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

Saturday, October 19, 2013

week ending Oct 19

Fed Balance Sheet Increases By $50 Billion In One Week, $100 Billion In One Month, $1 Trillion In One Year - Five years after the "recovery" began, the Fed continues to monetize more debt as part of QE3 than at any time in history, and certainly more than during QE1, Twist, and QE2, as can be seen on the chart below (remember: all that matters is the flow, as we noted well over a year ago, and as even the Fed has finally realized).Why is this important? Because as even the Treasury has now admitted, the Fed's daily liquidity injections are all that matters. Of note: in the just completed week, the Fed's balance sheet increased by over $50 billion (again, in one week), by $100 billion in the past month, and by just shy of $1 trillion in the past year. Incidentally, this is "money" that continues to not make its way into the economy, and every single "reserve" dollar created by the Fed in exchange for monetization, is used by banks to ramp asset prices to now daily record levels.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 17, 2013: Federal Reserve statistical release - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline - The massive size of the Federal Reserve‘s balance sheet increases its commitment to keep inflation under control, New York Fed President William Dudley said in a speech Tuesday in Mexico City. “The size and composition of the Federal Reserve’s balance sheet actually creates incentives that reinforce the pursuit of the Federal Reserve’s objective with respect to inflation,” the official said in the text of remarks he was to give at a conference. The official made no forward-looking comments about U.S. monetary policy in his prepared remarks. He did say the policies pursued by the Fed have aided the economy. Mr. Dudley’s speech emphasized that even as the Fed has pursued a wide range of unprecedented policies to help the economy, its much cherished independence has not been compromised. The official countered those who believe the rapid and continued expansion of the Fed’s balance sheet will lead to surging inflation. From late 2007, when the Fed balance sheet stood at about $800 billion, Fed holdings have surged to $3.8 trillion, fueled primarily by Fed bond buying stimulus efforts. Much of the balance sheet is comprised of excess bank reserves, which could in theory flow very quickly back into the economy and cause growth to overheat and create inflation. Mr. Dudley explained in his speech that the size of central-bank holdings “create strong incentives to adjust policy in a timely way.” He said that if the Fed were to either fall behind on its effort to control inflation, or if it acted too soon to reign in price pressures, each mistake would create undesirable costs for managing the Fed’s holdings.

QE3 Critic Fisher Says Hard to Argue for October Taper Amid Washington Showdown - One of the loudest critics of the Federal Reserve’s $85 billion-per-month bond-buying program said Tuesday it could be hard for him to argue for reducing the program at the October policy meeting because of the budget showdown in Washington. Dallas Fed President Richard Fisher said in an interview with CNBC that he can’t see himself making the argument to scale back the program at the Oct. 29-30 meeting if the markets are still rattled or there still isn’t a resolution to the fiscal fight. That is significant, because Mr. Fisher has been one of the staunchest opponents of the bond-buying program, known as quantitative easing, or QE. He has said he argued in favor of the Fed making a small reduction in the pace of purchases at the Sept. 17-18 meeting. Instead, the Fed chose to stand pat, in part because it feared the budget fight in Washington could escalate. That has come to pass, with the government partially shut down for the past two weeks and the U.S. Treasury saying it will no longer be able to borrow and face a cash crunch on Thursday. “We don’t want to upset the boat here. I don’t want to upset the boat” on the “horribly rough seas” being produced by Congress and the White House,” said Mr. Fisher. Not only has the fiscal showdown created a headwind for economic growth, it has also complicated the Fed’s ability to see how the economy is doing, Mr. Fisher said, referring to the fact that the government shutdown has prevented government agencies from producing a variety of economic data reports that the Fed uses. “Here we are full throttle at the Fed, they’ve got the foot jammed on the brake and they’re smashing the instrument panel at the same time, and we’re in mid-flight,”

Fisher Says Fed Stimulus Won’t Work Amid Fiscal Fog - A top Federal Reserve official warned Thursday that there is a limit to how much the central bank can do to keep markets and the economy on an even keel while fiscal authorities wrangle over U.S. finances. Addressing the Economic Club of New York, Federal Reserve Bank of Dallas President Richard Fisher said it takes fiscal and economic clarity for businesses to make decisions and put to use all the cheap money the Fed has provided. “We can provide the fuel, but we can’t engage the gears of the engine of employment,” the official said in prepared remarks. The Fed’s aggressive stimulus program “is for naught as long as the fiscal authorities are slamming on the brakes and leaving everyone in the dark as to how they will cure the fiscal mess they have wrought.” Mr. Fisher’s comments echo much of what he said this past week. But even with Washington’s last-minute plan struck Wednesday that will reopen the government and extend funding into early 2014, the central banker warned that kicking the can down the road for a few months “will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future.” In response to questions from the press, the official acknowledged that the monetary side of policy now has to proceed more carefully. “I don’t like the [monetary policy] course we’re on, [but] given all this uncertainty, it’s hard even for me to argue to change the course,” he said.

George: Fed Should Start to Cut Bond Buying, but Gradually - Kansas City Fed President Esther George renewed her attack on the central bank’s aggressively easy monetary policy, saying the institution should start cutting its bond-buying stimulus. “The benefits of quantivative easing have been quite small, and the potential costs of the program grow each month as we buy those assets,” Ms. George said Thursday. When it comes to cutting the pace of the Fed’s $85 billion-per-month in bond purchases, “it would be important to start now, to start slowly to allow markets time to adjust, to recognize this is likely to be a long process in terms of unwinding” the bond purchases. Ms. George’s comments came from a speech before a local group in Oklahoma City. She is a voting member of the monetary policy-setting Federal Open Market Committee, and has over the course of the year carved out a role as the institution’s dissident with the highest profile. Ms. George has feared for some time that Fed bond buying is creating risks of a future inflation surge. She also worries that the bond buying, which is designed to lower the unemployment rate and boost growth, will create new bubbles in financial markets. She has had little success bringing other voting members of the FOMC to her view although some regional Fed officials, who do not currently have voting slots, agree with her

Evans: Fed To Remain Accommodative for Some Time to Come - Federal Reserve Bank of Chicago President Charles Evans says now isn’t the time to pull back on the central bank’s easy money policies. “I expect our overall stance of monetary policy to remain highly accommodative for some time to come,” Mr. Evans said in the text of a speech to be delivered Thursday in Madison, Wisc. “It is not yet time to remove accommodation. The data are still not definitive enough to say that now is time to adjust” the pace of the Fed’s ongoing bond-buying stimulus program, the official said. Mr. Evans, who is a voting member of the monetary policy-setting Federal Open Market Committee, has been a consistent supporter of the Fed’s $85 billion per month bond-buying program, which is designed to lower unemployment and push up growth. Ahead of the September FOMC meeting, however, the official had described himself as open-minded on the question of whether the Fed should begin to pare the pace of bond buying to reflect the economy’s improvement. The outlook for bond buying is now in flux in the wake of the government shutdown and borrowing limit battle, amid signs the Fed may stay the course on asset purchases to offset the uncertainty created by Washington. The shutdown has also broken the stream of government-generated data the Fed needs to make a choice on policy. “Only the data can tell us how much progress we’ve made, and they aren’t saying much right now: The data available in September were inconclusive, and since then, incoming information has been silenced with the federal government shutdown,” Mr. Evans said.

Fed’s Evans Sees QE Tapering Postponed After Data Shutdown - Federal Reserve Bank of Chicago President Charles Evans, an outspoken advocate of pressing on with Fed stimulus, said the central bank should not begin reducing the pace of asset purchases as the data used to gauge the economy’s health stopped during the government shutdown. “Only the data can tell us how much progress we’ve made and they aren’t saying much right now,” Evans said today in a speech prepared for delivery in Madison, Wisconsin. “The data available in September were inconclusive, and since then, incoming information has been silenced with the federal government shutdown.”  “It is not yet time to remove accommodation,” Evans said at the 2013 Wisconsin Real Estate and Economic Outlook Conference. “The data are still not definitive enough to say that now is time to adjust the QE3 flow purchase rate.” In response to audience questions, Evans said the Fed would likely need “a couple of meetings to assess” the economy and await data that present a picture of how the economy weathered the shutdown.

Fed Unlikely to Trim Bond Buying in October - The government shutdown might be over, but the long-running drama about when the Federal Reserve will start scaling back its $85 billion-a-month bond-buying program might now last longer.Just a few months ago, the Fed seemed to be on track to start pulling the program back by September in response to an improving economy. Now, it isn't clear when the first move will occur. The Fed is unlikely to start curtailing its bond buying at its next policy meeting Oct. 29-30. Fed officials have said the decision depends on how the economic data evolve, but the data won't be very illuminating into November because the partial government shutdown closed the agencies that collect them. "For those who really look at the data, it is going to basically delay thought of changing course," Richard Fisher, president of the Federal Reserve Bank of Dallas, said Thursday in an interview. Fed officials could act at one of the following two meetings—Dec. 17-18 or Jan. 28-29. Their decision will turn on the strength of an economy that would still be a bit harder to read.

Fed’s Williams: Unconventional Policies Unlikely Be Permanent --Some of the most prominent parts of the current monetary policy tool kit will likely be retired when the Federal Reserve is able to raise short term interest rates above their current zero percent level, Federal Reserve Bank of San Francisco President John Williams said Friday. Speaking at a conference held by the National Bureau of Economic Research in Boston, Mr. Williams praised the effectiveness of the tools the central bank has adopted since it could cut its traditional monetary policy level, the overnight fed funds rate, effectively to zero. He said he believed the Fed’s bond buying activities, as well as its efforts to offer guidance about the future path of monetary policy, have all done a lot for the economy. But bond buying, and things like job and inflation thresholds that give clues to when the Fed might raise rates, still have enough uncertainty about them that they should be reserved for extraordinary times. “Given this understanding and the predictability of the effects of conventional policy, the short-term interest rate remains the best primary tool for future monetary policy,” Mr. Williams said in the text of his speech. That means the bond buying that has come to serve as the highest profile expression of central bank monetary policy will likely not return once the Fed funds rate has moved above its de facto zero percent rate. Also to be retired: current Fed guidance that says the funds rate is unlikely to be lifted until the jobless rate goes below 6.5%, so long as expected inflation stays under 2.5%.

3 Academic Studies Show that Quantitative Easing Doesn’t Help the Economy - Quantitative easing doesn’t help Main Street or the average American. It only helps big banks, giant corporations, and big investors. (In reality, Federal Reserve policy works … just not for the average American. And a lot of the money goes abroad). Lacy Hunt – former senior economist for the Federal Reserve in Dallas, chief economist for Fidelity Bank, chief U.S. economist for HSBC, and now Vice President of Hoisington Investment Management Company (with more than $5 billion under management) – writes today: Another piece of evidence that points toward monetary ineffectiveness is the academic research indicating that LSAP [the Federal Reserve's program of Large Scale Asset Purchases] is a losing proposition. The United States now has had five years to evaluate the efficacy of LSAP, during which time the Fed’s balance sheet has increased a record fourfold.Three different studies by respected academicians have independently concluded that indeed these efforts have failed. These studies, employing various approaches, have demonstrated that LSAP cannot shift the Aggregate Demand (AD) Curve. The AD curve intersects the Aggregate Supply Curve to determine the aggregate price level and real GDP and thus nominal GDP. The AD curve is not responding to monetary actions, therefore the price level and real GDP, and thus nominal GDP, are stuck—making the actions of the Fed irrelevant.

QE Does Not Create Jobs. It Never Did. It Never Will.  - I continue to read pieces in the media claiming the QE should not be stopped because it will hurt the recovery. I don’t understand this claim because there is literally no historical evidence that QE creates jobs in the first place.  The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there. Now let’s look at the US today.  The official unemployment rate is highly charged politically as it is used by the media to gauge how well a particular administration is doing at generating job growth. As such the unemployment numbers are routinely massaged to the point of no longer reflecting the true number of unemployed Americans. For this reason, I prefer to use the labor participation rate when gauging the health of the US jobs markets: this metric represents the number of Americans who are currently employed as a percentage of the total number of Americans of working age.

QE Is "At Best An Unfair And At Worst An Evil Policy" = Five years ago, when QE first started, we blasted the Fed's "Plan Z" systemic rescue "policy" - which was merely a tried and true dilutive fallback plan used by every collapsing monetary regime starting with the Romans - stating it does absolutely nothing to resolve the biggest underlying threat to the economy and the western way of life, namely the epic accumulation of debt (most of it bad), courtesy of a Fed which has now unleashed a perpetual "buyer of only resort" QE (as we predicted months before QEternity was revealed), which instead only redistributes wealth from the middle class to the wealthiest 0.01%, while providing scraps to the poorest to keep them occupied and away from very violent thoughts.  We were quickly branded as conspiracy theorists, with the confused legacy media promptly resorting to ad hominem attacks: after all, that is what it really knows how to do when all else fails.  So it is with great amusement that we watch how one after another vehicles of legacy, conventional thought turn, and confirm that Zero Hedge was hardly conspiratorial with our assessment back in 2009. We were just about 5 years ahead of the curve. Enter the FT, which in an Op-Ed today titled "QE has stigmatised the well-off" says that "despite it being entirely justified as a save-the-world policy in its first round, it is still at best an unfair and at worst an evil policy. Why? Because of the way in which it redistributes wealth. Very low interest rates and the ongoing purchase of government bonds were supposed to lead to a huge investment boom as people put money into capital projects and new business that

Regional Fed Bosses Struggle With Communication Issue - In the three weeks since the Federal Reserve shocked markets with a decision to stick with its aggressively easy monetary policy stance, regional central bank leaders have been taking stock of their institution’s efforts to clearly communicate its policy outlook. And as much as the officials who lead the regional banks frequently disagree about the right path for monetary policy, they also are struggling to hold a coherent view about the state of central-bank communications. Some see a central bank conveying as much as it can, in uncertain times. Others fear markets see a hidden subtext to central-bank comments that doesn’t in fact exist. Others think the Fed is simply doing a bad job at managing expectations and believe the process needs a significant overhaul.  One thing they all agree on: Clear communications is important and surprising markets and the broader public is something best avoided. But from that shared view, officials can’t seem to agree on how the current strategy is playing out in the real world, in an environment where financial markets are on the receiving end of a steady stream of Fed official statements, officials’ speeches and frequent press interviews. In a speech Friday, Federal Reserve Bank of Boston leader Eric Rosengren said when the Fed is pursuing a policy that is driven by the data, it can be “difficult” to communicate with clarity. “Policy will necessarily change as we update our forecasts and risk assessments in the face of new economic data,” and officials need to “respond if the latest information suggests that the economy is likely to significantly diverge from the appropriate path,” Mr. Rosengren said.

Getting the Fed to Explain Itself Better - The nomination of a new chief of the Federal Reserve seems a fine time to step back a pace and look at some crucial issues on the role of the Fed with an eye to making a good institution even better. In case that “good institution” threw you, let me elaborate.  In an era where almost every societal institution I can think of has been failing, the Federal Reserve stands out as a notable exception.  The government sector is a bad joke right now.  Corporate America is widely viewed as giving up on America in the pursuit of global profit.  Fundamental aspects of democracy — voting rights, the independence of the Supreme Court, equal opportunity and mobility — are in doubt.Yet the Fed, largely by dint of its designed independence from political pressure, continues to pursue its mandates of stable prices, full employment, and oversight of the banking system.  It has, of course, made big mistakes.  Critics, including myself, are always arguing about whether it is being too hawkish (overweighting inflation concerns) or dovish (overweighting employment concerns), and the economy is still suffering from the fact that it missed the housing bubble, a truly egregious error, though one made by most economists. But that was an analytic error, not an institutional one, and the Fed clearly has the capacity to self-correct, whereas a characteristic of failing institutions is the inability to do just that.

Minneapolis Fed Voted to Lower Discount Rate, Three Banks Want Increase - The Federal Reserve Bank of Minneapolis voted in September to lower the central bank’s discount rate, reflecting the regional bank’s view that the economy needed support amid high unemployment. The Federal Reserve’s Board of Governors decided last month to keep its discount rate unchanged at 0.75%. That rate is what banks are charged on short-term loans they receive from the central bank. Directors from Dallas, Philadelphia and Kansas City voted to raise the rate to 1%, as they have done before. Those officials were “interested in moving toward the … pre-crisis discount rate structure,” according to minutes released by the Fed Tuesday. The Kansas City Fed has voted consistently and the Philadelphia Fed first voted this summer to increase the discount rate. The Dallas Fed first voted for the change in June. By lowering the rate, Minneapolis Fed officials “believed that a looser setting would help to foster the committee’s macroeconomic objectives of maximum employment and price stability.” Regional Fed directors send their request for the discount rate every two weeks, and the Fed’s Board of Governors makes the final decision. The discount rate is separate from the Fed’s more prominent interest rate, the federal funds rate, which is the rate at which banks lend to each other overnight.

Fed’s Evans: Bad Idea to Use Monetary Policy to Burst Bubbles - Federal Reserve Bank of Chicago President Charles Evans said those who would prefer to tighten monetary policy to reduce the threat of new financial bubbles are barking up the wrong tree. The central banker, who has been a strong supporter of the Fed taking aggressive actions to aid the economy, said that instead of using monetary policy actions to bolster stability in markets, the central bank should use its expanding portfolio of regulatory powers to target imbalances. “Without adequate safeguards, excessive and persistently low interest rates could lead to excessive risk-taking by some investors,” Mr. Evans said in the text of a speech to be given in Chicago before the Financial Management Association Annual Meeting Luncheon. But those safeguards now exist: “Regulatory efforts can effectively minimize the risks of another crisis and increase the resiliency of the financial system,” the official said. In a refrain common to Fed officials, Mr. Evans warned that monetary policy is simply too blunt a tool to deal with financial bubbles. “Higher interest rates would reduce risk-taking where it is excessive; but they also would result in a pullback in economic activity in sectors where risk-taking might already be overly restrained,” the official said. Hiking rides to reduce excessive risk taking in markets would result in “higher unemployment; a risk of choking off the economic recovery; even lower inflation below our objective; and, somewhat paradoxically, the introduction of new financial risks by reducing asset values and credit quality,” Mr. Evans warned.

Would Janet Yellin as Fed Chair Mark a Shift in Economic Policy? - Bill Black -The latest episode of the Black Finance and Fraud Report from The Real News Network. Bill is discussing whether Yellin’s confirmation marks a victory for progressive democrats?  Or you can visit the TRNN site that includes transcripts.

Five On The Floor - Paul Krugman - We’re coming up on the fifth anniversary of an important moment: the point at which US interest rates hit the zero lower bound, and we entered a liquidity trap. Five years! Yet many people, even many economists, are still in denial over what that means. First of all, about that date: Officially, the Fed established a target rate between 0 and 0.25 percent on December 15, 2008, but the effective Fed funds rate (the rate at which banks lend reserves to each other) plunged to near-zero in late October: As some of us tried to argue right from the beginning, hitting the zero lower bound changes everything. It’s not just that the rules change for monetary policy, although they do: some people have been warning for the whole five-year period that the surge in the monetary base will cause runaway inflation, and it keeps not happening. It’s also true that we enter the territory of paradoxes; the paradox of flexibility, but also, and more crucially, the paradox of thrift, in which attempts by some players in the economy to save more end up leading to less, not more, investment. For those who don’t know or don’t get the paradox of thrift, it’s actually very simple: if people (or the government) cut their spending, and the Fed can’t offset this move by cutting interest rates, the economy will contract — and the economy’s contraction will reduce the incentive to invest, so that investment actually falls.

The Ever-slowing Velocity of Money -  There is one rather little reported economic statistic that goes a long way to explaining why this recovery has been so poor; the velocity of money.  M2 is the supply of currency in circulation plus both demand and chequing deposits (the aforementioned being M1 or the narrowest definition of the supply of money) plus savings deposits, certificates of deposit (less than $100,000) and money market deposits.   Since the beginning of the Great Recession in December 2007, the M2 money supply has grown from $7450.8 billion to its current level of $10818.5 billion, an increase of 45.2 percent.  Now, let's look at the growth in nominal GDP:  Since the beginning of the Great Recession in December 2007, nominal GDP has grown from $14672.9 billion to its current level of $16661 billion, an increase of only 13.5 percent.  Note that the growth in M2 has far outstripped the growth in nominal GDP.  As a result, here's a graph that explains a lot about why the American economy is lagging: The velocity of money has dropped substantially since the beginning of the Great Recession and continues to fall.  In fact, at this point in time, the velocity of money is at its lowest level in over five decades.  Central banks hope that by boosting the supply of money, that consumption will rise, boosting GDP.  In our current situation, the Federal Reserve has obviously boosted the supply of money through one of the means available to it (lower interest rates, changing bank reserve requirements and through the open market by purchasing government bonds), however, this huge boost of money has not been used as often (or at all) like the Fed has hoped.  As you can see from the third graph, during each recession over the past five decades, the velocity of money has dropped but, as the economy ramps up, the velocity rises generally as a result of an increase in the supply of money.   During the first half of 2010, the velocity rose very slightly, however, since the third quarter of 2010, it has fallen and is showing no sign of reversing that trend as shown here:

Where Have All the (New) Dollars Gone? - About a month ago, someone called “Suzanne” wrote a comment here that read, “I’d like to point out something: Look at your cash… you won’t see any paper dollars of any denomination printed after 2009.” ( I thought that was very interesting and have since checked hundreds of bills of all denominations (up to $100) and haven’t found any of Series 2010, 2011, 2012, or 2013. She may be right about that, and that the Fed is “printing”/creating money in digital form only, in the account balances at the primary dealer banks (mostly as “reserves”). It’s not clear to me yet why this might be happening, but if it’s true then the net effect is the gradual reduction of physical US currency in the world. (The “money supply” may be increasing but in digital form only, not as cash in circulation.) The reason for this is that a portion of all cash transactions eventually make their way into the banking system in which worn out bills are supposed to be replaced with new ones, presumably ones that show the year the bills were printed (e.g., Series 2012). But, evidently, that may not be what’s happening, so fewer and fewer bills remain in circulation over time. I haven’t even found a new looking Series 2009, in case all new bills printed after 2009 continue to have that mark, for whatever reason. I’ve heard that banks want to create a cashless monetary system, and this could be the way they are trying to do it.

Fed's Beige Book: Economic activity increased "at a modest to moderate pace" - Fed's Beige Book This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. "  Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of September through early October. Eight Districts reported similar growth rates in economic activity as during the previous reporting period, while growth slowed some in the Philadelphia, Richmond, Chicago, and Kansas City Districts. Contacts across Districts generally remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate. Construction and real estate activity continued to improve in September. Residential construction increased moderately on balance, growing at a stronger pace in the Minneapolis and Dallas Districts but only slightly in Richmond and Philadelphia. Multifamily construction remained stronger than single-family construction in a number of Districts. Residential real estate activity continued to improve at a moderate pace in most Districts, as home sales and prices continued to rise and inventories remained low. Nonresidential construction activity remained modest, but varied by market and District. . A number of Districts reported that vacancy rates continued to fall, rents rose, and the outlook for commercial real estate was generally positive.

Fed Beige Book: District By District Summary - The Fed's latest "beige book" report said overall economic activity continued to expand at a "modest to moderate pace" throughout the nation. The following are excerpts from a district-by-district summary of economic conditions.

Game-Changing Investments for the U.S. - While Washington remains mired in brinksmanship over the debt ceiling and the budget, a potentially larger problem is building that may constrain growth for decades to come. In late 2012, the Congressional Budget Office issued a report revising potential gross domestic product downward because of weak investment in the underlying productive capacity of the economy, a slowdown in productivity growth and demographic shifts.  Today G.D.P. in the United States remains nearly $2 trillion below the prerecession trend and is expanding at an anemic annual rate of about 2 percent, both because of weak aggregate demand and because of the slowdown in the economy’s potential growth rate. A resurgence in investment is essential to address both causes of the disappointing recovery and to create jobs.Annual net private nonresidential fixed investment — a measure of the productive investment and real expansion in physical structures, equipment and software — fell to less than $100 billion (in 2005 dollars) in 2009 and 2010 from a peak of $435 billion in 2007. And while it has recovered since then, it remains 40 percent below its prerecession peak.  When measured as a share of G.D.P., this trend is even more worrisome. Net productive investment averaged roughly 4 percent of G.D.P. in the United States in the postwar period until 2000. The share plummeted after the 2001 recession and again after the 2008-9 recession, falling to a historic low of just 0.63 percent of G.D.P. in 2009.

Shutdown puts health of economy on ice — Lawmakers are finally breaking the ice after a two-week government shutdown, but it may take awhile to gauge how much of a chill it gave to the U.S. economy. Despite rising prospects of a deal on government spending and the U.S. debt limit, the standoff in Washington has delayed a number of key economic reports, and it may take another week before they start to appear. Yet those reports, such as employment growth for September, may not tell us much about where the economy is headed in light of the disruption caused by the stalemate. The government shutdown has increased the “uncertainty around current economic conditions,” Some economists figure the dispute will only shave a few ticks off growth in the fourth quarter, which began at the start of October. Others see a deeper impact owing to the hesitancy of consumers and businesses to spend in the midst of yet another episode of political brinkmanship. The scarcity of economic data also makes it harder for the Federal Reserve to figure out its next step. The central bank was poised at the end of summer to begin to scale back a massive stimulus program for the economy, but now it’s in wait-and-see mode. Still, some clues about the economy are likely to emerge this week with non-government reports on the health of U.S. manufacturers . The Fed, which was not affected by the shutdown, is also on tap to produce its snapshot of what’s going on around the United States.

As Goldman Slashes 0.5% From Q4 Growth, How Much More "Government Shutdown" GDP Pain Is There? - Over the past month there has been a sudden shift in the public's attention to the debt ceiling debate and away from the government shutdown, which since it did not result in the Armageddon many had predicted (same as the sequester) has been promptly forgotten. However, the reality is that while government workers are getting a post-facto paid vacation when the government reopens, current consumption is substantially curtailed and furthermore, government appropriation budgets are in limbo and thus unspent (for a prior analysis of how the calendar of government appropriations may favorable impact the late summer economy, read here). Which means with every passing day the US economic output is declining, and once again sellside analyst estimates will (as usual) have to be substantially lowered.  Enter Goldman Sachs, whose Alex Phillips just said that: "If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%." In other words, pro forma for the 14 day government shutdown (and continuing) Goldman has just cut its Q4 GDP forecast from 2.5% to 2.0%. And to think this was the year that Jan Hatzius was desperately praying his optimism (for the 4th year in a row - and who can possibly forget Hatzius boosting its Q4 2010 GDP estimate from 4% to 5.8% - and the same every year since) would finally be rewarded. Sorry Jan: we were right again, you were wrong. Again.

Vital Signs: Economic Optimism Fades, Again - For many economists, a stronger recovery has always been just around the corner. Their problem: The corner keeps moving. The latest Wall Street Journal survey of economists found forecasters, as the year winds down, acknowledging – again — that their growth expectations were more likely to prove too bullish. The October survey found 85% of economists saying the risk to their growth forecasts was to the downside, meaning growth would prove weaker than they anticipated. For most of the year, the majority of economists saw upside risks to their forecasts — the possibility of stronger growth than they expected. As recently as June, two-thirds said stronger growth than they had forecast was more likely than weaker growth. It’s part of a slow awakening this year, as it has been in prior years. To be fair to economists, surprises keep getting in the way. Forecasting a Japanese natural disaster, euro-zone debt crisis or U.S. political dysfunction is hard to do. One driver of the big swing this month: The economists were surveyed after the government shut down and as the risk of a U.S. default approached. Most forecasters cited that uncertainty as a key risk to the economy.

Yield curve inversion moves beyond one month - It took a while for the public to begin to care about the debt ceiling fiasco, but the realization is sinking in that it's not just "fun and games".  Google search frequency for the term "government default" has moved way past the spike in 2011 to hit a new record. Equity investors have pinned their hopes on a potential breakthrough in negotiations, as Paul Ryan suddenly stepped into a leadership role (see post). VIX dropped some 24% (relative move) in a couple of days in response and indices rose sharply. Expectations have risen that the Republican leadership will attempt to find a face saving solution that will reduce the ongoing bleeding of popular support for the GOP. Bond investors however are not taking any chances. The yield curve inversion has now moved beyond 1-month bills, with maturities out to three months feeling the impact. Rumors persist that institutions are continuing to move out of treasury money market accounts in fear of having their funds frozen.

Uneasy Investors Sell Billions in Treasurys - While leaders in Washington have been chasing a deal to avert a U.S. default, investors and banks have dumped billions of dollars in government debt. In the past two weeks, investors have sold mountains of short-term debt issued by the government. Banks have also reduced their holdings, trimming such debt by more than 50% over that period, according to data from the Federal Reserve Bank of New York. Amid anxiety about near-term finances, yields on U.S. debt that comes due in one month have risen to levels higher than for similar securities that don't mature for six months. Typically, issuers pay more to borrow for longer periods of time. Some large institutions have taken steps to prevent clients from using short-term U.S. debt in certain transactions, to avoid being stuck with the debt in the event of a U.S. default. Citigroup Inc. has started telling some clients it would rather not take Treasurys maturing Oct. 24 or Oct. 31 as collateral, sounding out clients about whether they could instead use Treasurys that mature later, according to people familiar with the matter. Units of Boston-based bank State Street Corp. have been discussing which Treasury bills—or debt securities maturing in a year or less—it may restrict as collateral for loans and trades, according to a person familiar with the matter. A spokesman for State Street said the firm is "monitoring negotiations in Washington, and evaluating how we can protect our clients," but had "not implemented any changes with respect to [its] collateral policy."

Washington Dysfunction Is Hurting GDP Growth - For the last three years, there has been much speculation over the economic cost of partisan politics. A new study has put a number on it. According to a report prepared by Macroeconomic Advisors for the Peterson Foundation, the fiscal drag and uncertainty that has resulted from a more polarized Washington has shaved a percentage point off GDP growth since 2010 and cost the country 2 million jobs over the last three years.  The study’s starting point is an index of policy uncertainty from Stanford academics, which it tweaked to reflect the budget and fiscal debates in Washington over the last three years. The study takes into account factors such as news mentions of policy uncertainty, tax provisions that are set to expire by year-end (and thus come up for debate), and widely divergent ideas about what budget and spending policy is likely to be. These are then tallied against uncertainty in the market, as evidenced by things like the divergence between T-bill yields and mortgage rates, corporate bond rates, other credit spreads and the equity risk premium. Looking at all of this, Macroeconomic Advisors found that market uncertainty was strongly correlated with political uncertainty. The group then created a counter-factual model of what the economy would have looked like if policy had been perfect—meaning no budget fights, debt-ceiling standoffs, or sequesters. The result would have been an addition 3/10th of a percentage point of growth per year, plus 2 million more jobs.

‘Corrosive’ Political Conflict Is Holding Back U.S. Growth - Recurring political conflict in Washington is weighing on the U.S. economy and holding back growth, the chief economist at Moody’s Analytics said Wednesday. Mark Zandi was the latest Wall Street official to warn of the broader consequences of U.S. political dysfunction, and he painted a grim picture despite the fact that Congress was cobbling together a temporary compromise to raise the U.S. borrowing limit and reopen the government. He said that while the markets aren’t likely to nose dive if the compromise holds, business owners may continue to hold back investments as long as another fiscal fight looms.“This brinksmanship, which happens every three, six, [or] twelve months, is corrosive on our collective psyche and it is weighing on our willingness and ability to take risk,” Mr. Zandi said at an event hosted by the Washington-based think tank Third Way. “I am increasingly of the view that the reason why we can’t get our groove back, why those animal spirits that are so key to the well workings of the American economy are bottled up are because of what’s happening” in Washington.

Analysis: Washington becomes the biggest risk to the U.S. economy (Reuters) - Consensus may be hard to find in Washington these days, but many corporate executives and economists seem to agree on one point: the biggest risk to the world's largest economy may be its own elected representatives. Down-to-the-wire budget and debt crises, indiscriminate spending cuts and a 16-day government shutdown may not be enough to push the U.S. economy back into recession. But Washington's policy blunders in recent years have significantly slowed economic growth and kept roughly 2 million people out of work, according to recent estimates. Steep spending cuts are a big reason. But the governance-by-crisis also may be prompting businesses to sit on their cash rather than building new factories, buying more equipment and hiring more workers, some economists say. "Increasingly I'm of the view that the reason why our economy can't kick into a higher gear is because of the uncertainty created by Washington," said Mark Zandi, chief economist of Moody's Analytics. Congress on Wednesday voted to re-open the government and extend its borrowing authority through February of next year. But the deal did nothing to resolve the underlying disputes that led to the crisis in the first place - leading many to fear that the standoff may play out again in a few months. The plan sets up a forum to try to forge a more permanent budget deal, but few expect it to succeed. "We have crisis after crisis after crisis and it has a corrosive impact on the economy," . "If you're a business, how do you make plans in this environment?" Leading chief executives agree.

The artificial fuel for growth cannot last forever - Mohamed El-Erian - With the US government shutdown and the possibility of a debt default occupying a lot of the bandwidth, last week’s International Monetary Fund/World Bank annual meetings struggled to deliver on already-low expectations regarding major policy breakthroughs. Yet, if they internalise well what was discussed in formal meetings, in panels and in the corridors, policy makers from more than 180 countries would return to their national capitals with four important realisations.  First, they cannot ignore an external political context that will continue to impinge on their domestic economies and markets. The ongoing congressional drama in Washington is the latest reminder that western political systems are challenged by the (“new normal”) persistence of unusually low economic growth and high unemployment. Second, western central banks will have no choice but to continue to carry an enormous policy burden, and do so with inevitably-imperfect measures. In addition to compensating for the inactions of other policymaking entities – particularly in the fiscal and structural reform areas – look for central bankers to continue to counter the negative impact of political dysfunction on growth. This would be great news for the rest of the world were it not for an inconvenient truth: the policy tools at the disposal of the central bank are just too blunt and indirect for the task at hand. As such, the benefits of highly-experimental monetary policy come with externalities that the rest of the world needs to respond to, including financial and economic spillovers.  Third, this combination – namely, unhelpful politics and policy responses that fall short of a first best – is likely to make worse the disconnect between artificially-bolstered asset markets and the sluggish fundamentals of the real economy. In the process, central banks and markets will continue in what is becoming quite an unhealthy co-dependency relationship

2014 GDP Forecast Cuts Begin As Bank of America Trims Q1 Growth From 3.3% To 2.8% - While the downward Q4 GDP revisions were inevitable courtesy of the government shutdown scapegoat (making a joke out of the sellside exuberance in late 2012 which had seen 3% growth some time around now,) starting first at Goldman, and shortly after at JPM both of which cut their Q4 GDP forecasts by 0.5% to 2.0%, we had yet to see the persistent bullish bias spill over into 2014. That just changed following an overnight cut by Bank of America of Q1 2014 growth estimates from 3.3% to 2.8%. Certainly, this is the first of many as once again optimism proves unjustified. But who can blame it: after all there will have been "only" 5 years of QE, and the Fed's balance sheet will be only $4 trillion at December 31, 2013, implying a S&P of 1800. From Bank of America:  We have made a minor change in our GDP forecast: we continue to see just 2% 4Q GDP growth, but we have cut 1Q back from 3.3% to 2.8%. This reflects offsetting factors: government spending will bounce back in 1Q, but with new budget deadlines we expect mild confidence headwinds to persist into the quarter. Our Fed call remains the same, with a $10 bn tapering in January and with a later move more likely than a sooner move.

The sun is setting on dollar supremacy, and with it, American power - A serious alternative to the dollar is still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed momentum. All great empires – from the Greek, to the Roman, the Spanish and the British - have at their heart a dominant means of exchange which is very much part of their political and social hegemony. Once upon a time, it was Roman coinage which was the world's pre-eminent currency. In more recent times it was the British pound. Today, it's the US dollar to which international investors flock as a safe haven for their money. Highly liquid and apparently reliable – until recently at least – nothing else comes even remotely close to the greenback's dominant position in the international monetary system. That this position – what Giscard d'Estaing referred to as America's "exorbitant privilege" – could so casually be put at risk by politicians on Capitol Hill is an extraordinary spectacle that may be indicative of a great power already seriously on the wane. The dollar was able quickly to usurp the pound's position. Lack of any credible alternative means it won't happen so quickly with the dollar. For all the progress of the last 30 years, China for now remains a much smaller economy than the US and in any case is nowhere near ready financially to assume such a role. As for the euro, the dollar needn't trouble itself much about this one-time pretender to the throne.

Next Step In Dismantling The Dollar And US Credit Hegemony - The US has used its three phenomenal privileges to put the financial stability of the whole world at risk, “like a truck full of dynamite heading right toward us,” said the just appointed chairman of the International Advisory Board of the newly formed Universal Credit Rating Group (UCRG). The first privilege: Control of the currency. As the world has become dependent on the dollar as “the only true currency of world exchanges,” the US decided to take advantage of it and has become the greatest debtor “without ever having to pay back that debt,” he said. “Americans have become the consumer of last resort”; and “Washington is financing its policies” with money borrowed from the rest of the world. The second privilege: Control of the rules. It’s much easier to win if you’re the one deciding what the rules are, he said. It’s even easier if you can change the rules during the game. The third privilege: Control of the risk. The US decides “what is risky and what is not,” that is, “where the money should go and where not,” he said. It’s “a way to redirect money” – by undervaluing risk in the West and overvaluing it in countries like China, India, Brazil, or Pakistan. And they can do it because the three American credit ratings agencies, S&P, Moody’s, and Fitch carve up 96% of the market. A huge advantage in a world dependent on debt.

Panic About U.S. Debt Might Cause Interest Rates on U.S. Government Bonds to Fall or the People Who Say Such Things Might Just be Confused - When people worry about the security of an asset the price usually plummets. It is pretty hard to envision the opposite scenario: However this is what Ezra Klein tells us in a column today. The story is that worries over the possibility that the U.S. government is becoming dysfunctional could actually result in the price of U.S. government bonds rising. "The paradox is that defaulting on our debt could lead to a panic so severe that, in a desperate bid for safety, markets will buy even more of our debt. 'We are the only country in the world where a fiscal mess, rather than increasing spreads, pushes yields lower,' El-Erian said [Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.]. 'If there was another round of debt-ceiling fight with no agreement, we might have lower 10-year Treasury yields, rather than higher.'" The basis for the idea that uncertainty about the stability of the U.S. government will lead people to buy more U.S. government debt seems to come from the experience in the summer of 2011. The problem with this story is that there is a more obvious explanation.  The very real risk of the collapse of the euro gives a perfectly plausible explanation for the plunge in world stock markets and U.S. interest rates, even if Boehner and Obama were spending their afternoons having beers together and telling jokes. In other words, the history to date suggests that there is little basis for serious concern about the hostile relationship between the parties imposing a major cost in the form of higher interest rates. I hate to spoil the efforts at building fear and panic, but this is getting more than a bit overblown. Hitting the debt ceiling would undoubtedly be bad news, but an earth-shaking disaster is pretty unlikely. Everyone will get their money, with interest, even if it is a bit late.

How to Talk About Debt and Deficits: Don’t Think of an Elephant* -- Stephanie Kelton - Many economists (perhaps even those who agree with us) refuse to talk about the national debt and government deficits the way we do on this blog.  Instead of boldly challenging the assertion that the U.S. faces a long-run debt (or deficit) problem, headline progressives typically do what Jared Bernstein did in his column today — i.e. they pay “obligatory” tribute to the Balanced Budget Gods, thereby reinforcing the case for austerity at some point in the not-so-distant future when we will be forced to to deal with this very bad thing called the government deficit. Followers of my work here and on Twitter know that I refuse to pay homage to the Balanced Budget Gods.  Instead, I prefer to shift the burden of proof onto those who contend that the U.S. faces a long-term debt or deficit problem.  The first step is to establish that solvency can never be an issue for a government that spends, taxes and borrows in its own (non-convertible) currency.  The following quote from the St. Louis Federal Reserve usually does the trick, but this great confession from Alan Greenspan also helps.

The Fed Could Simply CANCEL $2 Trillion of Government Debt - Congressman Alan Grayson and former congressman Ron Paul are two of the fiercest warriors against an out-of-control Federal Reserve. Paul has campaigned to dissolve the Fed for 35 years, and wrote an entire book called "End the Fed". Grayson has  repeatedly slammed the Fed, and absolutely demolished it ... to its face.    Paul and Grayson also co-sponsored a bill to audit the Federal Reserve. (Their desire to rein in the Fed is supported by numerous top economists.) So when the two of them support a Fed-related solution to the "government shutdown" crisis,  I listen. Congressman Grayson writes: A simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government's debt. This wouldn't solve the debt problem entirely. The Federal Reserve doesn't own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who's counting?) NPR has a helpful graphic showing the various holders of U.S. government debt, including the Fed: Congressman Grayson continues: Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default. The debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.

The battle over the US budget is the wrong fight - Lawrence Summers - More fundamental is this: budget deficits are now a second-order problem relative to more pressing issues facing the US economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed. The latest Congressional Budget Office projection is that the federal deficit will fall to 2 per cent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 per cent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the US economy. It would be offset by an increase in revenues or a decrease in spending of 0.8 per cent of GDP for the next 25 years and 1.7 per cent of GDP for the next 75 years.These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5 per cent of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40 per cent that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years.

Republicans are delusional about US spending and deficits - Dean Baker - There is no doubt that the Republicans deserve the blame for the shutdown and the risk of debt default. They decided that it was worth shutting down the government and risking default in order stop Obamacare. That is what they said as loudly and as clearly as possible in the days and weeks leading up to the shutdown. In fact, this is what Senator Ted Cruz said for 21 straight hours on the floor of the US Senate.  However, given the national media's concept of impartiality, they now feel an obligation to accept that the Republicans' claim that this is a dispute over spending levels. But that is only the beginning of the reason that people should detest budget reporters. The more important reason is that they have spread incredible nonsense about the deficit and spending problems facing the country, causing most of the public to be completely confused on these issues. If budget reporters were held to the same standards as school teachers, with the expectation that they would be able to convey information, they would all be fired in a minute.  Contrary to the widely repeated stories of out-of-control deficits and spending, deficits have plunged in the last four years falling from 10.1% of GDP in 2009 to just 4% of GDP in 2013. The Congressional Budget Office projects the deficit to be just 3.4% of GDP in 2014. The latest projections show the debt-to-GDP ratio falling for the rest of the decade.  In other words, the story of out-of-control debts and deficits is just plain wrong. Less polite people would call it a lie, but it stands at the center of the public debate because the media consider it rude to point out a truth that would embarrass so many important politicians.

The Important Takeaway from Ken Rogoff's Latest - Brad DeLong -- On the horizon, I see the eurozone breakup vigilantes approaching in the form of Ken Rogoff's latest: Three Wrongs Do Not Make a Right. But first, focus on his conclusion: High return infrastructure projects pay for themselves in the long run, and are a reasonable risk for the short run… [as are] effective expenditures aimed at making education more effective…. Monetary policy should have been even more aggressive after the crisis…. Debt overhang is a huge problem…. I have long clearly favoured sharply writing down debts… at the ultimate expense of taxpayers in the core of Europe… Hold tight to that: Ken Rogoff believes, along with the rest of us, that since 2010 European governments (including Britain's) should have spent more, that central banks should have eased more, and that banking policy should have written-off more.  Now I wish Ken would go farther: I wish he would do the arithmetic of fiscal policy in more depth, because I think that if he did he would agree with Larry Summers and me that at current interest rates--and at the interest rates that bond markets expect to prevail for at least the next generation--it is not just government investments in infrastructure and education that pay for themselves in the sense of reducing the future debt burden, but any government expenditures at all that do so.

The GOP’s latest poison pill - House Republicans are preparing a six-week debt-ceiling extension that includes the Vitter amendment (see here for more on that bit of health-care trolling), strengthened income verification under Obamacare, and Rep. James Lankford's 'Government Shutdown Prevention Act.' Lankford's bill is interesting. Here's the description from his congressional office:If Congress fails to approve a budget by the end of each fiscal year, the Government Shutdown Prevention Act would ensure that all operations remain running normally .. by automatically triggering a continuing resolution (CR) or short-term, stop-gap spending device. ... After the first 120 days, auto-CR funding would be reduced by one percentage point and would continue to be reduced by that margin every 90 days. By progressively decreasing the amounts provided under the automatic continuing resolution, the bill provides continued incentives for Congress and the President to reach agreement on regular appropriations bills. Catch the problem? The Lankford bill creates a world in which the failure to fund the government leads to automatic, across-the-board spending cuts. That's not a world in which there are "continued incentives for Congress and the President to reach agreement on regular appropriations bills." It's a world in which Republicans who want spending cuts have a continued incentive to refuse to reach agreement on bills to fund the government.

Flim Flam Forever - Paul Krugman - Aha. Paul Ryan, the Serious, Honest Conservative (the media myth) — as opposed to Paul Ryan the unserious, dishonest partisan (always the reality) — made a brief reappearance over the past couple of days. Needless to say, his initiative was completely useless, and the debt talks were in breakdown.  What Ryan offered was billed as a compromise; I do not think that word means what they think it means. It involved reducing the harshness of the sequester — which Republicans and Democrats both want — in return for Medicare and/or Social Security cuts, which only Republicans want. Oh, and it only postponed the debt ceiling crisis, setting the stage for further extortion attempts. So: you give me something, I give you nothing, and I don’t threaten your wife and kids until next week. Compromise! What I’m told is that the really crucial thing for the WH is a matter of principle: no deal unless the extortion ends. And Rs just can’t or won’t give up the idea that they deserve to be rewarded for not blowing up the world..

The Dixiecrat Solution, by Paul Krugman - Stocks surged last Friday in the belief that House Republicans were getting ready to back down on their ransom demands over the government shutdown and the debt ceiling. But what Republicans were actually offering, it seems, was the “compromise” Paul Ryan, the chairman of the House Budget Committee, laid out in a Wall Street Journal op-ed article: rolling back some of the “sequester” budget cuts — which both parties dislike; cuts in Medicare, but with no quid pro quo in the form of higher revenue; and only a temporary fix on the debt ceiling, so that we would soon find ourselves in crisis again.   I do not think that word “compromise” means what Mr. Ryan thinks it means. Above all, he failed to offer the one thing the White House won’t, can’t bend on: an end to extortion over the debt ceiling. Yet even this ludicrously unbalanced offer was too much for conservative activists, who lambasted Mr. Ryan for basically leaving health reform intact.  Does this mean that we’re going to hit the debt ceiling? Quite possibly; nobody really knows, but careful observers are giving no better than even odds that any kind of deal will be reached before the money runs out. Beyond that, however, our current state of dysfunction looks like a chronic condition, not a one-time event. Even if the debt ceiling is raised enough to avoid immediate default, even if the government shutdown is somehow brought to an end, it will only be a temporary reprieve. Conservative activists are simply not willing to give up on the idea of ruling through extortion, and the Obama administration has decided, wisely, that it will not give in to extortion.

Shutdown’s Quiet Toll, From Idled Research to Closed Wallets — The Environmental Protection Agency has stopped monitoring mercury contamination in the Everglades and testing water after the recent floods in Colorado. An $8 billion space telescope, the largest in the world, waits to be tested at minus-400 degrees Fahrenheit in a closed government facility in suburban Maryland, facing the possibility of costly delays. Many of the half a million federal workers whose paychecks on Friday showed half of what they normally earn fretted about how to juggle bills and put off major purchases. As the partial government shutdown reached its 11th day on Friday, it was affecting far more than the nation’s monuments and parks, with much of the little-noticed machinery of government shifted to idle. Jobs deemed essential continued to be performed, but other tasks that have paused may take a lasting toll, even if President Obama and Congressional Republicans reach an agreement to end the shutdown soon. The temporary disruption of furloughed workers’ spending patterns, a skittishness likely to continue even after they go back to work, is capable of measurable damage to the nation’s growth rate, economists said. Federal workers are “spooked” and are likely to save more and spend less, said Mark Zandi, chief economist at Moody’s Analytics. “They’re going to be cautious at least into the next year,” he said.

Reid, McConnell launch bipartisan talks on ending shutdown - McConnell and Reid held an hour-long meeting in Reid’s office with two close Senate allies and left the Capitol by mid-afternoon. Late Saturday night neither side cited any progress, and Republicans reported that Democrats were dug in on their demand to increase funding for federal agencies. During the fiscal crises that have gripped Capitol Hill over the past five years, each resolution and compromise came after Senate leaders picked up the pieces of failed efforts between the White House and the House. In the morning session, Reid rejected a proposal crafted by rank-and-file Republicans with some Democratic input to raise the federal debt limit until Jan. 31 and fund federal agencies through the end of March. It also called for minor adjustments to Obama’s health-care law .  Senate leaders began negotiations Saturday aimed at reopening federal agencies and avoiding a government default after every other effort to end Congress’s impasse crumbled in the previous 48 hours. Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) took over the talks, which had led nowhere in recent days. House Speaker John A. Boehner (R-Ohio) acknowledged early Saturday that his discussions with President Obama had collapsed and that the Senate was the last hope to avert a financial disaster.

Talks between White House and House break down as action shifts to Senate - With less than week to go until the federal government faces a possible default, talks between the White House and House of Representatives Republicans broke down Saturday.The future of any compromise shifted to the Senate, largely to two wily, veteran negotiators, Senate Majority Leader Harry Reid, D-Nevada, and Republican Leader Mitch McConnell, R-Ky. They, along with Sens. Lamar Alexander, R-Tenn., and Charles Schumer, D-N.Y., met Saturday for the first time to discuss a way forward.“The conversations were extremely cordial but very preliminary of course,” Reid said. “Nothing conclusive, but I hope that our talking is some solace to the American people and the world.” He added that any deal was “a long ways away.”Senate Democrats, though, offered a less optimistic take late Saturday after Reid and other Democratic Senate leaders talked strategy at the White House with President Barack Obama for more than an hour. They were joined by Obama’s chief of staff, Denis McDonough, deputy chief of staff Rob Nabors and Office of Management and Budget Director Sylvia Mathews Burwell.A Senate Democratic leadership aide said the senators and the White House reviewed a number of options, but concluded that “while Democrats remain united, Republicans have yet to coalesce behind a clear negotiating position.” The aide said Obama and the senators agreed that talks between Senate Democrats and Republicans should continue, but said the Democratic position remains the same: “Democrats are willing to negotiate on anything Republicans want to discuss, as soon as we reopen the government and pay our bills.”

Senate Democrats Press New Front in Budget Battle—Senate leaders attempting to avoid a U.S. debt default remained at loggerheads Sunday and escalated the standoff by reopening the contentious issue of automatic spending cuts, damping hopes that some of Congress's most canny negotiators would break the impasse. As the search for a way to end the partial federal shutdown and avoid a debt crisis shifted to the Senate, Democrats made plain that one of their top priorities was to diminish the next round of across-the-board spending cuts, known as the sequester, due to take effect early next year. Many Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), oppose retreating from those cuts. That set up a clash that seemed almost as intense as the one that caused budget talks between House Republicans and President Barack Obama to collapse Friday. "Total federal spending has now gone down for two years in a row—the first time that's happened since the Korean War,'' Mr. McConnell said Sunday. With the additional sequestration cuts on tap for 2014, the budget limits have produced "the most significant spending reduction in modern history and Senate Republicans will not accept anything that undoes these cuts."

GOP: Dem request for higher spending hurting deal chances - Several Republican senators said Sunday a Democratic request to increase government spending is hurting chances of a deal to end the 13-day-old shutdown.Leaders of the Democratic-led Senate were dismissive of a proposal Saturday, in part, because it kept in place for too long the automatic spending cuts that went into effect earlier this year. Another round of those decade-long cuts -- dubbed the sequester and approved by Congress and the White House in 2011 -- is expected in January. The Republican complaints came as Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., spoke briefly Sunday afternoon but failed to reach a deal to end the shutdown or find common ground that would allow Congress to approve raising the federal debt ceiling.“Our discussions were substantive and we’ll continue those discussions,” Reid said before the Senate adjourned Sunday. “I’m optimistic about the prospects for a positive conclusion to the issues before this country today.”Sen. Rand Paul, R-Ky. said that maintaining spending cuts is the same for Republicans as maintaining the Affordable Care Act is for Democrats."They’re all about Obamacare being the law of the land, but so’s the sequester,” he said on CNN’s State of the Union with Candy Crowley. “If we exceed that, it’s real big step in the wrong direction."Sen. Bob Corker, R-Tenn. said House Republicans went too far in their initial proposals by trying to force repeal or delay of the new health care law as part of legislation needed to keep parts of the government open when money ran out with the end of the fiscal year Sept. 30. Now, he said, Senate Democrats are oing the same with their bid to end the sequester and increase spending.

Still No Better That 50% That Debt Ceiling Is Raised By 10/17...And A Few Other Things - Some quick thoughts this morning:

  • 1. It's still no better than 50-50 ("a coin flip" as @thefix said to me on Washington Post TV last week) that the debt ceiling will be raised by October 17, the date Treasury says it will run out of the ability to use "extraordinary measures" and the government will have to operate just from the cash it has on hand every day.
  • 2. If anything the situation has gotten worse rather than better over the past few days with House Republicans in open warfare against their GOP Senate colleagues. It appears that House Republicans need to get something out of the box the are in with the government shutdown and debt ceiling even if it means extracting a pound of political flesh from their own party to do it.
  • 3. Let me say this yet again as directly as possible: John Boehner (R-OH) is the weakest and least effective speaker in my lifetime, and he may come close to taking the all-time title.
  • 4. One of the biggest problem with the current shutdown/debt ceiling situation is that no one has any assurance that the person they're negotiating with has any authority to agree to anything. The president can't be sure congressional Democrats will go along with what he might agree to with Republicans, Boehner absolutely knows there is no guarantee that House and Senate Republicans will follow his lead and Senate Minority Leader Mitch McConnell (R-KY) won't be followed blindly by Senate Republicans. In other words, even if there were a deal it not clear who could agree to it.
  • 6. The White House seriously undercut some of its own leverage on the shutdown when it allowed the Defense Department to recall 300,000 civilian workers who were furloughed on October 1. Without that, private sector government contractors would have started furloughing tens of thousands of their own workers by now and the economic pain would be widespread. 

Reports: Some Progress on Deal to Open Government, Still discussing Length of Agreement, Senate Adjourned until Monday -- From Kasie Hunt of NBC News:  Senate is adjourned until 2 p.m. Monday. From John Harwood of CNBC:  Aide: Senate D leaders optimistic of deal after "productive" Reid-McConnell talk. Haggling over length of CR/debt hike but expect to resolve Currently the Democrats want a shorter deal (like 6 weeks) for both a continuing resolution (CR) and to pay-the-bills (aka raise "debt ceiling").    The reason for a shorter deal is the Democrats are concerned about sequestration cuts in the Budget Control Act of 2011 (BCA) that will take effect in 2014.  

Senate leaders’ talks on shutdown, debt limit stall as sides await market’s reaction - What started as a mad dash to strike a deal to lift the federal debt limit slowed to a crawl over the weekend as stalemated Senate leaders waited nervously to see whether financial markets would plunge Monday morning and drive the other side toward compromise. Republicans seemed to think they had more to lose. After talks broke down between President Obama and House leaders, GOP senators quickly cobbled together a plan to end the government shutdown — now entering its third week — and raise the $16.7 trillion debt limit. Senate Minority Leader Mitch McConnell (R-Ky.) then asked Majority Leader Harry M. Reid (D-Nev.) to elevate negotiations to the highest level.On Sunday — with the Treasury Department due to exhaust its borrowing power in just four days — Reid was wielding that leverage to maximum advantage. Rather than making concessions that would undermine Obama’s signature health-care initiative, as Republicans first demanded, Democrats are now on the offensive and seeking to undo what has become a cherished prize for the GOP: deep agency spending cuts known as the sequester. Reid and McConnell spoke only once Sunday, a telephone call in the afternoon, aides said. As he closed a rare Sunday session of the Senate, Reid characterized the conversation as “productive” and “substantive.” “I’m optimistic about the prospects for a positive conclusion to the issues before this country today,” he said. But the shift in focus away from the imminent threat of a first-ever default on the U.S. debt sparked outrage among Republicans and alarm among the world’s financial leaders, meeting this weekend in Washington.

Markets Could Help Close the Deal - I’ll let you read about the latest machinations of the dysfunctionistas up on Capitol Hill.  The House melted down–turns out the Cruz strategy had some glitches–and the Senate has taken over (there’s a comforting thought).  D’s, to their credit, are trying to avoid locking in sequester-level budget cuts, while R’s are begging for some face-saving concession–”just cut a damn tax or whack some poor people and let’s get outta this mess!” Sens Reid and McConnell are actively negotiating, but they appeared to be stalemated by the day’s end.  And there’s a real chance of a reverse of last week’s relief rally when it looked like a deal was coming together.  We’ll see.  Traders might decide that the grownups are talking, and figure they’ll resolve this sooner than later, certainly before Treasury’s cutoff on Thurs.  But if not, last week’s melt-up could become this week’s meltdown.  Not a good thing–such volatile swings are unsettling and disruptive.  But, like the 777 point decline when House R’s rejected the TARP, only to pass it a few days later, that may be what it takes to end this charade.

Rand Paul – “Cold Turkey Balanced Budget is a Good Thing” - Warren Mosler - Deep down, I suspect most of Congress believes what Rand Paul believes. They believe balancing the budget is the right thing to do for our children and grandchildren. And, of course, they have widespread popular support for a balanced budget and probably enough votes for a balanced budget amendment to the US constitution as well. So maybe that’s why both sides are OK painting themselves into a corner. There is no way out apart from one side completely losing face and credibility. And when something can’t happen, sometimes it doesn’t happen, and we actually do go cold turkey into a balanced budget. So what happens when the automatic fiscal stabilizers are disabled? When the slowdown slows tax revenues, instead of the deficit going up as spending then exceeds revenues, spending is instead cut, which slows things down further, which means more spending cuts, which slows things down further, all the way to 0, as ‘balance’ combined with the fixed ‘demand leakages’ puts the system in ‘default’. Said another way, the dollars to pay taxes and net save come from govt spending. (You can’t do a reserve drain without a reserve add.) With a balanced budget and automatic net savings/demand leakages, govt isn’t allowed to spend enough dollars to cover the tax bill. And when taxes don’t get paid, spending is further constrained, so additional taxes can’t get paid, further restricting spending, etc. etc. etc. So given our current institutional structure, the answer is yes, if we balance the budget and leave it that way, the world as we know it is definitely going to end. (And with a bang, not a whimper.)

The Shutdown Talks Are in Chaos - Yves Smith - A lot of readers, when we’ve discussed the budget/shutdown/debt ceiling negotiations, have done the equivalent of declaring it all to be kabuki, that the fix is in.  While I have no doubt that any resolution of this impasse is certain to make matters worse for what is left of the endangered species known as the American middle class, what is going on in DC is not a pretty scripted stagefight. The negotiations are in a mess. Anyone who says they know where things are or what the outcome will be is kidding themselves.  This has all the signs, even from what little that can be seen with confidence, of a negotiation that has gone off the rails. Relations between the principals, which in this case was Obama and Boehner have broken down. Senators Harry Reid and Mitch McConnell are trying to broker a deal Both sides have rejected each other’s version of what they think is a clean and simple deal. Obama insists on a clean continuing resolution (as opening the government) and a clean lifting of the debt ceiling. The Republicans were willing to only push out the debt ceiling limit to only to November 22, which Obama rejected. McConnell then offered to Reid to increase the debt ceiling through January and keep the government operating until March, but Reid nixed that. From the New York Times: The core of the dispute is about spending, and how long a stopgap measure that would reopen the government should last. Democrats want the across-the-board cuts known as sequestration to last only through mid-November; Republicans want them to last as long as possible. The Democrats’ demand shows a newfound aggressiveness. Previously, they had favored a so-called clean bill that would reopen the government and lift the debt ceiling without any policy changes attached. With Republicans on the defensive, it remains unclear whether the Democrats are using a negotiating ploy to raise the likelihood that any final deal will include their priorities as well as the Republicans’… 

An exit strategy for Republicans - And so what I expect to see this week is the Republicans to cave, trading their vote on the debt ceiling for whatever fig leaf might offer meager political cover for having taken us to this point and then turning back.Let me suggest to my Republican friends a bolder alternative. Seize the day as an opportunity to renounce this weapon of self-destruction. The President says he wants a clean debt-ceiling increase. So give him exactly that-- a stand-alone debt ceiling increase, say $2 trillion. No strings attached, no riders, just do it.What would Republicans gain from this? Well, one obvious thing-- it would help them to avoid getting trapped in a self-destructive endgame for at least another year. For another, it would give them an intellectually defensible claim with independents that they are trying to find compromise and common ground, by giving the President exactly what he asked for, getting nothing in return. And while I'm making suggestions that won't be followed, here's another. The President says he wants a clean continuing spending resolution. So give him this too. Say with a 60 day time limit, but otherwise no strings, no riders, just do it. The benefit of that for Republicans? See point 1 above.

Obama, Pelosi say ‘clean’ bills needed for debt ceiling, restart (Reuters) - President Barack Obama spoke by phone on Sunday with Nancy Pelosi, Democratic leader in the House of Representatives, to discuss the need for "clean" legislation that would increase the debt limit for a year and restart government, free from any other policy demands, the White House said. "The President and the Leader also discussed their willingness, once the debt limit is raised and the government reopened, to negotiate on a longer-term budget solution that will grow our economy and create jobs," the White House said in a statement.

Lew’s Vow Not to Shift on Debt Limit Frustrates Republicans - When Treasury Secretary Jacob J. Lew told the Senate Finance Committee last week that the Obama administration would never bargain over raising the nation’s debt limit, it was a declaration the lawmakers had heard before. Lew, the administration’s point man for pressing Congress to increase the $16.7 trillion debt ceiling, has been making the same case privately on Capitol Hill for months, lawmakers say, as he has publicly in speeches and on Sunday talk shows. His determination to stay on message has frustrated Republicans hungry for a deal.He’s “an implacable negotiator” who is “ideologically committed to protecting every big-government gain,” Senator Jeff Sessions, an Alabama Republican, said Lew, 58, has led President Barack Obama’s drive to separate the debt ceiling from other issues that are subject to political deal-making, a position that may change as congressional Democrats and Republicans negotiate how to end the impasse and increase the borrowing limit.

GOP Warns "Definitely A Chance We're Going To Go Past The Deadline" - The rhetoric from today's political maneuvering is eerily reminiscent of the rhetoric just a week ago and absolutely in now way represents the 'progress' than an impatient to BTFATH equity market appears confident about. As AP reports, Harry Reid seemed to arrogantly explain "we haven't done anything yet" by way of compromise (as his party rejected the compromise deal on the basis of the spending and taxes issues; and the Republicans came out swinging. Boehner (behind closed doors) exclaimed "The Senate needs to hold tough; the President isn't negotiating with us;" and tea-party caucus member Fleming blasted, "It's very clear to us he does not now, and never had, any intentions of negotiating," and warned, there was "definitely a chance that we're going to go past the deadline."

Meh ceiling? - WHY haven't financial markets been more perturbed by the dangerous game being played in Washington? There are plenty of explanations circulating, but we shouldn't ignore the most straightforward one, however unlikely it seems: because the game isn't that dangerous. The political mess in Washington is every bit as stupid (and, for an American, embarrassing) as everyone says it is. It has also already done its share of harm. The government is wasting the opportunity presented by dirt cheap borrowing costs to make valuable public investments and boost short- and long-term growth. If the government were dead set on slashing deficits there are vastly better ways of doing it than what has emerged through several years of disaster chicken. Foolish fiscal battles, and the Republicans' daft and doomed attempt to short-circuit Obamacare, have had an enormous opportunity cost, in terms of the legislation that might have been passed—immigration reform, tax reform, and so on—but which has now been delayed by these antics and potentially sunk by the accumulation of bad blood. And the debt ceiling is a doomsday machine. If Congress actually did fail to authorise the issuance of more debt and the White House didn't come up with a work around then payment prioritisation for any length of time would mean dramatic and chaotic austerity sufficient to return the American economy to recession. But how much of this is new information? Surely markets have by now priced in deep Washington dysfunctionality, rapid fiscal consolidation, and even the new norm of debt-ceiling gamesmanship. Default, in the sense of not receiving the expected pay-off on a loan to the government, is always a risk in any country, including America. The question is whether perceptions of this risk have gone up.

President Obama to meet with Congressional leaders on debt limit - US President Barack Obama and Vice-President Joe Biden are scheduled to meet congressional leaders from both parties as the deadline to raise the nation's debt limit nears. The bipartisan meeting will include leaders from both the House of Representatives and the Senate. Officials warn of economic calamity should the US default on its debt. Expected to attend are Senate Democratic Majority Leader Harry Reid, Senate Republican Leader Mitch McConnell, Republican House Speaker John Boehner and House Democratic Minority Leader Nancy Pelosi. Weekend negotiations between US congressional leaders failed to reach a breakthrough to raise the nation's debt limit ahead of Thursday's deadline.Negotiations between Republican and Democrat Senate leaders continued on Sunday, with both sides reportedly awaiting the Monday opening of US financial markets to reassess their negotiating positions. On Monday, Republican Senator Bob Corker said the Democrats were demanding too much. "For about 48 hours now, the Democrats have overreached by wanting to spend more, unbelievably", he said in an interview with NBC's Today show.

Obama meeting with congressional leaders postponed - —The White House says a meeting between Obama and congressional leaders has been postponed to give Senate leaders more time to resolve a standoff over the nation's debt and the partial government shutdown. Obama was scheduled to meet Monday afternoon at the White House with the Democratic and Republican leaders in the House and Senate. A new day or time for the meeting wasn't announced. The delay comes as all sides are expressing optimism that they are getting closer to an agreement to end the two-week partial shutdown and avert a potential default on the U.S. debt. The last meeting between Obama and the congressional leaders was Oct. 2.

Senators Near Fiscal Deal, but the House Is Uncertain -  Senate leaders neared the completion Monday night of a bipartisan deal to raise the debt ceiling and end the government shutdown.  Negotiators talked into the evening as senators from both parties coalesced around a plan that would lift the debt limit through Feb. 7, pass a resolution to finance the government through Jan. 15 and conclude formal discussions on a long-term tax and spending plan no later than Dec. 13, according to one Senate aide briefed on the plan. But while both Senator Mitch McConnell of Kentucky, the Republican leader, and Senator Harry Reid of Nevada, the Democratic leader, praised the progress that was made in the Senate, it was already clear that the most conservative members of the House were not going to go along quietly with a plan that does not accomplish their goal from the outset of this two-week-old crisis: dismantling the president’s health care law. “We’ve got a name for it in the House: it’s called the Senate surrender caucus,” said Representative Tim Huelskamp, Republican of Kansas. “Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger.”  As they drafted their deal, Senate negotiators in both parties were hoping that House Republican leaders would have no choice but to let a bipartisan agreement come to a vote, even if it could pass only with votes from Democrats and a minority of the Republican majority.

A Debt Deal is Nigh! A Debt Deal is Nigh! Or is It? -  Yves Smith - If you make a quick scan of the headlines, which is the way a lot of people interact with the news, you’d see numerous reports stressing that Senate leaders had made “progress” in the “let’s try not to crash into the debt ceiling” talks and were hopeful of getting a deal done. Stock markets took cheer from these reports.  It is also important to recognize that even though the messaging was positive, anyone who has an eye on the calendar knows that things have to go close to without a hitch for bills to get through the Senate and House in time to avert putting the Treasury in the position of having to make do with existing cash flow until the debt ceiling is lifted. Mind you, only really serious pessimists doubt that the debt ceiling will be raised, and likely well before the real crunch time of October 31-November 1. And even then that does not a default on Treasury bonds; one analyst argues the drop dead date for Treasuries is November 15 (personally, I think there is no way an Administration so close heavily populated with acolytes of Bob Rubin would ever let that happen. Expect the Fed to invoke its unusual and exigent circumstances powers in the unlikely event that things go on that long). But it’s also critical to recognize that the sanguine reaction of equity markets represents the reactions of a particularly happy-go-lucky bunch that has had the Greenspan and Bernanke put protecting their backs for a very long time. Fixed income investors are a much more sober and quant-y bunch, and with good reason. As Goldman’s senior partner in the 1970s, Gus Levy, remarked, “In bonds, you eat like a bird and you shit like an elephant.” In other words, the upside is modest and the downside is considerable.

US borrowing crisis 'days away' from danger, says World Bank head - The president of the World Bank, Jim Yong Kim, has warned that the United States is just "days away from a very dangerous moment" because of the government's borrowing crisis. He urged US policymakers to reach a deal to raise the government's debt ceiling before Thursday's deadline. The US Treasury will start to run short of funds if no agreement is reached for it to borrow on financial markets. Mr Kim warned this could be a "disastrous event" for the world. "The closer we get to the deadline the greater the impact will be for the developing world. "Inaction could result in interest rates rising, confidence falling and growth slowing," said Mr Kim, speaking at the What happens in a US debt default? "If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well," he added.

Treasury Default Firewall Hatched in 2011 Crisis: Credit Markets - The groundwork for preventing a U.S. Treasury default from causing a cataclysmic breakdown of the plumbing of the global financial system was laid after the last debt-ceiling crisis in 2011 -- and is still a work in progress. The Treasury Market Practices Group, the government-debt markets watchdog that’s sponsored by the Federal Reserve Bank of New York, outlined steps last year that would include manually changing the maturity dates of securities that are processed through the central bank’s Fedwire, its electronic service that transfers securities and payments. That would help enable systems to handle debt with delayed payments. Even with two years of preparations, the financial industry is racing against an Oct. 17 deadline when the government says it runs out of its borrowing authority. Kenneth Bentsen, the president of the Securities Industry and Financial Markets Association, told Congress this week that Wall Street is still at work, particularly in the $5 trillion market for repurchase agreements, or repos, a form of secured, short-term borrowing that is frequently backed by Treasuries. “Since filing our written testimony just yesterday, market participants have continued to meet and review enhancements that might -- that could -- mitigate operational risks that have been identified, particularly in the repo market,” Bentsen said Oct. 10 before a Senate panel.

Key dates on debt limit as Thursday deadline nears -- Here are key dates to watch as Congress negotiates over raising the U.S. government's debt limit:

  • _ THURSDAY: This is when Treasury Secretary Jacob Lew says the government would no longer be able to borrow. As a result, it would have to spend only from its cash on hand and tax revenue. Lew estimates that the Treasury would have about $30 billion in cash.
  • _ OCT. 22: Sometime between this date and Oct. 31, according to the Congressional Budget Office, the government would run out of cash. It would have to slash spending 32 percent over the next month, according to the Bipartisan Policy Center. Treasury would probably make its top priority the payment of interest and principal on its debt to avoid a default. Either way, some programs wouldn't be funded, possibly including Social Security, veterans' benefits and Medicare.
  • _ OCT. 23: A $12 billion Social Security payment is due. Without an increase in the debt limit, Treasury would have to wait two days to accumulate enough cash to make that payment, according to the Bipartisan Policy Center. Missing the payment would likely intensify fears that the government will soon default.
  • _ OCT. 24: The government must redeem $93 billion in short-term debt. It typically sells new debt to pay old debt. Nervous investors would likely demand higher rates, thereby raising the government's borrowing costs. And if too few investors want to buy the new debt, the government wouldn't have enough cash to pay off its maturing debt. A default would result.
  • _ OCT. 31: The Treasury Department must pay $6 billion in interest on the debt. If it doesn't have enough cash, it would default. If the debt limit hasn't been raised by this point, much higher rates and far less government spending would likely nudge the economy toward recession.

If there is a default it is because both Obama and Republicans want it -I don’t know if there’ll be a debt default.  What I do know is this: if Obama doesn’t want to default he has options. Forget the platinum coin nonsense (though he could if he wanted), Obama can just tell the Treasury to keep on keeping on, and continue selling treasuries.  There isn’t anything Congress can do about that, they don’t have the votes to actually impeach him, they don’t have an army, they don’t have the balls to, say, lock up the Treasury Secretary.  In short, they don’t have an army. Now I assume Obama doesn’t want a default.  But, to be sure, I could be wrong.  Why?  Because a default throws all the cards in the air. It lets you remake the country in your image.  Obama has long wanted a “Grand Bargain” and the ultimate neo-liberal no-no is defaulting on bond-holders.  Then, of course, there are all the SS checks… If there is a default, whoever sets the terms of the new arrangement gets to remake America in their image.  Obama might want a crack that that.

Market distortions in the short end of the curve - In recent years the 1-month treasury bill has been quite sensitive to policy risks. While in the past the bill mostly responded to changes in the Fed's overnight target rate, in the current zero rate environment other events cause bill pricing to fluctuate. Changes in the 1m yield have not always corresponded to moves in longer term rates. For example, "taper" fears caused a spike in the 10-year rates while pushing the 1m bill down into the 0-2bp range. On the other hand, bank CD ("certificate of deposit" or "term deposit") rates just kept moving lower. Flush with deposits (see post), most banks have little use for additional short-term financing. As a result, the 1-m treasury bill now yields more than an average 1-month CD - which is a distortion that would normally never exist.An even more bizarre market distortion is that the one-month LIBOR (which is somewhat tied to CD rates these days) is also lower that the corresponding treasury bills. The spread between the two has become negative for the first time in history. A naive interpretation of this effect would be that the US government credit is worse than bank credit. A better way to think about this however is that the one-month bill is priced to be longer than one month. Let's hope that all of this will be just a bad dream tomorrow, with the Senate apparently beginning to make some progress

The default has already begun - The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors”. In this conception — and I have subscribed to it just as much as anybody else — the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable. This frame is a useful one, not least for the politicians in Washington, who seem to have become inured to the suffering caused by the shutdown, and downright blasé about the negative consequences of the sequester. Both of them could last more or less indefinitely were it not for the debt ceiling, which is helpfully providing a hard-and-fast deadline: Congress is going to have to come up with a deal before the ceiling is reached, because the alternative is, well, the zombie apocalypse. The best way to look at this, I think, is that there’s a spectrum of default severities. At one end, you have the outright repudiation of sovereign debt, a la Ecuador in 2008; at the other end, you have the sequester, which involves telling a large number of government employees that the resources which were promised them will not, in fact, arrive. Both of them involve the government going back on its promises, but some promises are far more binding, and far more important, than others.

What Are the Effects of Default? - The Washington Post has a really good piece that explains the overall impact of a default.  Here are some of the more important points: Experts on federal finances say that money might be enough to make payments for a few days, but certainly not for more than two weeks. In any event, they say, President Obama will have to make untested decisions about who and what to pay because daily tax receipts will make up only about 70 cents of every dollar of necessary spending.  Economists roundly agree that no matter which course Obama chooses, a drop in federal spending that large would exert a huge drag on economic growth. And in contrast to what happens during a traditional downturn — the safety net expands to help the vulnerable — assistance to seniors and low-income people could be delayed or reduced if Congress doesn’t raise the debt ceiling. According to the Bipartisan Policy Center, which has done the most detailed analysis of federal finances in a debt-ceiling breach, administration officials would have to consider delaying or suspending tens of billions of dollars in critical payments to low-income people and seniors.  Under the most alarming scenario, as soon as Friday, payments to Medicare and Medicaid providers, unemployment benefits, Social Security checks and tax refunds would be postponed for one to four days.  Food stamps due to be distributed Oct. 25 could be held until Oct. 30. The same would happen to payments to defense contractors. With huge payments due in early November, the situation would become grimmer. Nearly $60 billion in Social Security checks, veterans benefits and pay for active-duty troops is due Nov. 1.

 Political Experiments On A $17 Trillion Economy - Another week and still no sign of a resolution to the political stalemate in Washington that’s kept the federal government partially shuttered.  The question is what happens on October 17 and beyond if the federal government can no longer borrow? The immediate result is that spending would be limited to cash on hand and incoming tax revenue. The big mystery is how such an event would impact the markets, the financial system, and the economy? No one really knows, but we may soon find out. If Thursday arrives and the debt ceiling hasn’t been raised, the next issue will be estimating exactly when the cash runs out. Some analysts think this dark moment would come soon after, on the following Tuesday, October 22. At that point, assuming we go that far into the rabbit hole, the system may suffer a real shock as government spending would start sliding in more than trivial degrees. Interest payments on Treasury securities would probably be a victim, and delays on issuing checks for various programs—Social Security, for instance—are likely too. Depending on the analyst, Thursday’s red line is a disaster waiting to happen or a technical problem that may cause limited disruption but otherwise go down in history as little more than an annoying non-event. But when you're considering unknowns, minds will differ. The only certainty is that this self-inflicted problem will be resolved.  "If a default was possible, you would see bond prices fall through the floor. Eventually you have to stop listening to the people crying wolf."

Economist Mark Zandi on Default: "We Will Be Dooming Our Economy and the Entire Global Economy" For Years - On Monday, I took a shot at Sarah Palin after she wrote, "To suggest that raising the debt limit doesn’t incur more debt is laughably absurd. The very reason why you raise the debt limit is so that you can incur more debt. Otherwise what’s the point?" In a tweet, I noted, "No, you do it so you can pay the debt you accrued." That is, the government's debt is not created by the extension of borrowing authority; it is created when Congress establishes entitlements or passes spending bills that require government borrowing. If you sign a tuition contract with a college for your kid and need to take out a loan to cover all or part of it, you assume a debt when you enter into that agreement, not when you go to the bank and ask for an extended line of credit. Put another way, raising the debt ceiling does not change the amount of money the US government owes. Nevertheless, a mass of conservative trolls rushed to Palin's defense and howled about my tweet. Looking for further edification on this matter that I could share with the Palinites, I sent her quote to Mark Zandi, the prominent economist who was one of the policy advisers to the McCain-Palin campaign in 2008, and asked him to evaluate it. Zandi, who is now chief economist of Moody's Analytics, emailed back with a bigger message: The point is that with each passing day the debt limit is not increased the more damage it will do to our economy. If lawmakers don’t raise the debt limit by November 1, the economy will fall back into recession. If they can't raise it by the end of November, we will be dooming our economy and the entire global economy to a wrenching economic downturn with implications for years if not decades to come.

Wall Street Officials Say Debt Ceiling Already Hitting Economy — A panel of Wall Street officials told members of the House Financial Services Committee Tuesday the debate over the debt ceiling is already hurting the broader economy. The concerns reflect widening fears that economic reverberations stemming from the debate in Washington will be long lasting even if Congress manages to cobble together a last-minute plan to raise the debt ceiling before the Oct. 17 deadline, when the Treasury Department will no longer be able to raise new funds. Scott Talbott, senior vice president of public policy for the Financial Services Roundtable, which represents large Wall Street firms, said uncertainty sparked by the debate is triggering a drop in demand for loans from small businesses, which he said will likely lead to the failure of some small businesses. A rise in short-term interest rates and a drop in stock prices is also hitting consumer demand, he said. A drop in consumer spending, even if temporary, just ahead of the holiday season could ripple through the broader economy, the several panel members said, noting that retailers concerned about slack demand could already be cutting back on spending plans. “The uncertainty compounds itself,” said Jim Chessen, chief economist of the American Bankers Association.

For Many Hard-Liners, Debt Default Is the Goal - This week, according to the Treasury Department, it will exhaust its “extraordinary” measures to avoid hitting a hard debt ceiling. It is not known precisely the date at which it will lack the cash to pay interest on the national debt, but on the day that happens, the United States will be in default.The Obama administration and those on Wall Street have long thought that such a prospect was so horrifying that it would necessarily lead to resolution of the current budget impasse. What I don’t think they understand is that there has been a movement under way for some years among right-wing economists and activists not merely to default on the debt, but even to repudiate it. Those making this argument are largely unknown to professional economists and journalists, but their research permeates the obscure Web sites where Tea Party members get their ideas. And not all are obscure. The late Nobel Prize-winning economist James Buchanan supported debt default, as has the Harvard historian Niall Ferguson.I have previously noted that defeated Southerners were very hostile to being taxed to repay the Union debt after the Civil War, while the Confederate debt was repudiated and not permitted to be repaid by the states. This is the reason that Section 4 of the 14th Amendment, guaranteeing the validity of the national debt, was included in that amendment.

House GOP to move own bill on debt and shutdown: -- House Republicans intend to pass their own plan to reopen government and avert an impending Thursday default deadline instead of waiting for Senate leaders who are nearing agreement on a competing budget offer. House Republicans are dissatisfied with the contours of the Senate plan because it does not go far enough to rein in President Obama's health care law. The government shutdown, now in its 15th day, began when House Republicans refused to advance a stopgap funding bill unless it included provisions to delay or defund the Affordable Care Act. The decision may complicate the effort to avoid an unprecedented default. Treasury Secretary Jack Lew has said the U.S. will stop being able to meet all of its financial obligations on time by Oct. 17. House GOP aides not authorized to speak about the new House plan until it is released publicly, said it mirrors the Senate plan to extend federal spending through January and raise the debt ceiling through February. However, the House plan removes the Treasury secretary's ability to use "extraordinary measures" to extend the debt ceiling deadline, restricting the executive branch's flexibility to shift money around to pay bills.

House GOP Scales Back Its Health-Care Demands - The Journal has been reporting the latest developments as House Republicans try to come up with a new budget plan. House Republicans started the day with the idea of dropping one Senate-proposed tweak to the federal health law and adding three other changes. That stance is far different from earlier demands to delay — or ditch — the Affordable Care Act. Here’s a guide to potential changes outlined this morning:  House Republicans say they don’t want to delay the collection of a $63 fee on each person covered in health plans paid by big employers, labor unions and traditional insurance carriers. The money goes into a fund designed to compensate insurance carriers that end up taking on riskier new customers through the health law’s exchanges. Big employers and labor unions lobbied hard to get the fee postponed, saying it didn’t benefit them and they couldn’t afford it. Republican lawmakers in the House indicated they saw it as a sop to labor unions and wouldn’t take it. A Senate GOP aide said Tuesday the reinsurance fee was not part of the latest Senate negotiations. (Want to know more? See here.) Newly on the table: Stripping lawmakers, the president and his cabinet of the health insurance they currently get as employees of the federal government. The House proposal indicates they’ll be required to go to the new insurance exchanges designed for people who don’t have access to insurance through their jobs, and won’t be able to get subsidies towards the cost of premiums, including a proposed 75% contribution from the federal government designed to match their current benefits. (Congressional aides are breathing a bipartisan sigh of relief since they aren’t included in this particular proposal. It’s not clear whether they’d still be subject to requirements that they get their coverage through the District of Columbia’s small-business exchange but continue to get their employer contribution towards premiums. Read more about that here.)

U.S. senators hopeful fiscal deal could pass Wednesday (Reuters) - U.S. senators expressed hope that a bipartisan deal could emerge on Tuesday to end Washington's fiscal crisis even as Republicans in the House of Representatives said they were working on a separate plan. Even if Democrats and Republicans agree, it could be Wednesday before the U.S. Senate signs off on a plan, senators said, close to a Thursday deadline when the Obama administration says it will reach its borrowing limit and risk default. Republicans in the House of Representatives were discussing an alternative plan that includes measures that would affect President Barack Obama's healthcare reforms, which have been at the heart of the crisis. "I think we'll get an agreement today in the Senate," Arkansas Democrat Mark Pryor told CNN's "New Day" program. "I'm not saying we can pass it today because there's logistics about drafting and getting it to the floor and the procedural things we'll have to do ... but my guess is we'll pass something in the Senate tomorrow." "There's a lot of work that's going to be done over the next two or three days," Republican Senator Bob Corker also said on CNN. But he cautioned it was too early to be sure of a deal. "I don't think it's time to spike the football yet," he said

A Temporary Cease-Fire - The budget deals being talked about in the Senate and the House suggest that the government shutdown will end soon and that the debt ceiling will be raised, at least for a while. This cease-fire looks like the Tea Party has snatched a possible victory from the jaws of defeat. Helaine Olen, author of Pound Foolish, appropriately calls this a ‘cease-fire’ because nothing got settled and hostilities are bound to resume in a few months. It seems that no hostages (like the health care law) will be taken this time but the situation is set so hostages may be taken again in February. The extortion threat remains the same but now the ransom demand is the Democrats’ assurance that the so-called grand budget deal goes according to the House Tea Party caucus’ wishes:  cuts in Social Security and Medicare. This is unfortunate since the President and Senator Reid have clearly articulated that they wanted to end the hostage-taking, where either the government or the economy is a hostage. After all, the setup is to trade entitlement cuts, meaning unpopular reductions in Medicare (like raising the eligibility age) or in Social Security (cutting cost-of-living increases and/or raising the full retirement age), for revenue. That’s a tried and failed deal. So, if the President does not agree to Social Security and Medicare cuts there won’t be an increase in the debt ceiling? A government shutdown again? I wonder, is this setup meant to pressure the Tea Party into granting more revenue or is it meant to pressure Democrats into accepting Social Security and Medicare cuts they do not want or think are necessary?

House GOP debt effort puts Senate talks on hold: — House Republicans are working to pass their own plan to reopen government and avert an impending Thursday default deadline instead of waiting for Senate leaders who were nearing agreement on a competing budget offer. The House effort appeared to put the brakes on the Senate talks. However, House Speaker John Boehner, R-Ohio, struck a cautious tone about how the House would proceed following a nearly two-hour meeting with GOP lawmakers. "There are a lot of opinions about what direction to go. There have been no decisions about what exactly we will do," he said. "We are very cognizant of the calendar," added House Majority Whip Kevin McCarthy, R-Calif. "We want to find a solution that gets us moving forward and America back working again." House Republicans are dissatisfied with the contours of the Senate plan because they say it does not go far enough to rein in President Obama's health care law. The government shutdown, now in its 15th day, began when House Republicans refused to advance a stopgap funding bill unless it included provisions to delay or defund the 2010 Affordable Care Act.

House G.O.P. Backs Off Plan, Leaving Fiscal Talks in Limbo - Negotiations to reopen the government and avert a possible default just two days away were temporarily suspended Tuesday, and Senate Republicans emerged from a closed-door lunch saying they had to wait to see if their struggling House counterparts could still come up with their own plan.  House Republican leaders, who had appeared stymied in their efforts earlier in the day, rushed out a new proposal Tuesday afternoon that would reopen the government through Dec. 15, extend the government’s borrowing authority until Feb. 7 and eliminate government contributions to lawmakers, White House officials and their staffs for their purchases of health insurance on the new insurance exchanges.  Under the new plan, the Treasury Department would be forbidden to use “extraordinary measures” — juggling government accounts — to extend its borrowing capabilities. Speaker John A. Boehner was hoping to bring a bill to a vote as early as Tuesday evening.  The continuing efforts by the House to reach agreement on a proposal put a halt to talks in the Senate after negotiators had appeared to be closing in on a deal. Stock markets dipped as meetings continued on Capitol Hill and at the White House. But for the moment, the attention had returned to the House and whether Mr. Boehner could come up with a proposal that would attract enough support.

U.S. fiscal talks stumble as lawmakers race against clock  (Reuters) - Stop-start negotiations to end the U.S. fiscal impasse left congressional leaders and President Barack Obama desperately searching on Tuesday for a way to reopen the government and raise the country's debt limit ahead of a Thursday deadline. Fitch Ratings warned it could cut the sovereign credit rating of the United States from AAA citing the political brinkmanship over raising the federal debt ceiling. Fitch's action emphasized how close to an economically damaging default Washington has come and sent U.S. stock futures lower. Republicans in the fractious House of Representatives said they would try a new approach after their first attempt crash-landed on Tuesday. But differences with an emerging Senate proposal could complicate prospects for final passage before October 17, when the U.S. Treasury says the government will reach its borrowing limit. The first alternative plan from House Republican leaders failed to gain enough support in a closed-door morning meeting for the House to proceed. The disarray raised questions about what the House will ultimately be able to pass and stoked 11th-hour uncertainty.

Debt Limit Talks in Limbo After Senate Deal Collapses - A proposal by a group of Democrats and moderate Republicans in the Senate fizzled when GOP leaders in the House of Representatives failed to get their rank-and-file members to back a revised version. But just as the embattled House GOP leadership attempted to muster support for a deal by adding new clauses picking away at Barack Obama's healthcare reforms, it was rejected by Democrats. "It can't pass the Senate and won't pass the Senate," said Harry Reid, the majority leader. The latest tussle began when House Republicans met at 9am to consider a deal reached on Monday between Senate leaders that would have extended the debt limit and authorised government spending with only one token concession over healthcare. Speaker John Boehner floated an alternative that, in addition, would delay a new tax on medical devices designed to help pay for Obamacare and deprive lawmakers of any personal health insurance subsidies. That succeeded only in inflaming conservatives in his own party, who regard both House and Senate compromises as surrender, and Democrats, who accused Boehner of introducing unacceptable new "ransom demands". House Republican leaders emerged from their bruising encounter with conservatives without announcing whether they would even try to stage a vote on their new proposal. "There is no decision about what exactly we will do," Boehner told reporters. "We are talking with our members and both sides of aisle to try to find a way forward today."

Oh No, Not Again - The current fiscal showdown was actually a little different in that the House GOP and Senator Ted Cruz largely did not claim to be engaging in obstructionism in the name of reducing budget deficits. Indeed, their central demand—the wholesale rollback of the Affordable Care Act (ACA) would actually increase long-run deficits substantially. But those days seem over and discussion after any short-term cease-fire on the continuing resolution (CR) and debt ceiling seems set to snap back to the Washington perennial of obsessing over long-run budget deficits. A clear sign that the nation’s political debate has shifted back to budget deficits is always that Erskine Bowles and Alan Simpson have launched a campaign calling on policy-makers to reduce deficits and are invited on talk shows and fawned over. Looks like we’re here again. As comfortable as this makes Beltway pundits, it’s a disaster, since previous episodes where fiscal showdowns focused on budget deficits led to the radical austerity that has been so damaging to recovery from the Great Recession. Let’s recap.

Boehner sees his control of House Republicans slip away - House Speaker John A. Boehner (R-Ohio) started Tuesday with a last-ditch attempt to exert control over his restive caucus, proposing a new plan to open the government and raise the debt ceiling in an effort to give Republicans a bit of leverage. But as evening fell over the Capitol, it was increasingly clear who had control over the House GOP: no one. Boehner struggled to accommodate his most vocal and hard-line members, adjusting his plan to address their concerns only hours after laying it out in a morning meeting with his caucus. But even after the rewrite, even after cajoling lawmakers in small groups — attempting to convince them that passing a Republican plan in the House would give the party more power to win concessions from Democrats than if they allowed the Senate to take the lead — there were still not enough votes to pass it. Before the defeat, some of Boehner’s friends, particularly former House members now in the Senate, fretted about the impact of another failure. “Of all the damage to be done politically here, one of the greatest concerns I have is that, somehow, John Boehner gets compromised,” said Sen. Lindsey O. Graham (R-S.C.), who entered the House in 1995 and was involved in several coup attempts at the time against Speaker Newt Gingrich (R-Ga.). “You know, I was involved in taking one speaker down; I’d like to be involved in keeping this speaker, because, quite frankly, I think he deserves it.”

We're Approaching the Worst-Case Scenario for House GOP Hostage-Taking - What the House will do today or this week isn't clear. Time is running out to address the more pressing concern, an increase to the debt limit that would allow the Treasury Department to pay the nation's obligations and prevent the massive economic disruption that would follow from a government default. Passing (non-unanimous) bills is slow. To ensure creditors and beneficiary recipients get paid, there is no reason to delay the process of passing this critically important one.But the House can't begin that process until it figures out what it wants to pass. It's fairly clear, as it has been for a long time, that enough Republicans would join with Democrats to pass an unamended funding bill for the government and, particularly now, an increase to the debt limit. When GOP leaders on Tuesday morning went before their caucus to present a counter-offer to the Senate compromise bill, they included elements that they hoped would assuage the concerns of their Tea Party members — elements that could potentially themselves be points of negotiation with the Senate, an ominous clock-tick in the background. Instead, the House Republicans split apart at the seams, preferring to float the idea of reintroducing the same measures rejected on the first day of the shutdown — an exception to employer coverage of contraception clause, the amendment to end health care co-pays for congressional staffers. Not only are these obvious poison pills for the Senate, but, unlike when they were raised at the beginning of the month, this strategy has already been judged by the public.

House GOPers Pushing for Anti-Birth-Control Measure in Debt Ceiling Deal - On Tuesday morning, Speaker of the House John Boehner (R-Ohio) held a meeting to brief House GOP members on his new plan to stave off a US government default and end the government shutdown. The proposed package would include a two-year delay of the Affordable Care Act's tax on medical devices, eliminate the health insurance employer subsidy for members of Congress, and require income verification for people who qualify for federal subsidies under Obamacare. It would also prohibit the Department of the Treasury from taking "extraordinary measures" to postpone a debt crisis. The measure would fund the government until mid-January and raise the debt ceiling until early February. Immediately, Senate Majority Leader Harry Reid (D-Nev.) said Boehner's plan would be DOA if it ever reaches the Senate. And initial reports noted that it did not have the full backing of Boehner's caucus—partly because tea partiers were upset that this plan would still allow employer subsidies for the health insurance of congressional staffers. Many members who left the meeting declined to say how they'd vote. Rep. John Campbell (R-Calif.) pried open an elevator door to escape reporters hurling questions at him. But several Republican legislators said there was another provision they wanted included in the legislation: a so-called "conscience clause" that would exempt employers (citing religious objections) from having to provide coverage for birth control as part of the health care plans they offer employees. This idea has been on the Republican wish list for years—Obamacare already has this sort of exemption for churches, mosques, and other places of worship—and with Washington in full-on crisis mode, GOPers are looking to exploit current circumstances to win this long-running fight.

No Plan B as deadline approaches -- Whatever deal Senate leaders come up with to solve the fiscal crisis had better work, because President Barack Obama has no Plan B if it doesn’t. The Treasury is set to hit its credit limit Thursday. Much of the federal government has been shut down for more than two weeks. And Fitch, one of the three major ratings agencies, is considering downgrading the reliability of U.S. debt. The latest episode in debt limit roulette resembles a dystopian projection of the American form of democracy: a paralyzed House, a slow Senate, and an unbending president sit once again at the brink of a fiscal abyss. Obama, who has met with congressional leaders and rank-and-file lawmakers — and sent top aides to the Hill to keep lines of communication open — is working to help shape the contours of legislation, but he has not been willing to make significant concessions to reopen government and raise the debt ceiling. That won’t change as Thursday’s deadline approaches, White House officials say. “What he will not do, what he has firmly made clear again and again is give the tea party its ideological agenda in exchange for Congress opening the government or Congress raising the debt ceiling so that the United States doesn’t default,” White House press secretary Jay Carney said Tuesday. “That has been his position all along.” The White House’s hope is that the negotiations between Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) — suspended for about 12 hours Tuesday while House Republicans made another failed run at passing their own bill — will yield a deal that Speaker John Boehner (R-Ohio) chooses to put on the floor to avoid a default.

Inching Towards Default - It's Tuesday night and the prospects are looking increasingly dim for a political solution for the politically driven risk of a US Treasury default. The credit rating agency Fitch earlier today "placed the United States of America's (U.S.) 'AAA' Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN)," the firm announced this afternoon. "The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This 'faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns." Adding to the rising concern that time is running short (the Treasury's ability to borrow runs out on Thursday without a legislative green light from Congress) is the Tuesday-evening collapse of the House's efforts to reopen the government. In other words, it's up to the Senate to avert a default that's little more than a day away.  As for the financial situation, the immediate threat, according to Fitch, runs as follows: Although the Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so. The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens - all of which would damage the perception of U.S. sovereign creditworthiness and the economy.

Treasury Bills Collapse - As equities continue to press back towards all-time highs, the Treasury Bill market is growing increasingly uncomrtable that these "people" in DC will find a solution before the 10/17/13 bill matures (10/17/13 Bill +15 at 35bps now!). Dec VIX is continuing to diverge higher against stock exuberance as at least someone is hedging. Following the dismal tail in the 3- and 6-month bill auctions, it seems the US equity market's dissonance is remarkable... It's not just the short-dated Bills, Feb Bills are now 8-9bps higher in yield (triple the levels they started the day at!)

Tea party Republicans put dollar's reputation at risk - Economic conditions provide exactly zero reasons to worry that the U.S. cannot service its debts. The danger in the current crisis, therefore, is not catastrophic economic collapse. Rather, the danger is that the House's tea party Republicans, in their zeal to block President Barack Obama's policies, especially on health care, have damaged investors' long-term trust in the U.S. government. And by thwarting the principle of majority rule, they have demonstrated a disrupting power that they may wield into the next decade, causing further erosion in confidence. Trust is crucial to investment, economic growth, fiscal stability and the continuation of the tremendous benefits the U.S. gets from the dollar's serving as the global reserve currency. Tea party Republicans undermine that trust by voicing wild claims that have little to no basis in fact, especially their absurd assertion that the federal government is going broke.

Rugged Egalitarianism – Hope in the Ruins - As I write, American conservatism has gone mad: openly, disturbingly and resoundingly bats. There is no mistaking it. But the furious imprecations and cracked laughter of the lunatic conservatives echoing loudly down the halls of our sad American bedlam have helped obscure the fact that liberalism in the United States is moribund.  While conservatives strive to tear down our rotten and unjust system and replace it with something even more terrifying, liberals offer nothing but a determination to patch up some of the superficial rot while approving the general injustice.Entered in evidence: Paul Krugman takes issue with Peggy Noonan’s recent assertion that the Republican Party is a party of roiling intellectual ferment and new ideas, while the Democratic Party has nothing novel to offer. Krugman plausibly, though pedantically, resists seeing the radical right ideas of the contemporary Republican Party as genuinely new, since most of those ideas go back at least to the mid-1990′s. But does Krugman then argue that the Democratic Party does represent the new thinking in America? Hardly. Krugman acknowledges the stolid and unflappable consistency of orthodox Democratic Party thinking, but extols that intellectual stagnation as a virtue:Am I saying, then, that Democrats are the party of new ideas? No, not at all. Democrats are for progressive taxation, a stronger safety net, more effective financial regulation, and more environmental protection — none of it stuff that would have seemed strange or new to someone who somehow missed the past few decades.

Rationalization and Obligation, Part VI: What He Ought to Do, What He Probably Will Do - This is Part VI of a six part series replying to a claim by the President at his recent White House News Conference. Part I covered the News Conference and the first two (the selective default, and the exploding option) of seven options the President might use to try save the US from defaulting in the face of continued deadlock in the Congress on raising the debt limit or repealing the law enabling it in its entirety. Part II discussed Platinum Coin Seigniorage, invoking the 14th amendment to justify continuing to issue conventional Treasury debt instruments, and consols. Part III discussed premium bonds, and Treasury sales of the Government’s material and cultural assets to the Federal Reserve. Part IV, then evaluated all seven options in light of variations among them in likely degree of legal difficulties they might face, and also the likely impact of each on confidence in the bond markets, if used. Part V then summarized my evaluation of the seven options. This part will end the series by saying first, what the President ought to do, and then by saying what I think he is most likely to do.

Robert Reich: Democrats should have never compromised with Republican "extortionists" on debt ceiling -  Democrats have contributed to the current government shutdown by making the mistake of compromising with Republican “extortionists” during the last debt ceiling showdown in 2011, Robert Reich said. “Once you start compromising, once you start negotiating with extortionists, there's no end to it because they will always increase their extortionist demands the next time around,” Clinton’s labor secretary told “Top Line.” Reich described the current political standoff – with the government shutdown now in its sixteenth day and the possibility of default only a matter of hours away – as “crazy” and places the majority of the blame on Tea Party “extremists.” He also had a sharp warning about what default would mean for the U.S. economy. “If we ever get to an actual default, then interest rates are going to spike more than they actually have, we're going to see dramatic declines in share prices, the world economy is going to be affected,” Reich said.

Yes, the debt fight could delay Social Security checks. Here’s how. - The Washington Post: There’s a theory pinging around that says no matter what happens with the debt ceiling, Social Security beneficiaries will keep getting their checks on time. Social Security is a trust fund that brings in more money than it pays out, so the theory holds that even if the United States can’t legally borrow more money, benefits must continue until the trust fund runs out. Evidence strongly suggests that theory is wrong. Assuming the borrowing authority runs out this week and lawmakers stay in their stalemate, the policy center calculates, a batch of Social Security benefits scheduled to go on Oct. 23 would likely be delayed by two days. A larger batch, scheduled for Nov. 1, would be delayed by 12 days. The longer the debt-limit impasse, the longer the delays. Wait, Social Security taxes bring in more than the benefits cost. How could it not have money to pay benefits? Because lawmakers don’t treat Social Security, to borrow an old phrase, like it’s in a lockbox. They mix its tax receipts with income taxes, capital gains taxes and every other revenue source the government has. Benefits get paid out of that big mixed revenue stream. “If they delay payments, then Social Security just stands in line with everything else,” said Shai Akabas, a senior economic policy staffer at the Bipartisan Policy Center. “Social security does not necessarily receive any special treatment because it has its own trust fund. It gets paid out of cash, like everything else.”

Oct. 17 Is Start Rather Than Finish of Debt-Limit Endgame - The day after tomorrow represents the beginning of Washington’s debt-crisis end game, not the end of it. The Treasury Department expects to exhaust its borrowing authority no later than Oct. 17, leaving the federal government with no more than $30 billion on hand. Depending upon daily tax receipts and incoming bills, the U.S. government could be forced to default on its obligations at any date thereafter -- to bondholders and millions of Social Security recipients. President Barack Obama said yesterday the U.S. now faces “a good chance of defaulting,” a development that would have a “devastating effect” on the economy. Though that would roil financial markets and risk triggering a global recession, the full effect will take time to unfold. Oct. 18’s dawn may seem little changed from that of the day before. “It’s not that you know there’s one date where the whole thing is going to go kaboom,”. “It’s that you have increasing risks, because we’ve never encountered this series of events in our modern history so we really don’t know what’s going to happen. But it’s fairly safe to say that the further we go without a resolution, the more the risks increase.”

Wall Street doubts debt deadline and puts its money on 1 November - While Treasury secretary Jack Lew says that Thursday is the day on which the country runs out of cash and will be unable to borrow more, Wall Street has its own estimate: 1 November. That day, argue some in the financial industry, is the Big One: the day that the US Treasury has to pay $67bn in social security checks, disability benefits, military pay, and interest on government bonds. October 17 is just a speed bump on the way, they argue. Magical thinking? Perhaps, but 1 November is where Wall Street is putting its money. On a conference call with investors today, for instance, Citigroup said it no longer holds US government bonds that are due to be paid before 1 November. That suggests Citigroup believes government bonds after November 1 will be paid; it also indicates that Citigroup believes the government will not pay investors on time for bonds scheduled to mature in October. Lew has insisted that October 17 marks the beginning of a financial crisis for the US Treasury. "The federal government has numerous large payments that are due shortly after October 17, when we will have exhausted our borrowing authority and will only have cash on hand to meet our obligations," Lew told lawmakers. "Between October 17 and November 1, we have large payments to Medicare providers, social security beneficiaries, and veterans, as well as salaries for active duty members of the military. A failure to raise the debt limit could put timely payment of all of these at risk."

What Happens If We Actually, Truly Default? --  Until recently, asking what would happen if the U.S. defaulted on its debt was like asking what unicorns like to eat for breakfast. It was simply an exercise in absurdity – a question whose answers lay outside the realm of possibility. But as it’s become increasingly clear that we could, in fact, default on our debt later this month, if the current attempts at striking a deal to extend the debt ceiling fall apart or simply take too long, it's worth trying to figure out what exactly would happen in a default scenario. In recent days, I’ve spoken to a number of financiers and policy experts on what could happen if we reach the “X Date” – the date on which the United States Treasury has burned through all of its cash, and is no longer able to cover its expenses. (The Bipartisan Policy Center expects this date to come between October 18 and November 1, but for simplicity's sake, let's assume it happens on an appropriately scary date – October 31, Halloween, and the day a huge interest payment on U.S. debt is due.) I asked these experts to indulge me in a speculative exercise, and give me a medium-case scenario of what could happen on the X Date – not the worst-case scenario, not the best-case scenario, just a reasonably pessimistic imagining of how that day might go, from morning until night. Here's what they told me might happen:

A government above the people - On October 11, 2013, ten days after the government of the United States shut down, leaving hundreds of thousands of federal workers without pay, Republican Congressman Steve Pearce left a message on his Facebook page. "If you are a furloughed government employee, we encourage you to reach out to your financial institution as soon as you worry you may miss a pay cheque," he wrote. "Financial institutions often offer short-term loans and other resources. Don't wait until you are behind on a bill; call now and explore your options." Steve Pearce is a multimillionaire. He has an estimated worth of $8m, which makes him only the 46th richest member of Congress. His constituents, in New Mexico, are among the poorest in the country. Over 22 percent of the people he represents live in poverty, including one-third of children. Pearce has voted to deny them food assistance. Many in his district make less than $19,000 per year, which is how much taxpayer money Pearce once spent on a plane ticket.  Steve Pearce is not unique. He is not unique in America, where the majority of elected officials are far wealthier than the average American, and he is not unique in the world. The 70 richest members of China's Congress are worth a combined $89.8bn while the average Chinese makes $2,425 per year. In Russia, where 110 people own 35 percent of the country's wealth, parliament is staffed by billionaires while millions suffer in poverty.

MMT and the Struggles of Political Democracy - A principal dilemma of the theory of modern fiat currency (MMT) is the question of how the state spends the money it issues: who decides, and by what process? It may be frustrating to watch U.S. Congressmen and Senators bicker and behave as if their national government has run out of dollars, but it is sobering to consider what would happen should these legislative prodigies suddenly realize that, in fact, there are no currency constraints on their spending at all. It is hard to imagine who, or what, would step in to impose some kind of discipline and planning for the spending spree that would ensue. I suspect that many who actually understand fiat currency are hesitant to overtly embrace it for precisely this reason—because they are unsure what structure exists, or could be put in place, that would rationally manage the remarkable levels of sovereign spending MMT makes possible. Looking ahead, then, to a time when the cat is out of the bag and modern fiat currency is widely understood and accepted, some effort should be made to imagine how it might best be managed and controlled. This is especially difficult in the United States because of our obsessive belief in laissez-faire capitalism and reflexive fears of socialism. The fact that modern money theory requires the sovereign government to spend the fiat currency it issues appears to implicitly suggest some form of command economy, with the sovereign choosing, by virtue of its spending choices, how resources will be allocated, which industries will be preferred, and what investment goals will be pursued. The extreme aversion of the U.S. political system (the democratic process) to making these kinds of choices was illustrated by the 2009 stimulus bill in which Congress struggled mightily to agree on useful ways to spend $800 billion into the private sector in hopes of alleviating the Great Recession.

Shutdown of US govt & ‘debt default’: Dress rehearsal for privatization of federal state system? —  The ‘shutdown’ of the US government and the financial climax associated with a deadline date, leading to a possible ‘debt default’ by the federal government, is a money-making undertaking for Wall Street. Several overlapping political and economic agendas are unfolding. Is the shutdown – implying the furloughing of tens of thousands of public employees – a dress rehearsal for the eventual privatization of important components of the federal state system? A staged default, bankruptcy and privatization is occurring in Detroit (with the active support of the Obama administration), whereby large corporations become the owners of municipal assets and infrastructure. The important question: could a process of ‘state bankruptcy’, which is currently afflicting local level governments across the land, realistically occur in the case of the central government of the United States of America? This is not a hypothetical question. A large number of developing countries under the brunt of IMF ‘economic medicine’ were ordered by their external creditors to dismantle the state apparatus, fire millions of public sector workers as well as privatize state assets. The IMF’s Structural Adjustment Program (SAP) has also been applied in several European countries. Will this gamut of deadly macro-economic reforms engineered by Wall Street and the Federal Reserve be conducive to widespread civil disorder across the United States?

Government Shutdown 2013: Fix the Debt Won't Go Away - They’re back! Barely had Harry Reid and Mitch McConnell announced their agreement to reopen the government and raise the debt ceiling than zooming in from the leaden skies came our old friends, the fiscal hawks. Fix the Debt, the organization that took flight last year from the very deep pockets of octagenarian Blackstone co-founder Pete Peterson, held an afternoon event at the National Press Club to remind everyone that, crisis averted, the real problem in this country remained our crushing long-term debt. You might think that the fiasco of the past few weeks would have prompted some soul-searching within the organization – after all, its well-broadcast doomsday warnings of a nation drowning in red ink have only helped to feed conservative Republican fury about out of control spending, even as budget deficits steadily decline and the long-term fiscal picture brightens. It is that fury that, as much as anything, drove the brinksmanship over the government shutdown and debt ceiling, but Fix the Debt officials spoke as if they have had no role in bringing us to this point – as if, to the contrary, we arrived at this point precisely because we were not listening to them. Compared to them, the second-guessing Republicans on the Hill Wednesday were models of candor and self-awareness.

Crooks, Liars, Idiots, and Plutocrats - At first glance, the shutdown of the government and the looming debt-ceiling crisis seem to indicate that we are dealing with idiots, the likes of Michele Bachmann, Ted Cruz, Louie Gohmert, Steve King, and other Tea Party Republicans. After all, there is no rational reason to shut down the government to preclude what is essentially a Republican-designed health law (created by the Heritage Foundation), that would create the conditions for finally attaining universal health coverage in the United States, a goal that all the other advanced nations have achieved decades ago. In particular, the alternative to “Obamacare” proposed by the GOP is nonexistent, and basically means leaving millions of Americans without proper medical care. On top of that, the shutdown, together with the previous sequestration, and the overall contractionary fiscal stance, will most likely make the very slow recovery even slower, maintaining an unnecessarily large portion of the labor force unemployed. The debt ceiling, which we are still approaching, even if at a slower pace because of the shutdown, will make matters even worse. There is a certain degree of uncertainty of what could happen if an agreement on the debt ceiling is not reached. I tend to believe that there will be neither a run on the dollar nor a collapse of the world economy, as some expect. It seems unlikely that the euro, or the yen, let alone the yuan, would replace the dollar. Europe and Japan are not really thriving, and investors are not going to flock in mass to Chinese assets, since it is far from clear that an economy controlled by a single party with extensive ability to intervene in contracts provides more security than U.S. bonds.

Envy, Scorn and Shutdown - “Dysfunctional” is a word often applied to the federal government shutdown. If only we had a functional understanding of the causes of dysfunction. Many explanations offered point to the effects of increased income inequality on political institutions. But increased inequality may have even more direct effects, undermining trust and driving the emotional climate toward more intense expressions of envy and scorn. The announcement of a recent Gallup Poll was headlined “Dysfunctional Government Surpasses Economy as Top U.S. Problem.” The results are newsworthy: 33 percent of Americans cite dissatisfaction with government and elected representatives as their top concern, the highest level in a Gallup survey since the question was first asked in 1939. As Gallup notes, this is far higher than the 19 percent of Americans who label the economy their top concern.  These two domains, however, can’t be neatly separated. Economics affects both the way we govern and our perceptions of who is governing.  A more recent global survey conducted by CBS International found that 64 percent of Americans felt the government was run by a few big interests, compared with 5 percent who felt the same in Norway and 83 percent in Greece.  Cross-national comparisons suggest that inequality can literally undermine democratic institutions, perhaps because the very rich find them inconvenient. The political scientist Christian Houle finds that inequality is associated with an increased “probability of backsliding from democracy to dictatorship.”

A conspiracy theory of the debt ceiling - So, my working hypothesis is that, should the debt ceiling actually bind, the US Treasury will prioritize payment on formal debt securities and then institute some form of delayed payments on the rest of its obligations.  A delayed payments regime would amount to a regressive tax issued at two levels: first by the Federal government, and then by the financial industry. By delaying payments, the Federal government would tax recipients of government disbursements by forcing them to finance loans to the Treasury for free. Like all taxes, the actual incidence would be more complicated than the direct hit. Payees with bargaining power — say vendors of bespoke military systems or well-connected contractors — would find ways to add the finance cost to their bills, and largely escape the tax. Payees without bargaining power — your average social security recipient, for example — would have to simply accept the delayed payment and eat the interest cost that the government should be paying. A common narrative about the debt ceiling is basically a Frankenstein story: businesspeople funded these Tea Party crazies, and now despite pulling all their levers, they just can’t control the monster they have created. And maybe that’s right.But suppose, plausibly, that the Jamie Dimons of the world know what Treasury has assiduously ensured the rest of us do not, which is exactly what Treasury is capable of and planning to do when George Washington bumps his head. And suppose it is debt prioritization plus delayed payments. Is it too much to wonder whether some quarters of the business community — you know, the ones who own the place — may not be pushing quite as hard as they pretend to raise or eliminate the debt ceiling? I hope that it is too much to wonder. I hope it is evidence only of my own paranoia that I do wonder.

Poll: Americans Name ‘Dysfunctional Government’ As The Top Problem Facing The Country -- Dissatisfaction with our non-functioning government rocketed to the top of Americans’ list of problems facing the country after House Republicans shut the government down last week in an effort to dismantle the Affordable Care Act, according to a new Gallup poll: This polling result is not particularly surprising, both because the House GOP’s willingness to extort the president with a shutdown and the threat of a government default is a genuine sign of dysfunction and because the shutdown dominated the news for the last two weeks. The interesting question is whether voters will simply attribute the shutdown to a failure of individuals within government, or whether this moment of extreme dysfunction opens the door to larger reforms to our system of government.  The shutdown resulted because Democrats and Republicans can’t agree on which terms to open the government, but it also resulted because our Constitution permits periods of divided government when these kinds of impasses can occur. It occurred because gerrymandering and other factors related to legislative districts allowed Republicans to gain control of the House, even though more Americans voted for a Democratic representative than for a Republican, and because the House rules enable the Republican leadership to prevent a vote to reopen the government even if a majority of the elected representatives would support such a bill.

US must grasp global impact of debt crisis: Japan -  Japan's finance minister said Tuesday US lawmakers needed to get to grips with the seriousness of the budget impasse in Washington and its reverberations around the world. Taro Aso, who also serves as deputy prime minister, said the Republican Party's ultra-conservative Tea Party faction appeared to be unaware of the wider implications. "Many of them don't seem to understand well the magnitude of the international impact this problem could have," Aso said at a news conference, according to Dow Jones Newswires. "In the worst scenario, there will be a default, which is serious" for Japan, one of the biggest holders of US government bonds, Aso was quoted as saying by the Nikkei daily. "The impact is big at a time when the (Japanese) economy is about to grow," he added. But Aso also sounded an optimistic note, saying he expects the issue will be resolved. Japan holds some $1.1 trillion in Treasuries, making it the biggest lender to the US government after China. Aso made similar remarks on Friday in Washington after he attended a meeting of finance chiefs of the Group of 20 major economies there. "Japan expects this issue to be resolved once and for all without delay," Aso said. "This is not only a matter for the United States."

China’s State Press Calls for ‘Building a de-Americanized World’ - “It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.” As nations around the world fret over the U.S. budget impasse, that is the conclusion of a not-so-subtle commentary published by China’s official Xinhua News Agency on Oct. 14. Key among its proposals: the creation of a new international reserve currency to replace the present reliance on U.S. dollars, a necessary step to prevent American bumbling from further afflicting the world, the commentary suggests. “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising the debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized,” says Xinhua. “The world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites,” it adds. It’s not a new refrain: Back in March 2009, China’s central bank governor, Zhou Xiaochuan, also called for the creation of a new reserve currency, albeit in less heated language. The world needs a new “super-sovereign reserve currency” to replace the current reliance on the dollar, Zhou wrote in a paper published on the People’s Bank of China’s website (Zhou still heads the bank). The goal, he wrote, is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

What China Really Thinks of the Shutdown - In the midst of a domestic crisis, it is easy to forget that the rest of the world is watching. Now that the U.S. federal government has shut down for the first time since the mid 1990s, the talk of the town is the political problems of the world’s largest economy and sole superpower. In China, most media reports about the shutdown have been merely informative, but every now and then they offer a rare insight into what the Chinese have learned about America’s shortcomings. “As far as the Chinese populace is concerned, the government shutdown is like the Arabian Nights,” writes Wang Xuejing of Hong Kong Daily News. Evidently, for the citizens of a totalitarian state, the prospect of a government shutdown seems otherworldly. The newspaper Qilu Wanbao complains, “To us, far on the other side of the ocean, the information appears contradictory. Some say Americans are furious [...] Some say [everyday] life remains unchanged. Have or haven’t Americans been affected by the federal shutdown?” The notion of a government shutdown is strange for the average Chinese person because its consequences in the People’s Republic would go far beyond closed federal agencies and parks. In mainland China, and increasingly Hong Kong, every school and every agency (national and local) answers to a party minder. Banking and internet traffic are also closely monitored by Beijing. Should the party overseers be absent one day, many organizations crucial to China’s social structure would suddenly find themselves without official guidance. Yet other commentators find the federal shutdown inspiring. Dr. Li Xiaohui, Assistant Professor of Law at Xiamen University writes, “The life of the average American has not been greatly affected by it and the economy has continued to grow. This reflects the clear limits between America’s government and the market.  Similarly, the newspaper Nanfang Dushi Bao commended the strength of American society for being able to function without the government. Interestingly, while the American public sees the shutdown as a government failure, some Chinese are seeing it as a sign of efficiency.

Viewing U.S. in Fear and Dismay - Faced with Washington’s march toward a default, the world has reacted mostly with disbelief that the reigning superpower could fall into such dysfunction, worry over global suffering to come and frustration that American lawmakers could let the problem reach this point.  A common question crossing continents remains quite simple: The Americans aren’t really that unreasonable and self-destructive, are they?  “It just goes to show that it’s not only Greece that has irresponsible and shortsighted politicians,” For countries that have had their own experiences with financial crises — often followed by American dictates about the need to be more responsible — the brinkmanship in the United States has produced an especially caustic mix of bewilderment, offense and more than a little eagerness to scold.  Many people in countries like Greece, Argentina, Mexico and Russia still have searing memories of defaults and their lasting effects, including lost power. Especially galling for those who endured crises of their own is the fact that the United States remains sheltered: a default could well hurt weaker countries more than the United States, which has the advantage of the dollar’s being used as a global currency.  Indeed, the unequal distribution of power and wealth — part of the exceptionalism that American politicians loudly defend — has become a focal point for many foreign economists and officials.“The U.S.'s exorbitant privilege” — of issuing the world’s most widely accepted currency — “allows it not to have a budget, to bump against debt limit with scant market reaction,” said Luis de la Calle, a Mexican economist.

Some are born solvent, some achieve solvency, and some have solvency thrust upon them - The prospect of a US technical default is unfortunately becoming an ever greater reality. That said, there’s no reason to panic just yet.  If there is a D-day it isn’t until November 15. What’s more, there’s an ever louder chorus of voices suggesting that a technical default may not matter at all. How can that be?Well, for one thing, there’s a multitude of tricks the Treasury and the Fed working in partnership with the Treasury could play to avoid a crisis. A few of them are outlined here and here.  More interesting, however, is the idea that they may not have to do anything too outlandish at all.  There is indeed a very good chance that the strength, size and solvency of the US debt market will prevail of its own accord. After all, solvency is not necessarily up for negotiation. If the market believes you are solvent, wants you to be solvent, and considers you to be solvent — solvent you will be. Payments or no-payments. The state of solvency is ultimately bestowed upon you by the market, it is not determined by politicians or credit rating agencies. Whatever politicians and credit agencies say, if the market disagrees this is what matters ultimately.

Imagining the Dollar Without Its Privilege - Remember the last time the country came to the brink of default? It was August 2011. For the first time in history, Standard & Poor’s, the ratings agency, downgraded United States government debt.  “The effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges,” it said. Investors around the world rushed to find a safe place to put their money.  Rather than dump America’s downgraded bonds, however, investors flocked to them. The dollar strengthened. The United States might have become a threat to the world economy, but with even worse troubles developing elsewhere, including a flare-up in the euro crisis, it was still its safest place. As George Soros, the hedge fund investor, told me in an interview last Friday, “The dollar is the weakest currency except for all the others.” The dollar’s resilience comes to mind as Congress again flirts with financial disaster.Christine Lagarde, the fund’s managing director, told NBC’s “Meet the Press” that failing to lift the debt ceiling would cause so much disruption to the world economy that “the standing of the U.S. economy would, again, be at risk.”  Indeed, the United States’ erratic policy making has kindled fears that the dollar could lose its perch as the world’s reserve currency — what the former French president Charles de Gaulle called America’s “exorbitant privilege.”  Today almost two-thirds of the world’s foreign currency reserves are held in dollar assets, mostly Treasury bonds. Nearly half the foreign debt securities in the world are in dollars, as are more than half the world’s cross-border loans and deposits.

Senate Paves Way to End Debt Impasse - Senate Democratic and Republican leaders on Wednesday reached final agreement on a deal to reopen the government and extend its borrowing authority into February, with final passage looking increasingly possible by Wednesday evening.  Senator Harry Reid of Nevada, the majority leader, and Senator Mitch McConnell of Kentucky, the Republican leader, announced the completion of the agreement shortly after noon, and the Senate Republicans who had led the push to shut down the government unless President Obama’s health care law was gutted conceded defeat and promised not to delay a final vote.  “This is not a time to point fingers of blame,” Mr. Reid said. “This is a time of reconciliation.”  The deal, with the government shutdown in its third week, yielded virtually no concessions to the Republicans, other than some minor tightening of income verifications for people obtaining subsidized insurance under the new health care law.  Under the agreement, the government would be funded through Jan. 15, and the debt ceiling would be raised until Feb. 7. The Senate will take up a separate motion to instruct House and Senate negotiators to reach accord by Dec. 13 on a long-term blueprint for tax and spending policies over the next decade.

Senate Leaders Reached Agreement - "This is a time for reconciliation," said Senate Majority Leader Harry Reid of the agreement he had forged with the GOP leader, Sen. Mitch McConnell of Kentucky. One prominent tea party lawmaker, Sen. Ted Cruz of Texas, said he would oppose the plan, but not seek to delay its passage. Officials said the proposal called for the Treasury to have authority to continue borrowing through Feb. 7, and the government would reopen through Jan. 15. Democratic Leader, Rep. Nancy Pelosi of California, has signaled she will support the plan and her rank and file is expected to vote for it in overwhelming numbers. Despite initial Republican demands for the defunding of the health care law known as Obamacare, the pending agreement makes only one modest change in the program. It requires individuals and families seeking subsidies to purchase coverage to verify their incomes before qualifying.

Off the Debt Limit Hook for at Least the Next Four Months - Provided that the Senate and House follow through on the scenario now on the table, it looks like the game of chicken worked for the Democrats this time. We’re off the hook on default and Government shutdown for now, and Washington village pundits are in full-throated cries of celebration. Congress is off the hook too. They don’t have to offer any solutions to real, rather than manufactured, problems.  The President is also off the hook, he won’t, for now, need to exercise any of the options, like minting the coin, using consols, or premium bonds, or asset sales to the Fed, or others available to him to render the debt limit legislation impotent. So, he gets to preserve debt limit threats from the Republicans as a negotiating tool they can use to “force” him into entitlements cuts later on. In fact, as I write Jay Carney is already talking about the President taking “a balanced approach” to future negotiations of fiscal policy so that the burdens of sacrifice will fall on everybody fairly. And, a bit later, there’s Nancy Pelosi echoing the Administration line on future negotiations. That, of course is also the Pete Peterson, Bowles-Simpson, catfood line for justifying further victimization of food stamp recipients, seniors, children, and the people who have paid the price for the Crash of 2008 and the neoliberal period in American fiscal policy beginning in 1977.However, the deal that looks like it will happen isn’t a solution, but just kicking the can down the road including built-in pretty good possibilities for future Government shutdown and debt ceiling crises in just three – four months, if Congresspeople have the guts to subject the American people to this nonsense again in an election year.

Debt Deal Back on Track and Why the Wheels Came off Yesterday -- Yves Smith -- Bloomberg and other news services are reporting that a “stop the default meteor from hitting the planet” deal is back on. According to sources on the Hill, the current outline a short-term deal in which the government stays open through January 15, and the authorization to borrow is pushed back till February 7 with a budget that supercedes the short-term deal due in by December 11. So what happened yesterday, and more generally? As we’ve said, various whip counts based on public statements of Republicans members have shown that Boehner has had the 19+ Republican votes needed to join House Democrats to pass a clean continuing resolution, which also meant he’d also have enough votes to pass a clean bill to lift the debt ceiling. Obama has been insistent that he would not make policy concessions based on the use of the debt ceiling or shutdown threat, that it makes it impossible to govern. The Democrats wanted a December budget because a new round of spending cuts kicks in under the sequester on January 15 and they want a budget wrapped up before then.  So why did everything blow up yesterday? The short form is the Senate was working on passing a deal. The House Republican caucus knew that if a bill passed the Senate with 70 or so votes, it would be pretty much impossible for the House not to pass it. So Boehner tried to gain control of the dynamic by passing a bill in the House first so as to get something a little more Republican-favorable than the Senate bill to the Senate to put them on the back foot. But he couldn’t do it. He tried first moving terms to the right and to the left and various Republican factions balked along with some Democrats.  So as of now, things look to be on track, with the goal of getting a deal inked today or at worst early tomorrow.

Senate moves toward final vote; Boehner urges GOP to back deal - Senate leaders on Wednesday announced a deal to end the partial government shutdown and avoid a possible U.S. default, and House Speaker John Boehner urged fellow Republicans to support it while a key GOP conservative said he wouldn't try to block it in the Senate. "We fought the good fight; we just didn't win," Boehner told a radio station in his home state of Ohio in reference to GOP efforts to dismantle or defund President Barack Obama's signature health care reforms and extract deficit reduction concessions around the need to fund the government and raise the federal borrowing limit. The Democratic-led Senate first approved a procedural motion, 83 to 16, that allowed a vote on final passage. The Republican-led House was expected to follow later in the evening. Both chambers expedited efforts to get the legislation passed quickly. There were some concerns earlier in the day that tea party conservatives led by Sen. Ted Cruz of Texas would seek to block or delay it in a final effort to include provisions intended to harm Obama's signature health care reforms. While Cruz called it a terrible deal and urged his colleagues to oppose it, he did not mount a filibuster or employ other procedural moves against the measure. He criticized his Senate colleagues for what he called their failure to listen to the American people and said the fight against Obamacare will continue.

Quick Guide: What’s in the Debt Deal? Here’s a rundown of the major pieces of the bipartisan deal reached in the Senate, which is expected to be passed by both the House and the Senate.

  • Debt Ceiling: Legislation permits the Treasury to borrow normally through Feb. 7, and preserves Treasury’s emergency flexibility to avoid default for a period of time after that date.
  • Shutdown: Deal funds the government through Jan. 15. Government workers will go back to work, and will get back pay.
  • Budget: Deal directs House and Senate negotiators to try to reach a budget agreement by mid-December.
  • Obamacare: No major alterations to the 2010 health-care law known as Obamacare; one minor change sought by Republicans will set new procedures to verify the incomes of some people receiving government subsidies for health-insurance costs. Deal does not cut government health-insurance benefits for congressional and administration officials, or their staff.
  • Sequester: Senate deal doesn’t include a provision granting federal agencies more flexibility to mitigate the effects of the across-the-board reductions known as the sequester; congressional aides said the next round of cuts kick in when the stopgap spending measure ends in mid-January, giving negotiators more motivation to reach a deal.

Senate passes debt increase/shutdown ending bill - The Senate tonight passed a bill 81-18 to end the shutdown and increase the debt ceiling--both short term measures requiring new action in January and February of 2014.  See New York Times story (regarding HR 2775). The shutdown sent Republican poll ratings plunging, cost the government billions of dollars and damaged the nation’s international credibility. What we're getting (assuming the House does now pass this bill) is not a "clean" bill.  The Senate and House are supposed to negotiate a tax and spending "blueprint" for the next decade--with anarcho-libertarian Paul Ryan in the House and Senator Patty Murray leading the negotiations!  It may be wishful thinking for Dick Durbin to hope that the Tea Party Republicaions will "be willing to be more constructive."   Fleming (R-LA) has already said that this just moves to "Round 2" where "we're going to start this all over again."   One of the instigators of the shutdown and debt ceiling fight Senator Ted Cruz, in spite of the clear expression of American will against his position, still is apparently under the delusion that he is speaking for "the American people."  You can bet that the right-wing corporate defenders will push for severe cuts in corporate tax and will not be willing to do what the 1986 reformers knew was needed--eliminate the capital gains preference entirely (thus getting rid, with one fell swoop, of the elite's "carried interest" ploy) or increase taxes with more brackets and higher rates for income and estate taxes.  The GOP will also push for huge changes in Medicare and Social Security and for continuing cuts to spending on child welfare and infrastructure provisions.  Let's hope the Democrats have learned something about keeping a stiff backbone from this experience. 

Deal or No Deal on Shutdown and Debt Ceiling, Biggest Fiscal Policy Crisis Remains Unaddressed - The biggest fiscal policy crisis the U.S. economy faces is guaranteed to continue for at least the rest of the year, even if resolutions are found for the government shutdown and the debt ceiling. This larger crisis is the extraordinary degree of spending-side austerity undertaken by the public sector since the Great Recession officially ended in 2009. The figure below shows growth in real (i.e., inflation-adjusted) spending by federal, state and local governments in the years before and after recessions. It shows clearly that public spending following the Great Recession is the slowest on record, and as of the second quarter of 2013 stood roughly 15 percent below what it would have been had it simply matched historical averages. This spending austerity has enormous economic consequences—if public spending since 2009 had matched typical business cycles, this spending would be roughly $550 billion higher today, and more than 5 million additional people would have jobs (and most of these would be in the private sector). In fact, this extreme cutback in public spending can entirely explain why the recovery from the Great Recession has been so sluggish compared to recoveries following previous recessions. And, needless to say, the latest fiscal showdown has done nothing to reverse this deeply damaging trend.

Congress passes bill to raise US debt ceiling and end shutdown – live

• Bill passes with majorities in Senate and House
• Deal funds federal government through 15 January 
• Pushes debt ceiling deadline to 7 February
• Recriminations fly in divided Republican party
• Details of agreement here
• Read the latest blog summary

The Details of the Last Minute Deal to Raise the Debt Ceiling - Last night, after receiving a bill from the Senate, the House approved a deal to raise the debt ceiling and end the government shutdown. According to Reuters, these are the basic details of the law:

  • U.S. borrowing authority has been extended to February 7th. Once that date has been reached, Congress would need to raise the debt ceiling again, or the Treasury would need to start using “extraordinary measures” again, to prevent a default.
  • Federal spending, at current levels, has been extended to January 15th. This spending level still incorporates the previous cuts caused by sequestration.
  • A House-Senate bipartisan panel was created to come up with long-term deficit reduction plans. These plans will be created by December 13th, after which the need to be approved by Congress.
  • Establishes measures to prevent fraud in the payment of Obamacare subsidies.
  • Delivers back pay to federal workers due to the federal shutdown.

Due to the temporary nature of the bill, it is likely we will see a similar fight from Congress this winter or next spring. The full 35-page bill is here.

The Shutdown Shuts Down - How about a little of our own Q. & A.?

  • Q. Why such a short-term deal? 
  • A. I’m afraid that’s the best they could do.  The longer that clean funding and ceiling bills were slated to last, the more Republicans injected deal-breakers into the process.
  • Q. What happens next?A.
  • A group of legislators from both sides will get together in what’s called a budget conference (sounds fun, right!?) where they’ll supposedly try to hammer out the differences between the House and Senate budgets with the goal of coming up with a real budget bill that appropriates funding for 2014. More likely, since those budgets are irreconcilable, they’ll work on short-term issues, like replacing sequestration.  I’d guess that Democrats will push for a replacement that balances cuts and revenues, while backloading any cuts to reduce some of the fiscal drag on growth. They’ll find some Republicans who agree with them that sequestration should be replaced, especially since the 2014 version reduces military spending by about $20 billion (this isn’t a matter of singling out defense for more cuts — it’s taking back some added military spending in the first year of the sequester).  Also, it should be lost on no one that House Republicans were unable to appropriate to the levels in the current budget deal.  That is, they were happy to prove their fiscal fierceness by lowering the overall budget caps, but when it came to paying for specific bills, like transportation, they couldn’t squeeze their spending desires under their own caps, a good example of ideology colliding with reality.

The GOP’s income verification ‘concession’ is meaningless: The primary reason our federal government closed for 16 days and came very close to defaulting on its debt obligation was a dispute over whether to fund the new health-care law. Now the two parties have reached a deal to end the shutdown, and the one change made to President Obama's signature health legislation as part of the deal won't actually change anything at all. The change centers on what the Department of Health and Human Services does to verify incomes submitted by applicants in the new marketplace. This is important because, without income verification, shoppers could say they earn a tiny salary so that they can net a higher level of insurance subsidies. Over the summer, Health and Human Services scaled back some of the income verification requirements on the marketplace. Instead of auditing every applicant, HHS said, states would audit a statistically significant number of people who reported incomes that were strikingly different than what federal records showed. Republicans balked, arguing that this would allow for rampant fraud. House Republicans passed legislation that would require the HHS inspector general to set up a new income verification system before any subsidies could go out. That could have created a big obstacle for the health-care law. But that demand didn't make it into the agreement signed by the president Wednesday night. Instead, the deal basically requires two submitted reports in the course of the next year. Health and Human Services Secretary Kathleen Sebelius is due to submit the first report by Jan. 1, which must detail "the procedures employed by American Health Benefit Exchanges to verify eligibility for credits and cost-sharing reductions described in subsection."

What Was ‘Essential’ and What Wasn’t: The Government Shutdown in Perspective - In reality, that government shutdown was partial and selective. Paychecks, for example, kept flowing to the very lawmakers who most fervently supported it, while the plush congressional gym with its heated pool, paddleball courts, and flat-screen televisions remained open. That’s because “essential” services continued, even as “nonessential” ones ceased. And it turned out that whether the services you cared about were essential or not was a matter of just who got to do the defining.  In that distinction between what was necessary and what wasn’t, it was easy enough to spot the values of the people’s representatives. And what we saw was gut-wrenching. Stomach-churning. Prioritized above all else were, of course, “national security” activities, deemed beyond essential under the banner of “protecting life and property.”  Surveillance at the National Security Agency, for instance, continued, uninterrupted, though it was liberated from its obviously nonessential and, even in the best-funded of times, minimal responsibility to disclose those activities under the Freedom of Information Act.  Such disclosure was judged superfluous in a shutdown era, while spying on Americans (not to speak of Brazilians, Mexicans, Europeans, Indians, and others around the planet) was deemed indispensible.  Then there were the nonessential activities.In Arkansas, for instance, federal funds for infant formula to feed 2,000 at-risk newborn babies were in jeopardy, as were 85,000 meals for needy children in that state. Nutrition for low-income kids was considered nonessential even though one in four children in this country doesn’t have consistent access to nutritious food, and medical research makes it clear that improper nutrition stunts brain architecture in the young, forever affecting their ability to learn and interact socially. Things got so bad that a Texas couple dug into their own reserves to keep the program running in six states.

Extending Debt Ceiling Doesn’t Remove Market Uncertainty -- A deal to fund the U.S. government and extend the country’s borrowing authority through early 2014 isn’t enough to alleviate market uncertainty, credit-ratings firm DBRS Inc. said Wednesday. Nor does it change the firm’s negative outlook on the U.S. debt rating, Fergus McCormick, head of the sovereign ratings team at DBRS, said in an interview with The Wall Street Journal. Last week DBRS placed the U.S. debt rating under review for potential downgrade, citing the “growing risk of a selective default.” Senate leaders Wednesday struck an 11th-hour agreement to avoid a U.S. debt crisis and fully reopen the federal government. The Senate plan would fund federal agencies at current spending levels through Jan. 15 and extend the nation’s borrowing authority through Feb. 7. Under those conditions, DBRS would likely keep the U.S. rating under review with negative implications, and would likely maintain that status in early 2014 when the next set of deadlines approach. “What we’ve seen so far does not change the outlook,” Mr. McCormick said. “If they kick the can down the road for a few weeks or a few months, it doesn’t really remove the uncertainty prevailing in the market.” The firm, however, has had discussions regarding whether the U.S. is worthy of its triple-A status, he said. “There are some people on the rating committee of DBRS who believe that the triple-A rating of the United States should no longer be triple-A,” he said. Mr. McCormick, however, believes the world’s largest economy still deserves the top-notch rating because its capacity to pay, outside of the debt ceiling issue, is “unparalleled.”

Budget Decisions Are Delayed, Not Settled - Washington political leaders have averted an economic meltdown during the baseball playoffs — only to delay it until the upcoming football playoffs. Congress and the White House came to an agreement Wednesday night to avoid the U.S. defaulting on its sovereign debt and to reopen the government. Those are welcome developments. The problem, however, is that a replay of the budget standoff is now scheduled for January. A bipartisan committee will meet to reconcile two budget agreements, one passed by the Senate and one passed in the House. The committee may also take up the nation’s longer-run budget challenges: growing entitlement spending and an overly confusing tax code. But the U.S. has played this game before, the best known being the Simpson-Bowles commission. It advocated for many long-term changes to both taxes and entitlements, but those recommendations went nowhere. The risk to kicking the can down the road is that business uncertainty and voter disgust could once again skew private spending and hiring decisions in the first quarter of 2014. Surveys done by the New York and Philadelphia Federal Reserve banks show area manufacturers are very upbeat about the future. But another fiscal standoff could crush that optimism fairly quickly. Fiscal uncertainty could also sway decisions at the Federal Reserve. It looks very unlikely that the Fed will start tapering at its October policy meeting and worries about another budget debacle in early 2014 could keep tapering off the table at the December meeting.

S&P Says Government Shutdown Cost Economy $24 Billion - The ratings agency said more than two-week long government shutdown has cost the economy $24 billion — or $1.5 billion per day — reducing S&P’s September forecast of 3 percent annualized fourth-quarter 2013 GDP growth and shaving off 0.6 percent, according to a press release. While S&P recognizes Congress will resolve the political gridlock and pass a deal to raise the debt ceiling, it warns that the impact is causing more harm as we approach Thursday’s deadline. S&P also added that the impact of a government default would be more disastrous than the collapse of Lehman Brothers in 2008, forcing the economy back into a recession.

The Aftermath - After the failure of the Republican effort to defund the Affordable Care Act, what is the net macro effect? According the IHS-Global Insight, and S&P [1], 0.6 ppts were shaved off 2013Q4 GDP growth (SAAR). S&P puts a number to this impact -- $24 billion in lost output. As IHS-Global Insight notes [not online], while Treasurys are rallying, "yields on 1-, 3-, and 6-month T-bills could stay elevated (relative to September levels) since the debt-ceiling will have to be raised again in February." Moreover, "We further estimate that the spike in short-term yields this week will add another $114 million to the federal debt in higher interest costs from this week’s T-bill auctions." (That's the instantaneous effect; recall that GAO estimated that pulling to the brink in 2011 cost $1.3 billion in elevated interest costs in FY2011 alone. [2] The Bipartisan Policy Center estimated the ten year cost of that event at $18.9 billlion. [3]  Note that the short rates are indeed higher than they were a month ago. Not surprising, since in February, we'll be back at (roughly) the same place. If indeed we face a similar bout of brinksmanship (perhaps it'll be about defunding Medicare next time), then this will not auger well for the future.

Chaos in DC Is Taking Its Toll on the Dollar - The shutdown is over; the U.S. dollar remains the world’s reserve currency. But for how much longer? At what point will foreign creditors and the markets at large begin rethinking their asset allocation, and moving slowly away from the dollar and U.S. Treasury bills, and into other safe haven assets? That’s a question that analysts are already asking in the wake of a debt deal that merely kicks the can down the road into early next year. “The prospective framework looks to be one of hopping from one short-term fix to another shot term fix, with each ‘fix’ being accompanied by a potentially disruptive political process and 11th hour negotiations,” says Michael Purves, chief global strategies for institutional broker Weeden & Co. “While future debt ceiling wrangling will more than likely not lead to default, this type of process takes its toll on US credit perceptions.” Indeed, it’s telling that gold is sharply up following the debt ceiling resolution. While investors didn’t turn to gold, which is a safe haven asset, during the debt ceiling fights, the fact that they did so post deal means that the markets aren’t completely happy with an agreement that simply brings us another, similar fight in a few months time.

Gridlock Has Cost U.S. Billions, and the Meter Is Still Running - - Containers of goods idling at ports. Reduced sales at sandwich shops in downtown Washington. Canceled vacations to national parks and to destinations abroad. Reduced corporate earnings forecasts. Higher interest payments on short-term debt.  Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress’s gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year. A complete accounting will take months once the government reopens and the Treasury resumes adding to the country’s debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe. Economists say the shutdown and near breach of the debt ceiling would be unlikely to derail the recovery, now that Congress resolved the impasse late Wednesday. In the weeks after the government reopens, there should be a modest rebound as employees spend their paychecks for the days they were on furlough and the government rushes to process backlogged orders. Still, many businesses might not recover all the money they would have made had the government operated normally, said Shai Akabas of the Bipartisan Policy Center, a research group based in Washington.

Yes, Virginia, the Slowdown Cost Us Real Money - From the NY Times: Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress’s gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year.  A complete accounting will take months once the government reopens and the Treasury resumes adding to the country’s debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe.  “We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter G.D.P. growing just 1.4 percent,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s, referring to earlier brinkmanship over the debt ceiling. “Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.”

Number of the Week: Economic Impact of Shutdown Was Likely Small - 4.9%: The rate of U.S. economic growth in the final three months of 2011, the quarter that followed the last major debt-ceiling fight—and the best period of growth in the recovery so far.  The federal government finally reopened on Thursday after a 16-day shutdown, meaning federal employees returned to work, national parks reopened and reporters’ inboxes filled up with estimates of how much the whole fiasco had cost the nation’s economy. Predictably, those estimates are all over the map. Forecasting firm Macroeconomic Advisers estimated the shutdown would trim fourth-quarter growth by 0.2 percentage points, but boost growth in early 2014 by nearly as much. Morgan Stanley said the shutdown would shave 0.4 percentage points off fourth-quarter growth. IHS said 0.6 percentage points. Nomura put the toll at a whopping 0.8 percentage points. It will be months before we’ll know whose estimates came closest to the mark, not least because government agencies stopped collecting data during the shutdown. But history suggests the impact will likely fall on the lower end of the spectrum.

The delusion of victory and the damage done - Both temporary and permanent damage has been done to the US economy due to the latest fiscal crisis. Standard and Poors estimates that the US lost $24,000,000,000 of output due to the government shutdown. But the damage is more permanent. This is from CNBCCurrency analysts have told CNBC that the dollar's status as a reserve currency will suffer long-term damage from the impasse.  "I think it's part of the demise of the dollar as an international reserve currency,"  Alasdair MacLeod agreed saying the dollar's credibility has taken a "very, very bad hit".  if the dollar loses status as the world's most reliable currency, the United States will lose the right to print money to pay its debt and could be forced to pay this debt. But at least fiscal hostage-taking has been well and truly killed, right? According to CNN, Obama certainly thinks so:  As Obama walked away from a press conference Wednesday night, he was asked whether he thought America would be going through this brouhaha again in a few months.  His answer: "No." And so do Congressional democrats, According to Felix SalmonDemocratic aides are confident GOP debt limit extortion is effectively dead. They acknowledge the Cruz-ites will try for another debt limit crisis, but can’t imagine GOP elites will humor this demand next time, when the 2014 elections are underway But remember, Washington democrats also thought that the GOP would never, ever let the sequester happen. And everybody else seems to think the GOP will be right back for another bite of the apple in three months:

What A Drag - Krugman - The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the “fiscal drag” of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs.  I’ve been looking a bit harder at that report, and while I am in broad agreement with its conclusion, I think it’s missing quite a lot. On balance, I’d argue that the negative effect of the crazies has been even worse than MA says.  I’m not too happy with the report’s reliance on the Bloom et al uncertainty index to measure costs. As Mike Konczal pointed out a while back, that index is a strange creature, driven to an important extent by the number of times politicians talk about uncertainty. It’s really not something you want to lean on, and if you take it out, MA’s estimates of the Republican drag fall.But we shouldn’t stop there, because there are two important aspects of the story that MA leaves out. First, part of the fiscal cliff deal involved letting the Obama payroll tax cut — a significant, useful form of economic stimulus — expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers.  Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets:

Citi Summarizes The Post-Deal State Of The Markets In One Brutally Sobering Paragraph - Finally, President Obama has signed into law an agreement that will raise the U.S. debt ceiling and end the government shutdown. Optimism for a deal ignited a major rally in the stock markets, which are once again within reach of all-time highs. But in a brief 7-page note to clients, Citi's Tobias Levkovich warns us that averting disaster should not be confused with problem solved. "The latest agreement though only punts an immediate risk to a few short months away and thus should not give rise to much optimism," wrote Levkovich, Citi's Chief U.S. Equity Strategist. "Yet, the VIX has dropped back to below 15 from more than 20, illustrating some element of new complacency settling in." Here's the key paragraph: Kicking the proverbial can down the street does not address the long-term fiscal imbalances. The twin decisions of a taper timing push out and the discord in Washington being swept under the rug until January and February roll in could keep P/E multiples more compressed as equity risk premiums stay elevated. Investors typically do not like uncertainty and it is hard to determine how these recent almost non-decisions can be seen as reinvigorating confidence aside from some relief that an imminent likely disaster has been avoided. Nonetheless, one cannot respectably believe that things truly have turned for the better as opposed to averting the worst. The long-term growth of non-discretionary government spending can still prove to be an overwhelming liability and it has not been the primary focus for legislators.

Does America Really Have to Suffer Through Yet Another Congressional Psychodrama? - Congress at the midnight hour has passed a deal to re-open the government and raise the debt ceiling, yet this deal is amazingly short lived.  The political theater has been unbelievable and once again the problem with America's economy is completely irresponsible politics versus external events.  Instead of focusing in on the responsible thing, which of course is to not destroy the United States and global economy, the press is now having a field day with who blinked first in this very dangerous game of political chicken.  The vote in the Senate was 81 to 18.  The House vote was 285 to 144 with 87 Republicans voting yes.  Obama wasted no time in shoving the disastrous immigration bill down people's throats, so clearly on the administration side, the government still didn't learn anything or wake up to the interests of America's citizens either.  Frankly, who cares who blinked politically and if one does care, obviously they blinked way too late.  The point of this entire exercise in political gamesmanship has been to put the American economy on the table as Calvinball, which should never be allowed.  To do such behavior is outright traitorous and as such should be banned, stopped, once and for all. The great deal is actually kicking the can down the road where more of this insanity political shenanigans can occur.  The bill which just passed in the nick of time funds the government just until January 15th and also only raises the debt ceiling until February 7th.  There is payback for the almost 1 million federal workers sent home without pay due to the shutdown and income verification for Obamacare subsidies, which leads us to how that will be implemented. Bottom line the great deal just opens the door for this all happening again in just a few months.  America is so sick and tired of these let's drive America off the economic cliff games.  What has the game Of Debt Ceiling Chicken and repeatedly heading for a head on collision cost the United States?  A lot, even with disaster averted at the 11th hour.

One Modest Path to a No-Drama Budget Deal - The conventional wisdom is that next January, Congress and President Obama will be in exactly the same place they’ve been for most of the past three weeks—deep in government shutdown mode. The argument: The recent fiscal battles that ended with last night’s short-term deal to reopen the government and reauthorize Treasury borrowing  buys time but does nothing to change Washington’s toxic culture. It is hard to disagree, but there is another possible outcome. No, it isn’t the grand bargain. That’s off the table at least until 2015 and perhaps longer. But Congress and Obama could reach a mini-bargain that would at least take the edge off the current ugliness. It would be simple and the first steps could be taken in a week or two (although they won’t be).  The deal would look come in three parts.To start, remember that yesterday’s agreement called for House and Senate negotiators to sit down and finish the 2014 budget process that came to a grinding halt last March. So lawmakers have a ready-made venue for a deal. But what could a realistic agreement look like?  Here is one possibility:

The Un-Default: Congress Has Become A Seinfeld Episode  - Like Seinfeld, the classic 1990s TV comedy, Congress is increasingly about…nothing. If the agreement reached by Senate leaders this afternoon sticks (and given recent history, even that is uncertain) Congress has just shuttered much of the federal government for more than two weeks and risked a market-shattering federal default in order to convene a meeting of budget negotiators.According to published reports, that is pretty much the sum total of what lawmakers agreed to today. They will reopen the government until Jan. 15 and give the Treasury renewed authority to borrow money until Feb. 7. This will give Congress and President Obama another three months of artificial fiscal crisis, generate more breathless headlines, and almost certainly drive Washington’s standing with the public even closer to rock bottom.As a result of this frantic last-minute deal, it is a virtual certainty that we will be in exactly the same place in mid-January as we are today, only colder. Between now and then, we will return to the status quo ante. The GOP’s Quixotic and self-destructive efforts to demolish the Affordable Care Act have come to naught. The law is not defunded. The individual mandate is not delayed. Even the tax on medical device makers remains.

Shutdown takeaway: the US wants a fair society, not 'defund Obamacare' crazy - The rest of the world must have been fascinated at the spectacle that was the US government shutdown and threat of default on our public debt. Here is a country that not only has no public debt problem, but can pay any foreign creditors in its own currency – that is, money that our central bank creates. Yet, even this "exorbitant privilege" – as Barry Eichengreen titled his book about the dollar being the center of the international financial system – was not enough to assure the world that Republicans would not cause disruption by attempting the impossible. As expected, the Republicans were defeated and got nothing for their efforts other than a record low approval rating. The New Yorker's satirist Andy Borowitz summed up their "noble cause" with a fictional quote from Ted Cruz: The dream of keeping poor people from seeing a doctor must never die. The outcome was never much in doubt. The Tea Party and its friends do not control the majority of the Congress, nor could anyone expect House majority leader John Boehner to defy the Chamber of Commerce, the Business Roundtable, and the rest of America's most powerful business lobbies after they made it clear they would not stomach even a temporary, technical default on US Treasury obligations. Indeed, it is testimony to the extremists' base of support within their party – and their own stubbornness – that they made it as far as they did. If only the Democratic leadership had this kind of pressure to respond to its voters – including the fear of losing primary elections that plagues so many Republicans – now, there would be some democracy. This is because the majority of Democratic voters, unlike the Tea Party and its allies, have demands that are in line with the majority of the country.

Obama: "Stop Focusing On The Bloggers" Fast forward to 5'40" in Obama's speech delivered earlier today.  It is here that he makes the following statement:"Now that the government has reopened and this threat to our economy is removed, all of us need to stop focusing on the lobbyists, and the bloggers, and the talking heads on radio and the professional activists who profit from conflict, and focus on what the majority of Americans sent us here to do, and that’s grow this economy, create good jobs, strengthen the middle class, educate our kids, lay the foundation for broad-based prosperity and get our fiscal house in order for the long haul."   We will ignore the irony of a president talking about "profiting from conflict" when less than two months ago the world was on the verge of World War III over a fabricated, false flag-driven invasion "confirmed" by YouTube clips, and designed entirely by this administration to further (and profit) its Saudi and Qatari interests, and which was halted in the last minute thanks to none other than the Russian president, and ask: instead of stopping to "focus on bloggers" who merely do the math in a world in which math is long forgotten, let's for one month, week or day, simply halt the Federal Reserve's circular monetary authority which now purchases virtually all issued US Treasurys that carry any duration risk.

Obama Blames Shutdown on Lobbyists, Bloggers, “Talking Heads” and “Professional Activists” - Yves Smith - You cannot make this stuff up.  Obama gave his usual adult talking to the children, meaning American citizens, type of speech to mark the cease-fire in the budget battle so that the two sides can work out a peace accord. These speeches are unpleasant to read because the blarney is so thick it could be packaged and sold as an industrial lubricant. But underneath the greasy veneer is the message that the Important People in the Beltway, meaning Obama, Democrats, and “responsible Republicans” in Congress must dedicate themselves to the pursuit of prosperity…of the 1%.   One of the unintended bits of irony is that near the top of his lecture, Obama starts on a litany of costs of the shutdown is less dire than the consequences of his decision to protect the banks rather than rescue ordinary AmericansWe know that families have gone without paychecks or services they depend on. We know that potential homebuyers have gotten fewer mortgages, and small business loans have been put on hold. We know that consumers have cut back on spending… Contrast that with the millions who lost their homes to foreclosure, including the ones who were used to foam the runway for banks in HAMP mods (only to lose their home), or the new college grads who are un or under-employed, and many with heavy student debt loads. Obama pointedly avoids rubbing salt into the wounds of the Tea Party or the Republicans generally. He sticks with bromides: Now, there’s been a lot of discussion lately of the politics of this shutdown. But let’s be clear: There are no winners here….And, of course, we know that the American people’s frustration with what goes on in this town has never been higher. That’s not a surprise that the American people are completely fed up with Washington. But Obama is clear who the bad actors have been: And now that the government is reopened, and this threat to our economy is removed, all of us need to stop focusing on the lobbyists and the bloggers and the talking heads on radio and the professional activists who profit from conflict, and focus on what the majority of Americans sent us here to do, and that’s grow this economy; create good jobs; strengthen the middle class; educate our kids; lay the foundation for broad-based prosperity and get our fiscal house in order for the long haul. That’s why we’re here. That should be our focus.

The shutdown is over, but the austerity fight continues - Yves Smith - The bruising battle on Capitol Hill over the debt ceiling is not over. It has simply been postponed until a longer-term budget negotiation. Congress has agreed to fund the government through Jan. 15 and extend its borrowing authority through Feb. 7, at which point the turmoil of the past few weeks might recur. Although the immediate goal of tea party Republicans in Congress was to defund President Barack Obama's health care law, it is important not to lose sight of their larger purpose. The recent drama is only the latest battle in a decades-long war by radical conservatives, joined by pro-business interests in both parties, to gut the governmental supports for the middle and lower classes responsible for America's postwar prosperity. The mystery is why politicians and pundits tout austerity policies despite ample evidence that they are damaging and counterproductive. Since 2011, the leaders of both parties have failed to agree on the terms of a so-called grand bargain for America's long-term budget outlook. But both sides believe that government debt levels need to be reduced. They also agree that entitlements ought to be shrunk, which would place the burden of debt reduction on middle- and lower-class Americans. The last major round of negotiations foundered over taxes: Obama insisted that a deal include some increases, including on top earners; the Republicans would consider only spending cuts. This protracted budget negotiation is not just another effort to whack spending and, with it, the government's size. Recall that President Ronald Reagan went into office with similar bold talk but simply delivered massive tax cuts. Where it differs is in its fundamental consensus on the goal: A major object of both the Republicans and Obama is to "reform," as in cut, the most beloved and substantial of the remaining New Deal programs: Social Security and Medicare. And if they succeed, it will be the crowning success of a 40-year-long propaganda campaign against the tax and social-welfare programs that were the foundation of a formerly healthy American middle class.

Post-deal optimism - It’s wise to be cautious whenever Wall Street strategists play political prognosticators, but these points from Barclays about the recent deal to lift the debt ceiling and reopen the government seem sensible enough, if a bit more sanguine than is warranted: One key lesson is that the debt limit is out of bounds. In August 2011 and in the latest stand-off, the two parties did come to an agreement to raise the debt limit before the Treasury’s stated deadline, even though the Treasury had enough cash to operate for days after that. Hence, the market and Fed are less likely to worry about a new debt limit crisis. Even if they do, the next deadline may be many months after February 7. The debt limit has been suspended until February 7, which means that until then, the Treasury can borrow as much as it needs and replenish the extraordinary measures as well. On February 8, the debt limit will become binding. The Treasury will again have access to extraordinary measures (of ~$200bn) and the ability to the reduce cash balance from the level on February 7 (the average over the past few years has been $65bn), to about $30bn. Figure 3 shows that the Treasury will rapidly use these measures through February and March as it issues tax refunds and will exhaust them sometime in March. However, if revenues continue to rise and the Treasury makes it past April 15, the debt limit may not be binding until the middle of the year, as revenues in April would exceed outlays and the Treasury would likely get access to more extraordinary measures over time. Hence, at the December meeting, the Fed should not be worrying about an imminent debt limit crisis.

Treasury Quickly Unwinding Emergency Debt Ceiling Moves - The Treasury Department is quickly unwinding emergency measures it had used to stay under the debt ceiling, rebuilding a cushion that kept the U.S. from defaulting for about five months.  The latest budget agreement, signed into law by President Barack Obama early Thursday, suspends the federal borrowing limit until Feb. 7. If that date comes with no agreement, the Treasury would once again have a full set of maneuvers to deploy.With the short-term deal in place, the Treasury on Thursday restored funding to three federal retirement funds it had tapped and on Wednesday reinvested in an account created to promote exchange rate stability on Wednesday, a Treasury official said.  The Treasury Department’s latest daily statement reflects the maneuvers. Total public debt subject to the limit shot up to $17.028 trillion on Thursday, well past the $ 16.699 trillion limit that had been in effect through Wednesday.  The Treasury also must repay interest that would have been earned by the Civil Service Retirement and Disability Fund, the Postal Service Retiree Health Benefit Fund, and the Government Securities Investment Fund, or G-Fund, which is a money-market retirement fund for federal employees. The interest payment to the G-Fund is due Friday, the official said. Payments to the other two funds are due Dec. 31.

U.S. Debt Jumps to $17.076 Trillion - Well, that didn’t take long. Congress’s deal to suspend the government’s borrowing limit on Wednesday night led to a sharp spike in total U.S. debt on Thursday. This is largely because the Treasury Department had been using emergency steps to prevent the debt from increasing since mid-May. Total government debt had hovered at close to $16.7 trillion for around five months. But when the debt ceiling was increased on Wednesday, Treasury was immediately able to rebalance its books and refund pensions and other programs that had gone unfunded since earlier in the year. That snapped total U.S. debt to a record $17.076 trillion, Treasury revealed on Friday. Wednesday night’s agreement suspends the debt ceiling until Feb. 7, meaning the government can borrow as much money as it needs to cover obligations now and that time.

Budget group with Paul Ryan and Patty Murray starts ‘common ground’ search - The chairs of the new budget committee kicked off their first meeting Thursday morning over breakfast, eyeing a Dec. 13 deadline to come up with a long-term plan for taxes and spending.  Patty Murray, the Washington Democrat who chairs the Senate Budget Committee, said members will try to find “common ground” from competing House and Senate budgets that they can vote on. For his part, Rep. Paul Ryan, the Wisconsin Republican in charge of the House Budget Committee, said they had a very good conversation and are committed to finding ways to enact “smart deficit reduction.” The committee, set up by the deal to raise the debt ceiling and reopen the government, is a disparate group that has some pundits proclaiming low expectations.

Patty Murray vs. Paul Ryan, in one chart: The Ryan budget wasn't the only spending document released Tuesday. The Senate Budget Committee, led by Patty Murray, released the topline numbers of their budget as well. It includes $100 billion in stimulus spending on infrastructure projects, $975 billion in new tax revenue through cutting expenditures, $493 billion in domestic cuts (including $275 billion in health cuts), and $240 billion in defense cuts (all numbers over 10 years). Together with the $242 billion that it saves in interest payments, it adds up to a $1.85 trillion package, split evenly between taxes and spending cuts. The Democrats say that together with the $2.5 trillion in deficit reduction Congress has already passed, this means that Senate Democrats would have passed $4.25 trillion in total deficit reduction -- enough to put debt-to-GDP on a declining path through the next decade. Ryan's got no tax increases, no stimulus, much more in spending cuts, and a much faster pace of deficit reduction. Here's how the plans stack up:

Congress Fights Over Proposed Budgets At the Expense Of Actually Passing One - This week, Congress extends what seems to be an endless discussion of our fiscal future. Sen. Patty Murray (D-Wash.) and Rep. Paul Ryan (R-Wis.) are not making the fight any less grueling. The two proposed dueling visions of America which cling to their ideology ... at the expense of passing a sensible budget. After four years, Senate Democrats finally proposed a budget. But rather than giving Republicans something to work with, they proposed the same tax-and-spend policies Republicans have opposed since the president took office. Republicans are not doing any better. Paul Ryan’s plan proposed steep cuts to entitlements and gave tax cuts to corporations. The budgets Congress has to deal with this week are not serious. They resemble campaign platforms more than they do budgets. The selling point of Paul Ryan’s plan for 2014 is that it balances the budget in 10 years. Any sane person would ask how this is possible given that our deficit is hovering around $1 trillion. The answer is that it is not possible. Last week, Paul Ryan told Chris Wallace, host of Fox News Sunday, that his budget would assume the repeal of the president’s signature health law, to which Wallace replied, “That’s not gonna happen.” In response to Wallace, Ryan said, “Well we believe it should. That’s the point. This is what budgeting is all about. It’s about making tough choices to solve our country’s problems.” But repealing Obamacare is not a tough choice, it is an implausible choice. Basically, Ryan needs trillions of dollars in new spending to simply not be spent. That is trillions of dollars in a bill that Ryan’s own speaker of the House said was the “law of the land.” Democrats fought tirelessly for months against grassroots activists, Republicans, and their own party to get Obamacare passed, but Paul Ryan thinks they will give in to repeal only three years after their landmark struggle.

What to Expect During the Cease-Fire - Robert Reich - The war isn’t over. It’s only a cease-fire. Republicans have agreed to fund the federal government through January 15 and extend the government’s ability to borrow (raise the debt ceiling) through Feb. 7. The two sides have committed themselves to negotiate a long-term budget plan by mid-December. Regardless of what happens in the upcoming budget negotiations, it seems doubtful House Republicans will try to prevent the debt ceiling from being raised next February. Saner heads in the GOP will be able to point to the debacle Tea Partiers created this time around.... The saner Republicans will also be able to point out that President Obama means it when he says he won’t ever negotiate over the debt ceiling. On the other hand, there’s a significant chance of another government shutdown in January. By then we’ll be well into the gravitational pull of the 2014 midterm elections. Every House member is up for reelection – mostly from safe (often gerrymandered) districts in which their major competitors are likely to be primary opponents from the Tea Party right. Which means the real action between now and January 15 will be over the federal budget. The threat of another government shutdown is the only major bargaining leverage House Republicans possess in order to get what they consider “meaningful” concessions. We know the parameters of the upcoming budget debate because we’ve been there before. The House already has its version — the budget Paul Ryan bequeathed to them. This includes major cuts in Medicare (turning it into a voucher) and Social Security (privatizing much of it), and substantial cuts in domestic programs ranging from education and infrastructure to help for poorer Americans. Republicans also have some bargaining leverage in the sequester, which continues to indiscriminately choke government spending. The Senate has its own version of a budget, which, by contrast, cuts corporate welfare, reduces defense spending, and raises revenues by closing tax loopholes for the wealthy. Here, I fear, is where the President is likely to cave.

Bill Moyers and Martin Wolf of the Financial Times Discuss Debt Ceiling Brinksmanship, Coming Budget Talks - Yves Smith - The latest Bill Moyers broadcast features the widely-respected lead editorial writer of the Financial Times, Martin Wolf, who discusses the Federal shutdown/debt default negotiations and the prospects for the coming budget talks. Wolf is pointed and colorful, mincing no words about the implications of the staredown. He’s mystified as to why the Democrats have not attempted to discredit Grover Norquist-style demonization of government. As astute as Wolf is, someone needs to clue him in that the Democratic and Republican leadership agree on most economic issues, but the Democrats need to be able to throw a few scraps to their base.

Debt Ceiling Crisis Averted, House Tea Partiers Express No Regrets - Rep. Thomas Massie, the Hayek-quoting, trouble-making first-term Republican congressman from northern Kentucky, stood in a circle of reporters in the Capitol basement and shrugged. "Goose egg—we got nothing." That was his summation of what House Republicans had accomplished, after shutting down the federal government for 15 days, costing $24 billion in economic losses, and bringing the nation to the brink of an unprecedented default. Still, Massie had no regrets. "I don't see any credence to the argument that we would have been better off without the fight," he said, "because nobody can tell me what we'd have now that we don't have." Among House Republicans on Wednesday night, Massie's attitude was hardly an outlier. Asked if the shutdown and debt fight had been worth, Rep. Michele Bachmann (R-Minn.) didn't blink: "Absolutely, I think it's worth it! It's been worth it because what we did is we fought the right fight." Rep. Louie Gohmert (R-Texas) argued that the House's intransigence was ultimately critical to America's survival. "For this government to continue as a republican form of democracy, we've got to have both houses contribute, not one,"

Seeing the Debt Ceiling Fight From the Other Side - As the debt ceiling fight drags on, we're seeing more and more reporting about just what it is that motivates tea partiers to be so frenzied on the subjects of Obamacare, the national debt, and government spending in general. Roughly speaking, the conclusion of these pieces of ethnography is that tea partiers have an almost panicky belief in several things:

  • The growth of the welfare state is sapping the strength of the country as more and more people are allowed to live off the taxes of others.
  • Obamacare is the tipping point: if it's allowed to stand, the fight against welfare entitlements is lost.
  • Likewise, the United States has reached the breaking point on its national debt. If it's allowed to keep growing, the country is doomed.
  • Refusing to raise the debt ceiling may be tough medicine, but it needs to be done in order to rein in spending right now.

If you believe these things, then you wouldn't care about polls or charges of hostage taking or any of that. You'd feel like you were literally fighting a war for the future of your country, and anything is worth the cost. Shut down the government. Breach the debt ceiling. Do anything. Just make sure to stop the spending, rein in welfare programs, and stop Obamacare. The fate of the United States literally depends on it.

The Tea Party’s Tactical Brilliance and Strategic Incompetence - William K. Black - The Tea Party and its (non) think tanks have proven that they are tactically brilliant in manipulating the Republican Party, but strategically incompetent. Today’s Senate Bill, which will be forced down the House Tea Party members’ throats, is the result of that strategic incompetence. The Tea Party has learned that there are a few things many GOP elected officials are still unwilling to do. Specifically, once the admittedly slow-witted House GOP leadership realized that the Tea Party had marched it to the far edge of a bridge to nowhere and the choices were (Option One: suicide) to keep marching off the bridge into the river (doing grave harm to the Nation and the world, ruining the GOP “brand,” returning the House to control by the Democratic Party, and threatening their own seats or (Option Two: truce) to stop and beg the Democrats for a truce – the GOP leadership would abandon the Tea Party and blame it for the humiliating rout. The Tea Party and entities like Heritage understand how to extort the Republican Party and its Congressional leaders. They made it seem to be political suicide for the House GOP leadership and members not to support the Tea Party’s extortion tactics against Obamacare. The Tea Party’s assumption that tactics that excelled against the GOP leadership would excel against the Democratic Party exhibited their lack of strategic understanding and proved that self-described “think tanks” like Heritage are oxymorons run by regular morons in which any thinking that differs from accepted dogma is grounds for instant expulsion of the apostate, e.g., David Frum. 

The Insufficient Craziness Theory - Every time Republicans suffer a rejection of the most right-wing items on their agenda, a significant number decide they haven’t been sufficiently crazy. That was the conclusion that many Republicans drew from the defeat of Mitt Romney in 2012. And now that Republicans in Congress have been forced to surrender in their fight with President Obama over the budget, health care and the nation’s credit, some are drawing the same conclusion.In this view, as Dylan Scott pointed out on Talking Points Memo today, it was not the far-right that caused Speaker John Boehner problems, it was those pesky moderates (whoever they may be).  ”I’m more upset with my Republican conference, to be honest with you,” said Rep. Raul Labrador, Republican of Idaho. “It’s been Republicans here that have given Speaker Boehner the inability to be successful in this fight. So if anybody should be kicked out, it’s probably those Republicans.” He said they “are unwilling to keep the promises they made to the American people. Those are the people who should be looking behind their back.” I don’t really have any idea what Mr. Labrador thinks those promises were. Presumably they did not include withholding paychecks from federal workers and threatening to create a worldwide recession. But in the view of this crowd, having the same fight again in an election year (which could happen since the debt ceiling was raised only until Feb. 15) could actually be a good thing. That’s not so shocking, I guess, coming from the bomb-throwing Tea Party wing, but the political blindness goes farther than that.

Ted Cruz Won't Rule Out Another Government Shutdown: Sen. Ted Cruz (R-TX) said Thursday that he would not rule out pushing the federal government to shut down again in order to defund the health care law. "I would do anything, and I will continue to do anything I can, to stop the train wreck that is Obamacare," Cruz told ABC News when asked if he would block government funding in order to take down the Affordable Care Act. Cruz only said that he intended to continue to fight Obamacare. "What I intend to do is continue to stand with the American people working to stop Obamacare,” Cruz said. "Washington focuses on the politics all day long. That’s what this town does, but what we saw in the deal last night, is that the U.S. Senate is not concerned about all the people out of a job, all the people in part-time work, all the people whose health insurance premiums are skyrocketing, all the people who are losing their health insurance, and that’s happening because of Obamacare."

Business groups stand by Boehner, plot against tea party -  Despite presiding over a chamber that nearly drove the country to a debt default, John A. Boehner still has the enduring support of a group that would have been most harmed by that event: the business community. Rather than revisit their strategy of supporting Republicans after this week’s near-disaster, influential organizations such as the U.S. Chamber of Commerce are standing behind Boehner. More important, Boehner’s friends in the business community are getting ready to take sides in a few Republican primary races against tea party candidates in Michigan, Idaho and Alabama who could cause the House speaker more trouble. Boehner, who was once president of a small plastics company in Ohio, has spent much of his career burnishing the GOP’s identity as the party of business, building deep relationships since the 1990s with groups like the U.S. Chamber by providing legislative favors and easy access through countless receptions and rounds of golf. In return, business groups have helped Boehner and his counterparts in the Senate raise millions of dollars to put Republicans in office, including the 2010 election of tea party lawmakers who have now roiled the GOP.

The GOP Tax - Krugman - Macroeconomic Advisers has a new report out about the effects of bad fiscal policy since 2010 — that is, since the GOP takeover of the House. The way it’s written, however, might confuse some people. They say that combined effects of uncertainty in the bond market and cuts in discretionary spending have subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized rate of growth, so that we’re talking about almost 3% of GDP at this point; cumulatively, the losses come to around $700 billion of wasted economic potential. This is in the same ballpark as my own estimates. And they also estimate that the current unemployment rate is 1.4 points higher than it would have been without those policies (a number consistent with almost 3% lower GDP); so, we’d have unemployment below 6% if not for these people. Great work all around, guys.

Enemies vs. Adversaries - For democracies to work, politicians need to respect the difference between an enemy and an adversary. An adversary is someone you want to defeat. An enemy is someone you have to destroy. With adversaries, compromise is honorable: Today’s adversary could be tomorrow’s ally. With enemies, on the other hand, compromise is appeasement. Between adversaries, trust is possible. They will beat you if they can, but they will accept the verdict of a fair fight. This, and a willingness to play by the rules, is what good-faith democracy demands. Between enemies, trust is impossible. They do not play by the rules (or if they do, only as a means to an end) and if they win, they will try to rewrite the rules, so that they can never be beaten again. Adversaries can easily turn into enemies. If majority parties never let minority parties come away with half a loaf, the losers are bound to conclude they can only win through the utter destruction of the majority. Once adversaries think of democracy as a zero-sum game, the next step is to conceive of politics as war: no quarter given, no prisoners taken, no mercy shown.

Changing the Debt-Ceiling Game -  THERE’S a lot of talk these days about raising the debt ceiling, to create time for more meaningful budget negotiations. But why should anyone expect Act II of this tragedy to unfold any differently from Act I? What we need most isn’t more time, but to change the debt-ceiling game itself, to make “debt-ceiling moments” less fraught with peril, less prone to stalemate, and more conducive to productive negotiations.  The basic problem is a lack of trust. Republicans don’t trust Democrats to make substantial concessions on the debt, while Democrats believe that, no matter what they put on the table, Republicans will always demand more. Why then bother negotiating at all?  When a transaction isn’t happening because of a lack of trust, the affected parties can still often reach a deal by tying their own hands, limiting their ability to take advantage of the other side.Imagine that, in the negotiations over this problem, the Republicans were to suggest making the next debt ceiling automatically self-extending if an agreed-upon debt-reduction target were met. Such a self-extension provision would allow both parties to avoid the next debt-ceiling crisis. (If the debt-reduction target wasn’t met, we would have to endure another debt-ceiling crisis.) The strategic benefits of tying your own hands are counterintuitive, and some fiscal conservatives will undoubtedly hate this idea. Yet limiting your own options can be essential to getting others to do what you want.

U.S.-based money market funds have $43 billion outflow: Lipper (Reuters) - U.S.-based money market fund assets recorded their largest one-week decline since August 2011 as investors pulled $43 billion out of fear over a possible U.S. government default, data from Thomson Reuters' Lipper service showed on Thursday. The outflows from money market funds, which invest in short-term securities such as short-dated U.S. Treasury bills, came ahead of a crucial deadline to raise the nation's $16.7 trillion debt ceiling. Without a debt ceiling increase, the government would have faced a default on its IOUs, including some of those very same short-term Treasuries held in those money funds, which traders feared would wreak havoc on the global economy. Late Wednesday, the U.S. Congress passed a deal to prevent the United States from defaulting and end the government shutdown. It's possible next week some of that money pulled from money market funds will return now that the crisis has passed, but some lasting damage may have been done to investor confidence. Worries about a default led large money fund operators such as Fidelity, JPMorgan, BlackRock and Pimco to shed their holdings of Treasury bill issues that mature in late October to mid-November. Those bills are most vulnerable if the government were to delay its debt payments. Yields on one-month Treasury bills jumped to a five-year high of 0.38 percent the day before the debt deal was reached. The political brinkmanship led Fitch Ratings to place the United States' 'AAA' credit rating on watch negative.

IRS Wakes Up to Private Equity Scam - Yves Smith - Readers of Naked Capitalism may recall past mention of a common tax practice in the private equity (PE) industry known as a “management fee waiver.” This tax maneuver first got media attention during the Romney presidential campaign. Secret Bain Capital files released on Gawker last summer revealed that Bain had “waived” over a billion dollars of management fees in recent years, resulting in federal tax savings to Bain partners of approximately $250 million in aggregate. For decades, the IRS has been oblivious to the tax dollars that private equity firms have been stealing from the U.S. Treasury via this abusive fee waiver tax shelter. But NC readers in the tax world have alerted us to recent IRS pronouncements indicating that both the Service, as well as influential tax commentators, have woken up to the scam and don’t like what they see in terms of its compliance with tax law. The concept behind the management fee waiver tax shelter is quite simple, though the tax maneuvering to implement it is mind-bogglingly complex.  PE managers implement this scheme by “waiving” management fees owed to them by their limited partnership investors in exchange for a profits (carried) interest in the fund. Managers are deemed to have made a cashless contribution in the amount of the fee to the fund, which is deemed to earn profits like an investor’s cash contribution. Except that managers have leeway to find profits to cover it. Fund governing documents usually allow the general partner to find profits to cover the waived fee in any accounting period. Sometimes there is a clawback if cumulative profits are insufficent to cover waived fees. In the most aggressive version of this practice, fees are waived shortly before payment is due, so that managers can ensure that profits are available to cover them.

IMF Says Tax the Rich to Make Up the Deficits and Fight Income Inequity  -  Recent article by AFP cites an IMF report suggesting that countries fighting deficit spending should simply “Tax the Rich” in income its Fiscal Monitor report, subtitled “Taxing Times”, the Fund advanced the idea of taxing the highest-income people and their assets to reinforce the legitimacy of spending cuts and fight against growing income inequalities.“Scope seems to exist in many advanced economies to raise more revenue from the top of the income distribution,” the IMF wrote, noting “steep cuts” in top rates since the early 1980s.According to IMF estimates, taxing the rich even at the same rates during the 1980s would reap fiscal revenues equal to 0.25 percent of economic output in the developed countries.“The gain could in some cases, such as that of the United States, be more significant,” around 1.5 percent of gross domestic product, said the IMF report, which also singled out deficient taxation of multinational companies. In the US alone, legal loopholes deprive the Treasury of roughly $60 billion in receipts, the global lender said.

U.S. Said to Open Criminal Probe of FX Market Rigging - The U.S. Justice Department has opened a criminal investigation of possible manipulation of the $5.3 trillion-a-day foreign exchange market, a person familiar with the matter said. The Federal Bureau of Investigation, which is also looking into alleged rigging of interest rates associated with the London interbank offered rate, or Libor, is in the early stages of its currency market probe, said the person, who asked not to be identified because the inquiry is confidential. The U.S. investigation comes as the U.K. Financial Conduct Authority said in June it was reviewing potential manipulation of exchange rates. That month, allegations that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates were reported by Bloomberg News. Regulators are probing the alleged abuse of financial benchmarks used in markets from oil to interest rate swaps by the firms that play a central role in setting them. Swiss regulators said last week they were “coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated.” The probes include alleged manipulation of ISDAfix, a benchmark in the $379 trillion market for interest-rate swaps.

Credit default swaps run out of road - Single-name CDS are the simplest, and most common, of the default swap universe. They offer protection from default by companies, banks and governments. For some traders, they are also a means to speculate against the financial health of corporate and sovereign entities. The buyer of the protection makes periodic payments to the seller, and receives a pay-off in the event of default. Now, just two decades since their creation, such swaps have come under pressure from regulators, as well as a broader evolution in the behaviour of banks and investors. The amount of such swaps outstanding has shriveled to less than half of what it once was, fuelling speculation that the market for single-name CDS is on its deathbed. “Defaults are at historic lows, so there’s just less need for CDS from the point of hedging,” says Michael Hampden-Turner at Citigroup. “A lot of the key single-name CDS business uses have gone away or become less relevant.” While many regulators and politicians are unlikely to mourn the derivatives’ decline, the lack of a vibrant CDS market could leave big investors – such as the banks – with one less tool to offset or manage specific risks on their balance sheet. The declining health of single-name CDS stands in sharp contrast to the market’s glory days before the financial crisis. JPMorgan’s creation took off rapidly across Wall Street, with single-name CDS eventually proliferating alongside CDS indices that gave exposure to whole classes of credit instead of just a single loan.

Blowing the Whistle on the New York Fed and Goldman Sachs: There are a number of interesting aspects to the lawsuit filed by Carmen M. Segarra against the Federal Reserve Bank of New York and three of its employees. Segarra was a bank examiner at the New York Fed who is charging in her lawsuit that she was told to change her negative review of Goldman Sachs and when she refused to do so, she was terminated in retaliation and escorted from the Fed premises.  The first notable aspect of this saga is that Segarra has hired a lawyer, Linda Stengle, whose office is in Boyertown, Pennsylvania. (It is fairly safe to assume that the number of lawyers working in Manhattan who want to take on the New York Fed and Goldman Sachs runs in the single digits, if they exist at all.) This hunt for legal representation may explain why Segarra is filing her lawsuit more than 16 months after she was rudely escorted out the door on Liberty Street – a particularly ironic location for an institution that failed to report the Libor rigging transgressions in a timely fashion; refused to turn over documents to let the public know how many trillions of dollars in loans it had sluiced into domestic and foreign banks during the crash until it lost a protracted court battle; and is now charged by one of its own bank examiners with putting its “relationship” with Goldman Sachs ahead of the integrity of its examinations.

Chastening the Giant Banks - From the Gordon Gekko 1980s until the mortgage meltdown in 2007-8, the financial industry came to dominate the world economy. On this extraordinary and sometimes terrifying ride, banks reaped incredible profits while management and staff received generous salaries and lush bonuses.  And then everything fell apart. Eventually governments had to step in to bail out or shut many financial institutions. Five years after the crisis, some participants and close observers of the world of finance see a generational humbling of the big banks under way. For the first time in nearly 30 years, they say, finance is starting to look a bit more like a normal industry. “The future’s going to be different,” said Richard W. Fisher, president of the Federal Reserve Bank of Dallas and a former Wall Street banker and hedge fund manager. Though he thinks some financial institutions are still too large, he believes important progress has been made since the crisis. “The big, complex banks have been chastened,” he said. “There will be more hitting of singles and less swinging for the fences.”  The extent to which banks have been constrained is open to debate, especially in the view of regulators and of critics who continue to see the industry as creating risks to the economy even as it reaps the benefits of a recovery that has done little for most working people.

Tarullo Says Big Bank Failures Still an Issue - Regulators’ efforts to deal with the failure of a big bank remain a work in progress, but the Federal Reserve will move “in the next few months” to require large financial institutions to hold minimum amounts of long-term debt, a top official said Friday. Federal Reserve governor Daniel Tarullo said the regulator was hoping to push firms to at least maintain their current levels of long-term debt holdings, “which, by historical standards, are currently at fairly high levels.” Without a requirement to hold the debt, firms might unwind those positions in the future, Mr. Tarullo said in remarks prepared for a Fed conference here. The proposal is key to the broader effort by U.S. policy makers to be able to deal with the failure of a large financial institution without having to resort to the taxpayer-funded bailouts that were the hallmark of the 2008 financial crisis. The 2010 Dodd-Frank financial overhaul law gave the Fed and Federal Deposit Insurance Corp. the main responsibilities for establishing a framework that would have the federal government step in and place a firm in government “receivership” if an orderly bankruptcy by a failing bank was impossible. Officials at the Fed and FDIC have seized on a plan to require the largest and most complex banks to hold minimum levels of long-term unsecured debt as a way to ensure that a bank could continue its operations even while going through a receivership. That long-term debt could be used to provide capital to the firm during the wind-down process, Mr. Tarullo said the option of unwinding a firm through the FDIC should stand next to an option of taking the firm through bankruptcy, but he said changes ought to be made to make the U.S. bankruptcy code better able “to deal with large, but not necessarily systemic, financial firms.” The regulators could step in when firms present a systemic risk, he said.

How to Deal With ‘Too Big to Fail’ - Five years after the financial crisis, regulators, investors and everyday Americans have realized it’s dangerous for some firms to be so large and interconnected that their collapse endangers the broader financial system. Central bankers from former Bank of England governor Mervyn King to U.S. Federal Reserve Bank of Dallas President Richard Fisher have complained that when crises hit, taxpayers are on the hook to rescue large banks. America’s Dodd-Frank financial overhaul effectively outlawed bailouts, regulators say. And financial firms have increased their capital levels. But the biggest banks in the U.S. remain relatively large, indebted and interconnected. It’s unclear how U.S. regulators would handle a mass failure of global banks. And it’s debatable whether investors really believe they’ll have to shoulder heavy losses—instead of taxpayers—in another crisis. On Wednesday night, Dallas Fed President Mr. Fisher, in a debate over whether to break up the banks at New York City’s Kaufman Center, reiterated his earlier proposals to shrink banks, which include dividing them into smaller pieces under a parent company.“We need to correct this perversion of American capitalism,” said Mr. Fisher, calling big banks “the spreaders of the crisis” and “shielded from failure.” Mr. Fisher said American taxpayers should not be on the hook for the riskier activities of banks and that the failure of J.P. Morgan Chase & Co., the nation’s largest bank by assets, “would jeopardize our financial security and economy.”

It's back with a vengeance: Private debt: As Washington is struggling with debt and all its political ramifications, American companies and consumers are embracing it, running up record amounts in 2013. Whether it's corporate loans, all quality levels of bonds or simple consumer credit, the debt party is back on in the U.S., whether it's in the boardroom or the living room. Amid the financial crisis of 2008, the U.S. went into what economists call a "debt deleveraging cycle"—akin to a credit hangover, where the party has ended and everyone there decides to quit drinking cold turkey. Somebody has clearly turned the lights back on, though, and corporate and individual buying is soaring. Consumer credit, for instance, surged past the $3 trillion mark in the second quarter of 2013 and continues on an upward trajectory, according to the most recent numbers from the Federal Reserve. At $3.04 trillion, the total is up 22 percent over the past three years. Student loans are up a whopping 61 percent. Total household debt, according to the Fed's flow of funds report, is at $13 trillion, nearly back to its pre-crisis level in 2007 and a shade below government debt of $15 trillion.

Why C.E.O. Pay Keeps Going Up - Faith in disclosure has been crucial to the regulation of executive pay since the nineteen-thirties, when companies were first required to reveal those figures. More recently, rules have made companies detail the size and the structure of compensation packages and have enforced transparency about the kinds of comparisons they rely on to determine salaries. The business press, meanwhile, now rigorously tracks executive pay. The result is that shareholders today know far more about C.E.O. compensation than ever before. There’s only one problem: even as companies are disclosing more and more, executive pay keeps going up and up. This isn’t a coincidence: the drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. A more crucial reason, though, has to do with the way boards of directors set salaries. As the corporate-governance experts Charles Elson and Craig Ferrere write in a recent paper, boards at most companies use what’s called “peer benchmarking.” They look at the C.E.O. salaries at peer-group firms, and then peg their C.E.O.’s pay to the fiftieth, seventy-fifth, or ninetieth percentile of the peer group—never lower. This leads to the so-called Lake Wobegon effect: every C.E.O. gets treated as above average. With all the other companies following the same process, salaries ratchet inexorably higher. “Relying on peer-group comparisons, the way boards do, mathematically guarantees that pay is going to go up,” Elson told me. “Higher pay becomes a kind of self-fulfilling prophecy.”

Why CEO Pay Will Keep Rising to Even More Insanely Unjustified Levels While Ordinary Workers Fare Worse - Yves Smith - Even casual scrutiny will tell you that the current ridiculous levels of CEO pay bear no relationship to anything other than their highly developed rent extraction skills.  Bloomberg reported earlier this year that the ratio of CEO pay to worker pay has increased 1000% since 1950. Fortune 500 companies pay their chieftans 204 times the level of average worker pay, versus a mere 20 times in 1950 and 42 times in 1980. Is it really five times harder to run a big company now than in 1980? It’s one thing if CEOs were the ones that had built important businesses and taken entrepreneurial risk. But the Bill Gates and Sergey Brins of this world got really rich on their shareholdings. CEOs, by contrast, inherit businesses with established franchises. And the idea that paying more buys you more talent is spurious. If you were to say that paying more for a house makes it a better house, you’d see how this rationalization is a form of magical thinking. Studies have found no correlation between CEO pay and results. Quite a few studies have found the correlation to be negative (here, here and here, for instance). The more the CEO took relative to the rest of the top team, the worse the company did. But CEO pay is strongly correlated with one metric: how many people they fire.  Things have gotten so bad that even the lapdog SEC has tried to tamp things down a bit by launching a new rule requiring companies to disclose their ratio of top pay to average worker compensation. But as James Surowiecki describes in a new article in the New Yorker, this measure is not only likely to be ineffective, it may well be counterproductive. It does nothing to change the perverse norm for setting CEO pay, that of benchmarking. Benchmarking sounds perfectly sensible and objective until you understand how it really works in this arena

Bill Black: Arnold Kling’s Cunning Hairdresser Theory of the Financial Crisis from naked capitalism - Yves here. I have to confess that I love this title. It serves as a reminder that the meme that lenders in the crisis were somehow victimized by borrowers is a lame defense of rank incompetence or worse. The basic rule of lending is that all you have is downside from a credit perspective. The borrower is never going to perform better than the terms of the agreement, and he may well do worse. Any competent lender knows that borrowers can be overly optimistic, naive, unlucky, or downright crooked. Lenders therefore need to take prudent measures to protect themselves from these well-known borrower foibles, the most important being not lending to obvious bad risks, and adding enough margin to your cost of borrowing to cover debtor bad luck and your own miscalculation. So to have a huge explosion of borrower defaults, including a meaningful swathe of subprime borrowers defaulting in the first 90 days, is proof not of massive borrower chicanery, but massive lender incompetence or corruption (as in presuming they could dump the dodgy loan on the next fool in the securitization pipeline). By Bill Black: Arnold Kling is a libertarian economist who once worked for Freddie Mac.  This article discusses a blog and an article he wrote about the causes of the crisis.  Both (unintentionally) illustrate key theoclassical economic positions critical to understanding the origins of the crisis.  Kling’s blog was in response to a January 29, 2013 post by Thomas J. Sugrue.  Sugrue provided data demonstrating that blacks and Latino homeowners suffered far greater wealth losses in the crisis than did whites.  This upset Kling, who responded:Sugrue can only process this through the oppressor-oppressed model. He blames predatory lending. If he could open his eyes a little wider, he might be able to see the role played by government housing policy.

Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed-Income Markets - NY Fed  - Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post, the sharpest increase occurred between May 2 and July 5 of this year, with the ten-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury market liquidity, evaluate whether dealer balance sheet capacity amplified the selloff, and examine what motivated dealer behavior during the episode.

A Look at Bank Loan Performance - NY Fed  - U.S. banks experienced a rapid rise in loan delinquencies and defaults during the 2007-09 recession, driven by rising unemployment and falling real estate prices, among other factors. More than four years on from the official end of the recession, how do things look now?  The chart below highlights the striking deterioration in bank loan performance during the 2007-09 recession period. (This chart, like others in this post, is drawn from the most recent edition of the New York Fed’s report Quarterly Trends for Consolidated U.S. Banking Organizations.) At the start of 2007, only about 1 percent of bank loan balances were “nonperforming,” meaning that the loan was at least ninety days past due or in nonaccrual status. By late 2009, however, the fraction of nonperforming loans (NPLs) had increased to more than 5 percent. For the largest bank holding companies (those with consolidated assets exceeding $500 billion), the fraction of nonperforming loans increased even more rapidly, reaching a peak of 7.3 percent in fourth-quarter 2009.

Report: J.P. Morgan, Government Reach $4 Billion Deal Over Mortgage Bonds -  JPMorgan Chase & Co. is aiming to settle a federal investigation into its mortgage practices through a tentative $4 billion deal with the U.S. Federal Housing Finance Agency (FHFA). The agreement includes JPMorgan Chase doling out roughly $4 billion to the FHFA on behalf of financial agencies Freddie Mac and Fannie Mae, which claimed the bank misled them in the quality of mortgages sold during the housing bubble, sources close to the discussions told the Wall Street Journal. The New York City-based bank has come under fire from the Justice Department, which is investigating the bank’s history of mortgage bonds sales and looking at potential criminal and civil charges for its role in the mortgage crisis that began in 2008. JPMorgan Chase is looking to make a larger deal with the Justice Department to pay a total of $11 billion–including the FHFA’s $4 billion — in cash and consumer relief in an effort to resolve all state and federal claims lodged against the bank. Spokesmen for both JPMorgan and FHFA declined to comment on the alleged deal.

New effort to reform US mortgage banks - A third bill will be introduced to the US Congress to tackle the last major remnant of the financial crisis: reform of the mortgage giants Fannie Mae and Freddie Mac. Maxine Waters, the top Democrat on the House Financial Services Committee, is the latest lawmaker to put forward a plan to overhaul Fannie and Freddie. The final version will probably reflect a combination of at least two of the proposals. Dealing with Fannie and Freddie is a priority since their continuing existence five years after the financial crisis in 2008, when they needed a $188bn bailout, is seen as unfinished business for policymakers. But a lot more work needs to be done to get to an acceptable bill, meaning housing finance reform could be delayed until next year. Also, private capital has not returned to the housing market in a significant way, making Fannie and Freddie an important engine in mortgage financing. Last year, Fannie and Freddie provided support for about $1.3tn of the approximately $1.9tn in single-family home mortgages originated in the US. The involvement of Fannie and Freddie, and the government guarantee that goes with them, has helped maintain the availability of a mainstay of American home buying: the 30-year fixed-rate mortgage. Fannie and Freddie buy mortgage loans and package them into bonds. That is why, although it would close down the mortgage companies, the plan from Ms Waters would maintain government involvement through a guarantee, paid for by the mortgage industry, to capitalise an insurance fund. In place of Fannie and Freddie, it creates a new co-operative-owned mortgage securities issuer, according to her aides. The bill is still in draft stages.

Report: Office Vacancy Rate falling, "nowhere near the low vacancy that will result in new construction of office space" - From the LA Times: Southern California office rental market improves slightly Office vacancy in Los Angeles, Orange, Riverside and San Bernardino counties was 17.5% at the end of the third quarter, Cushman & Wakefield said, down from 18.4% a year earlier. Landlords asked for average monthly rents of $2.33 per square foot, an increase of 5 cents from the same period last year. "I don't see a significant demand for additional office space and increasing rents in coming quarters," . "We're not turning the corner to what we consider really healthy markets, and we're nowhere near the low vacancy that will result in new construction of office space." This is an important point - the vacancy rate for office buildings is slowly declining, however it is not close to the level that will lead to significant more investment (important for employment and GDP). Note: Reis reported the national office vacancy rate (large cities) declined in Q3 to 16.9% from 17.0% in Q2. I'd post a graph comparing the office vacancy rate and private fixed investment in offices, but the data for office investment is currently not available due to the government shutdown.

CoStar: Commercial Real Estate prices mostly flat in August, Up 9% Year-over-year - Here is a price index for commercial real estate that I follow.   From CoStar: Commercial Real Estate Pricing Growth Levels Off in August Amid Uncertainty over Fed Tapering and Rising Interest Rates The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted and the equal-weighted versions of the U.S. Composite Index—saw mixed movements for the month. The equal-weighted index, which reflects the pricing impact of more numerous smaller transactions, edged downward by 1.1% in August, while the value-weighted index, which is influenced by larger transactions, expanded by 1.6% during the same time period. On an annual basis, both indices advanced by nearly 10%. Despite investor reassurance following the Fed’s decision in September to delay the tapering of its quantitative easing policies, further economic uncertainty, largely stemming from the U.S. government shutdown and debt ceiling debate, may lead to further volatility in pricing in the near term. Net absorption of available space across the three major commercial property types – office, retail and warehouse – continues to improve. For the first three quarters of 2013 net absorption among these three property types totaled more than 240 million square feet, the highest level for the first three quarters of a year since 2008. ...

Fed official sees signs of U.S. housing bubble, warns on MBS buys - (Reuters) - A top Federal Reserve official said on Thursday he is seeing fresh signs of a U.S. "housing bubble" and warned about the central bank's ongoing purchases of mortgage-based bonds. "I'm beginning to see signs not just in my district but across the country that we are entering, once again, a housing bubble," Dallas Fed President Richard Fisher told reporters after a speech in New York. "So that leads me ... to be very cautious about our mortgage-backed securities purchase program." A mortgage-market bubble in part caused the 2007-2009 financial crisis and Great Recession from which the world's largest economy is still recovering. In response, the Fed has depressed interest rates and is buying $85 billion in assets each month, including $40 billion in mortgage-backed securities (MBS). Fisher, a vocal hawk on monetary policy, repeated he would not support a reduction in the quantitative easing (QE) program at a Fed meeting later this month in large part because of the fiscal "mess" in Washington. But citing rising year-on-year house prices in Texas cities, and elsewhere in the country, he warned that the central bank's hyper-accommodative policies could be inflating dangerous asset price bubbles. Home resales rose in August and median prices were up 14.7 percent over the previous 12 months, according to the National Association of Realtors, although other data have suggested a sharp rise in mortgage rates has dented the housing recovery.

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in September - Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in September.   Tom Lawler has been sending me this table every month for a couple of years (or longer). I think it is very useful for looking at the trend for distressed sales and cash buyers in these areas. I sincerely appreciate Tom sharing this data with us. 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.  As I've written before, plan to complete all short sales by the end of this year!   Total "Distressed" Share. In most areas 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, Las Vegas, Sacramento, Orlando), but steady in other areas.  When investors pull back in markets like Phoenix (already declining), the share of all cash buyers will probably decline.

MBA: Shutdown impacting Purchase Mortgage Application Activity - From the MBA: Purchase Applications Decrease in Latest MBA Weekly Survey - Mortgage applications increased 0.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 11, 2013. ... The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. ... “The government shutdown had a notable impact on the mortgage market last week. Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years,”  “Conventional purchase applications dropped as well, but not to the same extent, falling almost 4 percent for the week.” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.46 percent from 4.42 percent, with points decreasing to 0.31 from 0.44 (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 five weeks as rates have declined from the August levels. However the index is still down 60% from the levels in early May. The second graph shows the MBA mortgage purchase index.

Home Purchase Mortgage Applications Slump To Lowest In 2013 -- While the debt ceiling fracas has done nothing to stymie the demand for high-beta equity lottery tickets, it has decimated the demand for the most leveraged trade an American tends to make... home purchases. While real data is few and far between, we thought that the cracking of yet another foundational pillar of the US economic "recovery" was worthwhile noting although it is squeezed to the back pages as the mainstream media focuses on rumor after rumor to juice equities ever higher. With the hedgies having turned from marginal buyer to marginal seller, it seems the demand for mortgages for home purchases has collapsed to its lowest level in 2013 - even as rates have dropped notably from the year's highs.

Zillow: 30-Year Fixed Mortgage Rates increase slightly to 4.16% - The Freddie Mac Weekly Primary Mortgage Market Survey® will be released on Thursday (the series I usually follow), but here is a release from Zillow today: 30-Year Fixed Mortgage Rates Rise Slightly For Second Consecutive Week; Current Rate is 4.16% The 30-year fixed mortgage rate on Zillow® Mortgage Marketplace is currently 4.16 percent, up five basis points from 4.11 percent at this time last week. The 30-year fixed mortgage rates hovered between 4.11 and 4.14 percent for the majority of the week before rising to the current rate this morning.The rate for a 15-year fixed home loan is currently 3.18 percent, while the rate for a 5-1 adjustable-rate mortgage (ARM) is 2.84 percent. This is down from mid-August when 30 year fixed rates were at 4.58% (Freddie Mac survey).  Last year rates averaged 3.38% in October 2012. 

Average U.S. 30-Year Mortgage Rate at 3.33 Percent Average U.S. rates on fixed mortgages rose slightly this week, staying near three-month lows. Rates could fall next week now that lawmakers reached a deal to avert a possible government debt default. Mortgage buyer Freddie Mac says the average rate on the 30-year loan increased to 4.28 percent from 4.23 percent last week. The average on the 15-year fixed loan edged up to 3.33 percent from 3.31 percent. Mortgage rates began falling last month after the Federal Reserve held off slowing its $85-billion-a-month in bond purchases. The bond buys are intended to keep longer-term interest rates low, including mortgage rates. Longer-term rates also stayed low because of the partial government shutdown and a lack of government economic data.

Weekly Update: Existing Home Inventory down only 1.0% year-over-year on Oct 14th - 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 1.0% below the same week in 2012. This strongly suggests inventory bottomed early this year, and I expect inventory to be up year-over-year very soon, and I also expect the seasonal decline to be less than usual at the end of the year.  Inventory is still very low, but this increase in inventory should slow house price increases

FNC: House prices increased 5.3% year-over-year in August -   From FNC: FNC Index: Home Prices Up 0.6% in August; Signs of Subsiding Growth Momentum The latest FNC Residential Price Index™ (RPI) shows continued growth of home prices in August as the U.S. housing recovery remains well underway. The index moved 0.6% higher from the previous the month, making August the 18th consecutive month of rising home prices. According to the FNC RPI, August home prices have climbed to the levels attained in December 2009. ...In August, foreclosure sales nationwide accounted for 12.4% of total home sales, down slightly from July’s 12.7% and by more than 4.5 percentage points from a year ago. However, there are signs that the price momentum has likely subsided entering the fall/winter low season in homebuying. The latest September median sales-to-list price ratio edged lower to 96.2 – a 3.8% listing price markdown among closed sales, down from 97.2 in August. ... In a sign of moderating month-over-month price momentum, August’s price increase is smaller than June and July. On a year-over-year basis, home prices were up a modest 5.3% from a year ago. The two narrower indices exhibit similar month-over-month price momentums but a slightly faster year-over-year price increase...The 100-MSA composite was up 5.3% compared to August 2012 (slightly higher YoY change than in June and July). The FNC index turned positive on a year-over-year basis in July, 2012.

Zillow: Home Value Appreciation slows in Q3 - From Zillow: Housing Market Shows Welcome Signs of Cooling in Q3 The pace of home value appreciation nationwide is slowing, and has even turned negative in some areas. But rather than being a bad sign for housing, this slowdown was expected and is, in fact, welcome in a handful of markets, according to the third quarter Zillow Real Estate Market Reports. The U.S. Zillow Home Value Index stood at $163,000 as of the end of the third quarter, up 6.4 percent year-over-year and 1.2 percent from the end of the second quarter. But national home values in September remained the same as in August, and the pace of monthly home value growth has fallen in each of the past three months. Among the top 30 largest metro areas covered by Zillow, half showed negative monthly appreciation at the end of the third quarter. As recently as July, all of the top 30 metro areas showed positive monthly appreciation, with none exhibiting a monthly pace slower than 1 percent month-over-month. "Far from being a negative sign, we’re relieved to see more noticeable signs of cooling in the market. If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle, and nobody wants that,” said Zillow Chief Economist Dr. Stan Humphries. “This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we’ve been experiencing and finding a more sustainable level. This moderation should help consumers feel more at ease in their decisions to buy and sell, and will help keep the market balanced.

Home Sales, Prices Slowing in Bust-and-Boom Markets - The sharp home-price rally in some of the hardest-hit housing markets is likely to fade in the coming months amid a pullback in investor purchases and steady increases in the number of homes listed for sale. Three markets in particular—Phoenix, Las Vegas, and Sacramento, Calif.—have witnessed surprisingly strong home-price inflation over the past 18 to 24 months. For the three months ending in July, home prices rose 27.5% in Las Vegas from the previous-year period, according to the S&P/Case-Shiller index, the largest gain for any of the 20 cities in the index. Prices in Phoenix gained 18.9% from one year ago and 39.1% since September 2011, the best of any of the 20 cities in that span. The rally began in early 2012 after investors aggressively bought up cheap foreclosed homes that can be rehabbed and flipped to end users or rented out to those who aren’t ready or able to buy, clearing an overhang of distressed properties. Meanwhile, many traditional buyers couldn’t sell their properties because they owed more than their homes were worth, keeping inventories very lean. As home prices warmed up and interest rates fell to rock-bottom levels, traditional buyers got in on the game, releasing pent-up demand.Now, housing data is showing that the brakes could soon hit such sharp gains:

California homes sales drop - California single-family home and condominium sales fell 16.8% in September from August, but remained fairly unchanged from a year ago, PropertyRadar said in its latest report. However, the company noted that September’s double-digit drop in sales is not unusual for this time of year because sales volume typically declines in the fall and winter.“For the second month in a row, September sales and prices pulled back,” said Madeline Schnapp, Director of Economic Research for PropertyRadar.  “The 100+ basis point increase in borrowing costs since mid-June has definitely impacted market activity, reducing demand and pushing down prices.”

Home Shoppers Kicking the Tires, But Delaying Deals -- Potential home buyers continue to look at properties for sale but are submitting far fewer offers, the latest sign that real estate activity has cooled from the white hot pace seen during spring and summer, according to a recent report by Redfin, and online real estate brokerage. The number of offers by Redfin customers fell 11.8% in September from August — the biggest decline the brokerage has seen all year. In September 2012 — when the market was still in the early days of recovery — offers were up 4.5% during the same period. The problem is that people are just confused. Early last year the real estate market was starting to recover and homes were supposed to be a bargain. Then, as if overnight, you couldn’t find a home to buy, and boom-time relics like home-flipping and bidding wars were all of sudden back. Now interest rates are rising and home-sellers have sugarplums of the summer highs and are pricing their homes accordingly. Then there’s the government shutdown and a possible U.S. default that is affecting stock prices and treasury yields.

When Will the Housing Market Recovery Boost Retail Consumption? - Some good news for the economy: August home prices were 12.4 percent higher than they were last year. Real estate constitutes about a third of American's net wealth, according to the Federal Reserve's Financial Accounts of the United States (previously Flow of Funds Accounts of the United States). So just using common sense, you'd think that strong growth in home prices might translate into stronger retail sales and a stronger economy. But real personal consumption expenditures remain sluggish, according to the Bureau of Economic Analysis, growing by just 0.2 percent in August and 0.1 percent in July.  Should we expect home price gains to translate into stronger retail sales? In a former post, Kris Gerardi outlined the debate between economists about how strong this "wealth effect" is. Most researchers estimate that the marginal propensity to consume (MPC) from home price gains is about 3–5 percent. That is, for every $100 increase in home price value, retail consumption rises by $3–$5. This may sound small, but in practice, this effect can be quite large: the 30 percent decline in home values from 2005–09 translates to a yearly $350 billion decline in retail sales. There hasn't been much research using household-level data, which we'd prefer, in order to control for omitted variable bias. One 2013 study (by Sumit Agarwal and Wenlan Qian), which looked at the wealth effect in Hong Kong from 2000 to 2002 using individual-level data, found a smaller 2 percent MPC.

What’s an Economist to Do Without Government Data? - A day before the government partially shuttered Oct. 1, Jed Kolko wondered which data he might need if websites for the nation’s key statistics agencies went dark. He downloaded several data sets. “I accept that economists may be a bit of a neurotic bunch to begin with,” said Mr. Kolko, chief economist for the real estate firm Trulia. “But I’ve been really happy to have those data.” Two weeks into the shutdown, he’s been able to calculate which U.S. metro areas could be hit hardest by the shutdown. He used government data — now unavailable to the public — on the share of local wages that come from federal workers. During the shutdown, he also published a report about which local markets are the most affordable, using data on local median incomes. Ahead of the shutdown, agencies across the government were forced to evaluate which operations should be exempted from the shutdown. Some appear to have interpreted the law differently from their colleagues. Many government websites are offline because their content wasn’t considered necessary for the agency’s essential operations, or because the funding expired on Sept. 30. As a result, the government staff that maintains and troubleshoots many sites were furloughed. Some agencies took down their websites to keep the public from contacting them when no one would be available to respond.

NAHB: Builder Confidence declines in October to 55 -  The National Association of Home Builders (NAHB) reported the housing market index (HMI) declined in October to 55 from 57 in September. Any number above 50 indicates that more builders view sales conditions as good than poor.  (September was revised down from 58 to 57). From the NAHB: Builder Confidence Down in October; NAHB Estimates Sept. Housing Starts will Approach 900,000 Units Builder confidence in the market for newly built, single-family homes fell two points in October from a downwardly revised reading in the previous month to a level of 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. “A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit have caused builders and consumers to take pause,” “However, interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.” All of the HMI’s three components each fell two points in October. The component gauging current sales conditions registered 58, while the component gauging sales expectations in the next six months posted a reading of 62 and the component gauging traffic of prospective buyers was 44. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts (September housing starts were scheduled to be released tomorrow, but will now be delayed). This was below the consensus estimate of a reading of 57.

Vital Signs: Shutdown Battle Taking Toll on Sentiment - After posting the biggest drop last week since the collapse of Lehman Brothers, economic confidence fell even lower amid a continued government shutdown and no action on raising the nation’s debt limit, according to Gallup‘s daily survey.The polling firm’s daily economic confidence index remains at levels not seen since the previous debt-limit battle in 2011.Signs of hope emerged with a deal being negotiated in the Senate early this week that could end the shutdown and avoid a debt default. But Gallup notes that even after the situation was resolved in 2011, economic confidence remained low for weeks. And, of course, if lawmakers fail to reach a deal, there’s no telling how low the index could go. A separate poll showed spreading pessimism as an average of 71% of Americans said the economy was getting worse, while only 25% said it was getting better

Bloomberg Consumer Confidence Shows Americans Most Pessimistic About Economy In Two Years - While there haven't been many economic data points to highlights the so-called damage to if not the economy, then the confidence of the all important US consumer, data on consumer confidence has been trickling in, and as expected, has been sliding. However, nowhere more so than in the just released latest read in the Bloomberg Weekly Consumer confidence index, whose expectations gauge just tumbled to -31, or the lowest level since November 2011. Bloomberg reports: "Americans in October were the most pessimistic about the nation’s economic prospects in almost two years as concern mounted that continued political gridlock will hurt the expansion. The monthly Bloomberg Consumer Confidence Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago. The weekly measure of current conditions fell to minus 34.1 in the period ended Oct. 13, the weakest since March."

Retail Sales Slow As Shopping Season Heats Up: While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consuming spending as we head into the beginning of the biggest shopping periods of the year - Halloween, Thanks Giving (Black Friday) and Christmas. I wanted to first turn to the ICSC-Goldman Sachs retail sales report. This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. Since this is a weekly measure the raw data makes for a quite noisy chart therefore I have smoothed the data using a 3-month average of the annual rate of change to reveal the underlying trend as shown in the chart below. As I have discussed in the past - economic strength appears to have peaked in early 2011. Since personal consumption expenditures makes up a little more than 68% of the current GDP calculation the weakening trend is retail consumption is the real culprit behind the sluggish economic growth.However, since individuals can only consume with discretionary income, we can easily measure that capability by looking at the annual change in wages and salaries as compared to the ICSC retail survey. The wages and data salary is only available through August due to the government shutdown so the ICSC data implies that wages and salaries have weakened over the past month somewhat.  Lastly, I compared the ICSC survey with Gallup's weekly U.S. Consumer Spending survey. Again, in order to smooth very volatile weekly data and get a comparative basis, I have used a 3-month moving average of the annual rate of change.

Inflation Data Could Be Error-Prone for Months - There’s been a lot of focus on what impact the government shutdown will ultimately have on the timing and accuracy of the Labor Department’s employment data. But Federal Reserve officials care a lot about inflation, too, and the shutdown will have a long-lasting impact on that data, researchers at the Federal Reserve Bank of Cleveland said in a note Thursday. The department’s monthly consumer price index, a closely watched gauge of inflation, will show signs of the shutdown for at least seven months, However, they note that the year-over-year inflation rate “will continue to be quite reliable.” While the release of September CPI report — which was due out Oct. 16 — will be delayed, “the majority of the influence” from the shutdown will be on the October data, which were scheduled for release Nov. 15. The October CPI estimate “will be subject to significant error,” they said. Data collectors usually spend the entire month visiting stores, doctors’ offices and other outlets to collect prices for the CPI report. But those field staff weren’t working during the shutdown and thus missed 11 working days of data collection for the October report, the authors said. (The government was shut down for 16 days, but they don’t collect data on weekends). The sample size for the October CPI report will be half its usual size, the authors estimate, and that will significantly raise the report’s error level and thus the level of uncertainty about the true rate of inflation. The higher-than-usual error level in the data will persist in subsequent months due to quirks in the way the Labor Department collects data. For instance some prices, say on food, are collected every month, while others are collected only every other month and rents are collected every six months. “An increase in the standard error of the CPI reduces its usefulness to policymakers. It makes it hard to judge whether a number like 1.5% reflects real inflation, or whether it is simply error,” the authors wrote. They recommend Fed officials “react more cautiously than they otherwise would.”

Median wealth increases, but U.S. still stuck at #27 in world - The new Global Wealth Report and Global Wealth Databook from Credit Suisse were released last week. According to the Report (p. 3), Global wealth has reached a new all-time high of USD 241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase. Average [mean] wealth per adult reached a new all-time high of USD 51,600, with wealth per adult in Switzerland returning to above USD 500,000. For the United States, this represents an increase in mean wealth per adult of 11.4% from mid-2012 to mid-2013 (Databook, p. 92). Median wealth per adult increased even faster, from $38,786 to $44,911, or 15.8%, although we should recall that measurement of median wealth is less reliable than that for mean wealth. Nonetheless, while these data represent improvement for the typical American, there was no change in our ranking relative to the rest of the world. While Kuwait and Cyprus fell below the U.S., Slovenia and, more surprisingly, Greece now have higher median wealth per adult. Thus, the United States remains only 27th in the world.

The Savings Curse - We have too much savings, which is another way of saying we have too little consumption and investment. Counter-intuitively, the high level of savings also means that we have a high level of debt, lest people forget that except for the currency you hoard, a penny saved is also a penny lent. Note that by savings I am being expansive, not only household savings but also business and foreign savings in the US. Why do we have too much savings? As is usually the case with any large change, there are multiple causes that gang up. I can think of four.

  1. Fear of loss. The last recession really scared investors, and they are still scared. I tire of hearing bankers complain that they would lend if only the government would let them, though how they are prevented is never explained. Investors are still very afraid they will lose money. So are governments.
  2. Foreign government savings. Add up all the dollars that foreign governments have purchased in US Treasuries, MBS, and other securities ($6T) and it is double what the US Fed owns.
  3. Inequality. We don't have enough consumption. If we did, then we would direct the savings into private investment and there would be no surplus. The rich complain about redistribution, but without it the investment of their savings would lose value in the resulting recession.
  4. Inflation. If we had even 4 or 5% inflation then that would make private investments look more profitable, and that's important since most investors don't act in real terms. More conventionally, there's the fear of losing real savings to inflation by not investing it, but I think that case is overstated except when inflation is really high, because in a market economy the inflation rate infiltrates even risk-free interest rates.

These four effects have created a vicious cycle of higher savings. I'm not sure what will stop it. Particularly since the conventional wisdom and even human instinct is that our economic problems would be solved if we only saved more.

NY Fed: Empire State Manufacturing Activity "held steady" in October - From the NY Fed: Empire State Manufacturing Survey The October 2013 Empire State Manufacturing Survey indicates that business conditions held steady for New York manufacturers. The general business conditions index fell 5 points to 1.5. The new orders index rose five points to 7.8 ...Labor market conditions were also steady, with the index for number of employees falling four points to 3.6 and the average workweek index inching up to 3.6. Indexes for the six month outlook continued to convey a strong degree of optimism about future business conditions. The future general business conditions index held near last month’s year-and-a-half high, at 40.8. The indexes for expected new orders and expected shipments also remained at strong levels. This is the first of the regional surveys for October.  The general business conditions index was below the consensus forecast of a reading of 7.0, but shows continued modest expansion.

Philly Fed Manufacturing Survey indicates Solid Expansion in October - From the Philly Fed: October Manufacturing Survey Manufacturing growth in the region continued in October, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were positive, signifying growth. The survey's indicators of future activity suggest continued optimism about growth over the next six months. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from 22.3 in September to 19.8 this month. The index has now been positive for five consecutive months. ... The demand for manufactured goods, as measured by the current new orders index, increased 6 points, to 27.5, its highest reading since March 2011. abor market indicators showed improvement this month. The current employment index increased 5 points, to 15.4, its highest reading since May 2011. This was above the consensus forecast of a reading of 15.0 for October. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through October. The ISM and total Fed surveys are through September. The average of the Empire State and Philly Fed surveys has been positive for five consecutive months.  This was a solid report and suggests further solid expansion in the ISM report for October.

Philly Fed Business Outlook: Growth Continues and Future Outlook at 10-Year High - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity came in at 19.8, down from the previous month's 22.3. The 3-month moving average came in at 17.1, unchanged from last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's six-month outlook at 60.8 is the highest since September 2003. Here are the introduction and summary sections from the Business Outlook Survey released today: Manufacturing growth in the region continued in October, according to firms responding to this month's Business Outlook Survey. The survey's broadest indicators for general activity, new orders, shipments, and employment were positive, signifying growth. The survey's indicators of future activity suggest continued optimism about growth over the next six months. According to respondents to the October Business Outlook Survey, the region's manufacturing sector continued to grow this month. All the broad indicators were positive, with firms reporting improvements in new orders and hiring. Input price pressures were slightly less widespread this month. Firms' outlook has shown notable improvement in recent months, with a majority of firms now expecting to expand manufacturing activity over the next six months and more than one-third expecting to add workers. (Full PDF Report)  Today's 19.8 came in above the 15.0 forecast at The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012. At this point the contraction in 2013 was shallower and the trend has been rising since late spring.

It's Always Funny In Philadephia: Philly Fed Optimism Soars To Second Highest Ever - It is oddly appropriate for the BS New Normal, in which as the DOL showed earlier virtually every data point is made up, that moments after the Bloomberg Consumer Confidence Index showed a plunge in consumer expectations to the lowest leve in two years, that the October Philly Fed would come out with a six-month general activity outlook indicator of 60.8 (up from 58.2) and the second highest ever in the history of the series! One really can't make up the farce that biased, propaganda data "reporting" has become. In terms of current conditions, the broad diffusion index, declined just modestly from 22.3 to 19.8, but beat expectations of a 15.0 print, which in itself was apparently enough to send the EURJPY soaring, and pushing futures into green territory for the day. Apparently today good news is good news not to be confused with every other day when bad news is better news and confirmation QE will continue until the bitter end.

Vital Signs: Looking for Big Improvement in 2014 -- While the Federal Reserve banks of New York and Philadelphia painted two very different pictures of current factory activity, the two reports agreed on one thing: manufacturing will be busier in early 2014. The New York Fed said Tuesday that factory activity in the Empire State has nearly ground to a halt this month, while on Thursday the Philadelphia Fed reported activity in the Philly area was still robust. Shipments, unfilled orders and employment in Philadelphia are all performing strongly this month, while the same categories are struggling in New York State. When it comes to the outlook for the next six months, however, manufacturers in both regions are upbeat. That optimism also shows up in solid plans for hiring and capital spending. While the results only cover two Northeast areas, a healthier manufacturing sector in early 2014 could help the economy recover from end-2013’s drag from the federal government shutdown.

Will we ever face a wireless ‘spectrum crunch'? - If you think city streets are congested and badly planned, consider the air surrounding them. It is infused with data, pouring forth from phone masts, radio towers, wi-fi routers, bluetooth, taxi radios, airport beacons, even remote control garage doors. Our lives have become so saturated with data the fear is that communication networks could grind to a standstill entirely - it’s known as the spectrum crunch. Yet could we find ways to avoid this looming data-geddon? The problem is that so many wireless devices nowadays use the radio spectrum to transmit and receive data. When this spectrum was first divided up between different users, the authorities treated it like empty land. Swathes were allocated for different uses, including radio, television, navigation, astronomy, maritime services, aeronautics, military and of course, telecommunications. However, some of these industries grew much faster than others. For instance, while much of the military spectrum remains unused, the part reserved for telecommunications is bursting at the seams. For instance, while much of the military spectrum remains unused, the part reserved for telecommunications is bursting at the seams. The situation for telecoms became so dire that in 2012, London faced the very real threat that its wireless communications network would fail under heavy load. During the 2012 Olympic Games, British communications regulator Ofcom had to borrow part of the military spectrum to ensure the audio, visual and sensor feeds didn’t grind to a halt as the athletes were sprinting across the finish line.

The US still struggles with dilapidated roads and bridges - I was taken aback to find a report card with an overall grade of D+. That is the current assessment of US infrastructure by the American Society of Civil Engineers. The ASCE has a stake in persuading the US public to invest in infrastructure. Still, it is hard to contest the view that one of the weaknesses of the country’s economy is the poor state of its roads, railways, airports and other transport infrastructure. As the Wall Street Journal reportsOne in nine of the country’s 607,380 bridges are structurally deficient and 42 per cent of the country’s major urban highways are congested, according to an American Society of Civil Engineers estimate, the result of years of inadequate funding and deferred maintenance. Trucks ship the bulk of the country’s goods. But trucking companies and their customers complain those shipments are being rerouted – sometimes by hundreds of miles – or traveling at lower speeds over deteriorating or traffic-clogged highways. That causes higher costs for fuel, maintenance and other expenses, including drivers.I wrote about this issue five years ago, just before the financial crisis and the squeeze on state budgets that followed it. Things have not improved much, despite a broad political acceptance that investment is urgently needed. The Eisenhower interstate highway system dating from 1956 was one of the world’s great infrastructure projects. These days the most modern roads and railways are to be found in China, an economy awash with public investment.

Gauging the Momentum of the Labor Recovery - SF Fed Economic Letter - Federal Reserve policymakers are watching a broad set of indicators for signs of “substantial” labor market improvement, a key consideration for beginning to scale back asset purchases. One way to find which are most useful is to focus on how well movements in these indicators predict changes in the unemployment rate. Research suggests that six indicators are most promising. They offer evidence that the recovery has more momentum now than a year ago, a strong signal that the labor market is improving and could accelerate in coming months.

Labor market is improving, but hanging high - The Federal Reserve Bank of San Francisco published a letter about the labor market. The letter is titled, Gauging the Momentum of the Labor Recovery, and written by Mary C. Daly, Bart Hobijn, and Benjamin Bradshaw. They observe 6 indicators to judge how well the labor market is improving. The 6 indicators are the insured unemployment rate, initial claims for unemployment insurance, capacity utilization, the jobs gap, the Institute for Supply Management (ISM) manufacturing index, and private payroll employment growth. They see that the labor market has improved over the past year. The labor market is important for Fed policy in regards to Quantitative Easing. They conclude their letter with  these words…“All these indicators show that the recovery has more momentum now than a year ago. This is a strong signal that labor market improvement will continue at their current modest pace, and could even accelerate in the coming months. Of course, whether this increase in momentum amounts to a “substantial improvement” in the outlook for the labor market is a question for policymakers to decide.” I am left with the thought that “substantial improvement” is in the eye of the beholder.  Yet there is another issue of how low unemployment can go. Will it go to the expected natural level between 5% and 6%? They write this in their letter. “…while most of these indicators have not returned to normal levels, they are beginning to approach their historical averages, represented by the zero line.”They very carefully give a warning here that the end of the business cycle is in sight. Here is the graph that they refer to in their letter.

Okun's Law Says We're Growing Well Below Our Potential - Brookings - Half a century ago, when business cycle research was blossoming, Arthur Okun explored the relation between GDP and unemployment during periods of recession and recovery.In what came to be known as Okun's Law, he estimated that a one percentage point higher unemployment rate was associated with three percent less GDP. Thus if unemployment was 2 points above its full employment level, GDP would be 6 percent below its potential level-defined as the level of GDP at full employment.  The building blocks of Okun's Law were several cyclical features of the economy and its job market. In a weak job market, many discouraged workers stop looking for jobs and thereby leave the labor force. So a cyclical decline in employment does not produce a corresponding increase in measured unemployment. Cyclical movements in aggregate output per worker also reduce the impact of GDP fluctuations on the unemployment rate. In part this comes because a disproportionate part of cyclical job loss come in high productivity industries like manufacturing. And in part it comes because, in all industries, firms experience procyclical variations in output per worker because many jobs have the characteristics of "overhead" labor—they are needed if the firm is in business at all rather than in proportion to the firm's level of output. And even for production workers, whose jobs are closely tied to the level of current output, most firms vary hours worked per week as a buffer against layoffs.

U.S. Unemployment Aid Applications Drop to 358,000 | Applications for US unemployment benefits dropped 15,000 to a seasonally adjusted 358,000 last week, though the figure was distorted for the second straight week by California’s efforts to clear backlogged claims.The Labor Department says the less volatile four-week average rose 11,750 to 336,500. California is working through a large backlog caused by computer upgrades. Michigan has also been clearing a backlog that occurred after similar computer changes. Applications also rose by 15,000 two weeks ago because of the partial government shutdown, as furloughed private-sector workers sought benefits. The spokesman wouldn’t say what the impact was last week. About 70,000 furloughed federal employees sought benefits in the week ended Oct. 5, but they aren’t included in the overall totals. The government opened for business on Thursday after a 16-day shutdown.

Weekly Initial Unemployment Claims decline to 358,000 - The DOL reports: In the week ending October 12, the advance figure for seasonally adjusted initial claims was 358,000, a decrease of 15,000 from the previous week's revised figure of 373,000. The 4-week moving average was 336,500, an increase of 11,750 from the previous week's revised average of 324,750. The previous week was revised down from 374,000. The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 336,500. Some of this recent increase in the four-week average was related to the government shutdown (and some related to processing issues in California).

Fifty-Fold Increase in Jobless Claims By Federal Workers During Shutdown - More than 70,000 federal workers who were furloughed as a result of the partial government shutdown filed for unemployment insurance for the week ended Oct. 5, the Labor Department said Thursday. It was the first reading for federal employees’ claims, which are reported with a one-week lag and are not seasonally adjusted. The federal government shuttered Oct. 1 after funding ran out, but Congress struck a deal late Wednesday and the government reopened Thursday. The report marked a 50-fold increase in claims for a program that is normally quiet. For the week ended Sept. 28, 1,391 federal workers filed for claims, according to Thursday’s report. The claims figures are higher this time around from the last time the government shuttered, in late 1995 and early 1996. That first week, which ended Nov. 18, 1995, nearly 39,000 federal workers applied for benefits, according to Labor Department data, followed by 24,600 the following week. The number declined briefly before spiking again for a second-round shutdown six weeks later. For the week ended Jan. 6, 1996, 26,300 workers submitted applications. More than 800,000 federal workers were furloughed at some point during the shutdown, though almost half of them returned after the first week as agencies interpreted legislation designed to allow some defense and intelligence workers to stay on the job.

Confusion over when federal workers get back to work - It could especially be tricky getting the word out to all 450,000 employees, who are home on furlough. Federal law prohibits workers on furlough from accessing their work email through phones or laptops. Besides, some workers may have left town, or be completely unplugged. "How will we know? That's a good question," said Becky Moore, a program analyst for the Transportation Security Administration, whose supervisors told her to monitor the news and the Office of Personnel Management website. "Hopefully, it'll come through the grapevine." Agencies have been ordered to come up with other ways to alert employees to go back to work when a shutdown ends. Employees like Moore are terrified of having to stay up late Wednesday and watch the House vote close to midnight and then be up again at 5 a.m. to commute to work. Moore lives in Fredericksburg, Va., so it takes her more than two hours to get to her office in Arlington. "And then, how do we know that tomorrow's the day? Do we wait until President Obama signs the bill?" Moore asked.

When to expect shutdown-delayed economic data - There’s a long list of data that was not released as a result of the U.S. government shutdown, and investors should be keen to find out when this information will emerge. The data include September jobs data, CPI, retail sales, housing data and the budget statement, as well as the trade balance construction spending for August. “The question about how and when U.S. economic data that have not been released ultimately get released is now fairly pressing,” He noted the U.S. Office of Management and Budget has instructed all federal departments and agencies to resume operations in a “prompt and orderly manner.” It remains to be seen how quickly government statistical offices can begin turning out the backlog of data releases, the primary question will focus on the long-delayed payroll employment report and where the Bureau of Labor Statistics (BLS) was when it stopped processing the Household and Establishment survey data. Steven Ricchiuto, chief economist at Mizuho Securities USA, expects government statisticians will need two or three days to complete their analysis and release the data

After the Jobs Disappear - This shift from employment to livelihood, while far from prevalent, has become a necessity for many in the wake of the 2008 global financial collapse, which led to the loss of more than 8 million jobs in the United States. At the time, I and other observers predicted that these jobs — a victim of labor-saving technical change, globalization and financialization — were unlikely to return. Five years later, the employment-to-population ratio in the United States, 58.6 percent, is at its lowest since 1983. In much of Europe, unemployment has soared, especially for youth, even as aging populations place pressure on pension and other social welfare programs.  As jobs disappear, people have begun to carve out new ways to gain access to income, goods and services. This is evident not only in the “makerspaces,” but also in what has come to be called the “sharing economy,” which encompasses activities as diverse as car-pooling, ride-sharing, opening one’s home to strangers via Web-based services like Couchsurfing or Airbnb, sharing office space and working in community gardens and food co-ops.  Like “makerspaces,” the sharing economy is refashioning work, giving people new opportunities to earn money or to have access to goods and services. People are joining “time banks,” through which members trade services like baby-sitting, carpentry or tutoring. They are selling their labor for cash on platforms like Task Rabbit and Zaarly. They are renting out their cars, homes and durable goods, from appliances to lawn mowers. They are also giving away their stuff, via Web sites like Yerdle and Freecycle, rather than throwing it away.

Studies Link Fast-Food Wages to Public Assistance - Proponents of boosting low wages strategically shifted their focus to U.S. taxpayers Tuesday, issuing two studies contending the public foots the bill for billions of dollars in public assistance for fast-food workers.The companion studies, issued by the National Employment Law Project and researchers at the University of California, Berkeley, are the latest attempt to generate public pressure on fast-food companies and other employers accused of overpaying executives and shortchanging frontline workers. Low-wage critics, including unions in search of new members, have also been trying to pressure lawmakers to advance wage-increase proposals at the local, state and federal levels. “Until these companies do something, this movement is only going to continue to grow,” said Jack Temple, policy analyst for NELP, an advocacy group for the working poor and unemployed.The researchers said 52% of the families of frontline fast-food workers are enrolled in one or more public programs. They estimated that the cost of public assistance to families of fast-food workers is nearly $7 billion a year, including expenses for food stamps, Earned Income Tax Credit payments and Medicaid, the state-federal health insurance program for the poor.

Fast-Food Wages Come With a $7 Billion Side of Public Assistance - Two studies released today make some different calculations to determine the total cost to American taxpayers of a large, low-wage workforce. It comes to an average of $7 billion a year. That’s the amount of annual public assistance families of fast-food workers received between 2007 and 2011, according to a new report written by economist Sylvia Allegretto and others. The authors used publicly available data. The report calls out the fast-food industry for its low wages, citing a median salary of $8.69 an hour and a history of offering part-time work. That might have been fine when those behind the counter were mostly teenagers living at home. These days, though, 68 percent of fast-food workers are single or married adults who aren’t in school—and 26 percent are raising children.Overall, 52 percent of families of fast-food workers are enrolled in one or more public assistance programs, compared with 25 percent of the workforce as a whole. Medicaid and the Children’s Health Insurance Program accounted for nearly $4 billion of the $7 billion figure. The Earned Income Tax Credit, food stamps, and the Temporary Assistance for Needy Families program accounted for the rest. ”Public benefits receipt is the rule, rather than the exception, for this workforce,”

More than half of U.S. fast food workers on public aid, report says More than half of families of fast food workers receive some sort of public assistance, costing the nation $7 billion a year, according to a new report distributed by a group that has been pushing for union representation and higher wages for fast food workers. Fast food workers earn an average of $8.69 an hour, and often work fewer than 40 hours a week, qualifying them for food stamps, Medicaid and tax credits, according to the report, written by economists at UC Berkeley and the University of Illinois at Urbana-Champaign. The report calculates that about $3.9 billion a year is spent on Medicaid and children’s healthcare for fast food workers and their families. Families also receive $1.04 billion in food stamp benefits and $1.91 billion from the federal government through the earned income tax credit. Even those workers who are on a 40-hour-a-week schedule receive benefits; more than half of those families are enrolled in public assistance programs, the report says. Workers in the restaurant and food services industry far surpass workers in other industries for dependence on public assistance. About 44% of workers in the restaurant and food services sector have a family member enrolled in a public assistance program, compared to 35% for agriculture, forestry and fisheries and 30% in the retail trade.

Fast-Food Workers Are Costing the U.S. $7 Billion a Year in Public Aid - Those cheap fast-food prices conceal a huge hidden cost—even if you never pull into a drive-thru. New studies find that taxpayer-funded safety net programs effectively subsidize fast food workers’ low wages. Researchers say roughly 2.3 million non-managerial employees at the 10 largest fast-food companies in the United States cost taxpayers an estimated $3.8 billion per year in safety-net benefits. When you add in the families of these workers — 68% of workers are the primary wage earners in their family — the numbers balloon to almost nearly $7 billion per year. Reliance on public assistance is “the rule rather than the exception for fast-food jobs,” says University of California Berkeley’s Center for Labor Research and Education chair Ken Jacobs, even for those who work 40 hours or more a week. More than half of families are enrolled in one or more of public safety-net programs, including Medicaid, food stamps, the earned income tax credit, and the Children’s Health Insurance Program. Jacobs says the real number is probably higher, since the research doesn’t include WIC, subsidized housing or school lunches, home heating assistance or state programs.

McDonalds, Taco Bell as Welfare Queens: Over Half Their Workers Use Public Assistance - Yves Smith  Like Walmart, the fast food industry has taxpayers as a silent partner. But sadly, we don’t get shares or dividends. The National Employment Law Center has been publishing reports on how the rock-bottom wages paid to fast food workers force them to rely on public assistance. The NELC released two new documents yesterday that drill further into the issue. Here’s an overview from the Washington Post: Taxpayers are spending nearly $7 billion a year to supplement the wages of fast-food workers, even as the leading fast-food companies earn billions of dollars in annual profits, according to a pair of reports released Tuesday. More than half of the nation’s 1.8 million “core” fast-food workers rely on the federal safety net to make ends meet, the reports said. Together, they collect nearly $1.9 billion through the earned income tax credit, $1 billion in food stamps and $3.9 billion through Medicaid and the Children’s Health Insurance Program, Overall, the “core” fast-food workers are twice as likely to rely on public assistance than workers in other fields, said one of the reports, which examined nonmanagerial fast-food employees who work at least 11 hours a week and 27 weeks a year. Even among the 28 percent of fast-food workers who were on the job 40 hours a week, the report said, more than half relied on the federal safety net to get by. The Post deserves credit for flagging at the top of the piece that the fast food industry is handsomely profitable as a result of this stealth subsidy. It’s not as if they can’t afford to pay better wages but it sure is more lucrative for them not to. But many readers will have looked only at the headlines, and not delved into the stories proper. And the headlines don’t finger the employers as welfare queens.

Goldman Sachs: The Growing Income Divide in Four Charts - How the rich and poor view the economy has diverged to some of the widest levels in years, data from Goldman Sachs Group Inc.’s latest consumer survey shows.  Goldman asked the 2,000 U.S. consumers it surveyed how they characterize the current state of the economy compared to a year ago. Households that made more than $90,000 a year reported higher optimism and spending power, while the households that made under $50,000 a year reported the opposite. The chart below from Goldman illustrates the diverging viewpoints from different the classes of consumers. Consumer spending accounts for about 70% of economic activity. Five years after the financial crisis, stock prices have soared and housing prices have rebounded, but consumer spending still hasn’t returned to pre-crisis levels. Goldman also points to the so-called wealth effect and the benefits that the high-end are seeing, which aren’t filtering down to the rest of consumers. “Almost two times the number of consumers believe their home value is rising rather than falling, a reversal from this time last year,” Goldman says. “This, along with a rising stock market, has contributed to record U.S. household net worth.” This trend benefits the high-end because 90% of households that make more than $70,000 a year own a home. By comparison, this figure drops to 50% when tallying households that make under $45,000 a year. And 30% of higher-end households own stocks, versus 10% in the lower-end. The next chart shows how consumers with higher income are spending more, while people who earn less are spending less.

Mobility is no answer to dispersion - Lots of times in conversations about inequality, mobility is cited as a potential remedy. What matters, according to this argument, is not how much inequality there is, but whether there is opportunity for people anywhere in the wealth/income spectrum to rise. American politicians of both parties, loathe to tackle actual inequality, have made a religion of the phrase “equality of opportunity”.  It is easy, and accurate, to counter the “equality of opportunity” fetish on practical grounds. “Equality of opportunity” echoes another famous phrase in American politics, “separate but equal”. Even if one concedes the theoretical point (which one should not), neither sort of equality is achievable in a real-world social context. The schools into which an impoverished and oppressed minority are herded were never going to match those offered to children of the affluent and well-enfranchised. Children born to parents who can barely afford even to be present themselves will never have the same opportunities as kids tutored for hundreds of dollars an hour and groomed for internships by well-connected professionals.

The Shame of Our Prisons: New Evidence - As recently as five years ago, American corrections officials almost uniformly denied that rape in prison was a widespread problem. When we at Just Detention International—an organization aimed at preventing the sexual abuse of inmates—recounted stories of people we knew who had been raped in prison, we were told either that these men and women were exceptional cases, or simply that they were liars. What we have now that we didn’t then is good data. The Bureau of Justice Statistics (BJS), an agency within the Justice Department, has conducted a series of studies of the problem based on anonymous surveys that, between them, have reached hundreds of thousands of inmates. Those who agreed to take the surveys, without being informed in advance of the subject, spent an average of thirty-five minutes responding to questions on a computer touchscreen, with synchronized audio instructions given through headsets. The officials in charge either positioned themselves so they couldn’t see the computer screens or left the room. The consistency of the findings from these surveys is overwhelming. The same factors that put inmates at risk of sexual abuse show up again and again, as do the same patterns of abuse involving race and gender, inmates and guards. Prison officials used to say that inmates were fabricating their claims in order to cause trouble. But then why, for example, do whites keep reporting higher levels of inmate-on-inmate sexual abuse than blacks? Is there some cultural difference causing white inmates to invent more experiences of abuse (or else causing blacks to hide what they are suffering)? If so, then why do blacks keep reporting having been sexually abused by their guards at higher rates than whites? The more closely one looks at these studies, the more persuasive their findings become. Very few corrections professionals now publicly dispute them.

Foodstamp Program Shutdown Imminent? - When over the weekend, a Xerox "glitch" shut down the EBT system, better known as foodstamps, for nearly the entire day across 17 states leaving millions without "funding" to pay for food leading to dramatic examples of the basest human behavior possible, some of the more conspiratorial elements saw this merely as a dress rehearsal for what may be coming in the immediate future. While there was no basis to believe that is the case, a USDA (the currently shuttered agency that administers the Supplemental Nutrition Assistance Program) memo obtained by the Crossroads Urban Center in Utah carries in it a very disturbing warning for the 46+ million Americans currently on foodstamps.  To wit: "understanding the operational issues and constraints that States face, and in the interest of preserving maximum flexibility, we are directing States to hold their November issuance files and delay transmission to State electronic benefit transfer (EBT) vendors until further notice." In other words, as Fox13News summarizes, "States across the country are being told to stop the supplemental nutrition assistance program for the month of November, pending further notice."  The full memo first posted on the Crossroads Facebook page is shown below:

Bodies Double as Cash Machines With U.S. Income Lagging: Economy - Hair, breast milk and eggs are doubling as automated teller machines for some cash-strapped Americans such as April Hare.  “I was just trying to find ways to make money, and I remembered Jo from ‘Little Women,’ and she sold her hair,” the 35-year-old from Atlanta said. “I’ve always had lots of hair, but this is the first time I’ve actually had the idea to sell it because I’m in a really tight jam right now.”  The mother of two posted pictures of her 18-inch auburn mane on, asking at least $1,000 and receiving responses within hours. Hare, who also considered selling her breast milk, joins others exploring unconventional ways to make ends meet as the four-year-old economic expansion struggles to invigorate the labor market and stimulate incomes.  In all but two quarters since the beginning of 2011, “hair,” “eggs,” or “kidney” have been among the top four autofill results for the Google search query, “I want to sell my...,” according to Nicholas Colas, chief market strategist at New York-based ConvergEx Group, which provides brokerage and trading-related services for institutional investors.  While Americans can legally sell hair, breast milk and eggs, the sale and purchase of a kidney in the U.S. is against the law. “The fact that people even explore it indicates that there are still a lot of people worried about their financial outlook,” said Colas, who tracks off-the-grid economic indicators. “This is very much unlike every other recovery that we’ve had. It’s going to be a slow-grinding, very frustrating recovery.”

Families With Kids Go Homeless as U.S. Rents Exceed Pay: Economy - When Montoria Freeland separated from her husband of 15 years in 2008, she left a four-bedroom house and economic security. Before long, her pay and hours as a pharmacy technician were cut and she found herself and her son facing homelessness.  Freeland lived with family for a time, she said, and four months ago moved into transitional housing funded by the city government in Washington, D.C., while searching for work that pays more than her $8.25-an-hour retail job. Having lost her oldest son in a 2000 homicide, Freeland said she insists on looking for housing in a safe neighborhood for her surviving one, now 17. She found that’s available only at an increasingly steep price.  “It’s hard to survive out here.”  For households with children, rising housing costs, elevated unemployment and stagnant earnings are increasingly placing rent beyond reach. The housing slump made matters worse as former homeowners turned into renters, increasing competition for available apartments.

Winter In America Gets Colder – Why We Choose Poverty - Ilargi - Broadly speaking, if we look at what has happened to the world’s rich economies from 1945 to today, we can say that in the first 30 years, 1945-1975, real wealth – as expressed in standard of living – across the board, for the vast majority of people, increased.  Over the next 30 years, 1975-2005, the standard of living still seemed to rise, but if we look behind the numbers and between the lines, we see that much of the wealth increase over that period is illusional, because it was increasingly based on credit, i.e. it was borrowed from the future, while at the same time, the costs of “really big ticket” items such as education and health care were moved away from governments and towards citizens, where they began an unstoppable ascent (and we paid for them with credit). There are umpteen different ways to define standard of living, but it seems quite reasonable to say that, as societies, we hit the top of our wealth in the mid to late 1970′s, although valid arguments can be made for an even earlier date. And then from about 2005 onwards, we have entered payback time. A fast increasing part of our budgets started to go towards continually rising costs for education, health care etc., AND interest payments on what we borrowed in the previous three decades AND interest payments on what we borrowed to both make those payments and keep the illusion of (increasing) wealth alive. In a glaring example, housing prices went up not because people got richer, but because they could borrow more. In another example, across the western world, coming out of WWII, many if not most countries were dedicated to providing equal (and therefore necessarily free) access for everyone to the best health care and education available. And look at us now …

North Carolina Suspends Welfare Program Thanks To The Shutdown - On Monday, North Carolina became the first state to halt its welfare program, called Work First in the state and funded through the Temporary Assistance for Need Families (TANF) program, thanks to the government shutdown. While current enrollees will get October benefits, county offices have been instructed to stop processing new applications and November benefits won’t go out if the shutdown isn’t resolved in time. More than 20,700 state residents are enrolled in the program. When Congress failed to pass a continuing resolution to keep the government funded, it also failed to extend funding for TANF, meaning that state programs haven’t been getting any federal funding since October 1. Before Monday, all states had stepped up to cover the costs themselves. Arizona originally cut off benefits but later reversed course. But experts have warned that if the shutdown lasted more than a month some would start cutting off benefits. “After a month states [will] start to get nervous,” wondering when they will get federal funding, Elizabeth Lower-Basch, policy coordinator at CLASP, previously told ThinkProgress. As it wears on, more states are likely to join North Carolina.

Red States Discover The Pain of Paying Their Own Way  Yes, yes the Federal government is a horrible intrusion into all our lives and if only it could keep its nose out of the states' business! Right? Everyone knows that national monuments are just there - right? The Federal government doesn't actually 'do' anything to operate them, right? Well many of these states that depend on tourism dollars from national monuments discovered in no time flat how much they count on the Federal government to subsidize them. And were forced to admit it.   (AP) — The Obama administration’s willingness to reopen national parks shuttered by the government shutdown came with a big caveat: States must foot the bill with money they likely won’t see again.  So far, Utah, Colorado, South Dakota, Arizona and New York have jumped at the deal. Governors in other states were trying to gauge Fridaywhat would be the bigger economic hit — paying to keep the parks operating or losing the tourist money that flows when the scenic attractions are open.  South Dakota and several corporate donors worked out a deal with the National Park Service to reopen Mount Rushmore beginning Monday. Gov. Dennis Daugaard said it will cost $15,200 a day to pay the federal government to run the landmark in the Black Hills. Well isn't that exactly what conservatives want - private donations to keep unessential things like 'monuments' functioning? Just like we're supposed to rely on charity for our healthcare?

DiNapoli: State spending declines, but debt soars -  New York’s spending dropped for the second year in a row, but the state’s debt hit a record $63.5 billion in the last fiscal year, a report Tuesday found. The annual Financial Condition report from Comptroller Thomas DiNapoli gave a mixed picture of the state’s finances, showing that spending has been controlled but taxes continue to rise and the state’s budget faces ongoing pressure. “State policy decisions in the past three years have helped New York better align state spending with revenue, but difficulties remain,” DiNapoli said. “The aim should be to build on the progress made and put New York state on a truly sustainable fiscal path.” DiNapoli’s report found state spending decreased 0.3 percent, or $407 million, in the 2012-13 fiscal year from the prior year. The 2013-14 fiscal year started April 1. But since 2009, state spending outpaced inflation, growing a total of 9.5 percent – largely due to borrowing $17.8 billion since 2009, including $3.5 billion this year. New York was the second-most indebted state after California, and ranked fifth in per capita debt: $3,246.

Let's Treat Housing as a Health Issue - Governor Andrew Cuomo and New York State did something recently that homeless advocates in New York City have long argued for. They adopted the policy that housing is health care. Health care professionals who specialize in treating people experiencing homelessness have known it, and said it, for a long time. It's not just easier to access treatment when you're stably housed, but ongoing treatment is always more effective for those who have stable housing. As early as 1998, The New England Journal of Medicine published a study, based on New York City data from over 400,000 hospital discharges, that conclusively labeled homelessness as an extraordinarily aggravating condition for numerous chronic conditions and showed it produced "substantial excess costs" both in preventable utilization of emergency rooms and hospitals and in longer and more expensive hospital stays. The study recommended more "low-cost housing," supportive housing and better access to substance abuse treatment programs as prescriptions for "a more cost-effective as well as more humane approach to the problem of homelessness." Since then there have been a dozen more academic studies all showing the same thing. Homelessness itself aggravates chronic health conditions, interferes with the effectiveness of treatment and drastically increases emergency room visits and length of hospital admissions.

Bottom Line: What the Numbers Mean - State coffers welcomed a jump in revenues in September that offset shortfalls in the prior two months. With spending holding in line with estimates, California ended the first quarter of its fiscal year on track with estimates contained in the 2013-14 Budget Act. September saw total revenues move past expectations by $427 million, or 5.3%. Personal income taxes, which are California’s dominant revenue source, lurched past monthly projections by 9.5%. ... Retail sales tax receipts also beat budget estimates by close to double digits in September, as California consumers resumed shopping with the support of more jobs, higher home prices, and a rising stock market....California has completed the first leg of the fiscal year with a good pace. Both revenues and state spending have stayed close within their designated lanes, almost exactly matching estimates contained in the 2013-14 Budget Act. Revenue collections could be challenged in the coming months by any negative developments related to jobs, interest rates, stock prices, and home values. Spending will be impacted by demands for education, health care, social services, and other line items. Decisions or a stalemate in Washington related to defense outlays, research funds, Medicare, and other federal programs could ripple back to California in major ways.

Fewer snowplows on King County roads this winter -- If you live in the Cascade foothills, you may be out of luck when we get our first big snowfall. King County is warning that fewer roads will be plowed this winter, thanks to budget cuts. The county plans to operate snowplows on only 150 of 1,500 miles of roads in unincorporated parts of the county. "It's not practical to keep the entire network open both because parts of the network aren't safe even when they're plowed, and financially, it would take extraordinary resources," said King County director of road services Brenda Bauer. Road service crews have challenges during a weather event that affect the whole region at the same time, said Bauer. In case of snow, the county said it will focus on primary routes and emergency links to hospitals. King County has 100 drivers and equipment operators available, down from 171 in 2009, and Bauer said that is due to revenue. In particular, the maintenance crew staffing levels are down by between 40 and 50 percent. Only 253,000 of the county's 1.98 million people live in unincorporated areas. Bauer said those people can expect to be without utilities for longer periods of time. They may also be isolated in their neighborhoods and not be able to get out altogether in the event of an extreme weather situation.

Officials to demolish 1,600 vacant homes in Flint - Flint leaders and the Michigan State Housing Development Authority (MSHDA) Oct. 10 launched the largest residential blight removal effort in the city's history by overseeing the demolition and cleanup of a home in a distressed neighborhood on Flint's West Side. The Gov. Rick Snyder administration, MSHDA, the U.S. Department of Treasury and the Genesee County Land Bank Authority are joining city officials and neighborhood leaders on a $20.1 million initiative to help demolish more than 1,600 vacant and foreclosed Flint residential properties. “This is the largest single award of blight eradication money to Flint at one time and will be a big strike at the blight that undermines too many neighborhoods,” said Flint Mayor Dayne Walling. “We hope this encourages the people who live in our neighborhoods to take heart and continue revitalizing their communities.” The Flint-area “blight blitz” will raze about 25 percent of the city's 5,600 abandoned homes. Demolitions will take place in batches of 50 to 100 houses.

Detroit Secures $350 Million Loan To Help Pay Off Debt During Bankruptcy Proceedings --Detroit's state-appointed emergency manager says a $350 million loan has been secured to help the city pay its way out of a complicated deal involving major creditors. Kevyn Orr said Friday that the money committed by Barclays will help with Detroit's reconstruction as he tries to take the city into the largest municipal bankruptcy in U.S. history. The loan still has to be approved by a bankruptcy court judge. About $230 million would be used to pay off some obligations related to its pension debt. The rest would be used to improve basic city services and technology infrastructure. The city says the loan is secured with pledges of casino and income tax revenue, and cash from the potential value of assets that exceed $10 million.

Study: Poor children are now the majority in American public schools in South, West -  A majority of students in public schools throughout the American South and West are low-income for the first time in at least four decades, according to a new study that details a demographic shift with broad implications for the country. The analysis by the Southern Education Foundation, the nation’s oldest education philanthropy, is based on the number of students from preschool through 12th grade who were eligible for the federal free and reduced-price meals program in the 2010-11 school year.The meals program run by the Department of Agriculture is a rough proxy for poverty, because a family of four could earn no more than $40,793 a year to qualify in 2011. Children from those low-income families dominated classrooms in 13 states in the South and the four Western states with the largest populations in 2011, researchers found. A decade earlier, just four states reported poor children as a majority of the student population in their public schools. But by 2011, almost half of the nation’s 50 million public-school students — 48 percent — qualified for free or reduced-price meals. In some states, such as Mississippi, that proportion rose as high as 71 percent.

A million reasons to improve teacher quality  - THIS week's Free exchange column looks at a fascinating bit of statistical work on the value of a good teacher. Economists Raj Chetty, John Friedman, and Jonah Rockoff obtained a massive data set from a large, urban school system, which covered 2.5m students (and 18m test scores) over two decades. With it, they were able to calculate a "value added" score (showing how a teacher could be expected to influence a student's test scores) for every teacher in the sample—and demonstrate that the score didn't simply represent a child's background advantages, of parental income, for example. Even better, they were able to track the performance of the earliest pupils in the sample into early adulthood, and therefore see how exposure to teachers of various quality really mattered. The results are remarkable:They find, for instance, that the quality of teachers varies much more within schools than among them: a typical school has teachers spanning 85% of the spectrum for the school system as a whole. Not only do teachers matter, in other words, but the best teachers are not generally clumped within particular schools.Across schools, however, better pupils are assigned to slightly better teachers on average...[E]xposure to better teachers is associated with an increased probability of attending university and, among pupils who go on to university, with attendance at better ones, as well as with higher earnings. Somewhat more unexpectedly, good teachers also seem to reduce odds of teenage pregnancy and raise participation in retirement-savings plans. Effects seem to be stronger for girls than for boys, and English teachers have a longer-lasting influence on their pupils’ futures than maths teachers.

Study Finds Gains From Teacher Evaluations - The education research of recent years has pointed overwhelmingly to the importance of teachers. Perhaps more than anything else – quality of principal, size of school, size of class – the strength or weakness of classroom teachers influences how much students learn and even how they fare later in life. The great unknown is how to improve teacher quality, be it by attracting more good teachers, weeding out more bad teachers or helping teachers become better at their craft. A new study, released on Thursday, offers powerful if still tentative evidence that teacher-evaluation programs can play an important role. The study is especially notable because past research about evaluation programs suggested they had little effect. The new paper, however, studies an evaluation program – called Impact, in the District of Columbia school system – that is far larger, with bigger rewards and stiffer penalties, than most programs.  Impact, which began under Michelle Rhee while she was chancellor, has been a hotly debated program, and the new study is sure to attract attention from both supporters and critics of teacher evaluation. New York state’s plan to begin evaluating teachers has also been the subject of intense praise and criticism, as have such programs elsewhere. The study found that Impact caused more low-performing teachers to leave the school system than otherwise would have been expected. The program also seemed to improve teaching quality – as measured by classroom observations and test scores – of teachers with both strong and weak evaluation scores.

Raising the G.E.D. Bar Stirs Concern for Students - At a time when a high school diploma — much less an equivalency certificate — is losing currency in the labor market, exams being introduced in January will start to be aligned with the Common Core, a set of rigorous academic standards for kindergarten through 12th grade that 45 states and the District of Columbia have adopted.  In an echo of the debate surrounding the standards in elementary and secondary education, instructors and officials at adult education centers worry that increasing complexity could demoralize a population that already struggles to pass the current test, commonly known as the G.E.D.  Every year, about 700,000 people take the General Educational Development high school equivalency exam, and about 70 percent pass. New tests in math will add more advanced algebra, while reading and writing tests will assess higher-order critical thinking skills.  Starting in January, two more test developers, the Educational Testing Service and McGraw Hill, will also offer high school exams, potentially adding to the confusion.  The changes have caused anxiety as instructors and students try to prepare for the unknown. While many states have already selected a test company, Massachusetts is one of several still reviewing their options.

Could your education make you a risky borrower? -When it comes to economics, a little knowledge may truly be a dangerous thing. A recent Federal Reserve Bank of New York staff report suggests that high school students exposed to economics education develop worse credit habits than those taught in math and financial literacy. That might sound odd, since economics is steeped in lessons of costs and benefits, supply and demand, and inflation and interest rates — not to mention historical lessons. But it’s possible that such lessons in markets and macro just aren’t relevant to scores of teens who just need to learn about budgeting, debt and saving before they hit adulthood. In “Financial Education and the Debt Behavior of the Young,” the working paper’s authors — looking to test whether mathematics, financial literacy or economics education in US secondary schools affected a student’s approach to taking on debt in early adulthood — found that economics education was, effectively, bad for your credit health.

Applying to College Shouldn't Require Answering Life's Great Questions - Brown University is asking applicants for the Class of 2017: French novelist Anatole France wrote: "An education isn't how much you have committed to memory, or even how much you know. It's being able to differentiate between what you do know and what you don't." What don't you know? The University of Chicago would like high-school seniors to tell them: How are apples and oranges supposed to be compared? Possible answers involve, but are not limited to, statistics, chemistry, physics, linguistics, and philosophy. Tufts would simply like to know: What makes you happy? These essay prompts get at some of life’s greatest questions. And as this year’s college application season begins, 17-year-old high-school students around the world are frantically trying to answer with the insight and intelligence that will guarantee them an acceptance letter. Some are searching for profound thoughts and meaningful experiences in their short lives. Other applicants are embellishing the mundane in an attempt to make it sound extraordinary. High school students first come into contact with college through the admissions process. And right now, the first message they receive is: “Pretend to be something you are not.” There are innumerable sites that offer advice for college applicants, and almost all of them involve admissions experts pleading with students to “be genuine.” But I don’t blame a 17-year-old girl for thinking her authentic answer to “What makes you happy?” won’t get her into college.

Do student evaluations measure teaching effectiveness? -- Since 1975, course evaluations at Berkeley have included the following question: Considering both the limitations and possibilities of the subject matter and course, how would you rate the overall teaching effectiveness of this instructor?  1 (not at all effective), 2, 3, 4 (moderately effective), 5, 6, 7 (extremely effective) Among faculty, student evaluations of teaching are a source of pride and satisfaction—and frustration and anxiety. High-stakes decisions including merit reviews, tenure, and promotions are based in part on these evaluations.  Yet, it is widely believed that evaluations reflect little more than a popularity contest; that it’s easy to “game” the ratings; that good teachers get bad ratings; that bad teachers get good ratings; and that fear of bad ratings stifles pedagogical innovation and encourages faculty to water down course content. What do we really know about student evaluations of teaching effectiveness?

The case against algebra II  - There’s an interesting debate described in this essay, Wrong Answer: the case against Algebra II, by Nicholson Baker (hat tip Nicholas Evangelos) around the requirement of algebra II to go to college. I’ll do my best to summarize the positions briefly. I’m making some of the pro-side up since it wasn’t well-articulated in the article. On the pro-algebra side, we have the argument that learning algebra II promotes abstract thinking. It’s the first time you go from thinking about ratios of integers to ratios of polynomial functions, and where you consider the geometric properties of these generalized fractions. It is a convenient litmus test for even more abstraction: sure, it’s kind of abstract, but on the other hand you can also for the most part draw pictures of what’s going on, to keep things concrete. In that sense you might see it as a launching pad for the world of truly abstract geometric concepts. Plus, doing well in algebra II is a signal for doing well in college and in later life. Plus, if we remove it as a requirement we might as well admit we’re dumbing down college: we’re giving the message that you can be a college graduate even if you can’t do math beyond adding fractions. And if that’s what college means, why have college? What happened to standards? And how is this preparing our young people to be competitive on a national or international scale?

Student Loans Are Becoming a Drag on the US Economy -- The housing recovery remains on track. But high levels of student debt threaten to hang over the residential real estate market for many years, acting as a drag on both household formation and higher prices.  At the height of the housing boom, the U.S. was producing 1.4 million additional households every year. That figure plunged to 500,000 in the Great Recession. The number of new households is expanding again but remains stuck at 700,000—half the peak level. One big reason is underemployed new college graduates struggling with student debt and unable to contribute to the economy.  “Three-fourths of the fall in household formation can be directly correlated to student debt,” Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau, said at a conference last week. His comments were reported on  Chopra said he was seeing signs of far-reaching economic drag due to student indebtedness but that “the impact on the housing market is the most troubling part.” Many recent graduates don’t have the disposable income or the credit score needed to buy a house, Chopra said. So they boomerang back home.

Orr cuts Detroit retirees' health care benefits - Detroit’s bankruptcy is starting to hit home for 28,500 current and retired city workers who are getting the first glimpse this week at drastic cuts to their health insurance plans. Emergency Manager Kevyn Orr announced sweeping changes Monday to health insurance for active and retired workers slated to take effect Jan. 1. The changes will likely face a legal backlash as the city fights to win court approval for bankruptcy protection from its creditors. The changes mark the first major dent Orr is attempting to put in the city’s legacy costs at the center of Detroit’s bankruptcy case as he seeks to shift more of the cost burden onto employees and retirees. City officials began sending notices late last week to about 8,000 retirees under age 65 that Detroit is axing their city-paid $605 per month retiree health insurance coverage ($1,834 for families) and instead giving them a monthly $125 payment to use towarda private plan on the federal health insurance marketplace exchanges. Disabled retirees under age 65 will get a $200 monthly payment for their health insurance needs.

Sacramento County Selling Debt to Pay for Pensions - California’s Sacramento County will issue about $110 million in pension-obligation bonds this week as sales of such securities drop to the lowest since 2010. Sacramento County, home to the state capital and 1.5 million residents, will refinance variable-rate pension debt sold in 2004 in a sale set for Oct. 16. The new fixed-rate bonds will save the county $50 million, said debt officer Chris Marx. The taxable securities mature in 2025. “It’s really the last planned action in our measured approach to reduce the risk in our debt portfolio,” Marx said in a phone interview. She said the county, which has about $977 million in pension debt, doesn’t plan to issue more. The offering is among $6.7 billion of long-term municipal issues scheduled for this week as benchmark yields are the highest since Sept. 23, data compiled by Bloomberg show. The total is up from $4.6 billion last week. Individuals pulled about $729 million from muni-focused mutual funds in the week through Oct. 9, according to Lipper US Fund Flows data. Sacramento County must contribute more than $200 million to its pension system in fiscal 2014, a 391 percent increase from a decade ago, deal documents show.

Cities borrow to strengthen pension funds - Despite what finance experts say is a significant risk, cities across the nation continue to borrow money to bolster their employee retirement accounts. Nashville was the latest to consider such a move, but Mayor Karl Dean's administration withdrew the proposal last week after intense criticism. The city had considered borrowing $200 million to help reduce nearly $400 million of unfunded liability in its pension plan. Earlier this year, Franklin, Tenn., agreed to issue $10 million in bonds to invest in the city's pension fund. Elsewhere: The Connecticut towns of Hamden and Stratford agreed this year to borrow up to $125 million and $220 million, respectively, to shore up pension plans. Portsmouth, Va., this year borrowed nearly $170 million to help fund pension plans. Fort Lauderdale issued $337 million in bonds last year to cover $400 million of unfunded liability in two separate retirement funds. Oakland, the city believed to have issued the first pension obligation bond in 1985, again used them last year to pump more than $200 million into the city's retirement account for police and firefighters. Critics say borrowing money to invest in pension funds is risky and point to cities where the deals have gone bad and helped contribute to major financial difficulties — including municipal bankruptcy.

Shiller on 401K Plan Investing --  This reminds me of when I was the Trustee for our company's retirement plan. I was amazed at the reasons some people didn't participate - even with a decent match on their contributions - and I was even more amazed at how some people invested. From an interview of Robert Shiller by Neil Irwin at the WaPo: Robert Shiller: ‘When I look around I see a lot of foolishness, and I can’t believe it’s not important economically’. Robert Shiller said:   Here’s where the efficient markets hypothesis gets you into trouble. The idea that everyone will manage their 401k plan optimally is really not right. What was discovered by some of the behavioral finance research is people are inertial. They don’t do anything. If they have to sign up for the plan, they won’t do it. If they do sign up, they'll put their money in whatever asset seems to be recommended and leave it there the rest of their lives. You would think it’s kind of obvious, that some people aren't that interested in managing their portfolios. It was even worse than "inertia". Many people were too risk adverse and would park their money in money market funds all the time.  Others would invest in money markets, and then, if the market had done well for a few quarters, they'd move the money into the market. As soon as there was any kind of sell off, they'd be back in the money market. Amazingly these people underperformed every asset class by chasing recent performance. I think there is something to this "behavioral finance"!

Social Security Raise to Be Among Lowest in Years  — For the second straight year, millions of Social Security recipients, disabled veterans and federal retirees can expect historically small increases in their benefits come January. Preliminary figures suggest a benefit increase of roughly 1.5 percent, which would be among the smallest since automatic increases were adopted in 1975, according to an analysis by The Associated Press. Next year’s raise will be small because consumer prices, as measured by the government, haven’t gone up much in the past year. The exact size of the cost-of-living adjustment, or COLA, won’t be known until the Labor Department releases the inflation report for September. That was supposed to happen Wednesday, but the report was delayed indefinitely because of the partial government shutdown. The COLA is usually announced in October to give Social Security and other benefit programs time to adjust January payments. The Social Security Administration has given no indication that raises would be delayed because of the shutdown, but advocates for seniors said the uncertainty was unwelcome. Social Security benefits have continued during the shutdown. More than one-fifth of the country is waiting for the news.

Social Security Cost-of-Living Increase Likely to Be Around 1.5% - Social Security’s annual cost-of-living adjustment is likely to be around 1.5%, according to economists’ estimates, a small increase that reflects low inflation amid slow economic growth. The official announcement, calculated using the consumer price index, is delayed due to the government shutdown. The September CPI report, which had been due out at 8:30 this morning, contains the final bits of data the Social Security Administration uses to determine new benefit levels. The new payments normally begin in January. The increase was 1.7% last year, a bump that pushed average monthly benefits for retired workers to $1,261 from $1,240. Economists aren’t waiting for the official release to make their own estimates for 2014.Dean Baker, co-director of the Center for Economic and Policy Research, expects the COLA will end up being either 1.5% or 1.6%. Food and energy prices, often volatile, are wild cards but other components of inflation have been fairly steady this year, he says. Polina Vlasenko, a research fellow at the American Institute for Economic Research, a Great Barrington, Mass.-based think tank, estimates a COLA of 1.4% to 1.6%. Both economists caution, though, that standard CPI isn’t the best way to track how retirees spend.  Health care, for example, can account for a bigger share of spending among seniors. Prices for medical-care services were up 3.1% year over year in August, a much faster pace than overall prices.

Don't Count on a 1.5% Social Security Increase, the Figures Have not Been Released Yet  - The press is announcing a low social security cost of living adjustment for 2014, a 1.5% increase.  The problem with this headline announcement by the press is the social security cost of living increase has not been announced yet and is highly dependent on government inflation statistics for September.  These September statistics have not been released and due to the shutdown, probably will not be this week.  As a result there is no way to know what the cost of living adjustment will be for social security benefits. The cost of living increase is calculated using CPI-W, an inflation measure for workers.  The problem is the government shutdown has stopped economic statistical releases, including CPI, where September's figures were due to be released this Wednesday. The cost of living increase, or COLA, isn't just used to increase social security benefits in order to account for inflation, it is used for a host of government benefits to adjust for cost of living increases.  COLA impacts way more than the estimated 58 million Americans receiving social security benefits and the adjustment can mean the difference between being able to pay one's bills or not for the next year.  Below is a graph of past COLA increases since 2000 and as we can see, the deflation of the Great Recession caused for two years in a row social security and other government benefits not to be increased.  Generally speaking, inflation is low, so it is reasonable to assume there will be a low COLA adjustment for 2014.  The graph also shows CPI-W, index on the left (COLA on the right) to get a feel for what kind of inflation has been occurring for 2013.

Jon Stewart Slams 'Moocher' States That Won't Expand Medicaid (VIDEO): Jon Stewart on Thursday blasted Republican governors and lawmakers who reject expanding Medicaid in their states, singling out the most egregious offenders as "moochers."  Stewart added "total dickishness" to the list of obstacles facing the implementation of Obamacare, citing the 26 Republican-controlled states that declined federal dollars to expand Medicaid out of "spite." "All but three of those 26 states they represent already take more money from the federal government than they contribute in tax dollars. They are already burdens on the systems," he later added. "I believe they are referred to by those Republicans as moochers. Moocher states. And if statehood was health care, Mississippi and Missouri would be rejected as having that as a pre-existing condition."

How Medicare influences private payment systems -- There is a new paper by Jeffrey Clemens and Joshua D. Gottlieb on this topic, the abstract is here: We analyze Medicare’s influence on private payments for physicians’ services. Using a large administrative change in payments for surgical procedures relative to other medical services, we find that private payments follow Medicare’s lead. On average, a $1 change in Medicare’s relative payments results in a $1.30 change in private payments. We find that Medicare similarly moves the level of private payments when it alters fees across the board. Medicare thus strongly influences both relative valuations and aggregate expenditures on physicians’ services. We show further that Medicare’s price transmission is strongest in markets with large numbers of physicians and low provider consolidation. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. This paper, which seems quite sound to me, has a few implications. First, if you are unhappy with the American health care system, government is more at fault for the problems of the private sector than it may at first appear.  We have a much more governmental system than most of its critics care to admit and that goes even beyond government health care spending as a percentage of total health care spending.Second, we could cut Medicare reimbursement rates, by limiting the doc fix, without old people all very rapidly going to the back of the health care queue. Third, the authors find that the larger Medicare becomes, the stronger this “pass through” effect generally will be.  In other words, this result will be all the more true in our future

Reviewing Obamacare coverage: Week 2 . Steve Koff, the Washington bureau chief for the Cleveland Plain Dealer, deserves kudos for his deep dive into the roots of recent budget cuts at the Cleveland Clinic, a major healthcare provider in the PD’s backyard —and also the region’s largest employer. In mid-September, the clinic announced that it was cutting as much as $330 million from its 2014 budget.  But this week, Koff took a methodical, clear, objective look at the factors actually shaping the Clinic’s finances—and teased out the effects of the Affordable Care Act as it was passed, subsequent court rulings and state-level policy decisions, and long-term industry trends. He deciphered the “disproportionate share,” or DSH, payments some hospitals got under Medicare to help care for the poor. These will be reduced under Obamacare—but there have been further, larger cuts under sequestration and other congressional budget deals. Koff also discussed the fallout from the decision of many states—including Ohio, thanks to the Republican-controlled state legislature—not to expand Medicaid, which will deprive hospitals of an expected revenue source. John Graves, a health policy professor at Vanderbilt, told Koff that between the DSH money and the failure to expand Medicaid, roughly 20 to 30 percent of hospitals’ uncompensated care money is being cut.

Obama admin. projected strong health plan signups - The Obama administration's internal projections called for strong enrollment in the states in the first year of new health insurance markets, according to unpublished estimates obtained by The Associated Press. Whether those expectations will bear out is unclear. Technology glitches have frustrated many consumers trying to sign up for coverage online, and efforts to upgrade and repair are ongoing. But the estimates, obtained through a public records request, may be the closest thing to a yardstick for measuring the performance of President Barack Obama's health care law across the states. The enrollment breakdown by states was included in a draft of an administration report on insurance premiums in the new markets, but it was omitted from a subsequent version that was released to the public last month by the Department of Health and Human Services. Leading up to the opening of insurance markets Oct. 1, the White House generally deflected questions about its own expectations of how consumers would respond. Officials instead cited a congressional estimate that 7 million people would gain coverage in the first year through the markets, which offer subsidized private insurance to people who don't have a job-based health plan. The draft, dated Sept. 20, broke down the figure of 7 million among states. It estimated the expected enrollment in California, for example, at 1. 3 million people in 2014. The estimate for Texas was 629,000 and for Florida, 477,000. The report estimated 340,000 people would enroll in Washington state, and 218,000 in New York.

Implementing Health Reform: The State Of The Exchanges, Income Verification, And More – As I reported earlier,  income verification requirements are already quite demanding — far more demanding than verification requirements for tax benefits received by other Americans such as business-expense deductions — but in the end verification in advance of how much lower-income American families will earn over a year is a fantasy.  Lower-income Americans often work in part-time, intermittent, or seasonal jobs and are paid hourly wages, making predicting income exactly a year in advance simply not possible. Lying on an application is subject to serious civil and criminal penalties, and the amount of tax credits received by an individual will in any event be reconciled with actual income at the end of the year.  A good-faith estimate of income is all that is possible.  Congress cannot reasonably require the impossible.

How Many People Have Signed Up For Health Insurance on the Federal Health Insurance Exchanges? - Based upon my survey of a large number of health plans accounting for substantial market share in the 36 states the federal insurance exchange is operating in, not more than about 5,000 individuals and families signed-up for health insurance in the 36 states run by the Obama administration through Monday. It is not uncommon for a major health insurer with a large market share to report less than 100 enrollments in the first week. Reports today say the enrollments continue to trickle in at about the same rate. Worse, the backroom connection between the insurance companies and the federal government is a disaster. Things are worse behind the curtain than in front of it. Here is one example from a carrier--and I have received numerous reports from many other carriers with exactly the same problem. One carrier exec told me that yesterday they got 7 transactions for 1 person - 4 enrollments and 3 cancelations. For some reason the system is enrolling, unenrolling, enrolling again, and so forth the same person. This has been going on for a few days for many of the enrollments being sent to the health plans. It has got on to the point that the health plans worry some of these very few enrollments really don't exist. The reconciliation system, that reconciles enrollment between the feds and the health plans, is not working and hasn't even been tested yet

‘Obamacare is a bit like the astronaut on top of the rocket’ - interview - Ezra Klein: You wrote about how the problems on the back-end of the insurance portals, in the way they communicate with the systems of actual insurers, might be as bad or worse than the front-end traffic problems. What are you worried about, exactly?
Bob Laszewski: What I’m worried about is that when people go to their doctor in January they may walk in, and the doctor and hospital won’t find them in the insurer’s computer system or their bank account won’t be appropriately debited or they’ll be signed up for the wrong plan. I’m worried about all these things. Now, we have a few weeks to get this straightened out. But only a few weeks.
EK: Tell me what you’re hearing from the insurance industry that has you concerned.
BL: The insurance industry is literally receiving a handful of new enrollments from the 36 Obama administration-run exchanges. It’s really 20 or 30 or 40 each day through last week. And a good share of those enrollments are problematic. One insurance company told me, “we got an enrollment from John Doe. Then five minutes later we got a message from CMS disenrolling him. Then we got another message re-enrolling him.” On and on, up to 10 times. So insurers aren’t really sure if the enrollments they’ve got are enrollments they should have. And remember, the insurers have automated all this. They don’t have a clerk sending out a welcome letter and an enrollment card. So if you just let the computer run, it could theoretically issue a welcome letter, a cancellation letter, a welcome letter, a cancellation letter, etc. Now, they’re not doing this right now because it’s all screwed up. They can manage a few dozen per day by hand. But when you’re talking about thousands or tens of thousands or hundreds of thousands, it becomes completely unmanageable.

    Obamacare Rollout: Will Insurers Be Hoist on the Enrollment Petard? - Yves Smith - The Wall Street Journal looks to have used an interview by Ezra Klein on Obamacare tech woes as the basis for a reported piece on how insurers were having so much trouble with the Federal marketplaces that they were having to check and in some cases process enrollments manually. That’s clearly unworkable at anything resembling the scale of expected participation. But not only does the Journal article corroborate and add more color to an ugly story, but it also mentions a different type of problem, that of eligibility, in passing. That’s actually a hugely important and presumably separate subroutine in the system, and if that is also broken or buggy, it has serious implications of its own. The Journal reporters appear not to have understood the significance of what they were told about eligibility, so they didn’t follow up on in their account, but we’ll point out what the consequences of glitches on this front might be.  Klein’s interview with Robert Laszewski of Health Policy and Strategy Associates described the problems he was hearing from insurance companies, and what that implied about the IT systems. The critical section:The insurance industry is literally receiving a handful of new enrollments from the 36 Obama administration-run exchanges. It’s really 20 or 30 or 40 each day through last week. And a good share of those enrollments are problematic. One insurance company told me, “we got an enrollment from John Doe. Then five minutes later we got a message from CMS disenrolling him. Then we got another message re-enrolling him.” On and on, up to 10 times. So insurers aren’t really sure if the enrollments they’ve got are enrollments they should have. And remember, the insurers have automated all this. They don’t have a clerk sending out a welcome letter and an enrollment card. So if you just let the computer run, it could theoretically issue a welcome letter, a cancellation letter, a welcome letter, a cancellation letter, etc. Now, they’re not doing this right now because it’s all screwed up. They can manage a few dozen per day by hand. But when you’re talking about thousands or tens of thousands or hundreds of thousands, it becomes completely unmanageable.

    The Truth About the Obamacare Rollout - The federal government is open and paying its bills, which means you can start looking at the other big story from the past few weeks: The startup of Obamacare’s marketplaces. But to fully appreciate what’s happening, you need a split screen. On one side is the story you’ve heard so much about. In 36 states, the Department of Health and Human Services (HHS) is operating the new insurance marketplaces, where non-elderly people without employer benefits can buy coverage on their own. This part of the rollout has gone … really badly. Two weeks after the sites went online, people are still have trouble setting up accounts and logging onto the system.  HHS is working feverishly to make improvements and the system's performance has improved incrementally. But people are still getting hung up at the initial stages, which means they never get the chance to apply for financial assistance and shop for plans. A study following web traffic showed a sharp drop-off in users at each successive stage of the online application process, which suggests the system was stopping a lot of people from moving forward. And that’s just the part of the system visible to consumers. Insurers say that the system is producing some incorrect information about the few people who make it through the process—a fixable problem, for sure, but a warning that other flaws may yet lurk undetected.

    The shutdown could have bought 40 times over - High-end cost estimate of infrastructure: $600 million*. Estimated economic losses from 15 days of shutdown: $24 billion. That’s forty-fold more, and I’m being conservative. The exchange rollout has been ugly, and with the inanity of government shutdown (finally!) wrapped up, it’ll be commanding more headlines. It should: the system appears to be having problems on the front end and back, creating issues for consumers and insurers alike. It’s totally unclear how many have enrolled through the federal exchanges, though some information is available for the state-based marketplaces. HHS has a pretty narrow window to correct course—unless they make some administrative tweak, people need to enroll in plans by mid-February to avoid the penalty. But when furor over exchange glitches starts to fester in the media void that Ted Cruz left behind, remember that the last two weeks of  political histrionics—which achieved nothing of consequence in health policy land, despite being premised on an effort to defund Obamacare—racked up a price tag that makes the exchange infrastructure’s budget look like a pittance. *Manjoo makes a good argument that the site shouldn’t have cost as much as it did (even with lower estimates around $360 million) and that government contracting and procurement practices might be the culprit. His piece is worth reading in full.

    Obamacare's Failure In One Chart -- Confirming our fears from a few days ago, the early numbers are in for Obamacare... and they are not good. Of course, listening to "bloggers" an be bad for your health, but it seems, very few of the million of "uninsured" have decided that it is as crucial as the "leader" has exclaimed. As Millard Brown Digital reports, fewer than 1% of those trying to register for health insurance under Obamacare have completed the enrollment process. The following inverted pyramid highlights the dismal reality of the Affordable Car Act so far...

    Bad Government Software - Ezra Klein, one of the biggest supporters of Obamacare the statute, has already called the launch of Obamacare a “disaster,” and it looks like things are now getting worse: as people are actually able to buy insurance, the data being passed to health insurers are riddled with errors (something Klein anticipated), in effect requiring applications to be verified over the phone. Bad software is one of my blogging sidelights, so I wanted to find out who built this particular example, and I found Farhad Manjoo’s WSJ column, which fingered CGI, a big old IT consulting firm (meaning that they do big, custom, software development projects, mainly for big companies). (See here for more on CGI.) The data centers of the world’s largest companies are littered with difficult-to-use, inflexible, expensive, error-riddled software. Some of it was put there by their in-house IT departments; most of it was custom jobs purchased from consulting firms. Why is so much software so bad? There are lots of reasons. Writing good software is hard to begin with.* Big, custom projects are unique by definition, so they are sold as promises, not as finished products. Every vendor promises the same thing, so the one who promises to do it at the lowest cost often wins; when the project turns out late, bad, and over budget, too many executives have too much invested in its success to admit defeat.

    Why US government IT fails so hard, so often - The rocky launch of the Department of Health and Human Services' is the most visible evidence at the moment of how hard it is for the federal government to execute major technology projects. But the troubled "Obamacare" IT system—which uses systems that aren't connected in any way to the federal IT infrastructure—is just the tip of the iceberg when it comes to the government's IT problems. Despite efforts to make government IT systems more modern and efficient, many agencies are stuck in a technology time warp that affects how projects like the healthcare exchange portal are built. Long procurement cycles for even minor government technology projects, the slow speed of approval to operate new technologies, and the vast installed base of systems that government IT managers have to deal with all contribute to the glacial adoption of new technology. With the faces at the top of agency IT organizations changing every few years, each bringing some marquee project to burnish their résumés, it can take a decade to effect changes that last. That inertia shows on agency networks. The government lags far behind current technology outside the islands of modernization created by high-profile projects. In 2012, according to documents obtained by MuckRock, the Drug Enforcement Agency's standard server platform was still Windows Server 2003.

    Heritage: Same As It Ever Was - Paul Krugman - Senator Orrin Hatch is unhappy with the Heritage Foundation, which he worries is becoming political and losing its “reputation”.  So, what reputation is that, exactly? You could, maybe, argue that Heritage did some serious work in the 80s, when it looked at health reform and proposed the solution we now call Obamacare. But it has done nothing but junk “research” at least since 2000. I’ve written in the past about the nonsense it put out about the estate tax; more recently, Heritage “experts” explained that income is automatically spent, so that stimulus can’t increase demand and running budget deficits in a recession would send interest rates soaring; they declared that Paul Ryan’s budget would cut the unemployment rate to 2.8 percent, then tried to hide the record of their blunder; and much, much more. I guess Hatch’s lament makes some sense if you reinterpret it as dismay that Heritage isn’t even putting up a plausible facade anymore. But they took the think out of that think tank a long time ago.

    Obamacare: There is risk for the American public to be worse off - With the implementation of health insurance exchanges in October 2013 and the beginning of the Affordable Care Act (ACA), also known as Obamacare, there is tremendous risk for the American public to be worse off. Certainly the millions of Americans who currently are uninsured because their employers do not offer insurance coverage and those with pre-existing conditions unable to purchase affordable individual coverage, will benefit. It is those with employer-based insurance coverage who may lose. They just don’t know it yet. Employers have found it difficult to absorb the rising health insurance premiums and costs, which have increased faster than inflation. They have tried many ways to slow health care spending including requiring employees to have more “financial skin in the game” to encourage them to make “smarter” choices about their health care. They’ve done this with higher deductibles and co-pays and requiring employees to pay a larger percentage of the total health insurance premium. Yet despite these strategies, employers have seen their health care costs soar. Desperate for a solution, it appears that the ACA may have given them an option. With the term “health insurance exchanges” becoming part of the American lexicon, companies now have a way to finally contain health care costs. With public health insurance exchanges, individuals with no ability to purchase health insurance from an employer, will be able to purchase health insurance in a marketplace much the same way they do for hotels or flights. Depending on their household income, they may qualify for a tax credit. Shifting from a company offering health insurance benefits and instead having individuals find insurance on their own will increasingly be the norm. It is this where employers have now seized the chance to improve their own costs.

    Vital Signs: Health-Care Costs Vary by Firm Size - The Labor Department looked at the cost of medical care benefits across different firm sizes in the private sector. Among employers who do not require employees to contribute to healthcare benefits, the average monthly cost for family coverage hovers around $1,100 for small and medium sized firms, then rises to $1,266.40 for companies with 500 or more workers. When employees are required to pay part of the bill, the total average cost per employee is higher than when the employer picks up the entire tab. But the cost for the employer rises as the firm size increases. Employees at larger firms pay a smaller contribution than workers at small businesses.

    You Can’t Put a Price on an Offer That Doesn’t Exist - Recent reports from The Heritage Foundation and the American Action Forum claim that Americans (particularly young Americans) will pay more for health insurance in the new exchanges set up as part of the Affordable Care Act (ACA, or, Obamacare if you like) than they do currently. The question of how much prices differ between the current non-group market and the new health insurance exchanges is awfully interesting, but very difficult, if not impossible, to answer. And to be very clear—neither the Heritage nor the AAF studies do much to shed light on it.  Transparent prices are now widely available in the new health insurance exchanges. There are advertised prices for a variety of policies, for consumers in different age groups, and, similarly, subsidies can be calculated for a continuum of income levels. And these are the prices that people will actually end up paying. Now, let’s contrast that with the non-group market before the ACA. First, the insurance policies often compared to the exchanges do not line up in terms of benefits. Policies in the individual market often have higher deductibles and exclude various conditions from what’s covered by the policy. The policies offered in the exchanges generally offer more comprehensive coverage, and hence should be more expensive on average for this reason. Second, in the pre-reform non-group market, list prices don’t reflect the true prices people will actually end up paying. The individual market, in most states, does individual risk rating. This means the insurance company (often on a website) will give a price, but then they will do an individual risk assessment, for instance, by sending someone to measure an applicant’s blood pressure, weight, etc. At that point, the true price is given. Not surprisingly, it can turn out to be higher than the price listed.

    Patients Mired in Costly Credit From Doctors - The dentist told Patricia Gannon she needed a partial denture. The cost: more than $5,700. Ms. Gannon, 78, was staggered. She said she could not afford it. Before she knew it, Ms. Gannon recalled, the office manager was taking down her financial details. But what seemed like the perfect answer — seemed, in fact, like just what the doctor ordered — has turned into a quagmire. Her new loan ensured that the dentist, Dr. Dan A. Knellinger, would be paid in full upfront. But for Ms. Gannon, the price was steep: an annual interest rate of about 23 percent, with a 33 percent penalty rate kicking in if she missed a payment. She said that Dr. Knellinger’s office subsequently suggested another form of financing, a medical credit card, to pay for more work. Now, her minimum monthly dental bill, roughly $214 all told, is eating up a third of her Social Security check. If she is late, she faces a penalty of about $50. “I am worried that I will be paying for this until I die"In dentists’ and doctors’ offices, hearing aid centers and pain clinics, American health care is forging a lucrative alliance with American finance. A growing number of health care professionals are urging patients to pay for treatment not covered by their insurance plans with credit cards and lines of credit that can be arranged quickly in the provider’s office. The cards and loans, which were first marketed about a decade ago for cosmetic surgery and other elective procedures, are now proliferating among older Americans, who often face large out-of-pocket expenses for basic care that is not covered by Medicare or private insurance.

    Geography affects what drugs seniors prescribed (AP) - Where seniors live makes a difference not only in how much health care they receive but also the medications they're prescribed - as some miss out on key treatments while others get risky ones, new research shows. More than 1 in 4 patients on Medicare's prescription drug plan filled at least one prescription for medications long deemed high-risk for seniors, according to the study released Tuesday by the Dartmouth Atlas Project. Seniors who live in Alexandria, La., were more than three times as likely as those in Rochester, Minn., to receive those potentially harmful drugs, which include muscle relaxants and anxiety relievers that can cause excessive sedation, falls and other problems in older adults. On the flip side, far more seniors who survived a heart attack were filling prescriptions for cholesterol-lowering statin drugs in Ogden, Utah, than in Abilene, Texas - 91 percent compared to just 44 percent, the study found. That's even though statins are proven to reduce those patients' risk of another heart attack. Even more surprising, the study found just 14 percent of seniors who've broken a bone because of osteoporosis were receiving proven medications to guard against another fracture - ranging from 7 percent of those patients in Newark, N.J., to 28 percent in Honolulu. "There's no good reason" for that variation, said lead researcher Dr. Jeffrey Munson, an assistant professor at the Dartmouth Institute for Health Policy and Clinical Practice.

    LSD is good for you, say Norway researchers - Tales of debilitating acid flash-backs and permanently frazzled synapses are exaggerated, according to a new scientific report which concludes LSD use may even be beneficial. "There were no significant associations between lifetime use of any psychedelics, or use of LSD in the past year, and increased rate of any of the mental health outcomes," Pål-Ørjan Johansen and Teri Krebs from the Norwegian University of Science and Technology in Trondheim concluded in "Rather, in several cases psychedelic use was associated with a lower rate of mental health problems." For the study, the researchers analyzed data on the more than 130,000 Americans who took drug use surveys between 2001 and 2004, of which 22,000 had used a psychedelic drug at least once. "Despite popular perceptions, expert harm assessments have not demonstrated that classical serotonergic psychedelic substances such as LSD, psilocybin, and mescaline are demonstrated to cause chronic mental health problems," Johansen told The Local. "Everything has some risk: psychedelics can elicit temporary feelings of anxiety and confusion, but accidents leading to serious injury are extremely rare," Krebs added. "Over the past 50 years tens of millions of people have used psychedelics and there just is not much evidence of long-term problems."

    How Big Pharma Peddles Influence in FDA Panel Meetings - As reported by the Washington Post, a panel that shaped the government’s policy for testing the safety and effectiveness of painkillers was subsidized by pharmaceutical companies that paid hundreds of thousands of dollars for, essentially, access. They wanted to influence the thinking of the FDA, according to emails secured through a public records request. The emails show that the companies paid as much as $25,000 to attend a meeting of academics intended to provide advice to the FDA on how to analyze evidence from clinical trials. The communications suggest that the regulators had become too cozy with the companies who profit in the $9 billion U.S. painkiller market. FDA officials who regulate these meds also served on the steering committee of the panel, which met in private, and co-wrote papers with employees of pharmaceutical companies. We’ve written in several posts about the questionable control of painkillers (here and here), and The Post’s story is yet more evidence that the FDA has been less than conscientious in addressing the epidemic of addiction to prescription drugs such as Oxycontin and other opioids. “Instead of protecting the public health, the FDA has been allowing the drug companies to pay for a seat at a small table where all the rules were written.” Craig Mayton, the attorney who made the public records request, told The Post.

    Shutdown Salmonella Outbreak Continues. CDC Food Safety Chief: 'We Have a Blind Spot.' - We’re 11 days now into the federal shutdown and four days since the announcement of a major foodborne outbreak in chicken that is challenging the shutdown-limited abilities of the food-safety and disease-detective personnel at the Centers for Disease Control and Prevention, Food and Drug Administration and Department of Agriculture. The CDC has been able to bring back a few personnel to work on this — but only a few. Meanwhile, the Salmonella causing the outbreak has been shown to be multiple strains, several of which are resistant to multiple families of antibiotics. I spoke to Dr. Chris Braden, director of the CDC’s division of foodborne, waterborne and environmental diseases, and here is what he said:

    • Under normal circumstances, his division totals 300 workers.
    • Once people were sent home by the shutdown, he was left with 40 people to operate that entire division. Crucially, that includes the program PulseNet, which compares the molecular fingerprints of organisms sent in by state health labs to see whether an outbreak is making people sick in multiple places at once.
    • The CDC were required to send those workers home, even though the agency was aware at the time of more than 30 different outbreaks of foodborne illness, including the first signals of the Salmonella outbreak.
    • After some discussion with the Department of Health and Human Services — and after realizing that the shutdown would be not days, but possibly weeks — the CDC was able to wangle the return of 30 additional personnel..
    • To cover all the programs in his division — not just this massive Salmonella outbreak — Braden got 10 people. Some, not all, have returning to working on PulseNet.

    Shutdown’s science fallout could last for years - The government may finally be on a path to reopening, but the shutdown’s effects will linger for scientists studying everything from climate change to cancer. Antarctica-bound field researchers stuck in budget limbo over the past three weeks fret that decades of data on penguins and ice sheets will end up with a glaring gap, undercutting their documentation of global warming. Doctors operating federal-funded clinical studies on Alzheimer’s, cocaine addiction and heart disease worry they’ve lost the trust of patients Public health officials warn the country is still “flying blind” for the start of the flu season. “Even if the government opens tomorrow, a significant amount of damage has been done,” said Mary Woolley, president of Research!America, a nonprofit advocating for science-minded agencies. “This isn’t about a few people who can’t go to the labs like they’re on vacation or something. The whole research enterprise depends on operating 24/7.” Thinking more of the big picture, there’s also the little matter of keeping the best and brightest researchers working in, and for, the United States or seeing them flee to the private sector. It’s a realistic expectation after nearly three years of stop-and-go budget battles resulting in sequestration and now the cruel reality of laboratories ordered to keep the lights out.

    Air Pollution Definitively Linked To Cancer - Outdoor air pollution has been definitively linked to cancer and is officially classified as a carcinogen, according to research released Thursday by The International Agency for Research on Cancer (IARC), part of the World Health Organization. "The air we breathe has become polluted with a mixture of cancer-causing substances,” said Kurt Straif, head of the IARC’s monographs section, which is tasked with ranking carcinogens.  The IARC’s research found the toll of air pollution on public health worldwide is significant. In 2010 alone, exposure to ambient fine particles was recently estimated to have contributed to 3.2 million premature deaths, predominantly from cardiovascular disease, and 223,000 deaths from lung cancer. More than half of the lung cancer deaths attributable to ambient fine particles were projected to have been in China and other East Asian countries. Sources of air pollution identified by the agency include emissions from motor vehicles, industrial processes, power plants and household heating and cooking fumes and while the chemical makeup of outdoor air pollution varies around the globe, the IARC was clear that “the mixtures of ambient air pollution invariably contain specific chemicals known to be carcinogenic to humans.”

    BP’s silent disaster - Most people believe only those who have experienced war can know post-traumatic stress disorder (PTSD). But those living in the impact zone of BP's 2010 oil spill disaster in the Gulf of Mexico know differently. John Gooding began having health problems shortly after the disaster began. He became sicker with each passing month, and moved inland in an effort to escape continuing exposure to the chemicals after being diagnosed with toxic encephalitis. He experiences seizures regularly, and two of his dogs even died of seizures from what he believes was chemical exposure. "I've been married 25 years, and my wife and I've never had problems. But recently we've started having problems, mostly because of finances and my health,""I can no longer work because of my physical sickness from the chemicals. Our savings is gone. Our retirement is gone. This has been a living hell and continues to be a nightmare." Gooding's story is not uncommon among countless Gulf residents living in areas affected by the BP disaster. "People are becoming more and more hopeless and feeling helpless," Dr Arwen Podesta, a psychiatrist at Tulane University in New Orleans, told Al Jazeera back in August 2010. "They are feeling frantic and overwhelmed. There is already more PTSD and more problems with domestic violence, threats of suicide and alcohol and drugs."

    The Environmental Impact of the Government Shutdown - The U.S. Environmental Protection Agency has had to furlough more than 16,000 of its employees—about 93 percent of its staff—due to the government shutdown. It's down to the bare-bone minimum like so many other government agencies. But the longer the shutdown drags on, the longer the health of the environment and the public is at risk. The employees within the EPA make it their goal to protect the health of both American citizens and the environment. The agency's enforcement guards against toxic air and water pollutants, the release of poisonous chemicals from hazardous waste sites, ingestion of lead-based paint and even asbestos in buildings. But the shutdown has seriously hampered its capacity to perform these duties. There are no longer scientists to inspect industrial facilities to ensure they are following pollution control standards. Litigation to punish violators of pollution laws has been halted. Companies seeking environmental permits are out of luck. Basically, the EPA isn't much of a deterrent while the government's not operational. Some staff members remain at the EPA to handle any major emergences, such as an oil spill, but even still their capacity is severely limited.

    EPA May Finally Reduce the Ethanol Mandate  - It’s a start. There is a strong possibility that the EPA will lower the the ethanol mandate starting in 2014. The Renewable Fuels Standard (RFS) might be changed to 13 billion gallons of corn ethanol, which would be about six percent lower than this year’s mandated 13.8 billion gallons. In my opinion, they might have done it sooner, because the blend wall problems were predicted by the industry long ago. (See chart below.) Agribusinesses would prefer to keep the original and higher mandated amount and create a new policy-propped-up demand for it, such as E15, but just mentioning the word E15 triggers a consumer hot button for a whole host of reasons.  Even though this move by the EPA would be purely logical (that’s a stretch since NO corn ethanol is actually logical), the angry headlines are flying from the corn and ethanol special interest groups as they scramble to defend their industry in Washington D.C. of late. Ethanol’s headwinds have never been stronger.  To see where the new possible EPA mandated level of 13 billion gallons for next year compares to the original plan, please refer to the graph below, in which I’ve added a red line that marks the 13 billion gallon level.

    Colorado Flood 2013: Detailed Explanation of Geoengineered Event - As skeptics continue to scoff at the evidence of ongoing geoengineering, the destruction from these programs is unparallelled. This is an excellent video, detailing exactly what just took place in Colorado. It is inconceivable that more people aren’t demanding to know what on earth is going on.

    THE ECONOMIST: Northern China’s Water Problems  - The subject of water scarcity and pollution in China, as related to its huge population and rapid industrialization, is an important one. China is using up water at an unsustainable rate, and polluting it badly, as well. According to THE ECONOMIST, the World Bank estimates that China’s water problems are impacting its GDP growth by an estimated 2.3 percent (mostly health-related), and water scarcity is also threatening energy growth, which further threatens its GDP growth.  This ECONOMIST interview suggests the country of China needs fewer dams and more water pricing. It needs to stop building huge cities in the desert areas of the North, and it needs to encourage water conservation. Furthermore, if it wishes to invest in huge water engineering projects, it should direct some of that money and energy into water treatment and sewer projects, which it has not done very well to date. Four-fifths of China’s water is in the south, notably the Yangzi river basin. Half the people and two-thirds of the farmland are in the north, including the Yellow River basin. Beijing has the sort of water scarcity usually associated with Saudi Arabia: just 100 cubic metres per person a year. The water table under the capital has dropped by 300 metres (nearly 1,000 feet) since the 1970s.

    Extreme weather ‘keeps people poor’  - New research suggests that extreme weather events will keep people poor in many parts of the world. The authors argue that where disasters like drought are prevalent, they can be the most important cause of poverty. They say that up to 325 million people will be living in countries highly exposed to natural hazards by 2030. If aid is not used to reduce these risks, the progress made in fighting poverty could disappear. The  report has been compiled by the Overseas Development Institute. It examines the relationship between disasters and poverty over the next 20 years, using population projections, climate models and estimations of how governments can cope with extreme events. The report suggests that up to a third of a billion people could be living in the 49 countries most exposed to the full range of natural hazards and climate extremes in 2030. In sub-Saharan Africa 118 million people in poverty will face extreme events. Drought means poverty The big weather issues that will face most poor people are drought, extreme rainfall and flooding.

    Yes, Virginia, the sea level is rising! - Colbert video

    Sea Level Rise Swamping Florida's Everglades -- Rising sea levels are transforming the Florida Everglades, a new study shows. Plant communities that thrive in salt water are expanding along the coast, leaving less room for plants that depend on fresh water. Salt-loving mangroves in the Everglades have marched inland in the past decade, while freshwater plants — such as saw grass, spike rush and tropical hardwood trees — lost ground, according to a study published in the October 2013 issue of the journal Wetlands. The findings, which come from an analysis of satellite imagery from 2001 through 2010, match long-term trends tracked on the ground for the past 70 years, said lead study author Douglas Fuller, a geographer at the University of Miami. Satellite imagery of the southern Everglades — a region that includes Florida City, Key Largo and the upper Keys — revealed large patches of freshwater vegetation loss within 2.5 miles (4 kilometers) of the coast. Only freshwater plants in the interior, about 5 miles inland (8 km), showed growth trends, the researchers found.

    No Safe Havens in Increasingly Acid Oceans - Oil, gas and coal are contaminating the world’s oceans from top to bottom, threatening the lives of more than 800 million people, a new study warns Tuesday. “It took a year to analyse and synthesise all of the studies on the impacts of climate change on ocean species,” Camilo Mora, an ecologist at University of Hawai‘i in Honolulu and lead author, told IPS.  Mora is also lead author of ground-breaking climate study published in Nature last week. “It was very sad to see all the responses were negative. We were hoping there might be some safe havens,” he said. "We are seeing greater changes, happening faster, and the effects are more imminent than previously anticipated." The study found that carbon emissions from burning fossil fuels are overheating the oceans, turning them acidic and reducing the amount of oxygen in seawater. This is happening too fast for most marine species to adapt and ocean ecosystems around the world will collapse.By 2100, no corner of the oceans that cover 70 percent of the Earth’s surface will be untouched. “The impacts of climate change will be felt from the ocean surface to the seafloor. It is truly scary to consider how vast these impacts will be,”

    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. The authors (Camilo Mora and colleagues at the Department of Geography, University of Hawaii) used the complete set of available climate models to calculate the year when the Earth's climate will move beyond what we have experienced in our recent past. 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.

    Does the global warming 'pause' mean what you think it means? - In their study of media coverage of the 2013 Intergovernmental Panel on Climate Change (IPCC) report, Media Matters for America found that nearly half of print media stories discussed that the warming of global surface temperatures has slowed over the past 15 years. While this factoid is true, the question is, what does it mean? Many popular climate myths share the trait of vagueness. For example, consider the argument that climate has changed naturally in the past. Well of course it has, but what does that tell us? It's akin to telling a fire investigator that fires have always happened naturally in the past. That would doubtless earn you a puzzled look from the investigator. Is the implication that because they have occurred naturally in the past, humans can't cause fires or climate change? The same problem applies to the 'pause' (or 'hiatus' or better yet, 'speed bump') assertion. It's true that the warming of average global surface temperatures has slowed over the past 15 years, but what does that mean? One key piece of information that's usually omitted when discussing this subject is that the overall warming of the entire climate system has continued rapidly over the past 15 years, even faster than the 15 years before that.

    Confused about the new IPCC's carbon budget? So am I. - When the IPCC's new report on the physical basis of climate change was released in late September, media attention focused on a conclusion from the Summary for Policymakers that the world had emitted just over half of the allowable emissions if global warming is to be kept to 2 degrees Celsius (2 °C) of warming.  Unfortunately, because many people think if you have a budget you should spend every last dollar, the "carbon budget" message could be interpreted as saying there is plenty of budget left to spend. The respected climate researcher Ken Caldeira told Climate Progress that the carbon budget concept is dangerous for two reasons:  There are no such things as an “allowable carbon dioxide (CO2) emissions.” There are only “damaging CO2 emissions” or “dangerous CO2 emissions.” Every CO2 emission causes additional damage and creates additional risk. Causing additional damage and creating additional risk with our CO2 emissions should not be allowed. If you look at how our politicians operate, if you tell them you have a budget of XYZ, they will spend XYZ. Politicians will reason: “If we’re not over budget, what’s to stop us to spending? Let the guys down the road deal with it when the budget has been exceeded.” The CO2 emissions budget framing is a recipe for delaying concrete action now. And the idea that 2 °C of warming is safe is not a sustainable proposition. Prof. Kevin Anderson says that "the impacts associated with 2 °C have been revised upwards, sufficiently so that 2 °C now more appropriately represents the threshold between ‘dangerous’ and ‘extremely dangerous’ climate change."

    EU to Meet 2020 Climate Targets Thanks to Cheap Carbon Credits - Good news that the European Union (EU) will achieve its aim of a 20 percent reduction in greenhouse gases by 2020 has been tempered by criticism that, for most countries, the target has been too easy and that much more could and should have been done to help combat the threat of global warming. A combination of the recession and vast quantities of cheap carbon credits available for countries to buy their way out of their obligations has meant that industry has been able to afford to pollute as much as it wants, and governments have made too little political effort to promote energy efficiency and to boost renewables. The figures on carbon reductions are produced by the European Environment Agency (EEA) to keep track of what is happening in the EU and to make sure countries are keeping to their international obligations and EU law. The agency presents a generally rosy picture on reducing emissions. However, targets to produce 20 percent of energy from renewables and achieve 20 percent energy efficiency gains are not going to be reached so easily, if at all.

    What should be done about climate change refugees? = A pending court case in New Zealand involving a man from the low-lying island of Kiribati could have profound implications worldwide on the future of migration due to climate change. The 37-year-old is seeking refugee status, but not because he is being persecuted back home, one of the definitions of a refugee. Rather, he says, flooding and rising sea levels due to climate change are making it too dangerous for him, his wife and three children to return to Kiribati. The island nation, with a population of about 103,000, is made up of 33 coral atolls in the Pacific, half way between Hawaii and Australia.  Simulations, computer models and analyses vary widely as to which cities and regions will be the worst affected. The one thing most analysts agree on, in theory, is that both developed and developing nations need to look at ways to deal with some of the migration or displacement expected because of climate change. Not all of those solutions will involve moves to other countries; they might include increased sustainable development, aid and migration within one’s country, experts advise.  Up to 1 billion people could be displaced by climate change over the next 50 years. But many states, including Canada, prefer not to deal with it.

    Investors are fleeing clean energy just when the world needs them most - Global investment in clean energy is falling off a cliff, according to a report released today, just as carbon emissions are predicted to skyrocket.In the third quarter of this year, worldwide investment in wind, solar, energy efficiency and electric cars dropped 20% compared to the same period in 2012, to $45.9 billion, according to a report from research firm Bloomberg New Energy Finance (BNEF). That’s also a 14% decline from the second quarter of this year and continues a downward trend from the peak in 2011.“The latest setback reflects policy uncertainty in Europe, the lure of cheap gas in the US, a leveling-off in wind and solar investment in China, and a general weakening of political will in major economies,” BNEF chief executive Michael Liebreich said in a statement. “Governments accept that the world has a major problem with climate change but, for the moment, appear too engrossed in short-term domestic issues to take the decisive action needed.”

    Electrical Grid Is Called Vulnerable to Power Shutdown - Over the past few months, the discoveries of two engineers have led to a steady trickle of alarms from the Department of Homeland Security concerning a threat to the nation’s power grid. Yet hardly anyone has noticed. The advisories concern vulnerabilities in the communication protocol used by power and water utilities to remotely monitor control stations around the country. Using those vulnerabilities, an attacker at a single, unmanned power substation could inflict a widespread power outage. Still, the two engineers who discovered the vulnerability say little is being done. The engineers say they hardly qualify as security researchers. But seven months ago, Mr. Crain wrote software to look for defects in an open-source software program. The program targeted a very specific communications protocol called DNP3, which is predominantly used by electric and water companies, and plays a crucial role in so-called S.C.A.D.A. (supervisory control and data acquisition) systems. Utility companies use S.C.A.D.A. systems to monitor far-flung power stations from a control center, in part because it allows them to remotely diagnose problems rather than wait for a technician to physically drive out to a station and fix it. Mr. Crain ran his security test on his open-source DNP3 program and didn’t find anything wrong. Frustrated, he tested a third-party vendor’s program to make sure his software was working. The first program he targeted belonged to Triangle MicroWorks, a Raleigh, North Carolina based company that sells source code to large vendors of S.C.A.D.A. systems. It broke instantly.

    EIA to Shelve Energy Reports, Furlough Staff as Shutdown Continues - The U.S. Energy Information Administration, which is the statistical arm of the Department of Energy, announced on Friday that the ongoing government shutdown has forced it to cease operations and furlough staff at the end of the day. “Data releases and analyses will not be published during the furlough of EIA staff,” the agency said in an emailed statement. The EIA said its website and social media channels will not be updated. However, it did instruct survey respondents, such as energy companies, to continue to submit their data, which will be processed following the furlough period. The lack of EIA data will "hinder the ability to track historic supply/demand progress, but should have little to no effect on markets looking forward," Darin Newsom, a senior analyst at DTN, said in an email. According to EIA’s website, the agency had a fiscal 2013 budget of $99.5 million, down 5.2% from the year before. The smaller budget forced EIA to delay or suspend several planned activities. Energy Department documents show EIA requested a fiscal 2014 budget of $117 million, up 11.4% from fiscal 2012. “EIA will strive to restore service as quickly as possible after EIA reopens. The schedules for resumption of data releases and reports will be determined after the furlough period is over,” EIA said.

    Fukushima fuel rod removal in November is an emergency now - Journalist, author, activist and historian Harvey Wasserman has been reporting on, and participating in, the nuclear free movement for decades. In that time, by his judgment, only one other event matches the danger to the world posed by the Cuban Missile Crisis. That event is the ongoing nuclear disaster at Fukushima. Haven’t heard about it in the corporate media? That’s because the deadly and dying global nuclear industry and its allies don’t want you to know. That’s why he has organized a petition drive to the UN advocating international expert oversight of, and participation in, management of the Fukushima crisis.In this interview, he explains why we must all be involved in this world-historical challenge to human and planetary survival.

    With Nuclear Reactors on Ice, Japan Fires up Coal and Gas Plants - Pinched between a moribund nuclear sector and an overpriced oil sector, Japan’s power companies are plowing an estimated $7 billion into coal and gas. Reuters reports that Japan’s energy companies will have 12 new gas plants and two coal plants online by next year, adding a combined 6.8 gigawatts of capacity to the energy-starved nation. The Fukushima meltdown in 2011 prompted a nation-wide shutdown of nuclear reactors, forcing Japan to make a sudden switch to costly oil imports. Analysts predict a shift to coal and gas will alleviate industries suffering from soaring energy bills, which have dented their international sales. Japan’s trade deficit hit a record high of 4.8 trillion yen in the first half of 2013.

    World Coal Consumption To Surpass Oil By 2020 Due To Rising Demand In China And India - Coal will surpass oil as the key fuel for the global economy by 2020 despite government efforts to reduce carbon emissions, energy consultancy firm Wood Mackenzie said on Monday. Rising demand in China and India will push coal past oil as the two Asian powerhouses will need to rely on the comparatively cheaper fuel to power their economies. Coal demand in the United States, Europe and the rest of Asia will hold steady. Global coal consumption is expected to rise by 25 percent by the end of the decade to 4,500 million tonnes of oil equivalent, overtaking oil at 4,400 million tonnes, according to Woodmac in a presentation on Monday at the World Energy Congress. "China's demand for coal will almost single-handedly propel the growth of coal as the dominant global fuel," said William Durbin, president of global markets at Woodmac. "Unlike alternatives, it is plentiful and affordable." China - already the top consumer - will drive two-thirds of the growth in global coal use this decade. Half of China's power generation capacity to be built between 2012 and 2020 will be coal-fired, said Woodmac. China has no alternative to coal, with its domestic gas output limited and liquefied natural gas (LNG) imports more costly than coal, Durbin said.

    Brazil in Reverse  - In the last five years, Brazil has joined the ranks of the world’s big polluters, whose main source of greenhouse gases is the burning of fossil fuels. Climate pollution in South America’s giant is taking on a First World pattern, according to José Marengo, one of the authors of the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), whose first volume was released Sept. 30. And this is due, in part, to the country’s policies to foment industry and consumption. Tax exemptions to stimulate car and motorcycle sales had a positive effect on economic growth. But they also fuelled a surge in the number of cars in circulation.  The number of cars in Brazil doubled in just over a decade, from 24.5 million in 2001 to 50.2 million in 2012.  The number of cars in this country of 200 million people doubled in just over a decade, from 24.5 million in 2001 to 50.2 million in 2012, according to the report “Evolution of the fleet of cars and motorcycles in Brazil – 2013” published Oct. 10 by the Observatorio das Metropoles, an academic research group. Motorcycles experienced even more dizzying growth in the same period, with the number soaring from 4.5 million to 19.9 million. This country “ended the year 2012 with a total fleet of 76,137,125 motor vehicles. In 2001 there were approximately 31.8 million vehicles. That means a 138.6 percent increase,” says the report. “It should be noted that population growth in Brazil between the last two censuses (2000 and 2010) was 11.8 percent.”

    Scientists: U.S. Climate Credibility Getting Fracked - As fracking catapults the United States to the top of the list of the world’s largest crude oil and natural gas producers, climate scientists worry that the nation's booming fossil fuels production is growing too quickly with too little concern about its impact on climate change, possibly endangering America’s efforts to curb global greenhouse gas emissions. The U.S. is likely to become the world’s top producer of crude oil and natural gas by the end of 2013, producing more hydrocarbons than either Russia or Saudi Arabia, the Energy Information Administration recently announced. The U.S. is also the world’s chief crude oil consumer, burning 18.6 million barrels of crude and other liquid fossil fuels per day in September and producing 10.9 million barrels per day. China, the world’s chief oil importer, used 10.9 million barrels and produced 4.6 million barrels, the Associated Press reported Thursday.Climate scientists say America’s oil and gas boom is having unintended consequences, not just for the climate or the local environment in energy producing regions, but for America's global role in tackling climate change.“As we produce more, we burn more, and we send more CO2 per person into the atmosphere than almost any other country,” said Susan Brantley, geosciences professor and director of the Earth and Environmental Systems Institute at Pennsylvania State University. “We are blanketing our world with greenhouse gas, warming the planet.”

    Major Study Projects No Long-Term Climate Benefit From Shale Gas Revolution - More abundant, cheaper shale gas (dark blue) has little impact on annual growth in U.S. CO2 emissions through 2050 compared to low shale gas case (light blue). This is true for multiple energy-economy models. Deep cuts in CO2 require a rising carbon price (green). Most claims that shale gas will significantly reduce US carbon emissions in the future are based on little more than hand-waving and wishful thinking. That’s because those claims assume natural gas is replacing coal only, rather than replacing some combination of coal, renewables, nuclear power, and energy efficiency — which is obviously what will happen in the real world. To figure out what the impact of shale gas is actually going to be, you need an energy-economy model. And since the output of one model depends crucially on the specific assumptions it makes, the best approach would be to look at results of several models. And that is precisely what Stanford’s Energy Modeling Forum does in its new study, “Changing the Game? Emissions and Market Implications of New Natural Gas Supplies Report.”They “formed a working group of about 50 experts and advisors from companies, government agencies and universities” to study the impact of the North American shale gas revolution: Modeling teams from 14 different organizations participated in the study. All models integrated information on energy supply and demand to provide prices that reached market balances for each individual fuel. The models used different approaches to determine these prices.The top figure shows result of the models that extend to 2050 (though the results are not substantially different if the modeling stops at 2035). Note that for most models, CO2 emissions grow in both shale cases. The study points out that “Emission growth rates for the reference case are not shown because they track closely those for the two-shale cases.”

    Energy Industry's Odd Couple: Lee Raymond and Aubrey McClendon - It may be the U.S. energy industry's oddest couple: Lee Raymond, who was famously tightfisted as chief executive of Exxon Mobil Corp., now has a seat at the table in a venture headed by Aubrey McClendon, whose aggressive spending hastened his exit as chairman at Chesapeake Energy Corp. Mr. Raymond has emerged as a director alongside Mr. McClendon in American Energy Ohio Holdings LLC, a closely held company that has raised $1.35 billion for Mr. McClendon's new firm, American Energy Partners LP, according to a regulatory filing Wednesday triggered by the fundraising. The extent of Mr. Raymond's participation isn't clear; he declined to comment, as did American Energy. But his reputation for tough governance and devotion to return on capital could check Mr. McClendon's free-spending ways and tolerance for risk that at times rankled Chesapeake shareholders and eventually led to his ouster. Experts said it could also lend credibility to the new venture, which is wildcatting in Ohio's Utica Shale.

    North Dakota Landowners Sue Fossil Fuel Companies Over Wasted Natural Gas - Nearly 30 percent of natural gas drilled in North Dakota is intentionally burned off, or flared, resulting in an approximately $1 billion loss, and releasing greenhouse gases equivalent to nearly one million new cars on the road. Now, some North Dakota landowners are fighting back. Mineral owners from multiple states are suing ten oil and gas companies for millions of dollars in lost royalties for flared natural gas. They claim companies are burning off more gas than is allowed by the North Dakota Industrial Commission, disposing of valuable resources mineral owners should be getting paid for.The cases filed Wednesday sought class-action certification, and an amount in damages to be determined by trial, based on future flaring and flaring that occurred in for the six years prior. Since oil is 30 times more valuable than natural gas, companies are rushing to pull it out of the ground fast, while prices are high. Building the infrastructure to capture the natural gas that’s part of oil drilling would take time and money, and companies aren’t willing to wait or pay. Baumstark Braaten Law Partners, one law firm involved, said in a news release that the lawsuits are an attempt to create a “compelling economic incentive for producers to reduce and eliminate the wasteful practice of flaring.” Derrick Braaten, of that firm, said the state could make a case for owed taxes against the companies as well.

    Police Bring Snipers, Fire Hoses, And Tear Gas To First Nation Fracking Protest - Peaceful protests by First Nations members over a planned shale gas project in Rexton, New Brunswick exploded into violence and led to over 40 arrests on Thursday after Royal Canadian Mounted Police tried to break up a roadblock.  All summer, members of the Elsipogtog and Mi’kmaq First Nations tribes have been protesting plans by oil company SWN Resources Canada to perform seismic testing of land the tribe considers its traditional hunting ground. This testing could lead to a shale fracking operation in the area, and many are concerned about what that would mean for drinking water.  “We don’t want shale gas here,” former chief Susan Levi-Peters told the Globe and Mail. “We have been asking for consultations for three years now and nothing has happened. Instead they just put our people in jail.”

    Is Canadian Shale Gas Worth $35 Billion?: Excitement from energy investors over northern shale comes after Malaysian petro-major Petronas last week announced a massive investment here--$35 billion to build a liquefied natural gas (LNG) facility in the province of British Columbia. The deal is so big, it represents the largest foreign direct investment in Canada’s history. But the promise of natural gas riches here appears to justify the spend. Gas wells drilled into shale plays like the Notikewin, Montney and Horn River in northeastern British Columbia have yielded massive discoveries—some testing at towering rates up to 24.5 million cubic feet per day, along with valuable natural gas liquids. Tests like that are as good as any results coming out of even the hottest U.S. shale plays, such as the Marcellus. It’s these rosy results that enticed Petronas to pay $6 billion for British Columbia-focused gas producer Progress Energy Resources in late 2012. Petronas is now making these gas fields the backbone for supply to its massive LNG development—which will ship gas across the Pacific to high-value markets in Asia and possibly beyond.

    Europe Doomed without Fracking? Not So Fast - At a Council on Foreign Relations shindig in New York on Monday the hot topic was the European Union and its lesser-of-two evils energy choice: Russia or fracking; but this paints a black and white picture that leaves out other fossil fuel alternatives coming on line.  Eni—Italy’s largest oil company—took to the podium with the message that only fracking or increasing Russian imports can provide sustainable energy costs for Europe.  At the same time, both Eni and Shell are skeptical that fracking could take off in Europe, in part because there is too much opposition to the process, and because the geology isn’t as friendly, equipment lacking and landownership rights more complex. Despite their skepticism, they say that it’s either fracking or Russia—meaning, essentially, that they are dooming Europe to a life under Russian energy tutelage. Let us offer you another theory here, though, one that sees Russia gradually losing its hegemony over the European gas market. This theory is largely about Turkey, whose ambitions to become the key energy hub bridging Europe and the Middle East will be realized sooner rather than later. It also pits Europe in the middle of a game to control its gas market between Iran and Qatar, and this was largely what the conflict in Syria started off about—the race to the European market.

    Chevron Convoy Turned Away by Romanian Villagers Opposed To Fracking -  On Monday, nearly 400 protesters in northeastern Romania called on Chevron to “go home” as they blocked the U.S. energy giant’s convoy from reaching a field where test drilling for natural gas was scheduled to begin.  According to the AFP, the protesters from the impoverished village of Pungesti, near the Romania-Moldova border, included many women and children, some of whom arrived in horse-drawn carts. Chevron obtained permits to drill in three villages in this remote rural area back in July, after also getting a green light to explore for shale gas on Romania’s Black Sea coast back in May.  The Romanian government’s decision to open the country to fracking has sparked protests across the country. Demonstrators are calling for the resignation of Prime Minister Victor Ponta, whose center-left coalition, once opposed to fracking, pre-election, has since changed course. Concerns over groundwater contamination, a problem which has plagued natural gas developers in the U.S., is at the heart of objecting Romanians’ protests. Romania’s southern neighbor, Bulgaria, has already outlawed the technique and has seen protests of its own against Romania’s stance, as several natural gas concessions in Romania lie along the Bulgarian border. Anti-fracking activists in Bulgaria fear soil and water contamination of the entire region if Romania embraces fracking.

    Chevron Halts Shale Gas Search After Protests - Chevron says it has suspended searching for shale gas in northeast Romania following protests in the capital and the local area against fracking. The company said in a statement Thursday its priority was to “conduct these activities in a safe and environmentally responsible manner.” It said it had permits to start drilling for shale gas in the village of Pungesti. The statement came after hundreds of protested Wednesday in a field where Chevron plans to launch its operation, followed by a protest in Bucharest. Local environmentalists say pumping water and chemicals at high pressure into deep rock formations to free oil and gas could contaminate groundwater. Local authorities say they would hold a non-binding referendum on Nov. 24 on whether to allow Chevron to explore for shale.

    Saudi Arabia to Use Shale Gas for Domestic Power Generation - In an attempt to reduce its domestic consumption of oil, and therefore free up more product for export to the world markets, Saudi Arabia plans to become one of the first countries outside of North America to use shale gas for power generation. The US shale gas boom transformed the country from the largest gas importer in the world, to a potentially huge exporter, and Saudi Arabia hopes that fracking will supply it with an abundance of natural gas that can be used for domestic power generation. Khalid al-Falih, the chief executive officer at Saudi Aramco, spoke out at the World Energy Congress on Monday, stating that “we are ready to start producing our own shale gas and unconventional resources in various types in the next few years and deliver them to consumers. Only two years after launching our own unconventional gas programme, in the northern region of Saudi Arabia, we are ready to commit gas for the development of a 1,000 megawatt power plant which will feed a massive phosphate mining and manufacturing sector.” Saudi Oil Minister Ali al-Naimi, has estimated that the country contains unconventional gas reserves of over 600 trillion cubic feet, giving the country the fifth largest reserves in the world according to the US Energy Information Administration.

    Josh Fox on the Global Frackdown (videos)

    Fossil Fuel Euphoria, Hallelujah, Oil and Gas Forever! - Michael Klare - For years, energy analysts had been anticipating an imminent decline in global oil supplies.  Suddenly, they’re singing a new song: Fossil fuels growing scarce?  Don’t even think about it!  The news couldn’t be better: fossil fuels will become ever more abundant.  And all that talk about climate change?  Don’t worry about it, they chant.  Go out and enjoy the benefits of cheap and plentiful energy forever. There are good reasons to be deeply skeptical of such claims, but that hardly matters when they are gaining traction in Washington and on Wall Street.  What we’re seeing is a sea change in elite thinking on the future availability and attractiveness of fossil fuels.  Senior government officials, including President Obama, have already become infected with this euphoria, as have top Wall Street investors — which means it will have a powerful and longlasting, though largely pernicious, effect on the country’s energy policy, industrial development, and foreign relations. Today, peak oil seems a distant will-o’-the-wisp.  Experts at the U.S. government’s Energy Information Administration (EIA) confidently project that global oil output will reach 115 million barrels per day by 2040 — a stunning 34% increase above the current level of 86 million barrels.  Natural gas production is expected to soar as well, leaping from 113 trillion cubic feet in 2010 to a projected 185 trillion in 2040. These rosy assessments rest to a surprising extent on a single key assumption: that the United States, until recently a declining energy producer, will experience a sharp increase in output through the exploitation of shale oil and natural gas reserves through hydro-fracking and other technological innovations.   America’s gross domestic product, he claimed, will grow by 2% to 3% over the next seven years as a result of the energy revolution alone, adding as much as $624 billion to the national economy.  Even greater gains can be made, Morse and others claim, if the U.S. becomes a significant exporter of fossil fuels, particularly in the form of liquefied natural gas (LNG).

    US economy to remain tied to fluctuating oil prices: report | Al Jazeera America: Even amid the recent surge in oil production, the U.S. economy won't escape from ever-fluctuating international oil prices anytime soon, analysts reported Monday. Despite "improvements in its oil security, the United States would remain far from being truly insulated from the high and volatile oil prices characteristic of the global oil market," Securing America's Energy Future (SAFE), a nonpartisan group aiming to lessen America's dependence on oil, said in an Oil Security Index. While the U.S. is moving toward self-sufficiency, its oil consumption is the highest in the index at 1.7 gallons per capita each day. And it seems unlikely that the U.S. will meet its own energy needs in the short-term, despite the domestic production that could raise over the long-term by methods like hydraulic fracturing. Even if the U.S. produces the lion's share of its own energy, "there are other ways the U.S. will be connected to the global market," said Anthony Yuen, global energy strategist at Citigroup. "The U.S. is still going to be reliant on Canadian output." But the advantages to the U.S. oil boom still remain apparent, analysts note. "When there's unrest in Nigeria, that has the capacity to hurt the economy,"

    Another U.S. Whistleblower Behind Bars? Investor Jailed After Exposing Corrupt Azerbaijani Oil Deal -- In a Democracy Now! exclusive, we look at the case of multimillionaire American businessman and philanthropist Rick Bourke, who blew the whistle on a fraudulent scheme by international criminals to gain control of the oil riches of the former Soviet Republic of Azerbaijan — only to end up as the only person sent to jail by federal prosecutors in the massive conspiracy. Since May, Bourke has been held in a federal prison, serving a term of one year and one day for violating the Foreign Corrupt Practices Act for alleged knowledge of the bribery that allegedly took place in 1998. Other investors in the Azerbaijan scheme included former Democratic Senate Majority leader George Mitchell and major institutions including Columbia University and AIG, but no one else was jailed in the United States. High-ranking former U.S. and British officials from the CIA and MI6 have raised serious concerns about the conviction of Bourke in part because the key witnesses during his trial were allegedly intelligence assets working for the U.S. government. They are not the only ones who question Bourke’s guilt. Even the judge in his case has admitted having doubts. At the time of Bourke’s sentencing, Shira Scheindlin of the Federal District Court said, "After 10 years of supervising this case, it is still not entirely clear to me whether Mr. Bourke was a victim, or a crook, or a little bit of both." We speak to Bourke’s lawyer, the law professor and renowned attorney Michael Tigar, as well as former Washington Post reporter Scott Armstrong. "Why is it that they would go after the guy that blew the whistle on the thievery and bribery, Rick Bourke?" Tigar asks. "Why is it that the Czech citizen and the guy, the ex-patriot, and the German-Swiss lawyer all are walking free; the American citizen, philanthropist, and so on, is sitting in a minimum security jail? Well, investment in the Azerbaijan hydrocarbon industry is now safely in the hands of major petroleum companies. Is that a reason?"

    Why is The Economist Chortling over the Prospect of Oil Pollution in Ecuador? -- William K. Black - The Economist has increasingly been copying the descent of the Wall Street Journal into dogma.  One of it perennial hates is President Rafael Correa of Ecuador.  Correa, an economist, has committed the unforgivable offense of succeeding through economic policies that The Economist despises.  This is passing strange because Correa’s four foundational policies are expanded health care, expanded education, improved infrastructure, and encouraging entrepreneurs by reducing the time and cost of starting a business in Ecuador.  The Economists’ pages are littered with praise for right-wing governmental leaders and candidates who promise that they will implement those same four policies (but rarely do in practice).  Correa has actually delivered on his promises – quickly – and the improvements in the economy of Ecuador and the lives of ordinary citizens have been huge.  The result is that Correa is the second most popular head of state in the Americas. “Danilo Medina of the Dominican Republic and Ecuador’s Rafael Correa of Ecuador are the two most popular leaders in the western hemisphere, according to a survey by the Mexican polling firm of Consulta Mitofsky. The two posted approval ratings of 88% and 84% respectively in a survey of American leaders.” Correa’s popularity is over twice as high as the heads of state in the Americas such as Canadian Prime Minister Harper and Chilean President Sebastián Piñera Echenique that the Economist praises.  The Economist has lost the discipline to contain its hate and play it straight when it comes to Correa.  Its September 28, 2013 article tries to pervert the approval of the people of Ecuador for their elected leader into an attack on Correa.  Even weirder, it portrays policies it claims to champion (Correa’s four foundational policies), as akin to bribing the populace.

    Fear and loathing in House of Saud - Every sentient being with a functional brain perceives the possibility of ending the 34-year Wall of Mistrust between Washington and Tehran as a win-win situation. Here are some of the benefits:

    • The price of oil and gas from the Persian Gulf would go down;
      Washington and Tehran could enter a partnership to fight Salafi-jihadis (they already did, by the way, immediately after 9/11) as well as coordinate their policies in Afghanistan to keep the Taliban in check post-2014;
      Iran and the US share the same interests in Syria; both want no anarchy and no prospect of Islamic radicals having a shot at power.
    • With no more regime change rhetoric and no more sanctions, the sky is the limit for more trade, investment and energy options for the West, especially Europe (Iran is the best possible way for Europeans to soften their dependence on Russia's Gazprom);
      A solution for the nuclear dossier would allow Iran to manage civilian use of nuclear energy as an alternative source for its industry, releasing more oil and gas for export;
      Geopolitically, with Iran recognized for what it is - the key actor in Southwest Asia - the US could be released from its self-imposed strategic dogma of depending on the Israeli-Saudi axis. And Washington could even start pivoting to Asia for real - not exclusively via military means.

    Ay, there's the rub. Everybody knows why the Israeli right will fight an US-Iran agreement like the plague - as Iran as an "existential threat" is the ideal pretext to change the debate from the real issue; the occupation/apartheid regime imposed on Palestine. As for the House of Saud, such an agreement would be nothing short of Apocalypse Now.

    Coal Slump Leaves Australia Port Half-Used, Lenders at Risk -  Australia & New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corp. (WBC) are among lenders risking losses on $3 billion of loans backing a coal port in Australia that will be twice its required size. Wiggins Island Coal Export Terminal Pty, the group comprising the unfinished project’s owners, including Glencore Xstrata Plc (GLEN) and Wesfarmers Ltd. (WES), in 2011 borrowed the debt from 19 banks, according to data compiled by Bloomberg. When the port in the state of Queensland begins shipping in early 2015, only about half of its 27 million metric tons of initial annual export capacity will be used after a slump in coal demand, forecaster Wood Mackenzie Ltd. estimates.“There will be more capacity than mines available to utilize it,”

    China Steel Binge Spurs Record Hiring of Iron-Ore Vessels - Freight traders are hiring record numbers of iron-ore carriers in the spot market as Chinese steel production expands at the fastest pace in three years, spurring the biggest rally in shipping rates since 2009. One-time charters to haul the commodity on Capesizes, the largest ore carriers, rose 51 percent to 124 in September from the previous month, according to data compiled by Morgan Stanley. More than 90 percent are bound for China, and the ore they carry would make enough steel to build about 150 Golden Gate Bridges. The surge means more demand for Nippon Yusen K.K. (9101) and Mitsui O.S.K. Lines Ltd., which are based in Tokyo and control the biggest fleets. The jump in chartering reflects average monthly Chinese steel output that’s been about 10 percent higher in 2013, reducing the nation’s ore stockpiles to the lowest for this time of year since 2007. Imports of the raw material into China rose to a record last month. The demand is diminishing the fleet’s biggest capacity glut in three decades, spurring an almost sevenfold surge in rates since Jan. 2 that means ship owners are making money again for the first time in almost two years.

    China Reports a Modest Acceleration in Growth - China’s economy steadied in the third quarter, expanding by 7.8 percent compared with a year earlier, the government said Friday, indicating that the economy has pulled out of a jittery period of slowed growth thanks to revived investment, consumer spending and factory production. Economists disagree over how robust that economic uptick is, with some arguing that a boost provided by a rise in bank credit could soon fade. But the third-quarter data are likely to give policy makers in Beijing more confidence that, for now, they can maintain adequate growth without resorting to major stimulus initiatives, several economists said. “We’re seeing this recovery in consumer confidence,” said Stephen Green, head of Greater China research for Standard Chartered, and based in Hong Kong. “We’re seeing continued grinding out of the housing market recovery. So we’re relatively happy that we’ve got at least another couple of quarters of fairly plain sailing. Credit growth has decelerated a little bit, but not enough, we think, to slow us down now.” The Chinese government has set an economic growth target of 7.5 percent for 2013. China’s leaders have said that the double-digit growth of the past must be abandoned so that resources and revenues can be directed toward urgently needed adjustments to the economy. A Communist Party leadership conference next month is likely to unveil broad plans for economic change. But tepid economic indicators in the first half of the year had left some observers wondering whether even that lower target might be missed without aggressive policy moves. China’s economy grew by 7.5 percent in the second quarter, compared with a year earlier, and 7.7 percent in the first quarter. The latest figures from the National Bureau of Statistics showed that the economy grew by 7.7 percent in the first nine months of 2013. A spokesman for the bureau said they showed the economy is on the right footing.

    China Metals Demand Slower, Not Lower - Much has been made of a slump in China’s demand for ores and metals, hurting big exporting nations like Brazil, Indonesia and Australia. While it’s true Chinese demand for commodities has slowed, as its economy cools, a new report by Wood Mackenzie points out that China will continue to underpin solid demand for base metals for years to come. The international commodities consultancy reminds us that China’s demand for base metals – aluminum, copper, lead, nickel and zinc – is still growing at 5% to 8% per year. That’s slower than double-digit expansion between 2008 and 2013 – the go-go years for China’s economy. “However, it’s important to note that in absolute tonnage terms we still see significant numbers,” Wood Mackenzie estimates the global base metals market will grow to 122 million tons in 2018 from 96 million tons this year. By 2017, China will account for over half of world demand, up from 46% today, the report said. Prices for copper already have begun recovering, rising 9.3% from a trough in June. They were helped higher by Chinese imports in September, which last month were at their highest level in more than a year. Prices for iron ore – which is used in the production of steel – also are up 22% since a low in May on record Chinese imports last month to feed demand from steel makers. China’s government has been boosting spending on infrastructure to help juice the local economy, which slowed rapidly earlier this year. The economy grew 7.8% on year in the third quarter, above 7.5% in the previous quarter, the government said Friday. The data also showed domestic steel and base metal production grew strongly.

    China’s Economic Growth Rebounds to 7.8 Percent — China’s economic growth rebounded in the latest quarter, easing pressure on communist leaders for more stimulus and allowing them to focus on longer-term reforms. The world’s second-largest economy grew by 7.8 percent over a year earlier in the three months ending in September, boosted by higher government spending, data showed Friday. That was up from a two-decade low of 7.5 percent the previous quarter. “The fundamentals of China’s economy are turning for the better,” said a National Bureau of Statistics spokesman, Sheng Laiyun, at a news conference. The improvement eases pressure on communist leaders who say their priority is longer-term reforms aimed at steering the economy to slower, more sustainable growth based on domestic consumption instead of exports and investment. The abrupt drop in global demand for Chinese goods prompted them to backtrack temporarily and launch a mini-stimulus of higher spending on railway construction and other public works to prop up growth and avoid politically dangerous job losses.

    Food Costs Push China Inflation to 3.1 Percent  — Higher food prices pushed up China’s consumer inflation in September as the government tried to keep to keep an economic recovery on track.Consumer prices rose 3.1 percent over a year earlier, government data showed Monday. That was up from August’s 2.6 percent but below the Communist Party’s 3.5 percent target for the year.  Persistently higher inflation could complicate efforts to keep China’s economic recovery on track by limiting the government’s ability to prop up growth with lower interest rates or stimulus spending. The country’s top economic official, Premier Li Keqiang, earlier said Beijing would try to keep economic growth above 7.5 percent for the year. “Inflation remains at benign levels in the near term,” said JP Morgan economist Haibin Zhu in a report. “The relatively benign inflation dynamics suggest that stabilizing growth and economic reform remain the priority issues for policymakers in the near term.”

    Inflation in China: veg now, pork later - We use three signals to judge China‟s current potential growth. First, is the labour market, which remains tight despite GDP growth slowing to 7.5% in Q2 (Figure 2). The best indicator of labour market conditions is the demand-supply ratio, which in Q2 stood at around 1.07, suggesting that for every 100 jobseekers there were 107 job vacancies. This ratio has remained above 1 since Q4 2010 despite growth slowing from 9.8% to 7.4% over the same period, which indicates that the downturn in the economy is primarily structural rather than cyclical. The second signal is CPI inflation, which rose faster in 2013 than the historical average despite the economic downturn. On a month-on-month basis, CPI inflation rose by an average 0.2% per month for the first eight months in 2013, compared to an average of 0.1% for the same period each year since 2001 (Figure 3). CPI inflation has also remained high despite persistent PPI deflation, as the former is more driven by demand and supply in the service sector, which is labour intensive and thus sensitive to tight labour market conditions. The third signal is the high fiscal deficit. China‟s general government deficit was 7.4% of GDP in 2012, according to the IMF‟s Article IV report. If land proceeds are excluded, the fiscal deficit would have been as high as 9.7% in 2012 (Figure 4), which, for comparison, is greater than that of India – which is now struggling with huge fiscal pressures – and the other BRIC economies. This massive fiscal stimulus only managed to boost GDP growth in 2012 to 7.7%, which also suggests to us that China‟s growth is more likely to be running above its potential, not below it. [...] We see a rising risk of CPI inflation sitting above 3.5% for some months in 2014, as pork prices enter the upswing phase of the cycle, given that the ratio of corn prices to pork prices was below the important level of 6x for most of H1 2013 (Figure 10). Historically, pork prices have exhibited long cycles, with upswings preceded by this ratio dropping below 6x. Concerns over inflation will make monetary policy easing unlikely in 2014, because with the benchmark deposit rate at only 3% there is little room to cut rates.

    China-to-India Price Jump Risks Growth as World Outlook Dims - Higher food costs from China to India are raising prices for a third of the world’s people, adding to the challenge of sustaining the global economic recovery as the growth outlook dims. Consumer prices in China rose 3.1 percent last month as food costs advanced the most since May 2012, statistics bureau figures showed today in Beijing, while India’s Commerce Ministry said inflation unexpectedly accelerated to a seven-month high. Both gauges increased more than economists had estimated. “In both countries, in recent months, food seems to be the primary driver of the increase in inflation,” “not the ideal combination” when prices accelerate as growth slows. “It complicates the life of the policy makers.” The reports signal threats to growth in two of Asia’s three biggest economies as a partial shutdown of the U.S. government risks leading to a default that would roil financial markets and cause recession. The International Monetary Fund cut its global growth outlook last week as capital outflows further weaken emerging markets.

    Is China consuming more than we think? - That is the intriguing claim by two academics, Jun Zhang and Tian Zhu, respectively of Fudan University and China Europe International Business School, who argue that consumption has been consistently underreported. In a recent paper they find three important areas of undercounting. One is housing. China, they argue, does not properly account for “imputed rent”, an estimate of how much owner-occupiers would need to pay if they were renting. Second, they say, a lot of private consumption shows up in statistics as corporate expenses. For example, many executives pay for their private car on the company account. Although this appears in official data as investment, it is really consumption. Third, and most important, they argue, GDP surveys underrepresent high earners, who may not relish the idea of officials with clipboards noting down their every expenditure. If high-income households are missing from the survey, so is their consumption. Taking these three factors together, the two academics calculate that China underestimates consumption by 10-12 percentage points. “Our data suggest the transition to consumption-driven growth has already been under way for some time.” That, he says, is borne out by concrete data. Car sales, for example, are growing by 13-14 per cent, double the pace of the economy. Consumer-related stocks have long outperformed industrial ones.

    China’s Unexpected Export Drop Underscores Global Demand Threat - China’s exports unexpectedly fell in September, signaling the constraints of global demand on the nation’s recovery and highlighting distortions caused by fake invoices that have yet to be eliminated from trade data. Overseas shipments dropped 0.3 percent from a year earlier, the General Administration of Customs said in Beijing on Oct. 12, trailing all 46 estimates in a Bloomberg News survey, while imports rose a more-than-forecast 7.4 percent. The release of September inflation data today will provide further indication of the strength of domestic demand. The trade report may add to Premier Li Keqiang’s challenges in defending the government’s 7.5 percent expansion goal for this year. The International Monetary Fund cut its global growth outlook last week as capital outflows further weaken emerging markets and warned that a U.S. government default could “seriously damage” the world economy. “There has been an export recovery since July to the U.S. and Europe but it’s been pretty weak,”

    China's September export growth in surprise slide -  China's export growth fizzled in September to post a surprise fall as sales to Southeast Asia tumbled, data showed, a disappointing break to a recent run of indicators that had signaled its economy gaining strength. China's exports dropped 0.3 percent in September from a year earlier, the Customs Administration said on Saturday, sharply confounding market expectations for a rise of 6 percent, and marking the worst performance in three months. Imports fared better, rising 7.4 percent in September from a year ago, better than forecasts for a 7 percent increase, shrinking China's monthly trade surplus to $15.2 billion. Analysts said weak exports underscored worries about flagging global demand, which may crumble further in coming months - especially in emerging markets - when tighter U.S. monetary policy pushes investors away from developing economies. Indeed, the data showed Chinese exports to Southeast Asia, China's fastest-growing export market in the past year, dived to a 17-month low in September. Capital outflows from the region on bets that the U.S. central bank will cut its bond purchases had hit demand, said Louis Kuijs, an economist at RBS in Hong Kong. "Looking ahead, export data may be quite weak in the coming months," Kuijs said, adding that financial turmoil in several emerging markets had dragged on global demand.

    Weak Exports Show Limits of China’s Growth Model -- An unexpected fall in China’s exports in September, after a string of modest monthly gains, signals renewed weakness in the emerging markets that have become important trading partners for China, and indicates the limits of relying on further export growth to power the economy. Statistical shenanigans may explain part of the drop, but overseas demand is not doing much for the Chinese economy. China sent $185.6 billion worth of goods abroad in September, down 0.3% from the same month last year and well short of economists’ forecasts of 5.5% growth. One reason September’s exports look so bad is that a year ago exporters were likely exaggerating their sales as a way to bring in funds, sidestepping onerous restrictions on foreign exchange.  Shady companies have been pulling this trick for years, but it really took off toward the end of 2012 as a strengthening Chinese economy and expectations that the yuan would rise provided a powerful incentive to get money into the country. Only after widespread media coverage prompted authorities to crack down on over-invoicing last May did the export numbers return to earth.  It’s hard to know for sure, but the official export statistics were probably significantly inflated by last September, making the latest figures look worse by comparison. Ting Lu, an economist at Bank of America Merrill Lynch, notes that exports of integrated circuits – a favorite item for overinvoicing – and shipments through bonded areas, another red flag, were both much higher in September 2012.

    NSA Revelations Kill IBM Hardware Sales In China - Wolf Richter - The first shot was fired on Monday. Teradata, which sells analytics tools for Big Data, warned that quarterly revenues plunged 21% in Asia and 19% in the Middle East and Africa. Wednesday evening, it was IBM’s turn to confess that its hardware sales in China had simply collapsed. Every word was colored by Edward Snowden’s revelations about the NSA’s hand-in-glove collaboration with American tech companies, from startups to mastodons like IBM. But the fiasco was tucked away under the lesser debacle of IBM’s overall revenues, which fell 4.1% from prior year, the sixth straight quarter of declines in a row. Software revenue inched up 1%, service revenue skidded 3%. At the hardware unit, Systems and Technology, revenue plunged 17%. Within that, sales of UNIX and Linux Power System servers plummeted a dizzying 38%. Governmental and corporate IT departments had just about stopped buying these machines. IBM quickly pointed out that there were some pockets of growth in its lineup: business analytics sales rose 8%, Smarter Planet 20%, and Cloud, that new Nirvana for tech, jumped 70%. But there was nothing to spin in Asia-Pacific, where revenues plunged 15%. Revenues in IBM’s “growth markets” dropped 9%. They include the BRIC countries – Brazil, Russia, India, and China – where revenues sagged 15%. In China, which accounts for 5% of IBM’s total revenues, sales dropped 22%, with hardware sales, nearly half of IBM’s business there, falling off a cliff: down 40%.

    Commentary: U.S. fiscal failure warrants a de-Americanized world - Xinhua | English -- As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.With its seemingly unrivaled economic and military might, the United States has declared that it has vital national interests to protect in nearly every corner of the globe, and been habituated to meddling in the business of other countries and regions far away from its shores. Meanwhile, the U.S. government has gone to all lengths to appear before the world as the one that claims the moral high ground, yet covertly doing things that are as audacious as torturing prisoners of war, slaying civilians in drone attacks, and spying on world leaders.Moreover, instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies. As a result, the world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites, while bombings and killings have become virtually daily routines in Iraq years after Washington claimed it has liberated its people from tyrannical rule.

    China’s Foreign Exchange Reserves Jump Again - China’s mammoth foreign exchange reserves rose to a record $3.66 trillion in the third quarter, as the country continued to use massive FX purchases to hold down the value of its currency. The $163.3 billion rise since the end of June is the largest since 2011, and shows China’s all-but-unassailable cash position at a time when other emerging economies, from India to Indonesia, are being pummeled by capital outflows. This quarter’s increase dwarfs the $45 billion of new reserves China purchased between April and June, and marks a return to the heady days between 2008-2011 when China’s FX pile regularly grew by more than $100 billion per quarter. China’s reserves have grown tenfold in the past decade. That reflects a continued trade surplus as well as capital inflows, which force China’s central bank to buy foreign currency if it wants to stop the yuan from appreciating. A big chunk of these reserves – China goes to some lengths to disguise its bond purchases, so we don’t know exactly how much – is locked up in low-yielding U.S. Treasury bonds, one reason China is so nervous about any possibility of a U.S. default. To diversify and seek better returns on this vast cash pile, in 2007 China hived off $200 billion to create China Investment Corporation, a new sovereign wealth fund that invests in foreign equities, bonds and other assets. CIC had $575 billion under management at the end of 2012, according to its annual report, and held stakes in everything from London’s Heathrow Airport to the Moscow stock exchange.

    Watch what China does with US debt, not what it says - So much for the hot rhetoric from Beijing questioning the creditworthiness of US debt and consigning the US dollar to the dustbin of history. The latest data shows that China's foreign reserves soared by $163bn in the third quarter to $3.66 trillion, one of the biggest jumps ever. Mark Williams and Qinwei Wang from Capital Economic called the rise "astonishing". They estimate that China's central bank must have bought $70bn of foreign bonds last month in a frantic bid to hold down the currency. We won't know for a while where the money went, but a big chunk must have gone into US Treasuries. So bear that in mind when you read the Xinhua claims that the US debt ceiling fight "has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonised." Or when it says: A new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing. To that end, several corner stones should be laid to underpin a de-Americanised world. Talk, talk, talk. China's soaring reserves expose the truth. (And no, excess reserves are not a sign of strength, they are a sign of a deformed economy). Beijing is not in fact opening up its capital accounts and preparing to let the market decide the exchange rate.

    China Got into Bed with the U.S. Treasury and Can’t Get Out -- The Chinese sure are doing a lot of worrying these days about the stalemate in Washington. Li Keqiang, China’s Premier, told U.S. Secretary of State John Kerry that he was watching the tussle over raising the government’s debt ceiling with “great attention” in a meeting last week. He has good reason to be concerned. With a stash of nearly $1.3 trillion in Treasury securities, China is the world’s largest foreign owner of U.S. government debt. If the U.S. Congress fails to lift the ceiling to allow the government to borrow more by Thursday, Washington may not have enough money to pay its bills, potentially leading to a default. That could sink the value of Treasuries — wiping out a big chunk of Chinese wealth in the process. That possibility has caused much consternation in China. In a blistering (and highly hypocritical) editorial, state news agency Xinhua blasted what it sees as Washington’s irresponsibility in handling global affairs and called for greater say for developing nations in international institutions like the IMF and a new reserve currency to replace the dollar. The Chinese can blame themselves. Since the earliest days of Chinese economic reform, policies that the government has employed to create growth and exports have also made it dependent on debt issued by the U.S. Treasury. Those policies have generated huge current account surpluses and gargantuan reserves of foreign currency that have left Beijing no other option but to invest in the U.S.

    Chinese yuan gains popularity among global traders - The financial uncertainties conveyed in the US government shutdown have made the Chinese currency, renminbi, more popular among global traders, although the US Congress has passed a bill to end the debt ceiling deadlock. Businessmen attending the ongoing China Import and Export Fair, or Canton Fair, in Guangzhou, capital of southern Guangdong Province, said they had encountered wider acceptance of the Chinese yuan among their overseas partners. "Many overseas banks are now more willing to carry out renminbi business," said Zhang Qingfu, head of the Middle East and Africa overseas business division of Haier Group, China's largest home appliance manufacturer, adding that cross-border trades with China can now be settled in renminbi in many countries and regions. Zhang said Haier had begun to settle its business in renminbi in countries like South Africa, Iran and Sudan over the past year. "It used to be us proposing to settle trade in renminbi, but now it is our overseas buyers who are more proactive," he added. Data from the People's Bank of China (PBOC), the central bank, showed that overseas trade settlement in renminbi totaled 3.16 trillion yuan (515 billion US dollars) in the first three quarters of 2013, more than 50 percent up from the 2 trillion yuan registered in the same period last year.

    Fast train coming - IN THE grand concourse of Bangkok’s main train station, Hua Lamphong, the future is on display. Hulking billboards announce the impending arrival of high-speed trains and an age of international connectedness. For those who happen not to pass through the capital, a two-month road show called “Building the Thai Future 2020” is touring the provinces to keep people abreast of the government’s plans for the country’s railways and other infrastructure. In the past 20 years, train passenger numbers have collapsed from 88m per year to 46m. The government, it would seem, is no longer willing to tolerate the slide. The big idea is to spend 2 trillion baht ($64 billion) by 2020 towards upgrading the country’s creaking infrastructure. Another 3 trillion baht will come due as interest on the loans, accumulating over the next 50 years. It aims to fulfil a favourite dream of Thailand’s political class: To make the country the keystone of mainland South-East Asia. This will also be a stimulus programme, so large as to trigger labour migration. The new works should create 500,000 jobs—more than there are unemployed people in Thailand, the only country in Asia that enjoys an effective rate of full employment. The timing is convenient for the government, even if there are already jobs aplenty. Elections must be held by 2015 and a pot of off-budget spending worth nearly one-fifth of the country’s GDP is a nice thing for the politicians to have handy, just when well-placed allies and voters need reassurance that their loyalty is appreciated.

    Japan’s Message: Chasing Steady Growth to Achieve Inflation - Japan’s prime minister and central bank chief offered too subtly different messages in two campaigns to spread the gospel of Abenomics abroad. Prime Minister Shinzo Abe, in a speech aimed at the heart of American capitalism, talked about the Gordon Gekko character from the 1987 film “Wall Street,” while Bank of Japan Gov. Haruhiko Kuroda stuck closer to economic theory in his three speeches to a think tank and trade groups. “I have come to tell you that Japan will once again be a country where there is money to be made.” The emphasis was on producing a surge in growth. But this week, Mr. Kuroda, in his first public speeches outside Japan, seemed to emphasize the importance of steady growth. He told American audiences how Tokyo officials are trying to influence the country’s inflation expectations, teaching the public to expect prices to rise so that they invest more directly in the economy. Mr. Kuroda’s underlying message is that sustained growth, not booms and busts, are needed to durably push up inflation to 2%. The BOJ’s goal is “maintaining that target in a stable manner,” Mr. Kuroda said in Washington this week. Officials gathered for the International Monetary Fund meeting expressed concerns about financial market volatility as the U.S. Federal Reserve is set to wind down its massive monetary stimulus. Even without the Fed’s tapering, Japan’s economy is likely headed for a bumpy ride. Private consumption is expected to heat up through March, as consumers rush purchases before the first sales-tax boost in 17 years takes effect in April. Consumption may then pull back sharply after the tax increase, but Mr. Abe’s government is planning to mitigate that effect with a massive fiscal stimulus next year.

    BOJ’s Kuroda Keeps Message Simple - In a world of ultra low interest rates and unconventional monetary policy, the language used by central bankers has taken on much more significance than in the past. Managing market expectations on future policy action is not just a required skill for all central bank chiefs, it has become a policy tool. In the verbal minefield of “forward guidance,” Bank of Japan Gov. Haruhiko Kuroda has so far played his role impeccably with a deceptively straightforward strategy: Keep it simple and jargon-free. “I think the BOJ deserves very high marks for its simple communications. Everyone knows what the central bank is trying to do,” said Julian Jessop, chief global economist and head of commodities research at Capital Economics, a view echoed by other economists and analysts six months after the BOJ launched its ambitious new monetary stimulus program. Some might also argue that Mr. Kuroda has it easy since he has yet to reach the difficult turning point of signaling a winding down of aggressive policy measures. But the BOJ chief has yet to confuse his audience and the positive appraisal for his communications strategy follows recent comments by his counterparts in the U.S. and Europe that have puzzled markets.

    Abe gets ready to start "naming and shaming" -- As discussed earlier (see post), the key issue with Japan's economy these dyays is wage growth - or lack thereof. And that is holding back the so-called Abenomics. Recent increases in prices (mostly from yen's depreciation) can not be sustained unless salaries keep up. Inflation and weak wage growth can squeeze consumer spending power and stall economic growth. And Japan needs to have a sustainable period of price increases to get out of the deflationary hellhole. With a long history of wage declines however, getting Japanese firms to change their behavior has been a difficult task.  Apparently Abe has had enough. According to TV Tokyo (h/t ISI Group) Abe will begin pressuring business leaders directly to raise wages. The goal is to start with a corporate wage survey. How would a survey help? In Japan if the survey is published with the companies' names shown, the strategy of "naming and shaming" just might work. Public image is critical to most Japanese firms and this just may push them to change the way they pay their employees.

    Does flat global trade hurt GDP? - FT video - Global trade growth has stopped. Gavyn argues that this undermines global GDP growth, but The New York Times’s Paul Krugman disagrees. Mr Davies replies to Mr Krugman’s points in an interview with John Authers:

    'A Corporate Trojan Horse': Obama Pushes Secretive TPP Trade Pact, Would Rewrite Swath of U.S. Laws (Democracy Now video and transcript) As the federal government shutdown continues, Secretary of State John Kerry heads to Asia for secret talks on a sweeping new trade deal, the Trans-Pacific Partnership. The TPP is often referred to by critics as "NAFTA on steroids," and would establish a free trade zone that would stretch from Vietnam to Chile, encompassing 800 million people -- about a third of world trade and nearly 40 percent of the global economy. While the text of the treaty has been largely negotiated behind closed doors and, until June, kept secret from Congress, more than 600 corporate advisers reportedly have access to the measure, including employees of Halliburton and Monsanto. "This is not mainly about trade," says Lori Wallach, director of Public Citizen's Global Trade Watch. "It is a corporate Trojan horse. The agreement has 29 chapters, and only five of them have to do with trade. The other 24 chapters either handcuff our domestic governments, limiting food safety, environmental standards, financial regulation, energy and climate policy, or establishing new powers for corporations." [The 'corporate Trojan horse' is Obama himself.]

    There's an International Plan to Censor the Internet in the Works -- Let's Stop It in Its Tracks - That’s the time left before the Trans-Pacific Partnership (TPP) could become a finalized agreement. For those who are drawing blank looks -- and understandably so -- the TPP is a highly secretive trade deal involving 12 nations around the Pacific Rim.  Described by experts Lori Wallach and Ben Beachy of Public Citizen as “one of the most significant international commercial agreements since the creation of WTO”, the TPP is more than a trade agreement - it’s an underhanded attempt by old industry interests to censor the Internet. The lack of general awareness about the TPP is exactly what unelected trade officials and lobbyists hope for; the more covert the negotiations, the easier it is to usher in extreme new Internet censorship rules.  The changes proposed by the TPP could seriously undermine citizens’ rights to participate in a free and open Internet. We know from leaked drafts that these draconian measures could criminalize your everyday use of the Internet, force service providers to collect and hand over your private data, and give old industry conglomerates more power to fine you for Internet use. As opposed to fostering a global forum in which citizens can engage with one another, the TPP would stifle any kind of innovation within the Internet community.  The Electronic Frontier Foundation underlines the dangers of the TPP:  “The copyright provisions in the TPP will carve a highly restrictive copyright regime into stone and prevent countries from enacting laws that best address and promote users’ interests. In this final stage, it’s time for us to demand that our lawmakers join those who are already denouncing this agreement. We must drag this out into the light and reject international laws that uphold corporate interests at the expense of users’ rights.”

    Fast Track: New Report Proves Difficulty of Defending the Indefensible - Under the U.S. Constitution, Congress is supposed to write the laws and set trade policy.  For 200 years, these key checks and balances helped ensure that no one branch of government had too much power.  But that changed with Fast Track.  Fast Track delegated away Congress’ constitutional authority over trade pacts, empowering the executive branch to negotiate and sign an agreement before Congress approved the contents.  Then it allowed the executive branch to write legislation that could not be amended and to force a limited-debate vote on the sealed deal within 90 days. As unpopular deals like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) were rammed through Congress under Fast Track, mounting opposition to the maneuver grew strong enough to force Fast Track’s corporate proponents to attempt a rebranding (cynically redubbed as “Trade Promotion Authority”).   It didn’t work.  Fast Track remained polemical and Congress finally allowed it to die in 2007.   Now Fast Track’s corporate proponents are trying hard to revive it, because they’d like to shove another unpopular “free trade” agreement (FTA) through Congress.  Administration officials have admitted that Fast Track’s democracy-defying procedure will be essential to usher into law the controversial Trans-Pacific Partnership (TPP) – a sweeping U.S. pact under negotiation with 11 Pacific Rim countries that would impose new rules on daily realities ranging from access to medicines and food safety to Internet freedom and Wall Street reform

    Winds of Change Blow in Asia --- The recent APEC summit and associated meetings in Bali were marked not so much by results but by perceptions. In fact, the lack of results, rather than results, was the main story. This lack was not so much in the APEC itself, but in the Trans Pacific Partnership Agreement (TPPA). The leaders of TPPA countries met in a separate venue away from the APEC summit. The Indonesians were the host of APEC and not the TPPA, which they are not involved in, and were unhappy that the TPPA threatened to take away the limelight from the main event. But that was the secondary story. The main news was that U.S. President Barack Obama had to give a miss, not only to his scheduled visits to Malaysia and Indonesia, but to the APEC Summit itself. This was damaging to the U.S., symbolically and in practical terms. Obama could not be blamed personally, as everyone knows the problems he faces at home with the onset of the “government shutdown” and the looming debt-ceiling crisis. The problem was deeper. Obama’s absence confirmed the already-growing perception in the region and the world that there is a dysfunctional governance system in the U.S., at least for the moment, and it is becoming a long moment.

    Asian Outlook Clouded Despite U.S. Debt Deal -- Congress’s deal to avoid a U.S. government debt default was welcome news in Asia. But the budget fight, and the 16-day government shutdown, has cost the U.S. economy growth momentum that clouds Asia’s economic outlook.The region’s largest economies are only starting to climb out of a poor few months of economic performance. Before the U.S. shutdown, there was growing optimism among purchasing managers in Asia that exports to the U.S. and other developed nations would underpin growth.Now, that premise is less sure, Many forecasters expect the shutdown would cost the U.S. economy 0.1 to 0.2 percentage point to annualized growth for each week the impasse lasted. Standard & Poor’s, in response to the shutdown, cut its four-quarter growth forecast to 2% from 3%.That’s bad news for Asia’s exporters, who have been relying on the U.S. to counter softer demand elsewhere in the world.  China’s exports unexpectedly fell 0.3% on year in September. Exports to Europe and many emerging markets were down. By contrast, exports to the U.S. rose 4.2%. The latest export data from Taiwan and South Korea also were patchy. Both of these economies rely on U.S. demand and policy makers there will be watching closely to see the level of damage inflicted by the shutdown.

    Bank of Korea Chief Calls for Greater Global Coordination - In a speech that was optimistic about South Korea’s economic outlook, that nation’s top central banker called for greater coordination among the world’s economic policy makers. “The global economy has and will be increasingly more interconnected,” said Kim Choong-Soo, governor of the Bank of Korea, in the text of a speech prepared for delivery in New York on Tuesday. This interconnectedness, which often leaves emerging-market economies particularly exposed to financial market volatility, suggests that central bankers need to look less toward protecting their respective domestic economies, and more at how they can work together to promote financial stability, the official said. “Uncoordinated national policy responses to global financial issues are likely to be suboptimal from a global perspective,” Mr. Kim said. “I am arguing for a better sharing of responsibilities in stabilizing cross-border capital flows” between advanced and emerging-market economies, he added. The central banker said in his remarks that the most developed emerging markets had made great strides in industrial development. But they haven’t done as much work on the finance side of the equation, leaving these nations more dependent and exposed to market turmoil in advanced nations.

    India is Still Waiting for Its Monsoon Bonus - For months now, India has been clinging to the hope that abundant monsoon rains would rein in galloping food prices. But the monsoon bonus is being offset by two familiar bugaboos of Indian life: inadequate infrastructure and populist election spending. Data Monday showed wholesale inflation accelerating for the fourth straight month in September to 6.46%, its highest level since February. Wholesale vegetables were particularly expensive, up about 90% from a year ago. Food prices have also pushed consumer inflation to 9.84%. The Reserve Bank of India recently hiked its benchmark rates to counter inflation, but many were hoping a bumper crop of onions, rice, wheat and other foodstuffs would help cool prices. The thinking was that this would eventually allow the central bank to lower rates to kickstart economic growth, which slipped to a 10-year low last year. Most of India’s farmland is irrigated solely by the monsoon rains, which typically run from June-September. This year the rains have been more generous than usual — they continued into October — which should mean more productive fields for most of the country. “When the harvest starts coming in, we should see a lower rate of increase in inflation,”  That was the hope, at least. But that hope is fading. One reason is India’s crumbling infrastructure. Even if the monsoon produces a bounteous harvest, those products will get stuck on potholed roads and in India’s grossly inefficient storage and distribution systems. Morgan Stanley expects wholesale inflation to reach 7.0% by December and stay there until March.

    India may squeeze state firms for cash as asset sales falter (Reuters) - India's plan to raise about $9 billion from state-asset sales this year is in tatters, prompting the government to consider demanding state-run firms pay higher dividends as a way of papering over cracks in its budget. Four finance ministry officials with direct knowledge of the matter said that with the stake-sale target looking increasingly difficult to reach, they were preparing to take a decision early in the new year on other ways to raise cash. "We will see which companies have good cash reserves," said one of the officials. "If they (companies) have made good profits and have no immediate plan to spend the money, we may ask for a special dividend." Sales of stakes in state-run companies are critical to Finance Minister P. Chidambaram's plan to mend strained public finances and prevent a budget blow-out that would put India's investment-grade credit rating in peril. Indian debt is ranked at the bottom of investment grade and Standard & Poor's has a negative outlook. A cut would put India into "junk" status, raise its borrowing costs and possibly spark fresh panic in financial markets. The rupee fell as much as 20 percent this year, before recovering, amid an economic slump.

    Central Banks Begin Gaming Out U.S. Default Before Deadline (Bloomberg) -- Central banks have begun making contingency plans on how they would keep financial markets working if the U.S. defaults on the world’s benchmark debt. Policy makers discussed possible responses when they met at the International Monetary Fund’s annual meetings in Washington over the weekend, said officials who spoke on condition of anonymity because the talks were confidential. The discussions continued as policy makers headed home. “Because in the past it’s always been sorted out is absolutely not a reason to fail to do the contingency planning,” Jon Cunliffe, who joins the Bank of England as deputy governor for financial stability next month, told U.K. lawmakers yesterday. “I would expect the Bank of England to be planning for it. I’d expect private-sector actors to be doing that, and in other countries as well.” The initial response from the world’s central banks would likely echo their actions after the collapse of Lehman Brothers Holdings Inc. in 2008. Back then, policy makers pledged they would provide ample liquidity, eased the collateral they lent against and boosted dollar swap lines with each other to ensure supply of the currency. The $12 trillion of outstanding U.S. government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008.

    World Officials Plan Financial Defenses as Fed Eyes Exit - Finance ministers and central bankers at the International Monetary Fund’s annual meeting in Washington were eyeing the potential shock waves that could arise from the U.S. Federal Reserve’s planned exit from easy money policies. Below is a roundup of their comments.

    Surging Aussie Dollar Keeps Door Open To Rate Cut - The Australian dollar is surging again, increasing chances the central bank will cut interest rates further. The Aussie rose to its highest level in four months this week. On Friday, it was trading in Asia around 0.9630 to the U.S. dollar, up from $0.8900 at the start of September. The currency is up in part because of the growing view that the U.S. Federal Reserve won’t start scaling back its extraordinary monetary stimulus until next year, following the economic disruption caused by this month’s government shutdown. A pullback in easy money policies would push U.S. yields up, and the U.S. dollar higher. A delay in this – added to concerns over the U.S. government shutdown – has nudged the Australian currency up 5% from lows two months ago. That’s causing a policy conundrum for the Reserve Bank of Australia. A strong currency hurts Australia’s manufacturers by making their goods more expensive overseas. That’s bad news for the government, which is hoping this sector will help pick up some slack in the economy. Australia’s economy grew by 2.6% on year in the second quarter, compared with growth as high as 4% in early 2012, as mining profits fell in line with China’s slower growth. A rate cut would lead the currency lower, helping exporters. But it also risks stirring up even more frothiness in the country’s housing sector, which already is showing signs of overheating after eight rate cuts over the past two years.

    Bernanke: Central Bank Independence Has Helped Mexico Improve Economic Stability - Federal Reserve Chairman Ben Bernanke on Monday said the independent status of Mexico’s central bank has helped Mexico achieve economic stability over the past two decades. Mexico’s Congress granted autonomy to Mexico’s central bank in 1993, with price stability as the bank’s primary mandate. “Over the past two decades, these actions, along with a number of other constructive steps taken by Mexican policymakers, have paid substantial dividends in terms of improved economic performance,” Mr. Bernanke said in remarks prepared for delivery to a conference being hosted by the Bank of Mexico. Mr. Bernanke pre-recorded the remarks by video; he didn’t attend the conference in person. Mr. Bernanke praised the Bank of Mexico’s formal inflation-targeting regime, which it adopted in 2001. Altogether, the Bank of Mexico’s framework has helped reduce the threat of financial crises, Mr. Bernanke said. “When the recent financial crisis in the United States and other advanced economies threatened to spill over to Mexico, the inflation credibility enjoyed by the Bank of Mexico allowed it to counter economic weakness by easing monetary conditions,” even though inflation was running above the central bank’s target at the time, Mr. Bernanke said.

    Argentina faces a currency crisis as reserves dwindle (Reuters) - Argentina is inching closer to a currency crisis that could unleash economic havoc unless the government takes the tough decisions needed to increase confidence in Latin America's No. 3 economy and stem the outflow of foreign reserves. Starting in 2003, Argentina's government began moving away from market-friendly economic policies toward a more populist attitude that grants generous government subsidies on everything from public transport to social programs. This soon led to a spike in inflation, which private analysts estimate at 25 percent, one of the world's highest rates. The government, which has been reprimanded by the International Monetary Fund for inaccurate data reporting, says inflation is between 10 and 11 percent. In an attempt to control prices, President Cristina Fernandez's government has kept the official exchange rate at artificially strong levels, effectively making imports cheaper but hampering manufacturers' ability to compete internationally and driving down private investment. With the country unable to finance imports or debt payments by borrowing from abroad after its 2002 default, Argentina has been forced to rely on foreign exchange reserves, which are mostly generated by grains exports. Reserves are down by 20 percent this year to $34.4 billion, their lowest level since early 2007.

    Impatience With I.M.F. Is Growing - Emerging market countries complained on Saturday about the plodding progress in giving them more power at the International Monetary Fund. The global lender, after its annual meetings this past weekend, failed to meet a deadline originally self-imposed for 2012 to make historic changes meant to give emerging nations a greater say. The delay on changes first agreed to in 2010 also pushes off even more difficult decisions about how to reform the I.M.F., which is still dominated by the nations that founded the organization after World War II.  The 2010 changes have been held up because the United States, the fund’s biggest and most powerful member, has not ratified them and prospects for action before the end of the year are slim due to gridlock in the U.S. Congress. The next round of voting changes may involve even more give and take, as I.M.F. member countries wrangle over the specifics of an elaborate formula that determines the voting power of each country, how much it must contribute to the Fund and what it can borrow. The formula takes into account the size of each economy, foreign exchange reserves and trade, and members are tussling over how much weight to give each measure. The I.M.F. said it planned to finalize a formula by January, when it next reviews the voting shares of member countries. But many countries have not made formula debates a priority until the 2010 reforms are completed, meaning yet another deadline is likely to slip by.

    The Global Wealth Distribution - Credit Suisse has published its Global Wealth Report 2013. Reports like this help me update the mental picture of the world economy that I try to carry around with me. First, the quick overview of global wealth looks like this: Total world wealth was about $241 trillion in 2013, with a little under one-third in North America, a little under one-third in Europe, and the rest spread around the rest of the world. Average wealth per adult for the world economy was $52,000, with North Americans averaging about six times that amount, while those in Africa and India averaged less than one-tenth of that amount.The report has lots of detailed information about how wealth is held in financial and nonfinancial forms, trends in the last year, and trends back to 2000. I found especially interesting the discussion of what happens if we look at the distribution of global wealth not as averages across regions, as in the table above, but across individuals? Here's a pyramid of wealth for the world economy. The 32 million people around the world who have more than $1 million in wealth represent 0.7% of the world population, and hold 41% of the world's wealth.

    Inequality Is a Choice - Joseph Stiglitz - Mr. Milanovic  is the author of “The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality,” wrote in a paper published last November. While the gap between some regions has markedly narrowed — namely, between Asia and the advanced economies of the West — huge gaps remain. Average global incomes, by country, have moved closer together over the last several decades, particularly on the strength of the growth of China and India. But overall equality across humanity, considered as individuals, has improved very little. (The Gini coefficient, a measurement of inequality, improved by just 1.4 points from 2002 to 2008.) So while nations in Asia, the Middle East and Latin America, as a whole, might be catching up with the West, the poor everywhere are left behind, even in places like China where they’ve benefited somewhat from rising living standards.From 1988 to 2008, Mr. Milanovic found, people in the world’s top 1 percent saw their incomes increase by 60 percent, while those in the bottom 5 percent had no change in their income. And while median incomes have greatly improved in recent decades, there are still enormous imbalances: 8 percent of humanity takes home 50 percent of global income; the top 1 percent alone takes home 15 percent. Income gains have been greatest among the global elite — financial and corporate executives in rich countries — and the great “emerging middle classes” of China, India, Indonesia and Brazil. Who lost out? Africans, some Latin Americans, and people in post-Communist Eastern Europe and the former Soviet Union, Mr. Milanovic found.

    The Gap Between Schooling and Education -- The world has made dramatic gains in getting children — even very, very poor children — into school. But are they learning? The discomfiting conclusion from Lant Pritchett, a senior fellow at the Center for Global Development and professor at Harvard’s Kennedy School, is, in many cases, no.  “The vast majority of countries will meet the Millennium Development Goal target for universal primary school completion, and very few countries will miss it by much,” he writes in his new book, “The Rebirth of Education: From 19th Century Schooling to 21st Century Learning.”The change has been so rapid that the average Haitian or Bangladeshi  in 2010 had more years of schooling than the average French or Italian person did in 1960. (That data looks at average years of schooling for people 15 and older, by the way.) Even repressive and nondemocratic countries have seen tremendous gains. “Good governments do schooling, but nearly all bad governments do it, too,” Mr. Pritchett writes.But that does not mean that all that schooling has translated into much education, he says. For instance, in the state of Uttar Pradesh in northern India, less than half of surveyed children in fifth grade could read a story intended for second graders. About one in six students in fifth grade recognized letters but could not read words. What can schools and countries do to make sure students are learning while they are in school? What are the consequences of this schooling-education gap? Mr. Pritchett and I discussed those issues in a recent interview. A lightly edited transcript follows.

    60 percent of Russians want communism back - About 60 percent of Russians believe there were more positive than negative aspects to life in the former Soviet Union, an opinion poll suggests.Of the 1,000 people whom Russia’s Public Opinion Foundation (FOM) interviewed by telephone in a survey last month, 14 percent said the word communism had percent “very pleasant,” “positive” or “wonderful” connotations for them and 12 percent said they were nostalgic about the Soviet era. Communism was just a thing of the past for 11 percent, but the same proportion believed communism meant good and stable life.To 7 percent, the word communism gave a sense of “disgust” or “sad associations” or meant “something negative” generally.  For 5 percent, it stood for dreams of a “radiant future” that had never come true (“it’s a great pity that we never came to see it”). Asked by pollsters to explain the meaning of the word communism, 23 percent said that for them it meant a just society where everyone is equal and all property is common. For 9 percent, the word primarily stood for a specific economic and social system, while for 8 percent it represented a life better than today’s (“we were better off, people were taken better care of,” and “people were more plain and life was more plan as well”).nSix percent said communism represented good and stable life for them, and praised the official Soviet era principle “From each according to their abilities, to each according to their needs.”

    Will the Eurozone/Euro Benefit From a US Dollar Crisis? - As a holder of euros myself and other non-junky stores of value--not gold, not Treasuries or any of that riffraff--I of course wish that the United States' self-inflicted crisis wallops their godforsaken currency. No ifs, not buts. However, the opinion of ECB policymakers is decidedly more guarded. Sure, it may increase the prestige of euro currency at a time when the Eurozone is just exiting a very long recession if its share of global currency reserves increases further. Then again, the bifurcation of Northern and Southern states' economic performance is worrying. Sure the likes of Austria and Germany can survive with the single currency at, say, $1.40. But the hobbling "Club Med" countries declared no mas a long time ago.  So yes, (nominal) Austrian CB guv'nor Ewald Nowotny expresses concern with what happens Stateside: The dollar's role as the world's leading reserve currency is at risk because of the political impasse in the United States, which has raised fears of a debt default, European Central Bank policymaker Ewald Nowotny said. Then again, Nowotny wears two hats since he is also a member of the ECB's governing council and must therefore consider the plight of the Euro-laggards:  "This discrepancy is very dangerous and in my view will have a negative impact on the long-term role of the dollar.. This was not such a big problem for Austrian exporters but posed more of a threat to southern euro zone members, said Nowotny, who is also governor of the Austrian central bank.What's that saying about the weakest link(s)? It's what holding the Eurozone from wishing the US and its currency a well-deserved oblivion.

    Blame Europe’s policy makers for lost growth - The most frequent sentiment among readers these days is this: surely the years before 2008 were a bubble? In those giddy days, gross domestic product and other economic indicators were overshooting. So why even try to return to pre-crisis growth trends? The times of debt-driven growth are over. The more modest projected growth rates are the new normal. Get used to it and move on. When I read such comments I am always reminded of Andrew Mellon. During the early phase of the Depression, the US Treasury secretary recommended liquidating the entire economy. Fortunately, wiser heads prevailed and he was prevented from doing so. Unfortunately, these days the Europeans allow their policy makers to do just that. Average eurozone GDP during the period 1999-2007 was 2.3 per cent – similar to what it was the decade before. Once you look at the eurozone instead of individual countries, the fog lifts. Pre-crisis trends were fairly stable. On my calculations there is now a 12 per cent gap in real GDP between where we are today and where we would have been on the pre-crisis trend. This is staggering. There is no way that you can attribute this gap to a bubble – since at the eurozone level there was none.

    Eurozone Industrial Output Rebounds in August — Official figures show that industrial output across the eurozone rebounded in August, raising hopes that the sector will contribute to a pick-up in economic growth. Eurostat, the EU’s statistics office, says Monday that industrial production rose by 1 percent during the month, recouping July’s equivalent decline. The increase suggests that the sector will contribute to the recovery if September shows a rise. The economy of the 17 European Union countries that use the euro emerged from recession in the second quarter, when it grew 0.3 percent from the previous three-month period. There are hopes that the third quarter’s growth rate will be higher after a raft of surveys and economic indicators have suggested that the recovery is getting more broad-based and not overly dependent on the performance of Germany.

    VAT Increase Backfires in Spain, Supermarket Sales Plunge 7.2% - The nannycrats in Brussels and the IMF keep pressuring Spain to hike the VAT and Spain does every time. The results are easily predictable. Via translate from El Econimista, please consider VAT Rise is "Catastrophic" Anged, the "Association of Large Distribution Companies" suffered a 7.2% drop in sales through August, the biggest drop in sales since the crisis began. Anged companies include El Corte Ingles, Carrefour, Auchan, Tesco, Ikea, Media Markt, Leroy Merlin and Toys R'Us.Employer, Alfonso Merry del Val, said the increase in VAT has been "catastrophic". Data from the National Statistics Institute (INE) show that sales in supermarkets were down  7.2% through August and the crisis is deepening.Apart from the increase in VAT, the Anged president was particularly critical of the rate that some regions have tax supermarkets activity. "It's a revolutionary tax. If not corrected, 18,000 jobs and more than 200 million of investments per year are in grave danger of disappearing," he said.

    Bailed-out Portugal to make new cuts in 2014 budget - "There is no alternative to reducing spending. If we are not able to meet our goals, the price to be paid will be much higher," Prime Minister Pedro Passos Coelho said on the eve of the presentation of the spending plan. Portugal, which is trying to regain full access to debt markets with the end of a three-year 78-billion-euro ($106 billion) rescue plan in June 2014, has vowed to bring its deficit down to 4.0 percent of output next year from 5.5 percent in 2013. The country tried in vain to get its creditors, the European Union and International Monetary Fund, to raise its deficit target to 4.5 percent in 2014. It wanted more leeway to ease austerity measures and thus provide more support to boost economic growth. To meet the 2014 deficit target the ruling centre-right coalition government, which took a heavy beating in local elections last month, has to trim spending by about 4.0 billion euros next year. Raising the retirement age to 66 from 65 and lengthening the work week for civil servants to 40 hours from 35 hours are among the measures on the table to reduce spending.

    Greece plans 4.5 billion euro bond rollover to plug funding gap- finmin (Reuters) - Greece plans to roll over about 4.5 billion euros of bonds maturing in March next year to partly plug a funding shortfall, its finance minister told a Greek newspaper on Monday. "We are thinking of rolling over the bonds issued by the finance ministry in exchange for preferred shares from banks, about 4.5 billion euros. This means covering a big part of the funding gap," Finance Minister Yannis Stournaras told Naftemporiki financial daily in an interview. Under its latest bailout programme, Athens will be financed until the second half of 2014, when it hopes to tap the bond markets, from which it has been excluded since 2010. The IMF and Greece estimate that the country faces a funding gap of nearly 11 billion euros for 2014-15.

    Asmussen rejects Athens' call for ECB to roll over Greek bonds (Reuters) - The European Central Bank cannot roll over Greek bonds as this goes against a ban on financing governments, a senior ECB policymaker said on Monday, dashing Athens' hopes it will help plug a funding gap next year through such a move. Athens will be financed by bailout loans until the second half of 2014, when it hopes to tap bond markets again. It then faces a funding gap of nearly 11 billion euros for 2014-15, the International Monetary Fund and Athens estimate. Finance Minister Yannis Stournaras said on Monday that Greece planned to roll over debt next year to narrow the funding shortfall. He said that euro zone central banks had promised to roll over Greek bonds and that if they did not they should make up the difference by other means. But ECB Executive Board member Joerg Asmussen ruled out the idea, which is banned under the ECB's statutes.

    Troika challenges Greece over €2bn fiscal gap in budget - Greece faces tough negotiations with international lenders over a looming fiscal gap in the 2014 budget that could undermine its chances of emerging from a six-year recession. The “troika” – the European Commission, European Central Bank and International Monetary Fund – wants the government to adopt further austerity measures after identifying a potential shortfall of €2bn in the latest budget draft submitted by Athens. More videoGreek finance ministry officials say the gap amounts to only €500m and can be covered through a crackdown on social security fraud by thousands of cash-strapped small businesses who fail to pay contributions. “There is a clear disagreement,” said a senior finance ministry official. “The troika always presses for additional measures but we’ve reached the limit for making horizontal cuts in wages and pensions.” “The social pressures are becoming unsustainable ... Greek households on average have lost more than one-third of their income over the past five years,” the official added. The dispute has emerged as Greece’s credibility with international financial markets improves, with yields on government bonds falling this week to the lowest level since last year’s second €173bn international bailout. Greece is on course for a primary budget surplus this year, before debt repayments, thanks to higher revenues and tighter controls on spending, despite continuing cost overruns for state healthcare and a rising deficit at IKA, the main social security fund.

    Europe’s debt crisis credibility hangs on thin Irish thread - Whether Ireland or any other EMU victim state can claw its way back to viability depends on the actions of the ECB. Ireland has begun to say no. Its latest austerity budget -- the seventh in six years -- is a small act of defiance against the scorched earth policies of the EU-IMF Troika. Labour leader Eamon Glimore has long been grumbling that EU ideologues treat his country like "some type of economic experiment for austerity hawks". He has prevailed. Dublin will drain a further 1.5pc of GDP from the economy in fiscal cuts and taxes over the next year, not 1.8pc as demanded. Finance minister Michael Noonan told the Dail this week that the nation can take no more. "Too long a sacrifice can make a stone of the heart," he said, quoting WB Yeats from Easter 1916. The EMU commissars must bite their lips. They have been praising Ireland for so long as the poster child of "internal devaluation" that they cannot now risk a showdown. The credibility of EMU debt policy is at stake. Ireland must become the first rescued state to exit the Troika regime and return to the markets this year.

    EU finance ministers to agree new bank supervision system  - EU finance ministers prepared Tuesday to take a key step towards a new bank regulatory framework with final clearance of a single supervisor regime for the eurozone. “We are set to finally approve the Single Supervisory Mechanism today,” Lithuanian Finance Minister Rimantas Sadzius said. Once approved, the SSM will formally “enter into force in November next year,” Sadzius said, as he arrived for a meeting of all 28 European Union finance ministers. The SSM was originally supposed to start early next year but the timetable slipped amid sharp differences over its precise role and especially over how it would relate to non-euro countries. Non-euro Britain is home to the European Banking Authority, which is supposed to draft the rules for all banks in the EU, while the SSM is to be run by the European Central Bank. To ensure that the 17 eurozone members did not out-vote the 11 non-euro members also grouped in the EBA, London won agreement in December that there would have to be a ‘double majority’ in both camps for any action.

    ECB’s Draghi: Knowing Too Much About Our Big Banks Could Set Off A Panic - European banks, like all banks, have long been hermetically sealed black boxes. If someone managed to pry open just one tiny corner, the reek of asset putrefaction that billowed out was so strong that the corner would immediately be resealed. In cases where the corner didn’t get resealed fast enough and too much of the reek spread, the whole bank collapsed, only to be bailed out by taxpayers, often in other countries; it’s easier that way. The only thing known about the holes in the balance sheets of these black boxes, left behind by assets that have quietly decomposed, is that they’re deep. But no one knows how deep. And no one is allowed to know – not until Eurocrats decide who is going to pay for bailing out these banks. How do we know? ECB President Mario Draghi said that on Friday in Washington. The IMF, which can only sniff around the surface of the banks, determined that the Spanish and Italian banks alone would have to recognize an additional €230 billion ($310 billion) in losses over the next two years. As we have seen time and again, bank losses are always much larger when the truth finally seeps out, and that doesn’t happen until after the bank collapses and someone from the outside counts what’s left over. Next year will be a moment of truth, so to speak, when the ECB is to become the regulator of the 130 largest banks in its bailiwick. Imbued with new powers, it will subject them to a somewhat realistic evaluation, rather than the “stress tests” of yore that were nothing but banking agitprop – assuming certain banks in Italy and Spain can be kept upright until then.

    How not to run fiscal policy: lessons from the Eurozone - In my last but one post I noted the case of European Commission estimates of the output gap as an example of what can happen if you do not allow for the asymmetry implied by firms’ reluctance to cut nominal wages. Their methodology implied that the natural rate in Spain had more than doubled in a decade, which seems nonsensical. However the economists at the Commission at least came to recognise the problem, and had proposed making some changes to get more reasonable numbers. As I will explain, the methodology they use is reasonable given the state of macroeconomic arts, which is why in that earlier post I used this as an example of a failure of macroeconomics generally, rather than economists at the Commission. In this post I want to note what happened next, which in contrast does seem to reflect badly on how the Commission works.  But before getting to that, a few background points. First why this matters. As part of the “two pack” (don’t ask), Eurozone economies will now have to submit their budgets for approval by the Commission. Approval will depend, among other things, on the Commissions calculations of the structural budget deficit, which is the deficit corrected for the cycle. Measuring this is difficult, because we do not observe the output gap, which itself depends on both the natural rate of unemployment and the underlying trend in productivity (technical progress), which we also do not observe.

    The temples of the gods of capital - The London property market is booming. Property prices have risen by 9.7% in the last year and there is no sign of any decline. Such large price rises are, of course, only happening in London, not the rest of the UK, where property price rises are lower the further you are from London (in Scotland prices are actually falling). But the same is happening in other large cities such as New York. Prime real estate in big cities has never been so expensive - and so desirable. Yet people are leaving London. Both the FT and the NY Times carry opinion columns by disgruntled journalists who have decided the cost of property in London is way too high and are moving elsewhere. And they report that others are doing so too. Here's Michael Goldfarb in the NYT: "Matt summed up the reason for leaving best: “I don’t want to be a slave to a mortgage for the next 25 years.” Given the astronomic rise in house prices here, he wasn’t speaking metaphorically." So if people are leaving London, how do we explain such enormous price rises? Ordinarily we would expect what the NYT calls "London's great exodus" to cause prices to fall, not rise. But there is a simple reason, and it is due to the new role of property in the global economy. London's prices are rising at the same time as its residents are leaving for one simple reason. Property in these city centres no longer exists to provide homes for ordinary people. It exists to provide safe, high-yielding assets for the rich.  As Michael Goldfarb points out:  "This is what happens when property in your city becomes a global reserve currency. For that is what property in London has become, first and foremost."

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