic Growth in Low Gear Says IMF - The IMF has released their World Economic Outlook report and projects unemployment will remain unacceptably high in advanced economies as well as the Middle East and North Africa, an area of unrest. The IMF also warns if the U.S. debt ceiling is not promptly raised, serious damage to the global economy would probably result. The below graph shows the lowering of GDP estimates globally in comparison to last April's IMF projections.World economic output projections were reduced by 0.3 percentage points to 2.9% for 2013. Global growth for 2014 projections were also revised downward by 0.2 percentage points to 3.6%. The United States is only expected to have 1.6% annual 2013 GDP and 2.6% growth for 2014, revised downward by 0.1, 0.2 percentage points respectfully. The reason for the downgrade in GDP is the assumption the sequester will remain in place for the upcoming 2014 year. The IMF really slams the sequester and rightly so as it caused significantly less economic growth and notes The fiscal deficit reduction under the sequester is excessively rapid and ill designed, and it is expected to subtract between 1½ and 1¾ percentage points from growth in 2013. The probability of a new recession are low according to the IMF, 10% for the United States. That said, if the debt ceiling is not raised they predict the result would be a global recession and even worse. The Federal Reserve tapering their quantitative easing is projected to impact emerging economies around the globe with the taper removing 2.5 percentage points from Turkey's GDP and a quarter of a percentage point from Mexico's. Much of the reason for slower growth in emerging economies is rising interest rates and commodity prices.
IMF sours on BRICs and doubts eurozone recovery claims - Fund admits emerging markets have exhausted catch-up growth models after being caught off guard by rout triggered by Fed taper talk. The International Monetary Fund has thrown in the towel on emerging markets. After years of talking up the BRICS club of Brazil, Russia, India, China, and South Africa, it now admits that these countries have either exhausted their catch-up growth models, or run into the time-honoured problems of supply bottlenecks and bad government. The Fund has cut its forecast for the developing economies by 0.5pc to 4.5pc this year in its latest World Economic Outlook, and by 0.4pc to 5.1pc next year. The 2013 estimates have been slashed by 1.8pc for India, for Mexico by 1.7pc, and 1pc in Russia, compared to forecasts made in April. Similar damage is expected for Turkey, Indonesia, Ukraine, and others with big trade deficits as details are fleshed out. The IMF was caught off guard by the ferocity of the emerging market rout when the Fed began to talk tough in May, threatening to turn down the spigot of dollar liquidity that has fuelled the booms -- and masked the woes -- in Asia, Latin America, and Africa. In what amounts to a mea culpa, the IMF hinted that it had for long been blind to festering problems in the BRICS and mini-BRICs.
The pain of rebalancing global growth - FT.com: The world economy is like a see-saw. What was down comes up and what was up comes down. This creates new difficulties and new opportunities. But, overall, the story the International Monetary Fund tells in its latest World Economic Outlook is no disaster. Provided nothing bad happens – such as a US default – the world economy should now achieve somewhat more balanced growth. In the fund’s own words: “Activity in the major advanced economies has started to accelerate from subdued levels. By contrast, growth in China and many other emerging economies in Asia and Latin America, and to a lesser extent in the Commonwealth of Independent States, has cooled, after a surge in output beyond potential following the recovery from the Great Recession.” The overall picture presented, then, is one of a tricky rebalancing of the pattern of global growth: modestly improved dynamism in high-income economies, mainly the US, and reduced dynamism in a puzzlingly large number of emerging economies. Where are the risks? There are a few obvious ones. What if progress in the eurozone turns out to be temporary? A backlash against austerity and high unemployment in vulnerable members is still quite possible. Meanwhile, progress towards a true banking union in the eurozone seems to have stalled. A more immediate danger is a breakdown in US politics, leading to a huge disorderly tightening of fiscal policy or even a default on debt obligations. Yet another risk is that the unwinding of unconventional monetary policy and subsequent raising of interest rates prove chaotic. Some fear that inflation will suddenly explode in the high-income economies. This seems very unlikely.
Developed Countries See Slowing Inflation - Figures released by the Organization for Economic Cooperation and Development on Tuesday showed consumer prices in its 34 member countries rose by 1.7% in the 12 months to August, having risen by 2.0% in the 12 months to July. If global inflation rates were to continue to fall in coming months, central banks would find it easier to assure investors, businesses and consumers that they are in no rush to reverse the stimulus measures put in place since the 2008 financial crisis. While there is no agreed level of inflation that all central banks are content with, most that operate in developed economies have explicit targets for annual price rises of around 2.0%. Although the global economy appears to be picking up, policy makers remain concerned about the weakness of the recovery, and fear it remains vulnerable to setbacks, including uncertainty about the future of US budget policy. Across OECD members, energy prices rose by 1.7% in the 12 months to August, having risen by 4.5% in the 12 months to July. Food prices rose by 2.1%, down from 2.2% in June. The annual rate of inflation also fell or stabilized in most large developing economies, an indication that global inflationary pressures are easing. The annual rate of inflation dropped in China, Brazil and India, and was unchanged in Russia and South Africa
Countries Must Prepare for Exit From Monetary Policies - Countries around the world should take steps to prepare for a potentially bumpy exit from the unconventional monetary policies the U.S. and other major economies adopted in the wake of the 2008 financial crisis, the International Monetary Fund said in a policy paper published Monday.Exit from extraordinary stimulus programs such as the Federal Reserve’s ongoing bond-buying program is not yet warranted, the paper said. Still, other countries not pursuing unconventional policies “should take measures to safeguard their stability in preparation for exit and lay the foundation for sustained medium-run growth,” the paper said.While the IMF believes central banks have the tools and policies necessary to manage exit smoothly, there is still a chance that there could be some turbulence with international impact, Karl Habermeier, assistant director of the IMF’s monetary and capital markets department, told reporters during a conference call Monday. Emerging markets started reeling in May when the Fed began talking about winding down its easy money policies, which have sought to hold U.S. interest rates very low to spur a stronger U.S. economic recovery. Investors had plowed money into emerging markets in recent years while the U.S. recovery was sluggish and U.S. interest rates were at historic lows. That tide started to reverse in May, triggered by the prospect of rising U.S. rates and a strengthening economy, causing currencies and stocks to fall sharply in many developing economies.
A Brave New Transatlantic Partnership: the social & environmental consequences of the proposed EU-US trade deal - A Brave New Transatlantic Partnership highlights how the European Commission’s bold promises of up to 1% GDP growth and massive job creation through the EU-US trade deal are not supported even by its own studies, which rather predict a trivial growth rate of just 0.01% GDP over the next 10 years and the potential loss of jobs in several economic sectors, including agriculture. The report also explains how corporations are lobbying EU-US trade negotiators to use the deal to weaken food safety, labour, health and environmental standards as well as undermine digital rights. Attempts to strengthen banking regulation in the face of the financial crisis could also be jeopardised as the financial lobby uses the secretive trade negotiations to undo financial reforms such as restrictions on the total value of financial transactions or the legal form of its operations. On top of that, the investment chapter of the proposed EU-US trade agreement could open the floodgate to multi-million Euro lawsuits from corporations, challenging democratic policiesat international tribunals if they interfere with their profits (see our updated analysis of the leaked Commission proposals for so-called investor-state dispute settlement under the proposed EU-US deal here). Download a PDF of the report:Attached files: brave_new_transatlantic_partnership.pdf
IMF Sees Business-Loan Losses of EU250 Billion in Some EU Banks - Banks in Spain, Italy and Portugal face about 250 billion euros ($338 billion) in potential losses on their business loans over the next two years, the International Monetary Fund said. About one-fifth of combined corporate loans is at risk of default in the three economies, which are forecast to contract this year, according to the fund’s Global Financial Stability Report released today. The Spanish banking system is the only one with enough reserves to cover the losses, it said. The study is “an illustration of the potential magnitude of corporate risks for banking systems,” the fund said in the report. “Some banks in the stressed economies might need to further increase provisioning to address the potential deterioration of asset quality on their corporate loan books, which could absorb a large portion of future bank profits.”
Stronger Euro Creating Problems for ECB Inflation Target - The recent rise in the euro against other major currencies is weighing on southern European exports and reducing an inflation rate that is already well below the European Central Bank’s target, Austrian central bank governor Ewald Nowotny said Friday. In a briefing with reporters on the sidelines of meetings of the International Monetary Fund, Mr. Nowotny said he doesn’t see a need for changes in the ECB’s monetary policy stance. Still his remarks suggest that, although the ECB doesn’t target exchange rates, the euro’s rise may increasingly factor into the bank’s outlook for inflation and economic growth. Mr. Nowotny urged the U.S. government to find a way to increase its debt ceiling and avoid the devastating effects of a debt default. “The U.S. is the central power on monetary policy,” Mr. Nowotny said, and U.S. Treasurys are a key asset for the banking system globally. “Whatever reduces uncertainty is positive,” Mr. Nowotny said
Icelanders Run Out of Cash to Repay Foreign Debts - Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank. Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product. The nation faces a “repayment risk of foreign debt by private entities in the economy, who don’t have access to foreign financial markets,” Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said yesterday in an interview. “We view this as being exacerbated or made worse by the fact that our current account is actually declining.”
Ireland will need EU support when bailout ends this year, says IMF - A slowing economy, sky-high debts and a weak banking sector mean Ireland will need support from the European Union when its current bailout ends later this year, the International Monetary Fund said in a report on Friday. In a clear call for Brussels to accede to Irish demands for a credit line next year, the IMF warned that Dublin's recovery would be hampered without cheaper funding for its ailing banks. The report will deal a blow to the Irish government, which is under pressure domestically to maintain business and consumer confidence in the face of significant economic headwinds. In particular, export growth, which has underpinned the economy's recovery, has fallen in 2013. The IMF said that while exports had picked up moderately in recent months, the recovery would not stop Ireland's debts hitting 123% of GDP by the end of the year. Making matters worse, the poor state of the country's banks is holding back the domestic economy.
IMF Sees Greece Missing 2014 Bailout Budget Target - Greece is projected to miss a key bailout target for next year according to an International Monetary Fund report published Wednesday, a factor likely complicating already-fraught negotiations over the next tranche of financing for the ailing economy. The IMF projects in its latest Fiscal Monitor report that Greece’s budget surplus will only hit 1.1% of gross domestic product next year instead of the 1.5% of GDP target outlined in its bailout terms with the IMF and the euro zone. In the fund’s last review of the emergency financing program, it said Athens was on track to meeting the target. But tax collection problems, anemic growth and ongoing delays in a plan to sell off state assets have plagued the bailout program. Greece’s emergency creditors – the IMF, the European Commission and the European Central Bank – won’t issue the next round of needed bailout financing if Greece fails to meet its main objectives. The budget targets have become a new focal point in negotiations. Greek, euro zone and IMF officials paused the latest round of bailout talks to figure out how Athens might hit the budget target and to determine how to fill a shortfall in bailout financing, according to a person familiar with the matter. The mission was suspended for “technical work” in late September and is set to resume in the coming weeks. The revelation is also likely to give euro zone officials another reason to delay serious talks on reducing Athens’ debt burden. The euro zone, which holds most of Greece’s government debt, vowed to give the country debt relief if the country hit its bailout targets, but declined to say exactly how.
Cyprus economy set to contract by 8.7 percent, with jobless projected at 19.5 percent in 2014 -The Cypriot economy will contract by 8.7% in 2013, the IMF World Economic Output notes, reflecting the rapid deterioration of the macroeconomic environment on the island following the Eurogroup decisions that featured an unprecedented haircut of deposits. According to the WEO October projections, the Cypriot economy will decline by 8.7% in 2013 and by 3.9% in 2014, maintaining the same projections of the Troika adjustment programme. The WEO projects that the Cypriot GDP will shrink by 10.7% in the fourth quarter of 2013. Inflation is expected to be limited to 1.0% in 2013 and to marginally increase to 1.2% in 2014. The current account deficit is projected to reach 2.0% in 2013 and to decline further to 0.6% in 2014. Unemployment is projected at 17% for 2013 and to rise further at 19.5% in 2014.
Greek unemployment rate edges up to 27.6% - The Greek unemployment rate ticked up in July to 27.6 per cent from 25 per cent a year before, with young people still the hardest hit, official data shows. Announced by the Elstat statistics agency, the rate was marginally higher than the 27.5 per cent posted the month before. In total, the number of unemployed rose to 1.374 million people in July, while 3.6 million people were in jobs, the data said. Worst affected were workers under 24 years old, with 55.1 per cent out of jobs, compared to 54.9 per cent a year ago. The data also showed that in July, 31.1 per cent of women were unemployed compared to 25 per cent of men. After six years of recession and two strict bailout programs, Greece remains the eurozone country with the highest unemployment.
Greece risks becoming a 'failed state' without constitutional and economic reform - A call for a internationally backed programme on the postwar Marshall plan to rescue the Greek economy will be made at a conference in London on Thursday which will be attended by business leaders from the country. They will warn that without urgent action to address ineffective governance, the dramatic drop of the population’s confidence in the state and its political system and the slump in output and soaring unemployment, Greece risks becoming a "failed state" threatening to destabilise its continental neighbours. The alert will be sounded by Harris Ikonomopoulos, president of the British Hellenic Chamber of Commerce (BHCC), at a high-powered conference, entitled The Euro, Greece & the Southern Periphery, to be addressed by prominent politicians, businesspeople and academics drawn from the two countries. Ikonomopoulos, who is also the publisher of Eleftherotypia to which EnetEnglish belongs, believes that only a targeted constitutional correction – supported in opinion polls by more than 75% of respondents – followed by an internationally-sponsored programme of economic reform, along the lines of the Marshall plan that rescued Europe after the second world war, can save Greece from ruin and stop the contagion spreading to other EU states struggling with large debts. The scale of the Greek economic collapse, despite the repeated bailouts funded by the troika, made up of the European Union, the ECB and the IMF, will be laid bare by Ikonomopoulos, who will highlight an unemployment rate of 28%, the highest in Europe, rising to a catastrophic 65% among young people. The jobless rate is set to hit 34% by 2016, which equates to two million workers without a job in a country of just 11 million.
Portugal: no country for old people - At 60, Gesto not only finds herself living on a drastically reduced pension having been forced by redundancy into early retirement – she and her husband are also rapidly spending their savings, not on holidays but on supporting their separated daughter and two grandchildren. The Gestos are not unique. They belong to a growing new socio-economic grouping in crisis-stricken Portugal: elderly parents who, after a lifetime of raising children, are once again housing and providing for sons and daughters – and now their families too – following job losses and, as a consequence, homelessness.Pensioners, who comprise about a fifth of Portugal’s population, have been hard hit by austerity measures as the country struggles to comply with the terms of a €78 billion bailout. Scaled-back pensions combined with a higher cost of living driven by VAT hikes have slashed the purchasing power of the elderly. In its next round of cuts, the centre-right government of prime minister Pedro Passos Coelho plans to push the retirement age to 66 and to cut civil service pensions over €600 a month by 10 per cent. Almost a quarter of over-65s in Portugal are at risk of poverty and/or social exclusion, slightly above the overall country rate, according to the latest Eurostat figures from the European Commission. With the burden of the economic crisis landing on the doorstep of Portugal’s extended families, it is not unusual to see three generations living under one roof.
England's young people near bottom of global league table for basic skills - England is the only country in the developed world where the generation approaching retirement is more literate and numerate than the youngest adults, according to the first skills survey by the Organisation for Economic Co-operation and Development.In a stark assessment of the success and failure of the 720-million-strong adult workforce across the wealthier economies, the economic thinktank warns that in England, adults aged 55 to 65 perform better than 16- to 24-year-olds at foundation levels of literacy and numeracy. The survey did not include people from Scotland or Wales.The OECD study also finds that a quarter of adults in England have the maths skills of a 10-year-old. About 8.5 million adults, 24.1% of the population, have such basic levels of numeracy that they can manage only one-step tasks in arithmetic, sorting numbers or reading graphs. This is worse than the average in the developed world, where an average of 19% of people were found to have a similarly poor skill base. Out of 24 nations, young adults in England (aged 16-24) rank 22nd for literacy and 21st for numeracy. England is behind Estonia, Australia, Poland and Slovakia in both areas. This compares unfavourably with the adult population as a whole: English adults aged 16-65 rank 11th for literacy and 17th for numeracy. The OECD cautions that the "talent pool of highly skilled adults in England and Northern Ireland is likely to shrink relative to that of other countries".
Global greying - Last month, a group of charities warned that the government is unprepared for the impact of an ageing population, echoing a similar statement from the House of Lords earlier this year.It is certainly true that the average age of the UK population is rising. You only have to look at the census data to see that the proportion of the population over 60 has increased over the last 40 years and is set to carry on increasing for the next few decades.This is sometimes presented, especially by those on the right, as a birth rate problem. Charles Moore recently blamed a combination of contraception, homosexuality and hippie baby-boomers for reducing the birth rate and landing us in this economic & demographic mess. Others, usually on the left or the very free-market right, call for more immigration to rebalance our population profile. It’s the same solution by a different method – get more young people.But those who blame falling birth rates are looking at the wrong end of the population pyramid. The ageing population has come about because the top of the pyramid has grown, not because the bottom has shrunk. Thanks to better diets, healthcare, education and old age pensions, a lot of people are living past 70 and on into their 80s and 90s.